Pacific Biosciences of California, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
PacBio develops, manufactures and sells genetic-analysis instruments and consumables using its single molecule, real-time (SMRT) sequencing technology. Its principal platform was the PacBio RS II, launched in 2013. The business combines instrument sales with recurring sales of proprietary SMRT Cells, reagents and service. Customers are primarily research, academic, government, pharmaceutical and agricultural organizations.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $28.2 million | $26.0 million |
| Product revenue | $20.0 million | $20.1 million |
| Service and other revenue | $6.4 million | $5.9 million |
| Contractual revenue | $1.7 million | — |
| Gross profit / margin | $6.4 million / 22.8% | $0.9 million / 3.6% |
| Operating loss | $(77.5) million | $(94.3) million |
| Net loss / loss per share | $(79.3) million / $(1.26) | $(94.5) million / $(1.69) |
| Cash used in operating activities | $(29.8) million | $(76.8) million |
| Cash, cash equivalents and investments at year-end | $112.5 million | $100.6 million |
| Working capital at year-end | $103.9 million | $100.3 million |
FY 2013 fourth-quarter revenue was $9.1 million, gross profit $3.2 million, operating loss $17.0 million, net loss $17.2 million and basic and diluted loss per share $0.26.
Year-end total liabilities were $67.0 million, including $13.3 million of non-current notes payable at carrying value and $27.0 million of deferred contractual revenue. The debt notes had $20.5 million aggregate principal, bear 8.75% stated interest, and are secured by substantially all company property, including intellectual property. The company also issued warrants for 5.5 million shares at an initial $2.63 exercise price.
Material changes versus the prior year
- Revenue rose 8%, but product revenue was essentially flat. Consumables revenue increased to $8.5 million from $4.6 million, while instrument revenue fell to $11.5 million from $15.5 million; 17 instruments contributed revenue in 2013 versus 23 in 2012.
- Gross margin improved substantially, reflecting a larger share of consumables, lower product and service costs, and $1.7 million of Roche-related revenue. FY 2012 also included a $0.9 million excess-inventory charge and $0.7 million of new-product-release expense.
- Operating expenses declined 12% to $84.0 million, including lower R&D and SG&A. Net loss narrowed by $15.2 million, although the company remained materially loss-making.
- Operating cash use fell to $29.8 million, in part because the Roche upfront payment created $33.3 million of deferred contractual revenue. This deferral is a working-capital benefit and does not represent recognized revenue.
- Cash and investments increased by $11.9 million, supported by Roche proceeds, debt financing and equity issuance, despite continued cash consumption from operations and investing.
Outlook, management commentary and risks
- Management said year-end cash and investments were expected to fund projected requirements for at least 12 months and, elsewhere, beyond 2014. It also stated additional financing would likely be needed in the future and expected significant losses and negative cash flow for the foreseeable future.
- System backlog was approximately $7.4 million at year-end, versus $2.9 million a year earlier; management expected conversion during 2014, subject to customer delays or cancellations. Backlog is not guaranteed revenue.
- Management reported 25 net instrument orders in 2013 versus 12 in 2012, attributing stronger bookings to increased awareness, performance and reliability. Product upgrades included the RS II, HGAP and Quiver software, and P5-C3 chemistry.
- The Roche agreement, signed in September 2013, provides a non-refundable $35.0 million upfront payment and up to $40.0 million in development milestones. Roche has exclusive commercialization and sales rights for covered clinical products; PacBio is to develop, manufacture and supply specified products. The initial term is 13 years, with five-year renewal provisions. Only $1.7 million of the upfront payment was recognized in 2013; $33.3 million remained deferred. No milestone revenue was recognized.
- Key risks include continued losses and financing needs; competition from larger, better-resourced sequencing companies; adoption and sales-cycle uncertainty; product reliability and manufacturing yield; reliance on sole- or single-source suppliers; debt covenants, collateral and potential repayment triggers; Roche development, milestone and commercialization execution; and possible dilution from equity issuance and warrants.
- Other disclosed matters include potential limits on use of tax-loss carryforwards under ownership-change rules, regulatory uncertainty for future diagnostic uses, intellectual-property risks, and exposure to international operations. Four consolidated shareholder class-action suits were settled in 2013; the remaining Primo claims were dismissed with prejudice in March 2014, with amounts previously accrued.
The company reported an unqualified audit opinion on its consolidated financial statements and effective internal control over financial reporting as of December 31, 2013.
Important facts for investors to verify
- Whether the $7.4 million system backlog converted to 2014 revenue, and how cancellations or delays affected it.
- Actual operating cash burn, subsequent financing and dilution, and liquidity relative to management’s stated funding outlook.
- Debt terms and compliance, including the $41.0 million net-sales milestone test for the period spanning the second quarter of 2014 through the first quarter of 2015, which can affect principal repayment timing.
- Progress toward Roche development milestones, related payments, and the accounting assumptions behind deferred-revenue recognition.
- Whether instrument reliability, manufacturing yields, consumable utilization and gross margins improved as expected.