Pacific Biosciences of California, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
PacBio develops and sells genetic analysis products based on its single molecule, real-time (SMRT) technology. Its commercial platform is the PacBio RS analyzer, together with consumables and maintenance services. The company remains an early-stage commercial business and reported an accumulated deficit of $514.4 million.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $2.8 | $10.5 | $20.1 | $21.4 |
| Gross profit | $0.2 | $3.3 | $0.3 | $11.5 |
| Gross margin | 6.8% | 31.6% | 1.6% | 53.7% |
| Operating loss | $(22.6) | $(29.4) | $(72.6) | $(87.1) |
| Net loss | $(22.7) | $(29.3) | $(72.8) | $(86.6) |
| Net loss per share | $(0.41) | $(0.54) | $(1.31) | $(1.62) |
- Q3 product revenue was $1.3 million, down 87%; no PacBio RS instrument revenue was recognized in the quarter. Service and other revenue increased to $1.3 million from $0.5 million. For the nine months, product revenue declined 21% to $15.8 million, while service and other revenue rose to $3.6 million.
- Cash, cash equivalents and investments totaled $119.4 million at September 30, 2012, versus $177.4 million at year-end 2011. Cash and cash equivalents alone were $32.6 million; investments were $86.8 million.
- Operating cash use was $58.6 million for the first nine months, compared with $88.2 million in 2011. Cash and cash equivalents decreased $26.3 million during the period; investing activities provided $29.6 million, largely from net investment maturities.
- Current assets were $132.3 million and current liabilities $13.6 million. Total liabilities were $19.7 million. The balance sheet reported a $2.8 million facility financing obligation; no other borrowing balance is identified in the provided filing text.
Material changes and management commentary
- Q3 revenue fell primarily because the prior-year quarter included 15 instrument installations and acceptances; Q3 2012 had no instrument sales recognized. The nine-month period included 18 instrument acceptances, compared with 31 in 2011.
- Gross profit deteriorated sharply for the nine-month period as product and service costs increased relative to revenue. The company cited $0.7 million of expense associated with its C2 release and a $0.9 million excess and obsolete inventory charge.
- Operating expenses declined 31% in Q3 and 26% for the nine months, principally reflecting lower R&D spending and reduced headcount following the 2011 workforce reduction. Nine-month SG&A increased 6%, including higher litigation and professional-service costs.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, but anticipated raising additional capital in the future. The company also cautioned that slower product adoption or unavailable financing could require significant operational curtailment.
Outlook, risks and unusual items
- Management expected Q4 2012 revenue to increase sequentially from Q3, primarily from instrument and recurring consumable revenue; expected overall gross margin to be near break-even; and expected R&D and SG&A expenses to be comparable to Q3 levels.
- Backlog was five instruments, which the company expected to convert to revenue in Q4 2012 and Q1 2013. The filing warns backlog may be delayed, cancelled or not converted.
- On October 5, 2012, after quarter-end, PacBio entered an at-the-market sales agreement allowing up to $30 million of common-stock sales. It also had an effective shelf registration permitting up to $150 million of securities offerings. Any equity issuance could dilute shareholders.
- Three putative securities class actions and a shareholder derivative action were pending. The company disputed the allegations, but said it could not estimate potential losses and recorded no liability for these matters. It also recorded a $1.8 million Q1 2012 charge for settlements resolving two intellectual-property disputes.
- Key disclosed risks include continued losses and cash burn, uncertain customer adoption and capital spending, instrument reliability and consumable manufacturing yields, competition, dependence on certain suppliers, intellectual-property claims, and potential future financing needs.
Important facts for investors to verify
- Whether instrument orders and the five-unit backlog converted to revenue on the stated timetable, and whether consumable and service revenue grew.
- Whether gross margin improved from near break-even and whether costs, inventory reserves and service-support expenses remained controlled.
- Actual cash burn, financing activity and remaining liquidity relative to management’s stated 12-month funding expectation.
- Any developments in the securities and derivative litigation, including potential indemnification costs or changes to loss estimates.
- Whether the company sold shares under the ATM agreement and the resulting proceeds and dilution.