Pacific Biosciences of California, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts below are in millions of dollars unless otherwise stated. The company develops and sells its SMRT-based DNA sequencing platform; it began commercial shipments of the PacBio RS in April 2011 and was no longer classified as a development-stage enterprise after its commercial launch.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $10.519 | $0.220 | $21.419 | $1.394 |
| Gross profit | $3.328 | $0.220 | $11.497 | $1.394 |
| Gross margin | 31.6% | Not meaningful | 53.7% | Not meaningful |
| Operating expenses | $32.765 | $40.916 | $98.564 | $105.039 |
| Operating loss | $(29.437) | $(40.696) | $(87.067) | $(103.645) |
| Net loss | $(29.281) | $(40.708) | $(86.565) | $(103.747) |
| Basic and diluted loss per share | $(0.54) | $(39.70) | $(1.62) | $(134.07) |
Q3 2011 revenue included $9.819 million of product revenue, $0.535 million of service and other revenue, and $0.165 million of grant revenue. For the first nine months, product revenue was $19.966 million, service and other revenue $0.728 million, and grant revenue $0.725 million. The company recognized revenue on 15 instrument installations in Q3 and 31 year to date; 11 of the 31 were beta instruments upgraded to commercial specifications.
Q3 research and development expense fell 39% year over year to $20.001 million, while sales, general and administrative expense rose 59% to $12.764 million. Year-to-date, R&D expense declined 25% to $63.665 million and SG&A increased 77% to $34.899 million. The reported per-share comparisons are affected by the IPO and the substantially different share counts between periods.
Cash flow, liquidity and obligations
- Cash and cash equivalents were $57.580 million and investments were $136.116 million at September 30, 2011, totaling $193.696 million, down about $90.0 million from year-end 2010.
- Operating cash use for the first nine months was $88.202 million, versus $82.949 million a year earlier. Investing cash use was $9.354 million; financing provided $7.486 million, mainly from stock option exercises and employee stock purchases.
- Capital expenditures were $7.846 million. Inventory rose to $20.262 million from $6.864 million at year-end, reflecting commercial production and inventory build; receivables increased to $4.434 million from $0.341 million.
- Total current assets were $220.283 million and current liabilities $21.132 million. Total liabilities were $27.277 million. The facility financing obligation was $2.956 million, including its current portion; the filing does not report other material borrowings.
Material changes, outlook and unusual items
- The company reported a commercial launch and a substantial year-over-year increase in revenue, but comparisons with 2010 are not like-for-like: 2010 revenue was primarily grant revenue, with no product sales.
- Management said Q3 gross profit benefited from instrument component costs expensed in earlier periods. Most of this previously expensed inventory had been used by September 30, so management expected product costs to rise significantly in Q4 2011. Current manufacturing volumes were below normal capacity, with excess manufacturing overhead expensed in R&D.
- At September 30, backlog was approximately $18 million, representing 27 systems. Management expected conversion through the first half of 2012, while cautioning that orders may be delayed or canceled.
- Management believed existing cash, cash equivalents and investments would fund projected operating requirements for at least 12 months, based on current plans. It also warned that additional funding could be required; availability and terms are not assured, and equity or convertible-debt financing could dilute shareholders. No specific revenue or earnings guidance was provided.
- In September, the company reduced its workforce by approximately 130 employees, or 28%. It recorded $4.939 million of restructuring costs, with $1.589 million accrued at quarter-end, and expected to pay termination benefits in Q4. Management did not expect further restructuring charges.
- Two purported securities class actions were filed in California in October 2011 against the company and certain officers and directors, relating to the 2010 registration statement. The company intended to contest them; no loss estimate was provided and no liability was recorded. In the Helicos patent litigation, the USPTO maintained rejection of all claims in three asserted patents; further action on the fourth was pending. Litigation outcomes remain uncertain.
Key risks and investor verification points
- Verify the pace of PacBio RS placements, repeat consumables and service revenue, customer acceptance, backlog conversion and cancellations.
- Monitor manufacturing yields, SMRT Cell quality and cost, supply-chain concentration, service costs, and the expected Q4 increase in product costs and its effect on gross margin.
- Track operating cash burn and inventory investment against the company’s stated 12-month liquidity expectation and potential need for additional financing.
- Assess whether the workforce reduction delivers sustainable cost savings without impairing product development, manufacturing, sales or customer support.
- Follow the Helicos patent proceedings and securities class actions, including any change in potential exposure or indemnification obligations.
- Consider the filing’s identified risks: early-stage commercialization and continuing losses; uncertain market adoption and customer capital spending; competition and rapid technology change; intellectual-property disputes; and reliance on key suppliers and personnel.