Pacific Biosciences of California, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Amounts are in U.S. dollars. The company develops and sells SMRT sequencing systems, consumables, software and related services.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Total revenue | $16.4 million | $19.4 million; down 15% |
| Product revenue | $13.5 million | $16.3 million; down 17% |
| Service and other revenue | $3.0 million | $3.1 million; down 4% |
| Gross profit / gross margin | $5.1 million / 31.2% | $7.3 million / 37.7% |
| Operating expenses | $35.3 million | $31.2 million; up 13% |
| Operating loss | $30.1 million | $23.9 million |
| Net loss | $30.3 million; $0.20 per share | $24.2 million; $0.20 per share |
| Cash used in operations | $25.3 million | $18.8 million |
At March 31, cash and cash equivalents were $38.2 million and investments were $44.7 million, or $82.9 million combined excluding $4.5 million of restricted cash. The combined amount compares with $102.4 million at December 31, 2018. Current assets were $112.6 million and current liabilities $45.1 million. Investing activities provided $38.0 million, primarily from net investment maturities; financing activities provided $6.7 million, primarily from equity-plan issuances. Cash and restricted cash increased $19.4 million during the quarter.
Debt principal outstanding was $16.0 million, bearing 8.75% interest and due in February 2020; the carrying value was $14.9 million and was classified as current. The facility is secured by substantially all company property and includes covenants, a $2.0 million minimum quarterly cash requirement, and a potential lender right to receive up to 25% of net proceeds from certain equity financings. Adoption of lease accounting added operating lease liabilities; at March 31, total lease liabilities were $48.4 million.
Material changes and operating drivers
- Revenue fell mainly because of fewer instrument shipments and installations and lower RSII consumable sales. North American revenue increased to $9.0 million from $7.8 million, while Asia-Pacific revenue declined to $4.4 million from $7.5 million.
- Gross margin contracted 6.5 percentage points. The company attributed approximately $1.0 million of gross-profit impact to product-transition costs, including an inventory reserve reflecting a faster-than-forecast transition from Sequel to Sequel II.
- Research and development expense decreased 5%, primarily due to lower chip-development costs. Sales, general and administrative expense rose 32%, primarily reflecting $5.7 million in acquisition-related legal fees, partly offset by lower patent-litigation fees.
- Operating cash use increased by $6.5 million year over year. The company reported a $30.3 million net loss, partly offset by noncash stock compensation and depreciation.
- Q1 2019 share count used for loss per share was 151.3 million, versus 123.8 million a year earlier. Common shares outstanding at March 31 were 152.7 million.
Outlook, risks, contingencies and unusual items
- Illumina agreed to acquire PacBio for $8.00 per share in cash. Stockholders approved the merger agreement on January 24, 2019; required regulatory approvals remained outstanding. At filing, the companies expected closing in mid-2019, but gave no assurance of approval, timing or completion. If the merger terminates in specified circumstances, PacBio may owe Illumina a $43 million termination fee; Illumina may owe PacBio a $98 million reverse termination fee in specified circumstances.
- Management stated that cash, cash equivalents and investments, together with a possible reverse termination fee or other remedies upon merger termination, were expected to fund projected requirements for at least 12 months from filing. If the merger fails and adequate funding is unavailable, the company may need additional capital, reduce spending or curtail programs. Management’s forecast assumes, among other things, product demand; it generally expected demand to increase.
- The Sequel II System and SMRT Cell 8M were in an early-access program in Q1. The company announced their commercial launch on April 24, 2019, after quarter-end. The five early-access sites had purchased initial Sequel II systems. Execution, adoption, manufacturing quality and product-transition costs remain important risks.
- Customer concentration is material: Gene Company Limited, the China distributor, represented approximately 17% of Q1 2019 revenue, compared with 29% in Q1 2018. Quarterly results may vary with large customer orders, long sales cycles and seasonality.
- Five merger-related shareholder lawsuits were dismissed after supplemental proxy disclosures; PacBio accrued $300,000 in attorneys’ fees. Separate patent litigation with Oxford Nanopore continued. The company’s USITC appeal was affirmed without written opinion; certain U.S. district court claims and patent-review matters had progressed in PacBio’s favor. The European Patent Office ruled against PacBio on the ’542 patent, and PacBio intended to appeal. Litigation outcomes and financial effects were uncertain.
- PacBio remained loss-making and cash-flow negative, and had no assurance of sustained profitability. Other stated risks include product performance and manufacturing capacity, competition, intellectual-property disputes, international trade and regulatory changes, and reliance on third-party suppliers.
- Management reported disclosure controls and procedures were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Illumina transaction received all required approvals and closed, and the applicable treatment of shares and equity awards.
- Whether liquidity and cash-burn assumptions held, particularly if the merger did not close; confirm any financing, spending reductions or termination-fee proceeds.
- Sequel II and SMRT Cell 8M commercial uptake, instrument shipments, recurring consumable demand and gross-margin effects of the product transition.
- Customer concentration and the durability of revenue from Gene Company Limited and other large customers.
- Updates to the $16.0 million debt repayment due in February 2020, facility covenants and lease obligations.
- Developments and potential costs in the Oxford Nanopore disputes, including the appeal concerning the ’542 patent.