Pacific Biosciences of California, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. The company develops and sells SMRT DNA sequencing systems, consumables, software, and related services. Its newer Sequel system began launching in Q4 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $19.1 million | $17.6 million | Up 8% |
| Gross profit / margin | $9.5 million / 49.7% | $5.9 million / 33.6% | Margin up 16.1 percentage points |
| Operating loss | $18.6 million | $19.3 million | Loss narrowed $0.8 million |
| Net loss | $19.4 million | $20.2 million | Loss narrowed $0.8 million |
| Net loss per share | $0.23 | $0.27 | Loss per share narrowed |
| Cash used in operations | $20.3 million | $23.9 million | Use decreased $3.6 million |
- Product revenue was $12.4 million, up 9%; service and other revenue was $3.2 million, up 15%; contractual revenue was $3.6 million, unchanged. Most instrument revenue in Q1 2016 came from Sequel installations.
- Gross margin improved primarily because Sequel instruments carried higher margins than RS II instruments. Service costs rose 38%, reflecting increased materials and labor supporting a larger installed base.
- Research and development expense rose 13% to $16.4 million; sales, general and administrative expense rose 9% to $11.7 million. Stock-based compensation totaled $4.6 million, versus $3.3 million a year earlier.
- Cash and cash equivalents were $20.1 million at quarter-end, versus $33.6 million at year-end 2015. Investments were $71.5 million, bringing cash, cash equivalents, and investments to $91.5 million, up from $82.3 million. The quarter-end cash decline reflects cash flows, including net investment purchases, and does not represent the change in total cash and investments.
- Current assets were $119.1 million and current liabilities $32.0 million. The company reported $15.2 million of notes payable carrying value and $51.4 million of total liabilities. Long-term restricted cash of $4.5 million was pledged as a lease deposit.
Material changes and financing
- Revenue increased, while gross margin improved substantially; operating expenses also grew as the company expanded product development and commercial support for Sequel.
- Operating cash use remained significant. Financing activities provided $30.0 million, primarily from $26.5 million net proceeds under the at-the-market equity offering and $3.4 million from equity plans. Q1 ATM sales were 3.1 million shares at an average $8.80 per share.
- During the quarter, 3.818 million warrants were net exercised, resulting in approximately 3.0 million shares issued without additional cash proceeds. The company reported 86.986 million shares outstanding at March 31 and 87,168,677 at April 30.
- Deerfield notes bear 8.75% annual interest, are secured by substantially all company property, and have a maximum seven-year term from 2013. The agreement requires at least $2.0 million of cash and cash equivalents at each quarter-end. Certain equity financings may trigger a right for noteholders to receive 25% of net proceeds as debt repayment; holders waived that right for the current ATM sales.
Outlook, risks, and unusual items
- Management expected 2016 product revenue to increase versus 2015 and expected almost all new instrument installations to be Sequel. It forecast full-year 2016 R&D and sales, general and administrative expenses each to be approximately 10% above 2015.
- Management believed existing cash, cash equivalents, and investments would fund projected operating requirements for at least 12 months, while cautioning that additional capital may be needed. This assessment depends on operating and financing plans and could change.
- Q1 contractual revenue of $3.6 million was amortized from the Roche agreement’s upfront payment. All Roche development milestones had been achieved by year-end 2015; no further milestone revenue is indicated. The milestone revenue is therefore not a recurring source of future growth.
- The company cautioned that Sequel adoption and rollout, product reliability, manufacturing yields and supply, competition, and lengthy and unpredictable sales cycles could affect results. It also highlighted potential dilution and difficulty raising additional capital.
- A new Menlo Park facility lease is expected to run for 132 months. The filing estimates approximately $80 million of rent and $24 million of operating expenses over the expected term, with substantial improvement and moving costs; future landlord payments of $10 million are expected to partially offset expenditures.
- The filing reports no off-balance-sheet arrangements and no legal proceedings believed likely to have a material adverse effect, while noting ordinary-course claims are inherently unpredictable. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Sequel installations, consumable demand, and manufacturing yields support the revenue-growth and gross-margin improvement expectations.
- Whether the stated 12-month liquidity runway remains achievable given operating cash burn, facility transition costs, and potential need for additional financing.
- The future impact of equity issuance and warrant exercises on share count and dilution, and the remaining capacity and terms of the ATM program.
- Debt repayment terms, covenants, collateral, and noteholder rights in future financing or major-transaction scenarios.
- The timing and total cost of the new facility lease, including tenant improvements, move-related expenses, and receipt of remaining landlord payments.
- How much future revenue depends on recurring product and service sales, given that Roche milestone payments are complete and contractual amortization is finite.