Pacific Biosciences of California, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. The company develops and sells the PacBio RS II sequencing system and related consumables and services, based on its SMRT technology.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Total revenue | $17.6 million | $11.6 million; up 52% |
| Product revenue | $11.3 million | $7.9 million; up 44% |
| Service and other revenue | $2.7 million | $2.1 million; up 32% |
| Contractual revenue | $3.6 million | $1.7 million; up 112% |
| Gross profit / margin | $5.9 million / 33.6% | $2.7 million / 23.0% |
| Operating expenses | $25.3 million | $20.9 million; up 21% |
| Operating loss | $19.3 million | $18.2 million |
| Net loss | $20.2 million | $18.9 million |
| Basic and diluted loss per share | $0.27 | $0.28 |
| Net cash used in operating activities | $23.9 million | $16.3 million |
- Revenue growth reflected higher instrument and consumables sales, a larger installed base supporting consumables and service revenue, and increased Roche contractual revenue.
- R&D expense rose 23% to $14.5 million, primarily due to increased headcount, consulting and product-development costs, including work related to clinical diagnostic regulatory requirements. SG&A rose 18% to $10.8 million, mainly from higher compensation and marketing and travel costs.
- Cash and cash equivalents were $30.3 million at March 31, down from $36.4 million at year-end. Investments were $48.9 million; combined cash, cash equivalents and investments were $79.1 million, versus $101.3 million at December 31, 2014. Current assets were $99.5 million and current liabilities $38.4 million.
- Operating cash use increased year over year. The company cited operating losses, a $3.6 million reduction in deferred contractual revenue, higher inventory and receivables, and lower accrued expenses as uses of cash.
- Notes payable had a carrying value of $14.3 million. The Deerfield notes bear 8.75% annual interest, mature in February 2020, and are secured by substantially all company property. The facility requires at least $2.0 million of cash and cash equivalents at each quarter-end.
Material changes, outlook and risks
- Roche revenue estimate: In Q1, the company prospectively revised its estimated development period for Roche Agreement revenue as development timing became more certain. The change added $1.9 million of revenue, with 100% margin, reducing net loss by the same amount and improving loss per share by $0.03. The company said it would recognize the remaining $22.9 million of deferred upfront-payment revenue over the revised estimated development period.
- Subsequent milestone: In April 2015, PacBio achieved a second Roche development milestone, entitling it to a $10.0 million payment. It expected to recognize that amount as contractual revenue in Q2 2015; up to a further $20.0 million could be earned from future milestones.
- Management outlook: Management expected gross margin to rise in Q2 from the $10.0 million milestone revenue recognized at 100% margin, then return to the mid-30% range for the remainder of 2015, subject to revenue mix. It expected at least the current quarterly levels of R&D and SG&A expense to continue during 2015, with quarterly variation possible.
- Funding: Management stated existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, while also planning to raise additional capital. A shelf registration permits offerings of up to $150 million of securities. Additional financing may dilute shareholders or may not be available on acceptable terms; Deerfield may have rights to receive 25% of net proceeds from certain financings, subject to agreement terms and exceptions.
- Key risks: The company had a history of losses and expected continued losses and negative operating cash flow. Risks include product adoption and sales execution, competition, manufacturing and single-source supply constraints, product reliability, regulatory requirements, dependence on Roche and achievement of milestones, intellectual-property disputes, and the need for additional financing. The filing reported no off-balance-sheet arrangements and no material changes to internal control over financial reporting; management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether product and consumables demand, instrument utilization and the installed base continue to support revenue growth.
- How the revised Roche development period affects future contractual revenue recognition, and whether further milestones are achieved and collected.
- Cash burn, liquidity and the timing, terms and potential dilution of any additional financing.
- Debt covenants, security interests and any Deerfield rights that could affect financing proceeds or liquidity.
- Whether gross margin improves as management anticipated, excluding the effect of high-margin Roche milestone revenue.