Pacific Biosciences of California, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. The company develops and sells SMRT sequencing systems, consumables, software, and related services, including the Sequel II system.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $15.6 million | $16.4 million |
| Product revenue | $12.3 million | $13.5 million |
| Service and other revenue | $3.3 million | $3.0 million |
| Gross profit / margin | $7.5 million / 48.0% | $5.1 million / 31.2% |
| Operating expenses | $40.2 million | $35.3 million |
| Operating loss | $32.7 million | $30.1 million |
| Net income (loss) | $1.3 million | $(30.3) million |
| Operating cash flow | $75.4 million provided | $25.3 million used |
| Cash, cash equivalents and investments | $142.6 million | $49.1 million at Dec. 31, 2019 |
| Total liabilities | $174.4 million | $93.1 million at Dec. 31, 2019 |
Cash and cash equivalents were $68.9 million, investments were $73.7 million, and restricted cash was $4.0 million. The company repaid its remaining $16.0 million of Deerfield debt at maturity in February; no notes payable remained at quarter-end. Operating lease liabilities totaled $44.9 million.
Changes versus the prior comparable period
- Revenue fell 5%, mainly because instrument revenue declined to $4.0 million from $5.6 million. Management attributed lower shipments and installations in part to COVID-19-related customer delays. Consumables revenue rose to $8.3 million from $7.8 million, reflecting a larger installed base.
- Gross margin rose to 48.0% from 31.2%. Management cited higher factory utilization and the prior-year period’s approximately $1.0 million of product-transition costs and inventory reserve. Manufacturing output was reduced from mid-March 2020, and management expected lower margins while capacity remained underutilized.
- SG&A increased 26% to $24.9 million, reflecting a $6.0 million financial-advisor fee related to the terminated Illumina merger and $3.7 million of higher patent-litigation costs, partly offset by lower merger-related expenses.
- Net income included a $34.0 million non-operating gain from Illumina Continuation Advances. Excluding that gain, the company remained loss-making at the operating level.
Outlook, unusual items, and risks
- Illumina termination payments: Illumina paid a $98.0 million Reverse Termination Fee and $34.0 million in Q1 Continuation Advances. The $98.0 million fee was recorded as a deferred gain, not Q1 income, because repayment may be required if a qualifying change-of-control agreement is entered into by September 30, 2020 and the transaction is completed. The company paid the $6.0 million advisor fee in April.
- Up to $52.0 million of Continuation Advances may be repayable without interest if, within two years of March 31, 2020, the company enters into or consummates a qualifying change of control, or raises at least $100 million in a single equity or debt financing; the amount repayable depends on financing raised. Management stated repayment could jeopardize its ability to fund operations for at least 12 months.
- Management believed existing cash, cash equivalents, and investments would fund projected requirements for at least 12 months from the filing date, while warning that COVID-19 or repayment obligations could materially affect liquidity. No quantified revenue or earnings guidance was provided.
- Management reported that customer operations remained suspended at many installed-system sites as of late April and said consumable revenue was likely to decline from Q1 levels. The duration and financial impact of COVID-19 were not reliably estimable; reduced manufacturing output, customer spending, supply disruption, and broader economic weakness were identified as risks.
- In Pacific Biosciences’ patent cases against ONT, the jury found infringement of three patents but found them invalid on specified grounds; the company filed post-trial motions seeking to overturn those validity determinations. A separate patent-infringement case brought by Personal Genomics of Taiwan remained pending, with trial scheduled for March 2022. The company said litigation outcomes are unpredictable.
- Q1 operating cash flow benefited from receipt of the $98.0 million fee, reflected through deferred gain; it is not a recurring indicator of operating cash generation. The $34.0 million advance was classified as financing cash flow even though its accounting treatment produced a gain.
Important facts for investors to verify
- Whether COVID-19-related customer delays, instrument deliveries, and consumable utilization recovered or worsened after quarter-end.
- The terms and timing of any qualifying transaction or financing that could trigger repayment of the Reverse Termination Fee or Continuation Advances.
- Underlying operating cash burn and liquidity excluding the Illumina-related receipts and accounting effects.
- Factory utilization, product mix, and gross-margin recovery following the manufacturing reductions.
- Developments in the ONT post-trial motions and the PGI litigation, including potential costs or effects on intellectual-property rights.