Pacific Biosciences of California, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated financial statements; dollar amounts below are in millions except per-share data.
Business context
PacBio designs and sells sequencing systems based on its Single Molecule, Real-Time (SMRT) technology, including Sequel instruments, consumables, software, and related services. The company said its planned SMRT Cell 8M is designed for up to eight times the throughput of the current Sequel SMRT Cell 1M; beta testing was anticipated in early 2019, with broader launch some months later.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $21.6 | $20.1 | $40.9 | $45.0 |
| Gross profit | $8.9 | $8.0 | $16.2 | $16.9 |
| Gross margin | 41.1% | 39.9% | 39.5% | 37.7% |
| Operating loss | $(21.7) | $(24.4) | $(45.7) | $(47.7) |
| Net loss | $(22.5) | $(25.5) | $(46.7) | $(49.4) |
| Basic and diluted loss per share | $(0.17) | $(0.26) | $(0.37) | $(0.52) |
- Q2 product revenue rose 12% to $18.5 million, led by instrument revenue of $8.5 million and consumables of $10.0 million. Service and other revenue declined 12% to $3.1 million.
- First-half revenue fell 9%. Product revenue decreased 8% to $34.8 million, while service and other revenue fell 14% to $6.2 million. Management attributed the comparison in part to unusually high Sequel installations in Q1 2017 as the company worked through an instrument backlog. Consumables revenue increased, supported by greater utilization and a larger installed base.
- Operating expenses were $30.6 million in Q2 and $61.9 million in the first half, down 5% and 4%, respectively, year over year. Management cited lower chip-development costs in research and development and lower consulting and professional fees, including litigation-related legal fees, in selling, general and administrative expenses.
- Cash used in operating activities was $33.3 million in the first half, compared with $29.5 million in the prior-year period. Investing activities provided $4.4 million; financing activities provided $35.4 million, principally from the February 2018 equity offering.
Financial position and liquidity
- At June 30, 2018, cash and cash equivalents were $23.1 million and investments were $40.4 million. Combined, excluding restricted cash, they totaled $63.5 million, versus $62.9 million at December 31, 2017. An additional $4.5 million was held as long-term restricted cash.
- Total assets were $137.1 million, total liabilities $51.6 million, and stockholders’ equity $85.5 million. Notes payable had a $14.1 million carrying value; approximately $16.0 million of principal remained outstanding, bearing 8.75% simple interest. The debt agreement includes covenants and may entitle noteholders to up to 25% of net proceeds from certain equity financings, subject to its terms; noteholders waived that right for the February offering.
- Management stated existing cash, cash equivalents, and investments were expected to fund projected operating requirements for at least 12 months from the filing date, but said additional capital may be needed. It cautioned that weaker product demand, financing constraints, or other funding shortfalls could require reduced spending or development programs.
- The February offering sold 14.4 million shares at $2.40 per share and generated approximately $32.9 million in net proceeds. Shares outstanding were 131.9 million at June 30, versus 116.3 million at December 31, 2017.
- Future minimum operating lease payments were $71.4 million, including $39.2 million thereafter. The filing reported no off-balance-sheet arrangements.
Material changes, outlook, and risks
- Q2 revenue improved year over year, but first-half revenue declined. Gross margins improved in both comparison periods, while the company continued to report substantial operating and net losses.
- Management expected total operating expenses to be lower in the second half of 2018. The filing provides no specific revenue or profitability guidance.
- Management expected service revenue pressure to continue until service revenue from the growing Sequel installed base offsets declines in higher-priced RS II service revenue. Prior-year cost of revenue included $1.6 million in RS II-related charges in the first half of 2017 ($0.3 million in Q2), which also affected comparisons.
- Gene Company Limited, PacBio’s China distributor, represented approximately 33% of Q2 revenue and 31% of first-half revenue, increasing customer concentration risk.
- Patent disputes with Oxford Nanopore Technologies (ONT) remained active in the United States. The USITC terminated PacBio’s investigation in February 2018; PacBio appealed. PacBio disclosed that UK and German proceedings between the parties were settled in May 2018, with specified restrictions and non-assertion commitments through the end of 2023. The company said litigation costs are significant and outcomes are uncertain; it could not estimate the financial effect of the proceedings.
- Other disclosed risks include continued cash burn and potential dilution from future fundraising, debt covenants, dependence on customer adoption and purchasing patterns, manufacturing and consumables quality or supply issues, competition, and possible tariffs affecting components or sales. Management stated disclosure controls were effective at a reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether Sequel demand, consumables utilization, and the planned SMRT Cell 8M development and launch progress as expected.
- Whether cash burn, operating costs, and revenue trends support management’s stated liquidity runway, and whether additional financing will be required.
- The effect of Gene Company Limited’s revenue concentration and any changes in its orders or payment behavior.
- Remaining debt obligations, covenant compliance, and any noteholder rights that could affect proceeds from future financing.
- Developments in U.S. patent litigation, European patent oppositions, and associated legal expenses or potential outcomes.