Pacific Biosciences of California, Inc. — FY 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. PacBio develops and sells genetic-analysis systems based on its single-molecule, real-time (SMRT) sequencing technology. Its commercial platform combines PacBio RS instruments with proprietary consumables and services. The company remained an early-stage commercial business and reported substantial operating losses.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $26.0 million | $33.9 million |
| Product revenue | $20.1 million | $31.5 million |
| Service and other revenue | $5.0 million | $1.5 million |
| Gross profit / margin | $0.9 million / 3.6% | $13.0 million / 38.5% |
| Operating loss | $(94.3) million | $(109.8) million |
| Net loss / loss per share | $(94.5) million / $(1.69) | $(109.4) million / $(2.03) |
| Operating cash flow | $(76.8) million | $(103.0) million |
| Cash, cash equivalents and investments at year-end | $100.6 million | $177.4 million |
| Working capital at year-end | $100.3 million | $180.2 million |
At December 31, 2012, total assets were $129.7 million and total liabilities were $20.3 million. The balance sheet included a $2.8 million facility-financing obligation; the company had no Deerfield debt at year-end, as that financing was entered into in February 2013. Fourth-quarter 2012 revenue was $5.9 million, gross profit $0.6 million, net loss $21.7 million and diluted loss per share $0.39.
Material changes versus the prior comparable period
- Revenue declined 23%, principally because instrument revenue fell: PacBio RS instrument deliveries decreased from 48 in 2011 to 23 in 2012. Product revenue fell 36%, while service and other revenue grew 233% as the installed base expanded.
- Gross profit fell 93%, and gross margin contracted to 3.6%. Management attributed much of the 2011 margin comparison to instrument-component costs expensed as research and development before commercial designs were finalized; those previously expensed components had been used by the end of 2011.
- Research and development expense decreased 37% to $47.6 million, primarily reflecting lower personnel costs and reduced development-related spending. Total operating expenses fell 22%, helping narrow the operating and net losses.
- Cash and investments declined $76.8 million during 2012. Operating cash use improved to $76.8 million from $103.0 million, but remained substantial.
- Instrument bookings were 12 in 2012 versus 26 in 2011. System-revenue backlog decreased to $2.9 million from $11.0 million a year earlier.
Outlook, risks and unusual items
- Management expected year-end backlog to convert to revenue in the first half of 2013, subject to customer cancellation or delay. It provided no quantified revenue or profitability guidance.
- Management said year-end cash and investments were expected to fund projected operating requirements for at least 12 months, while also stating that additional financing would likely be needed. Cash use in 2013, excluding financing, was expected to decline from 2012.
- After year-end, PacBio obtained $20.5 million of Deerfield notes, receiving $20.0 million net before other transaction expenses. The notes bear 8.75% annual interest, are secured by substantially all company assets, include a $2.0 million minimum quarterly cash covenant, and carry repayment provisions tied to a sales milestone and certain transactions or defaults. Deerfield also received warrants for 5.5 million shares at an initial $2.63 exercise price.
- The company began its Cantor at-the-market equity offering in February 2013. By March 12, 2013, it had sold about 3.9 million shares for approximately $8.6 million net proceeds. Further equity issuance and the Deerfield warrants create potential dilution.
- Product adoption, customer capital budgets and research funding, competitive pressure, instrument reliability, low SMRT Cell manufacturing yields and costs, supplier concentration, and the company’s continuing cash burn are key risks. Management reported improved instrument reliability and significant 2012 performance enhancements, but broader customer adoption remained uncertain.
- PacBio recorded a $1.8 million 2012 charge for patent-litigation settlements with Life Technologies and Helicos/AzTE. A state-court securities class action had a tentative settlement, subject to final court approval; federal securities and derivative actions remained pending. The company accrued its best estimate for the state settlement but did not provide a clear amount. It said other potential losses could not be estimated.
- The company reported an accumulated deficit of $536.0 million and a full valuation allowance against deferred tax assets. Management and the auditor reported effective internal control over financial reporting at December 31, 2012; the financial-statement audit opinion was unqualified.
Most important facts for investors to verify
- Whether instrument bookings, installations and recurring consumables revenue recover, and whether the $2.9 million backlog converts as expected.
- Whether gross margins improve as manufacturing yields, service costs and instrument economics develop; compare reported margins with the unusual 2011 cost basis.
- Cash burn, available liquidity and financing needs, including the Deerfield facility’s sales milestone, covenants, repayment terms and security interest.
- Actual dilution from the Cantor offering, Deerfield warrants and equity compensation plans.
- Final status and financial impact of securities litigation and any other contingencies not quantified in the filing.