Pacific Biosciences of California, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed February 26, 2018. The company develops and sells SMRT-based DNA sequencing systems, consumables and services; quarterly figures below include Q4 2017 where relevant. Amounts are in U.S. dollars.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $93.5 million | $90.7 million | Up 3% |
| Gross profit / margin | $34.7 million / 37.1% | $44.2 million / 48.7% | Gross profit down $9.5 million |
| Operating expenses | $124.4 million | $115.4 million | Up 8% |
| Operating loss | $89.8 million | $71.2 million | Loss widened $18.5 million |
| Net loss / loss per share | $92.2 million / $0.87 | $74.4 million / $0.83 | Loss widened |
| Cash used in operations | $67.5 million | $67.9 million | Approximately flat |
FY2017 product revenue was $80.0 million: $38.6 million from instruments and $41.4 million from consumables. Consumables grew with higher system utilization and a larger installed base. Service and other revenue was $13.4 million; contractual revenue was zero following termination of the Roche agreement. FY2016 gross margin included $12.1 million of Roche contractual revenue at 100% margin; excluding it, FY2016 adjusted gross margin was 40.8%, versus 37.1% in FY2017. FY2017 cost of revenue also included a $1.6 million charge related primarily to revised useful lives of leased RS II instruments.
Q4 2017: Revenue was $24.9 million, gross profit $9.5 million, operating loss $20.5 million and net loss $20.8 million; diluted loss per share was $0.18.
Cash, liquidity and debt
- Cash, cash equivalents and investments totaled $62.9 million at year-end, down from $72.0 million in 2016; this includes $4.5 million of restricted cash separately reported on the balance sheet.
- Working capital was $73.0 million. Total assets were $144.1 million and total liabilities $58.0 million.
- Net cash used in operating activities was $67.5 million. Investing activities used $1.5 million; financing activities provided $68.8 million, mainly from equity offerings.
- Debt principal outstanding was $16.0 million, recorded net of discount at $13.6 million. The notes bear 8.75% interest, are secured by substantially all company property, and principal is due in 2020. Debt covenants include a $2.0 million minimum quarterly cash balance.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the filing date, based on assumptions including expected demand growth. The company cautioned that additional financing may be needed.
Material changes and unusual items
- Revenue rose modestly, but profitability and gross margin deteriorated. Higher product and service costs, product-transition and consumable warranty costs, and the absence of Roche revenue contributed to the margin decline.
- Roche terminated its development, commercialization and license agreement, effective February 10, 2017. The agreement had generated $12.1 million of contractual revenue in 2016; all specified development milestones had already been achieved.
- One customer, Gene Company Limited, accounted for approximately 31% of FY2017 revenue and 20% of year-end receivables. No customer exceeded 10% of revenue in 2016 or 2015.
- International customers generated $54.3 million, or 58% of revenue, in 2017, versus $41.0 million, or 45%, in 2016.
- The company issued equity in 2017, including $11.9 million net from its at-the-market program and $52.5 million net from an underwritten offering. Shares outstanding increased to 116.3 million at year-end from 92.7 million.
- In February 2018, after year-end, the company raised approximately $32.8 million net through an offering of 14.375 million shares at $2.40 per share. Noteholders waived their right to receive up to 25% of financing proceeds for this offering.
- The 2017 tax provision reflected provisional, non-cash tax-reform adjustments of $113.0 million. The company maintained a full valuation allowance against deferred tax assets; its reported effective tax rate was 0%.
Outlook, risks and contingencies
- Management expected 2018 research and development and sales, general and administrative expenses to remain relatively flat compared with 2017, and generally expected product demand to increase.
- Year-end instrument backlog was approximately $4.1 million, down from $11.0 million in 2016. Management expected conversion to revenue during 2018, but customers could cancel or delay orders.
- Key business risks include continued losses and operating cash outflows, dependence on additional financing, customer and revenue concentration, uncertain adoption of Sequel systems, manufacturing yields and consumable quality, single-source suppliers, competition and pricing pressure, and reliance on research funding and customer capital budgets.
- Patent litigation with Oxford Nanopore Technologies and related parties continued in U.S. and European jurisdictions. The USITC terminated the company’s investigation in February 2018 after adopting the administrative law judge’s claim construction; PacBio appealed. The filing stated that litigation outcomes and potential financial effects could not be estimated clearly. Litigation expense was a significant ongoing cost.
- Lease commitments totaled $74.8 million, primarily for the Menlo Park facility, and other purchase commitments were approximately $16.2 million at year-end. The company reported no off-balance-sheet arrangements.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether revenue growth, consumable demand and installed-base utilization can continue, especially given the 31% customer concentration and reduced backlog.
- Whether gross margins can recover as product-transition, warranty, manufacturing and service costs evolve.
- Cash runway under actual operating results and whether further financing will be required; assess the dilution and debt implications of future capital raises.
- Progress on Sequel manufacturing reliability, quality and supplier capacity, and the resulting effect on shipments and customer retention.
- Developments and costs in the patent disputes, including the USITC appeal and other U.S., U.K. and German proceedings.
- Final accounting effects of the Tax Act and the company’s ability to realize tax attributes, including limitations on net operating losses.