Pacific Biosciences of California, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; unaudited. Unless otherwise noted, amounts below are in millions of dollars. The company develops and sells the PacBio RS and PacBio RS II genetic-analysis systems, consumables, and related services using its SMRT sequencing technology.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $6.0 | $7.3 | $11.6 | $17.3 |
| Gross profit | $1.1 | $0.3 | $2.0 | $0.1 |
| Gross margin | 17.5% | 3.8% | 17.1% | 0.7% |
| Operating expenses | $21.1 | $22.8 | $42.6 | $50.2 |
| Operating loss | $(20.0) | $(22.6) | $(40.6) | $(50.1) |
| Net loss | $(20.5) | $(22.5) | $(41.6) | $(50.1) |
| Basic and diluted loss per share | $(0.33) | $(0.40) | $(0.70) | $(0.90) |
| Operating cash used | — | $(34.0) | $(41.0) |
- Q2 revenue fell 17% year over year, as product revenue declined 21% to $4.6 million; service and other revenue increased 13% to $1.4 million, while grant revenue was zero. Six-month revenue declined 33%, mainly due to lower instrument sales.
- The company installed three PacBio RS II instruments in Q2 2013 versus seven PacBio RS instruments in Q2 2012. For the first six months, it recognized revenue on six instrument installations and acceptances versus 18 in the comparable 2012 period. Q2 product revenue included approximately $2.7 million from instruments and upgrades and $1.9 million from consumables.
- Gross margin improved substantially from the prior-year periods, as cost of product revenue fell faster than product revenue. Prior-year cost of revenue included inventory and product-release charges. Operating losses remained significant despite lower SG&A.
Liquidity, cash flow, and financing
- At June 30, 2013, cash and cash equivalents were $40.8 million and investments were $66.1 million, totaling $107.0 million, up from $100.6 million at December 31, 2012. Current assets were $122.1 million and current liabilities $15.1 million.
- Operating activities used $34.0 million in the first half; investing activities used $12.7 million, including $12.1 million of net investment purchases and $0.6 million of property and equipment purchases. Financing activities provided $41.0 million.
- The company received $19.8 million net from a Deerfield debt facility and $21.2 million net from common-stock issuance and other equity-plan activity. The at-the-market offering generated $11.3 million in Q2 from 4.4 million shares sold at an average $2.66. At June 30, total shares sold under the offering were 8.3 million; the company reported $20.8 million of aggregate offering value used against its $30.0 million program.
- Deerfield notes have $20.5 million aggregate principal, carry 8.75% simple interest, and had a $13.0 million carrying value at quarter-end due to discounts and allocated financing costs. The reported estimated fair value was $13.7 million. Interest expense includes discount accretion; the notes’ effective interest rate is 20.6%.
- The debt is secured by substantially all company property and includes a minimum quarter-end cash-and-cash-equivalents covenant of $2.0 million. If defined net sales are below $41.0 million over Q2 2014 through Q1 2015, Deerfield may require one-third of original principal to be repaid on each of the third, fourth, and fifth anniversaries. Certain financing, default, and change-of-control provisions also affect repayment. Deerfield received warrants for 5.5 million shares at an initial $2.63 exercise price.
Outlook, commentary, and risks
- Management stated existing cash, cash equivalents, and investments were expected to fund projected operating requirements for at least 12 months, while also stating that it planned to raise additional capital. These expectations depend on current operating and financing plans and may change; no specific revenue or earnings guidance is provided.
- The company had an accumulated deficit of $577.6 million and expected significant losses and negative cash flow to continue as it invests in product development, commercialization, customer support, and infrastructure. It generally expected to convert its 10-instrument backlog within two quarters, but cautioned that backlog may not convert to revenue.
- Key risks include early-stage product adoption and uncertain customer capital spending; instrument reliability and consumable manufacturing quality and yield; production below normal capacity; dependence on limited or single-source suppliers; competition and technology changes; continued financing needs and shareholder dilution; and debt covenants, repayment triggers, and collateral exposure.
- Three putative IPO-related securities class actions were disclosed. A tentative settlement of the state-court action received preliminary approval, with a final-approval hearing scheduled for October 25, 2013; the company had accrued its best estimate, but the filing text does not provide a clear settlement amount. A separate federal action remained pending, including a motion to stay. A shareholder derivative action was dismissed without prejudice. The company said it believed the claims were without merit but could not determine the ultimate outcomes or estimate possible losses for matters other than the tentative settlement.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether PacBio RS II placements, consumables demand, and the 10-instrument backlog convert into sustained revenue growth.
- Cash burn and funding runway against management’s at-least-12-month estimate, including the need for further financing and resulting dilution.
- Compliance with Deerfield’s cash covenant and the $41.0 million sales milestone, plus the facility’s effective cost, repayment triggers, and warrant dilution.
- The final terms and approval of the state-court settlement and developments in the federal securities action.
- Whether manufacturing yields, instrument reliability, and service costs improve sufficiently to support positive gross margins at commercial scale.