Pacific Biosciences of California, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparison is with the three months ended March 31, 2012. Financial statement amounts below are in U.S. dollars and millions, except per-share data.
Business context and financial performance
PacBio develops and sells genetic analysis systems using its single molecule, real-time (SMRT) technology. Its commercial products include the PacBio RS and the recently launched PacBio RS II, along with consumables and service agreements. The company remains an early-stage commercial business and reported an accumulated deficit of $557.1 million at quarter-end.
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Total revenue | $5.6 | $10.0 | Down 44% |
| Product revenue | $3.8 | $8.7 | Down 56%; three instrument installations and acceptances versus 11 |
| Service and other revenue | $1.5 | $1.1 | Up 40% |
| Grant revenue | $0.3 | $0.3 | Approximately unchanged |
| Gross profit (loss) | $0.9 | $(0.2) | Gross margin approximately 16.7%, versus negative 1.5% |
| Research and development | $12.0 | $12.1 | Down 1% |
| Sales, general and administrative | $9.6 | $15.3 | Down 37% |
| Operating loss | $(20.6) | $(27.5) | Loss narrowed by $6.9 |
| Net loss | $(21.1) | $(27.6) | Loss narrowed by $6.5 |
| Basic and diluted loss per share | $(0.37) | $(0.50) | Weighted-average shares rose to 57.4 million from 55.2 million |
| Net cash used in operating activities | $(17.6) | $(17.3) | Cash use slightly increased |
Liquidity, debt and financing
- Cash and cash equivalents were $53.0 million and investments were $59.3 million at March 31, 2013, totaling $112.3 million, compared with $100.6 million at December 31, 2012.
- Current assets were $126.5 million and current liabilities were $13.6 million. The company had $139.8 million in total assets and $32.7 million in total liabilities.
- In February, PacBio obtained Deerfield notes with $20.5 million principal, receiving approximately $20.0 million before other transaction expenses. The notes bear 8.75% simple annual interest and have a maximum seven-year term. Their carrying value was $12.9 million at quarter-end, reflecting an original issue discount; the filing reports a separate $1.0 million financing-derivative liability.
- The Deerfield financing included warrants to purchase 5.5 million shares at an initial $2.63 exercise price. The company also sold 3.9 million shares through its at-the-market program by quarter-end, generating $8.7 million net proceeds. Common shares outstanding were 60.8 million at March 31.
- Operating cash use and capital expenditures were partly offset by financing proceeds. Cash and cash equivalents increased $6.5 million during the quarter, including net financing cash inflows of $29.7 million.
Material changes and management outlook
- Product revenue fell chiefly because instrument installations declined to three from 11. Instrument revenue was approximately $1.9 million in each period; consumables revenue rose to approximately $1.9 million from $0.9 million.
- SG&A declined by $5.7 million, principally due to $4.4 million less legal expense, including a $1.8 million intellectual-property settlement charge in Q1 2012, and lower marketing and travel costs. R&D remained broadly stable.
- Management said cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, based on current plans. It also expected to raise additional capital and anticipated continued significant losses and negative cash flow. Additional financing may dilute shareholders, may not be available on acceptable terms, or may not be available at all.
- Management expected future revenue primarily from PacBio RS II systems, consumables and maintenance agreements. Backlog consisted of six instruments; the company generally expected conversion to revenue within two quarters, while cautioning that orders may be delayed or canceled.
- Manufacturing volumes remained below normal capacity, and excess manufacturing overhead was expensed in R&D. Management reported Q1 service costs were approximately equal to service revenue.
Risks, contingencies and unusual items
- The Deerfield agreement requires at least $2.0 million of consolidated cash and cash equivalents at each quarter-end and imposes other covenants, including restrictions on additional indebtedness and liens. If defined net sales are below $41.0 million over the specified 2014–2015 measurement period, Deerfield may require staged early repayment. The notes may also become payable following specified transactions or defaults; substantially all company property is pledged as collateral.
- Three state-court securities class actions had reached a tentative settlement, subject to final court approval; the company accrued its best estimate of resolution. In a separate federal securities case, the amended complaint was dismissed on April 15, 2013, with leave to amend. A shareholder derivative action was dismissed without prejudice in April 2013. The company said it could not reliably estimate possible losses for other contingencies.
- Key business risks include uncertain adoption of the new system, customer instrument reliability and consumable performance, manufacturing yield and supply constraints, intense competition, long and unpredictable sales cycles, ongoing financing needs, and potential dilution. The filing also identifies intellectual-property, regulatory, foreign-exchange and litigation risks.
- Q1 2013 other expense included approximately $0.4 million of debt-facility interest expense and $0.03 million of derivative fair-value loss. The derivative was valued using significant unobservable inputs.
- Management stated that disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether PacBio RS II adoption, instrument installations, consumables sales and the six-instrument backlog translate into sustained revenue growth.
- Whether the company can manage its cash burn and obtain further financing without unfavorable terms or substantial dilution.
- Compliance with Deerfield’s cash covenant and other terms, and progress toward the defined net-sales milestone.
- Final court approval and financial impact of the state securities-action settlement, and any further developments in the federal case.
- Whether product reliability, consumable quality, manufacturing capacity and customer support improve sufficiently to support commercial growth.