Pacific Biosciences of California, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. The company develops and sells the PacBio RS II sequencing system and related consumables using its SMRT technology.
Key financial results
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $11.6 | $5.6 |
| Gross profit / gross margin | $2.7 / 23.0% | $0.9 / 16.7% |
| Operating expenses | $20.9 | $21.5 |
| Operating loss | $(18.2) | $(20.6) |
| Net loss | $(18.9) | $(21.1) |
| Basic and diluted loss per share | $(0.28) | $(0.37) |
| Cash used in operating activities | $(16.3) | $(17.6) |
- Revenue grew 109%. Product revenue was $7.9 million, including $5.3 million from nine PacBio RS II instruments and upgrades and $2.5 million from consumables. Service and other revenue was $2.1 million; contractual revenue was $1.7 million.
- Gross margin improved by 6.3 percentage points, primarily because contractual revenue carries no incremental costs, partly offset by product-mix changes. Product cost of revenue rose faster than product revenue.
- Research and development expense declined 2% to $11.8 million; sales, general and administrative expense declined 4% to $9.2 million.
- Cash and cash equivalents were $41.3 million and investments were $77.5 million at quarter-end, totaling $118.7 million, versus $112.5 million at December 31, 2013. Cash and investments increased by $6.2 million, including $20.6 million net proceeds from an at-the-market stock offering.
- Total assets were $141.0 million; current assets were $132.1 million and current liabilities were $22.5 million. Total liabilities were $65.5 million. Notes payable had a $13.5 million carrying value; the notes’ $20.5 million original principal bears 8.75% stated interest. The company also recorded a $0.5 million financing derivative.
- Quarter-end backlog was 13 instruments. The company reported 70.5 million common shares outstanding as of May 1, 2014.
Material changes and unusual items
- Revenue increased by $6.1 million year over year, mainly reflecting higher product revenue and the first quarterly recognition of Roche contractual revenue. Instrument revenue reflected nine PacBio RS II systems in Q1 2014 versus three PacBio RS systems in Q1 2013.
- The Roche agreement included a $35.0 million upfront payment received in 2013. The company recognized $1.7 million in Q1 2014 and reported $31.6 million still deferred at March 31, 2014. Up to $40.0 million of additional milestone payments may be earned; no milestone revenue had been recognized.
- The company issued 3.0 million shares through its at-the-market program at an average $7.12 per share, generating $20.6 million net proceeds. A further $17.9 million remained available under the program.
- Net loss improved by $2.2 million year over year, while interest expense increased by $0.3 million, primarily because Q1 2014 included a full quarter of expense on the 2013 debt financing.
- Investing activities provided $8.2 million, principally from net investment maturities; financing activities provided $23.0 million. Cash and investments excluding ATM proceeds declined by $14.4 million from year-end.
Outlook, risks and contingencies
- Management expected 2014 revenue to exceed 2013, with quarterly fluctuations possible. It expected gross margin to remain near Q1 levels, subject to product mix and sales geography, and quarterly R&D and SG&A expenses to remain near Q1 levels.
- Management believed existing cash, cash equivalents and investments would fund projected operating requirements for at least 12 months, while also stating that it planned to raise additional capital. Future financing may be unavailable on acceptable terms and equity financing would dilute shareholders.
- The company continued to incur significant losses and expected substantial losses and negative cash flow for the foreseeable future; it had not achieved profitability. It noted that manufacturing volume remained below normal capacity, with some manufacturing costs expensed in R&D.
- Key risks include adoption and reliability of products, manufacturing scale and supplier concentration, conversion of backlog to sales, competition and technology change, and the ability to meet Roche development milestones. The Roche agreement’s benefits are uncertain.
- Deerfield debt is secured by substantially all company property, including intellectual property, and includes covenants and a $2.0 million minimum quarter-end cash requirement. A covenant default could accelerate repayment.
- The company disclosed customary indemnification obligations with potentially indeterminable future payments, but recorded no additional liability for them. It reported no off-balance-sheet arrangements.
- Three consolidated shareholder class actions had received final settlement approval in October 2013. A separate opt-out plaintiff’s action was dismissed with prejudice in March 2014. The filing reports no other material legal proceeding in the supplied text.
- Management concluded disclosure controls were effective at a reasonable assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether product demand, instrument placements and the 13-instrument backlog convert into sustained recognized revenue and cash receipts.
- Whether the company achieves Roche development milestones and receives any of the potential $40.0 million in contingent payments; also monitor recognition of the deferred upfront payment.
- Operating cash burn and liquidity against management’s stated 12-month funding expectation, including dependence on additional capital and potential shareholder dilution.
- Debt terms, covenant compliance, collateral exposure and the expected increase in interest expense as the debt discount accretes.
- Whether gross-margin improvement persists without relying disproportionately on Roche contractual revenue, and whether manufacturing costs and product quality improve as volumes scale.