Pacific Biosciences of California, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited financial statements; amounts below are in millions of dollars unless stated otherwise.
Business context
PacBio develops and sells genetic analysis systems using its SMRT technology, including the PacBio RS and newly launched PacBio RS II, along with consumables and services. The company remained loss-making and described itself as an early-stage commercial business.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $7.421 | $2.776 | $19.048 | $20.105 |
| Gross profit | $1.241 | $0.190 | $3.230 | $0.313 |
| Gross margin | 16.7% | 6.8% | 17.0% | 1.6% |
| Operating loss | $(19.935) | $(22.579) | $(60.539) | $(72.644) |
| Net loss | $(20.487) | $(22.729) | $(62.062) | $(72.796) |
| Basic and diluted loss per share | $(0.31) | $(0.41) | $(1.01) | $(1.31) |
- Q3 revenue rose 167%, driven by product revenue of $5.814 million, including $3.7 million from six RS II instruments and upgrades. Nine-month revenue declined 5%; product revenue fell 10%, partly offset by 25% growth in service and other revenue.
- Q3 operating expenses decreased 7% year over year to $21.176 million. Nine-month operating expenses declined 13% to $63.769 million, including a 20% reduction in sales, general and administrative expenses.
- Interest expense increased to $0.686 million in Q3 and $1.785 million for the nine months, primarily due to the 2013 Deerfield debt facility.
- Cash and cash equivalents were $64.767 million and investments were $62.169 million at September 30, totaling $126.936 million. Current assets were $141.763 million versus current liabilities of $22.479 million.
- Operating cash use was $15.259 million for the nine months, versus $58.599 million in 2012. The 2013 figure benefited materially from the $35.0 million Roche payment recorded as deferred revenue. Investing activities used $8.965 million; financing activities provided $42.451 million. Cash increased $18.227 million during the period.
- Notes payable had a carrying value of $13.173 million; the notes’ face principal was $20.5 million. The facility also included a $0.894 million financing derivative liability. Stockholders’ equity was $83.543 million, down from $109.382 million at year-end 2012.
Material changes and significant transactions
- Roche agreement: Signed September 24, 2013, with a 13-year initial term and potential five-year renewals. PacBio received a nonrefundable $35 million upfront payment and may earn up to $40 million in development milestones. The upfront amount was deferred at quarter-end: $6.8 million current and $28.2 million non-current. PacBio is to develop clinical diagnostic products, while Roche receives exclusive commercialization and sales rights subject to agreement terms; PacBio is to manufacture and supply certain products.
- Deerfield financing: In February 2013, PacBio issued $20.5 million principal amount of notes bearing 8.75% simple interest, receiving approximately $20.0 million net of the facility fee before other transaction expenses. The notes have a maximum seven-year term, but include sales-linked early repayment provisions and other acceleration rights. Deerfield received immediately exercisable warrants for 5.5 million shares at an initial $2.63 exercise price.
- Equity issuance: The company reported $20.0 million net proceeds from its at-the-market offering during the nine months. Approximately $20.8 million of aggregate offering value had been sold under the program by September 30; the program limit was $30 million. Common shares outstanding were 66.143 million at quarter-end, versus 56.170 million at December 31, 2012.
- Litigation: In October 2013, a California court approved settlement of four consolidated shareholder class actions; an agreement in principle was reached with an individual who opted out. Related amounts had been accrued previously, with no additional expense recorded in the period.
Outlook, commentary and risks
- Management said 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 were based on current plans and were subject to change.
- Management expected continued significant losses and negative cash flow, and higher future interest expense as debt discount accretes. No specific revenue or earnings guidance was provided in the filing text.
- Key risks include uncertain adoption of the RS II and other products, customer order cancellations or delays, product reliability and consumables manufacturing quality, high fixed costs, competition, reliance on limited or single-source suppliers, and potential dilution or difficulty obtaining further financing.
- The Roche arrangement depends on successful product development, milestone achievement, manufacturing execution and Roche commercialization; failure or disputes could limit expected benefits. The Deerfield facility includes restrictive covenants, a minimum $2 million quarter-end cash requirement, collateral over substantially all company property, and repayment triggers including failure to meet a defined sales milestone.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether RS II sales and consumables growth can be sustained, and whether the nine-instrument backlog converts into recognized revenue.
- The Roche agreement’s revenue recognition schedule, development progress, milestone conditions, exclusivity requirements and eventual commercialization prospects.
- Cash burn excluding the Roche upfront payment, and whether the stated 12-month liquidity expectation remains valid given the plan to seek additional capital.
- Deerfield debt terms, including the sales threshold and potential repayment schedule, covenant compliance, interest accretion and dilution from 5.5 million warrants.
- Effects of continuing operating losses, share issuance and stock-based compensation on per-share value; the filing reported 13.351 million options outstanding and 5.504 million warrants at September 30.