Pacific Biosciences of California, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 12, 2015. The filing is an annual report, not a Q4-only filing. Quarterly figures below are unaudited. PacBio develops and sells the PacBio RS II sequencing system and related consumables and services, based on its Single Molecule, Real-Time (SMRT) technology.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $60.6 million | $28.2 million |
| Product revenue | $35.3 million | $20.0 million |
| Service and other revenue | $8.5 million | $6.4 million |
| Contractual revenue | $16.8 million | $1.7 million |
| Gross profit / gross margin | $23.4 million / 38.6% | $6.4 million / 22.8% |
| Operating expenses | $86.3 million | $84.0 million |
| Operating loss | $(62.9) million | $(77.5) million |
| Net loss / loss per share | $(66.2) million / $(0.94) | $(79.3) million / $(1.26) |
| Cash used in operating activities | $(51.5) million | $(29.8) million |
- Revenue grew 115%. Product revenue rose 76%, including instrument revenue of $22.1 million (38 instruments delivered, versus 17 in 2013) and consumables revenue of $13.2 million.
- FY 2014 gross profit and margin benefited materially from Roche contractual revenue, including a $10.0 million development milestone and $6.8 million of upfront-payment amortization. Contractual revenue has no incremental cost of revenue, according to the filing.
- Q4 2014 revenue was $16.9 million, gross profit $4.4 million, operating loss $17.9 million and net loss $19.0 million. Q4 2013 revenue was $9.1 million and net loss $17.2 million.
- At year-end, cash and cash equivalents were $36.4 million and investments were $64.9 million, totaling $101.3 million, down from $112.5 million a year earlier. Working capital was $86.3 million; total liabilities were $69.6 million.
- Cash flow from investing activities was positive $19.6 million, primarily reflecting net investment maturities; financing activities provided $42.0 million, mainly from $38.0 million of net at-the-market equity proceeds. Cash and cash equivalents increased $10.1 million during the year, while cash, cash equivalents and investments together declined $11.2 million.
- Notes payable had a $14.1 million carrying value at year-end. The debt bears 8.75% interest, is secured by substantially all company property, and has covenants including a $2.0 million minimum quarterly cash balance. Contractual future debt payments, including interest, were $29.0 million.
Material changes and business developments
- PacBio reported stronger instrument bookings: 40 instruments accepted in 2014 versus 25 in 2013. Instrument backlog was approximately $8.4 million at year-end, compared with $7.4 million; management expected conversion during 2015, subject to delay or cancellation risk.
- International customers accounted for $26.2 million, or 43% of 2014 revenue, compared with $14.6 million, or 52%, in 2013.
- During 2014, the company introduced sequencing chemistry, sample-preparation and software improvements. Research and development expense was $48.2 million, up from $45.2 million.
- Roche accounted for more than 10% of 2014 revenue. Under the 2013 collaboration, PacBio received a $35.0 million upfront payment and a $10.0 million milestone in 2014. Of the upfront payment, $26.5 million remained deferred at year-end; up to $30.0 million in further milestone payments remained available.
Outlook, risks and unusual items
- 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. This assessment depends on operating and financing plans and is subject to change.
- For 2015, management expected to pursue further product improvements and new products, and expected R&D and sales, general and administrative expenses to increase. It expected another $10.0 million Roche milestone revenue in 2015, but stated achievement was not assured. Gross margin was expected to remain variable, particularly with the mix of contractual revenue.
- Key risks include continued losses and operating cash outflows; uncertain product adoption and long sales cycles; stronger, better-resourced competitors; manufacturing variability and dependence on sole- or single-source suppliers; and potential equity dilution from future fundraising.
- Debt covenants, collateral over substantially all assets and the debt holders’ potential right to receive 25% of proceeds from certain equity-component financings may constrain liquidity and financing flexibility. The company had also filed a shelf registration allowing up to $150 million of securities and amended its ATM agreement in February 2015 to permit an additional $30 million of common stock sales.
- The Menlo Park facility leases were due to expire in December 2015. Following a property sale in February 2015, PacBio was negotiating with the new landlord; the landlord agreed to a 50% reduction in base rent for January through March 2015 while discussions continued.
- The filing states that ordinary-course litigation and claims were not expected to have a material adverse effect based on information then available. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2014.
Important facts for investors to verify
- Whether instrument bookings and the $8.4 million backlog converted to recognized revenue, and whether customer orders were delayed or cancelled.
- How much of future revenue and gross margin depends on Roche, including the timing and achievement of additional milestones and the assumptions behind amortizing deferred upfront revenue.
- Cash burn, financing needs and dilution, including the impact of ATM sales and the debt agreement’s financing-proceeds provisions and covenants.
- Progress in product reliability, manufacturing yields, consumables utilization and broader customer adoption, given competition and supplier concentration.
- Resolution of the Menlo Park lease negotiations and the effect of any new lease terms on costs and operations.