Fluidigm Corporation (now Standard BioTools Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing is Fluidigm Corporation’s unaudited quarterly report; results include DVS Sciences, acquired February 13, 2014, only from the acquisition date.
Business context and key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $25.7 million | $14.5 million |
| Product revenue | $25.4 million | $14.3 million |
| Product margin | 66% | 70% |
| Operating loss | $16.6 million | $5.1 million |
| Net loss | $15.4 million | $3.6 million |
| Net loss per share | $0.57 | $0.14 |
| Operating cash flow | $(10.5) million | $(0.9) million |
At March 31, 2014, cash and cash equivalents were $101.0 million and investments were $57.3 million; working capital was $158.4 million. Total assets were $424.7 million and total liabilities were $257.3 million. Convertible notes were recorded at $195.2 million net; no amounts were drawn on the $10 million bank line of credit. The company reported an accumulated deficit of $272.8 million.
Material changes versus the prior-year quarter
- Revenue increased 77%, with product revenue up 79%. Instrument revenue rose 91%, driven mainly by higher sales of preparatory systems, including C1, and some contribution from acquired CyTOF 2 products. Consumables revenue increased 63%, primarily on higher IFC volumes.
- Product margin declined from 70% to 66%. The company attributed approximately seven percentage points of cost-of-product-revenue impact to acquired-inventory step-up and amortization of DVS developed technology, partly offset by manufacturing efficiencies and improved instrument mix and pricing.
- Operating expenses rose, including $10.7 million of acquisition-related costs. Research and development increased 82% and selling, general and administrative expense increased 37%.
- Interest expense increased to $1.0 million, mainly due to the new convertible notes. Q1 2013 included a $1.8 million gain on the Verinata investment sale, which did not recur.
- Operating cash use increased to $10.5 million, reflecting the larger net loss and increased working-capital needs, including receivables and inventory.
Acquisition, financing, outlook and risks
- DVS acquisition: The estimated purchase price was $199.9 million, including $126.0 million cash and approximately $76.8 million in Fluidigm shares. DVS contributed $2.8 million of revenue and a $1.6 million net loss from February 13 through March 31. Purchase accounting remained preliminary; acquired developed technology was valued at $112.0 million with a 10-year useful life, and goodwill was $104.2 million.
- Financing: Fluidigm issued $201.3 million principal amount of 2.75% senior convertible notes due 2034, receiving $195.2 million net of underwriting discounts. The initial conversion price was approximately $55.94 per share. Notes include specified holder repurchase rights and are not guaranteed by subsidiaries.
- Management outlook: The company expected existing cash, cash equivalents and investments to meet working-capital and capital-expenditure needs for at least 18 months, while cautioning that lower cash generation or higher spending could require additional capital. Management expected higher 2014 capital expenditures, particularly for the Singapore facility, and anticipated continued growth in R&D and selling, general and administrative expenses.
- Proteomics outlook: The filing states that 2014 revenue from DVS/Fluidigm Sciences proteomics products was expected to be below 2013 revenue, and that recent growth rates were not expected to continue. The company cautioned that actual results could differ materially from expectations.
- Operational and legal risks: The planned Singapore manufacturing relocation in Q3 2014 could disrupt production or require significant expense. DVS integration, retention of key employees, and realization of acquisition benefits remained uncertain. Fluidigm disclosed negotiations with PerkinElmer concerning the DVS-related license after the acquisition, and an expired Nodality license for which reinstatement or a replacement was being negotiated. The company had paid Life Technologies $1.0 million under protest while reserving its rights regarding a separate license payment dispute.
- Controls and contingencies: Management concluded disclosure controls were effective at the reasonable-assurance level. Integration of DVS financial reporting and controls was ongoing. The filing reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the DVS acquisition produces sustainable revenue growth and whether proteomics sales meet or exceed the company’s stated below-2013 expectation.
- Whether the Singapore manufacturing move proceeds on schedule without material production interruption, margin pressure or additional cash needs.
- Final acquisition accounting, including the developed-technology valuation, deferred tax liabilities, goodwill and any subsequent measurement-period adjustments or impairment indicators.
- Resolution and commercial consequences of the PerkinElmer and Nodality license matters, including continuity of rights to DVS products.
- Cash burn, capital expenditures, note-related interest and dilution exposure, and the company’s ability to fund operations without further financing.