Pacific Biosciences of California, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 28, 2020. The company develops and sells SMRT genomic sequencing systems, consumables, and related services. Its principal products were the Sequel II system and SMRT Cell 8M, alongside the Sequel system.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $90.9 million | $78.6 million |
| Product revenue | $77.7 million | $66.4 million |
| Service and other revenue | $13.1 million | $12.3 million |
| Gross profit / margin | $34.6 million / 38.0% | $25.1 million / 31.9% |
| Operating expenses | $135.1 million | $126.1 million |
| Operating loss | $(100.5) million | $(101.0) million |
| Net loss | $(84.1) million | $(102.6) million |
| Net loss per share, basic and diluted | $(0.55) | $(0.76) |
| Cash used in operating activities | $78.3 million | $66.4 million |
- Instrument revenue rose to $45.1 million from $28.5 million, reflecting more shipments and installations, including Sequel II. Consumables revenue declined to $32.6 million from $37.9 million, which the company attributed mainly to lower Sequel utilization as customers transitioned to Sequel II.
- Gross margin improved as higher revenue and product mix lifted gross profit. Research and development expense decreased 5% to $59.6 million; sales, general and administrative expense increased 19% to $75.5 million, primarily due to merger-related legal and professional fees.
- FY 2019 net loss includes an $18.0 million non-operating gain from Illumina continuation advances. Excluding that gain, reported earnings would have been lower; operating loss was essentially unchanged year over year.
- Fourth-quarter 2019 revenue was $27.9 million, gross profit $12.9 million, operating loss $17.9 million, and net loss $0.1 million. The quarter’s reported net result included the $18.0 million continuation-advance gain.
Balance sheet, liquidity and debt
- At December 31, 2019, cash, cash equivalents and investments totaled $49.1 million, compared with $102.4 million a year earlier. Working capital was $31.9 million, versus $104.8 million.
- Total assets were $148.0 million, total liabilities $93.1 million, and stockholders’ equity $54.9 million. Current liabilities included $15.9 million of notes payable; the company reported $45.8 million in operating lease liabilities, including current and non-current portions.
- Operating cash outflow increased to $78.3 million from $66.4 million. Investing activities provided $62.0 million, primarily reflecting investment maturities, while financing activities provided $26.5 million, including $18.0 million of Illumina advances and $8.5 million from equity compensation plans.
- Management said existing cash, cash equivalents and investments, together with merger-related payments, were expected to fund projected operating requirements for at least 12 months from filing. This assessment depended in part on demand assumptions and the possibility of repayment obligations or additional financing needs.
- The $16.0 million principal balance under the Deerfield facility was outstanding at year-end and classified as current; the company repaid the remaining principal and interest in February 2020 and terminated the facility. The debt bore 8.75% annual interest.
Changes, outlook and material items
- Revenue increased 16% in 2019 after declining 16% in 2018. The 2018 decline was associated with customer purchase delays ahead of the Sequel II and SMRT Cell 8M launch. The 2019 improvement reflected instrument sales, while consumables remained affected by product transition and utilization.
- The proposed Illumina merger was terminated on January 2, 2020 after the FTC announced in December 2019 that it had authorized legal action to block it. Illumina paid a $98.0 million reverse termination fee after year-end; the company expected to pay approximately $10 million in financial-advisor fees. Additional continuation advances of $6 million in January and $22 million in February 2020 had been paid, with a final $6 million scheduled for March.
- The reverse termination fee may have to be repaid if the company enters into a definitive change-of-control agreement on or before September 30, 2020 and the transaction is consummated. Up to the continuation advances received may be repayable in specified circumstances, including a qualifying change of control or raising at least $100 million in a single equity or debt financing within two years of March 31, 2020; the amount depends on the financing raised.
- Management expects product demand to increase and backlog of $6.6 million at year-end to convert to revenue during 2020, but notes customers may cancel or delay orders. The filing provides no specific revenue, earnings, or margin guidance.
- Key risks include sustained losses and negative operating cash flow, need for future capital, product adoption and manufacturing execution, instrument and consumable quality, competition and pricing, reliance on suppliers, and customer concentration. Gene Company Limited, the primary distributor in China and Hong Kong, represented 17% of 2019 revenue, down from 26% in 2018. International sales represented 53% of revenue.
- The filing discusses potential business effects from the coronavirus outbreak, including delayed or cancelled China orders and supply-chain disruption; the impact was uncertain as of the filing date. Patent litigation with Oxford Nanopore and a patent infringement action brought by Personal Genomics of Taiwan were ongoing; management said outcomes and financial effects could not be estimated. No material loss accrual was recorded for these matters.
- Inventory reserves for excess or obsolete inventory charged to cost of revenue were approximately $5.6 million in 2019, compared with $2.1 million in 2018. The company also adopted lease accounting guidance in 2019, recognizing right-of-use assets and lease liabilities; reported operating lease liabilities were $45.8 million at year-end.
Important facts for investors to verify
- Whether Sequel II adoption and instrument placements translate into sustained consumables utilization and improved gross margins.
- Whether operating cash burn and the stated liquidity runway align with actual cash use, including the effect of the post-year-end Illumina payments and advisor fees.
- The precise repayment terms and triggers for the reverse termination fee and continuation advances, particularly if the company raises capital or pursues a change of control.
- Whether customer concentration, China-related disruption, and the coronavirus outbreak affect sales, collections, or supply availability.
- Developments in the ONT and PGI litigation and any resulting financial exposure; the filing does not provide a clear estimate of potential losses.
- The company reported unqualified auditor opinions on its financial statements and internal control over financial reporting, and management concluded disclosure controls and internal controls were effective as of year-end.