Pacific Biosciences of California, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial figures are unaudited and in U.S. dollars; amounts below are in millions unless stated otherwise.
Business context
PacBio develops and sells sequencing systems based on its Single Molecule, Real-Time technology, including Sequel instruments, consumables and related services. Management reported an installed base of more than 300 systems. The filing attributes product growth mainly to increased Sequel shipments and the larger installed base.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $24.9 | $19.1 | +30% |
| Product revenue | $21.3 | $12.4 | +72% |
| Service and other revenue | $3.6 | $3.2 | +15% |
| Contractual revenue | $0 | $3.6 | Roche-related revenue ended |
| Gross profit | $8.9 | $9.5 | Down $0.6 |
| Gross margin | 35.9% | 49.7% | Prior period included contractual revenue at 100% margin |
| Operating expenses | $32.2 | $28.1 | +15% |
| Operating loss | $(23.3) | $(18.6) | Loss widened |
| Net loss | $(23.9) | $(19.4) | Loss widened |
| Basic and diluted loss per share | $(0.26) | $(0.23) | |
| Cash used in operating activities | $(16.7) | $(20.3) | Cash use declined |
Excluding the $1.3 million charge related primarily to the estimated useful life of leased RS II instruments, Q1 2017 adjusted gross margin was 41.0%, versus 38.0% for Q1 2016 excluding contractual revenue. These are non-GAAP adjustments described by the company.
Balance sheet, liquidity and debt
- Cash, cash equivalents and investments totaled $56.1 million at March 31, 2017, down from $72.0 million at December 31, 2016. The balance sheet reported cash and cash equivalents of $29.0 million and investments of $27.1 million.
- Operating cash outflow was $16.7 million; investing activities provided $25.5 million, principally from investment maturities and sales; financing activities provided $3.4 million, mainly from equity compensation plans. Cash and cash equivalents ended the quarter at $29.0 million.
- Total assets were $135.5 million and total liabilities were $66.3 million. Stockholders’ equity was $69.2 million; accumulated deficit was $811.4 million.
- Notes payable had a $20.5 million principal amount, 8.75% annual interest and a reported carrying value of $16.4 million. Of the principal, $3.1 million was classified as current and due in Q1 2018. The debt is secured by substantially all company property and includes a $2.0 million minimum quarterly cash covenant.
- The new O’Brien facility lease carries $79.0 million of disclosed future minimum payments. The company recorded $4.5 million of restricted cash for a letter of credit.
Material changes and management outlook
- Product growth reflected higher instrument and consumable sales, while service revenue rose with the installed base. The absence of Roche contractual revenue partly offset product growth: Roche terminated its agreement effective February 10, 2017.
- Management expects product demand to increase for the remainder of 2017 and into 2018 compared with 2016, and expects gross margin to improve during 2017 compared with Q1. It also expects research and development and selling, general and administrative expenses to increase in 2017 versus 2016.
- Management stated that existing cash, cash equivalents and investments should fund projected operating requirements for at least 12 months, while also planning to raise additional capital. Its liquidity forecast depends in part on anticipated product demand.
- The company may sell up to $60.0 million of common stock through its at-the-market program; no shares were sold under that program in Q1 2017. In April, a majority of noteholders waived their right to receive 25% of certain equity-financing proceeds in connection with sales under the current program.
- The company moved into its new Menlo Park premises during Q1 and capitalized $28.9 million of tenant improvements. Rent expense was $1.6 million in Q1 2017, compared with $53,000 in Q1 2016.
Risks, contingencies and unusual items
- Management identified uncertainty around U.S. government funding as a potential headwind to sales to affected customers. Key operating risks include adoption and commercialization of Sequel, manufacturing scale and quality, supplier concentration, competition, and the ongoing facility transition.
- PacBio is pursuing patent claims against Oxford Nanopore in U.S. and U.K. proceedings. Oxford Nanopore and Harvard also brought claims against PacBio in the U.K. and Germany after quarter-end. The company said outcomes and financial effects could not be predicted or reasonably estimated at filing time.
- The Q1 gross-profit result included the $1.3 million RS II instrument charge. The prior-year comparison included $3.6 million of Roche contractual revenue at 100% gross margin. The company continued to report substantial losses and expected negative operating cash flow for the foreseeable future.
- Management concluded there was no substantial doubt about the company’s ability to continue as a going concern and reported disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether Sequel instrument shipments and consumable demand sustain revenue growth, particularly given exposure to uncertain government research funding.
- Whether gross margin improves as management expects, and how manufacturing costs, service costs and RS II charges affect reported margins.
- Cash burn, runway and financing needs: the 12-month liquidity assessment depends on demand assumptions, and additional equity financing could dilute shareholders.
- Debt terms and liquidity constraints, including the 8.75% interest rate, Q1 2018 principal due, collateral and minimum-cash covenant.
- Developments in the patent litigation and any resulting legal costs, business restrictions or financial exposure.
- Execution and costs of the new facility transition, including the $79.0 million disclosed future minimum lease payments.