Pacific Biosciences of California, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results. The company develops and sells the PacBio RS II sequencing system and related consumables and services using its SMRT technology.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $11.4 million | $6.0 million | $23.1 million | $11.6 million |
| Gross profit / margin | $3.1 million / 27.4% | $1.1 million / 17.5% | $5.8 million / 25.2% | $2.0 million / 17.1% |
| Operating loss | $(18.3) million | $(20.0) million | $(36.5) million | $(40.6) million |
| Net loss | $(19.1) million | $(20.5) million | $(38.0) million | $(41.6) million |
| Net loss per share | $(0.27) | $(0.33) | $(0.55) | $(0.70) |
- Q2 revenue rose 89% year over year; six-month revenue rose 98%. Product revenue increased 68% and 85%, respectively, reflecting higher instrument sales and consumables revenue, plus Roche contractual revenue recognized in 2014.
- The company recognized revenue from eight PacBio RS II instruments in Q2 and 17 in the first half, compared with three and six in the corresponding 2013 periods.
- Gross margin improved, primarily because of Roche contractual revenue, which has no incremental cost of revenue; product mix partly offset the improvement. Operating expenses were broadly stable: Q2 rose 2%, while first-half expenses declined 1% year over year.
Cash, liquidity and debt
- At June 30, cash, cash equivalents and investments totaled $105.0 million, down from $112.5 million at December 31, 2013. Cash and cash equivalents were $28.2 million; investments were $76.8 million.
- First-half operating cash use was $29.9 million, versus $34.0 million a year earlier. Investing activities provided $8.4 million, mainly from net investment maturities; financing provided $23.3 million, including $20.6 million net proceeds from at-the-market stock sales.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, while also stating it planned to raise additional capital. Future financing needs and availability are uncertain, and equity issuance may dilute shareholders.
- Notes payable had a carrying value of $13.7 million at June 30. The Deerfield facility originated with $20.5 million principal, bears 8.75% simple interest, and matures in February 2020; the effective interest rate, including discount accretion, is 20.6%. Substantially all company property secures the debt, and covenants include a minimum $2.0 million quarter-end cash balance.
- Common shares outstanding were 70.6 million at June 30, compared with 66.3 million at December 31. The company also had warrants to purchase 5.5 million shares outstanding.
Outlook, risks and unusual items
- Management expected 2014 revenue to exceed 2013 revenue and anticipated a Roche milestone during 2014, but cautioned that milestone achievement was not assured. No Roche milestone revenue had been recognized by June 30.
- The Roche agreement included a $35.0 million upfront payment, of which $29.9 million remained deferred at quarter-end, and up to $40.0 million of contingent development milestone payments. Milestones are recognized only when achieved and deemed substantive.
- Management expected quarterly R&D and sales, general and administrative expenses to remain near Q2 levels for the rest of 2014. Gross margin was expected to remain near current levels, subject to quarterly fluctuations from revenue mix and sales geography.
- The company continued to report substantial losses and expected significant losses and negative operating cash flow for the foreseeable future; it had not achieved profitability. Key risks include adoption and sales growth, converting backlog (10 instruments) into recognized revenue, product reliability and manufacturing scale, competition, reliance on single-source suppliers, and financing needs.
- Debt covenants and collateral create liquidity risk in the event of default. Roche development, commercialization and milestone outcomes are uncertain. The filing also describes intellectual-property, regulatory, international-operations and potential dilution risks.
- The company reported no off-balance-sheet arrangements, no material changes in internal control over financial reporting, and effective disclosure controls. Ordinary-course litigation and claims were not expected by management to have a material adverse effect, though outcomes are inherently unpredictable.
Important facts for investors to verify
- Whether instrument and consumables demand continues to grow, and whether the 10-instrument backlog converts to revenue.
- Actual operating cash burn and the adequacy of liquidity relative to management’s 12-month estimate and stated need for future capital.
- Progress against Roche development obligations and milestone conditions, including timing and any revenue recognized.
- Debt terms, covenant compliance, the pledged collateral and the potential effects of future equity sales, options and warrants on dilution.
- Whether margin improvement persists without relying disproportionately on contractual revenue, given continuing operating losses.