Pacific Biosciences of California, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted. The filing is unaudited.
Business context
PacBio develops and sells genetic sequencing instruments, consumables and services based on its Single Molecule, Real-Time (SMRT) technology. It also has a development, commercialization and license agreement with Roche. At quarter-end, reported backlog comprised 20 instruments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $20.6m | $7.4m | $43.7m | $19.0m |
| Product revenue | $6.8m | $5.8m | $22.4m | $14.2m |
| Service and other revenue | $2.2m | $1.6m | $6.2m | $4.8m |
| Contractual revenue | $11.7m | — | $15.1m | — |
| Gross profit / margin | $13.2m / 63.8% | $1.2m / 16.7% | $19.0m / 43.4% | $3.2m / 17.0% |
| Operating loss | $(8.4)m | $(19.9)m | $(45.0)m | $(60.5)m |
| Net loss | $(9.2)m | $(20.5)m | $(47.2)m | $(62.1)m |
| Basic and diluted loss per share | $(0.13) | $(0.31) | $(0.68) | $(1.01) |
Q3 product revenue included $3.5m from six instruments and $3.3m from consumables. Nine-month instrument revenue reflected 23 systems sold, compared with 12 in the prior-year period. Research and development expense was $11.7m in Q3 and $35.9m year to date; selling, general and administrative expense was $9.9m and $28.0m, respectively.
Cash, liquidity and debt
- Cash, cash equivalents and investments totaled $99.3m at September 30, 2014, down from $112.5m at December 31, 2013. Cash and cash equivalents alone were $35.4m.
- Nine-month operating cash use was $36.1m, versus $15.3m in 2013. Investing activities provided $21.1m, principally from net investment maturities; financing provided $24.1m, including $20.8m net proceeds from an at-the-market (ATM) stock offering.
- Notes payable were $13.9m carrying value. The debt originated with $20.5m principal, bears 8.75% simple interest and matures in February 2020. The agreement requires at least $2.0m of cash and cash equivalents at each quarter-end and is secured by substantially all company property.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months, while also stating the company planned to raise additional capital. From October 1 through November 3, it sold 1.8m shares through the ATM for $11.1m net.
Changes, outlook and notable items
- Revenue rose 178% in Q3 and 129% year to date, but the increase included Roche contractual revenue. PacBio recognized a $10.0m Roche development milestone in August 2014; Q3 contractual revenue also included approximately $1.7m of amortized upfront payment revenue. The milestone is non-recurring.
- The Roche agreement provided up to $40.0m in development milestone payments; after the first $10.0m milestone, up to $30.0m remained subject to future achievement. The original $35.0m upfront payment had $28.2m deferred at September 30.
- Management expected near-term gross margin to decrease because of a higher expected mix of instrument revenue in Q4 and the non-recurring Q3 milestone. It expected quarterly R&D and SG&A expenses to remain consistent with recent quarters for the remainder of 2014.
- The company remained loss-making and reported that it expected substantial losses and negative operating cash flow for the foreseeable future. It warned that additional financing may dilute shareholders and may not be available on favorable terms or at all.
- Key risks include limited commercial history and uncertain product adoption, variable customer purchasing cycles and backlog conversion, product reliability and manufacturing scale, reliance on certain single-source suppliers, competition and intellectual property disputes, and Roche development or commercialization execution. Debt covenant breach could trigger acceleration; substantially all property, including intellectual property, is pledged as collateral.
- Management reported effective disclosure controls and no material quarter-over-quarter change in internal control over financial reporting. The filing reported no off-balance-sheet arrangements and no legal proceedings expected by the company to have a material adverse effect, while noting litigation outcomes are inherently unpredictable.
Important facts for investors to verify
- How much future revenue and gross profit is attributable to recurring product and service sales versus Roche upfront-payment amortization and milestone revenue?
- Whether the reported 20-system backlog converts to shipped instruments and recognized revenue, and how instrument mix affects margins.
- Operating cash burn, runway assumptions and subsequent financing needs; the filing’s 12-month liquidity statement is based on current operating and financing plans.
- Roche milestone conditions, remaining potential payments and performance obligations, alongside the debt’s cash covenant, collateral and repayment terms.
- Share dilution: the filing reports 70.976m shares outstanding at September 30 and 71.356m at October 31, as well as outstanding warrants for 5.5m shares and additional ATM capacity at quarter-end.