Pacific Biosciences of California, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company develops and markets genetic-analysis systems based on its SMRT sequencing technology; its commercial product is the PacBio RS analyzer and related consumables and services. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $7.3m | $10.6m | $17.3m | $10.9m |
| Gross profit | $0.3m | $7.9m | $0.1m | $8.2m |
| Gross margin | 3.8% | 74.3% | 0.7% | 74.9% |
| Operating expenses | $22.8m | $30.6m | $50.2m | $65.8m |
| Operating loss | $(22.6)m | $(22.7)m | $(50.1)m | $(57.6)m |
| Net loss | $(22.5)m | $(22.5)m | $(50.1)m | $(57.3)m |
| Basic and diluted loss per share | $(0.40) | $(0.42) | $(0.90) | $(1.08) |
- Q2 product revenue was $5.8m, including approximately $4.6m from instruments and $1.2m from consumables. Service and other revenue was $1.3m; grants contributed $0.2m.
- During Q2, seven instruments were installed and accepted, versus 16 a year earlier. For the first half, 18 were accepted versus 16; product revenue rose 43% and service revenue rose to $2.3m from $0.2m.
- First-half operating cash use was $41.0m, compared with $64.4m in the prior-year period. Investing activities provided $13.7m, largely from net investment maturities; financing activities provided $2.0m.
- At June 30, cash and cash equivalents were $33.6m and investments were $103.5m, totaling $137.1m, down $40.3m from year-end 2011. Current assets were $152.6m and current liabilities $14.9m. The accumulated deficit was $491.6m.
- Total liabilities were $21.7m, including a $2.9m facility financing obligation ($0.2m current and $2.7m long-term). The filing reports no off-balance-sheet arrangements.
Changes, outlook and notable items
- Q2 revenue fell 31% year over year as instrument revenue declined; service revenue increased with the installed base. Despite lower operating expenses, gross profit contracted sharply. Product costs included a $0.6m excess and obsolete inventory provision. First-half cost of revenue also included $0.7m related to the C2 release and a further $0.7m inventory provision.
- R&D expense fell 42% in Q2 and 47% for the first half, primarily reflecting lower headcount and reduced development costs. First-half SG&A rose 21%, including increased legal costs and $1.8m of settlement charges.
- Management expected Q3 revenue to decrease sequentially from Q2 and gross margin to likely be negative. It expected Q3 R&D to be moderately higher and SG&A relatively consistent with Q2. No full-year revenue or profitability guidance is provided.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating needs for at least 12 months, but the company would likely seek additional financing. An effective shelf registration permits offerings of up to $150m in securities; future issuance could dilute shareholders, and financing may not be available on acceptable terms.
- The company settled two intellectual-property matters in April 2012 and paid $1.8m. Separate putative securities class actions and a shareholder derivative action remained pending. The company disputed the allegations, could not estimate a possible loss or range, and recorded no liability for these contingencies.
- Key risks include early-stage product adoption, instrument reliability and support costs, low consumables manufacturing yields, limited manufacturing scale, dependence on some single-source suppliers, and continuing losses and cash burn. Management cautioned that first-half results may not indicate full-year performance.
Important facts for investors to verify
- Whether instrument placements, consumable use and service revenue can grow enough to offset weak instrument revenue and very low gross margins.
- Whether management’s stated liquidity runway remains supportable given operating cash use, and whether additional capital is raised, on what terms, and with what dilution.
- Progress in product reliability, manufacturing yields and cost reduction, including any further inventory charges or changes to expected margins.
- Developments and potential financial exposure in the pending securities and derivative litigation; the filing provides no reliable loss estimate.
- Potential customer concentration: three customers represented approximately 78% of accounts receivable at June 30, 2012.