Pacific Biosciences of California, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company develops and sells SMRT sequencing systems, instruments, consumables, software and related services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $19.1 million | $21.9 million | $51.8 million | $63.0 million |
| Gross profit / margin | $7.1 million / 37.0% | $6.9 million / 31.5% | $21.2 million / 41.9% | $21.6 million / 34.4% |
| Operating loss | $24.2 million | $28.1 million | $80.4 million | $82.6 million |
| Net loss | $23.7 million | $29.1 million | $45.5 million | $84.0 million |
| Net loss per share, diluted | $0.14 | $0.19 | $0.29 | $0.55 |
- Q3 product revenue declined 15% to $15.7 million. Instrument revenue fell to $7.7 million from $11.6 million, while consumables revenue rose to $8.0 million from $6.9 million. Nine-month product revenue fell 21%, with declines in both instruments and consumables.
- Q3 gross margin improved, partly because the prior-year period included $2.8 million of Sequel-to-Sequel II transition costs and inventory reserves. Nine-month gross margin also improved, while gross profit decreased slightly.
- Research and development expense rose 10% in Q3, primarily due to chip development costs. Sales, general and administrative expense fell 26%, partly because merger-related expenses did not recur and patent litigation expense was lower.
Cash, liquidity and capital
- At September 30, cash and cash equivalents were $69.0 million and investments were $139.5 million, totaling $208.6 million. Total assets were $300.3 million; current liabilities were $130.3 million and stockholders’ equity was $129.5 million.
- Cash provided by operations was $33.8 million for the first nine months, compared with $60.1 million used in the prior-year period. The 2020 figure was substantially affected by receipt of Illumina’s $98.0 million reverse termination fee, which remained recorded as a liability at September 30; it is not a measure of recurring operating cash generation.
- Investing activities used $120.8 million, mainly reflecting net investment purchases. Financing activities provided $126.0 million, including approximately $93.8 million net proceeds from an August share offering and $34.0 million of Illumina continuation advances, partly offset by repayment of $16.0 million of debt.
- The Deerfield notes matured and were repaid in February 2020; no notes payable remained at quarter-end. Operating lease liabilities totaled $43.0 million.
- Management said existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the filing date. The company also said it expected to raise additional capital in the future. The filing reports no off-balance-sheet arrangements.
Material changes, outlook and risks
- Revenue was negatively affected by COVID-19: customer shutdowns, delayed instrument purchases and reduced instrument utilization. Management expected pandemic impacts to continue to adversely affect Q4 2020 revenue and said the future effect could not be reasonably estimated.
- Illumina’s $98.0 million reverse termination fee was contingent and deferred at September 30. The contingency lapsed October 1, 2020, and the company expected to recognize the gain in Q4. Separately, up to $52.0 million of continuation advances may be repayable without interest if specified change-of-control or financing conditions occur within two years of March 31, 2020.
- The company launched the Sequel IIe System in October 2020, designed to help customers generate HiFi reads more efficiently. It provided no specific revenue or earnings guidance in this filing, and stated it expected continued substantial losses and negative operating cash flow, excluding the subsequent reverse termination fee gain.
- Gene Company Limited, the company’s primary distributor in China, accounted for approximately 18% of Q3 revenue and 14% of nine-month revenue.
- Litigation remains a risk. A jury found ONT infringed three PacBio patents but also declined to find them valid on specified grounds; PacBio was pursuing an appeal. PGI patent claims were pending in the U.S. and China; the U.S. case was stayed pending patent review proceedings. The company said the outcomes were unpredictable and no material loss was considered probable or reasonably estimable.
- Other key risks include continued COVID-19 disruption, customer adoption and instrument sales, product and manufacturing reliability, competition, dependence on suppliers and capital markets, potential dilution, and the conditional repayment obligation to Illumina. The company reported recent CEO, CFO and other leadership transitions.
Investor verification points
- Track instrument placements, consumables utilization and customer purchasing recovery, particularly as COVID-19 effects evolve.
- Confirm Q4 recognition and cash treatment of the $98.0 million reverse termination fee, and distinguish it from recurring revenue and operating cash flow.
- Review whether future financing or a change-of-control transaction could trigger repayment of some or all of the $52.0 million continuation advances.
- Assess cash burn, capital needs, dilution and the stated 12-month liquidity outlook against subsequent results.
- Monitor the ONT appeal, PGI proceedings, and customer concentration in China.