Pacific Biosciences of California, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. PacBio develops and sells sequencing systems based on its Single Molecule, Real-Time (SMRT) technology, including instruments, consumables, and service.
Financial performance
| Metric (USD millions, except per-share data) | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $19.4 | $24.9 | Down 22% |
| Product revenue | $16.3 | $21.3 | Down 24% |
| Service and other revenue | $3.1 | $3.6 | Down 15% |
| Gross profit / margin | $7.3 / 37.7% | $8.9 / 35.9% | Margin up 1.8 points |
| Operating expenses | $31.2 | $32.2 | Down 3% |
| Operating loss | $(23.9) | $(23.3) | Loss increased $0.7 |
| Net loss | $(24.2) | $(23.9) | Loss increased $0.3 |
| Basic and diluted loss per share | $(0.20) | $(0.26) | — |
| Cash used in operating activities | $(18.8) | $(16.7) | Use increased $2.1 |
Instrument revenue fell to $7.2 million from $12.6 million, while consumables revenue rose to $9.1 million from $8.7 million. Management attributed the instrument comparison largely to a backlog of installations recognized in Q1 2017 after earlier Sequel chip production challenges. Service revenue was lower as RS II service revenue declined during customer transitions to Sequel.
Financial position and liquidity
- At March 31, cash and cash equivalents were $25.5 million and investments were $53.8 million; together, $79.3 million, excluding $4.5 million of restricted cash. Cash and investments totaled $62.9 million at year-end 2017.
- Total assets were $156.9 million; total liabilities were $54.2 million; stockholders’ equity was $102.7 million.
- Notes payable had a $13.9 million carrying value. The company reported $16.0 million of principal outstanding at March 31; the notes bear 8.75% interest. The debt is secured by substantially all company assets and includes financial and operating covenants.
- Operating cash use was partly offset by $35.5 million of financing cash inflows, including approximately $33.0 million net proceeds from a February public offering. The company sold 14.4 million shares at $2.40 per share.
- Future minimum operating lease payments were $73.1 million. The $4.5 million restricted cash balance secures a letter of credit for the company’s facility lease.
Changes, outlook, and risks
- Revenue declined 22% year over year, while gross margin improved to 37.7%, partly because Q1 2017 service costs included a $1.2 million charge related to leased RS II instruments. Operating expenses declined modestly, but operating and net losses widened.
- Management stated that existing cash, cash equivalents, and investments were expected to fund projected operating requirements for at least 12 months from the filing date. It also noted that additional capital may be needed; no specific revenue or earnings guidance was provided.
- One customer, Gene Company Limited, represented approximately 29% of Q1 revenue, creating customer-concentration and quarterly volatility risk.
- Management cited risks including slower product adoption, manufacturing and supply challenges, ongoing operating losses and cash burn, potential dilution or financing constraints, and competition. It warned that insufficient funding could require reductions or delays to development and commercialization activities.
- Patent disputes with Oxford Nanopore and related parties were ongoing in the U.S. and Europe. The USITC terminated PacBio’s investigation after adopting the administrative judge’s claim construction; PacBio appealed. The company said litigation outcomes and related financial effects could not be estimated, and that litigation is a significant ongoing expense.
- PacBio adopted ASC 606 on January 1, 2018; management reported no material impact on financial position or results. The company expected adoption of the new lease standard in 2019, with a material effect on reported assets and liabilities but not operating results.
Important facts for investors to verify
- Whether instrument orders and Sequel adoption recover after the Q1 decline, and whether consumables growth can offset lower instrument sales.
- Customer concentration, including the continuing revenue contribution from Gene Company Limited.
- Cash burn, the stated 12-month liquidity assessment, and the terms or availability of any future financing; note the dilution from the February share offering.
- Debt covenants, 8.75% interest, repayment schedule, and any restrictions on future equity financing.
- Progress and potential cost or business impact of the patent litigation, for which the filing provides no clear estimate of financial exposure.
- Manufacturing capacity and quality for SMRT Cells and other consumables, and the effect of the long-term facility lease obligations.