Pacific Biosciences of California, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. PacBio develops and sells sequencing systems, consumables, software and related services based on its SMRT technology.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $17.1 million | $24.6 million | $32.7 million | $41.0 million |
| Gross profit / margin | $6.6 million / 38.7% | $9.6 million / 39.0% | $14.1 million / 43.2% | $14.7 million / 35.9% |
| Operating loss | $23.5 million | $24.4 million | $56.2 million | $54.5 million |
| Net loss | $23.1 million | $24.6 million | $21.8 million | $54.9 million |
| Basic and diluted loss per share | $0.15 | $0.16 | $0.14 | $0.36 |
Q2 product revenue fell 35% to $13.8 million; service and other revenue was approximately flat at $3.3 million. For the first half, product revenue declined 25% to $26.0 million, while service revenue rose 5% to $6.6 million. Q2 operating expenses were $30.1 million, including $15.0 million in research and development and $15.1 million in sales, general and administrative expense.
Cash provided by operating activities was $51.6 million for the first half, versus $42.9 million used in the prior-year period. This was not a measure of recurring operating cash generation: it included the $98.0 million Illumina termination fee, recorded as a deferred gain, and reflected the accounting treatment of the $34.0 million Continuation Advances. Investing activities used $57.2 million; financing activities provided $18.8 million, including the advances and partly offset by debt repayment.
At June 30, cash and cash equivalents were $43.3 million, investments were $76.6 million, and restricted cash was $3.5 million. Cash, cash equivalents and investments totaled $120.0 million, compared with $49.1 million at December 31, 2019. Current assets were $150.9 million and current liabilities were $130.9 million; current liabilities included a $98.0 million deferred gain liability. Total liabilities were $172.3 million and stockholders’ equity was $41.4 million. The company repaid its remaining $16.0 million Deerfield loan principal at maturity in February; no notes payable remained at June 30. Operating lease liabilities totaled $44.0 million.
Material changes and unusual items
- Revenue declined year over year, primarily due to fewer instrument shipments and installations and lower installed-system utilization amid COVID-19 disruptions.
- Six-month net loss improved substantially, principally because the company recognized a $34.0 million non-operating gain on Continuation Advances from Illumina. The company had reported a $34.0 million gain for Q1; Q2 net loss was $23.1 million.
- The $98.0 million Illumina Reverse Termination Fee remained deferred as a liability because repayment contingencies had not been resolved. PacBio paid $6.0 million in related financial-advisor fees, recorded in SG&A.
- SG&A declined 21% in Q2, partly because $3.3 million of merger-related costs in Q2 2019 did not recur and patent-litigation expense was lower. First-half SG&A rose 3%, mainly due to compensation expense.
- First-half gross margin improved from 35.9% to 43.2%, partly because 2019 included product-transition costs and an inventory reserve related to the Sequel II transition. Q2 gross margin was approximately flat year over year.
Outlook, risks and contingencies
- Management stated existing cash, cash equivalents and investments were expected to fund projected operating requirements for at least 12 months from the filing date. This assessment is conditional: repayment of the Illumina amounts could impair that runway.
- Management expected COVID-19 to continue adversely affecting revenue in the second half of 2020, including Q3, and said the future impact could not be reasonably estimated. About 20% of customer sites remained inactive at June 30; reopened sites had not necessarily returned to prior utilization levels.
- The $98.0 million termination fee may have to be repaid if PacBio entered into a qualifying change-of-control agreement on or before September 30, 2020 and the transaction closed, subject to the agreement’s terms. Up to $52.0 million of Continuation Advances may be repayable in specified change-of-control or financing circumstances within two years of March 31, 2020.
- PacBio said it may need additional capital. A shelf registration permitting up to $250.0 million of securities became effective July 14, 2020; financing could dilute shareholders, and the Illumina agreement may affect repayment obligations for certain financing.
- Patent litigation remains material. A jury found ONT infringed three PacBio patents but also found those patents invalid on specified grounds; PacBio planned to appeal. PacBio is defending separate U.S. and China patent claims brought by Personal Genomics of Taiwan and sought inter partes review of the U.S. patent claims. The filing states that litigation outcomes are unpredictable and no material loss was considered probable and reasonably estimable.
- Leadership transitions were underway: the CEO planned to retire by year-end and the CFO in August 2020; an interim CFO was appointed effective August 8. The filing also highlights product adoption, manufacturing and supply, customer concentration, competition, intellectual-property, and ongoing-loss risks.
- No numerical revenue or earnings guidance was provided. Management said it expected continued substantial losses and negative operating cash flow, excluding any future gain recognition related to the termination fee.
Most important facts for investors to verify
- Whether COVID-19-related customer inactivity and reduced instrument utilization continued to depress shipments, consumables demand and revenue after June 30.
- The status and accounting resolution of the $98.0 million deferred termination fee and the repayment conditions on the Continuation Advances.
- Whether the stated 12-month liquidity runway remains supportable after operating cash burn, potential contingencies and any capital-raising needs.
- Developments in ONT and Personal Genomics litigation, including the appeal and any changes in potential exposure.
- Execution of leadership transitions and the company’s progress toward commercial adoption, sustainable margins and reduced losses.