Pacific Biosciences of California, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results. The company develops and sells PacBio RS II sequencing systems and related consumables and services using its SMRT technology.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $24.9 million | $11.4 million | $42.6 million | $23.1 million |
| Gross profit | $14.5 million | $3.1 million | $20.4 million | $5.8 million |
| Gross margin | 58.2% | 27.4% | 48.0% | 25.2% |
| Operating loss | $11.4 million | $18.3 million | $30.7 million | $36.5 million |
| Net loss | $11.9 million | $19.1 million | $32.1 million | $38.0 million |
| Basic and diluted loss per share | $0.16 | $0.27 | $0.43 | $0.55 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $31.4 million | $29.9 million |
Q2 product revenue was $8.8 million, including $4.3 million from instruments and $4.5 million from consumables; service and other revenue was $2.5 million. Contractual revenue was $13.6 million. For the six months, product revenue was $20.1 million, service and other revenue $5.3 million, and contractual revenue $17.2 million.
At June 30, cash and cash equivalents were $25.9 million and investments were $46.7 million, totaling $72.7 million, down from $101.3 million at December 31, 2014. Total assets were $96.8 million; current liabilities were $39.0 million; total liabilities were $62.9 million. Notes payable had a carrying value of $14.6 million. The Deerfield notes bear 8.75% interest, mature in February 2020, are secured by substantially all company property, and require at least $2.0 million of quarter-end cash and cash equivalents.
Material changes and unusual items
- Revenue increased 118% in Q2 and 85% for the first half, with the increase principally reflecting Roche contractual revenue. The company recognized a $10.0 million Roche development milestone in Q2 after achieving the milestone in April.
- The company prospectively shortened its estimated Roche development period, increasing recognized revenue by $1.9 million in Q2 and $3.8 million in the first half, with no incremental cost of revenue. Management said this change reduced loss per share by $0.03 and $0.05, respectively. The remaining deferred Roche upfront revenue was $19.3 million at June 30.
- Reported gross-margin improvement was substantially influenced by high-margin contractual revenue. Management attributed $11.9 million of the Q2 revenue increase and $13.8 million of the first-half increase to contractual revenue. Product costs also included excess-inventory charges of $0.9 million in Q2 and $1.3 million in the first half.
- Product revenue growth reflected increased consumable sales, a larger installed base and higher customer utilization; first-half instrument sales also rose, primarily due to more new installations. Research and development and selling, general and administrative expenses increased 21% and 20% in Q2, respectively, mainly from higher product-development costs, headcount-related compensation and professional fees.
- Shares outstanding increased to 74.9 million at June 30 from 73.9 million at year-end. First-half at-the-market offering proceeds were $1.4 million; $28.5 million remained available under that program.
Outlook, risks and contingencies
- Management expected existing cash, cash equivalents and investments to fund projected operating requirements for at least 12 months, but planned to raise additional capital. It warned that financing may not be available on acceptable terms and could dilute shareholders.
- Management expected gross margin to return to the mid-30% range for the remainder of 2015, subject to revenue mix. It expected quarterly R&D and SG&A to remain around current levels, with possible variation; SG&A could also be affected by the planned headquarters transition.
- Roche could provide up to $20.0 million more in milestone revenue, but achievement is not assured. The company also cited risks relating to product adoption, competition, manufacturing quality and supply, continued operating losses and negative operating cash flow, and its ability to finance operations.
- After quarter-end, the company signed a 132-month lease for approximately 180,000 square feet at 1315 O’Brien Drive. Expected payments over the lease term were approximately $80 million in rent and $24 million in operating expenses, with additional improvement and move costs expected to be substantial. The lease and amendments to existing leases were contingent on obtaining or waiving specified permits by September 30, 2015. The existing landlord payments potentially available under the amendment totaled up to $20 million, subject to conditions; rent abatement was provided through September 2017.
- The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective at a reasonable-assurance level. It reported no off-balance-sheet arrangements and no legal proceedings identified as expected to have a material adverse effect, while noting ordinary-course claims can be unpredictable.
Key investor verification points
- Separate recurring product and service performance from Roche milestone revenue and accelerated amortization when assessing revenue growth and margins.
- Verify the basis and remaining recognition period for Roche deferred revenue, and whether further milestones are achieved.
- Track operating cash burn, available liquidity, additional financing needs, dilution, and compliance with Deerfield debt covenants.
- Confirm the permit conditions and final economics of the new and amended leases, including landlord payments, improvement costs and relocation costs.
- Monitor excess inventory, product reliability, manufacturing capacity, customer utilization and the sustainability of management’s margin outlook.