Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GNOM > SEC Filings for GNOM > Form 10-Q on 9-Aug-2012All Recent SEC Filings

Show all filings for COMPLETE GENOMICS INC

Form 10-Q for COMPLETE GENOMICS INC


9-Aug-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. All statements other than statements of historical factors are "forward-looking statements" for purposes of these provisions. In some cases you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "project," "predict," and "potential," and similar expressions intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" in this report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a life sciences company that has developed and commercialized a DNA sequencing platform for whole human genome sequencing and analysis. Our goal is to become the preferred solution for whole human genome sequencing and analysis. Our Complete Genomics Analysis Platform, or CGA Platform, combines our proprietary human genome sequencing technology with our advanced informatics and data management software and our innovative, end-to-end, outsourced service model to provide our customers with data that is immediately ready to be used for genome-based research. We believe that our solution can provide academic, biopharmaceutical, and translational medicine researchers with whole human genome data and analysis at an unprecedented combination of quality, cost and scale without requiring them to invest in in-house sequencing instruments, high-performance computing resources and specialized personnel. By removing these constraints and broadly enabling researchers to conduct large-scale complete human genome studies, we believe that our solution has the potential to advance medical research and expand understanding of the basis, treatment and prevention of complex diseases.

We have targeted our complete human genome sequencing service at academic, governmental and other research institutions, as well as biopharmaceutical and healthcare organizations. In the DNA sequencing industry, whole human genome sequencing is generally deemed to be coverage of at least 90% of the nucleotides in the genome. We perform our sequencing service at our Mountain View, California headquarters facility, which began commercial operation in May 2010. In the near term, we expect to use our available capital to fund our research and development initiatives, obtain CLIA certification to supply sequenced genomes to clinical customers, and eventually grow our sales and marketing and general and administrative organization and expand our sequencing capacity to support our commercial operations and anticipated growth. In future years, we may construct additional genome sequencing centers in the United States and in other locations to accommodate an expected growing, global demand for high-quality, low-cost whole human genome sequencing on a large scale.

Our ability to generate revenue, and the timing of our revenue, will depend on generating new orders and contracts, receiving qualified DNA samples from customers and the rate at which we can convert our backlog of sequencing orders into completed and delivered data and the price per genome contracted with the customer. We define backlog as the number of genomes for which customers have placed orders or entered into contracts with volume estimates that we believe are firm and for which no revenue has yet been recorded. As of June 30, 2012, we had a backlog of orders for sequencing approximately 4,600 genomes, which we believe could contribute approximately $22.0 million toward revenue over the next 12 months. The speed with which we can convert orders into revenue depends principally on:

the speed with which our customers provide us with qualified samples after submitting an order;

the rate at which our system can sequence a genome; and

the rate at which all significant contractual obligations are fulfilled.

Changes in these variables (or orders cancellations or reductions) will cause our results of operations to fluctuate, perhaps significantly. We also have a very limited history to guide us in predicting variables like equipment and/or operating failure, throughput yield, customer delivery of qualified genomic samples and other factors that could affect revenue.

Although we do not anticipate any material seasonal effects, given our limited operating history as a revenue generating company, our sales cycle is uncertain. A limited number of customers accounted for all of the revenue we recognized for the six months ended June 30, 2012, with Inova Translational Medicine Institute and SAIC-Frederick, Inc., National Cancer Institute accounting for approximately 21% and 20% of this revenue, respectively. The loss of one or more of the customers named above could have a material adverse effect on our future results of operations.

We have not been profitable in any period since we were formed. We incurred net losses of $18.8 million and $16.0 million for the three months ended June 30, 2012 and 2011, respectively. Also, we incurred net losses of $39.1 million and $28.4 million for the six


Table of Contents

months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, our accumulated deficit was $250.3 million. We believe that, based on our current level of operations and anticipated growth, our cash and cash equivalents balances and interest income we earn on these balances will not be sufficient to meet our anticipated cash requirements for the six months beyond June 30, 2012. Our recurring operating losses and negative cash flow from operations and our requirement for additional funding to execute our business objectives beyond this period gives rise to substantial doubt as to our ability to continue as a going concern.

The Company announced on June 5, 2012 that it has engaged Jefferies & Company, Inc. to act as financial advisor to the Company and to assist in its review of strategic alternatives, which could include a merger, business combination, equity investment or sale of the Company. There can be no assurance that the Company will be successful in executing on any of these possible strategic alternatives. If the Company is unable to execute on one of these possible strategic alternatives or otherwise raise additional financing on a timely basis, it will need to significantly scale back or discontinue operations.

On June 5, 2012, we also announced a restructuring plan to reduce headcount and defer capital expenditures in an effort to reduce cash consumption. We notified approximately 55 employees of their involuntary termination. As a result of the restructuring plan, we recorded a restructuring charge of $1.5 million for the three and six months ended June 30, 2012. The restructuring charge is comprised of $1.4 million in employee severance benefits and $0.1 million related to contract cancellation charges and cancelled marketing program costs. These amounts are being funded by our available working capital. As a result of the reductions in headcount, we expect to realize approximately $7.0 million of annualized savings.

As a result of the plan to defer capital expenditures, we reassessed the estimated useful lives of our sequencing equipment and determined that the equipment would be used until December 2017. This change in estimate was applied prospectively from the date of the assessment. Depreciation expense for the three and six months ended June 30, 2012 was reduced by $0.3 million, consisting of a $0.2 million decrease in cost of revenues for the three and six months ended June 30, 2012 and a $0.1 million decrease in inventory as of June 30, 2012.

We announced in connection with this restructuring plan that we would focus on development of clinical applications for our whole human genome sequencing service, while continuing to provide high-quality genomes to research customers. We will maintain our current monthly manufacturing capacity of approximately 1,000 genomes at 40x coverage or 500 genomes at 80x coverage and delay capacity expansion until demand for clinical-grade genomes supports expansion. The delay in expanding capacity will defer capital expenditures.

Also in connection with this restructuring plan, we determined to vacate one of our leased buildings in July 2012 (the lease for which will expire in March 2013). We will measure and accrue future facilities exit costs at fair value upon exit and record the amount as a restructuring charge in the third quarter of 2012. The amount of the restructuring charge is anticipated to be approximately $0.6 million and will be substantially paid by the first quarter of 2013. These facilities exit costs will primarily consist of remaining contractual obligations under the lease agreement and operating and maintenance expenses incurred after vacating the facility.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could materially change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and financial condition.

Management determined that the decision to defer capital expenditures as part of the restructuring plan announced on June 5, 2012 (see Note 11) was a change in circumstances that required an evaluation of the recoverability of the Company's property and equipment and patent (intellectual property). Therefore, management performed an evaluation of the recoverability of the Company's property and equipment and patent (intellectual property) by comparing the carrying value of these assets to the projected, undiscounted cash flows generated by these assets over the estimated remaining useful life of these assets. Management determined that the Company's property and equipment and patent (intellectual property) were not impaired at June 30, 2012, as the projected undiscounted cash flows exceed the carrying value. However, management cannot assure that the property and equipment and patent (intellectual property) will remain recoverable in the future.

The following accounting policy was adopted during the three months ended June 30, 2012, in addition to the critical accounting policies described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2011:

Restructuring Charges - We measure and accrue contractual liabilities associated with employee separation costs at fair value as of the date the restructuring plan is announced and terminations are communicated to employees. The fair value measurement of restructuring related liabilities requires certain assumptions and estimates to be made by us. It is our policy to use the best estimates based on facts and circumstances available at the time of measurement, review the assumptions and estimates periodically, and adjust the liabilities when necessary.


Table of Contents

Recent Adopted Accounting Standards

In May 2011, the FASB issued further guidance that generally aligns the principles of fair value measurements with International Financial Reporting Standards. The guidance clarifies the application of existing fair value measurement requirements and expands the disclosure requirements for fair value measurements, and was effective January 1, 2012. The adoption of the guidance had no effect on our financial position or results of operations.

In June 2011, the FASB issued guidance concerning the presentation of comprehensive income. The guidance gives companies the option to present total comprehensive income, components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective January 1, 2012 and was applied retrospectively. The adoption of the guidance had no effect on our financial position or results of operations.

Results of Operations

Comparison of Three Months Ended June 30, 2012 and 2011

The following table shows the amounts of the listed items from our statements of
operations for the periods presented, showing period-over-period changes (in
thousands, except for percentages).



                                                 Three months ended
                                                      June 30,
                                               2012             2011             $ Change          % Change
                                                                                (unaudited)
Revenue                                      $   8,693        $   5,865        $       2,828              48 %
Cost and expenses:
Cost of revenue                                  8,122            6,122                2,000              33 %
Research and development                         8,946            8,028                  918              11 %
Sales and marketing                              4,642            3,138                1,504              48 %
General and administrative                       3,581            3,468                  113               3 %
Restructuring charges                            1,496               -                 1,496               *

Total costs and expenses                        26,787           20,756                6,031              29 %

Loss from operations                           (18,094 )        (14,891 )             (3,203 )            22 %
Interest expense                                  (735 )           (810 )                 75              (9 )%
Interest and other income (expense), net             2             (258 )                260            (101 )%

Net loss                                     $ (18,827 )      $ (15,959 )      $      (2,868 )            18 %

* Increase meaningless

Revenue

During the three months ended June 30, 2012, revenue was $8.7 million, compared to $5.9 million during the same period in 2011, an increase of 48%. We recognized revenue for over 2,100 genomes in the three months ended June 30, 2012, compared to over 900 during the same period in 2011, a 133% increase. The increase in our revenue resulted from the significant increase in the number of genomes for which revenue was recognized, offset by the decrease in the average selling price per genome.

During the second quarter of 2011, the average selling price per genome for revenue recognized was approximately $6,000, compared to approximately $4,000 during the second quarter of 2012. This decrease in price per genome was driven both by competitive pricing pressures from alternatives to whole genome sequencing, such as exome sequencing, as well as price competition from other suppliers of whole human genome sequencing services. We expect this price pressure to continue for the foreseeable future.

Cost of Revenue

During the three months ended June 30, 2012, cost of revenue was $8.1 million, compared to $6.1 million during the same period in 2011, a 33% increase. The modest increase in cost of revenue was achieved while recognizing revenue for approximately 133% more genomes than the same period last year. The increase in cost of revenue was primarily a result of the increase in the number of genomes for which revenue was recognized, offset by efficiencies gained in our sequencing processes and increases in our laboratory capacity utilization while maintaining similar fixed costs. During the second quarter of 2011, the average cost per genome for revenue recognized was approximately $6,500, compared to approximately $4,000 during the second quarter of 2012.


Table of Contents

Cost of revenue as a percent of revenue was 93% in the second quarter of 2012, compared to 104% in the second quarter of 2011. This decrease in cost of revenue as a percent of revenue was due to improvements in our manufacturing process, offset by the decline in average selling prices. We anticipate that these costs as a percentage of revenue will fluctuate as our capacity utilization changes, as the sequencing prices we charge to our customers change and as we continue to improve and automate our sequencing processes.

Research and Development

Research and development expenses were $8.9 million during the three months ended June 30, 2012, compared to $8.0 million during the three months ended June 30, 2011, representing an increase of $0.9 million, or 11%. The increase in research and development expenses was primarily due to an increase in salaries and benefits expense of $0.7 million primarily resulting from increased employee headcount, a $0.3 million reduction in amounts capitalized for internal-use software, a $0.2 million increase in facilities expenses, a $0.2 million increase in depreciation expense and a $0.2 million increase in stock-based compensation expense. The overall increase in research and development expenses was partially offset by a decrease in development material expenses of $0.6 million.

We expect to continue to invest in research and development activities as we seek to enhance our sequencing processes, components and systems to improve the yield and throughput, to reduce the cost of our sequencing service and to commercialize new technologies that will lower costs and increase accuracy of our sequencing services. However, as result of our restructuring activities in June 2012, we believe that in the near future, our research and development expenses will decrease.

Sales and Marketing

Sales and marketing expenses were $4.6 million during the three months ended June 30, 2012, compared to $3.1 million during the three months ended June 30, 2011, representing an increase of $1.5 million, or 48%. The increase in sales and marketing expenses was due primarily to an increase in employee salaries and benefits expense of $0.9 million resulting from increased headcount, expenses incurred of $0.5 million for genome sequencing services performed for marketing purposes during the second quarter of 2012, and a $0.2 million increase in stock-based compensation expense. The overall increase in sales and marketing expenses was partially offset by a decrease in consulting expense of $0.1 million.

General and Administrative

General and administrative expenses were $3.6 million for the three months ended June 30, 2012, compared to $3.5 million for the three months ended June 30, 2011, representing an increase of $0.1 million, or 3%. The increase in general and administrative expenses was primarily due to a $0.1 million increase in stock-based compensation and a $0.2 million increase in facilities expenses, partially offset by a $0.1 million decrease in recruiting fees.

Restructuring Charges

On June 5, 2012, we announced a restructuring plan to reduce employee headcount and defer capital expenditures in an effort to reduce cash consumption. We notified approximately 55 employees of their involuntary termination. As a result of the restructuring plan, we recorded a restructuring charge of $1.5 million for the three months ended June 30, 2012. The restructuring charge was comprised of $1.4 million in employee severance benefits and $0.1 million related to contract cancellation charges and cancelled marketing programs. The Company expects the remaining restructuring charges in the amount of $0.9 million to be substantially paid by the end of 2012.

Interest Expense

During the three months ended June 30, 2012, we incurred interest expense of $0.7 million compared to $0.8 million during the three months ended June 30, 2011. The decrease in interest expense between the two periods was primarily due to lower debt balances related to our loans.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, for the three months ended June 30, 2012 was income of $2,000 compared to expense of $0.3 million for the three months ended June 30, 2011. The change between the two periods was primarily due to the change in the valuation of our warrant liability in the second quarter of 2011. The final mark to market revaluation of the warrants occurred on June 17, 2011, the date the warrants were exercised.


Table of Contents

Comparison of Six Months Ended June 30, 2012 and 2011

The following table shows the amounts of the listed items from our statements of
operations for the periods presented, showing period-over-period changes (in
thousands, except for percentages).



                                                  Six months ended
                                                      June 30,
                                               2012             2011             $ Change          % Change
                                                                                (unaudited)
Revenue                                      $  12,601        $  12,698        $         (97 )            (1 )%
Cost and expenses:
Cost of revenue                                 13,420           12,704                  716               6 %
Research and development                        17,639           14,836                2,803              19 %
Sales and marketing                              9,895            5,838                4,057              69 %
General and administrative                       7,717            6,248                1,469              24 %
Restructuring charges                            1,496               -                 1,496               *

Total costs and expenses                        50,167           39,626               10,541              27 %

Loss from operations                           (37,566 )        (26,928 )            (10,638 )            40 %
Interest expense                                (1,499 )         (1,150 )               (349 )            30 %
Interest and other income (expense), net             6             (341 )                347            (102 )%

Net loss                                     $ (39,059 )      $ (28,419 )      $     (10,640 )            37 %

* Increase meaningless

Revenue

During the six months ended June 30, 2012, revenue was $12.6 million, compared to $12.7 million during the same period in 2011, a 1% decrease. We recognized revenue for approximately 3,000 genomes during the six months ended June 30, 2012, compared to approximately 1,600 genomes during the same period in 2011, an increase of 88%. The significant increase in the number of genomes for which revenue was recognized during the six months ended June 30, 2012 was more than offset by the decrease in the average selling price per genome.

During the first six months of 2011, the average selling price per genome for revenue recognized was approximately $8,000, compared to approximately $4,000 during the first six months of 2012. This decrease in price per genome was driven both by competitive pricing pressures from alternatives to whole genome sequencing, such as exome sequencing, as well as price competition from other suppliers of whole human genome sequencing services. We expect this price pressure to continue for the foreseeable future.

Cost of Revenue

During the six months ended June 30, 2012, cost of revenue was $13.4 million compared to $12.7 million during the same period in 2011, an increase of 6%. The slight increase in cost of revenue was achieved while shipping genomic data for approximately 88% more genomes than the same period last year. This increase in cost of revenue was primarily a result of the increase in the number of genomes for which revenue was recognized, offset by efficiencies gained in our sequencing processes and increases in our laboratory capacity utilization while maintaining similar fixed costs. During the first six months of 2011, the average cost per genome for revenue recognized was approximately $8,000, compared to approximately $4,500 during the first six months of 2012.

Cost of revenue as a percent of revenue increased to 106% in the first six months of 2012, compared to 100% in the first six months of 2011. This increase in cost of revenue as a percent of revenue was due to the decline in our average selling prices, outpacing the decline in our average unit costs. We anticipate that these costs as a percentage of revenue will fluctuate as our capacity utilization changes, as the sequencing prices we charge to our customers change and as we continue to improve and automate our sequencing processes.

Research and Development

Research and development expenses were $17.6 million during the six months ended June 30, 2012 compared to $14.8 million during the six months ended June 30, 2011, representing an increase of $2.8 million, or 19%. The increase in research and development expenses was primarily due to a $1.7 million increase in salaries and benefits expense resulting from increased headcount, a $0.5 million increase in facilities expenses, a $0.5 million increase in stock-based compensation expense, a $0.3 million increase in depreciation expense, a $0.3 million increase in development materials, and a $0.2 million increase in consulting expense. The increase in research and development expenses was partially offset by a $0.6 million decrease in non-revenue genomic services.


Table of Contents

We expect to continue to invest in research and development activities as we seek to enhance our sequencing processes, components and systems to improve the yield and throughput and to reduce the cost of our sequencing service. However, . . .

  Add GNOM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GNOM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.