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PACB > SEC Filings for PACB > Form 10-Q on 1-Nov-2012All Recent SEC Filings

Show all filings for PACIFIC BIOSCIENCES OF CALIFORNIA INC

Form 10-Q for PACIFIC BIOSCIENCES OF CALIFORNIA INC


1-Nov-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 that involve risks and uncertainties. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to them. Such forward looking statements include, but are not limited to, statements related to: our expectations regarding our future losses, our expectations regarding our future sources of revenue, the timing of the conversion of our backlog, our expectations regarding our operating expenses; our expectations regarding our interest expense, our financial outlook; our expected revenues, gross margin, research and development expenses, and sales, general and administrative expenses, revenue recognition; our ability to fulfill customer orders; our investments and financing obligations; the effect of global market fluctuations; our expected expenses, including research and development expenses and administrative expenses; our beliefs about our ability to finance our operations; the development and marketability of our products; the potential dilution of current stockholders; our use of any funds raised through the sale of securities; as well as statements of belief and statements of assumptions underlying any of the foregoing. In some cases you can identify forward-looking statements by words such as "may," "will," "should," "could," "would," "expect," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions intended to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from those we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We have developed and commercialized an integrated platform for genetic analysis. Combining nanofabrication, biochemistry, molecular biology, surface chemistry and optics, we created a technology platform called single molecule, real-time, or SMRT, technology. Our initial focus is to use our SMRT technology in the DNA sequencing market where we have developed and commercialized our first product, the PacBio RS High Resolution Genetic Analyzer. The PacBio RS consists of an instrument platform that uses our proprietary consumables, including our SMRT Cells and reagent kits.

Since our incorporation in 2000 through the first quarter of 2011 we primarily focused on developing our technology, undertaking engineering activities to develop our products, conducting initial marketing of our products, and pre-production activities associated with the commercial launch of the PacBio RS during April 2011. We have financed our operations primarily through the issuance of common and convertible preferred stock resulting in $575.0 million in net proceeds. Since our inception, we have incurred significant net losses and we expect to continue to experience significant losses as we invest in developing and taking advantage of market opportunities for our products, servicing and supporting customers, development of enhancements and updates to existing products, development of future products, and sales and administrative infrastructure. As of September 30, 2012, we had an accumulated deficit of $514.4 million.

Basis of Presentation

Revenue

During the three- and nine-month periods ended September 30, 2012 and 2011, the majority of our revenue related to the sale of PacBio RS instruments and associated consumables and services. Service and other revenue primarily consists of revenue derived from product maintenance agreements, while grant revenue represents amounts earned under research agreements with government entities which are recognized in the period during which the related costs are incurred.

We anticipate that our future revenue will be generated primarily from sales of our PacBio RS instruments and consumables, comprised of SMRT Cells and reagent kits, and system maintenance agreements.

As of September 30, 2012, our backlog was comprised of five instruments. We define backlog as purchase orders or signed contracts for systems from our customers which we believe are firm and for which we have not yet recognized revenue. We expect to convert this backlog to revenue during the fourth quarter of 2012 and the first quarter of 2013.

Cost of Revenue

Cost of revenue reflects the direct cost of product components, third party manufacturing services and our internal manufacturing overhead and customer service infrastructure costs incurred to produce, deliver, maintain and support our instruments, consumables, and services.

Manufacturing overhead, comprised mainly of labor costs, is determined and capitalized into inventory based on management's estimate of normal manufacturing capacity. Normal capacity is the production level expected to be achieved over a number of periods


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under normal circumstances with available resources. Our current manufacturing volumes are below expected normal capacities, therefore manufacturing overhead incurred during the period exceeds the amounts absorbed into inventory and included in cost of revenue. As excess manufacturing resources are engaged in next generation product research and development, production of product used internally for R&D, and other R&D support activities, manufacturing costs in excess of amounts reflected in inventory and cost of revenue are expensed as a component of research and development expense during the period in which the expenses are incurred.

Service costs include the direct costs of components used in support, repair and maintenance of customer instruments as well as the cost of personnel, materials and support infrastructure necessary to support the installed customer base. As we are in the early stages of the commercial launch of our products, the capacity of our existing service infrastructure exceeds the number of installed customer instruments. Therefore, management has estimated the capacity of the existing service infrastructure and recognizes service related cost of revenue based on the installed base. As a result, total service infrastructure costs exceed the costs associated with the support of customer instruments and such excess costs are included as a component of sales, general and administrative expense.

Operating Expense

Research and Development Expense. Research and development expense consists primarily of expenses for personnel engaged in the development of our SMRT technology, the design and development of our products, including the PacBio RS , SMRT Cells and reagent kits and the scientific research necessary to produce commercially viable applications of our technology. These expenses also include prototype-related expenditures, development equipment and supplies, facilities costs and other related overhead.

Sales, General and Administrative Expense. Sales, general and administrative expense consists primarily of personnel-related expense related to our executive, legal, finance, sales, marketing, field service, customer support, and human resource functions, as well as fees for professional services and facility costs. Professional services consist principally of external legal, accounting and other consulting services. Selling, general and administrative recurring expenses are expected to increase gradually over time as we continue to add resources to our sales and support infrastructure.

Restructuring Expense. During September 2011, we implemented a workforce reduction of approximately 130 employees, or 28% of our workforce. The actions taken were in consideration of uncertainties associated with the economic environment and to position us for long-term success. The cost associated with this restructuring consists of termination benefits of approximately $4.9 million, of which $3.5 million is included in research and development expense and $1.4 million is included in sales, general and administrative expense for the three- and nine-month periods ended September 30, 2011.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned, accretion of discounts and amortization of premiums on investment balances, net gains or losses on foreign currency transactions, net losses from disposal of fixed assets, and foreign income taxes. Our interest income will vary each reporting period depending on our average investment balances during the period and market interest rates. Other income, net also includes interest expense relating to our facility financing obligations resulting from lease agreements entered into in 2010. We expect interest expense to fluctuate in the future with changes in the obligations.

Income Taxes

Since inception, we have incurred net losses and have not recorded any U.S. federal or state income tax benefits for such losses as they have been offset by valuation allowances.

While such trends are important to understanding and evaluating our financial results, the other transactions, events and trends discussed in "Risk Factors" in this report may also materially impact our business operations and financial results.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, cost of revenue, and operating expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. During the three- and nine-month periods ended September 30, 2012, there have been no significant changes in our critical accounting policies and estimates as compared to the disclosures in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.


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Results of Operations

Comparison of the Three-Month Periods Ended September 30, 2012 and 2011



                                               Three-Month                 Increase/         % Increase/
                                       Period Ended September 30,          (Decrease)        (Decrease)
(in thousands, except percentages)       2012                2011
                                               (unaudited)
Revenue:
Product revenue                      $       1,268        $    9,819      $     (8,551 )              (87 %)
Service and other revenue                    1,283               535               748                140 %
Grant revenue                                  225               165                60                 36 %)

Total revenue                                2,776            10,519            (7,743 )              (74 %)

Cost of Revenue:
Cost of product revenue                        960             6,546            (5,586 )              (85 %)
Cost of service and other revenue            1,626               645               981                152 %

Total cost of revenue                        2,586             7,191            (4,605 )              (64 %)

Gross profit                                   190             3,328            (3,138 )              (94 %)

Operating Expense:
Research and development                    12,626            20,001            (7,375 )              (37 %)
Sales, general and administrative           10,143            12,764            (2,621 )              (21 %)

Total operating expense                     22,769            32,765            (9,996 )              (31 %)

Operating loss                             (22,579 )         (29,437 )           6,858                 23 %
Other income (expense), net                   (150 )             156              (306 )             (196 %)

Net loss                             $     (22,729 )      $  (29,281 )    $      6,552                 22 %

Revenue

Our total revenue for the third quarter of 2012 was $2.8 million compared to $10.5 million in the third quarter of 2011. Product revenue in the third quarter of 2012 consisted of approximately $1.3 million from sales of consumables compared to $9.4 million from sales of our PacBio RS instruments and $0.4 million from sales of consumables in the third quarter of 2011. Instrument revenue in the three-month period ended September 30, 2011 reflects 15 instrument installations and acceptances during the period. No revenue from the sale of PacBio RS instruments was recognized during the third quarter of 2012. Service and other revenue of $1.3 million and $0.5 million, for the third quarter of 2012 and 2011, respectively, was primarily derived from product maintenance agreements sold in conjunction with PacBio RS instruments.

We expect our fourth quarter revenue to increase sequentially from the third quarter of 2012 primarily reflecting increases in both instrument revenue and recurring consumable revenue.

Gross Profit

Gross profit of $0.2 million and $3.3 million for the third quarter of 2012 and 2011, respectively, pertains to consumable shipments and services provided to our installed base of instruments as well as the recognition of revenue on 15 PacBio RS instruments during the third quarter of 2011. Cost of product revenue of $1.0 million for the third quarter of 2012 reflects the costs relating to components and manufacturing overhead incurred on the consumables that were shipped during the period. Cost of product revenue of $6.5 million for the three-month period ended September 30, 2011 reflects part of the costs relating to components and manufacturing overhead incurred on the 15 instruments that were delivered and installed during the period. A significant portion of the costs associated with the instrument revenue recognized during the third quarter of 2011 were expensed as research and development costs during earlier periods prior to the finalization of the commercial designs, specifications and configurations of our products. Cost of service and other revenue of $1.6 million and $0.6 million for the third quarter of 2012 and 2011, respectively, reflect the costs of personnel, materials and support infrastructure necessary to support the installed base of PacBio RS instruments. We expect our overall gross margin will be near break-even during the fourth quarter of 2012.


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Research and Development Expense

During the third quarter of 2012, research and development expenses decreased $7.4 million, or 37%, compared to the third quarter of 2011. The decrease was driven primarily by a $7.1 million decrease in personnel related expense, including stock-based compensation, due to lower headcount in 2012 compared to 2011. The decrease in expenses also includes a $1.3 million decrease in supplies, equipment and consulting costs, offset by a $1.3 million increase in amounts allocated to research and development as a result of decreased commercial production volumes. Research and development expense included stock-based compensation expense of $1.2 million and $1.5 million during the third quarter of 2012 and 2011, respectively. Research and development expense for the third quarter of 2011 include $3.5 million of restructuring costs. Research and development expenses during the fourth quarter of 2012 are expected to be comparable to those incurred during the third quarter of 2012. Research and development expenses can fluctuate due to the timing of when certain activities such as prototype expenses occur.

Sales, General and Administrative Expense

For the third quarter of 2012, selling, general and administrative expenses decreased $2.6 million, or 21%, compared to the third quarter of 2011. The decrease was driven primarily by a $1.1 million decrease in personnel related expense, including stock-based compensation, due to decreased headcount in 2012 compared to 2011. The decrease in expenses also reflects a $0.7 million increase in service cost allocations to cost of service and a $0.7 million decrease in professional and consulting services. Sales, general and administrative expense included stock-based compensation expense of $1.1 million and $1.4 million during the third quarter of 2012 and 2011, respectively. Included in sales, general and administrative expense for the third quarter of 2011 is $1.4 million of restructuring costs. Sales, general and administrative expenses during the fourth quarter of 2012 are expected to be comparable to those incurred during the third quarter of 2012.

Other Income (Expense), Net

Other income (expense), net changed from $0.2 million of net income in the third quarter of 2011 to $0.2 million net expense in the third quarter of 2012 with the change primarily attributed to fixed assets written off during the third quarter of 2012.

Comparison of the Nine-Month Periods Ended September 30, 2012 and 2011



                                               Nine-Month                  Increase/         % Increase/
                                       Period Ended September 30,          (Decrease)        (Decrease)
(in thousands, except percentages)       2012                2011
                                               (unaudited)
Revenue:
Product revenue                      $      15,810        $   19,966      $     (4,156 )              (21 %)
Service and other revenue                    3,620               728             2,892                397 %
Grant revenue                                  675               725               (50 )               (7 %)

Total revenue                               20,105            21,419            (1,314 )               (6 %)

Cost of Revenue:
Cost of product revenue                     14,949             9,083             5,866                 65 %
Cost of service and other revenue            4,843               839             4,004                477 %

Total cost of revenue                       19,792             9,922             9,870                 99 %

Gross profit                                   313            11,497           (11,184 )              (97 %)

Operating Expense:
Research and development                    35,971            63,665           (27,694 )              (43 %)
Sales, general and administrative           36,986            34,899             2,087                  6 %

Total operating expense                     72,957            98,564           (25,607 )              (26 %)

Operating loss                             (72,644 )         (87,067 )          14,423                 17 %
Other income (expense), net                   (152 )             502              (654 )             (130 %)

Net loss                             $     (72,796 )      $  (86,565 )    $     13,769                 16 %

Revenue

Our total revenue for the nine-month period ended September 30, 2012 was $20.1 million compared to $21.4 million in the nine-month period ended September 30, 2011. Product revenue during the nine-month period ended September 30, 2012 consisted of approximately $12.5 million from sales of our PacBio RS instruments and approximately $3.3 million from sales of consumables compared to $19.4 million from sales of our PacBio RS instruments and $0.6 million from sales of consumables during the nine-month period ended September 30, 2011. Instrument revenue for the nine-month periods ended September 30, 2012 reflects the 18


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instrument installations and acceptances during the period. Instrument revenue for the nine-month periods ended September 30, 2011 reflects the 31 instrument installations, 11 of which were beta instruments that were upgraded to commercial specifications, and 20 additional instruments delivered and installed during the period. Service and other revenue of $3.6 million and $0.7 million, for the nine-month periods ended September 30, 2012 and 2011, respectively, was primarily derived from product maintenance agreements sold in conjunction with PacBio RS instruments.

Gross Profit

Gross profit of $0.3 million and $11.5 million for the nine-month periods ended September 30, 2012 and 2011 corresponds to the recognition of revenue on 18 and 31 PacBio RS instruments, respectively, as well as consumable shipments and services provided to our installed base of instruments. Cost of product revenue of $14.9 million for the nine-month period ended September 30, 2012 reflects the costs relating to components and manufacturing overhead incurred on the 18 instruments that were installed and consumables that were shipped during the period. Cost of product revenue of $9.1 million for the nine-month period ended September 30, 2011 reflects a portion of the costs relating to components and manufacturing overhead incurred on the 31 instruments that were delivered and installed during the period. A significant portion of the costs associated with the instrument revenue recognized during the period in 2011 were expensed as research and development costs during earlier periods prior to the finalization of the commercial designs, specifications and configurations of our products. Cost of revenue for the nine-month period ended September 30, 2012 also included $0.7 million of expense associated with our C2 release in the first quarter of 2012 and a $0.9 million charge associated with provision for excess and obsolete inventory based on a review of on hand inventory and future demand. Cost of service and other revenue of $4.8 million and $0.8 million for the nine-month periods ended September 30, 2012 and 2011, respectively, reflect the costs of personnel, materials and support infrastructure necessary to support the installed base of PacBio RS instruments.

Research and Development Expense

During the nine-month period ended September 30, 2012, research and development expenses decreased $27.7 million, or 43%, compared to the same period ended September 30, 2011. The decrease was driven primarily by a $16.4 million decrease in personnel related expense, including stock-based compensation, due to lower headcount in 2012 compared to 2011. The decrease in expenses also includes a $4.0 million decrease related to expensed instrument development components accounted for as development expense in 2011, a $3.2 million decrease in supplies, development materials and prototype-related expenses, a $1.3 million decrease in facility and technology expenses, a $1.0 million decrease in consulting and professional services and a net decrease of $1.8 million in other research and development expenses. Additionally, research and development expense for the nine-month period ended September 30, 2011 included $3.5 million of restructuring costs. Research and development expense included stock-based compensation expense of $3.4 million and $4.8 million during the nine-month periods ended September 30, 2012 and 2011, respectively.

Research and development expenses incurred during the first quarter of 2011 include costs associated with the finalization of commercial designs, specifications and configurations for our products prior to commercial launch during the second quarter of 2011. During the nine-month periods ended September 30, 2012 and 2011, research and development expenses were reduced by the capitalization of $6.5 million and $6.1 million, respectively, of manufacturing overhead into inventory.

Sales, General and Administrative Expense

For the nine-month period ended September 30, 2012, selling, general and administrative expenses increased $2.1 million, or 6%, compared to the same period ended September 30, 2011. The increase was driven primarily by a $3.6 million increase in legal and other professional and consulting expenses primarily related to litigation, including settlement charges of $1.8 million relating to the resolution of two intellectual property matters. The increase in expenses also includes a $0.9 million increase in depreciation expense partially offset by $2.6 million increase in service cost allocations to cost of service. Allocation of service related costs from sales, general and administrative expense to cost of service began in conjunction with the commercial launch during the second quarter of 2011. Sales, general and administrative expense included stock-based compensation expense of $3.4 million and $4.1 million during the nine-month periods ended September 30, 2012 and 2011, respectively. Included within sales, general and administrative expenses for the nine-month period ended September 30, 2011 is $1.4 million of restructuring costs.

Other (Expense) Income, Net

Other income (expense), net changed from $0.5 million of net income for the nine-month period ended September 30, 2011 to a net expense of $0.2 million for the nine-month period ended September 30, 2012. The change was primarily attributed to fixed assets written off during the first and third quarter of 2012 and lower interest income in the nine-month period ended September 30, 2012 compared to the nine-month period ended September 30, 2011. The decrease in interest income was primarily a result of lower average investment balances in 2012 as compared to 2011.

Liquidity and Capital Resources

Since our inception we have financed our operations primarily through the issuance of convertible preferred stock and the issuance of common stock through our initial public offering resulting in $575.0 million in net proceeds. As of September 30, 2012, we had cash, cash equivalents and investments of $119.4 million, a decrease of $58.0 million compared to December 31, 2011,


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reflecting approximately $58.6 million of cash used during the period to fund operations and $1.3 million of fixed asset purchases partially offset by $2.7 million of proceeds from employee stock plans. Although we believe that existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least 12 months, we expect to raise additional funds to support our operations through public or private equity or debt . . .

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