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PACB > SEC Filings for PACB > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for PACIFIC BIOSCIENCES OF CALIFORNIA, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PACIFIC BIOSCIENCES OF CALIFORNIA, INC.


10-May-2013

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 expectations regarding our financing activities, 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 develop, manufacture and market an integrated platform for high resolution genetic analysis. Combining advances in 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 offer our SMRT technology to the DNA sequencing market where we have developed and commercialized the PacBio RS High Resolution Genetic Analyzer and recently launched the PacBio RS II Sequencing System. The PacBio RS and the PacBio RS II each consists of an instrument platform that uses our proprietary consumables, including our SMRT Cells and reagent kits.

From 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 performing pre-production activities associated with the commercial launch of the PacBio RS which occurred in April 2011. We have financed our operations primarily through the issuance of common and convertible preferred stock resulting in $597.0 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 March 31, 2013, we had an accumulated deficit of $557.1 million.

Basis of Presentation

While the trends below 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.

Revenue

During the three-month periods ended March 31, 2013 and 2012, 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 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 recently launched PacBio RS II instruments and consumables, comprised of SMRT Cells and reagent kits, and system maintenance agreements.

As of March 31, 2013, our backlog was comprised of six instruments. We define backlog as purchase orders or signed contracts for systems from customers which we believe are firm and for which we have not yet recognized revenue. We generally expect to convert backlog to revenue within two quarters.


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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.

Product costs include the direct costs incurred to manufacture products and install instruments combined with allocated manufacturing overhead. 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 under normal circumstances with available resources. Our current manufacturing volumes are below expected normal capacities, therefore manufacturing overhead incurred exceeds the amounts absorbed into inventory and included in cost of revenue. As we engage excess manufacturing resources in next generation product research and development, production of product used internally for research and development, and other research and development 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 and support infrastructure necessary to support the installed customer base. As we have been in the early stages of the commercial launch of our products, the capacity of our service infrastructure has exceeded the demand for installing and servicing customer instruments. Management has estimated the capacity of the existing service infrastructure and has recognized service related cost of revenue based on the installed base. From our initial commercial launch, total service infrastructure costs exceeded the costs associated with the support of customer instruments and such excess costs have been included as a component of sales, general and administrative expense. For the first quarter of 2013, our service costs were approximately equal to our service revenue.

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 and PacBio RS II, 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, 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.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense relating to the debt facility, interest income earned on cash and investments, accretion of discounts and amortization of premiums related to investments and the debt facility, net gains or losses on foreign currency transactions, net losses from disposal of fixed assets, net gains or losses resulting from changes in fair value of the Financing Derivative, and foreign income taxes. Other income (expense), net also includes interest expense relating to our facility financing obligations resulting from lease agreements entered into in 2010. We expect interest expense to increase during future periods as a result of the debt issued during the first quarter of 2013 and subsequently as a result of the accounting treatment of the debt as the recorded value accretes to the amount due at maturity.

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.

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.


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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-month period ended March 31, 2013, 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, 2012 other than the assumptions used to value the Notes, Warrant and Financing Derivative as described above in "Part I, Item 1. Financial Statements-Note 7. Debt Facility" to the consolidated financial statements.

Results of Operations

Comparison of the Three-month Periods Ended March 31, 2013 and 2012



                                         Three Months Ended March 31,           Increase/         % Increase/
(in thousands, except percentages)        2013                  2012            (Decrease)        (Decrease)
                                                 (unaudited)
Revenue:
Product revenue                      $        3,833        $        8,715      $     (4,882 )              (50 %)
Service and other revenue                     1,475                 1,053               422                 40 %
Grant revenue                                   270                   270                -                  -

Total revenue                                 5,578                10,038            (4,460 )              (44 %)

Cost of Revenue:
Cost of product revenue                       3,200                 8,607            (5,407 )              (63 %)
Cost of service and other revenue             1,448                 1,583              (135 )               (9 %)

Total cost of revenue                         4,648                10,190            (5,542 )              (54 %)

Gross (loss) profit                             930                  (152 )           1,082                712 %

Operating Expense:
Research and development                     11,983                12,073               (90 )               (1 %)
Sales, general and administrative             9,554                15,285            (5,731 )              (37 %)

Total operating expense                      21,537                27,358            (5,821 )              (21 %)

Operating loss                              (20,607 )             (27,510 )           6,903                 25 %
Other income (expense), net                    (497 )                 (70 )            (427 )             (610 %)

Net loss                             $      (21,104 )      $      (27,580 )    $      6,476                 23 %

Revenue

Our total revenue for the first quarter of 2013 was $5.6 million compared to $10.0 million in the first quarter of 2012. Product revenue in the first quarter of 2013 consisted of approximately $1.9 million from sales of our PacBio RS instruments and approximately $1.9 million from sales of consumables compared to approximately $7.8 million from sales of our PacBio RS instruments and approximately $0.9 million from sales of consumables during the first quarter of 2012. Instrument revenue in the first quarter of 2013 and 2012 reflects the three and 11 instrument installations and acceptances during the periods, respectively. Service and other revenue of $1.5 million and $1.1 million for the first quarter of 2013 and 2012, respectively, was primarily derived from product maintenance agreements sold in conjunction with sales of PacBio RS instruments.

Grant revenue earned is dependent on the grant received, the amount of the grant and subsequent work performed pursuant to the grant. For the first quarter of 2013, grant revenue remained consistent with the first quarter of 2012 at $0.3 million.

Gross (loss) Profit

Gross profit of $0.9 million and gross loss of $0.2 million for the first quarter of 2013 and 2012, respectively, corresponds to the recognition of revenue on three and 11 PacBio RS instruments, respectively, as well as consumable shipments and services provided to our installed base of instruments. Cost of product revenue of $3.2 million for the first quarter of 2013 reflects the costs relating to components, manufacturing overhead and installation incurred on the three instruments that were installed and consumables that were shipped during the period. Cost of product revenue of $8.6 million for the first quarter of 2012 reflects the costs relating to the 11 instruments that were installed and consumables shipped during the period. Cost of revenue for the first quarter of 2012 also includes $0.7 million of expense associated with our C2 product release, including the write-off of certain inventory and field upgrade costs. Cost of service and other revenue of $1.4 million and $1.6 million for the first quarters of 2013 and 2012, respectively, reflect the costs of personnel, materials and support infrastructure necessary to support the installed base of PacBio RS instruments.


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Research and Development Expense

During the first quarter of 2013, research and development expense of approximately $12.0 million were in line with the $12.1 million of research and development expense in the first quarter of 2012. Decreases in depreciation expense of $0.2 million, equipment and supplies of $0.3 million, and $0.4 million, net, of other expenses were partially offset by an increase of $0.8 million 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 $1.1 million during the first quarter of 2013 and 2012, respectively.

Sales, General and Administrative Expense

For the first quarter of 2013, selling, general and administrative expense decreased $5.7 million, or 37%, compared to the first quarter of 2012. The decrease was largely driven by a $4.4 million decrease in legal expenses primarily related to litigation, including settlement charges of $1.8 million relating to resolution of two intellectual property matters during the first quarter of 2012. Additionally, marketing and travel related costs decreased by approximately $0.9 million due partly to lower expenses incurred for trade show and conference expenses. Sales, general and administrative expense included stock-based compensation expense of $1.4 million and $0.9 million during the first quarter of 2013 and 2012, respectively.

Other Income (Expense), Net

The change in other income (expense), net from $0.1 million to $0.5 million in the first quarter of 2012 and 2013, respectively, primarily reflects an increase in interest expense as a result of the debt facility entered into during the first quarter of 2013.

Liquidity and Capital Resources

Since our inception we have financed our operations primarily through the issuance of common stock and convertible preferred stock. Cash and investments at March 31, 2013 totaled $112.3 million compared to $100.6 million at December 31, 2012. Significant financing activities during the first quarter of 2013 included approximately $19.8 million of net proceeds received through the debt facility entered into with Deerfield on February 5, 2013 and approximately $8.7 million in net proceeds received through the sale of common stock under the Company's current "at-the-market" offering program. Excluding proceeds from these two financing transactions, cash and investments decreased by $16.8 million compared to December 31, 2012, primarily reflecting $17.6 million of cash used in operating activities and $0.3 million of fixed asset purchases partially offset by $1.2 million of proceeds from employee stock plans.

We believe that existing cash, cash equivalents and investments will be sufficient to fund our projected operating requirements for at least 12 months; however, we will raise additional capital in the future including, but not limited to, the financing arrangements as detailed under "Financing Activities" below. These expectations are based on our current operating and financing plans, which are subject to change. Factors that may affect our capital needs include, but are not limited to, slower than expected adoption of our products resulting in lower sales of our products and services; future acquisitions; our ability to maintain new collaboration and customer arrangements; the progress of our research and development programs; initiation or expansion of research programs and collaborations; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the purchase of patent licenses; and other factors.

To the extent we raise additional funds through the sale of equity or convertible debt securities, the issuance of such securities will result in dilution to our stockholders. There can be no assurance that such funds will be available on favorable terms, or at all. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into collaboration agreements on unattractive terms. Our inability to raise capital could have a material adverse effect on our business, financial condition and results of operations.

Operating Activities

Our primary uses of cash from operating activities are for the manufacturing and sale of PacBio RS and the recently launched PacBio RS II instruments and consumables, development of ongoing product enhancements and future product releases, and support functions related to our selling, general and administrative activities. The net cash used for the three-month periods ended March 31, 2013 and 2012 primarily reflects the net loss for those periods, offset by non-cash operating expenses including depreciation, stock-based compensation, and changes in operating assets and liabilities.

Net cash used in operating activities was $17.6 million for the three-month period ended March 31, 2013 as compared to $17.3 million for the three-month period ended March 31, 2012, due primarily to net losses of $21.1 million and $27.6 million, respectively, partially offset by depreciation and stock-based compensation of $4.2 million and $3.8 million, for the three-month periods ended March 31, 2013 and March 31, 2012, respectively. In addition, cash used in operating activities for the three-month period ended March 31, 2012 benefited from a $6.4 million change in working capital primarily as a result of a decrease in the accounts receivable balance and lower inventory levels in the first quarter of 2012.


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Investing Activities

Our investing activities consist primarily of net investment purchases, maturities and sales and capital expenditures. Net cash used in investing activities was $5.6 million for the three-month period ended March 31, 2013, comprised of net purchases and maturities of investments of $5.3 million and purchases of property and equipment of $0.3 million. Net cash provided by investing activities during the same period in 2012 was $13.0 million, comprised of net maturities, sales and purchases of investments of $13.3 million, partially offset by purchases of property and equipment of $0.3 million.

Financing Activities

For the three-month period ended March 31, 2013, we received net proceeds of $19.8 million from the debt facility, net proceeds of $8.7 million from our common stock "at-the-market" offering, and $1.2 million of proceeds from the issuance of our common stock through the sale of shares under our ESPP and stock option exercises. Additional details relating to the debt facility and common stock "at-the-market" offering are described above in "Part I, Item 1. Financial Statements-Note 7. Debt Facility and Note 8. Stockholders' Equity" to the consolidated financial statements, respectively.

For the three-month period ended March 31, 2012, we received $1.8 million from the issuance of our common stock through the sale of shares under our ESPP and stock option exercises.

Off-Balance Sheet Arrangements

As of March 31, 2013 we did not have any off-balance sheet arrangements.

In the ordinary course of business, we enter into standard indemnification arrangements. Pursuant to these arrangements, we indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified party in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to its technology, or from claims relating to our performance or non-performance under a contract, any defective products supplied by us, or any negligent acts or omissions, or willful misconduct, committed by us or any of our employees, agents or representatives. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments we could be required to make under these agreements is not determinable because it involves claims that may be made against us in future periods, but have not yet been made. To date, we have not incurred costs to defend lawsuits or settle claims related to these indemnification agreements.

We also enter and have entered into indemnification agreements with our directors and officers that may require us to indemnify them against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by applicable law. In addition, we may have obligations to hold harmless and indemnify third parties involved with our fund raising efforts and their respective affiliates, directors, officers, employees, agents or other representatives against any and all losses, claims, damages and liabilities related to claims arising against such parties pursuant to the terms of agreements entered into between such third parties and the Company in connection with such fund raising efforts. To the extent that such indemnification obligations apply to the lawsuits described above in "Part I, Item 1. Financial Statements-Note 5. Contingencies" to the consolidated financial statements, any associated expenses incurred are included within the related accrued litigation expense amounts. No additional liability associated with such indemnification agreements has been recorded at March 31, 2013.

Recent Accounting Pronouncements

Effective January 1, 2013 we adopted the accounting guidance which requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component. The amounts were not material to our financial statements, in the periods presented.


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