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PACB > SEC Filings for PACB > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

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


9-Aug-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 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 the PacBio RS High Resolution Genetic Analyzer and the PacBio RS II Sequencing System. The PacBio RS and the PacBio RS II consists of an instrument platform that uses our proprietary consumables, including our SMRT Cells and reagent kits.

We have financed our operations primarily through the issuance of common and convertible preferred stock resulting in $608.4 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 June 30, 2013, we had an accumulated deficit of $577.6 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- and six-month periods ended June 30, 2012, the majority of our revenue related to the sale of PacBio RSinstruments and associated consumables and services, and during the three- and six-month periods ended June 30, 2013, the majority of our revenue related to the sale of PacBio RS and PacBio RS II 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.

As of June 30, 2013, our backlog was comprised of 10 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.

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.


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Product costs include the direct costs incurred to manufacture products and install instruments combined with allocated manufacturing overhead. Manufacturing overhead 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. During the six-month periods ended June 30, 2013 and 2012, $3.6 million and $5.3 million, respectively, of manufacturing overhead was capitalized into inventory. As we engage excess manufacturing resources in 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 have generally 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.

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.

Interest Expense

Interest expense is primarily related to the debt facility entered into during the first quarter of 2013 and includes the amortization of debt discount and other related costs. To a lesser extent, amounts also include interest expense relating to our facility financing obligations resulting from a lease agreement 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.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income earned on cash and investments, accretion of discounts and amortization of premiums related to investments, net gains or losses on foreign currency transactions, net gains or losses from disposal of fixed assets, net gains or losses resulting from changes in fair value of the Financing Derivative, and foreign income taxes.

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.

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


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ended June 30, 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 6. Debt Facility" to the consolidated financial statements.

Results of Operations

Comparison of the Three-month Periods Ended June 30, 2013 and 2012



                                        Three Months Ended June 30,           Increase/         % Increase/
(in thousands, except percentages)       2013                 2012            (Decrease)        (Decrease)
                                                (unaudited)
Revenue:
Product revenue                      $       4,601        $       5,827      $     (1,226 )              (21 %)
Service and other revenue                    1,447                1,284               163                 13 %
Grant revenue                                   -                   180              (180 )             (100 %)

Total revenue                                6,048                7,291            (1,243 )              (17 %)

Cost of Revenue:
Cost of product revenue                      3,322                5,382            (2,060 )              (38 %)
Cost of service and other revenue            1,667                1,634                33                  2 %

Total cost of revenue                        4,989                7,016            (2,027 )              (29 %)

Gross profit                                 1,059                  275               784                285 %

Operating Expense:
Research and development                    11,682               11,272               410                  4 %
Sales, general and administrative            9,374               11,558            (2,184 )              (19 %)

Total operating expense                     21,056               22,830            (1,774 )               (8 %)

Operating loss                             (19,997 )            (22,555 )           2,558                 11 %
Interest expense                              (673 )                (69 )            (604 )             (875 %)
Other income (expense), net                    199                  137                62                 45 %

Net loss                             $     (20,471 )      $     (22,487 )    $      2,016                  9 %

Revenue

Our total revenue for the second quarter of 2013 was $6.0 million compared to $7.3 million during the second quarter of 2012. Product revenue in the second quarter of 2013 consisted of approximately $2.7 million from sales of our PacBio RS II instruments and instrument upgrades and approximately $1.9 million from sales of consumables compared to approximately $4.6 million from sales of our PacBio RS instruments and approximately $1.2 million from sales of consumables during the second quarter of 2012. Instrument revenue in the second quarter of 2013 reflects three PacBio RS II instrument installations as compared to seven PacBio RS instrument installations during the second quarter of 2012. Service and other revenue of $1.4 million and $1.3 million for the second quarters of 2013 and 2012, respectively, was primarily derived from product maintenance agreements sold in conjunction with our instruments.

Gross Profit

Cost of product revenue of $3.3 million for the second quarter of 2013 reflects the costs relating to the three instruments installed while cost of product revenue of $5.4 million for the second quarter of 2012 reflects seven instruments. Cost of revenue for the second quarter of 2012 also includes a $0.6 million charge associated with a provision for excess and obsolete inventory.


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Research and Development Expense

During the second quarter of 2013, research and development expense increased $0.4 million, or 4%, compared to the second quarter of 2012. The increase in research and development expense was primarily attributed to an increase of $0.8 million in manufacturing resources allocated to research and development as a result of decreased commercial production volumes partially offset by decreases of $0.2 million of facility costs and $0.2 million of other net expenses. Research and development expense included stock-based compensation expense of $1.0 million and $1.1 million during the second quarters of 2013 and 2012, respectively.

Sales, General and Administrative Expense

For the second quarter of 2013, selling, general and administrative expense decreased $2.2 million, or 19%, compared to the second quarter of 2012. The decrease was largely driven by a $1.1 million decrease in legal, professional and consulting expenses primarily as a result of decreased class action litigation related expenses. Additionally, marketing and travel related costs decreased by approximately $0.6 million due primarily to lower expenses incurred for trade show and conference expenses. Sales, general and administrative expense included stock-based compensation expense of $1.3 million and $1.4 million during the second quarters of 2013 and 2012, respectively.

Interest Expense

Interest expense increased $0.6 million from $0.1 million to $0.7 million during the second quarters of 2012 and 2013, respectively, primarily as a result of the debt facility entered into during the first quarter of 2013.

Other Income (Expense), Net

Other income (expense), net remained relatively consistent with $0.2 million in the second quarter of 2013 compared to $0.1 million in the second quarter of 2012.

Comparison of the Six-month Periods Ended June 30, 2013 and 2012



                                         Six-Month Period Ended June 30,           Increase/         % Increase/
(in thousands, except percentages)        2013                    2012             (Decrease)        (Decrease)
                                                   (unaudited)
Revenue:
Product revenue                      $         8,434         $        14,542      $     (6,108 )              (42 %)
Service and other revenue                      2,922                   2,337               585                 25 %
Grant revenue                                    270                     450              (180 )              (40 %)

Total revenue                                 11,626                  17,329            (5,703 )              (33 %)

Cost of Revenue:
Cost of product revenue                        6,522                  13,989            (7,467 )              (53 %)
Cost of service and other revenue              3,115                   3,217              (102 )               (3 %)

Total cost of revenue                          9,637                  17,206            (7,569 )              (44 %)

Gross profit                                   1,989                     123             1,866              1,517 %

Operating Expense:
Research and development                      23,665                  23,345               320                  1 %
Sales, general and administrative             18,928                  26,843            (7,915 )              (29 %)

Total operating expense                       42,593                  50,188            (7,595 )              (15 %)

Operating loss                               (40,604 )               (50,065 )           9,461                 19 %
Interest expense                              (1,098 )                  (139 )            (959 )             (690 %)
Other income (expense), net                      127                     137               (10 )               (7 %)

Net loss                             $       (41,575 )       $       (50,067 )    $      8,492                 17 %

Revenue

Our total revenue for the six-month period ended June 30, 2013 was $11.6 million compared to $17.3 million in the six-month period ended June 30, 2012. Product revenue in the six-month period ended June 30, 2013 consisted of approximately $4.6 million from sales of our instruments and instrument upgrades and approximately $3.8 million from sales of consumables compared to $12.5 million from sales of our instruments and $2.0 million from sales of consumables in the six-month period ended June 30, 2012.


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Instrument revenue in the six-month periods ended June 30, 2013 and 2012 reflects the six and 18 instrument installations and acceptances during the periods, respectively and upgrades during the second quarter of 2013. Service and other revenue of $2.9 million and $2.3 million, for the six-month periods ended June 30, 2013 and 2012, respectively, was primarily derived from product maintenance agreements sold in conjunction with our instruments.

Gross Profit

Gross profit of $2.0 million and $0.1 million for the six-month periods ended June 30, 2013 and 2012 corresponds to the recognition of revenue on six and 18 instruments, respectively. Cost of product revenue of $6.5 million for the six-month period ended June 30, 2013 reflects the costs relating to six instruments compared with $14.0 million for the six-month period ended June 30, 2012 relating to the 18 instruments that were installed and consumables that were shipped during the period. Cost of revenue for the six-month period ended June 30, 2012 also includes $0.7 million of expense associated with our C2 release in the first quarter of 2012 and a $0.7 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 $3.1 million and $3.2 million for the six-month periods ended June 30, 2013 and 2012, respectively, reflect the costs of personnel, materials and support infrastructure necessary to support the installed base of our instruments.

Research and Development Expense

During the six-month period ended June 30, 2013, research and development expenses increased $0.3 million, or 1%, compared to the same period ended June 30, 2012. The increase was driven primarily by an increase of $1.6 million in amounts allocated to research and development as a result of decreased commercial production volumes partially offset by decreases of $0.4 million of facility costs, $0.4 million of depreciation and $0.5 million of other net expenses. Research and development expense included stock-based compensation expense of $2.2 million and $2.2 million during the six-month periods ended June 30, 2013 and 2012, respectively.

Sales, General and Administrative Expense

For the six-month period ended June 30, 2013, selling, general and administrative expenses decreased $7.9 million, or 29%, compared to the same period ended June 30, 2012. The decrease was driven primarily by a $5.5 million decrease in legal, professional and consulting expenses primarily as a result of decreased class action litigation related and legal expenses, including settlement charges of $1.8 million relating to the resolution of two intellectual property matters. Additionally, marketing and travel related costs decreased by approximately $1.5 million due partly to lower expenses incurred for trade show and conference expenses and other net expenses decreased by $0.9 million. Sales, general and administrative expense included stock-based compensation expense of $2.8 million and $2.7 million during the six-month periods ended June 30, 2013 and 2012, respectively.

Interest Expense

Interest expense increased $1.0 million from $0.1 million to $1.1 million for the six-month periods ended June 30 2012 and 2013, respectively, primarily as a result of the debt facility entered into during the first quarter of 2013.

Other Income (Expense), Net

Other income (expense), net remained relatively consistent with $0.1 million net other income in the six-month periods ended June 30, 2012 and 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 June 30, 2013 totaled $107.0 million, compared to $100.6 million at December 31, 2012. Significant financing activities during the six-month period ended June 30, 2013 included $19.8 million received through the debt facility entered into with Deerfield on February 5, 2013 and $20.0 million received through the sale of common stock under our current "at-the-market" offering program. Excluding proceeds from these two financing transactions, cash and investments decreased by $33.4 million compared to December 31, 2012, primarily reflecting $34.0 million of cash used in operating activities and $0.6 million of fixed asset purchases partially offset by $1.3 million of proceeds received from equity sales through our 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 plan to 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


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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 in operating activities are for the manufacturing and sale of PacBio RS and the 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 June 30, 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 $34.0 million for the six-month period ended June 30, 2013 as compared to $41.0 million for the six-month period ended June 30, 2012, due primarily to net losses of $41.6 million and $50.1 million, respectively, partially offset by depreciation and stock-based compensation of $8.1 million and $8.1 million, for the six-month periods ended June 30, 2013 and June 30, 2012, respectively.

Investing Activities

Our investing activities consist primarily of investment purchases, maturities and sales and capital expenditures. Net cash used in investing activities was $12.7 million for the six-month period ended June 30, 2013, comprised of net purchases and maturities of investments of $12.1 million and purchases of property and equipment of $0.6 million. Net cash provided by investing activities during the same period in 2012 was $13.7 million, comprised of net maturities, sales and purchases of investments of $14.5 million, partially offset by purchases of property and equipment of $0.8 million.

Financing Activities

For the six-month period ended June 30, 2013, we received $19.8 million from the debt facility, $20.0 million from our common stock "at-the-market" offering, and $1.2 million from the issuance of our common stock through the sale of shares under our ESPP and stock option exercises. Our "at-the-market" offering program allows us to offer and sell shares of our common stock having an aggregate offering price of up to $30.0 million. As of June 30, 2013 we have sold shares with an aggregate offering price of $20.8 million. Additional details relating . . .

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