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PACB > SEC Filings for PACB > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for PACIFIC BIOSCIENCES OF CALIFORNIA, INC.

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


8-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes included in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties, including statements regarding our expected financial results in future periods. You should read the "Risk Factors" section of this report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

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 a third generation sequencing platform, the PacBio RS II sequencing system. The PacBio RS II is an instrument that uses our proprietary consumables, including our SMRT Cells and reagent kits that are used to prepare and sequence DNA samples.

Basis of Presentation

Revenue

During the three-month period ended March 31, 2014 and 2013, product revenue was derived from the sale of PacBio RS II instruments, instrument upgrades, and associated consumables. Service and other revenue was primarily derived from product maintenance agreements sold on our installed instruments. Contractual revenue relates to the quarterly amortization of $1.7 million from the non-refundable up-front payment of $35.0 million we received in September 2013 pursuant to the Roche Agreement.

As of March 31, 2014, our backlog was comprised of 13 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.

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. There are no incremental costs associated with our contractual revenue, all product development costs are reflected in research and development expense.

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 remain 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 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, materials and support infrastructure necessary to support the installed customer base. Prior to the fourth quarter of 2013, the capacity of our existing service infrastructure exceeded the number of installed customer instruments. Therefore, management estimated the capacity of the existing service infrastructure and recognized service related cost of revenue based on the installed base. As a result, total service infrastructure costs exceeded the costs associated with the support of customer instruments and such excess costs are included as a component of sales, general and administrative 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 future products and current product enhancements, and have historically included costs of developing the PacBio RS II, 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

Selling, general and administrative expenses include costs for sales, marketing and administrative personnel, sales and marketing activities, tradeshow expenses, legal expenses, regulatory fees and general corporate expenses.

Interest Expense

Interest expense is primarily related to our debt facility 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 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 fully offset by valuation allowances.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited Financial Statements, which have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe 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. There have been no material changes to our critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Results of Operations






                                     Three-Month Periods Ended March 31,       $ Change    % Change
(in thousands, except percentages)        2014                  2013
                                                   (unaudited)
Revenue:
Product revenue                    $           7,865     $           3,833    $   4,032        105%
Service and other revenue                      2,081                 1,745          336         19%
Contractual revenue                            1,696                      -       1,696            -
Total revenue                                 11,642                 5,578        6,064        109%
Cost of Revenue:
Cost of product revenue                        7,169                 3,200        3,969        124%
Cost of service and other revenue              1,797                 1,448          349         24%
Total cost of revenue                          8,966                 4,648        4,318         93%
Gross profit                                   2,676                   930        1,746        188%
Operating Expense:
Research and development                      11,771                11,983         (212)        (2%)
Sales, general and administrative              9,150                 9,554         (404)        (4%)
Total operating expense                       20,921                21,537         (616)        (3%)
Operating loss                               (18,245)              (20,607)       2,362         11%
Interest expense                                (686)                 (426)        (260)       (61%)
Other income (expense), net                       45                   (71)         116        163%
Net loss                           $         (18,886)    $         (21,104)   $   2,218         11%


Revenue

Our total revenue for the three-month period ended March 31, 2014 was $11.6 million compared to $5.6 million for the same period during 2013. Product revenue in the three-month period ended March 31, 2014 consisted of $5.3 million from sales of PacBio RS II instruments and instrument upgrades and $2.5 million from sales of consumables compared to $1.9 million from sales of PacBio RS instruments and instrument upgrades and $1.9 million from sales of consumables for the same period during 2013. Instrument revenue during the three-month period ended March 31, 2014 reflects revenue from nine PacBio RS II instruments as compared to three PacBio RS instruments for the same period during 2013. Service and other revenue of $2.1 million and $1.7 million for the three-month periods ended March 31, 2014 and 2013, respectively, was primarily derived from product maintenance agreements sold on our installed instruments. We expect 2014 revenue to exceed that recognized during 2013; however, revenue may fluctuate quarter to quarter.

Gross Profit

Gross profit for the three-month period ended March 31, 2014 increased to $2.7 million compared to $0.9 million for the same period during 2013. The $1.8 million increase in gross profit from 2013 to 2014 primarily reflects the gross profit realized in 2014 due to increases in contractual revenue. Gross margin for the three-month period ended March 31, 2014 was 23.0% compared to 16.7% for the same period during 2013. Gross margin increased primarily due to the increase in contractual revenue partially offset by changes in product mix. Cost of product revenue of $7.2 million for the three-month period ended March 31, 2014 reflects the costs relating to the sale of nine instruments, instrument upgrades installed, and consumables shipped during the period while cost of product revenue of $3.2 million for the same period during 2013 reflects the costs relating to the sale of three instruments, instrument upgrades installed, and consumables shipped during the period. Cost of service and other revenue of $1.8 million and $1.4 million for the three-month periods ended March 31, 2014 and 2013, respectively, reflect the costs of personnel, materials and support infrastructure necessary to support the installed base of our instruments. Gross margin for the remainder of this year is expected to remain near current levels, subject to fluctuation on a quarterly basis due to the mix of instruments and consumables delivered each quarter and the geographies into which the products are sold.

Research and Development Expense

During the three-month period ended March 31, 2014, research and development expense decreased $0.2 million, or 2%, compared to the same period during 2013. Research and development expense included stock-based compensation expense of $0.9 million and $1.2 million during the three-month periods ended March 31, 2014 and 2013, respectively. We anticipate quarterly research and development expenses to remain consistent with the current quarter for the remainder of 2014.

Sales, General and Administrative Expense

For the three-month period ended March 31, 2014, selling, general and administrative expense decreased $0.4 million, or 4%, compared to the same period during 2013. Sales, general and administrative expense included stock-based compensation expense of $1.2 million and $1.4 million during the three-month periods ended March 31, 2014 and 2013, respectively. We anticipate quarterly sales, general and administrative expenses to remain consistent with the current quarter for the remainder of 2014.

Interest Expense

Interest expense is primarily related to the debt facility entered into during the three-month period ended March 31, 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 three-month period ended March 31, 2013 as the recorded value accretes to the amount due at maturity.

Interest expense for the three-month period ended March 31, 2014 increased to $0.7 million compared to $0.4 million for the same period during 2013. The $0.3 million increase in interest expense from 2013 to 2014 is primarily as a result of the debt facility entered into during the three-month period ended March 31, 2013 and the interest expense for the three-month period ended March 31, 2013 included approximately two months of interest compared with three months of interest expense included for the three-month period ended March 31, 2014.

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 resulting from changes in fair value of the Financing Derivative and foreign income taxes.


Liquidity and Capital Resources

Since our inception we have financed our operations primarily through the issuance of common stock and convertible preferred stock, in addition to the debt financing. Cash and investments at March 31, 2014 totaled $118.7 million, compared to $112.5 million at December 31, 2013. During the three-month period ended March 31, 2014, we received $20.6 million, net, through the sale of common stock under our current "at-the-market" offering program. Excluding proceeds from the 'at-the-market" offering, cash and investments decreased by $14.4 million compared to December 31, 2013, primarily reflecting $16.3 million of cash used in operating activities and $0.5 million of fixed asset purchases, partially offset by $2.3 million of proceeds received from equity sales through our employee equity 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 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 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, 2014 and 2013 primarily reflects the net loss for those periods, partially offset by non-cash operating expenses including depreciation, stock-based compensation, and changes in operating assets and liabilities.

We used $16.3 million of cash from operating activities for the three-month period ended March 31, 2014, compared to cash usage of $17.6 million for the corresponding period in 2013. The cash used in operating activities for the three-month period ended March 31, 2014 was due primarily to a net loss of $18.9 million and a $1.0 million change in working capital, partially offset by stock-based compensation of $2.3 million and depreciation and amortization of $1.4 million. The cash used in operating activities for the three-month period ended March 31, 2013 was due primarily to a net loss of $21.1 million, partially offset by stock-based compensation of $2.7 million and depreciation of $1.5 million.

Investing Activities

Our investing activities consist primarily of capital expenditures and investment purchases, maturities and sales. We received $8.2 million of cash from investing activities for the three-month period ended March 31, 2014 compared to cash usage of $5.6 million for the corresponding period in 2013. The receipt of cash of $8.2 million from investing activities for the three-month period ended March 31, 2014 was due primarily to net maturities of investments of $8.7 million, partially offset by purchases of property and equipment of $0.5 million. The usage of cash for the three-month period ended March 31, 2013 were due primarily to net purchases of investments of $5.3 million, and purchases of property and equipment of $0.3 million.

Financing Activities

We received $23.0 million and $29.7 million of cash from financing activities for the three-month periods ended March 31, 2014 and 2013, respectively. The receipt of cash of $23.0 million from financing activities for the three-month period ended March 31, 2014 was due primarily to the net proceeds of $20.6 million from our common stock "at-the-market" offering and $2.3 million from the issuance of common stock through equity plans. Under our current "at-the-market" offering program, $17.9 million of common stock remain available for future sales; however, we are not obligated to make any sales under this program. The receipt of cash of $29.7 million from financing activities for the three-month period ended March 31, 2013 was due primarily to the net proceeds of $19.8 million from the debt facility, $8.7 million from our common stock "at-the-market" offering and $1.2 million from the issuance of common stock through equity plans.

Off-Balance Sheet Arrangements

As of March 31, 2014 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 in "Part II, Item 1. Legal Proceedings", 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, 2014.


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