UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2012
March 31, 2012
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number:
001-34939
Complete Genomics, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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20-3226545
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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2071 Stierlin Court
Mountain View, California
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94043
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(Address of Principal Executive Offices)
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(Zip Code)
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(650) 943-2800
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether
the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer
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¨
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Accelerated filer
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x
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Non-accelerated filer
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
As of April 30, 2012, the number of outstanding shares of the registrants common stock, par value $0.001 per share, was 33,885,734.
COMPLETE GENOMICS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012
INDEX
2
PART I FINANCIAL INFORMATION
COMPLETE GENOMICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31,
2012
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December 31,
2011
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(in thousands, except par value and share data)
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Assets
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Current assets
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Cash and cash equivalents
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$
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47,120
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$
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77,074
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Short-term investments
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15,998
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6,000
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Accounts receivable
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5,979
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6,488
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Inventory
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6,900
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4,121
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Prepaid expenses
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1,708
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1,141
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Other current assets
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153
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341
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Total current assets
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77,858
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95,165
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Property and equipment, net
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34,001
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33,592
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Other assets
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1,415
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1,446
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Total assets
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$
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113,274
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$
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130,203
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Liabilities and Stockholders Equity
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Current liabilities
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Accounts payable
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$
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4,215
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$
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5,363
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Accrued liabilities
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7,187
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5,400
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Notes payable, current
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22,939
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7,099
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Deferred revenue
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11,159
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10,026
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Total current liabilities
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45,500
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27,888
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Notes payable, net of current
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16,162
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Deferred rent, net of current
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3,334
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3,539
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Total liabilities
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48,834
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47,589
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Commitments and contingencies (Note 7)
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Stockholders equity
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Preferred stock, par value $0.001 5,000,000 shares authorized and no shares outstanding at March 31, 2012 and
December 31, 2011
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Common stock, $0.001 par value 300,000,000 shares authorized and 33,704,334 shares issued and outstanding at
March 31, 2012; 300,000,000 shares authorized and 33,409,638 shares issued and outstanding at December 31, 2011
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34
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33
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Additional paid-in capital
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295,834
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293,777
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Accumulated deficit
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(231,428
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)
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(211,196
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)
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Total stockholders equity
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64,440
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82,614
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Total liabilities and stockholders equity
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$
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113,274
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$
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130,203
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See accompanying notes to condensed consolidated financial statements.
3
COMPLETE GENOMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
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Three months ended
March 31,
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2012
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2011
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(in thousands, except share and per
share data)
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Revenue
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$
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3,908
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$
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6,833
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Costs and expenses:
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Costs of revenue
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5,298
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6,582
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Research and development
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8,693
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6,808
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Sales and marketing
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5,253
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2,700
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General and administrative
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4,136
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2,780
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Total costs and expenses
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23,380
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18,870
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Loss from operations
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(19,472
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)
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(12,037
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)
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Interest expense
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(764
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)
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(340
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)
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Interest and other income (expense), net
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4
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(84
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)
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Net loss
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$
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(20,232
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)
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$
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(12,461
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)
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Net loss per share attributed to common stockholdersbasic and diluted
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$
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(0.60
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)
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$
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(0.48
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)
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Weighted-average shares of common stock outstanding used in computing net loss per share attributed to common
stockholdersbasic and diluted
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33,482,456
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25,959,929
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Comprehensive loss
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$
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(20,232
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)
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$
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(12,461
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)
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See accompanying notes to condensed consolidated financial statements.
4
COMPLETE GENOMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three months ended
March 31,
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2012
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2011
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(in thousands)
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Cash flows from operating activities
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Net loss
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$
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(20,232
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)
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$
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(12,461
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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3,653
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2,544
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Change in inventory reserves
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32
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Change in fair value of warrant liability
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96
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Stock-based compensation
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1,377
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494
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Noncash interest expense related to notes payable
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319
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27
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Other
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71
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7
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Changes in assets and liabilities
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Accounts receivable
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440
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(2,442
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)
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Inventory
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(2,779
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)
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772
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Prepaid expenses
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(567
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)
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331
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Other current assets
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188
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24
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Other assets
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18
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(110
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)
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Accounts payable
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(395
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)
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96
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Accrued liabilities
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1,624
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590
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Deferred revenue
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1,133
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1,282
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Deferred rent
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(205
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)
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(184
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)
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Net cash used in operating activities
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(15,355
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)
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(8,902
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)
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Cash flows from investing activities
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Purchase of available-for-sale securities
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(15,998
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)
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Proceeds from maturities of available-for-sale securities
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6,000
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Purchase of property and equipment
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(4,804
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)
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(2,870
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)
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Purchase of patent
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(250
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)
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Net cash used in investing activities
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(14,802
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)
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(3,120
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)
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Cash flows from financing activities
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Proceeds from notes payable
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20,000
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Repayment of notes payable
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(478
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)
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(8,205
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)
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Proceeds from issuance of common stock, net of costs
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564
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Proceeds from issuance of common stock under equity incentive plans
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117
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|
100
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Net cash provided by financing activities
|
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|
203
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|
|
|
11,895
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|
|
|
|
|
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Net decrease in cash and cash equivalents
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|
(29,954
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)
|
|
|
(127
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)
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Cash and cash equivalents at beginning of period
|
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|
77,074
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|
|
|
68,918
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|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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$
|
47,120
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|
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$
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68,791
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|
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Supplemental disclosure of cash flow information
|
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|
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Cash paid for interest
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$
|
599
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$
|
315
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Supplemental disclosure of noncash investing and financing activities
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|
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|
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Issuance of warrants for common stock in connection with term debt
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|
$
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|
|
|
$
|
987
|
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Acquisition of property and equipment under accounts payable
|
|
$
|
(753
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)
|
|
$
|
94
|
|
See accompanying notes to condensed consolidated financial statements.
5
Complete Genomics, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Complete Genomics, Inc., (the Company) is a life sciences company that has developed and commercialized a DNA sequencing platform for whole human genome sequencing and analysis. The
Companys Complete Genomics Analysis Platform (CGA Platform) combines its proprietary human sequencing technology with its advanced informatics and data management software and its end-to-end outsourced service model to provide
customers with data that is immediately ready to be used for genome-based research. The Companys solution provides academic, biopharmaceutical and translational medicine researchers with whole human genome data and analysis without requiring
them to invest in in-house sequencing instruments, high-performance computing resources and specialized personnel. In the DNA sequencing industry, whole human genome sequencing is generally deemed to be coverage of at least 90% of the nucleotides in
the genome. The Company was incorporated in Delaware on June 14, 2005 and began operations in March 2006.
The Company has incurred net
operating losses and significant negative cash flow from operations during every year since inception. At March 31, 2012, the Company had an accumulated deficit of $231.4 million. Management believes that based on the current level of
operations and anticipated growth, cash and cash equivalents balances and interest income the Company will earn on these balances, will not be sufficient to meet the anticipated cash requirements for the nine months beyond March 31, 2012. The
Companys recurring operating losses and negative cash flow from operations and its requirement for additional funding to execute its business objectives beyond this period gives rise to substantial doubt as to the Companys ability to
continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company is exploring additional funding options, including equity offerings and strategic corporate alliances to obtain additional financing to
continue the development of its service offerings and the expansion of its business. There can be no assurance that the Company will be successful in its efforts to raise additional capital. Should the Company be unable to raise adequate financing
on a timely basis, operations will need to be scaled back or discontinued.
Basis of Presentation
The interim condensed consolidated financial statements have been prepared and presented by the Company in accordance with accounting principles generally
accepted in the United States (GAAP) and the rules and regulations of the Securities and Exchange Commission, without audit, and reflect all adjustments, consisting of adjustments of a normal, recurring nature, necessary to state fairly
the Companys interim financial information. The accounting principles and methods of computation adopted in these financial statements are the same as those of the audited financial statements for the year ended December 31, 2011.
The preparation of the Companys unaudited condensed consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of
expenses during the reporting period.
Certain information and footnote disclosures normally included in the Companys annual financial
statements prepared in accordance with GAAP have been condensed or omitted. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011 included in the
Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2012. The financial results for any interim period are not necessarily indicative of financial results for the full year or any other
interim period.
The Company operates as one segment, providing whole human genome sequencing and analysis.
The condensed consolidated financial statements include the accounts of Complete Genomics and those of its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated.
Summary of Significant Accounting Policies
There have been no changes to the Companys significant accounting policies during the three months ended March 31, 2012 as compared to the
significant accounting policies described in its audited financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011.
6
Recent Adopted Accounting Standards
In May 2011, the FASB issued further guidance which generally aligns the principles of fair value measurements with International Financial Reporting Standards. The guidance clarifies the application
of existing fair value measurement requirements and expands the disclosure requirements for fair value measurements, and was effective for the three months ended March 31, 2012. The adoption of the guidance had no effect on the Companys
financial position or results of operations.
In June 2011, the FASB issued guidance concerning the presentation of comprehensive
income. The guidance gives companies the option to present total comprehensive income, components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. The guidance was effective for the three months ended March 31, 2012 and was applied retrospectively. The adoption of the guidance had no effect on the Companys financial position or results of
operations.
2. CONCENTRATION OF CREDIT RISKS AND OTHER RISKS AND UNCERTAINTIES
The Company is subject to all of the risks inherent in an early-stage company developing a new approach to DNA sequencing. These risks
include, but are not limited to, significant capital requirements, limited management resources, intense competition, dependence upon customer acceptance of the products in development and the changing nature of the DNA sequencing industry. The
Companys operating results may be materially affected by the foregoing factors.
The Company depends on a limited number of suppliers,
including sole- and single-source suppliers, of various critical components in the sequencing process. The loss of these suppliers, or their failure to supply the Company with the necessary components in sufficient quantities on a timely basis and
without defect, could cause delays in the sequencing process and adversely affect the Company.
The Company derives accounts receivable from
direct sales and amounts contractually due, but not received, under contracts. The Company reviews its exposure to accounts receivable and generally requires no collateral for any of its accounts receivable. The allowance for doubtful accounts is
the Companys best estimate of the amount of expected credit losses existing in accounts receivable and is based upon specific customer issues that have been identified. As of March 31, 2012 and December 31, 2011, the Company has
$113,000 and $44,000, respectively, recorded as an allowance for doubtful account.
The Company allocates its revenues to individual countries
based on the primary locations of its customers.
As of March 31, 2012 and December 31, 2011, customers representing greater than
10% of accounts receivable were as follows:
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|
|
|
|
|
|
|
Customer
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
Customer A
|
|
|
25
|
%
|
|
|
16
|
%
|
Customer B
|
|
|
18
|
%
|
|
|
13
|
%
|
For the three months ended March 31, 2012 and 2011, customers representing greater than 10% of revenue were as
follows:
|
|
|
|
|
|
|
|
|
Customer
|
|
Three months ended
March 31,
2012
|
|
|
Three months ended
March 31,
2011
|
|
Customer A
|
|
|
34
|
%
|
|
|
*
|
|
Customer B
|
|
|
10
|
%
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
34
|
%
|
Customer D
|
|
|
*
|
|
|
|
18
|
%
|
For the three months
ended March 31, 2012 and 2011, countries representing greater than 10% of revenue were as follows:
|
|
|
|
|
|
|
|
|
Country
|
|
Three months ended
March 31,
2012
|
|
|
Three months ended
March 31,
2011
|
|
United States
|
|
|
85
|
%
|
|
|
70
|
%
|
The Netherlands
|
|
|
*
|
|
|
|
24
|
%
|
7
3. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss attributed to common stockholders by the weighted-average number of common
shares outstanding during the period. The Companys potential dilutive shares, which include outstanding common stock options and restricted stock units and warrants, have not been included in the computation of diluted net loss per share for
all periods as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce the net loss per share.
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an
anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Options to purchase common stock
|
|
|
4,057,836
|
|
|
|
2,875,125
|
|
Employee Stock purchase plan shares
|
|
|
286,405
|
|
|
|
|
|
Restricted stock units for common stock
|
|
|
15,003
|
|
|
|
27,500
|
|
Warrants to purchase common stock
|
|
|
1,533,823
|
|
|
|
2,165,323
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,893,067
|
|
|
|
5,067,948
|
|
|
|
|
|
|
|
|
|
|
4. SHORT-TERM INVESTMENTS
Summary of Available-for-Sale Securities
The following table summarizes the Companys available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
15,998
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
15,998
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
6,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
6,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. FAIR VALUE MEASUREMENT
Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated
with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:
Level 1:
Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2:
Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are
not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following tables set forth the Companys financial instruments that are measured at fair value on a recurring basis as of March 31, 2012
and December 31, 2011 and by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
8
As of March 31, 2012, the Companys fair value hierarchy for its financial assets and financial
liabilities that are carried at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
47,330
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47,330
|
|
U.S. government securities (included in short-term investments)
|
|
$
|
|
|
|
$
|
15,998
|
|
|
$
|
|
|
|
$
|
15,998
|
|
As of December 31, 2011, the Companys fair value hierarchy for its financial assets and financial liabilities
that are carried at fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (included in cash and cash equivalents)
|
|
$
|
74,376
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74,376
|
|
U.S. government securities (included in short-term investments)
|
|
$
|
|
|
|
$
|
6,000
|
|
|
$
|
|
|
|
$
|
6,000
|
|
Level 2 U.S. government securities are priced using non-binding market consensus prices that are corroborated by
observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three months
ended March 31, 2012.
The Company has determined that its notes payable would be classified as a level 3 item in the fair value
hierarchy. At March 31, 2012, the fair value of the notes payable approximates the carrying amount of $22.9 million. The estimated fair value of the notes payable was based on the then-current rates available to the Company for debt of similar
terms and remaining maturities and also took into consideration default and credit risk. The Company determined the estimated fair value amount by using available market information and commonly accepted valuation methodologies. However,
considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair value. For certain financial
instruments, including accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to the relatively short maturity of the items.
6. BALANCE SHEET COMPONENTS
Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
1,255
|
|
|
$
|
1,617
|
|
Work-in-progress
|
|
|
4,668
|
|
|
|
1,923
|
|
Finished goods
|
|
|
977
|
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,900
|
|
|
$
|
4,121
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Computer equipment
|
|
$
|
10,604
|
|
|
$
|
10,442
|
|
Computer software
|
|
|
2,599
|
|
|
|
2,398
|
|
Furniture and fixtures
|
|
|
576
|
|
|
|
586
|
|
Machinery and equipment
|
|
|
32,884
|
|
|
|
30,017
|
|
Leasehold improvements
|
|
|
10,879
|
|
|
|
10,800
|
|
Equipment under construction
|
|
|
4,051
|
|
|
|
3,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,593
|
|
|
|
57,544
|
|
Less: Accumulated depreciation and amortization
|
|
|
(27,592
|
)
|
|
|
(23,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,001
|
|
|
$
|
33,592
|
|
|
|
|
|
|
|
|
|
|
9
Depreciation and amortization expense for the three months ended March 31, 2012 and 2011 was $3.7
million and $2.5 million, respectively.
Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2012
|
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Accrued paid time off
|
|
$
|
2,068
|
|
|
$
|
1,840
|
|
Accrued compensation and benefits - other
|
|
|
3,288
|
|
|
|
1,909
|
|
Deferred rent, current
|
|
|
819
|
|
|
|
793
|
|
Other
|
|
|
1,012
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,187
|
|
|
$
|
5,400
|
|
|
|
|
|
|
|
|
|
|
7. COMMITMENTS AND CONTINGENCIES
In October 2007, the Company entered into an agreement for office facilities consisting of approximately 10,560 square feet under
an operating lease, which began on January 1, 2008. This agreement as amended expires in August 2016.
In October 2008, the Company
entered into an agreement for office facilities consisting of approximately 66,096 square feet under an operating lease, which began on March 1, 2009 and expires in August 2016.
In April 2011, the Company entered into an agreement for office facilities consisting of approximately 19,334 square feet under an operating lease, which began on July 15, 2011 and expires in March
2013.
The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records the difference between
cash rent payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent abatements and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company
applies them in the determination of straight-line rent expense over the lease term. Rent expense for the three months ended March 31, 2012 and 2011was $0.7 million and $0.5 million, respectively.
Future minimum lease payments under these non-cancellable operating leases as of March 31, 2012 are as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ending December 31,
|
|
|
|
|
2012 (Nine months remaining)
|
|
$
|
2,589
|
|
2013
|
|
|
3,025
|
|
2014
|
|
|
2,940
|
|
2015
|
|
|
3,020
|
|
2016
|
|
|
2,065
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
13,639
|
|
|
|
|
|
|
Term Loans
On December 17, 2010, the Company entered into a loan and security agreement with Atel Ventures, Inc. (Atel). On March 25, 2011, the Company entered into a new loan and security
agreement with Oxford Finance Corporation (Oxford).
10
Atel Loan Agreement
The loan and security agreement with Atel (the Atel Loan Agreement) consists of a $6.0 million term loan for equipment purchases, which is collateralized to secure the term loan. Under the
terms of the Atel Loan Agreement, the term loan balance is being repaid in 36 equal monthly payments of principal and interest. Interest accrues on the term loan at a rate of 11.26% per annum. The outstanding borrowings under the term loan are
collateralized by a senior priority interest in certain of our current property and equipment, and all property and equipment that was purchased during the term of the Atel Loan Agreement. In connection with entering into the loan and security
agreement with Oxford, the Company and Atel made certain administrative and technical amendments to the Atel Loan Agreement.
In connection
with the Atel Loan Agreement, the Company issued to Atel a warrant to purchase 49,834 shares of our common stock at an exercise price of $7.224 per share. The warrant was exercised in full on June 17, 2011.
The Atel Loan Agreement contains customary representations and warranties, covenants, including closing and advancing conditions, events of defaults and
termination provisions. The affirmative covenants include, among other things, that the Company maintains certain cash account balances, and liability and other insurance, and that the Company pledges security interests in any ownership interest of
a future subsidiary. The negative covenants preclude the Company from, among other things, disposing of certain assets, engaging in any merger or acquisition, incurring additional indebtedness, encumbering any collateral, paying dividends or making
prohibited investments, in each case without the prior consent of Atel. As of December 31, 2011, the Company was in compliance with all the covenants in the Atel Loan Agreement. In February 2012, it became evident that the Company would violate
a covenant in the Atel Loan Agreement as its 2011 consolidated financial statements would contain an explanatory paragraph regarding substantial doubt about the Companys ability to continue as a going concern in the opinion on the financial
statements from the Companys independent registered public accounting firm. In February 2012, the Atel Loan Agreement was amended to include, among other things, a waiver for this covenant violation. Management believes that based on the
current level of operations and anticipated growth, cash and cash equivalents balances and interest income the Company will earn on these balances, will not be sufficient to meet the anticipated cash requirements for the nine months beyond
March 31, 2012. Management believes that based on the current level of operations and anticipated growth, cash and cash equivalents balances and interest income the Company will earn on these balances, will not be sufficient to meet the
anticipated cash requirements for the nine months beyond March 31, 2012.
Oxford Loan Agreement
The loan and security agreement with Oxford (the Oxford Loan Agreement) provides for a term loan of $20.0 million. The outstanding balance of
the term loan must be repaid in full by October 1, 2014 (the Maturity Date). Under the terms of the Oxford Loan Agreement, the outstanding balance accrues interest at a rate of 9.80% per annum. Until May 1, 2012 (the
Amortization Date), the Company must make monthly payments equal to the accrued interest on the outstanding loan balance, and, following the Amortization Date through the Maturity Date the outstanding loan balance will be repaid in
thirty (30) equal monthly payments of principal and interest.
As a condition to the Oxford Loan Agreement, a portion of the term loan
was used to repay the remaining balance of $7.4 million on our existing term loan agreement with Comerica. Following repayment of the outstanding indebtedness, the Comerica Loan Agreement was terminated. The Company intends to use the remainder of
the Oxford term loan to fund our working capital requirements.
The term loan is secured by a senior priority on all of the Companys
assets, excluding its intellectual property and those assets securing borrowings under the Atel loan agreement. In addition, the Company agreed not to pledge its intellectual property to another entity without Oxfords approval or consent.
In connection with the entry into the Oxford Loan Agreement, the Company issued to Oxford warrants to purchase an aggregate of 160,128 shares
of its common stock (the Warrant Shares) at an exercise price of $7.495 per share. The warrants expire on the seventh anniversary of the issuance date. The Company also agreed to use best efforts to provide Oxford certain registration
rights covering the Warrant Shares.
The Oxford Loan Agreement contains customary representations and warranties, covenants, closing and
advancing conditions, events of defaults and termination provisions. The affirmative covenants include, among other things, that the Company timely files taxes, maintain certain operating accounts subject to control agreements in favor of Oxford,
maintain liability and other insurance, and pledge security interests in any ownership interest of a future subsidiary. The negative covenants preclude, among other things, disposing of certain assets, engaging in any merger or acquisition,
incurring additional indebtedness, encumbering any collateral, paying dividends or making prohibited investments, in each case, without the prior consent of Oxford. The Oxford Loan Agreement provides that an event of default will occur if
(1) there is a material adverse change in the Companys business, operations or condition (financial or otherwise), (2) there is a material impairment in the prospects of the Company repaying any portion of its obligations under the
term loan, (3) there is a material impairment in the value of the collateral pledged to secure its obligations under the agreement or in Oxfords perfection or priority over the collateral, (4) the Company defaults in the payment of
any amount payable
11
under the agreement when due, or (5) the Company breaches any negative covenant or certain affirmative covenants in the agreement (subject to a grace period in some cases). The repayment of
the term loan is accelerated following the occurrence of an event of default or otherwise, which would require the Company to immediately pay an amount equal to the sum of: (i) all outstanding principal plus accrued but unpaid interest,
(ii) the prepayment fee, (iii) the final payment, plus (iv) all other sums, that have become due and payable but have not been paid, including interest at the default rate with respect to any past due amounts. In February 2012, it
became evident that the Company would violate a covenant in the Oxford Loan Agreement given that its 2011 consolidated financial statements would contain an explanatory paragraph regarding substantial doubt about the Companys ability to
continue as a going concern in the opinion on the financial statements from the Companys independent registered public accounting firm. In February 2012, the Oxford Loan Agreement was amended to include, among other things, a waiver for this
covenant violation.
Management believes that based on the current level of operations and anticipated growth, cash and cash equivalents
balances and interest income the Company will earn on these balances, will not be sufficient to meet the anticipated cash requirements for the nine months beyond March 31, 2012. Accordingly, amounts due under the Atel Loan Agreement and the
Oxford Loan Agreement have been reclassified to notes payable, current.
Future contractual loan payments under the Oxford and Atel loan
agreements as of March 31, 2012 are as follows:
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ending December 31,
|
|
|
|
|
2012 (Nine months remaining)
|
|
$
|
7,957
|
|
2013
|
|
|
11,202
|
|
2014
|
|
|
8,295
|
|
|
|
|
|
|
Total payments
|
|
$
|
27,454
|
|
Less:
|
|
|
|
|
Cash interest payment and balloon payment accretion
|
|
|
3,692
|
|
Unamortized portion of value of warrants issued in connection with Atel and Oxford loans
|
|
|
823
|
|
|
|
|
|
|
Total principal payments notes payable, current
|
|
$
|
22,939
|
|
|
|
|
|
|
Contingencies
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Companys management does not believe that any such matters, individually or in the
aggregate, will have a material adverse effect on the Companys business, financial condition, results of operations or cash flows.
Indemnification
In the normal
course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Companys exposure under these agreements is unknown because it involves
claims that may be made against the Company in the future, but that have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may
record charges in the future as a result of these indemnification obligations.
In accordance with its Certificate of Incorporation and
Bylaws, as well as Indemnification Agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Companys request in such
capacity. There have been no claims to date, and the Company has director and officer insurance that enables it to recover a portion of any amounts paid for future potential claims.
Legal Proceedings
On August 3, 2010, a patent infringement lawsuit was filed
by Illumina, Inc. and Solexa, Inc. (an entity acquired by Illumina), or the plaintiffs, against the Company in the U.S. District Court in Delaware. On November 9, 2010, the U.S. District Court in Delaware granted the Companys motion to
transfer the case to the Northern District of California. The case caption is
Illumina, Inc. and Solexa, Inc. v. Complete Genomics, Inc.
, Civil Action No. 3:10-cv-05542. The complaint alleges that Complete Genomics Analysis
Platform, and in particular the combinatorial probe anchor ligation technology, infringes upon three patents held by Illumina and Solexa. The plaintiffs seek unspecified monetary damages and injunctive relief. If the Company is found to infringe one
or more valid claims of a patent-in-suit and if the district court grants an injunction, the Company may be forced to redesign portions of its sequencing process, seek a license, cease the infringing activity and/or pay monetary damages. On
September 23, 2010, the Company filed an answer to the complaint as well as its counterclaims against the plaintiffs. On November 9, 2010, the U.S. District Court in Delaware granted the Companys motion to transfer the case to the
Northern District of California. On May 5, 2011, the Court entered a stipulated order to dismiss two patents from the lawsuit. The dismissal is without prejudice but includes conditions on the ability to file lawsuits on these patents,
including a limitation that Illumina may not re-file such lawsuits against the Company until the later of (1) August 1, 2012, or
12
(2) the exhaustion of all appeal rights in both (a) the pending reexaminations in the U.S. Patent and Trademark Office and (b) the pending civil litigation in which these patents
are also asserted,
Life Technologies Corp. v. Illumina
, Case No. 3:11-cv-00703 (S.D. Cal.). The Company believes that it has substantial and meritorious defenses to the plaintiffs claims and intends to vigorously defend its
position. However, a negative outcome in this matter could have a material adverse effect on the Companys financial position, results of operations, cash flows and business. In addition, the Company has incurred and anticipates that it will
continue to incur significant expense and substantial time in defending these claims. The Company is not currently able to estimate the potential loss, if any, that may result from this litigation.
From time to time, the Company may become involved in other legal proceedings and claims arising in the ordinary course of its business. Other than as
described above, the Company is not currently a party to any legal proceedings the outcome of which, if determined adversely to the Company, would individually or in the aggregate has a material adverse effect on its business, consolidated operating
results, consolidated financial condition or consolidated cash flows.
8. COMMON STOCK
On March 8, 2012, the Company entered into an At Market Issuance Sales Agreement (the ATM Agreement) with
MLV & Co. LLC (MLV), which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell from time to time, at its option, shares of its common stock through MLV, as its
sales agent. On March 12, 2012, the Company filed a prospectus supplement with the Securities and Exchange Commission to its currently effective Registration Statement on Form S-3 (File No. 333- 178728) with respect to the sale of up to an
aggregate of $30.0 million of the Companys common stock through MLV pursuant to the ATM Agreement. The Company is required to pay MLV a commission of up to 3% of the gross proceeds from the sale of shares of its common stock pursuant to the
ATM Agreement and provide MLV with customary indemnification rights. As of March 31, 2012, the Company had received net proceeds of $0.6 million from the sale of an aggregate of 217,713 shares of common stock through MLV and had $29.4 million
of its common stock remaining available to issue and sell under its current prospectus supplement relating to the ATM Agreement.
9. WARRANTS FOR COMMON STOCK
In March 2011, the Company issued a warrant to purchase 160,128 shares of common stock at an exercise price of $7.495 per share in
connection with the Oxford Loan Agreement. The warrant expires on the seventh anniversary of its issuance date. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model with the following assumptions: seven
year contractual term; 75.01% volatility; 0% dividend rate; and a risk-free interest rate of 2.87%. The fair value of the warrant was determined to be $1.0 million and was recorded as equity in additional paid-in capital and a discount to the
carrying value of the loan. All of the warrants remain outstanding at March 31, 2012. The discount is being amortized to interest expense using the effective interest rate method over the 42-month term of the loan.
In December 2010, the Company issued a warrant to purchase 49,834 shares of common stock at an exercise price of $7.224 per share in connection with the
Atel Loan Agreement. The warrant expires on the tenth anniversary of its issuance date. The initial fair value of the warrant was calculated using the Black-Scholes option pricing model with the following assumptions: 10 year contractual term; 76.2%
volatility; 0% dividend rate; and a risk-free interest rate of 3.33%. The fair value of the warrant was determined to be $0.3 million and was recorded as a liability and a discount to the carrying value of the loan. The fair value of the warrant was
recorded as a liability due to certain mandatory redemption features at the option of the holder. The discount is being amortized to interest expense using the effective interest rate method over the three-year term of the loan. These warrants were
marked to market each reporting period until they were exercised. The final mark to market revaluation of the warrants occurred on June 17, 2011, the date the warrants were exercised.
10. STOCK-BASED COMPENSATION
Stock-based Compensation Plans
The number of shares reserved for issuance under the 2010 Equity Incentive Award Plan (the 2010 Plan) and the Employee Stock Purchase Plan (the ESPP) increased by 1,300,000 shares
and 668,192 shares, respectively, effective January 1, 2012. As of March 31, 2012, there were 3,610,953 and 1,746,709 shares available to be granted under the 2010 Plan and the ESPP, respectively.
13
Compensation Expense
During the three months ended March 31, 2012 and 2011, the Company granted stock options to purchase common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Number of options granted to employees
|
|
|
66,975
|
|
|
|
103,700
|
|
Weighted-average grant date fair value per share of options granted to employees
|
|
$
|
1.96
|
|
|
$
|
4.99
|
|
Total fair value of options granted to employees which vested
|
|
$
|
916,000
|
|
|
$
|
309,000
|
|
During the three months ended March 31, 2012 and 2011, the Company did not grant any options to nonemployees nor did
it grant any restricted stock units.
The following table summarizes stock-based compensation expense from stock option and restricted stock
unit awards to employees, directors and nonemployees as well as from employee purchase rights under the ESPP for the three months ended March 31, 2012 and 2011, respectively:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Employee awards and ESPP purchase rights
|
|
$
|
1,374
|
|
|
$
|
473
|
|
Nonemployee awards
|
|
|
3
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
1,377
|
|
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012, the Company had unrecognized stock-based compensation expense related to unvested stock
options and restricted stock units of $11.8 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.9 years.
14
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which are subject to the safe harbor created by those sections. Forward-looking statements are based on our
managements beliefs and assumptions and on information currently available to our management. All statements other than statements of historical factors are forward-looking statements for purposes of these provisions. In some cases
you can identify forward-looking statements by terms such as may, will, should, could, would, expect, plan, anticipate, believe,
estimate, project, predict, and potential, and similar expressions intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below, and those discussed in the section titled Risk Factors in this report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we
undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a life sciences
company that has developed and commercialized a DNA sequencing platform for whole human genome sequencing and analysis. Our goal is to become the preferred solution for whole human genome sequencing and analysis. Our Complete Genomics Analysis
Platform, or CGA Platform, combines our proprietary human genome sequencing technology with our advanced informatics and data management software and our innovative, end-to-end, outsourced service model to provide our customers with data that is
immediately ready to be used for genome-based research. We believe that our solution can provide academic, biopharmaceutical, and translational medicine researchers with whole human genome data and analysis at an unprecedented combination of
quality, cost and scale without requiring them to invest in in-house sequencing instruments, high-performance computing resources and specialized personnel. By removing these constraints and broadly enabling researchers to conduct large-scale
complete human genome studies, we believe that our solution has the potential to advance medical research and expand understanding of the basis, treatment and prevention of complex diseases.
We have targeted our complete human genome sequencing service at academic, governmental and other research institutions, as well as biopharmaceutical and healthcare organizations. In the DNA sequencing
industry, whole human genome sequencing is generally deemed to be coverage of at least 90% of the nucleotides in the genome. We perform our sequencing service at our Mountain View, California headquarters facility, which began commercial operation
in May 2010. In the near term, we expect to use significant capital to expand our Mountain View sequencing capacity, and to fund our research and development initiatives, and our sales and marketing and general and administrative expenses to support
our commercial operations and anticipated growth. In future years, we may construct additional genome centers in the United States and in other strategic markets to accommodate an expected growing, global demand for high-quality, low-cost whole
human genome sequencing on a large scale.
Our ability to generate revenue, and the timing of our revenue, will depend on generating new
orders and contracts, receiving qualified DNA samples from customers and the rate at which we can convert our backlog of sequencing orders into completed and delivered data and the price per genome contracted with the customer. We define backlog as
the number of genomes for which customers have placed orders or entered into contracts with volume estimates that we believe are firm and for which no revenue has yet been recorded. As of March 31, 2012, we had a backlog of orders for
sequencing approximately 5,700 genomes, which we believe could contribute approximately $27.0 million toward revenue over the next 12 months. The speed with which we can convert orders into revenue depends principally on:
|
|
|
the speed with which our customers provide us with qualified samples after submitting an order;
|
|
|
|
the rate at which our system can sequence a genome; and
|
|
|
|
the rate at which all significant contractual obligations are fulfilled.
|
Changes in these variables (or orders cancellations or reductions) will cause our results of operations to fluctuate, perhaps significantly. In addition, we are rapidly developing and implementing new
generations of sample preparation handling and automation processes, sequencing instruments, and information analysis and storage systems. As a result, we have a very limited history to guide us in predicting variables like equipment and/or
operating failure, throughput yield, customer delivery of qualified genomic samples and other factors that could affect revenue. We also experience delays from time to time due to challenges in implementing these new processes and systems.
We have not been profitable in any period since we were formed. We incurred net losses of $20.2 million and $12.5 million for the three
months ended March 31, 2012 and 2011. As of March 31, 2012, our accumulated deficit was $231.4 million. We believe that, based on our current level of operations and anticipated growth, our cash and cash equivalents balances and interest
income we earn on these balances, will not be sufficient to meet our anticipated cash requirements for the nine months beyond March 31, 2012. Our recurring operating losses and negative cash flow from operations and our requirement for
additional funding to execute our business objectives beyond this period gives rise to substantial doubt as to our ability to continue as a going concern.
15
We are seeking to raise additional capital, which may be from the sale of equity or convertible debt
securities in public or private offerings, an additional credit facility, or a strategic partnership coupled with an investment in us, or a combination of the foregoing. For the purpose of raising additional capital, we entered into an At Market
Issuance Sales Agreement, or ATM Agreement, with MLV & Co. LLC, or MLV, on March 8, 2012, pursuant to which we may sell from time to time, at our option, shares of our common stock through MLV, as our sales agent. We filed a prospectus
supplement with the Securities and Exchange Commission to our currently effective Registration Statement on Form S-3 (File No. 333-178728) with respect to the sale of up to an aggregate of $30.0 million of our common stock under the ATM
Agreement and have raised approximately $0.6 million thereunder. We are continuing to explore other capital-raising options.
Although we do
not anticipate any material seasonal effects, given our limited operating history as a revenue generating company, our sales cycle is uncertain. A limited number of customers accounted for all of the revenue we recognized for the three months ended
March 31, 2012, with Inova Translational Medicine Institute and SAIC-Frederick, Inc., National Cancer Institute accounting for approximately 34% and 10% of this revenue, respectively. The loss of either of the customers named above could have a
material adverse effect on our results of operations.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated
financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires our management to make estimates, assumptions and judgments that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the applicable periods. Management bases its
estimates, assumptions and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our
financial statements, which, in turn, could materially change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. Historically, our critical accounting estimates have not differed
materially from actual results. However, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material adverse effect on our statements of operations, liquidity and
financial condition.
There have been no significant changes in critical accounting policies during the three months ended March 31,
2012, as compared to the critical accounting policies described in
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates
in our Annual Report
on Form 10-K for the year ended December 31, 2011.
Recent Adopted Accounting Standards
In May 2011, the FASB issued further guidance which generally aligns the principles of fair value measurements with International Financial Reporting
Standards. The guidance clarifies the application of existing fair value measurement requirements and expands the disclosure requirements for fair value measurements, and was effective for the three months ended March 31, 2012. The
adoption of the guidance had no effect on our financial position or results of operations.
In June 2011, the FASB issued guidance concerning
the presentation of comprehensive income. The guidance gives companies the option to present total comprehensive income, components of net income, and components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The guidance was effective for the three months ended March 31, 2012 and was applied retrospectively. The adoption of the guidance had no effect on our financial
position or results of operations.
16
Results of Operations
Comparison of Three Months Ended March 31, 2012 and 2011
The following table
shows the amounts of the listed items from our statements of operations for the periods presented, showing period-over-period changes (in thousands, except for percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
First Quarter 2012 vs.
First Quarter 2011
|
|
|
|
2012
|
|
|
2011
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Revenue
|
|
$
|
3,908
|
|
|
$
|
6,833
|
|
|
$
|
(2,925
|
)
|
|
|
(43
|
)%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue
|
|
|
5,298
|
|
|
|
6,582
|
|
|
|
(1,284
|
)
|
|
|
(20
|
)%
|
Research and development
|
|
|
8,693
|
|
|
|
6,808
|
|
|
|
1,885
|
|
|
|
28
|
%
|
Sales and marketing
|
|
|
5,253
|
|
|
|
2,700
|
|
|
|
2,553
|
|
|
|
95
|
%
|
General and administrative
|
|
|
4,136
|
|
|
|
2,780
|
|
|
|
1,356
|
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
23,380
|
|
|
|
18,870
|
|
|
|
4,510
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(19,472
|
)
|
|
|
(12,037
|
)
|
|
|
(7,435
|
)
|
|
|
(62
|
)%
|
Interest expense
|
|
|
(764
|
)
|
|
|
(340
|
)
|
|
|
(424
|
)
|
|
|
(125
|
)%
|
Interest and other income (expense), net
|
|
|
4
|
|
|
|
(84
|
)
|
|
|
88
|
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,232
|
)
|
|
$
|
(12,461
|
)
|
|
$
|
(7,771
|
)
|
|
|
(62
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
During the three months ended March 31, 2012, revenue decreased 43% to $3.9 million, compared to $6.8 million during the same period in 2011. While
we recognized revenue for over 900 genomes in the three months ended March 31, 2012, compared to over 600 during the same period in 2011, our revenues decreased due to a significant decrease in the average selling price per genome.
For revenue recognized in the first quarter of 2011, the average selling price was approximately $10,000 per genome, which decreased to approximately
$4,000 per genome for revenue recognized in the first quarter of 2012. This decrease in price per genome was driven both by competitive pricing pressures from alternatives to whole genome sequencing, such as exome sequencing, as well as aggressive
price competition from other suppliers of whole human genome sequencing services. We expect to continue to face downward price pressure.
Costs of Revenue
During the three
months ended March 31, 2012, cost of revenue decreased 20% to $5.3 million from $6.6 million during the same period in 2011 despite shipping genomic data for approximately 35% more genomes. This reduction in cost of revenue is a result of
efficiencies gained in our sequencing processes and increases in our laboratory capacity while maintaining similar fixed costs.
Cost of
revenue as a percent of revenue increased to 136% in the first quarter of 2012 from 96% in the first quarter of 2011. This increase in cost of revenue as a percent of revenue was due to a more rapid decline in pricing than unit costs. We anticipate
that these costs as a percentage of revenue will fluctuate as our capacity utilization changes, as the sequencing price we charge to our customers changes and as we continue to improve and automate our sequencing processes.
Research and Development
Research and
development expenses were $8.7 million during the three months ended March 31, 2012, compared to $6.8 million during the three months ended March 31, 2011, representing an increase of $1.9 million, or 28%. The increase in research and
development expenses was primarily due to an increase in salaries and benefits expense of $0.9 million resulting from increased headcount, a $0.3 million increase in consulting expense, a $0.3 million due to increased stock based compensation
expense, a $0.2 million increase in facilities expense, and a $0.1 million increase in depreciation expense.
We expect to continue to invest
in research and development activities as we seek to enhance our sequencing processes, components and systems to improve the yield and throughput and to reduce the cost of our sequencing service. Consequently, we believe that in the near future, our
research and development expenses will increase.
Sales and Marketing
Sales and marketing expenses were $5.3 million during the three months ended March 31, 2012, compared to $2.7 million during the three months ended March 31, 2011, representing an increase of
$2.6 million, or 95%. The increase in sales and marketing expenses is due primarily to an increase in employee salaries and benefits expense of $1.2 million resulting from increased headcount, $0.7 million incurred for the expense of genome
sequencing services performed for marketing purposes during the first quarter of 2012 versus no expense in the first quarter of 2011, and $0.2 million due to increased stock based compensation expense. The remaining increase in expenses was
primarily a result of the growth of our sales and marketing activities to support the increased sales activity.
17
General and Administrative
General and administrative expenses were $4.1 million for the three months ended March 31, 2012, compared to $2.8 million for the three months ended March 31, 2011, representing an increase of
$1.4 million, or 49%. The increase was primarily due to an increase in employee salaries and benefits of $0.2 million due to increased headcount, $0.4 million resulting from increased legal expenses due to the pending litigation against Illumina,
Inc., $0.2 million due to increased stock based compensation, $0.1 million due to increased facility costs, and $0.1 million resulting from increased bad debt expense.
Interest Expense
During the three months ended March 31, 2012, we incurred interest
expense of $0.8 million compared to $0.3 million during the three months ended March 31, 2011. The increase in interest expense between the two periods was primarily due to higher debt balances related to our loans.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, for the three months ended March 31, 2012 was an income of $4,000 compared to expense of $84,000 for the
three months ended March 31, 2011. The change between the two periods was primarily due to the change in the valuation of our warrant liability in the first quarter of 2011. The final mark to market revaluation of the warrants occurred on
June 17, 2011, the date the warrants were exercised.
Liquidity and Capital Resources
Since our inception, we have generated operating losses in every quarter, resulting in an accumulated deficit of $231.4 million as of March 31, 2012.
We have financed our operations to date primarily through private placements of preferred stock and promissory notes, borrowings under our credit facilities, proceeds from our initial public offering, follow-on public offerings and term debt. As of
March 31, 2012, we had working capital of $32.4 million, consisting of $77.9 million in current assets and $45.5 million in current liabilities. As of December 31, 2011, we had working capital of $67.3 million, consisting of $95.2 million
in current assets and $27.9 million in current liabilities. Cash in excess of immediate operating requirements is invested primarily in money market funds and short-term investments in accordance with our investment policy, primarily with the goals
of capital preservation and liquidity maintenance.
We believe that, based on our current level of operations and anticipated growth, our cash
and cash equivalent and short-term investment balances, including interest income we earn on those balances, will not be sufficient to meet our anticipated cash requirements for the nine months beyond March 31, 2012. The report of our
independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2011 includes an explanatory paragraph stating that our recurring losses from operations and significant negative cash flow
from operations raise substantial doubt on our ability to continue as a going concern.
Our requirement for additional funding to execute our
business objectives gives rise to substantial doubt as to our ability to continue as a going concern. Additional sources of capital, which are not in place at this time, may be from the sale of equity or convertible debt securities in a public or
private offering, an additional credit facility, or a strategic partnership coupled with an investment in the Company or a combination of the foregoing. If we raise additional funds through the issuance of convertible debt securities, or other debt
securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. The issuance of any equity securities will also dilute our current stockholders.
In order to raise additional capital to fund our operations we entered into an the ATM Agreement with MLV on March 8, 2012, which provides that,
upon the terms and subject to the conditions and limitations set forth therein, we may sell from time to time, at our option, shares of our common stock through MLV, as our sales agent. On March 12, 2012, we filed a prospectus supplement with
the Securities and Exchange Commission to our currently effective Registration Statement on Form S-3 (File No. 333- 178728) with respect to the sale of up to an aggregate of $30.0 million of our common stock through MLV pursuant to the ATM
Agreement. As of March 31, 2012, we had received net proceeds of $0.6 million from the sale of an aggregate of 217,713 shares of common stock through MLV and we had $29.4 million of our common stock remaining available to issue and sell under
our current prospectus supplement relating to the ATM Agreement.
We may be unable to raise sufficient additional capital or financing on
terms that are acceptable, if at all. Given the risks associated with our business, including our operating history and our new business model in an emerging industry, and recent difficulties for life sciences companies raising funds in the capital
markets, we cannot guarantee that we will be able to raise additional capital in the amounts or timeframe we require, if at all. If we fail to raise additional capital in sufficient amounts and in a timely manner, we will be unable to operate our
business to December 31, 2012.
18
Cash Flows for the Three Months Ended March 31, 2012 and 2011
The following table summarizes our cash flows for the three months ended March 31, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
$
|
(15,355
|
)
|
|
$
|
(8,902
|
)
|
Net cash used in investing activities
|
|
|
(14,802
|
)
|
|
|
(3,120
|
)
|
Net cash provided by financing activities
|
|
|
203
|
|
|
|
11,895
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(29,954
|
)
|
|
$
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash used in operating activities was $15.4 million during the three months ended March 31, 2012 and consisted of a net loss of $20.2 million and a net increase in operating assets and
liabilities of $0.6 million, offset by noncash items of $5.4 million. Noncash items for the three months ended March 31, 2012 consisted primarily of the noncash interest expense related to notes payable of $0.3 million, depreciation expense of
$3.7 million and stock-based compensation expense of $1.4 million. The significant items in the change in operating assets and liabilities include an increase in prepaid expenses and inventory of $0.6 million and $2.8 million, respectively,
partially offset by a decrease in accounts receivable of $0.4 million, an increase of accrued liabilities of $1.6 million and an increase of deferred revenue of $1.1 million. The decrease in accounts receivable and deferred revenue were due to
decreased revenue during the first three months of 2012. The increase in accrued liabilities was primarily due to an increase in accrued compensation and benefits.
Net cash used in operating activities was $8.9 million during the three months ended March 31, 2011 and consisted of a net loss of $12.5 million, offset by noncash items of $3.2 million and a net
increase in operating assets and liabilities of $0.4 million. Noncash items for the three months ended March 31, 2011 consisted primarily of the change in valuation of our warrant liability of $0.1 million, depreciation expense of $2.5 million
and stock-based compensation expense of $0.5 million. The significant items in the change in operating assets and liabilities include an increase in accounts receivable of $2.4 million partially offset by a decrease in prepaid expenses and inventory
of $0.3 million and $0.8 million, respectively, and increases in deferred revenue and accounts payable of $1.3 million and $0.1 million, respectively. The increase in accounts receivable and deferred revenue were due to increased revenue and advance
billing arrangements during the first three months of 2011. The increase in accounts payable was due to purchases and expenses incurred as a result of the growth of the Company during the first three months of 2011.
Investing Activities
Net cash used in
investing activities was $14.8 million and $3.1 million for the three months ended March 31, 2012 and 2011, respectively. The 2012 amount represents net purchases of investments of $10.0 million and purchases of property and equipment of $4.8
million. The 2011 amount related entirely to purchases of property and equipment. The purchases of property and equipment during the first three months of 2012 and 2011 were primarily for sequencing equipment used in production.
Financing Activities
Net cash provided
by financing activities during the three months ended March 31, 2012 of $0.2 million consisted of net proceeds from the issuance of common stock of $0.6 million and proceeds from the issuance of common stock under equity incentive plans of $0.1
million. These proceeds were partially offset by repayments of notes payable of $0.5 million.
Net cash provided by financing activities
during the three months ended March 31, 2011 of $11.9 million consisted primarily of $20.0 million in proceeds from our term loan with Oxford. These proceeds were partially offset by repayments on term loans of $8.2 million.
Operating and Capital Expenditure Requirements
To date, we have not achieved profitability on a quarterly or annual basis and we expect this trend to continue as our cash expenditures will remain significant in the short-term. We plan to fund our
short-term liquidity requirements using cash and cash equivalents and short term investments, including interest income earned on those balances. At April 1, 2012, our principal short-term liquidity needs are:
|
|
|
to fund our operating losses;
|
|
|
|
to fund our working capital for commercial operations, including personnel costs and other operating expenses;
|
|
|
|
to expand the sample preparation, sequencing and computing capacity in our Mountain View and Santa Clara leased facilities;
|
|
|
|
to finance the further research and development of our sequencing technology and services;
|
19
|
|
|
to finance sales and marketing and general and administrative activities; and
|
|
|
|
to service our debt obligations.
|
We have a capital intensive business model and, based on our current operating plans, we forecast investing approximately $15 million in additional capital during the remainder of 2012. We anticipate that
we will continue to incur net losses for the foreseeable future as we continue to expand our business and build our infrastructure.
In
addition to our continued expenditures for the expansion of our Mountain View sequencing capacity, further development of our sequencing technology and services, and expansion of our sales and marketing activities, our principal long-term liquidity
needs are:
|
|
|
to fund our working capital for commercial operations, including any growth in working capital required by growth in our business;
|
|
|
|
to finance the possible development of additional sequencing centers; and
|
|
|
|
to service our debt obligations.
|
The timing and amount of our future capital requirements will depend on many factors, including, but not limited to, the following:
|
|
|
the financial success of our genome sequencing business;
|
|
|
|
our ability to increase the sample preparation, sequencing and computing capacities in our Mountain View and Santa Clara leased facilities;
|
|
|
|
the average selling price per genome at which we are able to sell our whole genome sequencing services;
|
|
|
|
whether repayment of our term loan(s) is accelerated if an event of default is triggered;
|
|
|
|
the rate at which we establish satellite genome sequencing centers, if any, and whether we can find suitable partners to establish such centers, if at
all;
|
|
|
|
whether we are successful in obtaining payments from customers;
|
|
|
|
whether we can enter into collaborations or establish a recurring customer base;
|
|
|
|
the progress and scope of our research and development projects;
|
|
|
|
our ability to obtain CLIA certification and capture clinical customers;
|
|
|
|
the effect of any joint ventures or acquisitions of other businesses or technologies that we may enter into or make in the future;
|
|
|
|
the filing, prosecution and enforcement of patent claims; and
|
|
|
|
the costs associated with our current litigation with Illumina, Inc. and any other litigation.
|
Our forecast of the period of time through which our financial resources will be adequate to support our operations and the costs to support our general
and administrative, sales and marketing and research and development activities are forward-looking statements and involve risks and uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including the
factors discussed under the caption Risk Factors. We have based these estimates on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect.
Term Loans
On December 17,
2010, we entered into a loan and security agreement with Atel Ventures, Inc. (Atel). On March 25, 2011, we entered into a new loan and security agreement with Oxford Finance Corporation (Oxford).
Atel Loan Agreement
The loan and
security agreement with Atel (the Atel Loan Agreement) consists of a $6.0 million term loan for equipment purchases, which are collateralized to secure the term loan. Under the terms of the Atel Loan Agreement, the term loan balance is
being repaid in 36 equal monthly payments of principal and interest. Interest accrues on the term loan at a rate of 11.26% per annum. The outstanding borrowings under the term loan are collateralized by a senior priority interest in certain of
our current property and equipment, and all property and equipment that was purchased during the term of the Atel Loan Agreement. In connection with entering into the loan and security agreement with Oxford, we and Atel made certain administrative
and technical amendments to the Atel Loan Agreement.
In connection with the Atel Loan Agreement, we issued to Atel a warrant to purchase
49,834 shares of our common stock at an exercise price of $7.224 per share. The warrant was exercised in full on June 17, 2011.
20
The Atel Loan Agreement contains customary representations and warranties, covenants, including closing and
advancing conditions, events of defaults and termination provisions. The affirmative covenants include, among other things, that we maintain certain cash account balances, and liability and other insurance, and that we pledge security interests in
any ownership interest of a future subsidiary. The negative covenants preclude us from, among other things, disposing of certain assets, engaging in any merger or acquisition, incurring additional indebtedness, encumbering any collateral, paying
dividends or making prohibited investments, in each case without the prior consent of Atel. As of December 31, 2011, we were in compliance with all the covenants in the Atel Loan Agreement. In February 2012, it became evident that we would
breach a covenant in the Atel Loan Agreement as our 2011 consolidated financial statements would contain an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern in the opinion on the financial statements
from our independent registered public accounting firm. In February 2012, the Atel Loan Agreement was amended to include, among other things, a waiver for this covenant violation.
Oxford Loan Agreement
The loan and security agreement with Oxford (the Oxford
Loan Agreement) provides for a term loan of $20.0 million. The outstanding balance of the term loan must be repaid in full by October 1, 2014 (the Maturity Date). Under the terms of the Oxford Loan Agreement, the outstanding
balance accrues interest at a rate of 9.80% per annum. Until May 1, 2012 (the Amortization Date), we must make monthly payments equal to the accrued interest on the outstanding loan balance, and, following the Amortization Date
through the Maturity Date the outstanding loan balance will be repaid in thirty (30) equal monthly payments of principal and interest.
As a condition to the Oxford Loan Agreement, a portion of the term loan was used to repay the remaining balance of $7.4 million on our existing term loan
agreement with Comerica. Following repayment of the outstanding indebtedness, the Comerica Loan Agreement was terminated. We intend to use the remainder of the Oxford term loan to fund our working capital requirements.
The term loan is secured by a senior priority on all of our assets, excluding our intellectual property and those assets securing borrowings under the
Atel loan agreement. In addition, we have agreed not to pledge our intellectual property to another entity without Oxfords approval or consent.
In connection with the entry into the Oxford Loan Agreement, we issued to Oxford warrants to purchase an aggregate of 160,128 shares of our common stock (the Warrant Shares) at an exercise
price of $7.495 per share. The warrants expire on the seventh anniversary of the issuance date. We also agreed to use best efforts to provide Oxford certain registration rights covering the Warrant Shares.
The Oxford Loan Agreement contains customary representations and warranties, covenants, closing and advancing conditions, events of default and
termination provisions. The affirmative covenants include, among other things, that we timely file taxes, maintain certain operating accounts subject to control agreements in favor of Oxford, maintain liability and other insurance, and pledge
security interests in any ownership interest of a future subsidiary. The negative covenants preclude, among other things, disposing of certain assets, engaging in any merger or acquisition, incurring additional indebtedness, encumbering any
collateral, paying dividends or making prohibited investments, in each case, without the prior consent of Oxford. The Oxford Loan Agreement provides that an event of default will occur if (1) there is a material adverse change in our business,
operations or condition (financial or otherwise), (2) there is a material impairment in the prospects of us repaying any portion of our obligations under the term loan, (3) there is a material impairment in the value of the collateral
pledged to secure our obligations under the agreement or in Oxfords perfection or priority over the collateral, (4) we default in the payment of any amount payable under the agreement when due, or (5) we breach any negative covenant
or certain affirmative covenants in the agreement (subject to a grace period in some cases). The repayment of the term loan is accelerated following the occurrence of an event of default or otherwise, which would require us to immediately pay an
amount equal to the sum of: (i) all outstanding principal plus accrued but unpaid interest, (ii) the prepayment fee, (iii) the final payment, plus (iv) all other sums, that have become due and payable but have not been paid,
including interest at the default rate with respect to any past due amounts. In February 2012, it became evident that we would breach a covenant in the Oxford Loan Agreement given that our 2011 consolidated financial statements would contain an
explanatory paragraph regarding substantial doubt about our ability to continue as a going concern in the opinion on the financial statements from our independent registered public accounting firm. In February 2012, the Oxford Loan Agreement was
amended to include, among other things, a waiver for this covenant violation.
Management believes that based on the current level of
operations and anticipated growth, cash and cash equivalents balances and interest income we will earn on these balances, will not be sufficient to meet the anticipated cash requirements for the nine months beyond March 31, 2012. Accordingly,
amounts due under the Atel Loan Agreement and the Oxford Loan Agreement have been reclassified to notes payable, current.
21
Contractual Obligations and Commitments
The following summarizes the future commitments arising from our contractual obligations at March 31, 2012 (in thousands):
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Payment due by period
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Contractual obligations
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Total
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Less than
1 year
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1-3 years
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3-5 years
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More than
5 years
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Debt obligations
(1)
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$
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23,547
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$
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8,821
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$
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14,726
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$
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$
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Interest
(2)
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3,907
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1,985
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1,922
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Operating lease obligations
(3)
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13,638
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3,458
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5,840
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4,340
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Purchase obligations
(4)
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13,631
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11,500
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2,123
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8
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Total
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$
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54,723
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$
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25,764
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$
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24,611
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$
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4,348
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$
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(1)
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Represents our outstanding debt under our term loans as of March 31, 2012.
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(2)
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Represents interest payments on our outstanding debt under our term loans as of March 31, 2012.
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(3)
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Consists of contractual obligations under non-cancellable office space operating leases.
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(4)
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Consists of purchase obligations related to our data center and non-cancellable orders for sequencing components. The table above also includes agreements to
purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under such contracts are included in the table above because management believes that cancellation of these contracts is unlikely and the
Company expects to make future cash payments according to the contract terms or in similar amounts for similar materials.
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Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving
non-exchange traded contracts.
ITEM 3:
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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As of March 31, 2012, our investment portfolio consists of money market funds and fixed- income government securities. The primary objectives of our investment are to preserve capital and maintain
liquidity. Our primary exposures to market risk are interest rate income sensitivity, which is affected by changes in the general level of U.S. interest rates, and conditions in the credit markets, including default risk. However, since all of our
investments are in money market funds and highly liquid short-term governmental securities, we do not believe we are subject to any material market interest rate risk exposure. We do not have any foreign currency or any other derivative financial
instruments.
ITEM 4:
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CONTROLS AND PROCEDURES
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Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive and financial officers, evaluated
the effectiveness of our disclosures controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2012. The term disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its chief executive and financial officers, as appropriate, to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our chief executive officer and chief financial officer concluded that, as of
such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over
Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended March 31, 2012
identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
22
PART II OTHER INFORMATION
ITEM 1:
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LEGAL PROCEEDINGS
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On August 3,
2010, a patent infringement lawsuit was filed by Illumina, Inc. and Solexa, Inc. (an entity acquired by Illumina), or the plaintiffs, against us in the U.S. District Court in Delaware. On November 9, 2010, the U.S. District Court in Delaware
granted our motion to transfer the case to the Northern District of California. The case caption is
Illumina, Inc. and Solexa, Inc. v. Complete Genomics, Inc.
, Civil Action No. 3:10-cv-05542. The complaint alleges that our Complete
Genomics Analysis Platform, and in particular our combinatorial probe anchor ligation technology, infringes upon three patents held by Illumina and Solexa. The plaintiffs seek unspecified monetary damages and injunctive relief. If we are found to
infringe one or more valid claims of a patent-in-suit and if the district court grants an injunction, we may be forced to redesign portions of our sequencing process, seek a license, cease the infringing activity and/or pay monetary damages. On
September 23, 2010, we filed our answer to the complaint as well as our counterclaims against the plaintiffs. On November 9, 2010, the U.S. District Court in Delaware granted our motion to transfer the case to the Northern District of
California. On May 5, 2011, the Court entered a stipulated order to dismiss two patents from the lawsuit. The dismissal is without prejudice but includes conditions on the ability to file lawsuits on these patents, including a limitation that
Illumina may not re-file such lawsuits against us until the later of (1) August 1, 2012, or (2) the exhaustion of all appeal rights in both (a) the pending reexaminations in the U.S. Patent and Trademark Office and (b) the
pending civil litigation in which these patents are also asserted,
Life Technologies Corp. v. Illumina
, Case No. 3:11-cv-00703 (S.D. Cal.). We believe that we have substantial and meritorious defenses to the plaintiffs
claims and intend to vigorously defend our position. However, a negative outcome in this matter could have a material adverse effect on our financial position, results of operations, cash flows and business. In addition, we have incurred and
anticipate that we will continue to incur significant expense and substantial time in defending these claims. For more information regarding the risk of this litigation and future litigation, please see Risk FactorsWe currently are, and
could in the future be, subject to litigation regarding patent and other proprietary rights that could harm our business and We may incur substantial costs as a result of our current, or future, litigation or other proceedings
relating to patent and other proprietary rights. We are not currently able to estimate the potential loss, if any, that may result from this litigation.
From time to time, we may become involved in other legal proceedings and claims arising in the ordinary course of our business. Other than as described above, we are not currently a party to any legal
proceedings the outcome of which, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, operating results, financial condition or cash flows.
23
Investing in our
common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this Quarterly Report on Form 10-Q. If any of such risks actually occur, our business, operating results or financial
condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Limited Operating History, Financial Condition and Capital Requirements
We are an early, commercial-stage company and have a limited operating history, which may make it difficult to evaluate our current business and
predict our future performance.
We are an early, commercial-stage company and have a limited operating history. We were incorporated
in Delaware in June 2005 and began operations in March 2006. From March 2006 until mid-2009, our operations focused on research and development of our DNA sequencing technology platform. Our revenue for the three months ended March 31, 2012 and
2011 was $3.9 million and $6.8 million, respectively. Our limited operating history, particularly in light of our novel, service-based business model in the rapidly evolving genome sequencing industry, may make it difficult to evaluate our current
business and predict our future performance. Our lack of a long operating history, and especially our very short history as a revenue-generating company, make any assessment of our profitability or prediction about our future success or viability
subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully,
our business will suffer.
We will require substantial additional funding and may be unable to raise capital when needed, which could
force us to delay, reduce or cancel certain business objectives or we may be unable to continue as a going concern.
Our capital
requirements are substantial, particularly as we further develop our business, expand the sample preparation, sequencing and computing capacities in our Mountain View and Santa Clara, California leased facilities and eventually establish satellite
genome sequencing centers. Our business model requires us to make significant research and development investments in many areas including sample preparation, sequencing, and bioinformatics. Historically, we have financed our operations through
private placements of preferred stock, convertible debt, borrowings under our credit facility, secured debt and through public offerings of our common stock.
We believe that, based on our current level of operations and anticipated growth, our cash and cash equivalent and short-term investment balances, including interest income we earn on those balances, will
not be sufficient to meet our anticipated cash requirements for the nine months beyond March 31, 2012. Our requirement for additional funding to execute our business objectives beyond this period gives rise to substantial doubt as to our
ability to continue as a going concern. We intend to seek additional funding through public sales or private placements of our equity and/or debt securities, an additional credit facility, collaborations and/or other strategic transactions.
We may not be able to raise sufficient additional financing on terms that are acceptable, if at all. Given the risks associated with our
business, including our limited operating history and our new business model in an emerging industry, and recent difficulties for life sciences companies raising funds in the capital markets, we may be unable to raise additional capital in the
amounts we require, if at all. In addition, if future financings involve the issuance of equity securities, our existing stockholders would suffer dilution. If we fail to raise sufficient funds and continue to incur losses, our ability to
operate our business, take advantage of strategic opportunities, further develop and enhance our technology or otherwise respond to competitive pressures could significantly suffer. If this happens, we may be forced to:
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slow the commercialization of our services;
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delay or terminate research or development programs;
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delay the establishment of satellite genome sequencing centers;
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seek to obtain funds through collaborative and licensing arrangements, which may require us to relinquish commercial rights or grant licenses on terms
that are not favorable to us; or
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curtail or cease operations.
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The amount of additional capital and timing at which we require the additional capital necessary to fund our operations and expand our business depends on many factors, including:
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the financial success of our genome sequencing business;
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our ability to increase the sample preparation, sequencing and computing capacities in our Mountain View and Santa Clara leased facilities;
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the average selling price per genome at which we are able to sell our whole genome sequencing services;
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24
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whether repayment of our term loan(s) is accelerated if an event of default occurs;
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the rate at which we establish satellite genome sequencing centers, if any, and whether we can find suitable partners to establish such centers, if at
all;
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whether we are successful in obtaining payments from customers;
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whether we can enter into collaborations or establish a recurring customer base;
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the progress and scope of our research and development projects;
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the effect of any joint ventures or acquisitions of other businesses or technologies that we may enter into or make in the future;
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the filing, prosecution and enforcement of patent claims; and
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the costs associated with our current litigation with Illumina, Inc. and any other litigation.
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Our term loans contain restrictions that limit our flexibility in operating our business and provisions that enable the lenders to accelerate
repayment of the outstanding amounts in the event of default.
In December 2010, we entered into two loan and security agreements,
replacing our existing credit facility. In March 2011, we entered into a new loan and security agreement for a term loan and repaid and terminated one of the December 2010 agreements with the proceeds from the new term loan. Our term loans contain
various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
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sell, transfer, lease or dispose of our assets;
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create, incur or assume additional indebtedness;
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encumber or permit liens on certain of our assets;
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make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our common stock;
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make specified investments (including loans and advances);
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
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enter into certain transactions with our affiliates.
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A breach of any of these covenants or a material adverse change to our business could result in a default under either or both of our term loans. In addition, our term loan with Oxford Finance Corporation
provides that an event of default will occur, among other instances, if there is a material adverse change in our business, operations or condition (financial or otherwise) or if there is a material impairment in the prospects of us repaying any
portion of our obligations under the term loan. These provisions are inherently subjective in nature. If we fail to raise additional capital in a timely manner, an event of default could occur under our term loan with Oxford. Upon the occurrence of
an event of default under our term loans, our lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders
could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the term loans.
We have a history of losses, and we may not achieve or sustain profitability in the future, on a quarterly or annual basis.
We have not been profitable in any annual or quarterly period since we were formed. We incurred net losses of $20.2 million and $12.5 million for the
three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, our accumulated deficit was $231.4 million. Based on our current operating plans and assumptions, we do not expect to achieve profitability in the near future.
In addition, we expect our cash expenditures to remain significant in the near term, including expenditures for the expansion of our sample preparation, sequencing and computing capabilities, research and development, sales and marketing and general
and administrative expenses. We may encounter unforeseen difficulties, complications and delays in our existing sequencing facility or establishing satellite genome sequencing centers and other unforeseen factors that require additional
expenditures. These costs, among other factors, have had and will continue to have an adverse effect on our working capital and stockholders equity. We will have to generate and sustain substantially increased revenue to achieve and maintain
profitability, which we may never do. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.
25
Our operating results may fluctuate in the future. As a result, we may fail to meet or exceed the
expectations of research analysts or investors, which could cause our stock price to decline.
Our financial condition and operating
results may fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following, as well
as other factors described elsewhere in this Quarterly Report:
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our ability to achieve profitability;
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our need for and ability to obtain the capital necessary to operate and expand our business;
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the timing of our receipt of customer samples;
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the size and frequency of customer orders;
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our ability to lower the average cost per genome that we sequence;
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the average selling price we charge our customers for sequencing genomes;
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the presence or absence in a specific quarter of one or more new large orders;
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our ability to expand our sample preparation, sequencing and computing operations;
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the demand for the sequencing of complete human genomes;
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the existence and extent of government funding for research and development relating to genome sequencing;
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the emergence of alternative genome sequencing technologies;
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risks associated with expanding our business into international markets;
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our dependence on sole- or single-source suppliers;
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our ability to manage our growth;
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our ability to successfully partner with other businesses in joint ventures or collaborations, or integrate any businesses we may acquire with our
business;
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our dependence on, and our need to attract and retain, key management and qualified sales personnel;
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our ability to obtain, protect and enforce our intellectual property rights and avoid infringing the intellectual property rights of others;
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our ability to prevent the theft or misappropriation of our know-how or technologies;
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lawsuits brought against us by third parties;
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business interruptions, such as earthquakes and other natural disasters;
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public concerns about the ethical, legal and social concerns related to the use of genetic information;
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our ability to comply with current laws and regulations and new or expanded regulatory schemes;
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our ability to properly handle and dispose of hazardous materials used in our business and biological waste; and
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our ability to use our net operating loss carryforwards to offset future taxable income.
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Due to the various factors mentioned above, and others, the results of any prior quarterly or annual periods are not necessarily indicative of our future
operating performance.
Our independent registered public accounting firm has included an explanatory paragraph relating to our ability
to continue as a going concern in its report on our audited financial statements included in our last Annual Report.
The report from
our independent registered public accounting firm dated March 8, 2012 for the year ended December 31, 2011 includes an explanatory paragraph stating that our recurring losses from operations and significant negative cash flow from
operations raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, financial condition and results of operations will be materially and adversely affected and we may be
unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and it is
likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing
sources may be unwilling to provide additional funding on commercially reasonable terms or at all.
26
Risks Related to Our Business
Our only source of revenue is our human genome sequencing service, which is a new business model in an emerging industry, and failure to achieve market acceptance will harm our business.
Since our inception, all of our efforts have been focused on the creation of a technology platform for our human genome sequencing
service, which we commercialized in May 2010. We expect to generate all of our revenue from our human genome sequencing service for the foreseeable future. As a result, market acceptance of our human genome sequencing service is critical to our
future success.
Providing genome sequencing as a service is a new and unproven business model in a relatively new and rapidly evolving
industry. We are using proprietary technology, involving multiple scientific and engineering disciplines, and a novel service model to bring complete human genome sequencing to an unproven market. We incur considerable research and development and
general and administrative expenses in providing our services to our customers and, hence, our revenues will have to grow many fold before we can achieve profitability.
Historically, companies in this industry have sold sequencing instruments directly to customers, and the customer performs the sequencing itself. We do not know if the purchasers and users of sequencing
instruments will adopt our service model. For example, many potential customers want to sequence human genomes for proprietary studies that may lead to discoveries which they would seek to exploit, either commercially or through the publication of
scientific literature. Accordingly, these potential customers may have significant reservations about allowing a third party to control the sequencing processes for their proprietary studies. Alternatively, other potential customers may want to
sequence only portions of human genomes, such as exomes, rather than complete human genomes. There are many reasons why our services might not become widely adopted, ranging from logistical or quality problems to a failure by our sales force to
engage potential customers, and including the other reasons stated in this Risk Factors section. As a result, our genome sequencing service may not achieve sufficient market acceptance to allow us to become profitable.
Our success depends on the growth in demand for analysis of genetic variation and biological function, and the shift in demand to whole human
genome sequencing.
We are currently targeting customers for our genome sequencing service in academic centers, medical research
centers, government research institutions, biopharmaceutical companies and health care organizations. Our customers are using our service for small- and large-scale human genome studies for a wide variety of diagnostic and discovery applications.
These customers and applications are new and emerging, and they may not develop as quickly as we anticipate, or reach their full potential. Our success depends on the demand of whole human genome sequencing increasing substantially from its current
levels. The development of demand for whole human genome sequencing and the success of our service depend in part on the following factors:
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demand by researchers for whole human genome sequencing;
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the usefulness of genomic data in preventing, identifying or treating disease;
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the ability of our customers to successfully analyze the genomic data we provide;
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the ability of researchers to convert genomic data into medically valuable information;
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the capacity and scalability of the hardware storage components necessary to store, manage, backup, retain and safeguard genomic data;
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the development of software tools, such as bioinformatics systems, to efficiently search, correlate and manage genomic data to assist our customers in
effectively analyzing the genomic data we provide; and
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competitive product offerings.
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For instance, demand for our genome sequencing service may decrease if researchers are unable to effectively use and ultimately analyze the large amounts of genomic data from a whole human genome or if
they fail to find meaningful correlations between genetic variation and disease susceptibility through whole human genome studies. In February 2012, our Genomic Discovery Partners Program was launched to facilitate the analysis of large amounts of
genomic data. This program is a partnership with other analysis software providers whose analysis tools are compatible with our analysis tools. We cannot be certain this program will be successful. In addition, factors affecting research and
development spending generally, such as changes in the regulatory environment affecting biopharmaceutical and other healthcare organizations and changes in government programs that provide funding to companies and research institutions, could harm
our business. If our target markets do not develop in a timely manner, demand for our service may grow at a slower rate than we expect, or may fall, and we may not achieve profitability.
To date, relatively few whole human genomes have been sequenced, in large part due to the high cost of large-scale sequencing. Our business plan assumes that the demand for sequencing whole human genomes
will increase significantly as the cost of whole human genome sequencing decreases. This assumption may prove to be incorrect, or the increase in demand may take significantly more time than we anticipate. For example, potential customers may not
think our cost reductions are sufficient to permit or justify large-scale sequencing. Moreover, some companies and institutions have focused on sequencing targeted areas of the genome that are believed to
27
be primarily associated with disorders and diseases, as opposed to the entire genome. Demand for sequencing whole human genomes may not increase if these targeted sequencing strategies, such as
exome sequencing, where selected regions containing key portions of genes are sequenced, prove to be more cost effective or are viewed as a more efficient method of genetic analysis than whole human genome sequencing. Since exome sequencing is
significantly less expensive than the sequencing of an entire human genome, customers, including those with limited budgets, may choose to sequence exomes instead of whole human genomes.
In addition, customers of whole genome sequencing services have a number of service options available to them. For us to succeed, our customers will need to find our service alternative superior to
services offered by our competitors.
We must significantly increase our production capabilities in order to achieve profitability.
We have very limited experience in running a commercial-scale production facility. We have only one sequencing facility, which at
present has the capacity to sequence approximately 1,000 complete human genomes per month. This capacity is significantly less than what would be required to achieve profitability. Our business plan assumes that we will be able to increase our
capacity multiple fold.
We plan to increase the capacity of our sequencing facility by increasing our sample preparation capacity, upgrading
our existing sequencers, installing additional sequencers, improving our software and designing and installing newer generations of sequencing instruments that are currently under research and development. We may also construct satellite genome
sequencing centers in the United States and elsewhere in the future. We may encounter difficulties in expanding our sequencing infrastructure, and we may not be able to build and improve this infrastructure in time to meet the volume, quality or
timing requirements necessary to be successful. Manufacturing and supply quality issues may arise, including issues due to third parties who provide the components of our technology platform. We are designing our next generation of sequencers that
are targeted to be faster than our current sequencers. We may experience technical difficulties that may cause substantial delays and as a result hamper our efforts to achieve a significant increase in our capacity. As our sequencing capacity and
demand for our sequencing services increases, we will be required to scale up our sample and library preparation capacity. We encountered delays and difficulties in scaling up our sample and library preparation capacity in the second half of
2011. We may also encounter delays or difficulties in our future sample and library expansion efforts. Generally, implementing improvements to our sequencing technology may involve significant changes that may result in delays, or may not
achieve expected results. For example, we are experimenting with improved library construction processes and with advanced fluidics for our sequencing platform. These experiments may be unsuccessful and may not lead to feasible technological
improvements that increase the capacity or reduce the costs of our sequencing services. If capacity or cost limitations prevent us from meeting our customers expectations, we will lose revenue and our potential customers may take their
business to our competitors.
Our need to increase capacity may require us to upgrade our machines to enhance our current production process.
This may render our current machines obsolete sooner than anticipated. If this occurs, the value of these machines could be impaired and we may need to write down the value of this equipment, which could have a material impact on our financial
statements.
We also plan to continue our efforts to reduce our turn-around time. We have a number of projects underway to do so. However,
there can be no assurance that we will be successful in these efforts. In addition, from time to time, our turn-around time may increase if we encounter any operator or process failures, if we have to resequence genomes, or if our capacity does not
keep up with our backlog. Failure to improve our turn-around time may cause us to lose existing or prospective orders.
Reduction or
delay in research and development budgets and government funding may adversely impact our sales.
We expect that for the foreseeable
future, our revenue will be derived primarily from selling our genome sequencing service to a relatively small number of academic, governmental and other research institutions, as well as biopharmaceutical and healthcare organizations. Our revenue
may decline substantially due to reductions and delays in research and development expenditures by these customers, which depend, in part, on their budgets and the availability of government funding. Factors that could affect the spending levels of
our customers include:
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weakness in the global economy and changing market conditions that affect our customers;
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changes in the extent to which the pharmaceutical and life science industry may use genetic information and genetic testing as a methodology for drug
discovery and development;
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changes in government programs that provide funding to companies and research institutions;
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changes in the regulatory environment affecting biopharmaceutical and life science companies and research and medical institutions;
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impact of consolidation within the biopharmaceutical and life science industry; and
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cost-reduction initiatives of customers.
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Also, government funding of research and development is subject to the political process, which is
inherently unpredictable. Any reduction in the funding of life science research and development or delay surrounding the approval of government budget proposals may cause our customers to delay or forgo purchases of our services. For example,
uncertainty regarding the size of the U.S. governments 2012 -2013 budget for the National Institute of Health, or NIH, and related agencies may cause our customers to slow or delay purchases of our services. In addition, it is unclear what
will happen to demand for our services after the stimulus funds provided to NIH pursuant to the American Recovery and Reinvestment Act of 2009 have been allocated and fully spent. A reduction or delay in demand for our service will adversely affect
our ability to achieve profitability.
The presence or absence in a specific quarter of one or more new large orders, our ability to
process orders or the cancellation of previous orders, may cause our results of operations and backlog to fluctuate significantly on a quarterly basis.
Since beginning commercial operations, we have received purchase orders or contracts from a growing but limited number of customers each quarter. Historically, the size of each purchase order has
fluctuated between a few genomes and multiple hundreds of genomes. As a result, the presence or absence in a specific quarter of one or more new large orders, delays in our ability to process large orders or the cancellation of previous orders,
combined with our uncertain sales cycle and changes in the variables that influence conversion of orders into revenue, may cause our results of operations and our backlog to fluctuate on a quarterly basis. These fluctuations may be significant from
one quarter to the next. In addition, our limited commercial history and the characteristic of our quarterly orders make it very difficult to predict or forecast our future operating results and backlog.
If we are not successful in reducing the average cost of our sequencing service, demand for our services, as well as our ability to achieve
profitability, will suffer.
Our ability to expand our customer base depends largely on our ability to reduce the average cost of
sequencing a human genome. For example, certain academic or government-sponsored research organizations may forgo or delay whole genome-wide studies based on the cost required to sequence complete human genomes, in favor of other less expensive
studies, including targeted sequencing strategies such as exome sequencing. Additionally, certain of our target customers may decide it is more cost-effective to purchase sequencing instruments from a competitor than contract for our sequencing
service or may choose to outsource their sequencing projects to another service provider. To compete effectively with competitors who sell and market sequencing instruments or provide sequencing services, our service must provide cost advantages,
superior quality and time savings.
In addition, we have significantly reduced the price of our complete human genome sequencing services over
the past few quarters. This reduction in price has been driven in part by competitive pricing pressure. As our competitors reduce the price of their sequencing services, or as new competitors enter the market or expand their business model to
include sequencing services, we expect increased pricing pressure, which may force us to further decrease the price of our genome sequencing service. Our gross profit and operating results will suffer if we are unable to offset any reductions in our
prices by reductions in our costs through developing new or enhanced technologies or methods, or increasing our sales volumes.
We face
significant competition. Our failure to compete effectively could adversely affect our sales and results of operations.
We currently
compete with companies that develop, manufacture and market genome sequencing instruments or provide genome sequencing services. We expect competition to increase as our competitors develop new, improved or cheaper instruments or expand their
businesses to include sequencing services, and as new companies enter the market with innovative technologies.
The genome sequencing industry
is highly competitive and is served by several large companies with significant competitive positions. For example, established companies such as Illumina, Inc., Life Technologies Corporation and Roche Diagnostics Corporation are marketing
instruments for genetic sequencing that impact demand for our services, and these companies have significantly greater financial, technical, marketing and other resources than we do to invest in new technologies and have substantial intellectual
property portfolios and substantial experience in product development and regulatory expertise. Also, many other companies, such as NABsys, Inc., Oxford Nanopore Technologies, Ltd., Pacific Biosciences, Inc. and Perkin Elmer Corporation, have
developed or are developing sequencing technologies or services that would compete with ours. Moreover, large established companies may acquire smaller companies with emerging technologies and use their extensive resources to develop and
commercialize such technologies or incorporate such technologies into their instruments and services. For example, in 2010, Life Technologies acquired Ion Torrent Systems, Inc., a chip-based sequencing technology company, and recently announced that
the sequencing platform acquired from Ion Torrent may be able to sequence a genome for $1,000 in less than one day by the end of 2012.
In
addition, many research, academic and other non-profit institutions are pursuing new sequencing technologies. These institutions often have access to significant government and other funding. For example, BGI (formerly known as Beijing Genomics
Institute) in the Peoples Republic of China offers a service that is similar to ours and is funded by the government of China. In the United States, agencies such as the National Human Genome Research Institute provide funding to institutions
to discover new sequencing technology. We may compete directly with these institutions, or these institutions may license their technologies to third parties with whom we would compete.
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While many of our existing competitors primarily sell sequencing instruments, they may also provide
sequencing services like us. Since these competitors have already developed their own sequencing technology, they will not experience significant technological barriers to entry and can likely enter the sequencing services market fairly quickly and
with little additional cost. For example, Illumina began providing whole genome sequencing services in-house and through its Illumina Genome Network in mid-2010, and Life Technologies has announced a collaboration to build a genome sequencing
facility. Recently, Illumina reported that its outsourced sequencing business is gaining traction and that it sequenced over 900 genomes for its customers in the fourth quarter of 2011. Furthermore, many of these instrumentation companies have
already established a significant market presence, have large cash balances and/or positive balances from their current businesses, and are trusted by customers in the industry. As established instrumentation companies offer sequencing services,
many potential customers may purchase sequencing services from these companies instead of us, even if we offer superior technology and services.
In addition to commercial companies, there are large, government-funded or research-sponsored organizations, such as the Broad Institute of MIT and Harvard, the Genome Center at Washington University, the
Baylor College of Medicine Human Genome Sequencing Center, the Wellcome Trust Sanger Institute and BGI (formerly known as Beijing Genome Institute), that purchase commercial DNA sequencing instruments and offer DNA sequencing services to academic
and commercial customers.
Our order backlog may never be completed, and we may never earn revenue on backlogged contracts to sequence
genomes. In addition, the timing of the conversion of our order backlog into revenue is dependent on the timing of receipt of samples from our customers.
As of March 31, 2012, we had a backlog of orders for sequencing approximately 5,700 genomes, which we believe could contribute approximately $27.0 million toward revenue over the next 12 months. This
figure represents the number of genomes for which customers have placed orders or entered into contracts with volume estimates that we believe are firm and for which we have not yet recognized revenue. We may not be able to convert order backlog
into revenue at the rate or times we anticipate, or at all. Consequently, the order backlog we report in this Form 10-Q and elsewhere from time to time may not be indicative of future revenue.
We may fail to complete backlog orders as we expect for many reasons. We may experience sequencing delays or customers may delay providing samples for
sequencing or might reduce or cancel orders. We are still scaling up our services, and while we have been increasing our throughput capacity rapidly, we have in the past experienced growing backlog due to our inability to keep pace with new orders,
operational challenges in implementing new equipment and procedures, delays in processing orders and in some cases due to lack of timely arrival of samples. Delays in sequencing for lack of capacity, lack of samples, or for any other reason could
cause backlog orders to be delayed or even cancelled by customers, which has happened on occasion. Even with sufficient throughput capacity, we are not always in control of the rate at which we complete orders and therefore convert backlog to
revenue. For example, customers often place orders with us before providing us with genomic samples, delaying our start of the sequencing process by weeks or months. A delay in receiving samples, particularly from a large order, may cause our
results of operations to fluctuate significantly from one quarter to the next. Additionally, once we receive a customers samples, we test them to assure that they are of sufficient quality and quantity for sequencing. If a sample fails this
test, we contact the customer and request additional samples, resulting in further delay. Also, customers may negotiate a period of time, measured in weeks or in some cases months, to accept or reject our sequencing reports once delivered. Customer
acceptance in these instances is a prerequisite for recording revenue for those orders. For these reasons, you should use caution in adopting changes in, or the absolute amount of, our backlog as a measure for market acceptance of our sequencing
services or as an indicator of future revenue.
The emergence of competitive genome sequencing technologies may harm our business.
The success of our genome sequencing services will depend, in part, on our ability to continue to enhance the performance and decrease
the cost of our genome sequencing technology. A number of genome sequencing technologies exist, and new methods and improvement to existing methods are currently being developed, including technology platforms developed by companies that we expect
will directly compete with us as providers of sequencing services or instruments. These new technologies may result in faster, more cost-effective and more accurate sequencing methods than ours. For example, our sequencing technology does not
currently cover all of the nucleotides in the genome. If competitive technologies emerge that sequence portions of the genome that our technology does not, our business could suffer if those portions contain important genomic information. We expect
to face competition from emerging companies, including NABsys, Oxford Nanopore Technologies and Pacific Biosciences, as well as from established companies such as Illumina, Inc. As a result of the emergence of these competitive sequencing
technologies, demand for our service may decline or never develop sufficiently to sustain our operations.
Our industry is rapidly changing,
with emerging and continually evolving technologies that increase the efficiency and reduce the cost of sequencing genomes. As new technologies emerge, we believe that the cost and error rates of, and the time required to, sequence human genomes
will eventually decrease to a level where competition in the industry will shift to other factors, such as providing related services and analytical technologies. We may not be able to maintain any technological advantage over these new sequencing
technologies, and if we fail to compete effectively on other factors relevant to our customers, our business will suffer.
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Our genome sequencing technology platform was developed for human DNA and is not currently optimized
to sequence non-human DNA.
Our technology platform was developed and has been optimized for sequencing human DNA, and we do not intend
to sequence non-human DNA. We face significant competition from established companies that sell genome sequencing instruments that can sequence both human and non-human DNA. Many of the academic and research institutions that are our target
customers conduct studies on both human and non-human DNA. Prospective customers may choose to purchase sequencing instruments rather than services from us because of their broader sequencing application. Our competitors may also choose to provide
sequencing services for non-human DNA. As a result, there may not be sufficient demand for our human genome sequencing service, which will harm our business.
We depend on a limited number of suppliers, including single-source suppliers, of various critical components for our sequencing process. The loss of these suppliers, or their failure to supply us
with the necessary components on a timely basis, could cause delays in the current and future capacity of our sequencing center and adversely affect our business.
We depend on a limited number of suppliers, including some sole- and single-source suppliers, of various critical components for our sequencing process. We do not have long-term contracts with our
suppliers or service providers. Because we do not have long-term contracts, our suppliers generally are not required to provide us with any guaranteed minimum production levels. As a result, we may not be able to obtain sufficient quantities of
critical components in the future.
Although alternative suppliers exist for each of the critical components of our sequencing process, that
process has been designed around the functions, limitations, features and specifications of the components that we currently utilize. For example, the cameras in our sequencers are supplied by Hamamatsu Photonics and the optical equipment is
supplied by Carl Zeiss, Inc. A failure by either or both of these companies to supply these components would require us to integrate alternative cameras and optical equipment, and potentially integrate other components, into future sequencing
instruments. If we are required to integrate new components into future sequencers, we would experience a delay in the deployment of these sequencers, and, as a result, our efforts to expand our sequencing capacity would be delayed.
A delay or interruption by our suppliers may also harm our business. For example, the wafers that comprise the base of our sample slide are fabricated by
SVTC Technologies, L.L.C. We have not yet qualified an alternative source for the supply of these wafers, which are critical to our sequencing process, and the custom manner in which these wafers are made may make it difficult to qualify other
semiconductor suppliers to manufacture them for us. Similarly, an interruption of services by Amazon Web Services, on whom we rely to deliver finished genomic data to our customers, could result in our customers not receiving their data on time.
In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting
demand in the event we must switch to a new supplier. The time and effort to qualify a new supplier could result in additional costs, diversion of resources or reduced manufacturing yields, any of which would negatively impact our operating results.
Our dependence on single-source suppliers exposes us to numerous risks, including the following:
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our suppliers may cease or reduce production or deliveries, raise prices or renegotiate terms;
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delays by our suppliers could significantly limit our ability to sequence customer data and delay our efforts to increase our sequencing capacity;
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quality issues that may not be immediately detected by our quality assurance team may arise causing disruption or delay in our operations;
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we may be unable to locate a suitable replacement on acceptable terms or on a timely basis, if at all; and
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delays caused by supply issues may harm our reputation, frustrate our customers and cause them to turn to our competitors for future projects.
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If our Mountain View genome sequencing facility becomes inoperable, we will be unable to perform our genome
sequencing services and our business will be harmed.
We currently do not have redundant sequencing facilities on a scale that could
support our business. We perform all of our commercial genome sequencing in our facility located in Mountain View, California. Mountain View is situated on or near earthquake fault lines. Our facility, the equipment we use to perform our sequencing
services and our other business process systems are costly to replace and could require substantial time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, wildfires,
floods, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to sequence genomes for some period of time. In addition, these events may temporarily
interrupt our ability to receive samples from our customers or materials from our suppliers and our access to our various systems necessary to operate our business. The inability to perform our sequencing service would result in the loss of
customers and harm our reputation. We do not currently have insurance coverage for damage arising from an earthquake. Our insurance covering damage to our property may not be sufficient to cover all of our potential losses and will not cover us in
the event of an earthquake, and may not continue to be available to us on acceptable terms, or at all.
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Failure to achieve expected sequencing process yields, or variability in our sequencing process
yields, could harm our operating results and damage our reputation.
Our sequencing process, like any other commercial-scale production
process, is not flawless. For example, our DNBs may not adhere to all of the sticky spots on the surface of the silicon wafers we use to sequence DNA, or parts of the wafers may be unreadable. We refer to the efficiency of our sequencing
process as its yield. The sequencing process yields we achieve depend on the design and operation of our sequencing process, which uses a number of complex and sophisticated biochemical, informatics, optical and mechanical processes, many of which
are highly sensitive to external factors. An operational or technology failure in one of these complex processes or fluctuations in external variables may result in sequencing processing yields that are lower than we anticipate or that vary
between sequencing runs. In addition, we are regularly evaluating and refining our sequencing process. These refinements may initially result in unanticipated issues that further reduce our sequencing process yields or increase the
variability of our sequencing yields. Low sequencing yields, or higher than anticipated variability, increases total sequencing costs and reduces the number of genomes we can sequence in a given time period, which can cause variability in our
operating results and damage our reputation.
We may have to resequence genomes due to contamination of DNA samples or other failures in
the sequencing process.
In the past, we have had to resequence various genome samples as a result of DNA samples that are degraded,
improperly prepared or contaminated when we receive them, or as a result of contamination or other failures in the sample preparation and library construction process. The sequencing process is highly sensitive, and the presence of any foreign
substances or variances in external factors, such as heat or moisture, during the preparation of the slide samples can corrupt the results of the sequencing process. The quality of our sequencing runs may also vary for other reasons. As we continue
to refine the efficiency of our sequencing process, we may modify the protocols in various stages of the sequencing process, which may have unintended consequences requiring us to further modify the protocols and/or resequence genomes samples.
Resequencing requires additional expense, time and capacity and delays the delivery of data and the recognition of revenue from the service. Samples may be contaminated in the future or the quality of our sequencing results may vary, which may
damage our reputation and decrease the demand for our service.
Mishandling or switching of DNA samples or genomic data may harm our
reputation and result in litigation against us.
We may unintentionally mishandle DNA samples. For example, if customer samples or
sequencing results are switched, our customers would receive the wrong sequencing data, which could have significant consequences, particularly if that data is used to diagnose or treat disease. Mishandling customer samples or data could lead to
loss of current or future business, harm our reputation and result in litigation against us.
Ethical, legal and social concerns related
to the use of genetic information could reduce demand for our genome sequencing services.
Our genome sequencing services are intended
to facilitate large-scale human genome studies for a wide variety of diagnostic and discovery applications. However, genetic testing has raised ethical, legal and social issues regarding privacy and the appropriate uses of the resulting information.
Governmental authorities could, for social or other purposes, limit or regulate the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these
concerns may lead individuals to refuse to use genetics tests even if permissible.
In addition, we do not control how our customers use the
genomic data we provide. In most cases, we do not know the identity of the individuals whose DNA we sequence, the reason why their DNA is being sequenced or the intended use of the genomic data we provide. If our customers use our services or the
resulting genomic data irresponsibly or in violation of legal restrictions, our reputation could be harmed and litigation could be brought against us.
Ethical and social concerns may also influence U.S. and foreign patent offices and courts with regard to patent protection for technology relevant to our business. These and other ethical, legal and
social concerns may limit market acceptance of our technology for certain applications or reduce the potential demand for our technology, either of which could have an adverse effect on our business, financial condition or results of operations.
We use biological and hazardous materials that require considerable expertise and expense for handling, storage and disposal and may
result in claims against us.
We work with materials, including chemicals, biological agents and compounds and DNA samples that could
be hazardous to human health and safety or the environment. Our operations also produce hazardous and biological waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of
these materials and wastes. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental laws and regulations may restrict our operations. If we do not comply with applicable regulations, we may be
subject to fines and penalties.
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In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or
wastes. While our property insurance policy provides limited coverage in the event of contamination from hazardous and biological products and the resulting cleanup costs, we do not currently have any additional insurance coverage for legal
liability for claims arising from the handling, storage or disposal of hazardous materials. Further, our general liability insurance and workers compensation insurance policies do not cover damages and fines arising from biological or
hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be liable for damages or penalized with fines in an amount exceeding our resources and our operations could be suspended or otherwise adversely
affected.
We have limited selling and marketing resources and may be unable to successfully commercialize our human genome sequencing
service.
To grow our business as planned, we must expand our sales, marketing and customer support capabilities. We may be unable to
attract, retain and manage the specialized workforce necessary to gain market acceptance and successfully commercialize our services. In addition, developing these functions is time consuming and expensive.
The sale of genome sequencing services involves extensive knowledge about genomic research and sequencing technology, including the sequencing technology
of our competitors. To be successful, our sales force and related personnel must be technically proficient in a variety of disciplines. For example, many of our existing salespersons have a Ph.D. or other advanced degree in relevant scientific
fields. There are relatively few people that have the necessary knowledge and qualifications to be successful salespersons or support personnel in our industry.
In certain regions or for certain customers, we may seek to partner with others to assist us with sales, marketing and customer support functions. However, we may be unable to find appropriate third
parties with whom to enter into these arrangements. Furthermore, if we do enter into these arrangements, these third parties may not perform as expected.
Our software may incorrectly analyze the raw genomic data produced by our sequencing equipment.
Our sequencing instruments generate raw genomic data from various segments of the genome being sequenced. This data must be arranged into the correct order to reconstruct the original genomic structure of
the sample. We have developed software algorithms that facilitate this reconstruction. However, these algorithms rely on statistical models that provide only relative assurance, and not absolute assurance, that the original genomic structure has
been reconstructed.
In addition, the genomic data we provide our customers includes a comparison of the sequenced genome against a reference
genome to help identify possible mutations or variations. This reference genome is designed to approximate a standard human genome. However, this approximation may not be accurate. If the algorithms we use to reconstruct genomic data
incorrectly reconstruct the sequenced genome, or if our reference genome is significantly flawed, the genomic data we deliver could be inaccurate and of little or no use to our customers.
An inability to manage our planned growth or expansion of our operations could adversely affect our business, financial condition or results of operations.
Our business has grown rapidly, and we expect this growth to continue as we expand our sequencing capacity. For example, we had three employees at the end
of 2005 and 270 employees as of March 31, 2012. The rapid expansion of our business and addition of new personnel may place a strain on our management and operational systems. To effectively manage our operations and growth, we must continue to
expend funds to enhance our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to expand our genome sequencing capacity and implement
improvements to our control systems efficiently and quickly, or if we encounter deficiencies in existing systems and controls, then we will not be able to successfully expand the commercialization of our services. In addition to enhancing our
sequencing capacity, our future operating results will depend on our managements ability to:
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implement and improve our sales, marketing and customer support programs and our research and development efforts;
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enhance our operational and financial control systems;
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expand, train and manage our employee base;
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manage the operating expenses of our business as we expand;
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integrate acquired businesses, if applicable; and
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effectively address new issues related to our growth as they arise.
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We may not manage our expansion successfully, which could adversely affect our business, financial condition or results of operations.
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If we expand our operations outside of the United States, we will face risks that may increase our
operating costs.
We plan to expand our operations to include satellite genome sequencing centers outside of the United States. Because
the laws of certain countries currently prohibit the export of DNA, we will have to establish local facilities to access customers in those countries and establish a presence there. To date, we have not expanded our sequencing operations outside the
United States. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited
experience with international operations, our international expansion efforts may be unsuccessful. In addition, we will face risks in doing business internationally that could increase our operating costs, including the following:
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economic conditions in various parts of the world;
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unexpected and more restrictive laws and regulations, including those laws governing ownership of intellectual property, collection and use of personal
information and other privacy considerations, hazardous materials and other activities important to our business;
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new and different sources of competition;
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multiple, conflicting and changing tax laws and regulations that may affect both our international and domestic tax liabilities and result in increased
complexity and costs;
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the difficulty of managing and staffing satellite genome sequencing centers and the increased travel, infrastructure and legal compliance costs
associated with multiple international locations;
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difficulties in enforcing contracts and collecting accounts receivable, especially in developing countries;
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fluctuations in exchange rates; and
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tariffs and trade barriers, import/export controls and other regulatory or contractual limitations on our ability to sell or develop our services in
certain foreign markets.
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The success of the expansion of our business internationally will depend, in part, on our ability
to anticipate and effectively manage these and other risks associated with international operations. Our failure to manage any of these risks successfully could increase our operating costs.
We may experience delays or incur significant expenses in becoming certified under the Clinical Laboratory Improvement Amendments of 1988.
Although we are not currently subject to the Clinical Laboratory Improvement Amendment of 1988, or CLIA, we have an internal program to seek CLIA
certification. CLIA, which extends federal oversight over clinical laboratories by requiring that they be certified by the federal government or by a federally approved accreditation agency, is designed to ensure the quality and reliability of
clinical laboratories by mandating specific standards in the areas of personnel qualifications, administration and participation in proficiency testing, patient test management, quality control, quality assurance and inspections. In order to receive
a CLIA certification, we will have to expend time, money and effort to ensure that we meet the applicable quality and safety requirements, which may divert the attention of management and disrupt our core business operations. In addition, it may
take us longer and/or require us to spend considerably more than planned resources to achieve CLIA certification. Without CLIA certification, we are not able to provide sequencing services to customers which require genomic data from a
CLIA-certified laboratory.
Because demand and applications for genome sequencing is relatively new and rapidly evolving, we may become
subject to additional future governmental regulation, which may place additional cost and time burdens on our operations.
We are
subject, both directly and indirectly, to the adverse impact of existing and potential future government regulation of our operations and markets. The life sciences and pharmaceutical industries, which are significant target industries for our
services, have historically been heavily regulated. There are comprehensive federal and state laws regarding matters such as the privacy of patient information and research in genetic engineering. For example, if we inadvertently disclose private
personal information in the course of providing our sequencing services, we could be prosecuted for violations of federal law.
Legislative
bodies or regulatory authorities may adopt additional regulation that adversely affects our growth opportunities. They could also extend existing regulations to cover our services. For example, medical diagnostic products may, depending on their
intended use, be regulated as medical devices by the Food and Drug Administration, or FDA, if they are:
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used in the diagnosis of disease or other conditions;
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used in the cure, mitigation, treatment or prevention of disease; or
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intended to affect the structure or any function of the body.
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Medical devices generally cannot be marketed without first receiving clearance or approval (depending on the
regulatory pathway) from the FDA. We do not believe that our sequencing services are currently subject to the FDAs medical device requirements because we do not intend our services to be used for the diagnosis of disease. However, we cannot
control how the genomic information we provide will be used by our customers.
In addition, the FDA is focusing on genomic and
diagnostic-related services, which has created uncertainty regarding the regulatory landscape. The FDA has recently taken actions suggesting that it interprets the applicable regulations expansively to cover certain genomic devices and services,
particularly those sold directly to consumers. Since June 2010, the FDA has sent numerous letters to certain companies in DNA sequencing, including 23andMe, Inc., deCODE Genetics, Knome, Inc., Navigenics, Inc. and Pathway Genomics. In these letters,
the FDA noted that it considers genetic tests marketed by these companies to be subject to FDA regulation and, accordingly, unapproved medical devices. Additionally, in March 2011, the FDA held a public two-day meeting discussing the appropriate
regulation of the direct-to-consumer genetic tests. The FDA may extend this position to services such as ours. In addition, the FDA may implement new regulations that may be broad enough to cover our operations. Changes to the current regulatory
framework, including the imposition of new regulations, could arise anytime, and we may be unable to obtain or maintain FDA or comparable regulatory approval or clearance for our services, if required. For example, the FDA may impose restrictions on
the types of customers to which we can market and sell our services and the types of persons whose DNA we may sequence. Also, future legislation may require that research subjects or patients provide specific consent to have their DNA sequenced.
This could require our customers to obtain new consents before they can submit DNA samples to us for sequencing.
In any event, as we look to
expand our business to include sequencing services intended to be used for the diagnosis of disease, we will likely become subject to regulation by the FDA or other comparable agencies of other countries, which may require us to obtain regulatory
approval or clearance before we can market those services.
These regulatory approval processes may be expensive, time-consuming and
uncertain, and our failure to obtain or comply with these approvals or clearances could harm our business, financial condition or operating results.
Disruption to or failure of our data center or other technical systems may disrupt our business and harm our operating results.
We rely on our network infrastructure, data centers, enterprise applications and technology systems for the development and support of our sequencing service, including the preparation, analysis and
transmission of data from our sequencing center, as well as for the internal operation of our business. These systems are susceptible to disruption or failure in the event of natural disasters such as a major earthquake, fire, flood, cyber-attack,
terrorist attack, telecommunications failure, power outage or other catastrophic event. Further, our data center and our sequencing facility, which houses certain of our technology systems, are located near major earthquake faults. Disruptions to or
the failure of our data center or any of these technology systems, including the network connection between our Mountain View facility and our data center, and the resulting loss of critical data, could cause delays in the transmission and analysis
of the sequencing data, prevent us from fulfilling our customers orders and severely affect our ability to conduct normal business operations.
If we fail to retain the services of our key executives or if we are unable to attract and retain skilled personnel, our ability to grow our business and our competitive position would be impaired.
We believe our future success will depend in large part upon our ability to attract, retain and motivate highly skilled personnel. In
particular, we depend highly on the contributions of Clifford A. Reid, Ph.D., our President and Chief Executive Officer, and Radoje T. Drmanac, Ph.D., our Chief Scientific Officer. The loss of either of these executives could make it more difficult
to manage our operations and research and development activities, reduce our employee retention and revenue and impair our ability to compete. If either of these key executives were to leave us unexpectedly, we could face substantial difficulty in
hiring qualified successors and could experience a loss in productivity, both during the search for, and integration of, any such successor.
Our research and development, operations and sales and marketing personnel represent a significant asset and serve as the source of our business
strategy, scientific and technological innovations and sales and marketing initiatives. As a result, our success substantially depends on our ability to retain and attract personnel for all areas of our organization. Competition for qualified
personnel is intense, and we may not be successful in attracting and retaining qualified personnel on a timely basis or on competitive terms, if at all. In addition, many qualified personnel are located outside of Northern California, where we are
located, and some qualified personnel that we may recruit may not be interested in relocating. If we are unable to attract and retain the necessary personnel on a cost-effective basis, our ability to grow our business and our competitive position
would be impaired.
We may engage in joint ventures or acquisitions that could disrupt our business, cause dilution to our stockholders,
reduce our financial resources and result in increased expenses.
In the future, we may enter into joint ventures or acquire other
businesses, products or technologies. Because we have not entered into any joint ventures or made any acquisitions to date, our ability to do so successfully is unproven. We may not be able to find suitable partners or acquisition candidates, and we
may not be able to complete such transactions on favorable terms, if at all, or successfully
35
integrate any acquired business, products or technologies into our operations. If we do enter into any joint ventures or complete acquisitions, we may not strengthen our competitive position or
achieve our goals; alternatively these transactions may be viewed negatively by customers or investors. In addition, we may have difficulty integrating personnel, technologies and operations from acquired businesses and retaining and motivating key
personnel from those businesses. Joint ventures and acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and
other uses, and could result in an increase in amortization expense related to identifiable intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt. We cannot predict the number, timing or size of
future joint ventures or acquisitions, or the effect that any such transactions might have on our operating results.
We incur
significant costs as a result of operating as a public company, and our management devotes substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including section 404 of the
Sarbanes-Oxley Act of 2002.
We have incurred and will continue to incur significant legal, accounting and other expenses as a public
company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, and regulations regarding corporate governance practices. The listing requirements of The NASDAQ Global Market
require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of
conduct. Our management and other personnel will need to devote a substantial amount of time to all of these requirements. Moreover, the reporting requirements, rules and regulations will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could make it more difficult for us to
attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers. In addition, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, and the related rules of the Securities and Exchange
Commission require that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, our management and independent registered public accounting firm are required to provide a report on the
effectiveness of our internal control over financial reporting with our annual report, as required by Section 404 of the Sarbanes-Oxley Act. During the course of our review and testing, we may identify deficiencies and be unable to remediate
them before we must provide the required reports. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our
operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall.
Our compliance with Section 404 may require that we incur substantial expense and expend significant management time on compliance-related issues.
Moreover, if we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm is unable to conclude that our internal control over financial reporting is effective or
otherwise identifies material weaknesses in our internal control, the market price of our stock would likely decline and we could be subject to sanctions or investigations by NASDAQ, the Securities and Exchange Commission or other regulatory
authorities, which would require additional financial and management resources.
Our ability to use our net operating loss carryforwards
to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code
of 1986, as amended, or the Code, a corporation that undergoes an ownership change is subject to limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, to offset future taxable income. If the Internal
Revenue Service challenges our analysis that our existing NOLs will not expire before utilization due to previous ownership changes, our ability to use our NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership,
some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons,
we may not be able to use a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.
Unfavorable
global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of
operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or
prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to our business, including, reductions or delays in planned research and development and other expenditures by our customers or decreased
funding of genomic research by governmental entities. A weak or declining economy could also put strain on our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing
could harm our business.
36
Risks Related to Intellectual Property
We currently are, and could in the future be, subject to litigation regarding patent and other proprietary rights that could harm our business.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. On August 3, 2010, Illumina, Inc. and
Solexa, Inc. (an entity acquired by Illumina) filed a complaint in the U.S. District Court in Delaware alleging patent infringement by us. The complaint alleges that our Complete Genomics Analysis Platform, and in particular our combinatorial probe
anchor ligation technology, infringes upon three patents held by Illumina and Solexa. The complaint seeks, among other things, a preliminary and permanent injunction against us from infringing these patents and unspecified monetary damages. We have
incurred and anticipate that we will continue to incur substantial time and expense in defending against this complaint. If we were found to infringe one or more valid claims of a patent-in-suit and if the district court granted an injunction on
that basis, we may be forced to redesign portions of our sequencing process, seek a license or cease the infringing activity. Redesigning portions of our sequencing process may take substantial time and resources and may delay our ability to
generate revenue. In addition, a license to the necessary patent rights may not be available on commercially reasonable terms, if at all. In the event that the district court grants an injunction and we are unsuccessful in redesigning our sequencing
process or obtaining a license, we may be forced to cease our sequencing operations altogether. See Part II, Item 1. Legal Proceedings.
As we enter our markets, it is possible other competitors will claim that our services infringe their intellectual property rights as part of a business
strategy to impede our successful entry into those markets. Such competitors and other third parties may have obtained and may in the future obtain patents covering products or processes that are similar to or may include steps or processes used in
our sequencing technology, allowing them to claim that the use of our technologies infringes these patents. In particular, we are aware of issued U.S. patents owned by competitors and other third parties, including Illumina, to which we do not
have licenses that may relate to our sequencing technology and which pertain to, among other things:
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sample preparation techniques;
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processes for making nucleic acid templates, or library construction;
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processes for making DNBs from nucleic acid templates;
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methods of making arrays of DNBs;
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sequencing methods, including those involving ligation;
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identifying genomic sequences on nucleic acid arrays;
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devices and apparatus used in nucleic acid detection systems, including optical systems; and
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information processing systems including software for base calling, sequence mapping and assembly.
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Some of the third parties that own these patents, including Illumina, have strong economic incentives, and substantial financial resources, to claim that
we are infringing their patent rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the
patents asserted, the breadth and scope of the construction of the claims of these patents, our ability to identify prior art in order to invalidate the asserted patent and on other factors.
However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States, issued patents enjoy a
presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance
of the evidence, which is a lower burden of proof.
If we were found by a court to have infringed a valid patent claim, we could be prevented
from using the patented technology or be required to pay the owner of the patent rights for the rights to use that technology and/or pay monetary damages, including, for example, treble damages if we are found to have willfully infringed. If we
decide to pursue a license to one or more of these patents, we may not be able to obtain such a license on commercially reasonable terms, if at all, or the license we obtain may require us to pay substantial royalties or grant cross licenses to our
patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose not to license patent rights to us, as it would be under no obligation to do so. If we decide to develop alternative technology, we may not be
able to do so on a timely or cost-effective manner, if at all.
In addition, because patent applications can take years to issue and are often
afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, which later result in issued patents that processes in our sequencing technology infringe. Processes in our sequencing technology may also
infringe existing issued patents of which we are currently unaware. Even though we own or have other rights to patents, these patents do not provide us with the freedom to offer our sequencing services unimpeded by the patent rights of
others. For example, we may be required to pursue or defend a patent infringement action in order to protect our intellectual property rights or practice our sequencing technology. If we expand our business to include sequencing services
intended to be used for the diagnosis of disease, it may be necessary to license patents related to such services.
37
It is possible that, in addition to our current litigation, we may in the future receive communications from
competitors and others alleging that we may be infringing their patents, trade secrets or other intellectual property rights or offering licenses to such intellectual property or threatening litigation. For example, an educational institution has
invited us to engage in negotiations for the license of certain of that institutions patent rights. We have not yet determined whether we will seek such a license. In addition to patent infringement claims, third parties may assert copyright,
trademark or other proprietary rights against us. We may not be able to successfully defend against the claims asserted by Illumina, or future claims, and our business may suffer if we are found to have infringed upon the patents held by
Illumina, or if future claims are brought against us.
We may not be able to protect our patent rights or other intellectual property
which could impair our ability to compete effectively.
We depend on proprietary technology for our success and ability to compete. If
others are able to reproduce our technology, our business will suffer significantly unless we can prevent them from competing with us. To protect our proprietary technology, we rely on patents and other intellectual property laws, as well as
nondisclosure agreements, licensing arrangements and confidentiality provisions. U.S. patent, copyright and trade secret laws afford us only limited protection, and the laws of some foreign countries do not protect proprietary rights to the same
extent.
We have licensed, from Callida Genomics, Inc., U.S. and international patents and patent applications relating to our business.
Because the issuance of a patent is not conclusive of its validity or enforceability, our existing patent rights, and rights we may obtain in the future, may not provide us with meaningful protection. The patent rights on which we rely may be
challenged and invalidated or may be interpreted not to be broad enough to cover the critical components of our technology. Our pending patent applications may have their claims limited or may not result in issued patents. Moreover, our patent
rights become more limited as owned or licensed patents begin to expire in 2014. We will be able to protect our technologies from unauthorized use by third parties only to the extent that valid and enforceable patents or other proprietary rights
cover them. Even if we have valid and enforceable patents or other proprietary rights, competitors may be able to design alternative methods or devices that avoid infringement of those patents or rights. Our key patent rights are licensed from
Callida, which is owned by our Chief Scientific Officer and his spouse. If we breach the terms of these licenses, or if our relationship with Callida or its owners deteriorates, Callida may seek to terminate the licenses. If we lose our rights to
use these patents, we may be forced to re-design our sequencing technology, which would be expensive and may not be possible.
The patent
positions of biotechnology companies, including us, can be highly uncertain and involve complex and evolving legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in
the United States. Legal developments may preclude or limit the patent protection available for our sequencing technology.
Despite our
efforts to protect our proprietary rights, attempts may be made to copy or reverse engineer aspects of our sequencing technology or to obtain and use information that we regard as proprietary. Accordingly, we may be unable to protect our proprietary
rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our intellectual property is difficult. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and could harm our business.
We may incur substantial costs as a result of our current, or future, litigation or other proceedings relating to patent and other proprietary rights.
The genomic sequencing industry includes several large companies that have rights to many broad issued patents and pending patent applications.
Competitors in this industry have fiercely litigated their patent positions and alleged infringements by others. For example, Illumina and Affymetrix were involved in long and expensive patent litigation relating to DNA sequencing technology. This
litigation resulted in a settlement involving the payment of $90 million by one party to the other.
Our current litigation with Illumina or
our involvement in any other future intellectual property litigation, including, or administrative proceedings could result in significant expense. Some of our competitors, including Illumina, Life Technologies and Affymetrix, have considerable
resources available to them. We, on the other hand, are an early-stage commercial company with comparatively few resources available to us to engage in costly and protracted litigation. Intellectual property infringement claims asserted against us,
whether with or without merit, could be costly to defend and could limit our ability to use some technologies in the future. They will be time consuming, will divert our managements and scientific personnels attention and may result in
liability for substantial damages. For example, we have incurred and anticipate that we will continue to incur significant expense and substantial time in defending against our current intellectual property infringement dispute with Illumina. In
addition, our standard customer contract requires us to indemnify our customers for claims alleging that any of our products misappropriate or violate any third party patent, copyright, trade secret or other intellectual property or proprietary
rights.
38
If third parties file patent applications or are issued patents claiming technology also claimed by us in
pending applications, we may be required to participate in interference or other proceedings with the U.S. Patent Office or U.S. courts or in other proceedings outside the United States, including oppositions, to determine priority of invention or
patentability. Even if we are successful in these proceedings, we may incur substantial costs, and the time and attention of our management and scientific personnel will be diverted in pursuit of these proceedings.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other
intellectual property protection, especially those relating to biotechnology. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For example, many foreign
countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors.
In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result
in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal
decisions by courts in the U.S. and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
Confidentiality agreements with employees and others may not adequately prevent disclosures of our trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to
protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment
or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individuals relationship with us be kept
confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Despite these measures, our proprietary
information may be disclosed, third parties could reverse engineer our sequencing technologies and others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Costly
and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Risks Related to Ownership of Our Common Stock
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
Our stock price is volatile, and from December 31, 2010 to March 31, 2012, the trading prices of our stock have ranged from $18.55 to $2.21 per share. The market price of our common stock may
fluctuate significantly in response to a number of factors. These factors include those discussed in this Risk Factors section of this Quarterly Report and others such as:
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our ability to raise capital to continue our operations as a going concern;
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quarterly variations in our results of operations or those of our competitors;
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changes in financial estimates or guidance, including our ability to meet our future revenue and operating profit or loss estimates or guidance;
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changes in earnings estimates or recommendations by securities analysts;
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announcements by us or our competitors of new products or services, significant contracts, commercial relationships, acquisitions, capital commitments
or changes in the outlook of the market for genomic sequencing products and services;
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developments with respect to intellectual property rights;
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whether repayment of our term loan(s) is accelerated if an event of default occurs;
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our commencement of, or involvement in, litigation;
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announcements regarding equity or debt financing transactions;
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any major changes in our board of directors or management;
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changes in governmental regulations; and
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a decrease in government funding of research and development or a slowdown in the general economy.
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In recent years, the stock market in general, and the market for technology and life sciences companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating
performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular companys securities, securities class action litigation has often been instituted against these companies. This
litigation, if instituted against us, could result in substantial costs and divert our managements attention and resources.
If
securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our
business. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, technology or stock performance, our stock price would likely decline. If one or more of these analysts cease coverage of us or
fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, the unpredictability of our financial results likely reduces the certainty,
and therefore reliability, of the forecasts by securities or industry analysts of our future financial results, adding to the potential volatility of our stock price.
Our directors, executive officers and principal stockholders and their respective affiliates will continue to have substantial influence over us and could delay or prevent a change in corporate
control.
Our directors, executive officers and the holders of more than 5% of our common stock, together with their affiliates,
beneficially own approximately 78% of our outstanding common stock based on the number of shares outstanding on December 31, 2011. These stockholders, acting together, have significant influence over the outcome of matters submitted to our
stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over our management and
affairs. Accordingly, this concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
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Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or if the market believes our existing stockholders will sell, substantial amounts of our common stock in the public
market, the trading price of our common stock could decline significantly. As of April 30, 2012, we had 33,885,734 shares of common stock outstanding. On August 23, 2011, 17,817,281 shares that were previously subject to contractual
lock-up agreements entered into by certain of our stockholders with the underwriters in connection with our follow-on public offering became freely tradable, except for shares of common stock held by directors, executive officers and our other
affiliates, which are subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended.
Certain of our existing
stockholders have demand and piggyback rights to require us to register with the SEC up to approximately 20.0 million shares of our common stock, including shares issuable upon exercise of outstanding options. If we register these shares of
common stock, the stockholders would be able to sell those shares freely in the public market, subject to the volume limitations described above.
We also registered 6,468,272 shares of our common stock that are subject to outstanding stock options, RSUs and reserved for issuance under our equity plans and we expect to register an additional
1,968,192 shares of our common stock for issuance under our equity plans. Once registered, these shares can be freely sold in the public market upon issuance, subject to vesting restrictions.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent changes in control or
changes in our management without the consent of our board of directors. These provisions include the following:
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a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of
our board of directors;
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no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the
resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
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the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those
shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
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the ability of our board of directors to alter our bylaws without obtaining stockholder approval;
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the required approval of at least 66
2
/3% of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the
provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our
stockholders;
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the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the
president or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be
acted upon at a stockholders meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of us.
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We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law.
Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors
has approved the transaction.
ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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None.
ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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None.
ITEM 4.
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MINE SAFETY DISCLOSURES
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None.
ITEM 5.
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OTHER INFORMATION
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Not applicable.
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Exhibit
Number
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Exhibit Description
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Incorporated by Reference
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Filed
Herewith
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Form
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Date
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Number
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3.1
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Amended and Restated Certificate of Incorporation of Complete Genomics, Inc.
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8-K
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11/16/2010
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3.1
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3.2
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Amended and Restated Bylaws of Complete Genomics, Inc.
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S-1/A
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10/04/2010
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3.4
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4.1
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Reference is made to exhibits 3.1 and 3.2.
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4.2
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Specimen Common Stock Certificate.
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S-1/A
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10/20/2010
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4.2
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4.3
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Form of Warrant to purchase shares of Common Stock issued in connection with the 2010 convertible bridge loan financing transaction.
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S-1
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07/30/2010
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4.4
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4.4
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Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated September 21, 2006.
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S-1
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07/30/2010
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4.5
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4.5
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Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated August 3, 2007.
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S-1
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07/30/2010
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4.7
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|
|
|
|
|
|
|
|
|
|
4.6
|
|
Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated July 30, 2008.
|
|
S-1
|
|
|
07/30/2010
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Atel Ventures, Inc., dated December 17, 2010.
|
|
10-K
|
|
|
03/30/2011
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Amendment No. 2 to the Loan and Security Agreement by and between Oxford Finance Corporation and Complete Genomics, Inc. effective February 28, 2012.
|
|
10-K
|
|
|
03/09/2012
|
|
|
|
10.4g
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Amendment No. 2 to the Loan and Security Agreement by and between Atel Finance Corporation and Complete Genomics, Inc. effective February 29, 2012.
|
|
10-K
|
|
|
03/09/2012
|
|
|
|
10.4h
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
At Market Issuance Sales Agreement between Complete Genomics, Inc. and MLV & Co. LLC dated March 8, 2012.
|
|
10-K
|
|
|
03/09/2012
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.4+
|
|
Offer Letter Employment Agreement, by and between Complete Genomics, Inc. and Arthur W. Homan, dated March 8, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer of Complete Genomics, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer of Complete Genomics, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
32.1
|
|
Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).**
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
Filed
Herewith
|
|
|
|
Form
|
|
Date
|
|
Number
|
|
|
|
|
|
|
|
32.2
|
|
Certification by the Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).**
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
101.1
|
|
The following materials from the Registrants Quarterly Report on Form 10-Q for the three month period ended March 31, 2012 are formatted in XBRL (eXtensible Business Reporting
Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial
Statements.*
|
|
|
|
|
|
|
|
|
X
|
|
*
|
Pursuant to Rule 406T of Regulation S-T, the XBRL files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
**
|
The certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Complete Genomics, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form
10-Q, irrespective of any general incorporation language contained in such filing.
|
+
|
Indicates management contract or compensatory plan.
|
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
COMPLETE GENOMICS, INC.
|
|
|
|
May 9, 2012
|
|
By:
|
|
/s/ A
JAY
B
ANSAL
|
|
|
|
|
Ajay Bansal
|
|
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer)
|
44
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
|
Filed
Herewith
|
|
|
|
Form
|
|
Date
|
|
|
Number
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Complete Genomics, Inc.
|
|
8-K
|
|
|
11/16/2010
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of Complete Genomics, Inc.
|
|
S-1/A
|
|
|
10/04/2010
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Reference is made to exhibits 3.1 and 3.2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2
|
|
Specimen Common Stock Certificate.
|
|
S-1/A
|
|
|
10/20/2010
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
Form of Warrant to purchase shares of Common Stock issued in connection with the 2010 convertible bridge loan financing transaction.
|
|
S-1
|
|
|
07/30/2010
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
4.4
|
|
Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated September 21, 2006.
|
|
S-1
|
|
|
07/30/2010
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated August 3, 2007.
|
|
S-1
|
|
|
07/30/2010
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
Form of Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement, dated July 30, 2008.
|
|
S-1
|
|
|
07/30/2010
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
Warrant to purchase shares of Common Stock issued in connection with the Loan and Security Agreement with Atel Ventures, Inc., dated December 17, 2010.
|
|
10-K
|
|
|
03/30/2011
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Amendment No. 2 to the Loan and Security Agreement by and between Oxford Finance Corporation and Complete Genomics, Inc. effective February 28, 2012.
|
|
10-K
|
|
|
03/09/2012
|
|
|
|
10.4g
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Amendment No. 2 to the Loan and Security Agreement by and between Atel Finance Corporation and Complete Genomics, Inc. effective February 29, 2012.
|
|
10-K
|
|
|
03/09/2012
|
|
|
|
10.4h
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
At Market Issuance Sales Agreement between Complete Genomics, Inc. and MLV & Co. LLC dated March 8, 2012.
|
|
8-K
|
|
|
03/12/2012
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.4+
|
|
Offer Letter Employment Agreement, by and between Complete Genomics, Inc. and Arthur W. Homan, dated March 8, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer of Complete Genomics, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer of Complete Genomics, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
32.1
|
|
Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).**
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
32.2
|
|
Certification by the Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).**
|
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
Filed
Herewith
|
|
|
|
Form
|
|
Date
|
|
Number
|
|
|
|
|
|
|
|
101.1
|
|
The following materials from the Registrants Quarterly Report on Form 10-Q for the three month period ended March 31, 2012 are formatted in XBRL (eXtensible Business
Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial
Statements.*
|
|
|
|
|
|
|
|
|
X
|
|
*
|
Pursuant to Rule 406T of Regulation S-T, the XBRL files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
|
**
|
The certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Complete Genomics, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form
10-Q, irrespective of any general incorporation language contained in such filing.
|
+
|
Indicates management contract or compensatory plan.
|
46
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