Illumina, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended April 2, 2006
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 000-30361
Illumina, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0804655 |
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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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9885 Towne Centre Drive, San Diego, CA
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92121 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(858) 202-4500
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of April 14, 2006, there were 41,701,483 shares of the Registrants Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Illumina, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
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April 2, 2006 |
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January 1, 2006 (1) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
49,044 |
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$ |
50,822 |
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Accounts receivable, net |
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21,427 |
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17,620 |
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Inventory, net |
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12,926 |
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10,309 |
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Prepaid expenses and other current assets |
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1,192 |
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959 |
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Total current assets |
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84,589 |
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79,710 |
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Property and equipment, net |
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19,215 |
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16,131 |
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Goodwill |
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2,125 |
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2,125 |
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Intangible and other assets, net |
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6,597 |
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2,644 |
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Total assets |
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$ |
112,526 |
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$ |
100,610 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
24,579 |
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$ |
21,600 |
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Current portion of long-term debt |
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118 |
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118 |
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Total current liabilities |
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24,697 |
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21,718 |
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Long-term debt, less current portion |
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25 |
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54 |
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Deferred gain on sale of land and building |
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2,749 |
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2,843 |
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Other long-term liabilities |
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6,333 |
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3,498 |
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Commitments and contingencies |
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Stockholders equity |
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78,722 |
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72,497 |
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Total liabilities and stockholders equity |
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$ |
112,526 |
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$ |
100,610 |
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(1) |
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The Condensed Consolidated Balance Sheet at January 1, 2006 has been derived from
the audited financial statements as of that date. |
See accompanying notes to the condensed consolidated financial statements.
3
Illumina, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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April 2, 2006 |
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April 3, 2005 |
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Revenue: |
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Product revenue |
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$ |
23,261 |
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$ |
12,165 |
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Service and other revenue |
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5,267 |
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2,691 |
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Research revenue |
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574 |
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292 |
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Total revenue |
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29,102 |
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15,148 |
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Costs and expenses: |
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Cost of product revenue (including
non-cash stock compensation expense
of $198 and $0, respectively) |
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7,676 |
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3,937 |
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Cost of service and other revenue
(including non-cash stock
compensation expense of $52 and $0,
respectively) |
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1,617 |
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662 |
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Research and development (including
non-cash stock compensation expense
of $958 and $15, respectively) |
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8,216 |
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5,893 |
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Selling, general and administrative
(including non-cash stock
compensation expense of $1,923 and
$42, respectively) |
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12,134 |
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6,035 |
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Total costs and expenses |
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29,643 |
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16,527 |
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Loss from operations |
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(541 |
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(1,379 |
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Interest and other income, net |
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568 |
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195 |
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Income (loss) before income taxes |
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27 |
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(1,184 |
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Provision for income taxes |
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131 |
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51 |
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Net loss |
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$ |
(104 |
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$ |
(1,235 |
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Net loss per share, basic and diluted |
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$ |
0.00 |
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$ |
(0.03 |
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Shares used in calculating net loss
per share, basic and diluted |
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41,475 |
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38,347 |
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See accompanying notes to the condensed consolidated financial statements.
4
Illumina, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
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Three Months Ended |
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April 2, 2006 |
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April 3, 2005 |
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Operating activities: |
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Net loss |
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$ |
(104 |
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$ |
(1,235 |
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Adjustments to reconcile net loss to net cash provided by (used
in) operating activities: |
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Depreciation and amortization |
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1,100 |
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811 |
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Loss on disposal of property and equipment |
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20 |
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71 |
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Amortization of premium on investments |
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(14 |
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Stock-based compensation expense |
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3,131 |
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57 |
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Amortization of gain on sale of land and building |
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(94 |
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(94 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(3,742 |
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(41 |
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Inventory |
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(3,549 |
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(1,172 |
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Prepaid expenses and other current assets |
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(236 |
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(623 |
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Other assets |
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54 |
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Accounts payable and accrued liabilities |
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2,961 |
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2,541 |
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Accrued litigation judgment |
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(5,957 |
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Other long-term liabilities |
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2,819 |
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2,331 |
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Net cash provided by (used in) operating activities |
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2,360 |
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(3,325 |
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Investing activities: |
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Investment in secured convertible debenture |
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(3,036 |
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Sales and maturities of available for sale securities |
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3,133 |
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Purchase of property and equipment |
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(4,192 |
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(3,060 |
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Net cash provided by (used in) investing activities |
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(7,228 |
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73 |
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Financing activities: |
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Payments on long-term debt |
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(29 |
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Proceeds from issuance of common stock |
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3,131 |
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1,284 |
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Net cash provided by financing activities |
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3,102 |
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1,284 |
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Effect of foreign currency translation on cash and cash equivalents |
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(12 |
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132 |
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Net decrease in cash and cash equivalents |
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(1,778 |
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(1,836 |
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Cash and cash equivalents at beginning of period |
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50,822 |
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54,789 |
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Cash and cash equivalents at end of period |
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$ |
49,044 |
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$ |
52,953 |
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See accompanying notes to the condensed consolidated financial statements.
5
Illumina, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Principles
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. In managements opinion, the accompanying
financial statements reflect all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of the results for the interim periods presented.
Interim financial results are not necessarily indicative of results anticipated for the full
year. These unaudited financial statements should be read in conjunction with the Companys 2005
audited financial statements and footnotes included in the Companys Annual Report on Form 10-K for
the year ended January 1, 2006, as filed with the Securities and Exchange Commission (SEC) on March
6, 2006.
The preparation of financial statements requires that management make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. Actual results could differ from those
estimates.
Fiscal Year
The Companys fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31,
with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30.
The quarters ended April 2, 2006 and April 3, 2005 were both 13 weeks.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
Revenue Recognition
The Companys revenue is generated primarily from the sale of products and services. Product
revenue consists of sales of arrays, reagents, instrumentation and oligos. Service and other
revenue consists of revenue received for performing genotyping services, extended warranty sales
and revenue earned from milestone payments.
The Company recognizes revenue in accordance with the guidelines established by SEC Staff
Accounting Bulletin (SAB) No. 104. Under SAB No. 104, revenue cannot be recorded until all of the
following criteria have been met: persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price to the buyer is fixed or determinable;
and collectibility is reasonably assured. All revenue is recorded net of any applicable allowances
for returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and customer acceptance. Revenue for genotyping services is
recognized when earned, which is generally at the time the genotyping analysis data is delivered to
the customer or as specific milestones are achieved.
6
In order to assess whether the price is fixed and determinable, the Company ensures there are
no refund rights. If payment terms are based on future performance, the Company defers revenue
recognition until the price becomes fixed and determinable. The Company assesses collectibility
based on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If the Company determines that collection of a payment is not
reasonably assured, revenue recognition is deferred until the time collection becomes reasonably
assured, which is generally upon receipt of payment. Changes in judgments and estimates regarding
application of SAB No. 104 might result in a change in the timing or amount of revenue recognized.
Sales of instrumentation generally include a standard one-year warranty. The Company also
sells separately priced maintenance (extended warranty) contracts, which are generally for one or
two years, upon the expiration of the initial warranty. Revenue for extended warranty sales is
recognized ratably over the term of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated revenue is recognized. If the
Company were to experience an increase in warranty claims or if costs of servicing its warrantied
products were greater than its estimates, gross margins could be adversely affected.
While the majority of its sales agreements contain standard terms and conditions, the Company
does enter into agreements that contain multiple elements or non-standard terms and conditions.
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables,
provides guidance on accounting for arrangements that involve the delivery or performance of
multiple products, services, or rights to use assets within contractually binding arrangements.
Significant contract interpretation is sometimes required to determine the appropriate accounting,
including whether the deliverables specified in a multiple element arrangement should be treated as
separate units of accounting for revenue recognition purposes, and if so, how the price should be
allocated among the deliverable elements, when to recognize revenue for each element, and the
period over which revenue should be recognized. The Company recognizes revenue for delivered
elements only when it determines that the fair values of undelivered elements are known and there
are no uncertainties regarding customer acceptance.
Some of the Companys agreements contain multiple elements that include milestone payments.
Revenue from a milestone achievement is recognized when earned, as evidenced by acknowledgement
from the Companys collaborator, provided that (i) the milestone event is substantive and its
achievability was not reasonably assured at the inception of the agreement, (ii) the milestone
represents the culmination of an earnings process, (iii) the milestone payment is non-refundable
and (iv) the performance obligations for both the Company and its collaborators after the milestone
achievement will continue at a level comparable to the level before the milestone achievement. If
all of these criteria are not met, the milestone achievement is recognized over the remaining
minimum period of the Companys performance obligations under the agreement. The Company defers
non-refundable upfront fees received under its collaborations and recognizes them over the period
the related services are provided or over the estimated collaboration term using various factors
specific to the collaboration. Advance payments received in excess of amounts earned are classified
as deferred revenue until earned.
Research revenue consists of amounts earned under research agreements with government grants,
which is recognized in the period during which the related costs are incurred.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of short-term, highly liquid investments primarily
consisting of money market-type funds.
Stock-Based Compensation
On January 2, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No.
123 (revised 2004), Share-Based Payment, which addresses the accounting for stock-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair value of the
enterprises equity instruments or that may be settled by the issuance of such equity instruments.
In January 2005, the SEC issued SAB No. 107, which provides supplemental implementation guidance
for SFAS No. 123R. SFAS No. 123R eliminates the ability to account for stock-based compensation
transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and instead generally requires that such transactions
be accounted for using a fair-value-based method. The Company uses the Black-Scholes-Merton
option-pricing model to
7
determine the fair-value of stock-based awards under SFAS No. 123R, consistent with that used
for pro forma disclosures under SFAS No. 123, Accounting for Stock-Based Compensation, in prior
periods. The Company has elected to use the modified prospective transition method as permitted by
SFAS No. 123R and, accordingly, prior periods have not been restated to reflect the impact of SFAS
No. 123R. The modified prospective transition method requires that stock-based compensation
expense be recorded for all new and unvested stock options, restricted stock and employee stock
purchase plan (ESPP) shares that are ultimately expected to vest as the requisite service is
rendered. Stock-based compensation expense for awards granted prior to January 2, 2006 is based on
the grant date fair-value as determined under APB No. 25. The Company has recorded an incremental
$3.1 million of stock-based compensation expense during the first quarter of 2006 as a result of
the adoption of SFAS No. 123R. Net income per share, basic and diluted, were each reduced by $0.07
in the first quarter of 2006 as a result of the adoption of SFAS No. 123R. Stock-based
compensation expense capitalized as part of inventory as of April 2, 2006 was approximately $0.1
million. As of April 2, 2006, approximately $27.5 million of total unrecognized compensation cost
related to stock options, restricted stock and ESPP shares are expected to be recognized over a
weighted-average period of approximately two years.
Prior to the adoption of SFAS No. 123R, the Company measured compensation expense for its
employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25. The Company applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure, as if the fair-value-based
method had been applied in measuring stock-based compensation expense. Under APB Opinion No. 25,
when the exercise price of the Companys employee stock options was not less than the market price
of the underlying stock on the date of the grant, no compensation expense was recognized.
The following table illustrates the effect on net loss and basic and diluted net loss per
share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation during the three months ended April 3, 2005 (in thousands, except per
share amounts):
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Net loss as reported |
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$ |
(1,235 |
) |
Add: Stock-based compensation expense recorded |
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57 |
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Less: Assumed stock-based compensation expense |
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(2,400 |
) |
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Pro forma net loss |
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$ |
(3,578 |
) |
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Basic and diluted net loss per share: |
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As reported |
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$ |
(0.03 |
) |
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Pro forma |
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$ |
(0.09 |
) |
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|
SFAS No. 123R requires the use of a valuation model to calculate the fair-value of stock-based
awards. The Company has elected to use the Black-Scholes-Merton option-pricing model, which
incorporates various assumptions including volatility, expected life, and interest rates. The
expected volatility is based on the historical volatility of the Companys common stock over the
most recent period generally commensurate with the estimated expected life of the Companys stock
options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other
relevant factors. The expected life of an award is based on historical experience and on the terms
and conditions of the stock awards granted to employees.
8
The assumptions used for the three months ended April 2, 2006 and April 3, 2005 and the
resulting estimates of weighted-average fair value per share of options granted and for stock
purchases under the ESPP during those periods are as follows:
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Three Months Ended |
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|
April 2, 2006 |
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April 3, 2005 |
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Interest rate stock options |
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4.36-4.57 |
% |
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3.88 |
% |
Interest rate stock purchases |
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4.85-4.86 |
% |
|
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4.08 |
% |
Volatility stock options |
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76-77 |
% |
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|
91 |
% |
Volatility stock purchases |
|
|
76 |
% |
|
|
90 |
% |
Expected life stock options |
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6 years |
|
5 years |
Expected life stock purchases |
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6-12 months |
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6 months |
Expected dividend yield |
|
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0 |
% |
|
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0 |
% |
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Weighted average fair value of options granted |
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$ |
14.91 |
|
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$ |
6.29 |
|
Weighted average fair value of employee stock
purchases |
|
$ |
8.11 |
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$ |
3.64 |
|
Net Loss per Share
Basic and diluted net loss per share is presented in conformity with SFAS No. 128, Earnings
per Share, for all periods presented. In accordance with SFAS No. 128, basic and net loss per share
is computed using the weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase. Diluted net loss per share is typically computed using
the weighted average number of common and dilutive common equivalent shares from stock options
using the treasury stock method. However, for all periods presented, diluted net loss per share is
the same as basic net loss per share because the Company reported a net loss and therefore the
inclusion of weighted average shares of common stock issuable upon the exercise of stock options
would be anti-dilutive.
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Three Months Ended |
|
|
|
April 2, 2006 |
|
|
April 3, 2005 |
|
|
|
(In thousands) |
|
Weighted-average shares outstanding |
|
|
41,515 |
|
|
|
38,418 |
|
Less: Weighted-average shares of
common stock subject to repurchase |
|
|
(40 |
) |
|
|
(71 |
) |
|
|
|
Weighted-average shares used in
calculating basic and diluted net
loss per share |
|
|
41,475 |
|
|
|
38,347 |
|
|
|
|
The total number of shares excluded from the calculation of diluted net loss per share, prior
to application of the treasury stock method, was 8,189,566 and 6,961,756 for the three months ended
April 2, 2006 and April 3, 2005, respectively.
Comprehensive Income (Loss)
Comprehensive loss is comprised of net loss and other comprehensive loss. Other comprehensive
loss includes unrealized gains and losses on the Companys available-for-sale securities, changes
in the fair value of derivatives designated as effective cash flow hedges, and foreign currency
translation adjustments.
9
The components of accumulated other comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 2, 2006 |
|
|
April 3, 2005 |
|
|
|
|
Foreign currency translation adjustments |
|
$ |
285 |
|
|
$ |
142 |
|
Unrealized loss on investments |
|
|
(42 |
) |
|
|
(7 |
) |
Unrealized gain on cash flow hedges |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
243 |
|
|
$ |
150 |
|
|
|
|
2. Acquisition of CyVera Corporation
On April 8, 2005, the Company completed its acquisition of 100% of the voting equity interests
of CyVera Corporation (CyVera). Pursuant to an Agreement and Plan of Merger, dated as of February
22, 2005 (the Merger Agreement), by and among Illumina, Semaphore Acquisition Sub, Inc., a Delaware
corporation and wholly-owned subsidiary of Illumina (Merger Sub), and CyVera, Merger Sub merged
with and into CyVera, with CyVera surviving as a wholly-owned subsidiary of Illumina. The results
of CyVeras operations have been included in the Companys consolidated financial statements since
the acquisition date of April 8, 2005.
CyVera was created in October 2003 to commercialize its digital microbead technology platform
and optical instrumentation/reader concepts. The Company believes that the CyVera technology will
be highly complementary to the Companys own portfolio of products and services; will enhance the
Companys capabilities to service its existing customers; and will accelerate the development of
additional technologies, products and services. The Company believes that integrating CyVeras
capabilities with the Companys technologies will better position the Company to address the
emerging biomarker research and development and in-vitro and molecular diagnostic markets.
Pursuant to the Merger Agreement, the Company issued 1.6 million shares (the Shares) of common
stock, paid $2.3 million in cash and assumed the net liabilities of CyVera. In addition, the
Company assumed the outstanding stock options of CyVera. Approximately 250,000 of the Shares were
deposited into an escrow account with a bank to satisfy any claims for indemnification made by the
Company or CyVera pursuant to the Merger Agreement. No claims for indemnification were made and, as
of April 8, 2006, the escrow agent has begun the process of releasing the shares from escrow and
distributing them to the former stockholders of CyVera.
The results of CyVeras operations have been included in the accompanying condensed
consolidated financial statements from the date of the acquisition. The total cost of the
acquisition is as follows (in thousands):
|
|
|
|
|
Fair market value of securities issued, net |
|
$ |
14,433 |
|
Cash paid |
|
|
2,291 |
|
Transaction costs |
|
|
681 |
|
Fair market value of options assumed |
|
|
394 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
17,799 |
|
|
|
|
|
The fair value of the Shares was determined based on the average closing price of the
Companys common stock for five trading days preceding, and following, February 22, 2005 (the date
the transaction was announced). The Company believes that this time period gives proper
consideration to matters such as price fluctuations and quantities traded and represents a
reasonable period before and after the date on which the terms of the acquisition were agreed.
Based on these closing prices, the Company estimated the fair value of its common stock to be
$9.167 per share, which equates to a total fair value of $14.4 million.
10
The final purchase price allocation is shown below (in thousands):
|
|
|
|
|
Cash |
|
$ |
4 |
|
Prepaid expenses |
|
|
12 |
|
Fixed assets |
|
|
349 |
|
Deferred compensation |
|
|
196 |
|
Accounts payable and accrued liabilities |
|
|
(432 |
) |
Debt assumed |
|
|
(255 |
) |
|
|
|
|
|
Net book value of net liabilities acquired |
|
|
(126 |
) |
|
In-process research and development |
|
|
15,800 |
|
Goodwill |
|
|
2,125 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
17,799 |
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill is not
amortized, but will be subject to a periodic assessment for impairment by applying a
fair-value-based test. None of this goodwill is expected to be deductible for tax purposes. The
Company expects to perform its annual test for impairment of goodwill in May of each year. The
Company is required to perform a periodic assessment between annual tests in certain circumstances.
As of April 2, 2006, the Company has determined there has been no impairment of goodwill.
The Company allocated $15.8 million of the purchase price to in-process research and
development projects. In-process research and development (IPR&D) represents the estimated fair
value of acquired, to-be-completed research projects. At the acquisition date, CyVeras ongoing
research and development initiatives were primarily involved with the development of its microbead
technology platform and optical instrumentation/reader concepts. These two projects were
approximately 50% and 25% complete at the date of acquisition.
The value assigned to purchased IPR&D was determined by estimating the costs to develop the
acquired technology into commercially viable products, estimating the resulting net cash flows from
the projects, and discounting the net cash flows to their present value. The revenue projections
used to value the IPR&D were, in some cases, reduced based on the probability of developing a new
technology, and considered the relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by the Company and its
competitors. The resulting net cash flows from such projects are based on the Companys estimates
of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to
discount the net cash flows to their present value were based on estimated cost of capital
calculations. Due to the nature of the forecast and the risks associated with the projected growth
and profitability of the developmental projects, discount rates of 30% were considered appropriate
for the IPR&D. The Company believes that these discount rates were commensurate with the projects
stage of development and the uncertainties in the economic estimates described above.
If these projects are not successfully developed, the sales and profitability of the combined
company may be adversely affected in future periods. The Company believes that the foregoing
assumptions used in the IPR&D analysis were reasonable at the time of the acquisition. No assurance
can be given, however, that the underlying assumptions used to estimate expected project sales,
development costs or profitability or the events associated with such projects will transpire as
estimated. At the date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no alternative future
uses. Accordingly, the $15.8 million initially allocated to IPR&D was charged to expense in the
second quarter of 2005.
11
The following unaudited pro forma information shows the results of the Companys operations
for the three months ended April 3, 2005 as though the acquisition had occurred as of the beginning
of that period (in thousands, except per share data):
|
|
|
|
|
Revenue |
|
$ |
15,148 |
|
Net loss |
|
$( |
2,699 |
) |
Basic and diluted net loss per share |
|
$( |
0.07 |
) |
The pro forma results have been prepared for comparative purposes only and are not necessarily
indicative of the actual results of operations had the acquisition taken place as of the beginning
of the period presented, or the results that may occur in the future. The pro forma results
exclude the non-cash acquired IPR&D charge recorded upon the closing of the acquisition during the
second quarter of 2005.
3. Segment Information
The Company has determined that, in accordance with SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, it operates in one segment as it only reports operating
results on an aggregate basis to chief operating decision makers of the Company.
4. Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost) or
market. Inventory includes raw materials and finished goods that may be used in the research and
development process and such items are expensed as consumed. Provisions for slow moving, excess and
obsolete inventories are provided based on product life cycle and development plans, product
expiration and quality issues, historical experience and inventory levels. The components of net
inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 2, 2006 |
|
|
January 1, 2006 |
|
|
|
|
Raw materials |
|
$ |
5,529 |
|
|
$ |
4,575 |
|
Work in process |
|
|
5,601 |
|
|
|
4,546 |
|
Finished goods |
|
|
1,796 |
|
|
|
1,188 |
|
|
|
|
|
|
|
$ |
12,926 |
|
|
$ |
10,309 |
|
|
|
|
5. Intangible Assets
Intangible assets consist of license agreements and acquired technology. The cost of the
Companys license agreements was $844,450 and the Company has amortized $792,117 through April 2,
2006.
6. Warranties
The Company generally provides a one-year warranty on genotyping and gene expression systems.
At the time revenue is recognized, the Company establishes an accrual for estimated warranty
expenses associated with system sales. This expense is recorded as a component of cost of product
revenue. Estimated warranty expenses associated with extended maintenance contracts are recorded as
cost of revenue ratably over the term of the maintenance contract.
Changes in the Companys warranty liability during the three months ended April 2, 2006 are as
follows (in thousands):
|
|
|
|
|
Balance at January 1, 2006 |
|
$ |
751 |
|
Additions charged to cost of revenue |
|
|
433 |
|
Repairs and replacements |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
|
Balance at April 2, 2006 |
|
$ |
943 |
|
|
|
|
|
12
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 2, 2006 |
|
|
January 1, 2006 |
|
|
|
|
Accounts payable |
|
$ |
10,582 |
|
|
$ |
7,390 |
|
Compensation |
|
|
3,912 |
|
|
|
4,922 |
|
Legal and other professional fees |
|
|
2,711 |
|
|
|
2,311 |
|
Short-term deferred revenue |
|
|
2,364 |
|
|
|
1,937 |
|
Customer deposits |
|
|
1,993 |
|
|
|
1,361 |
|
Reserve for product warranties |
|
|
943 |
|
|
|
751 |
|
Other |
|
|
2,074 |
|
|
|
2,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,579 |
|
|
$ |
21,600 |
|
|
|
|
8. Stockholders Equity
As of April 2, 2006, the Company had 41,696,733 shares of common stock outstanding, of which
4,813,491 shares were sold to employees and consultants subject to restricted stock agreements. The
restricted common shares vest in accordance with the provisions of the agreements, generally over
five years. All unvested shares are subject to repurchase by the Company at the original purchase
price. As of April 2, 2006, 40,250 shares of common stock were subject to repurchase. In addition,
the Company also issued 12,000 shares for a restricted stock award to an employee under the
Companys 2005 Stock and Incentive Plan based on service performance. These shares vest monthly
over a three-year period.
2005 Stock and Incentive Plan
In June 2005, the stockholders of the Company approved the 2005 Stock and Incentive Plan (the
2005 Stock Plan). Upon adoption of the 2005 Stock Plan, issuance of options under the Companys
existing 2000 Stock Plan ceased. The 2005 Stock Plan provides that an aggregate of up to 11,542,358
shares of the Companys common stock be reserved and available to be issued. In addition, the 2005
Stock Plan provides for an automatic annual increase in the shares reserved for issuance by the
lesser of 5% of outstanding shares of the Companys common stock on the last day of the immediately
preceding fiscal year, 1,200,000 shares or such lesser amount as determined by the Companys board
of directors. As of April 2, 2006, options to purchase 3,969,167 shares remain available for future
grant under the 2005 Stock Plan.
13
The Companys stock option activity under all stock option plans during the three months ended
April 3, 2005 and April 3, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
|
|
|
Outstanding at January 2, 2005 |
|
|
6,205,020 |
|
|
$ |
6.99 |
|
Granted |
|
|
872,100 |
|
|
$ |
8.72 |
|
Exercised |
|
|
(117,458 |
) |
|
$ |
2.94 |
|
Cancelled |
|
|
(45,159 |
) |
|
$ |
5.44 |
|
|
|
|
|
|
|
|
|
Outstanding at April 3, 2005 |
|
|
6,914,503 |
|
|
$ |
7.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2006 |
|
|
7,325,431 |
|
|
$ |
7.96 |
|
Granted |
|
|
1,193,100 |
|
|
$ |
21.40 |
|
Exercised |
|
|
(287,991 |
) |
|
$ |
7.09 |
|
Cancelled |
|
|
(90,893 |
) |
|
$ |
12.34 |
|
|
|
|
|
|
|
|
|
Outstanding at April 2, 2006 |
|
|
8,139,647 |
|
|
$ |
9.91 |
|
|
|
|
|
|
|
|
|
Following is a further breakdown of the options outstanding as of April 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Price |
|
Range of |
|
Options |
|
|
Life |
|
|
Average |
|
|
Options |
|
|
of Options |
|
Exercise Prices |
|
Outstanding |
|
|
in Years |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Exercisable |
|
|
$0.03 - 4.64 |
|
|
1,445,075 |
|
|
|
6.56 |
|
|
$ |
3.26 |
|
|
|
872,816 |
|
|
$ |
3.10 |
|
$4.87 7.90 |
|
|
1,870,751 |
|
|
|
7.05 |
|
|
$ |
6.58 |
|
|
|
710,436 |
|
|
$ |
6.63 |
|
$7.94 8.60 |
|
|
1,439,057 |
|
|
|
8.39 |
|
|
$ |
8.49 |
|
|
|
339,084 |
|
|
$ |
8.40 |
|
$8.70 12.35 |
|
|
1,369,784 |
|
|
|
7.41 |
|
|
$ |
9.94 |
|
|
|
605,594 |
|
|
$ |
9.65 |
|
$12.42 20.97 |
|
|
1,745,230 |
|
|
|
9.24 |
|
|
$ |
17.88 |
|
|
|
216,282 |
|
|
$ |
16.42 |
|
$21.31 - 45.00 |
|
|
269,750 |
|
|
|
8.98 |
|
|
$ |
24.47 |
|
|
|
48,333 |
|
|
$ |
25.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.03 - 45.00 |
|
|
8,139,647 |
|
|
|
7.79 |
|
|
$ |
9.91 |
|
|
|
2,792,545 |
|
|
$ |
7.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options outstanding and options exercisable as of April 2, 2006
was $113.1 million and $45.6 million, respectively. Aggregate intrinsic value represents the
difference between the Companys closing stock price on the last trading day of the fiscal period,
which was $23.75 as of March 31, 2006, and the exercise price multiplied by the number of options
outstanding. Total intrinsic value of options exercised was $4.6 million and $0.7 million for the
three months ended April 2, 2006 and April 3, 2005, respectively.
2000 Employee Stock Purchase Plan
In February 2000, the board of directors and stockholders adopted the 2000 Employee Stock
Purchase Plan (the Purchase Plan). A total of 4,827,988 shares of the Companys common stock have
been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to
purchase common stock at a discount, but only through payroll deductions, during defined offering
periods.
The price at which stock is purchased under the Purchase Plan is equal to 85% of the fair
market value of the common stock on the first or last day of the offering period, whichever is
lower. The initial offering period commenced in July 2000. In addition, the Purchase Plan provides
for annual increases of shares available for issuance under the Purchase Plan beginning with fiscal
2001. 118,740 and 355,731 shares were issued under the Purchase Plan during the
three months ended April 2, 2006 and April 3, 2005, respectively. As of April 2, 2006, there were
2,910,590 shares available for issuance under the Purchase Plan.
14
9. Commitments and Long-Term Debt
Building Loan
In July 2000, the Company entered into a ten-year lease to rent space in two newly constructed
buildings in San Diego that are now occupied by the Company. That lease contained an option to
purchase the buildings together with certain adjacent land that has been approved for construction
of an additional building. The Company exercised that option and purchased the properties in
January 2002 and assumed a $26.0 million, ten-year mortgage on the property at a fixed interest
rate of 8.36%. The Company made monthly payments of $208,974, representing interest and principal,
through August 2004.
In June 2004, the Company entered into a conditional agreement to sell its land and buildings
for $42.0 million and to lease back such property for an initial term of ten years. The sale was
completed in August 2004 at which time the lease was signed. After the repayment of the remaining
$25.2 million debt and other related transaction expenses, the Company received $15.5 million in
net cash proceeds. The Company removed the land and net book value of the buildings of $36.9
million from its balance sheet, deferred the resulting $3.7 million gain on the sale of the
property, and is amortizing the deferred gain over the ten-year lease term in accordance with SFAS
No. 13, Accounting for Leases.
Operating Leases
In August 2004, the Company entered into a ten-year lease for its San Diego facility after the
land and building were sold (as discussed above). Under the terms of the lease, the Company paid a
$1.9 million security deposit and is currently paying monthly rent of $328,202 with an annual
increase of 3% in each subsequent year through August 2014. The lease contains an option to renew
for three additional periods of five years each. In accordance with SFAS No. 13, the Company
records rent expense on a straight-line basis and the resulting deferred rent is included in other
long-term liabilities in the accompanying condensed consolidated balance sheet. The Company also
leases office space for a facility in Connecticut, an additional distribution and storage facility
in San Diego and for three foreign facilities located in Japan, Singapore and China under
non-cancelable operating leases that expire at various times through December 2008. These leases
contain renewal options ranging from one to three years.
10. Legal Proceedings
The Company has incurred substantial costs in defending itself against patent infringement
claims, and expects to devote substantial financial and managerial resources to protect its
intellectual property and to defend against the claims described below as well as any future claims
asserted against it.
Affymetrix Litigation
On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a complaint in the U.S.
District Court for the District of Delaware alleging that the use, manufacture and sale of
the Companys BeadArray products and services, including the Companys Array Matrix
and BeadChip products, infringe six Affymetrix patents. Affymetrix seeks an injunction
against the sale of products, if any, that are determined to be infringing these patents,
unspecified monetary damages, interest and attorneys fees. On September 15, 2004, the
Company filed its answer to Affymetrix complaint, seeking declaratory judgments from
the court that it does not infringe the Affymetrix patents and that such patents are invalid,
and the Company filed counterclaims against Affymetrix for unfair competition and
interference with actual and prospective economic advantage.
On February 15, 2006, the court allowed the Company to file its first amended
answer and counterclaims, adding allegations of inequitable conduct with respect to all
six asserted Affymetrix patents, violation of Section 2 of the Sherman Act, and unclean
hands. In March 2006, Affymetrix notified the Company of its decision to drop one of the
six patents from the suit and of its intention to assert infringement of certain additional
claims of the remaining five patents. The Company has filed a motion to preclude
Affymetrix from asserting infringement of those additional claims. On April 20, 2006, a
claims construction hearing was held. While rulings on the Companys motion and on the
claims construction issues could be issued at any time, the Company expects a ruling on
the claims construction issues in the next several weeks. Trial is scheduled for October
16, 2006. The Company believes it has meritorious defenses against each of the
infringement claims alleged by Affymetrix and intends to vigorously defend against this
suit. However, the Company cannot be sure that it will prevail in this matter. Any
unfavorable determination, and in particular, any significant cash amounts required to be
paid by the Company or prohibition of the sale of its products and services, could result
in a material adverse effect on its business, financial condition and results of operations.
15
Dr. Anthony W. Czarnik v. Illumina, Inc.
On June 15, 2005, Dr. Anthony Czarnik, a former employee, filed suit against the
Company in the U.S. District Court for the District of Delaware seeking correction of
inventorship of certain of the Companys patents and patent applications and alleging that
the Company committed inequitable conduct and fraud in not naming him as an inventor.
Dr. Czarnik seeks an order requiring the Company and the U.S. Patent and Trademark
Office to correct the inventorship of certain of the Companys patents and patent
applications by adding Dr. Czarnik as an inventor, a judgment declaring certain of the
Companys patents and patent applications unenforceable, unspecified monetary damages
and attorneys fees. On August 4, 2005, the Company filed a motion to dismiss the
complaint for lack of standing and failure to state a claim. While this motion was
pending, Dr. Czarnik filed an amended complaint on September 23, 2005. On October 7,
2005, the Company filed a motion to dismiss the amended complaint for lack of standing
and failure to state a claim, and this motion is still pending. There has been no trial date
set for this case. The Company believes it has meritorious defenses against this claim.
11. Invitrogen Corporation Collaboration Agreement
In December 2004, the Company entered into a strategic collaboration with Invitrogen
Corporation (Invitrogen). The goal of the collaboration is to combine the Companys expertise in
oligonucleotide manufacturing with the sales, marketing and distribution capabilities of
Invitrogen. In connection with the collaboration, the Company has developed the next generation
Oligator® DNA synthesis technology. This technology includes both plate- and tube-based
capabilities. Under the terms of the agreement, Invitrogen paid the Company an upfront
non-refundable collaboration payment of $2.3 million during the first quarter of 2005.
Additionally, Invitrogen made a milestone payment of $1.1 million to the Company in November 2005
upon achievement of a milestone event under the terms of the collaboration.
The Company began manufacturing and shipping the plate-based and certain tube-based oligo
products under the collaboration in the third quarter of 2005 and, therefore, has begun to amortize
the upfront collaboration payment of $2.3 million as product revenue over the life of the agreement
on a straight-line basis. The unamortized portion of the collaboration payment has been recorded as
short- and long-term deferred revenue. The Company recorded the $1.1 million milestone payment in
service and other revenue upon achievement of the milestone during the fourth quarter of 2005. The
Company recorded revenue related to this milestone payment upon its achievement, as evidenced by
acknowledgment from Invitrogen and due to the fact that (i) the milestone event is substantive and
its achievability was not reasonably assured at the inception of the agreement, (ii) the milestone
represents the culmination of an earnings process, (iii) the milestone payment is non-refundable
and (iv) the performance obligations for both the Company and Invitrogen after the milestone
achievement will continue at a level comparable to the level before the milestone achievement. In
addition, the agreement provides for the transfer of the Companys Oligator technology into two
Invitrogen facilities outside North America. The Company recognizes product revenue upon shipment
of collaboration products based on the Companys actual manufacturing cost. Collaboration profit,
as defined in the collaboration agreement, from the sale of collaboration products is divided
equally between the two companies and is recorded as product revenue.
12. Investment in Genizon BioSciences Inc.
In March 2006, the Company entered into a Subscription Agreement for Secured Convertible
Debentures with Genizon BioSciences Inc. (Genizon), a Canadian company focused on gene discovery.
Pursuant to the agreement, the Company purchased a secured convertible debenture (the debenture) of
Genizon and certain warrants for CDN$3.5 million (approximately U.S. $3.0 million). The Company
understands Genizon is exclusively using Illuminas Sentrix® HumanHap300 BeadChip along with the
Infinium assay to perform whole-genome association studies involving thousands of members of the
Quebec Founder Population. The goal of the studies is to provide understanding of the genetic
origins and mechanisms of common diseases which may then lead to possible drug
targets.
16
The debenture is convertible, automatically upon the occurrence of a liquidity event, as
defined in the debenture, into Class H Preferred Shares of Genizon. Upon the occurrence of certain
events, Illumina may be entitled to receive additional shares of Genizons Class H Preferred
Shares. The debenture matures two years from issuance and bears interest, payable semiannually, at
a rate of 5% per annum for the first year and 12.5% per annum for the second year. Unless the
debenture is converted before maturity, 112.5% of the principal amount of the debenture is due upon
maturity. Illumina also received warrants to purchase 226,721 shares of Genizon Class H Preferred
Shares at an exercise price of $1.5437 per share.
As of April 2, 2006, the debenture was recorded at face value, which is the fair value, and is
classified in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, as an available-for-sale security. The Company has concluded that the purchase of the
debenture and the concurrent purchase by Genizon of Illuminas products are linked transactions
under guidance contained in EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Since
the transactions are considered linked, the Company has deferred approximately $2.8 million of
revenue as of April 2, 2006, related to the Genizon product shipments. The deferred revenue is
classified as a long-term liability as of April 2, 2006. The Company has also deferred
approximately $1.0 million of costs related to product shipments to Genizon as a long-term asset as
of April 2, 2006. All Genizon shipments that generate revenue over the face value of the debenture
will be evaluated under the Companys revenue recognition policy, which is outlined in Note 1.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and
notes thereto for the year ended January 1, 2006 included in the Companys Annual Report on Form
10-K. Operating results are not necessarily indicative of results that may occur in future
periods.
The discussion and analysis in this Quarterly Report on Form 10-Q contain forward-looking
statements that involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Words such as anticipate, believe, continue, estimate,
expect, intend, may, plan, potential, predict, project, or similar words or phrases,
or the negatives of these words, may identify forward-looking statements, but the absence of these
words does not necessarily mean that a statement is not forward-looking. Examples of
forward-looking statements include, among others, statements regarding the integration of CyVeras
technology with our existing technology, the commercial launch of new products, including products
based on CyVeras technology, and the duration which our existing cash and other resources is
expected to fund our operating activities.
Forward-looking statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results to differ materially
from those expected or implied by the forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to, those discussed in the subsection
entitled Item 1A. Risk Factors. below as well as those discussed elsewhere. Accordingly, you
should not unduly rely on these forward-looking statements, which speak only as of the date of this
Quarterly Report. We undertake no obligation to publicly revise these forward-looking statements to
reflect circumstances or events after the date of this Quarterly Report or to reflect the
occurrence of unanticipated events. You should, however, review the factors and risks we describe
in the reports we file from time to time with the Securities and Exchange Commission (SEC).
Overview
We develop, manufacture and market next-generation tools for the large-scale analysis of
genetic variation and biological function. Understanding genetic variation and biological function
is critical to the development of personalized medicine, a key goal of genomics. Using our
technologies, we have developed a comprehensive line of products that are designed to provide the
performance, throughput, cost effectiveness and flexibility necessary to enable researchers in the
life sciences and pharmaceutical industries to perform the billions of tests necessary to extract
medically valuable information from advances in genomics and proteomics. This information is
expected to correlate genetic variation and biological function with particular disease states,
enhancing drug discovery and clinical research, allowing diseases to be detected earlier and
permitting better choices of drugs for individual patients.
In 2001, we began commercial sale of short pieces of DNA called oligonucleotides, which we
refer to as oligos, manufactured using our proprietary Oligator technology. We believe our Oligator
technology is more cost effective than competing technologies, and this advantage enabled us to
market our oligos under a price leadership strategy while still achieving attractive gross margins.
17
In 2001, we commercialized the first implementation of our BeadArray technology, the Sentrix
Array Matrix. This is a disposable matrix of 96 fiber optic bundles arranged in a pattern that
matches the standard 96-well microtiter plate. Each fiber optic bundle performs more than 1,500
unique assays, which enables researchers to perform focused genotyping experiments in a
high-throughput format. This format was also used to initiate our single nucleotide polymorphism
(SNP) genotyping services product line. As a result of the increasing market acceptance of our
high throughput, low cost BeadArray technology, we have entered into genotyping service contracts
with many leading genotyping centers.
Our production-scale BeadLab is a turn-key platform that includes all hardware and software
necessary to enable researchers to perform genetic analysis research on what we believe is an
unprecedented scale. This system is being marketed to a small number of high throughput genotyping
users. As of April 2, 2006, we have installed and recorded revenue for 11 BeadLabs.
In 2003, we announced the launch of several new products, including 1) a new array format, the
Sentrix BeadChip, which significantly expands market opportunities for our BeadArray technology and
provides increased experimental flexibility for life science researchers; 2) a gene expression
product line on both the Sentrix Array Matrix and the Sentrix BeadChip that allows researchers to
analyze a focused set of genes across eight to 96 samples on a single array; and 3) a benchtop SNP
genotyping and gene expression system, the BeadStation, for performing moderate-scale genotyping
and gene expression using our technology. The BeadStation includes our BeadArray Reader, analysis
software and assay reagents and is designed to match the throughput requirements and variable
automation needs of individual research groups and core labs. Sales of these
products began in the first quarter of 2004 and, as of April 2, 2006, we have shipped 139
BeadStations.
In late 2004, we announced a strategic collaboration with Invitrogen Corporation (Invitrogen)
to synthesize and distribute oligos. In the third quarter of 2005, we began shipping oligo
products in connection with this agreement. As part of the agreement, we have developed the next
generation of our Oligator DNA synthesis technology, which we have designed to support both plate-
and the larger tube-based oligo markets. Invitrogen is responsible for sales, marketing and technical support.
Profits from sales of collaboration products are divided equally between the two companies.
In 2005, we began shipments of Sentrix BeadChips for whole-genome gene expression and
whole-genome genotyping. The whole-genome gene expression BeadChips are designed to enable
high-performance, cost-effective, whole-genome expression profiling of multiple samples on a single
chip, resulting in a dramatic reduction in cost of whole-genome expression analysis. Our
whole-genome expression product line includes multi-sample products for both the Human and Mouse
Genomes. The whole-genome genotyping BeadChip is designed to scale to high levels of multiplexing
without compromising data quality and to provide scientists the ability to query hundreds of
thousands of SNPs in parallel. In the second quarter of 2005, we commenced shipment of our first
whole-genome genotyping BeadChip, the HumanHap-1, which interrogates more than 100,000 SNPs in
parallel.
In April 2005, we completed the acquisition of CyVera Corporation, a privately-held
Connecticut-based company, pursuant to which CyVera became a wholly-owned subsidiary of Illumina.
We believe that CyVeras digital-microbead technology, renamed the VeraCode technology, is highly
complementary to our portfolio of products and services. The acquisition is expected to provide us
with a comprehensive approach to bead-based assays for biomarker research and development and
in-vitro and molecular diagnostic opportunities, including those that require low-complexity as
well as high-complexity testing. We expect the first products based on the VeraCode technology to
be available in the second half of 2006. The purchase price associated with this transaction was
approximately $17.8 million. We allocated $15.8 million of this purchase price to acquired
in-process research and development and charged such amount against earnings in the second quarter
of 2005.
18
In December 2005, we began shipment of the new Sentrix HumanHap300 Genotyping BeadChip to
customers around the world. Using the Infinium assay, which enables us to select virtually any SNP
in the genome, the HumanHap300 BeadChip allows analysis of more than 317,000 SNPs. We selected the
SNPs for inclusion on the chip in collaboration with a consortium of scientists that are leaders in
the genotyping field. We believe this product has quality and performance features that support
our expectation that it will become an important discovery tool for researchers seeking to
understand the genetic basis of common, yet complex diseases.
In the first quarter of 2006, we introduced the Sentrix HumanHap240S BeadChip for genome-wide
disease association studies. This product is a companion to our Sentrix HumanHap300 BeadChip and
enables researchers to interrogate an additional 240,000 SNPs utilizing our Infinium assay. We
also introduced the Sentrix HumanHap550 BeadChip in the first quarter of 2006. The Sentrix
HumanHap550 BeadChip contains over 550,000 SNPs on a single microarray, and we believe it provides
the most comprehensive genomic coverage of any product currently available. The HumanHap550
BeadChip is currently available for commercial shipment.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and
service projects, the impact of seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending levels in the life science industry,
the timing and amount of government grant funding programs and other unpredictable factors that may
affect our customer ordering patterns. Any significant delays in the commercial launch or any lack
or delay of commercial acceptance of new products, unfavorable sales trends in our existing product
lines, or impacts from the other factors mentioned above, could adversely affect our revenue growth
in 2006 or cause a sequential decline in quarterly revenues. Due to the possibility of
fluctuations in our revenue and net income or loss, we believe quarterly comparisons of our
operating results are not a good indication of our future performance.
We have incurred substantial operating losses since our inception. As of April 2, 2006, our
accumulated deficit was $144.7 million and total stockholders equity was $78.7 million. These
losses have principally occurred as a result of the substantial resources required for the
research, development and manufacturing scale up effort required to commercialize our products and
services, an acquired in-process research and development charge of $15.8 million related to our
acquisition of CyVera and a charge of $5.9 million related to a termination-of-employment lawsuit.
We expect to continue to incur substantial costs for research, development and manufacturing scale
up activities over the next several years. We will also need to significantly increase our
selling, general and administrative costs as we build up our sales and marketing infrastructure to
expand and support the sale of systems, other products and services. As a result of the expected
increase in expenses, we will need to increase revenue significantly to achieve and sustain
profitability.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance with U.S. generally
accepted accounting principles. The preparation of financial statements requires that management
make estimates, assumptions and judgments with respect to the application of accounting policies
that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures
of contingent assets and liabilities. Actual results could differ from those estimates. Our
significant accounting policies are described in Note 1 to our condensed consolidated financial
statements. Certain accounting policies are deemed critical if 1) they require an accounting
estimate to be made based on assumptions that were highly uncertain at the time the estimate was
made, and 2) changes in the estimate that are reasonably likely to occur, or different estimates
that we reasonably could have used would have a material effect on our condensed consolidated
financial statements.
Management has discussed the development and selection of these critical accounting policies
with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the
disclosure. In addition, there are other items within our financial statements that require
estimation, but are not deemed critical as defined above.
We believe the following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of the consolidated financial statements.
19
Revenue Recognition
Our revenue is generated primarily from the sale of products and services. Product revenue
consists of sales of arrays, reagents, instrumentation and oligos. Service and other revenue
consists of revenue received for performing genotyping services, extended warranty sales and
revenue earned from milestone payments.
We recognize revenue in accordance with the guidelines established by SEC Staff Accounting
Bulletin (SAB) No. 104. Under SAB No. 104, revenue cannot be recorded until all of the following
criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the sellers price to the buyer is fixed or determinable; and
collectibility is reasonably assured. All revenue is recorded net of any applicable allowances for
returns or discounts.
Revenue for product sales is recognized generally upon shipment and transfer of title to the
customer, provided no significant obligations remain and collection of the receivables is
reasonably assured. Revenue from the sale of instrumentation is recognized when earned, which is
generally upon shipment. However, in the case of BeadLabs, revenue is recognized upon the
completion of installation, training and customer acceptance. Revenue for genotyping services is
recognized when earned, which is generally at the time the genotyping analysis data is delivered to
the customer or as specific milestones are achieved.
In order to assess whether the price is fixed and determinable, we ensure there are no refund
rights. If payment terms are based on future performance, we defer revenue recognition until the
price becomes fixed and determinable. We assess collectibility based on a number of factors,
including past transaction history with the customer and the creditworthiness of the customer. If
we determine that collection of a payment is not reasonably assured, revenue recognition is
deferred until the time collection becomes reasonably assured, which is generally upon receipt of
payment. Changes in judgments and estimates regarding application of SAB No. 104 might result in a
change in the timing or amount of revenue recognized.
Sales of instrumentation generally include a standard one-year warranty. We also sell
separately priced maintenance (extended warranty) contracts, which are generally for one or two
years, upon the expiration of the initial warranty. Revenue for extended warranty sales is
recognized ratably over the term of the extended warranty period. Reserves are provided for
estimated product warranty expenses at the time the associated revenue is recognized. If we were to
experience an increase in warranty claims or if costs of servicing our warrantied products were
greater than our estimates, gross margins could be adversely affected.
While the majority of our sales agreements contain standard terms and conditions, we do enter
into agreements that contain multiple elements or non-standard terms and conditions. Emerging
Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables, provides
guidance on accounting for arrangements that involve the delivery or performance of multiple
products, services, or rights to use assets within contractually binding arrangements. Significant
contract interpretation is sometimes required to determine the appropriate accounting, including
whether the deliverables specified in a multiple element arrangement should be treated as separate
units of accounting for revenue recognition purposes, and if so, how the price should be allocated
among the deliverable elements, when to recognize revenue for each element, and the period over
which revenue should be recognized. We recognize revenue for delivered elements only when we
determine that the fair values of undelivered elements are known and there are no uncertainties
regarding customer acceptance.
Some of our agreements contain multiple elements that include milestone payments. Revenue from
a milestone achievement is recognized when earned, as evidenced by acknowledgement from our
collaborator, provided that (i) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement, (ii) the milestone represents the culmination
of an earnings process, (iii) the milestone payment is non-refundable and (iv) the performance
obligations for both us and our collaborators after the milestone achievement will continue at a
level comparable to the level before the milestone achievement. If all of these criteria are not
met, the milestone achievement is recognized over the remaining minimum period of our performance
obligations under the agreement. We defer non-refundable upfront fees received under our
collaborations and recognize them over the period the related services are provided or over the
estimated collaboration term using
various factors specific to the collaboration. Advance payments received in excess of amounts
earned are classified as deferred revenue until earned.
Research revenue consists of amounts earned under research agreements with government grants,
which is recognized in the period during which the related costs are incurred.
20
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We evaluate the collectibility of our
accounts receivable based on a combination of factors. We regularly analyze customer accounts,
review the length of time receivables are outstanding and review historical loss rates. If the
financial condition of our customers were to deteriorate, additional allowances could be required.
Inventory Valuation
We record adjustments to inventory for potentially excess, obsolete or impaired goods in order
to state inventory at net realizable value. We must make assumptions about future demand, market
conditions and the release of new products that will supercede old ones. We regularly review
inventory for excess and obsolete products and components, taking into account product life cycle
and development plans, product expiration and quality issues, historical experience and our current
inventory levels. If actual market conditions are less favorable than anticipated, additional
inventory adjustments could be required.
Contingencies
We are subject to legal proceedings primarily related to intellectual property matters. Based
on the information available at the balance sheet dates and through consultation with our legal
counsel, we assess the likelihood of any adverse judgments or outcomes of these matters, as well as
the potential ranges of probable losses. If losses are probable and reasonably estimable, we will
record a liability in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies. Currently we have no such liabilities recorded. This may change in
the future depending upon new developments in each matter.
Goodwill and Intangible Asset Valuation
The purchase method of accounting for acquisitions requires extensive use of accounting
estimates and judgments to allocate the purchase price to the fair value of the net tangible and
intangible assets acquired, including in-process research and development (IPR&D). Goodwill and
intangible assets deemed to have indefinite lives are not amortized, but are subject to annual
impairment tests. The amounts and useful lives assigned to other acquired intangible assets impact
future amortization, and the amount assigned to IPR&D is expensed immediately. Determining the fair
values and useful lives of intangible assets especially requires the exercise of judgment. While
there are a number of different acceptable generally accepted valuation methods to estimate the
value of intangible assets acquired, we primarily use the discounted cash flow method. This method
requires significant management judgment to forecast the future operating results used in the
analysis. In addition, other significant estimates are required such as residual growth rates and
discount factors. The estimates we use to value and amortize intangible assets are consistent with
the plans and estimates that we use to manage our business and are based on available historical
information and industry estimates and averages. These judgments can significantly affect our net
operating results.
During fiscal 2001, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
142 requires that goodwill and certain intangible assets be assessed for impairment using fair
value measurement techniques. If the carrying amount of a reporting unit exceeds its fair value,
then a goodwill impairment test is performed to measure the amount of the impairment loss, if any.
The goodwill impairment test compares the implied fair value of the reporting units goodwill with
the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same
manner as in a business combination. Determining the fair value of the implied goodwill is
judgmental in nature and often involves the use of significant estimates and assumptions. These
estimates
21
and assumptions could have a significant impact on whether or not an impairment charge is
recognized and also the magnitude of any such charge. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons. These approaches use significant
estimates and assumptions, including projection and timing of future cash flows, discount rates
reflecting the risk inherent in future cash flows, perpetual growth rates, determination of
appropriate market comparables, and determination of whether a premium or discount should be
applied to comparables. It is reasonably possible that the plans and estimates used to value these
assets may be incorrect. If our actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used to assess the recoverability of
these assets, we could incur additional impairment charges. As of April 2, 2006, we had $2.1
million of goodwill. This goodwill is reported as a separate line item in the balance sheet.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment.
Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant
date based on the awards fair-value as calculated by the Black-Scholes-Merton (BSM) option-pricing
model and is recognized as expense over the requisite service period. The BSM model requires
various highly judgmental assumptions including volatility, forfeiture rates, and expected option
life. If any of these assumptions used in the BSM model change significantly, stock-based
compensation expense may differ materially in the future from that recorded in the current period.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of
operations. In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income
taxes is computed using the asset and liability method, under which deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and for operating losses
and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently
enacted tax rates that apply to taxable income in effect for the years in which those tax assets
are expected to be realized or settled. As of April 2, 2006, we have recorded a valuation
allowance for the full amount of the resulting net deferred tax asset, as the future realization of
the tax benefit is uncertain.
Results of Operations
To enhance comparability, the following table sets forth unaudited condensed consolidated
statements of operations for the three months ended April 2, 2006 and April 3, 2005 stated as a
percentage of total revenue.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
April 2, |
|
|
April 3, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
Product revenue |
|
|
80 |
% |
|
|
80 |
% |
Service and other revenue |
|
|
18 |
|
|
|
18 |
|
Research revenue |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of product revenue |
|
|
26 |
|
|
|
26 |
|
Cost of service and other revenue |
|
|
6 |
|
|
|
4 |
|
Research and development |
|
|
28 |
|
|
|
39 |
|
Selling, general and administrative |
|
|
42 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
102 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
Interest and other income, net |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
0 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(0 |
)% |
|
|
(8 |
)% |
|
|
|
22
Three Months Ended April 2, 2006 and April 3, 2005
Our fiscal year consists of 52 or 53 weeks ending the Sunday closest to December 31, with
quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, and September 30. The
quarters ended April 2, 2006 and April 3, 2005 were both 13 weeks.
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 2, |
|
|
April 3, |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Product revenue |
|
$ |
23,261 |
|
|
$ |
12,165 |
|
|
|
91 |
% |
Service and other revenue |
|
|
5,267 |
|
|
|
2,691 |
|
|
|
96 |
% |
Research revenue |
|
|
574 |
|
|
|
292 |
|
|
|
97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
29,102 |
|
|
$ |
15,148 |
|
|
|
92 |
% |
|
|
|
|
|
|
|
Total revenue for the three months ended April 2, 2006 and April 3, 2005 was $29.1 million and
$15.1 million, respectively. This represents an increase of $14.0 million, or 92%, as compared to
the three months ended April 3, 2005.
Product revenue increased to $23.3 million for the three months ended April 2, 2006, from
$12.2 million for the three months ended April 3, 2005. The increase resulted primarily from higher
consumable and BeadStation sales. Growth in consumable sales was primarily attributable to the
launch of the HumanHap300 BeadChip. In addition, growth in consumable revenue can be attributed to
the growth in our installed base of BeadStations. Consumable products constituted 50% of product
revenue in the first quarter of 2006, as compared to 34% in the first quarter of 2005. As of April
2, 2006, we have shipped a total of 139 BeadStations and 11 BeadLabs. We expect to see continued
growth in product revenue which can be partially attributed to the
launch of several new products,
as well as the growth of our installed base of BeadStations and BeadLabs.
Service and other revenue increased to $5.3 million for the three months ended April 2,
2006, from $2.7 million for the three months ended April 3, 2005, due primarily to higher demand
for our SNP genotyping service contracts during the three months ended April 2, 2006. We expect
sales from SNP genotyping services contracts to fluctuate on a quarterly basis, depending on the
mix and number of contracts that are completed. The timing of completion of a SNP genotyping
services contract is highly dependent on the customers schedule for selecting the SNPs and
delivering their samples to us.
Government grants and other research funding increased to $0.6 million for the three months
ended April 2, 2006, from $0.3 million for the three months ended April 3, 2005, due primarily to
an increase in internal research spending for our grants from the National Institutes of Health.
We expect government grants to remain a small percentage of total revenue in the future as we
increase our focus on commercial operations.
23
Cost of Product and Service and Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 3, |
|
|
April 3, |
|
|
Percentage |
|
|
|
2005 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
Cost of product revenue |
|
$ |
7,676 |
|
|
$ |
3,937 |
|
|
|
95 |
% |
Cost of service and
other revenue |
|
|
1,617 |
|
|
|
662 |
|
|
|
144 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product
and service and other
revenue |
|
$ |
9,293 |
|
|
$ |
4,599 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
Cost of product and service and other revenue represents manufacturing costs incurred in the
production process, including component materials, assembly labor and overhead, installation,
warranty, packaging and delivery costs, as well as costs associated with performing genotyping
services on behalf of our customers. Costs related to research revenue are included in research
and development expense. Cost of product and service and other revenue increased to $9.3 million
for the three months ended April 2, 2006, as compared to $4.6 million for the three months ended
April 3, 2005, due primarily to the significant increase in product revenue. Gross margin on
product and service and other revenue was 67% and 69% for the three months ended April 2, 2006 and
April 3, 2005, respectively.
Cost of product revenue increased to $7.7 million for the three months ended April 2, 2006, as
compared to $3.9 million for the three months ended April 3, 2005, driven by higher consumable
sales. Gross margin on product revenue decreased to 67% for the three months ended April 2, 2006,
from 68% for the three months ended April 3, 2005, due primarily to lower margins associated with
oligo products sold as a part of the Invitrogen collaboration. The change in oligo gross margin is
due to the fact that, under the Invitrogen collaboration, we no longer sell oligos directly. As a
result, the gross margin related to this product line decreased; however, the net margin has
increased due to the fact that most of the sales and marketing expenses surrounding the oligo
business have shifted to our collaboration partner, Invitrogen. In addition, gross margin on
product revenue was unfavorably impacted by a $0.2 million increase in stock-based compensation
expense recognized as cost of product revenue resulting from the adoption of SFAS No. 123R.
Cost of service and other revenue increased to $1.6 million for the three months ended April
2, 2006, as compared to $0.7 million for the three months ended April 3, 2005, primarily due to
higher service revenue. Gross margin on service and other revenue decreased to 69% for the three
months ended April 2, 2006, as compared to 75% for the three months ended April 3, 2005, primarily
due to a change in the mix of projects and decreased average selling
prices related to two projects. In addition, gross
margin on service and other revenue was unfavorably impacted by a $0.1 million increase in
stock-based compensation expense recognized as cost of service and other revenue resulting from the
adoption of SFAS No. 123R.
We expect product mix to continue to affect our future gross margins. However, we expect our
market to become increasingly price competitive and our margins may fluctuate. We expect product
and services and other gross margin to range between 66% and 69% for fiscal year 2006, depending
upon the mix of product and services and other revenue for the year and in any given quarter.
24
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 2, |
|
|
April 3, |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
Research and development |
|
$ |
8,216 |
|
|
$ |
5,893 |
|
|
|
39 |
% |
Our research and development expenses consist primarily of salaries and other
personnel-related expenses, laboratory supplies and other expenses related to the design,
development, testing and enhancement of our products. We expense our research and development
costs as they are incurred.
Research and development expenses increased to $8.2 million for the three months ended April
2, 2006, as compared to $5.9 million for the three months ended April 3, 2005. The increase in
research and development expenses is primarily due to the development of our recently-acquired
digital microbead technology purchased in conjunction with our acquisition of CyVera in April 2005.
Research and development expenses related to the digital microbead technology totaled
approximately $1.5 million for the three months ended April 2, 2006. In addition, research and
development expenses were unfavorably impacted by a $1.0 million increase in stock-based
compensation expense resulting from the adoption of SFAS No. 123R. We believe a substantial
investment in research and development is essential to remaining competitive and expanding into
additional markets. Accordingly, we expect our research and development expenses to increase in
absolute dollars as we expand our product base, but decrease as a percentage of revenue in future
periods.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 2, |
|
|
April 3, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Percentage Change |
|
|
|
(in thousands) |
|
|
|
|
|
Selling, general and administrative |
|
$ |
12,134 |
|
|
$ |
6,035 |
|
|
|
101 |
% |
Our selling, general and administrative expenses consist primarily of personnel costs for
sales and marketing, finance, human resources, business development and general management, as well
as professional fees, such as expenses for legal and accounting services. Selling, general and
administrative expenses increased $6.1 million to $12.1 million for the three months ended April 2,
2006, as compared to $6.0 million for the three months ended April 3, 2005. Selling, general and
administrative expenses increased $1.9 million during the three months ended April 2, 2006, as
compared to the three months ended April 3, 2005, due to increased stock-based compensation expenses
resulting from the adoption of SFAS No. 123R as of January 1, 2006. Exclusive of these stock-based
compensation charges, our sales and marketing expenses increased $1.2 million during the three
months ended April 2, 2006, as compared to the three months ended April 3, 2005, of which $1.0
million is attributable to personnel-related expenses for the build-out of our sales force and
customer support staff, and $0.2 million is attributable to other non-personnel-related costs,
mainly sales and marketing activities for our existing and new products. General and
administrative expenses, exclusive of stock-based compensation expense, increased $3.0 million in
the three months ended April 2, 2006, as compared to the three months ended April 3, 2005, of which
$1.8 million is attributable to outside legal costs related to the Affymetrix patent infringement
litigation, $0.8 million is attributable to higher personnel-related costs associated with the
growth of our business and $0.4 million is attributable to higher outside consulting costs.
We expect our selling, general and administrative expenses to accelerate in absolute dollars
as we expand our staff, add sales and marketing infrastructure, and incur increased litigation
costs and additional costs to support the commercialization and support of an increasing number of
products.
25
Interest and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 2, |
|
|
April 3, |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
Interest and other income, net |
|
$ |
568 |
|
|
$ |
195 |
|
|
|
191 |
% |
Interest income on our cash and cash equivalents and investments was $0.5 million for the
three months ended April 2, 2006 as compared to $0.3 million for the three months ended April 3,
2005. The increase is primarily due to higher effective interest rates on our short-term
investments.
In the three months ended April 2, 2006, we recorded approximately $76,000 in gains due
to foreign currency transactions, as compared to approximately $42,000 in losses for the three
months ended April 3, 2005. We also recorded approximately $20,000 in losses on disposals of
equipment in the three months ended April 2, 2006, as compared to approximately $71,000 in losses
on disposals of equipment in the three months ended April 3, 2005.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
April 2, |
|
|
April 3, |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(in thousands) |
|
|
|
|
|
Provision for income taxes |
|
$ |
131 |
|
|
$ |
51 |
|
|
|
157 |
% |
Our provision for income taxes consists primarily of expenses related to estimated foreign
income taxes, totaling approximately $111,000 and $51,000 for the three months ended April 2, 2006
and April 3, 2005, respectively. In addition, we have estimated U.S. federal and state income
taxes of $20,000 in the three months ended April 2, 2006. Since we have incurred losses in both
the three months ended April 2, 2006 and April 3, 2005, our federal and state income taxes are
minimal. As of April 2, 2006, we have recorded a valuation allowance for the full amount of the
resulting net deferred tax asset, as the future realization of the tax benefit is uncertain. In
the first quarter of 2006, we completed a formal Section 382 and 383 analysis, which resulted in
approximately $0.2 million of our net operating loss carryforwards being limited.
Liquidity and Capital Resources
As of April 2, 2006, we had cash, cash equivalents and investments of $49.0 million. We
currently invest our funds in U.S. dollar-based, short-term money market mutual funds.
Our operating activities generated cash of $2.4 million in the three months ended April 2,
2006, as compared to a use of cash of $3.3 million in the three months ended April 3, 2005. Net
cash provided by operating activities in the three months ended April 2, 2006 was primarily the
result of a $3.0 million increase in accounts payable and accrued liabilities, a $2.8 million
increase in long-term liabilities primarily related to payments received from Genizon BioSciences
Inc. recorded as deferred revenue, non-cash charges of $1.1 million for depreciation and
amortization and $3.1 million related to non-cash stock compensation expense resulting from the
adoption of SFAS No. 123R. These sources were partially offset by a $3.5 million increase in
inventory and a $3.7 million increase in
26
accounts
receivable. The accounts receivable and inventory increases are
primarily due to our significant sales growth of 92% in the first
quarter of 2006, as compared to the first quarter of 2005, which
resulted from increased customer demand and our introduction of new
products and services into the market. The increase in accounts
payable and accrued liability balances was primarily driven by
increases in general business activity associated with such sales
growth, as well as expenses associated with the expansion of our
corporate infrastructure to accommodate this growth. Net cash used in operating activities in the three months ended April 3, 2005 was
primarily the result of a net loss of $1.2 million, a $5.9 million payment for a litigation
judgment and a $1.2 million increase in inventory. These usages were reduced, in part, by a $2.5
million increase in accounts payable and accrued liabilities, a
$2.3 million increase in long-term
liabilities primarily related to payments received from Invitrogen Corporation recorded as deferred
revenue, and non-cash charges of $0.8 million for depreciation and amortization.
Our investing activities used cash of $7.2 million in the three months ended April 2, 2006, as
compared to cash provided by investing activities of $0.1 million in the three months ended April
3, 2005. Cash used in investing activities in the three months ended April 2, 2006 was due in part
to the payment of $4.2 million for the purchase of property and equipment primarily related to the
expansion of our manufacturing capacity. We have tripled our manufacturing capacity for BeadChips
over the level at the end of the second quarter of 2005. In addition, we used cash of $3.0 million
to purchase a secured convertible debenture in Genizon BioSciences Inc. Cash provided in investing
activities in the three months ended April 3, 2005 was due to $3.1 million from the sale or
maturity of investment securities used to provide operating funds for our business, which was
almost entirely offset by $3.1 million for the purchase of property and equipment.
Our financing activities provided $3.1 million in the three months ended April 2, 2006, as
compared to $1.3 million in the three months ended April 3,
2005. Cash provided by financing
activities in both the three months ended April 2, 2006 and April 3, 2005 was due primarily to
proceeds from the issuance of common stock from option exercises.
While we anticipate that our current cash and cash equivalents, revenue from sales and funding
from grants will be sufficient to fund our anticipated operating needs, we may choose to raise
additional capital due to market conditions or strategic considerations, such as an acquisition,
even if we believe we have sufficient funds for our current or future operating plans. Further,
any additional equity financing may be dilutive to our then existing stockholders and may adversely
affect their rights and debt financing may carry covenants that could restrict our operations.
Operating needs include the planned costs to operate our business, including amounts required to
fund working capital and capital expenditures. At the present time, we have no material
commitments for capital expenditures. However, our future capital requirements and the adequacy of
our available funds will depend on many factors, including our ability to successfully
commercialize our SNP genotyping and gene expression systems and extensions to those products and
to expand our oligos and SNP genotyping services product lines, scientific progress in our research
and development programs, the magnitude of those programs, competing technological and market
developments, the successful resolution of our legal proceedings with Affymetrix, the success of
our collaboration with Invitrogen and the need to enter into collaborations with other companies or
acquire other companies or technologies to enhance or complement our product and service offerings.
Therefore, we may require additional funding in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. The fair market value of fixed rate securities may be adversely impacted by fluctuations
in interest rates while income earned on floating rate securities may decline as a result of
decreases in interest rates. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety and preservation of
our invested principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. We have historically maintained
a relatively short average maturity for our investment portfolio, and a hypothetical 100 basis
point adverse move in interest rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive financial instruments.
27
Foreign Currency Exchange Risk
Although most of our revenue is denominated in U.S. dollars, some portions of our revenue are
realized in foreign currencies. As a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.
The functional currencies of our subsidiaries are their respective local currencies. Accordingly,
the accounts of these operations are translated from the local currency to the U.S. dollar using
the current exchange rate in effect at the balance sheet date for the balance sheet accounts, and
using the average exchange rate during the period for revenue and expense accounts. The effects of
translation are recorded in accumulated other comprehensive income as a separate component of
stockholders equity.
Exchange gains and losses arising from transactions denominated in foreign currencies are
recorded in operations. In July 2004, we began hedging significant foreign currency firm sales
commitments and accounts receivable with forward contracts. We only use derivative financial
instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial
instruments for trading or speculative purposes. Our forward exchange contracts have been
designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or
losses on these foreign currency forward contracts are reported in other comprehensive income.
Realized gains and losses for the effective portion are recognized with the underlying hedge
transaction. There were no forward foreign currency forward contracts outstanding at April 2, 2006.
The notional settlement amount of the foreign currency forward contracts outstanding at January 1,
2006 was $0.1 million. As of January 1, 2006, we had one foreign currency forward contract
outstanding. This contract had a fair value of $882, representing an unrealized gain, and was
included in other current assets at January 1, 2006. For the three months ended April 2,
2006 and April 3, 2005, there were no amounts recognized in earnings due to hedge ineffectiveness
and we settled foreign exchange contracts of $0.1 million and $1.7 million, respectively.
Item 4. Controls and Procedures.
We have established and maintain disclosure controls and procedures to ensure that we record,
process, summarize, and report information we are required to disclose in our periodic reports
filed with the Securities and Exchange Commission in the manner and within the time periods
specified in the SECs rules and forms. We also design our disclosure controls to ensure that the
information is accumulated and communicated to our management, including the chief executive
officer and the chief financial officer, as appropriate to allow timely decisions regarding
required disclosure. We also maintain internal controls and procedures to ensure that we comply
with applicable laws and our established financial policies. We design our internal controls to
provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded
and reported in conformity with U.S. generally accepted accounting principles.
We have evaluated the design and operation of our disclosure controls and procedures to
determine whether they are effective in ensuring that the disclosure of required information is
timely made in accordance with the Exchange Act and the rules and regulations of the Securities and
Exchange Commission. This evaluation was made under the supervision and with the participation of
management, including our chief executive officer and chief financial officer as of April 2, 2006.
Our management does not expect that our disclosure controls or our internal controls will prevent
all error and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of a simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
28
The chief executive officer and chief financial officer have concluded, based on their review,
that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and
15d-15(e), were effective to ensure that information required to be disclosed by us in reports that
we file under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms. In addition, no change
in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting has occurred during the
first quarter of 2006.
An evaluation was also performed under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, of any change in our
internal control over financial reporting that occurred during the first quarter of 2006 and that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. That evaluation did not identify any such change.
29
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We have incurred substantial costs in defending ourselves against patent infringement claims
and expect to devote substantial financial and managerial resources to protect our intellectual
property and to defend against the claims described below as well as any future claims asserted
against us.
Affymetrix Litigation
On July 26, 2004, Affymetrix, Inc. (Affymetrix) filed a complaint in the U.S. District Court
for the District of Delaware alleging that the use, manufacture and sale of our BeadArray products
and services, including our Array Matrix and BeadChip products, infringe six Affymetrix patents.
Affymetrix seeks an injunction against the sale of products, if any, that are determined to be
infringing these patents, unspecified monetary damages, interest and attorneys fees. On September
15, 2004, we filed our answer to Affymetrix complaint, seeking declaratory judgments from the
court that we do not infringe the Affymetrix patents and that such patents are invalid, and we
filed counterclaims against Affymetrix for unfair competition and interference with actual and
prospective economic advantage.
On February 15, 2006, the court allowed us to file our first amended answer and counterclaims,
adding allegations of inequitable conduct with respect to all six asserted Affymetrix patents,
violation of Section 2 of the Sherman Act, and unclean hands. In March 2006, Affymetrix notified us
of its decision to drop one of the six patents from the suit and of its intention to assert
infringement of certain additional claims of the remaining five patents. We have filed a motion to
preclude Affymetrix from asserting infringement of those additional claims. On April 20, 2006, a
claims construction hearing was held. While rulings on our motion and on the claims construction
issues could be issued at any time, we expect a ruling on the claims construction issues in the
next several weeks. Trial is scheduled for October 16, 2006. We believe we have meritorious
defenses against each of the infringement claims alleged by Affymetrix and intend to vigorously
defend against this suit. However, we cannot be sure that we will prevail in this matter. Any
unfavorable determination, and in particular, any significant cash amounts required to be paid by
us or prohibition of the sale of our products and services, could result in a material adverse
effect on our business, financial condition and results of operations.
Dr. Anthony W. Czarnik v. Illumina, Inc.
On June 15, 2005, Dr. Anthony Czarnik, a former employee, filed suit against us in the U.S.
District Court for the District of Delaware seeking correction of inventorship of certain of our
patents and patent applications and alleging that we committed inequitable conduct and fraud in not
naming him as an inventor. Dr. Czarnik seeks an order requiring us and the U.S. Patent and
Trademark Office to correct the inventorship of certain of our patents and patent applications by
adding Dr. Czarnik as an inventor, a judgment declaring certain of our patents and patent
applications unenforceable, unspecified monetary damages and attorneys fees. On August 4, 2005, we
filed a motion
to dismiss the complaint for lack of standing and failure to state a claim. While this motion was
pending, Dr. Czarnik filed an amended complaint on September 23, 2005. On October 7, 2005, we filed
a motion to dismiss the amended complaint for lack of standing and failure to state a claim, and
this motion is still pending. There has been no trial date set for this case. We believe we have
meritorious defenses against this claim.
ITEM 1A. Risk Factors.
There
have been no material changes to the risk factors previously
disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal
year ended January 1, 2006. Our business is subject to various risks, including those described below. In addition to the
other information included in this Form 10-Q, the following issues could adversely affect our
operating results or our stock price.
Litigation or other proceedings or third party claims of intellectual property infringement could
require us to spend significant time and money and could prevent us from selling our products or
services or impact our stock price.
Our commercial success depends in part on our non-infringement of the patents or proprietary
rights of third parties and the ability to protect our own intellectual property. As described
above under Part II. Other Information. Item 1. Legal Proceedings, Affymetrix, Inc. filed a complaint against us in July
2004, alleging infringement of six of its patents.
30
On April 20, 2006, a claims construction hearing was held as part of this proceeding. We
expect a ruling related to the claims construction within the next several weeks, but there is no
fixed time for such a ruling. At issue is the meaning of 15 terms, and depending on the courts
ruling on each of the 15 terms, or a mix of rulings across all the terms, an advantage (or at least
the perception of an advantage) may be obtained by one party or the
other as to one or more issues. We are not able to
predict the timing or the substance of the courts rulings. Any adverse ruling or perception of an
adverse ruling may have an adverse impact on our stock price, and such impact may be
disproportionate to the actual import of the ruling itself.
Including Affymetrix, third parties have asserted or may assert that we are employing
their proprietary technology without authorization. As we enter new markets, we expect that
competitors will likely assert that our products infringe their intellectual property rights as
part of a business strategy to impede our successful entry into those markets. In addition, third
parties may have obtained and may in the future obtain patents and claim that use of our
technologies infringes these patents. We could incur substantial costs and divert the attention of
our management and technical personnel in defending ourselves against any of these claims.
Furthermore, parties making claims against us may be able to obtain injunctive or other relief,
which effectively could block our ability to further develop, commercialize and sell products, and
could result in the award of substantial damages against us. In the event of a successful claim of
infringement against us, we may be required to pay damages and obtain one or more licenses from
third parties, or be prohibited from selling certain products. We may not be able to obtain these
licenses at a reasonable cost, or at all. We could incur substantial costs related to royalty
payments for licenses obtained from third parties, which could negatively affect our gross margins.
In that event, we could encounter delays in product introductions while we attempt to develop
alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses
on favorable terms could prevent us from commercializing
products, and the prohibition of sale of any of our products could materially affect our
ability to grow and to attain profitability.
We expect intense competition in our target markets, which could render our products obsolete,
result in significant price reductions or substantially limit the volume of products that we sell.
This would limit our ability to compete and achieve and maintain profitability. If we cannot
continuously develop and commercialize new products, our revenue may not grow as intended.
We compete with life sciences companies that design, manufacture and market instruments for
analysis of genetic variation and function and other applications using technologies such as
two-dimensional electrophoresis, capillary electrophoresis, mass spectrometry, flow cytometry,
microfluidics, next-generation DNA sequencing and mechanically deposited, inkjet and
photolithographic arrays. We anticipate that we will face increased competition in the future as
existing companies develop new or improved products and as new companies enter the market with new
technologies. The markets for our products are characterized by rapidly changing technology,
evolving industry standards, changes in customer needs, emerging competition, new product
introductions and strong price competition. For example, prices per data point for genotyping have
fallen significantly over the last two years and we anticipate that prices will continue to fall.
One or more of our competitors may render our technology obsolete or uneconomical. Some of our
competitors have greater financial and personnel resources, broader product lines, a more
established customer base and more experience in research and development than we do. Furthermore,
the life sciences and pharmaceutical companies, which are our potential customers and strategic
partners, could develop competing products. If we are unable to develop enhancements to our
technology and rapidly deploy new product offerings, our business, financial condition and results
of operations will suffer.
Our manufacturing capacity may limit our ability to sell our products.
We are currently ramping up our capacity to meet our anticipated demand for our products.
Although we have significantly increased our manufacturing capacity and we believe that we have
sufficient plans in place to ensure we have adequate capacity to meet our business plan in 2006,
there are uncertainties inherent in expanding our manufacturing capabilities and we may not be able
to increase our capacity in a timely manner. For example, manufacturing and product quality issues
may arise as we increase production rates at our manufacturing facility and launch new products. As
a result, we may experience difficulties in meeting customer, collaborator and internal demand, in
which case we could lose customers or be required to delay new product introductions, and demand
for our products could decline. Additionally, in the past, we have experienced variations in
manufacturing conditions that have temporarily reduced production yields. Due to the intricate
nature of manufacturing products that contain DNA, we may encounter similar or previously unknown
manufacturing difficulties in the future that could significantly reduce production yields, impact
our ability to launch or
sell these products, or to produce them economically, prevent us from achieving expected
performance levels or cause us to set prices that hinder wide adoption by customers.
31
We have not yet achieved annual operating profitability and may not be able to do so.
We have incurred net losses each year since our inception. As of April 2, 2006, our
accumulated deficit was $144.7 million and we incurred a net loss of $0.1 million for the three
months ended April 2, 2006. We may not be profitable in 2006, due in part to the impact of SFAS No.
123R, which is expected to add additional expense of $12.0 million to $15.0 million in 2006. Our
ability to achieve annual profitability will depend, in part, on the rate of growth, if any, of our
revenue and on the level of our expenses. We expect to continue incurring significant expenses
related to research and development, sales and marketing efforts to commercialize our products and
the continued development of our manufacturing capabilities. In addition, we expect that our
selling and marketing expenses will increase at a higher rate in the future as a result of the
launch of new products. As a result, we expect that our operating expenses will increase
significantly as we grow and, consequently, we will need to generate significant additional revenue
to achieve and maintain profitability. Even if we maintain profitability, we may not be able to
increase profitability on a quarterly basis.
The growth and profitability of our oligo business depends on a third party.
In December 2004, we entered into a collaboration agreement with Invitrogen to sell and market
our oligos worldwide. Under the terms of the collaboration, Invitrogen is responsible for sales,
marketing and technical support, while we are responsible for the manufacture of the collaboration
products. As Invitrogen is solely responsible for the sales and marketing support of the
collaboration, our continued growth and profitability related to these products depends on the
extent to which Invitrogen is successful in penetrating the oligo market and selling the
collaboration products. If Invitrogen is not successful in selling the collaboration products, our
business, financial condition and results of operations may suffer.
We have a limited history of commercial sales of systems and consumable products, and our success
depends on our ability to develop commercially successful products and on market acceptance of our
new and relatively unproven technologies.
We may not possess all of the resources, capability and intellectual property necessary to
develop and commercialize all the products or services that may result from our technologies. Sales
of our genotyping and gene expression systems only began in 2003, and some of our other
technologies are in the early stages of commercialization or are still in development. You should
evaluate us in light of the uncertainties and complexities affecting similarly situated companies
developing tools for the life sciences and pharmaceutical industries. We must conduct a substantial
amount of additional research and development before some of our products will be ready for sale,
and we currently have fewer resources available for research and development activities than many
of our competitors. We may not be able to develop or launch new products in a
timely manner, or at all, or they may not meet customer requirements or be of sufficient
quality or at a price that enables us to compete effectively in the marketplace. Problems
frequently encountered in connection with the development or early commercialization of products
and services using new and relatively unproven technologies might limit our ability to develop and
successfully commercialize these products and services. In addition, we may need to enter into
agreements to obtain intellectual property necessary to commercialize some of our products or
services, which may not be available on favorable terms, or at all.
32
Historically, life sciences and pharmaceutical companies have analyzed genetic variation and
biological function using a variety of technologies. In order to be successful, our products must
meet the commercial requirements of the life sciences and pharmaceutical industries as tools for
the large-scale analysis of genetic variation and biological function.
Market acceptance will depend on many factors, including:
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our ability to demonstrate to potential customers the benefits and cost effectiveness
of our products and services relative to others available in the market; |
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the extent and effectiveness of our efforts to market, sell and distribute our
products; |
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our ability to manufacture products in sufficient quantities with acceptable quality
and reliability and at an acceptable cost; |
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the willingness and ability of customers to adopt new technologies requiring capital
investments; and |
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the extended time lag and sales expenses involved between the time a potential customer
is contacted on a possible sale of our products and services and the time the sale is
consummated or rejected by the customer. |
Any inability to adequately protect our proprietary technologies could harm our competitive
position.
Our success will depend in part on our ability to obtain patents and maintain adequate
protection of our intellectual property in the United States and other countries. If we do not
protect our intellectual property adequately, competitors may be able to use our technologies and
thereby erode our competitive advantage. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States, and many companies have
encountered significant problems in protecting their proprietary rights abroad. These problems can
be caused by the absence of rules and methods for defending intellectual property rights.
The patent positions of companies developing tools for the life sciences and pharmaceutical
industries, including our patent position, generally are uncertain and involve complex legal and
factual questions. We will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that our proprietary technologies are covered by valid and enforceable
patents or are effectively maintained as trade secrets. We intend to apply for patents covering our
technologies and products, as we deem appropriate. However, our patent applications may be
challenged and may not result in issued patents or may be invalidated or narrowed in scope after
they are issued. Questions as to inventorship may also arise. For example, a former employee
recently filed a complaint against us, claiming he is entitled to be named as joint inventor of
certain of our U.S. patents and pending U.S. and foreign patents and seeking a judgment that the
related patents and applications are unenforceable. Any finding that our patents and applications
are unenforceable could harm our ability to prevent others from practicing the related technology,
and a finding that others have inventorship rights to our patents and applications could require us
to obtain licenses to practice the technology, which may not be available on favorable terms, if at
all.
In addition, our existing patents and any future patents we obtain may not be sufficiently
broad to prevent others from practicing our technologies or from developing competing products.
There also is risk that others may independently develop similar or alternative technologies or
design around our patented technologies. Also, our patents may fail to provide us with any
competitive advantage. We may need to initiate additional lawsuits to protect or enforce our
patents, or litigate against third party claims, which would be expensive and, if we lose, may
cause us to lose some of our intellectual property rights and reduce our ability to compete in the
marketplace. Furthermore, these lawsuits may divert the attention of our management and technical
personnel.
We also rely upon trade secret protection for our confidential and proprietary information. We
have taken security measures to protect our proprietary information. These measures, however, may
not provide adequate protection for our trade secrets or other proprietary information. We seek to
protect our proprietary information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully protect our trade
secrets. In addition, others may independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to our trade secrets.
33
Our sales, marketing and technical support organization may limit our ability to sell our products.
We currently have fewer resources available for sales and marketing and technical support
services as compared to some of our primary competitors. In order to effectively commercialize our
genotyping and gene expression systems and other products to follow, we will need to expand our
sales, marketing and technical support staff both domestically and internationally. We may not be
successful in establishing or maintaining either a direct sales force or distribution arrangements
to market our products and services. In
addition, we compete primarily with much larger companies that have larger sales and
distribution staffs and a significant installed base of products in place, and the efforts from a
limited sales and marketing force may not be sufficient to build the market acceptance of our
products required to support continued growth of our business.
If we are unable to develop and maintain operation of our manufacturing capability, we may not be
able to launch or support our products in a timely manner, or at all.
We currently possess only one facility capable of manufacturing our products and services for
both sale to our customers and internal use. If a natural disaster were to significantly damage our
facility or if other events were to cause our operations to fail, these events could prevent us
from developing and manufacturing our products and services. Also, many of our manufacturing
processes are automated and are controlled by our custom-designed Laboratory Information Management
System (LIMS). Additionally, as part of the decoding step in our array manufacturing process, we
record several images of each array to identify what bead is in each location on the array and to
validate each bead in the array. This requires significant network and storage infrastructure. If
either our LIMS system or our networks or storage infrastructure were to fail for an extended
period of time, it would adversely impact our ability to manufacture our products on a timely basis
and may prevent us from achieving our expected shipments in any given period.
If we are unable to find third-party manufacturers to manufacture components of our products, we
may not be able to launch or support our products in a timely manner, or at all.
The nature of our products requires customized components that currently are available from a
limited number of sources. For example, we currently obtain the fiber optic bundles and BeadChip
slides included in our products from single vendors. If we are unable to secure a sufficient supply
of those or other product components, we will be unable to meet demand for our products. We may
need to enter into contractual relationships with manufacturers for commercial-scale production of
some of our products, or develop these capabilities internally, and we cannot assure you that we
will be able to do this on a timely basis, for sufficient quantities or on commercially reasonable
terms. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing
at commercially reasonable costs.
We may encounter difficulties in integrating recently completed or future acquisitions that could
adversely affect our business.
In April 2005, we acquired CyVera Corporation and may in the future acquire technology,
products or businesses related to our current or future business. We have limited experience in
acquisition activities and may have to devote substantial time and resources in order to complete
acquisitions. Further, these potential acquisitions entail risks, uncertainties and potential
disruptions to our business. For example, we may not be able to successfully integrate a companys
operations, technologies, products and
services, information systems and personnel into our business. An acquisition may further
strain our existing financial and managerial resources, and divert managements attention away from
our other business concerns. In connection with the CyVera acquisition, we assumed certain
liabilities and hired certain employees of CyVera, which is expected to continue to result in an
increase in our research and development expenses and capital expenditures. There may also be
unanticipated costs and liabilities associated with an acquisition that could adversely affect our
operating results.
We may encounter difficulties in managing our growth. These difficulties could increase our losses.
We expect to experience rapid and substantial growth in order to achieve our operating plans,
which will place a strain on our human and capital resources. If we are unable to manage this
growth effectively, our losses could increase. Our ability to manage our operations and growth
effectively requires us to 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 scale up and implement improvements to our manufacturing
process and control systems in an efficient or timely manner, or if we encounter deficiencies in
existing systems and controls, then we will not be able to make available the products required to
successfully commercialize our technology. Failure to attract and retain sufficient numbers of
talented employees will further strain our human resources and could impede our growth.
34
We may need additional capital in the future. If additional capital is not available on acceptable
terms, we may have to curtail or cease operations.
Our future capital requirements will be substantial and will depend on many factors including
our ability to successfully market our genetic analysis systems and services, the need for capital
expenditures to support and expand our business, the progress and scope of our research and
development projects, the filing, prosecution and enforcement of patent claims, the outcome of our
legal proceedings with Affymetrix, the defense of any future litigation involving us and the need
to enter into collaborations with other companies or acquire other companies or technologies to
enhance or complement our product and service offerings. We anticipate that our current cash and
cash equivalents, revenue from sales and funding from grants will be sufficient to fund our
anticipated operating needs, barring unforeseen developments. However, this expectation is based
upon on our current operating plan, which may change as a result of many factors. Consequently, we
may need additional funding in the future. Our inability to raise capital would seriously harm our
business and product development efforts. In addition, we may choose to raise additional capital
due to market conditions or strategic considerations, such as an acquisition, even if we believe we
have sufficient funds for our current or future operating plans. To the extent that additional
capital is raised through the sale of equity, the issuance of these securities could result in
dilution to our stockholders.
We have no credit facility or committed sources of capital available as of April 2, 2006. To
the extent operating and capital resources are insufficient to meet future requirements, we will
have to raise additional funds to continue the development and commercialization of our
technologies. These funds may not be available on favorable terms, or at all. If adequate funds are
not available on attractive terms, we may be required to curtail operations significantly or to
obtain funds by entering into financing, supply or collaboration agreements on unattractive terms.
If we lose our key personnel or are unable to attract and retain additional personnel, we may be
unable to achieve our goals.
We are highly dependent on our management and scientific personnel, including Jay Flatley, our
president and chief executive officer, and John Stuelpnagel, our senior vice president and chief
operating officer. The loss of their services could adversely impact our ability to achieve our
business objectives. We will need to hire additional qualified personnel with expertise in
molecular biology, chemistry, biological information processing, sales, marketing and technical
support. We compete for qualified management and scientific personnel with other life science
companies, universities and research institutions, particularly those focusing on genomics.
Competition for these individuals, particularly in the San Diego area, is intense, and the turnover
rate can be high. Failure to attract and retain management and scientific personnel would prevent
us from pursuing collaborations or developing our products or technologies.
Our planned activities will require additional expertise in specific industries and areas
applicable to the products developed through our technologies, including the life sciences and
healthcare industries. Thus, we will need to add new personnel, including management, and develop
the expertise of existing management. The failure to do so could impair the growth of our business.
A significant portion of our sales are to international customers.
Approximately 47% and 64% of our revenue for the three months ended April 2, 2006 and April 3,
2005, respectively, was derived from customers outside the United States. We intend to continue to
expand our international presence and export sales to international customers and we expect the
total amount of non-U.S. sales to continue to grow. Export sales entail a variety of risks,
including:
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currency exchange fluctuations; |
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unexpected changes in legislative or regulatory requirements of foreign countries into
which we import our products; |
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difficulties in obtaining export licenses or other trade barriers and restrictions
resulting in delivery delays; and |
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significant taxes or other burdens of complying with a variety of foreign laws. |
35
In addition, sales to international customers typically result in longer payment cycles and
greater difficulty in accounts receivable collection. We are also subject to general geopolitical
risks, such as political, social and economic instability and changes in diplomatic and trade
relations. One or more of these factors could have a material adverse effect on our business,
financial condition and operating results.
Our success depends upon the continued emergence and growth of markets for analysis of genetic
variation and biological function.
We design our products primarily for applications in the life sciences and pharmaceutical
industries. The usefulness of our technology depends in part upon the availability of genetic data
and its usefulness in identifying or treating disease. We are initially focusing on markets for
analysis of genetic variation and biological function, namely SNP genotyping and gene expression
profiling. Both of these markets are new and emerging, and they may not develop as quickly as we
anticipate, or reach their full potential. Other methods of analysis of genetic variation and
biological function may emerge and displace the methods we are developing. Also, researchers may
not seek or be able to convert raw genetic data into medically valuable information through the
analysis of genetic variation and function. In addition, factors affecting research and development
spending generally, such as changes in the regulatory environment affecting life sciences and
pharmaceutical companies, and changes in government programs that provide funding to companies and
research institutions, could harm our business. If useful genetic data is not available or if our
target markets do not develop in a timely manner, demand for our products may grow at a slower rate
than we expect, and we may not be able to achieve or sustain profitability.
We expect that our results of operations will fluctuate. This fluctuation could cause our stock
price to decline.
Our revenue is subject to fluctuations due to the timing of sales of high-value products and
services projects, the impact of seasonal spending patterns, the timing and size of research
projects our customers perform, changes in overall spending levels in the life sciences industry,
the timing and amount of government grant funding programs and other unpredictable factors that may
affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of
sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue
resulting in the potential for a sequential decline in quarterly revenue. A large portion of our
expenses are relatively fixed, including expenses for facilities, equipment and personnel. In
addition, we expect operating expenses to continue to increase significantly. Accordingly, if
revenue does not grow as anticipated, we may not be able to achieve and maintain profitability. Any
significant delays in the commercial launch of our products, unfavorable sales trends in our
existing product lines, or impacts from the other factors mentioned above, could adversely affect
our revenue growth in 2006 or cause a sequential decline in quarterly revenues. Due to the
possibility of fluctuations in our revenue and expenses, we believe that quarterly comparisons of
our operating results are not a good indication of our future
performance. If our operating results fluctuate or do not meet the expectations of stock
market analysts and investors, our stock price probably would decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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Exhibit Number |
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Description of Document |
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10.31
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Secured Convertible Debenture
Indenture between Genizon
BioSciences Inc., Computershare Trust Company of Canada and Illumina, Inc., dated March 24, 2006. |
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31.1
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Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Christian O. Henry pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
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32.1
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Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of Christian O. Henry pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
37
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.
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Illumina, Inc.
(Registrant)
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Date: May 8, 2006
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/s/ Christian O. Henry
Christian O. Henry
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Vice President and Chief Financial Officer |
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38