PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CEPHEID
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
March 31, December 31,
2003 2002 (1)
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 13,250 $ 14,505
Restricted cash ..................................... 2,326 2,296
Accounts receivable ................................. 3,112 3,044
Inventory ........................................... 3,961 3,850
Prepaid expenses and other current assets ........... 781 352
------------ -------------
Total current assets .............................. 23,430 24,047
Property and equipment, net ............................ 6,248 6,144
------------ -------------
Total assets ...................................... $ 29,678 $ 30,191
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 2,024 $ 2,367
Accrued compensation ................................ 1,507 1,171
Other accrued liabilities ........................... 1,782 2,092
Current portion of equipment financing .............. 1,312 1,423
Current portion of bank loan payable................. 33 32
------------ -------------
Total current liabilities ......................... 6,658 7,085
Equipment financing, less current portion .............. 1,323 1,629
Bank loan payable, less current portion................. 366 364
Deferred rent, less current portion .................... 398 355
Commitments
Shareholders' equity:
Common stock ........................................ 80,709 75,928
Additional paid-in capital .......................... 7,488 7,505
Deferred stock-based compensation ................... (16) (103)
Accumulated foreign exchange translation adjustment.. 16 4
Accumulated deficit ................................. (67,264) (62,576)
------------ -------------
Total shareholders' equity ........................ 20,933 20,758
------------ -------------
Total liabilities and shareholders' equity ........ $ 29,678 $ 30,191
============ =============
(1) The balance sheet at December 31, 2002 has been
derived from the audited financial statements at the date which are
included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
See accompanying notes to Condensed Consolidated Fianancial Statements.
CEPHEID
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Revenues:
Instrument sales ............................. $ 2,794 $ 2,175
Reagents and disposables sales ............... 340 126
--------- ---------
Total product sales........................ 3,134 2,301
License and royalty revenue .................. 32 66
Contract revenue ............................. 613 --
--------- ---------
Total revenues ............................... 3,779 2,367
--------- ---------
Operating costs and expenses:
Cost of product sales ........................ 1,808 1,609
Research and development...................... 3,827 4,001
Selling, general and administrative........... 2,796 1,775
--------- ---------
Total operating costs
and expenses ................................ 8,431 7,385
--------- ---------
Loss from operations ......................... (4,652) (5,018)
Interest (expense) income, net ............... (36) 48
--------- ---------
Net loss ..................................... (4,688) (4,970)
========= =========
Net loss per share, basic and diluted......... $ (0.15) $ (0.19)
========= =========
Shares used in computing net loss per share,
basic and diluted ........................... 31,393 26,346
========= =========
See accompanying notes to Condensed Consolidated Financial Statements.
CEPHEID
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net loss ................................................ $ (4,688) $ (4,970)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................... 510 581
Amortization of deferred stock-based compensation ... 82 229
Amortization of deferred rent ....................... 43 (7)
Changes in operating assets and liabilities:
Accounts receivable .............................. (68) 803
Inventory ........................................ (111) 372
Prepaid expenses and other assets ................ (429) (346)
Accounts payable and other current liabilities ... (653) (251)
Accrued compensation ............................. 337 577
--------- ---------
Net cash used in operating activities ................... (4,977) (3,012)
--------- ---------
INVESTING ACTIVITY:
Capital expenditures .................................... (615) (1,075)
Restricted cash.......................................... (30) --
Proceeds from maturities of marketable securities ....... -- 8,775
--------- ---------
Net cash (used in) provided by investing activities ..... (645) 7,700
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from the sale of common shares ............. 4,781 11
Principal payments under loan arrangements .............. (414) (279)
--------- ---------
Net cash (used in) provided by financing activities ..... 4,367 (268)
--------- ---------
Net (decrease) increase in cash and cash equivalents .... (1,255) 4,420
Cash and cash equivalents at beginning of period ........ 14,505 15,905
--------- ---------
Cash and cash equivalents at end of period .............. $ 13,250 $ 20,325
========= =========
See accompanying notes to Condensed Consolidated Financial Statements.
CEPHEID
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Cepheid (the "Company") was incorporated in the State of
California on March 4, 1996. The Company develops, manufactures, and markets
fully-integrated systems that enable sophisticated genetic and DNA analysis of
patients and organisms by automating complex manual laboratory procedures.
The accompanying unaudited condensed consolidated financial
statements have been prepared by management in accordance with generally
accepted accounting principles in the United States ("GAAP") for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include certain
information and footnotes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (consisting only of normal
recurring entries) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003 or for any other future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 2002 filed with the Securities and Exchange
Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements of the
Company include the accounts of the Company and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the condensed consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.
Revenue Recognition
The Company recognizes revenue from product sales when goods
are shipped, there is persuasive evidence that an arrangement exists, delivery
has occurred, the price is fixed and determinable and collectibility is
reasonably assured. No rights of return exist for the Company's products except
in the case of damaged goods.
Contract revenues related to research and development
agreements and government grants are recognized as the related services are
performed based on the performance requirements of the relevant contract. Non-
refundable contract fees for which no further performance obligations exist,
where there is no continuing involvement required of the Company, are recognized
on the earlier of the date the payments are received or when collection is
reasonably assured. Under research and development agreements, the Company is
required to perform specific research and development activities and is
reimbursed based on the costs associated with each specific contract over the
term of the agreement. Milestone related revenues are recognized upon the
achievement of the specified milestone when the related milestone was at risk at
the inception of the arrangement and milestone related obligations are
fulfilled. Deferred revenue is recorded when funds are received in advance of
services to be performed.
Warranty Accrual
The Company warrants its products from defects for a period of 12 months
from the date of sale for material and labor costs to repair the product.
Accordingly, a provision for the estimated cost of the warranty is recorded at
the time revenue is recognized. The Company's warranty accrual is
established using management's estimate for future costs of providing customers
with a calibration as well as the cost of repairing any instrument failures
during the one-year warranty period. The Company's accrued warranty liability
for the quarter ended March 31, 2003 and 2002 was $0.5 million and $0.2 million,
respectively. The activity in the warranty accrual for the quarter ended March
31, 2003 consisted of the following (in thousands):
Balance at 12/31/02 $ 634
Cost incurred & charged against reserve (179)
Provision for warranty 56
---------
Balance at 3/31/03 $ 511
=========
Inventory
Inventory is stated at the lower of standard cost (which
approximates actual cost) or market, with cost determined on the
first-in-first-out ("FIFO") method.
The Company maintains a reserve for inventory obsolescence.
This reserve is established using management's estimate of the potential future
obsolescence of inventory.
Comprehensive (Income) Loss
Comprehensive loss includes net loss as well as other
comprehensive loss. Other comprehensive loss consists of net unrealized gains
and losses on available-for-sale marketable securities. Total accumulated other
comprehensive loss is presented as a separate component of shareholders' equity
in the accompanying Condensed Consolidated Balance Sheets. Comprehensive loss
equaled net loss for the quarters ended March 31, 2003 and 2002.
Stock-Based Compensation
Pro forma net loss and net loss per share has been
determined as if the Company had accounted for its employee stock options
granted using the fair value method of SFAS 123. The fair value of these
options was estimated at the date of grant using the Black-Scholes option
pricing model, with the following weighted-average assumptions: risk free
interest rates of 2.91% and 4% for grants in the three months ended March 31,
2003 and 2002, respectively; a weighted average expected life of five years; and
a dividend yield of zero. The weighted average fair value of options granted
during the three months ended March 31, 2003 and 2002 was $4.49 and $3.17,
respectively. The expected volatility of the Company's common stock used in the
pricing model was 1.3 and 1.4 for the three months ended March 31, 2003 and
2002, respectively.
For purposes of disclosure pursuant to FAS 123 as amended by
FAS 148, the estimated fair value of options is amortized to expense over the
options' vesting period. The following table illustrates the effect on net loss
per share as if we had applied the fair value recognition provision of FAS 123
to stock based employee compensation (in thousands, except per share data):
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Net loss as reported ................................... $ (4,688) $ (4,970)
Deduct: Total stock-based employee compensation
determined under the fair value method for all
awards, net of tax related effects....................... (692) (479)
Add: Amortization of deferred stock based compensation... 82 229
--------- ---------
Pro forma net loss....................................... (5,298) (5,220)
Basic and diluted net loss per share:
As reported........................................... $ (0.15) $ (0.19)
Pro forma............................................. $ (0.17) $ (0.20)
3. SIGNIFICANT CONCENTRATIONS
The Company distributes its products through its direct
sales force and through third-party distributors. For the three-month period
ended March 31, 2003, product sales through distributors represented 60% of
total product sales (consisting of sales of instruments, reagents and
disposables). The Company's distributors in the United States, the Far East and
Europe accounted for 35%, 13%, and 12%, respectively, of total product sales for
the quarter ended March 31, 2003. For the same quarter of the previous year,
distributors in the United States, the Far East, and Europe accounted for 58%,
19% and 0%, respectively, of total product sales. There were no direct
customers that represented greater than 10% of total product sales for the three
months ended March 31, 2003 or the corresponding period of the prior year.
The Company relies on several companies as its sole source
for various materials used in its manufacturing process. Any extended
interruption in the supply of these materials could result in the failure to
meet customer demand.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash equivalent debt
securities.
4. NET LOSS PER COMMON SHARE
Basic net loss per common share has been calculated based
on the weighted-average number of common shares outstanding during the period,
less shares subject to the Company's right of repurchase. Common stock
equivalents consisting of stock options and warrants (calculated using the
treasury stock method) have been excluded from the computation of diluted net
loss per share, as their inclusion would be antidilutive.
The following table presents the calculation of basic and
diluted net loss per share (in thousands, except per share data):
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Net loss ............................................... $ (4,688) $ (4,970)
========= =========
Basic and diluted:
Weighted-average shares of common stock outstanding ..... 31,446 26,658
Less: weighted-average shares subject to repurchase ..... (53) (312)
--------- ---------
Shares used in computing basic and diluted net
loss per share ....................................... 31,393 26,346
========= =========
Basic and diluted net loss per share ................... $ (0.15) $ (0.19)
========= =========
5. INVENTORY
Inventory is stated at the lower of standard cost (which
approximates actual cost) or market, with cost determined on the
first-in-first-out ("FIFO") method. The Company maintains a reserve for inventory
obsolescence. This reserve is established using management's estimate of the
potential future obsolescence of inventory.
The components of inventories (in thousands) are as follows:
March 31, December 31,
2003 2002
------------ -------------
Raw materials .................................... $ 1,982 $ 2,361
Work in process .................................. 1,117 988
Finished goods ................................... 862 501
------------ -------------
$ 3,961 $ 3,850
============ =============
6. COMMON STOCK OFFERING
On March 4, 2003, the Company completed the sale of
1,360,000 shares of common stock at price of $3.69 per share. The shares were
sold pursuant to an existing shelf registration statement. The offering
resulted in net proceeds to the Company of approximately $4.7 million, net of
issuance costs of approximately $0.3 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Form 10-Q, including without limitation the
information under the captions entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain or refer to
forward-looking statements within the meaning of the federal securities laws. We also
may provide oral or written forward-looking statements in other materials we
release to the public from time to time. Statements that are not statements of
historical fact are forward-looking statements. They are based on current
expectations. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "anticipate," "believe,"
"estimate," "predict," "intend," "potential" or "continue" or the negative of
these terms or other comparable terminology. Forward-looking statements involve
risks and uncertainties that could cause actual results and the timing of events
to differ materially from those anticipated in our forward-looking statements.
These risks and uncertainties include the impact of the factors set forth under
"Factors That Might Affect Future Results." We assume no obligation
to update any of the forward-looking statements after the date of this report or
to conform these forward-looking statements to actual results.
OVERVIEW
We develop, manufacture, and market fully-integrated
systems that enable sophisticated genetic and DNA analysis of patients and
organisms by automating complex manual laboratory procedures. Based on
state-of-the-art microfluidic and microelectronic technologies, our easy-to-use
systems analyze complex biological samples in disposable cartridges designed to
rapidly and automatically perform all of the steps associated with sophisticated
molecular biological procedures. We are focusing our efforts on those
applications where rapid genetic and DNA testing is particularly important, such
as the infectious disease, biothreat and cancer testing markets. In particular,
we have designed our systems to be capable of use in genetic management of
disease, performing a broad range of genetic tests that include identifying
infectious organisms, evaluating at-risk populations for the early detection of
disease such as cancer, determining the stage of the disease and assessing what
might be the most effective therapy. We have also designed our systems to
rapidly detect food, air and water contaminants through genetic identification
of disease causing agents. We are collaborating with strategic partners to
co-develop assays, or biological tests, and to provide marketing and sales support
across a broad range of markets.
We commenced commercial sales of our first product, the Smart
Cycler, in May 2000. The Smart Cycler is a DNA amplification and detection
system initially directed at the life sciences research market. We began
shipping the Smart Cycler II, which features various enhancements to the Smart
Cycler, in November 2002. We believe our Smart Cycler products allow users to
analyze biological samples faster and more efficiently than any other product
currently available.
Our GeneXpert system, currently in the final stages of
development, integrates automated sample preparation with our Smart Cycler
amplification and detection technology.
Following clinical trials and
FDA approval, we anticipate commercial launch of the GeneXpert system to the
clinical genetic assessment market in early 2005. We believe that the GeneXpert
system is the only genetic analysis system that integrates automated sample
preparation with genetic analysis, while also offering customers a complete
testing system comprised of both instrumentation and disposable cartridges
containing all necessary reagents for a particular test.
SIGNIFICANT ACCOUNTING POLICIES AND MANAGEMENT
JUDGMENTS
We consider certain accounting policies related to
revenue recognition, the inventory reserve, and warranty accrual to be critical
accounting policies. Inherent in our determination of when to recognize
revenue, and in our calculation of our inventory reserve and warranty accrual
are a number of estimates, assumptions and judgments. These estimates,
assumptions and judgments include deciding whether the elements required to
recognize revenue from a particular arrangement are present and estimating the
amount of inventory obsolescence and warranty costs associated with shipped
products.
Revenue Recognition. We recognize revenue from
product sales when goods are shipped, when there is persuasive evidence that an
arrangement exists, delivery has occurred, the price is fixed and determinable
and collectibility is reasonably assured. No right of return exists for our
products with the exception of damaged goods. We have not experienced any
significant returns of our products. Contract revenues related to research and
development agreements and government grants are recognized as the related
services are performed based on the performance requirements of the relevant
contract. Non-refundable contract fees for which no further performance
obligations exist, where there is no continuing involvement required of us are
recognized on the earlier of the date the payments are received or when
collection is reasonably assured. Under research and development agreements, we
are required to perform specific research and development activities and are
reimbursed based on the costs associated with each specific contract over the
term of the agreement. Milestone related revenues are recognized upon the
achievement of the specified milestone when the related milestone was at risk at
the inception of the arrangement and milestone related obligations are
fulfilled. Deferred revenue is recorded when funds are received in advance of
services to be performed. Determining whether the elements required for us to
recognize revenue are present (including, for example, determining whether there
is sufficient evidence that an arrangement existing, the collectibility of
billings and whether contractual performance obligations and milestones have
been met) requires us to make estimates, assumptions and judgments that affect
our operating results.
Inventory Reserve and Warranty Accrual. We maintain
reserves for inventory obsolescence and warranty costs that we believe are
reasonable and that are based on our historical experience and current
expectations for future performance of operations. The inventory reserve is
established using management's estimate of the potential future obsolescence of
inventory. A substantial decrease in demand for our product could lead to
excess inventories and could require us to increase our reserve for inventory
obsolescence.
Our warranty accrual is established using management's
estimate for the future costs of providing customers with a calibration as well
as the cost of repairing any instrument failures during the one-year warranty
period. A significant change in failure rates of our Smart Cycler system could
lead to increased warranty costs and could require us to increase our warranty
reserve. If such adverse conditions were to occur, we cannot readily predict
what effect on our financial condition or results of operations would result, as
any such effect would depend on both future results of operations and the
magnitude and timing of the adverse conditions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH
31, 2002
REVENUES
We derive our revenues principally from sales of our
Smart Cycler system and associated reagents and disposable reaction tubes and,
to a lesser extent, from contractual payments for services rendered in research
and development arrangements. Total revenues for the three-month period ended
March 31, 2003 were $3.8 million an increase of $1.4 million or 60% over the
corresponding prior year period. The increase in total revenues for the
three-month period ended March 31, 2003 as compared to corresponding prior year
period, was due to an overall increase in product sales and grant and government
sponsored research revenue. The increase in product sales resulted primarily
from the growth of sales of our Smart Cycler system, particularly in Europe.
The increase in product sales in Europe was due primarily to the establishment
of several new distributors in this region with our wholly owned French
subsidiary, Cepheid SA. For the three-month period ended March 31, 2003,
product sales through distributors represented 60%, of total product sales
(including instruments, reagents, and disposables). There were no direct
customers that represented greater than 10% of product sales for the three
months ended March 31, 2003, or for the corresponding periods of the prior year.
For the three-month period ended March 31, 2003, products sales in North
America, Europe, and Far East represented 68%, 19%, and 13%, respectively, of
total product sales as compared to 76%, 0%, and 24%, respectively for the
corresponding period of 2002. We expect that the percentage of sales
contributed by each of the three geographical areas in the first quarter of 2003
will remain relatively constant for the remainder of 2003.
Contract revenues for the three-month period ended March 31, 2003 were $0.6
million. There were no such revenues recognized in the corresponding prior year
period. Our contract revenues were derived principally from our research and
development contract with the United States Military Institute for Infectious
Disease ("USAMRIID"). We do not expect to experience a continued
increase in quarterly contract revenue in the remainder of 2003 as we continue
to focus on increasing our product marketing efforts and shifting our business
away from research and development
COST OF PRODUCT SALES
Cost of product sales consists of raw materials,
direct labor, manufacturing overhead, facility and warranty costs. Cost of
product sales for the three-month period ended March 31, 2003 was $1.8 million
an increase of $0.2 million or 12% over the corresponding prior year period. The
increase in absolute dollars of cost of product sales for the three-month period
ended March 31, 2003 as compared to the corresponding prior year period was
primarily due to the increase in product sales. The product gross margin
percentage for the three- month period ended March 31, 2003 was 42%. For the
corresponding prior year period, the product gross margin percentage was 30%.
The increase in product gross margin percentage for the three-month period ended
March 31, 2003, as compared to the corresponding prior year period, was due
primarily to improved product pricing and increased manufacturing economies of
scale. We expect quarterly gross margin percentage to remain essentially
unchanged from our first quarter of 2003 for the remainder of 2003.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist of
salaries, deferred stock compensation, research and development materials and
facility costs, and legal expenses for intellectual property protection and
regulatory matters. Research and development expense for the three-month period
ended March 31, 2003 was $3.8 million, a decrease of $0.2 million or 4% from the
corresponding prior year period. This decrease resulted from a $0.2 million
decrease in wages and other personnel-related expenses, a $0.1 million decrease
in outside engineering and consulting costs, and a $0.1 million decrease in
non-cash deferred stock compensation, partially offset by a $0.2 million increase in
costs for research and development supplies. We expect that our quarterly
research and development expenses will increase slightly in the remaining
quarters of 2003 as we further our product development efforts, particularly
with respect to developing additional assays for the Smart Cycler and GeneXpert
systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist
of salaries, deferred stock compensation, severance costs, accounting and other
professional fees, facilities costs, and human resource expenses. Selling,
general and administrative expense for the three-month period ended March 31,
2003 was $2.8 million, an increase of $1.1 million or 59% over the corresponding
prior year periods. The increase for the three month period ended March 31,
2003, as compared to the corresponding prior year period was due to a $0.5
million increase in salaries and personnel-related expenses resulting primarily
from increased sales and marketing and executive headcount, and included a $0.1
million increase in travel costs due primarily to the increase in our sales
force and the establishment of our French subsidiary, a $0.2 million increase in
legal costs, a $0.1 million increase in advertising and public relation costs, a
$0.1 million increase in consulting costs, and a $0.1 million increase in
insurance and occupancy costs. We expect that our quarterly selling general
and administrative costs will increase slightly in the remaining quarters of
2003 as we continue to make additional investments in sales and marketing.
INTEREST EXPENSE, NET
Interest expense, net for the three month period
ended March 31, 2003 was $36,000 a decrease of $84,000 or 175% from the
corresponding prior year period's net interest income. The decrease for the
three months ended March 31, 2003, as compared to the corresponding prior year
period was due to a decrease in cash balance as well as decreased investment
yield due to lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had $15.6 million in cash,
cash equivalents, short-term investments, and restricted cash as compared to
$16.8 million as of December 31, 2002. Net cash used for operating activities
was $5.0 million for the three months ended March 31, 2003 as compared to $3.0
million for the corresponding prior year period. The $2.0 million increase in
net cash used in operating activities for the three months ended March 31, 2003
as compared to the corresponding prior year period included a $2.1 million
increased investment in working capital including accounts receivable,
inventory, and prepaid assets, and a $0.1 million decrease in non-cash deferred
stock compensation, partially offset by a $0.2 million decease in net loss.
Through March 31, 2003, we had received net proceeds of $80.8
million from sales of common and convertible preferred stock since inception,
including our initial public offering and recent offerings pursuant to our shelf
registration statement. In addition through March 31, 2003, we had financed
equipment, land and building purchases and leasehold improvements totaling
approximately $6.7 million. As of March 31, 2003, we had $2.6 million in
equipment financing obligations under an equipment financing agreement.
These obligations are secured by the financed equipment, bear interest at a
weighted average fixed rate of 8.63% and are due in monthly installments through
September 2005. Under the equipment financing agreement, a balloon
payment is due at the end of each individual lease term for an item of
equipment. As additional security for our obligations under
this agreement, we provided a letter of credit in the amount of $1.1 million to
the creditor in October 2002. We are not currently able to draw down additional
funding under the agreement.
In December 2002, we purchased land and a building for
approximately $0.4 million for our newly formed subsidiary in France. We
financed the purchase with a ten-year mortgage loan, which bears interest at
4.75% per year and is fully secured by the land and building. Additionally, the
loan is guaranteed by us through a standby letter of credit in the amount of
$0.5 million. The collateral for this standby letter of credit is classified as
a component of restricted cash at March 31, 2003.
Net cash used in investing activities for the three months
ended March 31, 2003 consisted of $0.6 million in capital expenditures for
property and equipment, while net cash provided by investing activities for the
three months ended March 31, 2002 consisted of proceeds from maturities of
marketable securities of $8.8 million, offset by capital expenditures of $1.1
million. The decrease in capital expenditures for the three months ended March
31, 2003, as compared to the corresponding prior year period, was primarily the
result of capital expenditures made for leasehold improvements to our new
facility during the three months ended March 31, 2002. No such capital
expenditures were made during the three months ended March 31, 2003.
Net cash provided by financing activities for the three
months ended March 31, 2003 consisted primarily of proceeds from sales of common
stock partially offset by principal payments under the loan arrangements. For
the three months ended March 31, 2003, we received proceeds of $4.8 million from
sales of common stock, including net proceeds of of $4.7 million, from our March
2003 sale of 1,360,000 shares of our common stock pursuant to a shelf
registration statement and $0.1 million from stock option exercises and stock
purchases under our Employee Stock Purchase Plan, offset by repayments under
equipment financing arrangements of $0.4 million.
Our contractual obligations for the next five years, and
thereafter, are currently as follows (in thousands):
LESS
THAN 1 1-3 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS(1) YEAR YEARS YEARS YEARS TOTAL
- ------------------------------ --------- --------- --------- --------- ---------
Equipment and mortgage loans.. $ 1,681 $ 1,889 $ 100 $ 196 $ 3,866
Operating leases.............. 1,352 4,304 3,089 5,372 14,117
Research funding.............. 117 49 -- -- 166
Minimum royalty payments...... 260 844 620 3,031 4,755
--------- --------- --------- --------- ---------
Total contractual cash
obligations.............. $ 3,410 $ 7,086 $ 3,809 $ 8,599 $ 22,904
========= ========= ========= ========= =========
We expect to have negative cash flow from operations through
at least the end of 2003. We expect our cash use to average $1.5 million per
month for 2003. For the three month period ended March 31, 2003, total cash
used was $1.2 million, or $5.9 million after subtracting out the approximately
$4.7 million in net proceeds received from our March 2003 common stock offering.
We expect that our cash use will decline from the rate of cash used in the first
quarter of 2003 and will average $1.5 million per month for the twelve months
ended December 31, 2003. We anticipate that our existing capital resources will
enable us to maintain our currently planned levels of operations through the end
of 2003. This expectation is based on our current operating plan and may change
as a result of many factors, including our future capital requirements and our
ability to reduce expenses, which, in many instances, depend on a number of
factors outside our control. For example, our future cash use will depend on,
among other things, market acceptance of our products, the resources we devote
to developing and supporting our products, continued progress of our research
and development of potential products, the need to acquire licenses to new
technology or to use our technology in new markets, and the availability of
other financing. Consequently, we may need additional funding sooner than
anticipated. We currently have no credit facility or committed sources of
capital.
To the extent our capital resources are insufficient to meet
future capital requirements, we will need to raise additional capital or incur
indebtedness to fund our operations. In addition, we may choose to raise
additional capital due to market conditions or strategic considerations even if
we believe we have sufficient funds for our current or future operating plans.
In December 2001, we filed a shelf registration statement for the issuance of up
to $35 million in debt and/or equity securities. As of March 31, 2003, we had
approximately $19.4 million still available under this registration statement.
There can be no assurance that additional debt or equity financing will be
available on acceptable terms, if at all. If adequate funds are not available,
we may be required to delay, reduce the scope of, or eliminate our research and
development programs, reduce our commercialization effort or obtain funds
through arrangements with collaborative partners or others that my require us to
relinquish rights to technologies or products that we might otherwise seek to
develop or commercialize. To the extent that additional capital is raised
through the sale or equity or convertible debt securities, the issuance of these
securities could result in dilution to our shareholders. In addition, such
securities may be sold at a discount from the market price of our common stock,
and may include right preferences or privileges senior to our common stock.
FACTORS THAT MIGHT AFFECT FUTURE RESULTS
You should carefully consider the risks described
below, together with all of the other information included in this report, in
considering our business and prospects. The risks and uncertainties described
below are not the only ones facing Cepheid. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial also may impair
our business operations. The occurrence of any of the following risks could
harm our business, financial condition or results of operations.
Our participation in the U.S. Postal Service bio-threat detection program
evaluation and other similar programs may not result in contracts or
revenues.
We are part of a Northrop Grumman-led team being
evaluated by the U.S. Postal Service (USPS) to produce a DNA-based biothreat
detection system for installation in USPS mail sorting facilities. We cannot
state with certainty when this evaluation process will conclude, whether our
team will be awarded a production contract, whether such a contract would be
concluded on terms acceptable to all parties, or whether actual funding,
deployment and operating parameters, or product purchases, will be at currently
expected levels. The USPS biothreat detection system program, like many
governmental contracting programs, involves significant uncertainties in the
timing of decision-making and deployment and is highly sensitive to changes in
national and international priorities and budgets. In addition, if components
developed by us or our collaborators in the program fail to meet specifications,
the entire proposal could be rejected. In this and any similar future pilot
programs, there may be no obligation on the part of the eventual customer to buy
a minimum number of units or tests, so, even if we are awarded a production
contract, we may be subject to our customer's future spending patterns and
budgetary cycles. Accordingly, our participation in the USPS biothreat detection
system program and other similar programs are subject to a number of risks and
uncertainties and may never yield significant revenues.
If we cannot successfully commercialize our GeneXpert system, we may
never achieve profitability.
Our GeneXpert system is still in the development stage. We anticipate
that for the foreseeable future our ability to achieve profitability will depend
in part on the successful commercialization of GeneXpert. Many factors may
affect the market acceptance and commercial success of our GeneXpert system,
including:
- timely completion of the GeneXpert system for commercial sale;
- cost-effective commercial scale production of the GeneXpert system;
- the timing of market entry of our GeneXpert system relative to competitive
products;
- our ability to convince our potential customers of the advantages and
economic value of our GeneXpert systems over competing technologies and
products;
- the extent and success of our marketing and sales efforts, including our
ability to enter into successful collaborations with marketing partners;
and
- publicity concerning our GeneXpert system or any similar products.
We have not established the accuracy, reliability or ease of operation of the
GeneXpert system in commercial use. If the GeneXpert system does not gain
market acceptance, we will be unable to generate significant sales, which will
prevent us from achieving profitability. If the GeneXpert system is not
accepted in the marketplace, this could have a negative effect on our ability to
sell subsequent systems.
We may not achieve or maintain profitability and may be unable to
continue our operations.
We have experienced significant operating losses each year since our
inception and expect to have negative cash flow from operations through at least
the end of 2003. We experienced net losses of approximately $14.8 million in
2000, $15.5 million in 2001, $19.7 million in 2002 and $4.7 million for the
first three months of 2003. As of March 31, 2003, we had an accumulated deficit
of approximately $67.3 million. Our ability to become profitable will depend on
our revenue growth, which depends on a number of factors including market
acceptance of our products, the success of any pilot programs in which we are
participating, and global economic and political conditions, and on our expense
levels and product costs. Our expense levels and product costs are, in turn,
influenced by a number of factors, including the resources we devote to
developing and supporting our products, continued progress of our research and
development of potential products and the need to acquire licenses to new
technology or to use our technology in new markets and the potentially
significant ongoing royalty payments associated with these licenses. If we fail
to grow our revenue and manage our expenses and product costs, we may never
achieve profitability.
If we fail to raise additional capital, our ability to fund our
operations and advance our development programs would be impaired and our
business would be adversely affected.
We expect to have negative cash flow from operations
through at least the end of 2003. We expect our cash use to average $1.5
million per month for 2003. For the three month period ended March 31, 2003,
total cash used was $1.2 million, or $5.9 million after subtracting out the
approximately $4.7 million in net proceeds received from our March 2003 common
stock offering. We anticipate that our existing capital resources will enable
us to maintain our currently planned levels of operations through the end of
2003. This expectation is based on our current operating plan and may change as
a result of many factors, including our future capital requirements and our
ability to reduce expenses, which, in many instances, depend on a number of
factors outside our control. For example, our future cash use will depend on,
among other things, market acceptance of our products, the resources we devote
to developing and supporting our products, continued progress of our research
and development of potential products, the need to acquire licenses to new
technology or to use our technology in new markets, and the availability of
other financing. Consequently, we may need additional funding sooner than
anticipated. We currently have no credit facility or committed sources of
capital.
To the extent our capital resources are insufficient to meet future capital
requirements, we will need to raise additional capital or incur indebtedness to
fund our operations. In addition, we may choose to raise additional capital due
to market conditions or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans. In December 2001,
we filed a shelf registration statement for the issuance of up to $35 million in
debt and/or equity securities. As of March 31, 2003, we had approximately $19.4
million still available under this registration statement. There can no
assurance that additional debt or equity financing will be available on
acceptable terms, if at all. If adequate funds are not available, we may be
required to delay, reduce the scope of, or eliminate our research and
development programs, reduce our commercialization effort or obtain funds
through arrangements with collaborative partners or others that my require us to
relinquish rights to technologies or products that we might otherwise seek to
develop or commercialize. To the extent that additional capital is raised
through the sale or equity or convertible debt securities, the issuance of these
securities could result in dilution to our shareholders. In addition, such
securities may be sold at a discount from the market price of our common stock,
and may include right preferences or privileges senior to our common stock.
We may require licenses for new product features and products, and our
strategic plans and growth could be impaired if we are unable to obtain such
licenses.
We will need to introduce new products and product features in order
to market our products to a broader customer base. Our products typically
require licenses from third-party suppliers in order to be sold. Accordingly,
our introduction of new products and product features could require us to obtain
additional licenses. We may not be able to obtain such licenses on commercially
reasonable terms, if at all. Some of these licenses may include significant up
front and ongoing royalty payments. The failure to obtain necessary licenses or
other rights could have a material adverse effect on our anticipated strategies
and growth.
We will require licenses for certain reagents to produce a more
complete solution, and our business will suffer if we are unable to obtain such
licenses.
For certain markets, we intend to manufacture reagents for use with
our Smart Cycler and GeneXpert systems to offer a more complete solution for the
detection and analysis of DNA. However, we still will require licenses for many
reagents. We believe that manufacturing reagents for use in our Smart Cycler
and GeneXpert systems is important to our business and growth prospects. We may
not be able to obtain licenses for certain reagents on commercially reasonable
terms, if at all. Some of these licenses may include significant up front and
ongoing royalty payments. Some of our competitors have rights to reagents that
we have not yet obtained. Our failure to obtain similar rights would limit our
ability to offer a system that includes reagents and would adversely affect our
competitive position and our performance.
The regulatory approval process is expensive, time-consuming, and
uncertain and may prevent us from obtaining required approvals for the
commercialization of some of our products.
Some of our products, depending upon their intended use, will be
subject to approval or clearance by the FDA or foreign governmental entities
prior to their marketing for commercial use. Products, such as the Smart Cycler
and, when it is launched commercially, the GeneXpert system, when used for
clinical diagnostic purposes will require such approval. To date, we have only
received FDA approval for use of the group B streptococcus assay for Smart
Cycler that was developed through our collaboration with IDI. We have not
sought approval from the FDA or any other governmental body for other assays for
the Smart Cycler, and we have not received any such approvals. The process of
obtaining necessary FDA or foreign clearance or approvals can be lengthy,
expensive and uncertain. We generally expect to rely on our collaborators to
direct the regulatory approval process for our products. There are no
assurances that such collaborators will timely and diligently pursue such
process, or that they or we can obtain any required clearance or approval. Any
such failure, or any material delay in obtaining the clearance or approval,
could harm our business, financial condition and results of operations.
In addition, our failure or the failure of our collaborators to comply with
regulatory requirements applicable to our products could result in significant
sanctions, including:
- injunctions;
- recall or seizure of products;
- withdrawal of marketing clearances or approvals; and
- fines, civil penalties and criminal prosecutions.
If we fail to respond to changing technologies, demand for our products
and our ability to enhance our revenues will suffer.
If we do not continue to improve our products and develop new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and rapidly evolving customer requirements and
achieve market acceptance; we might be unable to attract new customers. The
development of proprietary technology and necessary service enhancements entails
significant technical and business risks and requires substantial expenditures
and lead-time. We may also need to modify our manufacturing processes with
respect to changes in product design or new product introductions. We might not
be successful in developing and marketing product enhancements and new products
that respond to technological advances and market changes, on a timely or cost-
effective basis. In addition, even if these products are developed and
released, they might not achieve market acceptance.
If our competitors and potential competitors develop superior products
and technologies our competitive position and results of operations would
suffer.
We face intense competition from a number of companies that offer
products in our targeted application areas. These competitors include:
- companies developing and marketing sequence detection systems for life
sciences research products;
- healthcare companies that manufacture laboratory-based tests and
analyzers;
- diagnostic and pharmaceutical companies;
- companies developing drug discovery technologies; and
- companies developing or offering biothreat detection technologies.
We also face competition from both established and development-stage
companies that continually enter these markets. Several companies are currently
making or developing products that may or will compete with our products. Our
competitors may succeed in developing, obtaining FDA approval for, or marketing
technologies or products that are more effective or commercially attractive than
our potential products, or that render our technologies and potential products
obsolete. As these companies develop their technologies, they may develop
proprietary positions that prevent us from successfully commercializing our
products.
We also need to compete effectively with companies developing their own
microfluidics technologies and products. Microfluidic technologies have
undergone and are expected to continue to undergo rapid and significant change.
Rapid technological development may result in our products or technologies
becoming obsolete. Products we offer could be made obsolete either by less
expensive or more effective products based on similar or other technologies.
Our future success will depend on our ability to establish and maintain a
competitive position in these and future technologies. We also compete against
universities and public and private research institutions. While these
organizations primarily have educational or basic research objectives, they may
develop proprietary technology and acquire patents that we need for the
development of our products. Licenses to this proprietary technology may not be
available to us on acceptable terms, if at all.
In many instances particularly in the clinical genetic assessment area, our
competitors have substantially greater financial, technical, research and other
resources, and larger, more established marketing, sales, distribution and
service organizations than we have. Moreover, these competitors may offer
broader product lines and tactical discounts and have greater name recognition.
If we fail to compete effectively against these and other competitors, we will
lose sales and our business will be harmed.
If our products do not perform as expected, or the reliability of the
technology on which our products are based is questioned, we could experience
lost revenue, delayed or reduced market acceptance of our products, increased
costs and damage to our reputation.
Our success depends on the market's confidence that we can provide
reliable, high quality genetic and DNA testing systems. We believe that
customers in the life sciences research, biothreat applications and genetic
management of disease markets are likely to be particularly sensitive to product
defects and errors. Our reputation and the public image of our products or
technologies may be impaired for any of the following reasons:
- failure of products to perform as expected;
- governmental, academic or industry concerns regarding the reliability or
efficacy of the polymerase chain reaction (PCR) technology on which our systems
are based;
- a perception that our products are difficult to use; or
- litigation concerning the performance of our products or our
technology.
Even after any underlying concerns or problems are resolved, any widespread
concerns regarding our technology or any manufacturing defects or performance
errors in our products could result in lost revenue, delay in market acceptance,
damage to our reputation, increased service and warranty costs, and claims
against us.
If product liability lawsuits are successfully brought against us, we
may face reduced demand for our products and incur significant liabilities.
We face an inherent business risk of exposure to product liability
claims if our technologies or systems are alleged to have caused harm. We
cannot be certain that we can successfully defend any product liability lawsuit
brought against us. Regardless of merit or eventual outcome, product liability
claims may result in:
- decreased demand for our products;
- injury to our reputation;
- costs of related litigation; and
- substantial monetary awards to plaintiffs.
If we are the subject of a successful product liability lawsuit that exceeds
the limits of any insurance coverage we may have, we may incur substantial
liabilities, which would adversely affect our earnings and financial condition.
The world geopolitical climate has created increased financial
expectations that may not materialize.
The world geopolitical climate in the wake of the September 11, 2001
terrorist attacks has created increased interest in biothreat detection systems.
However, we are uncertain what the long-term impact will be on our product
sales. To date, we have not generated significant revenues from the market for
biothreat detection systems. Even if our products are chosen as a part of the
solution for the biothreat detection systems for the USPS, it is unclear what
the level and how quickly funding may be made available. As a result, we may
not ever realize substantial revenues from the use of our products in biothreat
detection systems and, even if we do, the amount and timing of such revenues
would be subject to substantial uncertainty.
If we are unable to maintain our relationships with collaborative
partners, we may have difficulty selling our products and services.
We believe that our success in penetrating our target markets and in
bidding for certain kinds of contracts (such as the USPS pilot program) depends
in part on our ability to develop and maintain collaborative relationships with
key companies. However, our collaborative partners may not be able to perform
their obligations as expected or devote sufficient resources to the development,
supply or marketing of potential products developed under these collaborations.
Also, if a key collaborative partner fails to perform its obligations as
expected, including, for example, if it becomes insolvent or is acquired by
another company with which we have no relationship, we may not be able to
develop an adequate alternative in a timely manner.
Currently, our significant collaborative partners include:
- Infectio Diagnostics, Inc. in a joint venture to develop a line of assays
adapted to our systems;
- Smiths Detection which will market and sell products utilizing our I-CORE
and microfluidic sample preparation technology;
- Northrop Grumman Corp.'s Automation and Information Systems Division,
Sceptor Industries and Smiths Detection, with whom we will jointly install and
test bio-threat detection systems for the USPS;
- Applied Biosystems Group, in a collaboration to develop and sell reagents to
detect biothreat agents for use with our GeneXpert system and cartridges if our
products are used in the USPS biothreat detection system program; and
- Takara Bio, Inc. in a collaboration to manufacture and sell a line of
general use PCR enzyme reagents optimized for use on our products.
Relying on these or other collaborative relationships is risky to our future
success because, among other things:
- our collaborative partners may not devote sufficient resources to the
success of our collaboration;
- our collaborative partners may not obtain regulatory approvals necessary to
continue the collaborations in a timely manner;
- our collaborative partners may develop technologies or components
competitive with our products;
- components developed by collaborators could fail to meet specifications,
possibly causing us to lose potential projects and subjecting us to
liability;
- some agreements with our collaborative partners may terminate prematurely
due to disagreements or may result in litigation between the partners;
- our existing collaborations may preclude us from entering into additional
future arrangements; or
- we may not be able to negotiate future collaborative arrangements on
acceptable terms.
If we are unable to manufacture the GeneXpert system and reagents in
sufficient quantities and at acceptable costs, we may be unable to meet demand
for our products and our ability to generate revenue will be diminished.
We are in the process of launching our manufacturing process for our
GeneXpert system and reagents to support commercial sales. We have limited
manufacturing experience, and we cannot assure you that manufacturing or quality
control problems will not arise as we attempt to produce our GeneXpert systems
or reagents, or that we can scale-up manufacture and quality control in a timely
manner or at commercially reasonable costs. If we are unable to manufacture
GeneXpert systems or reagents consistently on a timely basis because of these or
other factors, our product sales will be negatively affected.
With the launch of a diagnostic product, our manufacturing facilities, where
we produce the Smart Cycler system and the GeneXpert system, cartridges and
reagents, will be subject to periodic regulatory inspections by the FDA and
other federal and state regulatory agencies. These facilities are subject to
Quality System Regulation, or QSR, requirements of the FDA. If we fail to
maintain our facilities in accordance with the QSR requirements, international
quality standards or other regulatory requirements, the manufacturing process
could be suspended or terminated, which would impair our business.
If our direct selling efforts for our products fail, our business
expansion plans could suffer and our ability to generate revenue will be
diminished.
We are utilizing a direct sales force to market our products in some
markets. We have a relatively small sales force compared to our competitors.
Failure to effectively promote and sell our products in these markets could have
a negative impact on their market acceptance. If our systems fail to penetrate
these expanding markets, this could have a negative effect on our ability to
sell subsequent systems and hinder the planned expansion of our business.
If we fail to effectively manage our modifications and planned
modifications to our distribution network, our sales could decline.
We are currently in the process of modifying our distribution
network, phasing in new distributors, changing our relationships with our
existing distributors and increasing our direct sales efforts. These
relationships are new and we cannot predict whether they will be successful.
Furthermore, we have limited experience and infrastructure for managing a larger
network of distributors. If we cannot effectively manage this new broader
network of distributors, our sales and marketing efforts in these geographic
areas would be adversely affected and our operating results could suffer.
If our distributor relationships are not successful, our ability to
market and sell our products in the life sciences research market would be
harmed and our financial performance will be adversely affected.
We are dependent on relationships with distributors for the marketing
and sales of our products in the life sciences research market in various
geographic regions and we have a limited ability to influence their efforts. For
the three-month period ended March 31, 2003, product sales through distributors
represented 60% of total product sales (consisting of sales of instruments,
reagents and disposables). The Company's distributors in the United States, the
Far East and Europe accounted for 35%, 13%, and 12%, respectively, of total
product sales for the quarter ended March 31, 2003. For the same quarter of the
previous year, distributors in the United States, the Far East, and Europe
accounted for 58%, 19% and 0%, respectively, of total product sales. Takara
Bio, Inc. is the exclusive distributor of Smart Cycler in the life sciences
research market in Japan, South Korea, China and Taiwan and we also rely on
various distributors for our sales of Smart Cycler in the European life sciences
research market. Relying on distributors for our sales and marketing in these
regions is risky to our future for various reasons, including:
- agreements with distributors may terminate prematurely due to disagreements
or may result in litigation between the partners;
- our distributors may not devote sufficient resources to the sale of
products;
- our distributors may be unsuccessful;
- our existing relationships with distributors may preclude us from entering
into additional future arrangements; and
- we may not be able to negotiate future distributor agreements on acceptable
terms.
We may be subject to third- party claims that we require additional
licenses for our products, and such claims could interfere with our
business.
Our industry is characterized by a large number of patents, claims of
which appear to overlap in many cases. As a result, there is a significant
amount of uncertainty regarding the extent of patent protection and
infringement. Obtaining licenses to relevant patents could be costly and could
materially harm our results of operations and future cash flows. Failing to
obtain a license could result in litigation, which may consume our resources and
lead to significant damages, royalty payments or an injunction on the sale of
our currently existing products. In addition, some of these licenses could
result in substantial additional royalties, which could adversely impact our
product costs and have an impact on our business.
If our products infringe on the intellectual property rights of others,
we could face costly litigation, which could cause us to pay substantial damages
and limit our ability to sell some or all of our products.
Our market success depends in part on us neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technologies and products. We are aware of
third-party patents that may relate to our technology. We plan to seek
licenses, as we deem appropriate; however, it is possible that we may
unintentionally infringe upon these patents or proprietary rights of third
parties. In response, third parties may assert infringement or other
intellectual property claims against us. We may consequently be subjected to
substantial damages for past infringement or be required to modify our products
if it is ultimately determined that our products infringe a third party's
proprietary rights. Further, we may be prohibited from selling our products
before we obtain a license, which, if available at all, may require us to pay
substantial royalties. Even if these claims are without merit, defending a
lawsuit takes significant time, may be expensive and may divert management
attention from other business concerns. Any public announcements related to
litigation or interference proceedings initiated or threatened against us could
cause our stock price to decline.
We may need to initiate lawsuits to protect or enforce our patents,
which would be expensive and, if we lose, may cause us to lose some, if not all,
of our intellectual property rights, and thereby impair our ability to
compete.
We rely on patents to protect a large part of our intellectual
property. To protect or enforce our patent rights, we may initiate patent
litigation against third parties, such as infringement suits or interference
proceedings. These lawsuits could be expensive, take significant time and
divert management's attention from other business concerns. They would also put
our patents at risk of being invalidated or interpreted narrowly and our patent
applications at risk of not issuing. We may also provoke these third parties to
assert claims against us. Patent law relating to the scope of claims in the
technology fields in which we operate is still evolving and, consequently,
patent positions in our industry are generally uncertain. We cannot assure you
that we would prevail in any of these suits or that the damages or other
remedies awarded, if any, would be commercially valuable. During the course of
these suits, there may be public announcements of the results of hearings,
motions and other interim proceedings or developments in the litigation. If
securities analysts or investors perceive any of these results to be negative,
it could cause our stock to decline.
If we fail to maintain and protect our intellectual property rights,
our competitors could use our technology to develop competing products and our
business will suffer.
Our competitive success will be affected in part by our continued
ability to obtain and maintain patent protection for our inventions,
technologies and discoveries, including intellectual property that we license.
Our pending patent applications may lack priority over others' applications or
may not result in the issuance of patents. Even if issued, our patents may not
be sufficiently broad to provide protection against competitors with similar
technologies and may be challenged, invalidated or circumvented.
In addition to patents, we rely on a combination of trade secrets, copyright
and trademark laws, nondisclosure agreements, licenses and other contractual
provisions and technical measures to maintain and develop our competitive
position with respect to intellectual property. Nevertheless, these measures
may not be adequate to safeguard the technology underlying our products. For
example, employees, consultants and others who participate in the development of
our products may breach their agreements with us regarding our intellectual
property and we may not have adequate remedies for the breach. We also may not
be able to effectively protect our intellectual property rights in some foreign
countries, as many countries do not offer the same level of legal protection for
intellectual property as the United States. Furthermore, for a variety of
reasons, we may decide not to file for patent, copyright or trademark protection
outside of the United States. Our trade secrets could become known through
other unforeseen means. Notwithstanding our efforts to protect our intellectual
property, our competitors may independently develop similar or alternative
technologies or products that are equal or superior to our technology. Our
competitors may also develop similar products without infringing on any of our
intellectual property rights or design around our proprietary technologies.
Our international operations and proposed expansion subject us to
additional risks and costs.
Our international operations are subject to a number of difficulties
and special costs, including:
- costs of customizing products for foreign countries;
- laws and business practices favoring local competitors;
- dependence on local vendors;
- uncertain regulation of electronic commerce;
- compliance with multiple, conflicting and changing governmental laws and
regulations;
- longer sales cycles;
- potential for exchange and currency risks;
- greater difficulty in collecting accounts receivable;
- import and export restrictions and tariffs;
- difficulties staffing and managing foreign operations;
- greater difficulties and expense in enforcing intellectual property
rights;
- business risks (including fluctuations in demand for our products and the
cost and effort to conduct international operations and travel abroad to promote
international distribution) associated with international military operations,
the global economic slowdown and the outbreak of Severe Acute Respiratory
Syndrome;
- multiple conflicting tax laws and regulations; and
- political and economic instability.
We intend to expand our international sales and marketing activities,
including through our European subsidiary, and enter into relationships with
additional international distribution partners. We are in the early stages of
developing our indirect distribution channels in markets outside the United
States. We may not be able to attract distribution partners that will be able
to market our products effectively.
Our international operations could also increase our exposure to
international laws and regulations. If we cannot comply with foreign laws and
regulations, which are often complex and subject to variation and unexpected
changes, we could incur unexpected costs and potential litigation. For example,
the governments of foreign countries might attempt to regulate our products and
services or levy sales or other taxes relating to our activities. In addition,
foreign countries may impose tariffs, duties, price controls or other
restrictions on foreign currencies or trade barriers, any of which could make it
more difficult for us to conduct our business.
The nature of our products may also subject us to export control regulation
by the U.S. Department of State and the Department of Commerce. Violations of
these regulations can result in monetary penalties and denial of export
privileges.
If our single source suppliers fail to deliver key product components
in a timely manner, our manufacturing ability would be impaired and our product
sales could suffer.
We depend on long term delivery contracts with several single source
suppliers that supply components used in the manufacture of the Smart Cycler,
the GeneXpert system, disposable reaction tubes, and cartridges. If we need
alternative sources for key component parts for any reason, such component parts
may not be immediately available. If alternative suppliers are not immediately
available, we will have to identify and qualify alternative suppliers, and
production of such components may be delayed. We may not be able to find an
adequate alternative supplier in a reasonable time period, or on commercially
acceptable terms, if at all. Our inability to obtain a key source supplier for
the manufacture of our potential products may force us to curtail or cease
operations.
We expect that our operating results will fluctuate significantly, and
any failure to meet financial expectations may disappoint securities analysts or
investors and result in a decline in our stock price.
We expect that our quarterly operating results will fluctuate in the
future as a result of many factors, some of which are outside of our control.
Because our revenue and operating results are difficult to predict, we believe
that period-to-period comparisons of our results of operations are not a good
indication of our future performance. We expect our gross profit to fluctuate
depending upon the timing of introduction and acceptance of our products. In
addition, our operating results may be affected by the inability of some of our
customers to consummate anticipated purchases of our products, whether due to
changes in internal priorities or, in the case of governmental customers,
problems with the appropriations process. It is possible that in some future
quarter or quarters our operating results will be below the expectations of
securities analysts or investors. In this event, the market price of our common
stock may fall abruptly and significantly.
Broad market fluctuations in our stock price could result in the loss of
market makers for our common stock, which could, in turn, result in a decline in
the price of our common stock. To maintain our eligibility for listing on
Nasdaq, we must maintain a minimum number of market makers and meet and maintain
other eligibility requirements, including a minimum trading value of our common
stock. A prolonged decline in the price of our common stock could effect the
operation of our business by severely limiting our ability to raise capital or
to use our common stock in connection with acquisitions. In addition because
the price of our common stock is below $5.00 per share, broker dealers have to
follow specific disclosure and suitability obligations requirements, which could
limit the marketability of our common stock.
If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, research and development and
selling, general and administrative expenses are not significantly affected by
variations in revenue.
If we fail to obtain an adequate level of reimbursement for our
products from third-party payers, our ability to sell products in some markets
would be harmed.
Our ability to sell our products in the clinical diagnostics market
will depend in part on the extent to which reimbursement for our products and
related treatments will be available from:
- government health administration authorities;
- private health coverage insurers;
- managed care organizations; and
- other organizations.
If appropriate reimbursement cannot be obtained, we could be prevented from
successfully commercializing some of our potential products.
There are efforts by governmental and third-party payers to contain or reduce
the costs of health care through various means. Additionally, third-party
payers are increasingly challenging the price of medical products and services.
If purchasers or users of our products are not able to obtain adequate
reimbursement for the cost of using our products, they may forego or reduce
their use. Significant uncertainty exists as to the reimbursement status of
newly approved health care products and whether adequate third-party coverage
will be available.
If we fail to retain key members of our staff, our ability to conduct
and expand our business would be impaired.
We are highly dependent on the principal members of our management
and scientific staff. The loss of services of any of these persons could
seriously harm our product development and commercialization efforts. In
addition, we will require additional skilled personnel in areas such as
manufacturing, quality control, project management, microbiology, software
engineering, mechanical engineering and electrical engineering. Retaining and
training personnel with the requisite skills is challenging even in today's
economy, and, if general economic conditions improve, is likely to become
extremely competitive again, particularly in the Silicon Valley area of
California where our main office is located. If at any point we are unable to
hire, train and retain a sufficient number of qualified employees to match our
growth, our ability to conduct and expand our business could be seriously
reduced. The inability to retain and hire qualified personnel could also hinder
the planned expansion of our business.
If we acquire companies, products or technologies, we may face risks
associated with those acquisitions.
If we are presented with appropriate opportunities, we may make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefit of any acquisition or investment. If we acquire
companies or technologies, we will likely face risks, uncertainties and
disruptions associated with the integration process, including difficulties in
the integration of this operations, and services of an acquired company,
integration of acquired technology with our products, diversion of our
management's attention from other business concerns and the potential loss of
key employees or customers of the acquired businesses. If we fail to
successfully integrate other companies that we may acquire, our business could
be harmed. Furthermore, we may have to incur debt or issue equity securities to
pay for any additional future acquisitions or investments, the issuance of which
could be dilutive to our existing shareholders or us. In addition, our
operating results may suffer because of acquisition-related costs or
amortization expenses or charges relating to acquired goodwill and other
intangible assets.
If a catastrophe strikes our manufacturing facilities, we may be unable
to manufacture our products for a substantial amount of time and we would
experience lost revenue.
Our manufacturing facilities are located in Sunnyvale, California.
Even though we have business interruption insurance, our facilities and some
pieces of manufacturing equipment are difficult to replace and could require
substantial replacement lead-time. Various types of disasters, including
earthquakes, fires, floods and acts of terrorism, may affect our manufacturing
facilities. Earthquakes are of particular significance since the manufacturing
facilities are located in an earthquake-prone area. In the event our existing
manufacturing facilities or equipment is affected by man-made or natural
disasters, we may be unable to manufacture products for sale, meet customer
demands or sales projections. If our manufacturing operations were curtailed or
ceased, it would seriously harm our business.
If we become subject to claims relating to improper handling, storage
or disposal of hazardous materials, we could incur significant cost and time to
comply.
Our research and development processes involve the controlled
storage, use and disposal of hazardous materials, including biological hazardous
materials. We are subject to federal, state and local regulations governing the
use, manufacture storage, handling and disposal of materials and waste products.
We may incur significant costs complying with both existing and future
environmental laws and regulations. In particular, we are subject to regulation
by the Occupational Safety and Health Administration, or OSHA, and the
Environmental Protection Agency, or EPA, and to regulation under the Toxic
Substances Control Act and the Resource Conservation and Recovery Act. OSHA or
the EPA may adopt regulations that may affect our research and development
programs. We are unable to predict whether any agency will adopt any
regulations that would have a material adverse effect on our operations.
Although we believe that our safety procedures for handling and disposing of
these hazardous materials comply with the standards prescribed by law and
regulation, the risk of accidental contamination or injury from hazardous
materials cannot be eliminated completely. In the event of an accident, we
could be held liable for any damages that result, and any liability could exceed
the limits or fall outside the coverage of our insurance. We may not be able to
maintain insurance on acceptable terms, if at all. We could be required to
incur significant costs to comply with current or future environmental laws and
regulations.
Our proposed reincorporation in Delaware would result in the
application of provisions of Delaware law that may prevent or delay
acquisitions.
Following our annual shareholder meeting, which is
scheduled for May 28, 2003, subject to receiving the requisite approval of our
shareholders, we intend to reincorporate in Delaware. If we complete the
proposed reincorporation, Cepheid will be governed by Delaware corporate law,
rather than California law. Certain provisions of Delaware law may have the
effect of preventing or delaying a change in control. For example, Delaware law
provides corporations with stronger defenses against unsolicited take-over
proposals and permits corporations to eliminate the ability of stockholders to
call meetings or to act by written consent.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intent to maintain our portfolio of cash equivalents and
short-term investments in short term commercial paper and money market funds.
Due to the short term nature of the investments, we believe we have no material
exposure to interest rate risk arising from our investments. Therefore we have
not included quantitative tabular disclosure in this Form 10Q.
We do not enter into financial investments for speculation or
trading purposes and are not a party to financial or commodity derivatives.
We have operated primarily in the United States and all sales
to date have been made in U.S. Dollars. Accordingly, we have not made any
material exposure to foreign currency rate fluctuations.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 require public
companies to maintain "disclosure controls and procedures", which are
defined to mean a company's controls and procedures that are designed to ensure
that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Our Chief Executive Officer and Chief Financial Officer, based
on their evaluation of our disclosure controls and procedures within 90 days
before, the filing date of this report, concluded that our disclosure controls
and procedures were effective for this purpose.
Changes in Internal Controls
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY
HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-K
- Exhibits
Exhibit 10.1 Letter Agreement between Infectio Diagnostic Inc. and
Cepheid dated February 21, 2003 *
Exhibit 10.2 Change of Control Retention and Severance Agreement between
Thomas L. Gutshall and Cepheid dated March 4, 2003
Exhibit 10.3 Change of Control Retention and Severance Agreement between
Kurt Petersen and Cepheid dated March 4, 2003
Exhibit 99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
Exhibit 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**
*Confidential treatment has been requested with respect to certain a
portion of this exhibit.
A complete copy of the exhibit, including redacted portions, has been filed
separately with the Securities and Exchange Commission
** These certifications "accompany" Cepheid's quarterly report on
Form 10Q; they are not deemed "filed" with the Securities and Exchange
Commission and are not to be incorporated by reference in any filing of Cepheid
under the Securities Act of 1933, or the Securities Exchange Act of 1934,
whether made before or after the date hereof and irrespective of any general
incorporation language in any filing.
- Reports on Form 8-K
On February 7, 2003, Cepheid filed a Current Report on 8-K reporting under
Item 5 the issuance of a press release regarding its financial results for the
three and twelve month periods ended December 31, 2002 and filing an unaudited
consolidated condensed balance sheet and statement of operations for the three
and twelve month periods ended December 31, 2002 and for the corresponding prior
year periods.
On March 4, 2003, Cepheid filed a Current Report on Form 8-K reporting,
under Item 5, the sale of 1,360,000 shares of its common stock at a price per
share of $3.69 directly to investors in a public offering under a shelf
registration statement on Form S-3.
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, in the City of Sunnyvale, State of
California on this 14th day of May, 2003.
|
CEPHEID
(Registrant) |
|
By: /s/ John L. Bishop
John L. Bishop
Chief Executive Officer and Director
(Duly Authorized Officer) |
|
By: /s/ John R. Sluis
John R. Sluis
Chief Financial Officer
(Principal Accounting Officer) |
CERTIFICATIONS
I, John L. Bishop certify that:
- I have reviewed this quarterly report on Form 10-Q of Cepheid;
- Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
- Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly
report;
- The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15-d-14) for the registrant and we
have:
- designed such disclosure controls and procedures to ensure that material
information relating the registrant including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which the quarterly report is being prepared;
- evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
- The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
- all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor's any material weaknesses in internal controls;
and
- any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
- The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/John L. Bishop
John L. Bishop
Chief Executive Officer and Director
I, John R. Sluis certify that:
- I have reviewed this quarterly report on Form 10-Q of Cepheid;
- Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
- Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly
report;
- The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15-d-14) for the registrant and we
have:
- designed such disclosure controls and procedures to ensure that material
information relating the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities particularly during the period
in which the quarterly report is being prepared.
- evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
- presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
- The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor's any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
- The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/John R. Sluis
John R. Sluis
Chief Financial Officer
