FORM 10-Q
FORM 10-Q |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2016
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
CEPHEID
(Exact Name of Registrant as Specified in its Charter)
CEPHEID (Exact Name of Registrant as Specified in its Charter) |
California | 77-0441625 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
904 Caribbean Drive, Sunnyvale, California | 94089-1189 | |
(Address of Principal Executive Office) | (Zip Code) |
Large Accelerated Filer | Accelerated Filer | ¨ | ||||
Non-Accelerated Filer | ¨ (Do not check if smaller reporting company) | Smaller Reporting Company | ¨ |
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ITEM 1.FINANCIAL STATEMENTS
CEPHEID
Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of $241 as of March 31, 2015 and $237 as of December 31, 2014 Inventory, net Prepaid expenses and other current assets Total current assets Property and equipment, net Investments Other non-current assets Intangible assets, net Goodwill Total assets Current liabilities: Accounts payable Accrued compensation Accrued royalties Accrued and other liabilities Current portion of deferred revenue Total current liabilities Long-term portion of deferred revenue Convertible senior notes, net Other liabilities Total liabilities Commitments and contingencies (Note 8) Shareholders’ equity: Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding Common stock, no par value; 150,000,000 shares authorized, 71,532,845 and 70,904,388 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively Additional paid-in capital Accumulated other comprehensive income, net Accumulated deficit Total shareholders’ equity Total liabilities and shareholders’ equity Revenue Costs and operating expenses: Cost of sales Collaboration profit sharing Research and development Sales and marketing General and administrative Total costs and operating expenses Income (loss) from operations Other income (expense): Interest income Interest expense Foreign currency exchange loss and other, net Other expense, net Income (loss) before income taxes Benefit from (provision for) income taxes Net income (loss) Basic net income (loss) per share Diluted net income (loss) per share Shares used in computing basic net income (loss) per share Shares used in computing diluted net income (loss) per share Net income (loss) Other comprehensive income (loss), before tax: Change in unrealized gains and losses related to cash flow hedges: Gain recognized in accumulated comprehensive income Loss reclassified from accumulated comprehensive income to the statement of operations Change in unrealized gains and losses related to available-for-sale investments: Gain (loss) recognized in accumulated comprehensive income Gain reclassified from accumulated comprehensive income to the statement of operations Other comprehensive income (loss), before tax Income tax expense related to items of accumulated comprehensive income, net Comprehensive income (loss) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment Amortization of intangible assets Unrealized foreign exchange differences Amortization of debt discount and transaction costs Stock-based compensation expense Excess tax benefits from stock-based compensation expense Loss on the disposal of property, equipment and intangible assets Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other current assets Other non-current assets Accounts payable and other current and non-current liabilities Accrued compensation Deferred revenue Net cash provided by (used in) operating activities Cash flows from investing activities: Capital expenditures Cost of acquisitions, net Proceeds from sale of an intangible asset Proceeds from sales of marketable securities and investments Proceeds from maturities of marketable securities and investments Purchases of marketable securities and investments Transfer from restricted cash Net cash used in investing activities Cash flows from financing activities: Net proceeds from the issuance of common shares and exercise of stock options Excess tax benefits from stock-based compensation expense Proceeds from borrowings of convertible senior notes, net of issuance costs Purchase of convertible note capped call hedge Principal payment of notes payable Net cash provided by financing activities Effect of foreign exchange rate change on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 2015. The Company’s marketable debt securities have been classified and accounted for as available-for-sale. The Company determines the appropriate classification of its investments at the time of purchase and re-evaluates the designations at each balance sheet date. The Company classifies its marketable debt securities as cash equivalents, short-term investments or non-current investments based on each instrument’s underlying effective maturity date. All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities with effective maturities of 12 months or less are classified as short-term, and marketable debt securities with effective maturities greater than 12 months are classified as non-current. The Company’s marketable debt securities are carried at fair value, with the unrealized gains and losses reported within accumulated other comprehensive Interest income includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities. countries. net Raw Materials Work in Process Finished Goods Inventory 2015, respectively. The Company sells service contracts for which revenue is deferred and recognized ratably over the contract period. shipped and all other revenue recognition criteria have been met. All revenue recognized from reagent rentals is included in reagent and disposable sales in Note 10, “Segment and Significant Concentrations”. from time-to-time. Basic: Net income (loss) Basic weighted shares outstanding Net income (loss) per share Diluted: Net income (loss) Basic weighted shares outstanding Effect of dilutive securities: Stock options, ESPP, restricted stock units, restricted stock awards and convertible senior notes Diluted weighted shares outstanding Net income (loss) per share Balance as of March 31, 2015: Assets: Cash and cash equivalents Short-term investments: Asset-backed securities Corporate debt securities Commercial Paper Government agency securities Other securities Total short-term investments Foreign currency derivatives Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Total Liabilities: Foreign currency derivatives Total Balance as of December 31, 2014: Assets: Cash and cash equivalents Short-term investments: Asset-backed securities Corporate debt securities Commercial paper Government agency securities Other securities Total short-term investments Foreign currency derivatives Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Total Liabilities: Foreign currency derivatives Total Balance as of March 31, 2015: Liabilities: Convertible senior notes Total Balance as of December 31, 2014: Liabilities: Convertible senior notes Total 2016. Balance as of March 31, 2015: Short-term investments: Asset-backed securities Commercial paper Corporate debt securities Government agency securities Other securities Amounts classified as cash equivalents Total short-term investments Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Balance as of December 31, 2014: Short-term investments: Asset-backed securities Commercial paper Corporate debt securities Government agency securities Other securities Amounts classified as cash equivalents Total short-term investments Investments: Asset-backed securities Corporate debt securities Government agency securities Other securities Total investments Gross realized gains Gross realized losses Realized gains, net 2015. Balance at March 31, 2015: Asset-backed securities Corporate debt securities Government agency securities Other securities Total Balance at December 31, 2014: Asset-backed securities Corporate debt securities Government agency securities Other securities Total : Debt securities: Mature in one year or less Mature after one year through three years Mature in more than three years Total debt securities Securities with no contractual maturity Total The Company does not hold or purchase any currency contracts for trading purposes. 2015. Derivative Assets (a): Foreign exchange contracts Derivative Liabilities (b): Foreign exchange contracts Derivative Assets (a): Foreign exchange contracts Derivative Liabilities (b): Foreign exchange contracts March 31, December 31, 2015 2014 (unaudited) ASSETS $ 109,626 $ 96,663 200,894 196,729 74,719 68,809 140,761 132,635 29,120 24,274 555,120 519,110 119,009 115,765 62,798 79,731 7,911 7,847 29,341 31,440 39,681 39,681 $ 813,860 $ 793,574 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 55,753 $ 50,435 24,984 33,760 4,375 5,443 33,285 34,761 13,633 13,447 132,030 137,846 4,687 4,532 280,581 278,213 20,126 18,768 437,424 439,359 — — 435,798 422,151 233,103 225,529 341 247 (292,806 ) (293,712 ) 376,436 354,215 $ 813,860 $ 793,574 March 31, December 31, 2016 2015 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 89,820 $ 112,568 Short-term investments 202,492 210,147 Accounts receivable, less allowance for doubtful accounts of $617 as of March 31, 2016 and $383 as of December 31, 2015 72,626 66,550 Inventory, net 150,426 148,690 Prepaid expenses and other current assets 26,637 18,515 Total current assets 542,001 556,470 Property and equipment, net 143,969 127,639 Investments 63,361 62,175 Other non-current assets 5,643 4,205 Intangible assets, net 23,812 25,241 Goodwill 39,681 39,681 Total assets $ 818,467 $ 815,411 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 57,963 $ 57,771 Accrued compensation 30,112 39,015 Accrued royalties 4,140 5,469 Accrued and other liabilities 27,616 27,451 Current portion of deferred revenue 13,586 12,778 Total current liabilities 133,417 142,484 Long-term portion of deferred revenue 6,936 5,538 Convertible senior notes, net 284,295 281,627 Other liabilities 16,639 15,779 Total liabilities 441,287 445,428 Commitments and contingencies (Note 8) Shareholders’ equity: Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding — — Common stock, no par value; 150,000,000 shares authorized, 72,693,942 and 72,415,317 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively 453,943 449,704 Additional paid-in capital 272,480 263,429 Accumulated other comprehensive loss, net (400 ) (908 ) Accumulated deficit (348,843 ) (342,242 ) Total shareholders’ equity 377,180 369,983 Total liabilities and shareholders’ equity $ 818,467 $ 815,411 Three Months Ended
March 31, 2015 2014 $ 132,637 $ 106,907 61,201 53,083 1,267 1,291 23,986 21,740 25,936 23,458 15,642 13,667 128,032 113,239 4,605 (6,332 ) 373 153 (3,603 ) (1,862 ) (945 ) (582 ) (4,175 ) (2,291 ) 430 (8,623 ) 476 (680 ) $ 906 $ (9,303 ) $ 0.01 $ (0.13 ) $ 0.01 $ (0.13 ) 71,262 69,272 73,189 69,272 Three Months Ended
March 31, 2016 2015 Revenue $ 144,780 $ 132,637 Costs and operating expenses: Cost of sales 72,595 61,201 Collaboration profit sharing 658 1,267 Research and development 29,914 23,986 Sales and marketing 28,795 25,936 General and administrative 15,055 15,642 Total costs and operating expenses 147,017 128,032 Income (loss) from operations (2,237 ) 4,605 Other income (expense): Interest income 660 373 Interest expense (3,765 ) (3,603 ) Foreign currency exchange loss and other, net (528 ) (945 ) Other expense, net (3,633 ) (4,175 ) Income (loss) before income taxes (5,870 ) 430 Benefit from (provision for) income taxes (731 ) 476 Net income (loss) $ (6,601 ) $ 906 Basic net income (loss) per share $ (0.09 ) $ 0.01 Diluted net income (loss) per share $ (0.09 ) $ 0.01 Shares used in computing basic net income (loss) per share 72,588 71,262 Shares used in computing diluted net income (loss) per share 72,588 73,189 Three Months Ended
March 31, 2015 2014 $ 906 $ (9,303 ) 404 180 23 274 142 (60 ) — (2 ) 569 392 (475 ) — $ 1,000 $ (8,911 ) Three Months Ended
March 31, 2016 2015 Net income (loss) $ (6,601 ) $ 906 Other comprehensive income, before tax: Change in unrealized gains and losses related to cash flow hedges: Gain (loss) recognized in accumulated other comprehensive loss, net (74 ) 404 Loss reclassified from accumulated other comprehensive loss, net to the statement of operations 331 23 Change in unrealized gains and losses related to available-for-sale investments: Gain recognized in accumulated other comprehensive loss, net 547 142 Gain reclassified from accumulated other comprehensive loss, net to the statement of operations (1 ) — Other comprehensive income, before tax 803 569 Income tax expense related to items of accumulated other comprehensive loss, net (295 ) (475 ) Comprehensive income (loss) $ (6,093 ) $ 1,000 Three Months Ended
March 31, 2015 2014 $ 906 $ (9,303 ) 6,045 4,977 1,673 919 1,455 (52 ) 2,502 1,257 7,557 6,782 (53 ) — 142 — (5,910 ) (4,400 ) (8,160 ) (15,270 ) (2,299 ) (5,842 ) (197 ) 122 5,512 3,470 (8,776 ) (1,595 ) 341 2,079 738 (16,856 ) (9,989 ) (8,762 ) (3,000 ) — 339 — 13,303 18,788 61,774 4,650 (62,494 ) (259,553 ) 31 — (36 ) (244,877 ) 13,804 21,631 53 — — 335,789 — (25,082 ) (39 ) (48 ) 13,818 332,290 (1,557 ) 89 12,963 70,646 96,663 66,072 $ 109,626 $ 136,718 Three Months Ended
March 31, 2016 2015 Cash flows from operating activities: Net income (loss) $ (6,601 ) $ 906 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 7,532 6,045 Amortization of intangible assets 1,429 1,673 Unrealized foreign exchange differences (101 ) 1,455 Amortization of debt discount and transaction costs 2,667 2,502 Stock-based compensation expense 9,007 7,557 Excess tax benefits from stock-based compensation expense — (53 ) Other non-cash items 357 142 Changes in operating assets and liabilities: Accounts receivable (6,076 ) (5,910 ) Inventory, net (1,693 ) (8,160 ) Prepaid expenses and other current assets (7,459 ) (2,299 ) Other non-current assets (68 ) (197 ) Accounts payable and other current and non-current liabilities (1,408 ) 5,512 Accrued compensation (8,904 ) (8,776 ) Deferred revenue 2,205 341 Net cash provided by (used in) operating activities (9,113 ) 738 Cash flows from investing activities: Capital expenditures (22,741 ) (9,989 ) Cost of acquisitions, net — (3,000 ) Proceeds from sale of equipment and an intangible asset 24 339 Proceeds from sales of marketable securities and investments 21,230 13,303 Proceeds from maturities of marketable securities and investments 58,627 61,774 Purchases of marketable securities and investments (73,040 ) (62,494 ) Transfer from (to) restricted cash (2,059 ) 31 Net cash used in investing activities (17,959 ) (36 ) Cash flows from financing activities: Net proceeds from the issuance of common shares and exercise of stock options 4,251 13,804 Excess tax benefits from stock-based compensation expense — 53 Principal payment of notes payable (43 ) (39 ) Net cash provided by financing activities 4,208 13,818 Effect of foreign exchange rate change on cash and cash equivalents 116 (1,557 ) Net increase (decrease) in cash and cash equivalents (22,748 ) 12,963 Cash and cash equivalents at beginning of period 112,568 96,663 Cash and cash equivalents at end of period $ 89,820 $ 109,626 testing in the Clinical market, as well as for application in the Company’s Non-Clinical legacy market.diagnostic testing. The Company’s systems enable rapid,fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures.2015,2016, the Condensed Consolidated Statements of Operations for the three months ended March 31, 20152016 and 2014,2015, the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 20152016 and 20142015 and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20152016 and 20142015 are unaudited. In the opinion of management, these condensed consolidated financial statements reflect all normal recurring adjustments that management considers necessary for a fair presentation of the Company’s financial position at such dates, and the operating results and cash flows for those periods. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The results of operations for such periods are not necessarily indicative of the results expected for the remainder of 20152016 or for any future period. The Condensed Consolidated Balance Sheet as of December 31, 20142015 is derived from audited consolidated financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Restricted Cash, Short-Term Investments and Non-Current InvestmentsInterest income includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities.Restricted cash consists of cash contractually restricted for use to develop the Xpert Ebola test in accordance with the Company’s agreements with the Bill and Melinda Gates Foundation (“BMFG”) and the National Philanthropic trust (“NPT”). At March 31, 2015 and December 31, 2014, prepaid expense and other current assets included $1.8 million and $1.9 million of restricted cash, respectively.income (loss),loss, a component of shareholders’ equity. The cost of securities sold is based upon the specific identification method.“Investments,”“Investments”, for information and related disclosures regarding the Company’s investments.54%62% and 58%66% of the Company’s cash and cash equivalents as of March 31, 20152016 and December 31, 2014,2015, respectively.net revenuesales to customers and distributors located in the United States and other countries.distributors. The Company performs credit evaluations of its customers’ financial condition. The Company provides reserves for potential credit losses but has not experienced significant losses to date. There was one direct customer whose accounts receivable balance represented 20% and 26%11% of total accounts receivable as of December 31, 2015. No direct customer represented more than 10% of total accounts receivable as of March 31, 20152016.December 31, 2014, respectively.The Company currently sells products through its directSignificant Concentrations,” for disclosure regarding total sales force and third-party distributors. There were noto direct customers that accounted for 10% or more of total revenue for the three months ended March 31, 2015 and 2014. No single country outside of the United States represented more than 10% of the Company’s total revenue in any period presented.AllocationThe allocation of fixed production overheadsoverhead to conversioninventory costs is based on normal capacity of production.production capacity. Abnormal amounts of idle facility expense, freight, handling costs, and spoilage are expensed as incurred, and not included in overhead. The Company maintains provisions for excess and obsolete inventory based on management’s estimates of forecasted demand and, where applicable, product expiration. March 31, 2015 December 31, 2014 $ 43,223 $ 36,287 45,179 51,691 52,359 44,657 $ 140,761 $ 132,635 March 31, 2016 December 31, 2015 Raw Materials $ 38,887 $ 39,267 Work in Process 67,657 62,153 Finished Goods 43,882 47,270 Inventory, net $ 150,426 $ 148,690 $1.5$2.6 million and $1.6$2.5 million were included in inventory as of March 31, 20152016 and December 31, 2014, respectively The Company sells service contracts for which revenue is deferred and recognized ratably over the contract period.The Company may place an instrument at a customer site under a reagent rental. Under a reagent rental, the Company retains title to the instrument and earns revenue for the usage of the instrument and related maintenance services through the amount charged for reagents and other disposables. Under a reagent rental, a customer may commit to purchasing minimum quantities of reagents at stated prices over a defined contract term, which is typically between three to five years. Revenue is recognized over the term of a reagent rental as reagents and other disposables are shipped and all other revenue recognition criteria have been met. All revenue recognized from reagent rentals is included in reagent and disposable sales in Note 11, “Segment and Significant Concentrations”.Company’sCompany's best estimate of the selling price of an element in a transaction. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met.recognizesmay place an instrument at a customer site under a reagent rental agreement ("reagent rental"). Under a reagent rental, the Company retains title to the instrument and earns revenue for delivered elements only when it determines therethe usage of the instrument and related maintenance services through the amount charged for reagents and other disposables. Under a reagent rental, a customer may commit to purchasing minimum quantities of reagents at stated prices over a defined contract term, which is typically between three and five years. Revenue is recognized over the term of a reagent rental as reagents and other disposables are no uncertainties regarding customer acceptance.including research and developmentearned under grants and government sponsored research and collaboration agreements.agreements, which are recognized on a contract-specific basis. Revenue and profit under cost-plus service contracts are recognized as costs are incurred plus negotiated fees. Fixed fees on cost-plus serviceFor certain contracts, are recognized ratably over the contractCompany utilizes the proportional performance period as services are performed. Contractmethod of revenue recognition, which requires that the Company estimate the total amount of costs include laborto be expended for a project and related employee benefits, subcontractingrecognize revenue equal to the portion of costs and other direct costs, as well as allocations of allowable indirect costs. For contract change orders, claims or similar items,incurred to date. The Company exercises judgment is required forwhen estimating the amounts, assessing the potential for realization, and determining whether realization is probable. From timelevel of effort required to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent thatcomplete a revised estimate affects the current or an earlier period, the cumulative effect of theproject. The estimated total costs to complete a project are subject to revision is recognized in the period in which the facts requiring the revision become known. Advance payments received in excess of amounts earned, such as funds received in advance of products to be delivered or services to be performed, are classified as deferred revenue until earned.perPer Shareearningsnet income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options, employee stock purchases, restricted stock awards, restricted stock units and shares issuable upon a potential conversion of the convertible senior notes using the treasury stock method. In loss periods, the earnings per share calculation excludes all common equivalent shares because their inclusion would be antidilutive. Anti-dilutiveAntidilutive common equivalent shares totaled 6,477,00011,256,000 and 8,129,0006,477,000 for the three months ended March 31, 2016 and 2015, and 2014, respectively.earningsnet income (loss) per share (in thousands, except for per share amounts): Three Months Ended March 31, 2015 2014 $ 906 $ (9,303 ) 71,262 69,272 $ 0.01 $ (0.13 ) $ 906 $ (9,303 ) 71,262 69,272 1,927 — 73,189 69,272 $ 0.01 $ (0.13 ) Three Months Ended March 31, 2016 2015 Basic: Net income (loss) $ (6,601 ) $ 906 Basic weighted shares outstanding 72,588 71,262 Net income (loss) per share $ (0.09 ) $ 0.01 Diluted: Net income (loss) $ (6,601 ) $ 906 Basic weighted shares outstanding 72,588 71,262 Effect of dilutive securities: Stock options, ESPP, restricted stock units, restricted stock awards and convertible senior notes — 1,927 Diluted weighted shares outstanding 72,588 73,189 Net income (loss) per share $ (0.09 ) $ 0.01 20172018 using one of two retrospective transition methods. The Company has not yet selected a transition method nor has it determined the potential effects that the adoption of ASU No. 2014-09 will have on its consolidated financial statements. In April 2015, the FASB proposed delaying the effective date of the new guidance by one additional year.In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which amends limited sections within ASC Subtopic 835-30. The amendments in the new guidance require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The effective date will be the first quarter of fiscal year 2016 and early adoption is permitted. The new guidance must be applied retrospectively to all prior periods presented in the financial statements. The Company has not yet determined if the guidance will be adopted earlier than the required effective date. The Company is evaluating the impact of adopting this new accounting guidance on its financial statements.20152016 and December 31, 20142015 (in thousands): Level 1 Level 2 Level 3 Total $ 76,230 $ 33,396 $ — $ 109,626 — 48,894 — 48,894 — 72,833 — 72,833 — 34,878 — 34,878 — 32,583 — 32,583 — 11,706 — 11,706 — 200,894 — 200,894 — 6,342 — 6,342 — 4,797 — 4,797 — 29,778 — 29,778 — 23,002 — 23,002 — 5,221 — 5,221 — 62,798 — 62,798 $ 76,230 $ 303,430 $ — $ 379,660 $ — $ 5,964 $ — $ 5,964 $ — $ 5,964 $ — $ 5,964 Level 1 Level 2 Level 3 Total $ 76,065 $ 20,598 $ — $ 96,663 52,220 52,220 — 64,202 — 64,202 — 56,096 — 56,096 15,003 15,003 — 9,208 — 9,208 — 196,729 — 196,729 — 3,887 — 3,887 — 12,713 — 12,713 — 22,679 — 22,679 — 39,532 — 39,532 — 4,807 — 4,807 — 79,731 — 79,731 $ 76,065 $ 300,945 $ — $ 377,010 $ — $ 3,812 $ — $ 3,812 $ — $ 3,812 $ — $ 3,812 Balance as of March 31, 2016: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 53,431 $ 36,389 $ — $ 89,820 Short-term investments: Asset-backed securities — 53,613 — 53,613 Corporate debt securities — 77,686 — 77,686 Commercial paper — 42,354 — 42,354 Government agency securities — 17,206 — 17,206 Other securities — 11,633 — 11,633 Total short-term investments — 202,492 — 202,492 Foreign currency derivatives — 1,531 — 1,531 Investments: Asset-backed securities — 11,917 — 11,917 Corporate debt securities — 35,436 — 35,436 Government agency securities — 12,000 — 12,000 Other securities — 4,008 — 4,008 Total investments — 63,361 — 63,361 Total $ 53,431 $ 303,773 $ — $ 357,204 Liabilities: Foreign currency derivatives $ — $ 1,316 $ — $ 1,316 Total $ — $ 1,316 $ — $ 1,316 Balance as of December 31, 2015: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 84,625 $ 27,943 $ — $ 112,568 Short-term investments: Asset-backed securities — 51,973 — 51,973 Corporate debt securities — 81,600 — 81,600 Commercial paper — 48,762 — 48,762 Government agency securities — 12,684 — 12,684 Other securities — 15,128 — 15,128 Total short-term investments — 210,147 — 210,147 Foreign currency derivatives — 1,431 — 1,431 Investments: Asset-backed securities — 11,818 — 11,818 Corporate debt securities — 36,414 — 36,414 Government agency securities — 11,944 — 11,944 Other securities — 1,999 — 1,999 Total investments — 62,175 — 62,175 Total $ 84,625 $ 301,696 $ — $ 386,321 Liabilities: Foreign currency derivatives $ — $ 1,298 $ — $ 1,298 Total $ — $ 1,298 $ — $ 1,298 20152016 and December 31, 20142015 were as follows (in thousands): Level 1 Level 2 Level 3 Total $ — $ 383,495 $ — $ 383,495 $ — $ 383,495 $ — $ 383,495 Level 1 Level 2 Level 3 Total $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 Balance as of March 31, 2016: Level 1 Level 2 Level 3 Total Liabilities: Convertible senior notes $ — $ 312,570 $ — $ 312,570 Total $ — $ 312,570 $ — $ 312,570 Balance as of December 31, 2015: Level 1 Level 2 Level 3 Total Liabilities: Convertible senior notes $ — $ 307,481 $ — $ 307,481 Total $ — $ 307,481 $ — $ 307,481 we have been classified as Level 2 financial instruments, was determined based on the quoted price of the convertible senior notes in an over-the-counter market on March 31, 2015.Level 3 assets and liabilities are valued by applying the income approach and are based on significant unobservable inputs that are supported by little or no market activity. The Company had no level 3 financial assets as of March 31, 2015 and December 31, 2014.2015,2016, were classified as available-for-sale securities, with changes in fair value recognized in accumulated other comprehensive income, net,Accumulated Other Comprehensive Income ("AOCI"), a component of shareholders’ equity. Classification ofThe Company classifies its marketable securities as a current asset iscash equivalents, short-term investments or non-current investments based on the intended holding period and realizability of the investment.each instrument's underlying effective maturity date. The following tables summarize available-for-sale marketable securities (in thousands): Cost Gross Unrealized
Gain Gross Unrealized
Loss Estimated Fair
Value $ 48,909 $ 1 $ (16 ) $ 48,894 68,256 18 — 68,274 72,839 10 (16 ) 72,833 32,574 11 (2 ) 32,583 11,705 1 — 11,706 (33,392 ) (4 ) — (33,396 ) $ 200,891 $ 37 $ (34 ) $ 200,894 $ 4,800 $ — $ (3 ) $ 4,797 29,781 8 (11 ) 29,778 23,002 6 (6 ) 23,002 5,225 — (4 ) 5,221 $ 62,808 $ 14 $ (24 ) $ 62,798 Cost Gross Unrealized
Gain Gross Unrealized
Loss Estimated Fair
Value $ 52,240 $ 3 $ (23 ) $ 52,220 76,683 12 — 76,695 64,244 2 (45 ) 64,201 15,000 3 — 15,003 9,206 2 — 9,208 (20,598 ) — — (20,598 ) $ 196,775 $ 22 $ (68 ) $ 196,729 $ 12,724 $ — $ (12 ) $ 12,712 22,709 — (29 ) 22,680 39,583 — (51 ) 39,532 4,815 — (8 ) 4,807 $ 79,831 $ — $ (100 ) $ 79,731 ForBalance as of March 31, 2016: Cost Short-term investments: Asset-backed securities $ 53,663 $ 5 $ (55 ) $ 53,613 Commercial paper 78,721 22 — 78,743 Corporate debt securities 77,742 18 (74 ) 77,686 Government agency securities 17,202 4 — 17,206 Other securities 11,626 9 (2 ) 11,633 Amounts classified as cash equivalents (36,387 ) (2 ) — (36,389 ) Total short-term investments $ 202,567 $ 56 $ (131 ) $ 202,492 Investments: Asset-backed securities $ 11,933 $ 9 $ (25 ) $ 11,917 Corporate debt securities 35,372 79 (15 ) 35,436 Government agency securities 11,999 1 — 12,000 Other securities 4,000 8 — 4,008 Total investments $ 63,304 $ 97 $ (40 ) $ 63,361 Balance as of December 31, 2015: Cost Short-term investments: Asset-backed securities $ 52,102 $ — $ (129 ) $ 51,973 Commercial paper 76,711 3 (9 ) 76,705 Corporate debt securities 81,777 — (177 ) 81,600 Government agency securities 12,701 — (17 ) 12,684 Other securities 15,122 7 (1 ) 15,128 Amounts classified as cash equivalents (27,943 ) — — (27,943 ) Total short-term investments $ 210,470 $ 10 $ (333 ) $ 210,147 Investments: Asset-backed securities $ 11,884 $ — $ (66 ) $ 11,818 Corporate debt securities 36,530 3 (119 ) 36,414 Government agency securities 11,999 — (55 ) 11,944 Other securities 2,001 — (2 ) 1,999 Total investments $ 62,414 $ 3 $ (242 ) $ 62,175 and 2014, $13.3 million and $18.8 million, respectively, of proceeds from sales of marketable securities were collected.respectively. The Company determines gains and losses from sales of marketable securities based on specific identification of the securities sold. Gross realizedRealized gains and losses from sales of marketable securities, all of which are reported as a component of “Interest income”Other income (expense) in the Condensed Consolidated Statements of Operations, were immaterial for the three months ended March 31, 20152016 and 2014 (in thousands): Three Months Ended March 31, 2015 2014 $ — $ 2 — — $ — $ 2 20152016 and December 31, 2014,2015, and the duration of time that such losses had been unrealized (in thousands) were: Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 45,493 $ (16 ) $ 6,117 $ (3 ) $ 51,610 $ (19 ) 52,837 (24 ) 6,300 (3 ) 59,137 (27 ) 25,994 (8 ) — — 25,994 (8 ) 5,221 (4 ) — — 5,221 (4 ) $ 129,545 $ (52 ) $ 12,417 $ (6 ) $ 141,962 $ (58 ) Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 54,580 $ (35 ) $ — $ — $ 54,580 $ (35 ) 79,360 (74 ) — — 79,360 (74 ) 39,532 (51 ) — — 39,532 (51 ) 4,807 (8 ) — — 4,807 (8 ) $ 178,279 $ (168 ) $ — $ — $ 178,279 $ (168 ) Balance as of March 31, 2016: Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Asset-backed securities $ 45,486 $ (80 ) $ 250 $ — $ 45,736 $ (80 ) Corporate debt securities 55,487 (85 ) 7,844 (4 ) 63,331 (89 ) Government agency securities 2,002 — — — 2,002 — Other securities 1,999 (2 ) — — 1,999 (2 ) Total $ 104,974 $ (167 ) $ 8,094 $ (4 ) $ 113,068 $ (171 ) Balance as of December 31, 2015: Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Asset-backed securities $ 57,866 $ (192 ) $ 5,923 $ (3 ) $ 63,789 $ (195 ) Corporate debt securities 101,701 (289 ) 8,911 (7 ) 110,612 (296 ) Government agency securities 24,628 (72 ) — — 24,628 (72 ) Commercial Paper 11,374 (9 ) — — 11,374 (9 ) Other securities 7,496 (3 ) — — 7,496 (3 ) Total $ 203,065 $ (565 ) $ 14,834 $ (10 ) $ 217,899 $ (575 ) has evaluated suchmarketable securities, which consist of investments in asset-backed securities, corporate debt securities, government agency securities, commercial paper, and other securities as of March 31, 2015,2016, and has determined that there was no indication of other-than-temporary impairments. This determination was based on several factors, including the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the debt issuer, and the Company’s intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value.20152016 and December 31, 2014,2015, by contractual maturity (in thousands): March 31, 2015 December 31, 2014 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value $ 165,803 $ 165,820 $ 150,133 $ 150,105 120,358 120,343 135,675 135,566 10,930 10,925 11,396 11,387 297,091 297,088 297,204 297,058 — — — — $ 297,091 $ 297,088 $ 297,204 $ 297,058 March 31, 2016 December 31, 2015 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Mature in one year or less $ 182,069 $ 182,035 $ 186,311 $ 186,118 Mature after one year through three years 112,281 112,340 106,377 106,086 Mature in more than three years 7,908 7,867 8,139 8,061 Total $ 302,258 $ 302,242 $ 300,827 $ 300,265 business exposure to foreign currency exchange risk. The Company may enter into foreign currency forward contracts generally up to twelve months to offset some of the foreign exchange risk on expected future cash flows on certain forecasted revenue cost of sales, operatingand expenses and on certain existing assets and liabilities.accumulated other comprehensive income or loss (“AOCI”),AOCI, a separate component of shareholders’ equity and subsequently reclassifies these amounts into earnings within the same financial statement line item as the hedged item in the period during which the hedged transaction is realized.recognized in earnings. The ineffective portions of cash flow hedges are recorded in foreign currency exchange loss and other, net.gainloss of $0.4$0.2 million and $0.2$0.4 million associated with cash flow hedges recorded in AOCI as of March 31, 20152016 and December 31, 2014,2015, respectively. Deferred gains and losses associated with cash flow hedges of forecasted foreign currency revenue are recognized as a component of revenues in the same period as the related revenue is recognized, and deferred gains and losses related to cash flow hedges of forecasted expenses are recognized as a component of cost of sales, research and development expense, sales and marketing expense and general and administrative expense in the same period as the related expenses are recognized. The Company’s hedged transactions as of March 31, 20152016 are expected to occur within twelve months.20152016 and 2014.20152016 and 2014,2015, the Company recognized a gainloss of $2.0$0.5 million and a lossgain of $0.3$2.0 million, respectively, as a component of foreign currency exchange loss and other, net.net, related to derivative instruments not designated as hedging instruments. These amounts represent the net gain or loss on the derivative contracts and do not include changes in the related exposures or ineffective portion or amounts excluded from the effectiveness testing of cash flow hedges.principleprincipal amounts of the Company’s outstanding derivative instruments designated as cash flow hedges are $154.1$133.8 million and $117.2$117.6 million as of March 31, 20152016 and December 31, 2014,2015, respectively. The notional principleprincipal amounts of the Company’s outstanding derivative instruments not designated as cash flow hedges is $38.4are $27.8 million and $30.4$25.9 million as of March 31, 20152016 and December 31, 2014,2015, respectively.20152016 and December 31, 2014,2015, respectively (in thousands): March 31, 2015 Fair Value
of Derivates
Designated
as Hedge
Instruments Fair Value of
Derivates
Not Designated
as Hedge
Instruments Total Fair Value $ 6,335 $ 7 �� $ 6,342 (5,678 ) (286 ) (5,964 ) December 31, 2014 Fair Value
of Derivates
Designated
as Hedge
Instruments Fair Value of
Derivates
Not Designated
as Hedge
Instruments Total Fair Value $ 3,887 $ — $ 3,887 (3,685 ) (127 ) (3,812 ) March 31, 2016 Fair Value of Derivatives Designated as Hedge Instruments Fair Value of Derivatives Not Designated as Hedge Instruments Total Fair Value Derivative Assets (a): Foreign exchange contracts $ 1,207 $ 324 $ 1,531 Derivative Liabilities (b): Foreign exchange contracts (1,292 ) (24 ) (1,316 ) December 31, 2015 Fair Value of Derivatives Designated as Hedge Instruments Total Fair Value Derivative Assets (a): Foreign exchange contracts $ 1,390 $ 41 $ 1,431 Derivative Liabilities (b): Foreign exchange contracts (1,250 ) (48 ) (1,298 ) (a) The fair value of derivative assets is measured using Level 2 fair value inputs and is recorded as prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. (b) The fair value of derivative liabilities is measured using Level 2 fair value inputs and is recorded as accrued and other liabilities in the Condensed Consolidated Balance Sheets.
Three Months Ended | ||||||||||||||||||||||||||
Gain Recognized in OCI - Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Loss Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing | ||||||||||||||||||||||||
March 31, 2015 | March 31, 2014 | March 31, 2015 (a) | March 31, 2014 (b) | Location | March 31, 2015 | March 31, 2014 | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||
Foreign exchange contracts | $ | 404 | $ | 180 | $ | (23 | ) | $ | (274 | ) | Foreign currency exchange loss and other, net | $ | (86 | ) | $ | — | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 404 | $ | 180 | $ | (23 | ) | $ | (274 | ) | $ | (86 | ) | $ | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |||||||||||||||||||||||||
Gain (Loss) Recognized in OCI - Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Loss Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing | |||||||||||||||||||||||
March 31, 2016 | March 31, 2015 | March 31, 2016 (a) | March 31, 2015 (b) | Location | March 31, 2016 | March 31, 2015 | |||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Foreign exchange contracts | $ | (74 | ) | $ | 404 | $ | (331 | ) | $ | (23 | ) | Foreign currency exchange loss and other, net | $ | (161 | ) | $ | (86 | ) | |||||||
Total | $ | (74 | ) | $ | 404 | $ | (331 | ) | $ | (23 | ) | $ | (161 | ) | $ | (86 | ) |
(a) | Includes gains and losses reclassified from AOCI into net loss for the effective portion of cash flow hedges, of which a $0.4 million loss within costs and operating expenses and a $0.1 million gain within revenue, were recognized within the Condensed Consolidated Statement of Operations for the three months ended March 31, 2016. |
(b) | Includes gains and losses reclassified from AOCI into net income for the effective portion of cash flow hedges, of which a $2.3 million loss within costs and operating expenses and a $2.3 million gain within revenue, |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Balance, March 31, 2015 | ||||||||||||
Licenses | $ | 13,594 | $ | (8,937 | ) | $ | 4,657 | |||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | ||||||||
Customer relationships and other intangible assets acquired in acquisitions | 35,849 | (11,165 | ) | 24,684 | ||||||||
|
|
|
|
|
| |||||||
$ | 58,056 | $ | (28,715 | ) | $ | 29,341 | ||||||
|
|
|
|
|
| |||||||
Balance, December 31, 2014 | ||||||||||||
Licenses | $ | 13,594 | $ | (8,477 | ) | $ | 5,117 | |||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | ||||||||
Customer relationships and other intangible assets acquired in acquisitions | 36,582 | (10,259 | ) | 26,323 | ||||||||
|
|
|
|
|
| |||||||
$ | 58,789 | $ | (27,349 | ) | $ | 31,440 | ||||||
|
|
|
|
|
|
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Balance, March 31, 2016 | |||||||||||
Licenses | $ | 11,256 | $ | (7,342 | ) | $ | 3,914 | ||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | |||||||
Customer relationships and other intangible assets acquired in acquisitions | 35,849 | (15,951 | ) | 19,898 | |||||||
$ | 55,718 | $ | (31,906 | ) | $ | 23,812 | |||||
Balance, December 31, 2015 | |||||||||||
Licenses | $ | 11,454 | $ | (7,280 | ) | $ | 4,174 | ||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | |||||||
Customer relationships and other intangible assets acquired in acquisitions | 35,849 | (14,782 | ) | 21,067 | |||||||
$ | 55,916 | $ | (30,675 | ) | $ | 25,241 |
For the Years Ending December 31, | Amortization Expense | |||
2015 (remaining nine months) | $ | 4,651 | ||
2016 | 5,745 | |||
2017 | 5,384 | |||
2018 | 5,301 | |||
2019 | 3,781 | |||
Thereafter | 4,479 | |||
|
| |||
Total expected future annual amortization | $ | 29,341 | ||
|
|
For the Years Ending December 31, | Amortization Expense | ||
2016 (remaining nine months) | $ | 4,361 | |
2017 | 5,448 | ||
2018 | 5,144 | ||
2019 | 4,168 | ||
2020 | 3,891 | ||
Thereafter | 800 | ||
Total expected future amortization | $ | 23,812 |
Income Taxes
The Company acquired certain intangible assets from a distributor in the United States on October 1, 2014 in order to directly serve the smaller hospital market. The total purchase price for this transaction was $21.0 million, of which $18.0 million was paid in cash in 2014, and $3.0 million was retained subject to certain final price adjustments. The retained amount was recorded in “Accrued and other liabilities” in the Balance Sheet at December 31, 2014 and was paid in full in January 2015. The Company accounted for the transaction as an asset acquisition and recorded two intangible assets: re-acquired exclusive distribution rights, and re-acquired distribution rights and customer relationships of $0.9 million and $19.9 million, respectively. The remaining $0.2 million was recorded as settlement for pre-existing relationships in the statements of operations in 2014.
For the asset acquisition completed in 2014, re-acquired exclusive distribution rights were assigned a useful life of 3 months, and re-acquired distribution rights and customer relationships assets were assigned a useful life of 6 years beginning from January 1, 2015.
7. Income Taxes
foreign subsidiaries. For the three months ended March 31, 2015, the Company recorded an income tax benefit of $0.5 million, comprised primarily of ordinary tax benefit of the Company’s foreign subsidiaries and the tax effect of items in accumulated other comprehensive income. For the three months ended March 31, 2014, the Company recorded an income tax provision of $0.7 million, primarily related to ordinary tax expense of the Company’s foreign subsidiaries.
loss, net.
2015.
8.2015.
March 31, 2015 | December 31, 2014 | |||||||
Liability component: | ||||||||
Principal | 345,000 | 345,000 | ||||||
Less: debt discount, net of amortization | (64,419 | ) | (66,787 | ) | ||||
|
|
|
| |||||
Net carrying amount | 280,581 | 278,213 | ||||||
Equity component (a) | 73,013 | 73,013 |
March 31, 2016 | December 31, 2015 | ||||
Liability component: | |||||
Principal | 345,000 | 345,000 | |||
Less: debt discount, net of amortization and reclassification of debt issuance costs | (60,705 | ) | (63,373 | ) | |
Net carrying amount | 284,295 | 281,627 | |||
Equity component (a) | 73,013 | 73,013 |
(a) | Recorded in the condensed consolidated balance sheets within additional paid-in capital, net of $2.0 million issuance costs in equity |
Three months ended March 31, 2015 | Three months ended March 31, 2014 | |||||||
1.25% coupon | $ | 1,078 | $ | 575 | ||||
Amortization of debt issuance costs | 134 | 50 | ||||||
Amortization of debt discount | 2,368 | 1,207 | ||||||
|
|
|
| |||||
3,580 | 1,832 |
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
1.25% coupon | $ | 1,078 | $ | 1,078 | |||
Amortization of debt issuance costs | 179 | 134 | |||||
Amortization of debt discount | 2,488 | 2,368 | |||||
$ | 3,745 | $ | 3,580 |
March 31, 2015 | December 31, 2014 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
Convertible Senior Notes | $ | 383,495 | $ | 280,581 | $ | 382,232 | $ | 278,213 |
March 31, 2016 | December 31, 2015 | ||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||
Convertible Senior Notes | $ | 312,570 | $ | 284,295 | $ | 307,481 | $ | 281,627 |
9.
Years Ending December 31, | Purchase Commitments | |||
2015 (remaining nine months) | $ | 32,909 | ||
2016 | — | |||
2017 | — | |||
2018 | — | |||
2019 | — | |||
Thereafter | — | |||
|
| |||
Total minimum payments | $ | 32,909 | ||
|
|
Years Ending December 31, | Purchase Commitments | ||
2016 (remaining nine months) | $ | 41,517 | |
2017 | — | ||
2018 | — | ||
2019 | — | ||
2020 | — | ||
Thereafter | — | ||
Total minimum payments | $ | 41,517 |
system modules.
allocated certain legal fees and costs between the parties.
determine the likelihood of whether these potential outcomes will occur or estimate their respective potential amounts.
10.
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Cost of sales | $ | 1,040 | $ | 381 | ||||
Research and development | 2,198 | 2,128 | ||||||
Sales and marketing | 1,450 | 1,616 | ||||||
General and administrative | 2,869 | 2,657 | ||||||
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|
| |||||
Total stock-based compensation expense | $ | 7,557 | $ | 6,782 | ||||
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|
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Cost of sales | $ | 1,515 | $ | 1,040 | |||
Research and development | 2,278 | 2,198 | |||||
Sales and marketing | 1,929 | 1,450 | |||||
General and administrative | 3,316 | 2,869 | |||||
Total stock-based compensation expense | $ | 9,038 | $ | 7,557 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Instrinic Value | |||||||||||||
Outstanding, December 31, 2014 | 5,581 | $ | 33.20 | |||||||||||||
Granted | 40 | $ | 56.23 | |||||||||||||
Exercised | (476 | ) | $ | 23.30 | ||||||||||||
Forfeited | (121 | ) | $ | 39.95 | ||||||||||||
|
| |||||||||||||||
Outstanding, March 31, 2015 | 5,024 | $ | 34.16 | 4.06 | $ | 114,223 | ||||||||||
|
| |||||||||||||||
Exercisable, March 31, 2015 | 2,857 | $ | 27.42 | 2.91 | $ | 84,215 | ||||||||||
Vested and expected to vest, March 31, 2015 | 4,868 | $ | 33.85 | 4.00 | $ | 112,197 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Intrinsic Value | |||||||||
Outstanding, December 31, 2015 | 5,442 | $ | 39.46 | |||||||||
Granted | 308 | $ | 32.27 | |||||||||
Exercised | (76 | ) | $ | 9.33 | ||||||||
Forfeited | (54 | ) | $ | 42.41 | ||||||||
Outstanding, March 31, 2016 | 5,620 | $ | 39.45 | 4.05 | $ | 13,888 | ||||||
Exercisable, March 31, 2016 | 3,249 | $ | 33.40 | 2.86 | $ | 13,223 | ||||||
Vested and expected to vest, March 31, 2016 | 5,452 | $ | 39.22 | 3.99 | $ | 13,810 |
Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding, December 31, 2014 | 698 | $ | 40.30 | |||||
Granted | 51 | 55.85 | ||||||
Vested | (56 | ) | 36.76 | |||||
Cancelled | (29 | ) | 41.21 | |||||
|
| |||||||
Outstanding, March 31, 2015 | 664 | $ | 41.75 | |||||
|
|
Shares | Weighted Average Grant Date Fair Value | |||||
Outstanding, December 31, 2015 | 1,000 | $ | 48.44 | |||
Granted | 101 | 32.89 | ||||
Vested | (55 | ) | 43.46 | |||
Cancelled | (24 | ) | 46.72 | |||
Outstanding, March 31, 2016 | 1,022 | $ | 47.21 |
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
OPTION SHARES: | ||||||||
Expected Term (in years) | 4.40 | 4.42 | ||||||
Volatility | 0.38 | 0.43 | ||||||
Expected Dividends | — | % | — | % | ||||
Risk Free Interest Rates | 1.39 | % | 1.66 | % | ||||
Estimated Forfeitures | 6.75 | % | 7.61 | % | ||||
Weighted Average Fair Value Per Share | $ | 18.55 | $ | 18.43 | ||||
ESPP SHARES: | ||||||||
Expected Term (in years) | 1.22 | 1.25 | ||||||
Volatility | 0.32 | 0.32 | ||||||
Expected Dividends | — | % | — | % | ||||
Risk Free Interest Rates | 0.26 | % | 0.17 | % | ||||
Weighted Average Fair Value Per Share | $ | 16.43 | $ | 14.54 |
11.
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
OPTION SHARES: | |||||||
Expected Term (in years) | 4.33 | 4.40 | |||||
Volatility | .36 | .38 | |||||
Expected Dividends | — | — | |||||
Risk Free Interest Rates | 1.39 | % | 1.39 | % | |||
Estimated Forfeitures | 6.14 | % | 6.75 | % | |||
Weighted Average Fair Value Per Share | $ | 10.13 | $ | 18.55 | |||
ESPP SHARES: | |||||||
Expected Term (in years) | 1.23 | 1.22 | |||||
Volatility | .49 | .32 | |||||
Expected Dividends | — | — | |||||
Risk Free Interest Rates | 0.59 | % | 0.26 | % | |||
Weighted Average Fair Value Per Share | $ | 9.87 | $ | 16.43 |
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Revenue by market: | ||||||||
Clinical Systems | $ | 16,301 | $ | 17,285 | ||||
Clinical Reagents | 109,006 | 83,160 | ||||||
|
|
|
| |||||
Total Clinical | 125,307 | 100,445 | ||||||
Non-Clinical | 7,330 | 6,462 | ||||||
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|
|
| |||||
Total revenue | $ | 132,637 | $ | 106,907 | ||||
|
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|
|
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Revenue: | |||||||
System and other revenue | $ | 24,284 | $ | 18,714 | |||
Reagent and disposable revenue | 120,496 | 113,923 | |||||
Total revenue | $ | 144,780 | $ | 132,637 |
Three Months Ended March 31, | ||||||||
2015 | 2014 | |||||||
Geographic revenue information: | ||||||||
North America | ||||||||
Clinical | $ | 75,473 | $ | 57,286 | ||||
Non-Clinical | 6,832 | 5,549 | ||||||
|
|
|
| |||||
Total North America | 82,305 | 62,835 | ||||||
International | ||||||||
Clinical | $ | 49,834 | $ | 43,159 | ||||
Non-Clinical | 498 | 913 | ||||||
|
|
|
| |||||
Total International | 50,332 | 44,072 | ||||||
|
|
|
| |||||
Total revenue | $ | 132,637 | $ | 106,907 | ||||
|
|
|
|
Three Months Ended March 31, | |||||||
2016 | 2015 | ||||||
Geographic revenue information: | |||||||
North America | $ | 82,390 | $ | 82,305 | |||
International | 62,390 | 50,332 | |||||
Total revenue | $ | 144,780 | $ | 132,637 |
March 31, 2016 | December 31, 2015 | ||||||
United States | $ | 125,102 | $ | 108,210 | |||
Other regions | 18,867 | 19,429 | |||||
Total long-lived assets | $ | 143,969 | $ | 127,639 |
12. Related party transaction
The Company sells its products and provides services to Geisinger Health System (“Geisinger”), a physician-led health care system serving multiple regions of Pennsylvania. The President and Chief Executive Officer of Geisinger is also a director of the Company. Net revenues recorded from sales to Geisinger were approximately $0.8 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively. Asas of March 31, 20152016 and December 31, 2014, the Company had accounts receivable of approximately $0.3 million and $0.2 million due from Geisinger, respectively.
13. Subsequent Events
On April 28, 2015, the shareholders of the Company approved the Cepheid 2015 Equity Incentive Plan (the “2015 EIP”), which was approved by the Company’s Board of Directors on February 10, 2015. The 2015 EIP will replace the Company’s existing 2006 Equity Incentive Plan.
productivity;productivity and the productivity and effectiveness of our distributors; speed and extent of test menu expansion and utilization; improving gross margins; execution of manufacturing operations; our reliance on a single contract manufacturer; our success in increasing product sales under the High Burden Developing Country (“HBDC”) program; the relative mix of commercial and HBDC sales and the relative mix of instrument and test sales; our success in commercial test and commercial system sales andsales; our ability to sell directly to the smaller hospital market and the independent reference laboratory market; the performance and market acceptance of our new products, including our new point-of-care system; manufacturing costs associated with the ramp-up of new products; test performance in the field; testing volumes for our products; unforeseen supply, development and manufacturing problems; our ability to manage our inventory levels; our ability to scale up manufacturing; our research and development budget; the potential need for intellectual property licenses for tests and other products and the terms of such licenses; the environment for capital spending by hospitals and other customers for our diagnostic systems; the effectiveness of our sales personnel and our ability to successfully expand and effectively manage increased sales and marketing operations, including expansion of our direct sales force to address the smaller hospital market and the independent reference laboratory market; lengthy sales cycles in certain markets, including the HBDC program and the smaller hospital market; variability in systems placements and reagent pull-through in our HBDC program and the smaller hospital market; the impact of competitive products and pricing; sufficient customer demand; customer confidence in product availability and available customer budgets; the level of testing at clinical customer sites, including for healthcare associated infections; our ability to consolidate customer demand through volume pricing; our ability to develop new products and complete clinical trials successfully in a timely manner for new products; our ability to obtain regulatory approvals for new products; uncertainties related to FDAthe United States Food and Drug Administration (“FDA”) regulatory and international regulatory processes; our ability to respond to changing laws and regulations affecting our industry and changing enforcement practices related thereto; our reliance on distributors in some regions to market, sell and support our products in certain geographic locations; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; costs of litigation, including settlement costs; our ability to manage geographically-dispersed operations; the scope and timing of actual United States Postal Service (“USPS”) funding of the Biohazard Detection System (“BDS”) in its current configuration; the rate of environmental testing using the BDS conducted by the USPS, which will affect the amount of consumable products sold; underlying market conditions worldwide; the impact of foreign currency exchange; protection of our intellectual property and proprietary information; and the other risks set forth under “Risk Factors” and elsewhere in this report. We neither undertake, nor assume any 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.testing in the Clinical and Non-Clinical markets.testing. Our systems enable rapid,fast, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Our objective is to become the leading supplier of integrated systems and tests for molecular diagnostics. We intend to do this, in part, by extending the reach of our platform deeper into the hospital and reference laboratory markets as well as expanding into the point-of-care market and new geographic markets, and, in part, by extending the breadth of our platform by developing new tests for our systems, such as oncology. Key elements of our strategy to achieve this objective include:•Provide a fully-integrated molecular testing solution to the Clinical market. We are focusing our investments on selling our systems and tests to the Clinical market and we believe our GeneXpert system will continue to significantly expand our presence in the Clinical market due to its ability to deliver accurate and rapid results, ease of use, flexibility and scalability. Features of the GeneXpert system and Xpert tests include:
2015
Three Months Ended March 31, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
Revenue by market: | ||||||||||||||||
Clinical Systems | $ | 16,301 | $ | 17,285 | $ | (984 | ) | -6 | % | |||||||
Clinical Reagents | 109,006 | 83,160 | 25,846 | 31 | % | |||||||||||
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Total Clinical | 125,307 | 100,445 | 24,862 | 25 | % | |||||||||||
Non-Clinical | 7,330 | 6,462 | 868 | 13 | % | |||||||||||
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Total revenue | $ | 132,637 | $ | 106,907 | $ | 25,730 | 24 | % | ||||||||
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Total Clinical
Three Months Ended March 31, | ||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||
Revenue: | ||||||||||||||
System and other revenue | $ | 24,284 | $ | 18,714 | $ | 5,570 | 30 | % | ||||||
Reagent and disposable revenue | 120,496 | 113,923 | 6,573 | 6 | % | |||||||||
Total revenue | $ | 144,780 | $ | 132,637 | $ | 12,143 | 9 | % |
Non-Clinical revenue increased $0.9 million, or 13%, for the three months ended March 31, 20152016 as compared to the same period in the prior year, primarily due to increased granta large reagent order to India, our growing installed base of GeneXpert instruments and collaboration revenues.
our expanding menu of Xpert tests, partially offset by a decrease in sales of anthrax test cartridges under our USPS BDS program.
additional tests within our customer base.
Three Months Ended March 31, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
Geographic revenue information: | ||||||||||||||||
North America | ||||||||||||||||
Clinical | $ | 75,473 | $ | 57,286 | $ | 18,187 | 32 | % | ||||||||
Non-Clinical | 6,832 | 5,549 | 1,283 | 23 | % | |||||||||||
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Total North America | 82,305 | 62,835 | 19,470 | 31 | % | |||||||||||
International | ||||||||||||||||
Clinical | 49,834 | 43,159 | $ | 6,675 | 15 | % | ||||||||||
Non-Clinical | 498 | 913 | (415 | ) | -45 | % | ||||||||||
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Total International | 50,332 | 44,072 | 6,260 | 14 | % | |||||||||||
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Total revenue | $ | 132,637 | $ | 106,907 | $ | 25,730 | 24 | % | ||||||||
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Three Months Ended March 31, | ||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||
Geographic revenue information: | ||||||||||||||
North America | $ | 82,390 | $ | 82,305 | $ | 85 | 0 | % | ||||||
International | 62,390 | 50,332 | 12,058 | 24 | % | |||||||||
Total revenue | $ | 144,780 | $ | 132,637 | $ | 12,143 | 9 | % |
driven by higher sales of Xpert tests, partially offset by a decrease in sales of anthrax test cartridges under our USPS BDS program. International revenue increased $6.3$12.1 million, or 14%24%, for the three months ended March 31, 20152016 as compared to the same period in the prior year, primarily driven by higher revenue from Clinical reagents partially offset by lower sales of Clinicalclinical systems and reagents to customers participating in our HBDC program. Some of our international revenue is denominated in foreign currencies. Duecustomers, including a large system and reagent order to theIndia, as well as higher sales from clinical reagents to commercial customers.
We expect that foreign currency rates will continue to negatively impact our international revenue. Some of this will be offset by our cash flow hedging program in place, however a significant portion of our expected internationalwhich were recorded as revenue in the remainder of 2015 was not hedgedsame period in the prior to the strengthening of the United States dollar – especially for the second half of this year.
No single country outside of the United States represented more than 10% of our total sales in any period presented.
Three Months Ended March 31, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
Costs and operating expenses: | ||||||||||||||||
Cost of sales | $ | 61,201 | $ | 53,083 | $ | 8,118 | 15 | % | ||||||||
Collaboration profit sharing | 1,267 | 1,291 | (24 | ) | -2 | % | ||||||||||
Research and development | 23,986 | 21,740 | 2,246 | 10 | % | |||||||||||
Sales and marketing | 25,936 | 23,458 | 2,478 | 11 | % | |||||||||||
General and administrative | 15,642 | 13,667 | 1,975 | 14 | % | |||||||||||
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Total costs and operating expenses | $ | 128,032 | $ | 113,239 | $ | 14,793 | 13 | % | ||||||||
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Three Months Ended March 31, | ||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||
Costs and operating expenses: | ||||||||||||||
Cost of sales | $ | 72,595 | $ | 61,201 | $ | 11,394 | 19 | % | ||||||
Collaboration profit sharing | 658 | 1,267 | (609 | ) | (48 | )% | ||||||||
Research and development | 29,914 | 23,986 | 5,928 | 25 | % | |||||||||
Sales and marketing | 28,795 | 25,936 | 2,859 | 11 | % | |||||||||
General and administrative | 15,055 | 15,642 | (587 | ) | (4 | )% | ||||||||
Total costs and operating expenses | $ | 147,017 | $ | 128,032 | $ | 18,985 | 15 | % |
clinical reagent products and increased system shipments.
the increase in revenue derived from our HBDC customers, which included a large system and reagent order to India, and was also negatively impacted by changes in foreign currency rates.
medical device excise tax, offset by a shift in customer mix. If sales to our HBDC customers are higher than anticipated, gross margin percentage may be negatively impacted
.2015.
initiative and the development of our GeneXpert Omni for the point-of-care market.
and the development of our GeneXpert Omni for the point-of-care market.
be comparable to 2015.
fees, which were partially offset by an increase in headcount and increased stock-based compensation expense.
Three Months Ended March 31, | ||||||||||||||||
2015 | 2014 | $ Change | % Change | |||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest income | $ | 373 | $ | 153 | $ | 220 | 144 | % | ||||||||
Interest expense | (3,603 | ) | (1,862 | ) | (1,741 | ) | 94 | % | ||||||||
Foreign currency exchange loss and other, net | (945 | ) | (582 | ) | (363 | ) | 62 | % | ||||||||
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Other expense, net | $ | (4,175 | ) | $ | (2,291 | ) | $ | (1,884 | ) | 82 | % | |||||
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Three Months Ended March 31, | ||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||
Other income (expense) | ||||||||||||||
Interest income | $ | 660 | $ | 373 | $ | 287 | 77 | % | ||||||
Interest expense | (3,765 | ) | (3,603 | ) | (162 | ) | 4 | % | ||||||
Foreign currency exchange loss and other, net | (528 | ) | (945 | ) | 417 | (44 | )% | |||||||
Total other expense, net | $ | (3,633 | ) | $ | (4,175 | ) | $ | 542 | (13 | )% |
LIQUIDITY AND CAPITAL RESOURCES
Cashconvertible note discount into interest expense from the issuance of senior convertible notes in February 2014. Foreign currency exchange loss and Cash Flow
Three Months Ended March 31, | ||||||||||||
2015 | 2014 | Increase/ (Decrease) | ||||||||||
(In thousands) | ||||||||||||
Net cash provided by (used in) operating activities | $ | 738 | $ | (16,856 | ) | $ | 17,594 | |||||
Net cash used in investing activities | (36 | ) | (244,877 | ) | 244,841 | |||||||
Net cash provided by financing activities | 13,818 | 332,290 | (318,472 | ) |
Theother, net cash provideddecreased by operating activities was $0.7$0.4 million, in the first three months of 2015. It was primarily comprised of net income and cash adjusted for the effects of non-cash expenses and working capital uses of cash. Non-cash expenses were comprised of stock-based compensation, depreciation and amortization of property and equipment, amortization of debt discount and debt issuance costs and amortization of intangible assets. The primary working capital uses of cashor 44% for the three months ended March 31, 2016 as compared to the same period in the prior year, primarily due to the strengthening of the Euro, South African Rand and Australian dollar against the United States dollar, partially offset by the strengthening of the United States dollar against the British pound.
Three Months Ended March 31, | |||||||||||
2016 | 2015 | Change | |||||||||
(In thousands) | |||||||||||
Net cash provided by (used in) operating activities | $ | (9,113 | ) | $ | 738 | $ | (9,851 | ) | |||
Net cash used in investing activities | (17,959 | ) | (36 | ) | (17,923 | ) | |||||
Net cash provided by financing activities | 4,208 | 13,818 | (9,610 | ) |
The net cash used in operating activities was $16.9 million inbalance during the first three months of 2014. It was primarily comprised of net loss and the net effect of cash adjusted for the effects of non-cash expenses and working capital uses of cash. Non-cash expenses were comprised of stock-based compensation, depreciation and amortization of property and equipment, amortization of debt discount and debt issuance costs and amortization of intangible assets. The primary working capital uses of cash for the three months ended March 31, 2014 were increases in inventory, prepaid expenses and other current assets and accounts receivable and decreases in accrued compensation partially offset by increases in accounts payable and other current liabilities and deferred revenue and a decrease in other non-current assets.
The net cash used in investing activities was not significant in2016 compared with the first three months of 2015, primarily driven by volume and timing of pre-payments and timing of payments of other receivables; partially offset by
The net cash used in investing activities was $244.9 million in the first three months in 2014. It was primarily comprised of purchases of marketable securities and investments, while cash inflows are primarily proceeds from sales and maturities of marketable securities and investments and proceeds from the sale of equipment and intangible assets. Net cash used in investing activities during the first three months of 2016 increased $17.9 million compared with the first three months of 2015, primarily due to increased capital expenditures following the issuance of our senior convertible notesand an increase in February 2014.
The netrestricted cash.
The net cash provided by financing activities was $332.3 million induring the first three months of 2014. It was2016 decreased $9.6 million compared with the first three months of 2015, primarily comprised ofdue to a decrease in net proceeds from the issuance of $345 million in principal amount of our convertible senior notes in February 2014 and, to a lesser extent, the issuance of common sharesstock and exercisesexercise of stock options partially offset byof $9.6 million during the purchasefirst three months of a capped call transaction for approximately $25.1 million.
2016.
1933, as amended.
RISKS 2016.RISKmillion.million as of March 31, 2016. In addition, if a 100 basis point change in overall interest rates were to occur in 2015,2016, our interest income would not change significantly in relation to amounts we would expect to earn, based on our cash, cash equivalents, and investments as of March 31, 2015.$345$345.0 million in aggregate principal amount of our 1.25% convertible senior notes due 2021. At our election, the notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock in each case under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock reaches a price for a sustained period at 130% above the conversion price of $65.10, the notes will become convertible. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished depends on our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of operations during the period in which the notes are converted. The implicit interest rate for the notes is 5.0%. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of $100 million aggregate principal amount of the notes would result in a loss of approximately $4.8$4.9 million.20152016 were transacted in United States dollars. As a corporation with international and domestic operations, we are exposed to changes in foreign exchange rates. Our international revenue is predominantly in European countries and South Africa and is denominated in a number of currencies, primarily the Euro, United States dollar, British Pound, South African Rand, and Australian dollar. In our international operations, we pay payroll and other expenses in local currencies. In the three months ended March 31, 2015 and 2014, international sales were 38% and 41%, respectively, of our total sales. Our international sales are predominantly in European countries and South Africa. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.willexpect to continue to use hedging programshedge our foreign currency exposure in the future and may use currency forward contracts, currency options, and/or other common derivative financial instruments commonly utilized to reduce financial market risks if it is determinedforeign currency risk. We performed a sensitivity analysis as of March 31, 2016 based on a model that such hedging activities are appropriate to reduce risk. Ameasures the impact of a hypothetical 10% adverse change in theforeign exchange rates upward or downward into the United States dollar (with all other variables held constant) on our portfolio ofunderlying estimated major foreign currency contractsexposures, net of derivative financial instruments. The foreign exchange rates used in the model were based on the spot rates in effect as of March 31, 2016. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign exchange rates would have decreased or increased, respectivelyan unfavorable impact on the underlying cash flow exposure, net of our unrealized loss by approximately $5.9foreign exchange derivative financial instruments, of $2.7 million atas of March 31, 2015 and unrealized loss by approximately $5.0 million at December 31, 2014. We do not hold or purchase any currency contracts for trading purposes.2016.
2015,2016, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.first quarter of 2015, we had a changeended March 31, 2016, there were no changes in our internal control over financial reporting that occurred as a result of our implementation of a new enterprise resource planning (“ERP”) system that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. During the first quarter of 2015, our new ERP system replaced our legacy system in which a significant portion of our business transactions originate, are processed and recorded. Our new ERP system is intended to provide us with enhanced transactional processing and management tools compared to our legacy system, and is intended to enhance internal controls over financial reporting.
parties. determine the likelihood of whether these potential outcomes will occur or estimate their respective potential amounts.Hoffman-LaHoffmann-La Roche Ltd. and Roche Molecular Systems, Inc. (“Roche”) that provided us with rights under a broad range of Roche patents, including patents relating to the PCR process, reverse transcription-based methods, nucleic acid quantification methods, real-time PCR detection process and composition, and patents relating to methods for detection of viral and cancer targets. A number of the licensed patents expired in the United States prior to the end of August of 2010 and in Europe prior to the end of August of 2011. In August 2010, we terminated our license to United States Patent No. 5,804,375 (the “375 Patent”) and ceased paying United States-related royalties. We terminated the entire license agreement in the fourth quarter of 2011. In August 2011, Roche initiated an arbitration proceeding against us in the International Chamber of Commerce pursuant to the terms of the terminated agreement. We filed an answer challenging arbitral jurisdiction over the issues submitted by Roche and denying that we violated any provision of the agreement. A three-member panel has beenwas convened to address these issues in confidential proceedings. On July 30, 2013, the panel determined that it had jurisdiction to decide the claims, a determination that we appealed to the Swiss Federal Supreme Court. On October 2, 2013, the arbitration panel determined that it would proceed with the arbitration while this appeal was pending. On February 27, 2014 the Swiss Federal Supreme Court upheld the jurisdiction of the arbitration panel to hear the case, andcase. On April 22, 2016, the case is continuing. We believearbitration panel transmitted a partial award holding that we have not violated any provisionwere liable for damages for the manufacture and sale of certain accused products starting after we terminated the agreementlicense until September 2015, with the final amount to be determined by audit. The partial award also denied Roche’s requests for an injunction, and thatallocated certain legal fees and costs between the asserted claim of the 375 Patent is expired, invalid, unenforceable and not infringed.loss to Cepheid.loss. Accordingly, we recorded an estimated charge of $20 million as our best estimate of the potential loss in the fourth quarteras of December 31, 2014, which amount was included in accrued and other liabilities in our condensed consolidated balance sheets. AsTaking into account the partial award, this continues to be our best estimate for this potential loss as of March 31, 2015, there was no change in2016. Depending on the Company’s best estimate. However, given the inherent uncertainty of arbitration and the naturefinal ruling of the claims in this matter,arbitrators, it is possible that we may incur an additional material charge, but an estimate of such a charge cannotcould also be maderesponsible for certain fees, costs and/or interest, if any; however, we are unable at this time. We continuetime to strongly dispute Roche’s claims and intend to vigorously defend against them.United States PatentUSPTO and Trademark Office and the Companywe filed a motion with the Court to stay this lawsuit pending the outcome of the IPR. On January 7, 2015, the Court issued an order staying the lawsuit pending the outcome of the IPR. On March 16, 2015, we filed a second petition for IPR of an additional claim of the 723 Patent. On June 11, 2015, the USPTO issued a decision declining to institute the first requested IPR. On July 13, 2015, we filed a request for reconsideration of the first petition for IPR with respect to certain challenged claims. On September 16, 2015, the USPTO denied the request for reconsideration. On September 17, 2015, the USPTO decided to institute our second petition for IPR. We believe that the possibility that these legal proceedings will result in a material loss is remote. various claims, complaints and legal actions that arise from time to time in the normal course of business. Other than as described above, we do not believe we are party to any currently pending legal proceedings that will result in a material adverse effect on our business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.
costs. production of our products. If we fail to compete effectively, we could lose sales, and our business will be harmed. If any of our distribution agreements are terminated or if we elect to distribute decrease or we may be unable to successfully launch our new point-of-care diagnostic platform. For example, the America Invents Act enacted proceedings involving various forms of post-issuance patent review proceedings, such as IPR and covered business method review. These proceedings are conducted before the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office. Each has different eligibility criteria and different types of challenges that can be raised. The IPR process permits any person (except a party who has been litigating the patent for more than a year) to challenge the validity of a patent on the grounds that it was known from the prior art. Recently, entities associated with hedge funds have begun challenging valuable pharmaceutical patents through IPR proceedings. The filing of such proceedings or the issuance of an adverse decision in such proceedings could result in the loss of valuable patent rights that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.2015,2016, we had a net incomeloss of $0.9 million. However,$6.6 million, and in the years ended December 31,2015 and 2014 and 2013, we experienced a net loss of $50.1$48.5 million and $18.0$50.1 million, respectively. As of March 31, 2015,2016, we had an accumulated deficit of approximately $292.8$348.8 million. We do not expect to be profitable for fiscal 20152016 and our ability to be profitable in the future will likely depend on our ability to continue to increase our revenues,revenue, which is subject to a number of factors including our ability to continue to successfully penetrate the Clinical market, our ability to successfully market the GeneXpert system and develop and market additional GeneXpertXpert tests, our ability to sell directlysuccessfully expand our United States sales organization and international commercial operations and the success of our sales organization in selling our systems and tests, the timing and success of market entry to the smaller hospital (hospitals with less than 150 beds)point-of-care market and independent referencethe introduction of the GeneXpert Omni, the acceptance and success of our Xpert tests in the point-of-care market upon launch, the success of our distributor relationships, particularly in expanding our offerings into non-acute care laboratory markets,customers, including moderately complex physician office labs, our ability to secure regulatory approval of additional GeneXpertXpert tests, our ability to gain FDA regulatory and international regulatory clearance for our new products, our ability to continue to grow sales of GeneXpertXpert tests, our ability to compete effectively against current and future competitors, the increasing number of competitors in our market that could reduce the average selling price of our products, the continued development of our HBDC program, the amount of products sold through the HBDC program and the extent of global funding for such program, our ability to penetrate new geographic markets, global economic and political conditions and our ability to increase manufacturing throughput. Our ability to be profitable also depends on our expense levels and product gross margin, which are also influenced by a number of factors, including: the mix of revenuesrevenue from Clinical reagent sales and GeneXpert system sales as opposed to GeneXpert Infinity system sales and sales under our HBDC program, both of which have lower gross margins; the resources we devote to developing and supporting our products; increases in manufacturing costs associated with our operations;operations, including those associated with ramp-up of new products; increases in costs related to our distributor relationships; our ability to improve manufacturing efficiencies,efficiencies; our ability to manage our inventory levels; third-party freight costs; the resources we devote to our research and development of, and compliance with regulatory processes for, potential products; license fees or royalties we may be required to pay; the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses; the impact of foreign currency exchange rates; and the prices at which we are able to sell our GeneXpert systems and Xpert tests. Our manufacturing expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenuesrevenue to offset higher expensesexpenses. These expenses or a reduction in the prices at which we are able to sell our products, among other things, may cause our net income and working capital to decrease. For example, our gross margin for the third quarter of 2015 was lower than expected due primarily to a higher proportion of lower-margin HBDC business and less commercial business as well as higher than expected manufacturing expenses associated with the ramp-up to volume of our newest virology tests. If we fail to grow our revenue, manage our expenses and improve our gross margin, we may never achieve profitability again. If we fail to do so, the market price of our common stock will likely decline.collection processes related to our recent implementationthe impact of an enterprise resource planning system.foreign currency exchange rates. Additionally, we have experienced, and expect to continue to experience, meaningful variability in connection with our commercial system placements and system placements and reagent pull-through in our HBDC program. This variability may cause our revenuesrevenue and operating results to fluctuate significantly from quarter to quarter. Additionally, because of the limited visibility into the actual timing of future system placements, our operating results are difficult to forecast from quarter to quarter. Additionally, we expect moderate fluctuations from quarter to quarter in gross margin depending on product, geography and channel mix, including the relative mix of instrument and test sales, as well as the revenue contribution from our HBDC program, which has a lower gross margin than our other products.commercial sales. If revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions and unexpected costs or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. However, if we have an unexpected increase in costs and expenses in a quarter, our quarterly operating results will be affected. For example, for the year ended December 31, 2013, we incurred certain costs and inventory reserve provisions related to our manufacturing scale up and restructuring activities. Additionally, in July 2014, we began to self-insure for a portion of employee health insurance coverage and we estimate the liabilities associated with the risks retained by us, in part, by considering actuarial assumptions which, by their nature, are subject to a high degree of variability. If the number or severity of claims for which we are self-insured increases, or if we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessments, our operating results may be affected. Additionally, we had higher than expected operating expenses and lower than expected gross margin for the third quarter of 2015, which were primarily driven by a higher proportion of lower-margin HBDC business and less commercial business and higher than expected manufacturing costs associated with the ramp-up to volume of our newest virology tests. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly.revenuesrevenue could be diminished, and our gross margin may be negatively impacted.revenuesrevenue and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. In the past, we have experienced lower than expected revenue due to intermittent interruptions in our supply chain, which also negatively impacted the efficiency of our manufacturing operations and our resulting gross margin. In addition, we may incur unexpected expenses in connection with the manufacturing scale-up of new products, which could negatively impact our gross margin. For example, in the third quarter of 2015, higher than expected manufacturing costs associated with new test ramp-up contributed to lower than expected gross margin.revenuesrevenue and adversely affect our operating results in a particular quarter, and could also adversely affect our relationships with our customers, and could erode customer confidence in our product availability. Manufacturing problems can and do arise, as evidenced by our higher than expected manufacturing costs associated with new test ramp-up in the third quarter of 2015, and as demand for our products increases, any such problems could have an increasingly significant impact on our operating results. In the past, we have experienced problems and delays in production that have impacted our product yield and the efficiency of our manufacturing operations and caused delays in our ability to ship finished products, and we, or our contract manufacturer, may experience such delays in the future. We may not be able to react quickly enough to ship products and recognize anticipated revenuesrevenue for a given period if we experience significant delays in the manufacturing process. In addition, we must maintain sufficient production capacity and inventory in order to minimize such delays, which carriescarry fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our revenues from product sales, gross margins and our other operating results will be materially and adversely affected.ifa contract manufacturer for the manufacture and assembly of our systems, and our reliance on such suppliers failand contract manufacturer exposes us to deliver key product components in a timely manner, our manufacturing ability would be impairedincreased risks associated with quality control, production delays and our product sales could suffer.that supplyfor some of the components used in the manufacture of our systems and our disposable reaction tubes and cartridges. We also depend on a single contract manufacturer for the manufacture and final assembly of the entire line of our GeneXpert systems. Strategic purchases of components are necessary for our business. Ifbusiness, but our reliance on a limited number of suppliers and a single contract manufacturer could expose us to reduced control over product quality and product availability, which could lead to product reliability issues and/or lower revenue and product shortages as a result of manufacturing capacity issues at our contract suppliers or manufacturer, or failure to adequately forecast demand for our components or systems. In addition, we need alternative sources for key component parts for any reason, these component parts may notcannot be immediately availablecertain that our suppliers or contract manufacturer will continue to us.be willing and able to meet our requirements according to existing terms or at all. If alternative suppliers or contract manufacturers are not immediately available, we will have to identify and qualify alternative suppliers or contract manufacturers and we could experience production of these components may be delayed.delays and additional costs. We may not be able to find an adequate alternative suppliersuppliers or contract manufacturers in a reasonable time period or on commercially acceptable terms, if at all. Shipments of affected products have been limited or delayed as a result of such problems in the past, and similar problems could occur in the future. For example, in the past, we have experienced intermittent interruptions in the supply of Xpert cartridge parts, which negatively impacted our product sales. In addition, some companies continue to experience financial difficulties, partially resulting from continued economic uncertainty. We cannot be assured that our suppliers or contract manufacturer will not be adversely affected by this uncertainty or that they will be able to continue to provide us with the components we need. Our inabilityneed or to manufacture and assemble our systems. If we are unable to obtain ourthe key source supplies for the manufacture of our products or we experience interruptions in the manufacture and assembly of our systems, product shipments may require us to delay shipments of products,be delayed, which could harm customer relationships and our distributor relationships or force us to curtail operations or temporarily cease operations.revenuesrevenue in a given period, and may cause revenuesrevenue and operating results to vary significantly from period to period. For example, sales of our products often involve purchasing decisions by large public and private institutions andwhere any purchases can require many levels of pre-approval. Additionally, because we only recently began selling directly to independent reference laboratories, the sales cycle to independent reference laboratories may be unpredictable for a period of time. In addition, certain Non-Clinical sales may depend on these institutions receiving research grants from various federal agencies, which grants vary considerably from year to year, in both amount and timing, due to the political process.approval. Additionally, participants in our HBDC program may be dependent on funding from governmental agencies and/or non-governmental organizations and, accordingly,organizations; as a result, such customers’ purchase decisions may not be within their direct control and may be subject to lengthy administrative processes, the result of which is thatprocesses. Accordingly, the sales cycle in our HBDC program is lengthy and unpredictable. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions on the schedule anticipated.willmay prevent us from achieving profitability. While we have received FDA clearance for a number of tests, these products may not experience increased sales. Many factors may affect the market acceptance and commercial success of our products, including:the timely expansion of our menu of tests;our tests under development on a timely basis;development;the demand for the tests we introduce;systems;systems and our new point-of-care diagnostic platform;healthcare associatedhealthcare-associated infections;market.market, including oncology tests, which is a key part of our strategy, and the successful launch of GeneXpert Omni, our new point-of-care diagnostic platform. For example, in April 2016, we announced a delay in the timing of the market launch of our GeneXpert Omni and any further delay could impact our ability to capitalize on this market opportunity. We believe that successfully expanding our business in the Clinical market is critical to our long-term goals and success. We have limited ability to forecast future demand for our products in this market. In addition, we have committed substantial funds to licenses that are required for us to compete in the Clinical market. If we cannot successfully penetrate the Clinical market to fully exploit these licenses, these investments may not yield significant returns, which could harm our business.countries.countries, for example, the Pharmaceuticals and Medical Devices Agency ("PMDA") of Japan and the China Food and Drug Administration ("CFDA"). In particular, FDA regulations govern activities such as product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Some of our products, depending on their intended use, will require premarket approval (“PMA”) or 510(k) clearance from the FDA prior to marketing. TheIn general, there are two types of FDA review processes applicable to our products: a premarket approval (“PMA”) and a 510(k) clearance process usually takes approximately 90 days from submission but can take longer.clearance. The PMA review process is much more costly, lengthy and uncertain, and generally takes from six months to one year or longer from submission, depending on whetherto complete after a submission. In some cases, the FDA may convene an expert advisory panel meeting is necessary.to independently review a submission and make a recommendation to approve or deny the submission. The 510(k) review process usually takes approximately three months after a submission, although the review process can sometimes take longer, particularly for novel or first-in-class products. Clinical studies are generally required to support both PMA and 510(k) submissions.submissions in the United States. Similar studies are required in other countries to support regulatory submissions, including for example, submissions to the PMDA in Japan and to the CFDA in China. Certain of our products for use on our GeneXpert and SmartCycler systems, when used for clinical purposes in the United States, may require PMA, and all such tests will most likely, at a minimum, require 510(k) clearance. We are planning clinical studies for other proposed products. Products intended for use in point-of-care settings, such as those intended to be used outside of the typical hospital laboratory environment (e.g., a non-waived physician office laboratory willlaboratory), require supplemental human factors clinical studies and an additional regulatory submission known as a CLIA waiver.waiver application. For example, we are seeking a CLIA waiver for GeneXpert II and IV. CLIA waiver applications typically takemay be submitted concurrently with a PMA or 510(k), or sequentially after a PMA or 510(k) review has been completed. Concurrent review of a CLIA waiver application with a PMA or 510(k) takes approximately 210 days from submission. Sequential review of a CLIA waiver application after a PMA approval or 510(k) clearance takes approximately 180 days for approval, and require additional studies.from submission. Clinical trials are expensive and time-consuming, as are human factors studies required for a CLIA waiver. In addition, the commencement or completion of any clinical trials may be delayed or halted for any number of reasons, including product performance, changes in intended use, changes in medical practice and the opinion of evaluator Institutional Review Boards. Additionally, since 2009, the FDA has significantly increased the scrutiny applied to its oversight of companies subject to its regulations, including PMA and 510(k) submissions, by hiring new investigators and increasing inspections of manufacturing facilities. We continue to monitor the CDRH’s implementationFDA Office of its plan of actionIn Vitro Diagnostics and Radiological Health ("OIR") and analyze how its decisions will impact the approval or clearance of our products and our ability to improve our systems and tests. The CDRH also deferred action on several other initiatives, including the creation ofOIR has proposed a new class of devices that would be subject to heightened review processes, until thefollowing an Institute of Medicine issues a related report on the 510(k) regulatory process whichthat was released in late July 2011. Many of the2011, but has since deferred any action on this proposal. At any time, actions proposed by the CDRHOIR could result in significant changes to the PMA or 510(k) process,processes, which could complicate the product approval process, although we cannot predict the effect of such changes and cannot ascertain if such changes will have a substantive impact on the approval of our products.or clearance process. If we fail to adequately respond to the increased scrutiny for the PMA and streamlined 510(k) submission process,processes, our business may be adversely impacted.premarket clearance or PMA for devices, withdrawal of marketing clearances or approvals, or criminal prosecution. For example, on July 27, 2015 Cepheid received a warning letter from the FDA regarding the Xpert Norovirus test describing deficiencies in the production quality system at Cepheid’s Stockholm, Sweden manufacturing facility. We continue to work with the FDA on resolution of the deficiencies. The Xpert Norovirus test manufactured in Sweden is not sold or distributed in the United States. As a result, it is our expectation that routine production and sale of the Xpert Norovirus test in the United States will not be affected. International sales of this test are not subject to FDA regulation. Until we successfully resolve the issues raised in the warning letter, the FDA will not approve any Cepheid Class III product. Cepheid has some Class III products currently in development but these are not currently expected to be available until 2017.approval, and/or a CLIA waiver (as appropriate) from the FDA, any failure or material delay to obtain such clearance or approval could harm our business. If the FDA were to disagree with our regulatory assessment and conclude that approval or clearance is necessary to market the products, we could be forced to cease marketing the products and seek approval or clearance. In addition, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may adversely affect our ability to obtain or maintain approval of our products and could harm our business.Our manufacturing facilities located in Sunnyvale and Lodi, California, Seattle, Washington and Stockholm, Sweden, where we assemble and produce the GeneXpert and SmartCycler systems, cartridges and other molecular diagnostic kits and reagents, are subject to periodic regulatory inspections by the FDA and other federal and state and foreign regulatory agencies. For example, these facilities are subject to Quality System Regulations (“QSR”) of the FDA and are subject to annual inspection and licensing by the States of California and Washington and European regulatory agencies. If we fail to maintain these facilities in accordance with the QSR requirements, international quality standards or other regulatory requirements, our manufacturing process could be suspended or terminated, which would prevent us from being able to provide products to our customers in a timely fashion and therefore harm our business. March 2010, the United States President signed the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “PPACA”), which makes changes that are expected to significantly impact the pharmaceutical and medical device industries. One of the principal aims of the PPACA as currently enacted is to expand health insurance coverage to approximately 32 million Americans who were previously uninsured. The PPACA contains a number of provisions designed to generate the revenues necessary to fund the coverage expansions among other things. This includes new fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013,a requirement that medical device manufacturers were required to pay an excise tax (or sales tax) of 2.3% of certain United States medical device revenues. Though there are some exceptions torevenue. Following additional legislation, the medical device excise tax thiswill apply beginning on January 1, 2018. This excise tax doeswill apply to all or most of our products sold within the United States.The taxes imposed by the PPACAStates and the expansion in the government’s role in the United States healthcare industry may result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.In addition, other legislativeoperationsMore recently,For example, on August 2, 2011, the United States President signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, which could mean that such providers have less available funds to purchase our products.Foundation for Innovative New Diagnostics,FIND, BMGF, USAID, UNITAID and the World Health Organization, may cease to devote financial resources to or otherwise cease to support our HBDC program.program, which may result in excess capacity and higher production costs.cyclecycles and lower gross margins and/or an adverse development relating to one or more of these risks could negatively impact our business, results of operations and financial condition. Additionally, our HBDC program facilitates the expansion of our commercial operations into additional geographic locations and, to the extent that our HBDC program is ineffective as a result of one or more of these risks, the international expansion of our commercial operations could suffer.We rely on licenses of key technology from third parties and may require additional licenses for many of our new product candidates.We rely on third-party licenses to be able to sell many of our products, and we could lose these third-party licenses for a number of reasons, including, for example, early terminations of such agreements due to breaches or alleged breaches by either party to the agreement. If we are unable to enter into a new agreement for licensed technologies, either on terms that are acceptable to us or at all, we may be unable to sell some of our products or access some geographic or industry markets. We also need to introduce new products and product features in order to market our products to a broader customer base and grow our revenues, and many new products and product features could require us to obtain additional licenses and pay additional license fees and royalties. Furthermore, for some markets, we intend to manufacture reagents and tests for use on our systems. We believe that manufacturing reagents and developing tests for our systems is important to our business and growth prospects but may require additional licenses, which may not be available on commercially reasonable terms or at all. Our ability to develop, manufacture and sell products, and our strategic plans and growth, could be impaired if we are unable to obtain these licenses or if these licenses are terminated or expire and cannot be renewed. We may not be able to obtain or renew licenses for a given product or product feature or for some reagents on commercially reasonable terms, if at all. Furthermore, some of our competitors have rights to technologies and reagents that we do not have which may put us at a competitive disadvantage in certain circumstances and could adversely affect our performance.molders,molders; in 2013, we acquired distributors in two of our international locations,locations; and in 2014, we re-acquired certain product distribution rights and acquired customer relationship assets from a former distributor in the United States. We have limited experience in successfully acquiring and integrating businesses, products and technologies, and even if we are able to consummate an acquisition or other investment, we may not realize the anticipated benefits of such acquisitions or investments, including our recent acquisitions. We may face risks, uncertainties and disruptions, including difficulties in the integration of the operations and services of these acquisitions or any other acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future acquisitions are not as successful as we originally anticipate. If we fail to successfully integrate companies, assets, products or technologies that we acquire or if we fail to successfully exploit acquired product distribution rights and maintain acquired relationships with customers, 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 or issue shares of common stock as consideration in the acquisition, the issuance of which could be dilutive to our existing shareholders. In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets. Furthermore, identifying, contemplating, negotiating or completing an acquisition and integrating an acquired business, product or technology could significantly divert management and employee time and resources.rapid strengthening of the United States dollar compared to foreign currencies, the volatility of the capital markets in the United States and abroad, and monetary and international financial uncertainties. These conditions have and may continue to make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and have caused our customers and potential customers to slow or reduce spending, particularly for systems. Furthermore, during economic uncertainty, our customers have experienced and may continue to experience issues gaining timely access to sufficient credit, which could result in their unwillingness to purchase products or an impairment of their ability to make timely payments to us. If that were to continue to occur, we might experience decreased sales, be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. Even with improved global economic conditions, it may take time for our customers to establish new budgets and return to normal purchasing patterns. We cannot predict the reoccurrencerecurrence or worsening of any economic slowdown or the sustainability of improved economic conditions, worldwide, in the United States or in our industry. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.industrial research products;production of laboratory-developed tests;and pharmaceutical companies;companies developing drug discovery technologies; and(sequence detection systems) to the commercial market. Roche, Abbott, Laboratories, Becton Dickinson and Company, Qiagen N.V., Hologic Inc., Luminex Corporation, Meridian Bioscience, Inc., bioMerieux SA, and Quidel Corporation sell sequencenucleic acid detection systems, some with separate robotic batch DNA purification systems, and sell reagents to the Clinical market. Other companies, such as Nanosphere Inc., Alere Inc. (which announced an agreement to be acquired by Abbott in February 2016), and GenMark Diagnostics, Inc., offer molecular tests. Additionally, we anticipate that in the future, additional competitors will emerge that offer a broad range of competing products.OneFor example, we are developing products in oncology, which is a key part of our strategy. If we are unable to successfully develop these products, our business could be harmed.test systems.systems and tests. We believe that customers in our target 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 if our products fail to perform as expected or our products are perceived as difficult to use. Despite testing, defects or errors could occur in our products or technologies. Furthermore, with respect to the USPS BDS program, our products are incorporated into larger systems that are built and delivered by others and we cannot control many aspects of the final system.revenues,revenue, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Such defects or errors could also prompt us to amend certain warning labels or narrow the scope of the use of our products, either of which could hinder our success in the market. Furthermore, any product failure in the overall USPS BDS program, even if it is unrelated to our products, could harm our business. 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, delayed market acceptance, damaged reputation, increased service and warranty costs and claims against us.If our direct selling efforts for our products fail, our business expansion plans could suffer and our ability to generate sales will be diminished.We have a relatively small sales force compared to some of our competitors. Further, we recently consolidated our global commercial operations under a single executive to emphasize end-to-end accountability, eliminate duplication and clarify decision responsibilities, and reduce organizational complexity. Our former Executive Vice President, International Commercial Operations, who joined us in June 2014, transitioned into the new role of Executive Vice President, Worldwide Commercial Operations in October 2014, where he is responsible for his prior duties and for our North American commercial operations, including the planned expansion of our United States sales organization. Our former Executive Vice President, North American Commercial Operations transitioned out of Cepheid in October 2014. If the size of our sales force, recent changes to the organization of our sales force or other issues cause our direct selling efforts to fail, our business expansion plans could suffer and our ability to generate sales could be diminished, which would harm our business.Clinicalclinical and Non-Clinicalnon-clinical markets in various geographic regions, and we have a limited ability to influence their efforts. We expect to continue to rely substantially on our distributor relationships for sales into other markets or geographic regions, thatwhich are key to our long-term growth strategy. For example, we recently entered into significant, non-exclusive agreements with three distribution partners offering our GeneXpert Systems to their non-acute care laboratory customers in the United States and intend to enter into additional distribution agreements to penetrate this market. Relying on distributors for our sales and marketing could harm our business for various reasons, including:distributors; anddistributors.we may not be able to negotiate future distributor agreements on acceptable terms.new products directly, we will have to invest in additional sales resources, including additional field sales personnel, which would increase future selling, general and administrative expenses. For example,as occurred in October 2014 when we terminated our distribution agreement with the Laboratory Supply Company and transitioned the smaller hospital market from a distributor sales model to a direct sales model. As a result,model, we are investingmay incur one-time costs related to such terminations and transitions. Additionally, we will have to invest in alternative distribution agreements or additional sales resources to sell directly to the smaller hospital marketpersonnel, which would increase future selling expenses and are exposed toresult in transition risks, as a result of transitioning the smaller hospital market from a distributor sales model to a direct sales model, such as difficulties maintaining relationships with specific customers and hiring appropriately trained personnel, any of which could result in lower revenuesrevenue than we previously received from our distributor in that market. IfFurther, if we elect to distribute new products directly in other markets or in new geographic regions, then we would be exposed to similar risks.Ifdesireseek to enter into other distribution arrangements, we may not be able to enter into new distribution agreements on satisfactory terms, or at all. For example, we may desire to enter into additional distribution agreements for our new point-of-care diagnostic platform and may not be able to enter into such agreements on satisfactory terms, or at all. If we fail to enter into acceptable distribution agreements that we deem are necessary or otherwise fail to successfully market our products, including our new point-of-care diagnostic platform, our product sales may decrease.GivenThis continues to be our best estimate for this potential loss as of March 31, 2016. Further, if we were to incur a loss in the inherent uncertainty of arbitration andproceeding, depending on the naturefinal ruling of the claims in this matter,arbitrators, it is possible that we may incur additional material losses but an estimate of such a charge cannotcould also be maderesponsible for certain fees, costs and/or interest, if any; however, we are unable at this time. Additionally, in September 2012, we entered into an agreement with Abaxis pursuanttime to which, in exchange for a one-time payment by us to Abaxisdetermine the likelihood of $17.3 million, all present and future litigation relating to the alleged infringement of certain Abaxis patents by us and our counterclaims against Abaxis were resolved.whether these potential outcomes will occur or estimate their respective potential amounts. Even if we are successful in defending against any current or future patent claims, we would likely incur substantial costs in doing so. Any litigation related to existing claims and others that may arise in the future would likely consume our resources and could lead to significant damages, royalty payments or an injunction on the sale of certain products. Any additional licenses to patented technology could obligate us to pay substantial additional royalties, which could adversely impact our product costs and harm our business.United States Patent and Trademark Office,USPTO, which may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, in September 2011, the United States enacted sweeping changes to the United States patent system under the Leahy-Smith America Invents Act, including changes that would transition the United States from a “first-to-invent” system to a “first-to-file” system and alter the processes for challenging issued patents. These changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. 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 or otherwise act improperly in relation to our proprietyproprietary information, and we may not have adequate remedies for the breach or improper actions. 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.We believe that companiesCompanies have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to malfeasance by employees, consultants or other service providers to state-sponsored attacks. Cyber threats may be generic, or they may be custom-crafted against our information systems. Over the past year,several years, cyber-attacks have become more prevalent and much harder to detect and defend against. Our network and storage applications may be vulnerable to cyber-attack, malicious intrusion, malfeasance, loss of data privacy or other significant disruption and may be subject to unauthorized access by hackers, employees, consultants or other service providers. For example, in the Company is currently investigating unauthorized system access bysecond quarter of 2015, an individual, whose employmentassociation with us has since been terminated.terminated, accessed our system and downloaded material in an unauthorized manner. Such data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose other confidential information and sensitive business information. Cyber-attacks could also cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. There can be no assurance that our systems and data protection efforts will prevent future business interruptions or loss or corruption of data.
Our reliance on international distribution partners may subject us to increased financial and operational risk, as our revenue and costs will be impacted by how successfully such distribution partners sell our products in international markets and by the terms on which such distribution partners are engaged.
A significant portion of our sales are denominated in foreign currencies and currency fluctuations and hedging expenses may cause our revenue and earnings to fluctuate and our foreign currency hedging program may not adequately offset foreign currency exposure.
A significant percentage of our product sales are denominated in foreign currencies, primarily the Euro. When the United States dollar strengthens against these foreign currencies, as it has recently, the relative value of sales made in the respective foreign currency decreases. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker United States dollar and are adversely affected by a stronger United States dollar relative to those foreign currencies in which we transact significant amounts of business.
We use foreign currency exchange forward contracts to hedge a portion of our forecasted revenue. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. We cannot predict future fluctuations in the foreign currency exchange rate. If the United States dollar appreciates significantly against certain currencies and our hedging program does not sufficiently offset the effects of such appreciation, our results of operations will be adversely affected and our stock price may decline.
Additionally, the expenses that we recognize in relation to our hedging activities can cause our earnings to fluctuate. The changes in interest rate spreads between the foreign currencies that we hedge and the United States dollar impact the level of hedging expenses that we recognize in a particular period.
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.
revenue.
Though we completed a sale of $345 million of convertible senior notes in February 2014, we
sufficiently.
We enter into collaborations with third parties that may not result in the development of commercially viable products or the generation of significant future revenues.
In the ordinary course of our business, we enter into collaborative arrangements to develop new products or to pursue new markets. These collaborations may not result in the development of products that achieve commercial success, and these collaborations could be terminated prior to developing any products. In addition, our collaboration partners may not necessarily purchase the volume of products that we expect. Accordingly, we cannot be assured that any of our collaborations will result in the successful development of a commercially viable product or result in significant additional revenues in the future.
The “conflict minerals” rule of the Securities and Exchange Commission, or SEC, has caused us to incur additional expenses, could limit the supply and increase the cost of certain metals used in manufacturing our products, and could make us less competitive in our target markets.
On August 22, 2012, the SEC adopted a rule requiring disclosure by public companies of the origin, source and chain of custody of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to obtain sourcing data from suppliers, engage in supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. The rule could limit our ability to source at competitive prices and to secure sufficient quantities of certain minerals used in the manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. We may incur material costs associated with complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence procedures that we implement, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy these customers, they may choose a competitor’s products. We continue to investigate the presence of conflict materials within our supply chain.
willis likely to continue to be highly volatile in the future. During the three months ended March 31,period commencing on January 1, 2015 and through April 30, 2016, the closing sale price of our common stock on The NASDAQ Global Select Market ranged from $52.19$63.52 to $59.62$27.12 per share. Because our stock price has been volatile, investing in our common stock is risky. Furthermore, volatility in the stock price of other companies has often led to securities class action litigation against those companies. Any future securities litigation against us could result in substantial costs and divert management’s attention and resources, which could seriously harm our business, financial condition and results of operations.
Not Applicable.
Incorporated by Reference Form File No. Exhibit Date Herewith Exhibit Description Filing Filed Exhibit Description 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1* 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. X 32.2* 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. X Incorporated by Reference Filing Filed Exhibit Description Form File No. Exhibit Date Herewith 101 The following materials from Cepheid’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015,2016, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. X * As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Cepheid under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.
this 7th day of May 2015.4, 2016.CEPHEID(Registrant)CEPHEID (Registrant) John L. Bishop Chairman and Chief Executive Officer (Principal Executive Officer)
/S/ | |
Daniel E. Madden | |
Executive Vice President, Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
Exhibit Description 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* 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. 32.2* 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. 101 2015,2016, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.* As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Cepheid under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.