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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Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of $300 as of June 30, 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, 72,057,132 and 70,904,388 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively Additional paid-in capital Accumulated other comprehensive income (loss), 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 Loss from operations Other income (expense): Interest income Interest expense Foreign currency exchange loss and other, net Other expense, net Loss before income taxes Provision for income taxes Net loss Basic net loss per share Diluted net loss per share Shares used in computing basic net loss per share Shares used in computing diluted net loss per share Net loss Other comprehensive loss, before tax: Change in unrealized gains and losses related to cash flow hedges: Loss recognized in other 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 recognized in other comprehensive income Gain reclassified from accumulated comprehensive income to the statement of operations Other comprehensive loss, before tax Income tax benefit (expense) related to items of accumulated comprehensive income, net Comprehensive loss Cash flows from operating activities: Net loss Adjustments to reconcile net 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 Impairment of acquired intangible assets, licenses, property and equipment 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, net 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 equipment and 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. 2016. net Raw Materials Work in Process Finished Goods Inventory 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 loss Basic weighted shares outstanding Net loss per share Diluted: Net 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 loss per share 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 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 Liabilities: Convertible senior notes Total Liabilities: Convertible senior notes Total 2016. 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 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. Asset-backed securities Corporate debt securities Other securities Total Asset-backed securities Corporate debt securities Government agency securities Other securities Total : Mature in one year or less Mature after one year through three years Mature in more than three years 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 June 30, December 31, 2015 2014 (unaudited) ASSETS $ 110,569 $ 96,663 189,375 196,729 77,758 68,809 142,050 132,635 28,596 24,274 548,348 519,110 120,226 115,765 79,665 79,731 7,776 7,847 28,180 31,440 39,681 39,681 $ 823,876 $ 793,574 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 60,700 $ 50,435 31,245 33,760 5,309 5,443 30,815 34,761 13,722 13,447 141,791 137,846 5,248 4,532 282,979 278,213 19,376 18,768 449,394 439,359 — — 443,209 422,151 241,528 225,529 (719 ) 247 (309,536 ) (293,712 ) 374,482 354,215 $ 823,876 $ 793,574 June 30, December 31, 2016 2015 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 100,331 $ 112,568 Short-term investments 223,155 210,147 Accounts receivable, less allowance for doubtful accounts of $504 as of June 30, 2016 and $383 as of December 31, 2015 62,828 66,550 Inventory, net 156,815 148,690 Prepaid expenses and other current assets 23,384 18,515 Total current assets 566,513 556,470 Property and equipment, net 151,999 127,639 Investments 55,184 62,175 Other non-current assets 5,665 4,205 Intangible assets, net 22,383 25,241 Goodwill 39,681 39,681 Total assets $ 841,425 $ 815,411 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 64,296 $ 57,771 Accrued compensation 35,944 39,015 Accrued royalties 4,730 5,469 Accrued and other liabilities 29,483 27,451 Current portion of deferred revenue 15,116 12,778 Total current liabilities 149,569 142,484 Long-term portion of deferred revenue 7,489 5,538 Convertible senior notes, net 287,005 281,627 Other liabilities 19,665 15,779 Total liabilities 463,728 445,428 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, 72,992,190 and 72,415,317 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively 454,488 449,704 Additional paid-in capital 282,337 263,429 Accumulated other comprehensive loss, net (53 ) (908 ) Accumulated deficit (359,075 ) (342,242 ) Total shareholders’ equity 377,697 369,983 Total liabilities and shareholders’ equity $ 841,425 $ 815,411 Three Months Ended
June 30, Six Months Ended
June 30, 2015 2014 2015 2014 $ 132,475 $ 116,503 $ 265,112 $ 223,410 69,377 59,568 130,578 112,651 1,326 649 2,593 1,940 28,092 23,998 52,078 45,738 28,078 23,502 54,014 46,960 16,352 14,340 31,994 28,007 143,225 122,057 271,257 235,296 (10,750 ) (5,554 ) (6,145 ) (11,886 ) 416 306 789 459 (3,646 ) (3,500 ) (7,250 ) (5,363 ) (1,496 ) (176 ) (2,440 ) (757 ) (4,726 ) (3,370 ) (8,901 ) (5,661 ) (15,476 ) (8,924 ) (15,046 ) (17,547 ) (1,254 ) (919 ) (778 ) (1,599 ) $ (16,730 ) $ (9,843 ) $ (15,824 ) $ (19,146 ) $ (0.23 ) $ (0.14 ) $ (0.22 ) $ (0.27 ) $ (0.23 ) $ (0.14 ) $ (0.22 ) $ (0.27 ) 71,861 69,968 71,563 69,622 71,861 69,968 71,563 69,622 Three Months Ended
June 30, Six Months Ended
June 30, 2016 2015 2016 2015 Revenue $ 146,001 $ 132,475 $ 290,781 $ 265,112 Costs and operating expenses: Cost of sales 73,235 69,377 145,830 130,578 Collaboration profit sharing 1,284 1,326 1,942 2,593 Research and development 33,592 28,092 63,506 52,078 Sales and marketing 29,874 28,078 58,669 54,014 General and administrative 15,418 16,352 30,473 31,994 Total costs and operating expenses 153,403 143,225 300,420 271,257 Loss from operations (7,402 ) (10,750 ) (9,639 ) (6,145 ) Other income (expense): Interest income 799 416 1,459 789 Interest expense (3,812 ) (3,646 ) (7,577 ) (7,250 ) Foreign currency exchange gain (loss) and other, net 298 (1,496 ) (230 ) (2,440 ) Other expense, net (2,715 ) (4,726 ) (6,348 ) (8,901 ) Loss before income taxes (10,117 ) (15,476 ) (15,987 ) (15,046 ) Provision for income taxes (115 ) (1,254 ) (846 ) (778 ) Net loss $ (10,232 ) $ (16,730 ) $ (16,833 ) $ (15,824 ) Basic net loss per share $ (0.14 ) $ (0.23 ) $ (0.23 ) $ (0.22 ) Diluted net loss per share $ (0.14 ) $ (0.23 ) $ (0.23 ) $ (0.22 ) Shares used in computing basic net loss per share 72,921 71,861 72,754 71,563 Shares used in computing diluted net loss per share 72,921 71,861 72,754 71,563 Three Months Ended
June 30, Six Months Ended
June 30, 2015 2014 2015 2014 $ (16,730 ) $ (9,843 ) $ (15,824 ) $ (19,146 ) (1,455 ) (472 ) (1,051 ) (291 ) 22 216 45 503 1 104 143 30 (3 ) (25 ) (3 ) (27 ) (18,165 ) (10,020 ) (16,690 ) (18,931 ) 375 — (100 ) — $ (18,540 ) $ (10,020 ) $ (16,590 ) $ (18,931 ) Three Months Ended
June 30, Six Months Ended
June 30, 2016 2015 2016 2015 Net loss $ (10,232 ) $ (16,730 ) $ (16,833 ) $ (15,824 ) Other comprehensive income (loss), before tax: Change in unrealized gains and losses related to cash flow hedges: Loss recognized in accumulated other comprehensive loss, net (71 ) (1,455 ) (145 ) (1,051 ) Loss reclassified from accumulated other comprehensive loss, net to the statement of operations 355 22 686 45 Change in unrealized gains and losses related to available-for-sale investments: Gain recognized in accumulated other comprehensive loss, net 274 1 821 143 Gain reclassified from accumulated other comprehensive loss, net to the statement of operations (9 ) (3 ) (10 ) (3 ) Other comprehensive income (loss), before tax 549 (1,435 ) 1,352 (866 ) Income tax benefit (expense) related to items of accumulated other comprehensive loss, net (202 ) 375 (497 ) (100 ) Comprehensive loss $ (9,885 ) $ (18,540 ) $ (15,978 ) $ (16,590 ) Six Months Ended
June 30, 2015 2014 $ (15,824 ) $ (19,146 ) 13,435 10,340 3,334 1,841 1,338 122 5,044 3,642 224 — 15,799 15,930 (53 ) — 28 — (8,949 ) (3,167 ) (9,267 ) (19,809 ) (5,151 ) (5,867 ) (207 ) (42 ) 9,695 1,916 (2,514 ) 2,821 991 2,864 7,923 (8,555 ) (19,308 ) (25,745 ) (3,000 ) — 834 — 44,873 67,739 118,497 21,326 (156,401 ) (334,800 ) 1,328 — (13,177 ) (271,480 ) 20,592 24,498 53 — — 335,789 — (25,082 ) (80 ) (95 ) 20,565 335,110 (1,405 ) (166 ) 13,906 54,909 96,663 66,072 $ 110,569 $ 120,981 Six Months Ended
June 30, 2016 2015 Cash flows from operating activities: Net loss $ (16,833 ) $ (15,824 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property and equipment 15,331 13,435 Amortization of intangible assets 2,858 3,334 Unrealized foreign exchange differences 57 1,338 Amortization of debt discount and transaction costs 5,377 5,044 Impairment of acquired intangible assets, licenses, property and equipment — 224 Stock-based compensation expense 18,839 15,799 Excess tax benefits from stock-based compensation expense — (53 ) Other non-cash items 547 28 Changes in operating assets and liabilities: Accounts receivable 3,722 (8,949 ) Inventory, net (8,058 ) (9,267 ) Prepaid expenses and other current assets (4,252 ) (5,151 ) Other non-current assets (91 ) (207 ) Accounts payable and other current and non-current liabilities 6,024 9,695 Accrued compensation (3,071 ) (2,514 ) Deferred revenue 4,288 991 Net cash provided by operating activities 24,738 7,923 Cash flows from investing activities: Capital expenditures (34,167 ) (19,308 ) Cost of acquisitions, net — (3,000 ) Proceeds from sale of equipment and an intangible asset 44 834 Proceeds from sales of marketable securities and investments 40,730 44,873 Proceeds from maturities of marketable securities and investments 112,313 118,497 Purchases of marketable securities and investments (158,527 ) (156,401 ) Transfer from (to) restricted cash (2,049 ) 1,328 Net cash used in investing activities (41,656 ) (13,177 ) Cash flows from financing activities: Net proceeds from the issuance of common shares and exercise of stock options 4,836 20,592 Excess tax benefits from stock-based compensation expense — 53 Principal payment of notes payable (85 ) (80 ) Net cash provided by financing activities 4,751 20,565 Effect of foreign exchange rate change on cash and cash equivalents (70 ) (1,405 ) Net increase (decrease) in cash and cash equivalents (12,237 ) 13,906 Cash and cash equivalents at beginning of period 112,568 96,663 Cash and cash equivalents at end of period $ 100,331 $ 110,569 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 and six months ended June 30, 20152016 and 2014,2015, the Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 20152016 and 20142015 and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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 (“BMGF”) and the National Philanthropic Trust (“NPT”). At June 30, 2015 and December 31, 2014, prepaid expense and other current assets included $0.5 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.59%50% and 58%66% of the Company’s cash and cash equivalents as of June 30, 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 15% 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 June 30, 2015 and December 31, 2014, respectively.NetAllocationThe 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. June 30, 2015 December 31, 2014 $ 31,080 $ 36,287 58,369 51,691 52,601 44,657 $ 142,050 $ 132,635 June 30, 2016 December 31, 2015 Raw Materials $ 42,561 $ 39,267 Work in Process 66,974 62,153 Finished Goods 47,280 47,270 Inventory, net $ 156,815 $ 148,690 $1.7$2.6 million and $1.6$2.5 million were included in inventory as of June 30, 20152016 and December 31, 2014,2015, 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.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. Antidilutive common equivalent shares totaled 8,847,00012,033,000 and 9,845,0008,847,000 for the three months ended June 30, 20152016 and 2014,2015, respectively, and 8,655,00011,715,000 and 9,237,0008,655,000 for the six months ended June 30, 2016 and 2015, and 2014, respectively.earningsnet loss per share (in thousands, except for per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 $ (16,730 ) $ (9,843 ) $ (15,824 ) $ (19,146 ) 71,861 69,968 71,563 69,622 $ (0.23 ) $ (0.14 ) $ (0.22 ) $ (0.27 ) $ (16,730 ) $ (9,843 ) $ (15,824 ) $ (19,146 ) 71,861 69,968 71,563 69,622 — — — — 71,861 69,968 71,563 69,622 $ (0.23 ) $ (0.14 ) $ (0.22 ) $ (0.27 ) Three Months Ended June 30, Six Months Ended June 30, 2016 2015 2016 2015 Basic: Net loss $ (10,232 ) $ (16,730 ) $ (16,833 ) $ (15,824 ) Basic weighted shares outstanding 72,921 71,861 72,754 71,563 Net loss per share $ (0.14 ) $ (0.23 ) $ (0.23 ) $ (0.22 ) Diluted: Net loss $ (10,232 ) $ (16,730 ) $ (16,833 ) $ (15,824 ) Basic weighted shares outstanding 72,921 71,861 72,754 71,563 Effect of dilutive securities: Stock options, ESPP, restricted stock units, restricted stock awards and convertible senior notes — — — — Diluted weighted shares outstanding 72,921 71,861 72,754 71,563 Net loss per share $ (0.14 ) $ (0.23 ) $ (0.23 ) $ (0.22 ) 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. ASU 2015-03 requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt ASU 2015-03 on January 1, 2016, at which time the Company will reclassify approximately $6 million of debt issuance costs associated with the Company’s long-term debt from other noncurrent assets to long-term debt. A reclassification will also be applied retrospectively to each prior period presented.20152016 and December 31, 20142015 (in thousands):Balance as of June 30, 2015: Level 1 Level 2 Level 3 Total $ 83,071 $ 27,498 $ — $ 110,569 — 47,547 — 47,547 — 65,662 — 65,662 — 47,033 — 47,033 — 21,007 — 21,007 — 8,126 — 8,126 — 189,375 — 189,375 — 3,444 — 3,444 — 18,383 — 18,383 — 44,567 — 44,567 — 8,005 — 8,005 — 8,710 — 8,710 — 79,665 — 79,665 $ 83,071 $ 299,982 $ — $ 383,053 $ — $ 3,205 $ — $ 3,205 $ — $ 3,205 $ — $ 3,205 Balance as of December 31, 2014: 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 June 30, 2016: Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 75,637 $ 24,694 $ — $ 100,331 Short-term investments: Asset-backed securities — 51,347 — 51,347 Corporate debt securities — 80,834 — 80,834 Commercial paper — 53,006 — 53,006 Government agency securities — 29,256 — 29,256 Other securities — 8,712 — 8,712 Total short-term investments — 223,155 — 223,155 Foreign currency derivatives — 1,359 — 1,359 Investments: Asset-backed securities — 17,227 — 17,227 Corporate debt securities — 33,939 — 33,939 Other securities — 4,018 — 4,018 Total investments — 55,184 — 55,184 Total $ 75,637 $ 304,392 $ — $ 380,029 Liabilities: Foreign currency derivatives $ — $ 1,391 $ — $ 1,391 Total $ — $ 1,391 $ — $ 1,391 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):Balance as of June 30, 2015: Level 1 Level 2 Level 3 Total $ — $ 399,344 $ — $ 399,344 $ — $ 399,344 $ — $ 399,344 Balance as of December 31, 2014: Level 1 Level 2 Level 3 Total $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 $ — $ 382,232 Balance as of June 30, 2016: Level 1 Level 2 Level 3 Total Liabilities: Convertible senior notes $ — $ 295,406 $ — $ 295,406 Total $ — $ 295,406 $ — $ 295,406 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 commercial paper,asset-backed securities, corporate debt securities, United Statescommercial paper, government securities, government agency securities, asset-backed securities, and other securities, as similar or identical instruments can be found in active markets.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 June 30, 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 June 30, 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 (loss)Accumulated Other Comprehensive Income ("AOCI"), net, 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):Balance as of June 30, 2015: Cost Gross Unrealized
Gain Gross Unrealized
Loss Estimated Fair
Value $ 47,549 $ 4 $ (6 ) $ 47,547 74,511 20 — 74,531 65,683 4 (25 ) 65,662 21,000 7 — 21,007 8,118 8 — 8,126 (27,494 ) (4 ) — (27,498 ) $ 189,367 $ 39 $ (31 ) $ 189,375 $ 18,373 $ 10 $ — $ 18,383 44,596 7 (36 ) 44,567 8,001 4 — 8,005 8,711 3 (4 ) 8,710 $ 79,681 $ 24 $ (40 ) $ 79,665 Balance as of December 31, 2014: 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 June 30, 2016: Cost Short-term investments: Asset-backed securities $ 51,338 $ 43 $ (34 ) $ 51,347 Commercial paper 75,678 21 — 75,699 Corporate debt securities 80,827 27 (20 ) 80,834 Government agency securities 31,208 50 (1 ) 31,257 Other securities 8,711 1 — 8,712 Amounts classified as cash equivalents (24,694 ) (1 ) 1 (24,694 ) Total short-term investments $ 223,068 $ 141 $ (54 ) $ 223,155 Investments: Asset-backed securities $ 17,199 $ 28 $ — $ 17,227 Corporate debt securities 33,824 123 (8 ) 33,939 Government agency securities — — — — Other securities 4,000 18 — 4,018 Total investments $ 55,023 $ 169 $ (8 ) $ 55,184 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, $44.9 million and $67.7 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 and six months ended June 30, 20152016 and 2014 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 $ 3 $ 25 $ 3 $ 27 — — — — $ 3 $ 25 $ 3 $ 27 20152016 and December 31, 2014,2015, and the duration of time that such losses had been unrealized (in thousands) were:Balance at June 30, 2015: Less Than 12 months More than 12 months Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 24,297 $ (5 ) $ 3,592 $ (1 ) $ 27,889 $ (6 ) 72,814 (51 ) 4,464 (10 ) 77,278 (61 ) 6,898 (4 ) — — 6,898 (4 ) $ 104,009 $ (60 ) $ 8,056 $ (11 ) $ 112,065 $ (71 ) Balance at December 31, 2014: 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 June 30, 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 $ 15,746 $ (9 ) $ 2,079 $ (25 ) $ 17,825 $ (34 ) Corporate debt securities 29,513 (21 ) 5,844 (7 ) 35,357 (28 ) Other securities — — 2,000 — 2,000 — Total $ 45,259 $ (30 ) $ 9,923 $ (32 ) $ 55,182 $ (62 ) 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 June 30, 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): June 30, 2015 December 31, 2014 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value $ 157,642 $ 157,654 $ 150,133 $ 150,105 125,417 125,397 135,675 135,566 13,483 13,487 11,396 11,387 $ 296,542 $ 296,538 $ 297,204 $ 297,058 June 30, 2016 December 31, 2015 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Mature in one year or less $ 179,418 $ 179,473 $ 186,311 $ 186,118 Mature after one year through three years 111,507 111,730 106,377 106,086 Mature in more than three years 11,860 11,831 8,139 8,061 Total $ 302,785 $ 303,034 $ 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 recognized in earnings. The ineffective portions of cash flow hedges are recorded in foreign currency exchange lossgain (loss) and other, net.$0.8 million and a net deferred gain of $0.2$0.4 million associated with cash flow hedges recorded in AOCI as of June 30, 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 June 30, 20152016 are expected to occur within twelve months.lossgain (loss) and other, net unless they are re-designated as hedges of other transactions. The Company did not recognize any significant net gains or losses related to the loss of hedge designation on discontinued cash flow hedges during the three and six months ended June 30, 20152016 and 2014.lossgain (loss) and other, net. During the three months ended June 30, 20152016 and 2014,2015, the Company recognized a less than $0.1 million gain and a loss of $0.3 million and $0.2 million, respectively, as a component of foreign currency exchange lossgain (loss) and other, net, related to derivative instruments not designated as hedging instruments. During the six months ended June 30, 20152016 and 2014,2015, the Company recognized a gainloss of $1.7$0.5 million and a lossgain of $0.5$1.7 million, respectively, as a component of foreign currency exchange lossgain (loss) and other, 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 $152.8$130.1 million and $117.2$117.6 million as of June 30, 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 $35.1are $23.2 million and $30.4$25.9 million as of June 30, 20152016 and December 31, 2014,2015, respectively.20152016 and December 31, 2014,2015, respectively (in thousands): June 30, 2015 Fair Value of Derivatives Designated
as Hedge Instruments Fair Value of Derivatives Not
Designated as Hedge Instruments Total Fair Value $ 3,396 $ 48 $ 3,444 (3,014 ) (191 ) (3,205 ) December 31, 2014 Fair Value of Derivatives Designated
as Hedge Instruments Fair Value of Derivatives Not
Designated as Hedge Instruments Total Fair Value $ 3,887 $ — $ 3,887 (3,685 ) (127 ) (3,812 ) June 30, 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 $ 1,285 $ 74 $ 1,359 Derivative Liabilities (b): Foreign exchange contracts (1,391 ) — (1,391 ) 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 | ||||||||||||||||||||||||||
Loss Recognized in OCI - Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Gain (Loss) Recognized - Ineffective Portion and | ||||||||||||||||||||||||
June 30, 2015 | June 30, 2014 | June 30, 2015 (a) | June 30, 2014 (b) | Location | June 30, 2015 | June 30, 2014 | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||
Foreign exchange contracts | $ | (1,455 | ) | $ | (472 | ) | $ | (22 | ) | $ | (216 | ) | Foreign currency exchange loss and other, net | $ | (38 | ) | $ | 20 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | (1,455 | ) | $ | (472 | ) | $ | (22 | ) | $ | (216 | ) | $ | (38 | ) | $ | 20 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |||||||||||||||||||||||||
Loss Recognized in OCI - Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Loss Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing | |||||||||||||||||||||||
June 30, 2016 | June 30, 2015 | June 30, 2016 (a) | June 30, 2015 (b) | Location | June 30, 2016 | June 30, 2015 | |||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Foreign exchange contracts | $ | (71 | ) | $ | (1,455 | ) | $ | (355 | ) | $ | (22 | ) | Foreign currency exchange gain (loss) and other, net | $ | (189 | ) | $ | (38 | ) | ||||||
Total | $ | (71 | ) | $ | (1,455 | ) | $ | (355 | ) | $ | (22 | ) | $ | (189 | ) | $ | (38 | ) |
(a) | Includes gains and losses reclassified from AOCI into net |
(b) | Includes gains and losses reclassified from AOCI into net loss for the effective portion of cash flow hedges, of which a $2.4 million loss within costs and operating expenses and a $2.4 million gain within revenue, were recognized within the Condensed Consolidated Statement of Operations for the three months ended June 30, 2015. |
Six Months Ended | |||||||||||||||||||||||||
Loss Recognized in OCI- Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Loss Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing | |||||||||||||||||||||||
June 30, 2016 | June 30, 2015 | June 30, 2016 (a) | June 30, 2015 (b) | Location | June 30, 2016 | June 30, 2015 | |||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||||
Foreign exchange contracts | $ | (145 | ) | $ | (1,051 | ) | $ | (686 | ) | $ | (45 | ) | Foreign currency exchange gain (loss) and other, net | $ | (350 | ) | $ | (124 | ) | ||||||
Total | $ | (145 | ) | $ | (1,051 | ) | $ | (686 | ) | $ | (45 | ) | $ | (350 | ) | $ | (124 | ) |
(a) | Includes gains and losses reclassified from AOCI into net income for the effective portion of cash flow hedges, of which a |
Six Months Ended | ||||||||||||||||||||||||||
Loss Recognized in OCI - Effective Portion | Loss Reclassified from AOCI into Income - Effective Portion | Gain (Loss) Recognized - Ineffective Portion and | ||||||||||||||||||||||||
June 30, 2015 | June 30, 2014 | June 30, 2015 (a) | June 30, 2014 (b) | Location | June 30, 2015 | June 30, 2014 | ||||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||||||||||
Foreign exchange contracts | $ | (1,051 | ) | $ | (291 | ) | $ | (45 | ) | $ | (503 | ) | Foreign currency exchange loss and other, net | $ | (124 | ) | $ | 33 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | (1,051 | ) | $ | (291 | ) | $ | (45 | ) | $ | (503 | ) | $ | (124 | ) | $ | 33 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(b) | Includes gains and losses reclassified from AOCI into net |
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Balance, June 30, 2015 | ||||||||||||
Licenses | $ | 11,454 | $ | (6,747 | ) | $ | 4,707 | |||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | ||||||||
Customer relationships and other intangible assets acquired in acquisitions | 35,849 | (12,376 | ) | 23,473 | ||||||||
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|
|
|
|
| |||||||
$ | 55,916 | $ | (27,736 | ) | $ | 28,180 | ||||||
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|
| |||||||
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 | ||||||||
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|
|
| |||||||
$ | 58,789 | $ | (27,349 | ) | $ | 31,440 | ||||||
|
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|
|
|
|
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Balance, June 30, 2016 | |||||||||||
Licenses | $ | 11,256 | $ | (7,602 | ) | $ | 3,654 | ||||
Technology acquired in acquisitions | 8,613 | (8,613 | ) | — | |||||||
Customer relationships and other intangible assets acquired in acquisitions | 35,849 | (17,120 | ) | 18,729 | |||||||
$ | 55,718 | $ | (33,335 | ) | $ | 22,383 | |||||
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 six months) | $ | 3,001 | ||
2016 | 5,822 | |||
2017 | 5,460 | |||
2018 | 5,080 | |||
2019 | 4,181 | |||
Thereafter | 4,636 | |||
|
| |||
Total expected future annual amortization | $ | 28,180 | ||
|
|
For the Years Ending December 31, | Amortization Expense | ||
2016 (remaining six months) | $ | 2,853 | |
2017 | 5,343 | ||
2018 | 5,260 | ||
2019 | 4,235 | ||
2020 | 3,891 | ||
Thereafter | 801 | ||
Total expected future amortization | $ | 22,383 |
subsidiaries, partially offset by the tax effect of items in accumulated other comprehensive loss, net.
2015.
2015.
liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $270 million upon issuance, calculated as the present value of implied future payments based on the $345 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the Notes. The $75 million difference between the aggregate principal amount of $345 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the Notes were not considered redeemable.
June 30, 2015 | December 31, 2014 | |||||||
Liability component: | ||||||||
Principal | 345,000 | 345,000 | ||||||
Less: debt discount, net of amortization | (62,021 | ) | (66,787 | ) | ||||
|
|
|
| |||||
Net carrying amount | 282,979 | 278,213 | ||||||
Equity component (a) | 73,013 | 73,013 |
June 30, 2016 | December 31, 2015 | ||||
Liability component: | |||||
Principal | 345,000 | 345,000 | |||
Less: debt discount, net of amortization and reclassification of debt issuance costs | (57,995 | ) | (63,373 | ) | |
Net carrying amount | 287,005 | 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 June 30, | Six months ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
1.25% coupon | $ | 1,078 | $ | 1,078 | $ | 2,156 | $ | 1,653 | ||||||||
Amortization of debt issuance costs | 144 | 100 | 278 | 150 | ||||||||||||
Amortization of debt discount | 2,398 | 2,284 | 4,766 | 3,491 | ||||||||||||
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|
| |||||||||
3,620 | 3,462 | 7,200 | 5,294 | |||||||||||||
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|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
1.25% coupon | $ | 1,078 | $ | 1,078 | $ | 2,156 | $ | 2,156 | |||||||
Amortization of debt issuance costs | 191 | 144 | 370 | 278 | |||||||||||
Amortization of debt discount | 2,519 | 2,398 | 5,007 | 4,766 | |||||||||||
$ | 3,788 | $ | 3,620 | $ | 7,533 | $ | 7,200 |
June 30, 2015 | December 31, 2014 | |||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
Convertible Senior Notes | $ | 399,344 | $ | 282,979 | $ | 382,232 | $ | 278,213 |
June 30, 2016 | December 31, 2015 | ||||||||||||||
Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||
Convertible Senior Notes | $ | 295,406 | $ | 287,005 | $ | 307,481 | $ | 281,627 |
Years Ending December 31, | Purchase Commitments | |||
2015 (remaining six months) | $ | 36,177 | ||
2016 | — | |||
2017 | — | |||
2018 | — | |||
2019 | — | |||
Thereafter | — | |||
|
| |||
Total minimum payments | $ | 36,177 | ||
|
|
Years Ending December 31, | Purchase Commitments | ||
2016 (remaining six months) | $ | 32,406 | |
2017 | — | ||
2018 | — | ||
2019 | — | ||
2020 | — | ||
Thereafter | — | ||
Total minimum payments | $ | 32,406 |
system modules.
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, the Company terminated the Company’s license to United States Patent No. 5,804,375 (the “375 Patent”) and ceased paying United States-related royalties. The Company terminated the entire license agreement in the fourth quarter of 2011. In August 2011, Roche initiated an arbitration proceeding against the Company in the International Chamber of Commerce pursuant to the terms of the terminated agreement. The Company filed an answer challenging arbitral jurisdiction over the issues submitted by Roche and denying that the Company 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 the Company 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. The Company believes that it has not violated any provision of the agreement andarbitration panel transmitted a partial award holding that the asserted claimCompany was liable for damages for the manufacture and sale of certain accused products starting after the 375 Patent is expired, invalid, unenforceable,Company terminated the license until September 2015, with the final amount to be determined by audit. The partial award also denied Roche’s requests for an injunction, and not infringed.
allocated certain legal fees and costs between the parties.
their respective potential amounts.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Cost of sales | $ | 1,008 | $ | 1,473 | $ | 2,049 | $ | 1,854 | ||||||||
Research and development | 2,277 | 2,481 | 4,475 | 4,609 | ||||||||||||
Sales and marketing | 1,743 | 1,926 | 3,193 | 3,542 | ||||||||||||
General and administrative | 3,241 | 3,268 | 6,110 | 5,925 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total stock-based compensation expense | $ | 8,269 | $ | 9,148 | $ | 15,827 | $ | 15,930 | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Cost of sales | $ | 1,583 | $ | 1,008 | $ | 3,098 | $ | 2,049 | |||||||
Research and development | 2,666 | 2,277 | 4,944 | 4,475 | |||||||||||
Sales and marketing | 2,101 | 1,743 | 4,030 | 3,193 | |||||||||||
General and administrative | 3,505 | 3,241 | 6,821 | 6,110 | |||||||||||
Total stock-based compensation expense | $ | 9,855 | $ | 8,269 | $ | 18,893 | $ | 15,827 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Intrinsic Value | |||||||||||||
Outstanding, December 31, 2014 | 5,581 | $ | 33.20 | |||||||||||||
Granted | 1,141 | $ | 56.46 | |||||||||||||
Exercised | (912 | ) | $ | 22.84 | ||||||||||||
Forfeited | (144 | ) | $ | 41.29 | ||||||||||||
|
| |||||||||||||||
Outstanding, June 30, 2015 | 5,666 | $ | 39.35 | 4.57 | $ | 123,503 | ||||||||||
|
| |||||||||||||||
Exercisable, June 30, 2015 | 2,955 | $ | 31.05 | 3.34 | $ | 88,962 | ||||||||||
Vested and expected to vest, June 30, 2015 | 5,431 | $ | 38.87 | 4.50 | $ | 120,996 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | Intrinsic Value | |||||||||
Outstanding, December 31, 2015 | 5,442 | $ | 39.46 | |||||||||
Granted | 1,278 | $ | 34.53 | |||||||||
Exercised | (285 | ) | $ | 9.61 | ||||||||
Forfeited | (168 | ) | $ | 38.66 | ||||||||
Outstanding, June 30, 2016 | 6,267 | $ | 39.81 | 4.45 | $ | 6,374 | ||||||
Exercisable, June 30, 2016 | 3,453 | $ | 37.45 | 3.23 | $ | 5,848 | ||||||
Vested and expected to vest, June 30, 2016 | 6,050 | $ | 39.73 | 4.37 | $ | 6,316 |
Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding, December 31, 2014 | 698 | $ | 40.30 | |||||
Granted | 447 | 56.31 | ||||||
Vested | (186 | ) | 39.07 | |||||
Cancelled | (50 | ) | 44.37 | |||||
|
| |||||||
Outstanding, June 30, 2015 | 909 | $ | 48.20 | |||||
|
|
Shares | Weighted Average Grant Date Fair Value | |||||
Outstanding, December 31, 2015 | 1,000 | $ | 48.44 | |||
Granted | 364 | 34.60 | ||||
Vested | (191 | ) | 49.25 | |||
Cancelled | (41 | ) | 46.62 | |||
Outstanding, June 30, 2016 | 1,132 | $ | 44.56 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
OPTION SHARES: | ||||||||||||||||
Expected Term (in years) | 4.46 | 4.40 | 4.46 | 4.40 | ||||||||||||
Volatility | 0.36 | 0.38 | 0.36 | 0.38 | ||||||||||||
Expected Dividends | — | % | — | % | — | % | — | % | ||||||||
Risk Free Interest Rates | 1.45 | % | 1.73 | % | 1.45 | % | 1.73 | % | ||||||||
Estimated Forfeitures | 6.14 | % | 6.75 | % | 6.14 | % | 6.79 | % | ||||||||
Weighted Average Fair Value Per Share | $ | 18.05 | $ | 15.29 | $ | 18.07 | $ | 15.64 | ||||||||
ESPP SHARES: | ||||||||||||||||
Expected Term (in years) | 1.22 | 1.25 | 1.22 | 1.25 | ||||||||||||
Volatility | 0.32 | 0.32 | 0.32 | 0.32 | ||||||||||||
Expected Dividends | — | % | — | % | — | % | — | % | ||||||||
Risk Free Interest Rates | 0.26 | % | 0.17 | % | 0.26 | % | 0.17 | % | ||||||||
Weighted Average Fair Value Per Share | $ | 16.43 | $ | 14.54 | $ | 16.43 | $ | 14.54 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
OPTION SHARES: | |||||||||||||||
Expected Term (in years) | 4.49 | 4.46 | 4.45 | 4.46 | |||||||||||
Volatility | 0.47 | 0.36 | 0.44 | 0.36 | |||||||||||
Expected Dividends | — | — | — | — | |||||||||||
Risk Free Interest Rates | 1.37 | % | 1.45 | % | 1.38 | % | 1.45 | % | |||||||
Estimated Forfeitures | 6.01 | % | 6.14 | % | 6.01 | % | 6.14 | % | |||||||
Weighted Average Fair Value Per Share | $ | 14.10 | $ | 18.05 | $ | 13.12 | $ | 18.07 | |||||||
ESPP SHARES: | |||||||||||||||
Expected Term (in years) | 1.23 | 1.22 | 1.23 | 1.22 | |||||||||||
Volatility | 0.49 | 0.32 | 0.49 | 0.32 | |||||||||||
Expected Dividends | — | — | — | — | |||||||||||
Risk Free Interest Rates | 0.59 | % | 0.26 | % | 0.59 | % | 0.26 | % | |||||||
Weighted Average Fair Value Per Share | $ | 9.87 | $ | 16.43 | $ | 9.87 | $ | 16.43 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue by market: | ||||||||||||||||
Clinical Systems | $ | 21,783 | $ | 28,334 | $ | 38,084 | $ | 45,619 | ||||||||
Clinical Reagents | 103,227 | 83,006 | 212,233 | 166,166 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Clinical | 125,010 | 111,340 | 250,317 | 211,785 | ||||||||||||
Non-Clinical | 7,465 | 5,163 | 14,795 | 11,625 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 132,475 | $ | 116,503 | $ | 265,112 | $ | 223,410 | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Revenue: | |||||||||||||||
System and other revenue | $ | 24,838 | $ | 24,360 | $ | 49,122 | $ | 43,074 | |||||||
Reagent and disposable revenue | 121,163 | 108,115 | 241,659 | 222,038 | |||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 290,781 | $ | 265,112 |
2015.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Geographic revenue information: | ||||||||||||||||
North America | ||||||||||||||||
Clinical | $ | 69,056 | $ | 57,649 | $ | 144,529 | $ | 114,935 | ||||||||
Non-Clinical | 7,131 | 3,926 | 13,963 | 9,475 | ||||||||||||
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|
|
|
|
|
| |||||||||
Total North America | 76,187 | 61,575 | 158,492 | 124,410 | ||||||||||||
International | ||||||||||||||||
Clinical | $ | 55,953 | $ | 53,691 | $ | 105,787 | $ | 96,850 | ||||||||
Non-Clinical | 335 | 1,237 | 833 | 2,150 | ||||||||||||
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|
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|
| |||||||||
Total International | 56,288 | 54,928 | 106,620 | 99,000 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total revenue | $ | 132,475 | $ | 116,503 | $ | 265,112 | $ | 223,410 | ||||||||
|
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|
|
|
|
|
|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Geographic revenue information: | |||||||||||||||
North America | $ | 81,202 | $ | 76,187 | $ | 163,592 | $ | 158,492 | |||||||
International | 64,799 | 56,288 | 127,189 | 106,620 | |||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 290,781 | $ | 265,112 |
2015.
As of June 30, 2015 and December 31, 2014, the Company has long lived-assets (excludingfollowing table summarizes long-lived assets, excluding intangible assets and goodwill)goodwill, by geographic region (in thousands):
June 30, 2016 | December 31, 2015 | ||||||
United States | $ | 132,767 | $ | 108,210 | |||
Other regions | 19,232 | 19,429 | |||||
Total long-lived assets | $ | 151,999 | $ | 127,639 |
11. 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. A director of the Company was the President and Chief Executive Officer of Geisinger until the second quarter of 2015. Net revenues recorded from sales to Geisinger were approximately $0.5 million and $0.4 million for the three months ended June 30, 2015 and 2014, respectively, and $1.3 million and $0.8 million for the six months ended June 30, 2015 and 2014, respectively. Asas of June 30, 20152016 and December 31, 2014, the Company had accounts receivable of approximately $0.2 million and $0.2 million due from Geisinger, respectively.
productivity;productivity and the productivity and effectiveness of our distributors; speed and extent of test menu expansion and utilization; improvingthe success of our cost reduction and gross margins;margin improvement efforts; 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, the GeneXpert Omni, our new Honeycomb module and new virology and oncology products; 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 tests and additional virology tests. 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:
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
Recent Accounting Pronouncements
Refer to Note 1, “Organizationidentifying infectious disease and Summaryoncology targets held by academic institutions or commercial organizations for potential license or acquisition.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 13,526 | 10 | % | $ | 290,781 | $ | 265,112 | $ | 25,669 | 10 | % | |||||||
Gross margin | 50 | % | 48 | % | N/A | 2 | % | 50 | % | 51 | % | N/A | (1 | )% | |||||||||
Net loss | $ | (10,232 | ) | $ | (16,730 | ) | $ | 6,498 | (39 | )% | $ | (16,833 | ) | $ | (15,824 | ) | $ | (1,009 | ) | 6 | % | ||
Diluted net loss per share | $ | (0.14 | ) | $ | (0.23 | ) | $ | 0.09 | (39 | )% | $ | (0.23 | ) | $ | (0.22 | ) | $ | (0.01 | ) | 5 | % | ||
Non-GAAP Adjusted Results | |||||||||||||||||||||||
Total revenue on a constant currency basis | $ | 146,161 | $ | 130,084 | $ | 16,077 | 12 | % | $ | 293,484 | $ | 260,527 | $ | 32,957 | 13 | % | |||||||
Non-GAAP gross margin | 51 | % | 49 | % | N/A | 2 | % | 51 | % | 52 | % | N/A | (1 | )% | |||||||||
Non-GAAP net income (loss) | $ | 3,503 | $ | (4,512 | ) | $ | 8,015 | (178 | )% | $ | 9,776 | $ | 7,861 | $ | 1,915 | 24 | % | ||||||
Non-GAAP diluted net income (loss) per share | $ | 0.05 | $ | (0.06 | ) | $ | 0.11 | (183 | )% | $ | 0.13 | $ | 0.11 | $ | 0.02 | 18 | % |
Non-GAAP Measures".
2015
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | $ Change | % Change | 2015 | 2014 | $ Change | % Change | |||||||||||||||||||||||||
Revenue by market: | ||||||||||||||||||||||||||||||||
Clinical Systems | $ | 21,783 | $ | 28,334 | $ | (6,551 | ) | -23 | % | $ | 38,084 | $ | 45,619 | $ | (7,535 | ) | -17 | % | ||||||||||||||
Clinical Reagents | 103,227 | 83,006 | 20,221 | 24 | % | 212,233 | 166,166 | 46,067 | 28 | % | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total Clinical | 125,010 | 111,340 | 13,670 | 12 | % | 250,317 | 211,785 | 38,532 | 18 | % | ||||||||||||||||||||||
Non-Clinical | 7,465 | 5,163 | 2,302 | 45 | % | 14,795 | 11,625 | 3,170 | 27 | % | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total revenue | $ | 132,475 | $ | 116,503 | $ | 15,972 | 14 | % | $ | 265,112 | $ | 223,410 | $ | 41,702 | 19 | % | ||||||||||||||||
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|
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|
|
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|
|
Clinical systems
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||
Revenue: | |||||||||||||||||||||||||||||
System and other revenue | $ | 24,838 | $ | 24,360 | $ | 478 | 2 | % | $ | 49,122 | $ | 43,074 | $ | 6,048 | 14 | % | |||||||||||||
Reagent and disposable revenue | 121,163 | 108,115 | 13,048 | 12 | % | 241,659 | 222,038 | 19,621 | 9 | % | |||||||||||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 13,526 | 10 | % | $ | 290,781 | $ | 265,112 | $ | 25,669 | 10 | % | |||||||||||||
Non-GAAP Adjusted Results | |||||||||||||||||||||||||||||
Total revenue on a constant currency basis | $ | 146,161 | $ | 130,084 | $ | 16,077 | 12 | % | $ | 293,484 | $ | 260,527 | $ | 32,957 | 13 | % |
Non-Clinical revenue increased $2.3 million, or 45%, for the three months ended June 30, 2015 as2016 compared to the same period in the prior year,year. The increases for both the three and increased $3.2 million, or 27%, for the six months ended June 30, 2015 as compared to the same period in prior year, in each case,month periods were primarily due to increased granta higher volume of systems shipped to HBDC customers, as a result of a large system order delivered to India during the first and collaboration revenues.
second quarters of 2016.
tests.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | $ Change | % Change | 2015 | 2014 | $ Change | % Change | |||||||||||||||||||||||||
Geographic revenue information: | ||||||||||||||||||||||||||||||||
North America | ||||||||||||||||||||||||||||||||
Clinical | $ | 69,056 | $ | 57,649 | $ | 11,407 | 20 | % | $ | 144,529 | $ | 114,935 | $ | 29,594 | 26 | % | ||||||||||||||||
Non-Clinical | 7,131 | 3,926 | 3,205 | 82 | % | 13,963 | 9,475 | 4,488 | 47 | % | ||||||||||||||||||||||
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|
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|
| |||||||||||||||||||||
Total North America | 76,187 | 61,575 | 14,612 | 24 | % | 158,492 | 124,410 | 34,082 | 27 | % | ||||||||||||||||||||||
International | ||||||||||||||||||||||||||||||||
Clinical | 55,953 | 53,691 | $ | 2,262 | 4 | % | 105,787 | 96,850 | $ | 8,937 | 9 | % | ||||||||||||||||||||
Non-Clinical | 335 | 1,237 | (902 | ) | -73 | % | 833 | 2,150 | (1,317 | ) | -61 | % | ||||||||||||||||||||
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|
|
|
|
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|
| |||||||||||||||||||||
Total International | 56,288 | 54,928 | 1,360 | 2 | % | 106,620 | 99,000 | 7,620 | 8 | % | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total revenue | $ | 132,475 | $ | 116,503 | $ | 15,972 | 14 | % | $ | 265,112 | $ | 223,410 | $ | 41,702 | 19 | % | ||||||||||||||||
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|
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||
Geographic revenue information: | |||||||||||||||||||||||||||||
North America | $ | 81,202 | $ | 76,187 | $ | 5,015 | 7 | % | 163,592 | 158,492 | 5,100 | 3 | % | ||||||||||||||||
International | 64,799 | 56,288 | 8,511 | 15 | % | 127,189 | 106,620 | 20,569 | 19 | % | |||||||||||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 13,526 | 10 | % | $ | 290,781 | $ | 265,112 | $ | 25,669 | 10 | % |
critical infectious disease. North American Clinical revenue increased $29.6 million, or 26%, for the six months ended June 30, 2015 as compared to the same period in prior year, in each case, driven by higher sales of Xpert tests. Additionally, the increase for the six months ended June 30, 2015 also reflects increased sales volumes of our Xpert Flu and Xpert Flu RSV tests during the first quarter of 2015 due to the strong flu season. North American Non-Clinical revenue increased $3.2 million, or 82%, for the three months ended June 30, 2015 as2016 compared to the same period in the prior year, and increased $4.5$5.1 million, or 47%3%, for the six months ended June 30, 2015 as2016 compared to the same period in the prior year,year. The increases for both the three and six month periods were primarily driven by an increase in each case, primarily due to increasedreagent and disposable revenue, partially offset by lower grant and collaboration revenues.
revenue. The increase in reagent and disposable revenue was primarily driven by the increase in clinical reagent test volumes.
prior year.
Therefore, we do not expect to recognize similar hedging gains in revenue in 2016.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | $ Change | % Change | 2015 | 2014 | $ Change | % Change | |||||||||||||||||||||||||
Costs and operating expenses: | ||||||||||||||||||||||||||||||||
Cost of sales | $ | 69,377 | $ | 59,568 | $ | 9,809 | 16 | % | $ | 130,578 | $ | 112,651 | $ | 17,927 | 16 | % | ||||||||||||||||
Collaboration profit sharing | 1,326 | 649 | 677 | 104 | % | 2,593 | 1,940 | 653 | 34 | % | ||||||||||||||||||||||
Research and development | 28,092 | 23,998 | 4,094 | 17 | % | 52,078 | 45,738 | 6,340 | 14 | % | ||||||||||||||||||||||
Sales and marketing | 28,078 | 23,502 | 4,576 | 19 | % | 54,014 | 46,960 | 7,054 | 15 | % | ||||||||||||||||||||||
General and administrative | 16,352 | 14,340 | 2,012 | 14 | % | 31,994 | 28,007 | 3,987 | 14 | % | ||||||||||||||||||||||
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|
| |||||||||||||||||||||
Total costs and operating expenses | $ | 143,225 | $ | 122,057 | $ | 21,168 | 17 | % | $ | 271,257 | $ | 235,296 | $ | 35,961 | 15 | % | ||||||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||
Costs and operating expenses: | |||||||||||||||||||||||||||||
Cost of sales | $ | 73,235 | $ | 69,377 | $ | 3,858 | 6 | % | $ | 145,830 | $ | 130,578 | $ | 15,252 | 12 | % | |||||||||||||
Collaboration profit sharing | 1,284 | 1,326 | (42 | ) | (3 | )% | 1,942 | 2,593 | (651 | ) | (25 | )% | |||||||||||||||||
Research and development | 33,592 | 28,092 | 5,500 | 20 | % | 63,506 | 52,078 | 11,428 | 22 | % | |||||||||||||||||||
Sales and marketing | 29,874 | 28,078 | 1,796 | 6 | % | 58,669 | 54,014 | 4,655 | 9 | % | |||||||||||||||||||
General and administrative | 15,418 | 16,352 | (934 | ) | (6 | )% | 30,473 | 31,994 | (1,521 | ) | (5 | )% | |||||||||||||||||
Total costs and operating expenses | $ | 153,403 | $ | 143,225 | $ | 10,178 | 7 | % | $ | 300,420 | $ | 271,257 | $ | 29,163 | 11 | % |
and Gross Margin
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
2016 | 2015 | Change | 2016 | 2015 | Change | ||||||||||||
Gross margin | 50 | % | 48 | % | 2 | % | 50 | % | 51 | % | (1 | )% | |||||
Non-GAAP gross margin | 51 | % | 49 | % | 2 | % | 51 | % | 52 | % | (1 | )% |
Cost of sales
Our gross margin percentage was 48% and 49% for2016, partially offset by the three months ended June 30, 2015 and 2014, respectively, and 51% and 50% for the six months ended June 30, 2015 and 2014, respectively. The decrease period-over-period for the three months ended June 30, 2015, was primarily attributable to an unfavorable mix of products sold. The increase period-over-period for the six months ended June 30, 2015, was primarily attributable to reducedbenefit from lower product manufacturing costs.
cost improvements.
2015.
projects.
2016.
force.
2016.
driven by an approximate 22% increase in the average quarterly headcount.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | $ Change | % Change | 2015 | 2014 | $ Change | % Change | |||||||||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||||||||||
Interest income | $ | 416 | $ | 306 | $ | 110 | 36 | % | $ | 789 | $ | 459 | $ | 330 | 72 | % | ||||||||||||||||
Interest expense | (3,646 | ) | (3,500 | ) | (146 | ) | 4 | % | (7,250 | ) | (5,363 | ) | (1,887 | ) | 35 | % | ||||||||||||||||
Foreign currency exchange loss and other, net | (1,496 | ) | (176 | ) | (1,320 | ) | 750 | % | (2,440 | ) | (757 | ) | (1,683 | ) | 222 | % | ||||||||||||||||
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| |||||||||||||||||||||
Other expense, net | $ | (4,726 | ) | $ | (3,370 | ) | $ | (1,356 | ) | 40 | % | $ | (8,901 | ) | $ | (5,661 | ) | $ | (3,240 | ) | 57 | % | ||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2016 | 2015 | $ Change | % Change | ||||||||||||||||||||||
Other income (expense) | |||||||||||||||||||||||||||||
Interest income | $ | 799 | $ | 416 | $ | 383 | 92 | % | $ | 1,459 | $ | 789 | $ | 670 | 85 | % | |||||||||||||
Interest expense | (3,812 | ) | (3,646 | ) | (166 | ) | 5 | % | (7,577 | ) | (7,250 | ) | (327 | ) | 5 | % | |||||||||||||
Foreign currency exchange gain (loss) and other, net | 298 | (1,496 | ) | 1,794 | (120 | )% | (230 | ) | (2,440 | ) | 2,210 | (91 | )% | ||||||||||||||||
Total other expense, net | $ | (2,715 | ) | $ | (4,726 | ) | $ | 2,011 | (43 | )% | $ | (6,348 | ) | $ | (8,901 | ) | $ | 2,553 | (29 | )% |
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Flow
Six Months Ended June 30, | ||||||||||||
2015 | 2014 | Increase/ (Decrease) | ||||||||||
(In thousands) | ||||||||||||
Net cash provided by (used in) operating activities | $ | 7,923 | $ | (8,555 | ) | $ | 16,478 | |||||
Net cash used in investing activities | (13,177 | ) | (271,480 | ) | 258,303 | |||||||
Net cash provided by financing activities | 20,565 | 335,110 | (314,545 | ) |
The net cash provided by operating activities was $7.9 million indollar during the first six months of 2015. It was primarily comprised of net loss 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, amortization of intangible assets, and unrealized foreign currency exchange differences. The primary working capital uses of cash forended June 30, 2016 compared with the six months ended June 30, 2015, were increaseswhen the Euro and South African Rand weakened against the United States dollar.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Total revenue | $ | 146,001 | $ | 132,475 | $ | 290,781 | $ | 265,112 | ||||||||
Foreign currency exchange (gain) loss on Q2 '16 revenue using Q2 '15 rates | (88 | ) | — | 2,481 | — | |||||||||||
Loss (benefit) from cash flow hedges | 248 | (2,391 | ) | 222 | (4,585 | ) | ||||||||||
Total revenue on a constant currency basis | $ | 146,161 | $ | 130,084 | $ | 293,484 | $ | 260,527 | ||||||||
Total revenue growth | 10 | % | 10 | % | ||||||||||||
Total revenue growth on a constant currency basis | 12 | % | 13 | % | ||||||||||||
Cost of sales | $ | 73,235 | $ | 69,377 | $ | 145,830 | $ | 130,578 | ||||||||
Stock-based compensation expense | (1,583 | ) | (1,008 | ) | (3,098 | ) | (2,048 | ) | ||||||||
Amortization of purchased intangible assets | (829 | ) | (1,024 | ) | (1,658 | ) | (2,048 | ) | ||||||||
Non-GAAP measure of cost of sales | $ | 70,823 | $ | 67,345 | $ | 141,074 | $ | 126,482 | ||||||||
Gross margin on revenue per GAAP | 50 | % | 48 | % | 50 | % | 51 | % | ||||||||
Gross margin on revenue per Non-GAAP | 51 | % | 49 | % | 51 | % | 52 | % | ||||||||
Net loss | $ | (10,232 | ) | $ | (16,730 | ) | $ | (16,833 | ) | $ | (15,824 | ) | ||||
Stock-based compensation expense | 9,855 | 8,270 | 18,893 | 15,827 | ||||||||||||
Amortization of debt discount and transaction cost | 2,710 | 2,542 | 5,377 | 5,044 | ||||||||||||
Amortization of purchased intangible assets | 1,170 | 1,406 | 2,339 | 2,814 | ||||||||||||
Non-GAAP measure of net income (loss) | $ | 3,503 | $ | (4,512 | ) | $ | 9,776 | $ | 7,861 | |||||||
Diluted net loss per share | $ | (0.14 | ) | $ | (0.23 | ) | $ | (0.23 | ) | $ | (0.22 | ) | ||||
Stock-based compensation expense | 0.14 | 0.12 | 0.26 | 0.23 | ||||||||||||
Amortization of debt discount and transaction cost | 0.04 | 0.03 | 0.07 | 0.06 | ||||||||||||
Amortization of purchased intangible assets | 0.01 | 0.02 | 0.03 | 0.04 | ||||||||||||
Non-GAAP measure of net income (loss) per share | $ | 0.05 | $ | (0.06 | ) | $ | 0.13 | $ | 0.11 | |||||||
Shares used in computing basic net loss per share | 72,921 | 71,861 | 72,754 | 71,563 | ||||||||||||
Shares used in computing Non-GAAP diluted net income (loss) per share | 74,267 | 71,861 | 74,143 | 74,330 |
Six Months Ended June 30, | |||||||||||
(in thousands) | 2016 | 2015 | Change | ||||||||
Net cash provided by operating activities | $ | 24,738 | $ | 7,923 | $ | 16,815 | |||||
Net cash used in investing activities | (41,656 | ) | (13,177 | ) | (28,479 | ) | |||||
Net cash provided by financing activities | 4,751 | 20,565 | (15,814 | ) |
The net cash used in operating activities was $8.6 million induring the first six months of 2014. It was primarily comprised of net loss and2016 increased $16.8 million compared with the net effect of cash provided by 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 thefirst six months ended June 30, 2014 were increasesof 2015, primarily due to the following:
The net cash used in investing activities was $13.2 million inreceivable balance during the first six months of 2015. ItThis favorable change was primarily compriseddue to improved collections and timing of cash receipts; and
The netmarketable securities and investments and proceeds from the sale of equipment and intangible assets. Net cash used in investing activities was $271.5 million induring the first six months of 2014. It was2016 increased $28.5 million compared with the first six months of 2015, primarily comprised of purchases of marketable securities followingdue to the issuance of our convertible senior notes issued in February 2014, and investments andfollowing:
The net2016 compared with the first six months of 2015.
The net cash provided by financing activities was $335.12016 decreased $15.8 million incompared with the first six months of 2014. It was2015, primarily comprised of net proceeds from the issuance of $345 million in principal amount of our convertible senior notes in February 2014 and,due to a lesser extent, thedecrease in net proceeds from issuance of common sharesstock and exercisesexercise of stock options partially offset byof $15.8 million during the purchasefirst six months of a capped call transaction for approximately $25.1 million.
2016.
1933, as amended.
2016. countries and South Africa and is denominated in a number of currencies, primarily the Euro, $1.4$1.6 million as of June 30, 2015.2016. 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 June 30, 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 $5.0$5.8 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 EuropeanU.S.United States dollar, British Pound, and South African Rand.Rand and Australian dollar. In our international operations, we pay payroll and other expenses in local currencies. Our exposures to foreign currency risks may change over time and could have a material adverse impact on our financial results.A sizeable portionWe performed a sensitivity analysis as of our 2015 forecasted international revenue was not hedged priorJune 30, 2016 based on a model that measures the impact of a hypothetical 10% adverse change in foreign exchange rates to the strengthening of the United States dollar and therefore, we expect a greater(with all other variables held constant) on our underlying estimated major foreign currency exposures, net of derivative financial instruments. The foreign exchange rates used in the model were based on the spot rates in effect as of June 30, 2016. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign exchange rates would have an unfavorable impact on revenue in the second halfunderlying cash flow exposure, net of 2015. A 10% change in theour foreign exchange rates upward or downward in our portfolioderivative financial instruments, of foreign currency contracts would have decreased or increased, respectively our unrealized loss by approximately $5.1$3.2 million atas of June 30, 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.ITEM 4.CONTROLS AND PROCEDURES
Except as described above in connection with the changes implementing our ERP system, during the quarter ended June 30, 2015,2016, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
parties.
their respective potential amounts.
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. business, 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 production of our products. For example, earlier this year, the Department of Health and Human Services announced plans for a Notice of Proposed Rulemaking on Federal Policy for the Protection of Human Subjects (NPRM), which, if enacted in its entirety, could substantially limit the use of leftover, de-identified clinical specimens for pre-clinical and clinical research by requiring informed consent for all clinical specimens. Cepheid and other diagnostic development companies routinely use leftover, de-identified specimens to support pre-clinical and clinical research. A requirement for informed consent on all clinical specimens would substantially increase the cost and potentially limit the accessibility to these types of specimens. 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 include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the United States federal government has the right to require us or our licensors (as applicable) to grant licenses which would be exclusive under any of such inventions to a third party if they determine that: (1) adequate steps have not been taken to commercialize such inventions in a particular field of use; (2) such action is necessary to meet public health or safety needs; or (3) such action is necessary to meet requirements for public use under federal regulations. Further, the government rights include the right to use and disclose, without limitation, technical data relating to licensed technology that was developed in whole or in part at government expense. At least one of our technology license agreements contains a provision recognizing these government rights.2015,2016, we had a net loss of $15.8$16.8 million, and in 20142015 and 20132014 we experienced a net loss of $50.1$48.5 million and $18.0$50.1 million, respectively. As of June 30, 2015,2016, we had an accumulated deficit of approximately $309.5$359.1 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, our ability to diversify our revenue streams by successfully selling and marketing our existing products while introducing new products and increasing the volume of sales of such new products, 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 expenses, a portion of our sales and marketing expenses 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.presently outsourcerecently expanded our existing relationship with a contract manufacturer, which was previously responsible for the assemblymanufacture of a significant portion of our GeneXpert systems to a contract manufacturer.now include the complete manufacturing, assembly and testing of our GeneXpert systems. This outsourced manufacturing approach was fully in place as of the end of fiscal 2015. We create estimates in order to schedule production runs with thethis contract manufacturer. To the extent system orders materially vary from our estimates, we may experience constraints in our systems production and delivery capacity.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 carry fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we, or our contract manufacturer, 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.that supplyfor some of the components used in the manufacture of our systems and our disposable reaction tubes and cartridges, andcartridges. We also depend on a single contract manufacturer for the manufacture and assembly of our systems. We recently expanded our existing relationship with a contract manufacturer, which was previously responsible for the manufacture of a substantial portion of our systems, to cover the manufacture and final assembly of allthe entire line of our GeneXpert systems. We expect to complete this transition to the contract manufacturer in the third quarter of 2015. Strategic purchases of components are necessary for ourcontract suppliers or contract manufacturer, or failure to adequately forecast demand for our components or systems. In addition, we cannot be certain that our suppliers or contract manufacturer will continue to 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 delays and additional costs. We may not be able to find adequate alternative suppliers 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 or to manufacture and assemble our systems. Our inabilityIf 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, our new point-of-care diagnostic platform, GeneXpert Omni, and future products, including our Honeycomb module;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. Any further delay could impact our ability to capitalize on this market opportunity. Similarly, delays in the market launch of our Honeycomb module or other new products could impact our ability to capitalize on those market opportunities. 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 CLIA waiver for use of our next generation Flu/RSV, Flu, and Group A Strep tests on 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.Likewise, theThe oversight of laboratory developed tests would require laboratories that compete with high risk (PMA) tests to go through FDA review. It is unclear if this guidance will be finalized. If it is, competition for PMA tests from laboratories would be reduced. 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. The Company is workingWe continue to actively 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 the Company’sour 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 the Companywe successfully resolvesresolve the issues raised in the warning letter, the FDA will not approve any Cepheid Class III product. Cepheid’sCepheid has some Class III products are currently in development andbut these are not currently expected to be available until late 2017.approval, and/or a CLIA waiver (as appropriate) from the FDA, or similar regulatory approvals from foreign regulatory agencies, 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. 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. Although the device tax was suspended for two years in January 2016, the medical device excise tax thiswill be reinstated beginning on January 1, 2018, subject to any intervening legislative action. 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 maywill result in decreased profits to us, lower reimbursement by payors for our products, and/or reduced medical procedure volumes, all of which maywill adversely affect our business, financial condition and results of operations.In addition, other legislativeMore 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.For example, theThe United States government has in the past considered, is currently considering and may in the future consider healthcare policies and proposals intended to curb rising healthcare costs, including those that could significantly affect both private and public reimbursement for healthcare services. For example, the United States government implemented bundled payment mechanisms, such as the Center for Medicare & Medicaid Service’s Comprehensive Joint Replacement program for total hip/total knee arthroplasty procedures, which allows one fixed payment for the procedure and all related healthcare services for a period of 90-days post discharge. Further, state and local governments, as well as a number of foreign governments, are also considering or have adopted similar types of policies. Future significant changes in the healthcare systems in the United States or elsewhere, and current uncertainty about whether and how changes may be implemented, could have a negative impact on the demand for our products. We are unable to predict whether other healthcare policies, including policies stemming from legislation or regulations affecting our business may be proposed or enacted in the future; what effect such policies would have on our business; or the effect ongoing uncertainty about these matters will have on the purchasing decisions of our customers.Foundation for Innovative New Diagnostics,FIND, BMGF, USAID, UNITAID, UNOPS - Global Drug Facility 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., Biofire Diagnostics, Inc. (which was acquired by bioMerieux SA in 2014), 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. (which was acquired by Luminex Corporation in June 2016), 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 Henry Schein, Medline, and McKesson 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 or litigation risk 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 revenues than we previously received from our distributor in that market. Ifrevenue. Further, if we elect to distribute new products directly in other markets or in new geographic regions in which we were previously relying on distributors, as a result of termination of our distribution agreement or otherwise, 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.attorney’s fees, and interest. Given the inherent uncertainty of arbitration and the nature of the claims in this matter, it is possible thatcosts and/or interest, if any; however, we may incur additional material losses but an estimate of such a charge cannot be madeare 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.USPTO.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.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 second quarter of 2015, an individual, whose association with the Companyus has since been terminated, recently 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. Further, should we need to transition between international distribution partners, we could be exposed to various costs and risks as further described above under the heading “If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will be adversely affected.”
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.
could create uncertainty in our industry, result in increased costs of compliance, and further restrict our ability to sell our products abroad. In particular, we are required to obtain a new license for each purchase order of our biothreat products that are exported outside the United States. Delays or denial of the grant of any required license, or changes to the regulations that make such delays or denials more likely or frequent, could make it difficult to make sales to foreign customers and could adversely affect our revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.
If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.
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.
fees as further described below under the heading “Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.”
condition or the way we conduct business and could require us to incur greater accounting fees. For example, significant changes to revenue recognition rules have been enacted and will be effective for us in the first quarter of fiscal year 2018. We could incur significant costs to implement these new rules, including costs to modify our IT systems. In addition, accounting policies affecting many other aspects of our business are under review or being revised by the International Accounting Standards Board.
way with which our investors disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. We may invest the net proceeds from our Notes in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors, and may negatively impact the price of our securities.willis likely to continue to be highly volatile in the future. During the six months endedperiod commencing on January 1, 2015 and through June 30, 2015,2016, the closing sale price of our common stock on The NASDAQ Global Select Market ranged from $52.19 and $61.15$25.64 to $63.52 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.
On April 9, 2015, we granted 10,000 restricted stock units (the “RSUs”) to the Company’s Chief Financial Officer, Ilan Daskal, as a non-plan inducement grant pursuant to his offer letter with Cepheid. Additional information relating to the issuance of such RSUs was disclosed in Current Report on Form 8-K, dated April 7, 2015. Additionally, on April 28, 2015, an aggregate of 13,500 RSUs were automatically granted to our non-employee directors pursuant to our 2015 Equity Incentive Plan. Additional information relating to the automatic non-employee director grants under our 2015 Equity Incentive Plan was disclosed in our definitive Proxy Statement for our 2015 Annual Meeting of the Shareholders, dated March 19, 2015. These issuance were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(a)(2) of the Securities Act as a transaction by an issuer not involving any public offering. The grant of these securities was made without general solicitation or advertising and did not result in any proceeds to us.
Exhibit Number Incorporated by Reference Exhibit Description Form File No. Exhibit Date Herewith Incorporated by Exhibit Description Form File No. Exhibit Date Herewith Filing Filed 10.1 Offer Letter dated April 2, 2014 by and between Cepheid and Ilan Daskal. 8-K 000-30755 10.01 April 7,
2015 10.2 2015 Equity Incentive Plan and related forms of agreement for stock options and restricted stock units. X 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
Reference Filing Filed 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 101 The following materials from Cepheid’s Quarterly Report onForm 10-Q for the quarter ended June 30, 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 Loss,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 6th day of August 2015.8, 2016.CEPHEID (Registrant) John L. Bishop Chairman and Chief Executive Officer (Principal Executive Officer) ILAN DASKAL Daniel E. MaddenIlan DaskalDaniel E. Madden Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer)
Exhibit Description 10.1 Offer Letter dated April 2, 2014 by and between Cepheid and Ilan Daskal. 10.22015 Equity Incentive Plan and related forms of agreement for stock options and restricted stock units.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 Loss,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.