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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-0030755
CEPHEID
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0441625
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1190 BORREGAS AVENUE
SUNNYVALE, CALIFORNIA 94089-1302
(Address of principal executive offices including zip code)
(408) 541-4191
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
As of August 1, 2001 there were 26,510,601 shares of Common Stock outstanding.
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CEPHEID
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets As of June 30, 2001 and
December 31, 2000 .............................................. 1
Condensed Consolidated Statements of Operations for the three
and six month periods ended June 30, 2001 and 2000 ............. 2
Condensed Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2001 and 2000 ..................... 3
Notes to Condensed Consolidated Financial Statements ............. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 11
Item 2. Changes in Securities and Use of Proceeds ........................ 11
Item 3. Defaults Upon Senior Securities .................................. 11
Item 4. Submission of Matters to Vote of Security Holders ................ 12
Item 5. Other Information ................................................ 12
Item 6. Exhibits and Reports on Form 8-K ................................. 12
Signatures ....................................................... 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CEPHEID
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000 (1)
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents .......................... $ 32,785 $ 39,698
Accounts receivable, net ........................... 1,582 2,407
Inventory .......................................... 3,788 1,772
Prepaid expenses and other current assets .......... 440 530
-------- --------
Total current assets .......................... 38,595 44,407
Property and equipment, net ........................ 3,101 2,892
Other assets ....................................... 51 54
-------- --------
Total assets .................................. $ 41,747 $ 47,353
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 481 $ 501
Accrued compensation ............................... 625 510
Accrued other liabilities .......................... 1,062 1,236
Current portion of equipment financing ............. 1,011 879
Current portion of deferred rent ................... 27 22
-------- --------
Total current liabilities ..................... 3,206 3,148
Equipment financing, less current portion ............ 1,531 1,504
Deferred rent, less current portion .................. 40 54
Commitments
Shareholders' equity:
Common stock ....................................... 65,226 64,944
Additional paid-in capital ......................... 8,356 8,310
Notes receivable from shareholder .................. -- (35)
Deferred stock-based compensation .................. (1,981) (3,238)
Accumulated other comprehensive loss ............... (14) (10)
Accumulated deficit ................................ (34,617) (27,324)
-------- --------
Total shareholders' equity .................... 36,970 42,647
-------- --------
Total liabilities and shareholders' equity .... $ 41,747 $ 47,353
======== ========
- ----------
(1) The balance sheet at December 31, 2000 has been derived from the audited
financial statements which are included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
See accompanying notes.
1
CEPHEID
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Product sales ................................... $ 1,482 $ 785 $ 3,843 $ 937
Contract revenue ................................ 560 404 1,547 1,168
-------- -------- -------- --------
Total revenues ............................. 2,042 1,189 5,390 2,105
Operating costs and expenses:
Cost of product sales ........................... 1,303 683 3,243 814
Research and development ........................ 3,607 4,060 7,308 7,527
Selling, general and administrative ............. 1,592 1,277 2,997 2,007
-------- -------- -------- --------
Total operating costs and expenses ......... 6,502 6,020 13,548 10,348
-------- -------- -------- --------
Loss from operations .............................. (4,460) (4,831) (8,158) (8,243)
Interest income, net .............................. 352 222 865 381
-------- -------- -------- --------
Net loss .......................................... (4,108) (4,609) (7,293) (7,862)
Deemed dividend to Series C preferred
shareholders .................................... -- -- -- (19,114)
-------- -------- -------- --------
Net loss allocable to common shareholders ......... $ (4,108) $ (4,609) $ (7,293) $(26,976)
======== ======== ======== ========
Basic and diluted net loss per common share ....... $ (0.16) $ (0.60) $ (0.28) $ (4.23)
======== ======== ======== ========
Shares used in computing basic and diluted net loss
per common share ................................ 25,846 7,701 25,763 6,371
======== ======== ======== ========
See accompanying notes.
2
CEPHEID
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net loss ...................................................................... $ (7,293) $ (7,862)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 601 418
Amortization of deferred stock-based compensation ........................... 1,303 1,594
Issuance of options to purchase common stock for services rendered .......... -- 783
Amortization of deferred rent ............................................... (9) (4)
Changes in assets and liabilities:
Accounts receivable ...................................................... 825 (681)
Inventory ................................................................ (2,016) (572)
Prepaid expenses and other assets ........................................ 93 11
Accounts payable and other current liabilities ........................... (198) 740
Accrued compensation ..................................................... 115 210
-------- --------
Net cash used in operating activities ......................................... (6,579) (5,363)
-------- --------
INVESTING ACTIVITY:
Capital expenditures .......................................................... (810) (1,046)
-------- --------
Net cash used in investing activity ........................................... (810) (1,046)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from the sales of preferred and common shares .................... 282 46,442
Repayment on note receivable from shareholder ................................. 35 --
Proceeds from financing arrangements .......................................... 631 --
Principle payments under financing arrangements ............................... (472) (241)
-------- --------
Net cash provided by financing activities ..................................... 476 46,201
-------- --------
Net (decrease) increase in cash and cash equivalents .......................... (6,913) 39,792
Cash and cash equivalents at beginning of period .............................. 39,698 1,493
-------- --------
Cash and cash equivalents at end of period .................................... $ 32,785 $ 41,285
======== ========
See accompanying notes.
3
CEPHEID
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Organization and Business
Cepheid (the "Company") was incorporated in the State of California on
March 4, 1996. The Company is commercializing its I-CORE(R) microfluidic and
microelectronic technologies as the preferred platform for rapid, on-site
detection of DNA (or RNA) in complex biological samples for scientific, medical
and industrial applications. The Company is developing fast, versatile systems
that can perform all the steps required to analyze DNA in complex biological
samples - sample preparation, amplification and detection - with results in less
than 30 minutes on a single instrument.
The accompanying unaudited condensed consolidated financial statements have
been prepared by management in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain
information and footnotes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (consisting of normal recurring
entries) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001 or for any other future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in our Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Cepheid include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated.
Revenue Recognition
The Company recognizes revenue from product sales when goods are shipped,
when there is persuasive evidence that an arrangement exists, delivery has
occurred, the price is fixed and determinable, and collectibility is reasonably
assured. No rights of return exist for product sales.
Contract revenues related to best efforts, research and development
agreements and government grants are recognized as the related services are
performed. Revenue is earned based on the performance requirements of the
contract. Non-refundable contract fees for which no further performance
obligations exist, and there is no continuing involvement by the Company, are
recognized on the earlier of when the payments are received or when collection
is assured. Under these agreements, the Company is required to perform specific
research and development activities and is reimbursed based on the costs
associated with each specific contract over the term of the agreement. Milestone
related revenues are recognized upon the achievement of the specified milestone.
Deferred revenue is recorded when funds are received in advance of services to
be performed.
Significant Concentrations
We distribute our products through our direct sales force and through
third-party distributors. Product revenue from our three distributors, each
representing 10% or more of total sales, was 26% for Fisher Scientific Company
L.L.C., 37% for Takara Shuzo Co. Ltd. and 27% for Eurogentec for the quarter
ended June 30, 2001. For the same quarter of the previous year, Fisher was 57%
and Takara and Eurogentec were zero.
4
CEPHEID
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company relies on several companies as the sole source of various
materials in its manufacturing process. Any extended interruption in the supply
of these materials could result in the failure to meet customer demand.
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash equivalent securities.
Warranty Accrual
We generally warrant our products from defect for a period of 12 months
from the date of sale for material and labor costs to repair the product.
Accordingly, a provision for the estimated cost of the warranty is recorded at
the time revenue is recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with banks, money
market instruments, commercial paper and debt securities with original
maturities of 90 days or less. At June 30, 2001 and December 31, 2000, the
Company had approximately $32.8 million and $39.7 million, respectively, in cash
and cash equivalents.
Inventory
Inventory is stated at the lower of standard cost (which approximates
actual cost) or market, with cost determined on the first-in-first-out ("FIFO")
method.
Comprehensive (Income) Loss
Comprehensive loss includes net loss as well as other comprehensive loss.
Cepheid's other comprehensive loss consists of unrealized losses on
available-for-sale marketable securities. Total accumulated other comprehensive
income is presented as a separate component of shareholders' equity in the
accompanying Condensed Consolidated Balance Sheets.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles".
FASB 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FASB 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment, applying a fair-value
based test. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged , regardless of the acquirer's
intention to do so. Other intangible assets will continue to be valued and
amortized over their estimated lives; in-process research and development will
continue to be written off immediately. The Company does not expect that the
implementation of these statements will have a material impact on its financial
position or results of operations.
3. NET LOSS PER COMMON SHARE
Basic net loss per common share has been calculated based on the
weighted-average number of common shares outstanding during the period, less
shares subject to the Company's right of repurchase. Diluted net loss per share
would give effect to the dilutive effect of common stock equivalents consisting
of stock options and warrants (calculated using the treasury stock method).
Potentially dilutive securities have been excluded from the computation of
diluted net loss per share as their inclusion would be antidilutive.
5
CEPHEID
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The computation of pro forma basic and diluted net loss per share includes
shares issuable upon the conversion of outstanding shares of convertible
preferred stock (using the as-if converted method) from the original date of
issuance.
The following table presents the calculation of basic and diluted net loss per
share (in thousands, except per share data):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(unaudited) (unaudited)
Net loss allocable to common shareholders ........... $ (4,108) $ (4,609) $ (7,293) $(26,976)
======== ======== ======== ========
Basic and diluted:
Weighted-average shares of common stock outstanding . 26,403 9,280 26,409 8,109
Less: weighted-average shares subject to repurchase . (557) (1,579) (646) (1,738)
-------- -------- -------- --------
Shares used in computing basic and diluted net
loss per common share ............................. 25,846 7,701 25,763 6,371
======== ======== ======== ========
Basic and diluted net loss per common share ......... $ (0.16) $ (0.60) $ (0.28) $ (4.23)
======== ======== ======== ========
Pro forma basic and diluted:
Shares used above ................................... 25,846 7,701 25,763 6,371
Pro forma adjustment to reflect the effect of assumed
conversion of preferred stock as of the date of
issuance through the date of actual conversion .... -- 11,862 -- 11,859
-------- -------- -------- --------
Shares used in computing pro forma basic and
diluted net loss per share ........................ 25,846 19,563 25,763 18,230
======== ======== ======== ========
Pro forma basic and diluted net loss per share ...... $ (0.16) $ (0.24) $ (0.28) $ (1.48)
4. ADOPTION OF SFAS 133
Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The adoption of the statement did not have an
impact on the Company's financial position or results of operations as the
Company holds no derivative financial instruments and does not currently engage
in hedging activities.
5. INVENTORY
The components of inventories (in thousands) are as follows:
JUNE 30, DECEMBER 31,
2001 2000
------- -------
(unaudited)
Raw materials ................ $ 1,777 $ 988
Work in process .............. 1,465 271
Finished goods ............... 546 513
------- -------
$ 3,788 $ 1,772
======= =======
6
CEPHEID
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. DEEMED DIVIDEND
In January through March 2000, the Company consummated the sale of
6,379,978 shares of Series C convertible preferred stock from which the Company
received proceeds of approximately $19.1 million or $3.00 per share. At the date
of issuance, the Company believed the per share price of $3.00 represented the
fair value of the preferred stock. Subsequent to the commencement of the
Company's initial public offering process, Cepheid re-evaluated the fair value
of its common stock as of January and March 2000. Accordingly, the increase in
fair value has resulted in a beneficial conversion feature of $19.1 million that
has been recorded as a deemed dividend to preferred shareholders in 2000. The
Company recorded the deemed dividend at the date of issuance by offsetting
charges and credits to additional paid-in-capital, without any effect on total
shareholders' equity. This charge was made against additional paid in capital,
as the Company did not have retained earnings from which it could have deducted
a deemed dividend. The preferred stock dividend increases the net loss allocable
to common shareholders in the calculation of basic and diluted net loss per
common share for the year ended December 31, 2000. The guidelines set forth in
the Emerging Issues Task Force Consensus No. 98-5 limit the amount of the deemed
dividend to the amount of the proceeds of the related financing.
7. CONTINGENCIES
On April 12, 2001, a complaint was filed in the United States District
Court for the Western District of Pennsylvania by Fisher Scientific Company
L.L.C., against Cepheid and two of our employees. The complaint alleges that
Cepheid's hiring of two former Fisher employees violates the employees'
employment agreements with Fisher as well as Fisher's distribution agreement
with Cepheid, and asserts a variety of contract, tort and trade secrets claims.
The complaint seeks declaratory relief and damages of an unspecified amount.
There has been no discovery to date and no trial is scheduled. We believe
that we have meritorious defenses to this action and if the claims are not
withdrawn, intend to defend them vigorously. Based upon information presently
known to management, the Company is unable to determine the ultimate resolution
of this lawsuit or whether it will have a material adverse effect on the
Company's financial condition.
8. SUBSEQUENT EVENTS
On August 9, 2001, the Company signed a Patent and Technology Licensing and
Supply Agreement with Environment Technologies Group, Inc ("ETG"), a wholly
owned subsidiary of Smith Industries, PLC. Under the agreement, the Company will
provide its proprietary I-CORE technology to ETG for integration by ETG into
fully automated bio-detection systems. In connection with this agreement, the
Company received an initial license fee payment of $250,000 and will receive
annual minimum royalty payments ranging from $50,000 to $200,000 for the life of
this agreement. The agreement expires upon the expiration of the legal life of
the patent rights.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q, including without limitation the
information under the captions entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Legal Proceedings," contain
forward-looking statements within the meaning of the federal securities laws. We
also may provide oral or written forward-looking statements in other materials
we release to the public from time to time. Statements that are not statements
of historical fact are forward-looking statements. They are based on current
expectations. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "intend," "potential" or "continue" or the
negative of these terms or other comparable terminology. Forward-looking
statements involve risks and uncertainties that could cause actual results and
the timing of events to differ materially from those anticipated in our
forward-looking statements. These risks and uncertainties include the impact of
competitive products and pricing, market acceptance of new products, market
conditions, reliance on the efforts of distributors, enforcement of intellectual
property rights and other factors set forth under the caption "Risk Factors" in
our Form 10-K for the year ended December 31, 2000. We assume no obligation to
update any of the forward-looking statements after the date of this report or to
conform these forward-looking statements to actual results.
OVERVIEW
Cepheid is applying proprietary I-CORE microfluidic and microelectronic
technologies to the development of fast, versatile systems that can perform all
the steps required to analyze DNA (or RNA) in complex biological samples -
sample preparation, amplification and detection - with results in less than 30
minutes on a single instrument. In 2000, we launched our first product, the
Smart Cycler system, a system which performs quantitative DNA amplification and
detection in a single, random access platform. Our initial distribution
agreement for the life sciences research market in the United States was
finalized with Fisher Scientific Company L.L.C. ("Fisher") in late 1999 and the
Smart Cycler was launched through Fisher in the United States in May 2000.
During the third quarter of 2000, we selected Takara Shuzo Co., LTD.
("Takara") as our distributor to the life science research markets in Japan,
South Korea and Taiwan. Takara initiated product sales in its territory during
the fourth quarter. In December 2000 we selected Eurogentec SA ("Eurogentec") to
distribute our Smart Cycler system in Europe, and Fisher as our distribution
partner in Canada. Eurogentec initiated product sales in the first quarter of
2001. During the second quarter of 2001, we selected BioSyn Tech Sdn Bhd to
distribute our Smart Cycler system in Malaysia and Singapore. The product launch
occurred in July 2001.
Our GeneXpert system, currently in development, is designed to integrate
automated sample preparation with our Smart Cycler amplification and detection
technology in a disposable cartridge format. We are collaborating with strategic
partners to co-develop assays, or biological tests, and to provide marketing and
sales support across a broad range of markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
REVENUES
Total revenues increased approximately 72% to $2,042,000 in the second
quarter of 2001 from $1,189,000 in the second quarter of 2000. The components of
this increase were a $697,000 increase in product sales, coupled with a $277,000
increase in grant and government-sponsored research revenue and offset in part
by a $121,000 decrease in commercial contract revenue. The increase in product
sales was a result of the launches of our Smart Cycler product in the United
States, Japan, South Korea, Taiwan, Europe, and Canada beginning in May 2000
through the second quarter of 2001. As a result, we sold approximately 65 Smart
Cyclers and approximately 200,000 tubes in the three months ended June 30, 2001.
The vast majority of these sales were through distributors.
COST OF PRODUCT SALES
Cost of sales increased 91% to $1,303,000 in the second quarter of 2001
from $683,000 in the second quarter of 2000, reflecting the corresponding
increase in product sales. Sales and cost of sales in 2000 reflect the initial
sales resulting from our product launch with Fisher in May 2000.
8
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 11% to $3,607,000 in the second
quarter of 2001 from $4,060,000 in the second quarter of 2000. Research &
development efforts were shifted from primarily Smart Cycler development in 2000
to primarily GeneXpert development in 2001. These expenses include approximately
$379,000 and $1,282,000 for the three months ending June 30, 2001 and 2000,
respectively, of non-cash charges related to the amortization of deferred
stock-based compensation, a decrease of approximately $903,000. The remaining
increase in expenses of $450,000 was primarily attributable to a $182,000
increase in salaries and related personnel cost, an increase of $86,000 in
temporary help, and an increase of $182,000 in outside consulting and lab
supplies and other development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 25% to $1,592,000 in
the second quarter of 2001 from $1,277,000 in the second quarter of 2000. These
expenses include approximately $157,000 and $315,000 for the three months ending
June 30, 2001 and 2000, respectively, of non-cash charges related to the
amortization of deferred stock-based compensation. The remaining $473,000
increase was primarily attributable to a $174,000 increase in salaries and
related personnel costs, an increase of $206,000 in professional service
expenses, and a $93,000 increase in investor and public relations, insurance,
and other operating expenses. Most of these increases relate to the addition of
a direct sales force, customer support and technical service people along with
other infrastructure to support the launches of the Smart Cycler system
throughout the world, as well as the ongoing increased expenses associated with
being a public company.
INTEREST INCOME, NET
Net interest income increased 59% to $352,000 in the second quarter of 2001
from $222,000 in the second quarter of 2000. This $130,000 increase was due
primarily to increased interest income generated from the increased cash and
cash equivalents position raised from our initial public offering on June 21,
2000.
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the second quarter of 2001
was $0.16, compared with $0.60 for the same period in 2000. The pro forma basic
net loss per common share for the second quarter of 2001 was $0.16, compared
with $0.24 for the same period in 2000. Pro forma net loss per share amounts
assume conversion of preferred stock to common at the time of their original
issuance.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
REVENUES
Total revenues increased 156 % to $5,390,000 in the first six months of
2001 from $2,105,000 in the same period of 2000. The components of this increase
were a $2,906,000 increase in product sales, coupled with a $602,000 increase in
grant and government-sponsored research revenue and offset by a decrease in
commercial contract revenue of $223,000. The increase in product sales was a
result of the launches of our Smart Cycler product in the United States, Japan,
South Korea, Taiwan, Europe, and Canada beginning in May 2000 through the second
quarter of 2001.
COST OF PRODUCT SALES
Cost of sales increased 298% to $3,243,000 in the first half of 2001 from
$814,000 in the first half of 2000, reflecting the corresponding increase in
product sales. Sales and cost of sales in 2000 reflect the initial sales
resulting from our product launch with Fisher in May 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 3% to $7,308,000 in the first
half of 2001 from $7,527,000 in the first half of 2000. These expenses include
approximately $914,000 and $1,856,000 for the six months ending June 30, 2001
and 2000, respectively, of non-cash charges related to the amortization of
deferred stock-based compensation, a decrease of approximately $942,000. The
remaining increase in expenses of approximately $723,000 was primarily
attributable to a
9
$312,000 increase in salaries and related personnel cost, an increase of
$142,000 in additional facility expenses, an increase of $124,000 in temporary
help, and an increase of $145,000 outside consulting, lab supplies and other
development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 49% to $2,997,000 in
the first six months of 2001 from $2,007,000 in the same period of 2000. These
expenses include approximately $389,000 and $521,000 for the six months ending
June 30, 2001 and 2000, respectively, of non-cash charges related to the
amortization of deferred stock-based compensation. The remaining $1,122,000
increase was primarily attributable to a $377,000 increase in salaries and
related personnel costs, an increase of $309,000 in professional service
expenses and a $436,000 increase in investor and public relations, insurance,
and other operating expenses. Most of these increases relate to the addition of
a direct sales force, customer support and technical service people along with
other infrastructure to support the launches of the Smart Cycler system
throughout the world, as well as the ongoing increased expenses associated with
being a public company.
INTEREST INCOME, NET
Net interest income increased 127% to $865,000 in the first half of 2001
from $381,000 in the first half of 2000. This $484,000 increase was due
primarily to increased interest income generated from the increased cash and
cash equivalents raised from our initial public offering on June 21, 2000.
NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share for the first half of 2001 was
$0.28, compared with $4.23 for the same period in 2000. The pro forma basic net
loss per common share for the first half of 2001 was $0.28, compared with $1.48
for the same period in 2000. Pro forma net loss per share amounts assume
conversion of preferred stock to common at the time of their original issuance.
For the first half of 2000, the actual and pro forma basic net loss per common
share includes a one-time deemed dividend of $3.00 and $1.05 per share,
respectively, associated with a deemed dividend of $19.1 million relating to the
beneficial conversion feature associated with the January through March 2000
private placements of preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception through proceeds generated
from our initial public offering of our common stock on June 21, 2000, and
through private sales of convertible preferred stock, contract payments to us
under government and commercial research and development agreements, product
sales and equipment financing arrangements. Through June 30, 2001, we received
net proceeds of $65.2 million from issuances of common and convertible preferred
stock. In addition, through June 30, 2001, we had financed equipment purchases
and leasehold improvements totaling approximately $3,883,000. As of June 30,
2001, we had $2,542,000 in equipment financing obligations. These obligations
are secured by the equipment financed, bear interest at a weighted average fixed
rate of 11.4% and are due in monthly installments through May 2005. Under the
terms of the equipment financing agreement a balloon payment is due at the end
of the loan term. As of June 30, 2001, we had approximately $191,000 available
under an equipment financing line of credit, which expires October 31, 2001.
As of June 30, 2001, we had $32.8 million in cash and cash equivalents, as
compared to $39.7 million as of December 31, 2000. Net cash used for operating
activities was $6.6 million for the six months ended June 30, 2001, and $5.4
million for the six months ended June 30, 2000. For the six months ended June
30, 2001, this consisted of a net loss for the period of $7,293,000, and an
increase in working capital of $1,181,000, which were offset in part by non-cash
charges of $1,303,000 related to stock-based compensation, and $592,000 of
amortization and depreciation expense. For the six months ended June 30, 2000,
cash used for operating activities consisted of $7,862,000 in net loss, offset
by an increase of $292,00 in working capital, as well as non-cash charges of
$2,377,000 related to stock-based compensation and $414,000 of amortization and
depreciation for the period.
Capital expenditures for property and equipment were $810,000 in the first
six months of 2001 compared to $1,046,000 for the same period in 2000. In the
first half of 2001, we received $282,000 from the sale of common shares and
received proceeds from equipment financing of $631,000, offset by repayments of
$472,000. We received $46,442,000, net of costs in cash from the sale of
preferred and common shares during the six month period ended June 30, 2000, and
used $241,000 to repay equipment financing obligations.
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We expect to have negative cash flow from operations through at least 2003.
We expect to incur increasing research and development expenses, as well as
expenses for additional personnel for production and commercialization efforts.
Our future capital requirements depend on a number of factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, continued progress of our research and development of potential
products, the need to acquire licenses to new technology and the availability of
other financing. We believe that our current cash balances, together with
revenue to be derived from product sales and research and development
collaborations, will be sufficient to fund our operations at least through the
year 2002. To the extent our capital resources are insufficient to meet future
capital requirements, we will need to raise additional capital or incur
indebtedness to fund our operations. There can be no assurance that additional
debt or equity financing will be available on acceptable terms, if at all. If
adequate funds are not available, we may be required to delay, reduce the scope
of or eliminate our research and development programs, reduce our
commercialization efforts or obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
technologies or products that we might otherwise seek to develop or
commercialize.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have not been any material changes in our exposure to market risk
during the six months ended June 30, 2001 which would require an update to the
disclosures provided in our Annual Report on form 10-K for the fiscal year ended
December 31, 2000.
PART II
ITEM 1. LEGAL PROCEEDINGS
On April 12, 2001, a complaint was filed in the United States District
Court for the Western District of Pennsylvania by Fisher Scientific Company
L.L.C., against Cepheid and two of our employees. The complaint alleges that
defendant Cepheid's hiring two former Fisher employees violates the employees'
employment agreements with Fisher as well as Fisher's distribution agreement
with Cepheid, and asserts a variety of contract, tort and trade secrets claims.
The complaint seeks declaratory relief and damages of an unspecified amount.
There has been no discovery to date and no trial is scheduled. We believe
that we have meritorious defenses to this action and if the claims are not
withdrawn, intend to defend them vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On June 12, 2001 we held our annual meeting of shareholders. The following
items were submitted to a vote of shareholders:
(a) To elect two Class II members currently serving on the Board of
Directors to three year terms.
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Gerald S. Casilli 14,277,218 1,164,974
Cristina H. Kepner 14,277,218 1,164,974
As a result, Mr. Casilli and Ms. Kepner were elected as Directors of the
Company. The following incumbent members continue to serve on the Board of
Directors: Thomas L. Gutshall, Kurt Petersen, Ph.D., Ernest Mario, Ph.D., Dean
O. Morton and Hollings C. Renton.
(b) To amend the Company's 1997 Stock Option Plan to increase the number of
shares of Common Stock reserved for issuance thereunder by 1,875,000 shares from
3,592,732 shares to 5,467,732 shares.
Votes
----------
For 10,327,119
Against 1,558,190
Abstain 20,446
The amendment was approved.
(c) To ratify the appointment of Ernst & Young LLP as the Company's
independent accountants for the year ending December 31, 2001.
Votes
----------
For 14,195,586
Against 20,893
Abstain 1,225,713
The appointment was approved.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Sunnyvale, State of
California on this 14th day of August, 2001.
CEPHEID
by: /s/ THOMAS L. GUTSHALL
------------------------------------
Thomas L. Gutshall
Chairman of the Board and Chief
Executive Officer
(Duly Authorized Officer)
by: /s/ CATHERINE A. SMITH
------------------------------------
Catherine A. Smith
Chief Financial Officer
(Principal Accounting Officer)
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