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| CPHD > SEC Filings for CPHD > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that are based upon current expectations. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "intend", "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including, but not limited to, the following: the adverse impact of the significant global economic downturn on our target markets and our business; continued market acceptance of our healthcare associated infection products; changes in the protocols, best practices or level of testing for healthcare associated infections; development and manufacturing problems; the need for additional intellectual property licenses for new tests and other products and the terms of such licenses; our ability to successfully sell additional products in the Clinical market; lengthy sales cycles in certain markets; the performance and market acceptance of our new products; our ability to obtain regulatory approvals and introduce new products into the Clinical market; the level of testing at existing clinical customer sites; the mix of products sold, which can affect gross margins; our reliance on distributors to market, sell and support our products; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; our ability to integrate the businesses, technologies, operations and personnel of acquired companies; 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; our success in increasing our direct sales and the effectiveness of our sales personnel; the impact of competitive products and pricing; our ability to manage geographically-dispersed operations; our ability to continue to realize manufacturing efficiencies, which are an important factor in improving gross margins; underlying market conditions worldwide; and the other risks set forth under "Risk Factors" and elsewhere in this report. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.
OVERVIEW
We are a broad-based molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for testing in the Clinical market, as well as for application in our legacy Biothreat, Industrial and Partner markets. Our systems enable rapid, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Molecular testing historically has involved a number of complicated and time-intensive steps, including sample preparation, DNA amplification and detection. Our easy-to-use systems integrate these steps and analyze complex biological samples in our proprietary test cartridges. We are currently the only company to have obtained Clinical Laboratory Improvement Amendments ("CLIA") moderate complexity categorization for an amplified molecular test system and associated specific infectious disease tests on the market in the United States. Our efforts are principally focused on those Clinical applications where rapid and accurate testing is particularly important, such as identifying infectious diseases and cancer.
Our two principal systems are the GeneXpert and SmartCycler systems. The GeneXpert system, our primary offering in the Clinical market, integrates sample preparation in addition to DNA amplification and detection. The GeneXpert system is designed for a broad range of user types ranging from reference laboratories and hospital central laboratories to satellite testing locations, such as emergency departments and intensive care units within hospitals and doctors' offices. The GeneXpert system is also our main system in the Biothreat market. The SmartCycler system integrates DNA amplification and detection to allow rapid analysis of a sample.
The GeneXpert system represents a paradigm shift in molecular diagnostics in terms of ease-of-use and flexibility, producing accurate results in a timely manner with minimal risk of contamination. Our GeneXpert system can provide rapid results with superior test specificity and sensitivity over comparable systems on the market today that are integrated but have open architectures.
We currently have available a broad and expanding menu of tests and reagents for use on our systems. Our reagents and tests are marketed along with our systems on a worldwide basis.
Sales Channels
Sales for products within our specific markets are conducted through both direct sales and indirect distribution channels worldwide. Clinical market sales in the United States and the United Kingdom are handled primarily on a direct basis, while sales in all other markets are handled primarily through indirect distribution. As international Clinical markets continue to develop, we expect to expand our direct sales efforts. Our marketing programs are managed on a direct basis.
Revenues
Currently, we derive our revenues primarily from the sales of our two systems and associated reagents and disposables in the Clinical, Biothreat, Industrial and Partner markets, and to a lesser extent from contract and government sponsored research.
Research and Development
The principal objective of our research and development program is to develop high-value clinical diagnostic products for the GeneXpert system. We focus our efforts on four main areas: a) assay development efforts to design, optimize, and produce specific tests that leverage the systems and chemistry we have developed, b) target discovery research to identify novel micro RNA targets to be used in the development of future assays, c) chemistry research in our Bothell, Washington facility to develop innovative and proprietary methods to design and synthesize oligonucleotide primers, probes and dyes to optimize the speed, performance and ease-of-use of our assays and d) engineering efforts to extend the multiplexing capabilities of our systems and to develop new low and high throughput systems.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
Management believes that there have been no significant changes during the three months ended March 31, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operation in our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2009 and 2008
Revenues
Three Months Ended March 31,
2009 2008 % Change
(Amounts in thousands)
Revenues:
System sales $ 7,909 $ 14,324 -45 %
Reagent and disposable sales 28,679 27,596 4 %
Total product sales 36,588 41,920 -13 %
Other revenue 2,179 2,913 -25 %
Total revenues $ 38,767 $ 44,833 -14 %
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We operate in four market areas: Clinical, Biothreat, Industrial and Partner. The following table illustrates product sales in the four market areas as a percentage of total product sales:
Three Months Ended March 31,
2009 2008 % Change
(Amounts in thousands)
Product sales by market:
Clinical Systems $ 4,773 $ 7,045 -32 %
Clinical Reagents 19,010 10,603 79 %
Total Clinical 23,783 17,648 35 %
Industrial 3,695 3,603 3 %
Biothreat 7,927 12,562 -37 %
Partner 1,183 8,107 -85 %
Total product sales $ 36,588 $ 41,920 -13 %
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Total product sales decreased 13% to $36.6 million in the first quarter of 2009 from $41.9 million in the first quarter of 2008, primarily due to a decline in sales in our legacy Partner and Biothreat markets, partially offset by an increase in our healthcare associated infections ("HAI") test sales in the Clinical Reagents market. The $6.1 million and 35% increase in Clinical product sales to $23.8 million for the first quarter of 2009 from $17.6 million for the same quarter of 2008 was mainly due to an increase of approximately $7.6 million of sales of our HAI tests as we continue to develop and expand our test menu as well as the markets we serve. This increase was partially offset by a decrease of $2.3 million in Clinical Systems product sales as customers have continued to be constrained by budgets as a reflection of the effect of the challenging economic environment on capital purchase decisions. The decrease of $6.9 million in Partner product sales was due to the expiration of our contract with Becton Dickinson in the fourth quarter of 2008 and the cancellation of certain contracted purchases by Roche during 2008. In the Biothreat market, product sales decreased $4.6 million primarily due to reduced anthrax test cartridge sales to Northrop Grumman/USPS.
We expect our Clinical product sales to continue to increase during the remainder of 2009 with the continued expansion of the HAI market. We expect that our Partner product sales will not change significantly throughout the remainder of 2009. We expect our Biothreat sales to decrease during the remainder of 2009 as we expect the USPS to purchase contractually minimum levels of product.
The following table provides a breakdown of our product sales by geographic regions:
Three Months Ended
March 31,
2009 2008 % Change
Product Sales Geographic information:
North America
Clinical $ 18,368 $ 12,812 43 %
Other 10,830 18,612 -42 %
Total North America 29,198 31,424 -7 %
International
Clinical $ 5,416 $ 4,836 12 %
Other 1,974 5,660 -65 %
Total International 7,390 10,496 -30 %
Total product sales $ 36,588 $ 41,920 -13 %
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Product sales in North America decreased $2.2 million, or 7%, from $31.4 million in the first quarter of 2008 to $29.2 million in the first quarter of 2009. The decrease in North America product sales was primarily driven by reduced anthrax test cartridge sales to Northrop Grumman/USPS in the Biothreat market as well as reduced Partner sales. In the Clinical market, increases in HAI test sales more than offset a decline in systems revenue. Internationally, which primarily represents sales in Europe, product sales decreased $3.1 million, or 30%, from $10.5 million in the first quarter of 2008 to $7.4 million in the first quarter of 2009. The decrease in international sales is mainly due to reduced Partner sales.
No single country outside of the United States represented more than 10% of our total revenues in any period presented.
Other revenue of $2.2 million for the three months ended March 31, 2009 decreased 25% from $2.9 million for the same period in 2008. This decrease was primarily due to a decrease in our program associated with the development of our test for genetic polymorphisms in clotting factors II and V. We expect that our quarterly other revenue will decrease during the remainder of 2009 as certain of our collaboration projects reach transition levels in their lifecycles.
Costs and Operating Expenses
Three Months Ended
March 31,
2009 2008 % Change
(Amounts in thousands)
Costs and operating expenses:
Cost of product sales $ 20,511 $ 22,986 -11 %
Collaboration profit sharing 2,629 3,733 -30 %
Research and development 10,338 9,898 4 %
Sales and marketing 6,812 6,941 -2 %
General and administrative 5,269 4,747 11 %
Restructuring charge 747 - 100 %
Total costs and operating expenses $ 46,306 $ 48,305 -4 %
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Cost of Product Sales
Cost of product sales consists of raw materials, direct labor and stock-based compensation expense, manufacturing overhead, facility costs and warranty costs. Cost of product sales also includes royalties on product sales and amortization of intangible assets related to technology licenses and intangibles acquired in the purchase of Sangtec. As a result of the decreased product sales discussed above, cost of product sales decreased 11% to $20.5 million for the first quarter of 2009 compared to $23.0 million for the first quarter of 2008. Our product gross margin percentage was 44% for the first quarter of 2009 compared to 45% for the first quarter of 2008. The slight decrease in product gross margin percentage in the three months ended March 31, 2009 versus the same period in 2008 was primarily due to an increase in license fee amortization expense and under-absorption of overhead in our European manufacturing facility that manufactures product for Roche, who cancelled certain contract purchases in 2008.
Collaboration Profit Sharing
Collaboration profit sharing represents the amount that we pay to ABI (now Life Technologies Corporation) under our collaboration agreement to develop reagents for use in the USPS BDS program. Under the agreement, computed gross margin on anthrax cartridge sales are shared equally between the two parties. Collaboration profit sharing expense was $2.6 million and $3.7 million for the first quarter of 2009 and 2008, respectively. The decrease in collaboration profit sharing for the first quarter of 2009 as compared to the first quarter of 2008 was the result of decreased anthrax cartridge sales under the USPS BDS program. This expense will remain approximately proportional to the sales of anthrax cartridges under the USPS BDS program, which we expect will decrease during the remainder of 2009.
Research and Development Expenses
Research and development expenses consist of salaries and employee-related expenses, which include stock-based compensation, clinical trials, research and development materials, facility costs and depreciation. Research and development expenses increased 4% to $10.3 million for the first quarter of 2009 from $9.9 million for the first quarter of 2008. The increase in research and development expenses of $0.4 million is primarily due to a $0.1 million increase in stock-based compensation, a $0.2 million increase in clinical trial costs and a $0.1 million increase in contractor costs. We expect that our research and development expenses will decrease as a percentage of total revenues during the remainder of 2009.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and employee-related expenses, which include commissions and stock-based compensation, travel, facility-related costs and marketing and promotion expenses. Sales and marketing expenses decreased 2% to $6.8 million for the first quarter of 2009 from $6.9 million for the first quarter of 2008. The decrease is primarily due to a $0.1 million decrease in stock-based compensation. We expect our sales and marketing expenses will increase in the remainder of 2009 as we continue to expand our efforts in the Clinical market, with particular emphasis on pursuing the market opportunities for our healthcare associated infection products.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee-related expenses, which include stock-based compensation, travel, facility costs, legal, accounting and other professional fees. General and administrative expenses increased 11% to $5.3 million for the first quarter of 2009 from $4.7 million for the first quarter of 2008. The increase is primarily due to a
$1.0 million increase in salaries and employee-related expenses, inclusive of a $0.3 million increase in stock-based compensation expense, which reflects an increase in headcount. In addition, other professional expenses decreased $0.5 million in the first quarter of 2009 as compared to the same period of 2008. We expect our general and administrative expenses to decline as a percentage of total revenues during the remainder of 2009.
Restructuring Charge
During the first quarter of 2009, we eliminated 47 positions that impacted employees, contractors and replacement positions, which resulted in $0.7 million of restructuring expense, mainly related to severance. As of March 31, 2009, we have an immaterial amount remaining to be paid.
Other Income (Expense), Net
Three Months Ended
March 31,
2009 2008 % Change
(Amounts in thousands)
Other income (expense), net:
Interest income $ 131 $ 540 -76 %
Interest expense (75 ) (1 ) 7400 %
Foreign currency exchange gain and other 16 743 -98 %
Total other income (expense), net $ 72 $ 1,282 -94 %
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Other income (expense), net consists of interest income, interest expense and foreign currency exchange gain, net and other. Interest income decreased to $0.1 million for the first quarter of 2009 from $0.5 million for the first quarter of 2008. The decrease is primarily due to lower interest rates in 2009 as compared to 2008. The interest expense increase of $0.1 million from the first quarter of 2008 to first quarter of 2009 is primarily due to interest expense related to our UBS loan entered into during the fourth quarter of 2008. Foreign currency exchange gain and other decreased $0.7 million primarily due to the foreign currency hedge program which we entered into during the fourth quarter of 2008 to limit our currency risk exposure.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Flow
Three Months Ended
March 31,
Increase/
2009 2008 (Decrease)
(Amounts in thousands)
Net cash provided by (used in) operating activities $ 3,178 $ (1,654 ) $ 4,832
Net cash used in investing activities (1,560 ) (1,583 ) 23
Net cash provided by financing activities 1,510 6,728 (5,218 )
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As of March 31, 2009, we had $26.8 million in cash and cash equivalents. The total cash, cash equivalents and marketable securities increase in the three months ended March 31, 2009 was $3.3 million, which primarily consisted of $1.5 million provided by financing activities and $3.2 million provided by operating activities offset by $1.6 million used in investing activities.
Net cash provided by operating activities was $3.2 million for the three months ended March 31, 2009 versus net cash used in operating activities of $1.7 million for the three months ended March 31, 2008. The net cash provided by operating activities was primary comprised of net loss plus the net effect of non-cash expenses. Non-cash expenses primarily include stock-based compensation, unrealized loss on put option, depreciation and amortization expenses and prepaid compensation expense, offset by unrealized gain on auction rate securities and deferred rent expense. The primary working capital sources of cash were increases in accounts payable and other current liabilities, and decreases in prepaid expenses, other current assets and accounts receivable. The primary working capital uses of cash were increases in inventory and other non-current assets, and decreases in accrued compensation and deferred revenue.
Net cash used in investing activities was $1.6 million for both the three months ended March 31, 2009 and 2008. For the three months ended March 31, 2009, net cash used in investing activities consisted of payments for technology licenses, net capital expenditures and the cost of an acquisition offset by a transfer of restricted cash to unrestricted cash.
Net cash provided by financing activities was $1.5 million and $6.7 million for the three months ended March 31, 2009 and 2008, respectively. The change is primarily due to the decrease in net proceeds from the issuance of common shares and exercise of stock options.
At March 31, 2009, we had $25.0 million invested in auction rate securities at cost and $18.1 million at fair value, all of which have failed to settle at auction since March 2008. At March 31, 2009, all but three of our auction rate securities continue to carry at least an AAA rating by at least one of the major rating agencies. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program ("FFELP"), or insured.
In October 2008, UBS offered us an option to sell the auction rate securities held by us back to UBS at par value beginning June 30, 2010 until July 2, 2012 and with an offer to provide "no net cost" loans to us up to 75% of the fair value of the auction rate securities. On November 10, 2008, we accepted this offer and borrowed $14.7 million on the line of credit. In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. The put option with fair value of $6.4 million is a separate freestanding instrument and will be accounted for separately from our auction rate securities investment. We intend to exercise our option and sell the auction rate securities back at par beginning June 30, 2010 through July 2, 2012, depending on market conditions.
In the first quarter of 2009, we recorded a gain of $3.0 million to increase the value of our auction rate securities investments classified as trading securities, offset by a loss of $3.1 million on the put option. We do not believe that the recent auction failures and our inability to liquidate these investments for some period of time will have any material impact on our ability to fund our operating requirements, capital expenditures, acquisitions, if any, or other business requirements.
Off-Balance-Sheet Arrangements
As of March 31, 2009, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1933.
Financial Condition Outlook
We plan to continue to make expenditures to expand our manufacturing capacity and to support our activities in sales and marketing and research and development. We plan to continue to support our working capital needs and anticipate that our existing cash resources will enable us to maintain currently planned operations. This expectation is based on our current and long-term operating plan and may change as a result of many factors, including our future capital requirements and our ability to increase revenues and reduce expenses, which, in many instances, depend on a number of factors outside our control including the general decline in global economic conditions. For example, our future cash use will depend on, among other things, market acceptance of our products, the resources we devote to developing and supporting our products, continued progress of our research and development of potential products, the need to acquire licenses to new technology or to use our technology in new markets, expansion through acquisitions and the availability of other financing.
In the future, we may seek additional funds to support our strategic business needs and may seek to raise such additional funds through private or public sales of securities, strategic relationships, bank debt, lease financing arrangements, or other available means. If additional funds are raised through the issuance of equity or equity-related securities, stockholders may experience additional dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If adequate funds are not available or are not available on acceptable terms to meet our business needs, our business may be harmed.
Please see Note 8 to our financial statements included herein for a description of certain changes to our commitments and contingencies.
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