Notes to the Consolidated Financial Statements
(Unaudited)
(in
thousands, except per share amounts, unless otherwise indicated)
We develop, manufacture, market and sell diagnostic products and specimen collection
devices using our proprietary technologies, as well as other diagnostic products, including immunoassays and other
in vitro
diagnostic tests that are used on other specimen types. Our diagnostic products include tests that are performed on a
rapid basis at the
point-of-care,
tests that are processed in a laboratory, and include a rapid
point-of-care
HIV
in-home
test approved for use in the domestic consumer retail or
over-the-counter
(OTC) market and a rapid
point-of-care
HIV self-test used in certain international markets. We also
manufacture and sell devices used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomic, personalized medicine, microbiome and
animal genetic markets. Lastly, we manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our products are sold in the United States and internationally to various clinical laboratories,
hospitals, clinics, community-based organizations, public health organizations, research and academic institutions, distributors, government agencies, physicians offices, commercial and industrial entities, retail pharmacies and mass
merchandisers, and to consumers over the internet.
2.
|
Summary of Significant Accounting Policies
|
Principles of Consolidation and Basis of
Presentation
.
The consolidated financial statements include the accounts of OraSure Technologies, Inc. (OraSure) and its wholly-owned subsidiary, DNA Genotek, Inc. (DNAG). All intercompany transactions and
balances have been eliminated. References herein to we, us, our, or the Company mean OraSure and its consolidated subsidiary, unless otherwise indicated.
The accompanying consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and
recurring adjustments) necessary for a fair presentation of our financial position and results of operations for these interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto included
in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2016. Results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results of
operations expected for the full year.
Use of Estimates
.
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets
and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing
for intangible assets and goodwill, as well as calculations related to contingencies, accruals, and performance- based compensation expense, among others. These estimates and assumptions are based on managements best estimates and judgment.
Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. We adjust such
estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity and foreign currency markets, reductions in government funding, and declines in consumer spending have combined to increase the uncertainty
inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the
economic environment and other factors will be reflected in the financial statements in those future periods.
Short-Term Investments
.
We consider all short-term investments to be
available-for-sale
securities. These securities are comprised of guaranteed investment certificates with purchased
maturities greater than ninety days.
Available-for-sale
securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any,
reported in stockholders equity as a component of accumulated other comprehensive loss.
- 7-
Our
available-for-sale
securities
as of March 31, 2017 and December 31, 2016 consisted of guaranteed investment certificates with amortized cost and fair value of $18,776 and $11,160, respectively.
Fair Value of Financial Instruments
.
As of March 31, 2017 and December 31, 2016, the carrying values of cash and cash
equivalents, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature.
Fair value measurements
of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly,
for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Included in cash and cash equivalents
at March 31, 2017 and December 31, 2016, was $82,142 and $83,704 invested in government money market funds. These funds have investments in government securities and are Level 1 instruments.
We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in
the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan
are held in mutual funds and Company stock. The fair value of the plan assets as of March 31, 2017 and December 31, 2016 was $2,828 and $1,980, respectively, and was calculated using the quoted market prices of the assets as of those
dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying
consolidated balance sheets.
All of our
available-for-sale
securities are
measured as Level 1 instruments as of March 31, 2017 and December 31, 2016.
In 2017, we purchased certificates of deposit (CD)
from a commercial bank. The CDs bear interest at an annual rate ranging from 0.28% to 0.44% and mature monthly through February 28, 2018. The carrying values of the CDs approximate their fair value. These CDs serve as collateral for certain
standby letters of credit and are reported as restricted cash on the accompanying consolidated balance sheets. Also see Note 7 Commitments and Contingencies.
Inventories
.
Inventories are stated at the lower of cost and net realizable value determined on a
first-in,
first-out
basis and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
5,024
|
|
|
$
|
5,399
|
|
Work in process
|
|
|
1,035
|
|
|
|
1,034
|
|
Finished goods
|
|
|
6,648
|
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,707
|
|
|
$
|
11,799
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment
.
Property and equipment are stated at cost. Additions or improvements are
capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to
- 8-
forty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful
lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of income. Accumulated depreciation of property and equipment as of
March 31, 2017 and December 31, 2016 was $36,856 and $36,067, respectively.
Intangible Assets
. Intangible assets consist of a customer
list, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses, and product distribution rights. Intangible assets are amortized using the
straight-line method over their estimated useful lives of seven to fifteen years. Accumulated amortization of intangible assets as of March 31, 2017 and December 31, 2016 was $15,944 and $15,197, respectively. The change in intangibles
from $10,337 as of December 31, 2016 to $9,779 as of March 31, 2017 is a result of $637 in amortization expense and $79 in foreign currency translation gains.
Goodwill
.
Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable
intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S.
generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the fair value of a reporting unit is greater than its carrying
amount, then we would not be required to perform the
two-step
quantitative impairment test. Otherwise, performing the
two-step
impairment test is necessary. The first
step of the
two-step
quantitative impairment test involves comparing the fair values of the applicable reporting unit with its aggregate carrying value, including goodwill. If the carrying value of a reporting
unit exceeds the reporting units fair value, we perform the second step of the test to determine the amount of the impairment loss, if any. The second step involves measuring any impairment by comparing the implied fair values of the affected
reporting units goodwill and intangible assets with the respective carrying values.
We performed our last annual impairment assessment as of
July 31, 2016 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to
calculate the fair value of our reporting unit. If actual future results are not consistent with managements estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests
will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. As of March 31, 2017, we believe no indicators of impairment exist.
The change in goodwill from $18,793 as of December 31, 2016 to $18,971 as of March 31, 2017 is a result of foreign currency translation.
Revenue Recognition
.
We recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or
determinable, title has passed and collection is reasonably assured. Product revenues are recorded net of allowances for any discounts or rebates. Other than for sales of our OraQuick
®
In-Home
HIV test to the retail trade, we do not grant price protection or product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent
and immaterial. Accordingly, we expense warranty returns as incurred.
Our net revenues recorded on sales of the OraQuick
®
In-Home
HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts,
rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer
allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of income.
We record
shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues.
In June 2014, we entered into a Master Program Services and
Co-Promotion
Agreement with AbbVie Bahamas Ltd., a
wholly-owned subsidiary of AbbVie Inc. (AbbVie), to
co-promote
our OraQuick
®
HCV test in the United
- 9-
States. On June 30, 2016, we mutually agreed to terminate our agreement with AbbVie effective December 31, 2016. Following the termination of the agreement, AbbVie was relieved of its
co-promotion
obligations, including its obligation to detail the OraQuick
®
HCV Rapid Test into physician offices, and has no further financial obligations to
us. We are no longer obligated to compensate AbbVie for product detailing activities and are free to pursue arrangements with other pharmaceutical companies to market and promote our OraQuick
®
HCV Rapid Antibody Test in the U.S. Accordingly, during the first quarter of 2017 we did not record any revenue from this
co-promotion
agreement. During the first quarter of 2016, $3,362 in exclusivity revenue
was recognized and was recorded as other revenue in our consolidated statements of income.
On June 12, 2015, we were awarded a grant for up to
$10,400 in total funding from the U.S. Department of Health and Human Services (HHS) Office of the Assistant Secretary for Preparedness and Responses Biomedical Advanced Research and Development Authority (BARDA)
related to our OraQuick
®
Ebola Rapid Antigen test. The three-year, multi-phased grant includes an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain
clinical and regulatory activities. In September 2015, BARDA exercised an option to provide $7,200 in additional funding for the development of our OraQuick
®
Ebola Rapid Antigen test. Amounts
related to this grant are recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During the first quarters of 2017 and 2016, $420 and $482, respectively, was
recognized in connection with this grant.
In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid
Zika test. The
six-year,
multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and
regulatory activities. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During the first quarter of 2017, $644 was
recognized in connection with this grant.
Customer Sales Returns and Allowances
.
We do not grant return rights to our customers for
any product, except for our OraQuick
®
In-Home
HIV test. Accordingly, we have recorded an estimate of expected returns as a reduction of gross OraQuick
®
In-Home
HIV product revenues in our consolidated statements of income. This estimate reflects our historical sales experience to retailers and consumers,
as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. As of March 31, 2017 and December 31, 2016, the reserve for sales returns and allowances was $235 and $217, respectively. If
actual product returns differ materially from our reserve amount, or if a determination is made that this products distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should
the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected.
Deferred Revenue
.
We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue
as of March 31, 2017 and December 31, 2016 includes customer prepayments of $1,306 and $1,388, respectively.
Customer and Vendor
Concentrations
.
One of our customers accounted for 22% of our accounts receivable as of March 31, 2017. Another customer accounted for 15% of our accounts receivable as of December 31, 2016. We had no significant
concentrations in net consolidated revenues for the three months ended March 31, 2017. One of our customers accounted for approximately 12% of our net consolidated revenues for the three months ended March 31, 2016.
We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply
the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our
inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations.
Earnings Per Share
.
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted average number of shares outstanding is increased to
- 10-
include shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock, and performance stock units, unless the impact is
antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used
to acquire shares of common stock at the average market price during the reporting period.
The computations of basic and diluted earnings per share are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
12,441
|
|
|
$
|
2,446
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56,929
|
|
|
|
55,451
|
|
Dilutive effect of stock options and restricted stock
|
|
|
1,843
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,772
|
|
|
|
56,079
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods ended March 31, 2017 and 2016, outstanding common stock options, unvested restricted stock,
and unvested performance units representing 666 and 4,843 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive.
Foreign Currency Translation
. The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as
of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of
stockholders equity.
Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than
functional currency are included in our consolidated statements of income in the period in which the change occurs. Net foreign exchange losses resulting from foreign currency transactions that are included in other income (expense) in our
consolidated statements of income were $(200) and $(346) for the three months ended March 31, 2017 and 2016, respectively.
Accumulated Other
Comprehensive Income (Loss)
.
We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive income (loss) separately from accumulated deficit and additional
paid-in
capital in the stockholders equity section of our consolidated balance sheet.
We have defined the
Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. The $450 and $2,867 currency translation
adjustments recorded in the first three months of 2017 and 2016, respectively, are largely the result of the translation of our Canadian operations balance sheets into U.S. dollars.
Recent Accounting Pronouncements
.
In May 2014, the Financial Accounting Standards Board (FASB) issued converged guidance on
recognizing revenue in contracts with customers, ASU
2014-09,
Revenue from Contracts with Customers
. The intent of the new standard is to improve financial reporting and comparability of revenue
globally. The core principle of the standard is for a company to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange
for those goods or services. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, at which point we plan to adopt the standard.
- 11-
The FASB allows two adoption methods under ASU
2014-09.
We plan to adopt
the standard using the modified retrospective method. Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effective
of the change and providing additional disclosures comparing results to previous accounting standards.
Upon initial evaluation, we believe the key
changes in the standard that impact our revenue recognition relate to the allocation of the transaction price to performance obligations related to our device and lab services for drug testing. This revenue stream amounts to less than 1% of total
consolidated revenues. We will continue to evaluate the impact that the adoption of ASU
2014-09
will have on our consolidated financial statements and related disclosures, but do not anticipate the adoption to
have a material impact on our financial results.
In July 2015, the FASB issued ASU
2015-11,
Simplifying the
Measurement of Inventory
, which requires an entity that uses the
first-in,
first-out
method for inventory measurement to report inventory cost at the lower of cost
and net realizable value versus the current measurement principle of lower of cost or market. The ASU requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016. We adopted
ASU
2015-11
on January 1, 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU
2016-02,
Leases
, which requires entities to begin recording assets and
liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period
within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach. Early adoption is permitted. We are evaluating the effect that ASU
2016-02
may have on our
consolidated financial statements and related disclosures.
In March 2016, the FASB issued authoritative guidance under ASU
2016-09,
Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
. ASU
2016-09
provides for simplification of several
aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted ASU
2016-09
on January 1, 2017. Since we have a full valuation allowance against our net deferred tax assets, the adoption of this standard for recognition of tax effects of deductions for employee share awards in
excess of compensation costs (windfall) did not have a material impact on our consolidated financial statements and related disclosures. See Note 6 Income Taxes, for additional information. Should the full valuation allowance be
reversed in future periods the adoption of this new guidance will introduce more volatility to our effective tax rate depending on the Companys share price at exercise or vesting of share-based awards compared to grant date. The other
provisions of ASU
2016-09
did not have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments
, which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption. The majority of the guidance in ASU
2016-15
is consistent with our current cash flow classifications and we do not expect the adoption of this standard will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU
2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment
, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value
of the reporting unit. This update will be effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the future adoption of this standard on
our consolidated financial statements and related disclosures.
- 12-
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Payroll and related benefits
|
|
$
|
3,905
|
|
|
$
|
7,685
|
|
Income taxes payable
|
|
|
2,045
|
|
|
|
(39
|
)
|
Royalties
|
|
|
688
|
|
|
|
982
|
|
Professional fees
|
|
|
686
|
|
|
|
715
|
|
Other
|
|
|
2,361
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,685
|
|
|
$
|
11,314
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2016, we entered into a credit agreement (the Credit
Agreement) with a commercial bank. The Credit Agreement provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit subfacility of $2,500), with an option to request, prior to
the second anniversary of the closing date, that the lender, at its election, provide up to $5,000 of additional revolving commitments. Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible
accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings outstanding under the Credit Agreement at March 31, 2017 and December 31, 2016.
Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest under the
Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or
six-month
loans, as selected by the Company, plus 2.50% per year. The Credit Agreement is subject to an unused line fee
of 0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019.
In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as
of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of March 31, 2017 and December 31, 2016, we were in compliance with all applicable covenants in the Credit Agreement.
Stock-Based Awards
We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the Stock Plan). The Stock Plan permits stock-based
awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted
awards, performance awards and other stock-based awards. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We
recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust
compensation expense related to these awards, as appropriate. To satisfy the exercise of options or to issue restricted stock, or redeem performance-based restricted stock units, we issue new shares rather than purchase shares on the open market.
Total compensation cost related to stock options for the three months ended March 31, 2017 and 2016 was $502 and $733, respectively. Net cash
proceeds from the exercise of stock options were $9,417 and $0 for the three months ended March 31, 2017 and 2016, respectively. As a result of the Companys net operating loss carryforward position, no actual income tax benefit was
realized from stock option exercises during these periods.
- 13-
The following table summarizes the stock option activity for the first three months ended March, 31, 2017:
|
|
|
|
|
|
|
Options
|
|
Outstanding on January 1, 2017
|
|
|
5,456
|
|
Granted
|
|
|
191
|
|
Exercised
|
|
|
(1,462
|
)
|
Expired
|
|
|
(27
|
)
|
Forfeited
|
|
|
(19
|
)
|
|
|
|
|
|
Outstanding on March 31, 2017
|
|
|
4,139
|
|
|
|
|
|
|
Compensation cost of $655 and $719 related to restricted shares was recognized during the three months ended March 31,
2017 and 2016, respectively.
In connection with the vesting of restricted shares and exercise of stock options during the three months ended March 31, 2017 and 2016, we purchased and immediately retired 96 and 98 shares with aggregate
values of $851 and $527, respectively, in satisfaction of minimum tax withholding and exercise obligations.
The following table summarizes restricted
stock award activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
Shares
|
|
Issued and unvested, January 1, 2017
|
|
|
750
|
|
Granted
|
|
|
288
|
|
Vested
|
|
|
(297
|
)
|
Forfeited
|
|
|
(4
|
)
|
|
|
|
|
|
Issued and unvested, March 31, 2017
|
|
|
737
|
|
|
|
|
|
|
Commencing in 2016, we granted to certain executives performance-based restricted stock units (PSUs). Vesting of
these PSUs is dependent upon achievement of performance-based metrics during a
one-year
or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must
also remain in our service for three years from the grant date. Performance during the
one-year
period will be based on a
one-year
earnings per share target. If the
one-year
target is achieved, the PSUs will then vest three years from grant date. Performance during the three-year period will be based on achievement of a three-year compound annual growth rate for consolidated
product revenues. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested. Upon grant of the PSUs, we recognize compensation expense
related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate.
Compensation cost of $361 related to PSUs was recognized during the three months ended March 31, 2017. No compensation cost related to the PSUs was
recognized during the three months ended March, 31, 2016.
The following table summarizes PSU activity for the three months ended March 31, 2017:
|
|
|
|
|
|
|
Units
|
|
Issued and unvested, January 1, 2017
|
|
|
456
|
|
Granted
|
|
|
229
|
|
Vested
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
Issued and unvested, March 31, 2017
|
|
|
685
|
|
|
|
|
|
|
- 14-
Stock Repurchase Program
On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 of our
outstanding common shares. No shares were purchased and retired during the three months ended March 31, 2017. During the three months ended March 31, 2016, we purchased and retired 423 shares of common stock at an average price of $6.29
per share for a total cost of $2,660, respectively.
During the three months ended March 31, 2017 and 2016, we recorded tax expense of
$3,897 and $61, respectively.
Tax expense reflects taxes due to state and Canadian taxing authorities and the tax effects of temporary differences
between the basis of assets and liabilities recognized for financial reporting and tax purposes, and net operating loss and tax credit carryforwards. The significant components of our total deferred tax liability as of March 31, 2017 relate to
the tax effects of the basis difference between the intangible assets acquired in the DNAG acquisition for financial reporting and tax purposes. Tax expense in the first quarter of 2017 reflects the additional Canadian taxes due as a result of the
$12,500 gain from the settlement of the Ancestry litigation.
In 2008, we established a full valuation allowance against our U.S. deferred tax asset.
Management believes the full valuation allowance is still appropriate as of both March 31, 2017 and December 31, 2016 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal or state
deferred income tax expense or benefit was recorded for the three-month periods ended March 31, 2017 and 2016.
The new accounting guidance under ASU
2016-09
allows for the recognition of excess tax benefits regardless of whether the deduction reduces taxes payable. On January 1, 2017, we recorded a cumulative-effect adjustment to retained earnings of
$3,391 to recognize the increase in our net operating loss carryforwards from the cumulative excess tax benefits not recognized in periods prior to January 1, 2017. A corresponding $3,391 increase to our valuation allowance associated with this
tax benefit was also recorded to retained earnings thereby recording a net impact to retained earnings of $0.
7.
|
Commitments and Contingencies
|
Standby Letters of Credit
In 2016, we established four standby letters of credit in the aggregate amount of $1,831, naming international customers as the beneficiaries. These letters of
credit were required as a performance guarantee of our obligations under our product supply contracts with those customers and are collateralized by certificates of deposit maintained at a commercial bank.
Litigation
From time to time, we are involved in certain
legal actions arising in the ordinary course of business. In managements opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or
results of operations.
In May 2015, our subsidiary DNAG filed a complaint in the United States District Court for the District of Delaware against
Ancestry.com DNA LLC (Ancestry) relating to the manufacture and sale by Ancestry of its oral fluid DNA collection device (the Ancestry Device). Ancestry previously purchased DNAGs patented oral fluid DNA collection
devices. The complaint alleged that the manufacture and sale by Ancestry of the Ancestry Device infringes U.S. Patent No. 8,221,381 B2, which is owned by DNAG. In addition, the complaint alleged that Ancestry has breached the terms of
agreements under which Ancestry previously purchased DNAG products. The complaint also included an action to quiet title to the Ancestry Device and related patent applications. DNAG requested the court to grant injunctive relief and
damages.
On October 20, 2015, Ancestry filed with the United States Patent and Trademark Office (USPTO) a Petition for
Inter
Partes
Review (IPR) of some, but not all, claims of U.S. Patent No. 8,221,381 B2. On April 8, 2016, the USPTO instituted an IPR of some, but not all, of the claims raised in Ancestrys petition. On June 3, 2016,
Ancestry filed a second Petition for IPR of some, but not all, of the claims of U.S. Patent No. 8,221,381 B2.
- 15-
In July 2015, DNAG filed a complaint in the United States District Court for the District of Delaware against
Spectrum DNA, Spectrum Solutions L.L.C. and Spectrum Packaging L.L.C. (collectively Spectrum) relating to the manufacture and sale by Spectrum of an oral fluid DNA collection device (the Spectrum Device). The Spectrum Device
is the same as the Ancestry device mentioned above and Spectrum is the manufacturer of the Ancestry Device for Ancestry. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum Device infringes U.S. patent number 8,221,381
B-2,
which is owned by DNAG. DNAG requested the court to grant injunctive relief and damages. Spectrum filed a motion to dismiss this lawsuit on the grounds that the Delaware District Court lacked jurisdiction over
Spectrum. The Court granted Spectrums motion to dismiss for lack of personal jurisdiction.
On June 20, 2016, DNAG filed a complaint in
the United States District Court for the Southern District of California against Spectrum relating to the manufacture and sale of the Spectrum Device. The complaint alleged that the manufacture and sale by Spectrum of the Spectrum Device
infringes U.S. Patent No. 9,207,164, which is owned by DNAG. DNAG requested the court to grant injunctive relief and damages. On June 21, 2016, DNAG filed a motion for preliminary injunction. On July 21, 2016, Spectrum
filed a motion to stay the case pending resolution by the PTO of a Petition for IPR of U.S. Patent No. 9,207,164, which was filed by Ancestry in July 2016. On October 6, 2016, the Court issued an order denying DNAGs motion for
preliminary injunction and on October 7, 2016, the Court issued an order staying the case pending resolution of the IPR of U.S. Patent No. 9,207,164.
Effective February 6, 2017, DNAG settled the foregoing litigation with Ancestry and Spectrum. Under a Settlement and License Agreement executed by the
parties, Ancestry agreed to pay DNAG a settlement fee of $12,500. This settlement amount has been recorded as a separate line item and a reduction of our operating expenses in our consolidated statements of income. In addition, DNAG granted Ancestry
a royalty-bearing,
non-exclusive,
worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA
collection kits sold or used as part of Ancestrys genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestrys business. The Settlement and License Agreement also provides DNAG with a
royalty-free,
non-exclusive
license to patents related to Ancestrys existing saliva DNA collection kit and certain modifications thereto.
The parties have each agreed to a mutual release of claims and other provisions typical for settlement agreements of this type. Pursuant to the terms of the
Settlement and License Agreement, the pending federal lawsuits in the District of Delaware and the Southern District of California have been dismissed and the IPR proceedings before the USPTO involving the DNAG patents asserted in the litigation
have been terminated.
8.
|
Business Segment Information
|
We operate our business within two reportable segments: our
OSUR business, which consists of the development, manufacture and sale of diagnostic products, specimen collection devices and medical devices; and our molecular collection systems or DNAG business, which primarily consists
of the manufacture, development and sale of oral fluid collection devices that are used to collect, stabilize and store samples of genetic material for molecular testing. OSUR revenues are derived primarily from products sold in the United States
and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, public health organizations, distributors, government agencies, physicians offices, commercial and industrial entities, retail pharmacies
and mass merchandisers, and to consumers over the internet. OSUR also derives other revenues, including exclusivity payments for
co-promotion
rights and other licensing and product development activities. DNAG
revenues result primarily from products sold into the commercial market which consists of customers engaged in consumer genetics, clinical genetic testing, pharmacogenomics, personalized medicine, microbiome, and animal genetic testing. DNAG
products are also sold into the academic research market, which consists of research laboratories, universities and hospitals.
We organized our operating
segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting
- 16-
policies (see Note 2). We evaluate performance of our operating segments based on revenue and operating income (loss). We do not allocate interest income, interest expense, other income, other
expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated.
The following table summarizes operating segment information for the three months ended March 31, 2017 and 2016, and asset information as of
March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
21,840
|
|
|
$
|
22,199
|
|
DNAG
|
|
|
10,706
|
|
|
|
6,890
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,546
|
|
|
$
|
29,089
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
(219
|
)
|
|
$
|
1,608
|
|
DNAG
|
|
|
16,090
|
|
|
|
1,091
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,871
|
|
|
$
|
2,699
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
625
|
|
|
$
|
639
|
|
DNAG
|
|
|
783
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,408
|
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
784
|
|
|
$
|
447
|
|
DNAG
|
|
|
94
|
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
878
|
|
|
$
|
1,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Total assets:
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
161,730
|
|
|
$
|
151,719
|
|
DNAG
|
|
|
70,862
|
|
|
|
56,216
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
232,592
|
|
|
$
|
207,935
|
|
|
|
|
|
|
|
|
|
|
Our products are sold principally in the United States and Europe.
The following table represents total net revenues by geographic area, based on the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
20,854
|
|
|
$
|
22,170
|
|
Europe
|
|
|
3,125
|
|
|
|
3,879
|
|
Other regions
|
|
|
8,567
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,546
|
|
|
$
|
29,089
|
|
|
|
|
|
|
|
|
|
|
- 17-
The following table represents total long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
United States
|
|
$
|
15,886
|
|
|
$
|
15,737
|
|
Canada
|
|
|
4,238
|
|
|
|
4,286
|
|
Other regions
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,134
|
|
|
$
|
20,033
|
|
|
|
|
|
|
|
|
|
|
- 18-