Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Quidel Corporation and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included.
The information at
June 30, 2017
, and for the
three and six
months ended
June 30, 2017
and
2016
, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended
December 31, 2016
included in the Company’s
2016
Annual Report on Form 10-K. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.
For
2017
and
2016
, the Company’s fiscal year will end or has ended on December 31, 2017 and January 1, 2017, respectively. For
2017
and
2016
, the Company’s
second
quarter ended on July 2, 2017 and July 3, 2016, respectively. For ease of reference, the calendar quarter end dates are used herein. The
three and six
month periods ended
June 30, 2017
and
2016
each included 13 weeks.
Comprehensive (Loss) Income
Comprehensive (loss) income
includes foreign currency translation adjustments excluded from the Company’s Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an on-going basis, management evaluates its estimates, including those related to customer programs and incentives, bad debts, inventories, intangible assets, income taxes, stock-based compensation, contingencies and litigation.
Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Revenue Recognition
The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts that are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenues from product sales are recorded upon passage of title and risk of loss to the customer. Passage of title to the product and recognition of revenue occurs upon delivery to the customer when sales terms are free on board (“FOB”) destination and at the time of shipment when the sales terms are FOB shipping point and there is no right of return.
A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property and equipment. The instrument is depreciated on a straight-line basis over the life of the instrument. Depreciation expense is recorded in cost of sales included in the Consolidated Statements of Operations. The reagent rental agreements represent one unit of accounting as the instrument and consumables (reagents) are interdependent in producing a diagnostic result and neither has a stand-alone value with respect to these agreements. No revenue is recognized at the time of instrument placement. All revenue is recognized when the title and risk of loss for the diagnostic kits have passed to the customer.
Royalty income from the grant of license rights is recognized during the period in which the revenue is earned and the amount is determinable from the licensee.
The Company earns income from grants for research and commercialization activities. On November 6, 2012, the Company was awarded a milestone-based grant totaling up to
$8.3 million
from the Bill and Melinda Gates Foundation to develop, manufacture and validate a quantitative, low-cost, nucleic acid assay for HIV drug treatment monitoring on the integrated Savanna MDx platform for use in limited resource settings. Upon execution of the grant agreement, the Company received
$2.6 million
to fund subsequent research and development activities and received milestone payments totaling
$2.5 million
in 2013. On September 10, 2014, the Company entered into an amended grant agreement with the Bill and Melinda Gates Foundation for additional funding of up to
$12.6 million
in order to accelerate the development of the Savanna MDx platform in the developing world. Upon execution of the amended grant agreement, the Company received
$10.6 million
in cash. The Company received payments of
$2.4 million
in April 2015 and
$2.8 million
in July 2016 based on milestone achievements for both the original and the amended grant agreements. Under the original and amended grant agreements, the Company recognized grant revenue on the basis of the lesser of the amount recognized on a proportional performance basis or the amount of cash payments that were non-refundable as of the end of each reporting period. The Company recognized
$1.0 million
and
$2.7 million
as grant revenue for the
three and six
months ended
June 30, 2016
, respectively. Cash payments received were restricted as to use until expenditures contemplated in the grant were incurred or committed. As of December, 31, 2016 all payment related milestones were achieved and all of the grant revenue of
$20.9 million
was fully recognized. As such, the Company recognized
no
grant revenue during the three and
six months ended June 30, 2017
.
Fair Value Measurements
The Company uses the fair value hierarchy established in Accounting Standards Codification (“ASC”) Topic 820
, Fair Value Measurements and Disclosures,
which
requires that the valuation of assets and liabilities subject to fair value measurements be classified and disclosed by the Company 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 for similar assets and liabilities in active markets, 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).
The carrying amounts of the Company’s financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature.
Reclassifications
The Company recorded immaterial reclassifications of one-time acquisition costs totaling
$0.3 million
and
$0.4 million
for
three and six
months ended
June 30, 2016
, respectively, from general and administrative expense as previously reported in the Consolidated Statements of Operations to conform to current year presentation. The Company believes these reclassifications provide greater clarity and insight into the consolidated financial statements for the periods presented. The reclassification did not impact the net loss as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows, Statements of Comprehensive (Loss) Income or Statements of Stockholders' Equity.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which amends the guidance in former
ASC 605, Revenue Recognition
(“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has issued several amendments to the new standard, which include clarification of accounting guidance related to identification of performance obligations, intellectual property licenses, and principal vs. agent
considerations. The standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein.
The Company has assigned internal resources to assist in the adoption of the new standard and is evaluating the impact of the new standard on its accounting policies, processes and system requirements. The Company has begun the process of identifying, categorizing and analyzing its various revenue streams, but has not yet completed its assessment of the impact. The Company will continue to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on the Consolidated Financial Statements and related disclosures throughout 2017. The Company will adopt the new standard beginning January 2018.
In February 2016, the FASB issued guidance codified in ASU 2016-02 (Topic 842),
Leases
. The guidance requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term on the balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018 including interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2019.
In March 2016, the FASB issued guidance codified in ASU 2016-09 (Topic 718),
Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”)
.
This guidance includes provisions to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liability, and classification on the statement of cash flows. ASU 2016-09 includes a requirement that the tax effect related to the settlement of share-based awards be recorded within income tax expense or benefit in the income statement. The simplification of income tax accounting for share-based payment transactions also impacts the computation of weighted-average diluted shares outstanding under the treasury stock method. The Company adopted ASU 2016-09 in the first quarter of 2017 and the impact of the adoption resulted in the following:
|
|
•
|
Upon adoption, the balance of the unrecognized excess tax benefits of
$1.8 million
was recorded as an increase to deferred tax assets and a corresponding increase to the valuation allowance, resulting in no impact to retained earnings.
|
|
|
•
|
Excess tax benefits from share-based arrangements are to be classified within cash flow from operating activities, rather than as cash flow from financing activities. The Company applied this provision on a retrospective basis and the prior period statement of cash flows was adjusted. This adoption did not have a material impact on the Company’s cash flows.
|
|
|
•
|
The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when appropriate, as is currently required. This adoption did not have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.
|
|
|
•
|
There was no material impact on the computation of weighted-average diluted shares outstanding.
|
In January 2017, the FASB issued guidance codified in ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). Under this new guidance, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The guidance is effective for fiscal years beginning after December 15, 2019 including interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2020.
Note 2. Computation of Earnings (Loss) Per Share
For the
three and six
months ended
June 30, 2017
and
2016
, basic earnings (loss) per share was computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding, including restricted stock units (“RSUs”) vested during the period. Diluted earnings per share (“EPS”) reflects the potential dilution that could occur if the earnings were divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options as well as unvested RSUs. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding stock options and unvested RSUs.
The following table reconciles the weighted-average shares used in computing basic and diluted earnings (loss) per share in the respective periods (in thousands):
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|
|
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares used in basic earnings (loss) per share (weighted-average common shares outstanding)
|
33,500
|
|
|
32,541
|
|
|
33,351
|
|
|
32,632
|
|
Effect of dilutive stock options and RSUs
|
—
|
|
|
—
|
|
|
944
|
|
|
—
|
|
Shares used in diluted earnings (loss) per share calculation
|
33,500
|
|
|
32,541
|
|
|
34,295
|
|
|
32,632
|
|
Potentially dilutive shares excluded from calculation due to anti-dilutive effect
|
1,291
|
|
|
3,240
|
|
|
1,465
|
|
|
3,166
|
|
Potentially dilutive shares excluded from the calculation above represent stock options when the combined exercise price and unrecognized stock-based compensation are greater than the average market price for the Company’s common stock because their effect is anti-dilutive. Additionally, stock options and RSUs that would have been included in the diluted EPS calculation if the Company had earnings amounted to
1.1 million
for the three months ended
June 30, 2017
. Stock options and RSUs that would have been included in the diluted EPS calculation if the Company had earnings amounted to
0.7 million
for both the three and
six months ended
June 30, 2016
.
As discussed in Note 6, the Company issued its 3.25% Convertible Senior Notes due 2020 (“Convertible Senior Notes”) in December 2014. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in cash or shares of common stock (“conversion premium”). No conversion premium existed as of
June 30, 2017
and
2016
; therefore, there was no dilutive impact from the Convertible Senior Notes to diluted EPS during the three and
six months ended
June 30, 2017
and
2016
.
Note 3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Inventories consisted of the following, net of reserves of
$0.5 million
and
$0.7 million
at
June 30, 2017
and
December 31, 2016
, respectively (in thousands):
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|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
9,104
|
|
|
$
|
9,297
|
|
Work-in-process (materials, labor and overhead)
|
7,665
|
|
|
7,990
|
|
Finished goods (materials, labor and overhead)
|
6,195
|
|
|
8,758
|
|
Total inventories
|
$
|
22,964
|
|
|
$
|
26,045
|
|
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
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|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Customer incentives
|
$
|
4,852
|
|
|
$
|
3,766
|
|
Accrued interest
|
227
|
|
|
227
|
|
Other
|
1,176
|
|
|
1,006
|
|
Total other current liabilities
|
$
|
6,255
|
|
|
$
|
4,999
|
|
Note 5. Income Taxes
The Company recognized an income tax benefit of
$2.0 million
and
$4.1 million
for the
three months ended June 30, 2017 and 2016
, respectively, which represents an effective tax rate of
14%
and
34%
, respectively. For the
three months ended June 30, 2017
, the effective tax rate was lower compared to the same period of 2016 due to a projected utilization of net operating loss and credit carryforwards available to offset 2017 domestic taxable income. The Company recorded a full
valuation allowance against these tax attributes during 2016. The Company recognized an income tax expense of
$0.2 million
and an income tax benefit of
$6.8 million
for the
six months ended June 30, 2017 and 2016
, respectively, which represents an effective tax rate of
6%
and
38%
, respectively. For the
six months ended
June 30, 2017
, the effective tax rate was lower primarily due to the projected utilization of net operating loss and credit carryforwards available to offset 2017 domestic taxable income. The Company recorded a full valuation allowance against these tax attributes during 2016.
The Company is subject to periodic audits by domestic and foreign tax authorities. Due to the carryforward of unutilized net operating loss and credit carryovers, the Company's federal tax years from 2009 and forward are subject to examination by the U.S. authorities. The Company's state and foreign tax years for 2001 and forward are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax laws applied to the facts of each matter.
Note 6. Debt
In December 2014, the Company issued
$172.5 million
aggregate principal amount of its Convertible Senior Notes. Debt issuance costs of approximately
$5.1 million
were primarily comprised of underwriters fees, legal, accounting and other professional fees, of which
$4.2 million
were capitalized and are recorded as a reduction to long-term debt and are being amortized using the effective interest method to interest expense over the
six
-year term of the Convertible Senior Notes. The remaining
$0.9 million
of debt issuance costs were allocated as a component of equity in additional paid-in capital. Deferred issuance costs related to the Convertible Senior Notes were
$2.4 million
and
$2.8 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
The Convertible Senior Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock based on an initial conversion rate, subject to adjustment, of
31.1891
shares per $1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately
$32.06
per share). The conversion will occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported sales price of the Company’s common stock, for at least
20
trading days (whether or not consecutive) in the period of
30
consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than
130%
of the conversion price of the notes in effect on each applicable trading day; (2) during the
five
consecutive business day period following any
five
consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Senior Notes for each such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or after September 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the principal portion in shares of common stock or cash. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000, or the conversion value during the
25
-day observation period as described in the indenture for the Convertible Senior Notes. The conversion value is the sum of the daily conversion value, which is the product of the effective conversion rate divided by
25
days and the daily volume weighted-average price (“VWAP”) of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.
The Company pays
3.25%
interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash on June 15 and December 15 of each year. The Convertible Senior Notes mature on December 15, 2020. During the
six months ended
June 30, 2017
, the Company recorded total interest expense of
$5.5 million
related to the Convertible Senior Notes, of which
$2.8 million
related to the amortization of the debt discount and issuance costs and
$2.7 million
related to the coupon due semi-annually. During the
six months ended
June 30, 2016
, the Company recorded total interest expense of
$5.5 million
related to the Convertible Senior Notes, of which
$2.7 million
related to the amortization of the debt discount and issuance costs and
$2.8 million
related to the coupon due semi-annually.
If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as an acquisition, merger, or liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price
equal to
100%
of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
The Company accounts separately for the liability and equity components of the Convertible Senior Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company had no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Convertible Senior Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry with similar credit ratings and with similar maturity, the Company estimated the implied interest rate of its Convertible Senior Notes to be
6.9%
, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, which were defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Senior Notes, which resulted in a fair value of the liability component of
$141.9 million
upon issuance, calculated as the present value of implied future payments based on the
$172.5 million
aggregate principal amount. The
$30.7 million
difference between the cash proceeds of
$172.5 million
and the estimated fair value of the liability component was recorded in additional paid-in capital, net of tax and issuance costs, as the Convertible Senior Notes were not considered redeemable.
During the
six months ended June 30, 2016
, the Company repurchased and retired
$5.2 million
in principal amount of the outstanding Convertible Senior Notes. The aggregate cash used for the transaction was
$4.5 million
. The repurchase resulted in a reduction in debt of
$4.4 million
and a reduction in additional paid-in capital of
$0.5 million
with a gain on extinguishment of Convertible Senior Notes of
$0.4 million
included in interest expense, net in the Consolidated Statements of Operations. The Company made
no
repurchases in principal amount of the outstanding Convertible Senior Notes during the
six months ended June 30, 2017
.
The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.
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June 30, 2017
|
|
December 31, 2016
|
Principal amount of Convertible Senior Notes outstanding
|
$
|
167,314
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|
|
$
|
167,314
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|
Unamortized discount of liability component
|
(17,808
|
)
|
|
(20,221
|
)
|
Unamortized debt issuance costs
|
(2,425
|
)
|
|
(2,753
|
)
|
Net carrying amount of liability component
|
147,081
|
|
|
144,340
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|
Less: current portion
|
—
|
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—
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Long-term debt
|
$
|
147,081
|
|
|
$
|
144,340
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Carrying value of equity component, net of issuance costs
|
$
|
29,211
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|
|
$
|
29,211
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Fair value of outstanding Convertible Senior Notes
|
$
|
186,353
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|
|
$
|
165,223
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Remaining amortization period of discount on the liability component
|
3.5 years
|
|
|
4.0 years
|
|
As a policy election under applicable guidance related to the calculation of diluted net EPS, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of dilutive impact of the Convertible Senior Notes. The Convertible Senior Notes were not convertible as of
June 30, 2017
and
2016
; therefore there was no dilutive impact during the three and six months months ended
June 30, 2017
and
2016
. If the Convertible Senior Notes were converted as of
June 30, 2017
, the if-converted value would not exceed the principal amount.
Note 7. Stockholders’ Equity
Issuances and Repurchases of Common Stock
The Company issued
95,669
shares of common stock in conjunction with the vesting and release of RSUs,
411,781
shares of common stock upon the exercise of stock options and
32,358
shares of common stock in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately
$5.3 million
during the
six
months ended
June 30, 2017
. The Company repurchased
no
shares of common stock under its previously announced share repurchase program during
six
months ended
June 30, 2017
. The Company withheld
23,579
shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating
to the lapse of restrictions on certain RSUs for approximately
$0.5 million
during the
six
months ended
June 30, 2017
. The Company repurchased
1,152,386
shares of common stock under its previously announced share repurchase program for approximately
$19.6 million
during the
six
months ended
June 30, 2016
. The Company withheld
24,932
shares of outstanding common stock in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain RSUs for approximately
$0.4 million
during the
six
months ended
June 30, 2016
. As of
June 30, 2017
, there was
$35.0 million
available under the Company’s share repurchase program.
Stock-Based Compensation
The compensation expense related to the Company’s stock-based compensation plans included in the accompanying Consolidated Statements of Operations was as follows (in thousands):
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Three months ended June 30,
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Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Cost of sales
|
$
|
107
|
|
|
$
|
134
|
|
|
$
|
237
|
|
|
$
|
369
|
|
|
Research and development
|
404
|
|
|
344
|
|
|
816
|
|
|
641
|
|
|
Sales and marketing
|
437
|
|
|
332
|
|
|
907
|
|
|
269
|
|
|
General and administrative
|
1,190
|
|
|
1,296
|
|
|
2,099
|
|
|
2,807
|
|
|
Total stock-based compensation expense
|
$
|
2,138
|
|
|
$
|
2,106
|
|
|
$
|
4,059
|
|
|
$
|
4,086
|
|
Total compensation expense recognized for the
three and six
months ended
June 30, 2017
includes
$1.0 million
and
$2.1 million
related to stock options and
$1.1 million
and
$2.0 million
related to RSUs. Total compensation expense recognized for the
three and six
months ended
June 30, 2016
includes
$1.1 million
and
$2.5 million
related to stock options and
$1.0 million
and
$1.6 million
related to RSUs. As of
June 30, 2017
, total unrecognized compensation expense related to non-vested stock options was
$6.2 million
, which is expected to be recognized over a weighted-average period of approximately
2.4 years
. As of
June 30, 2017
, total unrecognized compensation expense related to non-vested restricted stock was
$6.7 million
, which is expected to be recognized over a weighted-average period of approximately
2.6 years
. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the
three and six
months ended
June 30, 2017
or
2016
.
The estimated fair value of each stock option was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants.
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Risk-free interest rate
|
2.31
|
%
|
|
1.47
|
%
|
|
Expected option life (in years)
|
6.63
|
|
|
6.59
|
|
|
Volatility rate
|
36
|
%
|
|
36
|
%
|
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
The weighted-average fair value of stock options granted during the
six
months ended
June 30, 2017
and
2016
was
$8.71
and
$5.97
, respectively. The Company granted
253,844
and
670,733
stock options during the
six
months ended
June 30, 2017
and
2016
, respectively. The fair value of RSUs is determined based on the closing market price of the Company’s common stock on the grant date. The weighted-average fair value of RSUs granted during the
six
months ended
June 30, 2017
and
2016
was
$21.55
and
$15.51
, respectively. The Company granted
332,216
and
167,925
shares of restricted stock during the
six
months ended
June 30, 2017
and
2016
, respectively.
Note 8. Industry and Geographic Information
The Company operates in
one
reportable segment. Sales to customers outside the U.S. represented
$14.7 million
(
13%
) and
$16.5 million
(
18%
) of total revenue for the
six
months ended
June 30, 2017
and
2016
, respectively. As of
June 30, 2017
and
December 31, 2016
, balances due from foreign customers were
$4.5 million
and
$6.8 million
, respectively.
The Company had sales to individual customers in excess of
10%
of total revenues, as follows:
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
2016
|
|
Customer:
|
|
|
|
|
A
|
22
|
%
|
|
14
|
%
|
|
B
|
16
|
%
|
|
13
|
%
|
|
C
|
15
|
%
|
|
13
|
%
|
|
|
53
|
%
|
|
40
|
%
|
As of
June 30, 2017
and
December 31, 2016
, accounts receivable from customers with balances due in excess of
10%
of total accounts receivable totaled
$8.2 million
and
$13.9 million
, respectively.
Note 9. Commitments and Contingencies
Legal
The Company is involved in various claims and litigation matters from time to time in the ordinary course of business. Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. The Company also maintains insurance, including coverage for product liability claims, in amounts which management believes are appropriate given the nature of its business.
No
accruals have been recorded as of
June 30, 2017
or as of December 31, 2016 related to such matters as they are not probable and/or reasonably estimable.
Licensing Arrangements
The Company has entered into various licensing and royalty agreements, which largely require payments by the Company based on specified product sales as well as the achievement of specified milestones. The Company had royalty and license expenses relating to those agreements of approximately
$0.2 million
and
$0.3 million
for the three months ended
June 30, 2017
and
2016
, respectively. The Company had royalty and license expenses relating to those agreements of approximately
$0.4 million
and
$0.5 million
for the
six months ended June 30, 2017 and 2016
, respectively.
Research and Development Agreements
The Company has entered into various research and development agreements that provide it with rights to develop, manufacture and market products using the intellectual property and technology of its collaborative partners. Under the terms of certain of these agreements, the Company is required to make periodic payments based on achievement of certain milestones or resource expenditures. These milestones generally include achievement of prototype assays, validation lots and clinical trials. As of
June 30, 2017
and
December 31, 2016
, total future commitments under the terms of these agreements are estimated at
$0.8 million
and
$2.3 million
, respectively. The commitments will fluctuate as the Company agrees to new phases of development under the existing arrangements.
Note 10. Fair Value Measurements
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
130,820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,820
|
|
|
$
|
133,540
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133,540
|
|
Total assets measured at fair value
|
$
|
130,820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,820
|
|
|
$
|
133,540
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133,540
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
4,691
|
|
|
4,691
|
|
|
—
|
|
|
—
|
|
|
5,175
|
|
|
5,175
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,691
|
|
|
$
|
4,691
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,175
|
|
|
$
|
5,175
|
|
There were
no
transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the
three and six
month periods ended
June 30, 2017
and the year ended
December 31, 2016
.
The Company used Level 1 inputs to determine the fair value of its cash equivalents, which primarily consist of funds held in government money market accounts and commercial paper. As such, the carrying value of cash equivalents approximates fair value. As of
June 30, 2017
and
December 31, 2016
, the carrying value of cash equivalents was
$130.8 million
and
$133.5 million
, respectively.
In conjunction with the acquisitions of BioHelix Corporation in May 2013, AnDiaTec GmbH & Co. KG in August 2013 and Immutopics, Inc. in March 2016, the Company has recorded contingent consideration of
$4.7 million
as of
June 30, 2017
and
$5.2 million
as of
December 31, 2016
. The Company assesses the fair value of contingent consideration to be settled in cash related to acquisitions using a discounted revenue model. Significant assumptions used in the measurement include revenue projections and discount rates. This fair value measurement of contingent consideration is based on significant inputs not observed in the market and thus represent Level 3 measurements.
Changes in estimated fair value of contingent consideration liabilities from
December 31, 2016
through
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
Contingent consideration liabilities
(Level 3 measurement)
|
Balance at December 31, 2016
|
$
|
5,175
|
|
Cash payments
|
(486
|
)
|
Unrealized loss on foreign currency translation
|
2
|
|
Balance at June 30, 2017
|
$
|
4,691
|
|
Note 11. Acquisition
On May 16, 2017 the Company acquired the InflammaDry® and AdenoPlus® diagnostic businesses from RPS Diagnostics ("RPS"), a developer and manufacturer of rapid, point-of-care ("POC") diagnostic tests for the eye health and primary care markets, for approximately
$14.0 million
in cash. The purchase price has been preliminarily allocated as follows:
$6.1 million
to purchased technology,
$7.8 million
to goodwill and the remaining value to inventory and property and equipment. The acquisition has been accounted for in conformity with ASC Topic 805,
Business Combinations
. The InflammaDry and AdenoPlus products are rapid, lateral-flow based, POC products for the detection of infectious and inflammatory diseases and conditions of the eye. Revenues for these products are reflected in the Company’s Immunoassay revenue category. The purchase price allocation related to this acquisition is preliminary as the Company obtains additional information related to working capital items.
Note 12. Subsequent Events
Pending Acquisition of Triage Business
On July 15, 2017, the Company entered into a Purchase Agreement (the “Triage Purchase Agreement”) with Alere Inc., a Delaware corporation (“Seller”), QTB Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (“Purchaser”), and, for the limited purposes set forth therein, Abbott Laboratories, an Illinois corporation (“Abbott”), pursuant to which Seller agreed to sell, and Purchaser agreed to acquire, Seller’s cardiovascular and toxicology Triage® MeterPro business (the “Triage Business”). As aggregate consideration for the Triage Business, the Company will pay
$400.0 million
in cash at the closing of the acquisition (subject to an inventory adjustment as set forth in the Triage Purchase Agreement) and assume certain post-closing liabilities. The Company expects to fund the cash purchase price for the Triage Business with a combination of cash on hand and new debt financing.
The closing of the acquisition of the Triage Business is subject to certain closing conditions, including: (i) the consummation of the transactions contemplated by the Agreement and Plan of Merger, dated as of January 30, 2016, as amended on April 13, 2017, by and among Seller, Abbott and Angel Sub, Inc. (“Abbott/Alere”), pursuant to which Seller will become a wholly-owned subsidiary of Abbott (the “Abbott/Alere Merger”), (ii) no law or judgment (whether temporary, preliminary or permanent) shall have been promulgated, entered, enforced, enacted or issued by any governmental authority, including a court, that remains in effect and that prohibits, enjoins or makes illegal the consummation of the transactions, (iii) the consummation of the transactions contemplated by the BNP Purchase Agreement (as discussed below), and (iv) other customary closing conditions. Consummation of the acquisition of the Triage Business is expected to occur concurrent with, or as soon as practicable following, the closing of the Abbott/Alere Merger
.
Pending Acquisition of BNP Business
Also on July 15, 2017, the Company entered into a Purchase Agreement (the “BNP Purchase Agreement”) with Seller, Purchaser, and, for the limited purposes set forth therein, Abbott, pursuant to which Seller agreed to sell, and Purchaser agreed to acquire, assets and liabilities relating to Seller’s contractual arrangement with Beckman Coulter, Inc. for the supply by Seller of antibodies and other inputs related to, and distribution of, the Triage® BNP Test (the “BNP Product”) for the Beckman Coulter Access Family of Immunoassay Systems (the “BNP Business”). As aggregate consideration for the BNP Business, the Company will pay up to
$40.0 million
in cash, payable in five annual installments of
$8.0 million
, the first of which will be paid approximately six months following the closing of the transactions contemplated by the BNP Purchase Agreement, and assume certain post-closing liabilities. The cash purchase price is subject to an inventory adjustment as set forth in the BNP Purchase Agreement. The obligation to pay the annual installments will (i) terminate if our net sales of BNP Product fall below a specified amount in the European Economic Area and certain other specified market conditions occur, and (ii) accelerate, and be immediately payable, if the Company transfers or conveys certain associated rights, assets or properties. The Company intends to fund the cash purchase price for the BNP Business from cash on hand.
The closing of the acquisition of the BNP Business is subject to certain closing conditions, including: (i) the consummation of the Abbott/Alere Merger, (ii) no law or judgment (whether temporary, preliminary or permanent) shall have been promulgated, entered, enforced, enacted or issued by any governmental authority, including a court, that remains in effect and that prohibits, enjoins or makes illegal the consummation of the transactions, (iii) the consummation of the transactions contemplated by the Triage Purchase Agreement, and (iv) other customary closing conditions. The acquisition of the BNP Business is expected to occur at, or as soon as practicable following, the closing of the Abbott/Alere Merger.
Commitment Letter
Also, on July 15, 2017, in connection with the entry into the Triage Purchase Agreement, the Company entered into a commitment letter (the “Commitment Letter”) with Bank of America, N.A. (“Bank of America”) and JPMorgan Chase Bank, N.A. (“JPMorgan” and together with Bank of America, the “Initial Lenders”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates, “MLPFS”) and JPMorgan (“JPMS” and together with MLPFS, the “Lead Arrangers”). The Commitment Letter provides that, in connection with the transactions contemplated by the Triage Purchase Agreement and subject to the conditions set forth in the Commitment Letter, the Initial Lenders will provide to the Company a
$245.0 million
senior secured term loan facility (the “Term Loan”) and a
$25.0 million
revolving credit facility (the “Revolving Credit Facility,” and together with the Term Loan, the “Financing”).
The Company intends to use, along with cash on hand, the proceeds of the Term Loan and a portion of the Revolving Credit Facility to pay the consideration for the Triage Business and associated fees and costs for its acquisitions of the Triage Business and the BNP Business.
The commitment to provide the Financing remains subject to certain conditions, including consummation of the acquisitions; the negotiation and execution of definitive documentation consistent with the Commitment Letter; the delivery of certain financial information; the absence of a material adverse effect on the Triage Business; the accuracy of specified representations and warranties of Abbott/Alere in the Triage Purchase Agreement and specified representations and warranties of the Company to be set forth in the definitive loan documents; the Lead Arrangers having been provided a specified period to syndicate the Financing, with the assistance of the Company as set forth in the Commitment Letter; and other customary closing conditions. The actual documentation governing the Financing has not been finalized, and accordingly, the actual terms may differ from the description of such terms in the Commitment Letter.