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, 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 and nine months ended September 30, 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. 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.
Investments
.
We consider all investments to be available-for-sale securities. These securities are comprised of guaranteed investment
certificates and corporate bonds 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-
The following is a summary of our available-for-sale securities at September 30, 2017 and December 31,
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment certificates
|
|
$
|
16,039
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,039
|
|
Corporate bonds
|
|
|
85,923
|
|
|
|
|
|
|
|
(300
|
)
|
|
|
85,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
101,962
|
|
|
$
|
|
|
|
$
|
(300
|
)
|
|
$
|
101,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment certificates
|
|
$
|
11,160
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$
|
11,160
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017 maturities of our available-for-sale securities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
83,582
|
|
|
$
|
|
|
|
$
|
(210
|
)
|
|
$
|
83,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year
|
|
$
|
18,380
|
|
|
$
|
|
|
|
$
|
(90
|
)
|
|
$
|
18,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments
.
As of September 30, 2017 and December 31, 2016, the carrying
values of cash and cash equivalents, restricted cash, 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).
All of our available-for-sale securities are measured as Level 1 instruments as of September 30, 2017 and December 31, 2016.
Included in cash and cash equivalents at September 30, 2017 and December 31, 2016, was $33,633 and $83,704 invested in government money market
funds. These funds hold investments in government securities and are measured as 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 September 30, 2017 and December 31, 2016 was
$3,670 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.
In 2017, we purchased
certificates of deposit (CDs) from a commercial bank. The CDs bear interest at rates ranging from 0.86% to 0.94% and mature periodically through January 15, 2018. The carrying values of the CDs
-8-
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 or net realizable value determined on
a first-in, first-out basis and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
8,252
|
|
|
$
|
5,399
|
|
Work in process
|
|
|
1,746
|
|
|
|
1,034
|
|
Finished goods
|
|
|
6,861
|
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,859
|
|
|
$
|
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 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 September 30, 2017 and December 31, 2016 was $38,689 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 September 30, 2017 and December 31, 2016 was $18,129 and $15,197, respectively. The change in intangibles from $10,337 as of December 31, 2016 to $8,972 as of
September 30, 2017 is a result of $1,984 in amortization expense and $619 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 carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
units fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
We performed our
last annual impairment assessment as of July 31, 2017 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 September 30, 2017, we believe no indicators of impairment exist.
The increase in goodwill from $18,793 as of December 31, 2016 to $20,257 as of September 30, 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
-9-
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 States.
On June 30, 2016, we mutually agreed to terminate our agreement with AbbVie effective December 31, 2016. Accordingly, during the third quarter and first nine months of 2017 we did not record any revenue from this co-promotion agreement.
During the third quarter and first nine months of 2016, $6,114 and $12,837, respectively, of exclusivity revenue was recognized and recorded as other revenue in our consolidated statements of income.
In June 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 and July 2017, BARDA exercised an option to provide $7,200 and
$1,330, respectively, in additional funding for our OraQuick
®
Ebola 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 third quarter and first nine months of 2017, $386 and $1,260, respectively, was recognized in connection with this grant. During the third quarter and first nine months of 2016, $474
and $1,373 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. In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test. 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 third quarter and first nine months of 2017, $553 and $1,787, respectively, was recognized as other revenue in connection with this grant. During the third quarter and first nine months
of 2016, $203 was recognized as other revenue in connection with this grant.
In June 2017, we entered into a four-year Charitable Support Agreement with
the Bill & Melinda Gates Foundation (Gates Foundation) that will enable us to offer our OraQuick
®
HIV self-test at an affordable price in 50 developing countries with
funding from the Gates Foundation. The funding will consist of support payments tied to volume of product sold by us and reimbursement of certain related costs. The funding from the Gates Foundation will be in an aggregate amount not to exceed
$20,000 over the four-year term or $6,000 each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a component of product revenue. During the third quarter and first nine
months of 2017, $458 of support payments were recognized in product revenue in connection with this agreement. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated statements of
income. During the third quarter and first nine months of 2017, $218 was recognized in other revenue in connection with this agreement.
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
-10-
ensure that it reflects potential product returns. As of September 30, 2017 and December 31, 2016, the reserve for sales returns and allowances was $186 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
September 30, 2017 and December 31, 2016 was comprised of customer prepayments of $1,186 and $1,388, respectively.
Customer and Vendor
Concentrations
.
One of our customers accounted for 21% of our accounts receivable as of September 30, 2017. Another customer accounted for 14% and 15% of our accounts receivable as of September 30, 2017 and December 31, 2016,
respectively. One of our customers accounted for approximately 25% and 19% of our net consolidated revenues for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2016, this
same customer accounted for approximately 19% and 14% of our net consolidated revenues, respectively. Another customer accounted for 11% and 10% of our net consolidated revenues for the three months and nine months ended September 30, 2017,
respectively. This customer notified us in October 2017 that our supply contract for HCV rapid test will not be renewed at this time. It is unclear whether this customer will fulfill the remaining $4 million of purchase obligations under our
existing contract.
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 include shares from the assumed vesting or exercise
of dilutive securities, such as common stock options, unvested restricted stock or 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
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
5,763
|
|
|
$
|
6,242
|
|
|
$
|
23,632
|
|
|
$
|
12,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,090
|
|
|
|
55,653
|
|
|
|
58,511
|
|
|
|
55,549
|
|
Dilutive effect of stock options, restricted stock, and performance units
|
|
|
2,082
|
|
|
|
877
|
|
|
|
2,058
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
62,172
|
|
|
|
56,530
|
|
|
|
60,569
|
|
|
|
56,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
0.40
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|
|
$
|
0.39
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-11-
For the three-month periods ended September 30, 2017 and 2016, outstanding common stock options, unvested
restricted stock, and unvested performance units representing 8 and 2,130 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. For the nine months ended
September 30, 2017 and 2016, outstanding common stock options, unvested restricted stock and unvested performance units representing 238 and 2,837 shares, respectively, were similarly excluded from the computation of diluted earnings per share.
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) gains resulting from foreign currency transactions that are included in other income (expense) in our
consolidated statements of income were $(638) and $84 for the three months ended September 30, 2017 and 2016, respectively. Net foreign exchange losses were $(1,256) and $(564) for the nine months ended September 30, 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 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. Accumulated other comprehensive loss at September 30, 2017 consists of $9,338 of currency translation adjustments and $300 of net unrealized losses on marketable securities.
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.
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 those under
the previous accounting standard.
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 drug testing kits. 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 will 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
-12-
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 U.S. net deferred tax
assets, the adoption of this standard for recognition of the tax effect 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 our full valuation allowance be reversed in future periods, the adoption of this new guidance will introduce more volatility in the calculation of our effective
tax rate, depending on the Companys share price at exercise or vesting of share-based awards as 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 adopted ASU 2017-04 in the second quarter of 2017. The adoption of this standard did not have a material impact on
our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-08,
Receivables-Nonrefundable Fees and Other
Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
, which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected
to more closely align the interest income recognition with the expectations incorporated in the market pricing on the underlying securities. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018.
Early adoption is permitted. We are evaluating the effect that ASU 2017-08 may have on our consolidated financial statements and related disclosures.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Payroll and related benefits
|
|
$
|
8,684
|
|
|
$
|
7,685
|
|
Income taxes payable (receivable)
|
|
|
3,303
|
|
|
|
(39
|
)
|
Professional fees
|
|
|
688
|
|
|
|
982
|
|
Royalties
|
|
|
659
|
|
|
|
715
|
|
Other
|
|
|
2,479
|
|
|
|
1,971
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,813
|
|
|
$
|
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
-13-
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 September 30, 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 September 30, 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 September 30, 2017 and 2016 was $547 and $646, respectively. Total
compensation cost related to stock options for the nine months ended September 30, 2017 and 2016 was $1,554 and $2,033, respectively. Net cash proceeds from the exercise of stock options were $31,402 and $894 for the nine months ended
September 30, 2017 and 2016, respectively. As a result of the Companys net operating loss carryforward position, no actual income tax benefit was recognized in the consolidated statements of income from stock option exercises during these
periods.
Compensation cost of $667 and $736 related to restricted shares was recognized during the three months ended September 30, 2017 and 2016,
respectively. Compensation cost of $2,022 and $2,137 related to restricted shares was recognized during the nine months ended September 30, 2017 and 2016, respectively. In connection with the vesting of restricted shares during the nine months
ended September 30, 2017 and 2016, we purchased and immediately retired 122 and 117 shares with aggregate values of $1,234 and $651, respectively, in satisfaction of minimum tax withholding obligations.
Commencing in 2016, we granted performance-based restricted stock units (PSUs) to certain executives. 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 $368 and $114 related to PSUs
-14-
was recognized during the three months ended September 30, 2017 and 2016, respectively. Compensation cost of $1,637 and $268 related to PSUs was recognized during the nine months ended
September 30, 2017 and 2016, respectively.
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 nine months ended September 30, 2017. During the nine months ended September 30, 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 under this share purchase agreement.
During the three and nine months ended September 30, 2017, we recorded tax expense of
$1,669 and $7,121, respectively. During the three and nine months ended September 30, 2016, we recorded tax expense of $400 and $634, 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 September 30, 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 nine months of 2017 reflects an increase in earnings and additional Canadian taxes due as a result of the
$12,500 gain from the settlement of our patent infringement and breach of contract litigation against Ancestry.com DNA LLC and its contract manufacturer.
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 September 30, 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 and
nine-month periods ended September 30, 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 resulting in a net
impact to retained earnings of $0.
7.
|
Commitments and Contingencies
|
Standby Letters of Credit
We established standby letters of credit in the aggregate amount of $1,840, 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.
-15-
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, animal genetic testing and research. 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 policies (see Note 2). We evaluate performance of our operating segments based on
revenue and operating income. 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 and nine months ended September 30, 2017 and 2016, and asset
information as of September 30, 2017 and December 31, 2016:
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
23,762
|
|
|
$
|
23,924
|
|
|
$
|
69,720
|
|
|
$
|
69,050
|
|
DNAG
|
|
|
18,552
|
|
|
|
8,327
|
|
|
|
45,316
|
|
|
|
23,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,314
|
|
|
$
|
32,251
|
|
|
$
|
115,036
|
|
|
$
|
92,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
(453
|
)
|
|
$
|
4,571
|
|
|
$
|
(235
|
)
|
|
$
|
9,098
|
|
DNAG
|
|
|
7,772
|
|
|
|
1,573
|
|
|
|
30,312
|
|
|
|
4,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,319
|
|
|
$
|
6,144
|
|
|
$
|
30,077
|
|
|
$
|
13,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
855
|
|
|
$
|
688
|
|
|
$
|
2,189
|
|
|
$
|
2,003
|
|
DNAG
|
|
|
843
|
|
|
|
726
|
|
|
|
2,400
|
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,698
|
|
|
$
|
1,414
|
|
|
$
|
4,589
|
|
|
$
|
4,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
1,156
|
|
|
$
|
283
|
|
|
$
|
2,493
|
|
|
$
|
1,406
|
|
DNAG
|
|
|
739
|
|
|
|
500
|
|
|
|
969
|
|
|
|
2,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,895
|
|
|
$
|
783
|
|
|
$
|
3,462
|
|
|
$
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
192,298
|
|
|
$
|
151,719
|
|
|
|
|
|
|
|
|
|
DNAG
|
|
|
89,961
|
|
|
|
56,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
282,259
|
|
|
$
|
207,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents total net revenues by geographic area, based on the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
29,063
|
|
|
$
|
26,302
|
|
|
$
|
78,871
|
|
|
$
|
72,493
|
|
Europe
|
|
|
3,204
|
|
|
|
2,171
|
|
|
|
8,765
|
|
|
|
9,006
|
|
Other regions
|
|
|
10,047
|
|
|
|
3,778
|
|
|
|
27,400
|
|
|
|
11,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,314
|
|
|
$
|
32,251
|
|
|
$
|
115,036
|
|
|
$
|
92,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
The following table represents total long-lived assets by geographic area:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
United States
|
|
$
|
16,644
|
|
|
$
|
15,737
|
|
Canada
|
|
|
4,767
|
|
|
|
4,286
|
|
Other regions
|
|
|
85
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,496
|
|
|
$
|
20,033
|
|
|
|
|
|
|
|
|
|
|
-18-