Item 1. Financial Statements
The accompanying notes form an integral part of these condensed consolidated financial statements.
The accompanying notes form an integral part of these condensed consolidated financial statements.
The accompanying notes form an integral part of these condensed consolidated financial statements.
The accompanying notes form an integral part of these condensed consolidated financial statements.
The accompanying notes form an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of U.S. Dollars — except for share data and per share data, unless otherwise stated)
Note 1. Description of Business and Basis of Presentation
Description of Business
The principal activity of Quotient Limited (the “Company”) and its subsidiaries (the “Group”) is the development, manufacture and sale of products for the global transfusion diagnostics market. Products manufactured by the Group are sold to hospitals, blood banking operations and other diagnostics companies worldwide.
Basis of Presentation
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. In accordance with those rules and regulations, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position, results of operations, changes in shareholders’ equity and cash flows for the interim periods presented. The March 31, 2020 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the audited consolidated financial statements at and for the year ended March 31, 2020 included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the six month period ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 2021 and any future period.
The Company has incurred net losses and negative cash flows from operations in each year since it commenced operations in 2007 and had an accumulated deficit of $523.8 million as of September 30, 2020. At September 30, 2020, the Company had available cash holdings and short-term investments of $162.7 million. Following the completion of a public offering which raised $80.7 million of net proceeds (see Note 7), and the resolution of the Ortho arbitration (see Notes 2 and 6), the Company’s existing available cash and short-term investment balances are adequate to meet its forecasted cash requirements for the next twelve months and accordingly the financial statements have been prepared on the going concern basis.
In the longer term, the Company expects to fund its operations, including the ongoing development of MosaiQ through successful field trial completion, achievement of required regulatory authorizations and commercialization, from existing available cash and short-term investment balances, cash generated through on-going sales of the Company’s COVID-19 antibody test, and the issuance of new equity or debt.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes.
On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a global pandemic. The extent to which the COVID-19 pandemic will impact the Company’s business, operations and financial results will depend on future developments and numerous evolving factors, which are highly uncertain and difficult to predict. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to further update estimates, judgments or revise the carrying value of any assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements.
- 8 -
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At September 30, 2020 and March 31, 2020, all cash and cash equivalents comprised readily accessible cash balances. Restricted cash comprised $8,700 at both September 30, 2020 and March 31, 2020, held in a cash reserve account pursuant to the indenture governing the Company’s 12% Senior Secured Notes (“the Secured Notes”) and $331 and $317 at September 30, 2020 and March 31, 2020, respectively, held in a restricted account as security for the property rental obligations of the Company’s Swiss subsidiary.
Short-term Investments
Short-term investments represent investments in money-market funds which are valued daily and which have no minimum notice period for withdrawals. The funds are invested in a portfolio of holdings and the creditworthiness requirement for individual investment holdings is a minimum of an A rating from a leading credit-rating agency. The Company records the value of its investment in the funds based on the quoted value of the funds at the balance sheet date. Unrealized gains or losses are recorded in accumulated other comprehensive loss and are transferred to the statement of comprehensive loss when they are realized.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. Movements in the allowance for doubtful accounts are recorded in general and administrative expenses. The Company reviews its trade receivables to identify specific customers with known disputes or collectability issues. In addition, the Company maintains an allowance for all other receivables not included in the specific reserve by applying specific rates of projected uncollectible receivables to the various aging categories. In determining these percentages, the Company analyzes its historical collection experience, customer credit-worthiness, current and forecast economic trends and changes in customer payment terms.
Concentration of Credit Risks and Other Uncertainties
The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Derivative instruments, consisting of foreign exchange contracts, and short-term investments are stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the foreign exchange contracts consist of large financial institutions of high credit standing. The short-term investments are invested in a fund which is invested in a portfolio of holdings and the creditworthiness requirement for individual investment holdings is a minimum of an A rating from a leading credit-rating agency.
The Company’s main financial institutions for banking operations held all of the Company’s cash and cash equivalents as of September 30, 2020 and March 31, 2020. The Company’s accounts receivable are derived from net revenue to customers and distributors located in the United States and other countries. The Company performs credit evaluations of its customers’ financial condition. The Company provides reserves for potential credit losses, but has not experienced significant losses to date. There was one customer whose accounts receivable balance represented 10% or more of total accounts receivable, net, as of September 30, 2020 and March 31, 2020. This customer represented 61% and 70% of the accounts receivable balances as of September 30, 2020 and March 31, 2020, respectively.
The Company currently sells products through its direct sales force and through third-party distributors. There was one customer that accounted for 10% or more of total product sales for the six month periods ended September 30, 2020 and September 30, 2019. This customer represented 58% and 60% of total product sales for the the six month period ended September 30, 2020 and the six month period ended September 30, 2019, respectively.
Fair Value of Financial Instruments
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximized the use of observable inputs and minimized the use of unobservable inputs. The fair value hierarchy is based on the following three levels of inputs:
•
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Level 1—Quoted prices in active markets for identical assets or liabilities.
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•
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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- 9 -
•
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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See Note 6, “Commitment and Contingencies,” for information and related disclosures regarding the Company’s fair value measurements.
Inventory
Inventory is stated at the lower of standard cost or market, net of reserves. Cost is determined at standard cost, approximating average cost. Allocation of fixed production overheads to conversion costs is based on normal capacity of production. Abnormal amounts of idle facility expense, freight, handling costs and spoilage are expensed as incurred and not included in overhead. Variances between standard cost and actual cost, arising in the production process, are analyzed to determine whether they reflect part of the normal cost of production, and should therefore be reflected as inventory value, or whether they are a period cost and should thus not be included in inventory. Inventory reserves are recorded based upon historic usage, expected future demand and shelf life of the products held in inventory. No stock-based compensation cost was included in inventory as of September 30, 2020 and March 31, 2020.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets as follows:
•
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Plant, machinery and equipment—3 to 20 years;
|
•
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Leasehold improvements—the shorter of the lease term or the estimated useful life of the asset.
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Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property and equipment, are expensed as incurred.
Intangible Assets
Intangible assets related to product licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, on a straight-line basis as follows:
Customer relationships—5 years
Brands associated with acquired cell lines—40 years
Product licenses—10 years
Other intangibles assets—7 years
The Company reviews its intangible assets for impairment and conducts an impairment review when events or circumstances indicate the carrying value of a long-lived asset may be impaired by estimating the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists. No impairment losses have been recorded in either of the six month periods ended September 30, 2020 or September 30, 2019.
Revenue Recognition
Revenue is recognized in accordance with ASU 2014-09, Revenue from Contracts with Customers.
Product revenue is recognized at a point in time upon transfer of control of a product to a customer, which is generally at the time of shipment at an amount based on the transaction price. Customers have no right of return except in the case of damaged goods and the Company has not experienced any significant returns of its products. Shipping and handling costs are expensed as incurred and included in cost of product sales.
- 10 -
Revenue is also earned from the provision of development services to a small number of original equipment manufacturer (“OEM”) customers. These development service contracts are reviewed individually to determine the nature of the performance obligations and the associated transaction prices. In recent years, product development revenues have been commensurate with achieving milestones specified in the respective development agreements relating to those products. These milestones may include the approval of new products by the European or U.S. regulatory authorities, which are not within the Company’s control. While there can be no assurance that this will continue to be the case, the milestones have been such that they effectively represent completion of the Company’s performance obligations under a particular part of a development program. Should the Company fail to achieve these milestones the Company would not be entitled under the terms of the development agreements to any compensation for the work undertaken to date. As a result, the milestone-related revenues have been recognized as the contractual milestones are achieved.
Pursuant to an Umbrella Supply Agreement with Ortho-Clinical Diagnostics, Inc. (“Ortho”), the Company executed a product attachment relating to the development of a range of rare antisera products. During the year ended March 31, 2020, the Company recognized milestones totaling $1,050 related to the approval by the FDA of an application submitted during the year ended March 31, 2019, and a further FDA submission and approval related to the use of the products on another of Ortho’s automation platforms. There are no further milestone revenues due under this agreement.
In January 2015, the Company’s subsidiaries, Quotient Suisse and QBD (QS-IP) Limited, entered into a supply and distribution agreement with Ortho related to the commercialization and distribution of certain MosaiQ products (the "Prior Ortho Agreement"), which the Company terminated effective as of December 27, 2019. Under the terms of the Prior Ortho Agreement, the Company was entitled to receive milestone payments, totaling in aggregate $59.0 million, upon CE-mark and FDA approval, as well as upon the first commercial sale of the relevant MosaiQ products by Ortho within the European Union, United States and within any country outside of these two regions. In November 2019, Ortho initiated an arbitration proceeding as result of the Company's termination of the Prior Ortho Agreement. See Note 6, "Commitments and Contingencies—Ortho Arbitration and Settlement," for details.
On September 4, 2020, the Company and Ortho entered into a binding letter agreement (the “Letter Agreement”) pursuant to which the Company and Ortho agreed:
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•
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to confirm the termination of the Prior Ortho Agreement and various related contracts;
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|
•
|
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to end the parties’ disputes regarding the Prior Ortho Agreement by executing mutual releases and terminating their pending arbitration proceeding related to the Prior Ortho Agreement (see Note 6); and
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|
•
|
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to negotiate in good faith, and use their respective reasonable best efforts to execute, a new distribution agreement (the “New Distribution Agreement”) based on the terms set forth in the Letter Agreement, but if for any reason no such definitive agreement is reached, the Letter Agreement will govern the parties’ respective rights and obligations as a binding contract.
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Pursuant to the Letter Agreement, Ortho made an initial, non-refundable milestone payment of $7.5 million to the Company on the date of the Letter Agreement.
In the Letter Agreement, the Company and Ortho have agreed that Ortho has the right to distribute, market and sell a dedicated MosaiQ microarray optimized for the patient transfusion diagnostics market (the “MosaiQ IH3 Microarray”) in the European Territory (defined as the European Economic Area plus the United Kingdom and Switzerland) and in the United States, solely for use in testing the immuno-hematological profile of the blood of medical patients in the course of their care or treatment. Ortho’s rights in the two territories each are for one ten-year term commencing on the receipt of specified regulatory approvals in the respective territory. The Company retains the right to distribute, market and sell the immunohematology Microarrays for use in blood donor testing worldwide and in the patient testing market outside of the European Territory and the United States. Ortho’s rights in respect of the MosaiQ IH3 Microarray are exclusive provided it satisfies annual minimum purchase volume requirements in each territory. Ortho also has the non-exclusive right to sell and distribute MosaiQ instruments in the United States and the European Territory for use in testing the immuno-hematological profile of blood of medical patients in the course of their care or treatment. Ortho is required to purchase the MosaiQ IH3 Microarrays, and the instruments, controls and reagents required for their use, only from the Company at specified prices.
In addition to the initial $7.5 million milestone payment, Ortho is required to make up to another $60 million of additional milestone payments upon achievement of certain regulatory milestones and commercial sales benchmarks, including up to $25 million upon the achievement by Ortho of certain cumulative gross revenue hurdles.
The Company has concluded that the initial $7.5 million milestone represents a payment in respect of development work undertaken to date in respect of the MosaiQ IH3 Microarray and accordingly has recognized the revenue in the quarter ended September 30, 2020.
The Company has also concluded that each of the remaining milestones under the Letter Agreement require significant levels of development work to be undertaken and there is no certainty at the start of the projects that the development work will be successful, these milestones are substantive and, accordingly, the revenue will be recognized when the milestones are achieved.
- 11 -
In the six month period ended September 30, 2020, revenue recognized from performance obligations related to prior periods was not material and, at September 30, 2020, revenue expected to be recognized in future periods related to remaining performance obligations was also not material.
Research and Development
Research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These costs include direct and research-related overhead expenses. Other than materials assessed as having alternative future uses and which are recognized as prepaid expenses, the Company expenses research and development costs, including products manufactured for research and development purposes and the expenses for research under collaborative agreements, as such costs are incurred. Where government grants are available for the sponsorship of such research, the grant receipt is included as a credit against the related expense.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of comprehensive loss.
In determining fair value of the stock-based compensation payments, the Company uses the Black–Scholes model and a single option award approach for share options, which requires the input of subjective assumptions. These assumptions include: the fair value of the underlying share, estimating the length of time employees will retain their awards before exercising them (expected term), the estimated volatility of the Company’s ordinary share price over the expected term (expected volatility), risk-free interest rate (interest rate), expected dividends and the number of shares subject to awards that will ultimately not complete their vesting requirements (forfeitures).
Where modifications are made to vesting conditions, the Company considers the nature of the change and accounts for the change in accordance with ASC 715 Compensation – Stock Compensation. The Company determined that certain modifications made during the six month periods ended September 30, 2020 and September 30, 2019 were type III in nature and accordingly the original compensation expense related to these awards was reversed and the value of the awards was re-measured at the date of the change and was expensed over the vesting period of the awards concerned.
Share Warrants
As of September 30, 2020, the Company had one class of warrants to purchase ordinary shares outstanding, which comprised warrants that were issued in December 2013 and August 2015 in connection with the establishment or increase of the Company’s then existing secured term loan facility. None of these warrants contain any obligation to transfer value and, as such, the issuance of these warrants has been recorded in additional paid in capital as part of shareholders’ (deficit) equity.
Leases
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time, in exchange for consideration. The Company determines if the contract conveys the right to control the use of an identified asset for a period of time. The Company assesses throughout the period of use whether the Company has both of the following: (1) the right to obtain substantially all of the economic benefits for use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. The Company also reviews the terms of the lease in accordance with Accounting Standard Update, or ASU, 2016-02 in order to determine whether the lease concerned is a finance or an operating lease. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less.
For finance leases, an asset is included within property and equipment and a lease liability equal to the present value of the minimum lease payments is included in current or long-term liabilities. Interest expense is recorded over the life of the lease at a constant rate.
Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. The operating lease right-of-use assets also include any lease payments made prior to the commencement date and any initial direct costs incurred, less any lease incentives received. The interest rate implicit in lease contracts
- 12 -
is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The incremental borrowing rate is determined at lease commencement, or as of April 1, 2019 for operating leases existing upon adoption of ASU 2016-02. The incremental borrowing rate is subsequently reassessed upon modification to the lease arrangement. Operating lease expense is recognized on a straight-line basis over the lease term.
In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Although separation of lease and non-lease components is required, certain practical expedients are available. In particular, entities may elect a practical expedient to not separate lease and non-lease components and instead account for each lease component and the related non-lease component together as a single component. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating lease right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.
The finance lease assets and operating lease right-of-use assets are assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
Derivative Financial Instruments
In the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations. The Company’s policy is to mitigate the effect of these exchange rate fluctuations on certain foreign currency denominated business exposures. The Company has a policy that allows the use of derivative financial instruments to hedge foreign currency exchange rate fluctuations on forecasted revenue denominated in foreign currencies. The Company carries derivative financial instruments (derivatives) on the balance sheet at their fair values. The Company does not use derivatives for trading or speculative purposes. The Company does not believe that it is exposed to more than a nominal amount of credit risk in its foreign currency hedges, as counterparties are large, global and well-capitalized financial institutions. To hedge foreign currency risks, the Company uses foreign currency exchange forward contracts, where possible and prudent. These forward contracts are valued using standard valuation formulas with assumptions about future foreign currency exchange rates derived from existing exchange rates, interest rates, and other market factors.
The Company considers its most current forecast in determining the level of foreign currency denominated revenue to hedge as cash flow hedges. The Company combines these forecasts with historical trends to establish the portion of its expected volume to be hedged. The revenue and expenses are hedged and designated as cash flow hedges to protect the Company from exposures to fluctuations in foreign currency exchange rates. If the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated other comprehensive loss to the consolidated statement of comprehensive loss at that time.
Income Taxes
The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements, but have not been reflected in taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets. Deferred tax assets and liabilities are classified as noncurrent on the balance sheet.
The Company accounts for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The Company evaluates uncertain tax positions on a quarterly basis and considers various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit and changes in facts or circumstances related to the tax position.
- 13 -
Termination and Transition Charges
Termination charges are recognized as a result of actions to restructure operations. Transition charges are recognized as a result of the retirement of senior employees. Such charges are recognized upon meeting certain criteria, including the finalization of committed plans or agreements and discussions with the impacted employees.
Loss Contingencies
Loss contingencies from legal proceedings and claims may occur from contractual and other related matters. Accruals are recognized when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. Gain contingencies are not recognized until realized. Legal fees are expensed as incurred.
Debt Issuance Costs and Royalty Rights
The Company follows the requirements of Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.
On October 14, 2016, June 29, 2018 and May 15, 2019, the Company issued Secured Notes, and, on December 4, 2018, the Company amended the indenture governing the Secured Notes, which amendments became effective on December 18, 2018. In connection with these issuances and this amendment, the Company entered into royalty rights agreements with the subscribers and the consenting note holders, as applicable, which, as of September 30, 2020, provided for an aggregate amount of royalties payable thereunder of 3.4% of net sales of MosaiQ instruments and consumables made in the donor testing market in the United States and the European Union. All of these royalty rights agreements are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 “Debt” (“ASC 470”) to be treated as debt. The future cash outflows under the royalty rights agreements have been combined with the issuance costs (which includes the one-time consent payment of $3.9 million paid to holders of our Secured Notes in December 2018) and interest payable to calculate the effective interest rate of the Secured Notes and is being expensed through interest expense in the consolidated statement of comprehensive loss using the effective interest rate method over the term of the Secured Notes and royalty rights agreements.
Pension Obligation
The Company maintains a pension plan covering employees in Switzerland pursuant to the requirements of Swiss pension law. Certain aspects of the plan require that it be accounted for as a defined benefit plan pursuant to Accounting Standards Codification Topic, 715 Compensation – Retirement Benefits (“ASC 715”). The Company recognizes an asset for the plan’s overfunded status or a liability for the plan’s underfunded status in its consolidated balance sheets. Additionally, the Company measures the plan’s assets and obligations that determine its funded status as of the end of the year and recognizes the change in the funded status within ‘‘Accumulated other comprehensive loss’’. The service cost component of the net periodic benefit cost is disclosed in the same line item as other employee compensation costs arising from services rendered during the period, and the other components are reported separately from the line item that includes the service cost and within interest expense, net in the consolidated statement of comprehensive loss.
- 14 -
The Company uses an actuarial valuation to determine its pension benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Details of the assumptions used to determine the net funded status are set out in the notes to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020. The Company’s pension plan assets are assigned to their respective levels in the fair value hierarchy in accordance with the valuation principles described in the ‘‘Fair Value of Financial Instruments’’ section above.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. The standard, including subsequently issued amendments, requires a financial asset measured on an amortized cost basis, such as accounts receivable, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company adopted ASU 2016-13 on April 1, 2020. The adoption of this standard did not have a material impact on the unaudited condensed consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, “Compensation Retirement Benefits - Defined Benefit Plans -General (Subtopic 715-20)” or ASU 2018-14. ASU 2018-14 removes the requirements to disclose the amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year and other disclosure requirements. In addition, the ASU adds the requirement to disclose an explanation for any significant gains and losses related to changes in the benefit obligation for the period. The ASU is effective for fiscal years ending after December 15, 2020 and will be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company adopted ASU 2018-14 on April 1, 2020. The adoption of this standard did not have a material impact on the unaudited condensed consolidated financial statements and related disclosures.
Note 3. Intangible Assets
|
|
September 30, 2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Remaining
Useful Life
|
|
Customer relationships
|
|
$
|
2,534
|
|
|
$
|
(2,534
|
)
|
|
$
|
—
|
|
|
|
—
|
|
Brands associated with acquired cell lines
|
|
|
523
|
|
|
|
(171
|
)
|
|
|
352
|
|
|
26.9 years
|
|
Product licenses
|
|
|
882
|
|
|
|
(620
|
)
|
|
|
262
|
|
|
3.0 years
|
|
Other intangibles
|
|
|
165
|
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
4,104
|
|
|
$
|
(3,490
|
)
|
|
$
|
614
|
|
|
16.7 years
|
|
|
|
March 31, 2020
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Weighted
Average
Remaining
Useful Life
|
|
Customer relationships
|
|
$
|
2,436
|
|
|
$
|
(2,436
|
)
|
|
$
|
—
|
|
|
|
—
|
|
Brands associated with acquired cell lines
|
|
|
502
|
|
|
|
(158
|
)
|
|
|
344
|
|
|
27.4 years
|
|
Product licenses
|
|
|
849
|
|
|
|
(568
|
)
|
|
|
281
|
|
|
3.3 years
|
|
Other intangibles
|
|
|
158
|
|
|
|
(158
|
)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,945
|
|
|
$
|
(3,320
|
)
|
|
$
|
625
|
|
|
16.5 years
|
|
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Note 4. Debt
Long-term debt comprises:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Total debt
|
|
$
|
145,000
|
|
|
$
|
145,000
|
|
Less current portion
|
|
|
12,083
|
|
|
|
—
|
|
|
|
$
|
132,917
|
|
|
$
|
145,000
|
|
Royalty liability
|
|
$
|
19,060
|
|
|
$
|
15,473
|
|
Deferred debt costs, net of amortization
|
|
|
(6,651
|
)
|
|
|
(7,449
|
)
|
Long-term debt, less current portion
|
|
$
|
145,326
|
|
|
$
|
153,024
|
|
The Company’s debt at September 30, 2020 and March 31, 2020, comprises the Secured Notes. On October 14, 2016, the Company completed the private placement of up to $120 million aggregate principal amount of the Secured Notes and entered into an indenture governing the Secured Notes with the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee and collateral agent. The Company issued $84 million aggregate principal amount of the Secured Notes on October 14, 2016 and an additional $36 million aggregate principal amount of the Secured Notes on June 29, 2018. On December 18, 2018, the Company also completed certain amendments to the indenture governing the Secured Notes. The amendments included an increase to the aggregate principal amount of Secured Notes that can be issued under the indenture from $120 million to up to $145 million following the European CE Marking of the Company’s initial MosaiQ IH Microarray. On April 30, 2019, the Company was notified that it had received the European CE Marking of the initial MosaiQ IH Microarray and, on May 15, 2019, the Company issued the additional $25 million of Secured Notes.
The obligations of the Company under the indenture and the Secured Notes are unconditionally guaranteed on a secured basis by the guarantors, which include all the Company’s subsidiaries, and the indenture governing the Secured Notes contains customary events of default. The Company and its subsidiaries must also comply with certain customary affirmative and negative covenants, including a requirement to maintain six-months of interest in a cash reserve account maintained with the collateral agent. Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales (each, as defined in the indenture), holders of the Secured Notes may require the Company to repurchase for cash all or part of their Secured Notes at a repurchase price equal to 101% or 100%, respectively, of the principal amount of the Secured Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase.
The Company paid $8.7 million of the total proceeds of the three issuances into the cash reserve account maintained with the collateral agent under the terms of the indenture, $1.5 million of which related to the third issuance on May 15, 2019.
Interest on the Secured Notes accrues at a rate of 12% per annum and is payable semi-annually on April 15 and October 15 of each year commencing on April 15, 2017. Commencing on April 15, 2021, the Company will also be required to pay an installment of principal of the Secured Notes on each April 15 and October 15 until April 15, 2024 pursuant to a fixed amortization schedule.
- 16 -
In connection with the three issuances of the Secured Notes as well as the December 2018 amendment of the related indenture, the Company has entered into royalty rights agreements, pursuant to which the Company has agreed to pay 3.4% of the aggregate net sales of MosaiQ instruments and consumables made in the donor testing market in the United States and the European Union. The royalties will be payable beginning on the date that the Company or its affiliates makes its first sale of MosaiQ consumables in the donor testing market in the European Union or the United States and will end on the last day of the calendar quarter in which the eighth anniversary of the first sale date occurs. The royalty rights agreements are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 “Debt” to be treated as debt. The future cash outflows under the royalty rights agreements, estimated at $90.7 million at September 30, 2020 and $87.0 at March 31, 2020, have been combined with the Secured Notes issuance costs and interest payable to calculate the effective interest rate of the Secured Notes and will be expensed through interest expenses using the effective interest rate method over the term of the Secured Notes and such royalty rights agreements. Estimating the future cash outflows under the royalty rights agreements requires the Company to make certain estimates and assumptions about future sales of MosaiQ products. These estimates of the magnitude and timing of MosaiQ sales are subject to significant variability due to the current status of development of MosaiQ products, and thus are subject to significant uncertainty. Therefore, the estimates are likely to change as the Company gains experience of marketing MosaiQ, which may result in future adjustments to the accretion of the interest expense and amortized cost based carrying value of the Secured Notes.
At September 30, 2020, the outstanding debt was repayable as follows:
Within 1 year
|
|
$
|
12,083
|
|
Between 1 and 2 years
|
|
|
30,208
|
|
Between 2 and 3 years
|
|
|
48,334
|
|
Between 3 and 4 years
|
|
|
54,375
|
|
Between 4 and 5 years
|
|
|
—
|
|
Total debt
|
|
$
|
145,000
|
|
The Company’s condensed consolidated balance sheet as of June 30, 2020 incorrectly classified $12,083 thousand of indebtedness as non-current liabilities instead of as current liabilities. The error had no impact on the condensed consolidated statement of comprehensive income, condensed consolidated statement of changes in shareholders’ equity or condensed consolidated statement of cash flows for the 3 months ended June 30, 2020 or total liabilities shown in the condensed consolidated balance sheet as of June 30, 2020.
Note 5. Consolidated Balance Sheet Detail
Inventory
The following table summarizes inventory by category for the dates presented:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Raw materials
|
|
$
|
10,825
|
|
|
$
|
9,737
|
|
Work in progress
|
|
|
9,564
|
|
|
|
8,522
|
|
Finished goods
|
|
|
2,409
|
|
|
|
2,242
|
|
Total inventories
|
|
$
|
22,798
|
|
|
$
|
20,501
|
|
Inventory at September 30, 2020 included $8,867 of raw materials, $5,248 of work in progress and $438 of finished goods related to the MosaiQ project. Inventory at March 31, 2020, included $8,093 of raw materials and $4,395 of work in progress and $368 of finished goods related to the MosaiQ project.
Property and equipment
The following table summarizes property and equipment by categories for the dates presented:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Plant and equipment
|
|
$
|
61,685
|
|
|
$
|
57,726
|
|
Leasehold improvements
|
|
|
32,807
|
|
|
|
31,395
|
|
Total property and equipment
|
|
|
94,492
|
|
|
|
89,121
|
|
Less: accumulated depreciation
|
|
|
(54,580
|
)
|
|
|
(48,956
|
)
|
Total property and equipment, net
|
|
$
|
39,912
|
|
|
$
|
40,165
|
|
- 17 -
Depreciation expenses were $2,154 and $3,009 in the quarters ended September 30, 2020 and September 30, 2019, respectively, and $4,090 and $6,022 in the six month periods ended September 30, 2020 and 2019, respectively. During the quarter ended June 30, 2020, the Company reassessed the useful economic lives of equipment used in the production line at its facility in Eysins, Switzerland. Based on lower utilization rates than initially estimated, the remaining useful lives of the equipment was increased from 4 years to 6 years. The impact of these changes in remaining useful lives was to reduce the depreciation expenses for the six month period ended September 30, 2020 by $598.
Accrued compensation and benefits
Accrued compensation and benefits consist of the following:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Salary and related benefits
|
|
$
|
1,479
|
|
|
$
|
635
|
|
Accrued vacation
|
|
|
646
|
|
|
|
521
|
|
Accrued payroll taxes
|
|
|
1,191
|
|
|
|
1,200
|
|
Accrued incentive payments
|
|
|
1,875
|
|
|
|
3,700
|
|
Accrued termination and transition payments
|
|
|
—
|
|
|
|
1,154
|
|
Total accrued compensation and benefits
|
|
$
|
5,191
|
|
|
$
|
7,210
|
|
In the year ended March 31, 2020, the Company incurred termination benefit costs of $1,323 in respect of a restructuring of its operations. The restructuring was completed during the year ended March 31, 2020. In the year ended March 31, 2020 the Company also incurred transition benefit costs of $807 in respect of the transitional arrangements with its former chief financial officer and its former group financial controller. The final payments under these arrangements were made during the quarter ended June 30, 2020.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Accrued legal and professional fees
|
|
$
|
1,651
|
|
|
$
|
829
|
|
Accrued interest
|
|
|
8,056
|
|
|
|
8,056
|
|
Goods received not invoiced
|
|
|
2,511
|
|
|
|
1,724
|
|
Accrued capital expenditure
|
|
|
1,284
|
|
|
|
1,287
|
|
Other accrued expenses
|
|
|
3,908
|
|
|
|
3,594
|
|
Total accrued expenses and other current liabilities
|
|
$
|
17,410
|
|
|
$
|
15,490
|
|
Note 6. Commitments and Contingencies
Hedging arrangements
The Company’s subsidiary in the United Kingdom (“UK”) has entered into three contracts to sell $500 in each calendar month from October 2020 through December 2020 at £1:$1.2520, three contracts to sell $500 in each calendar month from January 2021 through March 2021 at £1:$1.335, three contracts to sell $500 in each calendar month from April 2021 through June 2021 at £1:$1.2630, and three contracts to sell $500 in each calendar month from July 2021 through September 2021 at £1:$1.260, as hedges of its U.S. dollar denominated revenues. The fair values of these contracts in place at September 30, 2020, and similar contracts in place at March 31, 2020, amounted to assets of $49 and liabilities of $227, respectively.
- 18 -
Fair value measurements
The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:
|
|
September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan assets(1)
|
|
$
|
—
|
|
|
$
|
14,585
|
|
|
$
|
—
|
|
|
$
|
14,585
|
|
Short-term investments(2)
|
|
|
144,618
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,618
|
|
Foreign currency forward contracts(3)
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
103
|
|
Total assets measured at fair value
|
|
$
|
144,618
|
|
|
$
|
14,688
|
|
|
$
|
—
|
|
|
$
|
159,306
|
|
|
|
September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts(3)
|
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
54
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
54
|
|
|
|
March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan assets(1)
|
|
$
|
—
|
|
|
$
|
12,436
|
|
|
$
|
—
|
|
|
$
|
12,436
|
|
Short-term investments(2)
|
|
|
116,871
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116,871
|
|
Total assets measured at fair value
|
|
$
|
116,871
|
|
|
$
|
12,436
|
|
|
$
|
—
|
|
|
$
|
129,307
|
|
|
|
March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts(3)
|
|
$
|
—
|
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
227
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
227
|
|
(1)
|
The fair value of pension plan assets has been determined as the surrender value of the portfolio of active insured employees held within the AXA LLP Foundation Suisse Romande collective investment fund. See Note 10, “Defined Benefit Pension Plans”.
|
(2)
|
The fair value of short-term investments has been determined based on the quoted value of the units held in the money market fund at the balance sheet date. See Note 2, “Summary of Significant Accounting Policies – Short-term Investments”.
|
(3)
|
The fair value of foreign currency forward contracts has been determined by calculating the present value of future cash flows, estimated using market-based observable inputs including forward and spot exchange rates and interest rate curves obtained from third party market price quotations.
|
The total unrealized gains on the short-term investments were $423 and $863 in the six month periods ended September 30, 2020 and September 30, 2019, respectively. The amount of these unrealized gains reclassified to earnings were $906 and $669 in the six month periods ended September 30, 2020 and September 30, 2019, respectively.
Ortho Arbitration and Settlement
The Company’s subsidiaries, Quotient Suisse and QBD (QS-IP) Limited were party to the Prior Ortho Agreement with Ortho related to the commercialization and distribution of certain MosaiQ products. See Note 2, “Summary of Significant Accounting Policies—Revenue Recognition,” for information regarding the Prior Ortho Agreement. The Company and an affiliate of Ortho also entered into a subscription agreement pursuant to which the affiliate subscribed for newly issued ordinary shares of the Company and newly issued 7% cumulative redeemable preference shares, of no par value, of the Company for an aggregate subscription price of approximately $25 million.
On November 27, 2019, the Company delivered a notice to Ortho that it had terminated the Prior Ortho Agreement, effective as of December 27, 2019. The Company did not realize any revenue under the Prior Ortho Agreement prior to its termination.
- 19 -
On or about November 17, 2019, Ortho initiated an arbitration proceeding in which it sought a declaration that the Company did not have the right to terminate the Prior Ortho Agreement, specific performance of certain provisions of the Prior Ortho Agreement, and damages including in respect of the difference in amounts Ortho invested in the Company’s shares and their market value. The Company pursued counterclaims against Ortho, including that it had the right to terminate the Prior Ortho Agreement and damages that included the milestone payments due under the Prior Ortho Agreement (see Note 2, "Summary of Significant Accounting Policies—Revenue Recognition," for details). In addition, on December 20, 2019, the Company entered into an agreement with Ortho pursuant to which it agreed, while the arbitration was pending, not to grant commercialization rights in respect of products that overlapped with Ortho’s rights under the Prior Ortho Agreement without prior written notice to Ortho.
On September 4, 2020, the Company and Ortho entered into the Letter Agreement, pursuant to which the Company and Ortho agreed to confirm the termination of the Prior Ortho Agreement and various related contracts and to end the parties’ disputes regarding the Prior Ortho Agreement by executing mutual releases and terminating their pending arbitration proceeding related to the Prior Ortho Agreement.
The Company and Ortho also agreed to negotiate in good faith, and use their respective reasonable best efforts to execute, the New Distribution Agreement based on the terms set forth in the Letter Agreement, but if for any reason no such definitive agreement is reached, the Letter Agreement will govern the parties’ respective rights and obligations as a binding contract. See Note 2, "Summary of Significant Accounting Policies—Revenue Recognition," for further details regarding the commercial terms included in the Letter Agreement.
Note 7. Ordinary and Preference Shares
Ordinary shares
The Company’s issued and outstanding ordinary shares were as follows:
|
|
Shares Issued
and Outstanding
|
|
|
|
|
|
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
|
Par value
|
|
Ordinary shares
|
|
|
100,965,451
|
|
|
|
80,398,326
|
|
|
$
|
—
|
|
Total
|
|
|
100,965,451
|
|
|
|
80,398,326
|
|
|
$
|
—
|
|
On September 15, 2020, the Company completed a public offering of 20,294,117 newly issued ordinary shares at $4.25 per share which raised $86.3 million of gross proceeds before underwriting discounts and other offering expenses of $5.6 million.
Preference shares
The Company’s issued and outstanding preference shares consist of the following:
|
|
Shares Issued
and Outstanding
|
|
|
Liquidation
amount per share
|
|
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
7% Cumulative Redeemable
Preference shares
|
|
|
666,665
|
|
|
|
666,665
|
|
|
$
|
31.43
|
|
|
$
|
30.64
|
|
Total
|
|
|
666,665
|
|
|
|
666,665
|
|
|
|
|
|
|
|
|
|
The 7% Cumulative Redeemable Preference shares were issued to Ortho-Clinical Diagnostics Finco S.A.R.L., an affiliate of Ortho on January 29, 2015 at a subscription price of $22.50 per share. These preference shares are redeemable at the request of the shareholder on the “Redemption Trigger Date” which is currently the date of the seventh anniversary of the date of issue of the preference shares, but the Company may further extend the redemption date in one year increments up to the tenth anniversary of the date of issue. Because the 7% Cumulative Redeemable Preference shares are redeemable at the option of the shareholders, they are shown as a liability in the unaudited condensed consolidated balance sheet.
- 20 -
Note 8. Share-Based Compensation
The Company records share-based compensation expense in respect of options and restricted share units (“RSUs”) issued under its share incentive plans. Share-based compensation expense amounted to $1,324 and $1,001 in the quarters ended September 30, 2020 and September 30, 2019, respectively, and $2,284 and $2,179 in the six month periods ended September 30, 2020 and September 30, 2019, respectively.
Share option activity
The following table summarizes share option activity:
|
|
Number
of Share
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual Life
(Months)
|
|
Outstanding — March 31, 2020
|
|
|
1,848,052
|
|
|
$
|
7.73
|
|
|
|
70
|
|
Granted
|
|
|
106,360
|
|
|
|
6.45
|
|
|
|
120
|
|
Exercised
|
|
|
(12,628
|
)
|
|
|
7.67
|
|
|
|
—
|
|
Forfeited
|
|
|
(42,504
|
)
|
|
|
10.43
|
|
|
|
—
|
|
Outstanding — September 30, 2020
|
|
|
1,899,280
|
|
|
$
|
7.60
|
|
|
|
67
|
|
Exercisable — September 30, 2020
|
|
|
1,653,387
|
|
|
$
|
7.76
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The closing price of the Company’s ordinary shares on the Nasdaq Global Market at September 30, 2020 was $5.14.
The following table summarizes the options granted in the financial year ending March 31, 2021 with their exercise prices, the fair value of ordinary shares as of the applicable grant date, and the intrinsic value, if any:
Grant Date
|
|
Number of
Options Granted
|
|
|
Exercise Price
|
|
|
Ordinary
Shares
Fair Value Per
Share at Grant
Date
|
|
|
Per Share
Intrinsic
Value of
Options
|
|
May 24, 2020
|
|
|
60,438
|
|
|
$
|
7.69
|
|
|
$
|
7.69
|
|
|
$
|
4.96
|
|
September 1, 2020
|
|
|
45,922
|
|
|
4.81
|
|
|
4.81
|
|
|
3.07
|
|
Determining the fair value of share options
The fair value of each grant of share options was determined by the Company using the Black Scholes option pricing model. The total fair value of option awards in the six month periods ended September 30, 2020 and September 30, 2019 amounted to $441 and $185, respectively.
Assumptions used in the option pricing models are discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Expected volatility. The expected volatility was based on the historical share price volatility of the Company’s shares over a period equal to the expected terms of the options.
Fair value of ordinary shares. Since the Company’s initial public offering in April 2014, the fair value of ordinary shares has been based on the share price of the Company’s shares on the Nasdaq Global Market immediately prior to the grant of the options concerned.
Risk-Free Interest Rate. The risk-free interest rate is based on the UK Government 10-year bond yield curve in effect at the time of grant prior to the initial public offering and 10-year U.S. Treasury Stock for awards from April 2014 onwards.
Expected term. The expected term is determined after giving consideration to the contractual terms of the share-based awards, graded vesting schedules ranging from one to three years and expectations of future employee behavior as influenced by changes to the terms of its share-based awards.
Expected dividend. According to the terms of the awards, the exercise price of the options is adjusted to take into account any dividends paid. As a result, dividends are not required as an input to the model, as these reductions in the share price are offset by a corresponding reduction in exercise price.
- 21 -
A summary of the assumptions applicable to the share options issued in the six month period ended September 30, 2020 is as follows:
|
|
May 24, 2020
|
|
|
September 1, 2020
|
|
Risk-free interest rate
|
|
|
0.65
|
%
|
|
|
0.69
|
%
|
Expected lives (years)
|
|
|
6
|
|
|
|
6
|
|
Volatility
|
|
|
74.50
|
%
|
|
|
73.30
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Grant date fair value (per share)
|
|
$
|
7.69
|
|
|
$
|
4.81
|
|
Number granted
|
|
|
60,438
|
|
|
|
45,922
|
|
A summary of the RSUs in issue at September 30, 2020 is as follows:
|
|
Number
of RSUs
Outstanding
|
|
|
Weighted
Average
Remaining
Vesting Period
(Months)
|
|
Period in which the
target must be
achieved
|
RSUs subject to time based vesting
|
|
|
809,422
|
|
|
14
|
|
N/A
|
RSUs subject to milestone based vesting
|
|
|
45,000
|
|
|
N/A
|
|
N/A
|
At September 30, 2020, 809,422 RSUs were subject to time-based vesting and the weighted average remaining vesting period was 14 months. In addition, 45,000 RSUs were subject to vesting based on the achievement of various business milestones related mainly to the development, approval and marketing of MosaiQ.
Note 9. Income Taxes
A reconciliation of the income tax expense at the statutory rate to the provision for income taxes is as follows:
|
|
Quarter ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Income tax expense at statutory rate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign tax rate differential
|
|
|
(845
|
)
|
|
|
(679
|
)
|
|
|
(1,246
|
)
|
|
|
(1,599
|
)
|
Increase in valuation allowance against deferred
tax assets
|
|
|
862
|
|
|
|
693
|
|
|
|
1,278
|
|
|
|
1,626
|
|
Provision for income tax
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
32
|
|
|
$
|
27
|
|
Significant components of deferred tax are as follows:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Provisions and reserves
|
|
$
|
1,426
|
|
|
$
|
1,315
|
|
Operating lease liability
|
|
|
3,875
|
|
|
|
3,409
|
|
Fixed asset basis difference
|
|
|
95
|
|
|
|
—
|
|
Net operating loss carry forwards
|
|
|
20,508
|
|
|
|
19,526
|
|
Gross deferred tax assets
|
|
$
|
25,904
|
|
|
$
|
24,250
|
|
Fixed asset basis difference
|
|
$
|
—
|
|
|
$
|
(90
|
)
|
Operating lease right-of-use assets
|
|
$
|
(3,875
|
)
|
|
$
|
(3,409
|
)
|
Gross deferred tax liabilities
|
|
$
|
(3,875
|
)
|
|
$
|
(3,499
|
)
|
Net deferred tax asset
|
|
$
|
22,029
|
|
|
$
|
20,751
|
|
Valuation allowance
|
|
|
(21,792
|
)
|
|
|
(20,514
|
)
|
Total
|
|
$
|
237
|
|
|
$
|
237
|
|
The balance sheet classification of deferred tax is as follows:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
Net noncurrent deferred tax assets
|
|
$
|
237
|
|
|
$
|
237
|
|
Total
|
|
$
|
237
|
|
|
$
|
237
|
|
- 22 -
The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):
|
|
Quarter ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
|
$
|
1,216
|
|
|
$
|
—
|
|
|
$
|
1,216
|
|
|
$
|
—
|
|
Increases related to current year tax positions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Increases related to prior years tax positions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at end of period
|
|
$
|
1,216
|
|
|
$
|
—
|
|
|
$
|
1,216
|
|
|
$
|
—
|
|
As of September 30, 2020, the Company has an unrecognized benefit of $1,216, that if recognized would be recorded as a component of tax expense. The Company’s unrecognized tax benefits include exposures related to positions taken on all jurisdictions income tax returns. The Company has interest expense carryforward from March 31, 2017 that potentially would be disqualified as interest expense in the amount of $613. Additionally, the Company has reassessed its transfer pricing policies in certain jurisdictions from 2015 to 2017, the impact of which is $603. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities and the Company has accrued a liability when it believes it is more likely than not that the tax position claimed on tax returns will not be sustained by the taxing authorities on the technical merits of the position. Changes in the recognition of the liability are reflected in the period in which the change in judgment occurs.
In connection with the sale and leaseback transaction of the Company’s conventional reagents manufacturing facility, near Edinburgh, Scotland (the “Alan Robb Campus (“ARC”) facility”) that was completed in March 2018, the Company has agreed to transfer tax allowances related to certain other property, plant and equipment to the purchaser of the facility. An election to effect the transfer of these allowances to the purchaser has been made, but due to uncertainty regarding whether the election will be effective, the tax effect of the transfer of the allowances has not been recorded in the financial statements as at September 30, 2020. If the transfer of the allowances was regarded as being effective at September 30, 2020, the financial statements would reflect an additional deferred tax expense of $1,257 and an equivalent deferred tax liability. The Company will continue to monitor the position regarding the effectiveness of the election to transfer the allowances in order to determine whether the deferred tax liability should be recorded.
Note 10. Defined Benefit Pension Plans
The Company’s Swiss subsidiary has a fully insured pension plan managed by Swiss Life. The costs of this plan were:
|
|
Quarter ended
|
|
|
Six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Employer service cost
|
|
$
|
627
|
|
|
$
|
450
|
|
|
$
|
1,198
|
|
|
$
|
906
|
|
Interest cost
|
|
|
32
|
|
|
|
31
|
|
|
|
62
|
|
|
|
62
|
|
Expected return on plan assets
|
|
|
(64
|
)
|
|
|
(31
|
)
|
|
|
(121
|
)
|
|
|
(62
|
)
|
Amortization of prior service credit
|
|
|
14
|
|
|
|
(5
|
)
|
|
|
27
|
|
|
|
(11
|
)
|
Amortization of net loss
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
|
|
107
|
|
Net pension cost
|
|
$
|
609
|
|
|
$
|
498
|
|
|
$
|
1,166
|
|
|
$
|
1,002
|
|
The employer contributions for the six month periods ended September 30, 2020 and September 30, 2019 were $652 and $638, respectively. The estimated employer contributions for the fiscal year ending March 31, 2021 are $1,255.
- 23 -
Note 11. Net Loss Per Share
In accordance with Accounting Standards Codification Topic 260 “Earnings Per Share”, basic earnings available to ordinary shareholders per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted earnings available to ordinary shareholders per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potential ordinary shares considered outstanding during the period, as long as the inclusion of such shares is not anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of share options (using the treasury shares method), the warrants to acquire ordinary shares and the ordinary shares issuable upon vesting of the RSUs.
The following table sets forth the computation of basic and diluted loss per ordinary share:
|
|
Quarter ended
|
|
|
Six months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,975
|
)
|
|
$
|
(26,990
|
)
|
|
$
|
(40,404
|
)
|
|
$
|
(50,561
|
)
|
Net loss available to ordinary
shareholders - basic and diluted
|
|
$
|
(14,975
|
)
|
|
$
|
(26,990
|
)
|
|
$
|
(40,404
|
)
|
|
$
|
(50,561
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
outstanding - basic and diluted
|
|
|
83,949,195
|
|
|
|
66,291,548
|
|
|
|
82,227,052
|
|
|
|
66,185,501
|
|
Loss per share - basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.76
|
)
|
The following table sets out the numbers of ordinary shares excluded from the above computation of earnings per share at September 30, 2020 and September 30, 2019 as their inclusion would have been anti-dilutive:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Ordinary shares issuable on exercise of options to purchase ordinary shares
|
|
|
1,899,280
|
|
|
|
1,815,417
|
|
Restricted share units awarded, including the multi-year performance related restricted share units
|
|
|
854,422
|
|
|
|
846,383
|
|
Ordinary shares issuable on exercise of warrants at $16.14 per
share
|
|
|
111,525
|
|
|
|
111,525
|
|
Ordinary shares issuable on exercise of warrants at $9.375 per
share
|
|
|
64,000
|
|
|
|
64,000
|
|
|
|
|
2,929,227
|
|
|
|
2,837,325
|
|
12. Lease Commitments
The Company has operating lease commitments for real estate and certain equipment in the United States, the United Kingdom, the Republic of Ireland and Switzerland. There are no sublease agreements in place. The Company has finance lease commitments for equipment in the United Kingdom and Switzerland.
The Company leases an 87,200 square foot conventional reagents manufacturing facility, with integrated offices and laboratories, in Edinburgh, Scotland. This lease commenced in March 2018, following completion of a sale and leaseback transaction, and expires in September 2052. Rent is recognized in the consolidated statement of comprehensive loss on a straight-line basis over the lease term. Additionally, the lease required the Company to provide a rent deposit of £3.6 million which amounted to $4.6 million at September 30, 2020 and $4.4 million at March 31, 2020 and is included within other non-current assets in the consolidated balance sheets. In March 2015 the Company signed a five-year lease agreement for its corporate headquarters and MosaiQ manufacturing facility in Eysins, Switzerland. This lease was extended for a further five-year period to March 14, 2025. The Company also leases office space for commercial and development activities under one to three-year lease agreements in Newtown PA, Chapel Hill NC and Dublin, Republic of Ireland.
The operating lease commitments relating to equipment are not material. The finance lease commitments relate to specialized equipment required for manufacturing operations in both Edinburgh, Scotland and Eysins, Switzerland.
- 24 -
Many of the Company’s leases contain options to renew and extend lease terms and options to terminate leases early. Reflected in the right-of-use asset and lease liability on the Company’s balance sheet are the periods provided by renewal and extension options that the Company is reasonably certain to exercise, as well as the periods provided by termination options that the Company is reasonably certain not to exercise. The Company does not have any existing lease agreements with variable lease components.
In calculating the present value of future lease payments, the Company has elected to utilize an incremental borrowing rate based on the remaining lease term at the date of adoption. Incremental borrowing rates are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has elected to account for each lease component and its associated non-lease component as a single lease component and has allocated all the contract consideration across the lease component only. There are no material non-lease components. As of September 30, 2020, an operating lease right-of-use asset of $21,557 and an operating lease liability of $23,420 (including a current portion of $3,138) were reflected on the condensed consolidated balance sheet. As of March 31, 2020, an operating lease right-of-use asset of $21,493 and an operating lease liability of $22,947 (including a current portion of $3,033) were reflected on the condensed consolidated balance sheet. As of September 30, 2020, the Company had entered into finance leases for the purchase of plant and equipment that had net book values of $1,763. An associated finance lease liability of $1,498 (including a current portion of $577) was reflected on the condensed consolidated balance sheet. As of March 31, 2020, the Company had entered into finance leases for the purchase of plant and equipment that had net book values of $2,216. An associated finance lease liability of $1,715 (including a current portion of $598) was reflected on the condensed consolidated balance sheet.
The elements of lease expense were as follows:
|
|
Quarter ended September 30,
|
|
|
Six months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Lease cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
1,068
|
|
|
$
|
908
|
|
|
$
|
2,129
|
|
|
$
|
1,810
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset
|
|
|
323
|
|
|
|
54
|
|
|
|
516
|
|
|
|
109
|
|
Interest on lease liabilities
|
|
|
34
|
|
|
|
27
|
|
|
|
71
|
|
|
|
55
|
|
Short-term lease cost
|
|
|
17
|
|
|
|
17
|
|
|
|
34
|
|
|
|
34
|
|
Total lease cost
|
|
$
|
1,442
|
|
|
$
|
1,006
|
|
|
$
|
2,750
|
|
|
$
|
2,008
|
|
Other information related to leases was as follows:
Supplemental cash flow information
|
|
Six months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating leases - operating cash flows
|
|
$
|
1,821
|
|
|
$
|
1,476
|
|
Finance leases - financing cash flows
|
|
$
|
356
|
|
|
$
|
210
|
|
Finance leases - operating cash flows
|
|
$
|
65
|
|
|
$
|
44
|
|
Non-cash leases activity
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
56
|
|
|
$
|
4,625
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
93
|
|
|
$
|
28
|
|
Lease term and discount rate
|
|
As of September 30,
2020
|
|
Weighted average remaining lease terms (in years)
|
|
|
|
|
Operating leases
|
|
29.7
|
|
Finance leases
|
|
|
2.0
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
10.9
|
%
|
Finance leases
|
|
|
9.2
|
%
|
- 25 -
Future lease payments required under non-cancellable operating leases were as follows:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
2021 (excluding the six months ended September 30, 2020)
|
|
$
|
1,764
|
|
|
$
|
3,335
|
|
2022
|
|
|
3,492
|
|
|
|
3,319
|
|
2023
|
|
|
3,199
|
|
|
|
3,050
|
|
2024
|
|
|
3,190
|
|
|
|
3,055
|
|
2025
|
|
|
3,236
|
|
|
|
3,105
|
|
Thereafter
|
|
|
68,800
|
|
|
|
66,138
|
|
Total lease payments
|
|
$
|
83,681
|
|
|
$
|
82,002
|
|
Less : imputed interest
|
|
|
(60,261
|
)
|
|
|
(59,055
|
)
|
Total operating lease liabilities
|
|
$
|
23,420
|
|
|
$
|
22,947
|
|
Future lease payments required under finance leases were as follows:
|
|
September 30,
2020
|
|
|
March 31,
2020
|
|
2021 (excluding the six months ended September 30, 2020)
|
|
$
|
345
|
|
|
$
|
720
|
|
2022
|
|
|
901
|
|
|
|
838
|
|
2023
|
|
|
390
|
|
|
|
349
|
|
2024
|
|
|
34
|
|
|
|
7
|
|
Total lease payments
|
|
$
|
1,670
|
|
|
$
|
1,914
|
|
Less : imputed interest
|
|
|
(172
|
)
|
|
|
(199
|
)
|
Total finance lease liabilities
|
|
$
|
1,498
|
|
|
$
|
1,715
|
|
- 26 -