ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
(in thousands, except per share amounts, unless otherwise indicated)
Our business is composed of two segments: our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays, and other in vitro diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the development, manufacture, marketing and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our collection kits are also used for the collection of first-void urine for liquid biopsy in the prostate and bladder cancer markets, and in the sexually transmitted infection screening market. In addition, our DNAG business provides microbiome laboratory services that accelerate research and discovery for customers in the pharmaceutical, agricultural, and academic research markets.
Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. We also previously manufactured and sold medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products were sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia. We sold the assets associated with our cryosurgical systems business to a third party in August 2019. See further discussion at Note 4.
Our DNAG or molecular collection systems business is operated by our subsidiaries, DNA Genotek Inc. (“DNAG”), CoreBiome Inc. (“CoreBiome”), and Novosanis NV (“Novosanis”). DNAG’s specimen collection devices provide all-in-one systems for the collection, stabilization, transportation and storage of nucleic acids from human saliva and other sample types for genetic and microbiome applications. Novosanis’ Colli-Pee collection device is designed for the volumetric collection of first-void urine for use in research, screening and diagnostics for the liquid biopsy and sexually transmitted disease markets. We also sell research use only sample collection products into the microbiome market and we offer our customers a suite of genomics and microbiome services, which range from package customization and study design optimization to extraction, analysis and reporting services. We serve customers worldwide in the research, healthcare, pharmaceutical and agricultural communities.
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 subsidiaries, DNAG, CoreBiome, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, 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, 2018. Results of operations for the three and nine months ended September 30, 2019 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 accruals, taxes, contingent consideration, and performance-based compensation expense, among others. These estimates and assumptions are based on management’s 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 in debt securities to be available-for-sale securities. These securities consist of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale debt 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 as of September 30, 2019 and December 31, 2018:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment certificates
|
|
$
|
24,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,181
|
|
Corporate bonds
|
|
|
91,637
|
|
|
|
286
|
|
|
|
(326
|
)
|
|
|
91,597
|
|
Total available-for-sale securities
|
|
$
|
115,818
|
|
|
$
|
286
|
|
|
$
|
(326
|
)
|
|
$
|
115,778
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment certificates
|
|
$
|
23,096
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,096
|
|
Corporate bonds
|
|
|
90,707
|
|
|
|
—
|
|
|
|
(917
|
)
|
|
|
89,790
|
|
Total available-for-sale securities
|
|
$
|
113,803
|
|
|
$
|
—
|
|
|
$
|
(917
|
)
|
|
$
|
112,886
|
|
At September 30, 2019, maturities of our available-for-sale
securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
78,271
|
|
|
$
|
183
|
|
|
$
|
(239
|
)
|
|
$
|
78,215
|
|
Greater than one year
|
|
$
|
37,547
|
|
|
$
|
103
|
|
|
$
|
(87
|
)
|
|
$
|
37,563
|
|
Fair Value of Financial Instruments. As of September 30, 2019 and December 31, 2018, the carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature.
Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
All of our available-for-sale debt securities are measured as Level 2 instruments as of September 30, 2019 and December 31, 2018.
Included in cash and cash equivalents at September 30, 2019 and December 31, 2018, was $18,790 and $21,631 invested in government money market funds and certificates of deposit. Both 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, 2019 and December 31, 2018 was $4,280 and $3,884, 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.
See Note 3 for discussion of the contingent consideration liabilities.
Accounts Receivable. Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs.
Inventories. Inventories are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis, and consist of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
14,425
|
|
|
$
|
14,092
|
|
Work in process
|
|
|
838
|
|
|
|
544
|
|
Finished goods
|
|
|
9,777
|
|
|
|
8,252
|
|
|
|
$
|
25,040
|
|
|
$
|
22,888
|
|
-8-
Property, Plant and Equipment. Property, plant 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 operations. Accumulated depreciation of property, plant and equipment as of September 30, 2019 and December 31, 2018 was $45,533 and $42,797, respectively.
Intangible Assets. Intangible assets consist of customer lists, 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 five to fifteen years. Accumulated amortization of intangible assets as of September 30, 2019 and December 31, 2018 was $22,410 and $20,105, respectively. The change in intangibles from $5,137 as of December 31, 2018 to $11,577 as of September 30, 2019 is a result of intangibles acquired in our acquisitions of CoreBiome and Novosanis of $8,400 offset by foreign currency translation losses of $129 and $1,831 in amortization expense.
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 acquisitions of DNAG, CoreBiome, and Novosanis. 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 unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
The increase in goodwill from $18,521 as of December 31, 2018 to $28,935 as of September 30, 2019 is a result of the additional goodwill associated with our acquisitions of CoreBiome and Novosanis of $9,994 and an increase of $420 associated with foreign currency translation. All acquired goodwill has been allocated to our DNAG segment.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We adopted this standard on January 1, 2019 on a modified retrospective basis and will not restate comparative amounts. Also, we elected the practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. Leases with an initial term of 12 months or less are not recognized on the balance sheet and the associated lease payments are included in the consolidated statements of operations on a straight-line basis over the lease term. As a result, on January 1, 2019, we recorded right-of-use assets of $4,027 and lease liabilities of $4,263 on our consolidated balance sheet.
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 incremental 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,078
|
|
|
$
|
8,096
|
|
|
$
|
14,218
|
|
|
$
|
10,098
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
61,726
|
|
|
|
61,208
|
|
|
|
61,656
|
|
|
|
61,059
|
|
Dilutive effect of stock options, restricted stock, and performance stock units
|
|
|
417
|
|
|
|
1,398
|
|
|
|
516
|
|
|
|
1,480
|
|
Diluted
|
|
|
62,143
|
|
|
|
62,606
|
|
|
|
62,172
|
|
|
|
62,539
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
$
|
0.23
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.13
|
|
|
$
|
0.23
|
|
|
$
|
0.16
|
|
-9-
For the three months ended September 30, 2019 and 2018, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 909 and 304 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, 2019 and 2018, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 709 and 256 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 a functional currency are included in our consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income in our consolidated statements of income were $50 and $(375) for the three months ended September 30, 2019 and 2018, respectively. Net foreign exchange gains (losses) were $(875) and $(30) for the nine months ended September 30, 2019 and 2018, 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 sheets.
We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and we have defined the Euro as the functional currency of our Belgian subsidiary, Novosanis. The results of operations for those subsidiaries are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at September 30, 2019 consists of $14,638 of currency translation adjustments and $40 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investment portfolio. Accumulated other comprehensive loss at December 31, 2018 consists of $17,789 of currency translation adjustments and $917 of net unrealized losses on marketable securities.
Recent Accounting Pronouncements
In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2020, with early adoption permitted beginning in fiscal year 2019. We are evaluating the impact this guidance will have on our consolidated financial statements.
In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. The guidance is effective in fiscal year 2020, with early adoption permitted, including adoption in an interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the enactment of the U.S. Tax Cuts and Jobs Act (i.e., our first quarter of fiscal year 2018). We are evaluating the impact of this guidance and expect no impact to our consolidated financial statements.
3. Business Combinations
On January 4, 2019, the Company acquired all of the outstanding stock of CoreBiome, pursuant to the terms of a merger agreement, dated January 3, 2019. Also on January 4, 2019, the Company, through a wholly-owned subsidiary, acquired all of the outstanding stock of Novosanis, pursuant to a share purchase agreement, dated January 3, 2019. We began operating these entities as of the January 4, 2019 closing date. The aggregate purchase price for both of these transactions was $13,320 adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into escrow accounts for a limited period after closing, in order to secure the potential payment of certain indemnification obligations of the selling stockholders under each agreement noted above.
During the nine months ended September 30, 2019, we incurred a total of $597 of acquisition-related costs, including success-based investment banking fees and accounting, legal and other professional fees, related to both acquisitions, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of income.
Pursuant to our acquisition agreements, we may pay up to an additional $32,400 of contingent consideration over the next three years based on the achievement of certain performance criteria as defined under the agreements, including generating certain revenue dollars, the achievement of a large customer contract, and the development of certain new technology. The Company, with the assistance of an independent valuation specialist, utilized a Monte Carlo simulation to determine the estimated acquisition-date fair value of the acquisition-related contingent consideration of $4,350. The simulation calculates the probability-weighted payments based on our assessment of the likelihood that the benchmarks will be achieved. The probability-weighted payments were then discounted using a discount rate based on an internal rate of return
-10-
analysis using the probability-weighted cash flows. The fair value measurement was based on significant inputs, including revenue forecasts, not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The change in the fair value of the contingent consideration obligation from $4,350 as of the acquisition date to $3,424 as of September 30, 2019 is a result of changes in our estimated revenue forecasts, offset by the probability associated with achieving a certain technical milestone. In October 2019, management agreed to settle the contingent consideration associated with one of the acquisition’s 2019 results for $3,500, which will result in an increase of approximately $500 in the fair market value of the related contingent consideration liability in the fourth quarter of 2019.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
791
|
|
Inventories
|
|
|
310
|
|
Other current assets
|
|
|
82
|
|
Property, plant, and equipment, net
|
|
|
414
|
|
Other assets
|
|
|
5
|
|
Acquired intangible assets
|
|
|
8,400
|
|
Goodwill
|
|
|
9,994
|
|
Total assets acquired
|
|
|
19,996
|
|
Liabilities Assumed
|
|
|
|
|
Current liabilities
|
|
|
1,180
|
|
Notes payable, short-term
|
|
|
730
|
|
Deferred tax liability
|
|
|
445
|
|
Other long-term liabilities
|
|
|
74
|
|
Total liabilities assumed
|
|
|
2,429
|
|
Net Assets Acquired
|
|
|
17,567
|
|
Estimated fair value of contingent consideration
|
|
|
(4,350
|
)
|
Net Cash Paid (net of cash acquired of $103)
|
|
$
|
13,217
|
|
The purchase price was allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based on their acquisition-date estimate fair values. The identifiable intangible assets principally included developed technology, customer relationships, and tradenames, all of which are subject to amortization on a straight-line basis and are being amortized over estimated useful lives as summarized below:
|
|
Estimated Useful
|
|
|
|
|
Description
|
|
Life (in yrs)
|
|
Amount
|
|
Developed Technology
|
|
10
|
|
$
|
5,000
|
|
Customer relationships
|
|
10
|
|
|
2,200
|
|
Tradenames
|
|
8.34
|
|
|
1,200
|
|
Total acquired intangibles
|
|
|
|
$
|
8,400
|
|
The Company, with the assistance of an independent valuation specialist, assessed the fair value of the assets of CoreBiome and Novosanis. The income approach was used to value the acquired intangibles and the fair value measurements were primarily based on significant inputs that are not observable in the market and are considered Level 3 fair value measurements. The income approach estimates fair value for an asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required rate of return that reflects the relative risk of achieving the cash flows and the time value of money.
The useful lives of the intangible assets were estimated based on the expected future economic benefit of the assets and are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method.
The amortization of intangible assets is not deductible for income tax purposes.
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired, and represents the future economic benefits that we expect to achieve as a result of the acquisition. We believe the goodwill related to the acquisitions was a result of providing us a complementary service and product offering that will enable us to leverage those services and products with existing and new customers. The goodwill is not deductible for income tax purposes. All of the goodwill identified above has been allocated to our DNAG segment.
-11-
We continue to evaluate the fair value of certain assets acquired and liabilities assumed, including the fair valuation of deferred tax assets acquired, related to the acquisition. Additional information, which existed as of the acquisition date, but was at that time unknown to us, may become known during the remainder of the measurement period. Changes to amounts recorded as a result of the final determination may result in a corresponding adjustment to these assets and liabilities, including goodwill. The determination of the estimated fair values of all assets acquired is expected to be completed within one year from the date of acquisition.
Revenues from CoreBiome primarily consist of microbiome laboratory services that utilize optimal analytical algorithms to deliver speed and scalability in the lab with precise analytics. Revenues from Novosanis primarily consist of the sale of its Colli-Pee collection device which was designed for the standard collection of first-void urine used in the liquid biopsy and sexually transmitted infection screening market. For the three and nine months ended September 30, 2019, consolidated net revenues include combined revenues associated with the CoreBiome and Novosanis business were $1,437 and $3,482, respectively. Consolidated results from operations for the three and nine months ended September 30, 2019 included net income (loss) of $1,377 and $(1,142), respectively, generated from the combined companies since the acquisition date. Effective as of January 4, 2019, the financial results of CoreBiome and Novosanis are included in our DNAG segment.
Unaudited Pro Forma Financial Information
The unaudited pro forma results presented below include the results of the CoreBiome and Novosanis acquisitions as if they had been consummated as of January 1, 2018. The unaudited pro forma results include the amortization associated with acquired intangible assets and the estimated tax effect of adjustments to income before income taxes but do not include changes in the fair value of our contingent consideration obligations. Material nonrecurring charges, directly attributable to the transactions, including direct acquisition costs, are also excluded. In addition, the unaudited pro forma results do not include any expected benefits of the acquisitions. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2018.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
35,989
|
|
|
$
|
46,628
|
|
|
$
|
104,937
|
|
|
$
|
133,150
|
|
Net income
|
|
|
13,078
|
|
|
|
7,649
|
|
|
|
14,218
|
|
|
|
7,335
|
|
Net income per share, basic and diluted
|
|
|
0.21
|
|
|
|
0.12
|
|
|
|
0.23
|
|
|
|
0.11
|
|
4. Sale of Cryosurgical Systems Business
On August 16, 2019, we sold all rights and title to the assets necessary to operate our cryosurgical systems line of business to CryoConcepts LP (“CryoConcepts”) for $12,000. This business consisted of medical devices used for the removal of benign skin lesions by cryosurgery or freezing. The products were sold in both the professional and OTC markets in North America, Europe, Central and South America and Australia. We also entered into a transition services agreement with CryoConcepts in which both parties agreed to provide certain transition services beginning after the closing. The Company recorded a gain on sale of business of $10,149 reflected in our statement of income for the quarter and year ended September 30, 2019. The gain includes the $12,000 of proceeds net of the fair value of the assets sold, which consisted entirely of inventory and fully-depreciated fixed assets, the legal fees associated with the transaction, and a value attributed to the transition services.
-12-
Revenues by product. The following table represents total net revenues by product line:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
OraQuick®
|
|
$
|
13,256
|
|
|
$
|
12,016
|
|
|
$
|
37,813
|
|
|
$
|
40,813
|
|
|
Oragene®
|
|
|
11,590
|
|
|
|
22,450
|
|
|
|
27,316
|
|
|
|
52,799
|
|
|
ORAcollect®
|
|
|
2,489
|
|
|
|
1,353
|
|
|
|
9,032
|
|
|
|
3,460
|
|
|
Intercept®
|
|
|
2,230
|
|
|
|
1,743
|
|
|
|
6,144
|
|
|
|
5,811
|
|
|
Histofreezer® (through August 16, 2019)
|
|
|
569
|
|
|
|
2,199
|
|
|
|
5,718
|
|
|
|
6,526
|
|
|
Other products
|
|
|
5,165
|
|
|
|
3,689
|
|
|
|
14,875
|
|
|
|
11,177
|
|
|
Net product revenues
|
|
|
35,299
|
|
|
|
43,450
|
|
|
|
100,898
|
|
|
|
120,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income
|
|
|
758
|
|
|
|
1,132
|
|
|
|
2,956
|
|
|
|
4,827
|
|
|
Research and development funding
|
|
|
(183
|
)
|
|
|
1,083
|
|
|
|
679
|
|
|
|
4,540
|
|
|
Charitable support reimbursement
|
|
|
85
|
|
|
|
220
|
|
|
|
203
|
|
|
|
1,544
|
|
|
Grant funding
|
|
|
30
|
|
|
|
-
|
|
|
|
201
|
|
|
|
-
|
|
|
Other revenues
|
|
|
690
|
|
|
|
2,435
|
|
|
|
4,039
|
|
|
|
10,911
|
|
|
Net revenues
|
|
$
|
35,989
|
|
|
$
|
45,885
|
|
|
$
|
104,937
|
|
|
$
|
131,497
|
|
|
Revenues by geographic area. 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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
26,245
|
|
|
$
|
36,883
|
|
|
|
$
|
74,712
|
|
|
$
|
99,860
|
|
Europe
|
|
|
2,767
|
|
|
|
1,982
|
|
|
|
|
8,188
|
|
|
|
7,187
|
|
Other regions
|
|
|
6,977
|
|
|
|
7,020
|
|
|
|
|
22,037
|
|
|
|
24,450
|
|
|
|
$
|
35,989
|
|
|
$
|
45,885
|
|
|
|
$
|
104,937
|
|
|
$
|
131,497
|
|
Customer and Vendor Concentrations. One of our customers accounted for 24% of our accounts receivable as of September 30, 2019. The same customer accounted for approximately 17% and 11% of our net consolidated revenues for the three and nine months ended September 30, 2019 and 39% and 27% of our net consolidated revenues for the three and nine months ended September 30, 2018.
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 product. 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.
Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of September 30, 2019 and December 31, 2018 includes customer prepayments of $2,150 and $2,057, respectively. Deferred revenue as of September 30, 2019 and December 31, 2018 also includes $ 1,790 and $1,464, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue is recognized at that rate.
6.
|
Accrued Expenses and other current liabilities
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Payroll and related benefits
|
|
$
|
6,250
|
|
|
$
|
8,926
|
|
Professional fees
|
|
|
1,101
|
|
|
|
1,541
|
|
Income taxes payable
|
|
|
74
|
|
|
|
1,447
|
|
Other
|
|
|
3,549
|
|
|
|
1,947
|
|
|
|
$
|
10,974
|
|
|
$
|
13,861
|
|
-13-
On March 29, 2019, we terminated our credit agreement with a commercial bank which was entered into on September 30, 2016 and had a maturity date of September 30, 2019.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We adopted this standard on January 1, 2019 on a modified retrospective basis and will not restate comparative amounts.
We determine whether an arrangement is a lease at inception. We have operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of September 30, 2019, we are the lessee in all agreements. Our leases have remaining lease terms of 1 to 8 years, some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.
We have lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, we account for lease components separate from non-lease components.
The components of lease expense are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Operating Lease Cost
|
|
$
|
232
|
|
|
$
|
695
|
|
Finance Lease Cost
|
|
|
|
|
|
|
|
|
Amortization of right-of use assets
|
|
|
112
|
|
|
|
264
|
|
Interest on lease liabilities
|
|
|
10
|
|
|
|
23
|
|
Total Finance Lease Cost
|
|
$
|
122
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
Lease cost for the three and nine months ended September 30, 2018 was $368 and $1,097.
Supplemental cash flow information related to leases is as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
232
|
|
|
$
|
690
|
|
Operating cash flows from financing leases
|
|
|
10
|
|
|
|
23
|
|
Financing cash flows from financing leases
|
|
|
129
|
|
|
|
253
|
|
Non-cash activity
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
|
|
-
|
|
|
|
240
|
|
Right-of-use assets obtained in exchange for finance lease obligations
|
|
|
-
|
|
|
|
1,249
|
|
-14-
Supplemental balance sheet information related to leases is as follows:
|
|
September 30, 2019
|
|
Operating Leases
|
|
|
|
|
Right-of-use assets
|
|
$
|
3,574
|
|
|
|
|
|
|
Current lease liabilities
|
|
|
761
|
|
Non-current lease liabilities
|
|
|
3,053
|
|
Total operating lease liabilities
|
|
$
|
3,814
|
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Right-of-use assets
|
|
$
|
1,276
|
|
|
|
|
|
|
Current lease liabilities
|
|
|
439
|
|
Non-current lease liabilities
|
|
|
829
|
|
Total finance lease liabilities
|
|
$
|
1,268
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Weighted-average remaining lease term—operating leases
|
|
|
4.89
|
|
Weighted-average remaining lease term—finance leases
|
|
|
3.25
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Weighted-average discount rate—operating leases
|
|
|
4.23
|
%
|
Weighted-average discount rate—finance leases
|
|
|
2.82
|
%
|
As of September 30, 2019, minimum lease payments by period are expected to be as follows:
|
|
|
|
|
|
|
|
|
Finance
|
|
|
Operating
|
|
2019 (excluding the nine months ended September 30, 2019)
|
$
|
120
|
|
|
$
|
231
|
|
2020
|
|
454
|
|
|
|
951
|
|
2021
|
|
325
|
|
|
|
923
|
|
2022
|
|
324
|
|
|
|
898
|
|
2023
|
|
94
|
|
|
|
542
|
|
Thereafter
|
|
4
|
|
|
|
807
|
|
Total Minimum Lease Payments
|
|
1,321
|
|
|
|
4,352
|
|
Less: imputed interest
|
|
(53
|
)
|
|
|
(538
|
)
|
Present Value of Lease Liabilities
|
$
|
1,268
|
|
|
$
|
3,814
|
|
As of December 31, 2018, minimum lease payments under non-cancelable operating leases by period were expected to be as follows:
2019
|
$
|
903
|
|
2020
|
|
902
|
|
2021
|
|
877
|
|
2022
|
|
850
|
|
2023
|
|
506
|
|
Thereafter
|
|
737
|
|
|
$
|
4,775
|
|
|
|
|
|
-15-
Reconciliation of the changes in stockholders' equity for the three and nine months ended September 30, 2019 and 2018
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
|
61,276
|
|
|
$
|
—
|
|
|
$
|
401,273
|
|
|
$
|
(18,706
|
)
|
|
$
|
(99,189
|
)
|
|
$
|
283,378
|
|
Common stock issued upon exercise
of options
|
|
|
4
|
|
|
|
—
|
|
|
|
22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
Vesting of restricted stock and performance
stock units
|
|
|
664
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(277
|
)
|
|
|
—
|
|
|
|
(3,595
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,595
|
)
|
Compensation cost for restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
653
|
|
Compensation cost for stock option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
324
|
|
|
|
—
|
|
|
|
—
|
|
|
|
324
|
|
Compensation cost for performance
stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
254
|
|
|
|
—
|
|
|
|
—
|
|
|
|
254
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,258
|
)
|
|
|
(3,258
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
|
|
|
|
2,232
|
|
Unrealized gain on marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
497
|
|
|
|
—
|
|
|
|
497
|
|
Balance at March 31, 2019
|
|
|
61,667
|
|
|
$
|
—
|
|
|
$
|
398,931
|
|
|
$
|
(15,977
|
)
|
|
$
|
(102,447
|
)
|
|
$
|
280,507
|
|
Common stock issued upon exercise
of options
|
|
|
18
|
|
|
|
—
|
|
|
|
147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
147
|
|
Vesting of restricted stock and performance
stock units
|
|
|
51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(109
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(109
|
)
|
Compensation cost for restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
874
|
|
|
|
—
|
|
|
|
—
|
|
|
|
874
|
|
Compensation cost for stock option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311
|
|
Compensation cost for performance
stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
(569
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(569
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,398
|
|
|
|
4,398
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,476
|
|
|
|
|
|
|
|
2,476
|
|
Unrealized gain on marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
186
|
|
|
|
—
|
|
|
|
186
|
|
Balance at June 30, 2019
|
|
|
61,725
|
|
|
$
|
—
|
|
|
$
|
399,585
|
|
|
$
|
(13,315
|
)
|
|
$
|
(98,049
|
)
|
|
$
|
288,221
|
|
Common stock issued upon exercise
of options
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Vesting of restricted stock and performance
stock units
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
Compensation cost for restricted stock
|
|
|
-
|
|
|
|
—
|
|
|
|
858
|
|
|
|
—
|
|
|
|
—
|
|
|
|
858
|
|
Compensation cost for stock option grants
|
|
|
-
|
|
|
|
—
|
|
|
|
259
|
|
|
|
—
|
|
|
|
—
|
|
|
|
259
|
|
Compensation cost for performance
stock units
|
|
|
-
|
|
|
|
—
|
|
|
|
319
|
|
|
|
—
|
|
|
|
—
|
|
|
|
319
|
|
Net income
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,078
|
|
|
|
13,078
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,557
|
)
|
|
|
|
|
|
|
(1,557
|
)
|
Unrealized gain on marketable securities
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
194
|
|
|
|
—
|
|
|
|
194
|
|
Balance at September 30, 2019
|
|
|
61,726
|
|
|
$
|
—
|
|
|
$
|
401,014
|
|
|
$
|
(14,678
|
)
|
|
$
|
(84,971
|
)
|
|
$
|
301,365
|
|
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
|
60,662
|
|
|
$
|
—
|
|
|
$
|
387,931
|
|
|
$
|
(10,340
|
)
|
|
$
|
(119,510
|
)
|
|
$
|
258,081
|
|
Adoption of ASU 2014-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
(75
|
)
|
Common stock issued upon exercise
of options
|
|
|
133
|
|
|
|
—
|
|
|
|
974
|
|
|
|
—
|
|
|
|
—
|
|
|
|
974
|
|
Vesting of restricted stock and performance
stock units
|
|
|
407
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(149
|
)
|
|
|
—
|
|
|
|
(2,959
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,959
|
)
|
Compensation cost for restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
3,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,626
|
|
Compensation cost for stock option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
900
|
|
|
|
—
|
|
|
|
—
|
|
|
|
900
|
|
Compensation cost for performance
stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
2,957
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,957
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,119
|
)
|
|
|
(2,119
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,154
|
)
|
|
|
|
|
|
|
(2,154
|
)
|
Unrealized loss on marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(512
|
)
|
|
|
—
|
|
|
|
(512
|
)
|
Balance at March 31, 2018
|
|
|
61,053
|
|
|
$
|
—
|
|
|
$
|
393,429
|
|
|
$
|
(13,006
|
)
|
|
$
|
(121,704
|
)
|
|
$
|
258,719
|
|
Common stock issued upon exercise
of options
|
|
|
29
|
|
|
|
—
|
|
|
|
222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
222
|
|
Vesting of restricted stock and performance
stock units
|
|
|
106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
(212
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(212
|
)
|
Compensation cost for restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
1,419
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,419
|
|
Compensation cost for stock option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
475
|
|
|
|
—
|
|
|
|
—
|
|
|
|
475
|
|
Compensation cost for performance
stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
1,885
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,885
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,121
|
|
|
|
4,121
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,652
|
)
|
|
|
|
|
|
|
(1,652
|
)
|
Unrealized gain on marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
194
|
|
|
|
—
|
|
|
|
194
|
|
Balance at June 30, 2018
|
|
|
61,174
|
|
|
$
|
—
|
|
|
$
|
397,218
|
|
|
$
|
(14,464
|
)
|
|
$
|
(117,583
|
)
|
|
$
|
265,171
|
|
Common stock issued upon exercise
of options
|
|
|
62
|
|
|
|
—
|
|
|
|
483
|
|
|
|
—
|
|
|
|
—
|
|
|
|
483
|
|
Vesting of restricted stock and performance
stock units
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Purchase and retirement of common shares
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9
|
)
|
Compensation cost for restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
589
|
|
|
|
—
|
|
|
|
—
|
|
|
|
589
|
|
Compensation cost for stock option grants
|
|
|
—
|
|
|
|
—
|
|
|
|
359
|
|
|
|
—
|
|
|
|
—
|
|
|
|
359
|
|
Compensation cost for performance
stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
316
|
|
|
|
—
|
|
|
|
—
|
|
|
|
316
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,096
|
|
|
|
8,096
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,783
|
|
|
|
|
|
|
|
1,783
|
|
Unrealized loss on marketable securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(34
|
)
|
|
|
—
|
|
|
|
(34
|
)
|
Balance at September 30, 2018
|
|
|
61,237
|
|
|
$
|
—
|
|
|
$
|
398,956
|
|
|
$
|
(12,715
|
)
|
|
$
|
(109,487
|
)
|
|
$
|
276,754
|
|
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 account for stock-based compensation to employees and directors using the fair value method. 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
-17-
expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than shares purchased on the open market.
Total compensation cost related to stock options for the nine months ended September 30, 2019 and 2018 was $894 and $1,734 respectively.
Compensation cost of $2,385 and $5,634 related to restricted shares was recognized during the nine months ended September 30, 2019 and 2018, respectively. In connection with the vesting of restricted shares during the nine months ended September 30, 2019 and 2018, we purchased and immediately retired 289 and 164 shares with aggregate values of $3,711 and $3,181, respectively, in satisfaction of minimum tax withholding obligations.
We grant 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 generally remain in our service for three years from the grant date. Performance during the one-year period is based on a one-year earnings per share or income before income taxes 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.
Compensation cost of $4 and $5,158 related to PSUs was recognized during the nine months ended September 30, 2019 and 2018, respectively.
Modification of Grants
Stock compensation costs for the nine months ended September 30, 2018 include the additional expense associated with modifications of existing grants held by our retired President and Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”). These additional costs were $8,039 during the nine months ended September 30, 2018, and are included in general and administrative expenses in the accompanying consolidated statement of income.
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, 2019 and 2018.
During the three and nine months ended September 30, 2019, we recorded income tax expense of $1,169 and $2,551, respectively. During the three and nine months ended September 30, 2018, we recorded tax expense of $3,271 and $7,477, respectively.
Tax expense reflects taxes due to the 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, 2019 and December 31, 2018 relate to the tax effects of the basis difference between the intangible assets acquired in our acquisitions for financial reporting and for tax purposes.
In 2008, we established a full valuation allowance against our U.S. deferred tax asset. Management believes the full valuation allowance is still appropriate at both September 30, 2019 and December 31, 2018 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 period ended September 30, 2019.
11.
|
Commitments and Contingencies
|
From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations.
In January 2018, we announced the retirement of Douglas A. Michels, our then President and CEO, and Ronald H. Spair, our then CFO and Chief Operating Officer. Stephen S. Tang, Ph.D., who served as Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018. Dr. Tang replaced Mr. Michels, who retired as President and CEO, and as a member of the Board, on March 31, 2018. In addition, Roberto Cuca was appointed as the Company’s new CFO, effective June 8, 2018. Mr. Cuca replaced Mr. Spair, who retired as CFO and Chief Operating Officer, and as a member of our Board of Directors, on that same date. Charges associated with
-18-
these transitions were $8,628 during the nine months ended September 30, 2018 and are included in general and administrative expenses in the accompanying consolidated statement of income. These charges primarily reflect non-cash charges associated with modifications to existing stock grants held by the retiring executives and expenses associated with the onboarding of the Company’s new President and CEO. No related transition costs were recorded during the nine months ended September 30, 2019.
13.
|
Business Segment Information
|
Our business consists of two segments: our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. Our molecular collections systems or “DNAG” business consists of the development, manufacture, marketing and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets. Our collection kits are also used for the collection of first-void urine for liquid biopsy in the prostate and bladder cancer markets; and in the sexually transmitted infection screening market. In addition, our DNAG business provides microbiome laboratory services that accelerate research and discovery for customers in the pharmaceutical, agricultural, and academic research markets. Effective as of January 4, 2019, the financial results of CoreBiome and Novosanis are included in our DNAG segment. Our cryosurgical system business was included in our OSUR segment and the impact of the sale of that business in August 2019 is reflected in the results presented below.
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.
Operating income (loss) for the three and nine months ended September 30, 2018 has been modified to conform to the classification of the intercompany service fee presentation for 2019. Beginning with the first quarter of 2019, we have included the fees for intercompany services in our segment operating income (loss) in order to more accurately reflect the results of each segment.
The following table summarizes operating segment information for the three and nine months ended September 30, 2019 and 2018, and asset information as of September 30, 2019 and December 31, 2018:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
17,730
|
|
|
$
|
19,258
|
|
|
$
|
56,335
|
|
|
$
|
65,623
|
|
DNAG
|
|
|
18,259
|
|
|
|
26,627
|
|
|
|
48,602
|
|
|
|
65,874
|
|
Total
|
|
$
|
35,989
|
|
|
$
|
45,885
|
|
|
$
|
104,937
|
|
|
$
|
131,497
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
8,080
|
|
|
$
|
(2,344
|
)
|
|
$
|
4,595
|
|
|
$
|
(13,654
|
)
|
DNAG
|
|
|
4,972
|
|
|
|
13,201
|
|
|
|
9,931
|
|
|
|
29,571
|
|
Total
|
|
$
|
13,052
|
|
|
$
|
10,857
|
|
|
$
|
14,526
|
|
|
$
|
15,917
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
889
|
|
|
$
|
879
|
|
|
$
|
2,555
|
|
|
$
|
2,883
|
|
DNAG
|
|
|
1,033
|
|
|
|
963
|
|
|
|
2,977
|
|
|
|
2,705
|
|
Total
|
|
$
|
1,922
|
|
|
$
|
1,842
|
|
|
$
|
5,532
|
|
|
$
|
5,588
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
1,796
|
|
|
$
|
908
|
|
|
$
|
5,341
|
|
|
$
|
3,682
|
|
DNAG
|
|
|
652
|
|
|
|
546
|
|
|
|
2,620
|
|
|
|
2,256
|
|
Total
|
|
$
|
2,448
|
|
|
$
|
1,454
|
|
|
$
|
7,961
|
|
|
$
|
5,938
|
|
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Total assets:
|
|
|
|
|
|
|
|
|
OSUR
|
|
$
|
181,133
|
|
|
$
|
190,178
|
|
DNAG
|
|
|
158,088
|
|
|
|
125,393
|
|
Total
|
|
$
|
339,221
|
|
|
$
|
315,571
|
|
-19-
On November 8, 2019, the Company acquired all of the outstanding stock of Diversigen, Inc. (“Diversigen”), pursuant to the terms of a merger agreement. Diversigen is a Texas-based microbiome laboratory services provider that provides metagenomics sequencing, bioinformatics and statistical analysis for the study of the microbiome.
The initial aggregate purchase price for this transaction was $12,000, adjusted for certain transaction costs, indebtedness, and holdback amounts, and was funded with cash on hand. A portion of the purchase price was deposited into an escrow account for a limited period after closing, pursuant to indemnification obligations under the merger agreement noted above. The merger agreement also includes a contingent payment to be paid based on Diversigen’s performance during the 2019 calendar year.
Through September 30, 2019, we incurred a total of $448 of acquisition related costs, including investment banking fees and accounting, legal and other professional fees, all of which were expensed and reported as a component of general and administrative expenses in the consolidated statement of income for the nine months ended September 30, 2019.
-20-