Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Quidel Corporation and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included.
The information at
September 30, 2015
, and for the
three and nine
months ended
September 30, 2015
and
2014
, is unaudited. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended
December 31, 2014
included in the Company’s 2014 Annual Report on Form 10-K. Operating results for any quarter are historically seasonal in nature and are not necessarily indicative of the results expected for the full year.
For
2015
and
2014
, the Company’s fiscal year will end or has ended on January 3, 2016 and December 28, 2014, respectively. For
2015
and
2014
, the Company’s
third
quarter ended on September 27, 2015 and September 28, 2014, respectively. For ease of reference, the calendar quarter end dates are used herein. The
three and nine
month periods ended
September 30, 2015
and 2014 each included 13 and 39 weeks, respectively.
Change in Accounting Principle
The Company historically presented deferred debt issuance costs, or fees related to directly issuing debt, as assets on the Consolidated Balance Sheets. During the first quarter of 2015, the Company adopted guidance codified in ASU 2015-03,
Interest - Imputation of Interest
(Subtopic 835-30),
Simplifying the Presentation of Debt Issuance Costs
. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method pursuant to ASC 835-30-35-2 through 35-3. The Company elected to early adopt the requirements of ASU 2015-03 effective the first quarter ended March 31, 2015 and applied this guidance retrospectively to all prior periods presented in the Company's financial statements.
The reclassification does not impact net income (loss) as previously reported or any prior amounts reported on the Consolidated Statements of Comprehensive Income (Loss) or the Consolidated Statements of Cash Flows. The following table presents the effect of the retrospective application of this change in accounting principle on the Company’s Consolidated Balance Sheets as of December 31, 2014:
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Consolidated Balance Sheets (in thousands)
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As Reported December 31, 2014
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Effect of Change in Accounting Principle
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After change in Accounting Principle
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ASSETS
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Current assets:
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|
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|
Prepaid expenses and other current assets
|
$
|
3,554
|
|
|
$
|
(640
|
)
|
|
$
|
2,914
|
|
|
Total current assets
|
275,121
|
|
|
(640
|
)
|
|
274,481
|
|
|
Other non-current assets
|
4,565
|
|
|
(3,499
|
)
|
|
1,066
|
|
|
Total assets
|
$
|
451,550
|
|
|
$
|
(4,139
|
)
|
|
$
|
447,411
|
|
|
|
|
|
|
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|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
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|
Long-term debt
|
142,097
|
|
|
(4,139
|
)
|
|
137,958
|
|
|
Total liabilities and stockholders’ equity
|
$
|
451,550
|
|
|
$
|
(4,139
|
)
|
|
$
|
447,411
|
|
Comprehensive Loss
Comprehensive loss includes foreign currency translation adjustments excluded from the Company’s Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to revenue recognition, customer programs and incentives, bad debts, inventories, intangible assets, software development costs, stock-based compensation, restructuring, contingencies and litigation, contingent consideration, the fair value of the debt component of convertible debt instruments, and income taxes. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Revenue Recognition
The Company records revenues primarily from product sales. These revenues are recorded net of rebates and other discounts that are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenue from product sales are recorded upon passage of title and risk of loss to the customer. Passage of title to the product and recognition of revenue occurs upon delivery to the customer when sales terms are free on board (“FOB”) destination and at the time of shipment when the sales terms are FOB shipping point and there is no right of return.
A portion of product sales includes revenues for diagnostic kits, which are utilized on leased instrument systems under the Company’s “reagent rental” program. The reagent rental program provides customers the right to use the instruments at no separate cost to the customer in consideration for a multi-year agreement to purchase annual minimum amounts of consumables (“reagents” or “diagnostic kits”). When an instrument is placed with a customer under a reagent rental agreement, the Company retains title to the equipment and it remains capitalized on the Company’s Consolidated Balance Sheets as property and equipment. The instrument is depreciated on a straight-line basis over the shorter of the lease term or the life of the instrument. Depreciation expense is recorded in cost of sales included in the Consolidated Statements of Operations. The reagent rental agreements represent one unit of accounting as the instrument and consumables (reagents) are interdependent in producing a diagnostic result and neither has a stand-alone value with respect to these agreements. No revenue is recognized at the time of instrument placement. All revenue is recognized when the title and risk of loss for the diagnostic kits have passed to the customer.
Royalty income from the grant of license rights is recognized during the period in which the revenue is earned and the amount is determinable from the licensee. The Company also earns income from the licensing of technology.
The Company earns income from grants for research and commercialization activities. On November 6, 2012, the Company was awarded a milestone-based grant totaling up to
$8.3 million
from the Bill and Melinda Gates Foundation to develop, manufacture and validate a quantitative, low-cost, nucleic acid assay for HIV drug treatment monitoring on the integrated Savanna MDx platform for use in limited resource settings. Upon execution of the grant agreement, the Company received
$2.6 million
to fund subsequent research and development activities and received milestone payments totaling
$2.5 million
in 2013. On September 10, 2014, the Company entered into an amended grant agreement with the Bill and Melinda Gates Foundation for additional funding of up to
$12.6 million
with the intent to accelerate the development of the Savanna MDx platform in the developing world. Upon execution of the amended grant agreement, the Company received
$10.6 million
in cash. The Company received a payment of
$2.4 million
in April 2015 and expects to receive the remaining milestone payment of up to
$2.8 million
in 2016. Under the original and amended grant agreements, the Company recognizes grant revenue on the basis of the lesser of the amount recognized on a proportional performance basis or the amount of cash payments that are non-refundable as of the end of each reporting period. The Company recognized
$0.8 million
and
$3.4 million
for the three months ended
September 30, 2015
and
2014
, respectively, and recognized
$3.2 million
and
$4.7 million
for the nine months ended
September 30, 2015
and
2014
, respectively, as grant revenue associated with this grant. Cash payments received are restricted as to use until expenditures contemplated in the grant are incurred or committed. Therefore, the Company classified
$1.8 million
and
$3.1 million
of funds received from the Bill and Melinda Gates Foundation as restricted cash as of
September 30, 2015
and
December 31, 2014
, respectively. In addition, the Company has classified
$5.5 million
and
$6.3 million
as deferred grant revenue as of
September 30, 2015
and
December 31, 2014
, respectively.
Fair Value Measurements
The Company uses the fair value hierarchy established in ASC Topic 820
, Fair Value Measurements and Disclosures,
which requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed by the Company in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The carrying amounts of the Company’s financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company establishes reserves for estimated uncollectible accounts and believes its reserves are adequate.
Changes to the recording of prior period freight billed to customers from sales and marketing expenses to revenues
The Company corrected immaterial errors in the classification of freight billed to customers of
$0.3 million
and
$1.2 million
for the three and nine months ended
September 30, 2014
, from sales and marketing expense as previously reported in the Consolidated Statements of Operations to revenues. The adjustments did not impact net income (loss) as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Cash Flows, Statements of Comprehensive (Loss) Income or Statements of Stockholders' Equity. Management evaluated the materiality both qualitatively and quantitatively and determined it was not material to the previously reported consolidated financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which amends the guidance in former
ASC 605, Revenue Recognition
. This guidance is intended to improve and converge with international standards relating to the financial reporting requirements for revenue from contracts with customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The original guidance was effective for annual reporting periods beginning after December 15, 2016. However, in July 2015, the FASB deferred by one year the effective dates of the new revenue recognition standard for entities reporting under GAAP. As a result, the standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. The Company is currently evaluating the impact of this guidance and expects to adopt the standard in the first quarter of 2018.
In August 2014, the FASB issued guidance codified in ASU 2014-15 (Subtopic 205-40),
Presentation of Financial Statements - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. The guidance requires management to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). Management will be required to make this evaluation for both annual and interim reporting periods and will make certain disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the entity’s ability to continue as a going concern. Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in ASC Topic 450,
Contingencies
. The guidance is effective for annual periods ending after December 15, 2016 and for interim reporting periods starting in the first quarter 2017, with early adoption permitted. The Company expects to adopt ASU 2014-15 for the annual reporting period ended December 31, 2016, which is not expected to have a significant impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued guidance codified in ASU 2015-02 (Topic 810),
Consolidation - Amendments to the Consolidation Analysis
. The guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the guidance amends (i) the identification of variable interests (fees paid to a decision maker or service provider), (ii) the Variable Interest Entity (VIE) characteristics for a limited partnership or similar entity and (iii) the primary beneficiary determination. The guidance is effective for annual periods ending after December 15, 2015 and for interim reporting periods starting in the first quarter 2016, with early adoption permitted. ASU 2015-02 is not expected to have a significant impact on the Company’s consolidated financial statements.
In July 2015, the FASB issued guidance codified in ASU 2015-11 (Topic 330),
Simplifying the Measurement of Inventory
. The guidance applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company expects to early adopt ASU 2015-11 in the first quarter of 2016, which is not expected to have a significant impact on the Company’s consolidated financial statements.
Note 2. Computation of Loss Per Share
For the
three and nine
months ended
September 30, 2015
and
2014
, basic loss per share was computed by dividing net loss by the weighted-average number of common shares outstanding, including restricted stock units vested during the period. Diluted earnings per share (“EPS”) reflects the potential dilution that could occur if the earnings were divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options as well as unvested restricted stock units. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding stock options and unvested restricted stock units.
For the
three and nine
months ended
September 30, 2015
and
2014
, there were no differences between the number of common shares used for the basic and diluted EPS computation because the Company incurred a net loss and the effect would be anti-dilutive. Stock options and shares of restricted stock that would have been included in the diluted EPS calculation if the Company had earnings amounted to
0.9 million
and
1.0 million
for the three months ended
September 30, 2015
and
2014
, respectively, and
1.0 million
and
1.1 million
for the nine months ended
September 30, 2015
and
2014
, respectively.
Additionally, stock options are excluded from the calculation of diluted EPS when the combined exercise price, unrecognized stock-based compensation and expected tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive. Stock options totaling
2.2 million
and
1.8 million
for the
three and nine
months ended
September 30, 2015
, respectively, and
1.2 million
and
1.1 million
for the
three and nine
months ended
September 30, 2014
, respectively, were not included in the computation of diluted EPS because the exercise of such options would be anti-dilutive.
As discussed in Note 6, the Company issued Convertible Senior Notes (“Convertible Senior Notes”) in December 2014. It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in cash or shares of common stock (“conversion premium”). No conversion premium existed as of
September 30, 2015
, therefore, there was no dilutive impact from the Convertible Senior Notes to diluted EPS.
Note 3. Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or market. Inventories consisted of the following, net of reserves of
$0.4 million
and
$2.2 million
at
September 30, 2015
and
December 31, 2014
, respectively (in thousands):
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September 30, 2015
|
|
December 31, 2014
|
|
Raw materials
|
$
|
10,969
|
|
|
$
|
10,472
|
|
|
Work-in-process (materials, labor and overhead)
|
8,343
|
|
|
6,834
|
|
|
Finished goods (materials, labor and overhead)
|
5,256
|
|
|
7,457
|
|
|
Total inventories
|
$
|
24,568
|
|
|
$
|
24,763
|
|
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
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September 30, 2015
|
|
December 31, 2014
|
|
Customer incentives and rebates
|
$
|
5,571
|
|
|
$
|
4,729
|
|
|
Accrued research and development costs
|
183
|
|
|
990
|
|
|
Accrued interest
|
1,604
|
|
|
311
|
|
|
Other
|
1,880
|
|
|
2,013
|
|
|
Total other current liabilities
|
$
|
9,238
|
|
|
$
|
8,043
|
|
Note 5. Income Taxes
The Company recognized income tax benefit of
$1.1 million
and
$4.6 million
for the
three months ended September 30, 2015 and 2014
, respectively, which represents an effective tax rate of
59%
and
44%
, respectively. For the
nine
months ended
September 30, 2015
and
2014
, the Company recognized an income tax benefit of
$3.3 million
and
$8.9 million
, respectively, which represents an effective tax rate of
36%
and
39%
, respectively. For the nine months ended
September 30, 2015
, the effective tax rate was lower compared to the same periods of 2014 due primarily to the valuation allowance recorded for state deferred tax assets, partially offset by the federal manufacturing deduction.
The Company is subject to periodic audits by domestic and foreign tax authorities. The Company’s federal tax years for 2011 and forward are subject to examination by the U.S. authorities. With few exceptions, the Company’s state and foreign tax years beginning with 2001 and 2003, respectively, are subject to examination by applicable tax authorities. The Company believes that it has appropriate support for the income tax positions taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter.
Note 6. Debt
3.25% Convertible Senior Notes due 2020
In December 2014, the Company issued Convertible Senior Notes in the aggregate principal amount of
$172.5 million
. The Convertible Senior Notes have a coupon rate of
3.25%
and are due 2020. Debt issuance costs of approximately
$5.1 million
were incurred, of which
$4.2 million
consisted of underwriters fees, legal, accounting and other professional fees, and are recorded as a reduction to long-term debt and are being amortized to interest expense using the effective interest method over the
six
-year term of the Convertible Senior Notes. The remaining
$0.9 million
of debt issuance costs are allocated as a component of equity in additional paid-in capital. Deferred issuance costs related to the Convertible Senior Notes were
$3.7 million
and
$4.1 million
as of
September 30, 2015
and
December 31, 2014
, respectively.
The Convertible Senior Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock based on an initial conversion rate, subject to adjustment, of
31.1891
shares per $1,000 principal amount of the Convertible Senior Notes (which represents an initial conversion price of approximately
$32.06
per share) on the business day immediately preceding September 15, 2020. The conversion will occur in the following circumstances and to the following extent: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported sales price of the Company’s common stock, for at least
20
trading days (whether or not consecutive) in the period of
30
consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than
130%
of the conversion price of the notes in effect on each applicable trading day; (2) during the
five
consecutive business day period following any
five
consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Senior Note for each such trading day was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; or (3) upon the occurrence of specified events described in the indenture for the Convertible Senior Notes. On or after September 15, 2020 until the close of business on the second scheduled trading day immediately preceding the stated maturity date, holders may surrender their notes for conversion at any time, regardless of the foregoing circumstances.
It is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment in cash equal to the “principal portion” and delivery of the “share amount” in excess of the principal portion in shares of common stock or cash. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000, or the conversion value during the
25
-day observation period as described in the indenture for
the Convertible Senior Notes. The conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by
25
days and the daily volume weighted average price (“VWAP”) of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000.
The Company pays
3.25%
interest per annum on the principal amount of the Convertible Senior Notes semi-annually in arrears in cash on June 15 and December 15 of each year. The Convertible Senior Notes mature on December 15, 2020. During the
nine months ended
September 30, 2015
, the Company recorded total interest expense of
$8.2 million
related to the Convertible Senior Notes of which
$4.0 million
related to the amortization of the debt discount and issuance costs and
$4.2 million
related to the coupon due semi-annually.
If a fundamental change, as defined in the indenture for the Convertible Senior Notes, such as an acquisition, merger, or liquidation of the Company, occurs prior to the maturity date, subject to certain limitations, holders of the Convertible Senior Notes may require the Company to repurchase all or a portion of their Convertible Senior Notes for cash at a repurchase price equal to
100%
of the principal amount of the Convertible Senior Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.
The Company accounts separately for the liability and equity components of the Convertible Senior Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company has no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Convertible Senior Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied interest rate of its Convertible Senior Notes to be
6.9%
, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, which were defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Convertible Senior Notes, which resulted in a fair value of the liability component of
$141.9 million
upon issuance, calculated as the present value of implied future payments based on the
$172.5 million
aggregate principal amount. The
$30.7 million
difference between the cash proceeds of
$172.5 million
and the estimated fair value of the liability component was recorded in additional paid-in capital, net of tax and issuance costs, as the Convertible Senior Notes were not considered redeemable.
As a policy election under applicable guidance related to the calculation of diluted net EPS, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of dilutive impact of the Convertible Senior Notes. The Convertible Senior Notes were not convertible as of
September 30, 2015
. If the Convertible Senior Notes were converted as of
September 30, 2015
, the if-converted value would not exceed the principal amount.
The following table summarizes information about the equity and liability components of the Convertible Senior Notes (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.
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|
September 30, 2015
|
|
December 31, 2014
|
|
Principal amount of Convertible Senior Notes outstanding
|
$
|
172,500
|
|
|
$
|
172,500
|
|
|
Unamortized discount of liability component
|
(26,893
|
)
|
|
(30,403
|
)
|
|
Unamortized debt issuance costs (1)
|
(3,661
|
)
|
|
(4,139
|
)
|
|
Net carrying amount of liability component
|
141,946
|
|
|
137,958
|
|
|
Less: current portion
|
—
|
|
|
—
|
|
|
Long-term debt
|
$
|
141,946
|
|
|
$
|
137,958
|
|
|
Carrying value of equity component, net of issuance costs
|
$
|
29,758
|
|
|
$
|
29,758
|
|
|
Fair value of outstanding Convertible Senior Notes (2)
|
$
|
166,023
|
|
|
$
|
190,613
|
|
|
Remaining amortization period of discount on the liability component
|
5.3 years
|
|
|
6.0 years
|
|
(1) Includes reclassification of
$0.6 million
from prepaid expenses and other current assets and
$3.5 million
from other non-current assets as of December 31, 2014.
(2) Subsequent to the issuance of the financial statements for the year ended December 31, 2014, the Company discovered an error in its disclosure of the fair value of outstanding convertible senior notes. The fair value of the Convertible Senior Notes at December 31, 2014 was
$190.6 million
instead of the amount originally disclosed in the Company’s Annual Report on Form 10-K, which inappropriately reflected only the book value of the long-term debt component of the Convertible Senior Notes, which was
$142.1 million
. The revision in the disclosure of fair value for the Convertible Senior Notes did not impact net loss as previously reported or any prior amounts reported on the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive (Loss) Income, Statements of Cash Flows or Statements of Stockholders' Equity as of and for the year ended December 31, 2014.
Line of Credit
On August 10, 2012, the Company entered into an amended and restated
$140.0 million
senior secured syndicated credit facility (the “Senior Credit Facility”) that matures on
August 10, 2017
. As part of this amendment, the Company incurred an additional
$1.0 million
in deferred financing costs related to the Senior Credit Facility. The Company had previously recorded
$0.6 million
related to the prior credit facility. Deferred financing costs are amortized on a straight-line basis over the term of the Senior Credit Facility. The Company presents debt issuance costs as an asset when there is no associated liability. As of
September 30, 2015
, the Company had deferred financing costs related to the Senior Credit Facility of
$0.3 million
included as a portion of other non-current assets and
$0.3 million
included as a portion of prepaid expenses and other current assets. As of
December 31, 2014
, the Company had deferred financing costs related to the Senior Credit Facility of
$0.5 million
included as a portion of other non-current assets and
$0.3 million
included as a portion of prepaid expenses and other current assets. The Senior Credit Facility bears interest at either the London Interbank Offered Rate (“LIBOR”) or the base rate, plus, in each case, an applicable margin. The base rate is equal to the highest of (i) the lender’s prime rate, (ii) the federal funds rate plus one-half of one percent and (iii) LIBOR plus
one
percent. The applicable margin is generally determined in accordance with a performance pricing grid based on the Company’s leverage ratio and ranges from
1.25%
to
2.50%
for LIBOR rate loans and from
0.25%
to
1.50%
for base rate loans. The agreement governing the Senior Credit Facility includes certain customary limitations, including among others: limitation on liens; limitation on mergers, consolidations and dispositions of assets; limitation on debt; limitation on dividends, stock redemptions and the redemption and/or prepayment of other debt; limitation on investments (including loans and advances) and acquisitions; and limitation on transactions with affiliates. The Company is also subject to financial covenants, which include a funded debt to adjusted EBITDA ratio (as defined in the Senior Credit Facility, with adjusted EBITDA generally calculated as earnings before, among other adjustments, interest, taxes, depreciation, amortization, and stock-based compensation) not to exceed
3
:1 as of the end of each fiscal quarter, and an interest coverage ratio of not less than
3
:1 as of the end of each fiscal quarter. Funded debt is defined as outstanding borrowings on the Senior Credit Facility plus Convertible Senior Notes, less the Company’s domestic cash and cash equivalents in excess of
$15.0 million
. The Senior Credit Facility is secured by substantially all present and future assets and properties of the Company and is senior to the Convertible Senior Notes.
As of
September 30, 2015
and
December 31, 2014
, the Company had
no
borrowings outstanding. The Company had
$95.9 million
available under the Senior Credit Facility as of
September 30, 2015
. The Company’s ability to borrow under the Senior Credit Facility fluctuates from time to time due to, among other factors, the Company’s borrowings under the facility and its funded debt to adjusted EBITDA ratio. As of
September 30, 2015
,
the Company was in compliance with all financial covenants.
Note 7. Stockholders’ Equity
Issuances and Repurchases of Common Stock
During the
nine
months ended
September 30, 2015
,
69,828
shares of common stock were issued in conjunction with the vesting and release of restricted stock units,
92,164
shares of common stock were issued due to the exercise of stock options and
52,677
shares of common stock were issued in connection with the Company’s employee stock purchase plan (the “ESPP”), resulting in net proceeds to the Company of approximately
$2.2 million
. During the
nine
months ended
September 30, 2015
,
1,211,769
shares of outstanding common stock were repurchased under the Company’s previously announced share repurchase program for approximately
$27.2 million
. Additionally,
17,181
shares of outstanding common stock were repurchased in connection with payment of minimum tax withholding obligations for certain employees relating to the lapse of restrictions on certain restricted stock units for approximately
$0.4 million
. As of
September 30, 2015
, there was
$22.9 million
available under the Company’s share repurchase program.
Stock-Based Compensation
The compensation expense related to the Company’s stock-based compensation plans included in the accompanying Consolidated Statements of Operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
|
|
|
|
2015
|
|
2014
|
|
2015
|
|
2014
|
|
|
Cost of sales
|
$
|
113
|
|
|
$
|
103
|
|
|
$
|
454
|
|
|
$
|
431
|
|
|
|
Research and development
|
268
|
|
|
221
|
|
|
562
|
|
|
786
|
|
|
|
Sales and marketing
|
351
|
|
|
222
|
|
|
1,228
|
|
|
702
|
|
|
|
General and administrative
|
987
|
|
|
747
|
|
|
3,469
|
|
|
2,853
|
|
|
|
Total stock-based compensation expense
|
$
|
1,719
|
|
|
$
|
1,293
|
|
|
$
|
5,713
|
|
|
$
|
4,772
|
|
Total compensation expense recognized for the three months and
nine
months ended
September 30, 2015
includes
$1.1 million
and
$3.5 million
related to stock options and
$0.6 million
and
$2.2 million
related to restricted stock units, respectively. Total compensation expense recognized for the three and
nine
months ended
September 30, 2014
includes
$0.9 million
and
$3.3 million
related to stock options and
$0.4 million
and
$1.5 million
related to restricted stock units, respectively. As of
September 30, 2015
, total unrecognized compensation expense related to non-vested stock options was
$7.5 million
, which is expected to be recognized over a weighted-average period of approximately
2.4 years
. As of
September 30, 2015
, total unrecognized compensation expense related to non-vested restricted stock units was
$3.0 million
, which is expected to be recognized over a weighted-average period of approximately
2.7 years
. Compensation expense capitalized to inventory and compensation expense related to the Company’s ESPP were not material for the three and
nine
months ended
September 30, 2015
and
2014
.
The estimated fair value of each stock option award was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for the option grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
2015
|
|
2014
|
|
|
Risk-free interest rate
|
1.48
|
%
|
|
1.59
|
%
|
|
|
Expected option life (in years)
|
6.23
|
|
|
5.77
|
|
|
|
Volatility rate
|
40
|
%
|
|
42
|
%
|
|
|
Dividend rate
|
—
|
%
|
|
—
|
%
|
The weighted-average fair value of stock options granted during the
nine
months ended
September 30, 2015
and
2014
was
$9.60
and
$10.95
, respectively. The Company granted
616,994
and
542,020
stock options during the
nine
months ended
September 30, 2015
and
2014
, respectively. The weighted-average fair value of restricted stock units granted during the
nine
months ended
September 30, 2015
and
2014
was
$23.47
and
$25.34
, respectively. The Company granted
146,164
and
116,319
shares of restricted stock units during the
nine
months ended
September 30, 2015
and
2014
, respectively. The fair value of restricted stock units is determined based on the closing market price of the Company’s common stock on the grant date.
Note 8. Industry and Geographic Information
The Company operates in
one
reportable segment. Sales to customers outside the U.S. represented
$18.8 million
(
13%
) and
$16.7 million
(
14%
) of total revenue for the
nine
months ended
September 30, 2015
and
2014
, respectively. As of
September 30, 2015
and
December 31, 2014
, balances due from foreign customers were
$4.3 million
and
$5.5 million
, respectively.
The Company had sales to individual customers in excess of
10%
of total revenues, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
2015
|
|
2014
|
|
|
Customer:
|
|
|
|
|
|
A
|
23
|
%
|
|
16
|
%
|
|
|
B
|
16
|
%
|
|
16
|
%
|
|
|
C
|
11
|
%
|
|
10
|
%
|
|
|
|
50
|
%
|
|
42
|
%
|
As of
September 30, 2015
and
December 31, 2014
, accounts receivable from customers with balances due in excess of
10%
of total accounts receivable totaled
$23.5 million
and
$23.7 million
, respectively.
Note 9. Commitments and Contingencies
Legal
The Company is involved in various claims and litigation matters from time to time in the ordinary course of business. Management believes that all such current legal actions, in the aggregate, will not have a material adverse effect on the Company. The Company also maintains insurance, including coverage for product liability claims, in amounts that management believes are appropriate given the nature of its business. At
September 30, 2015
and
December 31, 2014
, the Company had
$0.3 million
accrued as a liability for various legal matters where the Company deemed the liability probable and estimable.
Licensing Arrangements
The Company has entered into various licensing and royalty agreements, which largely require payments based on specified product sales as well as the achievement of specified milestones. The Company had royalty and license expenses relating to those agreements of approximately
$0.1 million
for both of the three months ended
September 30, 2015
and
2014
. The Company had royalty and license expenses relating to those agreements of approximately
$0.5 million
and
$0.6 million
for the nine months ended
September 30, 2015
and
2014
, respectively.
Research and Development Agreements
The Company has entered into various research and development agreements that provide it with rights to develop, manufacture and market products using the intellectual property and technology of its collaborative partners. Under the terms of certain of these agreements, the Company is required to make periodic payments based on achievement of certain milestones or resource expenditures. These milestones generally include achievement of prototype assays, validation lots and clinical trials. At
September 30, 2015
and
December 31, 2014
, total future commitments under the terms of these agreements are estimated at
$3.8 million
and
$4.3 million
, respectively. The commitments will fluctuate as we agree to new phases of development under the existing arrangements.
Contingent Consideration
In conjunction with the acquisition of BioHelix Corporation (“BioHelix”) in May 2013, the Company agreed to contingent consideration ranging from
$5.0 million
to
$13.0 million
upon achievement of certain research and development milestones and revenue targets through 2018. At December 31, 2014, all research and development milestones had been achieved and all payments related to research and development milestones had been disbursed.
No
payments related to the royalty revenue earn-out were disbursed during the three months ended
September 30, 2015
and
2014
. Payments of
$0.1 million
and
$49,000
related to the revenue royalty earn-out were disbursed during the nine months ended
September 30, 2015
and
2014
, respectively. As of
September 30, 2015
, the current portion of the contingent consideration is
$0.6 million
and the
non-current portion of the contingent consideration is
$4.9 million
. The fair value of the remaining contingent consideration related to the revenue royalty earn-out to be settled in cash is estimated based on the Monte Carlo Simulation Model.
In August 2013, the Company completed a business combination accomplished by acquiring the assets of AnDiaTec GmbH & Co. KG (“AnDiaTec”), a privately-held, diagnostics company, based in Germany. The Company agreed to contingent consideration of up to
€0.5 million
(
$0.6 million
based on the
September 30, 2015
currency conversion rate) upon achievement of certain revenue targets through 2018. As of
September 30, 2015
, the current portion of the contingent consideration is
$25,000
and the non-current portion of the contingent consideration is
$0.1 million
, based on the Monte Carlo Simulation Model. In addition, the Company agreed to pay the founder of AnDiaTec contingent payments of up to
€3.0 million
(
$3.4 million
based on the
September 30, 2015
currency conversion rate) upon achievement of certain research and development milestones, subject to continued employment. The Company paid
$0.3 million
for the achievement of agreed upon research and development milestones during the
three months ended September 30, 2015
and
$0.6 million
during the
three months ended September 30, 2014
. The Company paid
$1.2 million
and
$0.9 million
for the achievement of agreed upon research and development milestones during the nine months ended
September 30, 2015
and
2014
, respectively. In October 2015, the Company paid
$0.5 million
for the achievement of agreed upon research and development milestones that were accrued for as of September 30, 2015. These costs are recorded as compensation expense included in research and development expense in the Consolidated Statements of Operations.
Note 10. Lease Obligation
In the fourth quarter of 2013, the Company entered into a lease for approximately
30,000
square feet of office space and moved the executive and administrative functions into this facility in the second quarter of 2014. The lease expires in
2022
with options to extend the lease for
two
additional
five
-year periods. This operating lease included a lease incentive for tenant improvements of
$1.7 million
, which has been included as a leasehold improvement in property, plant and equipment and as deferred rent. At
September 30, 2015
, the total deferred rent was
$2.6 million
, of which
$0.3 million
was included in other current liabilities.
During 1999, the Company completed a sale and leaseback transaction of its San Diego McKellar facility. The facility was sold for
$15.0 million
, of which
$3.8 million
was capital contributed by the Company. The sale was an all cash transaction, netting the Company approximately
$7.0 million
. The Company is a
25%
limited partner in the partnership that acquired the facility. The transaction was deemed a financing transaction under the guidance in ASC Topic 840-40,
Accounting for Sales of Real Estate
. The assets sold remain on the books of the Company and will continue to be depreciated over the estimated useful life. In December 2009, the Company amended the terms of its lease agreement. The amended terms include a new
ten
-year lease term through
December 2019
, with options to extend the lease for up to
three
additional
five
-year periods. The Company is amortizing the lease obligation over the new lease term. The amount of the monthly rental payments remains the same under the amendment. In August 2015, the lease agreement was amended to extend the timing to January 1, 2016 to exercise an option in the lease to purchase the general partner’s interest in the partnership for a fixed price. The Company has determined that the partnership is a variable interest entity (VIE). The Company is not, however, the primary beneficiary of the VIE as it does not absorb the majority of the partnership’s expected losses or receive a majority of the partnership’s residual returns. The Company made lease payments to the partnership of approximately
$0.3 million
for each of the
three months ended September 30, 2015 and 2014
and
$0.9 million
and
$0.8 million
for the nine months ended
September 30, 2015
and
2014
, respectively.
Note 11. Fair Value Measurements
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
December 31, 2014
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
168,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168,123
|
|
|
$
|
3,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,057
|
|
|
Total assets measured at fair value
|
$
|
168,123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168,123
|
|
|
$
|
3,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,057
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
5,607
|
|
|
5,607
|
|
|
—
|
|
|
—
|
|
|
5,756
|
|
|
5,756
|
|
|
Total liabilities measured at fair value
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,607
|
|
|
$
|
5,607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,756
|
|
|
$
|
5,756
|
|
There were
no
transfers of assets or liabilities between Level 1, Level 2 and Level 3 categories of the fair value hierarchy during the
three and nine
month periods ended
September 30, 2015
and the year ended
December 31, 2014
.
The Company used Level 1 inputs to determine the fair value of a portion of its cash equivalents, which primarily consist of funds held in a money market account, and as such, the carrying value of such cash equivalents approximates fair value. As of
September 30, 2015
and
December 31, 2014
, the carrying value of these cash equivalents was
$168.1 million
and
$3.1 million
, respectively.
The Company assesses the fair value of contingent consideration to be settled in cash related to acquisitions using the Monte Carlo Simulation Model for the royalty earn-out portion of the contingent liability. This is a Level 3 measurement. Significant assumptions used in the measurement include future royalty payments and the discount rate associated with the potential volatility of the acquired business. The Company recorded
no
changes to the fair value of the contingent consideration for the three months ended
September 30, 2014
. Due to changes in the estimated future royalty payments and a shorter discounting period, the fair value of the contingent consideration liabilities changed, resulting in a
$42,000
loss recorded to cost of sales in the Consolidated Statements of Operations during the nine months ended
September 30, 2014
. The Company recorded
no
changes to the fair value of the contingent consideration liabilities during the
three and nine
month periods ended
September 30, 2015
.
Changes in estimated fair value of contingent consideration liabilities from
December 31, 2014
through
September 30, 2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Contingent consideration liabilities
(Level 3 measurement)
|
|
Balance at December 31, 2014
|
$
|
5,756
|
|
|
Cash payments
|
(129
|
)
|
|
Unrealized gain on foreign currency translation
|
(20
|
)
|
|
Balance at September 30, 2015
|
$
|
5,607
|
|
