10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 5, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019 .
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 001-33528
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
|
(Address of Principal Executive Offices) (Zip Code) | ||
(Registrant’s Telephone Number, Including Area Code) | ||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act:
x |
Accelerated filer |
☐ |
|
Non-accelerated filer |
¨ |
Smaller reporting company |
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ YES ý NO
As of October 30, 2019, the registrant had 665,600,775 shares of Common Stock outstanding.
TABLE OF CONTENTS
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3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as that term is defined under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described below and in “Item 1A-Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 and this Quarterly Report on Form 10-Q, and described from time to time in our other filings with the Securities and Exchange Commission (“SEC”). We do not undertake any obligation to update forward-looking statements, except to the extent required by applicable law. We intend that all forward-looking statements be subject to the safe-harbor provisions of the PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business and could cause our actual results to differ materially from any future results expressed or implied in forward-looking statements include the following:
• |
we have a history of losses and may not generate sustained positive cash flow sufficient to fund our operations and research and development programs; |
• |
our need for, and ability to obtain, additional financing when needed on favorable terms, or at all; |
• |
adverse results in material litigation matters or governmental investigations, including, without limitation, recent lawsuits against the Company and its Chairman and Chief Executive Officer by the SEC, as well as related class action and derivative lawsuits; |
• |
the risks inherent in developing, obtaining regulatory approvals for and commercializing new, commercially viable and competitive products and treatments; |
• |
our research and development activities may not result in commercially viable products; |
• |
that earlier clinical results of effectiveness and safety may not be reproducible or indicative of future results; |
• |
the success of our relationship with Pfizer; |
• |
that we may fail to obtain regulatory approval for hGH-CTP or successfully commercialize Rayaldee and hGH-CTP;
|
• |
that we may not generate profits or cash flow from our laboratory operations or substantial revenue from Rayaldee and our pharmaceutical and diagnostic products;
|
• |
availability of insurance coverage with respect to material litigation matters; |
• |
that currently available over-the-counter and prescription products, as well as products under development by others, may prove to be as or more effective than our products for the indications being studied; |
• |
our ability to build a successful pharmaceutical sales and marketing infrastructure; |
• |
our ability and our distribution and marketing partners’ ability to comply with regulatory requirements regarding the sales, marketing and manufacturing of our products and product candidates and the operation of our laboratories; |
• |
the performance of our third-party distribution partners, licensees and manufacturers over which we have limited control; |
• |
our success is dependent on the involvement and continued efforts of our Chairman and Chief Executive Officer; |
• |
integration challenges for acquired businesses; |
• |
changes in regulation and policies in the United States (“U.S.”) and other countries, including increasing downward pressure on healthcare reimbursement; |
4
• |
our ability to manage our growth and our expanded operations; |
• |
increased competition, including price competition; |
• |
changing relationships with payors, including the various state and multi-state Blues programs, suppliers and strategic partners; |
• |
efforts by third-party payors to reduce utilization and reimbursement for clinical testing services; |
• |
our ability to maintain reimbursement coverage for our products and services, including the 4Kscore test;
|
• |
failure to timely or accurately bill and collect for our services; |
• |
failure in our information technology systems or those of our third party vendors, including cybersecurity attacks or other data security or privacy incidents; |
• |
failure to obtain and retain new clients and business partners, or a reduction in tests ordered or specimens submitted by existing clients; |
• |
failure to establish, and perform to, appropriate quality standards to assure that the highest level of quality is observed in the performance of our testing services; |
• |
failure to maintain the security of patient-related information; |
• |
our ability to obtain and maintain intellectual property protection for our products; |
• |
our ability to defend our intellectual property rights with respect to our products; |
• |
our ability to operate our business without infringing the intellectual property rights of others; |
• |
our ability to attract and retain key scientific and management personnel; |
• |
the risk that the carrying value of certain assets may exceed the fair value of the assets causing us to impair goodwill or other intangible assets; |
• |
failure to obtain and maintain regulatory approval outside the U.S.; and |
• |
legal, economic, political, regulatory, currency exchange, and other risks associated with international operations. |
5
PART I. FINANCIAL INFORMATION
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company”, “OPKO”, “we”, “our”, “ours”, and “us” refer to OPKO Health, Inc., a Delaware corporation, including our wholly-owned subsidiaries.
Item 1. Financial Statements
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
6
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
September 30, 2019 |
December 31, 2018 |
||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
$ |
|||||
Accounts receivable, net |
|||||||
Inventory, net |
|||||||
Other current assets and prepaid expenses |
|||||||
Total current assets |
|||||||
Property, plant and equipment, net |
|||||||
Intangible assets, net |
|||||||
In-process research and development |
|||||||
Goodwill |
|||||||
Investments |
|||||||
Operating lease right-of-use assets |
— |
||||||
Other assets |
|||||||
Total assets |
$ |
$ |
|||||
LIABILITIES AND EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ |
$ |
|||||
Accrued expenses |
|||||||
Current maturities of operating leases |
— |
||||||
Current portion of convertible notes |
|||||||
Current portion of lines of credit and notes payable |
|||||||
Total current liabilities |
|||||||
Operating lease liabilities |
— |
||||||
Convertible notes |
|||||||
Deferred tax liabilities, net |
|||||||
Other long-term liabilities, principally contract liabilities, contingent consideration and line of credit |
|||||||
Total long-term liabilities |
|||||||
Total liabilities |
|||||||
Equity: |
|||||||
Common Stock - $0.01 par value, 1,000,000,000 and 750,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 616,150,952 and 586,881,720 shares issued at September 30, 2019 and December 31, 2018, respectively |
|||||||
Treasury Stock - 549,907 and 549,907 shares at September 30, 2019 and December 31, 2018, respectively |
( |
) |
( |
) |
|||
Additional paid-in capital |
|||||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
|||
Accumulated deficit |
( |
) |
( |
) |
|||
Total shareholders’ equity |
|||||||
Total liabilities and equity |
$ |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
7
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
For the three months ended September 30, |
For the nine months ended September 30, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Revenues: |
|||||||||||||||
Revenue from services |
$ |
$ |
$ |
$ |
|||||||||||
Revenue from products |
|||||||||||||||
Revenue from transfer of intellectual property and other |
|||||||||||||||
Total revenues |
|||||||||||||||
Costs and expenses: |
|||||||||||||||
Cost of service revenue |
|||||||||||||||
Cost of product revenue |
|||||||||||||||
Selling, general and administrative |
|||||||||||||||
Research and development |
|||||||||||||||
Contingent consideration |
( |
) |
( |
) |
( |
) |
|||||||||
Amortization of intangible assets |
|||||||||||||||
Asset impairment charges |
|||||||||||||||
Total costs and expenses |
|||||||||||||||
Operating loss |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Other income and (expense), net: |
|||||||||||||||
Interest income |
|||||||||||||||
Interest expense |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Fair value changes of derivative instruments, net |
( |
) |
( |
) |
|||||||||||
Other income (expense), net |
( |
) |
( |
) |
( |
) |
|||||||||
Other income and (expense), net |
( |
) |
( |
) |
( |
) |
|||||||||
Loss before income taxes and investment losses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Income tax benefit (provision) |
( |
) |
( |
) |
|||||||||||
Net loss before investment losses |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Loss from investments in investees |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Loss per share, basic and diluted: |
|||||||||||||||
Loss per share |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Weighted average common shares outstanding, basic and diluted |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
8
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
For the three months ended September 30, |
For the nine months ended September 30, |
||||||||||||||
2019 |
2018 |
2019 |
2018 |
||||||||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive income (loss), net of tax: |
|||||||||||||||
Change in foreign currency translation and other comprehensive income (loss) |
( |
) |
( |
) |
( |
) |
( |
) |
|||||||
Investments: |
|||||||||||||||
Reclassification adjustment due to adoption of ASU 2016-01 |
( |
) |
|||||||||||||
Comprehensive loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
9
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share and per share data)
For the three and nine months ended September 30, 2019
Common Stock |
Treasury |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total |
||||||||||||||||||||||||
Shares |
Dollars |
Shares |
Dollars |
||||||||||||||||||||||||||
Balance at June 30, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||
Equity-based compensation expense |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Exercise of Common Stock options and warrants |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Adoption of ASU 2018-07 |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
2025 convertible notes including share lending arrangement |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||||||
Balance at September 30, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
Common Stock |
Treasury |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total |
||||||||||||||||||||||||
Shares |
Dollars |
Shares |
Dollars |
||||||||||||||||||||||||||
Balance at December 31, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||
Equity-based compensation expense |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Exercise of Common Stock options and warrants |
— |
— |
— |
( |
) |
— |
— |
( |
) |
||||||||||||||||||||
Adoption of ASU 2018-07 |
— |
— |
— |
— |
( |
) |
— |
||||||||||||||||||||||
2025 convertible notes including share lending arrangement |
— |
— |
— |
— |
|||||||||||||||||||||||||
Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||||||
Balance at September 30, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
10
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share and per share data)
For the three and nine months ended September 30, 2018
Common Stock |
Treasury |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total |
||||||||||||||||||||||||
Shares |
Dollars |
Shares |
Dollars |
||||||||||||||||||||||||||
Balance at June 30, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||
Equity-based compensation expense |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Exercise of Common Stock options and warrants |
— |
— |
— |
— |
|||||||||||||||||||||||||
Adoption of ASU 2016-01 |
— |
— |
— |
— |
— |
— |
— |
||||||||||||||||||||||
Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||||||
Balance at September 30, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
Common Stock |
Treasury |
Additional Paid-In Capital |
Accumulated Other Comprehensive Loss |
Accumulated Deficit |
Total |
||||||||||||||||||||||||
Shares |
Dollars |
Shares |
Dollars |
||||||||||||||||||||||||||
Balance at December 31, 2017 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||
Equity-based compensation expense |
— |
— |
— |
— |
— |
— |
|||||||||||||||||||||||
Exercise of Common Stock options and warrants |
— |
— |
— |
— |
|||||||||||||||||||||||||
Adoption of ASU 2016-01 |
— |
— |
— |
— |
— |
( |
) |
||||||||||||||||||||||
Net loss |
— |
— |
— |
— |
— |
— |
( |
) |
( |
) |
|||||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||||||||
Balance at September 30, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
11
OPKO Health, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the nine months ended September 30, |
|||||||
2019 |
2018 |
||||||
Cash flows from operating activities: |
|||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|||||||
Depreciation and amortization |
|||||||
Non-cash interest |
|||||||
Amortization of deferred financing costs |
|||||||
Losses from investments in investees |
|||||||
Equity-based compensation – employees and non-employees |
|||||||
Realized loss (gain) on disposal of fixed assets and sales of equity securities |
|||||||
Change in fair value of equity securities and derivative instruments |
( |
) |
|||||
Change in fair value of contingent consideration |
( |
) |
( |
) |
|||
Impairment of assets |
|||||||
Deferred income tax (benefit) provision |
( |
) |
|||||
Changes in assets and liabilities, net of the effects of acquisitions: |
|||||||
Accounts receivable, net |
|||||||
Inventory, net |
( |
) |
|||||
Other current assets and prepaid expenses |
( |
) |
( |
) |
|||
Other assets |
( |
) |
|||||
Accounts payable |
( |
) |
|||||
Foreign currency measurement |
|||||||
Contract liabilities |
( |
) |
( |
) |
|||
Accrued expenses and other liabilities |
( |
) |
( |
) |
|||
Net cash used in operating activities |
( |
) |
( |
) |
|||
Cash flows from investing activities: |
|||||||
Investments in investees |
( |
) |
( |
) |
|||
Proceeds from sale of equity securities |
|||||||
Proceeds from the sale of property, plant and equipment |
|||||||
Capital expenditures |
( |
) |
( |
) |
|||
Net cash used in investing activities |
( |
) |
( |
) |
|||
Cash flows from financing activities: |
|||||||
Issuance of convertible notes, including to related parties |
|||||||
Debt issuance costs |
( |
) |
|||||
Proceeds from the exercise of Common Stock options and warrants |
( |
) |
|||||
Borrowings on lines of credit |
|||||||
Repayments of lines of credit |
( |
) |
( |
) |
|||
Redemption of 2033 Senior Notes |
( |
) |
|||||
Net cash provided by financing activities |
|||||||
Effect of exchange rate changes on cash and cash equivalents |
( |
) |
( |
) |
|||
Net increase (decrease) in cash and cash equivalents |
( |
) |
( |
) |
|||
Cash and cash equivalents at beginning of period |
|||||||
Cash and cash equivalents at end of period |
$ |
$ |
|||||
SUPPLEMENTAL INFORMATION: |
|||||||
Interest paid |
$ |
$ |
|||||
Income taxes paid, net of refunds |
$ |
$ |
|||||
Operating lease right-of-use assets due to adoption of ASU No. 2016-02 |
$ |
$ |
— |
||||
Operating lease liabilities due to adoption of ASU No. 2016-02 |
$ |
$ |
— |
||||
Non-cash financing: |
|||||||
Shares issued upon the conversion of: |
|||||||
Common Stock options and warrants, surrendered in net exercise |
$ |
$ |
The accompanying unaudited Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
12
OPKO Health, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BUSINESS AND ORGANIZATION
We are a diversified healthcare company that seeks to establish industry-leading positions in large and rapidly growing medical markets. Our diagnostics business includes BioReference Laboratories, Inc. (“BioReference”), one of the nation’s largest full service laboratories with a core genetic testing business and an almost 300 -person sales and marketing team focused on driving growth and leveraging new products, including the 4Kscore prostate cancer test. Our pharmaceutical business features Rayaldee, an FDA-approved treatment for secondary hyperparathyroidism (“SHPT”) in adults with stage 3 or 4 chronic kidney disease (“CKD”) and vitamin D insufficiency (launched in November 2016); OPK88004, a selective androgen receptor modulator which we are exploring for various potential indications; and OPK88003, a once or twice weekly oxyntomodulin for type 2 diabetes and obesity which is a clinically advanced drug candidate among the new class of GLP-1 glucagon receptor dual agonists (phase 2b). Our pharmaceutical business also features hGH-CTP, a once-weekly human growth hormone that recently completed a phase 3 trial partnered with Pfizer Inc. (“Pfizer”). We are incorporated in Delaware, and our principal executive offices are located in leased offices in Miami, Florida.
Through BioReference, we provide laboratory testing services, primarily to customers in the larger metropolitan areas across New York, New Jersey, Maryland, Pennsylvania, Delaware, Washington, DC, Florida, California, Texas, Illinois and Massachusetts as well as to customers in a number of other states. We offer a comprehensive test menu of clinical diagnostics for blood, urine, and tissue analysis. This includes hematology, clinical chemistry, immunoassay, infectious diseases, serology, hormones, and toxicology assays, as well as Pap smear, anatomic pathology (biopsies) and other types of tissue analysis. We market our laboratory testing services directly to physicians, geneticists, hospitals, clinics, correctional and other health facilities.
We operate established pharmaceutical platforms in Ireland, Chile, Spain, and Mexico, which currently generate revenue and which we expect to facilitate future market entry for our products currently in development. In addition, we have a development and commercial supply pharmaceutical company and a global supply chain operation and holding company in Ireland. We own a specialty active pharmaceutical ingredients (“APIs”) manufacturer in Israel, which we expect will facilitate the development of our pipeline of molecules and compounds for our molecular diagnostic and therapeutic products.
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NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Inventories. Inventories are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. We consider such factors as the amount of inventory on hand, estimated time required to sell such inventories, remaining shelf-life, and current market conditions to determine whether inventories are stated at the lower of cost and net realizable value. Inventories at our diagnostics segment consist primarily of purchased laboratory supplies, which is used in our testing laboratories. Inventory obsolescence expense for the nine months ended September 30, 2019 and 2018 was $1.4 million and $1.5 million, respectively.
Goodwill and intangible assets. Goodwill represents the difference between the purchase price and the estimated fair value of the net assets acquired accounted for by the acquisition method of accounting. Refer to Note 4. Goodwill, in-process research and development (“IPR&D”) and other intangible assets acquired in business combinations, licensing and other transactions at September 30, 2019 and December 31, 2018 was $1.9 billion and $2.0 billion, respectively.
Assets acquired and liabilities assumed in business combinations, licensing and other transactions are generally recognized at the date of acquisition at their respective fair values. We determined the fair value of intangible assets, including IPR&D, using the “income method.”
Goodwill is tested annually for impairment and additionally if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that its fair value exceeds the carrying value.
Estimating the fair value of a reporting unit for goodwill impairment is highly sensitive to changes in projections and assumptions; therefore, in some instances, changes in these assumptions could potentially lead to impairment. We perform sensitivity analyses around our assumptions in order to assess the reasonableness of the assumptions and the results of our testing. Ultimately, potential changes in these assumptions may impact the estimated fair value of a reporting unit and result in an impairment if the fair value of such reporting unit is less than its carrying value.
We believe that our estimates and assumptions are reasonable and otherwise consistent with assumptions that marketplace participants would use in their estimates of fair value. However, if actual results are not consistent with our estimates and
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assumptions, then we may be exposed to an impairment charge, which could be material. For the nine month period ending September 30, 2019, the results of operations of our BioReference reporting unit were below management’s long-term forecast of expected cash flows for the year ending December 31, 2019 due to a change in reimbursement coverage for our 4Kscore test and other market factors. If we are unable to obtain appropriate reimbursement for our 4Kscore test and experience sustained declines in operating results versus forecast, then our estimates of the fair value of the BioReference reporting unit may change. If the fair value of the reporting unit falls below carrying value, then we would record impairment of goodwill at BioReference and such impairment could be significant.
Intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, although IPR&D is required to be tested at least annually until the project is completed or abandoned. Upon obtaining regulatory approval, the IPR&D asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the IPR&D asset is charged to expense.
The cost and duration of the development project for hGH-CTP have exceeded our original estimates and will result in additional expenses beyond our estimates and the development cap agreed between us and Pfizer. If we are unable to reach an agreement with Pfizer regarding cost sharing for overruns, as well as other obligations, including development obligations, it could have a material adverse impact on the expected benefits of our arrangement with Pfizer. If we are unable to successfully develop or obtain regulatory approval for hGH-CTP, or if changes in projections and assumptions negatively impact our forecast of net cash flows, then we may be exposed to a material impairment charge related to the IPR&D for hGH-CTP.
Impairment analysis and measurement is a process that requires significant judgment. Our stock price and any estimated control premium are significant qualitative factors affecting the assessment of fair value for purposes of performing our impairment assessment. Our stock price and public market capitalization has experienced volatility in the past and during 2019, our public market capitalization decreased to a value below the net book carrying value of our equity. In October 2019, our stock price also experienced a substantial decline. A significant sustained decline in our stock price and market capitalization can be a positive indicator of impairment. While no impairment was recorded as a result of the interim impairment evaluation, it is possible that a material change could occur in the future.
Fair value measurements. The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate their fair value due to the short-term maturities of these instruments. Investments that are considered equity securities as of September 30, 2019 and December 31, 2018 are predominately carried at fair value. Our debt under our credit agreement with JPMorgan Chase Bank, N.A. approximates fair value due to the variable rate of interest.
Contingent consideration. Each period we revalue the contingent consideration obligations associated with certain prior acquisitions to their fair value and record increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction in contingent consideration expense. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related milestones, the estimated timing in which the milestones are achieved and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our assumptions. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value which may have a material impact on our results from operations and financial position.
Derivative financial instruments. We record derivative financial instruments on our Condensed Consolidated Balance Sheet at their fair value and recognize the changes in the fair value in our Condensed Consolidated Statement of Operations when they occur, the only exception being derivatives that qualify as hedges. For the derivative instrument to qualify as a hedge, we are required to meet strict hedge effectiveness and contemporaneous documentation requirements at the initiation of the hedge and assess the hedge effectiveness on an ongoing basis over the life of the hedge. At September 30, 2019 and December 31, 2018, our foreign currency forward contracts held to economically hedge inventory purchases did not meet the
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Property, plant and equipment. Property, plant and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets and includes amortization expense for assets capitalized under finance leases. The estimated useful lives by asset class are as follows: software - 3 years, machinery, medical and other equipment - 5 -8 years, furniture and fixtures - 5 -12 years, leasehold improvements - the lesser of their useful life or the lease term, buildings and improvements - 10 -40 years, and automobiles - 3 -5 years. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation expense was $21.9 million and $22.0 million for the nine months ended September 30, 2019 and 2018, respectively. Assets held under finance leases are included within Property, plant and equipment, net in our Condensed Consolidated Balance Sheet and are amortized over the shorter of their useful lives or the expected term of their related leases.
Impairment of long-lived assets. Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, then an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes. Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We periodically evaluate the realizability of our
net deferred tax assets. Our tax accruals are analyzed periodically and adjustments are made as events occur to warrant such
adjustment. Valuation allowances on certain U.S. deferred tax assets and non-U.S. deferred tax assets are established, because
realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold.
We operate in various countries and tax jurisdictions globally. For interim reporting purposes, we record income taxes based on the expected effective income tax rate, taking into consideration year to date and global forecasted tax results. For the three and nine months ended September 30, 2019, the tax rate differed from the U.S. federal statutory rate of 21% primarily due to the valuation allowance against certain U.S. and non-U.S. deferred tax assets, the relative mix in earnings and losses in the U.S. versus foreign tax jurisdictions, and the impact of certain discrete tax events and operating results in tax jurisdictions which do not result in a tax benefit.
Revenue recognition. We recognize revenue when a customer obtains control of promised goods or services in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). The amount of revenue that is recorded reflects the consideration that we expect to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
Concentration of credit risk and allowance for doubtful accounts. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. Substantially all of our accounts receivable are with either companies in the healthcare industry or patients. However, credit risk is limited due to the number of our clients as well as their dispersion across many different geographic regions.
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balances (net of contractual adjustments) from Medicare and Medicaid were 10.1 % and 7.4 %, respectively, of our consolidated Accounts receivable, net.
The portion of our accounts receivable due from individual patients comprises the largest portion of credit risk. At September 30, 2019 and December 31, 2018, receivables due from patients represented approximately 2.3 % and 2.9 %, respectively, of our consolidated Accounts receivable, net.
Research and development expenses. Research and development expenses include external and internal expenses. External expenses include clinical and non-clinical activities performed by contract research organizations, lab services, purchases of drug and diagnostic product materials and manufacturing development costs. Research and development employee-related expenses include salaries, benefits and equity-based compensation expense. Other internal research and development expenses are incurred to support overall research and development activities and include expenses related to general overhead and facilities. We expense these costs in the period in which they are incurred. We estimate our liabilities for research and development expenses in order to match the recognition of expenses to the period in which the actual services are received. As such, accrued liabilities related to third party research and development activities are recognized based upon our estimate of services received and degree of completion of the services in accordance with the specific third party contract.
Research and development expense includes costs for in-process research and development projects acquired in asset acquisitions which have not reached technological feasibility and which have no alternative future use. For in-process research and development projects acquired in business combinations, the in-process research and development project is capitalized and evaluated for impairment until the development process has been completed. Once the development process has been completed the asset will be amortized over its remaining useful life.
Shipping and handling costs. We do not charge customers for shipping and handling costs. Shipping and handling costs are classified as Cost of revenues in the Condensed Consolidated Statement of Operations.
Foreign currency translation. The financial statements of certain of our foreign operations are measured using the local currency as the functional currency. The local currency assets and liabilities are generally translated at the rate of exchange to the U.S. dollar on the balance sheet date and the local currency revenues and expenses are translated at average rates of exchange to the U.S. dollar during the reporting periods. Foreign currency transaction gains (losses) have been reflected as a component of Other income (expense), net within the Condensed Consolidated Statement of Operations and foreign currency translation gains (losses) have been included as a component of the Condensed Consolidated Statement of Comprehensive Loss.
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Recently adopted accounting pronouncements.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, “Leases (Topic 842),” which requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. ASU 2016-02, as amended and codified under Topic 842, requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. As required, we adopted Topic 842 on January 1, 2019 and used the modified retrospective approach for all lease arrangements at the beginning or the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts were not adjusted and continue to be reported in accordance our historic accounting under ASC 840.
For leases that commenced before the effective date of Topic 842, we elected the use of permitted practical expedients and did not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We also elected the policy of not recording leases on our Condensed Consolidated Balance Sheet when the leases have terms of 12 months or less, and we elected not to separate nonlease components from lease components and instead account for each separate lease component and the nonlease components associated with that lease component as a single lease component.
The adoption of Topic 842 resulted in the recognition of operating lease liabilities of approximately $33.7 million and operating lease right-to-use assets of approximately $33.3 million as of March 31, 2019, primarily related to operating leases for our diagnostic facilities, based on the present value of lease payments over the lease term. There was no cumulative-effect adjustment to beginning Accumulated deficit on the Condensed Consolidated Balance Sheet. The accounting for our finance leases remains substantially unchanged, as finance lease liabilities and their corresponding right-to-use assets were already recorded on the Condensed Consolidated Balance Sheet under the previous guidance. The adoption of Topic 842 did not have a significant effect on our results of operations or cash flows. Refer to Note 15 for additional disclosures required by Topic 842.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive loss to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019 with the election not to reclassify immaterial amounts of stranded tax effects from accumulated other comprehensive loss to retained earnings.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718),” which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The adoption of ASU 2018-07 on January 1, 2019, did not have a significant impact on our Condensed Consolidated Financial Statements.
Pending accounting pronouncements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this new guidance on our Condensed Consolidated Financial Statements.
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NOTE 3 EARNINGS (LOSS) PER SHARE
Basic loss per share is computed by dividing our net loss by the weighted average number of shares of our common stock par value $0.01 per share (“Common Stock”) outstanding during the period. Shares of Common Stock outstanding under the share lending arrangement entered into in conjunction with the 2025 Notes (as defined in Note 6) are excluded from the calculation of basic and diluted earnings per share because the borrower of the shares is required under the share lending arrangement to refund any dividends paid on the shares lent. Refer to Note 6. For diluted earnings per share, the dilutive impact of stock options and warrants is determined by applying the “treasury stock” method. The dilutive impact of the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes (each, as defined herein and as discussed in Note 6) has been considered using the “if converted” method. For periods in which their effect would be antidilutive, no effect is given to outstanding options, warrants or the potentially dilutive shares issuable pursuant to the 2033 Senior Notes, the 2023 Convertible Notes and the 2025 Notes in the dilutive computation.
A total of 69,072,430 and 65,778,754 potential shares of Common Stock were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2019, respectively, because their inclusion would be antidilutive. A full presentation of diluted earnings per share has not been provided because the required adjustments to the numerator and denominator resulted in diluted earnings per share equivalent to basic earnings per share.
During the three months ended September 30, 2019, no Common Stock options or Common Stock warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of no shares of Common Stock.
During the nine months ended September 30, 2019, an aggregate of 24,877 options and warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 19,232 shares of Common Stock. Of the 24,877 Common Stock options and Common Stock warrants exercised, 5,645 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the applicable option and warrant agreements.
During the three months ended September 30, 2018, an aggregate of 208,000 options and warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 208,000 shares of Common Stock. Of the 208,000 Common Stock options and Common Stock warrants exercised, no shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the applicable option and warrant agreements.
During the nine months ended September 30, 2018, an aggregate of 540,000 options and warrants to purchase shares of our Common Stock were exercised, resulting in the issuance of 353,677 shares of Common Stock. Of the 540,000 Common Stock options and Common Stock warrants exercised, 186,323 shares of Common Stock were surrendered in lieu of a cash payment via the net exercise feature of the applicable option and warrant agreements.
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NOTE 4 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
(In thousands) |
September 30, 2019 |
December 31, 2018 |
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Accounts receivable, net: |
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Accounts receivable |
$ |
$ |
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Less: allowance for doubtful accounts |
( |
) |
( |
) |
|||
$ |
$ |
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Inventories, net: |
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Consumable supplies |
$ |
$ |
|||||
Finished products |
|||||||
Work in-process |
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Raw materials |
|||||||
Less: inventory reserve |
( |
) |
( |
) |
|||
$ |
$ |
||||||
Other current assets and prepaid expenses: |
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Taxes recoverable |
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Other receivables |
|||||||
Prepaid supplies |
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Prepaid insurance |