osur-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2018.

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 001-16537

 

ORASURE TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

Delaware

 

36-4370966

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

 

220 East First Street, Bethlehem, Pennsylvania

 

18015

(Address of Principal Executive Offices)

 

(Zip code)

(610) 882-1820

(Registrant’s Telephone Number, Including Area Code)

 

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.    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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.

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

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 checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of shares of Common Stock, par value $.000001 per share, outstanding as of November 2, 2018: 61,249,469 shares.

 


 

PART I. FINANCIAL INFORMATION

 

 

 

 

Page
No.

 

 

Item 1. Financial Statements (unaudited)

 

 

 

Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

3

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017

4

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

5

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

6

 

 

Notes to the Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

 

 

Item 4. Controls and Procedures

27

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

28

 

 

Item 1A. Risk Factors

28

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

Item 3. Defaults Upon Senior Securities

28

 

 

Item 4. Mine Safety Disclosures

28

 

 

Item 5. Other Information

28

 

 

Item 6. Exhibits

29

 

 

Signatures

30

 

 

 

-2-


 

Item 1.

FINANCIAL STATEMENTS

ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except per share amounts)

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

$

78,146

 

 

$

71,029

 

Restricted cash

 

 

 

 

1,840

 

Short-term investments

 

72,192

 

 

 

83,028

 

Accounts receivable, net of allowance for doubtful accounts of $292 and $471

 

33,284

 

 

 

42,521

 

Inventories

 

19,899

 

 

 

19,343

 

Prepaid expenses

 

1,356

 

 

 

1,658

 

Other current assets

 

3,020

 

 

 

2,486

 

Total current assets

 

207,897

 

 

 

221,905

 

PROPERTY AND EQUIPMENT, net

 

24,395

 

 

 

21,372

 

INTANGIBLE ASSETS, net

 

6,053

 

 

 

8,223

 

GOODWILL

 

19,568

 

 

 

20,083

 

LONG TERM INVESTMENTS

 

41,788

 

 

 

20,690

 

OTHER ASSETS

 

4,606

 

 

 

3,928

 

 

$

304,307

 

 

$

296,201

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

$

8,064

 

 

$

10,228

 

Deferred revenue

 

3,106

 

 

 

1,314

 

Accrued expenses

 

10,250

 

 

 

20,695

 

Total current liabilities

 

21,420

 

 

 

32,237

 

OTHER LIABILITIES

 

4,649

 

 

 

3,932

 

DEFERRED INCOME TAXES

 

1,484

 

 

 

1,951

 

COMMITMENTS AND CONTINGENCIES (Note 8)

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Preferred stock, par value $.000001, 25,000 shares authorized, none issued

 

 

 

 

 

Common stock, par value $.000001, 120,000 shares authorized, 61,237 and 60,662 shares

  issued and outstanding

 

 

 

 

 

Additional paid-in capital

 

398,956

 

 

 

387,931

 

Accumulated other comprehensive loss

 

(12,715

)

 

 

(10,340

)

Accumulated deficit

 

(109,487

)

 

 

(119,510

)

Total stockholders' equity

 

276,754

 

 

 

258,081

 

 

$

304,307

 

 

$

296,201

 

 

See accompanying notes to the consolidated financial statements.

 

-3-


ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

43,450

 

 

$

41,157

 

 

$

120,586

 

 

$

111,771

 

Other

 

 

2,435

 

 

 

1,157

 

 

 

10,911

 

 

 

3,265

 

 

 

 

45,885

 

 

 

42,314

 

 

 

131,497

 

 

 

115,036

 

COST OF PRODUCTS SOLD

 

 

17,340

 

 

 

17,670

 

 

 

52,590

 

 

 

44,605

 

Gross profit

 

 

28,545

 

 

 

24,644

 

 

 

78,907

 

 

 

70,431

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,855

 

 

 

3,228

 

 

 

12,191

 

 

 

9,536

 

Sales and marketing

 

 

7,304

 

 

 

7,162

 

 

 

22,232

 

 

 

21,541

 

General and administrative

 

 

6,529

 

 

 

6,935

 

 

 

28,567

 

 

 

21,777

 

Gain on litigation settlement

 

 

-

 

 

 

-

 

 

 

 

 

 

(12,500

)

 

 

 

17,688

 

 

 

17,325

 

 

 

62,990

 

 

 

40,354

 

Operating income

 

 

10,857

 

 

 

7,319

 

 

 

15,917

 

 

 

30,077

 

OTHER INCOME

 

 

510

 

 

 

113

 

 

 

1,658

 

 

 

676

 

Income before income taxes

 

 

11,367

 

 

 

7,432

 

 

 

17,575

 

 

 

30,753

 

INCOME TAX EXPENSE

 

 

3,271

 

 

 

1,669

 

 

 

7,477

 

 

 

7,121

 

NET INCOME

 

$

8,096

 

 

$

5,763

 

 

$

10,098

 

 

$

23,632

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

$

0.13

 

 

$

0.10

 

 

$

0.17

 

 

$

0.40

 

DILUTED

 

$

0.13

 

 

$

0.09

 

 

$

0.16

 

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHARES USED IN COMPUTING EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC

 

 

61,208

 

 

 

60,090

 

 

 

61,059

 

 

 

58,511

 

DILUTED

 

 

62,606

 

 

 

62,172

 

 

 

62,539

 

 

 

60,569

 

 

See accompanying notes to the consolidated financial statements.

-4-


 

ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

NET INCOME

 

$

8,096

 

 

$

5,763

 

 

$

10,098

 

 

$

23,632

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

1,783

 

 

 

2,570

 

 

 

(2,023

)

 

 

4,882

 

Unrealized loss on marketable securities

 

 

(34

)

 

 

(245

)

 

 

(352

)

 

 

(300

)

COMPREHENSIVE INCOME

 

$

9,845

 

 

$

8,088

 

 

$

7,723

 

 

$

28,214

 

 

See accompanying notes to the consolidated financial statements.

-5-


ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

10,098

 

 

$

23,632

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

12,526

 

 

 

5,213

 

Depreciation and amortization

 

 

5,588

 

 

 

4,589

 

Unrealized foreign currency gain

 

 

(48

)

 

 

(246

)

Deferred income taxes

 

 

(415

)

 

 

(425

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,832

 

 

 

(7,706

)

Inventories

 

 

(649

)

 

 

(4,886

)

Prepaid expenses and other assets

 

 

615

 

 

 

1,616

 

Accounts payable

 

 

(2,179

)

 

 

4,593

 

Deferred revenue

 

 

1,741

 

 

 

(212

)

Accrued expenses and other liabilities

 

 

(11,302

)

 

 

4,193

 

Net cash provided by operating activities

 

 

24,807

 

 

 

30,361

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(135,625

)

 

 

(132,177

)

Proceeds from maturities and redemptions of investments

 

 

124,071

 

 

 

42,613

 

Purchases of property and equipment

 

 

(5,938

)

 

 

(3,462

)

Net cash used in investing activities

 

 

(17,492

)

 

 

(93,026

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

1,684

 

 

 

31,402

 

Repurchase of common stock

 

 

(3,181

)

 

 

(1,234

)

Net cash (used in) provided by financing activities

 

 

(1,497

)

 

 

30,168

 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

 

 

(541

)

 

 

1,317

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

 

5,277

 

 

 

(31,180

)

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

72,869

 

 

 

109,790

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

78,146

 

 

$

78,610

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

14,482

 

 

$

4,317

 

Noncash investing activities (accrued property and equipment purchases)

 

$

592

 

 

$

437

 

Noncash unrealized losses on marketable securities

 

$

(352

)

 

$

(300

)

 

See accompanying notes to the consolidated financial statements.

-6-


 

ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(in thousands, except per share amounts, unless otherwise indicated)

 

1.

The Company

Our business is comprised of two segments: our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies, other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types, and other medical devices. Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets.

Our OSUR diagnostic products include tests that are performed on a rapid basis at the point of care and tests that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities.  We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery or freezing. These cryosurgical products are sold in both professional and over-the-counter (“OTC”) markets in North America, Europe, Central and South America, and Australia.

Our “DNAG” or molecular collection systems business is operated by our subsidiary, DNA Genotek Inc., a company based in Ottawa, Canada.  DNAG’s Oragene® DNA sample collection kit provides an all-in-one system for the collection, stabilization, transportation and storage of DNA from human saliva.  We also sell research use only sample collection products into the microbiome market and we offer our customers a suite of genomics and microbiome services called “GenoFINDTM”, which range from package customization and study design optimization to extraction, analysis and reporting services.  We serve customers worldwide, including many leading research universities and hospitals.

 

2.

Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiary, unless otherwise indicated.

The accompanying consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of our financial position and results of operations for these interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results of operations expected for the full year.

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods.

Investments. We consider all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss.

-7-


The following is a summary of our available-for-sale securities as of September 30, 2018 and December 31, 2017:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed investment certificates

 

$

24,401

 

 

$

 

 

$

 

 

$

24,401

 

Corporate bonds

 

 

90,484

 

 

 

 

 

 

(905

)

 

 

89,579

 

Total available-for-sale securities

 

$

114,885

 

 

$

 

 

$

(905

)

 

$

113,980

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed investment certificates

 

$

22,261

 

 

$

 

 

$

 

 

$

22,261

 

Corporate bonds

 

 

82,010

 

 

 

 

 

 

(553

)

 

 

81,457

 

Total available-for-sale securities

 

$

104,271

 

 

$

 

 

$

(553

)

 

$

103,718

 

At September 30, 2018, maturities of our available-for-sale

   securities were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than one year

 

$

72,758

 

 

$

 

 

$

(566

)

 

$

72,192

 

Greater than one year

 

$

42,127

 

 

$

 

 

$

(339

)

 

$

41,788

 

 

 

Fair Value of Financial Instruments. As of September 30, 2018 and December 31, 2017, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature.

Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

All of our available-for-sale debt securities are measured as Level 1 instruments as of September 30, 2018 and December 31, 2017.

Included in cash and cash equivalents at September 30, 2018 and December 31, 2017, was $30,199 and $40,760 invested in government money market funds and certificates of deposit. Both are measured as Level 1 instruments.

We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of September 30, 2018 and December 31, 2017 was $5,180 and $3,514, respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying consolidated balance sheets.

  

Inventories. Inventories are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis, and are comprised of the following:

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Raw materials

 

$

11,648

 

 

$

10,299

 

Work in process

 

 

429

 

 

 

199

 

Finished goods

 

 

7,822

 

 

 

8,845

 

 

 

$

19,899

 

 

$

19,343

 

-8-


 

 

Property and Equipment. Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. Accumulated depreciation of property and equipment as of September 30, 2018 and December 31, 2017 was $42,109 and $39,379, respectively.

Intangible Assets. Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses, and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of seven to fifteen years. Accumulated amortization of intangible assets as of September 30, 2018 and December 31, 2017 was $20,309 and $18,692, respectively. The change in intangibles from $8,223 as of December 31, 2017 to $6,053 as of September 30, 2018 is a result of $2,009 in amortization expense and $161 in foreign currency translation.

Goodwill. Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

We performed our last annual impairment assessment as of July 31, 2018 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. As of September 30, 2018, we believe no indicators of impairment exist.

The decrease in goodwill from $20,083 as of December 31, 2017 to $19,568 as of September 30, 2018 is a result of foreign currency translation.

Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period.

The computations of basic and diluted earnings per share are as follows:

 

 

Three Months

 

 

Nine Months

 

 

 

Ended September 30,

 

 

Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

8,096

 

 

$

5,763

 

 

$

10,098

 

 

$

23,632

 

Weighted-average shares of common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

61,208

 

 

 

60,090

 

 

 

61,059

 

 

 

58,511

 

Dilutive effect of stock options, restricted stock, and performance stock units

 

 

1,398

 

 

 

2,082

 

 

 

1,480

 

 

 

2,058

 

Diluted

 

 

62,606

 

 

 

62,172

 

 

 

62,539

 

 

 

60,569

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

 

$

0.10

 

 

$

0.17

 

 

$

0.40

 

Diluted

 

$

0.13

 

 

$

0.09

 

 

$

0.16

 

 

$

0.39

 

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For the three months ended September 30, 2018 and 2017, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 304 and 8 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive.  For the nine months ended September 30, 2018 and 2017, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 256 and 238 shares, respectively, were similarly excluded from the computation of diluted earnings per share.

Foreign Currency Translation. The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity.

Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our consolidated statements of income in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income (expense) in our consolidated statements of operations were ($375) and ($638) for the three months ended September 30, 2018 and 2017, respectively.  Net foreign exchange gains (losses) were ($30) and ($1,256) for the nine months ended September 30, 2018 and 2017, respectively.

Accumulated Other Comprehensive Income (Loss). We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.

We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at September 30, 2018 consists of $11,810 of currency translation adjustments and $905 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investment portfolio.  Accumulated other comprehensive loss at December 31, 2017 consists of $9,787 of currency translation adjustments and $553 of net unrealized losses on marketable securities.

Recent Accounting Pronouncements.  In February 2016, the FASB issued ASU 2016-02, Leases, which requires entities to begin recording assets and liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach by recognizing a cumulative effect adjustment to the opening balance of retained earnings. Early adoption is permitted. In July 2018, companies were provided with an option to apply the modified retrospective approach as of either the date of adoption or as of the earliest date presented.  We expect to adopt this guidance effective January 1, 2019 by applying the modified retrospective approach as of the date of adoption with the available practical expedients. We are currently evaluating the effect that ASU 2016-02 may have on our consolidated financial statements and related disclosures and have identified two large facility leases and several smaller equipment leases which would fall under the new accounting guidance.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance related to cash flows presentation and is effective for annual reporting periods beginning after December 15, 2017, subject to early adoption. We adopted ASU 2016-15 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing of the underlying securities. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted. We adopted ASU 2017-08 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting as described in Topic 718. This update is effective for annual periods and interim periods in fiscal years beginning after December 15, 2017 with early adoption permitted. We adopted ASU 2017-09 on January 1, 2018 and this standard did not have a material impact on our consolidated financial statements.

3.

Revenues

Adoption of New Revenue Recognition Standard

In January 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers using the modified retrospective method applied to contracts existing as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

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Upon adoption, we recorded a reduction of $75 to the opening balance of accumulated deficit as of January 1, 2018.  This adjustment is related to the change in revenue recognition associated with our drug testing kit sales.  Sales of our drug testing kits include two performance obligations: sales of the device and laboratory services.  Under this new accounting standard, we adjusted the allocation of the transaction price to the performance obligations and the estimate of unexercised rights (“breakage”) associated with the contracts.  Prior to the adoption of the new guidance, we used the residual value method to allocate the transaction prices.  With the adoption of ASU 2014-09, we allocated transition prices based upon the stand-alone selling price, or fair value method.  This change in methodology also impacted our estimated breakage amount.  

 

The following table summarizes the impact of the new revenue standard adjustment on our opening balance sheet:

 

 

Balance at

 

 

New Revenue

 

 

Balance at

 

 

 

December 31, 2017

 

 

Standard Adjustment

 

 

January 1, 2018

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

1,314

 

 

 

75

 

 

 

1,389

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(119,510

)

 

 

(75

)

 

 

(119,585

)

 

The adoption of this new standard had an immaterial impact on our reported total revenues and operating income, as compared to what would have been reported under the prior standard.  We expect the impact of adoption in future periods to continue to be immaterial.  Our accounting policies under the new standard were applied prospectively and are noted below.

 

Revenue Policies

 

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates.  

 

Our net revenues recorded for sales of the OraQuick® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks.  The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate.  Other customer allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of operations.

 

We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold.

 

Arrangements with multiple-performance obligations.  In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract.  The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price.  The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.  The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services.    

 

Other revenues.  Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement.  Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs.  Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements.  

 

As part of our litigation settlement agreement with Ancestry.com DNA LLC (“Ancestry”) and its contract manufacturer, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva.  The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business.  During the three and nine months ended September 30, 2018, we recorded $1,132 and $4,827, respectively, in royalty income under this agreement.

 

On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. Department of Health and Human Services (“HHS”) Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick® Ebola rapid antigen test.  The three-year, multi-phased grant, with an original expiration date of October 2018, was recently amended and extended through December 31, 2019, included an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory activities.  In September 2015 and July 2017, BARDA exercised options to provide $7,200 and $1,330, respectively, in additional funding for our OraQuick® Ebola test.  Amounts related to this grant are recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred.  During the three and nine

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months ended September 30, 2018, $782 and $2,581, respectively, were recognized in connection with this grant.  During the three and nine months ended September 30, 2017, $386 and $1,260, respectively, were recognized in connection with this grant.

 

In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid Zika test.  The six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and regulatory activities.  In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test.  Funding received under this contract is recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred.  During the three and nine months ended September 30, 2018, $301 and $1,959, respectively, were recognized as other revenue in connection with this grant.  During the three and nine months ended September 30, 2017, $553 and $1,787, respectively, were recognized in connection with this grant.

 

In June 2017, we entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that allows us to offer our OraQuick® HIV self-test at an affordable price in 50 developing countries with funding from the Gates Foundation.  The funding consists of support payments tied to volume of product sold by us and reimbursement of certain related costs.  The funding from the Gates Foundation will be in an aggregate amount not to exceed $20,000 over the four-year term or $6,000 each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a component of product revenue.  During the three and nine months ended September 30, 2018, $840 and $3,571, respectively, of support payments were recognized in product revenue in connection with this agreement. During the three and nine months ended September 30, 2017, $458 related to support payments was recognized in product revenue. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated statements of operations. During the three and nine months ended September 30, 2018, $220 and $1,544, respectively, were recognized in other revenue for reimbursement of certain related costs. During the three and nine months ended September 30, 2017 $218 was recognized in other revenue in connection with this agreement.

 

Deferred Revenue.  We record deferred revenue when funds are received prior to the recognition of the associated revenue.  Deferred revenue as of September 30, 2018 and December 31, 2017 includes customer prepayments of $1,882 and $1,045, respectively.  Deferred revenue as of September 30, 2018 and December 31, 2017 also includes $1,224 and $269, respectively, associated with a long-term contract that has variable pricing based on volume.  The average price over the life of the contract was determined and revenue is recognized at that rate.

 

Financing and Payment.  Our payment terms vary by the type and location of our customer and products or services offered.  Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation.

 

For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer.

 

Practical expedients and exemptions.  Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues.

 

Other than for sales of our OraQuick® In-Home HIV test to the retail trade, we generally do not grant product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred.

 

As a result of the return rights granted to our customers for our OraQuick® In-Home HIV test, we have recorded an estimate of expected returns as a reduction of gross OraQuick® In-Home HIV product revenues in our consolidated statements of operations.  This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns.  As of September 30, 2018 and December 31, 2017, the reserve for sales returns and allowances was $181 and $217, respectively.  If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve.  Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected.

 

Sales commissions are expensed when incurred if the amortization period is one year or less.  These costs are recorded in sales and marketing expense in the consolidated statements of operations.  If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract.

 

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 Revenues by product.  The following table represents total net revenues by product line:

 

 

 

Three Months Ended September 30,

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

OraQuick®

 

$

12,016

 

 

$

16,248

 

 

$

40,813

 

 

$

46,887

 

 

Oragene®

 

 

23,803

 

 

 

17,777

 

 

 

56,259

 

 

 

42,931

 

 

Intercept®

 

 

1,743

 

 

 

1,860

 

 

 

5,811

 

 

 

6,026

 

 

Histofreezer®

 

 

2,199

 

 

 

2,426

 

 

 

6,526

 

 

 

7,676

 

 

Other products

 

 

3,689

 

 

 

2,846

 

 

 

11,177

 

 

 

8,251

 

 

Net product revenues

 

 

43,450

 

 

 

41,157

 

 

 

120,586

 

 

 

111,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty income

 

 

1,132

 

 

 

-

 

 

 

4,827

 

 

 

-

 

 

BARDA funding

 

 

1,083

 

 

 

939

 

 

 

4,540

 

 

 

3,047

 

 

Charitable support reimbursement

 

 

220

 

 

 

218

 

 

 

1,544

 

 

 

218

 

 

Other revenues

 

 

2,435

 

 

 

1,157

 

 

 

10,911

 

 

 

3,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

45,885

 

 

$

42,314

 

 

$

131,497

 

 

$

115,036

 

 

 

Revenues by geographic area.  The following table represents total net revenues by geographic area, based on the location of the customer:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

United States

 

$

36,883

 

 

$

29,063

 

 

 

$

99,860

 

 

$

78,871

 

Europe

 

 

1,982

 

 

 

3,204

 

 

 

 

7,187

 

 

 

8,765

 

Other regions

 

 

7,020

 

 

 

10,047

 

 

 

 

24,450

 

 

 

27,400

 

 

 

$

45,885

 

 

$

42,314

 

 

 

$

131,497

 

 

$

115,036

 

 

Customer and Vendor Concentrations.  One of our customers accounted for 18% and 37% of our accounts receivable as of September 30, 2018 and December 31, 2017, respectively. The same customer accounted for approximately 39% and 27% of our net consolidated revenues for the three and nine months ended September 30, 2018 and 25% and 19% of our net consolidated revenues for the three and nine months ended September 30, 2017, respectively.  Another customer accounted for 11% and 10% of our net consolidated revenues for the three and nine months ended September 30, 2017, respectively.

 

We currently purchase certain products and critical components of our products from sole-supply vendors.  If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations.

4.

Accrued Expenses

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Payroll and related benefits

 

$

6,629

 

 

$

9,265

 

Professional fees

 

 

1,171

 

 

 

1,064

 

Royalties

 

 

107

 

 

 

845

 

Income taxes payable

 

 

 

 

 

6,469

 

Other

 

 

2,343

 

 

 

3,052

 

 

 

$

10,250

 

 

$

20,695

 

 

5.

Credit Facility

On September 30, 2016, we entered into a credit agreement (the “Credit Agreement”) with a commercial bank. The Credit Agreement, as amended on December 20, 2017, provides for revolving extensions of credit in an initial aggregate amount of up to $10,000 (inclusive of a letter of credit subfacility of $2,500).  Obligations under the Credit Agreement are secured by a first priority security interest in certain eligible accounts receivable, 65% of the equity of our subsidiary, DNAG, and certain related assets. There were no borrowings outstanding under the facility at September 30, 2018 and December 31, 2017.

Borrowings under the Credit Agreement are subject to compliance with borrowing base limitations tied to eligibility of accounts receivable. Interest under the Credit Agreement is payable at the London Interbank Offered Rate for one, two, three or six-month loans, as selected by the

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Company, plus 2.50% per year. The Credit Agreement is subject to an unused line fee of 0.375% per year on the unused portion of the commitment under the Credit Agreement during the revolving period. The maturity date of the Credit Agreement is September 30, 2019.

In connection with the Credit Agreement, under certain circumstances, we must comply with a minimum fixed charge coverage ratio of 1.10 to 1.00, measured as of the last day of each fiscal month and for the twelve-fiscal month period ending on such date. As of September 30, 2018 and December 31, 2017, we were in compliance with all applicable covenants in the Credit Agreement.

 

6.

Stockholders’ Equity

Stock-Based Awards

We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options or to issue restricted stock, or redeem performance-based restricted stock units, we issue new shares rather than purchase shares on the open market.

Total compensation cost related to stock options for the nine months ended September 30, 2018 and 2017 was $1,734 and $1,554, respectively.  Net cash proceeds from the exercise of stock options were $1,684 and $31,402 for the nine months ended September 30, 2018 and 2017, respectively. As a result of our net operating loss carryforward position, no actual income tax benefit was realized from stock option exercises during these periods.

Compensation cost of $5,634 and $2,022 related to restricted shares was recognized during the nine months ended September 30, 2018 and 2017, respectively.   In connection with the vesting of restricted shares during the nine months ended September 30, 2018 and 2017, we purchased and immediately retired 164 and 122 shares with aggregate values of $3,181 and $1,234, respectively, in satisfaction of minimum tax withholding obligations.

 

We grant performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of performance-based metrics during a one-year or three-year period, from the date of grant. Assuming achievement of each performance-based metric, the executive must also remain in our service for three years from the grant date. Performance during the one-year period is based on a one-year earnings per share or income before income taxes target. If the one-year target is achieved, the PSUs will then vest three years from grant date. Performance during the three-year period will be based on achievement of a three-year compound annual growth rate for consolidated product revenues. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested. Upon grant of the PSUs, we recognize compensation expense related to these awards based on assumptions as to what percentage of each target will be achieved. The Company evaluates these target assumptions on a quarterly basis and adjusts compensation expense related to these awards, as appropriate.

Compensation cost of $5,158 and $1,637 related to PSUs was recognized during the nine months ended September 30, 2018 and 2017, respectively.   

 

Modification of Grants

Stock compensation costs for the three and nine months ended September 30, 2018 include the additional expense associated with modifications of existing grants held by our retiring President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).  These additional costs were $8,039 during the nine months ended September 30, 2018 and is included in general and administrative expenses in the accompanying consolidated statement of income.

 

Stock Repurchase Program

On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 of our outstanding common shares. No shares were purchased and retired during the nine months ended September 30, 2018 and 2017.   

7.

Income Taxes

During the three and nine months ended September 30, 2018, we recorded tax expense of $3,271 and $7,477, respectively.  During the three and nine months ended September 30, 2017, we recorded tax expense of $1,669 and $7,121, respectively.

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Tax expense reflects taxes due to Canadian taxing authorities and the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting and tax purposes, and net operating loss and tax credit carryforwards. Tax expense in the first nine months of 2017 also includes the additional Canadian taxes due as a result of the $12,500 gain from the settlement of our patent infringement and breach of contract litigation against Ancestry.com DNA LLC and its contract manufacturer.

The significant components of our total deferred tax liability as of September 30, 2018 and December 31, 2017 relate to the tax effects of the basis difference between the intangible assets acquired in the DNAG acquisition for financial reporting and tax purposes.

In 2008, we established a full valuation allowance against our U.S. deferred tax asset. Management believes the full valuation allowance is still appropriate at both September 30, 2018 and December 31, 2017 since the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. federal or state deferred income tax expense or benefit was recorded for the three and nine-month periods ended September 30, 2018 and 2017.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”) that instituted fundamental changes to the taxation on multinational corporations.  Provisions of the Tax Act, which was effective January 1, 2018, include a permanent reduction in the corporate tax rate to 21% and a one-time transition tax imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates.  Given that the U.S. entity has a full valuation allowance against its deferred tax assets and is generating net operating losses (“NOLs”), these tax provisions do not impact our financial results.

The Tax Act also imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder effective in 2018. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying tangible property. Although we are subject to GILTI, the computation of GILTI is still subject to interpretation and additional clarifying guidance is expected. Tax law ordering rules require that NOLs be utilized first to offset any GILTI tax liability before the use of any other tax attributes.  We have sufficient NOLs to offset our projected 2018 GILTI income inclusion.

As a result of the complex impact of the Tax Act, the SEC provided guidance under Staff Accounting Bulletin No. 118 (“SAB 118”) that allows the Company to record provisional amounts as of December 31, 2017 for the impact of the Tax Act, provided that the provisional amounts can be reasonably determined, with the requirement that the final accounting be completed in a period not to exceed one year from the date of enactment.  During the three and nine months ended September 30, 2018, there were no adjustments made to the provisional amounts that were recorded under SAB 118 as of December 31, 2017 and these amounts remain provisional at September 30, 2018.   

8.

Commitments and Contingencies

 Litigation

From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on our future financial position or results of operations.

 

9.

Transition Costs

In January 2018, we announced the retirement of our President and CEO and our CFO and Chief Operating Officer.  Stephen S. Tang, Ph.D., who served as Chairman of the Board of Directors (the “Board”), was appointed as the Company’s new President and CEO, effective as of April 1, 2018.  Dr. Tang replaced Douglas A. Michels, who retired as President and CEO, and as a member of the Board, on March 31, 2018.  In addition, Roberto Cuca was appointed as the Company’s new CFO, effective June 8, 2018.  Mr. Cuca replaced Ronald H. Spair, our former CFO and Chief Operating Officer, who retired on that same date.  Charges associated with these transitions were $8,628 during the nine months ended September 30, 2018 and are included in general and administrative expenses in the accompanying consolidated statement of income.  These charges primarily reflect non-cash charges associated with modifications to existing stock grants held by the retiring executives and expenses associated with the onboarding of the Company’s new President and CEO.  No transition costs were recorded during the three months ended September 30, 2018.

10.

Business Segment Information

Our business is comprised of two segments: our “OSUR” business consists of the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary technologies,  other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types, and medical devices used to remove benign skin lesions by cryotherapy or “freezing.” Our molecular collections systems or “DNAG” business consists of the manufacture and sale of specimen collection kits that are used to collect, stabilize, transport and store samples of genetic material for molecular testing in the consumer genetic, clinical genetic, academic research, pharmacogenomics, personalized medicine, microbiome and animal genetics markets.

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We organized our operating segments according to the nature of the products included in those segments.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2).  We evaluate performance of our operating segments based on revenue and operating income.  We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments.  Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated.

The following table summarizes operating segment information for the three and nine months ended September 30, 2018 and 2017, and asset information as of September 30, 2018 and December 31, 2017:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OSUR

 

$

19,258

 

 

$

23,762

 

 

$

65,623

 

 

$

69,720

 

DNAG

 

 

26,627

 

 

 

18,552

 

 

 

65,874

 

 

 

45,316

 

Total

 

$

45,885

 

 

$

42,314

 

 

$

131,497

 

 

$

115,036

 

Operating income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OSUR

 

$

(2,599

)

 

$

(453

)

 

$

(14,420

)

 

$

(235

)

DNAG

 

 

13,456

 

 

 

7,772

 

 

 

30,337

 

 

 

30,312

 

Total

 

$

10,857

 

 

$

7,319

 

 

$

15,917

 

 

$

30,077

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OSUR

 

$

879

 

 

$

855

 

 

$

2,883

 

 

$

2,189

 

DNAG

 

 

963

 

 

 

843

 

 

 

2,705

 

 

 

2,400

 

Total

 

$

1,842

 

 

$

1,698

 

 

$

5,588

 

 

$

4,589

 

Capital expenditures: