Quotient Limited
Quotient Ltd (Form: 10-Q, Received: 02/07/2017 16:19:30)

 

 

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 December 31, 2016

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 001-36415

 

QUOTIENT LIMITED

(Exact name of registrant as specified in its charter)

 

 

Jersey, Channel Islands

 

Not Applicable

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

Pentlands Science Park

Bush Loan, Penicuik, Midlothian

EH26 0PZ, United Kingdom

 

Not Applicable

(Address of principal executive offices)

 

(Zip Code)

001-44-131-445-6159

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer 

 

Accelerated filer 

  

Non-accelerated filer

(Do not check if a smaller
reporting company)

 

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       No  

As of February 3, 2017 there were 29,511,775 Ordinary Shares, nil par value, of Quotient Limited outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

Page

 

PART I – FINANCIAL INFORMATION

  

 

3

 

 

Item 1. Financial Statements

  

 

3

 

 

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

  

 

18

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

 

32

 

 

Item 4. Controls and Procedures

  

 

33

 

 

PART II – OTHER INFORMATION

  

 

33

 

 

Item 1. Legal Proceedings

  

 

33

 

 

Item 1A. Risk Factors

  

 

33

 

 

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

  

 

34

 

 

Item 3. Defaults Upon Senior Securities

  

 

34

 

 

Item 4. Mine Safety Disclosures

  

 

34

 

 

Item 5. Other Information

  

 

34

 

 

Item 6. Exhibits

  

 

34

 

 

Signatures

 

 

35

 

 

 

 

- i -


 

Cautionary note regarding forward-looking statements

This Quarterly Report on Form 10-Q, and exhibits thereto, contains estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. The forward-looking statements are contained principally in Part I, Item 2: “Management’s Discussion and Analysis of Final Condition and Results of Operations” and are also contained elsewhere in this Quarterly Report. Forward-looking statements can be identified by words such as “strategy,” “objective,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” “might,” “design” and other similar expressions, although not all forward-looking statements contain these identifying words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain, and are subject to numerous known and unknown risks and uncertainties.

Forward-looking statements include statements about:

 

the development, regulatory approval and commercialization of MosaiQ TM ;

 

the design of blood grouping and disease screening capabilities of MosaiQ TM and the benefits of MosaiQ TM for both customers and patients;

 

future demand for and customer adoption of MosaiQ TM , the factors that we believe will drive such demand and our ability to address such demand;

 

our expected profit margins for MosaiQ TM ;

 

the size of the market for MosaiQ TM ;

 

the regulation of MosaiQ TM by the U.S. Food and Drug Administration, or the FDA, or other regulatory bodies, or any unanticipated regulatory changes or scrutiny by such regulators;

 

future plans for our conventional reagent products;

 

the status of our future relationships with customers, suppliers, and regulators relating to our conventional reagent products;

 

future demand for our conventional reagent products and our ability to meet such demand;

 

our ability to manage the risks associated with international operations;

 

anticipated changes, trends and challenges in our business and the transfusion diagnostics market;

 

the effects of competition;

 

the expected outcome or impact of litigation;

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

our anticipated cash needs and our expected sources of funding, including the achievement of product development milestones, and our estimates regarding our capital requirements and capital expenditures; and

 

our plans for executive and director compensation for the future.

You should also refer to the various factors identified in this and other reports filed by us with the Securities and Exchange Commission, including but not limited to those discussed in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2016 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

- 1 -


 

Where you can find more information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You can inspect, read and copy these reports, proxy statements and other information at the Securities and Exchange Commission’s Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the Securities and Exchange Commission’s Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.

We make available free of charge at www.quotientbd.com (in the “Investors” section) copies of materials we file with, or furnish to, the Securities and Exchange Commission. By referring to our corporate website, www.quotientbd.com , we do not incorporate any such website or its contents into this Quarterly Report on Form 10-Q.

 

 

- 2 -


 

PART I – FINANCI AL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(Expressed in thousands of U.S. Dollars — except for share data and per share data)

 

 

 

December 31,

2016

 

 

March 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,328

 

 

$

44,100

 

Short-term investments

 

 

30,009

 

 

 

 

Trade accounts receivable, net

 

 

1,639

 

 

 

2,269

 

Inventories

 

 

13,168

 

 

 

12,584

 

Prepaid expenses and other current assets

 

 

3,056

 

 

 

2,780

 

Total current assets

 

 

62,200

 

 

 

61,733

 

Property and equipment, net

 

 

60,905

 

 

 

57,115

 

Intangible assets, net

 

 

776

 

 

 

902

 

Total assets

 

$

123,881

 

 

$

119,750

 

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,463

 

 

$

7,286

 

Accrued compensation and benefits

 

 

2,799

 

 

 

3,294

 

Accrued expenses and other current liabilities

 

 

12,129

 

 

 

9,180

 

Current portion of long-term debt

 

 

 

 

 

1,000

 

Current portion of lease incentive

 

 

415

 

 

 

439

 

Current portion of capital lease obligation

 

 

1,363

 

 

 

152

 

Total current liabilities

 

 

26,169

 

 

 

21,351

 

Long-term debt, less current portion

 

 

80,063

 

 

 

27,910

 

Lease incentive, less current portion

 

 

933

 

 

 

1,316

 

Capital lease obligation, less current portion

 

 

188

 

 

 

1,723

 

Defined benefit pension plan obligation

 

 

4,597

 

 

 

4,502

 

7% Cumulative redeemable preference shares

 

 

17,013

 

 

 

16,225

 

Total liabilities

 

 

128,963

 

 

 

73,027

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity (deficit)

 

 

 

 

 

 

 

 

Ordinary shares (nil par value) 29,511,775 and 25,408,950 issued and outstanding at

   December 31, 2016 and March 31, 2016 respectively

 

 

172,288

 

 

 

155,914

 

Additional paid in capital

 

 

14,753

 

 

 

11,664

 

Accumulated other comprehensive loss

 

 

(19,130

)

 

 

(12,623

)

Accumulated deficit

 

 

(172,993

)

 

 

(108,232

)

Total shareholders' equity (deficit)

 

 

(5,082

)

 

 

46,723

 

Total liabilities and shareholders' equity (deficit)

 

$

123,881

 

 

$

119,750

 

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

- 3 -


 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(Expressed in thousands of U.S. Dollars — except for share data and per share data)

 

 

 

Quarter ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

4,841

 

 

$

4,354

 

 

$

15,401

 

 

$

13,477

 

Other revenues

 

 

 

 

 

 

 

 

1,300

 

 

 

 

Total revenue

 

 

4,841

 

 

 

4,354

 

 

 

16,701

 

 

 

13,477

 

Cost of revenue

 

 

(2,602

)

 

 

(2,225

)

 

 

(8,454

)

 

 

(7,100

)

Gross profit

 

 

2,239

 

 

 

2,129

 

 

 

8,247

 

 

 

6,377

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

(1,836

)

 

 

(918

)

 

 

(4,367

)

 

 

(2,350

)

Research and development, net of government grants

 

 

(17,183

)

 

 

(6,931

)

 

 

(43,479

)

 

 

(22,122

)

General and administrative expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense in respect of share options and

   management equity incentives

 

 

(1,108

)

 

 

(566

)

 

 

(3,089

)

 

 

(1,380

)

Other general and administrative expenses

 

 

(4,542

)

 

 

(6,493

)

 

 

(13,633

)

 

 

(16,768

)

Total general and administrative expense

 

 

(5,650

)

 

 

(7,059

)

 

 

(16,722

)

 

 

(18,148

)

Total operating expense

 

 

(24,669

)

 

 

(14,908

)

 

 

(64,568

)

 

 

(42,620

)

Operating loss

 

 

(22,430

)

 

 

(12,779

)

 

 

(56,321

)

 

 

(36,243

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,168

)

 

 

(1,134

)

 

 

(6,552

)

 

 

(2,992

)

Change in financial liability for share warrants

 

 

 

 

 

3,830

 

 

 

 

 

 

15,857

 

Other, net

 

 

(4,568

)

 

 

305

 

 

 

(1,888

)

 

 

(987

)

Other income (expense), net

 

 

(8,736

)

 

 

3,001

 

 

 

(8,440

)

 

 

11,878

 

Loss before income taxes

 

 

(31,166

)

 

 

(9,778

)

 

 

(64,761

)

 

 

(24,365

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(31,166

)

 

$

(9,778

)

 

$

(64,761

)

 

$

(24,365

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of effective portion of foreign currency cash flow

   hedges

 

$

29

 

 

$

(89

)

 

$

(310

)

 

$

120

 

Foreign currency gain (loss)

 

 

(594

)

 

 

(1,491

)

 

 

(6,326

)

 

 

(297

)

Provision for pension benefit obligation

 

 

46

 

 

 

 

 

 

129

 

 

 

(1,747

)

Other comprehensive loss, net

 

 

(519

)

 

 

(1,580

)

 

 

(6,507

)

 

 

(1,924

)

Comprehensive loss

 

$

(31,685

)

 

$

(11,358

)

 

$

(71,268

)

 

$

(26,289

)

Net loss available to ordinary shareholders - basic and diluted

 

$

(31,166

)

 

$

(9,778

)

 

$

(64,761

)

 

$

(24,365

)

Loss per share - basic and diluted

 

$

(1.06

)

 

$

(0.48

)

 

$

(2.34

)

 

$

(1.33

)

Weighted-average shares outstanding - basic and diluted

 

 

29,508,330

 

 

 

20,398,132

 

 

 

27,689,009

 

 

 

18,284,708

 

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

- 4 -


 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) (unaudited)

(Expressed in thousands of U.S. Dollars — except for share data)

 

 

 

Ordinary shares

 

 

Additional paid in

 

 

Accumulated

Other Comprehensive

 

 

Accumulated

 

 

Total Shareholders'

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

Loss

 

 

Deficit

 

 

Equity (Deficit)

 

March 31, 2016

 

 

25,408,950

 

 

$

155,914

 

 

$

11,664

 

 

$

(12,623

)

 

$

(108,232

)

 

$

46,723

 

Issue of Shares , net of Issue Costs of

  $1,348

 

 

3,220,000

 

 

 

16,362

 

 

 

 

 

 

 

 

 

 

 

 

16,362

 

Exercise of pre-funded warrants

 

 

850,000

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Issue of shares upon exercise of incentive

   share options and vesting of RSUs

 

 

32,825

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(64,761

)

 

 

(64,761

)

Change in the fair value of the effective

   portion of foreign currency cash

   flow hedges

 

 

 

 

 

 

 

 

 

 

 

(310

)

 

 

 

 

 

(310

)

Foreign currency gain (loss) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investment nature intra-

   entity balances

 

 

 

 

 

 

 

 

 

 

 

6,281

 

 

 

 

 

 

6,281

 

Retranslation of foreign entities

 

 

 

 

 

 

 

 

 

 

 

(12,607

)

 

 

 

 

 

(12,607

)

Provision for pension benefit obligation

 

 

 

 

 

 

 

 

 

 

 

129

 

 

 

 

 

 

129

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(6,507

)

 

 

 

 

 

(6,507

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,089

 

 

 

 

 

 

 

 

 

3,089

 

December 31, 2016

 

 

29,511,775

 

 

 

172,288

 

 

 

14,753

 

 

 

(19,130

)

 

 

(172,993

)

 

 

(5,082

)

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

- 5 -


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Expressed in thousands of U.S. Dollars)

 

 

 

Nine months ended

December 31,

 

 

 

2016

 

 

2015

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(64,761

)

 

$

(24,365

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,029

 

 

 

1,573

 

Share-based compensation

 

 

3,089

 

 

 

1,380

 

Amortization of lease incentive

 

 

(323

)

 

 

(327

)

Swiss pension obligation

 

 

489

 

 

 

 

Amortization of deferred debt issue costs

 

 

6,096

 

 

 

1,250

 

Accrued preference share dividends

 

 

788

 

 

 

788

 

Change in financial liability for share warrants

 

 

 

 

 

(15,857

)

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

 

246

 

 

 

307

 

Inventories

 

 

(1,310

)

 

 

(3,249

)

Accounts payable and accrued liabilities

 

 

6,660

 

 

 

(2,675

)

Accrued compensation and benefits

 

 

(85

)

 

 

(803

)

Other assets

 

 

(700

)

 

 

(725

)

Net cash used in operating activities

 

 

(42,782

)

 

 

(42,703

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Increase in short-term investments

 

 

(30,009

)

 

 

 

Purchase of property and equipment

 

 

(15,206

)

 

 

(19,832

)

Purchase of intangible assets

 

 

(65

)

 

 

(64

)

Net cash used in investing activities

 

 

(45,280

)

 

 

(19,896

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from (repayment of) finance leases

 

 

(108

)

 

 

55

 

Proceeds from drawdown of new debt

 

 

84,000

 

 

 

15,500

 

Issue costs of new debt

 

 

(5,493

)

 

 

(703

)

Repayment of debt

 

 

(33,450

)

 

 

(500

)

Proceeds from issuance of ordinary shares

 

 

16,374

 

 

 

34,553

 

Net cash generated from financing activities

 

 

61,323

 

 

 

48,905

 

Effect of exchange rate fluctuations on cash and cash equivalents

 

 

(3,033

)

 

 

230

 

Change in cash and cash equivalents

 

 

(29,772

)

 

 

(13,464

)

Beginning cash and cash equivalents

 

 

44,100

 

 

 

37,525

 

Ending cash and cash equivalents

 

$

14,328

 

 

$

24,061

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

 

Interest paid

 

$

1,687

 

 

$

1,463

 

 

The accompanying notes form an integral part of these consolidated financial statements.

 

 

- 6 -


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. Dollars — except for share data and per share data, unless otherwise stated)

 

Note 1. Description of Business and Basis of Presentation

Description of Business

The principal activity of Quotient Limited (the “Company”) and its subsidiaries (the “Group”) is the development, manufacture and sale of products for the global transfusion diagnostics market. Products manufactured by the Group are sold to hospitals, blood banking operations and other diagnostics companies worldwide.

Basis of Presentation

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are unaudited. In accordance with those rules and regulations, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The March 31, 2016 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the audited consolidated financial statements at and for the year ended March 31, 2016 included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the nine month period ended December 31, 2016 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 2017 and any future period.

The Company has incurred net losses and negative cash flows from operations in each year since it commenced operations in 2007 and had an accumulated deficit of $ 173.0 million as of December 31, 2016. At December 31, 2016, the Company had cash holdings and short-term investments of $ 44.3 million. The Company has expenditure plans over the next twelve months that exceed its current cash and short-term investment balances, raising substantial doubt about its ability to continue as a going concern. The Company expects to fund its operations in the near term, including the continued development of MosaiQ TM to commercialization, from a combination of funding sources, including through the use of existing cash and short-term investment balances and the issuance of new equity, debt or other securities. The Company’s Directors are confident in the availability of these funding sources and accordingly have prepared the financial statements on the going concern basis . However, there can be no assurance the Company will be able to obtain adequate financing when necessary and the terms of any financings may not be advantageous to the Company and may result in dilution to its shareholders.

 

 

Note 2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2016 and March 31, 2016, all cash and cash equivalents comprised readily accessible cash balances except for $5.0 million at December 31, 2016 held in a cash reserve account pursuant to the indenture governing the 12% Senior Secured Notes due 2023 (the “Notes”) and $299 and $317 at December 31, 2016 and March 31, 2016 held in a restricted account as security for the property rental obligations of the Company’s Swiss subsidiary.

Short-term Investments

Short-term investments represent investments in a money-market fund which is valued daily and which has no minimum notice period for withdrawals. The fund is invested in 89 holdings and the creditworthiness requirement for individual investment holdings is a minimum of an A rating from a leading credit-rating agency. The Company records the value of its investment in the fund based on the quoted value of the fund at the balance sheet date. Unrealized gains or losses are recorded in accumulated other comprehensive loss and are transferred to the statement of comprehensive loss when they are realized.

- 7 -


 

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. Movements in the allowance for doubtful accounts are recorded in General and administrative expenses. The Company reviews its trade receivables to identify specific customers with known disputes or collectability issues. In addition, the Company maintains an allowance for all other receivables not included in the specific reserve by applying specific rates of projected uncollectible receivables to the various aging categories. In determining these percentages, the Company analyzes its historical collection experience, customer credit-worthiness, current economic trends and changes in customer payment terms.

Concentration of Credit Risks and Other Uncertainties

The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Derivative instruments, consisting of foreign exchange contracts, and short-term investments are stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the foreign exchange contracts consist of large financial institutions of high credit standing. The short-term investments are invested in a fund which is invested in 89 holdings and the creditworthiness requirement for individual investment holdings is a minimum of an A rating from a leading credit-rating agency.

The Company’s main financial institutions for banking operations hold all of the Company’s cash and cash equivalents as of December 31, 2016 and at March 31, 2016. The Company’s accounts receivable are derived from net revenue to customers and distributors located in the United States and other countries. The Company performs credit evaluations of its customers’ financial condition. The Company provides reserves for potential credit losses but has not experienced significant losses to date. There was one customer whose accounts receivable balance represented 10% or more of total accounts receivable, net, as of December 31, 2016 and March 31, 2016. This customer represented 33% and 58% of the accounts receivable balances as of December 31, 2016 and March 31, 2016, respectively.

The Company currently sells products through its direct sales force and through third-party distributors. There was one direct customer that accounted for 10% or more of total product sales for the nine month periods ended December 31, 2016 and December 31, 2015. This customer represented 59% of total product sales for the nine month period December 31, 2016 and 56% for the nine month period ended December 31, 2015.

Fair Value of Financial Instruments

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company’s valuation techniques used to measure fair value maximized the use of observable inputs and minimized the use of unobservable inputs. The fair value hierarchy is based on the following three levels of inputs:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

See Note 6, “Commitment and Contingencies,” for information and related disclosures regarding the Company’s fair value measurements.

Inventory

Inventory is stated at the lower of standard cost (which approximates actual cost) or market, with cost determined on the first-in-first-out method. Accordingly, allocation of fixed production overheads to conversion costs is based on normal capacity of production. Abnormal amounts of idle facility expense, freight, handling costs and spoilage are expensed as incurred and not included in overhead. No stock-based compensation cost was included in inventory as of December 31, 2016 and March 31, 2016.

- 8 -


 

Property and Equipment

Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets as follows:

Land—not depreciated.

Plant, machinery and equipment—4 to 25 years;

Leasehold improvements—the shorter of the lease term or the estimated useful life of the asset.

Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property and equipment, are expensed as incurred.

Intangible Assets and Goodwill

Intangible assets related to product licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, on a straight-line basis as follows:

Customer relationships—5 years

Brands associated with acquired cell lines—40 years

Product licenses—10 years

Other intangibles assets—7 years

The Company reviews its intangible assets for impairment and conducts an impairment review when events or circumstances indicate the carrying value of a long-lived asset may be impaired by estimating the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists. No impairment losses have been recorded in either of the nine month periods ended December 31, 2016 or December 31, 2015.

Revenue Recognition

The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Customers have no right of return except in the case of damaged goods. The Company has not experienced any significant returns of its products. Shipping and handling costs are expensed as incurred and included in cost of product sales. In those cases where the Company bills shipping and handling costs to customers, the amounts billed are classified as revenue.

The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services. The terms of these arrangements may include non-refundable upfront payments, milestone payments, other contingent payments and royalties on any product sales derived on collaboration. Up-front fees received in connection with collaborative agreements are deferred upon receipts, are not considered a separate unit of accounting and are recognized as revenues over the relevant performance periods. Revenues related to research and development services included in a collaboration agreement are recognized as research and services are performed over the related performance periods for each contract. A payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved.

In June 2013, the Company entered into an agreement with Ortho-Clinical Diagnostics Inc. (“OCD”) to develop a range of rare antisera products. This agreement was amended in August 2016. Under the terms of the amended agreement, the Company is entitled to receive a milestone payment of $1,300 related to the completion of the CE marking of the products for use on OCD’s automation platforms, milestone payments totaling $1,400 upon the receipt of FDA approval of the rare antisera products and a milestone payment of $1,500 upon the updating of the FDA approval to cover use of the products on OCD’s automation platforms. In the quarter ended September 30, 2016, the Company recognized milestone revenue of $1,300 related to the completion of the CE marking of the products for use on OCD’s automation platforms.

In January 2015, the Company entered into a supply and distribution agreement with OCD related to the commercialization and distribution of certain MosaiQ TM products. Under the terms of this agreement, the Company is entitled to receive milestone payments upon CE-mark and FDA approval, as well as upon the first commercial sale of the relevant MosaiQ TM  products by OCD within the European Union, United States and within any country outside of these two regions. The Company has concluded that as each of these milestones require significant levels of development work to be undertaken and there was no certainty at the start of the projects that

- 9 -


 

the development work would be successful, these milestones are substantive and should be accounted for under the milestone method of revenue recognition.

Research and Development

Research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These costs include direct and research-related overhead expenses. The Company expenses research and development costs, including the expenses for research under collaborative agreements, as such costs are incurred. Where government grants or tax credits are available, the income concerned is included as a credit against the related expense.

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Comprehensive Loss.

In determining fair value of the stock-based compensation payments, the Company uses the Black–Scholes model and a single option award approach for share options and a barrier option pricing model for multi-year performance based restricted share units (“MRSUs”), both of which require the input of subjective assumptions. These assumptions include: the fair value of the underlying share, estimating the length of time employees will retain their awards before exercising them (expected term), the estimated volatility of the Company’s ordinary shares price over the expected term (expected volatility), risk-free interest rate (interest rate), expected dividends and the number of shares subject to awards that will ultimately not complete their vesting requirements (forfeitures).

Pension Obligation

The Company maintains a pension plan covering employees in Switzerland pursuant to the requirements of Swiss pension law. Certain aspects of the plan require that it be accounted for as a defined benefit plan pursuant to Accounting Standards Codification Topic, 715 Compensation – Retirement Benefits (“ASC 715”). The Company recognizes an asset for the plan’s overfunded status or a liability for the plan’s underfunded status in its Consolidated Balance Sheets. Additionally, the Company measures the plan’s assets and obligations that determine its funded status as of the end of the year and recognizes the change in the funded status within ‘‘Accumulated other comprehensive loss’’.

The Company uses an actuarial valuation to determine its pension benefit costs and credits. The amounts calculated depend on a variety of key assumptions, including discount rates and expected return on plan assets. Details of the assumptions used to determine the net funded status are set out in the notes to the Company’s March 31, 2016 financial statements. The Company’s pension plan assets are assigned to their respective levels in the fair value hierarchy in accordance with the valuation principles described in the ‘‘Fair Value of Financial Instruments’’ section above.

The Swiss pension arrangements were in place at March 31, 2015, but given the limited number of plan members, the accounting provisions of ASC 715 were not applied in the year ended March 31, 2015 or in the amounts originally reported for the nine month period ended December 31, 2015. During the quarter ended March 31, 2016, the Company began to apply the accounting provisions of ASC 715 for its Swiss pension arrangements to account for the arrangements as a defined benefit plan. The Company’s Condensed Consolidated Statements of Comprehensive Loss have been adjusted for the nine month period ended December 31, 2015 to reflect the adoption of the provisions of ASC 715 with effect from April 1, 2015. The impact of this adjustment is the inclusion of a pension benefit obligation provision amounting to $1,747 in Other comprehensive income (loss) for the nine month period ended December 31, 2015 where an amount for this provision was not previously reported. Therefore, there are consequent changes of $1,747 to Other comprehensive income (loss), net and Comprehensive loss for the previously reported nine month period. This adjustment had no impact on the results of operations or liquidity for the nine month period ended December 31, 2015.

Debt Issuance Costs

On September 30, 2015, the Company elected to adopt early the requirements of Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.

 

 

- 10 -


 

Note 3. Intangible Assets

 

 

 

 

December 31, 2016

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net   Carrying

Amount

 

 

Weighted

Average

Remaining

Useful   Life

 

Customer relationships

 

$

2,429

 

 

$

(2,429

)

 

$

 

 

 

 

Brands associated with acquired cell lines

 

 

501

 

 

 

(117

)

 

 

384

 

 

30.7 years

 

Product licenses

 

 

704

 

 

 

(312

)

 

 

392

 

 

5.6 years

 

Other intangibles

 

 

158

 

 

 

(158

)

 

 

 

 

 

 

Total

 

$

3,792

 

 

$

(3,016

)

 

$

776

 

 

18.0 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net   Carrying

Amount

 

 

Weighted

Average

Remaining

Useful   Life

 

Customer relationships

 

$

2,829

 

 

$

(2,829

)

 

$

 

 

 

 

Brands associated with acquired cell lines

 

 

583

 

 

 

(125

)

 

 

458

 

 

31.4 years

 

Product licenses

 

 

748

 

 

 

(304

)

 

 

444

 

 

5.9 years

 

Other intangibles

 

 

184

 

 

 

(184

)

 

 

 

 

 

 

Total

 

$

4,344

 

 

$

(3,442

)

 

$

902

 

 

18.9 years

 

 

 

Note 4. Debt

Long-term debt comprises:

 

 

 

December 31,

2016

 

 

March 31,

2016

 

Total debt

 

$

84,000

 

 

$

30,000

 

Less current portion

 

 

 

 

 

(1,000

)

Long-term debt

 

$

84,000

 

 

$

29,000

 

Fee due on final repayment of facility

 

 

 

 

 

1,350

 

Deferred debt costs, net of amortization

 

 

(3,937

)

 

 

(1,534

)

Fair value of associated share warrant, net of amortization

 

 

 

 

 

(906

)

 

 

$

80,063

 

 

$

27,910

 

 

The Company’s debt at December 31 2016 comprises the 12% Senior Secured Notes due 2023 issued on October 14, 2016. On that date, the Company completed the private placement of up to $120 million aggregate principal amount of the Notes and entered into an indenture governing the Notes with the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee and collateral agent. The obligations of the Company under the indenture and the Notes are unconditionally guaranteed on a secured basis by the guarantors, which include all the Company’s subsidiaries, and the indenture governing the Notes contains customary events of default. The Company and its subsidiaries must also comply with certain customary affirmative and negative covenants, including a requirement to maintain six-months of interest in a cash reserve account maintained with the collateral agent.

The Company issued $84 million aggregate principal amount of the Notes on October 14, 2016 and, so long as no event of default has occurred, the Company will issue an additional $36 million aggregate principal amount of the Notes upon public announcement of field trial results for the MosaiQ™ IH Microarray that demonstrates greater than 99% concordance for the detection of blood group antigens and greater than 95% concordance for the detection of blood group antibodies when compared to predicate technologies for a pre-defined set of blood group antigens and antibodies. The Company paid $5 million of the net proceeds into the cash reserve account maintained with the collateral agent under the terms of the indenture.

Interest on the Notes accrues at a rate of 12% per annum and is payable semi-annually on April 15 and October 15 of each year commencing on April 15, 2017. Commencing on April 15, 2019, the Company will also pay an installment of principal of the Notes on each April 15 and October 15 until October 15, 2023 pursuant to a fixed amortization schedule.

In connection with the offering on October 14, 2016, the Company entered into royalty rights agreements, pursuant to which the Company sold to the note purchasers in the offering, the right to receive an aggregate payment equal to 2.0% of the aggregate net sales

- 11 -


 

of MosaiQ™ instruments and consumables made in the donor testing market in the United States and the European Union . The royalty will be payable beginning on the date that the Company or its affiliates enters into a contract for the sale of MosaiQ™ instruments or consumables in the donor testing market in the European Union or the United States and will end on the last day of the calendar quarter in which t he eighth anniversary of the first contract date occurs . The royalty rights agreements are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 “ Debt” to be treated as debt. The estimated future cash outflows under the royalty rights agreements have been combined with the Notes issuance costs and interest payable to calculate the effective interest rate of the Notes and will be expensed through interest expenses using the effective interest rate metho d over the term of the Notes and royalty rights agreements. Estimating the future cash outflows under the royalty rights agreements requires the Company to make certain estimates and assumptions about future sales of MosaiQ TM products. The se estimates of t he magnitude and timing of MosaiQ TM sales are subject to significant variability due to the current status of development of MosaiQ TM products, and thus are subject to significa nt uncertainty. Therefore, the estimates are likely to change as the Company ga ins experience of marketing MosaiQ TM , which may result in future adjustments to the accretion of the interest expense and amortized cost based carrying value of the Notes.

 

The Company’s debt on March 31, 2016 comprised $30,000 drawn down under a secured credit facility agreement with MidCap Financial Trust. The facility bore interest at LIBOR plus 6.7%. The LIBOR rate applicable was the higher of the actual market rate from time to time or 2.0%. Using the proceeds of the Notes issued on October 14, 2016, the Company repaid in full on that day its borrowings under the secured credit facility with MidCap Financial Trust, which amounted to $33.5 million including fees and expenses .

At December 31, 2016, the outstanding debt was repayable as follows:

 

Within 1 year

 

$

 

Between 1 and 2 years

 

 

 

Between 2 and 3 years

 

 

13,440

 

Between 3 and 4 years

 

 

14,280

 

Between 4 and 5 years

 

 

16,800

 

After 5 years

 

 

39,480

 

Total debt

 

$

84,000

 

 

 

Note 5. Consolidated Balance Sheet Detail

Inventory

The following table summarizes inventory by category for the dates presented:

 

 

 

December 31,

2016

 

 

March 31,

2016

 

Raw materials

 

$

8,243

 

 

$

8,693

 

Work in progress

 

 

3,729

 

 

 

2,266

 

Finished goods

 

 

1,196

 

 

 

1,625

 

Total inventories

 

$

13,168

 

 

$

12,584

 

 

Inventory at December 31, 2016, included $6,915 of raw materials and $1,847 of work in progress related to the MosaiQ TM project. Inventory at March 31, 2016, included $7,099 of raw materials related to the MosaiQ TM project.

Property and equipment

The following table summarizes property and equipment by categories for the dates presented:

 

 

 

December 31,

2016

 

 

March 31,

2016

 

Land

 

$

1,271

 

 

$

1,480

 

Plant and machinery

 

 

43,690

 

 

 

42,375

 

Leasehold improvements

 

 

28,215

 

 

 

19,440

 

Total property and equipment

 

 

73,176

 

 

 

63,295

 

Less: accumulated depreciation

 

 

(12,271

)

 

 

(6,180

)

Total property and equipment, net

 

$

60,905

 

 

$

57,115

 

- 12 -


 

 

Depreciation expenses were $2,370 and $643 in the quarters ended December 31, 2016 and December 31, 2015, respectively, and $6,967 and $1,510 in the nine month periods ended December 31, 2016 and December 31, 2015 respectively. 

Accrued compensation and benefits

Accrued compensation and benefits consist of the following:

 

 

 

December 31,

2016

 

 

March 31,

2016

 

Salary and related benefits

 

$

184

 

 

$

113

 

Accrued vacation

 

 

384

 

 

 

351

 

Accrued payroll taxes

 

 

431

 

 

 

830

 

Accrued incentive payments

 

 

1,800

 

 

 

2,000

 

Total accrued compensation and benefits

 

$

2,799

 

 

$

3,294

 

 

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

December 31,

2016

 

 

March 31,

2016

 

Accrued legal and professional fees

 

$

675

 

 

$

102

 

Accrued interest

 

 

2,154

 

 

 

225

 

Goods received not invoiced

 

 

1,030

 

 

 

911

 

Accrued capital expenditure

 

 

3,113

 

 

 

2,253

 

Accrued development expenditure

 

 

2,825

 

 

 

3,533

 

Other accrued expenses

 

 

2,332

 

 

 

2,156

 

Total accrued expenses and other current liabilities

 

$

12,129

 

 

$

9,180

 

 

 

Note 6. Commitments and Contingencies

Government Grant

In 2008, the Company was awarded research and development grant funding from Scottish Enterprise amounting to £1,791, for the development of MosaiQ TM . The total grant claimed to December 31, 2016 is £1,790. The Company updates Scottish Enterprise periodically with the status of the project and, while the terms of the grant award provide for full repayment of the grant in certain circumstances, the Company does not consider that any repayment is likely.

Hedging arrangements

The Company’s subsidiary in the United Kingdom (“UK”) has entered into six forward exchange contracts to sell $500 and purchase pounds sterling at £1:$1.40 in each calendar month through June 2017, three contracts to sell $500 and purchase pounds sterling at £1:$1.2918 in each calendar month from July 2017 through September 2017 and six contracts to sell $500 in each calendar month from October 2017 through March 2018 at £1:$1.2655 as hedges of its U.S. dollar denominated revenues.

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan assets (1)

 

$

 

 

$

7,117

 

 

$

 

 

$

7,117

 

Short-term investments (2)