Item 1B.
UNRESOLVED STAFF COMMENTS
None.
We currently operate from two facilities, each of which is located in Carlsbad, California. We do not own any real property. In February 2010, we entered into a lease for an approximately 31,000 square foot facility in Carlsbad, California, the term of which originally ran through September 2017. The facility is part of a three-building office and research and development project located at 5964 La Place Court, Carlsbad, California. In January 2012, we signed a lease amendment which expanded our executive and administrative office, research and development, and manufacturing space by approximately 22,000 additional square feet and extended the term of the lease through June 2021. In June 2015, we leased an additional 34,000 square feet at a nearby location in Carlsbad, California, which we utilize primarily for ePlex manufacturing operations. The term of the lease runs through September 2023, and we have an option to extend the term of the lease for an additional five years. We believe that our currently leased facilities are adequate to meet our needs for the foreseeable future.
Item 3.
Item 3.
LEGAL PROCEEDINGS
We are from time to time subject to various claims and legal actions in the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations or financial condition.
Item 4.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II.
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been quoted on The NASDAQ Global Market under the symbol “GNMK” since May 28, 2010. The following table sets forth for the indicated periods the high and low sales prices per share of our common stock as reported on The NASDAQ Global Market.
Stock Performance Graph
The graph below compares the cumulative total stockholder returns on our common stock, the cumulative total stockholder returns on the NASDAQ Composite Index, and the NASDAQ Biotechnology Index for the five years ended December 31, 2017. The graph assumes that $100 was invested in the Company's common stock and in each index as of the market close on December 31, 2012 and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Stockholders
The last reported sale price of our common stock on February 23, 2018 as reported on the NASDAQ Global Market was $4.25. As of February 23, 2018, there were 1,244 holders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not expect to pay any dividends for the foreseeable future. In addition, our credit facility contains a negative covenant which may limit our ability to pay dividends. We currently intend to retain any future earnings to fund the operation, development and expansion of our business. Any future determination to pay dividends will be at the sole discretion of our Board of Directors and will depend upon a number of factors, including our results of operations, capital requirements, financial condition, future prospects, contractual arrangements, restrictions imposed by applicable law, any limitations on payments of dividends present in our current and future debt arrangements, and other factors our Board of Directors may deem relevant.
Item 6.
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data relates to GenMark Diagnostics, Inc. and its consolidated subsidiaries. The selected consolidated statement of comprehensive loss data presented below of GenMark Diagnostics, Inc. for the years ended December 31, 2017, 2016, and 2015 and the selected consolidated balance sheet data of GenMark Diagnostics, Inc. as of December 31, 2017 and 2016 have been derived from the audited consolidated financial statements of GenMark Diagnostics, Inc., which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, included elsewhere in this Annual Report. The selected consolidated statement of comprehensive loss data presented for the years ended December 31, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015, 2014, and 2013 have been derived from audited financial statements not included in this Annual Report.
The results for the periods shown below are not necessarily indicative of the results to be expected for any future periods. The selected consolidated financial data should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and with the consolidated financial statements and condensed consolidated financial statements of GenMark Diagnostics, Inc. and related notes included elsewhere in this Annual Report.
_____________________
(1)
In June 2017, we issued approximately 7.3 million shares of common stock at a price of $11.75 per share. We raised approximately $80.7 million in net proceeds.
(2)
In August and September 2016, we issued approximately 3.3 million shares of common stock at an average price of $9.04 per share. We raised approximately $28.9 million in net proceeds.
(3)
In August 2013, we issued approximately 8.7 million shares of common stock at a price of $9.84 per share. We raised approximately $81.0 million in net proceeds.
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with the “Selected Consolidated Financial Data” and the consolidated financial statements of GenMark and the related notes thereto that appear elsewhere in this Annual Report. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under the heading “Risk Factors” included elsewhere in this Annual Report. See also “Forward Looking Statements” included elsewhere in this filing.
Overview
GenMark was formed by Osmetech plc, or Osmetech, as a Delaware corporation in February 2010, and had no operations prior to its initial public offering, which was completed in June 2010. Immediately prior to the closing of the initial public offering, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization under the applicable laws of the United Kingdom. Following the reorganization, Osmetech became a wholly-owned subsidiary controlled by GenMark, and the former shareholders of Osmetech received shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization. In September 2012, GenMark placed Osmetech into liquidation to simplify its corporate structure. The liquidation of Osmetech was competed in the fourth quarter of 2013.
We are a molecular diagnostics company focused on developing and commercializing multiplex molecular tests that aid in the diagnosis of complex medical conditions and help guide therapy decisions. We currently develop and commercialize high-value, simple to perform, clinically relevant multiplex molecular tests based on our proprietary eSensor electrochemical detection technology.
Since inception, we have incurred net losses from operations each year, and we expect to continue to incur losses for the foreseeable future. Our net losses for the years ended December 31, 2017, 2016, and 2015 were approximately $61.9 million, $50.6 million, and $42.2 million, respectively. As of December 31, 2017, we had an accumulated deficit of $417.1 million. Our operations to date have been funded principally through sales of capital stock, borrowings, and cash from operations. We expect to incur increasing expenses over the next several years, principally to further expand our diagnostic test menu for our ePlex instrument, as well as to further increase our manufacturing capabilities and commercial organization.
Our Products and Technology
We offer our sample-to-answer ePlex instrument and Respiratory Pathogen (RP) Panel for sale in the United States and Europe. We have also obtained CE Mark for our ePlex BCID-GP Panel, ePlex BCID-GN Panel, and ePlex BCID-FP Panel. We intend to submit 510(k) applications to the FDA for all three of our ePlex BCID panels in 2018 and we continue to actively evaluate the development of additional assay panels that we believe will meet important, unmet clinical needs, which our ePlex system is uniquely positioned to address.
We offer four FDA-cleared diagnostic tests which run on our XT-8 instrument: our Respiratory Viral Panel; our Cystic Fibrosis Genotyping Test; our Warfarin Sensitivity Test; and our Thrombophilia Risk Test. We have also developed a number of hepatitis C virus, or HCV, genotyping tests and custom manufactured reagents, as well as other research-based and pharmacogenomics products, versions of which are available for use with our XT-8 instrument for research use only (RUO).
Revenue
Revenue from operations includes product sales, principally of our diagnostic tests. We primarily place our instruments with customers through a reagent rental agreement, under which we retain title to the instrument and customers commit to purchasing minimum quantities of reagents and test cartridges over a period of one to five years. We also offer our instruments for sale.
Cost of Revenues
Cost of revenues includes the cost of materials, direct labor and manufacturing overhead costs used in the manufacture of our consumable tests, including royalties on product sales. Cost of revenues also includes depreciation on revenue generating instruments that have been placed with our customers under a reagent rental agreement, cost of instruments sold to customers, amortization of licenses related to our products and other costs such as warranty, royalty and customer and product technical support. We manufacture our test cartridges in our facilities and have recently invested in significant capacity for expansion. Any potential underutilized capacity may result in a high cost of revenues relative to revenue, if manufacturing volumes are not able to fully absorb operating costs. Our instruments are procured from contract manufacturers. We expect our cost of revenues
to increase as we place additional instruments and manufacture and sell additional diagnostic tests; however, over time, we expect our cost per unit to decrease as production volume increases, manufacturing efficiencies are realized, improvements to procurement practices are made, instrument reliability increases and other improvements decrease costs.
Sales and Marketing Expenses
Sales and marketing expenses include costs associated with our direct sales force, sales management, marketing, technical support and business development activities. These expenses primarily consist of salaries, commissions, benefits, stock-based compensation, travel, advertising, promotions, product samples and trade show expenses. We expect sales and marketing expenses to continue to increase as we scale-up our domestic and international commercial efforts and expand our customer base.
Research and Development Expenses
Research and development expenses primarily include costs associated with the development of our ePlex instrument and its expanding test menu. These expenses also include certain clinical study expenses incurred in preparation for FDA clearance for these products, intellectual property prosecution and maintenance costs, and quality assurance expenses. The expenses primarily consist of salaries, benefits, stock-based compensation, outside design and consulting services, laboratory supplies, costs of consumables and materials used in product development, contract research organization costs, clinical studies and facility costs. We expense all research and development expenses in the periods in which they are incurred.
General and Administrative Expenses
Our general and administrative expenses include costs associated with our executive, accounting and finance, compliance, information technology, legal, facilities, human resource, administrative and investor relations activities. These expenses consist primarily of salaries, benefits, stock-based compensation costs, independent auditor costs, legal fees, consultants, insurance, and public company expenses, such as stock transfer agent fees and listing fees for NASDAQ.
Foreign Exchange Gains and Losses
Transactions in currencies other than our functional currency are translated at the prevailing rates on the dates of the applicable transaction. Foreign exchange gains and losses arise from differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is settled or translated.
Interest Income and Interest Expense
Interest income includes interest earned on our cash and cash equivalents and investments. Interest expense represents interest incurred on our loan payable and on other liabilities.
Provision for Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is more likely than not that we will not recover our deferred tax assets, we will increase our provision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable, and deferred taxes in the period in which the facts that give rise to a revision become known.
Critical Accounting Policies and Significant Judgments and Estimates
Revenue
We recognize revenue from product sales and contractual arrangements, net of discounts and sales related taxes. We recognize 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. Where applicable, all revenue is stated net of sales taxes and trade discounts. Revenue related to royalties received from licenses is generally recognized evenly over the contractual period to which the license relates. In those cases where we bill shipping and handling costs to customers, the amounts billed are classified as product revenue.
We offer customers the choice to either purchase an instrument outright or to receive possession of an instrument free of charge in exchange for a commitment to purchase an annual minimum amount of molecular diagnostic test cartridges.
When an instrument is sold, revenue is generally recognized upon shipment of the unit consistent with contract terms. When an instrument is placed free of charge under a reagent rental agreement, we retain title to the instrument and it remains capitalized on our balance sheet under property and equipment. Under our reagent rental agreements, our customers pay an instrument usage fee, which is included in the price of each test cartridge purchased. Our reagents and diagnostic test cartridges (consumables) are priced to include the expense of instrument usage and maintenance and are included in product revenue in our consolidated financial statements.
We sell our durable instruments and disposable test cartridges through a direct sales force in the United States and certain European countries and through distributor arrangements in other European jurisdictions. The instrument price is not dependent upon the purchase of any amount of disposable test cartridges. Revenue on instrument and test cartridge sales is generally recognized upon shipment consistent with contract terms, which is when title and the risk of loss and rewards of ownership have been transferred to the customer and there are no other post-shipment obligations.
Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, and the general condition of the economy. Changes in our allowance for doubtful accounts are charged to sales and marketing expense.
Inventory
We value inventories at the lower of cost or net realizable value on a part-by-part basis and provide an inventory reserve for estimated obsolescence and excess inventory based upon historical turnover and assumptions about future demand for our products and market conditions. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, which is generally 12 months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
Property and Equipment - net
Property, equipment and leasehold improvements are recorded at cost and depreciated using the straight-line method over the assets’ estimated useful lives, which are noted below. Each category of property and equipment is analyzed to determine its useful life. We look at the manufacturers’ estimates of useful life and adjust these for actual experience in our operating environment. Useful lives are reviewed periodically and occasionally changed as circumstances dictate.
Repair and maintenance costs are expensed as incurred. During 2017, 2016, and 2015, we disposed of certain assets no longer in use with a net book value of $207,000, $76,000 and $153,000, respectively, recorded to cost of revenue, sales and marketing, research and development, or general and administrative expenses based on the asset's respective use.
Impairment of Long-Lived Assets
We assess the recoverability of long-lived assets, including intangible assets and instruments at customer locations by periodically evaluating the carrying value of such assets whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. If impairment is indicated, we write down the carrying value of the asset to the estimated fair value.
Stock-Based Compensation
We generally grant employees and non-employee directors stock-based awards, which typically comprise stock options, restricted stock units, and/or market-based stock units, in connection with their employment or service. We grant stock options with an exercise price equal to the closing price of our common stock on the NASDAQ Global Market on the applicable grant date. We use the Black-Scholes option-pricing model as the method for determining the estimated fair value of stock options, the Monte Carlo Simulation Valuation Model as the method for determining the estimated fair value of our market-based stock units, and we use the grant date fair value of our common stock for valuing restricted stock awards and units. The estimated fair value of stock-based awards exchanged for employee and non-employee director services are expensed over the requisite service period. The stock-based compensation expense related to shares issued under our 2013 Employee Stock Purchase Plan, or ESPP, is also estimated using the Black-Scholes option-pricing model. These models require the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the stock award's expected term and the price volatility of the underlying stock. These assumptions include:
•
Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding and is determined by using the simplified method.
•
Expected Volatility. Expected volatility represents the expected volatility in our stock price over the expected term of the stock option or award.
•
Expected Dividend. The pricing models require a single expected dividend yield as an input. We assumed no dividends as we have never paid dividends and have no plans to do so.
•
Risk-Free Interest Rate. The risk-free interest rates used in the models is based on published government rates in effect at the time of grant for periods corresponding with the expected term of the option or award.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We file income tax returns in the United States, Switzerland, Germany, the United Kingdom, France, and various state jurisdictions. Significant judgments and estimates are required in determining our consolidated income tax expense.
We believe that it is more likely than not that the benefit from our deferred tax assets will not be realized. In recognition of this risk, we have provided a full valuation allowance on the net deferred tax assets relating to our net operating loss carryforwards and other deferred tax assets. If our assumptions change and we determine that we will be able to realize our deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The Tax Cuts and Jobs Act, or the Jobs Act, was enacted on December 22, 2017. The Jobs Act reduces the U.S. federal corporate tax rate from 34% to 21%, and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Due to the timing of the enactment and the complexity involved in applying the provisions of the Jobs Act, we have made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements. As a result of the Jobs Act, we remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. We do not anticipate to incur any liability for the one-time transition tax due to the losses generated by our foreign subsidiaries. As additional guidance is issued, and interpretation and analysis of the Jobs Act evolves, we may make adjustments to the provisional amounts recorded. We are not aware of any other such changes in tax laws and rates that would have a material effect on our results of operations, cash flows or financial position.
We recognize tax liabilities in accordance with Accounting Standards Codification, or ASC, Topic 740 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements, see Note 2, "Summary of Significant Accounting Policies and Significant Accounts" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Results of Operations
Comparison of Years Ended December 31, 2017, 2016 and 2015 (tables in thousands):
Revenue for the year ended December 31, 2017 increased by $3,245,000 due in part to higher reagent revenues of $47,866,000 for the year ended December 31, 2017 compared to $46,946,000 for the year ended December 31, 2016. The increase in consumables revenue was primarily driven by purchases of our infectious disease assays, due to an expanding customer base. Pricing changes did not have a material impact on the increase in revenue for the year ended December 31, 2107. Additionally, instrument revenues were $3,974,000 for the year ended December 31, 2017, compared to $1,592,000 for the year ending December 31, 2016.
For the year ended December 31, 2016, our revenue grew 25%, or $9,863,000, compared to 2015. Consumables revenue during the year ended December 31, 2016 increased by 23% to $46,946,000, compared to $38,061,000 in the prior year. This increase in consumables revenue was primarily driven by increased product purchases by several key customers. Pricing changes did not have a significant impact on revenue during the current period. Additionally, during the year ended December 31, 2016, instrument revenue increased $957,000 compared to the same period of the prior year, primarily due to the sale of ePlex instruments.
The increase in cost of revenue for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily related to increased production and production-related investments associated with manufacturing expansion for continued commercialization of the ePlex system. Increases in our cost of revenue were attributable to product costs of $3,925,000 corresponding to volume increases, increased support expenses of $3,260,000, unfavorable absorption variances of $3,010,000, increased inventory reserve expense of $908,000, decreased production efficiencies of $892,000, increased instrument depreciation, repair, and warranty expense of $376,000 driven by a greater instrument installed base, and increased reagent warranty expense $422,000. The decrease in gross profit was primarily due to increased product sales and product support costs related to the commercialization of the ePlex system.
The increase in cost of revenue for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily related to the increase in consumables revenue in the current year. Increases in our cost of revenue were attributable to product costs of $3,177,000, increased product warranty and support expenses of $519,000, and increased royalty expense of $431,000 corresponding to sales volume increases, less favorable manufacturing yields and variances of $235,000, and increased overhead expenses of $412,000, partially offset by decreased inventory reserve expense of $387,000. The improvement to gross profit during the year ended December 31, 2016, compared to December 31, 2015, was primarily due to increased sales of higher margin products.
The increase in sales and marketing expense for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily driven by an increase in employee-related expenses of $3,906,000 due to an increase in headcount, increased travel expenses of $428,000, increased supplies and equipment of $966,000 associated with additional instrument placements, increased marketing expenses of $224,000 associated with the commercial launch of the ePlex system, and an increase of $221,000 in outside service expense, primarily related to increased activity associated with our international distribution center.
The increase in sales and marketing expense for the year ended December 31, 2016, compared to the year ended December 31, 2015, was primarily driven by increased marketing and trade show expense of $582,000, increased freight and postage expense of $184,000, and increased travel expenses of $112,000 incurred in connection with expanding our domestic and international commercial organization, partially offset by a decrease in employee-related expenses of $522,000.
The increase in general and administrative expense for the year ended December 31, 2017 compared to the year ended December 31, 2016, was primarily driven by an increase in employee-related expenses of $1,311,000, including a $1,112,000 increase in stock-based compensation expense, an increase in travel expense of $147,000, and an increase in consulting services of $411,000, partially offset by a decrease in audit and tax expenses of $281,000 due to timing of payments, and a decrease in facility and supplies expense of $303,000.
The increase in general and administrative expense for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily driven by an increase in employee-related expenses of $536,000, an adjustment to our indirect tax accrual of $274,000, and an increase in travel-related expenses of $168,000, partially offset by a decrease in medical device tax expense of $447,000 as a result of the suspension of the excise tax in December 2015.
The decrease in research and development expense for the year ended December 31, 2017 compared to the year ended December 31, 2016, was primarily driven by a decrease in ePlex system development expenses of $10,067,000, a decrease in clinical trial expense of $392,000 due to the timing of trials, a decrease in repairs and maintenance expense of $303,000 and a decrease in freight expense of $514,000, partially offset by an increase in supplies and prototype materials utilized by our assay development teams of $4,413,000 and an increase in intellectual property prosecution and maintenance expenses of $206,000.
The increase in research and development expense for the year ended December 31, 2016, compared to the year ended December 31, 2015, was primarily driven by increased materials, equipment and consumables used in the development and expansion of our ePlex test menu totaling $10,523,000, increased employee-related expenses of $2,993,000, and increased clinical trials expense of $887,000, partially offset by reduced outside services expenditures of $3,420,000.
Other income (expense) represents non-operating income and expense, including, but not limited to, earnings on cash, cash equivalents, restricted cash, marketable securities, foreign exchange gains and losses of foreign currency denominated balances, and interest expense related to debt.
The change in other income (expense) for the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to an increase in interest expense of $1,506,000 on amounts due under our debt facility, partially offset by an increase in interest income of $385,000 and an increase of $415,000 related to foreign currency fluctuations.
The change in other income (expense) for the year ended December 31, 2016, compared to the year ended December 31, 2015, was due primarily to an increase in interest expense of $655,000 under our debt facility, and a decrease in income as a result of less interest earned on marketable securities of $217,000 in the current period.
Due to net losses incurred, the tax provisions recorded relate to minimum tax payments in the United States and tax liabilities generated by our foreign subsidiaries. Income tax expense for the year ended December 31, 2017, compared to the year ended December 31, 2016, remained consistent and related primarily to international income taxes. The increase for the year ended December 31, 2016 compared to December 31, 2015, was primarily a result of international income taxes due to increased foreign operations.
Liquidity and Capital Resources
To date we have funded our operations primarily from the sale of our common stock, borrowings and cash from operations. We have incurred net losses from operations each year and have not yet achieved profitability. As of December 31, 2017, we had $67,664,000 of working capital, including $71,990,000 in cash, cash equivalents, and marketable securities.
Cash Flows
The following table shows cash flow information for the years ended December 31, 2017, 2016 and 2015:
Cash flows used in operating activities
Net cash used in operating activities increased $17,785,000 to $53,422,000 for the year ended December 31, 2017, compared to $35,637,000 for the year ended December 31, 2016. The increase in cash used in operating activities was primarily due to an $11,249,000 increase in net loss and a $12,317,000 increase from changes in operating assets and liabilities. The main factors affecting the change in operating assets and liabilities included an increase in inventory purchases and accounts receivable, and decreases in accounts payables, accrued compensation, and other liabilities. These increases were partially offset by non-cash adjustments of $5,781,000, including increased stock-based compensation expense of $2,934,000, an increase in depreciation and amortization expense of $1,401,000 and non-cash adjustments to inventory of $1,189,000.
Net cash used in operating activities increased $3,722,000 to $35,637,000 for the year ended December 31, 2016, compared to $31,915,000 for the year ended December 31, 2015. The increase in cash used in operating activities was primarily due to an $8,404,000 increase in our net loss and $535,000 in lower non-cash changes primarily the result of lower stock-based compensation expense, partially offset by an additional $5,217,000 cash inflow from changes in operating assets and liabilities. The main factors affecting operating assets and liabilities included increases in accounts payable, accrued compensation and other liabilities and increases in inventory and accounts receivable.
Cash flows provided by (used in) investing activities
Net cash used in investing activities for the year ended December 31, 2017, compared to the year ended December 31, 2016, increased $785,000 primarily due to an increase in net purchases and sales of marketable securities of $31,420,000,
partially offset by decreases in purchases of property, plant, and equipment of $2,185,000, intellectual property milestone payments of $1,000,000, and the maturities of marketable securities of $27,450,000.
Net cash used in investing activities for the year ended December 31, 2016, compared to the year ended December 31, 2015, increased $43,444,000 primarily due to a $36,000,000 decrease from the maturity of short-term marketable securities, an increase in purchases of marketable securities of $11,042,000, and increased purchase of property, plant, equipment and licenses of $4,194,000, partially offset by a $7,792,000 increase in proceeds from the sale of marketable securities.
Cash flows provided by financing activities
Net cash provided by financing activities increased $48,691,000 to $89,050,000 for the year ended December 31, 2017, compared to $40,359,000 for the year ended December 31, 2016, primarily due to a net increase in proceeds from the sale of our common stock of $52,021,000 and an increase in net proceeds from debt issuance of $4,903,000, partially offset by an increase in the repayments of principal borrowings of $7,808,000 and a decrease in proceeds from the exercise of employee stock options of $425,000.
Net cash provided by financing activities increased $29,226,000 to $40,359,000 for the year ended December 31, 2016, compared to $11,133,000 for the year ended December 31, 2015, primarily due to a $28,893,000 increase in net proceeds generated from from an at-the-market equity offering, and an absence of debt issuance costs of $628,000 incurred in the prior year, partially offset by a decrease in proceeds from the exercise of employee stock options of $277,000.
We have prepared cash flow forecasts which indicate, based on our current cash resources available, that we will have sufficient resources to fund our business for at least the next 12 months. We expect capital outlays and operating expenditures to increase over the next several years as we grow our customer base and revenues, and expand our research and development, commercialization and manufacturing activities. Factors that could affect our capital requirements, in addition to those previously identified, include, but are not limited to:
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the level of revenues and the rate of our revenue growth;
•
change in demand from our customers;
•
the level of expenses required to expand our commercial (sales and marketing) and manufacturing activities;
•
the level of research and development investment required to develop our diagnostic systems and test menu;
•
our need to acquire or license complementary technologies;
•
the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
•
competing technological and market developments; and
•
changes in regulatory policies or laws that affect our operations.
Loan and Security Agreement
In January 2015, we entered into a Loan and Security Agreement, or the LSA, with Solar Capital Partners (as successor-in-interest to General Electric Capital Corporation), and certain other financial institutions party thereto, as lenders, pursuant to which we obtained up to $35,000,000 in a series of term loans and a revolving loan in the maximum amount of $5,000,000. As of June 2017, we borrowed all $35,000,000 under the terms loans as provided in the LSA. As of December 31, 2017, we had not borrowed any of the $5,000,000 available under the revolving loan.
In December 2017, we and the lenders agreed to extend the interest-only period in respect of amounts borrowed under the LSA, or the Interest-Only Period, until August 1, 2018 and the final maturity date on which all of our loans, debts, obligations and other liabilities under the LSA become due, or the Final Maturity Date, until October 12, 2019. We may further extend the Interest-Only Period until January 1, 2019 and the Final Maturity Date until March 12, 2020, subject in each case to the satisfaction of certain financial conditions.
Pursuant to the terms of the LSA, the lenders are granted a security interest in (a) all of our personal property, other than intellectual property (which is subject to a negative pledge), but including our rights to payment in respect of intellectual property, (b) the stock of all of our domestic subsidiaries, and (c) 65% of the voting stock and 100% of the non-voting stock of each of our non-U.S. subsidiaries.
The LSA contains customary affirmative and negative covenants, including, without limitation, delivering reports and notices relating to our financial condition and certain regulatory events and intellectual property matters, as well as limiting the creation of liens, the incurrence of indebtedness, and the making of certain investments, payments and acquisitions, other than as specifically permitted by the LSA.
Common Stock Equity Offering
On June 13, 2017, we entered into an Underwriting Agreement, or the Underwriting Agreement, with J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acting as joint book-running managers and as representatives of the underwriters, or the Underwriters, relating to the issuance and sale of 6,382,978 shares of our common stock, or the Offering. The price to the public in the Underwriting Agreement was $11.75 per share, before underwriting discounts and commissions. Under the terms of the Underwriting Agreement, we granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 957,446 shares of our common stock.
The Offering was completed on June 19, 2017, pursuant to which we sold a total of 7,340,424 shares of our common stock for gross proceeds of $86,250,000. We incurred $5,175,000 in related transaction costs, comprised of underwriting discounts and commissions paid in accordance with the Underwriting Agreement, and approximately $345,000 in additional miscellaneous offering expenses.
Equity Distribution Agreement
On June 14, 2016, we entered into an Equity Distribution Agreement, or the Distribution Agreement, with Canaccord Genuity Inc., as sales agent, or Canaccord, pursuant to which we could, at our discretion, offer and sell, from time to time, through Canaccord shares of our common stock having an aggregate offering price of up to $30,000,000. Under the Distribution Agreement, Canaccord could sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act or any other method permitted by law, including in privately negotiated transactions.
We began sales under the Distribution Agreement in August 2016 pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC. During the three months ended September 30, 2016, we sold 3.3 million shares of our common stock, at an average per share price of $9.04, for aggregate gross proceeds of $30,000,000. We incurred $1,143,000 in related transaction costs, comprising commissions paid to Canaccord of 3.0% of the aggregate gross proceeds from each sale of shares occurring pursuant to the Distribution Agreement, or $900,000, and $243,000 in additional miscellaneous expenses.
Letter of Credit
In September 2012, we provided a $758,000 letter of credit issued by Banc of California to the landlord of our executive office facility in Carlsbad, California. This letter of credit was secured with $758,000 of restricted cash at December 31, 2017.
If we require additional capital, we cannot be certain that it will be available when needed or that our actual cash requirements will not be greater than anticipated. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds through collaborations or licensing arrangements, we may be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Contractual Obligations
As of December 31, 2017, we had the following contractual obligations (in thousands):
_____________________
(1)
We enter into leases in the ordinary course of business with respect to facilities. Our lease agreements have fixed payment terms based on the passage of time. Certain facility leases require payment of maintenance and real estate taxes. Our future operating lease obligations could change if we terminate certain contracts or if we enter into additional leases.
In January 2012, we entered into a lease amendment with the landlord of our Carlsbad, California executive office facility to rent an additional 22,000 square feet. The lease amendment required an additional security deposit of $22,000 and an increase in our standby letter of credit to $758,000. We took possession of the additional space on January 1, 2013, at which time the rent increased by approximately $35,000 per month, subject to annual increases of between 3% and 4%. The term of the lease was also extended to June 30, 2021.
In June 2015, we entered into a lease agreement for additional manufacturing space located in Carlsbad, California. Pursuant to the lease agreement, rent payments total $4,490,000 over the 90-month lease term.
Impact of Inflation
The effect of inflation and changing prices on our operations was not significant during the periods presented.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. We have provided a $758,000 standby letter of credit to our landlord as security for future rent in connection the lease of our Carlsbad, California corporate headquarters, which is recorded as restricted cash on our consolidated balance sheet.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is limited to our cash and cash equivalents, all of which have maturities of less than three months, and marketable securities, which have maturities of less than one year. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs, and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may in the future maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. We currently do not hedge interest rate exposure. Because of the short-term maturities of our cash equivalents and short-term investments, we do not believe that an increase in market rates would have a material negative impact on the value of our portfolio.
Interest Rate Risk
As of December 31, 2017, based on current interest rates and total debt outstanding, a hypothetical 100 basis point increase or decrease in interest rates would have an insignificant pre-tax impact on our results of operations.
Foreign Currency Exchange Risks
We are a U.S. entity and our functional currency is the U.S. dollar. Substantially all of our revenues were derived from sales in the United States. We have business transactions in foreign currencies, however, we believe we do not have significant exposure to risk from changes in foreign currency exchange rates at this time. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of GenMark Diagnostics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GenMark Diagnostics, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
San Diego, California
February 27, 2018
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
See accompanying Notes to Consolidated Financial Statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying Notes to Consolidated Financial Statements.
GENMARK DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and basis of presentation
Organization
GenMark Diagnostics, Inc., the Company or GenMark, was formed by Osmetech plc, or Osmetech, as a Delaware corporation in February 2010, and had no operations prior to its initial public offering, or the IPO, which was completed in June 2010. Immediately prior to the closing of the IPO, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization, accounted for in a manner similar to a pooling-of-interests, under the applicable laws of the United Kingdom. As a result of the reorganization, all of the issued ordinary shares in Osmetech were cancelled in consideration of (i) the issuance of common stock of GenMark to the former shareholders of Osmetech and (ii) the issuance of new shares in Osmetech to GenMark. Following the reorganization, Osmetech became a subsidiary controlled by GenMark, and the former shareholders of Osmetech received shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization. In September 2012, GenMark placed Osmetech into liquidation to simplify its corporate structure. The liquidation of Osmetech was completed in the fourth quarter of 2013.
The Company is a leading provider of multiplex molecular solutions designed to enhance patient care, improve key quality metrics, and reduce the total cost-of-care. The Company's products include the XT-8 instrument and related diagnostic and research tests, as well as certain custom manufactured reagents, collectively referred to as the XT-8 system. Additionally, the Company offers a sample-to-answer ePlex instrument and associated molecular diagnostic panels. The Company sells its products in the U.S. and Europe directly and through distributors.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and applicable regulations of the U.S. Securities and Exchange Commission, or the SEC. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses from operations since its inception and has an accumulated deficit of $417,120,000 at December 31, 2017. Management expects operating losses to continue through the foreseeable future. The Company's ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure through expanding its product offerings and consequently increasing its product revenues. Cash, cash equivalents, and marketable securities at December 31, 2017 totaled $71,990,000. The Company has prepared cash flow forecasts which indicate, based on the Company’s current cash resources available, that the Company will have sufficient resources to fund its business for at least the next 12 months from the date of this filing.
Segment Reporting
The Company currently operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. The Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to accounts receivable, inventories, property and equipment, intangible assets, employee related compensation accruals, warranty liabilities, tax valuation accounts and stock-based compensation. Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies and Significant Accounts
Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash on deposit with banks, money market instruments and certificates of deposit with original maturities of three months or less at the date of purchase. Marketable securities consist of certificates of deposits that mature in greater than three months. Marketable securities are accounted for as "available-for-sale" with the carrying amounts reported in the balance sheets stated at cost, which approximates their fair market value, with unrealized gains and losses, if any, reported as a separate component of stockholders' equity and included in comprehensive loss.
Restricted Cash
Restricted cash represents amounts designated for uses other than current operations and includes $758,000 as of December 31, 2017 held as security for the Company’s letter of credit with Banc of California.
Fair Value of Financial Instruments
The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
•
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.
The carrying amounts of financial instruments such as accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate the related fair values due to the short-term maturities of these instruments.
Receivables
Accounts receivable consist of amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable, and a reserve for unknown items based upon the Company’s historical experience.
The allowance for doubtful accounts as of December 31, 2017 and 2016, comprised the following (in thousands):
The Company has included $2,702,000 in the allowance for doubtful accounts as of December 31, 2017 and 2016 for past due amounts from its former customer, Natural Molecular Testing Corporation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and include direct labor, materials, and manufacturing overhead. The Company periodically reviews inventory for evidence of slow-moving or obsolete parts, and writes inventory down to net realizable value, as needed. This write-down is based on management’s review of inventories on hand, compared to estimated future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable.
Property and Equipment, net
Property, equipment and leasehold improvements are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which are:
Property and equipment includes diagnostic instruments used for sales demonstrations or placed with customers under several types of arrangements, including performance evaluation programs, or PEPs, and reagent rental agreements. Instruments are placed with customers under PEPs for limited evaluation periods and the Company retains title to the instruments under these arrangements. Maintenance and repair costs are expensed as incurred.
Leased property meeting certain capital lease criteria is capitalized, and the net present value of the related lease payments is recorded as a liability. Amortization for assets noted as capital leases is recorded using the straight-line method over the shorter of the estimated useful lives or the lease terms.
Intangible Assets
Intangible assets are comprised of licenses or sublicenses to technology covered by patents owned by third parties, and are amortized on a straight-line basis over the expected useful lives of these assets, which is generally 10 years. Amortization of licenses typically begins upon the Company obtaining access to the licensed technology and is recorded in cost of revenues for licenses supporting commercialized products. The amortization of licenses to technology supporting products in development is recorded in research and development expenses.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets, including intangible assets, by periodically evaluating the carrying value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impairment is indicated, the Company writes down the carrying value of the asset to its estimated fair value. This fair value is primarily determined based on estimated discounted cash flows. The Company did not recognize any impairment charges during the years ended December 31, 2017, 2016, and 2015.
Revenue Recognition
The Company recognizes revenue from product sales and contract arrangements, net of discounts and sales related taxes. 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.
The Company offers customers the choice to either purchase a system outright or to receive a system free of charge in exchange for an annual minimum purchase commitment for diagnostic test cartridges. When a system is sold, the Company generally recognizes revenue upon shipment of the unit, however, if the end user already has the instrument being purchased installed at its location, revenue is recognized when the revenue recognition terms other than delivery have been satisfied. When a system is placed free of charge under a “reagent rental” agreement, the Company retains title to the equipment and it remains capitalized on the balance sheet under property and equipment. Under reagent rental agreements, the Company’s customers pay an additional system rental fee for each test cartridge purchased which varies based on the monthly volume of test cartridges purchased. The system rental fee and diagnostic test cartridges are recognized as contingent rental payments and are included in product revenue in the Company’s consolidated financial statements.
The Company has not had significant product returns and is not contractually obligated to accept returns unless such returns are related to warranty provisions. The Company generally does not accept reagent product returns, mainly due to FDA regulations, and does not offer volume rebates or provide price protection.
The Company enters into PEP agreements pursuant to which an instrument is installed on the premises of a pre-qualified customer for the purpose of allowing the customer to evaluate the instrument’s functionality over an extended trial period. The customer is generally required to purchase a minimum quantity of reagents and, at the end of the evaluation period, must purchase or return the instrument or sign a reagent rental agreement.
Revenues related to royalties received from licenses are recognized evenly over the contractual period to which the license relates. In those cases where the Company bills shipping and handling costs to customers, the amounts billed are included in product revenue.
In the years ended December 31, 2017, 2016 and 2015, Laboratory Corporation of America, Inc. represented 17%, 27%, and 17%, respectively, of the Company's total revenue.
Product Warranties
The Company generally offers a one-year warranty for its instruments sold to customers and up to a sixty day warranty for reagents and provides for the estimated cost of the product warranty at the time the system sale is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.
Product warranty reserve activity for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):
Research and Development Costs
The Company expenses all research and development costs in the periods in which they are incurred unless there is alternative future use that supports the capitalization of an asset.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. A full valuation allowance has been recorded against the Company’s net deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize these assets in the future. The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest related to uncertain tax positions as a component of income tax expense.
A tax position that is more likely than not to be realized is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more likely than not threshold considers the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances and information available at the reporting date.
Stock-Based Compensation
The Company recognizes stock-based compensation expense related to stock options, shares purchased under the Company's 2013 Employee Stock Purchase Plan, or ESPP, restricted stock awards, restricted stock units, and market-based stock units granted to employees and directors in exchange for services. The compensation expense is based on the fair value of the applicable award utilizing various assumptions regarding the underlying attributes of the award. The stock-based compensation expense is recorded in cost of revenues, sales and marketing, research and development, and/or general and administrative expenses based on the employee's respective function.
The estimated fair value of stock granted, net of forfeitures expected to occur during the vesting period, is amortized as compensation expense that approximates straight-line expense to reflect vesting as it occurs. The stock option expense is derived from the Black-Scholes Option Pricing Model that uses several judgment-based variables to calculate the expense. The market-based stock expense is derived from the Monte Carlo Simulation Valuation. The inputs utilized in the valuation of the stock-based awards include the following factors:
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Expected Term. Expected term represents the period that the stock-based awards are expected to be outstanding and is determined by using the simplified method.
•
Expected Volatility. Expected volatility represents the expected volatility in the Company’s stock price over the expected term of the option or market-based award and is determined by review of the Company’s and similar companies’ historical experience.
•
Expected Dividend. The valuation methods requires a single expected dividend yield as an input. The Company assumed no dividends as it has never paid dividends and has no current plans to do so.
•
Risk-Free Interest Rate. The risk-free interest rate is based on published U.S. Treasury rates in effect at the time of grant for periods corresponding with the expected term of the option or market-based award.
The compensation expense related to the grant of restricted stock awards or units is calculated as the fair market value of the stock on the grant date as further adjusted to reflect expected forfeitures.
Foreign Currency Translation
The Company translates the assets and liabilities of the Company's entities outside the U.S. into U.S. Dollars based on the foreign currency exchange rates at the end of each period. Gains or losses resulting from these foreign currency translations are recorded in accumulated comprehensive loss in the consolidated statement of stockholders' equity. Foreign currency translation impacts recorded in accumulated other comprehensive loss for the years ended December 31, 2017, 2016, and 2015 were $84,000, $77,000, and $36,000, respectively.
Revenue and expenses are translated at weighted average exchange rates during the applicable period. Transactions in foreign currencies were recognized using the rate of exchange prevailing at the date of the transaction. Foreign exchange gains, which are included in the accompanying consolidated statements of operations, totaled $225,000, $169,000, and $91,000 for the years ended December 31, 2017, 2016 and 2015, respectively, and relate primarily to transactions denominated in Euros.
Net Loss per Common Share
Basic net loss per share is calculated by dividing loss available to stockholders of our common stock (the numerator) by the weighted average number of shares of the Company's common stock outstanding during the period (the denominator). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted loss per share is calculated in a similar way to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential shares had been issued unless the effect would be anti-dilutive.
The calculations of diluted net loss per share for the years ended December 31, 2017, 2016 and 2015 did not include the effects of the following stock options or other unvested equity awards which were outstanding as of the end of each year because the inclusion of these securities would have been anti-dilutive (in thousands).
Concentration of Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investment securities, and accounts receivable. We limit our exposure to credit loss by placing our cash with high credit quality financial institutions. We have established guidelines relative to diversification of our cash and investment securities and their maturities that are intended to secure safety and liquidity. The following table summarizes customers who accounted for 10% or more of net accounts receivable:
Comprehensive Loss
The Company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company’s comprehensive loss comprises net losses, unrealized gains and losses on available for sale securities, and foreign currency translation.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that the Company adopts as of the specified effective date.
In November 2016, the FASB issued Accounting Standards Update, or ASU, 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents to be included in the cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-08 is effective for fiscal years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method for each period presented. Early adoption is permitted. The Company will adopt ASU 2016-18 in the first quarter of 2018 and anticipates the impact of adoption will result in a beginning and ending cash balance increase of approximately $758,000. The Company does not anticipate a material impact on its cash flow resulting from fluctuations in the restricted cash balance.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance simplifies how several aspects of share-based payments are accounted for and presented in the financial statements and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this guidance in the first quarter of 2017 and elected to apply this adoption prospectively. The adoption of the guidance resulted in excess tax benefits for which a benefit could not be previously recognized of approximately $1,976,000. Upon adoption, the balance of the unrecognized excess tax benefits was reversed with the impact recorded to retained earnings, including a corresponding change to the valuation allowance. Due to the full valuation allowance on the Company's U.S. deferred tax assets, there was no impact to the consolidated financial statements as a result of adoption and, therefore, no adjustments to prior period were needed. The Company continues to record stock-based compensation expense net of estimated forfeitures.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of 2019, with early adoption permitted. The Company believes that adoption will modify its analysis and disclosures of lease agreements because operating agreements are a significant portion of the Company's total lease commitments. The Company is in the process of determining the effects adoption of this guidance will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard (and all subsequent amendments) is based on the principle that revenue should be recognized in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of promised goods or services. The new standard provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP.
Companies are to apply the standard using either the full retrospective method by applying the standard to each prior reporting period presented, or the modified retrospective method. Under the modified retrospective method, the cumulative effect of applying the standard would be recognized, at the effective date of adoption of the standard, directly to retained earnings. The Company will adopt the standard under the modified retrospective method in the first quarter of 2018.
The Company has assessed impact of the new standard with the Company's current accounting policies for customer contracts and related disclosures and has not identified any accounting policy changes that would materially impact the amount or timing of revenues reported. Based on the analysis of open contracts as of December 31, 2017, the cumulative effect of applying the new standard is not material.
3. Intangible Assets, net
Intangible assets as of December 31, 2017 and 2016 comprised the following (in thousands):
In July 2012, the Company entered into a development collaboration and license agreement with Advanced Liquid Logic, Inc., or ALL, which was acquired by Illumina, Inc. in July 2013. Under the terms of the agreement, the Company established a collaborative program to develop in-vitro diagnostic products incorporating ALL’s proprietary electrowetting technology in conjunction with the Company’s electrochemical detection technology. The Company paid ALL an upfront license payment of $250,000 and agreed to pay up to $1,750,000 in potential additional milestone payments. In June 2017, the Company satisfied the final commercial milestone under this agreement requiring the payment of $500,000, which was recorded as licensed intellectual property.
Intellectual property licenses had a weighted average remaining amortization period of 4.43 years as of December 31, 2017. Amortization expense for intangible assets amounted to $546,000, $406,000, and $294,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Estimated future amortization expense for these licenses is as follows (in thousands):
4. Stockholders’ Equity
On June 13, 2017, the Company entered into an Underwriting Agreement, or the Underwriting Agreement, with J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated acting as joint book-running managers and as representatives of the underwriters, or the Underwriters, relating to the issuance and sale of 6,382,978 shares of the Company's common stock, or the Offering. The price to the public in the Underwriting Agreement was $11.75 per share, before underwriting discounts and commissions. Under the terms of the Underwriting Agreement, the Company granted the Underwriters an option, exercisable for 30 days, to purchase up to an additional 957,446 shares of common stock.
The Offering was completed on June 19, 2017, pursuant to which the Company sold a total of 7,340,424 shares of its common stock for gross proceeds of $86,250,000. The Company incurred $5,520,000 in related transaction costs, comprising underwriting discounts and commissions of $5,175,000 paid in accordance with the Underwriting Agreement, and approximately $345,000 in additional miscellaneous offering expenses.
On June 14, 2016, the Company entered into an Equity Distribution Agreement, or the Distribution Agreement, with Canaccord Genuity Inc., as sales agent, or Canaccord, pursuant to which the Company could, at its discretion, offer and sell, from time to time, through Canaccord shares of its common stock having an aggregate offering price of up to $30,000,000. Under the Distribution Agreement, Canaccord could sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act or any other method permitted by law, including in privately negotiated transactions.
The Company began sales under the Distribution Agreement in August 2016 pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC. During the three months ended September 30, 2016, the Company sold 3.3 million shares of common stock, at an average per share price of $9.04, for aggregate gross proceeds of $30,000,000. The Company incurred $1,143,000 in related transaction costs, comprising commissions paid to Canaccord of 3.0% of the aggregate gross proceeds from each sale of shares occurring pursuant to the Distribution Agreement, or $900,000, and $243,000 in additional miscellaneous expenses.
5. Stock-Based Compensation
In 2010, the Company adopted the 2010 Equity Incentive Plan, or the 2010 Plan, which provides for the grant of incentive and nonstatutory stock options, restricted stock, stock appreciation rights, restricted stock units, restricted stock bonuses and other stock-based awards. Employee participation in the 2010 Plan is at the discretion of the compensation committee of the board of directors of the Company. As of December 31, 2017, there were 650,142 shares available for future grant of awards under the 2010 Plan.
The Company estimates potential forfeitures of stock-based award grants and adjusts compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture experience and is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods.
Stock Options
All stock options granted under the 2010 Plan are exercisable at a price equal to the closing quoted market price of the Company’s shares on the NASDAQ Global Market on the date of grant and vest over a period of 4 years. Stock options are generally exercisable for a period up to 10 years after grant and are forfeited if employment is terminated before the options vest.
The following table summarizes stock option activity during the year ended December 31, 2017:
No stock options were granted in the year ended December 31, 2017. The weighted average fair value of stock options granted during the years ended December 31, 2016 and 2015 was $2.27 and $6.02 per share, respectively. Options that were exercisable as of December 31, 2017 had a remaining weighted average contractual term of 4.97 years and an aggregate intrinsic value of $61,000. As of December 31, 2017, there was $1,165,000 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 0.86 years. The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $173,000, $184,000 and $930,000, respectively. As of December 31, 2017, there were 2,490,465 stock options outstanding, which had a remaining weighted average contractual term of 5.14 years and an aggregate intrinsic value of $61,000.
The Company uses the Black-Scholes model to estimate the fair value on the date of grant of stock options. The assumptions used in the valuation of stock options granted in the years ended December 31, 2017, 2016 and 2015, are summarized in the following table:
Restricted Stock Awards and Units
In March 2013, the Company transitioned to granting restricted stock units under the 2010 Plan in lieu of granting restricted stock awards. Restricted stock awards or units may be granted at the discretion of the compensation committee of the board of directors under the 2010 Plan in connection with the hiring or retention of personnel and are subject to certain conditions. Restrictions expire after the grant date in accordance with specific provisions in the applicable award agreement.
The Company’s restricted stock activity for the year ended December 31, 2017 was as follows:
As of December 31, 2017, all compensation expense related to restricted stock awards has been recognized. The total fair value of restricted stock awards that vested during the years ended December 31, 2017, 2016 and 2015 was $2,000, $190,000 and $580,000, respectively.
As of December 31, 2017, there was $12,244,000 of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of 2.55 years. The total fair value of restricted stock units that vested during the years ended December 31, 2017, 2016 and 2015 was $7,813,000, $3,192,000 and $4,457,000, respectively.
Market-Based and Performance Stock Units
The Company issued market-based stock units in February 2017, 2016, and 2015, which may result in the recipient receiving shares of stock equal to up to 200% of the target number of units granted. The vesting and issuance of Company stock depends on the Company's stock performance as compared to the NASDAQ Composite Index over the three-year period following the grant. As of December 31, 2017, there was $1,088,000 of unrecognized stock-based compensation expense related to these awards, which is expected to be recognized over a weighted average period of 1.86 years. Based on performance, no market-stock units vested in the year ended December 31, 2017. The total fair value of market-stock units that vested during the years ended December 31, 2016 and 2015 was $2,433,000 and $29,000, respectively.
The Company’s market-based stock unit activity for the year ended December 31, 2017 was as follows:
The fair value of these market-based stock units was estimated on the date of grant using the Monte Carlo Simulation Valuation Model, which estimates the potential outcome of achieving the market condition based on simulated future stock prices, with the following assumptions:
The Company granted 43,200 performance-based restricted stock units in March 2014 with a grant date fair value of $12.30 per share. The vesting and issuance of Company stock pursuant to these awards depended on obtaining regulatory clearance of a designated number of ePlex products within a defined time. Stock-based compensation expense for performance-based awards is recognized when it is probable that the applicable performance criteria will be satisfied. The probability of achieving the relevant performance criteria is evaluated on a quarterly basis. On December 31, 2014, 10,800 units were earned and vested with a total fair value of $147,000. On each of December 31, 2017, 2016, and 2015, 10,800 units were forfeited and canceled as the related performance metrics were not achieved by such dates. As of December 31, 2017, all compensation related to the performance-based restricted stock units has been recognized.
Employee Stock Purchase Plan
Following the adoption of the ESPP by the Company’s board of directors in March 2013, the Company's stockholders approved the ESPP in May 2013 at the Company's Annual Meeting of Stockholders. A total of 650,000 shares of the Company’s common stock are reserved for issuance under the ESPP, which permits eligible employees to purchase common stock at a discount through payroll deductions.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company's board of directors; provided that no offering period may exceed 27 months. Employees may invest up to 10% of their gross compensation through payroll deductions. In no event may an employee purchase more than 1,500 shares of common stock during any six-month offering period. As of December 31, 2017, there were 93,116 shares of common stock available for issuance under the ESPP. The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation. As a result, stock-based compensation expense related to the ESPP has been recorded during the year ended December 31, 2017.
A summary of ESPP activity for the years ended December 31, 2017, 2016, and 2015 is as follows (in thousands, except share and per share data):
The Company uses the Black-Scholes model to estimate the fair value on the date of grant for ESPP purchase rights. The assumptions used in the valuation for the years ended December 31, 2017, 2016 and 2015, are summarized in the following table:
Stock-Based Compensation Expense Recognition
Stock-based compensation was recognized in the consolidated statements of comprehensive loss as follows (in thousands):
No stock-based compensation was capitalized during the periods presented, and there was no unrecognized tax benefit related to stock-based compensation for the years ended December 31, 2017, 2016 and 2015, respectively.
6. Income Taxes
The Company's income (loss) before provision (benefit) for income taxes for the years ended December 31, 2017, 2016, and 2015, respectively, was generated in the following jurisdictions (in thousands):
The components of income tax expense (benefit) were as follows for the years ended December 31, 2017, 2016, and 2015, respectively (in thousands):
The components of net deferred income taxes consisted of the following at December 31, 2017 and 2016, respectively (in thousands):
A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to the loss from operations is summarized for the years ended December 31, 2017, 2016, and 2015, respectively, as follows:
The Company had federal net operating loss (NOL) carryforwards available of approximately $264,400,000 as of December 31, 2017 after consideration of limitations under Section 382 of the Internal Revenue Code, or Section 382, as further described below. Additionally, the Company had state NOL carryforwards available of $186,900,000 as of December 31, 2017. These federal and state NOLs may be used to offset future taxable income and will begin to expire in 2025 and 2018, respectively.
The Company adopted ASU 2016-09 in the first quarter of 2017. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies related to share-based payment to employees in additional paid-in capital. Instead, all income tax effects of awards will be recognized in the income statement when awards vest or are settled. All excess tax benefits not previously recognized were to be recorded to retained earnings as a cumulative effect adjustment upon adoption. Upon adoption, no adjustment to retained earnings was necessary due to the Company’s valuation allowance position. Approximately $1,976,000 attributable to excess tax benefits on stock compensation that had not been previously recognized was added to the deferred tax asset for NOLs with a corresponding increase to the valuation allowance.
The future utilization of the Company’s NOL carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of changes in ownership by stockholders that hold 5% or more of the Company’s common stock. An assessment of such ownership changes under Section 382 was completed through December 31, 2017. As a result of this assessment, the Company determined that it experienced multiple ownership changes through 2017 which will limit the future utilization of NOL carryforwards. The Company has reduced its deferred tax assets related to NOL carryovers that are anticipated to expire unused as a result of ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. Additionally, future ownership changes may further impact the utilization of existing NOLs.
The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth. Based on this evaluation, as of December 31, 2017, a valuation allowance of $71,464,000 has been recorded in order to measure only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as estimates of future taxable income during carryforward periods and the Company's projections for growth.
The Tax Cuts and Jobs Act, or the Jobs Act, was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Jobs Act reduces the U.S. federal corporate tax rate from 34% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. Due to the timing of the enactment and the complexity involved in applying the provisions of the Jobs Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in the consolidated financial statements as of December 31, 2017. As a result of the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, the Company recorded an expense of $36,400,000, which was fully offset by a corresponding decrease in its valuation allowance. The one-time transition tax is based on the total post-1986 earnings and profits (E&P) previously deferred from U.S. income taxes. In aggregate, the Company has a deficit in post-1986 E&P from its foreign subsidiaries resulting in no increase in income tax expense. No amounts have been provided for any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. As additional guidance is issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts recorded. The Company expects to complete the accounting for tax effects of the Jobs Act in 2018.
The Company applies the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. Income tax positions must meet a more likely than not recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There were no unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015.
At December 31, 2017 and December 31, 2016, the Company had not accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate that there will be a significant change in the amount of unrecognized tax benefits over the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. The Company's Federal and state tax returns since inception are subject to examination due to the carryover of net operating losses. As of December 31, 2017, the Company’s tax years from 2011 through 2012 are subject to examination by the United Kingdom tax authorities. The statute of limitations for the assessment and collection of income taxes related to other foreign tax returns varies by country. In the foreign countries where the Company has operations, these time periods generally range from three to five years after the year for which the tax return is due or the tax is assessed.
7. Commitments and Contingencies
Leases
The Company has lease agreements for its office, manufacturing, warehousing and laboratory space and for office equipment. Rent and operating expenses charged were $1,654,000, $1,871,000 and $1,233,000 for the years ended December 31, 2017, 2016, and 2015, respectively. Pursuant to the Company’s lease agreements, a portion of the monthly rent has been deferred. The balance deferred at December 31, 2017 and 2016 was $3,652,000 and $4,097,000, respectively.
Annual future minimum obligations for leases as of December 31, 2017 are as follows (in thousands):
Legal Proceedings
From time to time, the Company is party to litigation and other legal proceedings in the ordinary course, and incidental to the conduct of its business. While the results of any litigation or other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material effect on its financial position or results of operations.
8. Inventories
Inventory on hand as of December 31, 2017 and 2016 comprised the following (in thousands):
9. Property and Equipment, net
Property and equipment comprised the following as of December 31, 2017 and 2016 (in thousands):
Depreciation expense was $4,771,000, $3,510,000 and $3,112,000 for the years ended December 31, 2017, 2016 and 2015, respectively. During the years ended December 31, 2017, 2016 and 2015, the Company disposed of certain assets no longer in use with a net book value of $207,000, $76,000, and $153,000, respectively, recorded to cost of revenue, sales and marketing, research and development, or general and administrative expenses based on the asset's respective use.
10. Loan Payable
As of December 31, 2017 and 2016, long-term debt consisted of the following (in thousands):
Term Loans
In January 2015, the Company entered into a Loan and Security Agreement, or the LSA, with Solar Capital Partners (as successor-in-interest to General Electric Capital Corporation), and certain other financial institutions party thereto, as lenders, pursuant to which the Company obtained (a) up to $35,000,000 in a series of term loans and (b) a revolving loan in the maximum amount of $5,000,000. As of December 31, 2017, the Company had borrowed all $35,000,000 under the term loans as provided in the the LSA.
The term loans will accrue interest at a rate equal to (a) the greater of 1.00% or the 3-year treasury rate in effect at the time of funding, plus (b) an applicable margin between 4.95% and 5.90% per annum. The Company is only required to make interest payments on amounts borrowed pursuant to the term loans from the applicable funding date until August 1, 2018, or the Interest Only Period. Following the Interest Only Period, monthly installments of principal and interest under the Term Loans will be due until the original principal amount and applicable interest is fully repaid by October 12, 2019, or the Maturity Date. The Company may further extend the Interest-Only Period until January 1, 2019 and the Final Maturity Date until March 12, 2020, subject in each case to the satisfaction of certain financial conditions. Interest expense recognized on the term loans for the years ended December 31, 2017, 2016, and 2015 totaled $1,820,000, $1,184,000, and $611,000, respectively.
Under the LSA, the Company is required to comply with certain affirmative and negative covenants, including, without limitation, delivering reports and notices relating to the Company’s financial condition and certain regulatory events and intellectual property matters, as well as limiting the creation of liens, the incurrence of indebtedness, and the making of certain investments, payments and acquisitions, other than as specifically permitted by the LSA. As of December 31, 2017, the Company was in compliance with all covenants under the LSA.
Revolving Loan
Pursuant to the LSA, the Company may borrow up to $5,000,000 under the revolving loan facility. Borrowings under the revolving loan will accrue interest at a rate equal to (a) the greater of 1.25% per annum or a base rate as determined by a three-month LIBOR-based formula, plus (b) an applicable margin between 2.95% and 3.95% based on certain criteria as set forth in the LSA. All principal and interest outstanding under the revolving loan is due and payable on the Maturity Date. Following the funding of Term Loan A, the Company is required to pay a commitment fee equal to 0.75% per annum of the amounts made available but unborrowed under the revolving loan. As of December 31, 2017, the Company had not borrowed any amounts pursuant the revolving loan facility. Interest expense recognized for the unused revolving loan facility fee for the years ended December 31, 2017, 2016, and 2015 was $35,000, $42,000, and $34,000, respectively.
Debt Issuance Costs
As of December 31, 2017 and 2016, the Company had $1,641,000 and $585,000, respectively, of unamortized debt issuance discount, which is offset against borrowings in long-term and short-term debt.
For the twelve months ended December 31, 2017, 2016, and 2015, amortization of debt issuance costs were $1,132,000, $298,000, and $208,000, respectively, which was included in interest expense in the Company's consolidated statements of comprehensive loss for the periods presented.
Letter of Credit
In September 2012, the Company provided a $758,000 letter of credit issued by Banc of California to the landlord of its executive office facility in Carlsbad, California. This letter of credit was secured with $758,000 of restricted cash as of December 31, 2017.
11. Employee Benefit Plan
The Company has a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation. The Company may make matching contributions under the 401(k) plan; however, the Company has not made any such contributions to date.
12. Other Current Liabilities
Other current liabilities as of December 31, 2017 and 2016 comprised the following (in thousands):
13. Fair Value of Financial Instruments
The following table presents the financial instruments measured at fair value on a recurring basis on the financial statements of the Company and the valuation approach applied to each class of financial instruments at December 31, 2017 and 2016, respectively, (in thousands):
At December 31, 2017, the carrying value of the financial instruments measured and classified within Level 1 was based on quoted prices and marked to market. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability.
14. Marketable Securities
The following table summarizes the Company’s marketable securities at December 31, 2017 and 2016 (in thousands):
The following table summarizes the maturities of the Company’s marketable securities at December 31, 2017 (in thousands):
During 2013, the Company sold its preferred stock investment in ALL in connection with ALL's acquisition by Illumina, Inc., resulting in a $1,392,000 realized gain. Additionally, in 2016 and 2015 the Company received $9,000 and $223,000, respectively, related to the release of escrowed proceeds.
15. Quarterly financial data (unaudited)
The following tables show a summary of the Company’s quarterly financial results for each of the four quarters of 2017 and 2016 (in thousands, except for per share amounts):
(1) Basic and diluted earnings per share are computed independently for each of the quarters presented. As such, the sum of the quarterly basic and diluted earnings per share information may not equal annual basic and diluted earnings per share.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2017, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred in the quarter ended December 31, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of GenMark Diagnostics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited GenMark Diagnostics, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). In our opinion, GenMark Diagnostics, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Diego, California
February 27, 2018
Item 9B.
Item 9B.
OTHER INFORMATION
None.
PART III.
Item 10.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Board of Directors Information,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement to be filed in connection with our 2018 Annual Meeting of Stockholders, or the Proxy Statement.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics for our directors, officers and employees, which is available on our website at www.genmarkdx.com in the Investor Relations section under “Corporate Governance.” If we make any substantive amendments to the code of business conduct and ethics or grant any waiver from a provision of the code of business conduct and ethics to any executive officer or director, we will promptly disclose, within four business days of such amendment or waiver, the nature of the amendment or waiver on our website. The information on, or that can be accessed from, our website is not incorporated by reference into this Annual Report.
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee” contained in the Proxy Statement.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Certain Relationships and Related Transactions,” and “Board of Directors Information” contained in the Proxy Statement.
Item 14.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Principal Accountant Fees and Services” and “Report of the Audit Committee” contained in the Proxy Statement.
Item 15.
Item 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a)
Documents filed as part of this Annual Report.
1.
The following financial statements of GenMark Diagnostics, Inc. and Report of Independent Registered Public Accounting Firm, are included in this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
2.
List of financial statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.
List of Exhibits required by Item 601 of Regulation S-K. See Item 15(b) below.
(b) Exhibits
_____________________
*
Indicates a management contract or compensatory plan or arrangement in which any director or named executive officer participates.
ü
Included in this filing.
†
Confidential treatment has been granted with respect to certain portions of this exhibit.
+
GenMark has requested confidential treatment with respect to certain portions of this exhibit.
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2018.
GENMARK DIAGNOSTICS, INC.
By:
/s/ HANY MASSARANY
Name:
Hany Massarany
Title:
Chief Executive Officer, President and Director
(principal executive officer)
February 27, 2018
By:
/s/ SCOTT MENDEL
Name:
Scott Mendel
Title:
Chief Financial Officer
(principal financial and accounting officer)
February 27, 2018
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hany Massarany and Scott Mendel, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.