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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

For the transition period from ____ to ____

Commission File Number 001-36200

________________________

 

OXFORD IMMUNOTEC GLOBAL PLC

(Exact name of registrant as specified in its charter)

 

England and Wales

98-1133710

(State or other jurisdiction of

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

incorporation or organization)

 

 

 

94C Innovation Drive, Milton Park, Abingdon

OX14 4RZ, United Kingdom

 

Not Applicable

(Address of Principal Executive Offices)

(Zip Code)

 

+44 (0)1235 442780

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Ordinary Shares, £0.006705 nominal value per share

 

OXFD

 

The Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Non-accelerated filer   ☐

Accelerated filer ☒

Smaller reporting company 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Yes   No ☒

 

As of October 26, 2020, there were 25,961,817 Ordinary Shares, nominal value £0.006705, of Oxford Immunotec Global PLC outstanding.

 

 

 

 

 

Oxford Immunotec Global PLC

Form 10-Q

Quarterly Period Ended September 30, 2020

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed consolidated balance sheets as of September 30, 2020 (unaudited) and December 31, 2019

4

 

 

 

 

Condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2020 and 2019

5

 

 

 

 

Condensed consolidated statements of other comprehensive loss (unaudited) for the three and nine months ended September 30, 2020 and 2019

6

 

 

 

 

Condensed consolidated statements of shareholders’ equity (unaudited) for the three and nine months ended September 30, 2020 and 2019

7

 

 

 

 

Condensed consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2020 and 2019

8

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 6.

Exhibits

30

 

 

 

Signatures

31

 

 

 

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or the Quarterly Report, and the exhibits hereto, contains or incorporates by reference estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” within the meaning of, and are made pursuant to the safe harbor provisions of, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and other applicable federal United States, or U.S., and United Kingdom, or U.K., laws, regulations and other legal principles. All statements other than statements of historical fact in this Quarterly Report are forward-looking statements. The forward-looking statements are contained principally in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A, “Risk Factors,” but are also contained elsewhere in this Quarterly Report. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “would,” “could,” “should,” “intend,” “plan,” “contemplate,” “expect,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “target,” “potential,” “continue,” and “ongoing” and other comparable expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements involve substantial known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, operations, condition, liquidity, prospects, opportunities, performance, achievements and industry results, as well as those of the markets we serve or intend to serve, to differ materially from those currently anticipated. Forward-looking statements are not assurances of future performance. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us, and our expectations of the future, about which we cannot be certain and that involve substantial risks and uncertainties. Such risks and uncertainties include, but are not limited to:

 

 

given our prior history of losses, our ability to achieve and sustain profitability and our ability to manage our growth;

 

our ability to continue to sell our T-SPOT.TB at current prices if, for example, our customers or prospective customers are unwilling to pay for our tests at current pricing levels or as a result of increased competition generally;

 

our ability to effectively use our current financial resources and our ability to obtain additional capital resources;

 

our ability to further develop, commercialize and achieve market acceptance of our current and future products;

 

our ability to obtain and maintain regulatory body clearance and approval to market any of our products;

 

continued demand for diagnostic products for tuberculosis and other immune-regulated conditions and the development of new market opportunities;

 

our ability to compete successfully in our target markets and to maintain and expand our sales network;

  the impact of global economic and political developments on our business, including economic slowdowns or recessions resulting from the ongoing coronavirus, or COVID-19, pandemic;
  natural and manmade disasters, including pandemics such as COVID-19, and other force majeures, which could impact our operations, and those of our partners and other participants in the health care industry, and which would likely reduce demand for, or inhibit our ability to supply, our products;
 

coverage and reimbursement decisions of insurers and other third-party payors, as well as guidelines, recommendations and studies published by various organizations related to the use of our products;

 

our dependence on certain of our customers, suppliers and service providers;

 

disruptions to our business, including disruptions at our laboratory and manufacturing facilities, natural and man-made disasters, public health crises and other catastrophic events;

 

the integrity and uninterrupted operation of our information technology and storage systems;

 

the impact of currency fluctuations on our business;

 

the impact of any disruptions resulting from the U.K.’s withdrawal from the European Union on January 31, 2020, and further withdrawal issues, timing and transition agreements, including those that impact at the end of the transition period on December 31, 2020;
 

potential changes in social, political, regulatory and economic conditions or laws and policies governing the health care system, tax laws of the U.S. and laws and regulations impacting foreign trade in the U.S. and abroad, including the ongoing trade dispute between the U.S. and China, immigration, manufacturing, development and investment in the U.S. and in other territories and countries where we or our customers and suppliers operate;

 

our ability to make successful acquisitions or investments and to manage the integration of such acquisitions or investments;

 

our ability to attract or retain key members of our management;

 

the impact of taxes on our business, including our ability to use net operating losses;

  our ability to maintain effective internal control over financial reporting and the possibility of identifying material weaknesses in our internal control over financial reporting;
 

the impact of legislative and regulatory developments, including healthcare and tax reform, on our business;

 

the impact of any product liability, intellectual property and commercial litigation on our business;

  the impact of disruptions in, or breach of, our information technology systems, or those of third parties that manage such systems, including as a result of cyber-attacks, and other similar matters which could result in, among other things, personal information or protected health information being improperly accessed, tampered with or disclosed;
 

our ability to comply with Securities and Exchange Commission, or SEC, reporting obligations, as well as domestic and international anti-fraud, anti-corruption, privacy, environmental, health and safety laws and regulations;

 

our ability to maintain our licenses to sell our products around the world, including in countries such as China, Japan and the U.S.;

 

our ability to protect and enforce our intellectual property rights;

 

our status as an English company with our ordinary shares listed in the U.S.;

 

the volatility of the price of our ordinary shares, potential substantial future sales of our ordinary shares and the fact that we do not pay dividends; and

 

the impact of anti-takeover provisions under U.K. law and our articles of association.

 

 

2

 

You should refer to Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as well as that Risk Factor included in Part II, Item 1A, “Risk Factors,” in this Quarterly Report for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard any forward-looking statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update or revise these forward-looking statements at some point in the future, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made.

 

As used in this Quarterly Report, the words “Company,” “we,” “us” and “our” refer to Oxford Immunotec Global PLC, a public limited company incorporated under the laws of England and Wales.

 

Where You Can Find More Information

 

We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public on the SEC’s website at www.sec.gov. In addition, we make available free of charge on our corporate website at www.oxfordimmunotec.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.oxfordimmunotec.com, we do not incorporate such website or its contents into this Quarterly Report.

 

 

 

 

 

 

 

 

3

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Oxford Immunotec Global PLC

Condensed consolidated balance sheets

 

  

September 30,

  

December 31,

 

(in thousands, except share and per share data)

 2020  2019 
  

(unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $160,621  $181,270 

Accounts receivable, net

  10,866   13,669 

Other receivables

  184   4,660 

Inventory, net

  13,099   11,096 

Prepaid expenses and other assets

  3,602   5,186 

Total current assets

  188,372   215,881 

Restricted cash

  100   100 

Property and equipment, net

  10,176   7,095 

Lease right-of-use assets

  7,317   7,443 

Goodwill

  2,483   2,483 

Other intangible assets, net

  70   87 

Deferred tax asset

  1,923   2,163 
Other assets  59    

Total assets

 $210,500  $235,252 
         

Liabilities and shareholders' equity

        

Current liabilities:

        

Accounts payable

 $2,371  $2,420 

Accrued liabilities

  7,916   10,396 

Current portion of lease liability

  1,487   984 

Deferred income

  27   19 

Total current liabilities

  11,801   13,819 

Long-term portion of lease liability

  7,190   7,710 

Other liabilities

  250   32 

Total liabilities

  19,241   21,561 
         

Commitments and contingencies (Note 12)

           
         

Shareholders' equity:

        

Ordinary shares, £0.006705 nominal value; 39,068,071 and 39,824,703 shares authorized at September 30, 2020 and December 31, 2019, respectively, and 25,961,817 and 26,419,961 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

  272   276 

Additional paid-in capital

  301,347   304,909 

Accumulated deficit

  (101,484)  (84,033)

Accumulated other comprehensive loss

  (8,876)  (7,461)

Total shareholders' equity

  191,259   213,691 

Total liabilities and shareholders' equity

 $210,500  $235,252 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

4

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of operations

(unaudited)

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 

(in thousands, except share and per share data)

 

2020

   

2019

   

2020

   

2019

 

Revenue

  $ 19,436     $ 21,219     $ 39,182     $ 55,596  

Cost of revenue

    4,578       5,731       10,352       15,359  

Gross profit

    14,858       15,488       28,830       40,237  

Operating expenses:

                               

Research and development

    2,612       1,631       7,731       6,044  

Sales and marketing

    6,570       7,405       19,258       21,169  

General and administrative

    5,401       5,531       17,983       16,230  

Settlement expense

          799             1,002  

Total operating expenses

    14,583       15,366       44,972       44,445  

Operating income (loss) from continuing operations

    275       122       (16,142 )     (4,208 )

Other income (expense):

                               

Interest income

    65       1,064       770       3,426  

Foreign exchange gains (losses)

    (300 )     360       539       (233 )

Other income

    18       23       50       65  

Income (loss) from continuing operations before income taxes

    58       1,569       (14,783 )     (950 )

Income tax benefit (expense) from continuing operations

    (157 )     (383 )     (230 )     1,230  

Income (loss) from continuing operations

    (99 )     1,186       (15,013 )     280  

Discontinued operations:

                               

Income (loss) from discontinued operations before income taxes

          (469 )     147       (469 )

Income tax expense from discontinued operations

    (50 )           (995 )      
Loss from discontinued operations     (50 )     (469 )     (848 )     (469 )

Net income (loss)

  $ (149 )   $ 717     $ (15,861 )   $ (189 )
                                 

Net income (loss) per ordinary share - basic:

                               
Income (loss) from continuing operations   $     $ 0.04     $ (0.58 )   $ 0.01  

Loss from discontinued operations

          (0.02 )     (0.03 )     (0.02 )
Net income (loss)   $ (0.01 )   $ 0.03     $ (0.61 )   $ (0.01 )
                                 

Net income (loss) per ordinary share - diluted:

                               
Income (loss) from continuing operations   $     $ 0.04     $ (0.58 )   $ 0.01  
Loss from discontinued operations           (0.02 )     (0.03 )     (0.02 )
Net income (loss)   $ (0.01 )   $ 0.03     $ (0.61 )   $ (0.01 )
                                 

Weighted-average shares used to compute net income (loss) per ordinary share - basic

    25,898,067       26,751,083       25,975,250       26,631,704  

Weighted-average shares used to compute net income (loss) per ordinary share - diluted

    25,898,067       26,936,541       25,975,250       26,904,481  

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

5

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of other comprehensive loss

(unaudited)

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 

Net income (loss)

 $(149) $717  $(15,861) $(189)
                 

Other comprehensive income (loss):

                

Foreign currency translation adjustment, including tax benefit (expense) of $309, $(426), $(417) and $(486), respectively

  1,399   (1,714)  (1,415)  (1,902)

Other comprehensive income (loss), net of tax

  1,399   (1,714)  (1,415)  (1,902)
                 

Total comprehensive income (loss)

 $1,250  $(997) $(17,276) $(2,091)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

6

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of shareholders’ equity

(unaudited)

 

                           

Accumulated

         
           

Additional

           

other

   

Total

 
   

Ordinary

   

paid-in

   

Accumulated

   

comprehensive

   

shareholders'

 
(in thousands)   shares     capital     deficit     gain (loss)     equity  

Balance at December 31, 2019

  $ 276     $ 304,909     $ (84,033 )   $ (7,461 )   $ 213,691  

Exercise of share options

          1                   1  

Share-based compensation expense

          957                   957  

Tax on vesting of restricted share units

          (155 )                 (155 )

Other comprehensive loss

                      (2,727 )     (2,727 )
Ordinary shares repurchased     (4 )     (6,138 )     (1,590 )           (7,732 )

Net loss

                (6,027 )           (6,027 )
Balance at March 31, 2020     272       299,574       (91,650 )     (10,188 )     198,008  
Exercise of share options           57                   57  
Share-based compensation expense           610                   610  
Tax on vesting of restricted share units           (10 )                 (10 )
Other comprehensive loss                       (87 )     (87 )
Net loss                 (9,685 )           (9,685 )

Balance at June 30, 2020

    272       300,231       (101,335 )     (10,275 )     188,893  
Exercise of share options           41                   41  
Share-based compensation expense           1,101                   1,101  
Tax on vesting of restricted share units           (26 )                 (26 )
Other comprehensive loss                       1,399       1,399  
Net loss                 (149 )           (149 )
Balance at September 30, 2020   $ 272     $ 301,347     $ (101,484 )   $ (8,876 )   $ 191,259  

 

                           

Accumulated

         
           

Additional

           

other

   

Total

 
   

Ordinary

   

paid-in

   

Accumulated

   

comprehensive

   

shareholders'

 

(in thousands)

 

shares

   

capital

   

deficit

   

gain (loss)

   

equity

 

Balance at December 31, 2018

  $ 276     $ 303,015     $ (80,762 )   $ (8,523 )   $ 214,006  

Exercise of share options

    2       1,800                   1,802  

Share-based compensation expense

          845                   845  

Tax on vesting of restricted share units

          (145 )                 (145 )

Other comprehensive income

                      1,167       1,167  

Net loss

                (1,496 )           (1,496 )
Balance at March 31, 2019     278       305,515       (82,258 )     (7,356 )     216,179  
Exercise of share options     2       1,531                   1,533  
Share-based compensation expense           846                   846  
Tax on vesting of restricted share units           (10 )                 (10 )
Other comprehensive loss                       (1,355 )     (1,355 )
Net income                 590             590  

Balance at June 30, 2019

    280       307,882       (81,668 )     (8,711 )     217,783  
Exercise of share options           593                   593  
Share-based compensation expense           983                   983  
Tax on vesting of restricted share units           (68 )                 (68 )
Other comprehensive loss                       (1,714 )     (1,714 )
Ordinary shares repurchased     (2 )     (2,789 )     (534 )           (3,325 )
Net income                 717             717  
Balance at September 30, 2019   $ 278     $ 306,601     $ (81,485 )   $ (10,425 )   $ 214,969  

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

7

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of cash flows

(unaudited)

 

  

Nine months ended

 
  

September 30,

 

(in thousands)

 

2020

  

2019

 

Cash flows from operating activities from continuing operations

        

Net loss

 $(15,861) $(189)

Less: Net loss from discontinued operations, net of tax

  (848)  (469)

Net income (loss) from continuing operations

  (15,013)  280 

Adjustments to reconcile net income (loss) from continuing operations to net cash used in operating activities from continuing operations:

        

Depreciation and amortization expense

  1,440   1,351 
Write-down for slow moving inventory  439    

Non-cash rent expense

  133   178 
Accretion and amortization of loan fees and non-cash interest income     (147)
Non-cash interest  (15)   

Share-based compensation expense

  2,667   2,674 
Loss on disposal of property and equipment  20   20 

Deferred income taxes

  (193)  (250)

Changes in operating assets and liabilities:

        

Accounts receivable, net

  2,590   (6,686)

Inventory, net

  (2,700)  (2,346)

Prepaid expenses and other assets

  1,461   (1,974)

Accounts payable

  (612)  325 

Accrued liabilities

  (3,352)  (820)

Deferred income

  8   49 
Long-term liabilities  220    

Net cash used in operating activities from continuing operations

  (12,907)  (7,346)

Cash flows from investing activities from continuing operations

        

Purchases of property and equipment

  (3,974)  (729)

Net cash used in investing activities from continuing operations

  (3,974)  (729)

Cash flows from financing activities from continuing operations

        

Proceeds from exercise of share options

  99   3,926 

Payments of tax withheld on exercises of options and vesting of restricted share units

  (189)  (224)
Repurchases of ordinary shares  (7,732)  (3,325)

Net cash provided by (used in) financing activities from continuing operations

  (7,822)  377 

Net cash flows used in continuing operations

  (24,703)  (7,698)

Cash flows from discontinued operations

        
Net operating cash flows provided by discontinued operations  147    

Net investing cash flows provided by discontinued operations

  4,500    

Net cash flows provided by discontinued operations

  4,647    

Effect of exchange rate changes on cash, cash equivalents and restricted cash

  (593)  (864)

Net decrease in cash, cash equivalents and restricted cash

  (20,649)  (8,562)

Cash, cash equivalents and restricted cash at beginning of period

  181,370   192,944 

Cash, cash equivalents and restricted cash at end of period

 $160,721  $184,382 
         
Supplemental disclosure of non-cash investing and financing information:        
Purchases of property and equipment included in accounts payable and accrued expenses $697  $186 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

8

 

Oxford Immunotec Global PLC

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2020 

 

 

1. Business and basis of presentation

 

Description of business

 

Oxford Immunotec Global PLC, or the Company, is a global, high-growth diagnostics company focused on developing and commercializing proprietary tests for immunology and infectious disease by leveraging the technological, product development, manufacturing, quality, regulatory and sales and marketing capabilities it has developed over its eighteen year history. The Company’s proprietary T-SPOT.TB test utilizes its T-SPOT technology platform to test for tuberculosis, which is the leading cause of infectious disease death worldwide. Alongside this, the Company has also developed reagents and methods to purify white blood cells for use in immunology assays. When used in conjunction with T-SPOT.TB, these reagents extend blood stability of samples for the Company’s test and/or enable workflow automation for T-SPOT.TB.

 

Unaudited interim financial statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments, of a normal recurring nature, necessary for a fair statement of the financial position at September 30, 2020, the results of operations for the three and nine months ended September 30, 2020 and 2019, and the cash flows for the nine-month periods ended September 30, 2020 and 2019. Interim results are not necessarily indicative of results for a full year.

 

The consolidated balance sheet presented as of December 31, 2019, has been derived from the Company’s audited consolidated financial statements as of that date. The consolidated financial statements and notes included in this Quarterly Report should be read in conjunction with the 2019 consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 6, 2020, or the 2019 Form 10-K.

 

Cash, cash equivalents and restricted cash

 

The Company considers all highly liquid investments purchased with maturities at acquisition of three months or less to be cash equivalents. Cash equivalents consist of amounts invested in money market funds and tri-party reverse repurchase agreements that are collateralized by U.S. Treasury and agency securities of at least 102% of the principal amount. The Company has a policy that the collateral has at least the prevailing credit rating of U.S. Government Treasuries and Agencies. In a tri-party reverse repurchase agreement, a third-party custodian bank is used to manage the exchange of funds and ensure that collateral received is maintained of at least 102% of the value of the tri-party reverse repurchase agreements on a daily basis thereby minimizing risk and exposure to both parties. The Company does not record an asset or liability as the Company is not permitted to sell or re-pledge the associated collateral. The tri-party reverse repurchase agreements have stated maturities of 90 days or less and are included in cash equivalents due to their high liquidity and relatively low risk.

 

The Company holds bank accounts in the United States, the United Kingdom, Germany, Japan, China, South Korea and Singapore. The Company maintains deposits in government insured financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

 

Restricted cash relates to collateral for procurement cards issued by a U.S. commercial bank.

 

 

Software developed for internal use

 

The Company accounts for the costs of software obtained or developed for internal use in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 350, Intangibles – Goodwill and Other, or ASC 350. Computer software development costs are expensed as incurred, except for internal use software costs that qualify for capitalization as described below and include the cost of computer software and costs incurred in developing features and functionality. These capitalized costs are included in property and equipment, net in the condensed consolidated balance sheets. The Company expenses costs incurred in the preliminary project and post implementation stages of software development and capitalizes costs incurred in the application development stage and costs associated with significant enhancements to existing internal use software applications. Software costs are amortized using the straight-line method over estimated useful lives commencing when the software project is ready for its intended use.

 

Revenues

 

The Company’s revenues include product and service revenues. Product revenue from diagnostic test kit sales and related accessories is typically recognized at a point in time based upon the amount of consideration to which the Company expects to be entitled. For sales made with variable consideration, such as discounts, refunds, incentives, or other similar items, changes to the transaction price will be re-assessed at each reporting period until a final outcome is determined. Service revenue is recorded based upon contractually established billing rates and recognized upon delivery of test results to the customer. See Note 2. Revenue for disaggregation of revenue by geography.

 

For each arrangement that results in revenues, the Company first identifies all performance obligations. Then, in order to determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that there is only a remote possibility that a significant reversal of previously recognized revenue will occur. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period.

 

For the three and nine months ended September 30, 2020, the Company had no material bad-debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the condensed consolidated balance sheet as of September 30, 2020. The Company generally expenses sales commissions when incurred because the amortization period would be less than one year.

 

Revenue expected to be recognized in any future year related to remaining performance obligations is not material.

 

Taxes assessed by governmental authorities on revenue, including sales and value added taxes, are recorded on a net basis (excluded from revenue) in the consolidated statements of operations.

 

Income taxes

 

The Company calculates its interim income tax provision in accordance with ASC 270, Interim Reporting, and ASC 740, Accounting for Income Taxes. At the end of each interim period, the Company estimates its annual effective tax rate and applies that rate to its ordinary quarterly earnings to calculate the tax related to ordinary income. The tax effects for other items that are excluded from ordinary income are discretely calculated and recognized in the period in which they occur.

 

The remainder of the significant accounting estimates and policies used in preparation of the condensed consolidated financial statements disclosed in Note 1. Description of business and significant accounting policies to the consolidated financial statements in the 2019 Form 10-K remain unchanged.

 

 

Recently adopted accounting pronouncements

 

In January 2017, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2017-04, Intangibles – Goodwill and Other, or ASU 2017-04. ASU 2017-04 simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The Company adopted ASU 2017-04 as of January 1, 2020 on a prospective basis. The adoption of ASU 2017-04 has not had a material impact on the Company’s results of operations, financial position or related disclosures.

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13, which modifies certain disclosure requirements on fair value measurements. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are required to be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 as of January 1, 2020. The adoption of ASU 2018-13 has not had a material impact on the Company’s disclosures.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 as of January 1, 2020 using the prospective transition approach, which allows the Company to change the accounting method without restating prior periods or recording a cumulative adjustment. The adoption of ASU 2018-15 has not had a material impact on the Company’s results of operations, financial position or related disclosures.

 

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, or ASU 2019-01, to clarify certain requirements of Accounting Standards Codification 842, Leases. The Company adopted ASU 2019-01 as of January 1, 2020. The adoption of ASU 2019-01 has not had a material impact on the Company’s results of operations, financial position or related disclosures.

 

Recently issued but not yet adopted accounting pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. Under current U.S. GAAP, a company only considered past events and current conditions in measuring an incurred loss. Under ASU 2016-13, the information that a company must consider is broadened in developing an expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. The new guidance is to be effective for smaller reporting companies for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. The guidance is applied using a modified retrospective, or prospective approach, depending on a specific amendment. The Company is currently evaluating ASU 2016-13.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, or ASU 2019-12, which includes amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740, Income Taxes, or ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The new guidance will be effective for the Company for interim and annual periods beginning after December 15, 2020. Early adoption of the amendments is permitted. The Company is still evaluating the impact of ASU 2019-12 on its financial statements, specifically the impact of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

 

 

 

 

 

2. Revenue

 

The following table presents the Company’s revenue disaggregated by geography (United States, Europe and rest of world, or Europe and ROW, and Asia):

 

     

Three months ended September 30,

   

Nine months ended September 30,

 

(in thousands)

   

2020

   

2019

   

2020

   

2019

 

Revenue

                                 

United States

    $ 4,442     $ 5,735     $ 11,366     $ 19,034  

Europe and ROW

      1,701       2,709       5,833       7,670  

Asia

      13,293       12,775       21,983       28,892  

Total revenue

    $ 19,436     $ 21,219     $ 39,182     $ 55,596  

 

 

3. Fair value measurement

 

As a basis for determining the fair value of certain of the Company’s financial instruments, the Company utilizes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1—Observable inputs such as quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs, other than Level 1 prices, 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.

 

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The carrying amount of certain of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses and other assets, accounts payable and accrued liabilities approximate fair value due to their short term nature.

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the entire fair value measurement requires management to make judgments and consider factors specific to the asset or liability.

 

The tables below present information about the Company’s financial assets measured at fair value on a recurring basis as of the respective dates and indicate the level of the fair value hierarchy utilized to determine such fair values. The Company had no financial liabilities measured at fair value on a recurring basis as of the dates indicated.

 

  

September 30, 2020

 

(in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                
U.S. Government money market funds $12,408  $12,408  $  $ 
Tri-party reverse repurchase agreements (collateralized by at least 102% U.S. Treasury and Agency Securities)  137,522      137,522    

Total

 $149,930  $12,408  $137,522  $ 

 

  

December 31, 2019

 

(in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Assets:

                
U.S. Government money market funds $14,971  $14,971  $  $ 
Tri-party reverse repurchase agreements (collateralized by at least 102% U.S. Treasury and Agency Securities)  154,258      154,258    

Total

 $169,229  $14,971  $154,258  $ 

 

 

There were no unrealized gains or losses from tri-party reverse repurchase agreements at  September 30, 2020 and December 31, 2019.

 

 

4. Cash, cash equivalents and restricted cash

 
Cash, cash equivalents and restricted cash consists of the following:
 

(in thousands)

 September 30, 2020  December 31, 2019 

Cash

 $10,691  $12,041 
Cash equivalents:        
U.S. Government money market funds  12,408   14,971 
Tri-party reverse repurchase agreements (collateralized by at least 102% U.S. Treasury and Agency Securities)  137,522   154,258 

Restricted cash, non-current

  100   100 

Total cash, cash equivalents and restricted cash

 $160,721  $181,370 

 

 

5. Accounts receivable, net

 

Accounts receivable, net, consisted of the following as of:

 

(in thousands)

 September 30, 2020  December 31, 2019 

Accounts receivable

 $10,891  $13,785 

Less allowance for uncollectible accounts receivable

  (25)  (116)

Accounts receivable, net

 $10,866  $13,669 

 

Included in the accounts receivable balances as of  September 30, 2020 and  December 31, 2019 are $151,000 and $1.6 million, respectively, related to an arrangement with one of our customers for which we have satisfied our performance obligations, however, we have not yet billed the customer as of the respective balance sheet dates.

 

 

6. Inventory, net

 

Inventory, net consisted of the following as of:

 

(in thousands)

 

September 30, 2020

  

December 31, 2019

 
Raw materials $11,394  $9,132 

Finished goods

  2,143   1,964 
Inventory reserve  (438)   

Inventory, net

 $13,099  $11,096 

 

 

 

 

 

7. Goodwill and acquired intangible assets

 

The Company has one reporting unit and goodwill represents the synergies realized in its acquisitions of Imugen, Inc. and Immunetics, Inc. The carrying amount of goodwill reflected in the Company’s consolidated balance sheets was $2.5 million at September 30, 2020 and December 31, 2019

 

Acquired intangible assets consisted of the following as of September 30, 2020 and December 31, 2019:

 

  

As of September 30, 2020

 

(in thousands)

 

Amortization period (years)

  Gross carrying amount  

Accumulated Amortization

  Net carrying amount 
Licenses 5-10  $664  $594  $70 

Total

    $664  $594  $70 

 

  

As of December 31, 2019

 

(in thousands)

 Amortization period (years) Gross carrying amount  

Accumulated Amortization

  Net carrying amount 

Licenses

 

5-10

 $680  $593  $87 

Total

   $680  $593  $87 

 

 

8. Accrued liabilities

 

Accrued liabilities consisted of the following as of:

 

(in thousands)

 September 30, 2020  December 31, 2019 
Employee related expenses $3,762  $4,827 
Accrued discount  1,172   1,173 
Corporate tax  1,090   105 
Professional services  292   959 
Royalties  4   1,291 
Other accrued liabilities  1,596   2,041 

Total accrued liabilities

 $7,916  $10,396 

 

 

9. Share capital

 

During the nine-month period ended September 30, 2020, the Company issued 27,616 ordinary shares upon the exercise of options and 45,130 ordinary shares were issued upon the vesting of restricted share units, or RSUs. During the year ended December 31, 2019, the Company issued 394,078 ordinary shares upon the exercise of options and 65,405 ordinary shares were issued upon the vesting of RSUs.

 

In 2019, the Company’s Board of Directors authorized the repurchase of up to $100 million of its ordinary shares in the aggregate (including commissions), subject to the approval of its shareholders by an ordinary resolution at its 2019 Annual General Meeting, or the share repurchase program. The share repurchase program was approved by the Company’s shareholders at its Annual General Meeting held on June 18, 2019. The Company began repurchasing shares in September 2019. For the four month period ended December 31, 2019, the Company purchased a total of 478,856 shares for a total cost of $7.0 million. During the three-month period ended  March 31, 2020, the Company repurchased 530,890 ordinary shares at a total cost of $7.7 million. No shares were repurchased during the second or third quarters of 2020, as the share repurchase program has been paused. At  September 30, 2020, $85.3 million of ordinary shares remain eligible for repurchase. The share repurchase program  may be suspended, modified or terminated at any time. The Company has no obligation to repurchase any amount of its ordinary shares under the program. Unless terminated by the Company’s Board of Directors, the share repurchase program will be valid for up to five years from the date of inception of the program

 

 

  

 

10. Share option and equity incentive plan

 

The impact on the Company’s results of operations from share-based compensation was as follows:

 

  

Three months ended September 30,

  

Nine months ended September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 

Cost of revenue

 $26  $21  $73  $56 

Research and development

  159   132   451   244 

Sales and marketing

  213   332   354   910 

General and administrative

  702   498   1,789   1,464 

Total share-based compensation

 $1,100  $983  $2,667  $2,674 

 

In November 2013, in connection with the Company’s initial public offering, the Company adopted the 2013 Share Incentive Plan, or the 2013 Plan, which provides for the grant of share options, restricted shares, RSUs and other share-based awards to employees, officers, directors and consultants of the Company. The 2013 Plan was amended at the Company’s 2017 Annual General Meeting of shareholders.

 

During the three-month period ended September 30, 2020, the Company granted 3,600 share options with an exercise price of $12.92 per share under the 2013 Plan. The weighted-average grant date fair value related to share options granted under the 2013 Plan during the three-month period ended September 30, 2020 was $5.85 per share. During the nine-month period ended September 30, 2020, the Company granted to certain employees and directors 454,001 share options with exercise prices ranging from $10.88 to $12.96 per share under the 2013 Plan. The weighted-average grant date fair value related to share options granted under the 2013 Plan during the nine-month period ended September 30, 2020 was $5.07 per share. Share options generally vest based on the employee’s continued service with the Company during the four year period following the vesting start date and expire after ten years. Share options granted to directors vest at the following annual general meeting of shareholders.

 

During the three-month period ended  September 30, 2020, the Company did not award any RSUs. During the nine-month period ended  September 30, 2020, the Company awarded 299,924 RSUs. RSUs generally vest based on the employee’s continued service with the Company during a specified period following grant as follows: 40% on the second anniversary of the vesting start date; 30% on the third anniversary of the vesting start date; and 30% on the fourth anniversary of the vesting start date. RSUs granted to directors vest at the following annual general meeting of shareholders. Share-based compensation expense for these RSUs is calculated based on the grant date market price of the shares and is being recognized over the vesting period.

 

For the three-month period ended September 30, 2020, the Company incurred shared-based compensation expense related to share options and RSUs of $613,000 and $487,000, respectively. For the three-month period ended September 30, 2019, the Company incurred shared-based compensation expense related to share options and RSUs of $658,000 and $325,000, respectively. For the nine-month period ended September 30, 2020, the Company incurred shared-based compensation expense related to share options and RSUs of $1.7 million and $962,000, respectively. For the nine months ended September 30, 2019, the Company incurred shared-based compensation expense related to share options and RSUs of $1.9 million and $741,000, respectively.

 

As of September 30, 2020, there was $4.1 million and $4.6 million of total unrecognized compensation cost related to unvested share options and RSUs, respectively. These costs are expected to be recognized over weighted-average periods of 2.4 years for share options and 2.7 years for RSUs.

 

 

 

 

11. Net income (loss) per ordinary share

 

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) per share:

 

  

Three months ended September 30,

  

Nine months ended September 30,

 

($ in thousands)

 

2020

  

2019

  

2020

  

2019

 

Numerator

                

Income (loss) from continuing operations

 $(99) $1,186  $(15,013) $280 

Income (loss) from discontinued operations

  (50)  (469)  (848)  (469)

Net income (loss)

 $(149) $717  $(15,861) $(189)
                 

Denominator

                

Weighted-average ordinary shares - basic

  25,898,067   26,751,083   25,975,250   26,631,704 

Dilutive effect of ordinary share equivalents resulting from ordinary share options and RSUs

     185,458      272,777 

Weighted-average ordinary shares - diluted

  25,898,067   26,936,541   25,975,250   26,904,481 

 

The following numbers of outstanding ordinary share options and unvested RSUs were excluded from the computation of diluted net loss per ordinary share for the periods presented because their effect would have been anti-dilutive:

 

  

Three months ended September 30,

  

Nine months ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Outstanding options to purchase ordinary shares

  114,933      112,907    

Unvested RSUs

  80,630      62,828    

 

 

12. Leases

 

Operating leases

 

The Company has operating leases for real estate and non-real estate in the United States, United Kingdom, China, Japan, South Korea and Singapore. One such operating lease is a sublease for real estate. The Company does not have any material finance leases.

 

In March 2020, the Company entered into a lease for new space in Marlborough, Massachusetts, which extends through November 2028 that will allow it to combine its laboratory and office space, currently located in Norwood, Massachusetts, with its U.S. corporate headquarters that is currently located in a separate location in Marlborough, Massachusetts, into a single facility. As of September 30, 2020, the property was not yet available for use by the Company and no right-of-use asset and corresponding lease liability were therefore recorded. The rent will commence on the earlier of the date on which the landlord delivers the property to the Company or the date on which the Company commences to operate its business in the property. The base rent on the facility over the remainder of the lease term will range from $30,000 per month to $38,000 per month.

 

On June 1, 2020, the Company entered into a lease extension for its property at 94C Milton Park, Abingdon U.K. The lease has been extended by a maximum of two years from the original agreement. The lease may be terminated by the Company at any time, without penalty, with three months’ notice. Annual rent during the extension period is £128,490 for January 1, 2021 to  December 31, 2021 and £256,980 for January 1, 2022 to December 31, 2022. The Company accounted for the extension as the modification of a lease and recorded an addition of £194,000 to its lease right-of-use assets and an addition of £175,000 to its lease liability. 

 

On July 2, 2020, the Company entered into a sub-lease extension for its property, comprising laboratory and office space, at 320 Norwood Park, South Norwood, Massachusetts. The sub-lease has been extended for 15 months until September 30, 2021 with annual rent of $213,000. The Company accounted for the extension as the modification of a lease and recorded an addition of $251,000 to its lease right-of-use assets and an addition of $234,000 to its lease liability.

 

 

 

 

 

13. Discontinued operations

 

In September 2018, the Company and certain of its subsidiaries entered into a Limited Liability Company Interest Purchase Agreement, or the Purchase Agreement, with Quest Diagnostics, Incorporated, or Quest, pursuant to which the Company sold its U.S. Laboratory Services Business to Quest, or the Transaction, for gross proceeds of $170 million in cash. Of this amount, approximately $32.3 million was paid directly to MidCap Financial Trust in settlement of all amounts due under the Company’s debt financing agreement, which included prepayment and exit fees of approximately $2.3 million.

 

At the time of sale, the U.S. Laboratory Services Business had a carrying value of $27.9 million. The Company recorded a gain of $146.0 million in connection with the Transaction, which amount was included in income from discontinued operations before income taxes in the Company’s consolidated statement of operations during the three months ended December 31, 2018.

 

Additionally, pursuant to the terms of the Purchase Agreement, the parties entered into certain ancillary agreements as of the Closing Date, including: (i) a transitional services agreement, or TSA, that was concluded in 2019, (ii) a technology license agreement that will remain in effect until the date of expiration or lapse of the last “Blood Stability Patent” to expire or lapse and (iii) a long-term supply agreement, or the Supply Agreement, pursuant to which Quest agreed to purchase T-SPOT.TB test kits and related accessories. The Supply Agreement will last for a period of seven years after the effective date unless terminated earlier by a party to the Supply Agreement. In addition, the parties entered into a strategic collaboration agreement to drive continued growth of T-SPOT.TB testing in the U.S. that will remain in effect until the expiration or termination of the Supply Agreement.

 

For the nine months ended September 30, 2020, the Company recorded a net charge from discontinued operations of $848,000 that included a correction of an immaterial prior period error of $937,000 related to a state tax assessment along with current taxes of $58,000, partially offset by a $147,000 adjustment on the remaining proceeds due from the Transaction.

 

During the second quarter of 2020, the Company received a payment of $4.5 million related to funds placed in escrow at the closing of the Transaction.

 

 

14. Income taxes

 

The Company recognized an income tax expense of $157,000 for the three months ended September 30, 2020, representing an effective income tax rate of 270.7%. Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations and other comprehensive income. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, it must allocate the tax provision to the other categories of earnings. The Company’s year-to-date gain recognized in other comprehensive income decreased during the three months ended September 30, 2020.  As a result, the Company recorded a discrete benefit in other comprehensive income related to unrealized gains and losses on foreign currency translation adjustments in the U.K and a tax expense for the three months ended September 30, 2020 through continuing operations. The Company’s effective income tax rate for the three months ended September 30, 2020 differs from the Company’s U.K statutory rate, primarily because the majority of its U.K. loss cannot be benefited due to the full valuation allowance position. The Company recorded an income tax expense of $383,000 for the three months ended  September 30, 2019.

 

For the nine months ended September 30, 2020, the Company recognized an income tax expense of $230,000 representing an effective income tax rate of (1.6)%. The income tax expense for the nine months ended September 30, 2020 was primarily related to discrete adjustments recorded in the period for an increase in valuation allowance on certain U.S state attributes and the write down of prepaid taxes, partially offset by the tax benefit recorded through continuing operations as a result of the intraperiod tax allocation rules. The Company’s effective income tax rate for the nine months ended September 30, 2020 differs from the Company’s U.K statutory rate, primarily because the majority of its U.K. loss cannot be benefited due to the full valuation allowance position. The Company recorded an income tax benefit of $1.2 million for the nine months ended September 30, 2019.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted in response to the COVID-19 pandemic. The CARES Act, among other provisions, permits carryovers and carrybacks of net operating losses generated in 2018 through 2020 to offset 100% of taxable income. In addition, the CARES Act allows net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company continues to evaluate the impact of the CARES Act, but at present does not expect it to have a material impact on its financial statements.

 

 

 

 

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

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Special Note Regarding Forward-Looking Statements” in this Quarterly Report for a discussion of the uncertainties, risks and assumptions associated with these statements. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below, including in Part II, Item 1A, “Risk Factors” and in the 2019 Form 10-K, particularly in Part I, Item 1A, “Risk Factors.” You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Form 10-K.

 

Overview

 

We are a global, high-growth diagnostics company focused on developing and commercializing proprietary tests for immunology and infectious disease by leveraging the technological, product development, manufacturing, quality, regulatory and sales and marketing capabilities we have developed over our eighteen year history. Our proprietary T-SPOT.TB test utilizes our T-SPOT technology platform to test for tuberculosis, or TB, which is the leading cause of infectious disease death worldwide. Alongside this, we have also developed reagents and methods to purify white blood cells for use in immunology assays. When used in conjunction with T-SPOT.TB, these reagents extend blood stability of samples for our test and/or enable workflow automation for T-SPOT.TB.

 

We have incurred significant losses from inception and as of September 30, 2020 had an accumulated deficit of $101.5 million. Our revenue for the nine months ended September 30, 2020 and 2019 was $39.2 million and $55.6 million, respectively. Our net loss for the nine months ended September 30, 2020 was $15.9 million compared to a net loss of $189,000 for the nine months ended September 30, 2019.

 

 

Impact of COVID-19 on our business

 

As the COVID-19 pandemic continues to impact global populations and economies, we continue to evaluate the impact of COVID-19 on both the broad diagnostics market and on the Company’s operations and financial condition more particularly. Given the importance of supporting patients with TB, which continues to be the leading cause of infectious disease death worldwide, we continue to diligently work with our suppliers, healthcare providers and partners to provide patients with access to our diagnostic tests, while taking into account regulatory, institutional and government guidance, policies and protocols. COVID-19 has affected the global economy as a whole, including the economies and industries in which we operate. Uncertainties regarding the scope and impact of the outbreak of COVID-19 has caused a re-prioritization of public health activities. COVID-19 has also impacted our sales, sources of supply and operations, along with the operations of our suppliers, other partners and customers, particularly as COVID-19 protocols and resources have restricted patient access to hospitals, physicians’ offices and other testing sites. Additionally, COVID-19 has restricted our sales representatives’ access to these sites. As a result, COVID-19 has impacted our performance and continues to represent a risk to our future performance.

 

Our U.K. laboratory and manufacturing facilities are open to required personnel and mandated safety protocols are in place. The majority of our remaining personnel currently work remotely.

 

The ultimate impacts of COVID-19 on our business are currently unknown and the challenges posed by COVID-19 on our business are expected to evolve. While restrictions put in place to control the spread of COVID-19 have been phasing out in many places, this trend appears to be slowing, as infection rates have recently been increasing. In fact, restrictions have been reimposed in certain countries. We are actively monitoring the situation and may take precautionary and preemptive actions that we determine are in the best interests of our employees and our business. We cannot predict the effects that such actions may have on our business or on our financial results, in particular with respect to demand for our products.

 

Financial operations overview

 

Revenue

 

We generate revenue mainly from sales associated with our T-SPOT technology platform via our direct sales force and also through distributors. Our T-SPOT.TB test is our first commercialized product based on this technology.

 

We currently offer our T-SPOT.TB test as both an in vitro diagnostic kit and a service. With respect to in vitro diagnostic kits, we sell test kits and associated accessories to distributors for resale and directly to institutions and laboratories that perform TB testing. Service revenue is earned from our established clinical testing laboratory in the U.K., where we perform our T-SPOT.TB test on samples sent to us by customers. For the majority of our customers, we primarily negotiate pricing directly with our customers; our prices are influenced to some degree by the mechanism and level of funding our customers receive for performing tests for TB infection.

 

18

 

Revenue by geography

 

We have a direct sales force in the U.S., certain European countries, China and Japan. Additionally, we market and sell our products through distributors in various countries, including some where we also have direct sales forces. As a result, our revenue is denominated in multiple currencies.

 

Second quarter revenue was significantly impacted by the COVID-19 pandemic, primarily due to a significant decline in testing demand in various countries, as responses to COVID-19 restricted patient access to hospitals, physicians’ offices and other testing sites and caused a re-prioritization of public health activities. However, revenue recovered during the third quarter of 2020.

 

The following table reflects revenue by geography (United States, Europe and rest of world, or Europe and ROW, and Asia) and as a percentage of total revenue, based on the billing address of our customers.

 

   

Three months ended September 30,

 

(in thousands, except percentages)

 

2020

   

2019

 

Revenue

                               
United States   $ 4,442       23 %   $ 5,735       27 %
Europe and ROW     1,701       9 %     2,709       13 %
Asia     13,293       68 %     12,775       60 %

Total revenue

  $ 19,436       100 %   $ 21,219       100 %

 

 

   

Nine months ended September 30,

 

(in thousands, except percentages)

 

2020

   

2019

 

Revenue

                               
United States   $ 11,366       29 %   $ 19,034       34 %
Europe and ROW     5,833       15 %     7,670       14 %
Asia     21,983       56 %     28,892       52 %

Total revenue

  $ 39,182       100 %   $ 55,596       100 %

 

Cost of revenue and operating expenses

 

Cost of revenue and gross margin

 

Cost of revenue consists of direct labor expenses, including employee benefits and share-based compensation expense, overhead expenses, material costs, cost of laboratory supplies, freight costs, royalties paid under license agreements, depreciation of laboratory equipment and leasehold improvements.

 

During the three months ended September 30, 2020 and 2019, our cost of revenue represented 24% and 27%, respectively, of our total revenue. For the nine months ended September 30, 2020 and 2019, our cost of revenue represented 26% and 28%, respectively, of our total revenue.

 

Our gross profit represents total revenue less total cost of revenue and gross margin is gross profit expressed as a percentage of total revenue. Our gross margins were 76% and 73% for the three months ended September 30, 2020 and 2019, respectively. Gross margins were 74% and 72% for the nine months ended September 30, 2020 and 2019, respectively.

 

19

 

Research and development expense

 

Our research and development efforts are focused on our recently announced T-SPOT Discovery SARS-CoV-2 (COVID-19) test kit and on development programs to enhance our TB product offering. We are developing multiple product enhancements that aim to improve the clinical utility of our TB test and to improve test workflow and automation.

 

Our research and development activities include performing research, development, clinical and regulatory activities and validating improvements to our technology and processes for the purpose of enhancing product performance. Research and development expense includes personnel-related expenses, including share-based compensation, fees for contractual and consulting services, clinical trial costs, travel costs, laboratory supplies, amortization, depreciation, rent, insurance and repairs and maintenance. The investment in our T-SPOT Discovery SARS-CoV-2 test kit is growing and on September 22, 2020, we announced that we will be contributing our test kits to a large clinical trial being conducted in collaboration with Public Health England. We expense all research and development costs as incurred. 

 

During the three months ended September 30, 2020 and 2019, our research and development expense represente13% and 8% respectively, of our total revenue. For the nine months ended September 30, 2020 and 2019, our research and development expense represented 20% and 11%, respectively, of our total revenue.

 

Sales and marketing expense

 

Our sales and marketing expense includes costs associated with our sales organization, including our direct sales force and sales management, and our marketing, customer service and business development personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits for these personnel, including share-based compensation, as well as travel costs related to sales, marketing costs, including the cost of obtaining marketing data, customer service activities, medical education activities and overhead expenses. We expense all sales and marketing costs as incurred.

 

During the three months ended September 30, 2020 and 2019, our sales and marketing expense represente34% and 35%, respectively, of our total revenue. For the nine months ended September 30, 2020 and 2019, our sales and marketing expense represented 49% and 38%, respectively, of our total revenue.

 

General and administrative expense

 

Our general and administrative expense includes costs for our executive, accounting, treasury, finance, legal, information technology, or IT, and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including share-based compensation and travel costs, professional services fees, such as consulting, audit, tax and legal fees, costs related to our Board of Directors, general corporate costs, overhead expenses and bad debt expense. Additionally, general and administrative expense for the three and nine months ended September 30, 2019 included a credit for income from a former transitional services agreement, or TSA, with Quest Diagnostics, Incorporated, or Quest, that was entered into in conjunction with the Company's 2018 sale of its U.S. Laboratory Services Business to Quest. We expense all general and administrative expenses as incurred.

 

During the three months ended September 30, 2020 and 2019, our general and administrative expense represente28% and 26%, respectively, of our total revenue. For the nine months ended September 30, 2020 and 2019, our general and administrative expense represented 46% and 29%, respectively, of our total revenue.

 

Settlement expense

 

Settlement expense of $799,000 for the three months ended September 30, 2019 and $1.0 million for the nine months ended September 30, 2019 related to the September 30, 2019 Settlement Agreement and Release with Oxford University Innovation Limited, or OUI, or the OUI Settlement Agreement, to resolve outstanding disputes arising from a license agreement with OUI, and to the June 30, 2017 Release and Settlement Agreement with Statens Serum Institut, or SSI, or the SSI Settlement Agreement, we entered into to resolve outstanding disputes arising from a license agreement with SSI. The terms of each of the agreements are confidential. There was no settlement expense for the three and nine months ended September 30, 2020.

 

Interest income

 

Interest income includes interest income on our available cash balances, which are primarily invested in money market funds and tri-party reverse repurchase agreements, primarily in U.S. government and agency securities, and bank savings accounts in the U.S., U.K., Germany, Japan, China, South Korea and Singapore. Essentially all of our cash is in the U.S. and the U.K. 

 

Foreign exchange gains (losses)

 

Foreign exchange gains (losses) largely resulted from U.S. dollar denominated bank accounts, accounts receivable and accounts payable reflected on the books of Oxford Immunotec Limited, which has a functional currency of the U.K. Pound Sterling. We are exposed to foreign exchange rate risk because we currently operate in three major regions of the world: the United States, Europe and ROW and Asia, and our revenue is denominated in multiple currencies. Sales in the U.S. and South Korea are denominated in U.S. dollars, while sales in Europe are denominated primarily in the U.K. Pound Sterling and Euro. As we grow Europe and ROW sales outside the U.K. and the Euro Zone, we may be subject to risk from additional currencies. Sales in China are denominated in Chinese Yuan. Sales in Japan are denominated in Yen.

 

Monetary assets and liabilities that are denominated in foreign currencies are remeasured at the period-end closing rate with resulting unrealized exchange fluctuations. Realized exchange fluctuations result from the settlement of transactions in currencies other than the functional currencies of our businesses. The functional currencies of our businesses are U.S. dollars, Pounds Sterling, Euros, Chinese Yuan and Japanese Yen, depending on the entity.

 

Other income

 

Other income includes other income and expense items.

 

20

 

Results of operations  

 

Comparison of three months ended September 30, 2020 and 2019

 

The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.

 

   

Three months ended September 30,

                 
   

2020

   

2019

   

Change

 
           

% of

           

% of

                 

(in thousands, except percentages)

 

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Revenue

  $ 19,436       100 %   $ 21,219       100 %   $ (1,783 )     (8 )%

Cost of revenue

    4,578       24 %     5,731       27 %     (1,153 )     (20 )%

Gross profit

    14,858       76 %     15,488       73 %     (630 )     (4 )%

Operating expenses:

                                               

Research and development

    2,612       13 %     1,631       8 %     981       60 %

Sales and marketing

    6,570       34 %     7,405       35 %     (835 )     (11 )%

General and administrative

    5,401       28 %     5,531       26 %     (130 )     (2 )%

Settlement expense

          0 %     799       4 %     (799 )     (100 )%

Total operating expenses

    14,583       75 %     15,366       72 %     (783 )