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EX-10.1 - EXHIBIT 10.1 - Oxford Immunotec Global PLCex_118360.htm
 

 

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 June 30, 2018 

 

OR

 

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

 

For the transition period from ____ to ____

 

Commission File Number 001-36200

________________________

 

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)

 

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

 

Yes ☒    No ☐

 

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

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  ☐

(Do not check if a smaller

reporting company) 

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 July 25, 2018, there were 25,967,617 Ordinary Shares, nominal value £0.006705, of Oxford Immunotec Global PLC outstanding.

 

 

 

 

Oxford Immunotec Global PLC

Form 10-Q

Quarterly Period Ended June 30, 2018

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

Condensed consolidated balance sheets as of June 30, 2018 (unaudited) and December 31, 2017

4

 

 

 

 

 

 

Condensed consolidated statements of operations (unaudited) for the three and six months ended June 30, 2018 and 2017

5

       

 

 

Condensed consolidated statements of other comprehensive loss (unaudited) for the three and six months ended June 30, 2018 and 2017

6

       

 

 

Condensed consolidated statements of cash flows (unaudited) for the six months ended June 30, 2018 and 2017

7

       

 

 

Notes to the unaudited condensed consolidated financial statements

8

 

 

 

 

Item 2.

 

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

17

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

 

Item 4.

 

Controls and Procedures

30

 

 

 

 

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 3.

 

Defaults Upon Senior Securities

30

 

 

 

 

Item 4.

 

Mine Safety Disclosures

30

 

 

 

 

Item 5.

 

Other Information

30

 

 

 

 

Item 6.

 

Exhibits

30

 

 

 

 

Signatures

31

 

 

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, and 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 Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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 statements about the future, although not all forward-looking statements contain these identifying words. These statements involve substantial known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to differ materially from those currently anticipated. Forward-looking statements are neither historical facts nor 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:

 

 

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

 

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

 

our ability to service our debt and meet the obligations thereunder;

 

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, tick-borne diseases and other than immune-regulated conditions and the development of new market opportunities;

 

our ability to compete successfully and to maintain and expand our sales network;

 

our ability to properly complete and submit claims to insurers and other third party payors with respect to coverage and reimbursement;

 

decisions by insurers and other third party payors with respect to coverage and reimbursement;

 

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

 

disruptions to our business, including disruptions at our laboratories and manufacturing facilities;

 

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

 

the impact of currency fluctuations on our business;

 

the impact of global economic and political developments, including the referendum to leave the European Union, passed by the United Kingdom, or U.K., on June 23, 2016, and further implementing legislation on our business;

 

potential changes in the United States, or U.S., social, political, regulatory and economic conditions or laws and policies governing the health care system, U.S. tax laws, foreign trade, immigration, manufacturing, and development and investment in the 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 retain key members of our management;

 

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

 

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

 

potential changes to the Patient Protection and Affordable Care Act of 2010, or PPACA;

 

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

 

our ability to comply with Securities and Exchange Commission, or SEC, reporting, antifraud, anti-corruption, 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 and the U.S. and in the several U.S. states requiring licensure;

 

our ability to protect and enforce our intellectual property rights;

 

 

 

our status as an emerging growth company, which ends in late 2018, and as an English company listing ordinary shares in the U.S.;

 

the volatility of the price of our shares, substantial future sales of our 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.

 

You should refer to Part I, Item 1A, “Risk Factors” in our 2017 Annual Report on Form 10-K for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report. 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 file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.

 

We make available free of charge 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.

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Oxford Immunotec Global PLC

Condensed consolidated balance sheets

 

 

   

June 30,

   

December 31,

 

(in thousands, except share and per share data)

 

2018

   

2017

 
   

(unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 66,263     $ 90,332  

Accounts receivable, net

    19,742       16,981  

Inventory, net

    9,835       10,142  

Prepaid expenses and other assets

    4,088       3,027  

Total current assets

    99,928       120,482  

Restricted cash, non-current

    200       200  

Property and equipment, net

    12,712       9,067  

Goodwill

    3,967       3,967  

Other intangible assets, net

    7,521       7,849  

Deferred tax asset

    1,435       2,486  

Other assets

    181       185  

Total assets

  $ 125,944     $ 144,236  
                 

Liabilities and shareholders’ equity

               

Current liabilities:

               

Accounts payable

  $ 4,186     $ 6,842  

Accrued liabilities

    9,754       11,134  

Settlement liability

    4,451       4,342  

Deferred income

    46       36  

Current portion of loans payable

    94       91  

Total current liabilities

    18,531       22,445  

Long-term portion of loans payable

    30,136       29,904  

Settlement liability

    3,991       3,894  

Other liabilities

    122       364  

Total liabilities

    52,780       56,607  
                 

Commitments and contingencies (Notes 3, 8, and 12)

               
                 

Shareholders’ equity:

               

Ordinary shares, £0.006705 nominal value; 36,183,293 shares authorized at June 30, 2018 and December 31, 2017, and 25,957,954 and 25,661,634 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

    272       269  

Additional paid-in capital

    297,906       294,613  

Accumulated deficit

    (218,338 )     (201,541 )

Accumulated other comprehensive loss

    (6,676 )     (5,712 )
                 

Total shareholders’ equity

    73,164       87,629  
                 

Total liabilities and shareholders’ equity

  $ 125,944     $ 144,236  

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of operations

(unaudited)

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands, except share and per share data)

 

2018

   

2017

   

2018

   

2017

 

Revenue:

                               

Product

  $ 11,721     $ 10,422     $ 19,656     $ 18,808  

Service

    17,597       15,698       31,032       28,817  

Total revenue

    29,318       26,120       50,688       47,625  

Cost of revenue:

                               

Product

    3,477       4,094       6,051       7,339  

Service

    9,229       8,398       17,245       15,650  

Total cost of revenue

    12,706       12,492       23,296       22,989  

Gross profit

    16,612       13,628       27,392       24,636  

Operating expenses:

                               

Research and development

    3,385       3,948       7,129       7,753  

Sales and marketing

    9,308       10,041       18,713       19,681  

General and administrative

    7,116       7,990       14,044       14,866  

Change in fair value of contingent purchase price consideration

          (238 )           (2,595 )

Settlement expense

    1,560       9,635       1,767       9,635  

Total operating expenses

    21,369       31,376       41,653       49,340  

Loss from operations

    (4,757 )     (17,748 )     (14,261 )     (24,704 )

Other expense:

                               

Interest expense, net

    (733 )     (807 )     (1,337 )     (1,630 )

Foreign exchange losses

    (151 )     (547 )     (254 )     (653 )

Other expense

    (196 )     (122 )     (248 )     (262 )

Loss before income taxes

    (5,837 )     (19,224 )     (16,100 )     (27,249 )

Income tax (expense) benefit

    (634 )     2,458       (697 )     2,411  

Net loss

  $ (6,471 )   $ (16,766 )   $ (16,797 )   $ (24,838 )

Net loss per ordinary share—basic and diluted

  $ (0.25 )   $ (0.74 )   $ (0.65 )   $ (1.10 )

Weighted-average shares used to compute net loss per ordinary share—basic and diluted

    25,845,124       22,805,379       25,782,366       22,670,206  

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of other comprehensive loss

(unaudited)

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Net loss

  $ (6,471 )   $ (16,766 )   $ (16,797 )   $ (24,838 )
                                 

Other comprehensive (loss) income:

                               

Foreign currency translation adjustment, net of tax charges / (credits) of $651, $(918), $272, and $(918), respectively

    (1,521 )     1,276       (964 )     1,495  
                                 

Other comprehensive (loss) income, net of tax

    (1,521 )     1,276       (964 )     1,495  
                                 

Total comprehensive loss

  $ (7,992 )   $ (15,490 )   $ (17,761 )   $ (23,343 )

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of cash flows

(unaudited)

 

 

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

 

Cash flows from operating activities

               

Net loss

  $ (16,797 )   $ (24,838 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization of intangible assets

    2,243       1,993  

Change in fair value of contingent purchase price consideration

          (2,595 )

Accretion and amortization of loan fees

    280       289  

Share-based compensation expense

    2,746       2,760  

Loss on disposal of property and equipment

    83        

Deferred income taxes

    728       (2,471 )

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (2,913 )     (4,480 )

Inventory, net

    187       (1,775 )

Prepaid expenses and other assets

    (1,096 )     (392 )

Accounts payable

    (3,292 )     1,064  

Accrued liabilities

    (1,114 )     2,872  

Other liabilities, net

    (44 )     7,234  

Net cash used in operating activities

    (18,989 )     (20,339 )

Cash flows from investing activities

               

Purchases of property and equipment

    (5,148 )     (2,928 )

Purchases of intangible assets

          13  

Net cash used in investing activities

    (5,148 )     (2,915 )

Cash flows from financing activities

               

Proceeds from exercise of share options

    814       308  

Payments of tax withheld on vesting of restricted share units

    (265 )     (203 )

Change in loans payable

    (45 )     196  

Net cash provided by financing activities

    504       301  

Effect of exchange rate changes on cash and cash equivalents

    (436 )     556  

Net decrease in cash, cash equivalents, and restricted cash

    (24,069 )     (22,397 )

Cash, cash equivalents, and restricted cash at beginning of period

    90,532       59,310  

Cash, cash equivalents, and restricted cash at end of period

  $ 66,463     $ 36,913  

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2018

 

 

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 underserved immune-regulated conditions. The Company’s focus is on four areas: infectious diseases, transplantation, autoimmune and inflammatory disease and immune-oncology. The Company believes these areas are particularly attractive because they involve large patient populations and chronic conditions that present the opportunity for both initial diagnosis and additional testing to monitor the conditions. These immune-regulated conditions also tend to be characterized by wide variation in presentation and progression and often require expensive therapies, making diagnostic tests that can better categorize patients and inform treatment pathways particularly useful and cost-effective. Lastly, the Company believes these conditions to be underserved as the industry lacks the appropriate techniques to prosecute the immune responses which are driving these conditions.

 

Unaudited interim financial statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 June 30, 2018, the results of operations for the three and six-month periods ended June 30, 2018 and 2017, and the cash flows for the six-month periods ended June 30, 2018 and 2017. Interim results are not necessarily indicative of results for a full year.

 

The consolidated balance sheet presented as of December 31, 2017, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes included in this report should be read in conjunction with the 2017 consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 27, 2018, or the Company’s 2017 Form 10-K.

 

Cash, cash equivalents, and restricted cash

 

We maintain our available cash balances in cash, money market funds and repurchase agreements primarily invested in U.S. government and agency securities, and bank savings accounts in the United States, United Kingdom, Germany, Japan, China and South Korea.

 

Restricted cash is pledged as collateral for procurement cards issued by a U.S. commercial bank.

 

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

 

(in thousands)

 

June 30,

2018

   

December 31,

2017

 

Cash and cash equivalents

  $ 66,263     $ 90,332  

Restricted cash, non-current

    200       200  

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

  $ 66,463     $ 90,532  

 

 

Revenues

 

The Company’s revenues include product and service revenues. Product revenue from diagnostic test kit sales and related accessories is recognized at a point in time based upon contractual rates. Service revenue from tests performed on samples sent by direct billing customers is recorded based upon contractually established billing rates and recognized upon delivery of test results to the customer. Revenue from tests paid by third-party payors in the U.S. includes variable consideration, which is estimated using the expected value method based on the Company’s historical collection experience. See Note 2 for disaggregation of revenue by type, indication and geography.

 

As of June 30, 2018, accounts receivables related to products and services were $19.7 million. For the three and six months ended June 30, 2018, 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 June 30, 2018. The Company generally expenses sales commissions when incurred because the amortization period would be less than one year.

 

For the three and six months ended June 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price), was not material.

 

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

 

The remainder of the significant accounting estimates and policies used in preparation of the condensed consolidated financial statements disclosed in Note 1 to the consolidated financial statements in the Company’s 2017 Form 10-K remain unchanged.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which converges the FASB and the International Accounting Standards Board standards on revenue recognition. Under ASU 2014-09, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 requires certain additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations and other technical corrections. The Company adopted ASU 2014-09 on January 1, 2018, using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position, results of operations, equity or cash flows as of the adoption date or for the six months ended June 30, 2018. The Company has included the disclosures required by ASU 2014-09 above and in Note 2 to the Condensed Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. ASU 2016-15 is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted ASU 2016-15 retrospectively as of January 1, 2018. The adoption of ASU 2016-15 has not had a material impact on the Company’s statement of cash flows.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes, or ASU 2016-16. The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The Company adopted ASU 2016-16 retrospectively as of January 1, 2018. The adoption of ASU 2016-16 has not had a material impact on the Company’s financial position, results of operations or related disclosures.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 retrospectively as of January 1, 2018. The adoption of ASU 2016-18 has not had a material impact on the Company’s statement of cash flows.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations, or ASU 2017-01. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted ASU 2017-01 prospectively as of January 1, 2018. The adoption of ASU 2017-01 has not had a material impact on the Company’s financial position, results of operations or related disclosures.

 

 

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, or ASU 2017-09. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting of a share-based payment award. The guidance should be applied prospectively to an award modified on or after the adoption date. The Company adopted ASU 2017-09 prospectively as of January 1, 2018. The adoption of ASU 2017-09 has not had a material impact on the Company’s financial position, results of operations or related disclosures.

 

Recently Issued Accounting Pronouncements 

 

In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02. ASU 2016-02 requires lessees to reflect most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates real estate-specific provisions for all entities. The new guidance will be effective for the Company for annual and interim periods beginning after December 15, 2018. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The adoption of ASU 2016-02 will result in an increase to the Company’s consolidated balance sheets for right-of-use assets and lease liabilities, and the Company is currently evaluating the other effects of adoption of ASU 2016-02 on the Company’s consolidated financial statements. This evaluation process includes reviewing all forms of leases, performing a completeness assessment over the lease population, and analyzing the practical expedients provided for in adopting ASU 2016-02.

 

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 will be effective for the Company for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The guidance is applied using a modified retrospective, or prospective approach, depending on a specific amendment. The Company is currently evaluating ASU 2016-13 and has not yet determined how it may impact its financial position, results of operations or related disclosures.

 

In January 2017, the FASB issued 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 new guidance will be applied on a prospective basis. ASU 2017-04 will be effective for the Company for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests. The Company is currently evaluating ASU 2017-04, but does not expect its adoption to have a material impact on the Company’s financial position, results of operations or related disclosures.

 

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 will be effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating ASU 2018-07, but does not expect its adoption to have a material impact on the Company’s financial position, results of operations or related disclosures.

 

Under the U.S. Jumpstart our Business Startups Act, or the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Company irrevocably elected not to avail itself of this exemption from new or revised accounting standards and, therefore, it is subject to the same new or revised accounting standards as public companies that are not emerging growth companies.

 

 

 

2. Revenue

 

The following tables present the Company’s revenues disaggregated by type:

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue

                               

Product

  $ 11,721     $ 10,422     $ 19,656     $ 18,808  

Service

    17,597       15,698       31,032       28,817  

Total revenue

  $ 29,318     $ 26,120     $ 50,688     $ 47,625  

 

The following tables present the Company’s revenues disaggregated by indication:

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue

                               

Tuberculosis

  $ 24,962     $ 21,338     $ 43,799     $ 39,880  

Tick-borne disease and other

    4,356       4,782       6,889       7,745  

Total revenue

  $ 29,318     $ 26,120     $ 50,688     $ 47,625  

 

The following tables reflect revenue by geography (United States, Europe and rest of world, or Europe and ROW, and Asia):

 

   

Three months ended June 30,

 

(in thousands, except percentages)

 

2018

   

2017

 

Revenue

                         

United States

  $ 17,696       60 %   $ 16,093       62 %

Europe and ROW

    2,234       8 %     1,914       7 %

Asia

    9,388       32 %     8,113       31 %

Total revenue

  $ 29,318       100 %   $ 26,120       100 %

 

   

Six months ended June 30,

 

(in thousands, except percentages)

 

2018

   

2017

 

Revenue

                         

United States

  $ 31,089       61 %   $ 29,629       62 %

Europe and ROW

    4,474       9 %     3,720       8 %

Asia

    15,125       30 %     14,276       30 %

Total revenue

  $ 50,688       100 %   $ 47,625       100 %

 

 

 

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 Company has a term loan outstanding with MidCap Financial Trust, or the MidCap agreement. The amount outstanding on the MidCap agreement is reported at its carrying value in the accompanying balance sheet. The estimated fair value of the MidCap agreement as of June 30, 2018, based upon current market rates for similar borrowings, as measured using Level 2 inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

 

 

4. Accounts receivable, net

 

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

 

(in thousands)

 

June 30,

2018

   

December 31,

2017

 

Accounts receivable

  $ 20,801     $ 17,807  

Less allowance for uncollectible accounts receivable

    (1,059 )     (826 )

Accounts receivable, net

  $ 19,742     $ 16,981  

 

 

5. Inventory, net

 

Inventory, net consisted of the following as of:

 

(in thousands)

 

June 30,

2018

   

December 31,

2017

 

Raw materials

  $ 5,850     $ 6,927  

Work in progress

    86       179  

Finished goods

    3,899       3,036  

Inventory, net

  $ 9,835     $ 10,142  

 

 

6. Goodwill and acquired intangible assets

 

The carrying amount of goodwill reflected in the Company’s condensed consolidated balance sheets was $4.0 million at June 30, 2018 and December 31, 2017 and was recorded in conjunction with the 2016 acquisitions of Imugen, Inc., or Imugen, and Immunetics, Inc., or Immunetics.

 

 

Acquired intangible assets consisted of the following as of June 30, 2018 and December 31, 2017:

 

   

As of June 30, 2018

 

(in thousands)

 

Amortization

period

(years)

   

Gross

carrying

amount

   

Accumulated

Amortization

   

Net carrying

amount

 

Imugen technology - clinical

      15       $ 5,100     $ 680     $ 4,420  

Imugen customer relationships

      10         1,400       280       1,120  

Imugen trademarks / trade names

      16         1,140       143       997  
                                     

Immunetics technology - clinical

      15         883       101       782  

Immunetics customer relationships

      11         130       20       110  

Immunetics trade name

      5         30       10       20  
                                     

Other

    5 - 10       676       604       72  

Total

              $ 9,359     $ 1,838     $ 7,521  

 

   

As of December 31, 2017

 

(in thousands)

 

Amortization

period

(years)

   

Gross

carrying

amount

   

Accumulated

Amortization

   

Net carrying

amount

 

Imugen technology - clinical

      15       $ 5,100     $ 510     $ 4,590  

Imugen customer relationships

      10         1,400       210       1,190  

Imugen trademarks / trade names

      16         1,140       107       1,033  
                                     

Immunetics technology - clinical

      15         883       72       811  

Immunetics customer relationships

      11         130       14       116  

Immunetics trade name

      5         30       8       22  
                                     

Other

    5 - 10       692       605       87  

Total

              $ 9,375     $ 1,526     $ 7,849  

 

The weighted average amortization period of our definite-lived intangible assets is 14 years. Amortization expense related to acquired intangible assets is estimated at $0.7 million per year for each of the years 2018 through 2020 and $0.6 million in 2021 and 2022.

 

 

7. Accrued liabilities

 

Accrued liabilities consisted of the following as of:

 

(in thousands)

 

June 30,

2018

   

December 31,

2017

 

Employee related expenses

  $ 6,020     $ 6,162  

Royalties

    741       1,419  

Professional services

    520       346  

Rent

    503       238  

Clinical trials

    192       688  

Other accrued liabilities

    1,778       2,281  

Total accrued liabilities

  $ 9,754     $ 11,134  

 

 

 

8. Loans payable

 

On October 4, 2016, the Company entered into an agreement with MidCap Financial Trust, or the MidCap agreement, that provided it with $40 million in debt financing, comprised of both a term loan and a revolving line of credit. The MidCap agreement provided the Company with a term loan of $30 million, which matures October 4, 2021. The term loan accrues interest at a rate of LIBOR plus 7.60% with interest only payments for the first 24 months, with the ability to extend to 48 months subject to certain conditions, before the loan begins to amortize. The Company has the intention and ability to extend the interest only period. The MidCap agreement also provides the Company with a revolving line of credit of up to $10 million, which matures October 4, 2021. The revolving line of credit accrues interest at a rate of LIBOR plus 4.45%. The Company is also required to pay the lenders an unused line fee equal to 0.50% per annum of the average unused portion of the revolving line of credit. Based on certain conditions, both the term loan and revolving line of credit may be increased by an additional $10 million for a total of $60 million.

 

The balance of the secured term loan due to MidCap as of June 30, 2018 is $30 million, and is recorded in the accompanying consolidated balance sheet, net of unamortized discount and debt issuance costs.

 

Future minimum payments required under the term loan , in consideration of the Company’s intent to extend the interest only period until at least November 2019, and under the revolving line of credit as of June 30, 2018 are as follows:

 

(in thousands)

 

Term Loan

 
         

2018

  $  

2019

    2,500  

2020

    15,000  

2021

    12,500  

2022

     

Thereafter

     
         

Total minimum payments

  $ 30,000  

 

The Company classifies current maturities of long-term debt that are expected to be refinanced on a long-term basis as long-term as they do not require the use of current assets.

 

The Company has never borrowed under the revolving line of credit.

 

 

9. 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 June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Cost of revenue

  $ 60     $ 43     $ 72     $ 86  

Research and development

    210       171       498       331  

Sales and marketing

    97       445       712       870  

General and administrative

    555       775       1,464       1,473  

Total share-based compensation

  $ 922     $ 1,434     $ 2,746     $ 2,760  

 

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, restricted share units, or RSUs, and other share-based awards to employees, officers, directors and consultants of the Company. The 2013 Plan was amended at the 2017 annual general meeting of shareholders.

 

During the three-month period ended June 30, 2018, the Company granted to certain employees 65,656 share options with exercise prices ranging from $14.49 to $14.59 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 June 30, 2018 was $6.76 per share. During the six-month period ended June 30, 2018, the Company granted to certain employees 749,787 share options with exercise prices ranging from $10.93 to $14.59 per share under the 2013 Plan. The weighted-average grant date fair value related to share options granted under the 2013 Plan during the six-month period ended June 30, 2018 was $6.17 per share. Share options generally vest based on the grantee’s continued service with the Company during a specified period following the vesting start date and expire after ten years.

 

 

During the three-month period ended June 30, 2018, the Company awarded to certain employees 44,473 RSUs with a weighted average grant date fair value of $13.60 per share under the 2013 Plan. During the six-month period ended June 30, 2018, the Company awarded to certain employees 161,899 RSUs with a weighted average grant date fair value of $13.34 per share under the 2013 Plan. The RSUs vest based on the grantee’s continued service with the Company during a specified period following grant as follows: 40% on the second anniversary of the grant date; 30% on the third anniversary of the grant date; and 30% on the fourth anniversary of the grant date. 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 June 30, 2018, the Company incurred shared-based compensation expense related to share options and RSUs of $713,000 and $209,000, respectively. For the three-month period ended June 30, 2017, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $919,000 and $515,000, respectively.

 

For the six-month period ended June 30, 2018, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $1.7 million and $1.0 million, respectively. For the six-month period ended June 30, 2017, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $1.7 million and $1.1 million, respectively.

 

As of June 30, 2018, there was $7.2 million and $4.0 million of total unrecognized compensation cost related to unvested share options and restricted shares/RSUs, respectively. These costs are expected to be recognized over weighted-average periods of 2.73 years for option shares and 3 years for RSUs.

 

 

10. Share capital

 

During the first six months of 2018, the Company issued 242,729 ordinary shares upon the exercise of options and 53,591 ordinary shares were issued upon the vesting of RSUs.

 

 

11. Net loss per share

 

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

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Options to purchase ordinary shares

    536,998       993,778       499,550       956,684  

Unvested restricted shares

          63,438             63,438  

Unvested restricted share units

    343,774       266,164       343,774       266,164  

 

 

12. Lease commitments

 

In March 2018, the Company entered into an agreement relating to its location in Norwood, Massachusetts to bifurcate its existing lease for two adjacent facilities into two separate leases, as one of the facilities was being sold to a new owner. The first of the two leases, which is referred to as the “315 Lease”, relates to about 18,000 rentable square feet within a larger facility. The escalating monthly base rental payments on the 315 Lease over the lease term will range from $32,000 per month to $35,000 per month and the term currently extends through March 31, 2019.

 

The second lease, which extends through March 31, 2023, is referred to as the “320 Lease” and relates to a building containing about 39,000 rentable square feet. The escalating monthly base rental payments on the 320 Lease over the lease term will range from $67,000 per month to $83,000 per month. The Company will have two options to extend the lease term, each for a five-year period.

 

 

In June 2018, the Company entered into a lease for new space in Abingdon, which extends through June 30, 2033, that will allow it to combine its manufacturing, laboratory, storage and office operations into a single facility. The base rent on the facility over the lease term will range from $39,000 per month to $79,000 per month. The Company expects to take occupancy of the new space in the second half of 2018.

 

 

13. Restructuring

 

During the third quarter of 2017, the Company’s management committed to a plan to terminate various government grants that were acquired as part of the acquisition of Immunetics. As a result, the Company terminated 15 employees during the fourth quarter of 2017 and recorded restructuring charges of $169,000 in research and development expense and $13,000 in general and administrative expense.

 

The following table provides a rollforward of the liability balance for this restructuring. Accrued restructuring costs at December 31, 2017 and June 30, 2018 were included in accrued liabilities in the accompanying balance sheet.

 

(in thousands)

 

Severance

 

Balance at December 31, 2017

  $ 74  

Payments

    (57 )

Balance at June 30, 2018

  $ 17  

 

 

14. Settlement expense

 

On June 18, 2018, the Company entered into a Settlement Agreement with the former shareholders of Immunetics, Inc., or the Immunetics Settlement Agreement, to resolve disputes arising from the Agreement and Plan of Merger dated October 12, 2016. The terms of the Immunetics Settlement Agreement are confidential.

 

On June 30, 2017, the Company and Statens Serum Institut, or SSI, entered into a Release and Settlement Agreement, or the SSI Settlement Agreement, to resolve outstanding disputes arising from the license agreement with SSI. The terms of the SSI Settlement Agreement are confidential.

 

 

 

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 on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. 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. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations. 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 and in the Company’s 2017 Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”

 

Overview

 

We are a global, high-growth diagnostics company focused on developing and commercializing proprietary tests for underserved immune-regulated conditions. Our focus is on four areas: infectious diseases, transplantation, autoimmune and inflammatory disease and immune-oncology. We believe these areas are particularly attractive because they involve large patient populations and chronic conditions that present the opportunity for both initial diagnosis and additional testing to monitor the conditions. These immune-regulated conditions also tend to be characterized by wide variation in presentation and progression and often require expensive therapies, making diagnostic tests that can better categorize patients and inform treatment pathways particularly useful and cost-effective. Lastly, we believe these conditions to be underserved as the industry lacks the appropriate techniques to prosecute the immune responses which are driving these conditions.

 

Our first product is our proprietary T-SPOT®.TB test, which is used to test for tuberculosis, or TB, infection and leverages our T-SPOT technology platform, which allows us to measure the response of specific immune cells to inform the diagnosis, prognosis and monitoring of patients with immune-regulated conditions. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the United States, where we have received premarket approval, or PMA, from the Food and Drug Administration, or FDA, in Europe, where we have obtained a CE mark, as well as in Japan and China. Interferon-gamma release assays, or IGRAs, such as our T-SPOT.TB test have been included in clinical guidelines for TB testing in over 30 countries, including the United States, several European countries and Japan. In addition, we have established reimbursement for our test in the United States, as well as a Current Procedural Terminology, or CPT 1, code that is unique to our test. Outside the United States, we have established reimbursement in several countries where reimbursement applies, including Japan, Switzerland, Germany, France and South Korea. We have also established the cost-effectiveness of our test in several published studies.

 

Our second product line is a range of assays for tick-borne diseases, such as Lyme disease. Tick-borne disease is the collective name for diseases passed to humans through the bite of an infected tick. The most prevalent and well known tick-borne disease is Lyme disease, but there are others such as anaplasmosis, ehrlichiosis, and babesiosis. If left unrecognised, and therefore untreated, they may go on to cause significant complications, including in rare cases death. Our tick-borne disease tests utilize molecular methods (such as polymerase chain reaction) and techniques to prosecute the immune system, and are widely reimbursed in the U.S. using existing codes on fee schedules. Our tests include multiple laboratory developed tests, or LDTs, which utilize unique methodologies offered from our Clinical and Laboratory Improvement Amendments, or CLIA, certified and College of American Pathologists, or CAP, accredited laboratory in Massachusetts and an FDA cleared test kit utilizing the C6 peptide, which is a marker specific to Lyme disease. Our C6 Lyme ELISATM kit is also CE marked in the European Union.

 

Our third product line is a series of assays for use in screening blood for the parasite Babesia microti which causes babesiosis. Babesiosis is a tick-borne disease characterized by a wide spectrum of clinical manifestations that range from asymptomatic to severe acute or even fatal illness. While it is primarily transmitted through a tick bite, babesiosis can also be transmitted by blood transfusion. In fact, transfusion-transmitted babesiosis is responsible for the highest percentage (31%) of transfusion-related infectious fatalities reported to the FDA in transfusion recipients. We received FDA approval for two of our assays in March 2018.

 


1 CPT is a registered trademark of the American Medical Association. 

 

 

Our T-SPOT.CMV test is a part of our fourth product line focused on the transplantation market. The test utilizes our T-SPOT technology platform and is an LDT performed in our CLIA certified, CAP accredited laboratory in Tennessee. The T-SPOT.CMV test is also CE marked as a kit in the European Union. The T-SPOT.CMV test measures the strength of a patient’s cellular immune response to antigens specific to cytomegalovirus, or CMV, and provides information that may be useful in informing management strategies of patients at risk of CMV infection and disease, such as transplant patients. We continue to take a measured approach to market introduction of this test as we continue to evaluate the final results of our two pivotal clinical studies involving this test.

 

In addition to our existing product lines, we continue to pursue development programs to enhance our TB and tick-borne disease and other product offerings. In April, we CE marked the T-Cell SelectTM kit enabling launch in the United Kingdom and across the European Union. The T-Cell Select kit is used to isolate mononuclear immune cells using positive selection via a magnetic bead cell separation system. In July, we launched two new tick-borne disease tests directed to the detection of additional species of Babesia and Ehrlichia. Product development activities are inherently uncertain, and there can be no assurance that we will be able to obtain regulatory body clearance to market any of our products, or if we obtain clearances that we will successfully commercialize any of our products. In addition, we may terminate our development efforts with respect to one or more of our products under development at any time, including before or during clinical trials.

 

We have incurred significant losses from inception and as of June 30, 2018 had an accumulated deficit of $218.3 million. We anticipate that our operating losses may continue for the foreseeable future as we continue to invest to grow our customer base and invest in research and development to expand our product portfolio. Our revenue for the six months ended June 30, 2018 was $50.7 million and for the six months ended June 30, 2017 was $47.6 million. Our net loss for the six months ended June 30, 2018 was $16.8 million and for the six months ended June 30, 2017 was $24.8 million.

 

Financial operations overview

 

Revenue

 

We generate revenue 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 and accounted for $25.0 million of our revenue in the second quarter of 2018. We also generate revenue from sales of tick-borne disease and other tests via our direct sales force and also through distributors. During the second quarter of 2018 these tests accounted for revenue of $4.3 million.

 

Revenue mix

 

We currently offer our T-SPOT.TB test as both an in vitro diagnostic kit and a service. In the former, we sell test kits and associated accessories to distributors for resale and directly to institutions and laboratories that perform TB testing. In the latter, we have established clinical testing laboratories in the U.S. and the U.K., where we perform our T-SPOT.TB test on samples sent to us by customers. In these markets, we have found that many of our customers prefer to send samples to us rather than perform their own analysis on-site.

 

Our U.S. business derived 95% and 93% of its revenue from our service offering, as opposed to kit sales, for the three months ended June 30, 2018 and 2017, respectively, and 95% and 93% from service revenue for the six months ended June 30, 2018 and 2017, respectively. These results reflect our experience that U.S. customers prefer to send IGRA tests out for processing and analysis rather than run them in-house. For the majority of our U.S. customers in the hospital and public health segments, TB testing programs are funded primarily from institutional budgets. We receive payment from these customers according to our pre-negotiated prices. For other segments of the U.S. market (notably, for example, the physicians’ office segment) third-party reimbursement is often available to cover the cost of our T-SPOT.TB test. In addition, U.S. results include revenue from our portfolio of tick-borne disease tests. For certain customers, we receive payment from customers according to pre-negotiated rates. For other customers we seek third party reimbursement. U.S. results also include revenue from our C6 Lyme ELISA kits, which is included in product revenue. Our C6 Lyme ELISA kits are sold to customers at pre-negotiated rates.

 

Outside the U. S., we derived 93% and 94% of our revenue from the sale of our in vitro diagnostic kits and associated accessories for each of the three month periods ended June 30, 2018 and 2017, respectively. These sales represented 92% and 93% of our revenue for each of the six month periods ended June 30, 2018 and 2017, respectively. For the majority of our customers outside the U.S., 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.

 

 

Revenue by type

 

By type, total revenues were as summarized in the table below.

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue

                               

Product

  $ 11,721     $ 10,422     $ 19,656     $ 18,808  

Service

    17,597       15,698       31,032       28,817  

Total revenue

  $ 29,318     $ 26,120     $ 50,688     $ 47,625  

 

Revenue by indication

 

By indication, total revenues were as summarized in the table below.

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Revenue

                               

Tuberculosis

  $ 24,962     $ 21,338     $ 43,799     $ 39,880  

Tick-borne disease and other

    4,356       4,782       6,889       7,745  

Total revenue

  $ 29,318     $ 26,120     $ 50,688     $ 47,625  

 

Revenue by geography

 

We have a direct sales force in the U.S., certain European countries and Japan and market development personnel in China and South Korea. In parts of the world where we do not maintain a direct sales force, we market and sell our products through distributors. As a result, our revenue is denominated in multiple currencies.

 

The following tables reflect 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 June 30,

 

(in thousands, except percentages)

 

2018

   

2017

 

Revenue

                             

United States

  $ 17,696       60 %   $ 16,093       62 %

Europe and ROW

    2,234       8 %     1,914       7 %

Asia

    9,388       32 %     8,113       31 %

Total revenue

  $ 29,318       100 %   $ 26,120       100 %

 

   

Six months ended June 30,

 

(in thousands, except percentages)

 

2018

   

2017

 

Revenue

                               

United States

  $ 31,089       61 %   $ 29,629       62 %

Europe and ROW

    4,474       9 %     3,720       8 %

Asia

    15,125       30 %     14,276       30 %

Total revenue

  $ 50,688       100 %   $ 47,625       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 expenses, overhead expenses, material costs, cost of laboratory supplies, freight costs, royalties paid under license agreements, depreciation of laboratory equipment and leasehold improvements.

 

We expect our overall cost of revenue to increase as we continue to increase our volume of kits manufactured and tests performed. However, we also believe that through these increased volumes, we can achieve certain efficiencies in our manufacturing and laboratory operations that could help maintain or improve our overall margins.

 

On June 30, 2017, we entered into a Release and Settlement Agreement, or the Settlement Agreement, with Statens Serum Institut, or SSI, to resolve outstanding disputes arising from the license agreement with SSI. The terms of the Settlement Agreement are confidential. Based on the Settlement Agreement, we no longer expect to pay royalties to SSI, which will improve future margins. On December 19, 2017, the Company amended its license agreement with Rutgers, The State University of New Jersey, which reduced our royalties due under the license. This agreement will further improve our future margins.

 

During the three months ended June 30, 2018 and 2017, our cost of revenue represented 43% and 48%, respectively, of our total revenue. For the six months ended June 30, 2018 and 2017 our cost of revenue represented 46% and 48%, respectively, of our total revenue.

 

   

Three months ended June 30,

   

Six months ended June 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Cost of revenue

                               

Product

  $ 3,477     $ 4,094     $ 6,051     $ 7,339  

Service

    9,229       8,398       17,245       15,650  

Total cost of revenue

  $ 12,706     $ 12,492     $ 23,296     $ 22,989  

 

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 57% and 52%, respectively, for the three months ended June 30, 2018 and 2017. Gross margins were 54% and 52%, respectively, for the six months ended June 30, 2018 and 2017.

 

Research and development expenses

 

Our research and development efforts have historically focused on developing multiple new diagnostic tests that use our quantitative T cell measurement technology, including assays that may help transplant physicians better manage patients at risk of rejection and infection.

 

Our research and development activities include performing research, development, clinical and regulatory activities and validating improvements to our technology and processes for the purposes of enhancing product performance. Research and development expenses include 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. We expense all research and development costs as incurred.

 

During the three months ended June 30, 2018 and 2017, our research and development expenses represented 12% and 15%, respectively, of our total revenue. For the six months ended June 30, 2018 and 2017, our research and development expenses represented 14% and 16%, respectively, of our total revenue.

 

Sales and marketing expenses

 

Our sales and marketing expenses include 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, customer service activities, medical education activities and overhead expenses. We expense all sales and marketing costs as incurred.

 

During the three-month periods ended June 30, 2018 and 2017, our sales and marketing expenses represented 32% and 38%, respectively, of our total revenue. For the six months ended June 30, 2018 and 2017, our sales and marketing expenses represented 37% and 41%, respectively, of our total revenue.

 

 

General and administrative expenses

 

Our general and administrative expenses include 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. We expense all general and administrative expenses as incurred.

 

During the three months ended June 30, 2018 and 2017, our general and administrative expenses represented 24% and 31%, respectively, of our total revenue. For the six-month periods ended June 30, 2018 and 2017, our general and administrative expenses represented 28% and 31%, respectively, of our total revenue.

 

Interest expense, net

 

Interest expense, net mainly relates to our October 4, 2016 MidCap agreement, that provides us with $40 million in debt financing, comprised of both a term loan and a revolving line of credit. The MidCap agreement provides us with a term loan of $30 million, which matures five years from closing. The term loan accrues interest at a rate of LIBOR plus 7.60% with interest only payments for the first 24 months, with the ability to extend to 48 months subject to certain conditions, before the loan begins to amortize. The MidCap agreement also provides us with a revolving line of credit of up to $10 million, which matures five years from closing. The revolving line of credit accrues interest at a rate of LIBOR plus 4.45%. Based on certain conditions, both the term loan and revolving line of credit may be increased by an additional $10 million for a total of $60 million. To date, we have not borrowed under the revolving line of credit.

 

Foreign exchange gains (losses)

 

Foreign exchange (losses) gains largely result 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 United States, China and South Korea are denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen.

 

Settlement expense

 

Settlement expense for 2018 relates mainly to the June 18, 2018 Settlement Agreement with the former shareholders of Immunetics, Inc., or the Immunetics Settlement Agreement, to resolve disputes arising from the Agreement and Plan of Merger dated October 12, 2016. The terms of the Immunetics Settlement Agreement are confidential.

 

Settlement expense for 2017 relates to the Settlement Agreement with SSI to resolve outstanding disputes arising from our previous license agreement. The terms of the SSI Settlement Agreement are confidential. Based on the SSI Settlement Agreement, we no longer pay royalties to SSI, which improves our margins.

 

Other expense

 

Other expense includes interest expense, net, foreign exchange gains/ (losses) and other income and expense items.

 

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, Japanese Yen and Chinese Yuan, depending on the entity.

 

 

Results of operations 

 

Comparison of three months ended June 30, 2018 and 2017

 

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 June 30,

                 
   

2018

   

2017

   

Change

 

(in thousands, except percentages)

 

Amount

   

% of
revenue

   

Amount

   

% of
revenue

   

Amount

   

%

 

Revenue:

                                               

Product

  $ 11,721       40 %   $ 10,422       40 %   $ 1,299       12 %

Service

    17,597       60 %     15,698       60 %     1,899       12 %

Total revenue

    29,318       100 %     26,120       100 %     3,198       12 %

Cost of revenue:

                                               

Product

    3,477       12 %     4,094       16 %     (617 )     (15 )%

Service

    9,229       31 %     8,398       32 %     831       10 %

Total cost of revenue

    12,706       43 %     12,492       48 %     214       2 %

Gross profit

    16,612       57 %     13,628       52 %     2,984       22 %

Operating expenses:

                                               

Research and development

    3,385       12 %     3,948       15 %     (563 )     (14 )%

Sales and marketing

    9,308       32 %     10,041       38 %     (733 )     (7 )%

General and administrative

    7,116       24 %     7,990       31 %     (874 )     (11 )%

Change in fair value of contingent purchase price consideration

          %     (238 )     (1 )%     238       (100 )%

Settlement expense

    1,560       5 %     9,635       37 %     (8,075 )     (84 )%

Total operating expenses

    21,369       73 %     31,376       120 %     (10,007 )     (32 )%

Loss from operations

    (4,757 )     (16 )%     (17,748 )     (68 )%     12,991       (73 )%

Interest expense, net

    (733 )     (3 )%     (807 )     (3 )%     74       (9 )%

Foreign exchange losses

    (151 )     (1 )%     (547 )     (2 )%     396       (72 )%

Other expense

    (196 )     (1 )%     (122 )     (0 )%     (74 )     61 %

Loss before income taxes

    (5,837 )     (20 )%     (19,224 )     (74 )%     13,387       (70 )%

Income tax expense

    (634 )     (2 )%     2,458       9 %     (3,092 )     (126 )%

Net loss

  $ (6,471 )     (22 )%   $ (16,766 )     (64 )%   $ 10,295       (61 )%

 

Revenue 

 

Revenue increased by 12% to $29.3 million for the three months ended June 30, 2017, compared to $26.1 million for the same period in 2017.

 

U.S. revenue increased by 10% to $17.7 million for the three months ended June 30, 2018, compared to $16.1 million for the same period in 2017, driven by TB revenue of $13.5 million in 2018, compared to $11.4 million in 2017.

 

Asia revenue increased by 16% to $9.4 million for the three months ended June 30, 2018, compared to the same period in 2017, due primarily to the timing of shipments to China. On a non-Generally Accepted Accounting Principles, or non-GAAP, constant currency basis, revenue for Asia would have increased by 15%. Europe and ROW revenue increased 17% to $2.2 million for the three months ended June 30, 2018, compared to the same period in 2017, due to strong TB sales and the additional contribution from the sale of Lyme kits. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 10% in 2018 compared to 2017.

 

 

Changes in revenue include the impact of changes in foreign currency exchange rates. We use the non-GAAP financial measure “constant currency basis” in our filings to show changes in our revenue without giving effect to period-to-period currency fluctuations. Under U.S. GAAP, revenues received in local (non-U.S. Dollar) currencies are translated into U.S. Dollars at the average exchange rate for the period presented. When we use the term “constant currency basis”, it means that we have translated local currency revenues for the prior reporting period into U.S. Dollars using the same average foreign currency exchange rates for the conversion of revenues into U.S. Dollars that we used to translate local currency revenues for the comparable reporting period of the current year. We then calculate the change, as a percentage, from the prior period revenues using the current period exchange rates versus the current period revenues. This resulting percentage is a non-GAAP measure referring to a change as a percentage on a “constant currency basis”. We consider the use of a period over period revenue comparison on a constant currency basis to be helpful to investors, as it provides a revenue growth measure free of positive or negative volatility due to currency fluctuations.

 

By revenue type, total revenues were:

 

   

Three months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

Product

  $ 11,721     $ 10,422     $ 1,299       12 %

Service

    17,597       15,698       1,899       12 %

Total revenue

  $ 29,318     $ 26,120     $ 3,198       12 %

 

By indication, total revenues were:

 

   

Three months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

Tuberculosis

  $ 24,962     $ 21,338     $ 3,624       17 %

Tick-borne disease and other

    4,356       4,782       (426 )     (9 )%

Total revenue

  $ 29,318     $ 26,120     $ 3,198       12 %

 

By geography, total revenues were:

 

   

Three months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

United States

  $ 17,696     $ 16,093     $ 1,603       10 %

Europe and ROW

    2,234       1,914       320       17 %

Asia

    9,388       8,113       1,275       16 %

Total revenue

  $ 29,318     $ 26,120     $ 3,198       12 %

 

Cost of revenue and gross margin

 

Cost of revenue increased by 2% to $12.7 million for the three months ended June 30, 2018 when compared to the same period in 2017. Gross margin was 57% and 52% for the three month periods ended June 30, 2018 and 2017, respectively.

 

   

Three months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Cost of revenue

                               

Product

  $ 3,477     $ 4,094     $ (617 )     (15 )%

Service

    9,229       8,398       831       10 %

Total cost of revenue

  $ 12,706     $ 12,492     $ 214       2 %

 

 

Research and development expenses

 

Research and development expenses decreased to $3.4 million for the three months ended June 30, 2018 from $3.9 million for the same period in 2017. The decrease was largely due to a $452,000 decrease in clinical costs and a $258,000 decrease in consulting costs, partially offset by a $280,000 increase in salary and other employee related expenses. As a percentage of total revenue, research and development expenses declined to 12% for the three months ended June 30, 2018 compared to 15% for the same period in 2017.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased to $9.3 million for the three months ended June 30, 2018 from $10.0 million for the same period in 2017. The decrease was largely due to a $615,000 decrease in salary and other employee related expenses, which included a credit from forfeited options and RSUs of $379,000 in the second quarter of 2018. As a percentage of total revenue, sales and marketing expenses declined to 32% for the three months ended June 30, 2018 compared to 38% for the same period in 2017.

 

General and administrative expenses

 

General and administrative expenses decreased to $7.1 million for the three months ended June 30, 2018 from $8.0 million for the same period in 2017. The decrease reflected a $1.2 million decrease in legal fees, partially offset by a $326,000 increase in property costs. As a percentage of total revenue, general and administrative expenses declined to 24% for the three months ended June 30, 2018 from 31% for the same period in 2017.

 

Settlement expense

 

Settlement expense for 2018 relates mainly to the Immunetics Settlement Agreement. The terms of the Immunetics Settlement Agreement are confidential.

 

Settlement expense for 2017 relates to the SSI Settlement Agreement. The terms of the SSI Settlement Agreement are confidential.

 

Interest expense, net

 

Interest expense, net was $733,000 for the three months ended June 30, 2018, compared to $807,000 in the same period in 2017.

 

Foreign exchange (losses) gains

 

We recorded foreign exchange losses of $151,000 for the three months ended June 30, 2018, substantially all as a net result of 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. For the three months ended June 30, 2017, we recorded foreign exchange losses of $547,000. 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. Approximately 60% of our sales for the three months ended June 30, 2018 were in the United States, which are denominated in U.S. Dollars. Sales in China and South Korea are also denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and the Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen.

 

Our expenses are generally denominated in the currencies in which our operations are located, which are primarily in the United States, the United Kingdom, Japan, Europe, China and South Korea.

 

As we continue to grow our business outside the United States, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any foreign currency hedging contracts, although we may do so in the future.

 

Other expense

 

Other expense was $196,000 for the three months ended June 30, 2018, compared to $122,000 for the three months ended June 30, 2017.

 

 

Comparison of six months ended June 30, 2018 and 2017

 

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.

 

   

Six months ended June 30,

                 
   

2018

   

2017

   

Change

 

(in thousands, except percentages)

 

Amount

   

% of
revenue

   

Amount

   

% of
revenue

   

Amount

   

%

 

Revenue:

                                               

Product

  $ 19,656       39 %   $ 18,808       39 %   $ 848       5 %

Service

    31,032       61 %     28,817       61 %     2,215       8 %

Total revenue

    50,688       100 %     47,625       100 %     3,063       6 %

Cost of revenue:

                                               

Product

    6,051       12 %     7,339       15 %     (1,288 )     (18 )%

Service

    17,245       34 %     15,650       33 %     1,595       10 %

Total cost of revenue

    23,296       46 %     22,989       48 %     307       1 %

Gross profit

    27,392       54 %     24,636       52 %     2,756       11 %

Operating expenses:

                                               

Research and development

    7,129       14 %     7,753       16 %     (624 )     (8 )%

Sales and marketing

    18,713       37 %     19,681       41 %     (968 )     (5 )%

General and administrative

    14,044       28 %     14,866       31 %     (822 )     (6 )%

Change in fair value of contingent purchase price consideration

          %     (2,595 )     (5 )%     2,595       (100 )%

Settlement expense

    1,767       3 %     9,635       20 %     (7,868 )     (82 )%

Total operating expenses

    41,653       82 %     49,340       104 %     (7,687 )     (16 )%

Loss from operations

    (14,261 )     (28 )%     (24,704 )     (52 )%     10,443       (42 )%

Interest expense, net

    (1,337 )     (3 )%     (1,630 )     (3 )%     293       (18 )%

Foreign exchange (losses) gains

    (254 )     (1 )%     (653 )     (1 )%     399       (61 )%

Other expense

    (248 )     (0 )%     (262 )     (1 )%     14       (5 )%

Loss before income taxes

    (16,100 )     (32 )%     (27,249 )     (57 )%     11,149       (41 )%

Income tax benefit (expense)

    (697 )     (1 )%     2,411       5 %     (3,108 )     (129 )%

Net loss

  $ (16,797 )     (33 )%   $ (24,838 )     (52 )%   $ 8,041       (32 )%

 

Revenue

 

Revenue increased by 6% to $50.7 million for the six months ended June 30, 2018, compared to $47.6 million for the same period in 2017.

 

U.S. revenue increased to $31.1 million for the six months ended June 30, 2018, compared to $29.6 million for the same period in 2017, driven by TB revenue of $24.4 million in 2018, compared to $22.1 million in 2017.

 

Asia revenue increased by 6% to $15.1 million for the six months ended June 30, 2018, compared to the same period in 2017, due primarily to the timing of shipments to China. On a non-Generally Accepted Accounting Principles, or non-GAAP, constant currency basis, revenue for Asia would have increased by 4%. Europe and ROW revenue increased 20% to $4.5 million for the six months ended June 30, 2018, compared to the same period in 2017, due to strong TB sales and the additional contribution from the sale of Lyme kits. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 9% in 2018 compared to 2017.

 

 

Changes in revenue include the impact of changes in foreign currency exchange rates. We use the non-GAAP financial measure “constant currency basis” in our filings to show changes in our revenue without giving effect to period-to-period currency fluctuations. Under U.S. GAAP, revenues received in local (non-U.S. Dollar) currencies are translated into U.S. Dollars at the average exchange rate for the period presented. When we use the term “constant currency basis”, it means that we have translated local currency revenues for the prior reporting period into U.S. Dollars using the same average foreign currency exchange rates for the conversion of revenues into U.S. Dollars that we used to translate local currency revenues for the comparable reporting period of the current year. We then calculate the change, as a percentage, from the prior period revenues using the current period exchange rates versus the current period revenues. This resulting percentage is a non-GAAP measure referring to a change as a percentage on a “constant currency basis”. We consider the use of a period over period revenue comparison on a constant currency basis to be helpful to investors, as it provides a revenue growth measure free of positive or negative volatility due to currency fluctuations.

 

By revenue type, total revenues were:

 

   

Six months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

Product

  $ 19,656     $ 18,808     $ 848       5 %

Service

    31,032       28,817       2,215       8 %

Total revenue

  $ 50,688     $ 47,625     $ 3,063       6 %

 

By indication, total revenues were:

 

   

Six months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

Tuberculosis

  $ 43,799     $ 39,880     $ 3,919       10 %

Tick-borne disease and other

    6,889       7,745       (856 )     (11 )%

Total revenue

  $ 50,688     $ 47,625     $ 3,063       6 %

 

By geography, total revenues were:

 

   

Six months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Revenue

                               

United States

  $ 31,089     $ 29,629     $ 1,460       5 %

Europe and ROW

    4,474       3,720       754       20 %

Asia

    15,125       14,276       849       6 %

Total revenue

  $ 50,688     $ 47,625     $ 3,063       6 %

 

Cost of revenue and gross margin

 

Cost of revenue increased by 1% to $23.3 million for the six months ended June 30, 2018 when compared to the same period in 2017. Gross margin was 54% and 52% for the six month periods ended June 30, 2018 and 2017, respectively.

 

   

Six months ended June 30,

   

Change

 

(in thousands, except percentages)

 

2018

   

2017

   

Amount

   

%

 

Cost of revenue

                               

Product

  $ 6,051     $ 7,339     $ (1,288 )     (18 )%

Service

    17,245       15,650       1,595       10 %

Total cost of revenue

  $ 23,296     $ 22,989     $ 307       1 %

 

 

Research and development expenses

 

Research and development expenses decreased to $7.1 million for the six months ended June 30, 2018 from $7.8 million for the same period in 2017. The decrease was largely due to a $1.2 million decrease in clinical costs and a $393,000 decrease in consulting costs, partially offset by an $832,000 increase in salary and other employee related expenses. As a percentage of total revenue, research and development expenses declined to 14% for the six months ended June 30, 2018 compared to 16% for the same period in 2017.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased to $18.7 million for the six months ended June 30, 2018 from $19.7 million for the same period in 2017. The decrease was largely due to a $794,000 decrease in salary and other employee related expenses, which included a credit from forfeited options and RSUs of $379,000 in the second quarter of 2018, and a $381,000 decrease in marketing costs. As a percentage of total revenue, sales and marketing expenses declined to 37% for the six months ended June 30, 2018 compared to 41% for the same period in 2017.

 

General and administrative expenses

 

General and administrative expenses decreased to $14.0 million for the six months ended June 30, 2018 from $14.9 million for the same period in 2017. The decrease reflected a $2.0 million decrease in legal fees, partially offset by a $559,000 increase in salary and other employee related expenses and a $471,000 increase in property costs. As a percentage of total revenue, general and administrative expenses declined to 28% for the six months ended June 30, 2018 from 31% for the same period in 2017.

 

Settlement expense

 

Settlement expense for 2018 relates mainly to Immunetics Settlement Agreement. The terms of the Immunetics Settlement Agreement are confidential.

 

Settlement expense for 2017 relates to the SSI Settlement Agreement. The terms of the SSI Settlement Agreement are confidential.

 

Interest expense, net

 

Interest expense, net was $1.3 million for the six months ended June 30, 2018, compared to $1.6 million in the same period in 2017.

 

Foreign exchange (losses) gains

 

We recorded foreign exchange losses of $254,000 for the six months ended June 30, 2018, substantially all as a net result of 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. For the six months ended June 30, 2017, we recorded foreign exchange losses of $653,000. 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. Approximately 61% of our sales for the six months ended June 30, 2018 were in the United States, which are denominated in U.S. Dollars. Sales in China and South Korea are also denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and the Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen.

 

Our expenses are generally denominated in the currencies in which our operations are located, which are primarily in the United States, the United Kingdom, Japan, Europe, China and South Korea.

 

As we continue to grow our business outside the United States, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could harm our business in the future. To date, we have not entered into any foreign currency hedging contracts, although we may do so in the future.

 

Other expense

 

Other expense was $248,000 for the six months ended June 30, 2018, compared to $262,000 for the six months ended June 30, 2017.

 

 

Liquidity and capital resources

 

Sources of funds

 

Since our inception, we have incurred significant net losses and negative cash flows from operations. For the six months ended June 30, 2018, we had a net loss of $16.8 million and used $19.0 million of cash for operating activities. As of June 30, 2018, we had an accumulated deficit of $218.3 million. We incurred a net loss of $24.8 million and used $20.3 million of cash for operating activities for the six months ended June 30, 2017.

 

As noted above, on October 4, 2016, we entered into a credit agreement with MidCap Financial Trust. The credit agreement consisted of a 60 month, $30 million term loan and a $10 million revolving line of credit, both of which mature on September 30, 2021. The availability of funds under the revolving line of credit is based upon the Company’s eligible accounts receivable and eligible inventory. To date, we have not borrowed under the revolving line of credit. Based on certain conditions, both the term loan and revolving line of credit may be increased by an additional $10 million for a total of $60 million.

 

The term loan accrues interest at a rate of LIBOR plus 7.60% with interest only payments for the first 24 months, with the ability to extend to 48 months subject to certain conditions, before the loan begins to amortize. The Company has the intention and ability to extend the interest only period.

 

As of June 30, 2018, we had cash and cash equivalents, including restricted cash, of $66.5 million. We maintain our available cash balances in cash, money market funds and repurchase agreements primarily invested in U.S. government and agency securities, and bank savings accounts in the United States, United Kingdom, Germany, Japan, China and South Korea. Essentially all our cash is in the U.S. and the U.K.

 

Summary of cash flows

 

The following table summarizes our cash and cash equivalents, accounts receivable and cash flows for the periods indicated:

 

   

As of and for the six months

ended June 30,

 

(in thousands)

 

2018

   

2017

 
                 

Cash and cash equivalents, including restricted cash

  $ 66,463     $ 36,913  

Accounts receivable, net

    19,742       18,016  
                 

Net cash used in operating activities

  $ (18,989 )   $ (20,339 )

Net cash used in investing activities

    (5,148 )     (2,915 )

Net cash provided by financing activities

    504       301  

Effect of exchange rate changes on cash and cash equivalents

    (436 )     556  

Net decrease in cash and cash equivalents, including restricted cash

  $ (24,069 )   $ (22,397 )

 

Cash flows for the six months ended June 30, 2018 and 2017

 

Operating activities

 

Net cash used in operating activities was $19.0 million during the six months ended June 30, 2018, which included a net loss of $16.8 million, non-cash expenses of $6.1 million, and cash used for changes in operating assets and liabilities of $8.3 million. The non-cash items included share-based compensation expense of $2.7 million, depreciation and amortization of intangible assets of $2.2 million, deferred tax expense of $728,000, accretion and amortization of loan fees of $280,000, and a loss on disposal of property and equipment of $83,000. The cash used for changes in operating assets and liabilities included a decrease in accounts payable and accrued liabilities of $4.4 million, an increase in accounts receivable of $2.9 million, an increase in prepaid expenses and other assets of $1.1 million, and a decrease in other liabilities of $44,000, partially offset by a decrease in inventory of $187,000. The decrease in accounts payable and accrued liabilities was largely due to payments in the first six months of 2018 for royalties on intellectual property and bonuses that were accrued for at December 31, 2017, as well as the timing of payments. The increase in accounts receivable reflects growing sales and timing of customer payments. The increase in prepaid expenses and other assets reflects the timing of certain payments.

 

 

Net cash used in operating activities was $20.3 million during the six months ended June 30, 2017, which included a net loss of $24.8 million, a net non-cash credit of $24,000 and cash provided by changes in operating assets and liabilities of $4.5 million. The non-cash items consisted of a decrease in the fair value of contingent purchase price consideration of $2.6 million and a deferred income tax credit of $2.5 million, partially offset by share-based compensation expense of $2.8 million, depreciation and amortization expense of $2.0 million and accretion and amortization expense on loan fees of $289,000. The cash from changes in operating assets and liabilities included an increase in other liabilities of $7.2 million and an increase in accounts payable and accrued liabilities of $3.9 million, partially offset by an increase in accounts receivable of $4.5 million, an increase in inventory of $1.8 million and an increase in prepaid expenses and other assets of $392,000. The increase in other liabilities is mainly due to the long-term portion of the settlement with SSI. The increase in accounts payable and accrued liabilities reflects the timing of certain payments. The increase in accounts receivable reflects growing sales. Inventory increased and prepaid expenses and other assets increased due to timing.

 

Investing activities

 

Net cash used in investing activities was $5.1 million during the six months ended June 30, 2018 and consisted of purchases of property and equipment.

 

Net cash used in investing activities was $2.9 million during the six months ended June 30, 2017 and consisted of purchases of property and equipment.

 

Financing activities

 

Net cash provided by financing activities was $504,000 during the six months ended June 30, 2018.

 

Net cash provided by financing activities was $301,000 during the six months ended June 30, 2017.

 

Employees

 

As of June 30, 2018, we had 437 employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and we believe our employee relations are good.

 

Contractual obligations

 

In March 2018, we entered into an agreement relating to our location in Norwood, Massachusetts to bifurcate our existing lease for two adjacent facilities into two separate leases, as one of the facilities was being sold to a new owner. The first of the two leases, which is referred to as the “315 Lease”, relates to about 18,000 rentable square feet within a larger facility. The base rent on the 315 Lease will range from $32,000 per month to $35,000 per month and extends through March 31, 2019, when the Company is anticipated to surrender the space.

 

The second lease, which extends through March 31, 2023, is referred to as the “320 Lease” and relates to an entire building containing about 39,000 rentable square feet. The base rent on the 320 Lease over the lease term will range from $67,000 per month to $83,000 per month. The Company will have two options to extend the lease term, each for a five-year period.

 

In June 2018, we entered into a lease for new space in Abingdon, England that will allow us to combine our manufacturing, laboratory, storage and office operations into a single facility. The base rent on the facility over the lease term will range from $39,000 per month to $79,000 per month. We expect to take occupancy of the new space in the second half of 2018.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s exposure to market risk from interest rate fluctuations, capital market fluctuations, and foreign currency exchange rate fluctuations has not materially changed from its exposure as of December 31, 2017, as described in Item 7A of our 2017 Form 10-K.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive and Chief Financial Officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control Over Financial Reporting

 

There have been no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors described in “Item 1A. Risk Factors” of the Company’s 2017 Form 10-K.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report, which Exhibit Index is incorporated herein by this reference.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

OXFORD IMMUNOTEC GLOBAL PLC

     

Date: July 31, 2018

/s/

Peter Wrighton-Smith, Ph.D.

   

Peter Wrighton-Smith, Ph.D.

   

Chief Executive Officer and Director

   

(Principal Executive Officer)

     

Date: July 31, 2018

/s/

Richard M. Altieri

   

Richard M. Altieri

   

Chief Financial Officer

   

(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

Exhibit No.

 

Description

 

 

 

3.1

 

Articles of Association of the Registrant (Filed as Exhibit 3.1 to our Current Report on Form 8-K on June 18, 2014 and incorporated herein by reference.)

10.1+

 

Fourth Amendment to Distributorship Agreement between Oxford Immunotec, Ltd., Fosun Long March Medical Science Co. Ltd. and Shanghai Xin Chang Medical Device Co. Ltd. entered into on June 5, 2018.

31.1

 

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated balance sheets at June 30, 2018 and December 31, 2017; (ii) Condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017; (iii) Condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2018 and 2017; (iv) Condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017; and (v) Notes to unaudited condensed consolidated financial statements

     

 

+

Confidential treatment has been granted or requested with respect to certain portions of this exhibit. Omitted portions have been submitted separately to the SEC.

 

32