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Quotient Ltd - Quarter Report: 2015 December (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended December 31, 2015

OR

¨

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

For the transition period from              to             

Commission File Number 001-36415

 

QUOTIENT LIMITED

(Exact name of registrant as specified in its charter)

 

 

Jersey, Channel Islands

 

Not Applicable

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

Pentlands Science Park

Bush Loan, Penicuik, Midlothian

EH26 0PZ, United Kingdom

 

Not Applicable

(Address of principal executive offices)

 

(Zip Code)

001-44-131-445-6159

(Registrant’s telephone number, including area code)

 

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

Yes  x    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  x    No  ¨

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

 

Large accelerated filer ¨

 

Accelerated filer ¨

  

Non-accelerated filer x

(Do not check if a smaller
reporting company)

 

Smaller reporting company ¨

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

Yes  ¨    No  x

As of February 10, 2016 there were 25,408,950 Ordinary Shares, nil par value, of Quotient Limited outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

  

Page

 

PART I – FINANCIAL INFORMATION

  

 

- 3 -

 

 

Item 1. Financial Statements

  

 

- 3 -

 

 

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

  

 

- 17 -

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

 

- 29 -

 

 

Item 4. Controls and Procedures

  

 

- 30 -

 

 

PART II – OTHER INFORMATION

  

 

- 30 -

 

 

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 -

 

 

 

 

- i -


 

Cautionary note regarding forward-looking statements

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

Forward-looking statements include statements about:

 

·

the development, regulatory approval and commercialization of MosaiQTM;

 

·

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

 

·

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

 

·

our expected profit margins for MosaiQTM;

 

·

the size of the market for MosaiQTM ;

 

·

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

 

·

future plans for our conventional reagent products;

 

·

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

 

·

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

 

·

our ability to manage the risks associated with international operations;

 

·

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

 

·

the effects of competition;

 

·

the expected outcome or impact of litigation;

 

·

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

 

·

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

 

·

our plans for executive and director compensation for the future.

You should also refer to the various factors identified in this and other reports filed by us with the Securities and Exchange Commission, including but not limited to those discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2015, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

- 1 -


 

Where you can find more information

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

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

 

 

- 2 -


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

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

 

 

 

December 31,

2015

 

 

March 31,

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,061

 

 

$

37,525

 

Trade accounts receivable, net

 

 

1,479

 

 

 

1,808

 

Inventories

 

 

7,812

 

 

 

4,608

 

Prepaid expenses and other current assets

 

 

6,305

 

 

 

5,580

 

Total current assets

 

 

39,657

 

 

 

49,521

 

Property and equipment, net

 

 

48,944

 

 

 

29,733

 

Intangible assets, net

 

 

952

 

 

 

950

 

Total assets

 

$

89,553

 

 

$

80,204

 

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,241

 

 

$

7,238

 

Accrued compensation and benefits

 

 

1,777

 

 

 

2,565

 

Accrued expenses and other current liabilities

 

 

3,992

 

 

 

8,787

 

Financial liability in respect of share warrants

 

 

 

 

 

31,011

 

Current portion of long-term debt

 

 

 

 

 

4,500

 

Current portion of lease incentive

 

 

426

 

 

 

435

 

Current portion of capital lease obligation

 

 

168

 

 

 

239

 

Total current liabilities

 

 

15,604

 

 

 

54,775

 

Long-term debt, less current portion

 

 

28,689

 

 

 

9,853

 

Lease incentive, less current portion

 

 

1,383

 

 

 

1,740

 

Capital lease obligation, less current portion

 

 

1,794

 

 

 

276

 

7% Cumulative redeemable preference shares

 

 

15,963

 

 

 

15,175

 

Total liabilities

 

 

63,433

 

 

 

81,819

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity (deficit)

 

 

 

 

 

 

 

 

Ordinary shares (nil par value) 20,964,405 and 17,020,574 issued and outstanding

   at December 31, 2015 and March 31, 2015 respectively;

 

 

119,078

 

 

 

84,525

 

Additional paid in (distribution in excess of) capital

 

 

11,040

 

 

 

(6,684

)

Accumulated other comprehensive loss

 

 

(5,279

)

 

 

(5,102

)

Accumulated deficit

 

 

(98,719

)

 

 

(74,354

)

Total shareholders' equity (deficit)

 

 

26,120

 

 

 

(1,615

)

Total liabilities and shareholders' equity (deficit)

 

$

89,553

 

 

$

80,204

 

 

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

 

 

- 3 -


 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

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

 

 

 

Quarter ended

 

 

Nine months ended

 

 

 

December 31

 

 

December 31

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

4,354

 

 

$

3,962

 

 

$

13,477

 

 

$

13,756

 

Other revenues

 

 

 

 

 

100

 

 

 

 

 

 

750

 

Total revenue

 

 

4,354

 

 

 

4,062

 

 

 

13,477

 

 

 

14,506

 

Cost of revenue

 

 

(2,225

)

 

 

(2,204

)

 

 

(7,100

)

 

 

(7,361

)

Gross profit

 

 

2,129

 

 

 

1,858

 

 

 

6,377

 

 

 

7,145

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

(918

)

 

 

(789

)

 

 

(2,350

)

 

 

(2,095

)

Research and development, net of government grants

 

 

(6,931

)

 

 

(4,453

)

 

 

(22,122

)

 

 

(13,573

)

General and administrative expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense in respect of share options and

   management equity incentives

 

 

(566

)

 

 

(305

)

 

 

(1,380

)

 

 

(814

)

Other general and administrative expenses

 

 

(6,493

)

 

 

(3,638

)

 

 

(16,768

)

 

 

(10,617

)

Total general and administrative expense

 

 

(7,059

)

 

 

(3,943

)

 

 

(18,148

)

 

 

(11,431

)

Total operating expense

 

 

(14,908

)

 

 

(9,185

)

 

 

(42,620

)

 

 

(27,099

)

Operating loss

 

 

(12,779

)

 

 

(7,327

)

 

 

(36,243

)

 

 

(19,954

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,134

)

 

 

(541

)

 

 

(2,992

)

 

 

(1,613

)

Change in financial liability for share warrants

 

 

3,830

 

 

 

(34,565

)

 

 

15,857

 

 

 

(33,581

)

Other, net

 

 

305

 

 

 

130

 

 

 

(987

)

 

 

(1,490

)

Other income (expense), net

 

 

3,001

 

 

 

(34,976

)

 

 

11,878

 

 

 

(36,684

)

Loss before income taxes

 

 

(9,778

)

 

 

(42,303

)

 

 

(24,365

)

 

 

(56,638

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,778

)

 

$

(42,303

)

 

$

(24,365

)

 

$

(56,638

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   hedges

 

$

(89

)

 

$

(35

)

 

$

120

 

 

$

(288

)

Foreign currency loss

 

 

(1,491

)

 

 

(1,219

)

 

 

(297

)

 

 

(2,711

)

Other comprehensive loss, net

 

 

(1,580

)

 

 

(1,254

)

 

 

(177

)

 

 

(2,999

)

Comprehensive loss

 

$

(11,358

)

 

$

(43,557

)

 

$

(24,542

)

 

$

(59,637

)

Net loss available to ordinary shareholders - basic and diluted

 

$

(9,778

)

 

$

(42,303

)

 

$

(24,365

)

 

$

(56,638

)

Loss per share - basic and diluted

 

$

(0.48

)

 

$

(2.80

)

 

$

(1.33

)

 

$

(3.95

)

Weighted-average shares outstanding - basic and diluted

 

 

20,398,132

 

 

 

15,101,441

 

 

 

18,284,708

 

 

 

14,352,476

 

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

 

 

- 4 -


 

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

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

 

 

 

Ordinary shares

 

 

Additional paid in (Distribution

in excess of)

 

 

Accumulated

Other Comprehensive

 

 

Accumulated

 

 

Total Shareholders'

Equity

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

Loss

 

 

Deficit

 

 

(Deficit)

 

Balances, March 31, 2015

 

 

17,020,574

 

 

$

84,525

 

 

$

(6,684

)

 

$

(5,102

)

 

$

(74,354

)

 

$

(1,615

)

Issue of shares upon exercise of incentive share

   options and vesting of RSUs

 

 

21,112

 

 

 

40

 

 

 

 

 

 

 

 

 

 

 

 

40

 

Issue of shares upon exercise of warrants

 

 

3,922,719

 

 

 

34,513

 

 

 

15,154

 

 

 

 

 

 

 

 

 

49,667

 

Issue of warrants

 

 

 

 

 

 

 

 

1,190

 

 

 

 

 

 

 

 

 

1,190

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,365

)

 

 

(24,365

)

Change in the fair value of the effective portion

   of foreign currency cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

120

 

 

 

 

 

 

120

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

(297

)

 

 

 

 

 

(297

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(177

)

 

 

 

 

 

(177

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,380

 

 

 

 

 

 

 

 

 

1,380

 

Balances, December 31, 2015

 

 

20,964,405

 

 

$

119,078

 

 

$

11,040

 

 

$

(5,279

)

 

$

(98,719

)

 

$

26,120

 

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

 

 

- 5 -


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Expressed in thousands of U.S. Dollars)

 

 

 

Nine months ended

December 31,

 

 

 

2015

 

 

2014

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,365

)

 

$

(56,638

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,573

 

 

 

938

 

Share-based compensation

 

 

1,380

 

 

 

814

 

Amortization of lease incentive

 

 

(327

)

 

 

(345

)

Amortization of deferred debt issue costs

 

 

1,250

 

 

 

587

 

Accrued preference share dividends

 

 

788

 

 

 

 

Change in financial liability for share warrants

 

 

(15,857

)

 

 

33,581

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

 

307

 

 

 

161

 

Inventories

 

 

(3,249

)

 

 

(365

)

Accounts payable and accrued liabilities

 

 

(2,675

)

 

 

4,109

 

Accrued compensation and benefits

 

 

(803

)

 

 

(320

)

Other assets

 

 

(725

)

 

 

(731

)

Net cash used in operating activities

 

 

(42,703

)

 

 

(18,209

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(19,832

)

 

 

(13,429

)

Purchase of intangible assets

 

 

(64

)

 

 

(203

)

Net cash used in investing activities

 

 

(19,896

)

 

 

(13,632

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from finance leases

 

 

55

 

 

 

304

 

Proceeds from drawdown of new debt, net of costs

 

 

14,297

 

 

 

 

Proceeds from issuance of ordinary shares

 

 

34,553

 

 

 

59,329

 

Net cash generated from financing activities

 

 

48,905

 

 

 

59,633

 

Effect of exchange rate fluctuations on cash and cash equivalents

 

 

230

 

 

 

(1,934

)

Change in cash and cash equivalents

 

 

(13,464

)

 

 

25,858

 

Beginning cash and cash equivalents

 

 

37,525

 

 

 

7,192

 

Ending cash and cash equivalents

 

$

24,061

 

 

$

33,050

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

 

 

$

 

Interest paid

 

$

1,463

 

 

$

346

 

 

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

 

 

- 6 -


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Note 1. Description of Business and Basis of Presentation

Description of Business

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

Basis of Presentation

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The March 31, 2015 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the audited consolidated financial statements at and for the year ended March 31, 2015 included in the Company’s Annual Report on Form 10-K for the year then ended. The results of operations for the nine month period ended December 31, 2015 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 2016 and any future period.

The Company has incurred net losses and negative cash flows from operations in each year since it commenced operations in 2007 and had an accumulated deficit of $98.7 million as of December 31, 2015. At December 31, 2015 the Company had cash holdings of $24.1 million and had covenants in place with lenders to maintain cash holdings above $10 million. As explained in Note 10, on February 10, 2016 the Company completed a public equity offering to raise $36.9 million, net of underwriting fees and commissions and other offering expenses. The Company has expenditure plans over the next fifteen months that exceed its current cash holdings, raising substantial doubt about its ability to continue as a going concern. The Company expects to fund its operations from a combination of funding sources, including through the use of existing cash balances, product sales, asset sales, the achievement of product development milestones, the extension or expansion of its credit facilities and the issuance of further new equity. The Company’s Directors are confident in the availability of these funding sources and accordingly have prepared the financial statements on the going concern basis. However, there can be no assurance that the Company will be able to obtain adequate financing when necessary and the terms of any financings may not be advantageous to the Company and may result in dilution to its shareholders.  

 

Note 2. Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December, 2015 and March 31, 2015, all cash and cash equivalents comprised readily accessible cash balances except for $307 at December 31, 2015 and $314 at March 31, 2015 held in a restricted account as security for the property rental obligations of the Company’s Swiss subsidiary.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. Additions to the allowance for doubtful accounts are recorded as General and administrative expenses. The Company reviews its trade receivables to identify specific customers with known disputes or collectability issues. In addition, the Company maintains an allowance for all other receivables not included in the

- 7 -


 

specific reserve by applying specific rates of projected uncollectible receivables to the various aging categories. In determining these percentages, the Company analyzes its historical collection experience, customer credit-worthiness, current economic trends and changes in customer payment terms.

Concentration of Credit Risks and Other Uncertainties

The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. Derivative instruments, consisting entirely of foreign exchange contracts, are stated at their estimated fair values, based on quoted market prices for the same or similar instruments. The counterparties to the agreements relating to the Company’s derivative instruments consist of large financial institutions of high credit standing.

The Company’s main financial institutions for banking operations hold all of the Company’s cash and cash equivalents as of December 31, 2015 and at March 31, 2015. The Company’s accounts receivable are derived from net revenue to customers and distributors located in the United States and other countries. The Company performs credit evaluations of its customers’ financial condition. The Company provides reserves for potential credit losses but has not experienced significant losses to date. There was one customer whose accounts receivable balance represented 10% or more of total accounts receivable, net, as of December 31, 2015 and March 31, 2015. This customer represented 37% and 47% of the accounts receivable balances as of December 31, 2015 and March 31, 2015, respectively.

The Company currently sells products through its direct sales force and through third-party distributors. There was one direct customer that accounted for 10% or more of total product sales for the nine month periods ended December 31, 2015 and December 31, 2014. This customer represented 56% of total product sales for the nine month period ended December 31, 2015 and 55% for the nine month period ended December 31, 2014.

Fair Value of Financial Instruments

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

·

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

·

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

·

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

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

Inventory

Inventory is stated at the lower of standard cost (which approximates actual cost) or market, with cost determined on the first-in-first-out method. Accordingly, allocation of fixed production overheads to conversion costs is based on normal capacity of production. Abnormal amounts of idle facility expense, freight, handling costs and spoilage are expensed as incurred and not included in overhead. No stock-based compensation cost was included in inventory as of December 31, 2015 and March 31, 2015.

Property and Equipment

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

·

Land—not depreciated.

·

Plant, machinery and equipment—4 to 25 years;

·

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

- 8 -


 

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

Intangible Assets and Goodwill

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

Customer relationships—5 years

Brands associated with acquired cell lines—40 years

Product licenses—10 years

Other intangibles assets—7 years

The Company reviews its intangible assets for impairment and conducts an impairment review when events or circumstances indicate the carrying value of a long-lived asset may be impaired by estimating the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists. No impairment losses have been recorded in either of the nine month periods ended December 31, 2015 or December 31, 2014.

Revenue Recognition

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

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

In June 2013, the Company entered into an agreement with Ortho-Clinical Diagnostics Inc. (“OCD”) to develop a range of rare antisera products. The Company had been working on this project for more than a year before the formal agreement was signed with OCD. Under the terms of the agreement, the Company is entitled to receive milestone payments of $1,400 upon the receipt of FDA approval of the rare antisera products and two further milestones of $500 each upon the updating of the CE-mark and FDA approvals to cover use of the products on OCD’s automation platform. The Company has concluded that as each of these milestones require significant levels of development work to be undertaken and there was no certainty at the start of the project that the development work would be successful, these milestones are substantive and will be accounted for under the milestone method of revenue recognition. The agreement also contains one further milestone of $650 payable upon fulfillment of $250 of cumulative orders of the rare antisera products covered by the agreement. This payment represents a royalty payment and was recognized in the quarter ended June 30, 2014 when the sales target was achieved.

Research and Development

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

- 9 -


 

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Compensation cost related to restricted stock units with a market condition is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. Stock-based compensation cost for restricted stock units granted to non-employees is measured when the awards vest and the expense is recognized during the period the related services are rendered.

In determining the fair value of the stock-based compensation payments in respect of share options, the Company uses the Black–Scholes model and a single option award approach, which requires the input of subjective assumptions. These assumptions include: the fair value of the underlying share, estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of the Company’s ordinary shares price over the expected term (expected volatility), risk-free interest rate (interest rate), expected dividends and the number of shares subject to options that will ultimately not complete their vesting requirements (forfeitures). The Company uses a barrier option pricing model to determine the grant date fair value of its multi-year performance related restricted stock unit awards. This requires the use of similar assumptions to the Black-Scholes model.

Debt Issuance Costs

On September 30, 2015, the Company elected to adopt early the requirements of Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset.   In view of the refinancing of the Company’s secured credit facility on August 3, 2015 (see note 4), the Company believes that it is preferable to adopt this presentation in the year of refinancing in order to reflect more accurately the assets of the Company and the substance of the financing arrangements.  Comparative financial statements of prior years have been adjusted to apply the new presentation retrospectively.   This had the effect of reducing “Prepaid expenses and other current assets” and “Other non-current assets at March 31, 2015 by $549 and $366, respectively, with a consequential reduction in “Long term debt, less current portion” of $915.   There has been no impact on the comparative Statements of comprehensive loss, Statement of changes in shareholders’ deficit or Statements of cash flows.

 

Note 3. Intangible Assets

 

 

 

December 31, 2015

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Weighted

Ave.

Remaining

Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,915

 

 

$

(2,915

)

 

$

 

 

 

 

Brands associated with acquired cell lines

 

 

601

 

 

 

(125

)

 

 

476

 

 

31.7 years

 

Product licenses

 

 

770

 

 

 

(294

)

 

 

476

 

 

6.2 years

 

Other intangibles

 

 

189

 

 

 

(189

)

 

 

 

 

 

 

Total

 

$

4,475

 

 

$

(3,523

)

 

$

952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

 

Weighted

Ave.

Remaining

Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

2,923

 

 

$

(2,923

)

 

$

 

 

 

 

Brands associated with acquired cell lines

 

 

603

 

 

 

(115

)

 

 

488

 

 

32.4 years

 

Product licenses

 

 

703

 

 

 

(241

)

 

 

462

 

 

6.6 years

 

Other intangibles

 

 

190

 

 

 

(190

)

 

 

 

 

 

 

Total

 

$

4,419

 

 

$

(3,469

)

 

$

950

 

 

 

 

 

 

 

- 10 -


 

Note 4. Debt

Long-term debt comprises:

 

 

 

December 31,

2015

 

 

March 31,

2015

 

Total debt

 

$

30,000

 

 

$

15,000

 

Less current portion

 

 

 

 

 

(4,500

)

Long-term debt

 

$

30,000

 

 

$

10,500

 

Deferred debt costs, net of amortization

 

 

(299

)

 

 

(428

)

Fair value of associated share warrant, net of amortization

 

 

(1,012

)

 

 

(219

)

 

 

$

28,689

 

 

$

9,853

 

 

On August 3, 2015, the Company drew down $30,000 under a new secured credit facility agreement with MidCap Financial Trust. The facility is repayable over a four year period with no repayments until March 1, 2017 when the first of 30 equal monthly repayments is due. If the Company achieves CE Mark approvals for the MosaiQTM instrument and blood grouping consumable, the facility is repayable over a four year period with no repayments until September 1, 2017 when the first of 24 equal monthly repayments is due. The facility bears interest at LIBOR plus 6.7%. The LIBOR rate applicable is the higher of the actual market rate from time to time or 2.0%. Other expense for the nine month period ended December 31, 2015 included $0.6 million of previously deferred fees that were expensed as a result of the expansion of the credit facility.

At December 31, 2015, the outstanding debt is repayable as follows:

 

Within 1 year

 

$

 

Between 1 and 2 years

 

 

10,000

 

Between 2 and 3 years

 

 

12,000

 

Between 3 and 4 years

 

 

8,000

 

Total debt

 

$

30,000

 

 

 

Note 5. Consolidated Balance Sheet Detail

Inventory

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

 

 

 

December 31,

2015

 

 

March 31,

2015

 

Raw materials

 

$

4,137

 

 

$

1,180

 

Work in progress

 

 

2,532

 

 

 

2,071

 

Finished goods

 

 

1,143

 

 

 

1,357

 

Total inventories

 

$

7,812

 

 

$

4,608

 

 

Property and equipment

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

 

 

 

December 31,

2015

 

 

March 31,

2015

 

Land

 

$

1,525

 

 

$

 

Plant and Machinery

 

 

35,886

 

 

 

21,688

 

Leasehold improvements

 

 

16,350

 

 

 

11,412

 

Total property and equipment

 

 

53,761

 

 

 

33,100

 

Less: accumulated depreciation

 

 

(4,817

)

 

 

(3,367

)

Total property and equipment, net

 

$

48,944

 

 

$

29,733

 

 

Depreciation expenses were $643 and $316 in the quarters ended December 31, 2015 and December 31, 2014 respectively and $1,510 and $873 in the nine month periods ended December 31, 2015 and December 31, 2014 respectively.

- 11 -


 

Accrued compensation and benefits

Accrued compensation and benefits consist of the following:

 

 

 

December 31,

2015

 

 

March 31,

2015

 

Salary and related benefits

 

$

59

 

 

$

300

 

Accrued vacation

 

 

267

 

 

 

165

 

Accrued payroll taxes

 

 

551

 

 

 

302

 

Accrued incentive payments

 

 

900

 

 

 

1,798

 

Total accrued compensation and benefits

 

$

1,777

 

 

$

2,565

 

 

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

December 31,

2015

 

 

March 31,

2015

 

Accrued legal and professional fees

 

$

182

 

 

$

3,758

 

Accrued interest

 

 

225

 

 

 

112

 

Goods received not invoiced

 

 

933

 

 

 

787

 

Accrued capital expenditure

 

 

230

 

 

 

972

 

Accrued development expenditure

 

 

1,786

 

 

 

2,110

 

Other accrued expenses

 

 

636

 

 

 

1,048

 

Total accrued expenses and other current liabilities

 

$

3,992

 

 

$

8,787

 

 

 

Note 6. Commitments and Contingencies

Government Grant

In 2008, the Company was awarded research and development grant funding from Scottish Enterprise amounting to £1,791, for the development of MosaiQTM. The total grant claimed to December 31, 2015 is £1,790. Regular meetings are held to update Scottish Enterprise with the status of the project and while the terms of the grant award provide for full repayment of the grant in certain circumstances, the Company does not consider that any repayment is likely.

Hedging arrangements

The Company’s subsidiary in the United Kingdom (“UK”) has entered into twelve forward exchange contracts to sell $500 and purchase pounds sterling at £1:$1.50 in each calendar month through December 2016 as a hedge of its U.S. dollar denominated revenues. The fair value of foreign currency forward contracts has been determined by calculating the present value of future cash flows, estimated using market-based observable inputs including forward and spot exchange rates and interest rate curves obtained from third party market price quotations.

Share warrants

As part of its initial public offering in April 2014 the Company issued 5 million warrants each to acquire 0.8 of an ordinary share for a price of $8.80 per whole share (“IPO warrants”). During the period from the initial public offering to October 26, 2015 when the warrants expired, 4,981,052 of these warrants were exercised and the remaining 18,948 expired on October 26, 2015. As of March 31, 2015, the financial statements included a financial liability of $31,011 in respect of these warrants which was equal to the market price of the outstanding warrants at that date. As of December 31, 2015 no financial liability in respect of the IPO warrants was included in the financial statements.  

- 12 -


 

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

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

 

$

 

 

$

 

 

$

 

Total assets measured at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

 

$

79

 

 

$

 

 

$

79

 

Fair value of share warrants

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities measured at fair value

 

$

 

 

$

79

 

 

$

 

 

$

79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

 

 

$

 

 

$

 

 

$

 

Total assets measured at fair value

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

199

 

 

$

 

 

$

 

 

$

199

 

Fair value of share warrants

 

 

31,011

 

 

 

 

 

 

 

 

 

31,011

 

Total liabilities measured at fair value

 

$

31,210

 

 

$

 

 

$

 

 

$

31,210

 

  

The change in the estimated fair value of share warrant liabilities is summarized below:

 

March 31,2015

 

$

31,011

 

Change in fair value of ordinary share warrants

 

 

(15,857

)

Exercise and expiry of warrants

 

 

(15,154

)

December 31, 2015

 

$

 

 

 

Note 7. Ordinary Shares

Ordinary Shares

The Company’s issued and outstanding ordinary shares were as follows:

 

 

 

Shares Issued

and Outstanding

 

 

 

 

 

 

 

December 31,

2015

 

 

March 31,

2015

 

 

Par value

 

Ordinary shares

 

 

20,964,405

 

 

 

17,020,574

 

 

$

 

Total

 

 

20,964,405

 

 

 

17,020,574

 

 

$

 

 

- 13 -


 

Preference shares

The Company’s issued and outstanding preference shares consist of the following:

 

 

 

Shares Issued

and Outstanding

 

 

Liquidation

amount per share

 

 

 

December 31,

2015

 

 

March 31,

2015

 

 

December 31,

2015

 

 

March 31,

2015

 

7% Cumulative Redeemable Preference

   shares

 

 

666,665

 

 

 

666,665

 

 

$

23.94

 

 

$

22.76

 

Total

 

 

666,665

 

 

 

666,665

 

 

 

 

 

 

 

 

 

 

 

Note 8. Share-Based Compensation

The Company records share-based compensation expense in respect of options, multi-year performance based restricted stock units (“MRSUs”) and restricted stock units (“RSUs”) issued under its share incentive plans. Share-based compensation expense amounted to $1,380 and $814 in the nine month periods ended December 31, 2015 and December 31, 2014, respectively.

Share option activity

The following table summarizes share option activity:

 

 

 

Number

of Share

Options

Outstanding

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining Contractual Life

(Months)

 

Outstanding — March 31, 2015

 

 

1,208,118

 

 

$

5.58

 

 

 

103

 

Granted

 

 

396,427

 

 

 

14.86

 

 

 

120

 

Exercised

 

 

(8,612

)

 

 

4.66

 

 

 

 

Forfeited

 

 

(6,695

)

 

 

12.08

 

 

 

 

Outstanding — December 31, 2015

 

 

1,589,238

 

 

$

7.87

 

 

 

99

 

Exercisable —December 31, 2015

 

 

634,466

 

 

$

4.13

 

 

 

91

 

The closing price of the Company’s Ordinary Shares on The NASDAQ Global Market on December 31, 2015 was $16.00.

The following table summarizes the options granted in the current financial year with their exercise prices, the fair value of ordinary shares as of the applicable grant date, and the intrinsic value:

 

Grant Date

 

Number of

Options Granted

 

 

Exercise Price

 

 

Ordinary

Shares

Fair Value Per

Share at Grant

Date

 

 

Per Share

Intrinsic

Value of

Options

 

May 20, 2015

 

 

312,300

 

 

$

15.17

 

 

$

15.17

 

 

$

6.08

 

August 5, 2015

 

 

8,000

 

 

$

16.70

 

 

$

16.70

 

 

$

6.54

 

September 2, 2015

 

 

25,000

 

 

$

16.34

 

 

$

16.34

 

 

$

6.52

 

October 31, 2015

 

 

39,727

 

 

$

11.62

 

 

$

11.62

 

 

$

4.76

 

November 4, 2015

 

 

11,400

 

 

$

13.00

 

 

$

13.00

 

 

$

5.33

 

 

Determining the fair value of share incentive awards

The fair value of each share incentive grant was determined by the Company using the Black-Scholes options pricing model.

Assumptions used in the option pricing models are discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

- 14 -


 

Expected volatility. The expected volatility was based on the historical share volatilities of a number of the Company’s publicly listed peers over a period equal to the expected terms of the options as the Company did not have a sufficient trading history to use the volatility of its own ordinary shares.

Fair value of ordinary shares. The fair value of the ordinary shares is based upon the closing price of the Company’s shares on The NASDAQ Global Market on the last trading day prior to the date of grant.

Risk-Free Interest Rate. The risk-free interest rate is based on the US Treasury 10-year bond yield in effect at the time of grant.

Expected term. The expected term is determined after giving consideration to the contractual terms of the share-based awards, graded vesting schedules ranging from one to three years and expectations of future employee behavior as influenced by changes to the terms of its share-based awards.

Expected dividend. According to the terms of the awards, the exercise price of the options is adjusted to take into account any dividends paid. As a result dividends are not required as an input to the model, as these reductions in the share price are offset by a corresponding reduction in exercise price.

A summary of the assumptions applicable to the share options issued in the current financial year is as follows:

 

 

 

May 20,

2015

 

 

August 5, 2015

 

 

September 2, 2015

 

 

October 31, 2015

 

 

November 4, 2015

 

Risk-free interest rate

 

 

2.29

%

 

 

2.27

%

 

 

2.18

%

 

 

2.14

%

 

 

2.23

%

Expected lives (years)

 

 

3

 

 

 

3

 

 

 

3

 

 

 

3

 

 

 

3

 

Volatility

 

 

57.14

%

 

 

55.67

%

 

 

57.01

%

 

 

58.86

%

 

 

58.86

%

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant date fair value (per share)

 

$

15.17

 

 

$

16.70

 

 

$

16.34

 

 

$

11.62

 

 

$

13.00

 

Number granted

 

 

312,300

 

 

 

8,000

 

 

 

25,000

 

 

 

39,727

 

 

 

11,400

 

 

The Company awarded 137,000 MRSUs on May 20, 2015. These MRSUs will vest if the volume weighted average price of the Company’s ordinary shares exceeds $60 for a continuous twenty day period between April 1, 2018 and December 31, 2018. The Company determined the grant date fair value of the MRSUs using a barrier option pricing model with the same grant date fair value per share, risk free interest rate, volatility and dividend yield assumptions as the options awarded on the same date. This resulted in a grant date fair value of $6.09 per MRSU on May 20, 2015.  On September 2, 2015 the Company issued 25,000 RSUs which will vest if specific sales performance targets are met prior to December 31, 2022.  The Company expects these performance targets to be met and share based compensation expense is being recognized on these awards over the period to the date when the sales performance targets are expected to be achieved.  The Company also issued 10,000 RSUs on May 20, 2015, 9,867 RSUs on September 4, 2015 and 10,328 RSUs on October 31, 2015 which vest over a two year period from the date of grant. On November 4, 2015 the Company issued 8,000 RSUs which vest over a three year period from the date of grant.  

During the quarter ended September 30, 2014, the Company awarded 50,000 RSUs to a non-executive director upon his appointment as a director of the Company.  These vest in equal annual installments over the four year period following the date of grant. During the nine months ended December 31, 2015, 12,500 of these RSUs vested resulting in the issuance of 12,500 ordinary shares and at December 31, 2015, 37,500 of these RSUs remained outstanding.

 

 

Note 9. Net Loss Per Share

In accordance with ASC 260 “Earnings Per Share”, basic earnings available to ordinary shareholders per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted earnings available to ordinary shareholders per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus potential ordinary shares considered outstanding during the period, as long as the inclusion of such shares is not anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of share options (using the treasury shares method), the warrants to acquire ordinary shares and the ordinary shares issuable upon vesting of the MRSUs and RSUs.

- 15 -


 

The following table sets forth the computation of basic and diluted earnings per ordinary share.

 

 

 

Quarter ended

 

 

Nine months ended

 

 

 

December 31

 

 

December 31

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,778

)

 

$

(42,303

)

 

$

(24,365

)

 

$

(56,638

)

Net loss available to ordinary shareholders - basic and diluted

 

$

(9,778

)

 

$

(42,303

)

 

$

(24,365

)

 

$

(56,638

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - basic and diluted

 

 

20,398,132

 

 

 

15,101,441

 

 

 

18,284,708

 

 

 

14,352,476

 

Loss per share - basic and diluted

 

$

(0.48

)

 

$

(2.80

)

 

$

(1.33

)

 

$

(3.95

)

 

The following table sets out the numbers of ordinary shares excluded from the above computation of earnings per share at December 31, 2015 and December 31, 2014 as their inclusion would have been anti-dilutive.

 

 

 

December 31,

2015

 

 

December 31,

2014

 

Ordinary shares issuable on exercise of options to purchase ordinary

   shares

 

 

1,589,238

 

 

 

1,329,659

 

Restricted stock units awarded, including the multi-year performance

   related restricted stock units

 

 

237,695

 

 

 

 

Ordinary shares issuable on exercise of warrants at $16.14 per share

 

 

111,525

 

 

 

 

Ordinary shares issuable on exercise of warrants at $9.37 per share

 

 

64,000

 

 

 

64,000

 

Ordinary shares issuable on exercise of warrants at $8.80 per share

 

 

 

 

 

3,955,028

 

Ordinary shares issuable on exercise of pre-funded warrants at $0.01 per

   share

 

 

850,000

 

 

 

850,000

 

 

 

 

2,852,458

 

 

 

6,198,687

 

 

 

Note 10. Subsequent Events

 

On February 10, 2016 the Company completed a public offering of 4,444,445 of its ordinary shares at a price of $9.00 per share.  The net proceeds from this offering were $36.9 million net of underwriting discounts and other offering expenses. The Company has also granted the underwriter a thirty-day option to purchase up to an additional 666,666 ordinary shares.

 

 

- 16 -


 

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

The following discussion should be read in conjunction with the corresponding section of our Annual Report on Form 10-K for the year ended March 31, 2015 filed with the Securities and Exchange Commission on June 1, 2015.

The information set forth and discussed below for the quarters and nine month periods ended December 31, 2015 and December 31, 2014 is derived from the Condensed Consolidated Financial Statements included under Item 1 above. The financial information set forth and discussed below is unaudited but includes all adjustments (consisting of normal recurring adjustments) that our management considers necessary for a fair presentation of the financial position and the operating results and cash flows for those periods. Our results of operations for a particular quarter may not be indicative of the results that may be expected for other quarters or the entire year.

Overview

We were incorporated in Jersey, Channel Islands on January 28, 2012. On February 16, 2012, we acquired the entire issued share capital of Alba Bioscience Limited (or Alba), Quotient Biodiagnostics, Inc. (or QBDI) and QBD (QSIP) Limited (or QSIP) from Quotient Biodiagnostics Group Limited (or QBDG), our predecessor.

The acquisition of Alba, QBDI and QSIP by us is treated for accounting purposes as a combination of entities under common control as these entities were all controlled by QBDG prior to their acquisition by us. We recognized the assets and liabilities of Alba, QBDI and QSIP at their carrying amounts in the financial statements of those companies. We are a continuation of QBDG and its subsidiaries and, accordingly, our consolidated financial statements include the assets, liabilities and results of operations of the subsidiaries transferred since their inception.

Our Business

We are a commercial-stage diagnostics company committed to reducing healthcare costs and improving patient care through the provision of innovative tests within established markets. Our initial focus is on blood grouping and serological disease screening, which is commonly referred to as transfusion diagnostics. Blood grouping involves specific procedures performed at donor or patient testing laboratories to characterize blood, which includes antigen typing and antibody identification. Serological disease screening involves the screening of donor blood for unwanted pathogens.

We have over 30 years of experience developing, manufacturing and commercializing conventional reagent products used for blood grouping within the global transfusion diagnostics market. We are developing MosaiQ™, our proprietary technology platform, to better address the comprehensive needs of this large and established market. MosaiQ™ will initially comprise two separate consumables, one for blood grouping and one for serological disease screening, and a high-throughput instrument. We are also developing a third consumable for nucleic acid testing. We believe MosaiQ™ has the potential to transform transfusion diagnostics, significantly reducing the cost of blood grouping in the donor and patient testing environments, while improving patient outcomes.

We operate as one business segment with 302 employees in the United States, the United Kingdom and Switzerland as of December 31, 2015. Our principal markets are the United States, Europe and Japan. Based on the location of the customer, revenues outside the United States accounted for 53% and 55% of total revenue during the nine month periods ended December 31, 2015 and December 31, 2014, respectively.

We have incurred net losses and negative cash flows from operations in each year since we commenced operations in 2007. As of December 31, 2015, we had an accumulated deficit of $98.7 million. We expect our operating losses will continue at least for the remainder of the current and the next fiscal year as we continue our investment in the development and commercialization of MosaiQ™. For the nine month period ended December 31, 2015, our total revenue was $13.5 million and our net loss was $24.4 million.

On April 29, 2014 we completed our initial public offering and issued 5,000,000 units at $8.00 per unit. Each unit comprised one ordinary share and one warrant to acquire 0.8 of an ordinary share at an exercise price of $8.80 per whole share. We raised $40.0 million of equity share capital before issuance costs of approximately $6.4 million. On May 27, 2014, our ordinary shares and warrants began trading separately on The NASDAQ Global Market and the units were delisted. During the period from our initial public offering to October 26, 2015 when the warrants expired, 4,981,052 of these warrants were exercised resulting in the issuance of 3,984,832 ordinary shares for $35.1 million.

On November 25, 2014, we entered into subscription agreements with certain institutional and individual accredited investors for the private placement of 2,000,000 newly issued ordinary shares at a price of $9.50 per share and 850,000 newly issued pre-funded

- 17 -


 

warrants at a price of $9.49 per warrant, amounting to an aggregate subscription price of approximately $27.1 million. Each pre-funded warrant permits the holder to subscribe for one new ordinary share at an exercise price of $0.01 per pre-funded warrant.

On January 29, 2015, we entered into a subscription agreement with Ortho-Clinical Diagnostics Finco S.Á.R.L., an affiliate of Ortho, for the private placement of 444,445 newly issued ordinary shares at a price of $22.50 per share and 666,665 newly issued 7% cumulative redeemable preference shares, of no par value, at a price of $22.50 per share, for an aggregate subscription price of approximately $25 million.

Revenue

We generate revenue from the sale of conventional reagent products directly to hospitals, donor collection agencies and independent testing laboratories in the United States, the United Kingdom and to distributors in Europe and the rest of the world, and indirectly through sales to our original equipment manufacturer (or OEM) customers. We recognize revenues in the form of product sales when the goods are shipped. Products sold by standing purchase orders as a percentage of product sales revenue were 72% for both the nine month periods ended December 31, 2015 and December 31, 2014. We also provide product development services to our OEM customers. We recognize revenue from these contractual relationships in the form of product development fees, which are included in other revenues. For a description of our revenue recognition policies, see “—Critical Accounting Policies and Significant Judgments and Estimates—Revenue Recognition and Accounts Receivable.”

Our revenue is denominated in multiple currencies. Sales in the United States and to certain of our OEM customers are denominated in U.S. Dollars. Sales in Europe and the rest of the world are denominated primarily in Pounds Sterling, Euros or Yen. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the United Kingdom, United States and Switzerland. We operate globally and therefore changes in foreign currency exchange rates may become material to us in the future due to factors beyond our control. See Part I, Item 3: “Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exchange Risk.”

Cost of revenue and operating expenses

Cost of revenue consists of direct labor expenses, including employee benefits, overhead expenses, material costs and freight costs, along with the depreciation of manufacturing equipment and leasehold improvements. Our gross profit represents total revenue less the cost of revenue and gross margin represents gross profit expressed as a percentage of total revenue. Our gross margin was 47% and 49% for the nine month periods ended December 31, 2015 and December 31, 2014, respectively. Excluding other revenues, which consist of product development fees, our gross margin on product sales was 47% for both the nine month periods ended December 31, 2015 and December 31, 2014. We expect our overall cost of revenue to increase in absolute U.S. Dollars as we continue to increase our product sales volumes. However, we also believe that we can achieve efficiencies in our manufacturing operations, primarily through increasing production volumes.

Our sales and marketing expenses include costs associated with our sales organization, including our direct sales force, as well as our marketing and customer service personnel. These expenses consist principally of salaries, commissions, bonuses and employee benefits, as well as travel costs related to our sales activities. These expenses also include direct and indirect costs associated with our product marketing activities. We expense all sales and marketing costs as incurred. We expect sales and marketing expense to increase in absolute U.S. Dollars, primarily as a result of commissions on increased product sales in the United States.

Our research and development expenses include costs associated with performing research, development, field trials and our regulatory activities, as well as production costs incurred in advance of the commercial launch of MosaiQTM. Research and development expenses include research personnel-related expenses, fees for contractual and consulting services, travel costs, laboratory supplies and depreciation of laboratory equipment.

We expense all research and development costs as incurred, net of government grants received and tax credits. In the year ended March 31, 2015 changes in UK tax legislation enabled our UK subsidiary to claim certain tax credits on its research and development expenditures. Previously, these tax credits increased the unutilized tax losses of our UK subsidiary, but are now being claimed and are included as an offset to our research and development expenses. Our research and development efforts are focused on developing new products and technologies for the global transfusion diagnostics market. We segregate research and development expenses for the MosaiQ™ project from expenses for other research and development projects. We do not maintain detailed records of these other costs by activity. We expect overall research and development expense to decrease in absolute U.S. Dollars following completion of the development of MosaiQ™.

- 18 -


 

Our general and administrative expenses include costs for our executive, accounting and finance, legal, corporate development, information technology and human resources functions. We expense all general and administrative expenses as incurred. These expenses consist principally of salaries, bonuses and employee benefits for the personnel performing these functions, including travel costs. These expenses also include share-based compensation, professional service fees (such as audit, tax and legal fees), costs related to our Board of Directors, and general corporate overhead costs, which includes depreciation and amortization. We expect our general and administrative expenses to increase as our business develops and also due to the costs of operating as a public company, such as additional legal, accounting and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act, directors’ and officers’ insurance premiums and expenses for investor relations.

Net interest expense consists primarily of interest charges on our loan balances and the amortization of debt issuance costs, as well as accrued dividends on the 7% cumulative redeemable preference shares issued in January 2015. We amortize debt issuance costs over the life of the loan and report them as interest expense in our statements of operations.

Net other income (expense) consists primarily of realized and unrealized gains and losses on foreign exchange and income or expense arising on the change in the fair value of our warrants.  Realized exchange fluctuations result from the settlement of transactions in currencies other than the functional currencies of our businesses. Monetary assets and liabilities that are denominated in foreign currencies are measured at the period-end closing rate with resulting unrealized exchange fluctuations. The functional currencies of our businesses are Pounds Sterling, Swiss Francs and U.S. Dollars depending on the entity.

Results of Operations

Comparison of the Quarters ended December 31, 2015 and 2014

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.

 

 

 

Quarter ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

4,354

 

 

 

100

%

 

$

3,962

 

 

 

98

%

 

$

392

 

 

 

10

%

Other revenues

 

 

 

 

 

0

%

 

 

100

 

 

 

2

%

 

 

(100

)

 

 

0

%

Total revenue

 

 

4,354

 

 

 

100

%

 

 

4,062

 

 

 

100

%

 

 

292

 

 

 

7

%

Cost of revenue

 

 

2,225

 

 

 

51

%

 

 

2,204

 

 

 

54

%

 

 

21

 

 

 

1

%

Gross profit

 

 

2,129

 

 

 

49

%

 

 

1,858

 

 

 

46

%

 

 

271

 

 

 

15

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

918

 

 

 

21

%

 

 

789

 

 

 

19

%

 

 

129

 

 

 

16

%

Research and development

 

 

6,931

 

 

 

159

%

 

 

4,453

 

 

 

110

%

 

 

2,478

 

 

 

56

%

General and administrative

 

 

7,059

 

 

 

162

%

 

 

3,943

 

 

 

97

%

 

 

3,116

 

 

 

79

%

Total operating expenses

 

 

14,908

 

 

 

342

%

 

 

9,185

 

 

 

226

%

 

 

5,723

 

 

 

62

%

Operating loss

 

 

(12,779

)

 

 

-293

%

 

 

(7,327

)

 

 

-180

%

 

 

(5,452

)

 

 

74

%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,134

)

 

 

-26

%

 

 

(541

)

 

 

-13

%

 

 

(593

)

 

 

110

%

Other, net

 

 

4,135

 

 

 

95

%

 

 

(34,435

)

 

 

-848

%

 

 

38,570

 

 

 

 

Total other income, net

 

 

3,001

 

 

 

69

%

 

 

(34,976

)

 

 

-861

%

 

 

37,977

 

 

 

 

Loss before income taxes

 

 

(9,778

)

 

 

-225

%

 

 

(42,303

)

 

 

-1041

%

 

 

32,525

 

 

 

-77

%

Provision for income taxes

 

 

 

 

 

0

%

 

 

 

 

 

0

%

 

 

 

 

 

 

Net loss

 

$

(9,778

)

 

 

-225

%

 

$

(42,303

)

 

 

-1041

%

 

$

32,525

 

 

 

-77

%

 

Revenue

Total revenue for the quarter ended December 31, 2015 increased by 7% to $4.4 million, compared with $4.1 million for the quarter ended December 31, 2014. Product sales revenue increased 10% to $4.4 million for the quarter ended December 31, 2015, compared with $4.0 million for the quarter ended December 31, 2014. The increase in product sales was mainly attributable to growth in direct sales to customers in the United States. Products sold by standing purchase order were 71% of product sales for the quarter ended December 31, 2015, compared with 74% for the quarter ended December 31, 2014.

- 19 -


 

The below table sets forth revenue by product group:

 

 

 

Quarter ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales - OEM customers

 

$

2,879

 

 

 

66

%

 

$

2,801

 

 

 

69

%

 

$

78

 

 

 

3

%

Product sales - direct customers and

   distributors

 

 

1,475

 

 

 

34

%

 

 

1,161

 

 

 

29

%

 

 

314

 

 

 

27

%

Other revenues

 

 

 

 

 

0

%

 

 

100

 

 

 

2

%

 

 

(100

)

 

 

0

%

Total revenue

 

$

4,354

 

 

 

100

%

 

$

4,062

 

 

 

100

%

 

$

292

 

 

 

7

%

OEM Sales. Product sales to OEM customers increased 3% to $2.9 million for the quarter ended December 31, 2015, compared with $2.8 million for the quarter ended December 31, 2014.

Direct Sales to Customers and Distributors. Direct product sales of $1.5 million for the quarter ended December 31, 2015 increased by 27% compared with $1.2 million for the quarter ended December 31, 2014. Direct sales in the United States increased by 27%, which was mainly attributable to recently launched new products and growth in sales of our reagent red blood cell products. Direct sales outside the United States increased by 27%, despite our decision to offer fewer products in Europe.

Other Revenues. Other revenues represent product development fees. There were no such revenues in the quarter ended December 31, 2015 compared to $0.1 million in the quarter ended December 31, 2014.

Cost of revenue and gross margin

Cost of revenue increased by 1% to $2.2 million for the quarter ended December 31, 2015, compared with $2.2 million for the quarter ended December 31, 2014. Costs associated with greater sales volumes were mostly offset by foreign exchange effects and efficiencies in our manufacturing operations.

Gross profit on total revenue for the quarter ended December 31, 2015 was $2.1 million, an increase of 15% when compared with $1.9 million in the quarter ended December 31, 2014. The increase was mainly attributable to greater gross profit on product sales offsetting a $0.1 million decrease in other revenues. Excluding other revenues, gross profit on product sales for the quarter ended December 31, 2015 was $2.1 million, an increase of 21% when compared with $1.8 million for the quarter ended December 31, 2014. The increase was attributable to the positive impact of greater sales volumes.

Gross margin, which represents gross profit expressed as a percentage of total revenue, was 49% for the quarter ended December 31, 2015, compared with 46% for the quarter ended December 31, 2014. Gross margin on product sales increased to 49% for the quarter ended December 31, 2015, compared with 44% for the quarters ended December 31, 2014. The gross margin improvement was attributable to the positive impact of greater sales volumes and manufacturing efficiencies.

Sales and marketing expenses

Sales and marketing expense was $0.9 million for the quarter ended December 31, 2015, compared with $0.8 million for the quarter ended December 31, 2014. As a percentage of total revenue, sales and marketing expenses were 21% for the quarter ended December 31, 2015, compared with 19% for the quarter ended December 31, 2014.

- 20 -


 

Research and development expenses

 

 

 

Quarter ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MosaiQTM research and development

 

$

6,221

 

 

 

143

%

 

$

3,976

 

 

 

98

%

 

$

2,245

 

 

 

56

%

Other research and development

 

 

786

 

 

 

18

%

 

 

526

 

 

 

13

%

 

 

260

 

 

 

49

%

Tax credits and grants

 

 

(76

)

 

 

-2

%

 

 

(49

)

 

 

-1

%

 

 

(27

)

 

 

 

Total research and development

   expenses

 

$

6,931

 

 

 

159

%

 

$

4,453

 

 

 

110

%

 

$

2,478

 

 

 

56

%

Research and development expenses increased by 56% to $6.9 million for the quarter ended December 31, 2015, compared with $4.5 million for the quarter ended December 31, 2014. As a percentage of total revenue, research and development expenses increased to 159% for the quarter ended December 31, 2015, compared with 110% for the quarter ended December 31, 2014.  This reflects incremental costs associated with the commercial scale-up of MosaiQ™, including initial production costs, which are currently expensed as research and development.  Recent changes in UK tax legislation now enable our UK subsidiary to claim certain tax credits on its research and development expenditures.

General and administrative expenses

General and administrative expenses increased by 79% to $7.1 million for the quarter ended December 31, 2015, compared with $3.9 million for the quarter ended December 31, 2014, reflecting greater personnel-related costs, increased facility rental charges and increased corporate costs. We recognized $0.6 million of stock compensation expense in the quarter ended December 31, 2015 compared with $0.3 million in the quarter ended December 31, 2014. As a percentage of total revenue, general and administrative expenses increased to 162% for the quarter ended December 31, 2015, compared with 97% for the quarter ended December 31, 2014.

Other income (expense)

Net interest expense was $1.1 million for the quarter ended December 31, 2015, compared with $0.5 million for the quarter ended December 31, 2014. Interest expense in the quarters ended December 31, 2015 and December 31, 2014 included interest charges on our borrowings from MidCap Financial, which bore interest at LIBOR plus 6.7% (with a LIBOR floor of 2.00%). Borrowings from MidCap amounted to $15.0 million during the quarter ended December 31, 2014 and $30.0 million during the quarter ended December 31, 2015. In the quarter ended December 31, 2015, net interest expense also included $0.3 million of dividends accrued on the 7% preference shares issued to OCD on January 29, 2015.

Other income for the quarter ended December 31, 2015 included income of $3.8 million related to the change in the fair value in the quarter of the warrants issued at the time of our initial public offering and $0.3 million of foreign exchange gains arising on monetary assets and liabilities denominated in foreign currencies.

Other expense for the quarter ended December 31, 2014 included $34.6 million of expense related to the change in the fair value in the quarter of the warrants issued at the time of our initial public offering and $0.1 million of foreign exchange gains.

- 21 -


 

Comparison of the nine month periods ended December 31, 2015 and 2014

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.

 

 

 

Nine months ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

13,477

 

 

 

100

%

 

$

13,756

 

 

 

95

%

 

$

(279

)

 

 

-2

%

Other revenues

 

 

 

 

 

0

%

 

 

750

 

 

 

5

%

 

 

(750

)

 

 

-100

%

Total revenue

 

 

13,477

 

 

 

100

%

 

 

14,506

 

 

 

100

%

 

 

(1,029

)

 

 

-7

%

Cost of revenue

 

 

7,100

 

 

 

53

%

 

 

7,361

 

 

 

51

%

 

 

(261

)

 

 

-4

%

Gross profit

 

 

6,377

 

 

 

47

%

 

 

7,145

 

 

 

49

%

 

 

(768

)

 

 

-11

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,350

 

 

 

17

%

 

 

2,095

 

 

 

14

%

 

 

255

 

 

 

12

%

Research and development

 

 

22,122

 

 

 

164

%

 

 

13,573

 

 

 

94

%

 

 

8,549

 

 

 

63

%

General and administrative

 

 

18,148

 

 

 

135

%

 

 

11,431

 

 

 

79

%

 

 

6,717

 

 

 

59

%

Total operating expenses

 

 

42,620

 

 

 

316

%

 

 

27,099

 

 

 

187

%

 

 

15,521

 

 

 

57

%

Operating (loss)

 

 

(36,243

)

 

 

-269

%

 

 

(19,954

)

 

 

-138

%

 

 

(16,289

)

 

 

82

%

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,992

)

 

 

-22

%

 

 

(1,613

)

 

 

-11

%

 

 

(1,379

)

 

 

85

%

Other, net

 

 

14,870

 

 

 

110

%

 

 

(35,071

)

 

 

-242

%

 

 

49,941

 

 

 

 

Total other expense, net

 

 

11,878

 

 

 

88

%

 

 

(36,684

)

 

 

-253

%

 

 

48,562

 

 

 

-132

%

Loss before income taxes

 

 

(24,365

)

 

 

-181

%

 

 

(56,638

)

 

 

-390

%

 

 

32,273

 

 

 

-57

%

Provision for income taxes

 

 

 

 

 

0

%

 

 

 

 

 

0

%

 

 

 

 

 

 

Net loss

 

$

(24,365

)

 

 

-181

%

 

$

(56,638

)

 

 

-390

%

 

$

32,273

 

 

 

-57

%

 

Revenue

Total revenue for the nine month period ended December 31, 2015 decreased by 7% to $13.5 million, compared with $14.5 million for the nine month period ended December 31, 2014. Product sales revenue decreased 2% to $13.5 million for the nine month period ended December 31, 2015, compared with $13.8 million for the nine month period ended December 31, 2014. The decrease in product sales was attributable to a $0.8 million negative impact of a stronger U.S. dollar relative to the British Pound and Euro. Products sold by standing purchase order were 72% of product sales for both the nine month periods ended December 31, 2015 and December 31, 2014. Total revenue for the nine month period ended December 31, 2014 also included revenue related to our product development services of $0.8 million.

The below table sets forth revenue by product group:

 

 

 

Nine months ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales - OEM customers

 

$

9,093

 

 

 

67

%

 

$

9,723

 

 

 

67

%

 

$

(630

)

 

 

-6

%

Product sales - direct customers

   and distributors

 

 

4,384

 

 

 

33

%

 

 

4,033

 

 

 

28

%

 

 

351

 

 

 

9

%

Other revenues

 

 

 

 

 

0

%

 

 

750

 

 

 

5

%

 

 

(750

)

 

 

-100

%

Total revenue

 

$

13,477

 

 

 

100

%

 

$

14,506

 

 

 

100

%

 

$

(1,029

)

 

 

-7

%

OEM Sales. Product sales to OEM customers decreased 6% to $9.1 million for the nine month period ended December 31, 2015, compared with $9.7 million for the nine month period ended December 31, 2014. The decrease was attributable to the negative impact of a stronger U.S. dollar relative to the British Pound and Euro and lower shipments of bulk antisera to OEM customers.

- 22 -


 

Direct Sales to Customers and Distributors. Direct product sales of $4.4 million for the nine month period ended December 31, 2015 increased by 9% compared to $4.0 million for the nine month period ended December 31, 2014. Direct sales in the United States increased by 13%, which was mainly attributable to recently launched new products and growth in sales of our reagent red blood cell products. Direct sales outside the United States decreased by 3%, which was mainly attributable to foreign exchange effects and our decision to offer fewer products in Europe.

Other Revenues. Other revenues represent product development fees. There were no such revenues in the nine month period ended December 31, 2015 compared with $0.8 million in the nine month period ended December 31, 2014.

Cost of revenue and gross margin

Cost of revenue decreased by 4% to $7.1 million for the nine month period ended December 31, 2015, compared with $7.4 million for the nine month period ended December 31, 2014. The decrease was primarily attributable to foreign exchange effects and efficiencies in our manufacturing operations.

Gross profit on total revenue for the nine month period ended December 31, 2015 was $6.4 million, a decrease of 11% when compared with $7.1 million in the nine month period ended December 31, 2014. The decrease was mainly attributable to a $0.8 million decrease in other revenues. Excluding other revenues, gross profit on product sales was $6.4 million for both the nine month periods ended December 31, 2015 and December 31, 2014.

Gross margin, which represents gross profit expressed as a percentage of total revenue, was 47% for the nine month period ended December 31, 2015, compared with 49% for the nine month period ended December 31, 2014. Gross margin on product sales was 47% for the nine month period ended December 31, 2015, compared with 46% for the nine month period ended December 31, 2014. The gross margin improvement was attributable to the positive impact of greater sales volumes and manufacturing efficiencies.

Sales and marketing expenses

Sales and marketing expense was $2.4 million for the nine month period ended December 31, 2015, compared with $2.1 million for the nine month period ended December 31, 2014. As a percentage of total revenues, sales and marketing expenses were 17% for the nine month period ended December 31, 2015, compared with 14% for the nine month period ended December 31, 2014.

Research and development expenses

 

 

 

Nine months ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

% of revenue

 

 

Amount

 

 

%

 

 

 

(in thousands, except percentages)

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MosaiQTM research and development

 

$

20,387

 

 

 

151

%

 

$

12,403

 

 

 

86

%

 

$

7,984

 

 

 

64

%

Other research and development

 

 

1,979

 

 

 

15

%

 

 

1,522

 

 

 

10

%

 

 

457

 

 

 

30

%

Tax credits and grants

 

 

(244

)

 

 

-2

%

 

 

(352

)

 

 

-2

%

 

 

108

 

 

 

-31

%

Total research and development

   expenses

 

$

22,122

 

 

 

164

%

 

$

13,573

 

 

 

94

%

 

$

8,549

 

 

 

63

%

Research and development expenses increased by 63% to $22.1million for the nine month period ended December 31, 2015, compared with $13.6 million for the nine month period ended December 31, 2014. As a percentage of total revenue, research and development expenses increased to 164% for the nine month period ended December 31, 2015, compared with 94% for the nine month period ended December 31, 2014. This reflects incremental costs associated with the commercial scale-up of MosaiQ™, including initial production costs, which are currently expensed as research and development.  Recent changes in UK tax legislation now enable our UK subsidiary to claim certain tax credits on its research and development expenditures.

General and administrative expenses

General and administrative expenses increased by 59% to $18.1 million for the nine month period ended December 31, 2015, compared with $11.4 million for the nine month period ended December 31, 2014, reflecting greater personnel-related costs, increased facility rental charges and increased corporate costs. We recognized $1.4 million of stock compensation expense in the nine month period ended December 31, 2015 compared with $0.8 million in the nine month period ended December 31, 2014. As a percentage of

- 23 -


 

total revenue, general and administrative expenses increased to 135% for the nine month period ended December 31, 2015, compared with 79% for the nine month period ended December 31, 2014.

Other income (expense)

Net interest expense was $3.0 million for the nine month period ended December 31, 2015, compared with $1.6 million for the nine month period ended December 31, 2014. Interest expense in the nine month periods ended December 31, 2015 and December 31, 2014 included interest charges on our borrowings from MidCap Financial, which bore interest at LIBOR plus 6.7% (with a LIBOR floor of 2.00%). Borrowings from MidCap amounted to $15.0 million during the nine months ended December 31, 2014. Borrowings from April 1, 2015 to July 1, 2015 were $15.0 million, then decreased to $14.5 million from July 1, 2015 to August 3, 2015 as a result of scheduled principal amortization and then increased to $30.0 million as a result of the increase in our secured credit facility. In the nine month period ended December 31, 2015, net interest expense also included $0.8 million of dividends accrued on the 7% preference shares issued to OCD on January 29, 2015.

Other income for the nine month period ended December 31, 2015 included income of $15.9 million related to the change in the fair value in the nine month period of the warrants issued at the time of our initial public offering offset by $0.4 million of foreign exchange losses arising on monetary assets and liabilities denominated in foreign currencies and $0.6 million of previously deferred fees that were expensed as a result of the expansion of our credit facility.

Other expense for the nine month period ended December 31, 2014 included an expense of $33.6 million related to the change in the fair value of the warrants issued at the time of our initial public offering. It also included $0.6 million of fees related to our initial public offering that were attributable to the issuance of these warrants, an expense of $0.4 million related to the settlement of a legal dispute and $0.5 million of foreign exchange losses.

Quarterly Results of Operations

Our quarterly product sales can fluctuate depending upon the shipment cycles for our red blood cell-based products, which account for approximately two-thirds of our current product sales. For these products, we typically experience 13 shipping cycles per year. This equates to three shipments of each product per quarter, except for one quarter per year when four shipments occur. In fiscal 2015, the greatest impact of extra product shipments occurred in our first quarter, while the greatest impact thus far in fiscal 2016 has also occurred in the first quarter. The timing of shipment of bulk antisera products to our OEM customers may also move revenues from quarter to quarter. We also experience some seasonality in demand around holiday periods in both Europe and the United States. As a result of these factors, we expect to continue to see seasonality and quarter-to-quarter variations in our product sales. The timing of product development fees included in other revenues is mostly dependent upon the achievement of pre-negotiated project or revenue milestones.

Liquidity and Capital Resources

Since our commencement of operations in 2007, we have incurred net losses and negative cash flows from operations. During the nine month period ended December 31, 2015, we had a net loss of $24.4 million and the cash used in our operating activities during this period was $42.7 million. During the nine month period ended December 31, 2014, we incurred a net loss of $56.6 million and used $18.2 million of cash in our operating activities. During each period, this use of cash was primarily attributable to our investment in the development of MosaiQ™. As of December 31, 2015, we had an accumulated deficit of $98.7 million.

On April 30, 2014, we completed our initial public offering of 5,000,000 units at a price of $8.00 per unit, each unit consisting of one ordinary share and one warrant to purchase 0.8 of one ordinary share, and received net proceeds of $37.2 million after deducting underwriting discounts and commissions. Other costs of the offering, apart from underwriting discounts and commissions, were $3.6 million. The warrants were exercisable at a price of $8.80 per ordinary share until October 26, 2015. During the period from our initial public offering to October 26, 2015 when the warrants expired, 4,981,052 warrants were exercised resulting in the issuance of 3,984,832 ordinary shares for $35.1 million.

On November 25, 2014, we entered into subscription agreements with certain institutional and individual accredited investors for the private placement of 2,000,000 newly issued ordinary shares at a price of $9.50 per share and 850,000 newly issued pre-funded warrants at a price of $9.49 per warrant, amounting to an aggregate subscription price of approximately $27.1 million. Each pre-funded warrant permits the holder to subscribe for one new ordinary share at an exercise price of $0.01 per pre-funded warrant. The proceeds of this placement were $27.1 million before costs and $24.7 million net of costs.

- 24 -


 

On January 29, 2015, we entered into a subscription agreement with Ortho-Clinical Diagnostics Finco S.Á.R.L., an affiliate of Ortho, for the private placement of 444,445 newly issued ordinary shares at a price of $22.50 per share and 666,665 newly issued 7% cumulative redeemable preference shares, of no par value, at a price of $22.50 per share, for an aggregate subscription price of approximately $25 million.

On August 3, 2015, we entered into an amended agreement with MidCap Financial Trust to expand our existing secured term loan facility from $15.0 million to $30.0 million. MidCap Financial Trust also agreed to make available, subject to certain conditions, additional credit facilities totaling $20.0 million. The amended facility agreement with MidCap Financial Trust includes a covenant to maintain cash balances above $10 million. 

As of December 31, 2015, we had cash and cash equivalents of $24.1 million, which included $0.3 million of cash held in a restricted account as part of the arrangements relating to the lease of our property in Eysins, Switzerland. On February 10, 2016 we completed a public offering of 4,444,445 ordinary shares at a price to the public of $9.00 per share.  The net proceeds from this offering were $36.9 million net of underwriting discounts and other offering expenses. We expect to fund our operations from a combination of funding sources, including through the use of existing cash balances, product sales, asset sales, the achievement of product development milestones, the extension or expansion of credit facilities and the issuance of further new equity. However, there can be no assurance that these funding sources will be available to us.

Cash Flows for the Nine month Periods Ended December 31, 2015 and 2014

Operating activities

Net cash used in operating activities was $42.7 million during the nine month period ended December 31, 2015, which included net losses of $24.4 million and negative non-cash items of $11.2 million. Non-cash items were depreciation and amortization expense of $1.6 million, share-based compensation expense of $1.4 million, amortization of deferred debt issue costs of $1.2 million and accrued preference share dividends of $0.8 million, offset by a change in the fair value of the liability in respect of share warrants of $15.9 million and amortization of lease incentives of $0.3 million. We also experienced a net cash outflow of $7.1 million from changes in operating assets and liabilities during the period, consisting of a $3.2 million increase in inventories, a $2.7 million reduction in accounts payable and accrued liabilities, an $0.8 million reduction in accrued compensation and benefits and a $0.7 million increase in other assets, offset by a $0.3 million decrease in accounts receivable.

Net cash used in operating activities was $18.2 million during the nine month period ended December 31, 2014, which included net losses of $56.6 million and non-cash items of $35.6 million. Non-cash items were depreciation and amortization expense of $0.9 million, share-based compensation expense of $0.8 million, and amortization of deferred debt issue costs of $0.6 million, as well as a change in the liability in respect of our ordinary share warrants of $33.6 million, offset by amortization of lease incentives of $0.3 million. We also experienced a net cash inflow of $2.9 million from changes in operating assets and liabilities during the period, consisting of a $4.1 million increase in accounts payable and accrued liabilities and a $0.2 million reduction in accounts receivable offset by a $0.7 million increase in other assets, a $0.4 million increase in inventories and a $0.3 million reduction in accrued compensation and benefits.

Investing activities

Net cash used in investing activities was $19.9 million and $13.6 million for the nine month periods ended December 31, 2015 and December 31, 2014, respectively. Purchases of property and equipment for the nine month period ended December 31, 2015 were $19.8 million and included $17.9 million related to the MosaiQTM project and $1.9 million related to our conventional reagent business. Purchases of property and equipment for the nine month period ended December 31, 2014 were $13.4 million and included $13.1 million related to the MosaiQTM project and $0.3 million related to our conventional reagent business. Purchases of intangible assets related to our conventional reagent business for the nine month period ended December 31, 2015 were $0.1 million and for the nine month period ended December 31, 2014 were $0.2 million.

Financing activities

Net cash provided by financing activities was $48.9 million during the nine month period ended December 31, 2015, consisting of $34.6 million of proceeds from the exercise of options and warrants, $14.3 million from an increase in our secured credit facility and $0.1 million of net capital lease receipts. Net cash provided by financing activities was $59.6 million during the nine month period ended December 31, 2014, consisted of net proceeds of $34.3 million from our initial public offering, $25.0 million net proceeds from the private placement completed in November 2014 and $0.3 million of net capital lease receipts.

- 25 -


 

Operating and Capital Expenditure Requirements

We have not achieved profitability on an annual basis since we commenced operations in 2007 and we expect to incur net losses at least for the remainder of the current and the next fiscal year. We expect our operating expenses to increase during the year ended March 31, 2016, as we continue to invest in MosaiQTM, grow our customer base, expand our marketing and distribution channels, hire additional employees and invest in other product development opportunities.

As of December 31, 2015, we had cash and cash equivalents of $24.1 million, including $0.3 million of cash held in a restricted account as part of the arrangements relating to the lease of our property in Eysins, Switzerland.

Our future capital requirements will depend on many factors, including:

 

·

our progress in developing and commercializing MosaiQTM and the cost required to complete development, obtain regulatory approvals and complete our manufacturing scale up;

 

·

Ortho’s progress in commercializing MosaiQ™ for the patient testing market;

 

·

our ability to manufacture and sell our conventional reagent products, including the costs and timing of further expansion of our sales and marketing efforts;

 

·

our ability to collect our accounts receivable;

 

·

our ability to generate cash from operations;

 

·

any acquisition of businesses or technologies that we may undertake; and

 

·

our ability to penetrate our existing market and new markets.

Contractual Obligations

Our contractual obligations and commitments were summarized in our Annual Report on Form 10-K for the year ended March 31, 2015.

On August 3, 2015, we entered into an amended agreement with MidCap Financial Trust to expand our existing secured term loan facility from $15.0 million to $30.0 million. Unless repaid sooner, as at December 31, 2015, the aggregate amount that will become due under the amended agreement with MidCap, inclusive of interest, is $37.5 million, with $2.6 million due in less than one year, $25.4 million due in one to three years and $9.5 million due in three to five years.

On November 25, 2015, we entered into a contract for the purchase of land at Biocampus, Scotland with deferred payment terms. The land is to be used for the construction of a new manufacturing facility for our conventional reagents business. The aggregate amount payable under the terms of this agreement, inclusive of interest, is £1.1 million (or $1.6 million at December 31, 2015 exchange rates) due on the earlier of November 25, 2017 or the date of completion of the manufacturing facility.

On December 3, 2015, we entered into a contract for the construction of a new manufacturing facility for our conventional reagents business to be built on the Biocampus site in Scotland. The estimated construction cost is £15.2 million (or $22.5 million at December 31, 2015 exchange rates) payable monthly in line with the construction work performed. The expected completion date of the construction is in July 2017.  

Other than the items described in the preceding three paragraphs, there were no major changes in the nature of our contractual obligations and commitments between March 31, 2015 and December 31, 2015.

Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our condensed consolidated financial statements in accordance with U.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.

- 26 -


 

While our significant accounting policies are described in more detail in Note 2 to our condensed consolidated financial statements included in this Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

Revenue recognition and accounts receivable

Revenue is recognized in accordance with Accounting Standards Codification, or ASC, Topic No. 605, “Revenue Recognition,” when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services are rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. For product sales, the application of this policy results in sales revenue being recorded at the point of delivery of product to the customer.

We also earn revenue from the provision of development services to a small number of OEM customers. These development service contracts are reviewed individually to ensure that our revenue recognition is in accordance with applicable accounting standards, including ASC Topic No. 605. In recent years, our product development revenues have been commensurate with achieving milestones specified in the respective development agreements relating to those products. These milestones may include the approval of new products by the European or U.S. regulatory authorities, which are not within our control. While there can be no assurance that we will earn product development revenues when milestones are achieved, the nature of the milestones have been such that they effectively represent full completion of a particular part of a development program. As a result, we typically fully recognize milestone-related revenues as the milestones are achieved in accordance with applicable accounting standards.

Under certain development contracts, we also manufacture and supply the customer with finished products once it has been approved for use by relevant regulatory agencies. These agreements reflect both arrangements for product development and the sales prices and other contractual terms for subsequent supply of the product to the customer. Under these development contracts, we view the development service revenue as distinct from subsequent product sales revenue, and we recognize each separately as described above.

Accounts receivable consist primarily of amounts due from OEM customers, hospitals, donor testing laboratories, and distributors. Accounts receivable are reported net of an allowance for uncollectible accounts, which we also refer to as doubtful accounts. The allowance for doubtful accounts represents a reserve for estimated losses resulting from our inability to collect amounts due from our customers. Direct sales, where we may make many low value sales to a large number of customers, represents a larger risk of doubtful accounts, as opposed to OEM customer sales consisting primarily of a small number of well established businesses with whom we have a long trading history. The collectability of our trade receivables balances is regularly evaluated based on a combination of factors such as the ageing profile of our receivables, past history with our customers, changes in customer payment patterns, customer credit-worthiness and any other relevant factors. Based on these assessments, we adjust the reserve for doubtful accounts recorded in our financial statements.

Inventories

We record inventories at the lower of cost (first-in, first-out basis) or market (net realizable value), net of reserves. We record adjustments to inventory based upon historic usage, expected future demand and shelf life of the products held in inventory. We also calculate our inventory value based on the standard cost of each product. This approach requires us to analyze variances arising in the production process to determine whether they reflect part of the normal cost of production, and should therefore be reflected as inventory value, or whether they are a period cost and should thus not be included in inventory.

Intangible assets

The intangible assets included in our financial statements include intangible assets identified as at the time of the acquisition of the business of Alba Bioscience on August 31, 2007. At the time of this acquisition, we identified intangible assets related to customer relationships, master cell lines and certain other items, which include domain names and product trademarks. The customer relationships have been amortized over a five-year period, which resulted in them becoming fully amortized at August 31, 2012. The other items were amortized over a seven-year period from August 31, 2007, which resulted in them becoming fully amortized at August 31, 2014.

The intangible assets related to master cell lines reflect the know-how and market recognition associated with the cell lines, which are used as the source material of certain of our products. These cell lines are maintained by us and have an indefinite life. We have nevertheless decided to amortize the intangible assets over a forty-year period to reflect the possibility of market changes or other events resulting in the lines becoming technically obsolete at some future date. In the event that any of the lines cease to be used, we would record additional amortization at that point.

- 27 -


 

We also include in intangible assets the costs of obtaining product licenses for our products. These include external costs such as regulatory agency fees associated with the approval and bringing to market of our products once the development is complete. We amortize these over an expected product life of eight years, although if any such product ceased to be produced, we would record additional amortization at that point.

Income taxes

We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of our assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing NOLs and research and development credit carry forwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

We follow the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes the de-recognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. We accrue for the estimated amount of taxes for uncertain tax positions if it is more likely than not that we would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. We did not have any accrued interest or penalties associated with any unrecognized tax positions, and there were no such interest or penalties recognized during the nine month period ended December 31, 2015 or the years ended March 31, 2015, 2014 or 2013.

Stock compensation expense

Stock compensation expense is measured at the grant date based on the fair value of the award and is recognized as an expense in the income statement over the vesting period of the award. The calculation of the stock compensation expense is sensitive to the fair value of the underlying ordinary shares. Details of the assumptions used to value the various types of awards are set out in the notes to the condensed consolidated financial statements included in this Quarterly Report.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. This ASU provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the impact that this standard will have on our condensed consolidated financial statements.

We have considered other recent accounting pronouncements and determined that they are either not applicable to our business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

JOBS Act

Under the Jumpstart Our Business Startups Act of 2012, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

- 28 -


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations and foreign currency exchange rate fluctuations.

Interest rate sensitivity

We are exposed to market risk related to changes in interest rates as it impacts our interest income and expense.

Cash and cash equivalents. At December 31, 2015, we had cash and cash equivalents of $24.1 million. Our exposure to market risk includes interest income sensitivity, which is impacted by changes in the general level of U.S. and European interest rates. Our cash and cash equivalents are held in interest-bearing savings accounts and bank accounts. We do not enter into investments for trading or speculative purposes. Due to the current levels of interest rates, we do not believe an immediate one percentage point change in interest rates would have a material effect on the fair market value of our holdings, and therefore we do not expect our operating results or cash flows to be significantly affected by changes in market interest rates.

Term loan facility. We currently have term debt of $30.0 million drawn under a term loan facility with MidCap Financial LLC. The term loan carries a variable interest rate of 6.7% above LIBOR, with a LIBOR floor of 2.00%. If there is a rise in LIBOR interest rates above 2.00%, our debt service obligation would increase even though the amount borrowed remained the same, which would affect our results of operations, financial condition and liquidity. Assuming no change in our debt obligations from the amount drawn down under the term loan, a hypothetical one percentage point change in underlying variable rates would not currently change our annual interest expense and cash flow from operations.

Foreign currency exchange risk

The main currencies that we use for our trading operations are the U.S. Dollar, the Pound Sterling, the Swiss Franc and to a lesser extent, the Euro. Our meaningful cash balances are held in a mixture of U.S. Dollars, Euros, Pounds Sterling and Swiss Francs. These cash balances may not be the same as the functional currencies of the Quotient entities in which they are held and as a result, exchange rate fluctuations may result in foreign exchange gains and losses on our income statement.

We are subject to market risks arising from changes in foreign currency exchange rates between the U.S. Dollar and the Pound Sterling and the U.S. Dollar and the Swiss Franc. Accordingly, fluctuations in the U.S. Dollar versus Pounds Sterling and U.S. Dollar versus the Swiss Franc exchange rate give rise to exchange gains and losses. These gains and losses arise from the conversion of U.S. Dollars and Euros to Pounds Sterling and the retranslation of cash, accounts receivable, intercompany indebtedness and other asset and liability balances. Based on our assets and liabilities held in Pounds Sterling at December 31, 2015 we estimate that a 5% strengthening of the Pound Sterling against the U.S. Dollar would give rise to a gain of approximately $1.0 million and a 5% weakening of the Pound Sterling against the U.S. Dollar would give rise to loss of approximately $1.0 million. Based on our assets and liabilities held in Swiss Francs at December 31, 2015 we estimate that a 5% strengthening of the Swiss Franc against the U.S. Dollar would give rise to a gain of approximately $0.8 million and a 5% weakening of the Swiss Franc against the U.S. Dollar would give rise to loss of approximately $0.8 million.

A significant proportion of our revenues are earned in U.S. Dollars, but the costs of our conventional reagent manufacturing operations are payable mainly in Pounds Sterling. We therefore closely monitor the results of our UK operations to address this difference. During the year ended March 31, 2015, the net operating expenses arising in Pounds Sterling from our UK conventional reagent manufacturing operations amounted to $13.8 million. This expenditure is offset by revenues arising in U.S. Dollars and other currencies. We have entered into forward contracts to hedge against the effects of fluctuations in the U.S. Dollar versus the Pounds Sterling exchange rate. The value of the hedges related to the results of fiscal year 2016 is $4.2 million and, based on this, a hypothetical instantaneous 5% strengthening of the Pound Sterling against the U.S. Dollar would reduce our net income by $0.5 million in the year ending March 31, 2016. Similarly, a hypothetical instantaneous 5% weakening of the Pound Sterling against the U.S. Dollar would increase group net income by $0.5 million over the same period. Our UK operations also have exposure to fluctuations in the Euro versus Pounds Sterling exchange rate, but to a lesser extent.

We do not use financial instruments for trading or other speculative purposes.

Our management does not believe that inflation in past years has had a significant impact on our results from operations. In the event inflation affects our costs in the future, we will offset the effect of inflation and maintain appropriate margins through increased selling prices.

 

 

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Item 4. Controls and Procedures

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 on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2015, 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.

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 on Form 10-Q 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

We are not currently a party to any pending legal proceedings that we believe could have a material adverse effect on our business or financial condition. However, we may be subject to various claims and legal actions arising in the ordinary course of business from time to time.

 

Item 1A. Risk Factors

There have been no material changes in the risk factors described in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2015.

 

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

Unregistered Sales of Equity Securities

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.

 

 

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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.

 

 

 

QUOTIENT LIMITED

 

Date: February 10, 2016

 

/s/ Paul Cowan

 

 

Paul Cowan

Chief Executive Officer and Chairman of the Board of Directors

 

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

 

10.1

 

 

Construction contract dated December 3, 2015 between Quotient Biocampus Limited and MW High Tech Projects UK Limited relating to the design, construction and fit out of Phase One of a Life Sciences Production Facility at Gowkley Moss, Penicuik, Midlothian, Scotland.

 

31.1

 

 

Certification of Paul Cowan, Chairman and Chief Executive pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2

 

 

Certification of Stephen Unger, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1

 

 

Certification of Paul Cowan, Chairman and Chief Executive pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2

 

 

Certification of Stephen Unger, Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101*

 

 

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Comprehensive Loss (unaudited), (iii) Condensed Consolidated Statements of Redeemable Convertible Preference Shares and Changes in Shareholders’ Deficit (unaudited), (iv) Condensed Consolidated Statements of Cash Flows (unaudited) and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

 

* XBRL information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement, prospectus or other document to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.

 

 

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