Item 1B.
UNRESOLVED STAFF COMMENTS
None.
We currently operate from two facilities, each of which is located in Carlsbad, California. We do not own any real property. In February 2010, we entered into a lease for an approximately 31,000 square foot facility in Carlsbad, California, the term of which originally ran through September 2017. The facility is part of a three-building office and research and development project located at 5964 La Place Court, Carlsbad, California. In January 2012, we signed a lease amendment which expanded our executive and administrative office, research and development, and manufacturing space by approximately 22,000 additional square feet and extended the term of the lease through June 2021. In June 2015, we leased an additional 34,000 square feet at a nearby location in Carlsbad, California, which we utilize primarily for ePlex manufacturing operations. The term of the lease runs through September 2023, and we have an option to extend the term of the lease for an additional five years. We believe that our currently leased facilities are adequate to meet our needs for the foreseeable future.
Item 3.
Item 3.
LEGAL PROCEEDINGS
We are from time to time subject to various claims and legal actions in the ordinary course of our business. We believe that there are currently no claims or legal actions that would reasonably be expected to have a material adverse effect on our results of operations or financial condition.
Item 4.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II.
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been quoted on The NASDAQ Global Market under the symbol “GNMK” since May 28, 2010. The following table sets forth for the indicated periods the high and low sales prices per share of our common stock as reported on The NASDAQ Global Market.
Stock Performance Graph
The graph below compares the cumulative total stockholder returns on our common stock for the period indicated with the cumulative total stockholder returns on the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the same period. The graph assumes that $100 was invested on May 28, 2010 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
Stockholders
The last reported sale price of our common stock on February 24, 2017 as reported on the NASDAQ Global Market was $11.25. As of February 24, 2017, there were 2,693 holders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock and do not expect to pay any dividends for the foreseeable future. In addition, our LSA with Solar Capital Partners contains a negative covenant which may limit our ability to pay dividends. We currently intend to retain any future earnings to fund the operation, development and expansion of our business. Any future determination to pay dividends will be at the sole discretion of our Board of Directors and will depend upon a number of factors, including our results of operations, capital requirements, financial condition, future prospects, contractual arrangements, restrictions imposed by applicable law, any limitations on payments of dividends present in our current and future debt arrangements, and other factors our Board of Directors may deem relevant.
Item 6.
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data relates to GenMark Diagnostics, Inc. and its consolidated subsidiaries. The selected consolidated statement of net loss data presented below of GenMark Diagnostics, Inc. for the years ended December 31, 2016, 2015, and 2014 and the selected consolidated balance sheet data of GenMark Diagnostics, Inc. as of December 31, 2016, and 2015 have been derived from the audited consolidated financial statements of GenMark Diagnostics, Inc., which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, included elsewhere in this Annual Report. The selected consolidated statement of comprehensive loss data presented for the years ended December 31, 2013 and 2012 and the selected consolidated balance sheet data as of December 31, 2014, 2013, and 2012 have been derived from audited financial statements not included in this Annual Report.
The results for the periods shown below are not necessarily indicative of the results to be expected for any future periods. The selected consolidated financial data should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and with the consolidated financial statements and condensed consolidated financial statements of GenMark Diagnostics, Inc. and related notes included elsewhere in this Annual Report.
_____________________
(1)
In August and September 2016, we issued approximately 8.3 million shares of common stock at an average price of $9.04 per share. We raised approximately $29.1 million in net proceeds.
(2)
In August 2013, we issued approximately 8.7 million shares of common stock at a price of $9.84 per share. We raised approximately $81.0 million in net proceeds.
(3)
In June 2012, we issued approximately 11.5 million shares of common stock at a price of $4.20 per share. We raised approximately $45.1 million in net proceeds.
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following in conjunction with the “Selected Consolidated Financial Data” and the consolidated financial statements of GenMark and the related notes thereto that appear elsewhere in this Annual Report. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under the heading “Risk Factors” included elsewhere in this Annual Report. See also “Forward Looking Statements” included elsewhere in this filing.
Overview
GenMark was formed by Osmetech ptc, or Osmetech, as a Delaware corporation in February 2010, and had no operations prior to its initial public offering, which was completed in June 2010. Immediately prior to the closing of the initial public offering, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization under the applicable laws of the United Kingdom. Following the reorganization, Osmetech became a wholly-owned subsidiary controlled by GenMark, and the former shareholders of Osmetech received shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization. In September 2012, GenMark placed Osmetech into liquidation to simplify its corporate structure. The liquidation of Osmetech was competed in the fourth quarter of 2013.
We are a molecular diagnostics company focused on developing and commercializing multiplex molecular tests that aid in the diagnosis of complex medical conditions and help guide therapy decisions. We currently develop and commercialize high-value, simple to perform, clinically relevant multiplex molecular tests based on our proprietary eSensor electrochemical detection technology.
Since inception, we have incurred net losses from operations each year, and we expect to continue to incur losses for the foreseeable future. Our net losses for the years ended December 31, 2016, 2015, and 2014 were approximately $50.6 million, $42.2 million, and $38.3 million, respectively. As of December 31, 2016, we had an accumulated deficit of $355.3 million. Our operations to date have been funded principally through sales of capital stock, borrowings, and cash from operations. We expect to incur increasing expenses over the next several years, principally to develop and commercialize our ePlex system and additional diagnostic tests, as well as to further increase our manufacturing capabilities and domestic and international commercial organization.
Our Products and Technology
We offer four FDA-cleared diagnostic tests which run on our XT-8 instrument: our Respiratory Viral Panel; our Cystic Fibrosis Genotyping Test; our Warfarin Sensitivity Test; and our Thrombophilia Risk Test. We also offer an HCV genotyping test and associated custom manufactured reagents, as well as a 2C19 Genotyping Test, versions of which are available for use with our XT-8 instrument for research use only (RUO).
In addition, we have commercially launched in Europe our sample-to-answer ePlex instrument and RP Panel, which integrates automated nucleic acid extraction and amplification with our eSensor detection technology to enable operators using ePlex to place a raw or a minimally prepared patient sample directly into our test cartridge and obtain results without any additional steps. This sample-to-answer capability is enabled by the robust nature of our eSensor detection technology, which is not impacted to the same degree by sample impurities that we believe hinder competing technologies. We have designed our ePlex system to further simplify workflow and provide powerful, cost-effective molecular diagnostics solutions to a significantly expanded group of hospitals and reference laboratories. We obtained CE Mark for our ePlex system and RP Panel in June 2016, and filed 510(k) applications with the FDA for the ePlex instrument and RP Panel in December 2016. During 2017, we intend to complete the development of, CE Mark, and submit 510(k) applications to the FDA our ePlex blood culture identification (BCID) family of panels, which include a gram-positive (GP), a gram-negative (GN), and a fungal pathogen panel. In addition, we are actively evaluating the development of additional assay panels that we believe will meet important, unmet clinical needs, which our ePlex system is uniquely positioned to address.
Revenue
Revenue from operations includes product sales, principally of our diagnostic tests. We primarily place our instruments with customers through a reagent rental agreement, under which we retain title to the instrument and customers commit to purchasing minimum quantities of reagents and test cartridges over a period of one to three years. We also offer our instruments for sale.
Cost of Revenues
Cost of revenues includes the cost of materials, direct labor and manufacturing overhead costs used in the manufacture of our consumable tests, including royalties on product sales. Cost of revenues also includes depreciation on revenue generating instruments that have been placed with our customers under a reagent rental agreement, cost of instruments sold to customers, amortization of licenses related to our products and other costs such as warranty, royalty and customer and product technical support. We manufacture our test cartridges in our facility and have recently invested in significant capacity for expansion. Any potential underutilized capacity may result in a high cost of revenues relative to revenue, if manufacturing volumes are not able to fully absorb operating costs. Our instruments are procured from contract manufacturers. We expect our cost of revenues to increase as we place additional instruments and manufacture and sell additional diagnostic tests; however, we expect gross margins related to our products will increase as production volumes, manufacturing efficiencies, improved procurement practices, instrument reliability increases and other improvements decrease costs as a percentage of sales.
Sales and Marketing Expenses
Sales and marketing expenses include costs associated with our direct sales force, sales management, marketing, technical support and business development activities. These expenses primarily consist of salaries, commissions, benefits, stock-based compensation, travel, advertising, promotions, product samples and trade show expenses. We expect sales and marketing expenses to increase as we increase our domestic and international commercial efforts to expand our customer base.
Research and Development Expenses
Research and development expenses primarily include costs associated with the development of our ePlex instrument and its test menu. These expenses also include certain clinical study expenses incurred in preparation for FDA clearance for these products, intellectual property prosecution and maintenance costs, and quality assurance expenses. The expenses primarily consist of salaries, benefits, stock-based compensation, outside design and consulting services, laboratory supplies and equipment, costs of consumables and materials used in product development, contract research organization costs, clinical studies and facility costs. We expense all research and development costs in the periods in which they are incurred.
General and Administrative Expenses
Our general and administrative expenses include expenses related to our executive, accounting and finance, compliance, information technology, legal, facilities, human resource, administrative and investor relations activities. These expenses consist primarily of salaries, benefits, stock-based compensation costs, independent auditor costs, legal and consulting fees, and travel, insurance, and public company expenses, such as stock transfer agent fees and listing fees for NASDAQ.
Foreign Exchange Gains and Losses
Transactions in currencies other than our functional currency are translated at the prevailing rates on the dates of the applicable transaction. Foreign exchange gains and losses arise from differences in exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date on which it is settled or translated.
Interest Income and Interest Expense
Interest income includes interest earned on our cash and cash equivalents and investments. Interest expense represents interest incurred on our loan payable and on other liabilities.
Provision for Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
We assess the likelihood that we will be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If it is more likely than not that we will not recover our deferred tax assets, we will increase our provision for income taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The
first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable, and deferred taxes in the period in which the facts that give rise to a revision become known.
Critical Accounting Policies and Significant Judgments and Estimates
Revenue
We recognize revenue from product sales and contractual arrangements, net of discounts and sales related taxes. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Where applicable, all revenue is stated net of sales taxes and trade discounts. Revenue related to royalties received from licenses is generally recognized evenly over the contractual period to which the license relates. In those cases where we bill shipping and handling costs to customers, the amounts billed are classified as other revenue.
We offer customers the choice to either purchase an instrument outright or to receive possession of an instrument free of charge in exchange for a commitment to purchase an annual minimum amount of molecular diagnostic test cartridges.
When an instrument is sold, revenue is generally recognized upon shipment of the unit consistent with contract terms. When an instrument is placed free of charge under a "reagent rental" agreement, we retain title to the instrument and it remains capitalized on our balance sheet under property and equipment. Under our reagent rental agreements, our customers pay an instrument usage fee, which is included in the price of each test cartridge purchased. Our reagents and diagnostic test cartridges (consumables) are priced to include the expense of instrument usage and maintenance and are included in product revenue in our consolidated financial statements.
We sell our durable instruments and disposable test cartridges through a direct sales force in the United States and certain European countries and through distributor arrangements in other European jurisdictions. The instrument price is not dependent upon the purchase of any amount of disposable test cartridges. Revenue on instrument and test cartridge sales is generally recognized upon shipment consistent with contract terms, which is when title and the risk of loss and rewards of ownership have been transferred to the customer and there are no other post-shipment obligations.
Allowance for Doubtful Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, and the general condition of the economy. Changes in our allowance for doubtful accounts are charged to sales and marketing expense.
Inventory
We value inventories at the lower of cost or net realizable value on a part-by-part basis and provide an inventory reserve for estimated obsolescence and excess inventory based upon historical turnover and assumptions about future demand for our products and market conditions. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, which is generally 12 months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our actual demand is less than our forecast demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
Property and Equipment - net
Property, equipment and leasehold improvements are recorded at cost and depreciated using the straight-line method over the assets’ estimated useful lives, which are noted below. Each category of property and equipment is analyzed to determine its useful life. We look at the manufacturers’ estimates of useful life and adjust these for actual experience in our operating environment. Useful lives are reviewed periodically and occasionally changed as circumstances dictate.
Repair and maintenance costs are expensed as incurred. During 2016, 2015 and 2014, we disposed of certain assets no longer in use with a net book value of $76,000, $153,000 and $102,000, respectively, recorded to cost of revenue, sales and marketing, research and development, or general and administrative expenses based on the asset's respective use.
Impairment of Long-Lived Assets
We assess the recoverability of long-lived assets, including intangible assets and instruments at customer locations by periodically evaluating the carrying value of such assets whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. If impairment is indicated, we write down the carrying value of the asset to the estimated fair value.
Stock-Based Compensation
We generally grant employees and non-employee directors stock-based awards, which typically comprise stock options, restricted stock units, and/or market-based stock units, in connection with their employment or service. We grant stock options with an exercise price equal to the closing price of our common stock on the NASDAQ Global Market on the applicable grant date. We use the Black-Scholes option-pricing model as the method for determining the estimated fair value of stock options, the Monte Carlo Simulation Valuation Model as the method for determining the estimated fair value of our market-based stock units, and we use the grant date fair value of our common stock for valuing restricted stock awards and units. The estimated fair value of stock-based awards exchanged for employee and non-employee director services are expensed over the requisite service period. The stock-based compensation expense related to shares issued under our 2013 Employee Stock Purchase Plan, or ESPP, is also estimated using the Black-Scholes option-pricing model. These models require the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the stock award's expected term and the price volatility of the underlying stock. These assumptions include:
•
Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding and is determined by using the simplified method.
•
Expected Volatility. Expected volatility represents the expected volatility in our stock price over the expected term of the stock option or award.
•
Expected Dividend. The pricing models require a single expected dividend yield as an input. We assumed no dividends as we have never paid dividends and have no plans to do so.
•
Risk-Free Interest Rate. The risk-free interest rates used in the models is based on published government rates in effect at the time of grant for periods corresponding with the expected term of the option or award.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. We file income tax returns in the United States, Switzerland, Germany, the United Kingdom, France, and various state jurisdictions. Significant judgments and estimates are required in determining our consolidated income tax expense.
We believe that it is more likely than not that the benefit from our deferred tax assets will not be realized. In recognition of this risk, we have provided a full valuation allowance on the net deferred tax assets relating to our net operating loss carryforwards and other deferred tax assets. If our assumptions change and we determine that we will be able to realize our deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
We recognize tax liabilities in accordance with Accounting Standards Codification, or ASC, Topic 740 and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from
our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see Note 2, "Summary of Significant Accounting Policies and Significant Accounts" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
Results of Operations
Comparison of Years Ended December 31, 2016, 2015 and 2014 (tables in thousands):
Our revenue consists primarily of revenue from the sale of test cartridges and reagents (consumables), with a small component from our sale of instruments and other revenue.
For the year ended December 31, 2016, our revenue grew 25%, or $9,863,000, compared to 2015. Consumables revenue during the year ended December 31, 2016 increased by 23% to $46,946,000, compared to $38,061,000 in the prior year. This increase in consumable revenue was primarily driven by increased product purchases by several key customers. Pricing changes did not have a significant impact on revenue during the current period. Additionally, during the year ended December 31, 2016, instrument revenue increased $957,000 compared to the same period of the prior year, primarily due to the sale of ePlex instruments.
For the year ended December 31, 2015, our revenue grew 29%, or $8,817,000, compared to 2014. Consumables revenue during the year ended December 31, 2015 increased by 30% to $38,061,000 compared to $29,235,000 in the prior year. This increase in consumable revenue was primarily driven by increases in our installed base of XT-8 analyzers over the prior year period. Pricing changes did not have an impact on revenue during 2015.
The increase in cost of revenue for the twelve months ended December 31, 2016 compared to the twelve months ended December 31, 2015 was primarily related to the increase in consumables revenue in the current year. Increases in our cost of revenue were attributable to product costs of $3,177,000, increased product warranty and support expenses of $519,000, and increased royalty expense of $431,000 corresponding to sales volume increases, less favorable manufacturing yields and variances of $235,000, and increased overhead expenses of $412,000, partially offset by decreased inventory reserve expense of $387,000. The improvement to gross profit during the year ended December 31, 2016, compared to December 31, 2015, was primarily due to increased sales of higher margin products.
The increase in cost of revenue for the twelve months ended December 31, 2015 compared to the twelve months ended December 31, 2014 was primarily related to the increase in consumables revenue during 2015. Increases in our cost of revenue in 2015 were attributable to product costs of $2,548,000 corresponding to sales volume increases, the expansion of our customer technical support group of $200,000, increased warranty reserve of $144,000, and increased royalty expense of $138,000, partially offset by greater manufacturing efficiencies of $761,000. The improvement to gross profit during the year ended December 31, 2015, compared to December 31, 2014, was primarily due to increased sales of higher margin products and a reduction in manufacturing personnel costs.
Sales and marketing expenses primarily comprise employee-related expenses for our domestic and international commercial organization, and marketing communication and trade show expenses. The increase in sales and marketing expense for the year ended December 31, 2016, compared to the year ended December 31, 2015, was primarily driven by increased marketing and trade show expense of $582,000, increased freight and postage expense of $184,000, and increased travel expenses of $112,000 incurred in connection with expanding our domestic and international commercial organization, partially offset by a decrease in employee-related expenses of $522,000.
The increase in sales and marketing expense for the year ended December 31, 2015, compared to the year ended December 31, 2014, was primarily driven by a $1,747,000 increase in employee-related expenses, including increased stock-based compensation expense of $1,187,000, incurred in connection with expanding our domestic and international commercial organization.
The increase in general and administrative expense for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily driven by an increase in employee-related expenses of $536,000, an adjustment to our indirect tax accrual of $274,00, and an increase in travel-related expenses of $168,000, partially offset by a decrease in medical device tax expense of $447,000 as a result of the suspension of the excise tax in December 2015.
The increase in general and administrative expense for the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily due to increased employee-related expenses of $1,966,000, including increased stock-based compensation expense of $1,559,000, and increased medical device tax of $447,000 as a result of higher product sales, partially offset by a $138,000 decrease in consultant and outside service costs and decreased legal expenses of $77,000.
The increase in research and development expense for the year ended December 31, 2016, compared to the year ended December 31, 2015, was primarily driven by increased materials, equipment and consumables used in the development and expansion of our ePlex test menu totaling $10,523,000, increased employee-related expenses of $2,993,000, and increased clinical trials expense of $887,000, partially offset by reduced outside services expenditures of $3,420,000.
The increase in research and development expense for the year ended December 31, 2015, compared to the year ended December 31, 2014, was primarily due to increased ePlex assay development expenses of $3,993,000, increased clinical trials and quality assurance expenses of $897,000, and an increase in ePlex instrument expenses of $663,000. Overall increases in research and development expenses were attributable to employee-related expenses, clinical trials expenses, and supplies and other materials to support our ePlex system and its related test menu.
Other income (expense) represents non-operating income and expense, including, but not limited to, earnings on cash, cash equivalents, marketable securities, and interest expense related to debt. The change in other income (expense) for the year ended December 31, 2016, compared to the year ended December 31, 2015, was due primarily to an increase in interest expense of $655,000 under our debt facility, and a decrease in income as a result of less interest earned on marketable securities of $217,000 in the current period.
The change in other income (expense) for the year ended December 31, 2015, compared to the year ended December 31, 2014, was due primarily to an increase in interest expense of $860,000 under our debt facility, a decrease in income as a result of less interest earned on marketable securities of $119,000, and an $84,000 increase in unrealized foreign currency losses as a result of our expanding international operations, partially offset by income from a one-time payment of $223,000 received from the release of escrowed proceeds related to our sale of a preferred stock investment in the fourth quarter of 2014.
Due to net losses incurred domestically, the tax provisions recorded relate to minimum tax payments in the United States. We have recorded tax liabilities related to income earned in local jurisdictions by our foreign subsidiaries. The increase in income tax expense for the year ended December 31, 2016, compared to the year ended December 31, 2015, was primarily a result of international income taxes. The increase in income tax expense for the year ended December 31, 2015 was primarily due to the expiration of the statue of limitations on uncertain tax positions resulting in the recognition of a $610,000 tax benefit in 2014.
Liquidity and Capital Resources
To date we have funded our operations primarily from the sale of our common stock, borrowings and cash from operations. We have incurred net losses from operations each year and have not yet achieved profitability. At December 31, 2016, we had $32,028,000 of working capital, including $41,566,000 in cash, cash equivalents, and marketable securities.
Cash Flows
The following table shows cash flow information for the years ended December 31, 2016, 2015 and 2014:
Cash flows used in operating activities
Net cash used in operating activities increased $3,722,000 to $35,637,000 for the year ended December 31, 2016, compared to $31,915,000 for the year ended December 31, 2015. The increase in cash used in operating activities was primarily due to an $8,404,000 increase in our net loss and $535,000 in lower non-cash charges primarily comprised of stock-based compensation expense, partially offset by an additional $5,217,000 cash inflow from changes in operating assets and liabilities. The main drivers in the change in operating assets and liabilities included increases in accounts payable, accrued compensation and other liabilities and increases in inventory and accounts receivable.
Net cash used in operating activities increased $2,343,000 to $31,915,000 for the year ended December 31, 2015, compared to $29,572,000 for the year ended December 31, 2014. The increase in cash used in operating activities was primarily due to a $3,934,000 increase in net loss and $4,658,000 in lower non-cash charges primarily related to less bad debt expense and impairment, partially offset by $3,067,000 of less cash outflow from changes in operating assets and liabilities.
Cash flows provided by (used in) investing activities
Net cash used in investing activities for the year ended December 31, 2016, compared to the year ended December 31, 2015, increased $43,444,000 primarily due to a $36,000,000 decrease from the maturity of short-term marketable securities, an increase in purchases of marketable securities of $11,042,000, and increased purchase of property, plant, equipment and licenses of $4,194,000, partially offset by a $7,792,000 increase in proceeds from the sale of marketable securities.
Net cash provided by investing activities for the year ended December 31, 2015, compared to the year ended December 31, 2014, decreased $10,096,000 primarily due to a $10,000,000 decrease from the maturity of short-term marketable securities and a $7,274,000 decrease in proceeds from the sale of marketable securities related to our sale of a preferred stock investment, partially offset by a decrease in purchases of marketable securities of $5,408,000.
Cash flows provided by financing activities
Net cash provided by financing activities increased $29,226,000 to $40,359,000 for the year ended December 31, 2016, compared to $11,133,000 for the year ended December 31, 2015, primarily due to a $28,893,000 increase in net proceeds
generated from from an at-the-market equity offering described in greater detail below, and an absence of debt issuance costs of $628,000 incurred in the prior year, partially offset by a decrease in proceeds from the exercise of employee stock options of $277,000.
Net cash provided by financing activities increased $9,846,000 to $11,133,000 for the year ended December 31, 2015, compared to $1,287,000 for the year ended December 31, 2014, primarily due to the borrowing of $10,000,000 under our debt facility and $458,000 in higher proceeds from stock option exercises, partially offset by $718,000 in costs associated with debt issuance.
We have prepared cash flow forecasts which indicate, based on our current cash resources available, that we will have sufficient resources to fund our business for at least the next 12 months. We expect capital outlays and operating expenditures to increase over the next several years as we grow our customer base and revenues, and expand our research and development, commercialization and manufacturing activities. Factors that could affect our capital requirements, in addition to those previously identified, include, but are not limited to:
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the level of revenues and the rate of our revenue growth;
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change in demand from our customers;
•
the level of expenses required to expand our commercial (sales and marketing) and manufacturing activities;
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the level of research and development investment required to develop our diagnostic systems and test menu;
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our need to acquire or license complementary technologies;
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the costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
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competing technological and market developments; and
•
changes in regulatory policies or laws that affect our operations.
Loan and Security Agreement
In January 2015, we entered into a Loan and Security Agreement, of the LSA, with Solar Capital Partners (as successor-in-interest to General Electric Capital Corporation), and certain other financial institutions party thereto, as lenders, pursuant to which we obtained (a) up to $35,000,000 in a series of term loans and (b) a revolving loan in the maximum amount of $5,000,000. Under the terms of the LSA, as amended, we could, subject to certain conditions, borrow:
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$10,000,000 (Term Loan A) on or before March 31, 2015, which we borrowed in March 2015;
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an additional $10,000,000 (Term Loan B), subject to our satisfaction of regulatory requirements necessary to CE Mark our ePlex system in Europe by a specified date, which we borrowed in June 2016;
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an additional $15,000,000 (Term Loan C), subject to our satisfaction of FDA 510(k) market clearance for the sale of our ePlex system in the United States by a specified date; and
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up to $5,000,000 in the form of a revolving loan, which is subject to a defined borrowing base as set forth in the LSA.
In July 2016, we entered into an amendment to the LSA pursuant to which the lenders internally reallocated certain funding commitments under the LSA between the lenders, and the parties extended the date by which the future funding requirements in respect of Term Loan C must be satisfied.
In February 2017, we entered into an amendment to the LSA pursuant to which the parties further extended the date by which the future funding requirements in respect of Term Loan C must be satisfied. In addition, the parties agreed to extend the interest-only period in respect of amounts already borrowed under Term Loan A and Term Loan B, as well as the amounts, if any, we may borrow pursuant to Term Loan C.
Pursuant to the terms of the LSA, the lenders are granted a security interest in (a) all of our personal property, other than intellectual property (which is subject to a negative pledge), but including our rights to payment in respect of intellectual property, (b) the stock of all of our domestic subsidiaries, and (c) 65% of the voting stock and 100% of the non-voting stock of each of our non-U.S. subsidiaries.
The LSA contains customary affirmative and negative covenants, including, without limitation, delivering reports and notices relating to our financial condition and certain regulatory events and intellectual property matters, as well as limiting the
creation of liens, the incurrence of indebtedness, and the making of certain investments, payments and acquisitions, other than as specifically permitted by the LSA.
Equity Distribution Agreement
On June 14, 2016, we entered into an Equity Distribution Agreement, or the Distribution Agreement, with Canaccord Genuity Inc., as sales agent, or Canaccord, pursuant to which we could, at our discretion, offer and sell, from time to time, through Canaccord shares of our common stock having an aggregate offering price of up to $30.0 million. Under the Distribution Agreement, Canaccord could sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act or any other method permitted by law, including in privately negotiated transactions.
We began sales under the Distribution Agreement in August 2016 pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC. During the three months ended September 30, 2016, we sold 3.3 million shares of our common stock, at an average per share price of $9.04, for aggregate gross proceeds of $30.0 million. We incurred $1,143,000 in related transaction costs, comprising commissions paid to Canaccord of 3.0% of the aggregate gross proceeds from each sale of shares occurring pursuant to the Distribution Agreement, or $900,000, and $243,000 in additional miscellaneous expenses.
Letter of Credit
In September 2012, we provided a $758,000 letter of credit issued by Banc of California to the landlord of our executive office facility in Carlsbad, California. This letter of credit was secured with $758,000 of restricted cash at December 31, 2016.
If we require additional capital, we cannot be certain that it will be available when needed or that our actual cash requirements will not be greater than anticipated. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we raise additional funds through collaborations or licensing arrangements, we may be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us.
Contractual Obligations
As of December 31, 2016, we had the following contractual obligations (in thousands):
_____________________
(1)
We enter into leases in the ordinary course of business with respect to facilities. Our lease agreements have fixed payment terms based on the passage of time. Certain facility leases require payment of maintenance and real estate taxes. Our future operating lease obligations could change if we terminate certain contracts or if we enter into additional leases.
In January 2012, we entered into a lease amendment with the landlord of our Carlsbad, California executive office facility to rent an additional 22,000 square feet. The lease amendment required an additional security deposit of $22,000 and an increase in our standby letter of credit to $758,000. We took possession of the additional space on January 1, 2013, at which time the rent increased by approximately $35,000 per month, subject to annual increases of between 3% and 4%. The term of the lease was also extended to June 30, 2021.
In August 2012, we entered into a three-year supply agreement with Leica for the purchase of our XT-8 instrument. Amounts reported in the table above reflect minimum purchase commitments under this supply agreement which we can satisfy through instrument purchases or the payment of a designated fee for each instrument we fail to purchase under the prescribed minimum amounts, subject to certain permitted exclusions.
In December 2015, we entered into a manufacturing and supply agreement with Plexus for the purchase of our ePlex instrument. Amounts reported in the table above reflect the current minimum purchase commitments under this supply agreement, which we satisfy through instrument and component part purchases.
In June 2015, we entered into a lease agreement for additional manufacturing space located in Carlsbad, California. Pursuant to the lease agreement, rent payments total $4,490,000 over the 90-month lease term.
Impact of Inflation
The effect of inflation and changing prices on our operations was not significant during the periods presented.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements. We have provided a $758,000 standby letter of credit to our landlord as security for future rent in connection the lease of our Carlsbad, California corporate headquarters, which is recorded as restricted cash on our consolidated balance sheet.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is limited to our cash and cash equivalents, all of which have maturities of less than three months, and marketable securities, which have maturities of less than one year. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs, and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk. To achieve our goals, we may in the future maintain a portfolio of cash equivalents and investments in a variety of securities that management believes to be of high credit quality. We currently do not hedge interest rate exposure. Because of the short-term maturities of our cash equivalents and short-term investments, we do not believe that an increase in market rates would have a material negative impact on the value of our portfolio.
Interest Rate Risk
As of December 31, 2016, based on current interest rates and total debt outstanding, a hypothetical 100 basis point increase or decrease in interest rates would have an insignificant pre-tax impact on our results of operations.
Foreign Currency Exchange Risks
We are a U.S. entity and our functional currency is the U.S. dollar. Substantially all of our revenues were derived from sales in the United States. We have business transactions in foreign currencies, however, we believe we do not have significant exposure to risk from changes in foreign currency exchange rates at this time. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of GenMark Diagnostics, Inc.
We have audited the accompanying consolidated balance sheets of GenMark Diagnostics, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GenMark Diagnostics, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), GenMark Diagnostics, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
February 28, 2017
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
See accompanying notes to consolidated financial statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
See accompanying notes to consolidated financial statements.
GENMARK DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to consolidated financial statements.
GENMARK DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and basis of presentation
Organization
GenMark Diagnostics, Inc., the Company or GenMark, was formed by Osmetech plc, or Osmetech, as a Delaware corporation in February 2010, and had no operations prior to its initial public offering, or the IPO, which was completed in June 2010. Immediately prior to the closing of the IPO, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization, accounted for in a manner similar to a pooling-of-interests, under the applicable laws of the United Kingdom. As a result of the reorganization, all of the issued ordinary shares in Osmetech were cancelled in consideration of (i) the issuance of common stock of GenMark to the former shareholders of Osmetech and (ii) the issuance of new shares in Osmetech to GenMark. Following the reorganization, Osmetech became a subsidiary controlled by GenMark, and the former shareholders of Osmetech received shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization. In September 2012, GenMark placed Osmetech into liquidation to simplify its corporate structure. The liquidation of Osmetech was completed in the fourth quarter of 2013.
Segment Reporting
The Company currently operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. The Company’s business operates in one operating segment because the Company’s chief operating decision maker evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to accounts receivable, inventories, property and equipment, intangible assets, employee related compensation accruals, warranty liabilities, tax valuation accounts and stock-based compensation. Actual results could differ from those estimates.
Basis of Presentation
The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses from operations since its inception and has an accumulated deficit of $355,270,000 at December 31, 2016. Management expects operating losses to continue through the foreseeable future. The Company's ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure through expanding its product offerings and consequently increasing its product revenues. Cash, cash equivalents, restricted cash, and investments at December 31, 2016 totaled $41,566,000. The Company has prepared cash flow forecasts which indicate, based on the Company’s current cash resources available, that the Company will have sufficient resources to fund its business for at least the next 12 months from the date of this filing.
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable regulations of the Securities and Exchange Commission, or the SEC.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies and Significant Accounts
Cash and Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash on deposit with banks, money market instruments and certificates of deposit with original maturities of three months or less at the date of purchase. Marketable securities consist of certificates of deposits that mature in greater than three months. Marketable securities are accounted for as "available-for-sale" with the carrying amounts reported in the balance sheets stated at cost, which approximates their fair market value, with unrealized gains and losses, if any, reported as a separate component of stockholders' equity and included in comprehensive loss.
Restricted Cash
Restricted cash represents amounts designated for uses other than current operations and includes $758,000 at December 31, 2016 held as security for the Company’s letter of credit with Banc of California.
Fair Value of Financial Instruments
The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial instruments such as accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate the related fair values due to the short-term maturities of these instruments.
Receivables
Accounts receivable consist of amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable, and a reserve for unknown items based upon the Company’s historical experience.
The allowance for doubtful accounts as of December 31, 2016, is as follows (in thousands):
The Company has included $2,702,000 in the allowance for doubtful accounts as of December 31, 2016 and 2015 for past due amounts from its former customer, Natural Molecular Testing Corporation.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and include direct labor, materials, and manufacturing overhead. The Company periodically reviews inventory for evidence of slow-moving or obsolete parts, and writes inventory down to net realizable value, as needed. This write-down is based on management’s review of inventories on hand, compared to estimated future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable.
Property and Equipment-net
Property, equipment and leasehold improvements are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which are:
Property and equipment includes diagnostic instruments used for sales demonstrations or placed with customers under several types of arrangements, including performance evaluation programs, or PEPs, and reagent rental agreements. PEPs are placed with customers for evaluation periods of up to three months and the Company retains title to the instruments under these arrangements. Maintenance and repair costs are expensed as incurred.
Intangible Assets
Intangible assets are comprised of licenses or sublicenses to technology covered by patents owned by third parties, and are amortized on a straight-line basis over the expected useful lives of these assets, which is generally 10 years. Amortization of licenses typically begins upon the Company obtaining access to the licensed technology and is recorded in cost of revenues for licenses supporting commercialized products. The amortization of licenses to technology supporting products in development is recorded in research and development expenses.
Impairment of Long-Lived Assets
The Company assesses the recoverability of long-lived assets, including intangible assets, by periodically evaluating the carrying value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impairment is indicated, the Company writes down the carrying value of the asset to its estimated fair value. This fair value is primarily determined based on estimated discounted cash flows. The Company did not recognize any impairment charges during the years ended December 31, 2016 and 2015.
Revenue Recognition
The Company recognizes revenue from product sales and contract arrangements, net of discounts and sales related taxes. The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.
The Company offers customers the choice to either purchase a system outright or to receive a system free of charge in exchange for an annual minimum purchase commitment for diagnostic test cartridges. When a system is sold, the Company generally recognizes revenue upon shipment of the unit, however, if the end user already has the instrument being purchased installed at its location, revenue is recognized when the revenue recognition terms other than delivery have been satisfied. When a system is placed free of charge under a “reagent rental” agreement, the Company retains title to the equipment and it remains capitalized on the balance sheet under property and equipment. Under reagent rental agreements, the Company’s customers pay an additional system rental fee for each test cartridge purchased which varies based on the monthly volume of test cartridges purchased. The system rental fee and diagnostic test cartridges are recognized as contingent rental payments and are included in product revenue in the Company’s consolidated financial statements.
The Company has not had significant product returns and is not contractually obligated to accept returns unless such returns are related to warranty provisions. The Company generally does not accept reagent product returns, mainly due to FDA regulations, and does not offer volume rebates or provide price protection.
The Company enters into PEP agreements pursuant to which an instrument is installed on the premises of a pre-qualified customer for the purpose of allowing the customer to evaluate the instrument’s functionality over an extended trial period. The customer is generally required to purchase a minimum quantity of reagents and, at the end of the evaluation period, must purchase or return the instrument or sign a reagent rental agreement.
Revenues related to royalties received from licenses are recognized evenly over the contractual period to which the license relates. In those cases where the Company bills shipping and handling costs to customers, the amounts billed are included in product revenue.
In 2016 and 2015, Laboratory Corporation of America, Inc. represented 27% and 17%, respectively, of the Company's total revenue. In 2014, no single customer represented more than 10% of the Company's total revenue.
Product Warranties
The Company generally offers a one-year warranty for its instruments sold to customers and up to a sixty day warranty for reagents and provides for the estimated cost of the product warranty at the time the system sale is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary.
Product warranty reserve activity for the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):
Research and Development Costs
The Company expenses all research and development costs in the periods in which they are incurred unless there is alternative future use that supports the capitalization of an asset.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. A full valuation allowance has been recorded against the Company’s net deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize these assets in the future. The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest related to uncertain tax positions as a component of income tax expense.
A tax position that is more likely than not to be realized is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more likely than not threshold considers the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances and information available at the reporting date.
Stock-Based Compensation
The Company recognizes stock-based compensation expense related to stock options, shares purchased under the Company's ESPP, restricted stock awards, restricted stock units and market-based stock units granted to employees and directors in exchange for services. The compensation expense is based on the fair value of the applicable award utilizing various assumptions regarding the underlying attributes of the award. The stock-based compensation expense is recorded in cost of revenues, sales and marketing, research and development, and/or general and administrative expenses based on the employee's respective function.
The estimated fair value of stock granted, net of forfeitures expected to occur during the vesting period, is amortized as compensation expense that approximates straight-line expense to reflect vesting as it occurs. The stock option expense is derived from the Black-Scholes Option Pricing Model that uses several judgment-based variables to calculate the expense. The market-based stock expense is derived from the Monte Carlo Simulation Valuation. The inputs utilized in the valuation of the stock-based awards include the following factors:
•
Expected Term. Expected term represents the period that the stock-based awards are expected to be outstanding and is determined by using the simplified method.
•
Expected Volatility. Expected volatility represents the expected volatility in the Company’s stock price over the expected term of the option or market-based award and is determined by review of the Company’s and similar companies’ historical experience.
•
Expected Dividend. The valuation methods required a single expected dividend yield as an input. The Company assumed no dividends as it has never paid dividends and has no current plans to do so.
•
Risk-Free Interest Rate. The risk-free interest rate is based on published U.S. Treasury rates in effect at the time of grant for periods corresponding with the expected term of the option or market-based award.
The compensation expense related to the grant of restricted stock awards or units is calculated as the fair market value of the stock on the grant date as further adjusted to reflect expected forfeitures.
Foreign Currency Translation
During 2015, the Company established foreign subsidiaries with currencies other than the U.S. Dollar. The assets and liabilities of the Company's entities outside the U.S. are translated into U.S. Dollars based on the foreign currency exchange rates at the end of each period, while revenues and expenses are translated at weighted average exchange rates during the applicable period. Gains or losses resulting from these foreign currency translations of the Company's assets and liabilities are recorded in accumulated comprehensive loss in the consolidated balance sheets. Foreign currency translation impacts recorded in accumulated other comprehensive loss for the year ended December 31, 2016 and 2015 was $77,000 and $36,000, respectively.
Transactions in foreign currencies were recognized using the rate of exchange prevailing at the date of the transaction. Foreign exchange losses, which are included in the accompanying consolidated statements of operations, totaled $169,000, $91,000 and $9,000 for the years ended December 31, 2016, 2015 and 2014, respectively, and relate primarily to transactions denominated in Euros.
Net Loss per Common Share
Basic net loss per share is calculated by dividing loss available to stockholders of our common stock (the numerator) by the weighted average number of shares of the Company's common stock outstanding during the period (the denominator). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted loss per share is calculated in a similar way to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential shares had been issued unless the effect would be anti-dilutive.
The calculations of diluted net loss per share for the years ended December 31, 2016, 2015 and 2014 did not include the effects of the following stock options or other unvested equity awards which were outstanding as of the end of each year because the inclusion of these securities would have been anti-dilutive (in thousands).
Concentration of Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investment securities, and accounts receivable. We limit our exposure to credit loss by placing our cash with high credit quality financial institutions. We have established guidelines relative to diversification of our cash and investment securities and their maturities that are intended to secure safety and liquidity. The following table summarizes customers who accounted for 10% or more of net accounts receivable:
Comprehensive Loss
The Company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company’s comprehensive loss comprises net losses, unrealized gains and losses on available for sale securities, and foreign currency translation.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board, or the FASB, or other standard setting bodies that the Company adopts as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.
In March 2016, the FASB issued Accounting Standards Update, or ASU, 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. This guidance is effective for the Company beginning January 1, 2017 and the Company will adopt this ASU in the first quarter of 2017. The Company has excess tax benefits for which a benefit could not be previously recognized of approximately $1,979,000. Upon adoption, the balance of the unrecognized excess tax benefits will be reversed with the impact recorded to retained earnings, including any change to the valuation allowance as a result of adoption. Due to the full valuation allowance on the Company's U.S. deferred tax assets, the Company does not expect any impact to the financial statements as a result of this adoption.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of 2019, with early adoption permitted. The Company is evaluating the effects adoption will have on its consolidated financial statements. The Company expects this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets and will likely have an immaterial impact on our consolidated statements of comprehensive loss.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported by companies while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards or U.S. GAAP. The main purpose of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures of revenue, provide guidance for transactions that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December l5, 2017, with early adoption permitted but not earlier than the original effective date. Accordingly, the updated standard is effective for the Company in the first quarter of fiscal 2018. The Company is currently evaluating the overall impact this standard will have on our consolidated financial statements, as well as the expected timing and method of adoption. Based on our preliminary assessment, the Company does not anticipate a material impact on its financial statements. The Company is continuing this assessment, which may identify other impacts.
3. Intangible Assets, net
Intangible assets as of December 31, 2016 and 2015 consisted of the following (in thousands):
In March 2012, the Company entered into a license agreement with Caliper Life Sciences Inc., or Caliper, pursuant to which the Company obtained a non-exclusive license under Caliper’s microfluidics patent portfolio. In consideration for the license, the Company agreed to pay Caliper $400,000 in up-front payments recorded as an intangible asset on the Company’s balance sheet plus certain sales-based milestone payments, as well as a royalty on the sale of certain products. As part of the agreement, the Company obtained an unconditional release from any and all claims based upon any alleged infringement of the licensed patents prior to the effective date of the agreement. The Company met sales-based milestones in March 2013, March 2014 and August 2015 triggering the payment of $450,000, $550,000, and $800,000, respectively, which were made after the fiscal year during which the respective milestone was achieved.
In July 2012, the Company entered into a development collaboration and license agreement with Advanced Liquid Logic, Inc., or ALL, which was acquired by Illumina, Inc. in July 2013. Under the terms of the agreement, the Company established a collaborative program to develop in-vitro diagnostic products incorporating ALL’s proprietary electrowetting technology in conjunction with the Company’s electrochemical detection technology. The Company paid ALL an upfront license payment of $250,000 and agreed to pay up to $1,750,000 in potential additional milestone payments. Pursuant to the agreement, as amended, the Company will be obligated to pay to ALL a royalty consisting of a low- to mid-single digit percent of net sales of designated licensed products containing ALL components. The Company met certain milestones in August 2013, June 2014 and September 2016 resulting in the payment of $200,000, $350,000 and $700,000, respectively, to ALL.
Intellectual property licenses had a weighted average remaining amortization period of 5.40 years as of December 31, 2016. Amortization expense for intangible assets amounted to $406,000, $294,000 and $227,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Estimated future amortization expense for these licenses is as follows (in thousands):
4. Stockholders’ Equity
On June 14, 2016, the Company entered into an Equity Distribution Agreement, or the Distribution Agreement, with Canaccord Genuity Inc., as sales agent, or Canaccord, pursuant to which the Company could, at its discretion, offer and sell, from time to time, through Canaccord shares of its common stock having an aggregate offering price of up to $30,000,000. Under the Distribution Agreement, Canaccord could sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act or any other method permitted by law, including in privately negotiated transactions.
The Company began sales under the Distribution Agreement in August 2016 pursuant to an effective shelf registration statement on Form S-3 previously filed with the SEC. During the three months ended September 30, 2016, the Company sold 3.3 million shares of common stock, at an average per share price of $9.04, for aggregate gross proceeds of $30,000,000. The Company incurred $1,143,000 in related transaction costs, comprising commissions paid to Canaccord of 3.0% of the aggregate gross proceeds from each sale of shares occurring pursuant to the Distribution Agreement, or $900,000, and $243,000 in additional miscellaneous expenses.
5. Stock-Based Compensation
In 2010, the Company adopted the 2010 Equity Incentive Plan, or the 2010 Plan, which provides for the grant of incentive and nonstatutory stock options, restricted stock, stock appreciation rights, restricted stock units, restricted stock bonuses and other stock-based awards. Employee participation in the 2010 Plan is at the discretion of the compensation committee of the board of directors of the Company. All stock options granted under the 2010 Plan are exercisable at a price equal to the closing quoted market price of the Company’s shares on the NASDAQ Global Market on the date of grant and generally vest over a period of between one and four years.
The Company estimates potential forfeitures of stock-based award grants and adjusts compensation cost recorded accordingly. The estimate of forfeitures is based on historical forfeiture experience and is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of evaluation and will also impact the amount of stock compensation expense to be recognized in future periods.
Stock options are generally exercisable for a period up to 10 years after grant and are forfeited if employment is terminated before the options vest. As of December 31, 2016, there were 79,455 shares available for future grant of awards under the 2010 Plan.
The following table summarizes stock option activity during the year ended December 31, 2016:
The weighted average fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $2.27, $6.02 and $7.45 per share, respectively. Options that were exercisable as of December 31, 2016 had a remaining weighted average contractual term of 5.67 years and an aggregate intrinsic value of $7,036,000. As of December 31, 2016, there was $3,323,000 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 1.57 years. The intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $896,000, $938,000 and $584,000, respectively. As of December 31, 2016, there were 2,569,550 stock options outstanding, which had a remaining weighted average contractual term of 6.20 years and an aggregate intrinsic value of $7,532,000.
Valuation of Stock-Based Awards
The assumptions used in the valuation of stock-based awards for the years ended December 31, 2016, 2015 and 2014, are summarized in the following table:
Restricted Stock Awards and Units
In March 2013, the Company transitioned to granting restricted stock units under the 2010 Plan in lieu of granting restricted stock awards. The Company’s restricted stock activity for the year ended December 31, 2016 was as follows:
Restricted stock awards or units may be granted at the discretion of the compensation committee of the board of directors under the 2010 Plan in connection with the hiring or retention of personnel and are subject to certain conditions. Restrictions expire at certain dates after the grant date in accordance with specific provisions in the applicable award agreement.
As of December 31, 2016, there was $1,000 of unrecognized compensation cost related to restricted stock awards, which is expected to be recognized over a weighted average-period of 0.04 years. The total fair value of restricted stock awards that vested during the years ended December 31, 2016, 2015 and 2014 was $190,000, $580,000 and $3,466,000, respectively.
As of December 31, 2016, there was $8,509,000 of unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted average period of 2.80 years. The total fair value of restricted stock units that vested during the years ended December 31, 2016, 2015 and 2014 was $3,192,000, $4,457,000 and $2,121,000, respectively.
The Company issued market-based stock units in February 2015 and February 2016, which may result in the recipient receiving shares of stock equal to up to 200% of the target number of units granted. The vesting and issuance of Company stock depends on the Company's stock performance as compared to the NASDAQ Composite Index over the three-year period following the grant. As of December 31, 2016, there was $781,000 of unrecognized stock-based compensation expense related to these awards, which is expected to be recognized over a weighted average period of 1.75 years. The total fair value of market-stock units that vested during the years ended December 31, 2016 and 2015 was $2,433,000 and $29,000, respectively. The Company’s market-based stock unit activity for the year ended December 31, 2016 was as follows:
The fair value of these market-based stock units was estimated on the date of grant using the Monte Carlo Simulation Valuation Model, which estimates the potential outcome of achieving the market condition based on simulated future stock prices, with the following assumptions for the year ended December 31, 2016:
The Company granted 43,200 performance-based restricted stock units in March 2014 with a grant date fair value of $12.30 per share. The vesting and issuance of Company stock pursuant to these awards depends on obtaining regulatory clearance of a designated number of ePlex products within a defined time. Stock-based compensation expense for performance-based awards is recognized when it is probable that the applicable performance criteria will be satisfied. The probability of achieving the relevant performance criteria is evaluated on a quarterly basis. On December 31, 2014, 10,800 units were earned and vested with a total fair value of $147,000. On each of December 31, 2016 and 2015, 10,800 units were forfeited and cancelled as the related performance metrics were not achieved by such dates. As of December 31, 2016, there was $133,000 in unrecognized stock-based compensation expense related to the remaining unvested awards.
Employee Stock Purchase Plan
Following the adoption of the ESPP by the Company’s board of directors in March 2013, the Company's stockholders approved the ESPP in May 2013 at the Company's Annual Meeting of Stockholders. A total of 650,000 shares of the Company’s common stock are reserved for issuance under the ESPP, which permits eligible employees to purchase common stock at a discount through payroll deductions.
The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or the last day of the offering period, whichever is lower. Generally, each offering under the ESPP will be for a period of six months as determined by the Company's board of directors; provided that no offering period may exceed 27 months. Employees may invest up to 10% of their gross compensation through payroll deductions. In no event may an employee purchase more than 1,500 shares of common stock during any six-month offering period. As of December 31, 2016, there were 267,839 shares of common stock available for issuance under the ESPP. The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation. As a result, stock-based compensation expense related to the ESPP, calculated using the Black-Scholes model at the beginning of each six-month offering period, has been recorded during the year ended December 31, 2016.
A summary of ESPP activity for the years ended December 31, 2016 and 2015 is as follows (in thousands, except share, and per share data):
Stock-Based Compensation Expense Recognition
Stock-based compensation was recognized in the consolidated statements of comprehensive loss as follows (in thousands):
No stock-based compensation was capitalized during the periods presented, and there was no unrecognized tax benefit related to stock-based compensation for the years ended December 31, 2016, 2015 and 2014, respectively.
6. Income Taxes
The Company's income (loss) before provision (benefit) for income taxes for the years ended December 31, 2016, 2015, and 2014, respectively, was generated in the following jurisdictions (in thousands):
The components of income tax expense (benefit) were as follows for the years ended December 31, 2016, 2015, and 2014, respectively (in thousands):
The components of net deferred income taxes consisted of the following at December 31, 2016 and 2015, respectively (in thousands):
A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to the loss from operations is summarized for the years ended December 31, 2016, 2015, and 2014, respectively, as follows:
The Company had federal net operating loss (NOL) carryforwards available of approximately $206,900,000 as of December 31, 2016 after consideration of limitations under Section 382 of the Internal Revenue Code, or Section 382, as further described below. Additionally, the Company had state NOL carryforwards available of $165,000,000 as of December 31, 2016. These federal and state NOLs may be used to offset future taxable income and will begin to expire in 2025 and 2017, respectively.
Of the $206,900,000 and $165,000,000 of federal and state NOL carryforwards at December 31, 2016, $5,402,000 represents excess tax benefits related to equity compensation which will result in an increase in equity if and when such excess benefits are ultimately realized.
The future utilization of the Company’s NOL carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of changes in ownership by stockholders that hold 5% or more of the Company’s common stock. An assessment of such ownership changes under Section 382 was completed through December 31, 2016. As a result of this assessment, the Company determined that it experienced multiple ownership changes through 2016 which will limit the future utilization of NOL carryforwards. The Company has reduced its deferred tax assets related to NOL carryovers that are anticipated to expire unused as a result of ownership changes. These tax attributes have been excluded from deferred tax assets with a corresponding reduction of the valuation allowance with no net effect on income tax expense or the effective tax rate. Additionally, future ownership changes may further impact the utilization of existing NOLs.
The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining that it is more likely than not that the Company will be able to generate sufficient taxable income to realize
such assets. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three year period ended December 31, 2016. Such objective evidence limits the ability to consider other subjective evidence such as the Company's projections for future growth. Based on this evaluation, as of December 31, 2016, a valuation allowance of $82,481,000 has been recorded in order to measure only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence, such as estimates of future taxable income during carryforward periods and the Company's projections for growth.
The Company applies the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. Income tax positions must meet a more likely than not recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The following table summarizes the changes to unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014, respectively (in thousands):
At December 31, 2016 and December 31, 2015, the Company had not accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate that there will be a significant change in the amount of unrecognized tax benefits over the next twelve months. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company is subject to taxation in the United States and various state and foreign jurisdictions. The Company's Federal and state returns since inception are subject to examination due to the carryover of net operating losses. As of December 31, 2016, the Company’s tax years from 2011 through 2012 are subject to examination by the United Kingdom tax authorities. The statute of limitations for the assessment and collection of income taxes related to other foreign tax returns varies by country. In the foreign countries where the Company has operations, these time periods generally range from three to five years after the year for which the tax return is due or the tax is assessed.
7. Commitments and Contingencies
Leases
The Company has lease agreements for its office, manufacturing, warehousing and laboratory space and for office equipment. Rent and operating expenses charged were $1,871,000, $1,233,000 and $1,147,000 for the years ended December 31, 2016, 2015, and 2014, respectively. Pursuant to the Company’s lease agreements, a portion of the monthly rent has been deferred. The balance deferred at December 31, 2016 and 2015 was $4,097,000 and $1,445,000, respectively.
Annual future minimum obligations for leases as of December 31, 2016 are as follows (in thousands):
Legal Proceedings
From time to time, the Company is party to litigation and other legal proceedings in the ordinary course, and incidental to the conduct of its business. While the results of any litigation or other legal proceedings are uncertain, the Company does not believe the ultimate resolution of any pending legal matters is likely to have a material effect on its financial position or results of operations.
8. Inventories
Inventory on hand as of December 31, 2016 and 2015 comprised the following (in thousands):
9. Property and Equipment, net
Property and equipment comprised the following as of December 31, 2016 and 2015 (in thousands):
Depreciation expense was $3,510,000, $3,112,000 and $2,429,000 for the years ended December 31, 2016, 2015 and 2014, respectively. During the years ended December 31, 2016, 2015 and 2014, the Company disposed of certain assets no longer in use with a net book value of $76,000, $153,000, and $102,000, respectively, recorded to cost of revenue, sales and marketing, research and development, or general and administrative expenses based on the asset's respective use.
10. Loan payable
As of December 31, 2016 and 2015, long-term debt consisted of the following (in thousands):
Term Loans
In January 2015, the Company entered into a Loan and Security Agreement, or the LSA, with Solar Capital Partners (as successor-in-interest to General Electric Capital Corporation), and certain other financial institutions party thereto, as lenders, pursuant to which the Company obtained (a) up to $35,000,000 in a series of term loans and (b) a revolving loan in the maximum amount of $5,000,000. Under the terms of the LSA, the Company may, subject to certain conditions, borrow:
• $10,000,000 on or before March 31, 2015, or Term Loan A;
• an additional $10,000,000, or Term Loan B, subject to the Company’s satisfaction of regulatory requirements necessary to CE Mark its ePlex system in Europe by a specified date; and
• an additional $15,000,000, or Term Loan C, and together with Term Loan A and Term Loan B, the Term Loans, subject to the Company’s satisfaction of FDA 510(k) market clearance for the sale of the Company’s ePlex system in the United States by a specified date.
The Company borrowed $10,000,000 on each of March 27, 2015 and June 10, 2016 pursuant to Term Loan A and Term Loan B, respectively. The Term Loans will accrue interest at a rate equal to (a) the greater of 1.00% or the 3-year treasury rate in effect at the time of funding, plus (b) an applicable margin between 4.95% and 5.90% per annum. The Company is only required to make interest payments on amounts borrowed pursuant to the Term Loans from the applicable funding date until March 1, 2017, or the Interest Only Period. Following the Interest Only Period, monthly installments of principal and interest under the Term Loans will be due until the original principal amount and applicable interest is fully repaid by January 12, 2019, or the Maturity Date. Interest expense recognized on the Term Loans for the years ended December 31, 2016 and 2015 totaled $1,184,000 and $611,000, respectively, for the stated interest and final fee accrual.
In July 2016, the Company entered into an amendment to the LSA pursuant to which the lenders reallocated certain funding commitments under the LSA between the lenders, and the parties extended the date by which the future funding requirements in respect of Term Loan C must be satisfied.
Under the LSA, the Company is required to comply with certain affirmative and negative covenants, including, without limitation, delivering reports and notices relating to the Company’s financial condition and certain regulatory events and intellectual property matters, as well as limiting the creation of liens, the incurrence of indebtedness, and the making of certain investments, payments and acquisitions, other than as specifically permitted by the LSA. As of December 31, 2016, the Company was in compliance with all covenants under the LSA.
Revolving Loan
Pursuant to the LSA, the Company may borrow up to $5,000,000 under the revolving loan facility. Borrowings under the revolving loan will accrue interest at a rate equal to (a) the greater of 1.25% per annum or a base rate as determined by a three-month LIBOR-based formula, plus (b) an applicable margin between 2.95% and 3.95% based on certain criteria as set forth in the LSA. All principal and interest outstanding under the revolving loan is due and payable on the Maturity Date. Following the funding of Term Loan A, the Company is required to pay a commitment fee equal to 0.75% per annum of the amounts made available but unborrowed under the revolving loan. As of December 31, 2016, the Company had not borrowed any amounts pursuant the revolving loan facility. Interest expense recognized for the unused revolving loan facility fee for the years ended December 31, 2016 and 2015 was $42,000 and $34,000, respectively.
Debt Issuance Costs
As of December 31, 2016 and December 31, 2015, the Company had $585,000 and $883,000, respectively, of unamortized debt issuance discount, which is offset against borrowings in long-term and short-term debt.
For the twelve months ended December 31, 2016 and 2015, amortization of debt issuance costs was $298,000 and $208,000, respectively, which was included in interest expense in the Company's unaudited condensed consolidated statements of comprehensive loss for the periods presented.
Letter of Credit
In September 2012, the Company provided a $758,000 letter of credit issued by Banc of California to the landlord of its executive office facility in Carlsbad, California. This letter of credit was secured with $758,000 of restricted cash as of December 31, 2016.
11. Employee benefit plan
The Company has a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation. The Company may make matching contributions under the 401(k) plan; however, the Company has not made any such contributions to date.
12. Other current liabilities
Other current liabilities as of December 31, 2016 and 2015 consisted of the following (in thousands):
13. Fair value of financial instruments
The following table presents the financial instruments measured at fair value on a recurring basis on the financial statements of the Company and the valuation approach applied to each class of financial instruments at December 31, 2016 and 2015, respectively, (in thousands):
At December 31, 2016, the carrying value of the financial instruments measured and classified within Level 1 was based on quoted prices and marked to market. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability.
14. Investments
The following table summarizes the Company’s available-for-sale investments at December 31, 2016 (in thousands):
During 2013, the Company sold its preferred stock investment in ALL in connection with ALL's acquisition by Illumina, Inc., resulting in a $1,392,000 realized gain. Additionally, in 2016 and 2015 the Company received an additional $9,000 and $223,000, respectively, related to the release of escrowed proceeds.
The following table summarizes the maturities of the Company’s available-for-sale securities at December 31, 2016 (in thousands):
15. Quarterly financial data (unaudited)
16. Subsequent events
The Company has completed an evaluation of all subsequent events through the issuance date of these consolidated financial statements and the following represents subsequent events for disclosure.
On February 27, 2017 the Company entered into a second amendment to the LSA with Solar Capital Partners and certain other financial institutions party thereto, as lenders, pursuant to which the parties extended the date by which the future funding requirements in respect of Term Loan C must be satisfied. In addition, the parties agreed to extend the Interest-Only Period in respect of amounts already borrowed under Term Loan A and Term Loan B, and the amount, if any, borrowed pursuant to Term Loan C, until June 1, 2017. The parties also agreed that the Company has the option to further extend the Interest-Only Period until August 1, 2017, and subsequently to March 1, 2018, subject in each case to the satisfaction of certain conditions.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2016, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred in the quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of GenMark Diagnostics, Inc.
We have audited GenMark Diagnostics, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). GenMark Diagnostics, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, GenMark Diagnostics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of GenMark Diagnostics, Inc. and our report dated February 28, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Diego, California
February 28, 2017
Item 9B.
Item 9B.
OTHER INFORMATION
On February 27, 2017, we entered into a second amendment to the LSA with Solar Capital Partners and certain other financial institutions party thereto, as lenders, pursuant to which the parties extended the date by which the future funding requirements in respect of Term Loan C must be satisfied. In addition, the parties agreed to extend the interest-only period in respect of amounts already borrowed under Term Loan A and Term Loan B, and the amount, if any, borrowed pursuant to Term Loan C (the “Interest-Only Period”), until June 1, 2017. The parties also agreed that we have the option to further extend the Interest-Only Period until August 1, 2017, and subsequently to March 1, 2018, subject in each case to the satisfaction of certain conditions.
PART III.
Item 10.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Board of Directors Information,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Proxy Statement to be filed in connection with our 2017 Annual Meeting of Stockholders, or the Proxy Statement.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics for our directors, officers and employees, which is available on our website at www.genmarkdx.com in the Investor Relations section under “Corporate Governance.” If we make any substantive amendments to the code of business conduct and ethics or grant any waiver from a provision of the code of business conduct and ethics to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website. The information on, or that can be accessed from, our website is not incorporated by reference into this Annual Report.
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee” contained in the Proxy Statement.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in the Proxy Statement.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Certain Relationships and Related Transactions,” and “Board of Directors Information” contained in the Proxy Statement.
Item 14.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated in this Annual Report by reference from the information under the captions “Principal Accountant Fees and Services” and “Report of the Audit Committee” contained in the Proxy Statement.
Item 15.
Item 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a)
Documents filed as part of this Annual Report.
1.
The following financial statements of GenMark Diagnostics, Inc. and Report of Independent Registered Public Accounting Firm, are included in this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
2.
List of financial statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.
4.
List of Exhibits required by Item 601 of Regulation S-K. See Item 15(b) below.
(b)
Exhibits.
The exhibits listed in the accompanying “Exhibit Index” are filed, furnished or incorporated by reference as part of this Annual Report, as indicated.
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2017.
GENMARK DIAGNOSTICS, INC.
By:
/s/ HANY MASSARANY
Name:
Hany Massarany
Title:
Chief Executive Officer, President and Director
(principal executive officer)
February 28, 2017
By:
/s/ SCOTT MENDEL
Name:
Scott Mendel
Title:
Chief Financial Officer
(principal financial and accounting officer)
February 28, 2017
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hany Massarany and Scott Mendel, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
EXHIBIT INDEX
_____________________
*
Indicates a management contract or compensatory plan or arrangement in which any director or named executive officer participates.
ü
Included in this filing.
†
Confidential treatment has been granted with respect to certain portions of this exhibit.
+
GenMark has requested confidential treatment with respect to certain portions of this exhibit.