UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2017 

 

OR

 

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

 

For the transition period from ____ to ____

 

Commission File Number 001-36200

________________________

 

OXFORD IMMUNOTEC GLOBAL PLC

(Exact name of registrant as specified in its charter)

 

England and Wales	98-1133710
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
94C Innovation Drive, Milton Park, Abingdon OX14 4RZ, United Kingdom	Not Applicable
(Address of Principal Executive Offices)	(Zip Code)

 

+44 (0)1235 442780

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Yes ☒    No ☐

 

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

 

Yes ☒    No ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☒	Smaller reporting company ☐
Non-accelerated filer  ☐		Emerging growth company ☒
(Do not check if a smaller reporting company)

 

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

 

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

 

Yes☐ No☒

 

As of October 25, 2017, there were 25,654,842 Ordinary Shares, nominal value £0.006705, of Oxford Immunotec Global PLC outstanding.

 

 

Form 10-Q

Quarterly Period Ended September 30, 2017

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed consolidated balance sheets as of September 30, 2017 (unaudited) and December 31, 2016	4
	Condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2017 and 2016	5
	Condensed consolidated statements of other comprehensive loss (unaudited) for the three and nine months ended September 30, 2017 and 2016	6
	Condensed consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2017 and 2016	7
	Notes to the unaudited condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		34

 

 

Special note regarding forward-looking statements

 

This Quarterly Report on Form 10-Q, and exhibits hereto, contains or incorporates by reference estimates, predictions, opinions, projections and other statements that may be interpreted as “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The forward-looking statements are contained principally in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A, “Risk Factors,” but are also contained elsewhere in this Quarterly Report. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “would,” “could,” “should,” “intend,” “plan,” “contemplate,” “expect,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “target,” “potential,” “continue,” and “ongoing” and other comparable expressions intended to identify statements about the future, although not all forward-looking statements contain these identifying words. These statements involve substantial known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievements to differ materially from those currently anticipated. Forward-looking statements are neither historical facts nor assurances of future performance. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain and that involve substantial risks and uncertainties. Such risks and uncertainties include, but are not limited to:

 

●

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

●

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

●

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

●

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

●

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

●

our ability to successfully develop and complete the acquired in-process research and development, or IPR&D, program and profitably commercialize the underlying product candidates before our competitors develop and commercialize similar products, or at all;

●

continued demand for diagnostic products for tuberculosis, tick-borne diseases and other than immune-regulated conditions and the development of new market opportunities;

●

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

●

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

	●	decisions by insurers and other third party payors with respect to coverage and reimbursement;
	●	our dependence on certain of our customers, suppliers and service providers;

●

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

●

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

●

the impact of currency fluctuations on our business;

●

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

●

potential changes in the United States, or U.S., social, political, regulatory and economic conditions or laws and policies governing the health care system, U.S. tax laws, foreign trade, immigration, manufacturing, and development and investment in the territories and countries where we or our customers and suppliers operate;

●

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

●

our ability to retain key members of our management;

●

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

●

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

●

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

●

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

●

our ability to comply with Securities and Exchange Commission, or SEC, reporting, antifraud, anti-corruption, environmental, health and safety laws and regulations;

●

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

●

our ability to protect and enforce our intellectual property rights;

●

our status as an emerging growth company and as an English company listing ordinary shares in the U.S.;

●

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

●

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

 

 

You should refer to Part I, Item 1A, “Risk Factors” in our 2016 Annual Report on Form 10-K for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report.

 

Where you can find more information

 

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

 

We make available free of charge on our corporate website at www.oxfordimmunotec.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.oxfordimmunotec.com, we do not incorporate such website or its contents into this Quarterly Report.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Oxford Immunotec Global PLC

Condensed consolidated balance sheets

 

 

		September 30,				December 31,
(in thousands, except share and per share data)		2017				2016
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	67,743			$	59,110
Accounts receivable, net			21,652				13,265
Inventory, net			9,174				7,437
Prepaid expenses and other assets			3,147				2,390
Total current assets			101,716				82,202
Restricted cash, non-current			200				200
Property and equipment, net			8,927				7,793
In-process research and development			6,970				16,170
Goodwill			3,967				3,822
Other intangible assets, net			8,296				11,017
Deferred tax asset			6,725				2,630
Other assets			190				178
Total assets		$	136,991			$	124,012
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	3,141			$	3,201
Accrued liabilities			15,563				14,282
Settlement liability			2,396				—
Contingent purchase price consideration			—				882
Deferred income			345				41
Current portion of loans payable			89				84
Total current liabilities			21,534				18,490
Long-term portion of loans payable			29,787				29,601
Settlement liability			7,930				—
Contingent purchase price consideration			—				2,593
Other liabilities			364				364
Total liabilities			59,615				51,048
Commitments and contingencies (Note 2)
Shareholders’ equity:
Ordinary shares, £0.006705 nominal value; 36,183,293 shares authorized at September 30, 2017 and December 31, 2016, and 25,596,345 and 22,635,431 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively			269				243
Additional paid-in capital			292,959				249,128
Accumulated deficit			(210,341	)			(168,656	)
Accumulated other comprehensive loss			(5,511	)			(7,751	)
Total shareholders’ equity			77,376				72,964
Total liabilities and shareholders’ equity		$	136,991			$	124,012

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of operations

(unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands, except share and per share data)		2017				2016				2017				2016
Revenue:
Product		$	12,000			$	9,713			$	30,808			$	27,144
Service			18,429				16,396				47,246				35,229
Total revenue			30,429				26,109				78,054				62,373
Cost of revenue:
Product			4,027				3,616				11,366				10,421
Service			9,141				7,887				24,791				17,853
Total cost of revenue			13,168				11,503				36,157				28,274
Gross profit			17,261				14,606				41,897				34,099
Operating expenses:
Research and development			4,467				3,532				12,220				9,837
Sales and marketing			9,493				8,794				29,174				26,665
General and administrative			8,141				6,466				23,007				16,200
Change in fair value of contingent purchase price consideration			(880	)			60				(3,475	)			172
Intangible assets impairment charge			11,064				—				11,064				—
Settlement expense			196				—				9,831				—
Total operating expenses			32,481				18,852				81,821				52,874
Loss from operations			(15,220	)			(4,246	)			(39,924	)			(18,775	)
Other income (expense):
Interest expense, net			(781	)			(54	)			(2,411	)			(88	)
Foreign exchange (losses) gains			(624	)			470				(1,277	)			1,707
Other income (expense)			—				(106	)			(262	)			(243	)
Loss before income taxes			(16,625	)			(3,936	)			(43,874	)			(17,399	)
Income tax (expense) benefit			(222	)			(60	)			2,189				(92	)
Net loss		$	(16,847	)		$	(3,996	)		$	(41,685	)		$	(17,491	)
Net loss per ordinary share—basic and diluted		$	(0.70	)		$	(0.18	)		$	(1.80	)		$	(0.78	)
Weighted-average shares used to compute net loss per ordinary share—basic and diluted			24,123,574				22,365,349				23,159,986				22,333,911

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of other comprehensive loss

(unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2017				2016				2017				2016
Net loss		$	(16,847	)		$	(3,996	)		$	(41,685	)		$	(17,491	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment, net of taxes			745				(411	)			2,240				(1,684	)
Other comprehensive income (loss), net of taxes			745				(411	)			2,240				(1,684	)
Total comprehensive loss		$	(16,102	)		$	(4,407	)		$	(39,445	)		$	(19,175	)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of cash flows

(unaudited)

 

		Nine months ended September 30,
(in thousands)		2017				2016
Cash flows from operating activities
Net loss		$	(41,685	)		$	(17,491	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangible assets			3,115				2,067
Change in fair value of contingent purchase price consideration			(3,475	)			172
Intangible assets impairment charges			11,064				—
Accretion and amortization of loan fees			429				—
Share-based compensation expense			4,266				3,827
Deferred income taxes			(2,264	)			—
Changes in operating assets and liabilities:
Accounts receivable, net			(7,868	)			(8,659	)
Inventory, net			(1,298	)			(782	)
Prepaid expenses and other assets			(596	)			1,177
Accounts payable			371				(1,235	)
Accrued liabilities			2,753				1,882
Other liabilities, net			7,548				—
Deferred income			286				(1,505	)
Net cash used in operating activities			(27,354	)			(20,547	)
Cash flows from investing activities
Purchases of property and equipment			(4,030	)			(2,351	)
Cash paid for acquisition			—				(22,200	)
Increase in restricted cash			—				(120	)
Net cash used in investing activities			(4,030	)			(24,671	)
Cash flows from financing activities
Proceeds from issuance of ordinary shares			39,298				—
Proceeds from exercise of share options			495				15
Payments of tax withheld on vesting of restricted share units			(203	)			—
Payments on loan			(63	)			(59	)
Net cash provided by (used in) financing activities			39,527				(44	)
Effect of exchange rate changes on cash and cash equivalents			490				(1,129	)
Net increase (decrease) in cash and cash equivalents, excluding restricted cash			8,633				(46,391	)
Cash and cash equivalents at beginning of period			59,110				83,715
Cash and cash equivalents at end of period		$	67,743			$	37,324

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2017

 

1. Business and basis of presentation

 

Description of business

 

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

 

On July 1, 2016, we acquired substantially all of the assets of Imugen, Inc., or Imugen, a privately owned Massachusetts corporation specializing in developing and commercializing proprietary tests for tick-borne diseases, including Lyme disease.

 

On October 12, 2016, we acquired Immunetics, Inc., or Immunetics, a privately owned Massachusetts corporation focused on developing specialized tests for infectious diseases, including tick-borne diseases, such as Lyme disease. 

 

Unaudited interim financial statements

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the interim condensed consolidated financial statements reflect all adjustments, of a normal recurring nature, necessary for a fair statement of the financial position at September 30, 2017, the results of operations for the three and nine-month periods ended September 30, 2017 and 2016, and the cash flows for the nine-month periods ended September 30, 2017 and 2016. Interim results are not necessarily indicative of results for a full year.

 

The consolidated balance sheet presented as of December 31, 2016, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes included in this report should be read in conjunction with the 2016 consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 28, 2017, or the Company’s 2016 Form 10-K.

 

Note 1 to the consolidated financial statements included in the Company’s 2015 and 2016 Form 10-K describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three and nine-month periods ended September 30, 2017. The Company updated its cash and cash equivalents and restricted cash policy to state that “the Company maintains its available cash balances in cash, money market funds and repurchase agreements primarily invested in U.S. government and agency securities, and bank savings accounts in the United States, United Kingdom, Germany, Japan, China and South Korea.”

 

Recent accounting pronouncements

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, which converges the FASB and the International Accounting Standards Board standards on revenue recognition. Under ASU 2014-09, a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, ASU 2014-09 requires certain additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The FASB has issued several amendments to the standard, including clarification on accounting for licenses of intellectual property, identifying performance obligations and other technical corrections. The Company will adopt ASU 2014-09 in the first quarter of 2018, using the “modified retrospective” approach. The Company is still evaluating certain aspects of ASU 2014-09, but does not currently expect the new guidance to have a material impact on its financial position, results of operations or related disclosures.

 

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, or ASU 2015-11. ASU 2015-11 requires that an entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 prospectively as of January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the Company’s financial position, results of operations or related disclosures. The Company updated its accounting policies to state that “inventory is stated at the lower of cost and net realizable value.”

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, or ASU 2015-17. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company adopted ASU 2015-17 prospectively as of January 1, 2017. The adoption of ASU 2015-17 did not have a material impact on the Company’s financial position, results of operations or related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02. ASU 2016-02 requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. The guidance also eliminates real estate-specific provisions for all entities. The new guidance will be effective for the Company for annual and interim periods beginning after December 15, 2018. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating ASU 2016-02 and has not yet determined how it may impact its financial position, results of operations or related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted ASU 2016-09 as of January 1, 2017 using a modified retrospective, retrospective, or prospective transition method, depending on a specific amendment. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial position, results of operations or related disclosures. The Company made the accounting policy election to continue to estimate the number of awards that are expected to vest, as opposed to accounting for forfeitures when they occur. The Company updated its accounting policies to classify cash paid when withholding shares for tax-withholding purposes as a financing activity in its consolidated statements of cash flows.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. Under current U.S. GAAP, a company only considered past events and current conditions in measuring an incurred loss. Under ASU 2016-13, the information that a company must consider is broadened in developing an expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. The new guidance will be effective for the Company for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The guidance is applied using a modified retrospective, or prospective approach, depending on a specific amendment. The Company is currently evaluating ASU 2016-13 and has not yet determined how it may impact its financial position, results of operations or related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. ASU 2016-15 is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new guidance will be effective for the Company for annual and interim periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The guidance should be applied retrospectively. The Company is currently evaluating ASU 2016-15 and has not yet determined how it may impact its statement of cash flows.

 

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes, or ASU 2016-16. The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. The guidance is effective for annual periods beginning after December 15, 2017, and early adoption is permitted as of the beginning of an annual reporting period. ASU 2016-16 amendments should be applied on a modified retrospective basis. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its financial position, results of operations or related disclosures.

 

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance should be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-18 to have a material effect on its statement of cash flows.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations, or ASU 2017-01. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance will be effective for the Company for annual periods beginning after December 15, 2017, including interim periods within those periods. The guidance should be applied on a prospective basis and early adoption is not permitted. The Company is currently evaluating the impact of the adoption of ASU 2017-01 on its financial position, results of operations or related disclosures.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, or ASU 2017-04. ASU 2017-04 simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The new guidance will be applied on a prospective basis. ASU 2017-04 will be effective for the Company for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating ASU 2017-04, but does not expect its adoption to have a material impact on the Company’s financial position, results of operations, or related disclosures.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, or ASU 2017-09. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting of a share-based payment award. The guidance should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of ASU 2017-09, but does not expect its adoption to have a material impact on the Company’s financial position, results of operations or related disclosures.

 

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

 

2. Fair value measurement

 

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

 

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

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

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

 

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

 

 

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

 

The following tables present information about the balances of liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The Company did not have any financial assets measured at fair value on a recurring basis.

 

Fair value measurements at September 30, 2017 using

(in thousands)

September 30, 2017

Quoted prices in active markets for identical assets (Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Liabilities:

Contingent purchase price consideration

$

—

$

—

$

—

$

—

Total

$

—

$

—

$

—

$

—

 

						Fair value measurements at December 31, 2016 using
(in thousands)		December 31, 2016				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
Liabilities:
Contingent purchase price consideration		$	3,475			$	—			$	—			$	3,475
Total		$	3,475			$	—			$	—			$	3,475

 

The following table provides a summary of changes in the fair value of the Company's Level 3 financial liabilities for the nine-month period ended September 30, 2017:

 

(in thousands)
Balance – December 31, 2016		$	3,475
Change in fair value of contingent purchase price consideration			(3,475	)
Balance – September 30, 2017		$	—

 

 

On October 12, 2016, the Company acquired Immunetics, a Massachusetts based diagnostics company focused on developing specialized tests for infectious diseases, including tick-borne diseases, such as Lyme disease. The terms of the purchase agreement included contingent purchase price consideration consisting of up to an additional $6.0 million in cash payable on the achievement of certain revenue thresholds and pipeline related milestones over the following three years. The fair value of these milestone payments was estimated to be $3.4 million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of 4.4%, which are considered as Level 3 inputs. During March 2017, as a result of events subsequent to the acquisition, the Company determined that the timing for Food and Drug Administration approval of the Babesia microti product acquired from Immunetics would be more likely to occur after the cut-off date for a milestone to be earned. As a result, the Company reduced the related contingent purchase price consideration liability by $2.4 million. As FDA approval did not occur in the second quarter of 2017, the remaining accrual related to this milestone of $238,000 was written-off at that time. In the third quarter of 2017, the Company determined there to be a remote chance that the revenue thresholds for 2017 would be met and so the remaining contingent consideration liability of $880,000 was written-off.

 

The Company has a term loan outstanding under the MidCap agreement. The amount outstanding on its 2016 term loan is reported at its carrying value in the accompanying balance sheet. The estimated fair value of the term loan as of September 30, 2017, based upon current market rates for similar borrowings, as measured using Level 2 inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

 

3. Accounts receivable, net

 

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

 

(in thousands)		September 30, 2017				December 31, 2016
Accounts receivable		$	22,679			$	14,050
Less allowance for uncollectible accounts receivable			(1,027	)			(785	)
Accounts receivable, net		$	21,652			$	13,265

 

4. Inventory, net

 

Inventory, net consisted of the following as of:

 

(in thousands)		September 30, 2017				December 31, 2016
Raw materials		$	5,777			$	4,928
Finished goods			3,397				2,509
Inventory, net		$	9,174			$	7,437

 

5. Goodwill and acquired intangible assets

 

The carrying amount of goodwill reflected in the Company’s condensed consolidated balance sheets was $4.0 million and $3.8 million as of September 30, 2017 and December 31, 2016, respectively.

 

 

Acquired intangible assets consisted of the following as of September 30, 2017 and December 31, 2016:

 

		As of September 30, 2017
(in thousands)		Amortization period (years)					Gross carrying amount				Accumulated Amortization				Net carrying amount
Imugen in-process research and development			Indefinite				$	—			$	—			$	—
Imugen technology - clinical			15					5,100				425				4,675
Imugen customer relationships			10					1,400				175				1,225
Imugen trademarks / trade names			16					1,140				89				1,051
Immunetics in-process research and development			Indefinite					6,970				—				6,970
Immunetics technology - clinical			15					883				57				826
Immunetics customer relationships		5	-	11				350				54				296
Immunetics trade name			5					160				31				129
Immunetics grants			2					—				—				—
Other		5	-	10				686				592				94
Total							$	16,689			$	1,423			$	15,266

 

		As of December 31, 2016
(in thousands)		Amortization period (years)					Gross carrying amount				Accumulated Amortization				Net carrying amount
Imugen in-process research and development			Indefinite				$	9,200			$	—			$	9,200
Imugen technology - clinical			15					5,100				170				4,930
Imugen customer relationships			10					2,700				135				2,565
Imugen trademarks / trade names			16					1,900				59				1,841
Immunetics in-process research and development			Indefinite					6,970				—				6,970
Immunetics technology - clinical			15					860				9				851
Immunetics customer relationships		5	-	11				400				11				389
Immunetics trade name			5					290				9				281
Immunetics grants			2					50				4				46
Other		5	-	10				632				518				114
Total							$	28,102			$	915			$	27,187

 

The weighted average amortization period of our finite-lived intangible assets is 13 years. Amortization expense related to acquired intangible assets is estimated at $0.9 million for the year ending December 31, 2017 and $0.7 million per year for each of the years ending December 31, 2018 through December 31, 2021.

 

The acquired IPR&D assets include $7.0 million for IPR&D acquired in conjunction with the Immunetics acquisition.

 

The acquisition of Immunetics was accounted for under the acquisition method of accounting and the purchase price allocation was provisionally prepared during the fourth quarter of 2016. In the second quarter of 2017, the Company finalized the accounting for the acquisition and recorded the following measurement period adjustments:

 

●

the fair value of the acquired inventory decreased by $45,000 with corresponding increases to the clinical technology asset of $22,500 and to goodwill of $22,500

●

the fair value of the acquired customer relationships decreased by $50,000 with a corresponding increase to goodwill

●

the fair value of the Immunetics trade name decreased by $130,000 with a corresponding increase to goodwill

 

 

The impact on the second quarter condensed consolidated statement of operations was a $44,000 reduction in cost of product revenue, a $26,000 reduction in sales and marketing expense and a $58,000 increase in income tax expense.

 

IPR&D acquired in a business combination is capitalized at fair value and is subject to impairment testing at least annually until the underlying project is completed. Once the project is completed, the carrying value of IPR&D is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the acquired IPR&D are expensed as incurred.

 

In the third quarter of 2017, due to increased competition in the molecular blood donor screening market for Babesia microti, the Company recorded an impairment charge of $11.1 million to write-off certain intangible assets acquired in conjunction with the 2016 acquisition of Imugen including:

 

●

$9.2 million related to Imugen IPR&D;

●

$1.1 million related to customer relationships; and

●

$701,000 related to the Imugen trade name.

 

6. Accrued liabilities

 

Accrued liabilities consisted of the following as of:

 

(in thousands)		September 30, 2017				December 31, 2016
Employee related expenses		$	7,355			$	6,592
Royalties			3,480				4,423
Professional services			1,445				387
Clinical trials			611				1,135
Other accrued liabilities			2,672				1,745
Total accrued liabilities		$	15,563			$	14,282

 

7. Share option and equity incentive plan

 

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

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2017				2016				2017				2016
Cost of revenue		$	43			$	28			$	129			$	15
Research and development			211				162				542				394
Sales and marketing			504				490				1,374				1,385
General and administrative			748				688				2,221				2,033
Total share-based compensation		$	1,506			$	1,368			$	4,266			$	3,827

 

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

 

During the three month-period ended September 30, 2017, the Company granted to certain employees 154,862 share options with exercise prices ranging from $15.37 to $16.91 per share under the 2013 Plan. The weighted-average grant date fair value related to share options granted under the 2013 Plan during the three month-period ended September 30, 2017 was $7.12 per share. During the nine month-period ended September 30, 2017, the Company granted to certain employees 800,430 share options with exercise prices ranging from $13.5 to $16.91 per share under the 2013 Plan. The weighted-average grant date fair value related to share options granted under the 2013 Plan during the nine month-period ended September 30, 2017 was $6.33per share. Share options generally vest based on the grantee’s continued service with the Company during a specified period following the vesting start date and expire after ten years.

 

 

During the three-month period ended September 30, 2017, the Company awarded to certain employees 102,141 RSUs with a weighted average grant date fair value of $16.75 per share under the 2013 Plan. During the nine-month period ended September 30, 2017, the Company awarded to certain employees 204,024 RSUs with a weighted average grant date fair value of $15.16 per share under the 2013 Plan. The RSUs vest based on the grantee’s continued service with the Company during a specified period following grant as follows: 40% on the second anniversary of the grant date; 30% on the third anniversary of the grant date; and 30% on the fourth anniversary of the grant date. Share-based compensation expense for these restricted shares is calculated based on the grant date market price of the shares and is being recognized over the vesting period.

 

For the three month-period ended September 30, 2017, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $934,000 and $573,000, respectively. For the three-month period ended September 30, 2016, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $844,000 and $524,000, respectively.

 

For the nine-month period ended September 30, 2017, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $2.6 million and $1.6 million, respectively. For the nine-month period ended September 30, 2016, the Company incurred shared-based compensation expense related to share options and restricted shares/RSUs of $2.4 million and $1.4 million, respectively.

 

As of September 30, 2017, there was $6.9 million and $4.5 million of total unrecognized compensation cost related to unvested share options and restricted shares/RSUs, respectively. These costs are expected to be recognized over weighted-average periods of 2.6 years for share options and 2.6 years for restricted shares/RSUs.

 

8. Share capital

 

On August 14, 2017, the Company entered into an underwriting agreement, or the Underwriting Agreement, with BTIG, LLC, as sole underwriter, or the Underwriter, relating to the issuance and sale of 2,500,000 ordinary shares, nominal value £0.006705 per share, or the Ordinary Shares, at a price to the public of $16.05 per share, or the Offering, which resulted in approximately $39.3 million of net proceeds to the Company after deducting underwriting discounts and estimated offering expenses. The Offering closed on August 18, 2017.

 

During the first nine months of 2017, the Company issued 436,091 ordinary shares upon the exercise of options and 24,823 ordinary shares were issued upon the vesting of RSUs. As of September 30, 2017, there were 36,183,293 ordinary shares authorized and 25,596,345 ordinary shares issued and outstanding.

 

9. Net loss per share

 

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

 

		Three months ended September 30,								Nine months ended September 30,
		2017				2016				2017				2016
Options to purchase ordinary shares			1,066,371				1,062,920				948,318				1,062,784
Unvested restricted shares			63,438				138,040				63,438				138,040
Unvested restricted share units			361,890				212,901				361,890				212,901

 

10. Settlement expense

 

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

 

 

11. Lease commitments

 

In April 2017, the Company entered into a lease amendment for its location in Norwood, Massachusetts to extend the term of the lease through March 31, 2023. In accordance with the lease amendment, the Company will expand in a larger space in an adjacent building in Norwood containing about 39,000 square feet of rentable space. The base rent for the new space over the lease term will range from an initial low of $73,000 per month to a high of $83,000 per month. The Company will have two options to extend the lease term, each for a five-year period. During the transition, the Company will also be responsible for the lease payments on the existing space.

 

In May 2017, the Company entered into an agreement to consolidate its U.K. office and laboratory facilities into a new building that is currently under construction. The lease for the new building is due to commence on June 1, 2018 and extends through June 1, 2033. Initial rent for the new building will be £30,000 per month, while the Company continues to occupy its existing facilities, including its laboratory space. When the leases on the Company’s existing facilities have terminated in December 2020, or possibly sooner, and it fully occupies the new building, rent for the new building will increase to £59,000 per month. Rent will be reviewed for possible increases on June 1, 2021 and every third anniversary after that date.

 

12. Restructuring

 

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

 

A summary of these charges and payments made to date are included in the below table. Accrued restructuring costs at September 30, 2017 are included in accrued liabilities in the accompanying balance sheet.

 

(in thousands)		Severance
Balance at December 31, 2016		$	—
Charge for restructuring			182
Payments			—
Balance at September 30, 2017		$	182

 

In addition to the items listed above, the Company recorded charges in the third quarter of 2017 totaling $28,000 to write-off equipment having no future benefit to the Company.

 

 

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

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Special note regarding forward-looking statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in the Company’s 2016 Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”

 

Overview

 

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

 

Our first product, the T-SPOT^®.TB test, is used to test for tuberculosis, or TB, infection and leverages our proprietary T-SPOT technology platform, which allows us to measure the response of specific immune cells to inform the diagnosis, prognosis and monitoring of patients with immune-regulated conditions. Our T-SPOT.TB test has been approved for sale in over 50 countries, including the U.S., where we have received premarket approval, or PMA, from the Food and Drug Administration, or FDA, in Europe, where we have obtained a CE mark, as well as in Japan and China. Interferon-gamma release assays, or IGRAs, such as our T-SPOT.TB test have been included in clinical guidelines for TB testing in at least 34 countries, including the U.S., several European countries and Japan. In addition, we have established reimbursement for our test in the U.S., as well as a Current Procedural Terminology, or CPT, code that is unique to our test. Outside the U.S., we have established reimbursement in several countries where reimbursement applies, including Japan, Switzerland, Germany, France and South Korea. We have also established the cost-effectiveness of our test in several published studies.

 

Our second product line is a range of assays for tick-borne diseases, such as Lyme disease, obtained through the acquisitions of Imugen, Inc., or Imugen, and Immunetics, Inc., or Immunetics, in the second half of 2016. Tick-borne disease is the collective name for diseases passed to humans through the bite of an infected tick. The most prevalent and well known tick-borne disease is Lyme disease, but there are others such as anaplasmosis, ehrlichiosis, and babesiosis. If left unrecognised, and therefore untreated, they may go on to cause significant complications, including in rare cases death. Our tick-borne disease tests utilize molecular methods (such as polymerase chain reaction) and techniques to prosecute the immune system, offer advantages over current tests, and are widely reimbursed in the U.S. using existing codes on fee schedules. Our tests include multiple proprietary laboratory developed tests, or LDTs, offered from our Clinical and Laboratory Improvement Amendments, or CLIA, certified and College of American Pathologists, or CAP, accredited laboratory in Massachusetts and an FDA cleared test kit utilizing the C6 peptide, which is a marker specific to Lyme disease. Our C6 Lyme ELISA^TM kit is also CE marked in the European Union.

 

Our third product line is a series of assays for use in blood screening, building upon our expertise in tick-borne disease. The parasite Babesia microti which causes babesiosis can be transmitted through the transfusion of infected blood, as well as by the bite of an infected tick. We are developing three assays for use in screening the U.S. blood supply for Babesia microti. We have submitted biological license applications for these three assays and they are currently under review by the FDA.

 

 

Babesiosis is a tick-borne disease characterized by a wide spectrum of clinical manifestations that range from asymptomatic to severe acute or even fatal illness. While the disease is generally mild to moderate in children and young healthy adults, it is more severe in neonates, the elderly and immunocompromised individuals such as those undergoing treatment for cancer. Babesiosis is predominately caused by a parasite called Babesia microti. While it is primarily transmitted through a tick bite, babesiosis can also be transmitted by blood transfusion. In fact, transfusion-transmitted babesiosis is responsible for the highest percentage (38%) of transfusion-related infectious fatalities reported to the FDA in transfusion recipients and Babesia microti is the highest ranking pathogen in the U.S. transmitted by blood transfusion for which no donor screening is available. The transmission risk of Babesia microti is comparable to the transmission risk of HIV, HBV, and HCV prior to the implementation of routine blood screening programs for these pathogens. Screening for Babesia microti, therefore, has become a priority for the FDA.

 

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

 

Based upon interim data obtained as part of our clinical trials and an ongoing process of reprioritizing our pipeline to maximize return on investment, we have decided to stop offering the T-SPOT.PRT test.

 

In addition to our existing product lines, we continue to pursue development programs targeting other immune-regulated conditions, as well as applications of our T-SPOT technology platform in immune-oncology. Product development activities are inherently uncertain, and there can be no assurance that we will be able to obtain regulatory body clearance to market any of our products, or if we obtain clearances that we will successfully commercialize any of our products. In addition, we may terminate our development efforts with respect to one or more of our products under development at any time, including before or during clinical trials.

 

We have incurred significant losses from inception and as of September 30, 2017 had an accumulated deficit of $210.3 million. We anticipate that our operating losses will continue for the next few years as we continue to invest to grow our customer base and invest in research and development to expand our product portfolio. Our revenue for the nine months ended September 30, 2017 was $78.1 million and for the nine months ended September 30, 2016 was $62.4 million. Our net loss for the nine months ended September 30, 2017 was $41.7 million and for the nine months ended September 30, 2016 was $17.5 million.

 

Financial operations overview 

 

Revenue

 

We generate revenue from sales associated with our T-SPOT technology platform via our direct sales force and also through distributors. Our T-SPOT.TB test is our first commercialized product based on this technology and accounted for $24.4 million of our revenue in the third quarter of 2017.  We generate revenue from sales of tick-borne disease and other tests via our direct sales force and also through distributors. During the third quarter of 2017 these tests accounted for revenue of $6.0 million.

 

Revenue mix

 

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

 

 

Our U.S. business derived 94% and 97% of its revenue from our service offerings, as opposed to kit sales, for the three months ended September 30, 2017 and 2016, respectively. These sales represented 93% and 96% of its revenue from service revenue for the nine months ended September 30, 2017 and 2016, respectively. These results reflect our experience that U.S. customers prefer to send IGRA tests out for processing and analysis rather than run them in-house. For the majority of our U.S. customers in the hospital and public health segments, TB testing programs are funded primarily from institutional budgets. We receive payment from these customers according to our pre-negotiated prices. For other segments of the U.S. market (notably, for example, the physicians’ office segment) third-party reimbursement is often available to cover the cost of our T-SPOT.TB test. In addition, U.S. results include revenue from operations acquired from Imugen, which is included in U.S. service revenue. For a portion of these tests, we receive payment from customers according to pre-negotiated rates. For other customers we seek third party reimbursement. U.S. results for 2017 also include revenue from Immunetics, which was acquired in the fourth quarter of 2016 and is included in product revenue. Immunetics kits are sold to customers at pre-negotiated rates.

 

Outside the U.S., we derived 93% of our revenue from the sale of our in vitro diagnostic kits and associated accessories for each of the three-month periods ended September 30, 2017 and 2016. These sales also represented 93% of our revenue for each of the nine-month periods ended September 30, 2017 and 2016. For the majority of our customers outside the U.S., we primarily negotiate pricing directly with our customers; our prices are influenced to some degree by the mechanism and level of funding our customers receive for performing tests for TB infection.

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2017				2016				2017				2016
Revenue
Product		$	12,000			$	9,713			$	30,808			$	27,144
Service			18,429				16,396				47,246				35,229
Total revenue		$	30,429			$	26,109			$	78,054			$	62,373

 

Revenue by indication

 

With the acquisitions of Imugen and Immunetics in the second half of 2016, we evolved from a single-product company to a multi-product company. By indication, total revenues were as summarized in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2017				2016				2017				2016
Revenue
Tuberculosis		$	24,417			$	21,953			$	64,297			$	58,193
Tick-borne disease and other			6,012				4,156				13,757				4,180
Total revenue		$	30,429			$	26,109			$	78,054			$	62,373

 

Revenue by geography

 

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

 

The following tables reflect revenue by geography (United States, Europe and rest of world, or Europe and ROW, and Asia) and as a percentage of total product revenue, based on the billing address of our customers. Revenue from operations acquired from Imugen is included in United States revenue for the third quarter of 2016 and for 2017. Revenue from operations acquired from Immunetics is included in United States revenue and Europe and ROW revenue for the fourth quarter of 2016 and for 2017.

 

		Three months ended September 30,
(in thousands, except percentages)		2017								2016
Revenue
United States		$	18,798				62	%		$	16,170				62	%
Europe and ROW			2,213				7	%			1,756				7	%
Asia			9,418				31	%			8,183				31	%
Total revenue		$	30,429				100	%		$	26,109				100	%

 

 

		Nine months ended September 30,
(in thousands, except percentages)		2017								2016
Revenue
United States		$	48,427				62	%		$	34,696				56	%
Europe and ROW			5,933				8	%			5,316				8	%
Asia			23,694				30	%			22,361				36	%
Total revenue		$	78,054				100	%		$	62,373				100	%

 

Cost of revenue and operating expenses

 

Cost of revenue and gross margin

 

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

 

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

 

On June 30, 2017, we and Statens Serum Institut, or SSI, entered into a Release and Settlement Agreement, or the Settlement Agreement, to resolve outstanding disputes arising from the license agreement with SSI. The terms of the Settlement Agreement are confidential. Based on the Settlement Agreement, we no longer expect to pay royalties to SSI, which will improve future margins.

 

During the three months ended September 30, 2017 and 2016, our cost of revenue represented 43% and 44%, respectively, of our total revenue. For the nine months ended September 30, 2017 and 2016, our cost of revenue represented 46% and 45%, respectively, of our total revenue.

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2017				2016				2017				2016
Cost of revenue
Product		$	4,027			$	3,616			$	11,366			$	10,421
Service			9,141				7,887				24,791				17,853
Total cost of revenue		$	13,168			$	11,503			$	36,157			$	28,274

 

Our gross profit represents total revenue less total cost of revenue, and gross margin is gross profit expressed as a percentage of total revenue. Our gross margins were 57% and 56% for the three months ended September 30, 2017 and 2016, respectively. Gross margins were 54% and 55% for the nine months ended September 30, 2017 and 2016, respectively. The lower gross margin in 2017 reflects the lower gross margins from our operations acquired from Imugen and Immunetics. All cost of revenue from operations acquired from Imugen and Immunetics are reflected in service cost of revenue and product cost of revenue, respectively.

 

Research and development expenses

 

Our research and development efforts have historically focused on developing multiple new diagnostic tests that use our quantitative T cell measurement technology, including assays that may help transplant physicians better manage patients at risk of rejection and infection. On July 1, 2016, we completed our acquisition of substantially all of the assets of Imugen, a privately owned Massachusetts corporation focused on the development and performance of tests for tick-borne diseases. Additionally, on October 12, 2016, we acquired Immunetics, a Massachusetts based diagnostics company focused on developing specialized tests for infectious diseases, including tick-borne diseases, such as Lyme disease.

 

Our research and development activities include performing research, development, clinical and regulatory activities and validating improvements to our technology and processes for the purposes of enhancing product performance. Research and development expenses include personnel-related expenses, including share-based compensation, fees for contractual and consulting services, clinical trial costs, travel costs, laboratory supplies, amortization, depreciation, rent, insurance and repairs and maintenance. We have supported the continued growth of our T-SPOT.TB business and expanded the team focused on the development of new products through management of clinical trial programs. In addition, we are expanding our research and development efforts in the U.K. and in the U.S. We expense all research and development costs as incurred.

 

 

During the three months ended September 30, 2017 and 2016, our research and development expenses represented 15% and 14%, respectively, of our total revenue. For each of the nine month periods ended September 30, 2017 and 2016, research and development expenses represented 16% of our total revenue.

 

Sales and marketing expenses

 

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

 

During the three-month periods ended September 30, 2017 and 2016, our sales and marketing expenses represented 31% and 34%, respectively, of our total revenue. For the nine months ended September 30, 2017 and 2016, sales and marketing expenses represented 37% and 43%, respectively, of our total revenue.

 

General and administrative expenses

 

Our general and administrative expenses include costs for our executive, accounting, treasury, finance, legal, information technology, or IT, and human resources functions. These expenses consist principally of salaries, bonuses and employee benefits for the personnel included in these functions, including share-based compensation and travel costs, professional services fees, such as consulting, audit, tax and legal fees, costs related to our Board of Directors, general corporate costs, overhead expenses, and bad debt expense. We expense all general and administrative expenses as incurred.

 

During the three months ended September 30, 2017 and 2016, our general and administrative expenses represented 27% and 25%, respectively, of our total revenue. For the nine-month periods ended September 30, 2017 and 2016, general and administrative expenses represented 29% and 26%, respectively, of our total revenue.

 

Change in fair value of contingent purchase price consideration

 

During March 2017, as a result of events subsequent to the acquisition of Immunetics, we determined that the timing for FDA approval of the Babesia microti product acquired as part of the acquisition would be more likely to occur after the cut-off date for a milestone to be paid. As a result, we recorded a $2.4 million decrease in fair value of contingent purchase price consideration related to the acquisition. The total contingent purchase price consideration of $6.0 million consisted of cash payable on the achievement of certain revenue thresholds and pipeline related milestones over the following three years, including FDA approval of the Babesia microti product by a certain date. The fair value of these milestone payments had been estimated to be $3.4 million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of 4.4%. As FDA approval did not occur in the second quarter of 2017, the remaining accrual related to this milestone of $238,000 was written-off. In the third quarter of 2017, we determined there to be a remote chance that the revenue thresholds for 2017 would be met and so the remaining contingent consideration liability of $880,000 was written-off.

 

Intangible assets impairment charge

 

In the third quarter of 2017, due to increased competition in the molecular blood donor screening market for Babesia microti, we recorded an impairment charge of $11.1 million to write-off certain intangible assets acquired in conjunction with the 2016 acquisition of Imugen.

 

Settlement expense

 

Settlement expense relates to the Settlement Agreement with SSI to resolve outstanding disputes arising from our previous license agreement. The terms of the Settlement Agreement are confidential.

 

 

Interest expense, net

 

Interest expense, net mainly relates to our October 4, 2016 agreement with MidCap Financial, or the MidCap agreement, that provides us with $40.0 million in debt financing, comprised of both a term loan and a revolving line of credit. The MidCap agreement provides us with a term loan of $30.0 million, which matures five years from closing. The term loan accrues interest at a rate of LIBOR plus 7.60% with interest only payments for the first 24 months, with the ability to extend to 48 months subject to certain conditions, before the loan begins to amortize. The MidCap agreement also provides us with a revolving line of credit of up to $10.0 million, which matures five years from closing. The revolving line of credit accrues interest at a rate of LIBOR plus 4.45%. Based on certain conditions, both the term loan and revolving line of credit may be increased by an additional $10.0 million for a total of $60.0 million. To date, we have not borrowed under the revolving line of credit.

 

Foreign exchange (losses) gains

 

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

 

Other income (expense)

 

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

 

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

 

 

Results of operations 

 

Comparison of three months ended September 30, 2017 and 2016

 

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

 

		Three months ended September 30,
		2017								2016								Change
(in thousands, except percentages)		Amount				% of revenue				Amount				% of revenue				Amount				%
Revenue:
Product		$	12,000				39	%		$	9,713				37	%		$	2,287				24	%
Service			18,429				61	%			16,396				63	%			2,033				12	%
Total revenue			30,429				100	%			26,109				100	%			4,320				17	%
Cost of revenue:
Product			4,027				13	%			3,616				14	%			411				11	%
Service			9,141				30	%			7,887				30	%			1,254				16	%
Total cost of revenue			13,168				43	%			11,503				44	%			1,665				14	%
Gross profit			17,261				57	%			14,606				56	%			2,655				18	%
Operating expenses:
Research and development			4,467				15	%			3,532				14	%			935				26	%
Sales and marketing			9,493				31	%			8,794				34	%			699				8	%
General and administrative			8,141				27	%			6,466				25	%			1,675				26	%
Change in fair value of contingent purchase price consideration			(880	)			(3	)%			60				0	%			(940	)			(1,567	)%
Intangible assets impairment charge			11,064				36	%			—				0	%			11,064				N/M
Settlement expense			196				1	%			—				0	%			196				N/M
Total operating expenses			32,481				107	%			18,852				72	%			13,629				72	%
Loss from operations			(15,220	)			(50	)%			(4,246	)			(16	)%			(10,974	)			258	%
Interest expense, net			(781	)			(3	)%			(54	)			(0	)%			(727	)			1,346	%
Foreign exchange (losses) gains			(624	)			(2	)%			470				2	%			(1,094	)			(233	)%
Other income (expense)			—				0	%			(106	)			(0	)%			106				(100	)%
Loss before income taxes			(16,625	)			(55	)%			(3,936	)			(15	)%			(12,689	)			322	%
Income tax expense			(222	)			(1	)%			(60	)			0	%			(162	)			270	%
Net loss		$	(16,847	)			(55	)%		$	(3,996	)			(15	)%		$	(12,851	)			322	%

 

Revenue 

 

Revenue increased by 17% to $30.4 million for the three months ended September 30, 2017 compared to $26.1 million for the same period in 2016. This increase in revenue was due to an increase in volumes across all regions where we sell our T-SPOT.TB test, as well as the addition of our tick-borne disease tests.

 

U.S. revenue grew by 16% to $18.8 million for the three months ended September 30, 2017, driven by tick-borne disease and other revenue of $6.0 million in 2017, compared to $4.2 million in 2016.

 

 

Asia revenue grew by 15% to $9.4 million for the three months ended September 30, 2017 compared to the same period in 2016, due primarily to an increase in volumes that led to higher revenue. On a non-Generally Accepted Accounting Principles, or non-GAAP, constant currency basis, revenue for Asia would have increased by 18%. Europe and ROW revenue increased 26% to $2.2 million for the three months ended September 30, 2017 compared to the same period in 2016. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 22% in 2017 compared to 2016.

 

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

 

By revenue type, total revenues were:

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
Product		$	12,000			$	9,713			$	2,287				24	%
Service			18,429				16,396				2,033				12	%
Total revenue		$	30,429			$	26,109			$	4,320				17	%

 

By indication, total revenues were:

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
Tuberculosis		$	24,417			$	21,953			$	2,464				11	%
Tick-borne disease and other			6,012				4,156				1,856				45	%
Total revenue		$	30,429			$	26,109			$	4,320				17	%

 

By geography, total revenues were:

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
United States		$	18,798			$	16,170			$	2,628				16	%
Europe and ROW			2,213				1,756				457				26	%
Asia			9,418				8,183				1,235				15	%
Total revenue		$	30,429			$	26,109			$	4,320				17	%

 

 

Cost of revenue and gross margin

 

Cost of revenue increased by 14% to $13.2 million for the three months ended September 30, 2017 from $11.5 million in the same period in 2016. This increase in cost of revenue was due to the increased tick-borne testing volume. Cost of revenue for Imugen was $1.3 million higher in Q3 2017 than in Q3 2016. In addition, cost of revenue for the three months ended September 30, 2017 included $0.5 million of cost of revenue for Immunetics. Gross margin increased to 57% for the three months ended September 30, 2017 from 56% for the same period in 2016. The increase in gross margin reflects the impact of improved accessory margins and lower royalty expenses due to the SSI settlement.

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Cost of revenue
Product		$	4,027			$	3,616			$	411				11	%
Service			9,141				7,887				1,254				16	%
Total cost of revenue		$	13,168			$	11,503			$	1,665				14	%

 

Research and development expenses 

 

Research and development expenses increased by 26%, to $4.5 million for the three months ended September 30, 2017, from $3.5 million for the same period in 2016. The increase primarily related to salary and other employee related expenses, which increased $1.4 million (including $169,000 of Immunetics restructuring costs) in the three months ended September 30, 2017 compared to the same period in 2016. The increase was partially offset by a decrease of $487,000 related to clinical studies. As a percentage of total revenue, research and development expenses increased to 15% for the three months ended September 30, 2017 from 14% for the same period in 2016.

 

Sales and marketing expenses

 

Sales and marketing expenses increased 8% to $9.5 million for the three months ended September 30, 2017 from $8.8 million for the same period in 2016. The increase primarily related to salary and other employee related expenses, which increased $720,000 in the three months ended September 30, 2017 compared to the same period in 2016. The increase reflects an increase in sales personnel and in personnel-related costs for commissions on increased sales and for hiring sales and marketing personnel. As a percentage of total revenue, sales and marketing expenses were 31% for the three months ended September 30, 2017 compared to 34% for the same period in 2016.

 

General and administrative expenses

 

General and administrative expenses increased by 26% to $8.1 million for the three months ended September 30, 2017 from $6.5 million for the same period in 2016. The increase in general and administrative expenses included increases of $1.1 million in legal and professional fees, largely related to our ongoing patent litigation, as well as increases in property costs, salary and other employee related expenses and depreciation and amortization. As a percentage of total revenue, general and administrative expenses increased to 27% for the three months ended September 30, 2017 from 25% for the same period in 2016.

 

Change in fair value of contingent purchase price consideration

 

During March 2017, as a result of events subsequent to the acquisition of Immunetics, we determined that the timing for FDA approval of the Babesia microti product acquired as part of the acquisition would be more likely to occur after the cut-off date for a milestone to be paid. As a result, we recorded a $2.4 million decrease in fair value of contingent purchase price consideration related to the acquisition. The total contingent purchase price consideration of $6.0 million consisted of cash payable on the achievement of certain revenue thresholds and pipeline related milestones over the following three years, including FDA approval of the Babesia microti product by a certain date. The fair value of these milestone payments had been estimated to be $3.4 million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of 4.4%. As FDA approval did not occur in the second quarter of 2017, the remaining accrual related to this milestone of $238,000 was written-off at that time. In the third quarter of 2017, we determined there to be a remote chance that the revenue thresholds for 2017 would be met and so the remaining contingent consideration liability of $880,000 was written-off.

 

 

For the third quarter of 2016, the change in fair value of contingent purchase price consideration of $60,000 related to the Company’s former GoutiFind program, which was terminated in the fourth quarter of 2016, and to the Company’s on-going SpiroFind program. During the fourth quarter of 2016, we determined that the SpiroFind assay developed using IPR&D from Boulder would not qualify for future milestone payments. Due to this fact, we wrote-off the related liability for contingent purchase price consideration of $551,000 at that time.

 

Intangible assets impairment charge

 

In the third quarter of 2017, due to increased competition in the molecular blood donor screening market for Babesia microti, we recorded an impairment charge of $11.1 million to write-off certain intangible assets acquired in conjunction with the 2016 acquisition of Imugen.

 

Settlement expense

 

Settlement expense relates to the Settlement Agreement with SSI to resolve outstanding disputes arising from our previous license agreement. The terms of the Settlement Agreement are confidential.

 

Interest expense, net

 

Interest expense, net was $781,000 for the three months ended September 30, 2017, compared to $54,000 in the same period in 2016. The increase in interest expense in 2017 mainly related to the MidCap agreement.

 

Foreign exchange (losses) gains

 

We recorded foreign exchange losses of $624,000 for the three months ended September 30, 2017, substantially all as a net result of U.S. Dollar denominated bank accounts, accounts receivable, and accounts payable reflected on the books of Oxford Immunotec Limited, which has a functional currency of the U.K. Pound Sterling. For the three months ended September 30, 2016, we recorded foreign exchange gains of $470,000. We are exposed to foreign exchange rate risk because we currently operate in three major regions of the world: the United States, Europe and ROW, and Asia, and our revenue is denominated in multiple currencies. Approximately 62% of our sales for the three months ended September 30, 2017 were in the United States, which are denominated in U.S. Dollars. Sales in China are denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen and sales in South Korea are denominated in U.S. Dollars.

 

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

 

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

 

Other income (expense)

 

There was no other income (expense) for the three months ended September 30, 2017. For the three months ended September 30, 2016, there was expense of $106,000.

 

 

Comparison of nine months ended September 30, 2017 and 2016

 

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

 

		Nine months ended September 30,
		2017								2016								Change
(in thousands, except percentages)		Amount				% of revenue				Amount				% of revenue				Amount				%
Revenue:
Product		$	30,808				39	%		$	27,144				44	%		$	3,664				13	%
Service			47,246				61	%			35,229				56	%			12,017				34	%
Total revenue			78,054				100	%			62,373				100	%			15,681				25	%
Cost of revenue:
Product			11,366				15	%			10,421				17	%			945				9	%
Service			24,791				32	%			17,853				29	%			6,938				39	%
Total cost of revenue			36,157				46	%			28,274				45	%			7,883				28	%
Gross profit			41,897				54	%			34,099				55	%			7,798				23	%
Operating expenses:
Research and development			12,220				16	%			9,837				16	%			2,383				24	%
Sales and marketing			29,174				37	%			26,665				43	%			2,509				9	%
General and administrative			23,007				29	%			16,200				26	%			6,807				42	%
Change in fair value of contingent purchase price consideration			(3,475	)			(4	)%			172				0	%			(3,647	)			(2,120	)%
Intangible assets impairment charge			11,064				14	%			—				0	%			11,064			N/M
Settlement expense			9,831				13	%			—				0	%			9,831			N/M
Total operating expenses			81,821				105	%			52,874				85	%			28,947				55	%
Loss from operations			(39,924	)			(51	)%			(18,775	)			(30	)%			(21,149	)			113	%
Interest expense, net			(2,411	)			(3	)%			(88	)			(0	)%			(2,323	)			2,640	%
Foreign exchange (losses) gains			(1,277	)			(2	)%			1,707				3	%			(2,984	)			(175	)%
Other income (expense)			(262	)			(0	)%			(243	)			(0	)%			(19	)			8	%
Loss before income taxes			(43,874	)			(56	)%			(17,399	)			(28	)%			(26,475	)			152	%
Income tax benefit (expense)			2,189				3	%			(92	)			(0	)%			2,281				(2,479	)%
Net loss		$	(41,685	)			(53	)%		$	(17,491	)			(28	)%		$	(24,194	)			138	%

 

Revenue

 

Revenue increased by 25% to $78.1 million for the nine months ended September 30, 2017 compared to $62.4 million for the same period in 2016. This increase in revenue was due to an increase in volumes across all regions where we sell our T-SPOT.TB test.

 

U.S. revenue grew by 40%, to $48.4 million for the nine months ended September 30, 2017, driven by tick-borne disease and other revenue of $13.5 million in 2017 compared to $4.2 million in 2016.

 

Asia revenue grew by 6% to $23.7 million for the nine months ended September 30, 2017 compared to the same period in 2016. On a non-GAAP constant currency basis, revenue for Asia would have increased by 7%. Europe and ROW revenue increased 12% to $5.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 15% in 2017 compared to 2016.

 

 

By revenue type, total revenues were:

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
Product		$	30,808			$	27,144			$	3,664				13	%
Service			47,246				35,229				12,017				34	%
Total revenue		$	78,054			$	62,373			$	15,681				25	%

 

By indication, total revenues were:

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
Tuberculosis		$	64,297			$	58,193			$	6,104				10	%
Tick-borne disease and other			13,757				4,180				9,577				229	%
Total revenue		$	78,054			$	62,373			$	15,681				25	%

 

By geography, total revenues were:

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Revenue
United States		$	48,427			$	34,696			$	13,731				40	%
Europe and ROW			5,933				5,316				617				12	%
Asia			23,694				22,361				1,333				6	%
Total revenue		$	78,054			$	62,373			$	15,681				25	%

 

Cost of revenue and gross margin

 

Cost of revenue increased by 28% to $36.2 million for the nine months ended September 30, 2017 from $28.3 million in the same period in 2016. Cost of revenue for the nine months ended September 30, 2017 included $8.7 million of cost of revenue from testing for tick-borne disease compared to $1.6 million for the same period in 2016 (only three months of activity included in 2016 totals). TB cost of revenue increased $0.9 million over the same period in 2016 due to an 11% increase in test volumes. Gross margin decreased to 54% for the nine months ended September 30, 2017 from 55% for the same period in 2016. The decrease in gross margin reflects the impact of the lower Immunetics margins and absorbing the full year of Imugen activity in 2017 compared to three months of activity in 2016.

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2017				2016				Amount				%
Cost of revenue
Product		$	11,366			$	10,421			$	945				9	%
Service			24,791				17,853				6,938				39	%
Total cost of revenue		$	36,157			$	28,274			$	7,883				28	%

 

 

Research and development expenses

 

Research and development expenses increased by 24%, to $12.2 million for the nine months ended September 30, 2017, from $9.8 million for the same period in 2016. The increase primarily related to salary and other employee related expenses, which increased $3.1 million (including $169,000 of Immunetics restructuring costs) in the nine months ended September 30, 2017 compared to the same period in 2016, and consulting costs, which increased $547,000. These increases were partially offset by the cost of clinical studies, which decreased $965,000, and by laboratory costs, which decreased $196,000. As a percentage of total revenue, research and development expenses were 16% for each of the nine month periods ended September 30, 2017 and 2016.

 

Sales and marketing expenses

 

Sales and marketing expenses increased 9% to $29.2 million for the nine months ended September 30, 2017 from $26.7 million for the same period in 2016. The increase primarily related to salary and other employee related expenses, which increased $2.6 million in the nine months ended September 30, 2017 compared to the same period in 2016. The increase reflects an increase in sales personnel and in personnel-related costs for commissions on increased sales and for hiring of sales and marketing personnel. In addition, consulting costs increased $302,000. These increases were partially offset by a $693,000 decrease in marketing program costs. As a percentage of total revenue, sales and marketing expenses were 37% for the nine months ended September 30, 2017 compared to 43% for the same period in 2016.

 

General and administrative expenses

 

General and administrative expenses increased by 42% to $23.0 million for the nine months ended September 30, 2017 from $16.2 million for the same period in 2016. The increase in general and administrative expenses included increases in legal and professional fees, largely related to our ongoing patent litigation, $1.7 million in salary and other employee related expenses, $440,000 in property costs, $342,000 for depreciation and amortization, $258,000 in insurance costs, $233,000 in administrative costs and $149,000 in computer related costs. As a percentage of total revenue, general and administrative expenses increased to 29% for the nine months ended September 30, 2017 from 26% for the same period in 2016.

 

Change in fair value of contingent purchase price consideration

 

As FDA approval of the Babesia microti product acquired as part of the acquisition of Immunetics did not occur in the second quarter of 2017, the remaining accrual for a related milestone of $238,000 was written-off at that time. In the third quarter of 2017, we determined there to be a remote chance that the revenue thresholds for 2017 would be met and so the remaining contingent consideration liability of $880,000 was written-off.

 

For the nine months ended September 30, 2016, the change in the fair value of contingent purchase price consideration of $172,000 was related to the Company’s former GoutiFind program, which was terminated in the fourth quarter of 2016, and to the Company’s on-going SpiroFind program.

 

Intangible assets impairment charge

 

In the third quarter of 2017, due to increased competition in the molecular blood donor screening market for Babesia microti, we recorded an impairment charge of $11.1 million to write-off certain intangible assets acquired in conjunction with the 2016 acquisition of Imugen.

 

Settlement expense

 

Settlement expense relates to the Settlement Agreement with SSI to resolve outstanding disputes arising from our previous license agreement. The terms of the Settlement Agreement are confidential.

 

Interest expense, net

 

Interest expense, net was $2.4 million for the nine months ended September 30, 2017, compared to $88,000 in the same period in 2016. The increase in interest expense in 2017 mainly related to the MidCap agreement.

 

 

Foreign exchange (losses) gains

 

We recorded foreign exchange losses of $1.3 million for the nine months ended September 30, 2017, substantially all as a net result of U.S. Dollar denominated bank accounts, accounts receivable, and accounts payable reflected on the books of Oxford Immunotec Limited, which has a functional currency of the U.K. Pound Sterling. For the nine months ended September 30, 2016, we recorded foreign exchange gains of $1.7 million. We are exposed to foreign exchange rate risk because we currently operate in three major regions of the world: the United States, Europe and ROW, and Asia, and our revenue is denominated in multiple currencies. Approximately 62% of our sales for the nine months ended September 30, 2017 were in the United States, which are denominated in U.S. Dollars. Sales in China are denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen and sales in South Korea are denominated in U.S. Dollars.

 

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

 

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

 

Other income (expense)

 

Other income (expense) was expense of $262,000 for the nine months ended September 30, 2017, compared to expense of $243,000 for the nine months ended September 30, 2016.

 

Liquidity and capital resources

 

Sources of funds

 

Since our inception, we have incurred significant net losses and negative cash flows from operations. For the nine months ended September 30, 2017, we had a net loss of $41.7 million and used $27.4 million of cash for operating activities. As of September 30, 2017, we had an accumulated deficit of $210.3 million. We incurred a net loss of $17.5 million and used $20.5 million of cash for operating activities for the nine months ended September 30, 2016.

 

As noted above, on October 4, 2016, we entered into a credit agreement with MidCap Financial Funding. The credit agreement consists of a 60 month, $30.0 million term loan and a $10.0 million revolving line of credit, both of which mature on September 30, 2021. The availability of funds under the revolving line of credit is based upon the Company’s eligible accounts receivable and eligible inventory. In accordance with the terms of the revolving line of credit, the Company is required to maintain a minimum drawn balance of no less than 30% of availability. Based on certain conditions, both the term loan and revolving line of credit may be increased by an additional $10.0 million for a total of $60.0 million. The Company has not yet borrowed under the revolving line of credit.

 

On August 14, 2017, we entered into an underwriting agreement, or the Underwriting Agreement, with BTIG, LLC, as sole underwriter, or the Underwriter, relating to the issuance and sale of 2,500,000 ordinary shares, nominal value £0.006705 per share, or the Ordinary Shares, at a price to the public of $16.05 per share, or the Offering, which resulted in approximately $39.3 million of net proceeds to us after deducting underwriting discounts and estimated offering expenses. The Offering closed on August 18, 2017.

 

As of September 30, 2017, we had cash and cash equivalents of $67.7 million. We maintain our available cash balances in cash, money market funds and repurchase agreements primarily invested in U.S. government and agency securities, and bank savings accounts in the United States, United Kingdom, Germany, Japan, China and South Korea.

 

Settlement agreement

 

Pursuant to the terms of the Settlement Agreement, we will be required to make future payments to SSI. The terms of the Settlement Agreement are confidential.

 

 

Summary of cash flows

 

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

 

		As of and for the nine months ended September 30,
(in thousands)		2017				2016
Cash and cash equivalents, excluding restricted cash		$	67,743			$	37,324
Accounts receivable, net			21,652				15,139
Net cash used in operating activities		$	(27,354	)		$	(20,547	)
Net cash used in investing activities			(4,030	)			(24,671	)
Net cash provided by (used in) financing activities			39,527				(44	)
Effect of exchange rate changes on cash and cash equivalents			490				(1,129	)
Net increase (decrease) in cash and cash equivalents, excluding restricted cash		$	8,633			$	(46,391	)

 

Cash flows for the nine months ended September 30, 2017 and 2016

 

Operating activities

 

Net cash used in operating activities was $27.4 million during the nine months ended September 30, 2017, which included a net loss of $41.7 million, net non-cash expenses of $13.1 million and cash provided by changes in operating assets and liabilities of $1.2 million. The non-cash items consisted of intangible assets impairments charges of $11.1 million, share-based compensation expense of $4.3 million, depreciation and amortization expense of $3.1 million and accretion and amortization of loan fees expense of $429,000. Partially offsetting these charges were credits for the change in fair value of contingent purchase price consideration of $3.5 million and deferred income taxes of $2.3 million. The cash from changes in operating assets and liabilities included an increase in other liabilities of $7.5 million and an increase in accounts payable and accrued liabilities of $3.1 million, partially offset by an increase in accounts receivable of $7.9 million and an increase in inventory of $1.3 million. The increase in other liabilities is mainly due to the long-term portion of the settlement with SSI. The increase in accounts payable and accrued liabilities reflects the timing of certain payments. The increase in accounts receivable reflects growing sales. Inventory increased due to timing.

 

Net cash used in operating activities was $20.5 million during the nine months ended September 30, 2016, which included a net loss of $17.5 million, non-cash expenses of $6.1 million, and cash used for changes in operating assets and liabilities of $9.1 million. The non-cash items consisted of share-based compensation expense of $3.8 million, depreciation and amortization expense of $2.1 million and change in fair value of contingent purchase price consideration of $172,000. The cash used for changes in operating assets and liabilities included an increase in accounts receivable, net of $8.7 million, a decrease in deferred income of $1.5 million, a decrease in accounts payable of $1.2 million and an increase in inventory of $782,000, partially offset by an increase in accrued liabilities of $1.9 million and a decrease in prepaid expenses and other assets of $1.2 million. The increase in accounts receivable, net reflects growing sales. The decrease in deferred income is related to a change in the process used to determine pricing for certain sales to customers in Japan that has resulted in those sales being recognized upon shipment. The decrease in accounts payable was largely due to payments in the first nine months of 2016 for royalties on intellectual property and bonuses that were accrued for at December 31, 2015, as well as the timing of payments. Inventory increased due to timing. The increase in accrued liabilities and the decrease in prepaid expenses and other assets reflect the timing of certain payments.

 

Investing activities

 

Net cash used in investing activities was $4.0 million during the nine months ended September 30, 2017.

 

Net cash used in investing activities was $24.5 million, including $22.2 million used for the acquisition of Imugen, during the nine months ended September 30, 2016.

 

 

Financing activities

 

Net cash provided by financing activities was $39.5 million during the nine months ended September 30, 2017, which mainly reflects the Offering, which resulted in approximately $39.3 million of net proceeds to us after deducting underwriting discounts and estimated offering expenses. The Offering closed on August 18, 2017.

 

Net cash used in financing activities was $44,000 during the nine months ended September 30, 2016. 

 

Employees

 

As of September 30, 2017, we had 482 employees. None of our employees is represented by a labor union. However, we have one employee in Belgium covered under a collective bargaining agreement. We have not experienced any work stoppages and we believe our employee relations are good.

 

Contractual obligations

 

In April 2017, we entered into a lease amendment for our location in Norwood, Massachusetts to extend the term of the lease through March 31, 2023. In accordance with the lease amendment, we will expand in a larger space in an adjacent building in Norwood containing about 39,000 square feet of rentable space. The base rent for the new space over the lease term will range from an initial low of $73,000 per month to a high of $83,000 per month. We will have two options to extend the lease term, each for a five-year period. During the transition, we will also be responsible for the lease payments on the existing space.

 

In May 2017, we entered into an agreement to consolidate two of our existing facilities for our U.K. headquarters into a new building that is currently under construction. The lease for the new building is due to commence on June 1, 2018 and extends through June 1, 2033. Initial rent for the new building will be £30,000 per month, while we continue to occupy our existing facilities, including our laboratory space. When the leases on our existing facilities have terminated in December 2020, or possibly sooner, and we fully occupy the new building, rent for the new building will increase to £59,000 per month. Rent will be reviewed for possible increases on June 1, 2021 and every third anniversary after that date.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s exposure to market risk from interest rate fluctuations, capital market fluctuations, and foreign currency exchange rate fluctuations has not materially changed from its exposure as of December 31, 2016, as described in Item 7A of our 2016 Form 10-K.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control Over Financial Reporting

 

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

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On August 10, 2015, Oxford Immunotec Limited, a wholly-owned subsidiary of Oxford Immunotec Global PLC, filed suit in the United States District Court for the District of Massachusetts against Qiagen N.V., Qiagen Inc., Quest Diagnostics LLC, and Laboratory Corporation of America Holdings alleging claims of patent infringement and seeking monetary and injunctive relief. The complaint alleges that the defendants’ manufacture, sale and/or use of the QuantiFERON-TB Gold test infringes patents owned by Oxford Immunotec Limited. The defendants timely responded to the complaint in early October 2015 and challenged the validity of the patents upon which the complaint is based. The defendants argued that our patents are invalid under U.S. law because they claim naturally occurring products or processes. The defendant’s motion to dismiss the complaint was denied on September 30, 2016. The defendants answered the Complaint and the parties are presently engaged in the discovery process. The Court issued its claim construction order in June 2017. In September, the Court denied the Company’s motion for preliminary injunction. Trial remains set for January 2018.

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors described in “Item 1A. Risk Factors” of the Company’s 2016 Form 10-K.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

 

 

SIGNATURES

 

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

 

		OXFORD IMMUNOTEC GLOBAL PLC
Date: October 31, 2017	/s/	Peter Wrighton-Smith, Ph.D.
		Peter Wrighton-Smith, Ph.D.
		Chief Executive Officer and Director
		(Principal Executive Officer)
Date: October 31, 2017	/s/	Richard M. Altieri
		Richard M. Altieri
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

Exhibit No.		Description
3.1		Articles of Association of the Registrant (Filed as Exhibit 3.1 to our Current Report on Form 8-K on June 18, 2014 and incorporated herein by reference.)
10.1+		Second Amendment to Supply Agreement, dated September 1, 2017, between StemCell Technologies Canada Inc. f/k/a StemCell Technologies and Oxford Immunotec Ltd.
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated balance sheets at September 30, 2017 and December 31, 2016; (ii) Condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016; (iii) Condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017 and 2016; (iv) Condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016; and (v) Notes to unaudited condensed consolidated financial statements

 

+ Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been submitted separately to the Securities and Exchange Commission.

 

35