Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 (Mark One)

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

 

For the quarterly period ended September 30, 2018 

 

OR

 

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

 

For the transition period from ____ to ____

Commission File Number 001-36200

________________________

 

OXFORD IMMUNOTEC GLOBAL PLC

(Exact name of registrant as specified in its charter)

 

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

 

+44 (0)1235 442780

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Yes ☒    No ☐

 

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

 

Yes ☒    No ☐

 

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

 

Large accelerated filer ☐   Non-accelerated filer  ☐

Accelerated filer ☒

Smaller reporting company ☐   Emerging growth company ☒

 

 

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

 

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

 

Yes☐ No☒

 

As of October 31, 2018, there were 26,361,334 Ordinary Shares, nominal value £0.006705, of Oxford Immunotec Global PLC outstanding.

 

 

Oxford Immunotec Global PLC Form 10-Q Quarterly Period Ended September 30, 2018   TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed consolidated balance sheets as of September 30, 2018 (unaudited) and December 31, 2017	4
	Condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2018 and 2017	5
	Condensed consolidated statements of other comprehensive loss (unaudited) for the three and nine months ended September 30, 2018 and 2017	6
	Condensed consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2018 and 2017	7
	Notes to the unaudited condensed consolidated financial statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38

 

 

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 failure to meet our obligations arising from the sale of our U.S. Laboratory Services Business with Quest Diagnostics Incorporated, a Delaware corporation, or Quest, (the “Transaction”);

●

the potential disruption of management time from ongoing business operations due to the Transaction;

●

our exposure to potential litigation and contingent liabilities pursuant to the Transaction that could have a material adverse effect on our financial condition;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

the impact of currency fluctuations on our business;

●

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

●

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

●

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

●

our ability to retain key members of our management;

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to protect and enforce our intellectual property rights;

 

 

●

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

●

the volatility of the price of our ordinary shares, including the risk the announcement of the completion of the Transaction could have adverse effects on the market price of our ordinary shares, substantial future sales of our ordinary shares and the fact that we do not pay dividends; and

●

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

 

You should refer to Part I, Item 1A, “Risk Factors” in our 2017 Annual Report on Form 10-K for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Further, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Quarterly Report represent our views only as of the date of this Quarterly Report. Subsequent events and developments may cause our views to change. While we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update any forward-looking statements, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report. As used in this Quarterly Report, the words “Company,” “we,” “us” and “our” refer to Oxford Immunotec Global PLC, a public limited company incorporated under the laws of England and Wales.

 

Where you can find more information

 

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

 

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

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Oxford Immunotec Global PLC

Condensed consolidated balance sheets

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of operations

(unaudited)

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of other comprehensive loss

(unaudited)

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

Oxford Immunotec Global PLC

Condensed consolidated statements of cash flows

(unaudited)

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

 

Oxford Immunotec Global PLC

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2018

 

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

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Special note regarding forward-looking statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in the Company’s 2017 Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”

 

Overview

 

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

 

During the three month period ended September 30, 2018, the Company announced that it had entered into a definitive agreement to sell the Company’s U.S. laboratory services business to Quest Diagnostics Incorporated. Accordingly, the assets and liabilities of this business have been classified as held for sale and the related operations reported in discontinued operations in the condensed consolidated financial statements for all periods presented. For further information on these changes, refer to Note 14, Discontinued operations.

 

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

 

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

 

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

 

 

---

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

 

 

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

 

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

 

We have incurred significant losses from inception and as of September 30, 2018 had an accumulated deficit of $221.8 million. We anticipate that our operating losses may decline following the sale of U.S. Laboratory Services Business to Quest, as we intend to reduce overhead costs and refocus the business on the sale of kits. Our revenue for the nine months ended September 30, 2018 was $44.4 million and for the nine months ended September 30, 2017 was $42.1 million. Our loss from continuing operations for the nine months ended September 30, 2018 was $20.2 million and for the nine months ended September 30, 2017 was $41.6 million.

 

Discontinued operations

 

On September 25, 2018, the Company entered into a Limited Liability Company Interest Purchase Agreement (the “Purchase Agreement”) with Quest, Oxford Immunotec Limited and Oxford Immunotec, LLC, a Delaware limited liability company (formerly known as Oxford Immunotec, Inc., a Delaware corporation) and a wholly owned subsidiary of the Company (“Oxford LLC”), pursuant to which Oxford Limited agreed to sell, and Quest agreed to acquire, the Company’s U.S. laboratory services business (the “U.S. Laboratory Services Business”) for gross proceeds of $170 million in cash (the “Transaction”). Of this amount, approximately $33 million will be paid directly to MidCap in settlement of all amounts due, as described in Note 7. Loans payable.

As contemplated in the Purchase Agreement, Oxford Immunotec USA, Inc., a Delaware corporation and a newly formed wholly owned subsidiary of Oxford Immunotec Limited (“Oxford USA”), joined the Purchase Agreement by way of a Joinder Agreement dated October 1, 2018.

The Transaction was consummated in accordance with the terms and conditions of the Purchase Agreement on November 6, 2018 (the “Closing Date”). Prior to and in connection with consummation of the Transaction, Oxford USA and Oxford LLC carried out a corporate restructuring pursuant to which (i) the assets and businesses of Oxford LLC other than the U.S. Laboratory Services Business were transferred to Oxford USA and (ii) Oxford LLC was converted into a limited liability company.

Additionally, pursuant to the terms of the Purchase Agreement, the parties entered into certain ancillary agreements as of the Closing Date, including: (i) a transitional services agreement, (ii) a technology license agreement and (iii) a long-term supply agreement (the “Supply Agreement”), pursuant to which Oxford USA agreed to sell, and Quest agreed to purchase, T-SPOT.TB test kits and related accessories from Oxford USA. In addition, the parties entered into a strategic collaboration agreement to drive continued growth of T.SPOT.TB testing in the U.S.

 

For more information related to the Transaction, please refer to our discussion in the notes to our financial statements in Note 14. Discontinued Operations.

 

 

Financial operations overview

 

Revenue

 

We generate revenue mainly from sales associated with our T-SPOT technology platform via our direct sales force and also through distributors. Our T-SPOT.TB test is our first commercialized product based on this technology and accounted for $15.6 million of our revenue in the third quarter of 2018. During the three month period ended September 30, 2018, the Company announced that it had entered into a definitive agreement to sell the Company’s U.S. laboratory services business to Quest Diagnostics Incorporated. Accordingly, the Company’s prior year revenues have been recast to present the U.S. laboratory services business as a discontinued operation. For further information on these changes, refer to Note 14, Discontinued operations.

 

Revenue mix

 

During the quarter, we offered 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 an established clinical testing laboratory in the U.K., where we perform our T-SPOT.TB test on samples sent to us by customers.

 

Revenue by type

 

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

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2018				2017				2018				2017
Revenue
Product		$	15,095			$	13,419			$	40,236			$	37,713
Service			955				1,592				4,150				4,411
Total revenue		$	16,050			$	15,011			$	44,386			$	42,124

 

Revenue in the above table includes sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation.

Revenue by geography

 

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

 

 

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

 

		Three months ended September 30,
(in thousands, except percentages)		2018								2017
Revenue
United States		$	2,876				18	%		$	3,381				23	%
Europe and ROW			2,277				14	%			2,213				15	%
Asia			10,897				68	%			9,417				62	%
Total revenue		$	16,050				100	%		$	15,011				100	%

 

		Nine months ended September 30,
(in thousands, except percentages)		2018								2017
Revenue
United States		$	11,615				26	%		$	12,496				30	%
Europe and ROW			6,750				15	%			5,933				14	%
Asia			26,021				59	%			23,695				56	%
Total revenue		$	44,386				100	%		$	42,124				100	%

 

United States revenue in the above tables include sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation.

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. However, we also believe that through these increased volumes, we can achieve certain efficiencies in our manufacturing operations that could help maintain or improve our overall margins.

 

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

 

During the three months ended September 30, 2018 and 2017, our cost of revenue represented 28% and 35%, respectively, of our total revenue. For the nine months ended September 30, 2018 and 2017 our cost of revenue represented 29% and 35%, respectively, of our total revenue.

 

		Three months ended September 30,								Nine months ended September 30,
(in thousands)		2018				2017				2018				2017
Cost of revenue
Product		$	3,864			$	4,035			$	9,993			$	11,319
Service			709				1,212				2,877				3,513
Total cost of revenue		$	4,573			$	5,247			$	12,870			$	14,832

 

 

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 72% and 65%, respectively, for the three months ended September 30, 2018 and 2017. Gross margins were 71% and 65%, respectively, for the nine months ended September 30, 2018 and 2017.

 

Research and development expenses

 

Our research and development efforts have historically focused on developing multiple new diagnostic tests that use our quantitative T cell measurement technology, including assays that may help transplant physicians better manage patients at risk of rejection and infection. We have also focused on improvements to our technology, such as T-Cell Select, which is a reagent kit available in Europe that allows automated sample preparation and enables the T-SPOT.TB test to be used with blood samples stored for up to 54 hours at room temperature.

 

Our research and development activities include performing research, development, clinical and regulatory activities and validating improvements to our technology and processes for the purposes of enhancing product performance. Research and development expenses include personnel-related expenses, including share-based compensation, fees for contractual and consulting services, clinical trial costs, travel costs, laboratory supplies, amortization, depreciation, rent, insurance and repairs and maintenance. We expense all research and development costs as incurred.

 

During the three months ended September 30, 2018 and 2017, our research and development expenses represented 11% and 20%, respectively, of our total revenue. For the nine months ended September 30, 2018 and 2017, our research and development expenses represented 13% and 19%, respectively, of our total revenue.

 

Sales and marketing expenses

 

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

 

During the three-month periods ended September 30, 2018 and 2017, our sales and marketing expenses represented 40% and 48%, respectively, of our total revenue. For the nine months ended September 30, 2018 and 2017, our sales and marketing expenses represented 47% and 53%, 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, 2018 and 2017, our general and administrative expenses represented 51% and 47%, respectively, of our total revenue. For the nine-month periods ended September 30, 2018 and 2017, our general and administrative expenses represented 44% and 46%, respectively, of our total revenue.

 

Interest expense, net

 

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

 

 

Foreign exchange gains (losses)

 

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

 

Settlement expense

 

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

 

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

 

Other expense

 

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

 

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

 

Income (loss) from discontinued operations

 

On September 25, 2018, the Company entered into an agreement to sell the Company’s U.S. Laboratory Services Business. This agreement represents a strategic business shift having a major effect on the Company’s operations and financial results. Accordingly, the operations of this business have been reported in discontinued operations in the condensed consolidated financial statements for all periods presented.

 

 

Results of operations  

 

Comparison of three months ended September 30, 2018 and 2017

 

During the three month period ended September 30, 2018, the Company announced that it had entered into a definitive agreement to sell the Company’s U.S. laboratory services business to Quest Diagnostics Incorporated. Accordingly, the assets and liabilities of this business have been classified as held for sale and the related operations reported in discontinued operations in the condensed consolidated financial statements for all periods presented. For further information on these changes, refer to Note 14, Discontinued operations.

 

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,
		2018								2017								Change
(in thousands, except percentages)		Amount				% of revenue				Amount				% of revenue				Amount				%
Revenue:
Product		$	15,095				94	%		$	13,419				89	%		$	1,676				12	%
Service			955				6	%			1,592				11	%			(637	)			(40	)%
Total revenue			16,050				100	%			15,011				100	%			1,039				7	%
Cost of revenue:
Product			3,864				24	%			4,035				27	%			(171	)			(4	)%
Service			709				4	%			1,212				8	%			(503	)			(42	)%
Total cost of revenue			4,573				28	%			5,247				35	%			(674	)			(13	)%
Gross profit			11,477				72	%			9,764				65	%			1,713				18	%
Operating expenses:
Research and development			1,754				11	%			2,931				20	%			(1,177	)			(40	)%
Sales and marketing			6,432				40	%			7,257				48	%			(825	)			(11	)%
General and administrative			8,132				51	%			7,066				47	%			1,066				15	%
Change in fair value of contingent purchase price consideration			—				—	%			(880	)			(6	)%			880				(100	)%
Intangible assets impairment charge			—				—	%			11,064				74	%			(11,064	)			(100	)%
Settlement expense			212				1	%			196				1	%			16				8	%
Total operating expenses			16,530				103	%			27,634				184	%			(11,104	)			(40	)%
Operating loss from continuing operations			(5,053	)			(31	)%			(17,870	)			(119	)%			12,817				(72	)%
Interest expense, net			(673	)			(4	)%			(781	)			(5	)%			108				(14	)%
Foreign exchange losses			(52	)			(0	)%			(624	)			(4	)%			572				(92	)%
Other income			5				0	%			—				—	%			5				NM	%
Loss from continuing operations before income taxes			(5,773	)			(36	)%			(19,275	)			(128	)%			13,502				(70	)%
Income tax expense from continuing operations			(485	)			(3	)%			(222	)			(1	)%			(263	)			118	%
Loss from continuing operations			(6,258	)			(39	)%			(19,497	)			(130	)%			13,239				(68	)%
Discontinued operations:
Income from discontinued operations before income taxes			2,774				18	%			2,650				18	%			124				5	%
Income tax expense			—				—	%			—				—	%			—				NM	%
Income from discontinued operations			2,774				18	%			2,650				18	%			124				5	%
Net loss		$	(3,484	)			(23	)%		$	(16,847	)			(112	)%		$	13,363				(79	)%

 

 

Revenue 

 

Revenue increased by 7% to $16.1 million for the three months ended September 30, 2018, compared to $15.0 million for the same period in 2017.

 

U.S. revenue, excluding revenue from discontinued operations, decreased by 15% to $2.9 million for the three months ended September 30, 2018, compared to $3.4 million for the same period in 2017, driven primarily by the decision to exit the blood donor screening business and the timing of kit shipments from our U.K. entity to the U.S. Laboratory Services Business.

 

Asia revenue increased by 16% to $10.9 million for the three months ended September 30, 2018, compared to the same period in 2017, due primarily to the timing of shipments to China. On a non-Generally Accepted Accounting Principles, or non-GAAP, constant currency basis, revenue for Asia would have increased by 18%. Europe and ROW revenue increased 3% to $2.3 million for the three months ended September 30, 2018, compared to the same period in 2017, due to strong TB sales and the additional contribution from the sale of Lyme kits. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 4% in 2018 compared to 2017.

 

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

 

By revenue type, total revenues were:

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Revenue
Product		$	15,095			$	13,419			$	1,676				12	%
Service			955				1,592				(637	)			(40	)%
Total revenue		$	16,050			$	15,011			$	1,039				7	%

 

Revenue in the above table includes sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation.

 

By geography, total revenues were:

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Revenue
United States		$	2,876			$	3,381			$	(505	)			(15	)%
Europe and ROW			2,277				2,213				64				3	%
Asia			10,897				9,417				1,480				16	%
Total revenue		$	16,050			$	15,011			$	1,039				7	%

 

Revenue in the above table includes sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation.

 

 

Cost of revenue and gross margin

 

Cost of revenue decreased by 13% to $4.6 million for the three months ended September 30, 2018 when compared to the same period in 2017. Gross margin was 72% and 65% for the three month periods ended September 30, 2018 and 2017, respectively.

 

		Three months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Cost of revenue
Product		$	3,864			$	4,035			$	(171	)			(4	)%
Service			709				1,212				(503	)			(42	)%
Total cost of revenue		$	4,573			$	5,247			$	(674	)			(13	)%

 

Research and development expenses

 

Research and development expenses decreased to $1.8 million for the three months ended September 30, 2018 from $2.9 million for the same period in 2017. The decrease was largely due to lower salary and other employee related costs and lower consulting costs. As a percentage of total revenue, research and development expenses declined to 11% for the three months ended September 30, 2018 compared to 20% for the same period in 2017.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased to $6.4 million for the three months ended September 30, 2018 from $7.3 million for the same period in 2017. The decrease was largely due to lower salary and other employee related expenses. As a percentage of total revenue, sales and marketing expenses declined to 40% for the three months ended September 30, 2018 compared to 48% for the same period in 2017.

 

General and administrative expenses

 

General and administrative expenses increased to $8.1 million for the three months ended September 30, 2018 from $7.1 million for the same period in 2017. The increase primarily reflected expenses related to the Transaction, partially offset by a decrease in legal fees. As a percentage of total revenue, general and administrative expenses increased to 51% for the three months ended September 30, 2018 from 47% for the same period in 2017.

 

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.

 

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

 

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

 

Interest expense, net

 

Interest expense, net was $673,000 for the three months ended September 30, 2018, compared to $781,000 in the same period in 2017.

 

 

Foreign exchange (losses) gains

 

We recorded foreign exchange losses of $52,000 for the three months ended September 30, 2018, substantially all as a net result of U.S. Dollar denominated bank accounts, accounts receivable, and accounts payable reflected on the books of Oxford Immunotec Limited, which has a functional currency of the U.K. Pound Sterling. For the three months ended September 30, 2017, we recorded foreign exchange losses of $624,000. 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 32% of our sales for the three months ended September 30, 2018 were in the United States, which are denominated in U.S. Dollars. Sales in China and South Korea are also denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and the Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen.

 

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

 

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

 

Other income

 

Other income was $5,000 for the three months ended September 30, 2018. There was no other income or expense for the three months ended September 30, 2017.

 

Income from discontinued operations

 

Discontinued operations represent the U.S. Laboratory Services Business that we sold to Quest. For financial statement purposes, the net assets and results of operations for the discontinued operations have been segregated from those of our continuing operations and are presented in our condensed consolidated financial statements as discontinued operations and assets held for sale.

 

The income from discontinued operations for the three months ended September 30, 2018 and 2017 was $2.8 million and $2.7 million, respectively.

 

 

Comparison of nine months ended September 30, 2018 and 2017

 

During the three month period ended September 30, 2018, the Company announced that it had entered into a definitive agreement to sell the Company’s U.S. laboratory services business to Quest Diagnostics Incorporated. Accordingly, the assets and liabilities of this business have been classified as held for sale and the related operations reported in discontinued operations in the condensed consolidated financial statements for all periods presented. For further information on these changes, refer to Note 14, Discontinued operations.

 

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,
		2018								2017								Change
(in thousands, except percentages)		Amount				% of revenue				Amount				% of revenue				Amount				%
Revenue:
Product		$	40,236				91	%		$	37,713				90	%		$	2,523				7	%
Service			4,150				9	%			4,411				10	%			(261	)			(6	)%
Total revenue			44,386				100	%			42,124				100	%			2,262				5	%
Cost of revenue:
Product			9,993				23	%			11,319				27	%			(1,326	)			(12	)%
Service			2,877				6	%			3,513				8	%			(636	)			(18	)%
Total cost of revenue			12,870				29	%			14,832				35	%			(1,962	)			(13	)%
Gross profit			31,516				71	%			27,292				65	%			4,224				15	%
Operating expenses:
Research and development			5,969				13	%			8,092				19	%			(2,123	)			(26	)%
Sales and marketing			20,655				47	%			22,175				53	%			(1,520	)			(7	)%
General and administrative			19,349				44	%			19,456				46	%			(107	)			(1	)%
Change in fair value of contingent purchase price consideration			—				—	%			(3,475	)			(8	)%			3,475				(100	)%
Intangible assets impairment charge			—				—	%			11,064				26	%			(11,064	)			(100	)%
Settlement expense			1,979				4	%			9,831				23	%			(7,852	)			(80	)%
Total operating expenses			47,952				108	%			67,143				159	%			(19,191	)			(29	)%
Operating loss from continuing operations			(16,436	)			(37	)%			(39,851	)			(95	)%			23,415				(59	)%
Interest expense, net			(2,011	)			(5	)%			(2,411	)			(6	)%			400				(17	)%
Foreign exchange (losses) gains			(306	)			(1	)%			(1,277	)			(3	)%			971				(76	)%
Other expense			(242	)			(1	)%			(262	)			(1	)%			20				(8	)%
Loss from continuing operations before income taxes			(18,995	)			(43	)%			(43,801	)			(104	)%			24,806				(57	)%
Income tax benefit (expense) from continuing operations			(1,182	)			(3	)%			2,189				5	%			(3,371	)			(154	)%
Loss from continuing operations			(20,177	)			(45	)%			(41,612	)			(99	)%			21,435				(52	)%
Discontinued operations:
Income (loss) from discontinued operations before income taxes			(104	)			(0	)%			(73	)			(0	)%			(31	)			42	%
Income tax expense			—				—	%			—				—	%			—				NM	%
Income (loss) from discontinued operations			(104	)			(0	)%			(73	)			(0	)%			(31	)			42	%
Net loss		$	(20,281	)			(46	)%		$	(41,685	)			(99	)%		$	21,404				(51	)%

 

 

Revenue

 

Revenue increased by 5% to $44.4 million for the nine months ended September 30, 2017, compared to $42.1 million for the same period in 2017.

 

U.S. revenue, excluding revenue from discontinued operations, decreased 7%, to $11.6 million for the nine months ended September 30, 2018, compared to $12.5 million for the same period in 2017, driven primarily by the decision to exit the blood donor screening business and the timing of kit shipments from our U.K. entity to the U.S. Laboratory Services Business.

 

Asia revenue increased by 10% to $26.0 million for the nine months ended September 30, 2018, compared to the same period in 2017, due primarily to the timing of shipments to China. On a non-Generally Accepted Accounting Principles, or non-GAAP, constant currency basis, revenue for Asia would have increased by 9%. Europe and ROW revenue increased 14% to $6.8 million for the nine months ended September 30, 2018, compared to the same period in 2017, due to strong TB sales and the additional contribution from the sale of Lyme kits. On a non-GAAP constant currency basis, Europe and ROW revenue would have increased by 7% in 2018 compared to 2017.

 

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

 

By revenue type, total revenues were:

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Revenue
Product		$	40,236			$	37,713			$	2,523				7	%
Service			4,150				4,411				(261	)			(6	)%
Total revenue		$	44,386			$	42,124			$	2,262				5	%

 

Revenue in the above table includes sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation.

 

By geography, total revenues were:

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Revenue
United States		$	11,615			$	12,496			$	(881	)			(7	)%
Europe and ROW			6,750				5,933				817				14	%
Asia			26,021				23,695				2,326				10	%
Total revenue		$	44,386			$	42,124			$	2,262				5	%

 

Revenue in the above table includes sales to the U.S. Laboratory Services Business at our intercompany transfer price that were formerly eliminated in consolidation. 

 

 

Cost of revenue and gross margin

 

Cost of revenue decreased by 13% to $12.9 million for the nine months ended September 30, 2018 when compared to the same period in 2017. Gross margin was 71% and 65% for the nine month periods ended September 30, 2018 and 2017, respectively.

 

		Nine months ended September 30,								Change
(in thousands, except percentages)		2018				2017				Amount				%
Cost of revenue
Product		$	9,993			$	11,319			$	(1,326	)			(12	)%
Service			2,877				3,513				(636	)			(18	)%
Total cost of revenue		$	12,870			$	14,832			$	(1,962	)			(13	)%

 

Research and development expenses

 

Research and development expenses decreased to $6.0 million for the nine months ended September 30, 2018 from $8.1 million for the same period in 2017. The decrease was largely due to lower clinical costs and consulting costs. As a percentage of total revenue, research and development expenses declined to 13% for the nine months ended September 30, 2018 compared to 19% for the same period in 2017.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased to $20.7 million for the nine months ended September 30, 2018 from $22.2 million for the same period in 2017. The decrease was largely due to lower salary and other employee related expenses and a decrease in marketing costs. As a percentage of total revenue, sales and marketing expenses declined to 47% for the nine months ended September 30, 2018 compared to 53% for the same period in 2017.

 

General and administrative expenses

 

General and administrative expenses decreased to $19.3 million for the nine months ended September 30, 2018 from $19.5 million for the same period in 2017. The decrease primarily reflected a decrease in legal fees. As a percentage of total revenue, general and administrative expenses declined to 44% for the nine months ended September 30, 2018 from 46% for the same period in 2017.

 

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.

 

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

 

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

 

Interest expense, net

 

Interest expense, net was $2.0 for the nine months ended September 30, 2018, compared to $2.4 million in the same period in 2017.

 

 

Foreign exchange losses

 

We recorded foreign exchange losses of $306,000 for the nine months ended September 30, 2018, substantially all as a net result of U.S. Dollar denominated bank accounts, accounts receivable, and accounts payable reflected on the books of Oxford Immunotec Limited, which has a functional currency of the U.K. Pound Sterling. For the nine months ended September 30, 2017, we recorded foreign exchange losses of $1.3 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 32% of our sales for the nine months ended September 30, 2018 were in the United States, which are denominated in U.S. Dollars. Sales in China and South Korea are also denominated in U.S. Dollars. Sales in Europe are denominated primarily in the U.K. Pound Sterling and the Euro. As we grow Europe and ROW sales outside the United Kingdom and the Euro Zone, we may be subject to risk from additional currencies. Sales in Japan are denominated in Yen.

 

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

 

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

 

Other expense

 

Other expense was $242,000 for the nine months ended September 30, 2018, compared to expense of $262,000 for the nine months ended September 30, 2017.

 

Income (loss) from discontinued operations

 

Discontinued operations represent the U.S. Laboratory Services Business that we sold to Quest. For financial statement purposes, the net assets and results of operations for the discontinued operations have been segregated from those of our continuing operations and are presented in our condensed consolidated financial statements as discontinued operations and assets held for sale.

 

There was a loss from discontinued operations of $104,000 for the nine months ended September 30, 2018, compared to a loss from discontinued operations for the nine months ended 2017 of $77,000.

 

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, 2018, we had a loss from continuing operations of $20.2 million and used $20.9 million of cash for operating activities. As of September 30, 2018, we had an accumulated deficit of $221.8 million. We incurred a loss from continuing operations of $41.6 million and used $31.1 million of cash for operating activities for the nine months ended September 30, 2017.

 

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

 

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

 

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, 2018, we had cash and cash equivalents, including restricted cash, of $70.4 million. We maintain our available cash balances in cash, money market funds and repurchase agreements primarily invested in U.S. government and agency securities, and bank savings accounts in the United States, United Kingdom, Germany, Japan, China and South Korea. Essentially all our cash is in the U.S. and the U.K.

 

Summary of cash flows

 

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

 

		As of and for the nine months ended September 30,
(in thousands)		2018				2017
Cash and cash equivalents, including restricted cash		$	70,356			$	67,943
Accounts receivable, net			7,080				8,788
Net cash used in operating activities from continuing operations		$	(20,914	)		$	(31,054	)
Net cash used in investing activities from continuing operations			(4,884	)			(735	)
Net cash provided by financing activities			2,375				39,536
Net operating cash flows provided by discontinued operations			6,778				3,690
Net investing cash flows used in discontinued operations			(2,527	)			(3,294	)
Net financing cash flows used in discontinued operations			(10	)			(9	)
Effect of exchange rate changes on cash and cash equivalents, including restricted cash			(994	)			499
Net (decrease) increase in cash and cash equivalents, including restricted cash		$	(20,176	)		$	8,633

 

Cash flows for the nine months ended September 30, 2018 and 2017

 

Operating activities from continuing operations

 

Net cash used in operating activities from continuing operations was $20.9 million during the nine months ended September 30, 2018, which included a net loss of $20.2 million, non-cash expenses of $6.1 million, and cash used for changes in operating assets and liabilities of $6.9 million. The non-cash items included share-based compensation expense of $3.6 million, deferred tax expense of $1.1 million, depreciation and amortization of intangible assets of $953,000, accretion and amortization of loan fees of $421,000, and a loss on disposal of property and equipment of $84,000. The cash used for changes in operating assets and liabilities included a decrease in accounts payable and accrued liabilities of $6.0 million, an increase in accounts receivable of $1.3 million, an increase in prepaid expenses and other assets of $270,000, and a decrease in other liabilities of $70,000, partially offset by a decrease in inventory of $773,000. The decrease in accounts payable and accrued liabilities was largely due to payments in the first nine months of 2018 for royalties on intellectual property and bonuses that were accrued for at December 31, 2017, as well as the timing of payments. The increase in accounts receivable reflects growing sales and timing of customer payments. The increase in prepaid expenses and other assets and the decrease in other liabilities reflects the timing of certain payments. The decrease in inventory reflects our efforts to better manage our inventory.

 

Net cash used in operating activities from continuing operations was $31.1 million during the nine months ended September 30, 2017, which included a net loss of $41.6 million, net non-cash expenses of $ 11.1 million and cash used for changes in operating assets and liabilities of $561,000. The non-cash items consisted of intangible assets impairments charges of $11.0 million, share-based compensation expense of $4.1 million, depreciation and amortization expense of $1.3 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 accounts receivable of $3.7 million, a decrease in accounts payable and accrued liabilities of $3.8 million, an increase in inventory of $487,000, and an increase in prepaid expenses and other assets of $422,000, largely offset by an increase in other liabilities of $7.6 and deferred income of $286,000.

 

 

Investing activities from continuing operations

 

Net cash used in investing activities from continuing operations was $4.9 million during the nine months ended September 30, 2018 and consisted of purchases of property and equipment.

 

Net cash used in investing activities from continuing operations was $735,000 during the nine months ended September 30, 2017 and consisted of purchases of property and equipment.

 

Financing activities from continuing operations

 

Net cash provided by financing activities from continuing operations was $2.4 million during the nine months ended September 30, 2018.

 

Net cash provided by financing activities from continuing operations 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 offering expenses.

 

Discontinued operations 

 

Net cash provided by discontinued operations for 2018 related to $6.8 million provided by operating activities of discontinued operations, partially offset by cash used in investing activities of discontinued operations of $2.5 million for the purchase of property and equipment.

 

Net cash provided by discontinued operations for 2017 related to $3.7 million provided by operating activities of discontinued operations, partially offset by $3.3 million used in investing activities of discontinued operations for the purchase of property and equipment.

 

Employees

 

As of September 30, 2018, we had 414 employees. However, in conjunction with the Transaction, approximately 210 employees will be moving to Quest. None of our employees is represented by a labor union. We have not experienced any work stoppages and we believe our employee relations are good.

 

Contractual obligations

 

In March 2018, we entered into an agreement relating to our location in Norwood, Massachusetts to bifurcate our existing lease for two adjacent facilities into two separate leases, as one of the facilities was being sold to a new owner. The first of the two leases, which is referred to as the “315 Lease”, relates to about 18,000 rentable square feet within a larger facility. The 315 Lease was amended in September 2018 to extend the term through March 31, 2023. The escalating monthly base rental payments on the 315 Lease over the lease term will range from $34,000 per month to $37,000 per month.

 

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

 

In June 2018, we entered into a lease for new space in Abingdon, England, which extends through June 30, 2033, that will allow us to combine our manufacturing, laboratory, storage and office operations into a single facility. The base rent on the facility over the lease term will range from $39,000 per month to $79,000 per month. Select functional groups began moving into the facility during the third quarter of 2018.

 

We had been leasing approximately 14,000 square feet in Boston, Massachusetts, which included a clinical and research laboratory directed to the development and testing of the products acquired from Immunetics. The lease for the Boston facility expired in July 2018, at which time the operations were consolidated into our Norwood, Massachusetts facility. Rent under this lease had been $263,000 annually.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control Over Financial Reporting

 

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

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

With the exception of the risk factors below, there have been no material changes from the Risk Factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

RISKS RELATED TO THE SALE OF OUR U.S. LABORATORY SERVICES BUSINESS TO QUEST

 

We will be subject to business uncertainties and contractual restrictions due to the Transaction.

 

The pursuit of the Transaction and the preparation for the integration of the U.S. Laboratory Services Business with Quest may place a significant burden on management and internal resources. Any significant diversion of management and employee attention away from ongoing business and any difficulties encountered in the transition and integration process could affect our financial results. Our customers, employees, partners and other parties may have uncertainties about the effects of the Transaction. In connection with the Transaction, it is possible that some customers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the Transaction. If any of these effects were to occur, it could materially and adversely impact our revenue, earnings and cash flows and other business results and financial condition, as well as the market price of our common stock.

 

For more information related to the Transaction, please refer to Note 14. Discontinued Operations and Note 15. Subsequent events, in the notes to our financial statements and also to our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report.

 

 

The Purchase Agreement exposes us to contingent liabilities that could have a material adverse effect on our financial condition.

 

We have agreed to indemnify Quest for damages resulting from or arising out of any inaccuracy or breach of our representations, warranties or covenants in the Purchase Agreement, any and all of our liabilities not assumed by Quest in the Transaction and for certain other matters. Pursuant to the Purchase Agreement, other than in the case of damages arising out of actual and intentional fraud of an indemnifying party, in no event will we or Quest be required to indemnify each other for any damages that exceed the final Transaction purchase price of $170 million. Yet, any event that results in a right for Quest to seek indemnity from us could result in a substantial payment from us to Quest and could have a material adverse effect on our financial condition and results of operations.

 

Litigation may arise in connection with the Transaction, which could be costly, divert management’s attention and otherwise materially harm our business.

 

Regardless of the outcome of any future litigation related to the Transaction, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management’s attention and resources to address the claims and counterclaims in any litigation related to the Transaction may materially adversely affect our business, financial condition and operating results. Any litigation related to the Transaction may result in negative publicity or an unfavorable impression of us, which could adversely affect the price of our common stock, impair our ability to recruit or retain employees, damage our relationships with our customers and suppliers, or otherwise materially harm our operations and financial performance.

 

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: November 9, 2018	/s/	Peter Wrighton-Smith, Ph.D.
		Peter Wrighton-Smith, Ph.D.
		Chief Executive Officer and Director
		(Principal Executive Officer)
Date: November 9, 2018	/s/	Richard M. Altieri
		Richard M. Altieri
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

Exhibit No.		Description
2.1*+		Limited Liability Company Interest Purchase Agreement, dated September 25, 2018, by and among Oxford Immunotec Global PLC, Quest Diagnostics Incorporated, Oxford Immunotec Limited and Oxford Immunotec, Inc.
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+		Fifth Amendment to Distributorship Agreement between Oxford Immunotec, Ltd., Fosun Long March Medical Science Co. Ltd. and Shanghai Xin Chang Medical Device Co. Ltd. entered into on September 17, 2018.
10.2		Form of Special Bonus Agreement, U.S. Employees.
10.3		Form of Special Bonus Agreement, U.K. Employees.
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, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed consolidated balance sheets at September 30, 2018 and December 31, 2017; (ii) Condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017; (iii) Condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2018 and 2017; (iv) Condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017; and (v) Notes to unaudited condensed consolidated financial statements.

 

*	Certain exhibits and schedules to the Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.

 

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

 

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