| Summary of Significant Accounting Policies | 2.
Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiary, DNA Genotek Inc. (“DNAG”). All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiary, unless otherwise indicated. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods. Supplemental Cash Flow Information In 2018, 2017 and 2016, we paid income taxes of $17,126, $4,309 and $1,123, respectively. In 2018, 2017 and 2016, we recorded through the consolidated statements of income an increase (decrease) in our allowance for doubtful accounts of $(27), $172 and $40, respectively. We had $11, $200 and $369 in write-offs against the allowance for doubtful accounts in 2018, 2017, and 2016, respectively. As of December 31, 2018, 2017 and 2016, we had accruals for purchases of property and equipment of $964, $449 and $302, respectively. Investments We consider all investments in debt securities to be available-for-sale securities. These securities are comprised of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss. The following is a summary of our available-for-sale securities as of December 31, 2018 and 2017:
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
December 31, 2018
Guaranteed investment certificates
$
23,096
$
—
$
—
$
23,096
Corporate bonds
90,707
—
(917
)
89,790
Total available-for-sale securities
$
113,803
$
—
$
(917
)
$
112,886
December 31, 2017
Guaranteed investment certificates
$
22,261
$
—
$
—
$
22,261
Corporate bonds
82,010
—
(553
)
81,457
Total available-for-sale securities
$
104,271
$
—
$
(553
)
$
103,718
At December 31, 2018, maturities of our available- for-sale securities were as follows:
Less than one year
$
68,702
$
—
$
(568
)
$
68,134
Greater than one year
$
45,101
$
—
$
(349
)
$
44,752
Accounts Receivable Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs. Inventories Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. In addition to reserving for these items identified through specific identification procedures, we also reserve for unidentified scrap or spoilage under a fixed-formula methodology. Property and Equipment Property and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of income. Intangible Assets Intangible assets consist of a customer list, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of seven to fifteen years. Impairment of Long-Lived Assets We assess the recoverability of our long-lived assets, which include property and equipment and intangible assets, by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Goodwill Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisition of DNAG in August 2011. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit. We performed our annual impairment assessment as of July 31, 2018 utilizing a qualitative evaluation and concluded that it was more likely than not that the fair value of our DNAG reporting unit is greater than its carrying value. We believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting unit. If actual future results are not consistent with management’s estimates and assumptions, we may have to take an impairment charge in the future related to our goodwill. Future impairment tests will continue to be performed annually in the fiscal third quarter, or sooner if a triggering event occurs. As of December 31, 2018, we believe no indicators of impairment exist. Revenue In January 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, Upon adoption, we recorded a reduction of $75 to the opening balance of accumulated deficit as of January 1, 2018. This adjustment is related to the change in revenue recognition associated with our drug testing kit sales. Sales of our drug testing kits include two performance obligations: sales of the device and laboratory services. Under this new accounting standard, we adjusted the allocation of the transaction price to the performance obligations and the estimate of unexercised rights (“breakage”) associated with the contracts. Prior to the adoption of the new guidance, we used the residual value method to allocate the transaction prices. With the adoption of ASU 2014-09, we allocated transition prices based upon the stand-alone selling price, or fair value method. This change in methodology also impacted our estimated breakage amount. The following table summarizes the impact of the new revenue standard adjustment on our opening balance sheet:
Balance at
New Revenue
Balance at
December 31, 2017
Standard Adjustment
January 1, 2018
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue
1,314
75
1,389
STOCKHOLDERS' EQUITY
Accumulated deficit
(119,510
)
(75
)
(119,585
) The adoption of this new standard had an immaterial impact on our 2018 reported total revenues and operating income, as compared to what would have been reported under the prior standard. We expect the impact of adoption in future periods to continue to be immaterial. Our accounting policies under the new standard were applied prospectively and are noted below. Product sales Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates. Our net revenues recorded for sales of the OraQuick ® We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold. Arrangements with multiple-performance obligations . In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services. Other revenues . Other revenues consist primarily of exclusivity revenues, royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements. On June 10, 2014, we entered into a Master Program Services and Co-Promotion Agreement with AbbVie to co-promote our OraQuick ® As part of our litigation settlement agreement with Ancestry.com DNA LLC (“Ancestry”) and its contract manufacturer, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. During the year ended December 31, 2018, we recorded $9,653, in royalty income under this agreement. On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick ® ® In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid Zika test. The initial six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of income as the activities are being performed and the related costs are incurred. During 2018, because of difficulties in completing development and optimizing our Zika test and because of significant uncertainty regarding the future commercial demand for this product, the scope of work covered by this contract was reduced. As a result, our contract with BARDA will be essentially completed in the first quarter of 2019. During 2018, 2017, and 2016, $1,963, $2,388 and $616 respectively, were recognized in connection with this grant. In June 2017, we entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that will enable us to offer our OraQuick ® Deferred Revenue We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of December 31, 2018 and 2017 includes customer prepayments of $2,057 and $1,045, respectively. Deferred revenue as of December 31, 2018 and 2017 also included $1,464 and $269, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of contract was determined and revenue is recognized at that rate when the product is delivered to the customer. Financing and Payment . Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer. Practical expedients and exemptions . Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues. Other than for sales of our OraQuick® In-Home HIV test to the retail trade, we generally do not grant product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred. As a result of the return rights granted to our customers for our OraQuick® In-Home HIV test, we have recorded an estimate of expected returns as a reduction of gross OraQuick® In-Home HIV product revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. As of December 31, 2018 and December 31, 2017, the reserve for sales returns and allowances was $191 and $217, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected. Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract. Revenues by product. The following table represents total net revenues by product line:
Twelve Months Ended December 31,
2018
2017
2016
OraQuick®
$
53,851
$
60,558
$
47,134
Oragene®
75,850
69,184
29,454
Intercept®
7,709
8,125
8,351
Histofreezer®
8,983
10,312
11,628
Other products
19,035
13,809
10,357
Net product revenues
165,428
161,988
106,924
Royalty income
9,653
-
-
AbbVie exclusivity
-
-
18,951
BARDA funding
4,951
4,387
2,323
Charitable support reimbursement
1,711
689
-
Other revenues
16,315
5,076
21,274
Net revenues
$
181,743
$
167,064
$
128,198
Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer:
December 31,
2018
2017
2016
United States
$
136,847
$
121,458
$
99,758
Europe
11,062
11,827
11,646
Other regions
33,834
33,779
16,794
$
181,743
$
167,064
$
128,198 Customer and Vendor Concentrations One of our customers accounted for 7% and 37% of our accounts receivable as of December 31, 2018 and 2017, respectively. The same customer accounted for approximately 24% and 25% of our net consolidated revenues for the year ended December 31, 2018 and 2017, respectively. Another customer accounted for approximately 15% of our net consolidated revenues for the year ended December 31, 2016. We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations. Research and Development Research and development expenses consist of costs incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, contract services and other outside expenses. Research and development costs are charged to expense as incurred. Advertising Expenses Advertising costs are charged to expense as incurred. During 2018, 2017, and 2016, we incurred $763, $717, and $626, respectively, in advertising expenses. Stock-Based Compensation We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than purchase shares in the open market. Income Taxes We follow the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax basis of assets and liabilities, as well as operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates for the respective taxing jurisdiction that are expected to apply to taxable income in the years in which those temporary differences and operating loss and credit carryforwards are expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We assess the realizability of our net deferred tax assets on a quarterly basis. If, after considering all relevant positive and negative evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized, we reduce our net deferred tax assets by a valuation allowance. The realization of the net deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to the expiration of our net operating loss carryforwards. Foreign Currency Translation The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than functional currency are included in our consolidated statements of income in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income (expense) in our consolidated statements of income were $831, $(1,442), and $(607) for the years ended December 31, 2018, 2017, and 2016, respectively. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period. The computations of basic and diluted earnings per share are as follows:
Year ended December 31,
2018
2017
2016
Net income
$
20,396
$
30,948
$
19,720
Weighted average shares of common stock outstanding:
Basic
61,112
59,050
55,615
Dilutive effect of stock options, restricted stock, and performance stock units
1,420
1,974
898
Diluted
62,532
61,024
56,513
Earnings per share:
Basic
$
0.33
$
0.52
$
0.35
Diluted
$
0.33
$
0.51
$
0.35
For the years ended December 31, 2018, 2017, and 2016, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 291, 180, and 2,546 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. Accumulated Other Comprehensive Loss We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets. We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and as such, the results of its operations are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at December 31, 2018 consists of $17,789 of currency translation adjustments and $917 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio. Accumulated other comprehensive loss at December 31, 2017 consists of $9,787 of currency translation adjustments and $553 of net unrealized losses on marketable securities. Fair Value of Financial Instruments As of December 31, 2018 and 2017, the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature. Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2:
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). All of our available-for-sale debt securities are measured as Level 1 instruments as of December 31, 2018 and 2017. Included in cash and cash equivalents at December 31, 2018 and 2017, was $21,631 and $40,760 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments. We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of December 31, 2018 and 2017 was $3,884 and $3,514, respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in both current assets and other assets with the same amounts included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. In 2017, we purchased certificates of deposit (“CDs”) from a commercial bank. The CDs bear interest at rates ranging from 0.89% to 1.03% and matured periodically through January 22, 2018. The carrying values of the CDs approximate their fair value. These CDs served as collateral for certain standby letters of credit and are reported as restricted cash on the accompanying consolidated balance sheets as of December 31, 2017. We have no restricted cash as of December 31, 2018. Recent Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases , which requires entities to begin recording assets and liabilities from leases on the balance sheet. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2018, using a modified retrospective approach by recognizing a cumulative effect adjustment to the opening balance of retained earnings. Early adoption is permitted. In July 2018, companies were provided with an option to apply the modified retrospective approach as of either the date of adoption or as of the earliest date presented. We adopted this guidance effective January 1, 2019 by applying the modified retrospective approach as of the date of adoption with the available practical expedients. We continue to utilize a comprehensive approach to assess the impact of this guidance on our financial statements and related disclosures, including the increase in the assets and liabilities on our balance sheet. We are substantially complete with our comprehensive review of our lease portfolio including significant leases by geography and by asset type that will be impacted by the new guidance, and enhancing our controls. In addition, we are progressing on the implementation of a new application for administering our leases and facilitating compliance with the new guidance. The new guidance will require us to record all leases, including operating leases, on the consolidated balance sheet as a right-of-use asset and corresponding liability for future payment obligations. Adoption of the standard will result in the estimated recognition of right-of-use assets of less than 2% of total assets and lease liabilities of less than 16% of total liabilities, and will not have a material impact to the consolidated income statement. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting . |
