Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Organization and basis of presentation | GenMark Diagnostics, Inc., the Company or GenMark, was formed by Osmetech plc, or Osmetech, as a Delaware corporation in February 2010, and had no operations prior to its initial public offering, or the IPO, which was completed in June 2010. Immediately prior to the closing of the IPO, GenMark acquired all of the outstanding ordinary shares of Osmetech in a reorganization under the applicable laws of the United Kingdom. As a result of the reorganization, all of the issued ordinary shares in Osmetech were cancelled in consideration of (i) the issuance of common stock of GenMark to the former shareholders of Osmetech and (ii) the issuance of new shares in Osmetech to GenMark. Following the reorganization, Osmetech became a subsidiary controlled by GenMark, and the former shareholders of Osmetech received shares of GenMark. Any historical discussion of GenMark relates to Osmetech and its consolidated subsidiaries prior to the reorganization. In September 2012, GenMark placed Osmetech into liquidation to simplify its corporate structure. The liquidation of Osmetech was completed in the fourth quarter of 2013. |
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As the reorganization was deemed to be a transaction under common control, GenMark accounted for the reorganization in a manner similar to a pooling-of-interests. Once the reorganization became effective, all stock options granted under the Osmetech plc 2003 U.S. Equity Compensation Plan, long term incentive awards and all warrants issued were exchanged for options and warrants exercisable for the common stock of the Company. |
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Corporate Reorganization |
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During the quarter ended June 30, 2011, the Company underwent a corporate reorganization intended to simplify its U.S. entity structure. As part of the reorganization, Osmetech Technologies, Inc. merged into Clinical Micro Sensors, Inc., or CMS, with CMS surviving. Additionally, Osmetech plc converted to a U.K. limited company for U.K. legal and tax purposes, and made an entity classification election to be treated as an entity disregarded from GenMark Diagnostics, Inc. for U.S. federal income tax purposes. The reorganization did not trigger any material U.S. federal or U.K. income tax expense. Additionally, the post-reorganization structure allowed GenMark Diagnostics, Inc. to elect to file a consolidated U.S. federal income tax return with its remaining U.S. subsidiaries, CMS and Osmetech, Inc. The liquidation of Osmetech plc was competed in the fourth quarter of 2013. |
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Segment Reporting |
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The Company currently operates in one reportable business segment, which encompasses the development, manufacturing, sales and support of instruments and molecular tests based on its proprietary eSensor® detection technology. Substantially all of the Company’s operations and assets are in the United States of America. |
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Use of Estimates |
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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 that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to accounts receivable, inventories, property and equipment, intangible assets, employee related compensation accruals, warranty liabilities, tax valuation accounts and share-based compensation. Actual results could differ from those estimates. |
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Basis of Presentation |
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The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses from operations since its inception and has an accumulated deficit of $262,472,000 at December 31, 2014. Management expects operating losses to continue through the foreseeable future. The Company's ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure through expanding its product offerings and consequently increasing its product revenues. Cash, cash equivalents, restricted cash, and investments at December 31, 2014 totaled $70,506,000. The Company has prepared cash flow forecasts which indicate, based on the Company’s current cash resources available, that the Company will have sufficient resources to fund its business for at least the next 12 months. |
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The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP, and applicable regulations of the Securities and Exchange Commission, or the SEC. |
Principles of Consolidation | Principles of Consolidation |
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The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. |
Corporate Reorganization | Corporate Reorganization |
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During the quarter ended June 30, 2011, the Company underwent a corporate reorganization intended to simplify its U.S. entity structure. As part of the reorganization, Osmetech Technologies, Inc. merged into Clinical Micro Sensors, Inc., or CMS, with CMS surviving. Additionally, Osmetech plc converted to a U.K. limited company for U.K. legal and tax purposes, and made an entity classification election to be treated as an entity disregarded from GenMark Diagnostics, Inc. for U.S. federal income tax purposes. The reorganization did not trigger any material U.S. federal or U.K. income tax expense. Additionally, the post-reorganization structure allowed GenMark Diagnostics, Inc. to elect to file a consolidated U.S. federal income tax return with its remaining U.S. subsidiaries, CMS and Osmetech, Inc. The liquidation of Osmetech plc was competed in the fourth quarter of 2013. |
Cash and Cash Equivalents and Short-Term Investments | Cash and Cash Equivalents and Marketable Securities |
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Cash and cash equivalents consist of cash on deposit with banks, money market instruments and certificates of deposit with original maturities of three months or less at the date of purchase. Marketable securities consist of certificates of deposits that mature in greater than three months. Marketable securities are accounted for as "available-for-sale" with the carrying amounts reported in the balance sheets stated at cost, which approximates their fair market value, with unrealized gains and losses, if any, reported as a separate component of stockholders' equity and included in comprehensive loss. |
Restricted Cash | Restricted Cash |
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Restricted cash represents amounts designated for uses other than current operations and includes $758,000 at December 31, 2014 held as security for the Company’s letter of credit with Banc of California. |
Fair Value of Financial Instruments | Fair Value of Financial Instruments |
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The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value: |
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• | Level 1 — Quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | |
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• | Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | | | | | | | | | | |
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• | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | | | | | | | | | | |
The carrying amounts of financial instruments such as accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate the related fair values due to the short-term maturities of these instruments. |
Receivables | Receivables |
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Accounts receivable consist of amounts due to the Company for sales to customers and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based on an assessment of the collectability of specific customer accounts, the aging of accounts receivable, and a reserve for unknown items based upon the Company’s historical experience. |
Inventories | Inventories |
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Inventories are stated at the lower of cost (first-in, first-out) or market and include direct labor, materials, and manufacturing overhead. The Company periodically reviews inventory for evidence of slow-moving or obsolete parts, and writes inventory down to market value, as needed. This write down is based on management’s review of inventories on hand, compared to estimated future usage and sales, shelf-life assumptions, and assumptions about the likelihood of obsolescence. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required. Inventory impairment charges establish a new cost basis for inventory and charges are not reversed subsequently to income, even if circumstances later suggest that increased carrying amounts are recoverable. |
Property and Equipment-net | Property and Equipment-net |
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Property, equipment and leasehold improvements are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which are: |
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Machinery and laboratory equipment | 3 – 5 years | | | | | | | | | | |
XT-8 Instruments | 4 years | | | | | | | | | | |
Office equipment | 5 years | | | | | | | | | | |
Leasehold improvements | over the shorter of the remaining life of the lease or the useful economic life of the asset | | | | | | | | | | |
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Property and equipment includes diagnostic instruments used for sales demonstrations or placed with customers under several types of arrangements, including performance evaluation programs, or PEPs, and rentals. PEPs are placed with customers for evaluation periods of up to six months. The customer is generally required to purchase a minimum quantity of reagents and, at the end of the evaluation period, must purchase or return the instrument or sign a reagent rental agreement. Maintenance and repair costs are expensed as incurred. |
Intangible Assets | Intangible Assets |
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Intangible assets are comprised of licenses or sublicenses to technology covered by patents owned by third parties, and are amortized on a straight-line basis over the expected useful lives of these assets, which is generally 10 years. Amortization of licenses typically begins upon the Company obtaining access to the licensed technology and is recorded in cost of revenues for licenses supporting commercialized products. The amortization of licenses to technology supporting products in development is recorded in research and development expenses. |
Impairment of Long-Lived Assets | Impairment of Long-Lived Assets |
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The Company assesses the recoverability of long-lived assets, including intangible assets, by periodically evaluating the carrying value whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impairment is indicated, the Company writes down the carrying value of the asset to its estimated fair value. This fair value is primarily determined based on estimated discounted cash flows. During 2013, the Company recorded an impairment charge of $1,624,000 to general and administrative expenses related to previously capitalized payments made under a license agreement, which the Company terminated in December 2013. The Company also recorded an impairment charge of $302,000 related to production equipment built for NMTC during 2013. The Company did not recognize any impairment charges during the years ended December 31, 2014 and 2012. |
Use of Estimates | Use of Estimates |
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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 that affect the amounts reported in the financial statements and the notes thereto. The Company’s significant estimates included in the preparation of the financial statements are related to accounts receivable, inventories, property and equipment, intangible assets, employee related compensation accruals, warranty liabilities, tax valuation accounts and share-based compensation. Actual results could differ from those estimates. |
Segment Reporting | Segment Reporting |
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The Company currently operates in one reportable business segment, which encompasses the development, manufacturing, sales and support of instruments and molecular tests based on its proprietary eSensor® detection technology. Substantially all of the Company’s operations and assets are in the United States of America. |
Revenue Recognition | Revenue Recognition |
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The Company recognizes revenue from product sales and contract arrangements, net of discounts and sales related taxes. The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. |
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The Company offers customers the choice to either purchase a system outright or to receive a system free of charge in exchange for an annual minimum purchase commitment for diagnostic test cartridges. When a system is sold, the Company generally recognizes revenue upon shipment of the unit, however, if the end user already has the instrument being purchased installed at its location, revenue is recognized when the revenue recognition terms other than delivery have been satisfied. When a system is placed free of charge under a “reagent rental” agreement, the Company retains title to the equipment and it remains capitalized on the balance sheet under property and equipment. Under reagent rental agreements, the Company’s customers pay an additional system rental fee for each test cartridge purchased which varies based on the monthly volume of test cartridges purchased. The system rental fee and diagnostic test cartridges are recognized as contingent rental payments and are included in product revenue in the Company’s consolidated financial statements. |
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The Company has not had significant product returns and is not contractually obligated to accept returns unless such returns are related to warranty provisions. The Company does not accept reagent product returns, mainly due to FDA regulations, and does not offer volume rebates or provide price protection. |
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The Company enters into performance evaluation program, or PEP, agreements pursuant to which a system is installed on the premises of a pre-qualified customer for the purpose of allowing the customer to evaluate the system’s functionality over an extended trial period. The customer generally agrees to purchase a starter kit at the time of installation and agrees to purchase a minimum volume of reagents over the life of the trial period. |
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Revenues related to royalties received from licenses are recognized evenly over the contractual period to which the license relates. |
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In those cases where the Company bills shipping and handling costs to customers, the amounts billed are included in product revenue |
Product Warranties | Product Warranties |
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The Company generally offers a one-year warranty for its systems sold to customers and up to a sixty day warranty for reagents and provides for the estimated cost of the product warranty at the time the system sale is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. |
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Product warranty reserve activity for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands): |
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| 2014 | | 2013 | | 2012 |
Beginning balance | $ | 226 | | | $ | 217 | | | $ | 92 | |
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Warranty expenses incurred | (608 | ) | | (649 | ) | | (305 | ) |
Provisions | 577 | | | 658 | | | 430 | |
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Ending balance | $ | 195 | | | $ | 226 | | | $ | 217 | |
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Research and Development Costs | Research and Development Costs |
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The Company expenses all research and development costs in the periods in which they are incurred unless there is alternative future use that supports the capitalization of an asset. |
Income Taxes | Income Taxes |
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Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. A full valuation allowance has been recorded against the Company’s net deferred tax assets due to the uncertainty surrounding the Company’s ability to utilize these assets in the future. The Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest related to uncertain tax positions as a component of income tax expense. |
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A tax position that is more likely than not to be realized is measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the taxing authority that has full knowledge of all relevant information. Measurement of a tax position that meets the more likely than not threshold considers the amounts and probabilities of the outcomes that could be realized upon settlement using the facts, circumstances and information available at the reporting date. |
Share-Based Compensation | Stock-Based Compensation |
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The Company recognizes stock-based compensation expense related to stock options, shares purchased under the Company's 2013 Employee Stock Purchase Plan, or ESPP, restricted stock awards, and restricted stock units granted to employees and directors in exchange for services. The compensation expense is based on the fair value of the applicable award utilizing various assumptions regarding the underlying attributes of the award. The stock-based compensation expense is recorded in cost of revenues, sales and marketing, research and development, and general and administrative expenses based on the employee's respective function. |
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The estimated fair value of stock options granted, net of forfeitures expected to occur during the vesting period, is amortized as compensation expense on a straight-line basis to reflect vesting as it occurs. The expense is derived from the Black-Scholes Option Pricing Model that uses several judgment-based variables to calculate the expense. The inputs include the expected term of the stock option, the expected volatility and other factors. |
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• | Expected Term. Expected term represents the period that the stock-based awards are expected to be outstanding and is determined by using the simplified method. | | | | | | | | | | |
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• | Expected Volatility. Expected volatility represents the volatility in the Company’s stock price expected over the expected term of the option and is determined by review of the Company’s and similar companies’ historical experience. | | | | | | | | | | |
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• | Expected Dividend. The Black-Scholes Option Pricing Model calls for a single expected dividend yield as an input. The Company assumed no dividends as it has never paid dividends and has no current plans to do so. | | | | | | | | | | |
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• | Risk-Free Interest Rate. The risk-free interest rate used in the Black-Scholes Option Pricing Model is based on published U.S. Treasury rates in effect at the time of grant for periods corresponding with the expected term of the option. | | | | | | | | | | |
The compensation expense related to the grant of restricted stock awards or units is calculated as the fair market value of the stock on the grant date as further adjusted to reflect expected forfeitures. |
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Foreign Currency Translation | Foreign Currency Translation |
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In 2010, the Company changed its functional currency from the British Pound to the U.S. Dollar and assets and liabilities of the Company’s entities outside of the U.S. were translated into U.S. dollars based on foreign currency exchange rates in effect at the end of each period, and revenues and expenses were translated at weighted average exchange rates during the periods. Gains or losses resulting from these foreign currency translations of the Company’s assets and liabilities were recorded in accumulated other comprehensive loss in the consolidated balance sheets. Upon the liquidation of Osmetech in the fourth quarter of 2013, $450,000 of accumulated other comprehensive loss was realized in other expense during 2013. |
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Transactions in foreign currencies were recognized using the rate of exchange prevailing at the date of the transaction. Foreign exchange gain (loss), which is included in the accompanying consolidated statements of operations, totaled $19,000 $19,000 and $6,000 for the years ended December 31, 2014, 2013 and 2012, respectively, and relate primarily to transactions denominated in U.S. dollars which were paid in Euros. |
Net Loss per Common Share | Net Loss per Common Share |
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Basic net loss per share is calculated by dividing loss available to stockholders of our common stock (the numerator) by the weighted average number of shares of the Company's common stock outstanding during the period (the denominator). Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted loss per share is calculated in a similar way to basic loss per share except that the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential shares had been issued unless the effect would be anti-dilutive. |
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The computations of diluted net loss per share for the years ended December 31, 2014, 2013 and 2012 did not include the effects of the following stock options to acquire stock which were outstanding as of the end of each year because the inclusion of these securities would have been anti-dilutive (in thousands). |
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| Year Ended December 31, | | | |
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Options outstanding to purchase common stock | 2,479 | | | 1,821 | | | 1,539 | | | | |
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Unvested restricted stock | 916 | | | 976 | | | 966 | | | | |
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Unvested performance stock | 32 | | | — | | | — | | | | |
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Total | 3,427 | | | 2,797 | | | 2,505 | | | | |
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Concentration of Risk | Concentration of Risk |
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Sales to individual customers representing greater than 10% of the total revenues for the years ended December 31, 2014, 2013 and 2012 were as follows: |
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| Year Ended December 31, | | | |
| 2014 | | 2013 | | 2012 | | | |
Natural Molecular Testing Corporation | — | % | | 30 | % | | 58 | % | | | |
Companion Dx Reference Labs, LLC | — | | | — | % | | 10 | % | | | |
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Comprehensive Loss | Comprehensive Loss |
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The Company has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company’s comprehensive loss is comprised of net losses, unrealized gains and losses on available for sale securities and foreign currency translation. |
Recent Accounting Pronouncements | From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board, or the FASB, or other standard setting bodies that the Company adopts as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. |
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In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the Company beginning in the first quarter of fiscal 2017 and allows for a full retrospective or a modified retrospective adoption approach. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated financial statements. |