osir_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 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: 001-32966

 

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

71-0881115

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7015 Albert Einstein Drive, Columbia, Maryland

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

443-545-1800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☐No  ☒

 

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

 

Large accelerated filer ☐

 

Accelerated filer  ☒

 

 

 

Non-accelerated filer ☐(Do not check if a smaller reporting company)

 

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  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at  August 3, 2018

Common Stock, par value $0.001 per share

 

34,525,886

 

 

 

 

 

 


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

 

INDEX

 

 

 

 

 

 

 

    

 

    

Page

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets — June 30, 2018 and December 31, 2017

 

3

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) — three and six months ended June 30, 2018 and 2017

 

4

 

 

Condensed Consolidated Statements of Cash Flows —six months ended June 30, 2018 and 2017

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

24

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

24

Item 1A. 

 

Risk Factors

 

25

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 3. 

 

Defaults Upon Senior Securities

 

25

Item 4. 

 

Mine Safety Disclosures

 

25

Item 5. 

 

Other Information

 

25

Item 6. 

 

Exhibits

 

26

 

 

 

 

 

Signatures 

 

 

 

27

 

 

 

2


 

Table of Contents

PART I -- FINANCIAL INFORMATION

 

Item 1.Financial Statements 

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

Assets

    

 

 

    

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,071

 

$

3,081

 

Short-term investments

 

 

9,303

 

 

24,807

 

Trade receivables, net

 

 

23,534

 

 

26,053

 

Inventory, net

 

 

11,118

 

 

11,278

 

Insurance receivable

 

 

4,788

 

 

4,788

 

Prepaid expenses and other current assets

 

 

2,876

 

 

2,920

 

Total current assets

 

 

74,690

 

 

72,927

 

Property and equipment, net

 

 

3,295

 

 

3,587

 

Other assets

 

 

1,842

 

 

1,608

 

Total assets

 

$

79,827

 

$

78,122

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

5,452

 

$

5,269

 

Accrued liabilities

 

 

10,023

 

 

9,399

 

Accrued shareholder litigation

 

 

18,500

 

 

18,500

 

Other current liabilities

 

 

1,739

 

 

1,934

 

Total current liabilities

 

 

35,714

 

 

35,102

 

Other long-term liabilities

 

 

2,433

 

 

1,626

 

Total liabilities

 

 

38,147

 

 

36,728

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Common stock, $0.001 par value, 72,000 shares authorized, 34,526 shares issued and outstanding at June 30, 2018, and 90,000 shares authorized, 34,526 shares issued and outstanding at December 31, 2017

 

 

35

 

 

35

 

Additional paid-in-capital

 

 

284,049

 

 

283,905

 

Accumulated other comprehensive loss

 

 

(230)

 

 

(208)

 

Accumulated deficit

 

 

(242,174)

 

 

(242,338)

 

Total  equity

 

 

41,680

 

 

41,394

 

Total liabilities and  equity

 

$

79,827

 

$

78,122

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

    

2018

    

2017

 

 

 

    

 

 

 

 

 

Revenue

 

$

33,876

 

$

29,151

 

$

65,510

 

$

56,132

Cost of revenue

 

 

9,672

 

 

7,668

 

 

18,525

 

 

15,479

Gross profit

 

 

24,204

 

 

21,483

 

 

46,985

 

 

40,653

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

1,749

 

 

924

 

 

3,296

 

 

2,143

Sales and marketing

 

 

16,889

 

 

14,698

 

 

33,176

 

 

29,431

General and administrative

 

 

3,401

 

 

5,427

 

 

10,848

 

 

10,286

Total operating expenses

 

 

22,039

 

 

21,049

 

 

47,320

 

 

41,860

Income (loss) from operations

 

 

2,165

 

 

434

 

 

(335)

 

 

(1,207)

Other income, net

 

 

353

 

 

356

 

 

569

 

 

392

Income (loss) before income taxes

 

 

2,518

 

 

790

 

 

234

 

 

(815)

Income tax expense

 

 

(34)

 

 

(32)

 

 

(70)

 

 

(64)

Net income (loss)

 

 

2,484

 

 

758

 

 

164

 

 

(879)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments available for sale

 

 

189

 

 

(144)

 

 

(22)

 

 

54

Comprehensive income (loss)

 

$

2,673

 

$

614

 

$

142

 

$

(825)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.02

 

$

0.00

 

$

(0.03)

Diluted

 

$

0.07

 

$

0.02

 

$

0.00

 

$

(0.03)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,526

 

 

34,526

 

 

34,526

 

 

34,523

Diluted

 

 

34,556

 

 

34,529

 

 

34,551

 

 

34,523

 

See accompanying notes to the condensed consolidated financial statements.

 

 

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Table of Contents

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2018

    

2017

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income (loss)

 

$

164

 

$

(879)

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Provision for excess and obsolete inventory

 

 

776

 

 

530

 

Loss on disposal of fixed assets

 

 

 —

 

 

 3

 

Realized loss on investments

 

 

263

 

 

152

 

Depreciation

 

 

426

 

 

345

 

Stock-based compensation expense

 

 

144

 

 

47

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivables, net

 

 

2,519

 

 

(166)

 

Inventory, net

 

 

(616)

 

 

(797)

 

Prepaid expenses and other assets

 

 

(190)

 

 

(797)

 

Accounts payable, accrued expenses, and other liabilities

 

 

1,419

 

 

(3,056)

 

Net cash provided by (used in) operating activities

 

 

4,905

 

 

(4,618)

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(134)

 

 

(200)

 

Proceeds from sale of investments

 

 

15,723

 

 

8,238

 

Purchases of investments

 

 

(504)

 

 

(4,756)

 

Net cash provided by investing activities

 

 

15,085

 

 

3,282

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from the exercise of options to purchase common stock

 

 

 —

 

 

128

 

Net cash provided by financing activities

 

 

 —

 

 

128

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

19,990

 

 

(1,208)

 

Cash and cash equivalents at beginning of period

 

 

3,081

 

 

2,833

 

Cash and cash equivalents at end of period

 

$

23,071

 

$

1,625

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

 

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Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

1.  Description of Business

 

Osiris Therapeutics, Inc. (“we”, “us”, “our”, “Osiris”, or the “Company”) researches, develops, manufactures and commercializes regenerative medicine products intended to improve the health and lives of patients and lower overall healthcare costs. We are headquartered in Columbia, Maryland. We continue to advance our research and development (“R&D”) by focusing on innovation in regenerative medicine, including the development of bioengineered stem cell and tissue-based products. We have achieved commercial success with products in orthopedics, sports medicine and wound care.

 

We operate in one segment and are focused on using unique tissue preservation technologies to develop viable human tissue products designed to improve wound closure and surgical outcomes for patients and physicians over standard of care alone. We have achieved commercial success with products in orthopedics, sports medicine, including the Grafix product line, Stravix, BIO4 and Cartiform.

 

We are a fully integrated company, having developed capabilities in R&D, manufacturing, marketing and sales of our products. We are focused on the long-term commercial growth of the Company through the delivery of differentiated products for use across multiple fields of medicine with clear value propositions for patients, providers and third-party payors.

 

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Osiris Therapeutics International GmbH. All intercompany transactions have been eliminated in consolidation. Osiris Therapeutics International GmbH does not have any operations.

 

The condensed financial statements included in this quarterly report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”). 

 

The condensed consolidated balance sheet as of December 31, 2017 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K for the years ended December 31, 2017, 2016, and 2015 (the “Annual Report”).  In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to fairly present the results of operations, financial position and cash flows for the periods indicated.

 

Operating results for any interim period are not necessarily indicative of the results that may be achieved for the full year.

 

Use of Estimates

 

We make certain estimates and assumptions in preparing our condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses for the period presented. Actual results may differ from these estimates.

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Table of Contents

 

 

Income (Loss) per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share adjusts basic income (loss) per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Six months ended

 

 

June 30,

 

June 30,

 

    

2018

    

2017

    

2018

    

2017

 

 

(in thousands, except per share amounts)

Net income (loss)

 

$

2,484

 

$

758

 

$

164

 

$

(879)

Shares used in computation:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

34,526

 

 

34,526

 

 

34,526

 

 

34,523

Basic earnings (loss) per share

 

$

0.07

 

$

0.02

 

$

0.00

 

$

(0.03)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,484

 

$

758

 

$

164

 

$

(879)

Shares used in computation:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

 

34,526

 

 

34,526

 

 

34,526

 

 

34,523

Weighted-average share equivalents from stock options

 

 

30

 

 

 3

 

 

25

 

 

 —

Weighted-average shares and share equivalents outstanding

 

 

34,556

 

 

34,529

 

 

34,551

 

 

34,523

Diluted earnings (loss) per share

 

$

0.07

 

$

0.02

 

$

0.00

 

$

(0.03)

 

Diluted earnings per common share for the three months ended June 30, 2018 and 2017 exclude 382,813 and 645,751 of our outstanding options as of that date, respectively, as their impact on our net income per share is anti-dilutive.  Diluted earnings (loss) per common share for the six months ended June 30, 2018 and 2017 excludes 380,501 and 682,876 of our outstanding options as of that date, respectively, as their impact on our net income (loss) per share is anti-dilutive. 

 

Stockholders’ Equity

 

On June 26, 2018, the Company amended Section 5.7 of Article V of its charter, which was approved by the Company’s stockholders, by decreasing the total number of authorized shares of common stock from ninety million (90,000,000) shares to seventy-two million (72,000,000) shares. The Company is authorized to issue shares of common stock at a par value per share of $0.001 as described in section 5.7 of the charter.

 

Concentration of Risk

 

We maintain cash and cash equivalents as well as short-term investment balances in accounts that exceed federally insured limits. Our investments consist primarily of marketable securities with a total portfolio duration of approximately two years.  We have historically provided credit in the normal course of business to contract counterparties and to the end user customers and distributors of our products. Trade accounts receivable in the accompanying condensed consolidated balance sheets consist primarily of amounts due from end user customers and distributors of our products within the United States.

 

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The Company's revenue concentrations through distributors of 10% or greater are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

Distributor

   

2018

 

   

2017

 

   

2018

 

   

2017

 

A

    

18

%

    

20

%

  

20

%

    

20

%

B

 

 3

%

 

 9

%

  

 5

%

 

10

%

Total

 

21

%

 

29

%

  

25

%

 

30

%

 

 

The Company's accounts receivable concentrations of 10% or greater are as follows:

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

Distributor

    

2018

 

   

2017

 

A

 

20

%

 

24

%

 

 

Recently Adopted Accounting Pronouncements 

 

In May 2014, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (“Topic 606”).” This ASU outlines a single set of comprehensive principles for recognizing revenue under GAAP and supersedes existing revenue recognition guidance. The main principle of this ASU is 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 to in exchange for those goods or services. The Company adopted the new standard on a modified retrospective basis as of January 1, 2018. The Company completed a comprehensive assessment of customer contracts and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements; therefore, no cumulative catch-up adjustment was recorded to prior periods.  See Note 8, “Revenue,” for additional information.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203).” This ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the statement of cash flows. The Company adopted this ASU on January 1, 2018 and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.  As such, no retrospective adjustment was recorded. 

 

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the newly-enacted U.S. Tax Cuts and Jobs Act (the “Act”). SAB 118 allows registrants to include a provisional amount to account for the implications of the Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Act or December 22, 2018.  We continue to evaluate the implications of the Act and have not made any adjustments to the provisional amounts recorded in the prior year. Additionally, the Company intends to file its 2017 U.S. income tax return in the second half of 2018 which may change our tax basis in temporary differences, tax pools, earning, profits and other elements of the income tax effects of the Act estimated as of December 31, 2017. This may result in an adjustment to the tax provision and be reflected as a re-measurement amount recorded in the financial statements during the quarter in which the U.S. tax return is filed.

 

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Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. This ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. The Company is in the process of analyzing initial data gathered to evaluate the impact of adopting this ASU on its consolidated financial statements, the related systems required to capture the increased reporting and disclosures associated with this ASU, and its use of practical expedients. The Company will apply this ASU and its related updates on a modified retrospective basis as of January 1, 2019. The adoption of the guidance will likely have a material effect on the consolidated balance sheets, resulting in the recording of an operating lease asset and liability.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. We have not yet begun to evaluate the specific impacts of this guidance nor have we determined the manner in which we will adopt this guidance.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220),  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  This ASU gives entities the option to reclassify the disproportionate income tax effects caused by the Act from accumulated other comprehensive income to retained earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material.

 

 

3. Investments

 

Our investments consisted of the following as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

Estimated

 

    

Cost

    

Gain

    

Loss

    

 

Fair Value

(in $000's) 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

2,114

 

$

 —

 

$

(60)

 

$

2,054

Obligations of government sponsored enterprises (1)

 

 

1,239

 

 

 —

 

 

(24)

 

 

1,215

Corporate debt securities

 

 

4,962

 

 

 3

 

 

(88)

 

 

4,877

Foreign government bonds

 

 

1,181

 

 

 —

 

 

(24)

 

 

1,157

Total (2)

 

$

9,496

 

$

 3

 

$

(196)

 

$

9,303

 

(1)

Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

(2)

During the six months ended June 30, 2018, investments were sold which resulted in net proceeds of $15.2 million and realized losses of $0.3 million.  Investments were sold in order to provide the funds necessary in cash and cash equivalents for the eventual payment of the settlement of the securities class action lawsuit.

 

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December 31, 2017

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

    

Cost

    

Gain

    

Loss

    

Fair Value

(in $000's) 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

6,077

 

$

 —

 

$

(73)

 

$

6,004

Obligations of government sponsored enterprises (1)

 

 

3,737

 

 

 —

 

 

(31)

 

 

3,706

Corporate debt securities

 

 

12,479

 

 

21

 

 

(66)

 

 

12,434

Foreign government bonds

 

 

2,689

 

 

 —

 

 

(26)

 

 

2,663

Total 

 

$

24,982

 

$

21

 

$

(196)

 

$

24,807

 

(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

The following tables summarize the securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

Less than 12 Months

 

12 Months or  More

 

Total

 

 

Fair

 

Unrealized

    

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

(in $000's)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

 —

 

$

2,054

 

$

(60)

 

$

2,054

 

$

(60)

Obligations of government sponsored enterprises (1)

 

 

350

 

 

(1)

 

 

865

 

 

(23)

 

 

1,215

 

 

(24)

Corporate debt securities

 

 

722

 

 

(4)

 

 

3,294

 

 

(84)

 

 

4,016

 

 

(88)

Foreign government bonds

 

 

199

 

 

(1)

 

 

957

 

 

(23)

 

 

1,156

 

 

(24)

Total

 

$

1,271

 

$

(6)

 

$

7,170

 

$

(190)

 

$

8,441

 

$

(196)

(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Less than 12 Months

 

12 Months or  More

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

    

Value

    

Loss

    

Value

    

Loss

    

Value

    

Loss

(in $000's)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

1,073

 

$

(3)

 

$

4,931

 

$

(70)

 

$

6,004

 

$

(73)

Obligations of government sponsored enterprises (1)

 

 

1,298

 

 

(6)

 

 

2,408

 

 

(25)

 

 

3,706

 

 

(31)

Corporate debt securities

 

 

1,667

 

 

(5)

 

 

7,286

 

 

(61)

 

 

8,953

 

 

(66)

Foreign government bonds

 

 

597

 

 

(3)

 

 

2,066

 

 

(23)

 

 

2,663

 

 

(26)

Total

 

$

4,635

 

$

(17)

 

$

16,691

 

$

(179)

 

$

21,326

 

$

(196)

(1)Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

As of June 30, 2018 and December 31, 2017, there were no material unrealized losses that the Company believed to be other-than-temporary.

 

The following table summarizes maturities of our investments available-for-sale as of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

June 30,  2018

(in $000's)

    

Cost

    

Fair Value 

Maturities:

 

 

 

 

 

 

Within 1 year

 

$

1,632

 

$

1,625

After 1 year through 5 years

 

 

7,864

 

 

7,678

Total investments available for sale

 

$

9,496

 

$

9,303

 

Realized gains (losses) net of investment income was $(0.2) million and $0.2 million for three months ended June 30, 2018, and 2017, respectively. Realized losses net of investment income was $0.3 million and $0.2 million for the six

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months ended June 30, 2018 and 2017, respectively. The realized losses net of investment income have been included as a component of “Other income, net” in the accompanying unaudited condensed consolidated statements of comprehensive income (loss). 

 

4. Inventory, net

 

Inventory, net consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2018

    

2017

 

(in $000's)

 

 

 

 

 

 

 

Raw materials and supplies

 

$

690

 

$

1,330

 

Work-in-process

 

 

6,627

 

 

5,605

 

Finished goods

 

 

6,574

 

 

6,350

 

 

 

 

13,891

 

 

13,285

 

Reserve for excess and obsolete inventory

 

 

(2,773)

 

 

(2,007)

 

Inventory, net

 

$

11,118

 

$

11,278

 

 

Work-in-process inventory is largely product that is in quarantine pending completion of our quality assurance procedures. Finished goods inventory included gross consigned inventory of $1.9 million and $1.5 million as of June 30, 2018 and December 31, 2017, respectively. This consigned finished goods inventory was reduced by reserves of $0.8 million and $0.6 million as of June 30, 2018 and December 31, 2017, respectively.

 

5. Property and Equipment, net

 

Property and equipment, net, consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciable Life

 

June 30,

 

December 31,

 

 

(in years)

    

2018

    

2017

(in $000's)

 

 

 

 

 

 

 

 

Laboratory and manufacturing equipment

 

 3

-

7

 

$

3,190

 

$

3,083

Computer hardware, furniture and fixtures

 

 3

-

7

 

 

944

 

 

1,134

Leasehold improvements

 

(A)

 

 

 

 

6,359

 

 

6,344

 

 

 

 

 

 

 

10,493

 

 

10,561

Accumulated depreciation

 

 

 

 

 

 

(7,198)

 

 

(6,974)

Property and equipment, net

 

 

 

 

 

$

3,295

 

$

3,587


(A) Shorter of economic life or lease term.

 

Depreciation expense was $0.2 million and $0.4 million for the three and six month periods ended June 30, 2018, respectively, and $0.2 million and $0.3 million for the three and six month periods ended June 30, 2017, respectively.

 

6. Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2018

    

2017

(in $000's)

 

 

 

 

 

 

Payroll and related

 

$

2,378

 

$

1,980

Commissions

 

 

4,749

 

 

5,651

Legal and accounting

 

 

895

 

 

905

Lease liabilities

 

 

321

 

 

120

Other

 

 

1,680

 

 

743

Total

 

$

10,023

 

$

9,399

 

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7. Financial Instruments and Fair Value

 

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

 

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and are as follows:

 

 

 

Level 1

Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

 

Level 2

Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.

 

 

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 and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

 

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in $000's)

 

June 30, 2018

Assets

    

Level I

    

Level II

    

Level III

    

Total

Investments:  Available for Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

2,054

 

$

 —

 

$

2,054

Obligations of government sponsored enterprises

 

 

 —

 

 

1,215

 

 

 —

 

 

1,215

Corporate debt securities

 

 

 —

 

 

4,877

 

 

 —

 

 

4,877

Foreign government bonds

 

 

 —

 

 

1,157

 

 

 —

 

 

1,157

Total investments available for sale

 

$

 —

 

$

9,303

 

$

 —

 

$

9,303

 

12


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

(in $000's)

 

December 31, 2017

Assets

    

Level I

    

Level II

    

Level III

    

Total

Investments:  Available for Sale Securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 —

 

$

6,004

 

$

 —

 

$

6,004

Obligations of government sponsored enterprises

 

 

 —

 

 

3,706

 

 

 —

 

 

3,706

Corporate debt securities

 

 

 —

 

 

12,434

 

 

 —

 

 

12,434

Foreign government bonds

 

 

 —

 

 

2,663

 

 

 —

 

 

2,663

Total investments available for sale

 

$

 —

 

$

24,807

 

$

 —

 

$

24,807

 

 

 

There were no transfers in or out of Level I, II, or III during the six months ended June 30, 2018.

 

 

8. Revenue

 

The Company began accounting for revenue in accordance with Topic 606 on January 1, 2018, using the modified retrospective method. Under the new revenue standard for arrangements that are determined to be within the scope of Topic 606, the Company recognizes revenue following the five-step model: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines the performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Accordingly, the Company recognizes revenue when title to the product, ownership and risk of loss transfer to the customer, which is either the date of receipt by the customer or when we receive appropriate notification that the product has been used or implanted in a patient. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for transferring the goods. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.

 

The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods to a customer. For contracts that include multiple performance obligations, the Company allocates the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.

 

The Company’s incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.

 

The following table presents our revenues disaggregated by product line: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2018

   

2017

   

2018

   

2017

 

(in $000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

Grafix/Stravix

 

$

25,350

 

$

21,308

 

$

47,971

 

$

40,745

 

BIO4

 

 

6,152

 

 

5,776

 

 

12,948

 

 

11,143

 

Cartiform