QUOTIENT LIMITED You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included later in this Annual Report on Form 10-K. Our discussion of results for the fiscal year endedMarch 31, 2019 is included in Part II, Item 7 of the annual report on Form 10-K for the fiscal year endedMarch 31, 2020 . In addition to historical financial information, the discussion below contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in "Risk Factors."
Overview
We were incorporated in Jersey, Channel Islands onJanuary 18, 2012 . OnFebruary 16, 2012 , we acquired the entire issued share capital ofAlba Bioscience Limited (or Alba),Quotient Biodiagnostics, Inc. (or QBDI) and QBD (QS IP) Limited (or QSIP) fromQuotient Biodiagnostics Group Limited (or QBDG), our predecessor. Our Business We are a commercial-stage diagnostics company committed to reducing healthcare costs and improving patient care through the provision of innovative tests within established markets. Our initial focus is on blood grouping and donor disease screening, which is commonly referred to as transfusion diagnostics. Blood grouping involves specific procedures performed at donor or patient testing laboratories to characterize blood, which includes antigen typing and antibody detection. Disease screening involves the screening of donor blood for unwanted pathogens using two different methods, a serological approach (testing for specific antigens or antibodies) and a molecular approach (testing for DNA or RNA). We have over 35 years of experience developing, manufacturing and commercializing conventional reagent products used for blood grouping within the global transfusion diagnostics market. We are developing MosaiQ, our proprietary technology platform, to better address the comprehensive needs of this large and established market. We believe MosaiQ has the potential to transform transfusion diagnostics, significantly reducing the cost of blood grouping in the donor and patient testing environments, while improving patient outcomes. We currently operate as one business segment with 435 employees in theUnited Kingdom ,Switzerland andthe United States as ofMarch 31, 2021 . Our principal markets arethe United States ,Europe andJapan . Based on the location of the customer, revenues outsidethe United States accounted for 35%, 45% and 49% of total revenue during the years endedMarch 31, 2021 , 2020 and 2019, respectively. We have incurred net losses and negative cash flows from operations in each year since we commenced operations in 2007. As ofMarch 31, 2021 , we had an accumulated deficit of$591.9 million . We expect our operating losses will continue for at least the next fiscal year as we continue our investment in the commercialization of MosaiQ. Our total revenue was$43.4 million for the year endedMarch 31, 2021 ,$32.7 million for the year endedMarch 31, 2020 and$29.1 million for the year endedMarch 31, 2019 . Our net loss was$108.5 million for the year endedMarch 31, 2021 ,$102.8 million for the year endedMarch 31, 2020 and$105.4 million for the year endedMarch 31, 2019 . From our incorporation in 2012 toMarch 31, 2020 , we have raised$160.0 million of gross proceeds through the private placement of our ordinary and preference shares and warrants,$346.7 million of gross proceeds from public offerings of our shares and issuances of ordinary shares upon exercise of warrants and$145.0 million of gross proceeds from the issuance of 12% Senior Secured Notes, or the Secured Notes. OnSeptember 15, 2020 , we completed a public offering of 20,294,117 newly issued ordinary shares at a price of$4.25 per share which raised$86.3 million of gross proceeds before deducting underwriting discounts and other offering expenses of$5.6 million . InMay 2021 , we issued$95.0 million aggregate principal amount of the Convertible Notes. On or prior toJune 2, 2021 , we may issue up to an additional$15.0 million aggregate principal amount of the Convertible Notes in one or more subsequent offerings. As discussed further below under "-Liquidity and Capital Resources," we have approximately$35.0 million of cash invested in two funds that have suspended redemptions, and there can be no assurance as to the timing or amount of future distributions from these funds. As ofMarch 31, 2021 , we had available cash, cash equivalents and short-term investments of$111.7 million and$9.0 million of restricted cash held as part of the arrangements relating to our Secured Notes and the lease of our property in Eysins,Switzerland . - 46 -
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Regulatory and Commercial Milestones
You should read the following regulatory and commercial milestones update in conjunction with the discussion included under the sections "Item 1. Business" and "Item 1A. Risk Factors".
• Initial European Regulatory Approval - we filed for European regulatory
approval for our initial MosaiQ IH Microarray in late
notified of its approval on
regulatory approval of the initial MosaiQ SDS Microarray in
were notified of its approval on
•
IH and SDS, testing menus included the completion of the validation and
verification, or "V&V", concordance study for the expanded MosaiQ IH
Microarray menu, which we announced in
expanded MosaiQ SDS Microarray is planned for the coming months.
• Field Trials - we commenced field trials for the expanded MosaiQ IH
Microarray in
were initially suspended due to the COVID-19 pandemic in
the end of
eased in all three trial locations allowing the work to recommence. However,
subsequent governmental restrictions implemented towards the end of 2020
impacted our ability to conduct these trials, as discussed below. We
announced the initial results from these trials in November 2020 . Based on
our internal performance testing, we subsequently determined to enhance alimited number of the tests on the expanded MosaiQ IH Microarray. Since then,
further field trials in
IH Microarray have been postponed due to the COVID-19 pandemic. We expect
these trials to re-commence in the second quarter of calendar year 2021 in
expect field trials for the expanded MosaiQ SDS Microarray to commence
towards the end of calendar year 2021.
• Ongoing Regulatory Approval Process - we filed for
for our initial MosaiQ SDS Microarray on
2020, we received a request from the FDA for additional testing data related
to specific individual performance characteristics of the assays on this
microarray. We anticipate that we will resubmit our filing and receive 510(k)
clearance for the initial MosaiQ SDS Microarray during the calendar year
2021. We expect to make the initial European regulatory submissions for our
expanded MosaiQ IH Microarray during the third quarter of calendar year 2021,
with the U.S. regulatory submissions following in the fourth quarter of
calendar year 2021 or first quarter of calendar year 2022. We expect to
receive the CE mark for the expanded MosaiQ IH Microarray by the fourth
quarter of calendar year 2021. We expect to make a European regulatorysubmission for the expanded MosaiQ SDS Microarray in the second quarter of
calendar year 2022, with the
second or third quarter of calendar year 2022. As noted above, our progress
toward regulatory approvals has been adversely impacted by the disruptive
effect of the COVID-19 pandemic. Our timing expectations described in this
paragraph are subject to a variety of factors, including COVID-19 impacts,
that could cause further delays.
• Patient IH Microarray - we are developing for Ortho the MosaiQ IH3
Microarray, and we expect to submit it for CE mark in the first half of
calendar year 2022.
COVID-19 Pandemic
You should read the following update regarding the COVID-19 pandemic in conjunction with the discussion included under the sections "Item 1. Business" and "Item 1A. Risk Factors".
OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The governments of each of the major locations in which we operate, theUnited Kingdom ,Switzerland andthe United States , have implemented varying measures and restrictions to combat the COVID-19 pandemic. The restrictions implemented at the beginning of the pandemic directly impacted our on-going clinical trials for our expanded MosaiQ IH Microarray inEurope and the commencement of clinical trials for our expanded MosaiQ IH Microarray inthe United States . All external work on these trials was suspended inMarch 2020 until such time as the existing restrictions in the relevant jurisdictions are removed or moderated. By the end ofMay 2020 , quarantine and containment measures and restrictions had eased in all of the three European trial locations allowing the work to recommence. - 47 - -------------------------------------------------------------------------------- In addition, onApril 6, 2020 , we announced the completion of the development phase of the MosaiQ COVID-19 Microarray, in response to the COVID-19 pandemic. OnApril 27, 2020 , we published the final performance data for the MosaiQ COVID-19 Microarray, achieving 100% sensitivity and 99.8% specificity, and onMay 1, 2020 , we announced the CE Mark for this Microarray. In addition, inMay 2020 , we submitted an application to the FDA for an Emergency Use Authorization (EUA) of the MosaiQ COVID-19 Microarray inthe United States , and inSeptember 2020 , we announced the EUA had been issued by the FDA for this Microarray. We signed the first commercial contract for the sale of the MosaiQ COVID-19 Microarray inMay 2020 , and we have subsequently entered into nine additional contracts with customers inEurope andthe United States . In addition, we developed an enhanced, semi-quantitative MosaiQ COVID-19 Microarray, which was CE marked as ofJanuary 29, 2021 . Towards the end of 2020 and beginning of 2021, there was a widespread increase, or "second wave," in reported infections from COVID-19, including inEurope andthe United States . In response, various countries including inEurope announced the re-imposition of some restrictions on social, business and other activities. Government travel restrictions and lockdowns imposed in response to the second wave seriously affected our operations inEurope and theUnited Kingdom . In spite of this widespread increase of COVID-19 infections, the COVID-19 pandemic and the associated restrictions have not had a material adverse impact on our conventional reagent revenues. Customer demand has remained robust sinceMarch 31, 2020 and, to date, supply chain disruptions have been minimal. Our manufacturing operations inEdinburgh, Scotland have been adapted to meet social distancing requirements, which impacted our operating costs during the year endedMarch 31, 2021 . However, the second wave negatively affected the on-going field trials for our expanded MosaiQ IH Microarray, with travel restrictions and lockdowns making it difficult for relevant teams to spend time on-site and resulting in trials repeatedly stopping and restarting. Furthermore, these restrictions and lockdowns have impacted our research and development activities, slowed down the regulatory approval process and delayed the timing of customer tenders. The extent to which the COVID-19 pandemic will impact our business, operations and financial results will depend on future developments and numerous evolving factors, which are highly uncertain and difficult to predict. See Item 1A. Risk Factors - "We face risks related to health pandemics, epidemics and outbreaks, including the outbreak of the current COVID-19 pandemic, which could significantly disrupt our operations and could have a material adverse impact on us." Revenue We generate product sales revenue from the sale of conventional reagent products directly to hospitals, donor collection agencies and independent testing laboratories inthe United States , theUnited Kingdom and to distributors inEurope and the rest of the world, and indirectly through sales to our OEM customers. We recognize revenues in the form of product sales when the goods are shipped. Products sold by standing purchase orders as a percentage of product sales revenue were 67%, 70% and 68% for the years endedMarch 31, 2021 , 2020 and 2019, respectively. We also provide product development services to our OEM customers. We recognize revenue from these contractual relationships in the form of product development fees, which are included in Other revenues. In addition, during the year endedMarch 31, 2021 , we began to generate sales revenue from the MosaiQ COVID-19 Microarray inEurope andthe United States , and our product sales from this microarray were approximately$1.3 million during this period. Although we believe that these product sales could continue in the first half of the next financial year, we believe there is ultimately a limited opportunity for future revenue from our MosaiQ COVID-19 Microarray beyond that timeframe, based on the limited demand for COVID-19 antibody testing that we are observing. For a description of our revenue recognition policies, see "-Critical Accounting Policies and Significant Judgments and Estimates-Revenue Recognition and Accounts Receivable." Our revenue is denominated in multiple currencies. Sales inthe United States and to certain of our OEM customers are denominated inU.S. Dollars. Sales inEurope and the rest of the world are denominated primarily inU.S. Dollars, Pounds Sterling or Euros. Our expenses are generally denominated in the currencies in which our operations are located, which are primarily in theUnited Kingdom ,Switzerland andthe United States . We operate globally and therefore changes in foreign currency exchange rates may become material to us in the future due to factors beyond our control. See "-Quantitative and Qualitative Disclosure About Market Risk-Foreign Currency Exchange Risk."
Cost of revenue and operating expenses
Cost of revenue consists of direct labor expenses, including employee benefits, overhead expenses, material costs and freight costs, along with the depreciation of manufacturing equipment and leasehold improvements. Our gross profit represents total revenue less the cost of revenue, gross margin represents gross profit expressed as a percentage of total revenue, and gross margin on product sales represents gross margin excluding other revenues as a percentage of revenues excluding other revenues. We expect our overall cost of revenue to increase in absoluteU.S. Dollars as we continue to increase our product sales volumes. However, we also believe that we can achieve efficiencies in our manufacturing operations, primarily through increasing production volumes. - 48 - -------------------------------------------------------------------------------- Our sales and marketing expenses include costs associated with our sales organization for conventional reagent products, including our direct sales force, as well as our marketing and customer service personnel, and the costs of the MosaiQ commercial team. These expenses consist principally of salaries, commissions, bonuses and employee benefits, as well as travel and other costs related to our sales and product marketing activities. We expense all sales and marketing costs as incurred. We expect sales and marketing expense to increase in absoluteU.S. Dollars, primarily as a result of commissions on increased product sales inthe United States and as we grow the MosaiQ commercial team. Our research and development expenses include costs associated with performing research, development, field trials and our regulatory activities, as well as production costs incurred in advance of the commercial launch of MosaiQ. Research and development expenses include research personnel-related expenses, fees for contractual and consulting services, travel costs, laboratory supplies and depreciation of laboratory equipment. We expense all research and development costs as incurred, net of government grants received and tax credits. OurUK subsidiary claims certain tax credits on its research and development expenditures and these are included as an offset to our research and development expenses. Our research and development efforts are focused on developing new products and technologies for the global transfusion diagnostics market. We segregate research and development expenses for the MosaiQ project from expenses for other research and development projects. We do not maintain detailed records of these other costs by activity. We are nearing completion of the initial development of MosaiQ and expect our costs associated with field trials and regulatory approvals will increase at the same time as our development costs decrease. As we move to commercialization of MosaiQ in the donor testing market, we expect our overall research and development expense to decrease. Our general and administrative expenses include costs for our executive, accounting and finance, legal, corporate development, information technology and human resources functions. We expense all general and administrative expenses as incurred. These expenses consist principally of salaries, bonuses and employee benefits for the personnel performing these functions, including travel costs. These expenses also include share-based compensation, professional service fees (such as audit, tax and legal fees), costs related to our Board of Directors, and general corporate overhead costs, which include depreciation and amortization. We expect our general and administrative expenses to increase as our business develops and also due to the costs of operating as a public company, such as additional legal, accounting and corporate governance expenses, including expenses related to compliance with the Sarbanes-Oxley Act, directors' and officers' insurance premiums and investor relations expenses. Net interest expense consists primarily of interest charges on our Secured Notes and the amortization of debt issuance costs (which includes amortization of the one-time consent payment of$3.9 million paid to holders of our Secured Notes inDecember 2018 ), as well as accrued dividends on the 7% cumulative redeemable preference shares issued inJanuary 2015 . We amortize debt issuance costs over the life of the note and report them as interest expense in our statements of operations. Net interest also includes the expected costs of the royalty rights agreements we entered into inOctober 2016 ,June 2018 ,December 2018 andMay 2019 with the purchasers or holders of the Secured Notes, as applicable. See Note 3 "Debt" and Note 8 "Ordinary and Preference Shares - Preference shares" to our consolidated financial statements included in this Annual Report for additional information. Other income (expense), net consists primarily of exchange fluctuations. These include realized exchange fluctuations resulting from the settlement of transactions in currencies other than the functional currencies of our businesses. Monetary assets and liabilities that are denominated in foreign currencies are measured at the period-end closing rate with resulting unrealized exchange fluctuations. The functional currencies of our business are Pounds Sterling, Swiss Franc andU.S. Dollars depending on the entity. Other income (expense) also includes exceptional costs related to deferred debt issue costs expensed on the repayment of debt facilities and certain other non-recurring items as mentioned below under "-Results of Operations- Comparison of Years endedMarch 31, 2021 and 2020- Other income (expense)" and "-Results of Operations- Comparison of Years endedMarch 31, 2020 and 2019- Other income (expense)." As discussed in more detail below, provision for income taxes in the year endedMarch 31, 2021 reflected the taxes payable on the taxable income of a subsidiary and the resolution of a major tax uncertainty related to the treatment of certain tax depreciation allowances. Provision for income taxes in the years endedMarch 31, 2020 andMarch 31, 2019 reflected a reduction in the net operating losses available to be carried forward in a subsidiary as a result of the offset of historic tax losses against the profits of this subsidiary and adjustments for uncertain tax positions. - 49 - --------------------------------------------------------------------------------
Results of Operations
Comparison of Years ended
The following table sets forth, for the periods indicated, the amounts of certain components of our statements of operations and the percentage of total revenue represented by these items, showing period-to-period changes.
Year ended March 31,
2021 2020 Change
Amount % of revenue Amount % of revenue Amount %
(in thousands, except percentages)
Revenue:
Product sales $ 35,787 82 % $ 31,601 97 % $ 4,186 13 %
Other revenues 7,592 18 % 1,055 3 % 6,537 620 %
Total revenue 43,379 100 % 32,656 100 % 10,723 33 %
Cost of revenue 20,074 46 % 17,800 55 % 2,274 13 %
Gross profit 23,305 54 % 14,856 45 % 8,449 57 %
Operating expenses:
Sales and marketing 9,849 23 % 9,853 30 % (4 ) 0 %
Research and development 54,168 125 % 53,744 165 % 424 1 %
General and administrative 41,796 96 % 31,950 98 % 9,846 31 %
Total operating expenses 105,813 244 % 95,547 293 % 10,266 11 %
Operating (loss) (82,508 ) -190 % (80,691 ) -247 % (1,817 ) 2 %
Other income (expense):
Interest expense, net (25,918 ) -60 % (23,859 ) -73 % (2,059 ) 9 %
Other, net 1,882 4 % 2,438 7 % (556 ) -23 %
Total other expense, net (24,036 ) -55 % (21,421 ) -66 % (2,615 ) 12 %
Loss before income taxes (106,544 ) -246 % (102,112 ) -313 % (4,432 ) 4 %
Provision for income taxes (1,926 ) -4 % (661 ) -2 % (1,265 ) 191 %
Net loss $ (108,470 ) -250 % $ (102,773 ) -315 % $ (5,697 ) 6 %
Revenue
Product sales revenue increased by 13% to $35.8 million for the year ended March
31, 2021 , compared with $31.6 million for the year ended March 31, 2020 . The
increase in product sales revenue was primarily attributable to incremental
direct sales of conventional reagent products to customers in the United States
and product sales to OEM customers. Products sold by standing purchase order
were 67% of product sales for the year ended March 31, 2021 , compared with 70%
for the year ended March 31, 2020 . Total revenue for the year ended March 31,
2021 increased by 33% to $43.4 million compared with $32.7 million in the year
ended March 31, 2020 , and included other revenues arising from the achievement
of product development milestones of $7.6 million and $1.1 million ,
respectively.
The below table sets forth revenue by product group:
Year ended March 31,
2021 2020 Change
Amount % of revenue Amount % of revenue Amount %
(in thousands, except percentages)
Revenue:
Product sales - OEM
customers $ 23,224 54 % $ 21,217 65 % $ 2,007 9.5 %
Product sales - direct
customers
and distributors 11,287 26 % 10,384 32 % 903 8.7 %
Product sales - MosaiQ 1,276 3 % - 0 % 1,276 100 %
Other revenues 7,592 17 % 1,055 3 % 6,537 620 %
Total revenue $ 43,379 100 % $ 32,656 100 % $ 10,723 33 %
- 50 -
-------------------------------------------------------------------------------- OEM Sales. Product sales to OEM customers increased 10% to$23.2 million for the year endedMarch 31, 2021 , compared with$21.2 million for the year endedMarch 31, 2020 . The increase was due to increased sales to existing customers and the impact and an additional shipment of red blood cell-based products inMarch 2021 . Direct Sales to Customers and Distributors. Direct product sales increased 9% to$11.3 million for the year endedMarch 31, 2021 compared with$10.4 million for the year endedMarch 31, 2020 . This mainly consisted of direct sales inthe United States which increased to$10.2 million in the year endedMarch 31, 2021 compared with$9.5 million in the year endedMarch 31, 2020 as a result of recent product launches and the expansion of our customer base. MosaiQ Product Sales. MosaiQ sales in the year endedMarch 31, 2021 consisted of revenues from our MosaiQ COVID-19 Microarray. There were no MosaiQ sales in the year endedMarch 31, 2020 . Other Revenues. Other revenues for the year endedMarch 31, 2021 arose from the recognition of an initial milestone payment of$7.5 million received from Ortho in respect of the development of the MosaiQ IH3 Microarray and a small development project for an OEM customer. Other revenues in the year endedMarch 31, 2020 arose from the achievement of product development milestones on another development contract, which was completed during the year endedMarch 31, 2020 . See Note 1 "Summary of Significant Accounting Policies - Revenue Recognition" to our consolidated financial statements included in this Annual Report for additional information.
Cost of revenue and gross margin
Cost of revenue increased by 13% to$20.1 million for the year endedMarch 31, 2021 , compared with$17.8 million for the year endedMarch 31, 2020 . The increase in cost of revenue reflected additional costs associated with operating social distancing restrictions and the incremental costs associated with the 13% increase in product sales in the year endedMarch 31, 2021 . For the year endedMarch 31, 2021 salaries, benefits and other employee expenses represented 29.0% of total cost of revenue compared to 31.7% in the year endedMarch 31, 2020 . Gross profit on total revenue in the year endedMarch 31, 2021 was$23.3 million , an increase of 57% when compared with$14.9 million for the year endedMarch 31, 2020 . The increase was attributable to the$6.5 million increase in other revenues (the associated cost of which was included in research and development expenses) in the year endedMarch 31, 2021 and the increase in gross margin on product sales described below. Gross profit on product sales, which excludes other revenues, was$15.7 million for the year endedMarch 31, 2021 compared with$13.8 million for the year endedMarch 31, 2020 . This increase was due to the gross profit on increased sales to existing and new customers, offset in part by higher costs associated with social distancing requirements. Gross margin on product sales, which excludes other revenues, was 44% for the year endedMarch 31, 2021 compared with 44% for the year endedMarch 31, 2020 .
Sales and marketing expenses
Sales and marketing expense were unchanged at$9.9 million for the year endedMarch 31, 2021 , compared with$9.9 million for the year endedMarch 31, 2020 . Cost reductions associated with reduced travel expenses and the cancellation of sales conferences due to the COVID-19 pandemic were offset by increased headcount and staff benefit costs. As a percentage of total revenue, sales and marketing expenses were 23% for the year endedMarch 31, 2021 compared to 30% for the year endedMarch 31, 2020 . For the year endedMarch 31, 2021 salaries, benefits and other employee expenses represented 75.8% of total sales and marketing expenses compared to 69.5% in the year endedMarch 31, 2020 .
Research and development expenses
Year ended March 31,
2021 2020 Change
Amount % of revenue Amount % of revenue Amount %
(in thousands, except percentages)
Research and development
expenses:
MosaiQ research and
development $ 53,546 123 % $ 52,202 160 % $ 1,344 3 %
Other research and
development 1,426 3 % 2,035 6 % (609 ) -30 %
Tax credits (804 ) -2 % (493 ) -1 % (311 ) 63 %
Total research and
development
expenses $ 54,168 125 % $ 53,744 165 % $ 424 1 %
- 51 -
-------------------------------------------------------------------------------- Research and development expenses increased by 1% or$0.4 million to$54.2 million for the year endedMarch 31, 2021 , compared with$53.7 million for the year endedMarch 31, 2020 . Our research and development expenses included expenses of$1.0 million in both the year endedMarch 31, 2021 andMarch 31, 2020 related to the costs of our intellectual property license with TTP. During the year endedMarch 31, 2021 , we recorded inventory provisions of$2.0 million in respect of certain raw materials and work-in-progress items following evaluation of further development data and corresponding changes in manufacturing processes. We also incurred additional development costs for the MosaiQ COVID-19 Microarray and higher employee costs in the year endedMarch 31, 2021 . These expenses were offset by a$3.5 million decrease in depreciation charges as a result of certain leasehold improvements becoming fully depreciated in the year endedMarch 31, 2021 , as well as the impact of extending the useful economic lives of certain operating equipment. In addition, termination benefit costs of$0.7 million were included in the year endedMarch 31, 2020 . There were no termination benefit costs in the year endedMarch 31, 2021 . For the year endedMarch 31, 2021 salaries, benefits and other employee expenses represented 40.6% of total research and development expenses compared to 38.8% in the year endedMarch 31, 2020 .
General and administrative expenses
General and administrative expenses increased 31% to$41.8 million for the year endedMarch 31, 2021 , compared with$32.0 million for the year endedMarch 31, 2020 . In the year endedMarch 31, 2021 , our general and administrative expenses included$4.2 million in costs associated with the appointment of our new Chief Executive Officer,$1.2 million in transition benefits payable to our former Chief Executive Officer and$0.4 million transition benefits payable to our former Chief Operating Officer. This compared to termination and transition benefit costs of$1.3 million in the year endedMarch 31, 2020 . The increase in general and administrative expenses also included additional legal expenses of$2 million related to our dispute with Ortho, higher D&O insurance costs of$2.3 million and increases in other advisory fees. We recognized$5.0 million of stock compensation expense in the year endedMarch 31, 2021 compared with$4.5 million in the year endedMarch 31, 2020 . Stock compensation expense is recognized over the expected vesting period of incentive awards. As a percentage of total revenue, general and administrative expenses increased to 96% for the year endedMarch 31, 2021 , compared with 98% for the year endedMarch 31, 2020 . For the year endedMarch 31, 2021 salaries, benefits and other employee expenses (including stock compensation expenses) represented 58.9% of total general and administrative expenses compared to 58.7% in the year endedMarch 31, 2020 .
Other income (expense)
Net interest expense was$25.9 million for the year endedMarch 31, 2021 , compared with$23.9 million for the year endedMarch 31, 2020 . Interest expense in the year endedMarch 31, 2021 included$17.4 million of interest charges on our Secured Notes compared with$17.1 million in the year endedMarch 31, 2020 . The increase was due to the additional issuance of$25 million of Secured Notes onMay 15, 2019 . Interest expense in the years endedMarch 31, 2021 andMarch 31, 2020 included amortization of deferred debt issue costs of$9.1 million and$7.0 million , respectively. The increased expense reflected changes in the royalty cost estimates. In each of the years endedMarch 31, 2021 andMarch 31, 2020 , net interest expense also included$1.1 million of accrued dividends on the 7% cumulative redeemable preference shares issued inJanuary 2015 . In addition, in the year endedMarch 31, 2021 we earned interest income of$1.6 million on our money market deposits as compared with$1.3 million in the year endedMarch 31, 2020 . Other, net in the year endedMarch 31, 2021 was comprised of$4.2 million of foreign exchange gains arising on monetary assets and liabilities denominated in foreign currencies and an impairment charge of$2.3 million in respect of our short term investments. Other, net comprised$2.4 million of foreign exchange gains for the year endedMarch 31, 2020 .
Provision for income taxes
Provision for income taxes in the year endedMarch 31, 2021 reflected the taxes payable on the taxable income of a subsidiary and the resolution of a major tax uncertainty related to the treatment of tax depreciation allowances, which resulted in a one-time tax charge of$1.5 million , and on-going tax charges of$0.4 million . Provision for income taxes in the year endedMarch 31, 2020 reflects both adjustments to net operating losses carried forward and current tax accruals in a subsidiary as a result of an uncertain tax position.
Quarterly Results of Operations
Our quarterly product sales can fluctuate depending upon the shipment cycles for
our red blood cell-based products, which account for approximately two-thirds of
our current product sales. For these products, we typically experience 13
shipping cycles per year. This equates to three shipments of each product per
quarter, except for one quarter per year when four shipments occur. In fiscal
2021 we made 14 shipments with the additional shipments in the first and fourth
quarters. In fiscal 2020, the greatest impact of extra product shipments
occurred in our first quarter. The timing of shipment of bulk antisera products
to our OEM customers may also move
- 52 -
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revenues from quarter to quarter. We also experience some seasonality in demand
around holiday periods in both Europe and the United States . As a result of
these factors, we expect to continue to see seasonality and quarter-to-quarter
variations in our product sales.
The timing of product development fees included in other revenues is mostly dependent upon the achievement of pre-negotiated project milestones.
Liquidity and Capital Resources
Since our commencement of operations in 2007, we have incurred net losses and negative cash flows from operations. As ofMarch 31, 2021 , we had an accumulated deficit of$591.9 million . During the year endedMarch 31, 2021 , we incurred a net loss of$108.5 million and used$77.6 million of cash for operating activities. During the year endedMarch 31, 2020 , we incurred a net loss of$102.8 million and used$80.6 million of cash for operating activities. During the year endedMarch 31, 2019 , we incurred a net loss of$105.4 million and used$75.7 million of cash for operating activities. As described under results of operations, our use of cash during the years endedMarch 31, 2021 andMarch 31, 2020 was primarily attributable to our investment in the development of MosaiQ and corporate costs, including costs related to being a public company. From our incorporation in 2012 toMarch 31, 2020 , we have raised$160.0 million of gross proceeds through the private placement of our ordinary and preference shares and warrants,$346.7 million of gross proceeds from public offerings of our shares and issuances of ordinary shares upon exercise of warrants and$145.0 million of gross proceeds from the issuance of the Secured Notes.
On
OnMarch 12, 2021 , we announced that two funds managed by CSAM in which we had invested an aggregate of approximately$110.35 million had suspended redemptions. The investments into these funds were made in accordance with our investment policy of making individual investments with a minimum of an A rating from a leading credit-rating agency. Each fund holds short-term credit obligations of various obligors. According to a press release issued by CSAM, redemptions in the funds were suspended because "certain part of the Subfunds' assets is currently subject to considerable uncertainties with respect to their accurate valuation." CSAM subsequently began a liquidation of the funds. Pursuant to the liquidation, we have already received cash distributions of approximately$75.6 million . Based on information provided by Credit Suisse, we expect to receive further cash distributions from the funds in the next several months; however, there can be no assurance as to the amount or timing of any such distributions. While Credit Suisse has advised that the credit assets held by the funds are covered by insurance that potentially will be available to cover losses the funds would incur if any of the obligors on the funds' credit assets were to default, we do not know if the funds will incur losses (net of insurance) on the credit assets held by the funds. We believe, and have advised Credit Suisse, that any such losses should be borne by Credit Suisse. As ofMarch 31, 2021 , we had available cash, cash equivalents and short-term investments of$111.7 million and$9.0 million of restricted cash held as part of the arrangements relating to our Secured Notes and the lease of our property in Eysins,Switzerland . OnMay 26, 2021 , we issued and sold$95.0 million aggregate principal amount of the Convertible Notes in a private offering to institutional investors. The Convertible Notes are guaranteed by our material subsidiaries. The Convertible Notes are our unsecured, senior obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness. The Convertible Notes are convertible at the option of the holders at an initial conversion rate of 176.3668 ordinary shares per$1,000.00 principal amount of Convertible Notes, subject to adjustment. We have the right to redeem the Convertible Notes in certain circumstances. On or prior toJune 2, 2021 , we may issue up to an additional$15.0 million aggregate principal amount of the Convertible Notes in one or more subsequent offerings. For further information about the Convertible Notes, please see our Current Report on Form 8-K filed with theSEC onMay 27, 2021 . We currently expect that the additional net cash generated from the Convertible Notes issuance combined with our existing available cash and short-term investment balances are adequate to meet our forecasted cash requirements for the next twelve months. We expect to fund our operations in the near-term, including the ongoing development of MosaiQ through successful field trial completion, achievement of required regulatory authorizations and commercialization from a combination of funding sources. These expected funding sources include the use of existing available cash and short-term investment balances, the sale of rights and other assets, and the issuance of new equity or debt.
Contractual Obligations
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We have contractual obligations for non-cancelable facilities leases, our
Secured Notes and related royalty rights agreements, equipment leases and
purchase commitments. The following table sets forth a summary of our
contractual obligations as of
Payment by period
Less than 1 to 3 3 to 5 After 5
Contractual Obligations Total 1 year years years years
12% Senior Secured Notes due
2024 $ 145,000 $ 24,167 $ 90,625 $ 30,208 $ -
Interest on 12% Senior
Secured Notes 39,875 16,675 21,387 1,813 -
Royalty rights agreements
with note
purchasers 106,448 - 2,190 17,795 86,463
7% Cumulative Redeemable
Preference
Shares (1) 15,000 - 15,000 - -
Dividends on 7% Cumulative
Redeemable Preference
Shares (1) 6,475 - 6,475 - -
Operating and capital leases 88,728 4,754 7,044 5,583 71,347
STRATEC Biomedical
manufacturing
agreement (2) 68,840 3,451 24,446 40,943 -
Other 20,603 15,691 4,912 - -
Total contractual
obligations $ 490,969 $ 64,738 $ 172,079 $ 96,342 $ 157,810 (1) The 7% Cumulative Redeemable Preference Shares are redeemable at the option
of the shareholders on a date not before
extended at our option in one year increments until
pay dividends on the 7% Cumulative Redeemable Preference Shares at any time,
but are not obligated to do so until redemption.
(2) We have entered into a manufacturing agreement with STRATEC in connection
with the supply of MosaiQ instruments over a six year period. The total
remaining purchase obligation under this agreement is
12% Senior Secured Notes Due 2024
OnOctober 14, 2016 , we completed a private placement of our Secured Notes. Our obligations under the Secured Notes and the related indenture are unconditionally guaranteed on a secured basis by the guarantors, which include all our subsidiaries, and the indenture contains customary events of default. We are also required to comply with certain customary affirmative and negative covenants, including a requirement to maintain six-months of interest in a cash reserve account maintained with the collateral agent. We issued$84 million aggregate principal amount of the Secured Notes onOctober 14, 2016 , an additional$36 million aggregate principal amount of the Secured Notes onJune 29, 2018 and an additional$25 million of the Secured Notes onMay 15, 2019 . Upon the occurrence of a Change of Control, subject to certain conditions, or certain Asset Sales (each, as defined in the indenture), holders of the Secured Notes may require us to repurchase for cash all or part of their Secured Notes at a repurchase price equal to 101% or 100%, respectively, of the principal amount of the Secured Notes to be repurchased, plus accrued and unpaid interest to the date of repurchase. We paid$7.2 million of the total proceeds of theOctober 2016 andJune 2018 issuances into the cash reserve account maintained with the collateral agent under the terms of the indenture,$2.2 million of which related to the second issuance. We paid a further$1.5 million into the cash reserve account onMay 15, 2019 in connection with the issuance of the additional$25 million of Secured Notes on that date. Interest on the Secured Notes accrues at a rate of 12% per annum and is payable semi-annually onApril 15 andOctober 15 of each year commencing onApril 15, 2017 . Commencing onApril 15, 2021 , we will also pay an installment of principal of the Secured Notes on eachApril 15 andOctober 15 untilApril 15, 2024 pursuant to a fixed amortization schedule. In connection with theOctober 2016 ,June 2018 andMay 2019 issuances of the Secured Notes as well as theDecember 2018 amendment of the related indenture, we entered into royalty rights agreements, pursuant to which we agreed to pay 3.4% of the aggregate net sales of MosaiQ instruments and consumables made in the donor testing market inthe United States and theEuropean Union . The royalties will be payable beginning on the date that we make our first sale of MosaiQ consumables in the donor testing market in theEuropean Union orthe United States and will end on the last day of the calendar quarter in which the eighth anniversary of the first sale date occurs. - 54 - --------------------------------------------------------------------------------
Cash Flows for the Years Ended
Operating activities
Net cash used in operating activities was$77.6 million during the year endedMarch 31, 2021 , which included net losses of$108.5 million and non-cash items of$29.7 million . Non-cash items were depreciation and amortization expense of$8.6 million , share-based compensation expense of$5.0 million , deferred lease rentals of$0.7 million , Swiss pension costs of$1.1 million , amortization of deferred debt issue costs of$9.1 million , impairment of short term investments of$2.3 million , accrued preference share dividends of$1.0 million and deferred income taxes of$1.9 million . We also experienced a net cash inflow of$1.2 million from changes in operating assets and liabilities during the period, consisting of a$0.5 million increase in inventories, a$0.5 million increase in other assets and a$2.5 million decrease in accounts payable and accrued liabilities, offset by a$0.6 million decrease in accounts receivable and a$4.0 million increase in accrued compensation and benefits. Net cash used in operating activities was$80.6 million during the year endedMarch 31, 2020 , which included net losses of$102.8 million and non-cash items of$26.3 million . Non-cash items were depreciation and amortization expense of$12.3 million , share-based compensation expense of$4.5 million , deferred lease rentals of$0.3 million , Swiss pension costs of$0.8 million , amortization of deferred debt issue costs of$7.0 million , accrued preference share dividends of$1.0 million and deferred income taxes of$0.4 million . We also experienced a net cash outflow of$4.1 million from changes in operating assets and liabilities during the period, consisting of a$5.0 million increase in inventories, a$0.7 million increase in other assets and a$2.1 million increase in accounts receivable, offset by a$2.5 million increase in accounts payable and accrued liabilities and a$1.2 million increase in accrued compensation and benefits. Investing activities Net cash from investing activities was$43.4 million in the year endedMarch 31, 2021 , compared to net cash used in investing activities of$30.2 million in the year endedMarch 31, 2020 . We divested$47.7 million net from our short-term investments in the year endedMarch 31, 2021 , compared to investing$25.6 million net in our short term investments in the year endedMarch 31, 2020 . Purchases of property and equipment in the year endedMarch 31, 2021 were$4.3 million and were mainly related to payments for MosaiQ instruments and IT upgrades. Purchases of property and equipment in the year endedMarch 31, 2020 were$4.6 million , and were mainly related to payments for an additional assembly unit for our MosaiQ manufacturing facility.
Financing activities
Net cash provided by financing activities was
Net cash provided by financing activities was$114.6 million during the year endedMarch 31, 2020 , consisting of$24.1 million of net proceeds from the issuance of additional Secured Notes onMay 15, 2019 ,$90.5 million of net proceeds from the issuance of ordinary shares onNovember 12, 2019 and$0.5 million of proceeds from the exercise of share options, offset by$0.5 million of repayments on finance leases.
Operating and Capital Expenditure Requirements
We have not achieved profitability on an annual basis since we commenced operations in 2007 and we expect to incur net losses for at least the next fiscal year. As we move towards the commercial launch of MosaiQ in the donor testing market, we expect our operating expenses during the year endedMarch 31, 2022 to be similar to those of the year endedMarch 31, 2021 , as we continue to invest in growing our customer base, expanding our marketing and distribution channels, completing field trials and regulatory filings, hiring additional employees and investing in other product development opportunities while development expenditure on MosaiQ reduces. As ofMarch 31, 2021 , we had available cash, cash equivalents and short-term investments of$111.7 million and$9.0 million of restricted cash held as part of the arrangements relating to our Secured Notes and the lease of our property in Eysins,Switzerland .
Our future capital requirements will depend on many factors, including:
• our progress in developing and commercializing MosaiQ and the cost
required to complete development, obtain regulatory approvals and complete
our manufacturing scale up;
• our ability to pursue successful alternatives for commercializing MosaiQ
in the patient market;
• our ability to manufacture and sell our conventional reagent products,
including the costs and timing of further expansion of our sales and
marketing efforts;
• the impact of the COVID-19 pandemic on the global economy, our business
and our development timeline for MosaiQ;
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• our ability to recoup the remaining approximately
invested in two funds that have suspended redemptions;
• our ability to collect our accounts receivable;
• our ability to generate cash from operations;
• any acquisition of businesses or technologies that we may undertake; and
• our ability to penetrate our existing market and new markets.
OnMay 26, 2021 , we issued and sold$95.0 million aggregate principal amount of the Convertible Notes in a private offering to institutional investors. The Convertible Notes are guaranteed by our material subsidiaries. The Convertible Notes are our unsecured, senior obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness. The Convertible Notes are convertible at the option of the holders at an initial conversion rate of 176.3668 ordinary shares per$1,000.00 principal amount of Convertible Notes, subject to adjustment. We have the right to redeem the Convertible Notes in certain circumstances. On or prior toJune 2, 2021 , we may issue up to an additional$15.0 million aggregate principal amount of the Convertible Notes in one or more subsequent offerings. For further information about the Convertible Notes, please see our Current Report on Form 8-K filed with theSEC onMay 27, 2021 . We currently expect that the additional net cash generated from the Convertible Notes issuance combined with our existing available cash and short-term investment balances are adequate to meet our forecasted cash requirements for the next twelve months. We expect to fund our operations in the near-term, including the ongoing development of MosaiQ through successful field trial completion, achievement of required regulatory authorizations and commercialization from a combination of funding sources. These expected funding sources include the use of existing available cash and short-term investment balances, the sale of rights and other assets, and the issuance of new equity or debt.
Critical Accounting Policies and Significant Judgments and Estimates
We have prepared our consolidated financial statements in accordance withU.S. GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements included in this Annual Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue recognition and accounts receivable
Revenue is recognized in accordance with Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers. Product revenue is recognized at a point in time upon transfer of control of a product to a customer, which is generally at the time of delivery at an amount based on the transaction price. Customers have no right of return except in the case of damaged or ineffective goods and we have not experienced any significant returns of our products. We also earn revenue from the provision of development services to a small number of OEM customers. These development service contracts are reviewed individually to determine the nature of the performance obligations and the associated transaction prices. In recent years, our product development revenues have been commensurate with achieving milestones specified in the respective development agreements relating to those products. These milestones may include the approval of new products by the European orU.S. regulatory authorities, which are not within our control. While there can be no assurance that this will continue to be the case, the nature of the milestones has been such that they effectively represent completion of our performance obligations under a particular part of a development program. Should we fail to achieve these milestones, we are not entitled under the terms of the development agreements to any compensation related to the work undertaken to date. As a result, we typically fully recognize milestone-related revenues as the contractual milestones are achieved. - 56 - -------------------------------------------------------------------------------- Accounts receivable consist primarily of amounts due from OEM customers, hospitals, donor testing laboratories, and distributors. Accounts receivable are reported net of an allowance for uncollectible accounts, which we also refer to as doubtful accounts. The allowance for doubtful accounts represents a reserve for estimated losses resulting from our inability to collect amounts due from our customers. Direct sales, where we may make many low value sales to a large number of customers, represents a larger risk of doubtful accounts, as opposed to OEM customer sales consisting primarily of a small number of well established businesses with whom we have a long trading history. The collectability of our trade receivables balances is regularly evaluated based on a combination of factors such as the aging profile of our receivables, past history with our customers, changes in customer payment patterns, customer credit-worthiness and any other relevant factors. Based on these assessments, we adjust the reserve for doubtful accounts recorded in our financial statements.
Inventories
We record inventories at the lower of cost (at standard costs, approximating average costs) or market (net realizable value), net of reserves. We record adjustments to inventory based upon historic usage, expected future demand and shelf life of the products held in inventory. We also calculate our inventory value based on the standard cost of each product. This approach requires us to analyze variances arising in the production process to determine whether they reflect part of the normal cost of production, and should therefore be reflected as inventory value, or whether they are a period cost and should thus not be included in inventory. Income taxes We account for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of our assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing NOLs and research and development credit carry forwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. We follow the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. We accrue for the estimated amount of taxes for uncertain tax positions if it is more likely than not that we would be required to pay such additional taxes. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained.
We did not have any accrued interest or penalties associated with any
unrecognized tax positions, and there were no such interest or penalties
recognized during the year ended
Stock compensation expense
Stock compensation expense is measured at the grant date based on the fair value of the award and is recognized as an expense in the income statement over the vesting period of the award. The calculation of the stock compensation expense is sensitive to the fair value of the underlying ordinary shares. The fair value of option awards at the grant date is calculated using the Black-Scholes model or other valuation models, which use a number of assumptions to determine the fair value. Details of the assumptions used are set out in the notes to the consolidated financial statements included in this Annual Report.
Defined Benefit Pension Obligations
We account for the pension obligations of our Swiss subsidiary as a defined
benefit plan under Accounting Standards Codification Topic 715 Compensation -
Retirement Benefits, or ASC 715. This requires that an actuarial valuation be
performed to determine the funded status of the pension arrangements. The
actuarial valuation is based on a number of assumptions including the expected
return on plan assets, withdrawal and mortality rates, discount rate, and rate
of increase in employee compensation levels.
Assumptions are determined based on our data and appropriate market indicators,
and are evaluated each year as of the plans' measurement date. Should any of
these assumptions change, they would have an effect on net periodic pension
costs and the unfunded benefit obligation.
The expected long-term rate of return on plan assets reflects the average rate
of earnings expected on the funds invested, or to be invested, to provide for
the benefits included in the projected benefit obligations. In determining the
expected long-term rate of return on plan assets, we consider the relative
weighting of plan assets, the historical performance of total plan assets and
individual asset classes and economic and other indicators of future
performance.
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The discount rate reflects the rate we would have to pay to purchase
high-quality investments that would provide cash sufficient to settle our
current pension obligations. A 25-basis point change in the discount rate
changes the projected benefit obligation by approximately
Royalty Liability The royalty rights agreements entered into in connection with the issuances of our Secured Notes and the amendment of the related indenture are treated as sales of future revenues that meet the requirements of Accounting Standards Codification Topic 470 "Debt" to be treated as debt. The estimated future cash outflows under the royalty rights agreements have been combined with the Secured Notes issuance costs and interest payable to calculate the effective interest rate of the Secured Notes and will be expensed through interest expenses using the effective interest rate method over the term of the Secured Notes and royalty rights agreements. Estimating the future cash outflows under the royalty rights agreements requires us to make certain estimates and assumptions about future sales of MosaiQ products. These estimates of the magnitude and timing of MosaiQ sales are subject to significant variability due to the current status of development of MosaiQ products, and thus are subject to significant uncertainty. Therefore, the estimates are likely to change as we gain experience of marketing MosaiQ, which may result in future adjustments to the accretion of the interest expense and the amortized cost based carrying value of the Secured Notes.
Valuation and Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, the following:
• significant underperformance relative to expected historical or projected
future operating results;
• significant negative industry or economic trends; or
• significant changes or developments in strategy or operations that negatively
affect the utilization of our long-lived assets.
Given the status of the project the valuation of the property, plant and
equipment associated with MosaiQ are reviewed each quarter. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the assets and their eventual disposition. In the
event that such cash flows are not expected to be sufficient to recover the
carrying amount of the assets, the assets are written down to their fair values.
Estimating the future cash outflows for this purpose requires us to make certain
estimates and assumptions about future sales of MosaiQ products. These estimates
of the magnitude and timing of MosaiQ sales are subject to significant
variability due to the current status of development of MosaiQ products, and
thus are subject to significant uncertainty. We measure any impairment based on
a projected discounted cash flow method using a discount rate determined by
management to be commensurate with the risk inherent in our current business
model.
Changes in these estimates and assumptions could materially affect the determination of fair value for these assets.
Valuation of short-term investments
OnMarch 12, 2021 , we announced that two funds managed by CSAM in which we had invested an aggregate of approximately$110.35 million had suspended redemptions. The investments into these funds were made in accordance with our investment policy of making individual investments with a minimum of an A rating from a leading credit-rating agency. Each fund holds short-term credit obligations of various obligors. According to a press release issued by CSAM, redemptions in the funds were suspended because "certain part of the Subfunds' assets is currently subject to considerable uncertainties with respect to their accurate valuation." CSAM subsequently began a liquidation of the funds. Pursuant to the liquidation, we have already received cash distributions of approximately$75.6 million . Based on information provided by Credit Suisse, we expect to receive further cash distributions from the funds in the next several months; however, there can be no assurance as to the timing or amount of any such distributions. While Credit Suisse has advised that the credit assets held by the funds are covered by insurance that potentially will be available to cover losses the funds would incur if any of the obligors on the funds' credit assets were to default, we do not know if the funds will incur losses (net of insurance) on the credit assets held by the funds. OnApril 22, 2021 , Credit Suisse published its FY 2021 Q1 press release with commentary related to theCredit Suisse Supply Chain Finance Investment Grade Fund and theCredit Suisse (Lux) Supply Chain Finance Fund . Notably, Credit Suisse indicated that investors in the funds should assume losses will be incurred. - 58 -
-------------------------------------------------------------------------------- As ofMarch 31, 2021 , we evaluated the investments in the CSAM managed funds for impairment and determined that our investment in one of the funds was impaired. We recognized an impairment expense of$2.3 million atMarch 31, 2021 related to this fund. We view the liquidation of the supply chain finance funds as a fluid situation with a significant amount of valuation uncertainty. We will closely monitor the situation and in the event that new information is released that provides valuation clarity will evaluate the accounting implications accordingly. We believe, and has advised Credit Suisse, that any losses on the supply chain funds should be borne by Credit Suisse. We will pursue all available options to recoup the full amount of its investment in the supply chain funds prior to liquidation. Leases At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present. A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time, in exchange for consideration. We determine if the contract conveys the right to control the use of an identified asset for a period of time. We assess throughout the period of use whether we have both of the following: (1) the right to obtain substantially all of the economic benefits for use of the identified asset, and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the contract are changed. We also review the terms of the lease in accordance with Accounting Standards Update, or "ASU", 2016-02, "Leases" in order to determine whether the lease concerned is a finance or an operating lease. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. For finance leases, an asset is included within property and equipment and a lease liability equal to the present value of the minimum lease payments is included in current or long-term liabilities. Interest expense is recorded over the life of the lease at a constant rate. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. The operating lease right-of-use assets also include any lease payments made prior to the commencement date and any initial direct costs incurred, less any lease incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The incremental borrowing rate is determined at lease commencement, or as ofApril 1, 2019 for operating leases existing upon the adoption of ASU 2016-02. The incremental borrowing rate is subsequently reassessed upon modification to the lease arrangement. Operating lease expense is recognized on a straight-line basis over the lease term. In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Although separation of lease and non-lease components is required, certain practical expedients are available. In particular, entities may elect a practical expedient to not separate lease and non-lease components and instead account for each lease component and the related non-lease component together as a single component. We have elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating lease right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.
The finance lease assets and operating lease right-of-use assets are assessed for impairment in accordance with our accounting policy for long-lived assets.
Recent Accounting Pronouncements
Refer to Note 1 to our accompanying audited consolidated financial statements
included elsewhere in this Annual Report for a discussion of recently issued
accounting pronouncements.
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