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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Principles of Consolidation and Basis of Presentation

Principles of Consolidation and Basis of Presentation. The consolidated financial statements include the accounts of OraSure Technologies, Inc. (“OraSure”) and its wholly-owned subsidiaries, DNAG, CoreBiome, and Novosanis. All intercompany transactions and balances have been eliminated. References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated.

The accompanying consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of our financial position and results of operations for these interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations expected for the full year.

Use of Estimates

Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable and inventories and assumptions utilized in impairment testing for intangible assets and goodwill, as well as calculations related to accruals, taxes, contingent consideration, and performance-based compensation expense, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis, using historical experience and other factors, which management believes to be reasonable under the circumstances, including the current economic environment. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in those future periods.

Investments

Investments. We consider all investments in debt securities to be available-for-sale securities. These securities consist of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. Available-for-sale debt securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss.

The following is a summary of our available-for-sale securities as of September 30, 2019 and December 31, 2018:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019
Guaranteed investment certificates	$	24,181	$	—	$	—		$	24,181
Corporate bonds		91,637		286		(326	)		91,597
Total available-for-sale securities	$	115,818	$	286	$	(326	)	$	115,778
December 31, 2018
Guaranteed investment certificates	$	23,096	$	—	$	—		$	23,096
Corporate bonds		90,707		—		(917	)		89,790
Total available-for-sale securities	$	113,803	$	—	$	(917	)	$	112,886
At September 30, 2019, maturities of our available-for-sale securities were as follows:
Less than one year	$	78,271	$	183	$	(239	)	$	78,215
Greater than one year	$	37,547	$	103	$	(87	)	$	37,563

Fair Value of Financial Instruments

Fair Value of Financial Instruments. As of September 30, 2019 and December 31, 2018, the carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their respective fair values based on their short-term nature.

Fair value measurements of all financial assets and liabilities that are being measured and reported on a fair value basis are required to be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

All of our available-for-sale debt securities are measured as Level 2 instruments as of September 30, 2019 and December 31, 2018.

Included in cash and cash equivalents at September 30, 2019 and December 31, 2018, was $18,790 and $21,631 invested in government money market funds and certificates of deposit. Both are measured as Level 1 instruments.

We offer a nonqualified deferred compensation plan for certain eligible employees and members of our Board of Directors. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and Company stock. The fair value of the plan assets as of September 30, 2019 and December 31, 2018 was $4,280 and $3,884, respectively, and was calculated using the quoted market prices of the assets as of those dates. All investments in the plan are classified as trading securities and measured as Level 1 instruments. The fair value of plan assets is included in other assets with the same amount included in other liabilities in the accompanying consolidated balance sheets.

See Note 3 for discussion of the contingent consideration liabilities.

Accounts Receivable

Accounts Receivable. Accounts receivable have been reduced by an estimated allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management’s evaluation of specific balances as they become past due, the financial condition of our customers and our historical experience related to write-offs.

Inventories

Inventories. Inventories are stated at the lower of cost or net realizable value with cost determined on a first-in, first-out basis, and consist of the following:

	September 30, 2019		December 31, 2018
Raw materials	$	14,425	$	14,092
Work in process		838		544
Finished goods		9,777		8,252
	$	25,040	$	22,888

Property, Plant and Equipment

Property, Plant and Equipment. Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty to forty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. Accumulated depreciation of property, plant and equipment as of September 30, 2019 and December 31, 2018 was $45,533 and $42,797, respectively.

Intangible Assets

Intangible Assets. Intangible assets consist of customer lists, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses, and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years. Accumulated amortization of intangible assets as of September 30, 2019 and December 31, 2018 was $22,410 and $20,105, respectively. The change in intangibles from $5,137 as of December 31, 2018 to $11,577 as of September 30, 2019 is a result of intangibles acquired in our acquisitions of CoreBiome and Novosanis of $8,400 offset by foreign currency translation losses of $129 and $1,831 in amortization expense.

Goodwill

Goodwill. Goodwill represents the excess of the purchase price we paid over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in our acquisitions of DNAG, CoreBiome, and Novosanis. Goodwill is not amortized but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current U.S. generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment. If we conclude that it is more likely than not that the carrying value of a reporting unit is greater than its fair value, then we would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

The increase in goodwill from $18,521 as of December 31, 2018 to $28,935 as of September 30, 2019 is a result of the additional goodwill associated with our acquisitions of CoreBiome and Novosanis of $9,994 and an increase of $420 associated with foreign currency translation. All acquired goodwill has been allocated to our DNAG segment.

Leases

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. We adopted this standard on January 1, 2019 on a modified retrospective basis and will not restate comparative amounts. Also, we elected the practical expedients permitted under the transition guidance, which allows us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. Leases with an initial term of 12 months or less are not recognized on the balance sheet and the associated lease payments are included in the consolidated statements of operations on a straight-line basis over the lease term. As a result, on January 1, 2019, we recorded right-of-use assets of $4,027 and lease liabilities of $4,263 on our consolidated balance sheet.

Earnings Per Share

Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive. The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the reporting period.

The computations of basic and diluted earnings per share are as follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2019		2018		2019		2018

Net income	$	13,078	$	8,096	$	14,218	$	10,098
Weighted-average shares of common stock outstanding:
Basic		61,726		61,208		61,656		61,059
Dilutive effect of stock options, restricted stock, and performance stock units		417		1,398		516		1,480
Diluted		62,143		62,606		62,172		62,539
Earnings per share:
Basic	$	0.21	$	0.13	$	0.23	$	0.17
Diluted	$	0.21	$	0.13	$	0.23	$	0.16

For the three months ended September 30, 2019 and 2018, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 909 and 304 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. For the nine months ended September 30, 2019 and 2018, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 709 and 256 shares, respectively, were similarly excluded from the computation of diluted earnings per share.

Foreign Currency Translation

Foreign Currency Translation. The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity.

Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than a functional currency are included in our consolidated statements of operations in the period in which the change occurs. Net foreign exchange gains (losses) resulting from foreign currency transactions that are included in other income in our consolidated statements of income were $50 and $(375) for the three months ended September 30, 2019 and 2018, respectively. Net foreign exchange gains (losses) were $(875) and $(30) for the nine months ended September 30, 2019 and 2018, respectively.

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss). We classify items of other comprehensive income (loss) by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.

We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and we have defined the Euro as the functional currency of our Belgian subsidiary, Novosanis. The results of operations for those subsidiaries are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at September 30, 2019 consists of $14,638 of currency translation adjustments and $40 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investment portfolio. Accumulated other comprehensive loss at December 31, 2018 consists of $17,789 of currency translation adjustments and $917 of net unrealized losses on marketable securities.

Recent Accounting Pronouncements

In June 2016, the FASB issued guidance on the measurement of credit losses, which requires measurement and recognition of expected credit losses for financial assets, including trade receivables and capital lease receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The method to determine a loss is different from the existing guidance, which requires a credit loss to be recognized when it is probable. The guidance is effective beginning in fiscal year 2020, with early adoption permitted beginning in fiscal year 2019. We are evaluating the impact this guidance will have on our consolidated financial statements.

In February 2018, the FASB issued guidance allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act. The guidance is effective in fiscal year 2020, with early adoption permitted, including adoption in an interim period. If elected, the reclassification can be applied in either the period of adoption or retrospectively to the period of the enactment of the U.S. Tax Cuts and Jobs Act (i.e., our first quarter of fiscal year 2018). We are evaluating the impact of this guidance and expect no impact to our consolidated financial statements.

Revenues by Product

Revenues by product. The following table represents total net revenues by product line:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
OraQuick®	$	13,256		$	12,016	$	37,813	$	40,813
Oragene®		11,590			22,450		27,316		52,799
ORAcollect®		2,489			1,353		9,032		3,460
Intercept®		2,230			1,743		6,144		5,811
Histofreezer® (through August 16, 2019)		569			2,199		5,718		6,526
Other products		5,165			3,689		14,875		11,177
Net product revenues		35,299			43,450		100,898		120,586

Royalty income		758			1,132		2,956		4,827
Research and development funding		(183	)		1,083		679		4,540
Charitable support reimbursement		85			220		203		1,544
Grant funding		30			-		201		-
Other revenues		690			2,435		4,039		10,911
Net revenues	$	35,989		$	45,885	$	104,937	$	131,497

Revenues by Geographic Area

Revenues by geographic area. The following table represents total net revenues by geographic area, based on the location of the customer:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	26,245	$	36,883	$	74,712	$	99,860
Europe		2,767		1,982		8,188		7,187
Other regions		6,977		7,020		22,037		24,450
	$	35,989	$	45,885	$	104,937	$	131,497

Customer and Vendor Concentrations

Customer and Vendor Concentrations. One of our customers accounted for 24% of our accounts receivable as of September 30, 2019. The same customer accounted for approximately 17% and 11% of our net consolidated revenues for the three and nine months ended September 30, 2019 and 39% and 27% of our net consolidated revenues for the three and nine months ended September 30, 2018.

We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its product. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations.

Deferred Revenue

Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of September 30, 2019 and December 31, 2018 includes customer prepayments of $2,150 and $2,057, respectively. Deferred revenue as of September 30, 2019 and December 31, 2018 also includes $ 1,790 and $1,464, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue is recognized at that rate.