NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(UNAUDITED)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of Affymetrix, Inc. and its wholly-owned subsidiaries (“Affymetrix” or the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments, consisting of normal recurring entries, considered necessary for a fair presentation have been included.
Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited financial statements should be read in conjunction with the Company's audited financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2013
, from which the balance sheet information as of that date and as included herein was derived.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
There have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013
.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss) (“OCI”). OCI includes foreign currency translation adjustments, unrealized gains and losses on the Company's non-marketable securities that are excluded from net loss and unrealized gains and losses on cash flow hedges. Total comprehensive loss has been disclosed in the Company's Condensed Consolidated Statements of Comprehensive Loss.
The following table summarizes the amounts reclassified out of accumulated other comprehensive income, net of tax, for the
six months ended June 30, 2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
(Decrease)/ Increase
|
|
Reclassification
Adjustments
|
|
June 30,
2014
|
Foreign currency translation adjustment
|
$
|
7,784
|
|
|
$
|
(458
|
)
|
|
$
|
—
|
|
|
$
|
7,326
|
|
Unrealized change in non-marketable securities
|
1,373
|
|
|
421
|
|
(1
|
)
|
—
|
|
|
1,794
|
|
Unrealized change in cash flow hedges
|
(765
|
)
|
|
1,253
|
|
|
(775
|
)
|
|
(287
|
)
|
Total accumulated other comprehensive income, net of tax
|
$
|
8,392
|
|
|
$
|
1,216
|
|
|
$
|
(775
|
)
|
|
$
|
8,833
|
|
(1) Amounts of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, were not material except for the increase in unrealized gain in non-marketable securities that is net of a
$0.5 million
income tax expense.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09) to provide guidance on revenue recognition. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company in the first quarter of 2017. Early adoption is not permitted. Upon adoption, ASU 2014-09 can be applied retrospectively to all periods presented or only to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented. The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.
NOTE 2—FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of
June 30, 2014
and
December 31, 2013
, the assets and liabilities measured at fair value consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Fair Value Measurements Using Input Types
|
|
|
|
Fair Value Measurements Using Input Types
|
|
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
185
|
|
|
$
|
—
|
|
|
$
|
185
|
|
Non-marketable securities
|
—
|
|
|
4,139
|
|
|
4,139
|
|
|
—
|
|
|
4,383
|
|
|
4,383
|
|
Total assets
|
$
|
7
|
|
|
$
|
4,139
|
|
|
$
|
4,146
|
|
|
$
|
185
|
|
|
$
|
4,383
|
|
|
$
|
4,568
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives liabilities
|
$
|
318
|
|
|
$
|
—
|
|
|
$
|
318
|
|
|
$
|
938
|
|
|
$
|
—
|
|
|
$
|
938
|
|
Derivative financial instruments
The Company's derivative financial instruments are measured at fair value on a recurring basis utilizing Level 2 inputs as determined based on review of third-party sources. The fair value of the Company's derivative assets and liabilities is determined based on the estimated consideration the Company would pay or receive to terminate these agreements on the reporting date. The derivative assets and liabilities are located in Prepaid expenses and other current assets and Accounts payable and accrued expenses, respectively, in the accompanying Condensed Consolidated Balance Sheets.
Non-Marketable Securities
The Company believes the carrying amounts of its non-marketable securities approximated their fair values at the dates presented above. These non-marketable securities consist of an investment in a limited partnership investment fund that invests in companies in the life science industry and are located in the United States. The investments were initially valued at purchase price and subsequently on the basis of inputs that market participants would use in pricing such investments. The portfolio of investments includes Level 1 publicly-traded equity securities and Level 3 equity securities and notes.
During the year ended
December 31, 2013
, other-than-temporary impairment charges of
$0.5 million
were recognized on the Company's non-marketable securities. There was
no
other-than-temporary impairment during the six months ended
June 30, 2014
. Net investment losses are included in Interest income and other, net in the accompanying Consolidated Statements of Operations. Depending on market conditions, the Company may incur additional charges on this investment in the future.
The following table summarizes the change in the fair value of the Company's non-marketable securities during the six months ended
June 30, 2014
(in thousands).
|
|
|
|
|
Balance as of December 31, 2013
|
$
|
4,383
|
|
Sales
|
(2,162
|
)
|
Realized gain (loss)
|
1,240
|
|
Unrealized gain (loss)
|
678
|
|
Balance as of June 30, 2014
|
$
|
4,139
|
|
Liabilities Measured at Fair Value on a Nonrecurring Basis
Long-term debt obligations as discussed in Note 7, "Long-Term Debt Obligations", are not measured at fair value on a recurring basis and are carried at amortized cost. The Company believes the fair values of the Term Loan approximates its carrying values, or amortized cost, due to the short-term nature of these obligations and the market rates of interest rates they bear. Such inputs are classified as Level 3 of the fair value hierarchy. The fair value of the Company’s
4.00%
Notes is based on quoted market prices as of the respective balance sheet date, and therefore is classified as Level 1 of the fair value hierarchy. As of
June 30, 2014
, the fair value of the Company’s
4.00%
Notes was approximately
$180.7 million
.
NOTE 3—DERIVATIVE FINANCIAL INSTRUMENTS
The Company derives a portion of its revenues in foreign currencies, predominantly in Europe and Japan, as part of its ongoing business operations. In addition, a portion of its assets are held in the foreign currencies of its subsidiaries. The Company enters into foreign currency forward contracts to manage a portion of the volatility related to transactions that are denominated in foreign currencies. The Company’s foreign currency forward contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. The Company’s accounting policies for these instruments are based on whether the instruments are classified as designated or non-designated hedging instruments. The Company records all derivatives on the accompanying Condensed Consolidated Balance Sheets at fair value. The effective portions of designated cash flow hedges are recorded in OCI until the hedged item is recognized in operations. As of
June 30, 2014
, the Company’s existing foreign currency forward exchange contracts mature within
12 months
. The deferred amount related to the Company’s derivatives recorded in OCI at
June 30, 2014
, and expected to be recognized into earnings over the next
12 months
is a net loss of
$0.3 million
. Derivatives that are not designated as hedging instruments and the ineffective portions of cash flow hedges are adjusted to fair value through operations.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Deferred gains and losses in association with such derivative instruments are reclassified immediately into operations through Interest income and other, net on the Condensed Consolidated Statement of Operations. Any subsequent changes in fair value of such derivative instruments are reflected in Interest income and other, net unless they are re-designated as hedges of other transactions. The Company recognized less than
$0.1 million
related to the loss of hedge designation on cash flow hedges related to the Euro that were deemed ineffective due to lower-than-forecasted revenue from Europe for the six months ended
June 30, 2014
. No additional hedges are deemed ineffective as of
June 30, 2014
. During the six months ended
June 30, 2013
, the Company recognized
$0.1 million
in net gains in Interest income and other, net, related to the loss of hedge designation on a portion of cash flow hedges related to the Japanese yen that were deemed ineffective due to lower-than-forecasted revenue from Japan.
Under the Credit Agreement as defined in Note 7, "Long-Term Debt Obligations", the Company is required to maintain derivative contracts to protect against fluctuations in interest rates with respect to at least
35%
of the aggregate principal amount of the Term Loan then outstanding, with such derivative contracts being required to have at least a
three
-year term. Accordingly, the Company maintains an interest rate swap (the "Interest Rate Swap") to comply with the requirements of the Credit Agreement. The Interest Rate Swap calls for fixed rate quarterly payments of
0.61%
of the notional amount in exchange for a variable rate quarterly receipt equal to a 3-month LIBOR rate. The Interest Rate Swap terminates on June 25, 2015.
The Company did not designate the Interest Rate Swap as a hedging instrument and will recognize adjustments to fair value through Interest income and other, net on the accompanying Condensed Consolidated Statements of Operations at each reporting date. As of
June 30, 2014
, the fair value of the Interest Rate Swap was less than
$0.1 million
.
As of
June 30, 2014
and
December 31, 2013
, the total notional values of the Company’s derivative assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Euro
|
$
|
14,714
|
|
|
$
|
21,990
|
|
Japanese Yen
|
3,630
|
|
|
4,588
|
|
British Pound
|
3,925
|
|
|
5,653
|
|
Interest rate swap
|
10,307
|
|
|
10,307
|
|
Total
|
$
|
32,576
|
|
|
$
|
42,538
|
|
Other than the Interest Rate Swap, the Company did not have any derivative assets or liabilities that were not designated or qualifying as hedges as of
June 30, 2014
and
December 31, 2013
.
The Company is exposed to the risk that the counterparties to its hedges may be unable to meet the terms of these agreements. To mitigate the risk, only contracts with carefully selected highly-rated major financial institutions are entered into. In the event of non-performance by these counterparties, the asset position carrying values of the financial instruments represent the maximum amount of loss that can be incurred; however, no losses as a result of counterparty defaults are expected. The Company does not require and is not required to pledge collateral for these financial instruments. The Company does not enter into foreign currency forward contracts for trading or speculative purposes and is not party to any leveraged derivative instruments.
The following table shows the Company’s foreign currency derivative measures at fair value as reflected on the accompanying Condensed Consolidated Balance Sheets as of
June 30, 2014
and
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
|
Balance Sheet
Classification
|
Derivative assets:
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
7
|
|
|
$
|
185
|
|
|
Prepaid expenses and other current assets
|
Derivative liabilities:
|
|
|
|
|
|
Foreign exchange contracts
|
296
|
|
|
927
|
|
|
Accounts payable and accrued liabilities
|
Interest rate swap
|
22
|
|
|
11
|
|
|
Other long-term liabilities
|
The following table shows the effect, net of tax, of the Company’s derivative instruments on the accompanying Condensed Consolidated Statements of Operations and OCI for the
three and six
months ended
June 30, 2014
a
nd
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
Net (loss) gain recognized in OCI, net of tax (1)
|
$
|
(181
|
)
|
|
$
|
(361
|
)
|
|
$
|
(478
|
)
|
|
$
|
725
|
|
Net (loss) gain reclassified from accumulated OCI into Revenue, net of tax (2)
|
(314
|
)
|
|
254
|
|
|
(758
|
)
|
|
1,081
|
|
Net (loss) gain reclassified from accumulated OCI into Interest income and other, net, net of tax (3)
|
(7
|
)
|
|
—
|
|
|
(17
|
)
|
|
158
|
|
Net gain recognized in Interest income and other, net, net of tax (4)
|
19
|
|
|
30
|
|
|
1
|
|
|
45
|
|
Derivatives not designated as hedging relationships:
|
|
|
|
|
|
|
|
Net gain recognized in Interest income and other, net, net of tax (5)
|
11
|
|
|
4
|
|
|
12
|
|
|
147
|
|
|
|
(1)
|
Net change in the fair value of the effective portion classified in OCI
|
|
|
(2)
|
Effective portion classified as Revenue
|
|
|
(3)
|
Ineffective portion classified as Interest income and other, net
|
|
|
(4)
|
Amount excluded from effectiveness testing classified as Interest income and other, net
|
|
|
(5)
|
Classified in Interest income and other, net
|
NOTE 4—STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION EXPENSE
Share-based Compensation Plans
The Company has a share-based compensation program, most recently the 2000 Amended and Restated Equity Incentive Plan (the “Plan”), that provides the Board of Directors broad discretion in creating equity incentives for employees, officers, directors and consultants. This program includes incentive and non-qualified stock options and non-vested stock awards (also known as restricted stock) granted under various stock plans. As of
June 30, 2014
, the Company had approximately
4.4 million
shares of common stock reserved for future issuance under its share-based compensation plans. New shares are issued as a result of stock option exercises, restricted stock units vesting and restricted stock award grants.
The Company recognized share-based compensation expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Costs of product sales
|
$
|
660
|
|
|
$
|
262
|
|
|
$
|
1,197
|
|
|
$
|
429
|
|
Research and development
|
637
|
|
|
202
|
|
|
1,144
|
|
|
531
|
|
Selling, general and administrative
|
1,830
|
|
|
812
|
|
|
3,931
|
|
|
2,150
|
|
Total share-based compensation expense
|
$
|
3,127
|
|
|
$
|
1,276
|
|
|
$
|
6,272
|
|
|
$
|
3,110
|
|
As of June 30, 2014,
$17.8 million
of total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award through 2018. The weighted‑average terms of the unrecognized share-based compensation expense are
2.3
years for stock options and
2.1
years for restricted stock.
Performance-Based Awards
The Company's share-based awards program includes performance-based restricted stock awards ("PRSUs") that vest based upon the achievement of certain performance criteria and a service vesting criteria following the achievement of
performance criteria. Performance criteria include various operational criteria of the Company such as revenues, earnings before interest, taxes, depreciation and amortization, product launches, and similar criteria, either on a Company-wide or segment specific basis. The service vesting criteria ranges from
six
months to
four
years. The Company recognizes the fair value of these awards to the extent the achievement of the related performance criteria is estimated to be probable. If a performance criteria is subsequently determined to not be probable of achievement, any related expense is reversed in the period such determination is made. Conversely, if a performance criteria is not currently expected to be achieved but is later determined to be probable of achievement, a “catch-up” entry is recorded in the period such determination is made for the expense that would have been recognized had the performance criteria been probable of achievement since the grant of the award.
As of
June 30, 2014
, there were
1,194,100
PRSUs outstanding with an average grant date fair value of
$5.93
per PRSU. The Company expects that it is probable that
874,686
of these PRSUs will vest and that the related unrecognized stock compensation expense of
$2.9 million
will be recognized over the next
4
years. Changes in the Company’s assessment of the probability of achievement of performance criteria could have a material effect on the results of operations in future periods. There were no changes in estimate related to the probability of vesting or recognition of expense related to PRSUs during either of the periods ended
June 30, 2014
or
2013
.
For additional information concerning the Company's share-based compensation plans, including performance-based awards programs, see Note 13, "Stockholders' Equity and Share-Based Compensation Expense", to the consolidated financial statements in Part II, Item 8 of the Company's 2013 Annual Report on Form 10-K.
NOTE 5—INVENTORIES
At
June 30, 2014
and
December 31, 2013
, inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
December 31,
2013
|
Raw materials
|
$
|
12,447
|
|
|
$
|
11,587
|
|
Work-in-process
|
17,878
|
|
|
22,139
|
|
Finished goods
|
29,719
|
|
|
30,305
|
|
Total
|
$
|
60,044
|
|
|
$
|
64,031
|
|
|
|
|
|
Short-term portion
|
$
|
54,043
|
|
|
$
|
58,059
|
|
Long-term portion
|
$
|
6,001
|
|
|
$
|
5,972
|
|
Amortization expense related to the fair value step-up during the
six
months ended
June 30, 2014
and
2013
was
$4.7 million
and
$9.1 million
, respectively.
NOTE 6—WARRANTIES
The Company provides for anticipated warranty costs at the time the associated product revenue is recognized. Accrued warranties are included in accounts payable and accrued liabilities in the accompanying Condensed Consolidated Balance Sheets. Product warranty costs are estimated based upon the Company’s historical experience and the applicable warranty period. The Company periodically reviews the adequacy of its warranty reserve and adjusts, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. Changes to the Company’s product warranty liability for the
six
months ended
June 30, 2014
are as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2013
|
$
|
1,697
|
|
Additions charged to cost of product sales
|
339
|
|
Repairs and replacements
|
(395
|
)
|
Adjustments
|
(183
|
)
|
Balance at June 30, 2014
|
$
|
1,458
|
|
NOTE 7—LONG-TERM DEBT OBLIGATIONS
The following table summarizes the carrying amount of the Company's borrowings (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Term loan
|
$
|
24,950
|
|
|
$
|
29,450
|
|
Revolving credit facility
|
—
|
|
|
10,000
|
|
4.00% Notes
|
105,000
|
|
|
105,000
|
|
Total debt
|
129,950
|
|
|
144,450
|
|
Less: current portion of long-term debt
|
4,000
|
|
|
12,750
|
|
Total long-term debt
|
$
|
125,950
|
|
|
$
|
131,700
|
|
Term Loan and Revolving Credit Facility
On June 25, 2012, in conjunction with the acquisition of eBioscience, Inc., the Company entered into a
five
year
$100.0 million
Senior Secured Credit Facility credit agreement (the “Credit Agreement”). The Credit Agreement provided for a Term Loan in an aggregate principal amount of
$85.0 million
and a revolving credit facility in an aggregate principal amount of
$15.0 million
.
On October 17, 2013 the Company refinanced its Senior Secured Credit Facility and entered into the Fourth Amendment to Credit Agreement (the "Fourth Amendment"). The Fourth Amendment provided, among other things, for term loan in the aggregate principal amount of
$38.0 million
and revolving loan commitments in the aggregate principal amount of
$10.0 million
, each with a term of
five
years. The Company borrowed a total of
$38.0 million
under the Term Loan and
$10.0 million
under the revolving loan upon refinancing. As of
June 30, 2014
, the applicable interest rate was approximately
4.38%
.
On July 28, 2014, the Company entered into the Fifth Amendment to Credit Agreement (the "Fifth Amendment" and the Credit Agreement as so amended, the "Amended Credit Agreement"). The Fifth Amendment provides, among other things, for (1) an uncommitted incremental term loan facility in an aggregate amount not to exceed
$50.0 million
and (2) the reduction of interest rate margins.
At the option of the Company (subject to certain limitations), borrowings under the Amended Credit Agreement bear interest at either a base rate or at the London Interbank Offered Rate (“LIBOR”), plus, in each case, an applicable margin. Under the Base Rate Option, interest will be at the base rate plus
1.5%
to
1.75%
dependent on the senior leverage ratio then in effect calculated on the basis of the actual number of days elapsed in a in a year of
365
or
366
days (as applicable) and payable quarterly in arrears. The base rate will be equal to the greatest of (a) the rate last quoted by The Wall Street Journal (or another national publication described in the Amended Credit Agreement) as the U.S. “Prime Rate,” (b) the federal funds rate, plus
0.50%
per annum or (c) LIBOR for an interest period of
one
month, plus
1.00%
per annum. Under the LIBOR Option, interest will be determined based on interest periods to be selected by Affymetrix of
one
,
two
,
three
or
six
months (and, to the extent available to all relevant lenders,
nine
or
12 years
) and will be equal to LIBOR plus
2.50%
and
2.75%
dependent on the senior leverage ratio then in effect, calculated based on the actual number of days elapsed in a
360
-day year. Interest will be paid at the end of each interest period or in the case of interest periods longer than three months, quarterly.
The loans and other obligations under the Senior Secured Credit Facility are (i) guaranteed by substantially all of the Company’s domestic subsidiaries (subject to certain exceptions and limitations) and (ii) secured by substantially all of the assets of Affymetrix and each guarantor (subject to certain exceptions and limitations).
The Amended Credit Agreement requires the Company to maintain an interest coverage ratio of at least
3.5
to 1.0 and a senior leverage ratio not exceeding initially
1.75
to 1.00 and stepping down to
1.20
to 1.00. The Amended Credit Agreement also includes other covenants, including negative covenants that, subject to certain exceptions, limit Affymetrix’, and that of certain of its subsidiaries’, ability to, among other things: (i) incur additional debt, including guarantees by the Company or its subsidiaries, (ii) make investments, pay dividends on capital stock, redeem or repurchase capital stock, redeem or repurchase the Company’s senior convertible notes or any subordinated obligations, (iii) create liens and negative
pledges, (iv) make capital expenditures, (v) dispose of assets, (vi) make acquisitions, (vii) create or permit restrictions on the ability of Affymetrix’ subsidiaries to pay dividends or make distributions to Affymetrix, (viii) engage in transactions with affiliates, (ix) engage in sale and leaseback transactions, (x) consolidate or merge with or into other companies or sell all or substantially all the Company’s assets and (xi) change their nature of business, their organizational documents or their accounting policies.
The Company is required to make the following mandatory prepayments: (a) annual prepayments in an amount equal to
50%
of excess cash flow (as defined in the Amended Credit Agreement), subject to leverage-based step-downs, (b) prepayments in an amount equal to
100%
of the net cash proceeds of issuances or incurrences of debt obligations of Affymetrix and its subsidiaries (other than debt incurrences expressly permitted by the Credit Agreement), (c) prepayments in an amount equal to
100%
of the net proceeds of asset sales in excess of
$2.5 million
annually (subject to certain reinvestment rights) and (d) prepayments in an amount equal to any indemnification payments or similar payments received under the Acquisition Agreement, subject to certain exclusions.
The Amended Credit Agreement also contains events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-default and cross-acceleration to other indebtedness in excess of specified amounts, monetary judgment defaults in excess of specified amounts, bankruptcy or insolvency, actual or asserted invalidity or impairment of any part of the credit documentation (including the failure of any lien on a material portion of the collateral to remain perfected) and change of ownership or control defaults. In addition, the occurrence of a “fundamental change” under the indenture governing the
4.00%
Notes would be an event of default under the Amended Credit Agreement.
As of June 30, 2014, the Company was in compliance with the covenants.
The proceeds received on June 25, 2012 from the original Term Loan were net of debt issuance costs of approximately
$4.5 million
being amortized over the
5
-year term of the Senior Secured Credit Facility. Following the refinancing under the Fourth Amendment, the Company wrote off unamortized debt issuance costs of
$2.5 million
associated with the original Term Loan, and received proceeds on October 17, 2013 from the new Term Loan and Revolver, net of debt issuance costs of approximately
$0.8 million
that amortize on the effective interest rate method beginning October 17, 2013.
As of
June 30, 2014
, the Company had an outstanding principal balance of approximately
$25.0 million
under the Term Loan and incurred
$0.4 million
and
$1.0 million
in interest expense under the Senior Secured Credit Facility for the
three and six
months ended
June 30, 2014
, respectively. There were
no
amounts outstanding under the Revolving Credit Facility as of June 30, 2014.
Quarterly, principal payments are due under the Term Loan, which amortizes such that
10%
of the outstanding principal is due during the first four years and the remaining
60%
is due in the fifth year, including any remaining principal balance and any outstanding revolver balance at such time. The principal amount of unpaid maturities per the Amended Credit Agreement is as follows (in thousands):
|
|
|
|
|
2014, remainder thereof
|
$
|
—
|
|
2015
|
—
|
|
2016
|
—
|
|
2017
|
2,150
|
|
2018
|
22,800
|
|
Total
|
$
|
24,950
|
|
The Company intends to continue making quarterly payments during 2014 and reclassified
$4.0 million
as current on the accompanying Condensed Consolidated Balance Sheet as of
June 30, 2014
.
4.00% Convertible Senior Notes
On June 25, 2012, the Company issued
$105.0 million
principal amount of
4.00%
Convertible Senior Notes ("
4.00%
Notes") due July 1, 2019. The net proceeds, after debt issuance costs totaling
$3.9 million
from the
4.00%
Notes offering, were
$101.1 million
. The
4.00%
Notes bear interest of
4.00%
per year payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2013 until the maturity date of July 1, 2019, unless converted, redeemed or repurchased earlier. The debt issuance costs are being amortized over the effective life of the
4.00%
Notes, which is
7
years.
Holders of the
4.00%
Notes may convert their
4.00%
Notes into shares of the Company’s stock at their option any time prior to the close of business on the business day immediately preceding the maturity date. The
4.00%
Notes are initially convertible into approximately
170.0319
shares of the Company’s common stock per
$1,000
principal amount of notes, which equates to
17,857,143
shares of common stock, or an initial conversion price of
$5.88
per share of common stock. The conversion rate is subject to certain customary anti-dilution adjustments. In addition, following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event in certain circumstances. Holders may also require the Company to repurchase for cash their notes upon certain fundamental changes.
On or after
July 1, 2017
, the Company can redeem for cash all or part of the
4.00%
Notes if the last reported sale price per share of the Company’s common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days during any
30
consecutive trading day period ending within
5
trading days prior to the date on which the Company provides notice of redemption. The redemption price will be equal to
100%
of the principal amount of the
4.00%
Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
As of
June 30, 2014
, the outstanding balance on the
4.00%
Notes was
$105.0 million
and interest incurred for the
three and six
months ended
June 30, 2014
was
$1.2 million
and
$2.4 million
, respectively.
NOTE 8—NET LOSS PER COMMON SHARE
Basic earnings per common share is calculated using the weighted‑average number of common shares outstanding during the period less the weighted‑average shares subject to repurchase. Diluted earnings per common share, if any, gives effect to dilutive common stock subject to repurchase, stock options (calculated based on the treasury stock method), shares purchased under the employee stock purchase plan and convertible debt (calculated using an as-if-converted method).
For the three and six months ended
June 30, 2014
and
2013
, diluted net loss per common share is identical to basic net loss per common share due to potentially dilutive securities being excluded from the calculation, as their effect is anti-dilutive. Potentially dilutive securities excluded from diluted net loss per common share on an actual outstanding basis, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Employee stock options
|
4,540
|
|
|
5,646
|
|
|
4,540
|
|
|
5,646
|
|
Employee stock purchase plan
|
89
|
|
|
14
|
|
|
45
|
|
|
14
|
|
Restricted stock and restricted stock units
|
4,336
|
|
|
3,887
|
|
|
4,336
|
|
|
3,887
|
|
Convertible notes
|
17,857
|
|
|
17,857
|
|
|
17,857
|
|
|
17,868
|
|
Total
|
26,822
|
|
|
27,404
|
|
|
26,778
|
|
|
27,415
|
|
NOTE 9—COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company has been in the past, and continues to be, a party to litigation, which has consumed, and may continue to consume, substantial financial and managerial resources. The Company could incur substantial costs and divert the attention of management and technical personnel in defending against litigation, and any adverse ruling or perception of an
adverse ruling could have a material adverse impact on the Company’s stock price. In addition, any adverse ruling could have a material adverse impact on the Company’s cash flows and financial condition. The results of any litigation or any other legal proceedings are uncertain and as of the date of this report, the Company has not accrued any liability with respect to any of the litigation matters listed below:
Enzo Litigation
Southern District of New York Case
: On October 28, 2003, Enzo Life Sciences, Inc., a wholly-owned subsidiary of Enzo Biochem, Inc. (collectively "Enzo"), filed a complaint against the Company that is pending in the United States District Court for the Southern District of New York for breach of contract, injunctive relief and declaratory judgment. The Enzo complaint relates to a 1998 distributorship agreement with Enzo under which the Company served as a non-exclusive distributor of certain reagent labeling kits supplied by Enzo. On November 10, 2003, the Company filed a complaint against Enzo in the United States District Court for the Southern District of New York for declaratory judgment, breach of contract and injunctive relief relating to the 1998 agreement. On April 22, 2014, the Company entered into a settlement agreement with Enzo with respect to these two lawsuits. Pursuant to the agreement the Company agreed to pay Enzo
$5.1 million
and recorded the litigation settlement charge within the results of operations for the six months ended June 30, 2014. The settlement agreement does not include the Delaware Case described below.
Delaware Case
: On April 6, 2012, Enzo filed a complaint against the Company in the United States District Court for the District of Delaware. In the complaint, plaintiff alleges that Affymetrix is infringing U.S. Patent No. 7,064,197 by making and selling certain GeneChip® products. The plaintiff seeks a preliminary and permanent injunction enjoining the Company from further infringement and unspecified monetary damages. The Company will vigorously defend against the plaintiff’s case. No trial date is set for this action.
Administrative Proceedings
The Company’s intellectual property is subject to a number of significant administrative actions. These proceedings could result in the Company’s patent protection being significantly modified or reduced, and the incurrence of significant costs and the consumption of substantial managerial resources. For the
six months ended June 30, 2014
and 2013, the Company did not incur significant costs in connection with administrative proceedings.
Leases
On June 20, 2014, the Company entered into two leases with BMR-10255 Science Center LP and BMR-10240 Science Center Drive LP, for two premises located in San Diego, California (the “Leases”). The Leases cover premises totaling approximately 82,759 rentable square feet. Subject to the completion of tenant improvements, both Leases are expected to commence in August 2015 and expire in March 2023. The Company expects to bring all employees of its eBioscience business unit in San Diego within closer proximity upon the commencement of the Leases.
Future minimum lease obligations, net of sublease income, as of June 30, 2014 under the two leases mentioned above are as follows (in thousands):
|
|
|
|
|
|
For the Year Ending December 31,
|
|
Amount
|
2014, remainder thereof
|
|
$
|
—
|
|
2015
|
|
780
|
|
2016
|
|
2,324
|
|
2017
|
|
2,393
|
|
2018
|
|
2,462
|
|
Thereafter
|
|
11,242
|
|
Total
|
|
$
|
19,201
|
|
NOTE 10—INCOME TAXES
During the
three and six
months ended
June 30, 2014
, the Company recognized a provision for income taxes of
$0.4 million
and
$0.7 million
, respectively. The provision for income taxes during the
three months ended June 30, 2014
primarily consists of foreign taxes, an income tax expense of
$0.1 million
resulting from a reduction in valuation allowance for net deferred tax assets arising from other comprehensive income recorded in accordance with intraperiod tax allocation guidance, and an income tax benefit of
$0.3 million
related to the lapses of statutes of limitations. The provision for income taxes during the
six months ended June 30, 2014
primarily consists of foreign taxes, offset by an income tax benefit of
$0.1 million
resulting from a reduction in valuation allowance for net deferred tax assets arising from other comprehensive income recorded in accordance with intraperiod tax allocation guidance, and an income tax benefit of
$0.3 million
related to the lapses of statutes of limitations.
Due to the Company’s history of cumulative operating losses, management concluded that, after considering all the available objective evidence, it is not more likely than not that all the Company’s net deferred tax assets will be realized. Accordingly, all of the Company's U.S. deferred tax assets continue to be subject to a valuation allowance as of
June 30, 2014
.
As of
June 30, 2014
, the total amount of unrecognized tax benefits decreased by approximately
$0.3 million
as compared to December 31, 2013, due to the lapses of statutes of limitations. As a result of settlements of ongoing tax examinations and/or expiration of statues of limitations without the assessment of additional income taxes, the amount of unrecognized tax benefits that could be recognized in earnings in the next 12 months could range from zero to approximately
$1.8 million
.
NOTE 11—SEGMENT INFORMATION
The Company reports segment information on the "management" approach which designates the internal reporting used by management for making decisions and assessing performance as the source of the Company's reportable segments. The Company has determined that its Chief Executive Officer is the Company's chief operating decision maker ("CODM") as he is responsible for reviewing and approving investments in the Company's technology platforms and manufacturing infrastructure. The Company is organized in
two
reportable segments: Affymetrix Core and eBioscience.
Affymetrix Core is divided into
four
business units, with each business unit having its own strategic Marketing and Research and Development groups to better serve customers and respond quickly to the market needs. Affymetrix Core manufacturing operations are based on platforms that are used to produce various Affymetrix products that serve multiple applications and markets and similar customer and economic characteristics. Additionally, the business units share certain research, development and common corporate services that provide capital, infrastructure and functional support. As such, the Company has concluded that the four business units represent one reportable operating segment. The following describes the four business units that form Affymetrix Core:
|
|
•
|
Expression:
This business unit markets the Company's GeneChip® gene expression products and services;
|
|
|
•
|
Genetic Analysis and Clinical Applications:
This business unit markets the Company's rapidly growing Axiom® genotyping product line, as well as products with clinical diagnostic and research applications including the CytoScan® and OncoScan products, as well as the QuantiGene ViewRNA in-situ hybridization platform for clinical translational research. In addition, the business unit is responsible for development and marketing of the Powered-by-Affymetrix (PbA) clinical partnering and licensing program which enables third-party diagnostic companies to access and develop DNA and RNA-based diagnostic tests on Affymetrix technology platforms. This business unit also markets the CytoScan Dx product, the recently FDA approved microarray system for post natal diagnostics of children with developmental delays and disorders;
|
|
|
•
|
Life Science Reagents:
This business unit sells reagents, enzymes, purification kits and biochemicals used by life science researchers and other tool provider businesses, including those developing and marketing Next Generation Sequencing products and molecular diagnostics; and
|
|
|
•
|
Corporate
: This business unit is comprised primarily of incidental revenue from royalty arrangements and field revenue from field-services provided to customers of the Company.
|
The eBioscience business unit operates with its own manufacturing, research and marketing groups. The eBioscience business unit does utilize certain Corporate functions such as finance, legal and human resources. This reportable
segment specializes in the areas of flow cytometry reagents, immunoassays, microscopic imaging, other protein-based analyses, QuantiGene single and multiplex RNA solution assays (not including the QuantiGeneRNA View in-situ hybridization platform) and Procarta multiplex immunoassay product lines.
eBioscience began integrating the development and marketing of the QuantiGene (excluding the QuantiGene ViewRNA in-situ hybridization platform) and Procarta product lines during 2013 with full integration in 2014. These products were previously reported by the Expression Business Unit of the Affymetrix Core reportable segment. Accordingly, segment information for prior periods has been restated to reflect these changes for purposes of comparability.
The Company evaluates the performance of its reportable segments based on revenue and income (loss) from operations. Revenue is allocated to each business unit based on product codes. The eBioscience business is operated on a stand-alone basis.
The following table shows revenue and loss from operations by reportable operating segment for the
three and six
months ended
June 30, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Revenue:
|
|
|
|
|
|
|
|
Affymetrix Core
|
$
|
62,085
|
|
|
$
|
57,237
|
|
|
$
|
121,532
|
|
|
$
|
113,157
|
|
eBioscience
|
23,347
|
|
|
22,227
|
|
|
46,871
|
|
|
44,252
|
|
Totals
|
$
|
85,432
|
|
|
$
|
79,464
|
|
|
$
|
168,403
|
|
|
$
|
157,409
|
|
Loss from operations:
|
|
|
|
|
|
|
|
Affymetrix Core
|
$
|
854
|
|
|
$
|
265
|
|
|
$
|
(6,734
|
)
|
|
$
|
(7,789
|
)
|
eBioscience
|
(1,158
|
)
|
|
(3,216
|
)
|
|
(2,311
|
)
|
|
(7,368
|
)
|
Totals
|
$
|
(304
|
)
|
|
$
|
(2,951
|
)
|
|
$
|
(9,045
|
)
|
|
$
|
(15,157
|
)
|
NOTE 12—RELATED PARTY TRANSACTIONS
In December 2011, the Company entered into an agreement under which it assigned one patent application and related know-how to Cellular Research, Inc. (“Cellular Research”), a company founded by the Company’s Chairman, Dr. Stephen P.A. Fodor. Dr. Fodor also owns a majority of the shares of Cellular Research. Pursuant to the agreement, Cellular Research shall pay single digit royalties to Affymetrix on sales of products covered by the assigned technology, and starting in December 2015, an annual minimum fee of
$100,000
. Affymetrix shall also have a right of first refusal to collaborate with Cellular Research for the development of certain new products and to supply arrays to Cellular Research under certain terms and conditions. As of
June 30, 2014
,
no
significant royalties had been earned from this agreement.
NOTE 13—RESTRUCTURING
During the fourth quarter of 2012, the Company initiated a cost reduction action that included downsizing its workforce to realign the Company's organization to support its strategy to stabilize its core business and position the Company for growth. Restructuring charges of
$4.5 million
were recognized during the
six months ended
June 30, 2013
.