Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses, or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to:
•our ability to market and sell products, whether through our internal, direct sales force or third parties;
•our ability to fulfill our commitments under our contracts with the U.S. government for InteliSwab® COVID-19 Rapid Tests;
•the impact of significant customer concentration in the genomics business;
•our ability to successfully scale-up our manufacturing for InteliSwab®COVID-19 Rapid Tests;
•failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products;
•our ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements;
•our ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products;
•our ability to comply with applicable regulatory requirements;
•our ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (or “FDA”), or other regulators;
•the potential impact of healthcare reform in the United States, including the Inflation Reduction Act of 2022, and measures being taken worldwide designed to reduce healthcare costs;
•the impact of the COVID-19 pandemic on our business and labor force and supply chain;
•our ability to successfully develop new products, validate the expanded use of existing collector products, receive necessary regulatory approvals and authorizations, transport work-in-process goods and finished products and commercialize such products for COVID-19 testing;
•changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements;
•our ability to meet increased demand for our products;
•our ability to diversify our customer base;
•the impact of replacing distributors on our business;
•inventory levels at distributors and other customers;
•our ability to achieve our financial and strategic objectives and continue to increase our revenues, including the ability to expand international sales;
•the impact of competitors, competing products and technology changes on our business;
•reduction or deferral of public funding available to customers;
•competition from new or better technology or lower cost products;
•our ability to develop, commercialize and market new products;
•market acceptance of oral fluid or urine testing, collection or other products;
•market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services;
•changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention, or (the “CDC”) or other agencies; ability to fund research and development and other products and operations;
19
•our ability to obtain and maintain new or existing product distribution channels;
•our reliance on sole supply sources for critical products and components;
•the availability of related products produced by third parties or products required for use of our products;
•the impact of contracting with the U.S. government on our business;
•the impact of negative economic conditions on our business; including as a result of inflation, hostilities or war;
•our ability to achieve and maintain sustained profitability;
•our ability to increase our gross margins;
•our ability to utilize net operating loss carry forwards or other deferred tax assets;
•the volatility of our stock price;
•uncertainty relating to patent protection and potential patent infringement claims;
•uncertainty and costs of litigation relating to patents and other intellectual property;
•the availability of licenses to patents or other technology;
•our ability to enter into international manufacturing agreements;
•obstacles to international marketing and manufacturing of products;
•our ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms;
•adverse movements in foreign currency exchange rates;
•loss or impairment of sources of capital;
•our ability to attract and retain qualified personnel;
•our exposure to product liability and other types of litigation;
•changes in international, federal or state laws and regulations;
•customer consolidations and inventory practices;
•equipment failures and ability to obtain needed raw materials and components; and
•general political, business and economic conditions.
These and other factors that could affect our results are discussed more fully in our Securities and Exchange Commission (“SEC”) filings, including our registration statements, Annual Report on Form 10-K for the year ended December 31, 2021, Quarterly Reports on Form 10-Q, and other filings with the SEC. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Report, and we undertake no duty to update these statements.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure.
The following discussion should be read in conjunction with our consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below.
20
Overview and Business Segments
The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment and our “Molecular Solutions” segment.
Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"), the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. We began recording revenues on the sales of our InteliSwab® COVID-19 Rapid Tests during the third quarter of 2021.
Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek Inc. ("DNAG"), Diversigen, Inc. ('Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets.
In 2020, we expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. In 2022, demand for COVID-19 PCR testing has declined driven by the availability of antigen tests and the wider availability of vaccines, thereby negatively impacting the sales of the collection products. We have also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health.
Our Molecular Solutions segment includes the Colli-Pee® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Our Molecular Solutions business also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions.
Recent Developments
Impact of COVID-19
As COVID-19 continues to impact the economy of the United States and other countries around the world, we are committed to being a part of the response to this unprecedented challenge. We have made substantial investments to expand our operations in order to manufacture product used for COVID-19 testing in the United States.
Due to COVID-19, we have experienced volatility, including periods of material decline compared to prior year periods in testing volume of our base business (which excludes COVID-19 testing) and periods of significant demand for our COVID-19 testing product, with demand generally fluctuating in line with changes in prevalence of the virus and related variants. While demand for our COVID-19 PCR testing has declined in 2022, it is difficult for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations.
BARDA Funding for Ebola Product
In September 2022, we entered into an agreement with Biomedical Advanced Research and Development Authority ("BARDA"), which is part of the office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services ("HHS"), pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform. Our current OraQuick® Ebola Rapid Antigen Test is de novo authorized for use with whole blood or cadaveric oral fluid. The test received de novo authorization from the FDA in 2019, making it the first and only rapid antigen test to receive authorization for the detection of Ebola virus.
New Contract for In-Home HIV Tests
21
In September 2022, we were selected to provide our OraQuick® In-Home HIV tests in support of the Centers for Disease Control and Preventions (CDC) “Together Take Me Home,” HIV self-test program. Under the program, the CDC will provide $41.5 million over a five-year period to support community testing. Emory University will manage the program and closely collaborate with a number of partner organizations, including OraSure, to supply tests to communities not equitably reached by HIV testing services across the United States.
Under the "Together Take Me Home" HIV self-test program, we will provide up to 1 million OraQuick® In-Home HIV tests over a five-year period. Emory University and partner organizations will manage the program and provide logistical and distribution services for the tests. A free HIV self-test will be mailed in discreet packages to people who enroll through its website. The program will target populations that are disproportionately affected by HIV and less likely to have access to key prevention services.
Current Consolidated Financial Results
During the nine months ended September 30, 2022, our consolidated net revenues increased 55% to $264.4 million, compared to $170.1 million for the nine months ended September 30, 2021. Net product and services revenues during the nine months ended September 30, 2022 increased 55% when compared to the same period of 2021, largely due to $144.8 million of InteliSwab® COVID-19 rapid test revenues recorded in the first nine months of 2022 compared to $7.9 million of revenue in the comparable period of 2021. We first began selling this product in August of 2021. Also contributing to the increased revenues were higher domestic sales of our HCV product and higher overall sales of our substance abuse testing and Colli-Pee® products. Declines in sales of our molecular sample collection kits for COVID-19 testing, lower laboratory services revenues, and a decline in international sales of our HIV products partially offset these positive drivers of revenue. Other revenues for the nine months ended September 30, 2022 were $7.2 million compared to $4.6 million in the same period of 2021. This increase was largely due to higher research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income.
Our consolidated net loss for the nine months ended September 30, 2022 was $33.5 million, or $0.46 per share on a fully diluted basis, compared to a consolidated net loss of $12.6 million, or $0.18 per share on a fully diluted basis, for the nine months ended September 30, 2021. Results for the nine months ended September 30, 2022 were impacted by lower gross margins rates caused by an unfavorable product mix of higher sales of lower margin products, increases in inventory reserves associated with excess inventory levels and manufacturing inefficiencies that occurred in the first quarter of 2022, lower absorption of labor costs that also occurred in the first half of 2022 and the absence of the Gates subsidy which expired in June 2021. Also contributing to our net loss is an increase in operating expense as a result of impairment charges taken on idle manufacturing lines and goodwill, higher legal fees, severance charges and accelerated stock compensation expense associated with our CEO transition and termination of our general counsel, increased staffing costs due to overall higher headcount, and nonrecurring costs associated with our strategic alternatives process.
Cash used in operating activities during the nine months ended September 30, 2022 was $29.2 million compared to cash used in operating activities during the nine months ended September 30, 2021 of $22.6 million. During the first nine months of 2022, our cash flow used in operating activities increased as a result of our net loss and increased working capital requirements as we scaled our InteliSwab® manufacturing capacity to meet higher demand. As of September 30, 2022, we had $101.6 million in cash, cash equivalents and available-for-sale securities.
Results of Operations
Three months ended September 30, 2022 compared to September 30, 2021
CONSOLIDATED NET REVENUES
The table below shows a breakdown of total consolidated net revenues (dollars in thousands) generated by each of our business segments during the three months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
|
|
Dollars |
|
|
|
|
|
|
Percentage of Total Net Revenues |
|
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
|
2022 |
|
|
|
2021 |
|
|
Diagnostics |
|
$ |
94,402 |
|
|
$ |
23,281 |
|
|
|
305 |
|
% |
|
|
81 |
|
% |
|
|
43 |
|
% |
Molecular Solutions |
|
|
18,419 |
|
|
|
29,948 |
|
|
|
(38 |
) |
|
|
|
16 |
|
|
|
|
56 |
|
|
Net product and services revenues |
|
|
112,821 |
|
|
|
53,229 |
|
|
|
112 |
|
|
|
|
97 |
|
|
|
|
99 |
|
|
Other |
|
|
3,642 |
|
|
|
688 |
|
|
|
429 |
|
|
|
|
3 |
|
|
|
|
1 |
|
|
Net revenues |
|
$ |
116,463 |
|
|
$ |
53,917 |
|
|
|
116 |
|
% |
|
|
100 |
|
% |
|
|
100 |
|
% |
Consolidated net product and services revenues increased 112% to $112.8 million for the three months ended September 30, 2022 from $53.2 million for the three months ended September 30, 2021. The increase in revenues is largely due to $79.6 million of InteliSwab® COVID-19 rapid test revenues in the third quarter of 2022 compared to $7.7 million in the third quarter of 2021. We first began selling this product in August of 2021. Higher sales of our HCV product also contributed to the increased revenues. Declines in revenues across all other product lines partially
22
offset this positive driver of revenue. Other revenues for the three months ended September 30, 2022 increased 429% to $3.6 million from $688,000 for the three months ended September 30, 2021 due to higher research and development funding associated with the development of our InteliSwab® COVID-19 rapid test.
Consolidated net revenues derived from products sold to customers outside of the United States were $7.5 million and $10.9 million, or 6% and 20% of total net revenues, for the three months ended September 30, 2022 and 2021, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues.
Net Revenues by Segment
Diagnostics Segment
The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Diagnostics segment during the three months ended September 30, 2022 and 2021.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
|
|
Dollars |
|
|
|
|
|
|
Percentage of Total Net Revenues |
|
|
Market |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
|
2022 |
|
|
|
2021 |
|
|
Infectious disease testing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COVID-19 |
|
$ |
79,559 |
|
|
$ |
7,675 |
|
|
|
937 |
|
% |
|
|
81 |
|
% |
|
|
33 |
|
% |
Other |
|
|
12,248 |
|
|
|
12,932 |
|
|
|
(5 |
) |
|
|
|
12 |
|
|
|
|
55 |
|
|
Total infectious disease testing |
|
|
91,807 |
|
|
|
20,607 |
|
|
|
346 |
|
|
|
|
94 |
|
|
|
|
88 |
|
|
Substance abuse testing |
|
|
2,595 |
|
|
|
2,674 |
|
|
|
(3 |
) |
|
|
|
3 |
|
|
|
|
11 |
|
|
Net product revenues |
|
|
94,402 |
|
|
|
23,281 |
|
|
|
305 |
|
|
|
|
97 |
|
|
|
|
99 |
|
|
Other |
|
|
3,249 |
|
|
|
230 |
|
|
NM |
|
|
|
|
3 |
|
|
|
|
1 |
|
|
Net revenues |
|
$ |
97,651 |
|
|
$ |
23,511 |
|
|
|
315 |
|
% |
|
|
100 |
|
% |
|
|
100 |
|
% |
NM - not meaningful
Infectious Disease Testing Market
COVID-19 revenues were $79.6 million for the three months ended September 30, 2022, driven by sales of our InteliSwab® COVID-19 rapid test. We first began selling this product in August of 2021.
Sales to the other infectious disease testing markets decreased 5% to $12.2 million for the three months ended September 30, 2022 from $12.9 million for the three months ended September 30, 2021. This decrease resulted from lower international sales of our OraQuick® HIV product offset by increased domestic sales of the same product and higher world-wide OraQuick® HCV product sales.
The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during the three months ended September 30, 2022 and 2021.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
Market |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
Domestic HIV |
|
$ |
4,609 |
|
|
$ |
3,440 |
|
|
|
34 |
|
% |
International HIV |
|
|
4,445 |
|
|
|
6,582 |
|
|
|
(32 |
) |
|
Net HIV revenues |
|
|
9,054 |
|
|
|
10,022 |
|
|
|
(10 |
) |
|
Domestic HCV |
|
|
1,866 |
|
|
|
1,827 |
|
|
|
2 |
|
|
International HCV |
|
|
1,368 |
|
|
|
888 |
|
|
|
54 |
|
|
Net HCV revenues |
|
|
3,234 |
|
|
|
2,715 |
|
|
|
19 |
|
|
Net OraQuick® revenues |
|
$ |
12,288 |
|
|
$ |
12,737 |
|
|
|
(4 |
) |
% |
Domestic OraQuick® HIV sales increased 34% to $4.6 million for the three months ended September 30, 2022 from $3.4 million for the three months ended September 30, 2021, primarily as a result of an increase in new customers driven by our distributor channel and an increase in sales of our OraQuick® In-Home HIV test sold to public health agencies as demand shifts from in-person testing to in-home testing.
International sales of our OraQuick® HIV tests decreased 32% to $4.4 million for the three months ended September 30, 2022 from $6.6 million for the three months ended September 30, 2021 largely due to customer ordering patterns.
23
Domestic OraQuick® HCV sales remained largely flat at $1.9 million for the three months ended September 30, 2022 compared to $1.8 million for the three months ended September 30, 2021.
International OraQuick® HCV sales increased 54 % to $1.4 million for the three months ended September 30, 2022 compared to $888,000 for the three months ended September 30, 2021 due to a recovery in ordering by certain countries post the COVID-19 impact.
Substance Abuse Testing Market
Sales to the substance abuse testing assessment market remained largely flat at $2.6 million for the three months ended September 30, 2022 compared to $2.7 million for the three months ended September 30, 2021.
Other Revenues
Other revenues for the three months ended September 30, 2022 increased to $3.2 million from $230,000 for the three months ended September 30, 2021, due to higher research and development funding associated with our InteliSwab® COVID-19 rapid test.
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the three months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, |
|
|
Market |
2022 |
|
|
2021 |
|
|
% Change |
|
|
Genomics |
|
$ |
13,980 |
|
|
$ |
19,018 |
|
|
|
(26 |
) |
% |
Microbiome |
|
|
1,761 |
|
|
|
1,693 |
|
|
|
4 |
|
|
COVID-19 |
|
|
361 |
|
|
|
6,255 |
|
|
|
(94 |
) |
|
Laboratory services |
|
|
1,957 |
|
|
|
2,406 |
|
|
|
(19 |
) |
|
Other product and service revenues |
|
|
360 |
|
|
|
576 |
|
|
|
(38 |
) |
|
Net molecular product and services revenues |
|
$ |
18,419 |
|
|
|
29,948 |
|
|
|
(38 |
) |
|
Other |
|
|
393 |
|
|
|
458 |
|
|
|
(14 |
) |
|
Net molecular revenues |
|
$ |
18,812 |
|
|
$ |
30,406 |
|
|
|
(38 |
) |
% |
Sales of our genomics products decreased 26% to $14.0 million for the three months ended September 30, 2022, compared to $19.0 million for the three months ended September 30, 2021, as result of customer ordering patterns and a shift in market prioritization at our larger commercial customers.
Microbiome kit sales increased 4% to $1.8 million for the three months ended September 30, 2022 compared to $1.7 million for the three months ended September 30, 2021, due to renewal of clinical study activities, new customer accounts offset by other customer ordering patterns.
Sales of our molecular sample collection kits for COVID-19 testing decreased 94% to $0.3 million for the three months ended September 30, 2022 compared to $6.3 million during the comparable period in 2021 due to lower COVID-19 PCR testing sales to our core customers, driven by the availability of antigen tests, the wider availability of vaccines and high inventory levels held by some of those customers and the termination of public funding for PCR testing.
Laboratory services revenues declined 19% to $2.0 million for the three months ended September 30, 2022 compared to $2.4 million for the three months ended September 30, 2021 as a result of a large customer ceasing its operations and a decline in clinical trial work at certain pharmaceutical customers, partially offset by the addition of new customer accounts.
Other product and service revenues declined 38% to $0.3 million in the third quarter of 2022 compared to $576,000 in the third quarter of 2021 largely due to the timing of customer orders.
Other revenues for the three months ended September 30, 2022 decreased 14% to $0.4 million from $0.5 million for the three months ended September 30, 2021, largely as a result of lower royalty income received under a litigation settlement agreement.
24
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit margins remained flat at 40% for both the three months ended September 30, 2022 and 2021.
Consolidated operating income for the three months ended September 30, 2022 was $875 thousand, a $13.9 million increase from the $13.0 million operating loss reported for the three months ended September 30, 2021. Results for the three months ended September 30, 2022 were positively impacted by the increase in revenues described above partially offset by impairment charges of $6.6 million associated with idle manufacturing lines associated with our molecular business and by an increase in operating expenses as described below.
OPERATING INCOME (LOSS) BY SEGMENT
We evaluate performance of our operating segments based on revenue and operating income. Reportable segments have inter-segment revenue and expenses that are eliminated in consolidation, including the fees associated with an intercompany service agreement between the U.S. and Canadian entities.
Diagnostics Segment
The gross profit margin for the Diagnostics segment was 38% for the three months ended September 30, 2022 compared to 16% for the three months ended September 30, 2021. This increase is due to improved product mix of higher margin product sales and the improved quality-yield experienced as compared to the scale-up and production issues experienced in the third quarter of 2021 related to the manufacturing of InteliSwab® tests which caused higher than normal scrap rates. In addition, the third quarter of 2021 included a reserve for COVID-19 antibody inventory that did not recur in the third quarter of 2022. Also contributing to the higher margins is the increase in non-product revenues which contributes 100% to the gross margin rate.
Research and development expenses increased 26% to $7.4 million for the three months ended September 30, 2022 compared to $5.9 million for the three months ended September 30, 2021 largely due to increased clinical study activities related to obtaining CE mark for our InteliSwab® rapid test and increased staffing costs associated with higher head count. Sales and marketing expenses increased 8% to $9.7 million for three months ended September 30, 2022 from $9.0 million for the three months ended September 30, 2021 due to an increase in our reserve for uncollectible accounts, increased staffing costs associated with higher head count and increased travel expenses as travel and in person events have resumed as COVID-19 restrictions have been lifted. These increases in spend were partially offset by a decline in consulting spend associated with business strategy work that occurred in 2021 and did not repeat in 2022 and lower advertising and market research costs associated with our InteliSwab® test. General and administrative expenses increased 5% to $8.9 million for the three months ended September 30, 2022 from $8.1 million for the three months ended September 30, 2021 largely due to increased staffing costs.
All of the above contributed to the Diagnostics segment’s operating income of $11.3 million for the three months ended September 30, 2022, which included the non-cash impairment charges of $8.5 million, non-cash charges of $2.1 million for depreciation and amortization and $1.6 million for stock-based compensation. The Diagnostics segment operating loss in the third quarter of 2021 included a $1.5 million non-cash pre-tax benefit associated with the change in the fair value of acquisition-related contingent consideration. There was no similar benefit recorded in the third quarter of 2022.
Molecular Solutions Segment
The gross profit margin for the Molecular Solutions segment was 49% for the three months ended September 30, 2022 compared to 58% for the three months ended September 30, 2021. This decrease was due to a less favorable product mix.
Research and development expenses decreased 13% to $2.4 million for the three months ended September 30, 2022 from $2.7 million for the three months ended September 30, 2021 largely due to a decline in non-cash stock compensation expense. Sales and marketing expenses decreased 23% to $3.8 million for the three months ended September 30, 2022 from $4.9 million for the three months ended September 30, 2021 largely due to a decline in consulting spend associated with business strategy work that occurred in 2021 and did not repeat in 2022, a decrease in expense related to the cancellation of a marketing loyalty program, and lower amortization expense as related intangibles were fully amortized at the end of 2021. General and administrative expenses increased 58% to $7.0 million for the three months ended September 30, 2022 from $4.4 million for the three months ended September 30, 2021 largely due to higher legal fees, increased non-cash stock compensation costs, and penalties and interest recorded related to a sales tax audit that did not occur in 2021.
Operating expenses for the Molecular segment also include an impairment charge of $6.6 million for the three months ended September 30, 2022 associated with several idle manufacturing lines for which there are no projected cash flow and minimal resale or salvage value.
25
All of the above contributed to the Molecular Solutions segment’s operating loss of $10.4 million for the three months ended September 30, 2022, which included the non-cash impairment charge of $6.6 million, non-cash charges of $1.8 million for depreciation and amortization and $0.7 million for stock-based compensation.
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the three months ended September 30, 2022, we recorded a U.S. state tax benefit of $40,000 compared to $102,000 for the three months ended September 30, 2021. For the three months ended September 30, 2022, we recorded a foreign tax benefit of $1.1 million compared to foreign tax expense of $2.2 million for the three months ended September 30, 2021. This overall decrease in foreign tax expense is largely a result of the decrease in income before taxes generated by our Canadian subsidiary.
Nine months ended September 30, 2022 compared to September 30, 2021
CONSOLIDATED NET REVENUES
The table below shows a breakdown of total consolidated net revenues (dollars in thousands) generated by each of our business segments during the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
Dollars |
|
|
|
|
|
Percentage of Total Net Revenues |
|
|
|
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
2022 |
|
|
|
2021 |
|
|
Diagnostics |
|
$ |
190,774 |
|
|
$ |
54,867 |
|
|
|
248 |
|
% |
|
72 |
|
% |
|
|
32 |
|
% |
Molecular Solutions |
|
|
66,450 |
|
|
|
110,682 |
|
|
|
(40 |
) |
|
|
26 |
|
|
|
|
65 |
|
|
Net product and services revenues |
|
|
257,224 |
|
|
|
165,549 |
|
|
|
55 |
|
|
|
98 |
|
|
|
|
97 |
|
|
Other |
|
|
7,177 |
|
|
|
4,557 |
|
|
|
57 |
|
|
|
3 |
|
|
|
|
4 |
|
|
Net revenues |
|
$ |
264,401 |
|
|
$ |
170,106 |
|
|
|
55 |
|
% |
|
101 |
|
% |
|
|
101 |
|
% |
Consolidated net product and services revenues increased 55% to $257.2 million for the nine months ended September 30, 2022 from $165.5 million for the nine months ended September 30, 2021. The increase in revenues is largely due to $144.8 million of InteliSwab® COVID-19 rapid test revenues recorded in the first nine months of 2022 compared to $7.9 million of revenue in the comparable period of 2021. We first began selling this product in August of 2021. Also contributing to the increased revenues were higher domestic sales of our HCV product and higher overall sales of our substance abuse testing and Colli-Pee® products. Declines in sales of our molecular sample collection kits for COVID-19 testing, lower laboratory services revenues, and a decline in international sales of our HIV products partially offset these positive drivers of revenue. Other revenues for the nine months ended September 30, 2022 were $7.2 million compared to $4.6 million in the same period of 2021. This increase was largely due to higher research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income.
Consolidated net revenues derived from products sold to customers outside of the United States were $27.2 million and $30.4 million, or 10% and 18% of total net revenues, for the nine months ended September 30, 2022 and 2021, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues.
26
Net Revenues by Segment
Diagnostics Segment
The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Diagnostics segment during the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
|
Dollars |
|
|
|
|
|
|
Percentage of Total Net Revenues |
|
|
Market |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
|
2021 |
|
|
|
2020 |
|
|
Infectious disease testing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COVID-19 |
|
$ |
144,809 |
|
|
$ |
7,938 |
|
|
NM |
|
% |
|
|
74 |
|
% |
|
|
0 |
|
% |
Other |
|
|
38,179 |
|
|
|
39,664 |
|
|
|
(4 |
) |
|
|
|
18 |
|
|
|
|
69 |
|
|
Total infectious disease testing |
|
|
182,988 |
|
|
|
47,602 |
|
|
|
284 |
|
|
|
|
93 |
|
|
|
|
83 |
|
|
Substance abuse testing |
|
|
7,786 |
|
|
|
7,265 |
|
|
|
7 |
|
|
|
|
4 |
|
|
|
|
13 |
|
|
Net product revenues |
|
|
190,774 |
|
|
|
54,867 |
|
|
|
248 |
|
|
|
|
97 |
|
|
|
|
96 |
|
|
Other |
|
|
5,642 |
|
|
|
2,501 |
|
|
|
126 |
|
|
|
|
4 |
|
|
|
|
3 |
|
|
Net revenues |
|
$ |
196,416 |
|
|
$ |
57,368 |
|
|
|
242 |
|
% |
|
|
101 |
|
% |
|
|
99 |
|
% |
NM - not meaningful
Infectious Disease Testing Market
COVID-19 revenues were $144.8 million for the nine months ended September 30, 2022, compared to $7.9 million for the nine months ended September 30, 2021. This increase was driven by sales of our InteliSwab® COVID-19 rapid test which we first began selling in August of 2021.
Sales to the other infectious disease testing markets decreased 4% to $38.2 million for the nine months ended September 30, 2022 from $39.7 million for the nine months ended September 30, 2021. This decrease resulted from lower world-wide OraQuick® HIV and international OraQuick® HCV product sales, partially offset by higher domestic OraQuick® HCV sales.
The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Market |
|
2022 |
|
|
2021 |
|
|
% Change |
|
|
Domestic HIV |
|
$ |
12,115 |
|
|
$ |
12,490 |
|
|
|
(3 |
) |
% |
International HIV |
|
|
15,462 |
|
|
|
17,255 |
|
|
|
(10 |
) |
|
Net HIV revenues |
|
|
27,577 |
|
|
|
29,745 |
|
|
|
(7 |
) |
|
Domestic HCV |
|
|
6,440 |
|
|
|
5,580 |
|
|
|
15 |
|
|
International HCV |
|
|
3,742 |
|
|
|
3,802 |
|
|
|
(2 |
) |
|
Net HCV revenues |
|
|
10,182 |
|
|
|
9,382 |
|
|
|
9 |
|
|
Net OraQuick® revenues |
|
$ |
37,759 |
|
|
$ |
39,127 |
|
|
|
(3 |
) |
% |
Domestic OraQuick® HIV sales decreased 3% to $12.1 million for the nine months ended September 30, 2022 from $12.5 million for the nine months ended September 30, 2021, primarily as a result of a large order fulfilled in the first half of 2021 for our OraQuick® In-Home HIV test shipped to the CDC and used in an initiative to drive increased in-home HIV testing. A similar order did not occur during the nine months ended September 30, 2022.
International sales of our OraQuick® HIV tests decreased 10% to $15.5 million for the nine months ended September 30, 2022 from $17.3 million for the nine months ended September 30, 2021 due to customer ordering patterns and the absence of the Gates Foundation subsidy, which expired in June 2021 and is not included in revenues in 2022.
Domestic OraQuick® HCV sales increased 15% to $6.4 million for the nine months ended September 30, 2022 from $5.6 million for the nine months ended September 30, 2021, driven by new funding granted by certain state governments, increased legislation regarding drug testing and a rise in drug use requiring more testing.
International OraQuick® HCV sales remained largely flat at $3.7 million for the nine months ended September 30, 2022 compared to $3.8 million for the nine months ended September 30, 2021.
27
Sales to the substance abuse testing assessment market increased 7% to $7.8 million for the nine months ended September 30, 2022 compared to $7.3 million for the nine months ended September 30, 2021 due to market share gains.
Other Revenues
Other revenues for the nine months ended September 30, 2022 increased to $5.6 million from $2.5 million for the nine months ended September 30, 2021, due to higher research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test partially offset by lower royalty income.
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the nine months ended September 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
Market |
2022 |
|
|
2021 |
|
|
% Change |
|
|
Genomics |
|
$ |
44,558 |
|
|
$ |
49,333 |
|
|
|
(10 |
) |
% |
Microbiome |
|
|
5,583 |
|
|
|
5,888 |
|
|
|
(5 |
) |
|
COVID-19 |
|
|
9,522 |
|
|
|
46,209 |
|
|
|
(79 |
) |
|
Laboratory services |
|
|
4,895 |
|
|
|
8,017 |
|
|
|
(39 |
) |
|
Other product revenues |
|
|
1,892 |
|
|
|
1,235 |
|
|
|
53 |
|
|
Net molecular product and services revenues |
|
$ |
66,450 |
|
|
$ |
110,682 |
|
|
|
(40 |
) |
|
Other |
|
|
1,535 |
|
|
|
2,056 |
|
|
|
(25 |
) |
|
Net molecular product and services revenues |
|
$ |
67,985 |
|
|
$ |
112,738 |
|
|
|
(40 |
) |
% |
Sales of our genomics products decreased 10% to $44.6 million for the nine months ended September 30, 2022, compared to $49.3 million for the nine months ended September 30, 2021 largely as a result of customer ordering patterns and a shift in market prioritization at our larger commercial customers.
Microbiome kit sales decreased 5% to $5.6 million for the nine months ended September 30, 2022 compared to $5.9 million for the nine months ended September 30, 2021, due to customer ordering patterns.
Sales of our molecular sample collection kits for COVID-19 testing decreased 79% to $9.5 million for the nine months ended September 30, 2022 compared to $46.2 million during the comparable period in 2021 due to lower COVID-19 PCR testing sales to our core customers, driven by the availability of antigen tests, the wider availability of vaccines, lower public funding for PCR testing, and high inventory levels held by some of those customers.
Laboratory services revenues declined 39% to $4.9 million for the nine months ended September 30, 2022 compared to $8.0 million for the nine months ended September 30, 2021 as a result of a large customer ceasing its operations and a slowdown in clinical trials.
Other product and service revenues increased 53% to $1.9 million for the nine months ended September 30, 2022 compared to $1.2 million for the nine months ended September 30, 2021 largely due to increased sales by our Novosanis subsidiary.
Other revenues for the nine months ended September 30, 2022 decreased 25% to $1.5 million from $2.1 million for the nine months ended September 30, 2021, largely as a result of lower royalty income received under a litigation settlement agreement.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit margins were 37% for the nine months ended September 30, 2022 compared to 53% for the nine months ended September 30, 2021. The decrease in gross margins rates was caused by an unfavorable product mix of higher sales of lower margin products, increases in inventory reserves associated with excess inventory levels and manufacturing inefficiencies that occurred in the first quarter of 2022, lower absorption of labor costs that also occurred in the first half of 2022 and the absence of the Gates Foundation subsidy which expired in June 2021.
Consolidated operating loss for the nine months ended September 30, 2022 was $36.4 million, a $35.6 million decrease from the $793 thousand recorded for the nine months ended September 30, 2021. Results in 2022 were negatively impacted by the lower gross profit margin described above coupled with an increase in operating expenses as described below, including an aggregate impairment charge of $17.1 million.
28
OPERATING INCOME (LOSS) BY SEGMENT
We evaluate performance of our operating segments based on revenue and operating income. Reportable segments have inter-segment revenue and expenses that are eliminated in consolidation, including the fees associated with an intercompany service agreement between the U.S. and Canadian entities.
Diagnostics Segment
The gross profit margin for the Diagnostics segment was 33% for the nine months ended September 30, 2022 compared to 29% for the nine months ended September 30, 2021. This improvement in margin is a result of a more favorable product mix, the increase in non-product revenues which contribute 100% to the gross margin rate partially offset by increases in scrap and lower absorption of labor costs associated with the manufacturing inefficiencies that occurred earlier in 2022 that have since been corrected and the June 2021 expiration of subsidies under the support agreement with the Gates Foundation.
Research and development expenses increased 10% to $19.2 million for the nine months ended September 30, 2022 compared to $17.4 million for the nine months ended September 30, 2021 largely due to higher staffing costs associated with increased head count, increased clinical study activities related to obtaining CE mark for our InteliSwab® rapid test, partially offset by lower product development activities related to our InteliSwab® rapid test as we received EUA authorization in June 2021. Sales and marketing expenses increased 18% to $25.6 million for the nine months ended September 30, 2022 from $21.7 million for the nine months ended September 30, 2021 due to increased staffing costs associated with higher head count, increased travel and annual meeting expenses as travel and in person events have resumed as COVID-19 restrictions have been lifted, increased consultant costs, and an increase in our reserve for uncollectible accounts, partially offset by a decrease in commission expense. General and administrative expenses increased 55% to $33.6 million for the nine months ended September 30, 2022 from $21.6 million for the nine months ended September 30, 2021 largely due to higher staffing costs associated with increased head count, higher stock compensation expense associated with accelerated vesting of shares under our former CEO's and general counsel's employment agreements, increased consulting costs, increased legal costs, higher severance costs, and increased accounting fees.
Operating expenses for the Diagnostic segment also include an impairment charge of $4.9 million associated with an idle manufacturing line for which it has no projected cash flows and minimal resale or salvage value. Diagnostic operating expenses also included a goodwill impairment charge of $3.6 million. The decline in the Company's stock price was identified as a triggering event which required the Company to perform a quantitative goodwill impairment analysis. The results of this analysis indicated the Diagnostic segment's goodwill was impaired and was written down to $0.
All of the above contributed to the Diagnostics segment’s operating loss of $20.3 million for the nine months ended September 30, 2022, which included the non-cash impairment charge of $8.5 million, non-cash charges of $5.7 million for depreciation and amortization and $7.5 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $36,000 associated with the change in the fair value of acquisition-related contingent consideration. This is in comparison to an $1.0 million benefit recorded in the first half of 2021.
Molecular Solutions Segment
The gross profit margin for the Molecular Solutions segment was 47% for the nine months ended September 30, 2022 compared to 66% for the nine months ended September 30, 2021. This decrease was due to an increase in reserves for excess inventory as result of a forecasted decline in demand and a less favorable product mix.
Research and development expenses increased 3% to $8.1 million for the nine months ended September 30, 2022 from $7.9 million for the nine months ended September 30, 2021 due to higher staffing costs. Sales and marketing expenses increased 1% to $12.3 million for the nine months ended September 30, 2022 from $12.1 million for the nine months ended September 30, 2021 due to higher staffing costs related to increased head count, increased consulting expense associated with business strategy planning, and an increase in travel costs as COVID-19 restrictions are lifted. These increases in expenses were partially offset by lower amortization expense associated with an intangible asset that was fully amortized at the end of 2021, lower commission, and a decrease in expense related to the cancellation of a marketing loyalty program. General and administrative expenses increased 53% to $18.6 million for the nine months ended September 30, 2022 from $12.1 million for the nine months ended September 30, 2021 due to increased legal fees, higher non-cash stock compensation expense and increased staffing costs.
Operating expenses for the Molecular Solutions segment also includes impairment charges of $8.6 million for the nine months ended September 30, 2022 associated with several idle manufacturing lines for which there are no projected cash flows and minimal resale or salvage value.
All of the above contributed to the Molecular Solutions segment’s operating loss of $16.1 million for the nine months ended September 30, 2022, which included the non-cash impairment charges of $8.6 million, $5.6 million for depreciation and amortization and $1.6 million for stock-based compensation.
29
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the nine months ended September 30, 2022, we recorded U.S. state tax expense of $379,000 compared to $13,000 of state income tax expense for the nine months ended September 30, 2021. Additionally, in the first nine months of 2022, we recorded approximately $1.7 million of withholding taxes due to the Canada Revenue Agency associated with our repatriation of $65.0 million of cash from Canada to the United States. For the nine months ended September 30, 2022, we recorded a foreign tax benefit of $438,000 compared to foreign tax expense of $12.2 million for the nine months ended September 30, 2021. This overall decrease in foreign tax expense is largely a result of the decrease in income before taxes generated by our Canadian subsidiary.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Cash and cash equivalents |
|
$ |
75,205 |
|
|
$ |
116,762 |
|
Available for sale securities |
|
|
26,432 |
|
|
|
53,288 |
|
Working capital |
|
|
208,035 |
|
|
|
220,367 |
|
Our cash and cash equivalents and available-for-sale securities decreased to $101.6 million at September 30, 2022 from $170.1 million at December 31, 2021. Our working capital decreased to $208.0 million at September 30, 2022 from $220.4 million at December 31, 2021.
During the nine months ended September 30, 2022, net cash used in operating activities was $29.2 million. Our net loss of $33.5 million included non-cash charges of $17.1 million associated with impairment charges taken for idle manufacturing lines and goodwill, depreciation and amortization expense of $11.4 million, stock-based compensation expense of $9.1 million, an inventory reserve of $977,000, an increase in our reserve for uncollectible accounts of $974,000 and other non-cash expense of $1.3 million. Cash used to fund our working capital accounts included an increase in inventory of $27.6 million to meet anticipated demand to support COVID-19 testing program, an increase in accounts receivable of $19.2 million largely associated with product shipped to the U.S. government, a $6.0 million increase in prepaid expenses and other assets associated with tax installments made to the Canadian Revenue Agency. Offsetting these uses of cash was $16.2 million increase in accounts payable due to the timing of invoices received and payments made.
Net cash used in investing activities was $4.5 million for the nine months ended September 30, 2022, which reflects proceeds from the maturities and redemptions of investments of $47.4 million. This was offset by $28.1 million to acquire property and equipment largely to increase our manufacturing capacity and $22.9 million of investment purchases.
Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2022, which is largely comprised of $2.0 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to our employees.
We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current operating and capital needs as well as those arising over the next twelve months. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under our $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of our research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors. In addition, $75.2 million or 74% of our $101.6 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In the first quarter of 2022, we repatriated $65.0 million of cash from Canada into the United States and incurred approximately $1.7 million of Canadian withholding tax. Further repatriation of cash from Canada into the United States could have additional adverse tax consequences. It is our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.
A summary of our obligations to make future payments under contracts existing at December 31, 2021 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2021. As of September 30, 2022, there were no significant changes to this information.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
30
financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our judgments and estimates, including those related to the bad debts, customer sales returns, inventories, intangible assets, income taxes, revenue recognition, performance-based compensation, contingencies and litigation. We base our judgments and estimates on historical experience and on various other factors that are believed to be 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 may differ from these estimates under different assumptions or conditions.
A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. Except as presented below, no material changes have been made to such critical accounting policies during the nine months ended September 30, 2022.
Goodwill
Goodwill is not amortized, but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in 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 process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit.