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Item 1. Financial Statements

2023-08-04 compared with 2023-05-10 · 164 added, 235 removed, 260 unchanged (61% of the section changed)

2 unchanged sentences

AND SUBSIDIARIES

CONSOLIDATED B ALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

March 31, 2023

December 31, 2022

June 30, 2023 December 31, 2022

Current Assets:

2 unchanged sentences

Accounts receivable, net of allowance of $ 1,908 and $ 2,365

52,750 70,797

Inventories 73,284 95,704

Prepaid expenses 5,248 6,273

3 unchanged sentences

Property, plant and equipment, net of accumulated depreciation of $ 84,423 and $ 69,881

49,282 59,413

Operating right-of-use assets, net 13,443 10,399

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Intangible assets, net of accumulated amortization of $ 32,737 and $ 31,077

10,665 11,694

Goodwill 35,606 35,104

Deferred tax asset 1,230 —

Other noncurrent assets 998 1,087

Total noncurrent assets 112,027 118,990

TOTAL ASSETS $ 453,594 $ 444,180

LIABILITIES AND STOCKHOLDERS' EQUITY

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AND SUBSIDIARIES

CONSOLIDATED STAT EMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

NET REVENUES:

Products and services $ 84,738 $ 79,167 $ 237,652 $ 144,403

Other 703 1,064 2,752 3,535

85,441 80,231 240,404 147,938

COST OF PRODUCTS AND SERVICES SOLD 59,070 52,434 148,218 95,842

Gross profit 26,371 27,797 92,186 52,096

OPERATING EXPENSES:

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Change in the estimated fair value of acquisition-related contingent consideration ( 35 ) — ( 59 ) ( 36 )

32,800 49,268 74,294 89,739

Operating income (loss) ( 6,429 ) ( 21,471 ) 17,892 ( 37,643 )

OTHER INCOME 1,467 1,713 4,140 1,881

Income (loss) before income taxes ( 4,962 ) ( 19,758 ) 22,032 ( 35,762 )

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INCOME (LOSS) PER SHARE:

BASIC $ ( 0.07 ) $ ( 0.26 ) $ 0.31 $ ( 0.53 )

DILUTED $ ( 0.07 ) $ ( 0.26 ) $ 0.30 $ ( 0.53 )

WEIGHTED-AVERAGE SHARES OUTSTANDING:

BASIC 73,324 72,496 73,219 72,361

DILUTED 73,324 72,496 74,115 72,361

See accompanying notes to the consolidated financial statements.

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(in thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

NET INCOME (LOSS) $ ( 4,796 ) $ ( 18,589 ) $ 22,423 $ ( 38,529 )

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AND SUBSIDIARIES

CONSOLIDATED STATEM ENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the Three Months Ended March 31,

Six Months Ended June 30,

OPERATING ACTIVITIES:

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Provision for credit losses ( 478 ) ( 152 )

Unrealized foreign currency loss

Unrealized foreign currency gain (loss) 106 ( 62 )

Interest expense on finance leases 28 55

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Accounts receivable 18,652 ( 18,646 )

Inventories 22,556 ( 18,179 )

Prepaid expenses and other assets 5,495 ( 4,416 )

4 unchanged sentences

INVESTING ACTIVITIES:

Purchases of investments

Proceeds from maturities and redemptions of investments 27,305 23,017

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Cash paid for income taxes $ 623 $ 9,107

Non-cash investing activities

Non-cash investing and financing activities

Accrued property and equipment purchases $ 314 $ 1,900

Accrued property and equipment purchases under government contracts $ — $ 2,023

Unrealized gain on marketable securities $ — $ 156

See accompanying notes to the consolidated financial statements.

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The accompanying interim unaudited consolidated financial statements include the accounts of OraSure Technologies, Inc.

(“OraSure”) and its wholly-owned subsidiaries, DNA Genotek Inc.

(“DNAG”), Diversigen, Inc.

(“Diversigen”), and Novosanis NV (“Novosanis”).

(“OraSure”) and its wholly-owned subsidiaries, DNA Genotek Inc.

(“DNAG”), Diversigen, Inc.

(“Diversigen”), and Novosanis NV (“Novosanis”).

All intercompany transactions and balances have been eliminated.

References herein to “we,”

“us,”

“our,”

or the “Company”

mean OraSure and its consolidated subsidiaries, unless otherwise indicated.

References herein to “we,” “us,” “our,” or the “Company” mean OraSure and its consolidated subsidiaries, unless otherwise indicated.

The unaudited financial statements, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the Company's financial position and results of operations for these interim periods.

These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations expected for the full year.

Results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations expected for the full year.

Summary of Significant Accounting Policies .

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See Note 11 for the discussion regarding the change in business segments.

Investments .

Cash Equivalents & Investments .

The Company considers all investments in debt securities to be available-for-sale securities.

These securities consist of guaranteed investment certificates and corporate bonds purchased with maturities greater than ninety days.

Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’

equity as a component of accumulated other comprehensive loss.

Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses, if any, reported in stockholders’ equity as a component of accumulated other comprehensive loss.

The Company records an allowance for credit loss for its available-for-sale securities when a decline in investment market value is due to credit-related factors.

When evaluating an investment for impairment, the Company reviews factors such as the severity of the impairment, changes in underlying credit ratings, forecasted recovery, the Company’s intent to sell or the likelihood that it would be required to sell the investment before its anticipated recovery in market value and the probability that the scheduled cash payments will continue to be made.

The following is a summary of the Company's available-for-sale securities:

March 31, 2023

Guaranteed investment certificates

Corporate bonds

Losses Fair Value

December 31, 2022

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Corporate bonds 4,978 — ( 220 ) 4,758

At March 31, 2023, maturities of the Company's available-for-sale securities were as follows:

Less than one year

Greater than one year

Total $ 27,087 $ — $ ( 220 ) $ 26,867

Fair Value of Financial Instruments .

As of March 31, 2023 and December 31, 2022, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature.

As of June 30, 2023 and December 31, 2022, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their respective fair values based on their short-term nature.

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

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

All of the Company's available-for-sale corporate bonds are measured as Level 2 instruments as of December 31, 2022.

The Company's available-for-sale guaranteed investment certificates are measured as Level 1 instruments as of March 31, 2023 and December 31, 2022.

Included in cash and cash equivalents at March 31, 2023 and December 31, 2022, was $ 6,846 and $ 1,730 invested in money market funds.

All of the Company's available-for-sale corporate bonds are measured as Level 2 instruments and the Company's available-for-sale guaranteed investment certificates are measured as Level 1 instruments as of December 31, 2022.

Included in cash and cash equivalents at June 30, 2023 and December 31, 2022, was $ 6,928 and $ 1,730 invested in money market funds.

These money market funds have investments in government securities and are measured as Level 1 instruments.

Included in cash and cash equivalents at June 30, 2023 was $ 22,642 of guaranteed investment certificates which are also measured as Level 1 instruments.

The Company offers a nonqualified deferred compensation plan for certain eligible employees and members of its Board of Directors.

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The assets of the plan are held in mutual funds and company stock.

The fair value of the plan assets as of March 31, 2023 and December 31, 2022 was $ 678 and $ 747 , respectively, and was calculated using the quoted market prices of the assets as of those dates.

The fair value of the plan assets as of June 30, 2023 and December 31, 2022 was $ 644 and $ 747 , respectively, and was calculated using the quoted market prices of the assets as of those dates.

All investments in the plan are classified as trading securities and measured as Level 1 instruments.

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Foreign Currency Translation .

Net foreign exchange gains and (losses) resulting from foreign currency transactions that are included in other income in the Company's consolidated statements of operations were $( 50 ) and $ 729 for the three months ended March 31, 2023 and 2022 , respectively.

Net foreign exchange gains and (losses) resulting from foreign currency transactions that are included in other income in the Company's consolidated statements of operations were $( 492 ) and $ 783 for the three months ended June 30, 2023 and 2022, respectively.

Net foreign exchange gains and (losses) resulting from foreign currency transactions for the six months ended June 30, 2023 and 2022 were $( 542 ) and $ 54 , respectively.

Accumulated Other Comprehensive Loss .

Changes in accumulated other comprehensive loss by component is listed below.

Foreign Currency

Marketable Securities

Foreign Currency Marketable Securities Total

Balance at December 31, 2022 $ ( 18,215 ) $ ( 220 ) $ ( 18,435 )

Other comprehensive gain 3,656 220 3,876

Balance at March 31, 2023

Balance at June 30, 2023 $ ( 14,559 ) $ — $ ( 14,559 )

Immaterial Correction of Errors.

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This correction was deemed to be immaterial to the consolidated financial statements as of and for the year ended December 31, 2022.

For the three months ended March 31, 2022, cost of products and services sold was reduced by $ 27 .

The respective operating activities on the consolidated statement of cash flows for the three months ended March 31, 2022 has also been adjusted.

Furthermore, stockholder's equity at March 31, 2022 has been adjusted to reflect the reduction in cost of products and services sold.

For the three and six months ended June 30, 2022, cost of products and services sold was reduced by $ 213 and $ 240 , respectively.

The respective operating activities on the consolidated statement of cash flows for the six months ended June 30, 2022 has also been adjusted.

Furthermore, stockholder's equity at June 30, 2022 has been adjusted to reflect the reduction in cost of products and services sold.

Reclassification .

Certain prior period amounts have been reclassified to conform to current year presentations.

For the three months ended March 31, 2022, $ 221 of research and development expenses were reclassed to other income in relation to the U.S.

Department of Defense (the “DOD”) engineering consulting costs further described in Note 2.

For the three and six months ended June 30, 2022, $ 395 and $ 616 of research and development expenses were reclassified to other income in relation to the U.S.

Department of Defense (the “DOD”) engineering consulting costs further described in Note 2.

This reclassification was made to conform to the presentation in our Annual Report on Form 10-K for the year ended December 31, 2022.

Change in Accounting Estimate.

During the three months ended June 30, 2023, the Company shortened the useful lives of machinery and equipment utilized for InteliSwab® production in Thailand.

This reduction in useful lives resulted in $ 6,900 of accelerated depreciation during the three months ended June 30, 2023, recorded in cost of products and services sold.

Government Capital Contracts

In September 2021, the Company entered into an agreement fo r $ 109,000 in funding from the DOD, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan.

Funding will be paid to the Company based on achievement of milestones through December 2023 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement.

In September 2021, the Company entered into an agreement for $ 109,000 in funding from the DOD, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for its InteliSwab ® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan.

Funding will be paid to the

Company based on achievement of milestones through December 2023 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement.

In accordance with the milestone payment schedule, 15 % of the total will not be funded until the completion of the final validation testing, which is scheduled to occur in late 2023.

The Company began making payments to vendors for the capital project during the fourth quarter of 2021.

began receiving funds from the DOD in January 2022 and has received $ 60,862 , as of March 31, 2023.

The remaining $ 48,138 is expected to be collected during 2023.

The Company began receiving funds from the DOD in January 2022 and has received $ 78,124 , as of June 30, 2023.

The remaining $ 30,876 is expected to be collected during the remainder of 2023.

Activity for these capital contracts is accounted for pursuant to International Accounting Standards ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance .

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and associated unpaid liabilities and government proceeds receivable are considered non-cash changes in such balances within the operating section of the consolidated statements of cash flows.

Amounts earned for the Company's guaranteed profit which covers project management costs are recognized straight-line in other income over the term of the government contract.

Any amount received in excess of the guaranteed profit discussed above will be recorded in other income at time of payment.

The Company recognized $ 561 of such income, which is reported as other income in the Company's consolidated statement of operations for both the three months ended June 30, 2023 and 2022.

The Company recognize $ 1,123 of such income, for both the six months ended June 30, 2023 and 2022.

The DOD also reimburses the Company for certain engineering consulting costs.

These expenses are reflected in research and development as incurred with the corresponding reimbursement presented in other income.

For the three months ended March 31, 2023 and 2022, $ 1,051 and $ 221 , respectively, were recorded in research and development and other income.

Amounts earned in excess of the Company's expected costs for the project for project management are recognized straight-line in other income over the term of the government contract.

The Company recognized $ 561 of such income, which is reported as other income in the Company's consolidated statement of operations for both the three months ended March 31, 2023 and 2022.

For the three months ended June 30, 2023 and 2022, $ 537 and $ 395 , respectively, were recorded in research and development and other income.

For the six months ended June 30, 2023 and 2022, $ 1,588 and $ 616 , respectively, were recorded in research and development and other income.

The balances corresponding to government contracts included in the Company's consolidated balance sheet are as follows:

2023 December 31,

Other current assets:

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The activity corresponding to the government contracts included in the Company's consolidated statements of cash flows is as follows:

2023 December 31,

Cost of assets, cumulative $ 87,057 $ 83,359

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Total property, plant and equipment, net $ — $ —

June 30, December 31,

Raw materials $ 29,647 $ 42,445

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Finished goods 41,752 50,924

$ 73,284 $ 95,704

Property, Plant and Equipment, net

June 30, December 31,

Land $ 1,118 $ 1,118

Buildings and improvements 35,765 35,582

3 unchanged sentences

Construction in progress 10,453 11,124

133,705 129,294

Accumulated depreciation ( 84,423 ) ( 69,881 )

During the three months ended March 31, 2023 , the Company determined several manufacturing lines will not be utilized due to changes in forecasted demand for the products the equipment is intended to produce.

As a result of this decision, the Company determined that the carrying values of the equipment is not recoverable and recorded an aggregate pre-tax asset impairment charge of $ 1,105 during the three months ended March 31, 2023 .

This charge is reported within loss on impairments in the consolidated statement of operations.

The Company estimated the fair value of the impaired long-lived assets using a market approach, which required the Company to estimate the value that would be received for the equipment in the principal or most advantageous market for that equipment in an orderly transaction between market participants.

Due to the extremely specialized nature of the manufacturing equipment and various market data points, the estimated fair value was zero .

$ 49,282 $ 59,413

During the six months ended June 30, 2023, the Company determined several manufacturing lines will not be utilized due to changes in forecasted demand for the products the equipment is intended to produce.

Additionally, the Company elected not to proceed with certain leasehold improvements to its research and development laboratories.

As a result of these decisions, the Company determined that the carrying values of the equipment and leasehold improvements made to date are not recoverable and recorded an aggregate pre-tax asset impairment charge of $ 1,320 during the six months ended June 30, 2023.

Due to the extremely specialized nature of the equipment and various market data points, the estimated fair value was zero .

These charges are reported within loss on impairments in the consolidated statement of operations.

Accrued Expenses and other current liabilities

June 30, December 31,

Payroll and related benefits $ 11,028 $ 14,103

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Sales tax payable 1,321 1,519

Other 4,424 5,455

$ 23,811 $ 25,762

Termination Benefits

On February 14, 2023, the Company announced a reduction in its non-production workforce.

During the first and second quarters of 2023, the Company executed a reduction in workforce.

This was accounted for pursuant to Accounting Standards Codification ("ASC") 420, Exit or Disposal Cost Obligations .

The expense included in the Company's consolidated statements of operations are as follows:

Three Months Ended March 31, 2023

Three Months Ended June 30, 2023 Six months ended June 30, 2023

Cost of products and services sold $ 334 $ 369

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General and administrative 201 787

As of March 31, 2023, the Company had $ 1,894 accrued and had paid $ 741 related to the reduction in workforce.

Total $ 629 $ 3,264

As of June 30, 2023 the Company had $ 1,591 accrued and had paid $ 1,674 related to the reduction in workforce.

Revenues by product line .

The following table represents total net revenues by product line:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

$ 47,507 $ 43,378 $ 165,916 $ 74,411

HIV 15,964 10,357 29,868 18,523

Molecular Products (2)

13,050 17,581 25,992 35,514

HCV 3,870 3,691 7,056 6,948

Risk assessment testing 2,358 2,630 4,986 5,191

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Other non-product revenues (3)

703 1,064 2,752 3,535

Net revenues $ 85,441 $ 80,231 $ 240,404 $ 147,938

(1) Includes COVID-19 Diagnostics and COVID-19 Molecular Products.

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

United States $ 73,871 $ 70,320 $ 218,890 $ 128,307

Europe 2,453 2,436 4,305 6,722

Other regions 9,117 7,475 17,209 12,909

$ 85,441 $ 80,231 $ 240,404 $ 147,938

Customer and Vendor Concentrations .

At March 31, 2023 , one non-commercial customer accounted for 77 % of the Company's consolidated accounts receivable.

At June 30, 2023, one non-commercial customer accounted for 47 % of the Company's consolidated accounts receivable.

The same non-commercial customer accounted for more than 57 % of the Company's consolidated accounts receivable as of December 31, 2022.

The same non-commercial customer also accounted for 78 % and 18 % of net consolidated revenues for the three months ended March 31, 2023 and 2022, respectively.

The same non-commercial customer also accounted for 56 % of net consolidated revenues for both the three months ended June 30, 2023 and 2022, respectively.

The same non-commercial customer also accounted for 70 % and 39 % of net consolidated revenues for the six months ended June 30, 2023 and 2022, respectively.

The Company currently purchases certain products and critical components of its products from sole-supply vendors.

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The Company records deferred revenue when funds are received prior to the recognition of the associated revenue.

Deferred revenue as of March 31, 2023 and December 31, 2022 included customer prepayments of $ 1,358 and $ 1,180 , respectively.

Deferred revenue as of March 31, 2023 and December 31, 2022 also included $ 631 and $ 1,093 , respectively, associated with a long-term contract that has variable pricing based on volume.

Deferred revenue as of June 30, 2023 and December 31, 2022 included customer prepayments of $ 1,285 and $ 1,533 , respectively.

Deferred revenue as of June 30, 2023 and December 31, 2022 also included $ 556 and $ 740 , respectively, associated with a long-term contract that has variable pricing based on volume.

The average price over the life of the contract was determined and revenue is recognized at that average price.

During the three months ended March 31, 2023 and 2022, the Company recorded income tax expense (benefit) of $( 225 ) and $ 3,936 , respectively.

Income taxes for 2023 is comprised of a U.S.

state tax benefit.

Income taxes for the first quarter of 2022 are primarily comprised of Canadian withholding tax on the repatriation of $ 65,000 of unremitted earnings from Canada to the United States with the remainder of tax primarily consisted of foreign tax expense.

The decline in foreign tax expense in 2023 compared to 2022 is a result of the decrease in projected income before taxes expected to be generated by the Company's Canadian subsidiary.

The components of income tax expense (benefits) are as follows:

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

State income tax expense (benefit) $ 1,481 $ 183 $ 1,257 $ 400

Foreign income tax expense (benefit) ( 1,648 ) ( 1,352 ) ( 1,648 ) 665

Foreign withholding tax — — — 1,702

$ ( 166 ) $ ( 1,169 ) $ ( 391 ) $ 2,767

Income taxes for the first six months of 2022 includes $ 1,702 of Canadian withholding tax on the repatriation of $ 65,000 of unremitted earnings from Canada to the United States.

The increase in state tax expense in 2023 compared to 2022 is a result of the increase in projected income before taxes to be generated by the Company's U.S.

Conversely, the increase in foreign tax benefit in 2023 compared to 2022 is a result of the decrease in projected income before taxes expected to be generated by the Company's Canadian subsidiary.

Tax expense reflects taxes due to the taxing authorities and the tax effects of temporary differences between the basis of assets and liabilities recognized for financial reporting and tax purposes, and net operating loss and tax credit carryforwards.

The significant components of the Company's total deferred tax liability as of March 31, 2023 and December 31, 2022 relate to the tax effects of the basis difference between the intangible assets acquired in its acquisitions for financial reporting and for tax purposes along with basis differences arising from accelerated tax depreciation of fixed assets.

A valuation allowance is recorded to the extent it is more likely than not that the some portion or all of the deferred tax assets will not be realized.

A full valuation allowance was recorded on the Company’s U.S.

deferred tax assets as of March 31, 2023 and December 31, 2022.

The significant components of the Company's total deferred tax asset as of June 30, 2023 relate to foreign net operating losses.

The significant components of the Company's total deferred tax liability at December 31, 2022 relate to the tax effects of the basis difference between the intangible assets acquired in its acquisitions for financial reporting and for tax purposes along with basis differences arising from accelerated tax depreciation of fixed assets.

A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized.

A full valuation allowance was recorded on the Company’s U.S.

deferred tax assets as of June 30, 2023 and December 31, 2022.

Income (Loss) Per Share

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Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share except that the weighted-average number of shares outstanding is increased to include incremental shares from the assumed vesting or exercise of dilutive securities, such as common stock options, unvested restricted stock or performance stock units, unless the impact is antidilutive.

The number of incremental shares is calculated by assuming that outstanding stock options were exercised and unvested restricted shares and performance stock units were vested, and the proceeds from such exercises or vesting were used to acquire shares of common stock at the average market price during the

reporting period.

Basic and dilutive computations of net loss per share are the same in periods in which a net loss exists as the dilutive effects of excluded items would be anti-dilutive.

For the three months ended March 31, 2022 , outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 463 shares, were excluded from the computation of diluted loss per share.

For the three months ended March 31, 2023, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 2,237 shares were excluded from the computation of dilute earnings per share as their inclusion would have been anti-dilutive.

Stockholders’

Reconciliation of the changes in stockholder's equity for the three months ended March 31, 2023 and 2022.

For the three months ended June 30, 2023 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 966 shares were excluded from the computation of diluted loss per share.

For the six months ended June 30, 2023, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 2,030 shares were excluded from the computation of diluted earnings per share as their inclusion

would have been anti-dilutive.

For the three and six months ended June 30, 2022, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 226 and 381 shares, respectively, were excluded from the computation of diluted loss per share.

Stockholders’ Equity

Reconciliation of the changes in stockholder's equity for the three and six months ended June 30, 2023 and 2022.

Common Stock Additional

Capital Accumulated

Comprehensive

Loss Accumulated

Deficit Total

Shares Amount

Balance at December 31, 2022 72,734 $ — $ 520,446 $ ( 18,435 ) $ ( 137,586 ) $ 364,425

Common stock issued upon exercise

Common stock issued upon exercise of options 12 — 66 — — 66

Vesting of restricted stock and performance stock units 737 — — — — —

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Stock-based compensation — — 2,655 — — 2,655

Net income — — — — 27,219 27,219

Currency translation adjustments — — — 797 — 797

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Balance at March 31, 2023 73,254 $ — $ 521,964 $ ( 17,418 ) $ ( 110,367 ) $ 394,179

Vesting of restricted stock and performance stock units 241 — — — — —

Purchase and retirement of common shares ( 82 ) — ( 460 ) — — ( 460 )

Stock-based compensation — — 2,357 — — 2,357

Net loss — — — — ( 4,796 ) ( 4,796 )

Currency translation adjustments — — — 2,859 — 2,859

Balance at June 30, 2023 73,413 $ — $ 523,861 $ ( 14,559 ) $ ( 115,163 ) $ 394,139

Common Stock Additional

Capital Accumulated

Comprehensive

Loss Accumulated

Deficit Total

Shares Amount

Balance at December 31, 2021 72,069 $ — $ 511,063 $ ( 10,077 ) $ ( 120,453 ) $ 380,533

Common stock issued upon exercise

Common stock issued upon exercise of options 2 — 15 — — 15

Vesting of restricted stock and performance stock units 352 — — — — —

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Stock-based compensation — — 3,524 — — 3,524

Net loss — — — — ( 19,940 ) ( 19,940 )

Currency translation adjustments — — — 1,756 — 1,756

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Balance at March 31, 2022 72,307 $ — $ 513,553 $ ( 8,247 ) $ ( 140,393 ) $ 364,913

Common stock issued upon exercise of options 407 — — — — —

Vesting of restricted stock and performance stock units ( 142 ) — ( 905 ) — — ( 905 )

Stock-based compensation — — 3,280 — — 3,280

Net loss — — — — ( 18,589 ) ( 18,589 )

Currency translation adjustments — — — ( 4,349 ) — ( 4,349 )

Unrealized gain on marketable securities — — — 82 — 82

Balance at June 30, 2022 72,572 $ — $ 515,928 $ ( 12,514 ) $ ( 158,982 ) $ 344,432

Business Segments

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From time to time, the Company is involved in certain legal actions arising in the ordinary course of business.

In management’s opinion, the outcomes of such actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company's future financial position or results of operations.

In March 2021, the Company filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG.

In June 2021, the Company filed a complaint against Spectrum Solutions, LLC ("Spectrum") in the United States District Court for the Southern District of California alleging that certain saliva collection devices manufactured and sold by Spectrum infringe a patent held by DNAG.

Spectrum has filed an answer to the initial complaint, asserting that its device does not infringe the Company's patent and that the Company's patent is invalid.

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Spectrum responded to the Company's amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation and subsequently filed a request for review of the second patent at the Patent and Trademark Office ("PTO"), which was granted by the PTO.

On May 2, 2023, the District Court issued two orders.

First, the District Court granted Spectrum’s motion for summary judgment of noninfringement, holding that Spectrum’s saliva collection devices are not “kits for collecting and preserving a biological sample,”

among other rulings.

The Company intends to appeal the Court’s grant of summary judgment.

Second, the Court denied Spectrum’s motion to supplement its allegations of alleged antitrust violations.

A separate motion by Spectrum to amend its counterclaims remains pending.

The District Court issued multiple pretrial orders, resolving the infringement, antitrust, and inequitable

conduct claims without trial.

The Company has appealed the grant of summary judgment to the Court of Appeal on June 8, 2023.

Second, the District Court denied Spectrum’s motion to amend its allegations of alleged antitrust violations, finding that if such an amendment were allowed, Spectrum’s claims would not survive a motion for summary judgment.

Spectrum thereafter withdrew its antitrust and inequitable conduct counterclaims.

Spectrum did not appeal the District Court's denial of its motion to amend.

Both parties have filed motions seeking sanctions in the District Court.

An inter partes review is currently pending before the PTO regarding the second asserted patent.

The final pretrial conference in the District Court is set for October 26, 2023.

Subsequent Events

In May 2023, the Company announced a reduction in its workforce and estimates the expense will be in the range of $ 500 to $ 600 .

This will be accounted for pursuant to ASC 420, Exit or Disposal Cost Obligations .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 3, 2023.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and impact and potential impacts on our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many factors, including, without limitation, those factors set forth in the “Risk Factors”

section of our Annual Report on Form 10-K for the year ended December 31, 2022 and the “Risk Factors”

section of subsequent Quarterly Reports on Form 10-Q, our actual results or timing of certain events could differ materially from the results or timing described in, or implied by, these forward-looking statements.

Business Overview

The overall goal of the Company is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services.

In 2022, our business previously consisted of two segments:

our “Diagnostics”

segment, and our “Molecular Solutions”

In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the two segments into one business unit with sales, marketing, product development and research teams covering multiple product lines.

This change is intended to accelerate innovation, enhance customer experience and result in operational synergies.

The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types.

The Company's diagnostic products 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.

The Company's 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.

The Company's business also includes molecular collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers.

These revenues are derived from product sales to commercial customers and sales into the academic and research markets.

Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets.

The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health.

The Company also has a urine collection device which allows 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.

Additionally, the Company 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.

Results of Operations

Three months ended March 31, 2023 compared to March 31, 2022

CONSOLIDATED NET REVENUES

The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Percentage of Total Net Revenues

COVID-19 Diagnostics

Diagnostics (1)

Molecular Products

Other products and services (2)

Molecular Services

COVID-19 Molecular Products

Net product and services revenues

Non-product and services revenues

(1) Includes HIV and HCV product revenues.

(2) Includes Risk assessment testing and other product and services revenues.

Product and Services Revenues

Consolidated net product and services revenues increased 134% to $152.9 million for the three months ended March 31, 2023 from $65.2 million for the three months ended March 31, 2022.

The Company expects total net product and services revenues to taper off throughout 2023 as demand for its COVID-19 Diagnostic product has declined.

COVID-19 Diagnostics revenues increased by 434% to $118.3 million for the three months ended March 31, 2023 compared to $22.1 million in the three months ended March 31, 2022 due to increased sales of the Company's InteliSwab ® tests through its government procurement contracts.

Sales of the Company's Diagnostics products increased 50% to $17.0 million for the three months ended March 31, 2023 from $11.4 million for the three months ended March 31, 2022.

This increase in revenues was primarily driven by higher sales of the Company's OraQuick® In-Home HIV tests in support of the CDC's "Together Take Me Home" HIV self-test program which commenced during the first quarter of 2023 and higher sales of the Company's OraQuick® HIV Self-Test in the international markets due to customer ordering patterns.

Molecular Products revenues decreased 28% to $12.9 million for the three months ended March 31, 2023 from $17.9 million for the three months ended March 31, 2022.

Sales of the Company's Molecular Products are being impacted by macro-economic factors in the markets in which its customers operate.

One of the Company's largest customer scaled down purchasing after they reorganized their business in the second half of 2022 and certain other customers placed large orders in Q1 2022 which did not repeat in the first quarter of 2023.

Furthermore revenues are impacted by customer ordering patterns whereby customers purchased at the end of 2022 and did not require further inventory in the first quarter of 2023.

Other products and services revenues were largely flat at $3.1 million for the three months ended March 31, 2023 and 2022.

Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 20% to $1.4 million for the three months ended March 31, 2023 from $1.7 million for the three months ended March 31, 2022.

The decline in services revenues was the direct result of loss of two large customers in 2022.

One customer ceased operations in 2022 and the other deprioritized microbiome studies.

Sales of the Company's COVID-19 Molecular Products collection kits decreased significantly by 98% to $0.2 million for the three months ended March 31, 2023 from $8.9 million for the three months ended March 31, 2022 due to decline in demand for COVID PCR testing given the availability of rapid antigen tests.

Non-product and Services Revenues

Non-product and services revenues decreased 17% to $2.0 million for the three months ended March 31, 2023 from $2.5 million for the three months ended March 31, 2022 as a result the timing of activities under the Company's funded research and development agreements for the development of a second generation Ebola test and to obtain 510(k) clearance and CLIA waiver for our InteliSwab® test coupled with lower royalty income.

CONSOLIDATED OPERATING RESULTS

Consolidated gross profit margin increased to 42.5% for the three months ended March 31, 2023 and 2022 from 36% for the three months ended March 31, 2022.

This improvement in margins was driven by InteliSwab® sales which generated higher margins due to reduced costs associated with the correction of manufacturing inefficiencies which occurred during the first quarter of 2022, a packaging change implemented during the first quarter of 2023, and lower freight charges.

These improved margins were partially offset by lower COVID-19 Molecular Products revenue which historically generated higher margins.

Lower scrap expense in the first quarter of 2023 compared to the first quarter of 2022 also contributed to the improved margins.

Consolidated operating income for the three months ended March 31, 2023 was $24.3 million, a $40.5 million increase from the $16.2 million operating loss reported for the three months ended March 31, 2022.

Results for the three months ended March 31, 2023 were positively impacted by the increase in revenues and gross margins described above and were partially offset by impairment charges of $1.1 million taken for idle manufacturing lines.

Operating expenses in the first quarter of 2023, excluding the impairment charge, remained largely flat compared to the first quarter of 2022.

Research and development expenses increased 22% to $10.6 million for the three months ended March 31, 2023 from $8.6 million for the three months ended March 31, 2022 largely due to an increase in clinical study activities related to obtaining 510(k) clearance and CLIA waiver for our InteliSwab® rapid test, severance costs associated with our reduction in workforce that occurred during the quarter and higher costs incurred under our DOD expansion contract.

Increased spend in research and development was offset by lower sales and marketing and general and administrative costs.

Sales and marketing expenses decreased 5% to $12.1 million for the three months ended March 31, 2023 from $12.7 million for the three months ended March 31, 2022 due to a decrease in our reserve for expected credit losses and lower consulting fees offset by severance cost related to our reduction in workforce.

General and administrative expenses decreased 8% to $17.7 million for the three months ended March 31, 2023 from $19.2 million for the three months ended March 31, 2022 largely due to lower consulting fees, stock compensation expense and recruitment fees.

In the first quarter of 2022, the company incurred high stock compensation expense associated with the accelerated vesting of shares under our former CEO's employment agreement and higher recruitment expense associated with the new CEO search.

These decreases in expense were partially offset by increased legal fees and severance costs associated with the reduction in workforce.

All of the above contributed to the Company's operating income of $24.3 million for the three months ended March 31, 2023, which included the non-cash impairment charge of $1.1 million related to equipment that will no longer be used in production, non-cash charges of $3.7 million for depreciation and amortization and $2.7 million for stock-based compensation.

The Company's operating loss of $16.2 million for the three months ended March 31, 2022 included non-cash charges of $3.7 million for depreciation and amortization and $3.5 million for stock-based compensation.

Other income for the three months ended March 31, 2023 was $2.7 million compared to $0.2 million for the months ended March 31, 2022.

This increase is largely due to the reimbursement of costs incurred under our DOD expansion contract which are presented in research and development expenses as discussed above.

CONSOLIDATED INCOME TAXES

The Company continues to believe the full valuation allowance established against its total U.S.

deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed.

For the three months ended March 31, 2023, the Company recorded a U.S.

state tax benefit of $0.2 million compared to $3.9 million of tax expense for the three months ended March 31, 2022.

The 2022 tax expense is comprised of U.S.

state tax expense of $0.2 million, $1.7 million of withholding taxes associated with our repatriation of $65.0 million of cash from Canada to the United States, and Canadian income tax expense of $2.0 million.

No foreign taxes were recorded for the three months ended March 31, 2023 due to it being more likely than not that the Canadian subsidiary will not produce sufficient income to receive a tax benefit for the year to date loss.

Liquidity and Capital Resources

(In thousands)

Cash and cash equivalents

Available-for-sale securities

Working capital

The Company's cash and cash equivalents and available-for-sale securities increased to $112.4 million at March 31, 2023 from $110.8 million at December 31, 2022.

$72.8 million or 65% of the $112.4 million in cash, cash equivalents and available-for-sale securities is held by DNAG, the Company's Canadian subsidiary.

In 2022, the Company repatriated $65.0 million of cash into the United States and incurred $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 still the Company's intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.

The Company's working capital increased to $288.5 million at March 31, 2023 from $256.1 million at December 31, 2022.

Working capital increased primarily due to increased accounts receivable of $36.6 million.

Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms.

Analysis of Our Cash Flows

Operating Activities

During the three months ended March 31, 2023, net cash provided by operating activities was $6.0 million.

Cash flows from operations can be significantly impacted by factors such as timing of receipt from customers, inventory purchases, and payments to vendors.

The Company's net income of $27.2 million included non-cash charges of depreciation and amortization expense of $3.7 million, stock-based compensation expense of $2.7 million, and impairment charges taken for idle equipment of $1.1 million.

Cash used to fund the working capital accounts included an increase in accounts receivable of $36.6 million largely associated with product shipped to the U.S.

government at the end of the first quarter 2023, a decreases in accounts payable of $12.1 million due to reduced inventory purchasing and the timing of payments made and invoices received, and a decrease in accrued expenses of $3.5 million largely associated with the payment of the Company's 2022 year-end bonuses.

Offsetting these uses of cash was a decrease in inventory of $18.5 million as demand for the Company's InteliSwab ® COVID-19 rapid test is declining, and a $5.3 million decrease in prepaid and other assets as the Company received payment of its Employee Retention Credit filed for in 2021.

Investing Activities

Net cash used in investing activities was $1.0 million for the three months ended March 31, 2023, which reflects proceeds from the maturities of investments of $27.3 million offset by $22.3 million used to purchase investments, $2.8 million to build additional manufacturing capacity as required by the $109 million agreement with the DOD and, $1.2 million to acquire property and equipment to support the normal operations of the business.

Financing Activities

Net cash used in financing activities was $1.3 million for the three months ended March 31, 2023, which is largely comprised of $1.2 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to the Company's employees.

The Company expects existing cash and cash equivalents and available-for-sale securities will be sufficient to fund its operating expenses and capital expenditure requirements over the next twelve months.

The Company's cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under its $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of its 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.

A summary of the Company's obligations to make future payments under contracts existing at December 31, 2022 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of its Annual Report on Form 10-K for the year ended December 31, 2022.

As of March 31, 2023, there were no significant changes to this information.

Critical Accounting Policies and Estimates

A more detailed review of the Company's critical accounting policies is contained in its Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC.

No material changes have been made to such critical accounting policies during the three months ended March 31, 2023.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.

Some of these statements can be identified by the use of terminology such as “believes,”

“expects,”

“anticipates,”

“may,”

“will,”

“should,”

“seeks,”

“approximately,”

“intends,”

“projects,”

“plans,”

“estimates,”

or the negative of these words and other comparable terminology.

The discussion of financial trends, strategy, plans, assumptions, or intentions may also include forward-looking statements.

Readers should not place undue reliance on forward-looking statements, which speak only as of the date such statements were first made.

Except to the extent required by law, we undertake no obligation to update or revise our forward-looking statements.

Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied.

Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, factors described in the Risk Factors discussion in Item 1A of Part I of our most recently filed Annual Report.

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

There has been no material change in the Company's assessment of its sensitivity to market risk since its presentation set forth in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in its Annual Report on Form 10-K for the year ended December 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements