ORASURE TECHNOLOGIES INC 10-Q

Item 2. 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 OraSure Technologies transforms health through powerful insight by providing access to accurate, essential information. In 2022, our business consisted of two segments: our “Diagnostics” segment, and our “Molecular Solutions” segment. 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 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. 17 Table of Contents Results of Operations Three months ended June 30, 2023 compared to June 30, 2022. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended June 30, 2023 and June 30, 2022: Three Months Ended June 30, Dollars % Change Percentage of Total Net Revenues 2023 2022 2023 2022 COVID-19 Diagnostics $ 47,477 $ 43,114 10 % 56 % 54 % Diagnostics (1) 19,834 14,048 41 23 18 Molecular Products 13,050 17,581 (26) 15 22 Other products and services (2) 2,993 2,956 1 4 4 Molecular Services 1,354 1,204 12 2 2 COVID-19 Molecular Products 30 264 (89) — — Net product and services revenues 84,738 79,167 7 99 99 Non-product and services revenues 703 1,064 (34) 1 1 Net revenues $ 85,441 $ 80,231 6 % 100 % 100 % (1) Includes HIV and HCV product revenues. (2) Includes Risk assessment testing and other product and services revenues. Product and Services Revenues Consolidated net revenues increased 6% to $85.4 million for the three months ended June 30, 2023 from $80.2 million for the three months ended June 30, 2022. COVID-19 Diagnostics revenues increased by 10% to $47.5 million for the three months ended June 30, 2023 compared to $43.1 million in three months ended June 30, 2022 due to increased sales of the Company's InteliSwab ® tests through its government procurement contracts. Sales of the Company's Diagnostics products increased 41% to $19.8 million for the three months ended June 30, 2023 from $14.0 million for the three months ended June 30, 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 international markets due to customer ordering patterns. Molecular Products revenues decreased 26% to $13.1 million for the three months ended June 30, 2023 from $17.6 million for the three months ended June 30, 2022. Sales of the Company's Molecular Products are being impacted by macro-economic factors in the markets in which its customers operate and as a result one of the Company's largest customers scaled down purchasing after they reorganized their business in the second half of 2022. Other products and services revenues remained flat at $3.0 million for the three months ended June 30, 2023 and 2022. Molecular Services revenues, which are largely derived from the Company's laboratory services, increased 12% to $1.4 million for the three months ended June 30, 2023 from $1.2 million for the three months ended June 30, 2022. The increase in services revenues was largely due to the timing of work performed for certain clinical studies. Sales of the Company's COVID-19 Molecular Products collection kits decreased by 89% to $30.0 thousand for the three months ended June 30, 2023 from $0.3 million for the three months ended June 30, 2022 due to decline in demand for COVID PCR testing given the availability of rapid antigen tests. 18 Table of Contents Non-product and Services Revenues Non-product and services revenues decreased 34% to $0.7 million for the three months ended June 30, 2023 from $1.1 million for the three months ended June 30, 2022 as a result of lower royalty income. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin decreased to 31% for the three months ended June 30, 2023 from 35% for the three months ended June 30, 2022. This decline in margins was driven by $7.0 million of accelerated depreciation recorded in the quarter associated with the wind-down of InteliSwab® manual assembly in Thailand as we on-shore and automate manufacturing of this product at our Pennsylvania facilities. This negative impact to margins was partially offset by a cost savings associated with the InteliSwab® packaging redesign, reduction in scrap expense and lower freight costs. Consolidated operating loss for the three months ended June 30, 2023 was $6.4 million, a $15.0 million improvement from the $21.5 million operating loss reported for the three months ended June 30, 2022. Results for the three months ended June 30, 2023 were positively impacted by reduced operating expense and lower impairment losses. Results for the three months ended June 30, 2022 included $10.5 million of impairment losses compared to $0.2 million for the three months ended June 30, 2023. Operating expenses in the second quarter of 2023, excluding the impairment charge, decreased $6.1 million compared to the second quarter of 2022 reflecting the impact of our cost saving measures and headcount reductions. Research and development expenses decreased 19% to $7.7 million for the three months ended June 30, 2023 from $9.5 million for the three months ended June 30, 2022 largely due to a decrease in headcount and lower manufacturing support costs. Sales and marketing expenses decreased 27% to $8.5 million for the three months ended June 30, 2023 from $11.7 million for the three months ended June 30, 2022 due to a decrease in headcount, lower advertising, marketing and sales meeting spend, and a decrease in our reserve for expected credit losses. General and administrative expenses decreased 7% to $16.4 million for the three months ended June 30, 2023 from $17.6 million for the three months ended June 30, 2022 largely due to lower severance and accelerated stock compensation expense associated with our former general counsel's employment and termination agreements, a decrease in headcount, lower consulting fees associated with project management of our $109 million manufacturing expansion contract, lower board of director fees associated with less board members and a decrease in accounting and recruitment fees. These decreases in expense were partially offset by increased legal fees. All of the above contributed to the Company's operating loss of $6.4 million for the three months ended June 30, 2023, which included a non-cash impairment charge of $0.2 million, non-cash charges of $10.3 million for depreciation and amortization, and $2.4 million for stock-based compensation. The Company's operating loss of $21.5 million for the three months ended June 30, 2022 included a non-cash impairment charge of $10.5 million, non-cash charges of $3.8 million for depreciation and amortization, and $3.3 million for stock-based compensation. OTHER INCOME Other income for the three months ended June 30, 2023 was $1.5 million compared to $1.7 million for the three months ended June 30, 2022. This decrease is largely due to higher foreign currency losses offset by higher interest income. 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 June 30, 2023, the Company recorded U.S. state tax expense of $1.5 million compared to $0.2 million for the three months ended June 30, 2022 and a foreign tax benefit of $1.6 million for the three months ended June 30, 2023 compared to $1.4 million expense for the three months ended June 30, 2022. U.S. tax expense is higher due to increased projected earnings while decreased foreign earnings resulted in the foreign tax benefit. 19 Table of Contents Results of Operations Six months ended June 30, 2023 compared to June 30, 2022. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the six months ended June 30, 2023 and June 30, 2022: Six Months Ended June 30, Dollars % Change Percentage of Total Net Revenues 2023 2022 2023 2022 COVID-19 Diagnostics $ 165,731 $ 65,250 154 % 69 % 44 % Diagnostics (1) 36,924 25,471 45 16 17 Molecular Products 25,992 35,514 (27) 11 24 Other products and services (2) 6,087 6,069 — 3 4 Molecular Services 2,733 2,938 (7) 1 2 COVID-19 Molecular Products 185 9,161 (98) — 6 Net product and services revenues 237,652 144,403 65 99 98 Non-product and services revenues 2,752 3,535 (22) 1 2 Net revenues $ 240,404 $ 147,938 63 % 100 % 100 % (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 63% to $240.4 million for the six months ended June 30, 2023 from $147.9 million for the six months ended June 30, 2022. The Company expects total net product and services revenues for the second half of 2023 to be lower than the first half of 2023 as demand for its COVID-19 Diagnostic product has declined from the levels experienced in the first quarter of 2023 and the second half of 2022. COVID-19 Diagnostics revenues increased by 154% to $165.7 million for the six months ended June 30, 2023 compared to $65.3 million for the six months ended June 30, 2022 due to increased sales of the Company's InteliSwab ® tests through its government procurement contracts. Sales of the Company's Diagnostics products increased 45% to $36.9 million for the six months ended June 30, 2023 from $25.5 million for the six months ended June 30, 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 international markets due to customer ordering patterns. Molecular Products revenues decreased 27% to $26.0 million for the six months ended June 30, 2023 from $35.5 million for the six months ended June 30, 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 customers scaled down purchasing after they reorganized their business in the second half of 2022 and certain other customers placed large orders in the first half of 2022 that have not been repeated in the six months ending June 30, 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 half of 2023. Other products and services revenues were largely flat at $6.1 million for the six months ended June 30, 2023 and 2022. Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 7% to $2.7 million for the six months ended June 30, 2023 from $2.9 million for the six months ended June 30, 2022. The decline in services revenues was the direct result of loss of two customers in 2022. One customer ceased operations in 2022 and the 20 Table of Contents other deprioritized microbiome studies. These decreases were offset by higher revenues generated by certain customer contracts due to the timing of work performed for certain clinical studies. Sales of the Company's COVID-19 Molecular Products collection kits decreased significantly by 98% to $0.2 million for the six months ended June 30, 2023 from $9.2 million for the six months ended June 30, 2022 due to decline in demand for COVID PCR testing given the availability of rapid antigen tests. Non-product and services revenues decreased 22% to $2.8 million for the six months ended June 30, 2023 from $3.5 million for the six months ended June 30, 2022 as a result of lower royalty income. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin increased to 38% for the six months ended June 30, 2023 from 35% for the six months ended June 30, 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. Lower scrap expense in the first half of 2023 compared to the first half of 2022 also contributed to the margins improvement. These improved margins were partially offset by $7.0 million of accelerated depreciation recorded in the second quarter of 2023 associated with the wind-down of InteliSwab® manual assembly in Thailand as we on-shore and automate the manufacturing of this product at our Pennsylvania facilities and lower COVID-19 Molecular Products revenue which historically generated higher margins. Consolidated operating income for the six months ended June 30, 2023 was $17.9 million, a $55.5 million increase from the $37.6 million operating loss reported for the six months ended June 30, 2022. Results for the six months ended June 30, 2023 were positively impacted by the increase in revenues and gross margins described above and were positively impacted by reduced operating expense and lower impairment losses. Results for the six months ended June 30, 2022 included $10.5 million of impairment losses compared to $1.3 million for the six months ended June 30, 2023. Operating expenses in the six months ended June 30, 2023, excluding the impairment charge, decreased $6.2 million compared to the first half of 2022. Research and development expenses increased to $18.2 million for the six months ended June 30, 2023 from $18.1 million for the six months ended June 30, 2022. Sales and marketing expenses decreased 15% to $20.7 million for the six months ended June 30, 2023 from $24.4 million for the six months ended June 30, 2022 due to a decrease in our reserve for expected credit losses and lower advertising, marketing, sales meeting, and consulting spend. General and administrative expenses decreased 7% to $34.1 million for the six months ended June 30, 2023 from $36.7 million for the six months ended June 30, 2022 largely due to lower severance and stock compensation expense and recruitment fees. In the first half of 2022, the Company incurred high severance and stock compensation expense associated with the accelerated vesting of shares under our former CEO's and general counsel's employment agreements and higher recruitment expense associated with the new CEO search. Also contributing to the decrease in expense was lower consulting fees, lower board of director fees, due to fewer board members, and lower sales tax penalties. These decreases in expense were partially offset by increased legal fees. All of the above contributed to the Company's operating income of $17.9 million for the six months ended June 30, 2023, which included a non-cash impairment charge of $1.3 million largely related to equipment that will no longer be used in production, non-cash charges of $14.0 million for depreciation and amortization, and $5.0 million for stock-based compensation. The Company's operating loss of $37.6 million for the six months ended June 30, 2022 included a non-cash impairment charge of $10.5 million, non-cash charges of $7.5 million for depreciation and amortization, and $6.8 million for stock-based compensation. OTHER INCOME Other income for the six months ended June 30, 2023 was $4.1 million compared to $1.9 million for the six months ended June 30, 2022. This increase is largely due to higher interest income and higher reimbursement of costs incurred under our DOD expansion contract which are presented in research and development expenses. 21 Table of Contents 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 six months ended June 30, 2023, the Company recorded U.S. state tax expense of $1.3 million compared to $0.4 million for the six months ended June 30, 2022 and a foreign tax benefit of $1.6 million for the six months ended June 30, 2023 compared to foreign tax expense of $0.7 million for the six months ended June 30, 2022. The 2022 foreign tax expense is also comprised of $1.7 million of withholding taxes associated with our repatriation of $65.0 million of cash from Canada to the United States. The 2023 U.S. state tax expense is higher due to higher expected US earnings while foreign income tax expense is lower due to lower expected foreign earnings. Liquidity and Capital Resources June 30, 2023 December 31, 2022 (In thousands) Cash and cash equivalents $ 185,936 $ 83,980 Available-for-sale securities — 26,867 Working capital 295,147 256,127 The Company's cash and cash equivalents and available-for-sale securities increased to $185.9 million at June 30, 2023 from $110.8 million at December 31, 2022. $72.1 million or 39% of the $185.9 million in cash and cash equivalents 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 $295.1 million at June 30, 2023 from $256.1 million at December 31, 2022. Working capital increased primarily due to the increase in cash and cash equivalents and lower accounts payable balances. 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 six months ended June 30, 2023, net cash provided by operating activities was $63.3 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 $22.4 included non-cash charges of depreciation and amortization expense of $14.0 million, stock-based compensation expense of $5.0 million, impairment charges taken for idle equipment of $1.3 million and a non-cash deferred tax benefit of $1.8 million. Cash provided by the working capital accounts included a decrease in inventory of $22.6 million as we fulfilled demand for our InteliSwab® product in the first half of the year, a decrease in accounts receivable of $18.7 million largely associated with collections of monies due from the U.S. government for InteliSwab ® shipments, a $5.5 million decrease in prepaid and other assets as the Company received payment of its Employee Retention Credit filed for in 2021. Offsetting these increases in cash is a decrease in accounts payable of $22.2 million and a decrease in accrued expenses of $1.3 million. Investing Activities Net cash provided by investing activities was $38.2 million for the six months ended June 30, 2023, which reflects proceeds from the maturities of investments of $27.3 million, $17.8 million in reimbursement received under our $109 million contract with the U.S. government offset by $4.0 million to build additional manufacturing capacity as required by the contract, and $2.9 million to acquire property and equipment to support the normal operations of the business. 22 Table of Contents Financing Activities Net cash used in financing activities was $2.0 million for the six months ended June 30, 2023, which is largely comprised of $1.7 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. Resources The Company expects existing cash and cash equivalents 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 June 30, 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 six months ended June 30, 2023. Item 3. QUANTITATIVE AND QUALITATIVE 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.