What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-04 · 110 added, 92 removed, 87 unchanged (70% of the section changed)

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.

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with (i) the Company's unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) the Company's audited consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in the Company's 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 the Company's plans and strategy for its business and impact and potential impacts on its 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 the Company's 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, the Company's 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.

In 2022, the Company's business consisted of two segments:

its “Diagnostics” segment, and its “Molecular Solutions” segment.

In February 2023, the Company 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.

12 unchanged sentences

These services are primarily provided to pharmaceutical, biotech companies, and research institutions.

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Results of Operations

Three months ended June 30, 2023 compared to June 30, 2022.

Three months ended September 30, 2023 compared to September 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,

The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended September 30, 2023 and 2022:

Three Months Ended September 30,

Dollars % Change Percentage of Total Net Revenues

4 unchanged sentences

Molecular Products (2)

15,238 15,829 (4) 17 14

Other products and services (3)

4 unchanged sentences

Non-product and services revenues (4)

173 3,642 (95) — 3

Net revenues $ 89,187 $ 116,463 (23) % 100 % 100 %

(1) Includes HIV and HCV product revenues.

(2) Includes Genomics, Microbiome and Novosanis product revenues.

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

(4) Non-product and services revenues include funded research and development contracts, royalty income and grant 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.

Consolidated net revenues decreased 23% to $89.2 million for the three months ended September 30, 2023 from $116.5 million for the three months ended September 30, 2022.

COVID-19 Diagnostics revenues decreased by 37% to $50.1 million for the three months ended September 30, 2023 compared to $79.6 million in three months ended September 30, 2022 due to decreased sales of the Company's InteliSwab ® tests through its U.S.

government procurement contracts.

We expect this decline in revenue to continue in the fourth quarter but at a lower rate.

Sales of the Company's Diagnostics products increased 59% to $19.6 million for the three months ended September 30, 2023 from $12.3 million for the three months ended September 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.

Molecular Products revenues decreased 4% to $15.2 million for the three months ended September 30, 2023 from $15.8 million for the three months ended September 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 larger customers scaled down purchasing after they reorganized their business.

These declines in revenues were partially offset by new customer sales in the animal and genetic testing markets.

Other products and services revenues increased 13% to $3.2 million for the three months ended September 30, 2023 from $2.8 million for the three months ended September 30, 2022.

Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 57% to $0.8 million for the three months ended September 30, 2023 from $2.0 million for the three months ended September 30, 2022.

The decrease in services revenues was largely due to completion of a large customer's clinical trial project and increased competition.

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Sales of the Company's COVID-19 Molecular Products collection kits decreased by 85% to $0.05 million for the three months ended September 30, 2023 from $0.4 million for the three months ended September 30, 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 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.

Non-product and services revenues decreased 95% to $0.2 million for the three months ended September 30, 2023 from $3.6 million for the three months ended September 30, 2022 as a result lower funding for research and development activities and 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 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 gross profit margin increased to 49.7% for the three months ended September 30, 2023 from 39.9% for the three months ended September 30, 2022.

This increase in margins was driven by InteliSwab® sales which generated higher margins due to reduced costs associated with manufacturing efficiencies and a packaging change implemented during the first quarter of 2023 .

Also contributing to improved margins is lower product scrap expense, and improved overhead absorption.

These improvement in margins were partially offset by a decrease in non-product revenues which contribute 100% to gross margin.

Gross margins in the fourth quarter to are expected to moderate and not remain at this level due to product mix shifts, including the anticipated reduction in InteliSwab volume

Consolidated operating income for the three months ended September 30, 2023 was $10.9 million, a $10.0 million improvement from the $0.9 million operating income reported for the three months ended September 30, 2022.

Results for the three months ended September 30, 2023 were positively impacted by lower operating expense and impairment losses.

Results for the three months ended September 30, 2022 included $6.6 million of impairment losses compared to $6.2 million for the three months ended September 30, 2023.

Impairment losses in the third quarter of 2023 were comprised of intangible impairments whereas impairment in the third quarter of 2022 was associated with idle manufacturing equipment.

Operating expenses in the third quarter of 2023, excluding the impairment charge, decreased $11.8 million compared to the third quarter of 2022 reflecting the impact of the Company's cost saving measures and headcount reductions.

Research and development expenses decreased 16% to $8.5 million for the three months ended September 30, 2023 from $10.1 million for the three months ended September 30, 2022 largely due a decrease in spend on COVID-19 product development, a decrease in employee costs associated with a reduction in headcount, and lower spending on lab supplies.

Sales and marketing expenses decreased 35% to $8.7 million for the three months ended September 30, 2023 from $13.5 million for the three months ended September 30, 2022 due to lower employee costs associated with a decrease in headcount, decreased spend on advertising and consulting fees and a decrease in our provision for uncollectible accounts.

General and administrative expenses decreased 35% to $10.1 million for the three months ended September 30, 2023 from $15.5 million for the three months ended September 30, 2022 largely due to a decrease in legal fees as well as lower sales tax penalties, lower staffing costs due to a reduction in headcount, and lower project management fees related to our $109 million manufacturing expansion contract.

All of the above contributed to the Company's operating income of $10.9 million for the three months ended September 30, 2023, which included a non-cash impairment charge of $6.2 million, non-cash charges of $3.4 million for depreciation and amortization, and $2.6 million for stock-based compensation.

The Company's operating income of $0.9 million for the three months ended September 30, 2022 included a non-cash impairment charge of $6.6 million, non-cash charges of $3.9 million for depreciation and amortization, and $2.3 million for stock-based compensation.

Other income for the three months ended September 30, 2023 was $2.6 million compared to $3.6 million for the three months ended September 30, 2022.

This decrease is largely due to lower foreign currency gains offset by higher interest income.

CONSOLIDATED INCOME TAXES

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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.

tax expense is higher due to increased projected earnings while decreased foreign earnings resulted in the foreign tax benefit.

For the three months ended September 30, 2023, the Company recorded U.S.

state income tax expense of $1.1 million compared to $40.0 thousand benefit for the three months ended September 30, 2022 and a foreign tax expense of $1.2 million for the three months ended September 30, 2023 compared to $1.1 million benefit for the three months ended September 30, 2022.

The overall increase in tax expense is associated with a projected increase in earnings in both the U.S.

and in Canada.

Results of Operations

Six months ended June 30, 2023 compared to June 30, 2022.

Nine months ended September 30, 2023 compared to September 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,

The table below shows an outline of total consolidated net revenues (dollars in thousands) for the nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30,

Dollars % Change Percentage of Total Net Revenues

4 unchanged sentences

Molecular Products (2)

41,230 51,344 (20) 13 19

Other products and services (3)

4 unchanged sentences

Non-product and services revenues (4)

2,925 7,177 (59) 1 3

Net revenues $ 329,591 $ 264,401 25 % 100 % 100 %

(1) Includes HIV and HCV product revenues.

(2) Includes Genomics, Microbiome and Novosanis product revenues.

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

(4) Non-product and services revenues include funded research and development contracts, royalty income and grant 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.

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

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 net product and services revenues increased 25% to $329.6 million for the nine months ended September 30, 2023 from $264.4 million for the nine months ended September 30, 2022.

COVID-19 Diagnostics revenues increased 49% to $215.9 million for the nine months ended September 30, 2023 compared to $144.8 million for the nine months ended September 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 50% to $56.5 million for the nine months ended September 30, 2023 from $37.8 million for the nine months ended September 30, 2022.

Molecular Products revenues decreased 20% to $41.2 million for the nine months ended September 30, 2023 from $51.3 million for the nine months ended September 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 customer ordering patterns.

These declines in revenue are being partially offset by new customer revenues in the animal, pharma, and genetic testing markets.

Other products and services revenues increased 4% to $9.3 million for the nine months ended September 30, 2023 from $8.9 million for the nine months ended September 30, 2022.

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Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 27% to $3.6 million for the nine months ended September 30, 2023 from $4.9 million for the nine months ended September 30, 2022.

The decline in services revenues was the result of the loss of two customers in 2022 :

one customer ceased operations in 2022 and the other deprioritized microbiome studies coupled with the completion of certain large clinical trial studies and timing of research studies.

Sales of the Company's COVID-19 Molecular Products collection kits decreased significantly by 97% to $0.2 million for the nine months ended September 30, 2023 from $9.5 million for the nine months ended September 30, 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 59% to $2.9 million for the nine months ended September 30, 2023 from $7.2 million for the nine months ended September 30, 2022 as a result of lower funding received on research and development activities and 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.

Consolidated gross profit margin increased to 41.4% for the nine months ended September 30, 2023 from 37.3% for the nine months ended September 30, 2022.

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

Lower product scrap expense in 2023 compared to 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 the Company on-shores and automates the manufacturing of this product at its Pennsylvania facilities and lower COVID-19 Molecular Products revenue which historically generated higher margins.

Consolidated operating income for the nine months ended September 30, 2023 was $28.8 million, a $65.6 million improvement from the $36.8 million operating loss reported for the nine months ended September 30, 2022.

Results for the nine months ended September 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 nine months ended September 30, 2022 included $17.1 million of impairment losses compared to $7.5 million for the nine months ended September 30, 2023.

Operating expenses in the nine months ended September 30, 2023, excluding the impairment charges, decreased $18.0 million compared to the nine months ended September 30, 2022.

Research and development expenses decreased to $26.7 million for the nine months ended September 30, 2023 from $28.2 million for the nine months ended September 30, 2022, largely due to a decline in spend on COVID-19 development and lower staffing costs due to a decrease in headcount, partially offset by increased engineering consulting spend associated with our $109 million manufacturing expansion contract.

Sales and marketing expenses decreased 22% to $29.4 million for the nine months ended September 30, 2023 from $37.9 million for the nine months ended September 30, 2022 due to decreased employee costs associated with the reduction in headcount, a decrease in the Company's reserve for expected credit losses and lower advertising, marketing, sales meeting, and consulting spend.

General and administrative expenses decreased 15% to $44.2 million for the nine months ended September 30, 2023 from $52.3 million for the nine months ended September 30, 2022 largely due a decrease in consulting fees, lower project management fees associated with the $109 million DOD manufacturing expansion contract, lower employee costs associated with lower headcount, severance, stock compensation expense and recruitment fees.

In the first nine months of 2022, the Company incurred high severance and stock compensation expense associated with the accelerated vesting of shares under the Company's 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 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.

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All of the above contributed to the Company's operating income of $28.8 million for the nine months ended September 30, 2023, which included non-cash impairment charges of $7.5 million largely related to equipment that will no longer be used in production and intangible asset impairment, non-cash charges of $17.4 million for depreciation and amortization, and $7.6 million for stock-based compensation.

The Company's operating loss of $36.8 million for the nine months ended September 30, 2022 included a non-cash impairment charge of $17.1 million, non-cash charges of $11.4 million for depreciation and amortization, and $9.1 million for stock-based compensation.

Other income for the nine months ended September 30, 2023 was $6.8 million compared to $5.5 million for the nine months ended September 30, 2022.

This increase is largely due to higher interest income and higher reimbursement of costs incurred under the Company's DOD expansion contract which are presented in research and development expenses offset by lower foreign currency gains.

CONSOLIDATED INCOME TAXES

1 unchanged sentence

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.

For the nine months ended September 30, 2023, the Company recorded U.S.

state tax expense of $2.4 million, and a foreign tax benefit of $0.4 million.

For the the nine months ended September 30, 2022, the Company recorded U.S.

state tax expense of $0.4 million, a foreign tax benefit of $0.4 million, and foreign withholding tax of $1.7 million associated with the Company's 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.

state tax expense is higher due to higher expected US earnings.

Liquidity and Capital Resources

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(in thousands)

2 unchanged sentences

Working capital 315,517 256,127

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.

The Company's cash and cash equivalents and available-for-sale securities increased to $224.9 million at September 30, 2023 from $110.8 million at December 31, 2022.

$78.9 million or 35% of the $224.9 million in cash and cash equivalents is held by DNAG, the Company's Canadian subsidiary.

1 unchanged sentence

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.

It is still the Company's intention going forward to continue to permanently reinvest the historical undistributed earnings of the Company's foreign subsidiaries.

The Company's working capital increased to $315.5 million at September 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

Analysis of the Company's Cash Flows

Operating Activities

During the six months ended June 30, 2023, net cash provided by operating activities was $63.3 million.

During the nine months ended September 30, 2023, net cash provided by operating activities was $100.2 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.

The Company's net income of $33.6 million included non-cash charges of depreciation and amortization expense of $17.4 million, stock-based compensation expense of $7.6 million, impairment charges taken for idle equipment and intangible assets of $7.5 million and a non-cash deferred tax benefit of $0.5 million.

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Cash provided by the working capital accounts included a decrease in inventory of $36.4 million as the Company fulfilled demand for its InteliSwab® product, a decrease in accounts receivable of $17.5 million largely associated with collections of monies due from the U.S.

government for InteliSwab ® shipments, a $10.5 million decrease in prepaid and other assets as the Company received payment of its Employee Retention Credit filed for in 2021 and taxes refunds associated with Canadian income tax returns.

Offsetting these increases in cash is a decrease in accounts payable of $25.1 million associated with the timing of payment of vendor invoices and a decrease in accrued expenses of $4.0 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.

Net cash provided by investing activities was $35.6 million for the nine months ended September 30, 2023, which reflects proceeds from the maturities of investments of $95.0 million, $24.3 million in reimbursement received under the Company's $109 million contract with the U.S.

government offset by $74.7 in purchases of investments, $4.5 million to build additional manufacturing capacity as required by the contract, and $4.5 million to acquire property and equipment to support the normal operations of the business.

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.

Net cash used in financing activities was $2.7 million for the nine months ended September 30, 2023, which is largely comprised of $1.9 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 will be sufficient to fund its operating expenses and capital expenditure requirements over the next twelve months.

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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.

As of September 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.

No material changes have been made to such critical accounting policies during the nine months ended September 30, 2023.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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 2. Management’s Discussion and Analysis