ORASURE TECHNOLOGIES INC 10-Q

Item 1. FINANCIAL STATEMENTS 3 Table of Content s ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share amounts) September 30, 2023 December 31, 2022 ASSETS Current Assets: Cash and cash equivalents $ 217,533 $ 83,980 Short-term investments 7,358 26,867 Accounts receivable, net of allowance of $ 2,289 and $ 2,365 53,402 70,797 Inventories 59,264 95,704 Prepaid expenses 6,423 6,273 Other current assets 12,484 41,569 Total current assets 356,464 325,190 Noncurrent Assets: Property, plant and equipment, net of accumulated depreciation of $ 84,168 and $ 69,881 48,027 59,413 Operating right-of-use assets, net 13,302 10,399 Finance right-of-use assets, net 793 1,293 Intangible assets, net of accumulated amortization of $ 27,336 and $ 31,077 3,793 11,694 Goodwill 35,033 35,104 Deferred tax asset 47 — Other noncurrent assets 973 1,087 Total noncurrent assets 101,968 118,990 TOTAL ASSETS $ 458,432 $ 444,180 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 14,966 $ 38,020 Deferred revenue 1,824 2,273 Accrued expenses and other current liabilities 21,140 25,762 Finance lease liability 1,000 1,179 Operating lease liability 2,017 1,764 Acquisition-related contingent consideration obligation — 65 Total current liabilities 40,947 69,063 Noncurrent Liabilities: Finance lease liability 247 503 Operating lease liability 11,758 9,101 Acquisition-related contingent consideration obligation — 99 Other noncurrent liabilities 595 581 Deferred income taxes — 408 Total noncurrent liabilities 12,600 10,692 TOTAL LIABILITIES 53,547 79,755 Commitments and contingencies (Note 12) STOCKHOLDERS' EQUITY Preferred stock, par value $ 0.000001 , 25,000 shares authorized, none issued — — Common stock, par value $ 0.000001 , 120,000 shares authorized, 73,483 and 72,734 shares issued and outstanding — — Additional paid-in capital 526,261 520,446 Accumulated other comprehensive loss ( 17,372 ) ( 18,435 ) Accumulated deficit ( 104,004 ) ( 137,586 ) Total stockholders' equity 404,885 364,425 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 458,432 $ 444,180 See accompanying notes to the consolidated financial statements. 4 Table of Content s ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 NET REVENUES: Products and services $ 89,014 $ 112,821 $ 326,666 $ 257,224 Other 173 3,642 2,925 7,177 89,187 116,463 329,591 264,401 COST OF PRODUCTS AND SERVICES SOLD 44,847 69,949 193,065 165,791 Gross profit 44,340 46,514 136,526 98,610 OPERATING EXPENSES: Research and development 8,516 10,088 26,737 28,185 Sales and marketing 8,736 13,474 29,413 37,875 General and administrative 10,051 15,527 44,186 52,262 Loss on impairments 6,183 6,559 7,503 17,101 Change in the estimated fair value of acquisition-related contingent consideration ( 40 ) — ( 99 ) ( 36 ) 33,446 45,648 107,740 135,387 Operating income (loss) 10,894 866 28,786 ( 36,777 ) OTHER INCOME 2,612 3,586 6,752 5,467 Income (loss) before income taxes 13,506 4,452 35,538 ( 31,310 ) INCOME TAX (BENEFIT) EXPENSE 2,347 ( 1,143 ) 1,956 1,624 NET INCOME (LOSS) $ 11,159 $ 5,595 $ 33,582 $ ( 32,934 ) INCOME (LOSS) PER SHARE: BASIC $ 0.15 $ 0.08 $ 0.46 $ ( 0.45 ) DILUTED $ 0.15 $ 0.08 $ 0.45 $ ( 0.45 ) WEIGHTED-AVERAGE SHARES OUTSTANDING: BASIC 73,453 72,616 73,298 72,448 DILUTED 74,349 72,785 74,197 72,448 See accompanying notes to the consolidated financial statements. 5 Table of Content s ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 NET INCOME (LOSS) $ 11,159 $ 5,595 $ 33,582 $ ( 32,934 ) OTHER COMPREHENSIVE INCOME Currency translation adjustments ( 2,813 ) ( 9,828 ) 843 ( 12,421 ) Unrealized gain on marketable securities — 11 220 167 COMPREHENSIVE INCOME (LOSS) $ 8,346 $ ( 4,222 ) $ 34,645 $ ( 45,188 ) See accompanying notes to the consolidated financial statements. 6 Table of Content s ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2023 2022 OPERATING ACTIVITIES: Net income (loss) $ 33,582 $ ( 32,934 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Stock-based compensation 7,602 9,100 Depreciation and amortization 17,372 11,391 Loss on impairments 7,503 17,101 Other non-cash amortization 3 411 Provision for credit losses ( 75 ) 974 Unrealized foreign currency gain ( 66 ) ( 396 ) Interest expense on finance leases 42 74 Deferred income taxes ( 490 ) 542 Loss on sale of fixed assets — 729 Change in the estimated fair value of acquisition-related contingent consideration ( 99 ) ( 36 ) Payment of acquisition-related contingent consideration ( 19 ) — Changes in assets and liabilities: Accounts receivable 17,468 ( 19,152 ) Inventories 36,425 ( 26,240 ) Prepaid expenses and other assets 10,530 ( 5,990 ) Accounts payable ( 25,122 ) 15,315 Deferred revenue ( 449 ) ( 312 ) Accrued expenses and other liabilities ( 3,990 ) 233 Net cash provided by (used in) operating activities 100,217 ( 29,190 ) INVESTING ACTIVITIES: Purchases of short-term investments ( 74,652 ) ( 22,873 ) Proceeds from maturities and redemptions of short-term investments 94,980 47,415 Purchases of property and equipment ( 4,517 ) ( 28,081 ) Purchase of property and equipment under government contracts ( 4,501 ) ( 38,705 ) Proceeds from funding under government contract 24,290 37,756 Net cash provided by (used in) investing activities 35,600 ( 4,488 ) FINANCING ACTIVITIES: Cash payments for lease liabilities ( 835 ) ( 826 ) Proceeds from exercise of stock options 76 15 Payment of acquisition-related contingent consideration ( 46 ) ( 208 ) Repurchase of common stock ( 1,863 ) ( 2,008 ) Net cash used in financing activities ( 2,668 ) ( 3,027 ) EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 404 ( 4,852 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 133,553 ( 41,557 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 83,980 116,762 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 217,533 $ 75,205 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash (refunds) paid for income taxes $ ( 5,733 ) $ 9,400 Non-cash investing and financing activities Accrued property and equipment purchases $ 155 $ 1,463 Accrued property and equipment purchases under government contracts $ 2 $ 2,374 Unrealized gain on marketable securities $ — $ 167 See accompanying notes to the consolidated financial statements. 7 Table of Content s ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation . 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”). 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. 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 and nine months ended September 30, 2023 are not necessarily indicative of the results of operations expected for the full year. Summary of Significant Accounting Policies . There have been no changes to the Company's significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 that have had a material impact on the consolidated financial statements and related notes except as discussed herein. See Note 11 for the discussion regarding the change in business segments. Cash Equivalents & Short-Term 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. Securities with maturities ninety days or less are considered cash equivalents. 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 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2023 Guaranteed investment certificates $ 7,358 $ — $ — $ 7,358 Corporate bonds — — — — Total $ 7,358 $ — $ — $ 7,358 December 31, 2022 Guaranteed investment certificates $ 22,109 $ — $ — $ 22,109 Corporate bonds 4,978 — ( 220 ) 4,758 Total $ 27,087 $ — $ ( 220 ) $ 26,867 At September 30, 2023, maturities of the Company's available-for-sale securities were as follows: Less than one year $ 7,358 $ — $ — $ 7,358 Greater than one year $ — $ — $ — $ — Fair Value of Financial Instruments . As of September 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. 8 Table of Content s 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: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: 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 and the Company's available-for-sale guaranteed investment certificates are measured as Level 1 instruments as of September 30, 2023 and December 31, 2022. Included in cash and cash equivalents at September 30, 2023 and December 31, 2022 was $ 37.1 million and $ 1.7 million, respectively, 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 September 30, 2023 was $ 14.7 million 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. The assets of the plan are held in the name of the Company at a third-party financial institution. Separate accounts are maintained for each participant to reflect the amounts deferred by the participant and all earnings and losses on those deferred amounts. The assets of the plan are held in mutual funds and company stock. The fair value of the plan assets as of September 30, 2023 and December 31, 2022 was $ 0.6 million and $ 0.7 million, 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. The fair value of plan assets is included in both current assets and noncurrent assets with the same amount included in accrued expenses and other noncurrent liabilities in the accompanying consolidated balance sheets. 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 $( 0.1 ) million and $ 2.3 million for the three months ended September 30, 2023 and 2022, respectively. Net foreign exchange gains and (losses) resulting from foreign currency transactions for the nine months ended September 30, 2023 and 2022 were $( 0.7 ) million and $ 2.4 million, respectively. Impairment of Long-Lived Assets . Long-lived assets, which include property, plant and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company assesses the recoverability of the Company's long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows expected to be generated from the use and eventual disposition of the asset. If indicators of impairment exist, the Company measures the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect the Company's assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time. The Company identified a triggering event to test for the recoverability of intangible assets in the third quarter given the decline in the Company's market capitalization leading up to and as of its annual goodwill impairment testing date. The Company performed an undiscounted cash flow analysis and determined the carrying value of the developed technology, trade names, and customer relationships intangible assets could not be recovered through the sum of the undiscounted future cash flows. The Company used an income approach to determine the fair value of the developed technology and customer relationship intangible assets and the relief from royalty method for the trade names. For the three months ended September 30, 2023, the Company determined the developed technology, trade names, and customer relationships intangible assets associated with Diversigen and Novosanis were impaired as the fair value of the intangible assets did not exceed their carrying value. A full impairment loss of $ 6.2 million is recorded on the consolidated statement of operations for the three months ended September 30, 2023. 9 Table of Content s There was no impairment of property, plant and equipment for the three months ended September 30, 2023 related to this triggering event. See Note 4 for discussion of equipment impairments recorded in the first half of 2023. Impairment of Goodwill . During the second quarter of 2022, we determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding significant decline in our market capitalization. As a result, we performed an interim goodwill impairment test and concluded that the carrying value of our Diagnostics reporting unit exceeded its estimated fair value and the goodwill balance for that segment was fully impaired. Thus, we recognized a pre-tax impairment charge of $ 3.6 million during the three months ended June 30, 2022, which is reported in loss on impairments in our condensed consolidated statement of operations. Accumulated Other Comprehensive Loss . Changes in accumulated other comprehensive loss by component is listed below (in thousands): Foreign Currency Marketable Securities Total Balance at December 31, 2022 $ ( 18,215 ) $ ( 220 ) $ ( 18,435 ) Other comprehensive gain 843 220 1,063 Balance at September 30, 2023 $ ( 17,372 ) $ — $ ( 17,372 ) Immaterial Correction of Errors. Inventories, accounts payable and cost of products and services were reduced by $ 0.5 million, $ 1.3 million and $ 0.8 million, respectively, as of and for the year ended December 31, 2022 to correct for the accounting of a vendor rebate earned in 2022. The tax impact of the vendor rebate was negligible. 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 and nine months ended September 30, 2022, cost of products and services sold was reduced by $ 0.3 million and $ 0.6 million, respectively. The respective operating activities on the consolidated statement of cash flows for the nine months ended September 30, 2022 has also been adjusted. Furthermore, stockholder's equity at September 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 and nine months ended September 30, 2022, $ 0.3 million and $ 0.9 million 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 the Company's 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 $ 6.9 million of accelerated depreciation during the three months ended June 30, 2023, recorded in cost of products and services sold. 2. Government Capital Contracts In September 2021, the Company entered into an agreement for $ 109.0 million 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 billed and funded until the completion of the final validation testing, which occurred in October 2023. The Company began making payments to vendors for the capital project during the fourth quarter of 2021. The Company began receiving funds from the DOD in January 2022 and has received $ 84.6 million, as of September 30, 2023. The remaining $ 24.4 million was received in October 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 . Funding received in relation to capital-related costs incurred for government contracts is recorded as a reduction to the cost of property, plant and equipment and reflected within investing activities in the consolidated statements of cash flows; 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. 10 Table of Content s 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 $ 0.6 million of such income, which is reported as other income in the Company's consolidated statement of operations for both the three months ended September 30, 2023 and 2022. The Company recognized $ 1.7 million of such income, for both the nine months ended September 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 September 30, 2023 and 2022, $ 0.4 million and $ 0.3 million, respectively, were recorded in research and development and other income. For the nine months ended September 30, 2023 and 2022, $ 2.0 million and $ 0.9 million, 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 (in thousands): September 30, December 31, 2023 2022 Other current assets: Billed receivables $ 4,365 $ — Unbilled receivables 5,956 27,013 Total other current assets 10,321 27,013 Accrued expenses and other current liabilities $ — $ ( 318 ) The activity corresponding to the government contracts included in the Company's consolidated statements of cash flows is as follows (in thousands): September 30, December 31, 2023 2022 Cost of assets, cumulative $ 86,993 $ 83,359 Reduction for funding earned to date, not yet received ( 1,841 ) ( 22,497 ) Reduction for funding received to date ( 85,152 ) ( 60,862 ) Total property, plant and equipment, net $ — $ — 3. Inventories (in thousands) September 30, December 31, 2023 2022 Raw materials $ 26,115 $ 42,445 Work in process 2,459 2,335 Finished goods 30,690 50,924 $ 59,264 $ 95,704 11 Table of Content s 4. Property, Plant and Equipment, net (in thousands) September 30, December 31, 2023 2022 Land $ 1,118 $ 1,118 Buildings and improvements 35,714 35,582 Machinery and equipment 65,371 60,725 Computer equipment and software 17,352 16,681 Furniture and fixtures 4,079 4,064 Construction in progress 8,561 11,124 132,195 129,294 Accumulated depreciation ( 84,168 ) ( 69,881 ) $ 48,027 $ 59,413 During the nine months ended September 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 aggregate pre-tax asset impairment charges of $ 1.3 million during the nine months ended September 30, 2023. No property, plant and equipment impairment charges were recorded during the three months ended September 30, 2023. During the three and nine months ended September 30, 2022, the Company determined several manufacturing lines and associated supporting assets would not be utilized due to changes in forecasted demand for the products the lines are intended to produce. As a result of this decision, the Company determined that the carrying values of the equipment and supporting assets were not recoverable and recorded aggregate pre-tax asset impairment charges during the three and nine months ended September 30, 2022 of $ 6.6 million and $ 13.5 million, respectively. 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. 5. Accrued Expenses and other current liabilities (in thousands) September 30, December 31, 2023 2022 Payroll and related benefits $ 12,213 $ 14,103 Professional fees 2,730 4,685 Sales tax payable 1,344 1,519 Other 4,853 5,455 $ 21,140 $ 25,762 6. Termination Benefits 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 . 12 Table of Content s The expense included in the Company's consolidated statements of operations are as follows (in thousands): Nine Months Ended September 30, 2023 Cost of products and services sold $ 369 Research and development 566 Sales and marketing 1,543 General and administrative 787 Total $ 3,265 As of September 30, 2023 the Company had $ 0.9 million accrued and had paid $ 2.4 million related to the reduction in workforce. No additional expense was incurred during the three months ended September 30, 2023. 7. Revenues Revenues by product line . The following table represents total net revenues by product line (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 COVID-19 (1) $ 50,199 $ 79,920 $ 216,115 $ 154,331 HIV 16,650 9,054 46,518 27,577 Molecular Products (2) 15,238 15,829 41,230 51,344 HCV 2,901 3,234 9,957 10,182 Risk assessment testing 2,554 2,595 7,540 7,786 Molecular Services 834 1,957 3,567 4,895 Other product and service revenues 638 232 1,739 1,109 Net product and services revenues 89,014 112,821 326,666 257,224 Non-product and services revenues (3) 173 3,642 2,925 7,177 Net revenues $ 89,187 $ 116,463 $ 329,591 $ 264,401 (1) Includes COVID-19 Diagnostics and COVID-19 Molecular Products. (2) Includes Genomics, Microbiome and Novosanis product revenues. (3) Non-product and services revenues include funded research and development contracts, royalty income and grant revenues. Revenues by geographic area . The following table represents total net revenues by geographic area, based on the location of the customer (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 United States $ 77,925 $ 108,941 $ 296,815 $ 237,248 Europe 1,992 2,207 6,297 8,929 Other regions 9,270 5,315 26,479 18,224 $ 89,187 $ 116,463 $ 329,591 $ 264,401 Customer and Vendor Concentrations . At September 30, 2023, one non-commercial customer accounted for 52 % of the Company's consolidated accounts receivable. The same non-commercial customer accounted for 57 % of the Company's consolidated accounts receivable as of December 31, 2022. The same non-commercial customer also accounted for 56 % and 69 % of net consolidated revenues for the three months ended September 30, 2023 and 2022, respectively. The same non-commercial customer also accounted for 66 % and 53 % of net consolidated revenues for the nine months ended September 30, 2023 and 2022, respectively. 13 Table of Content s The Company currently purchases certain products and critical components of its products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, the Company could be subject to increased costs and substantial delays in the delivery of its products to its customers. Third-party suppliers also manufacture certain products. The Company's inability to have a timely supply of any of these components and products could have a material adverse effect on its business, as well as its financial condition and results of operations. Deferred Revenue . The Company records deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of September 30, 2023 and December 31, 2022 included customer prepayments of $ 1.4 million and $ 1.5 million, respectively. Deferred revenue as of September 30, 2023 and December 31, 2022 also included $ 0.4 million and $ 0.7 million, 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. 8. Income Taxes The components of income tax expense (benefits) are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 State income tax expense (benefit) $ 1,131 $ ( 40 ) $ 2,388 $ 379 Foreign income tax expense (benefit) 1,216 ( 1,103 ) ( 432 ) ( 438 ) Foreign withholding tax — — — 1,683 $ 2,347 $ ( 1,143 ) $ 1,956 $ 1,624 Income taxes for the nine months ended September 30, 2022 includes $ 1.7 million of Canadian withholding tax on the repatriation of $ 65.0 million of unremitted earnings from Canada to the United States. The increase in income tax expense for three months ended September 30, 2023 is due to an increase in the income before taxes for both the U.S. and Canadian entities. Income 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 asset as of September 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 September 30, 2023 and December 31, 2022. 9. Income (Loss) Per Share Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. 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 and nine months ended September 30, 2023 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 2,027 shares and 2,048 shares, respectively, were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive. For the nine months ended September 30, 2022 outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 1,734 shares, were excluded from the computation of diluted loss per share as their inclusion would have been 14 Table of Content s anti-dilutive. For the nine months ended September 30, 2022, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing, 383 were excluded from the computation of diluted loss per share. 10. Stockholders’ Equity Reconciliation of the changes in stockholder's equity for the three and nine months ended September 30, 2023 and 2022 (in thousands): Common Stock Additional Paid-in Capital Accumulated Other 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 of options 12 — 66 — — 66 Vesting of restricted stock and performance stock units 737 — — — — — Purchase and retirement of common shares ( 229 ) — ( 1,203 ) — — ( 1,203 ) Stock-based compensation — — 2,655 — — 2,655 Net income — — — — 27,219 27,219 Currency translation adjustments — — — 797 — 797 Unrealized gain on marketable securities — — — 220 — 220 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 issued upon exercise of options 2 — 10 — — 10 Vesting of restricted stock and performance stock units 99 — — — — — Purchase and retirement of common shares ( 31 ) — ( 200 ) — — ( 200 ) Stock-based compensation — — 2,590 — — 2,590 Net income — — — — 11,159 11,159 Currency translation adjustments — — — ( 2,813 ) — ( 2,813 ) Balance at September 30, 2023 73,483 $ — $ 526,261 $ ( 17,372 ) $ ( 104,004 ) $ 404,885 15 Table of Content s Common Stock Additional Paid-in Capital Accumulated Other 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 of options 2 — 15 — — 15 Vesting of restricted stock and performance stock units 352 — — — — — Purchase and retirement of common shares ( 116 ) — ( 1,049 ) — — ( 1,049 ) Stock-based compensation — — 3,524 — — 3,524 Net loss — — — — ( 19,940 ) ( 19,940 ) Currency translation adjustments — — — 1,756 — 1,756 Unrealized gain on marketable securities — — — 74 — 74 Balance at March 31, 2022 72,307 $ — $ 513,553 $ ( 8,247 ) $ ( 140,393 ) $ 364,913 Vesting of restricted stock and performance stock units 407 — — — — — Purchase and retirement of common shares ( 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 Vesting of restricted stock and performance stock units 66 — — — — — Purchase and retirement of common shares ( 19 ) — ( 54 ) — — ( 54 ) Stock-based compensation — — 2,296 — — 2,296 Net income — — — — 5,595 5,595 Currency translation adjustments — — — ( 9,828 ) — ( 9,828 ) Unrealized gain on marketable securities — — — 11 — 11 Balance at September 30, 2022 72,619 $ — $ 518,170 $ ( 22,331 ) $ ( 153,387 ) $ 342,452 11. Business Segments The Company is organized on the basis of products and services under a new organizational structure. All products and services reside under the same reporting hierarchy. Historically there was separate management leading the Company's Diagnostics and Molecular Solutions businesses. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across the Diagnostics and Molecular Solutions segments into one operating segment with sales, marketing, product development and research teams covering all product lines and reporting to a Chief Product Officer. Resources are allocated and performance is assessed on a consolidated basis by the Company's Chief Executive Officer, whom the Company has determined to be its Chief Operating Decision Maker ("CODM"). The CODM reviews the business based on individual product success. Therefore, the Company's historical reportable segments, Diagnostics and Molecular Solutions are now considered one reportable segment and there will no longer be a distinction between Diagnostics and Molecular Solutions, only the Company holistically. 16 Table of Content s 12. Commitments and Contingencies Litigation 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. Spectrum 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. In August 2021, the Company amended its complaint to add a second patent to this litigation. 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. The District Court issued multiple pretrial orders, resolving the infringement, antitrust, and inequitable conduct claims without trial. 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 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. Those motions remain pending. DNAG filed its opening appellate brief on September 28, 2023. Spectrum’s responsive appellate brief is due December 22, 2023. Oral argument in the appeal has not been scheduled. An inter partes review is currently pending before the PTO regarding the second asserted patent. Oral argument in the inter partes review is currently scheduled for November 14, 2023. On September 15, 2023, Spectrum filed a petition for inter partes review of a third patent, which DNAG did not assert in the District Court. An optional preliminary patent owner response is due in December 2023. 17 Table of Content s