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 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, 2023 filed with the Securities and Exchange Commission on March 11, 2024. 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, 2023 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 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. These products include tests for diseases including COVID-19, HIV, Hepatitis C, and Syphilis that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe. The Company's business also includes molecular sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions 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, through its Diversigen subsidiary, the Company offered laboratory and bioinformatics services for both genomics and microbiome customers. These services were primarily provided to pharmaceutical, biotech companies, and research institutions. During the first quarter of 2024, the Company initiated steps to wind down and exit this line of business. Diversigen contributed $1.7 million to revenues during the six months ended June 30, 2024 and contributed $4.5 million to revenues for the full year of 2023. 18 Table of Contents Results of Operations For the three months ended June 30, 2024 compared to June 30, 2023. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended June 30, 2024 and 2023: For the Three Months Ended June 30, Dollars % Change Percentage of Total Net Revenues 2024 2023 2024 2023 COVID-19 Diagnostics $ 18,934 $ 47,477 (60) % 35 % 56 % Diagnostics (1) 18,746 19,834 (5) 35 23 Molecular Sample Management Solutions (2) 12,609 13,050 (3) 23 15 Other products and services (3) 2,845 2,993 (5) 5 4 Molecular Services 810 1,354 (40) 1 2 COVID-19 Molecular Products 5 30 (83) — — Net product and services revenues 53,949 84,738 (36) 99 99 Non-product and services revenues (4) 386 703 (45) 1 1 Net revenues $ 54,335 $ 85,441 (36) % 100 % 100 % (1) Includes HIV, HCV and Syphilis product revenues. (2) Includes Genomics, Microbiome and Novosanis product revenues. (3) Includes Risk assessment testing and other product and services revenues. (4) Includes funded research and development contracts, royalty income and grant revenues. Product and Services Revenues Consolidated net revenues decreased 36% to $54.3 million for the three months ended June 30, 2024 from $85.4 million for the three months ended June 30, 2023. COVID-19 Diagnostics revenues decreased by 60% to $18.9 million for the three months ended June 30, 2024 compared to $47.5 million for the three months ended June 30, 2023 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 throughout 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing. Sales of the Company's Diagnostics products decreased 5% to $18.7 million for the three months ended June 30, 2024 from $19.8 million for the three months ended June 30, 2023. This decrease in revenues is largely due to lower domestic and international HIV revenues of approximately $2.3 million primarily driven by customer ordering patterns partially offset by a combined increase in global HCV revenues and Syphilis revenues of approximately $1.2 million. The increase in HCV revenues is primarily due to new customer orders and customer ordering patterns and the Syphilis revenues are generated from the Company's new distribution agreements. Molecular Sample Management Solutions revenues decreased 3% to $12.6 million for the three months ended June 30, 2024 from $13.1 million for the three months ended June 30, 2023. Sales of the Company's Molecular Products are being impacted by reduced consumer demand for products in which our genomics collection devices are used, economic pressures, and the overall decline in the microbiome market. Other products and services revenues decreased 5% to $2.8 million for the three months ended June 30, 2024 from $3.0 million for the three months ended June 30, 2023. Molecular Services revenues, which are derived from the Company's microbiome molecular sequencing services, decreased 40% to $0.8 million for the three months ended June 30, 2024 from $1.4 million for the three months ended June 30, 2023. The decrease in services revenues was due to the decision to exit this line of business. We expect minimal molecular services revenues in the second half of 2024. 19 Table of Contents Non-Product and Services Revenues Non-product and services revenues decreased 45% to $0.4 million for the three months ended June 30, 2024 from $0.7 million for the three months ended June 30, 2023 as a result of no royalty income in the second quarter of 2024 as the royalty agreement for sample collection kits expired in June 2023. Further reducing the Company's non-product and services revenue is lower funding for research and development activities largely as a result of the end of our agreement with Biomedical Advanced Research Authority ("BARDA") which provided funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 waiver of our InteliSwab® tests. The Company has communicated to BARDA that it does not intend to pursue further development of this clearance. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin increased to 45.4% for the three months ended June 30, 2024 from 30.9% for the three months ended June 30, 2023. During the second quarter of 2023, the Company recorded $7.0 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company made the decision to onshore and automate manufacturing of this product at its Pennsylvania facilities. In addition, also contributing to the increased margins is improved overhead absorption and lower scrap expense partially offset by a negative impact in product mix caused by a higher volume of sales of lower margin products. Consolidated operating loss for the three months ended June 30, 2024 was $2.7 million, a 57.4% improvement from the $6.4 million operating loss reported for the three months ended June 30, 2023. Results for the three months ended June 30, 2024 benefited from a $6.2 million reduction in operating expense offset by lower gross profit dollars driven by the decrease in revenues. Results for the three months ended June 30, 2024 included $1.1 million of impairment losses compared to $0.2 million for the three months ended June 30, 2023. Operating expenses in the second quarter of 2024, excluding the impairment charge, decreased 19% to $26.4 million from $32.6 million in the second quarter of 2023 reflecting the impact of the Company's cost saving measures and headcount reductions. Research and development expenses decreased 14% to $6.6 million for the three months ended June 30, 2024 from $7.7 million for the three months ended June 30, 2023 largely due to a decrease in employee costs associated with a reduction in headcount, decrease in spend on COVID-19 product development, and no related project management fees for our $109 million manufacturing expansion contract which ended during the fourth quarter of 2023, partially offset by an increase in severance costs for those employees impacted by the Company's decisions to exit the molecular services business offered by its Diversigen subsidiary and wind-down operations located in Belgium. Sales and marketing expenses decreased 7% to $7.9 million for the three months ended June 30, 2024 from $8.5 million for the three months ended June 30, 2023 due to lower employee costs associated with a decrease in headcount, decreased advertising fees and lower amortization expense. General and administrative expenses decreased 28% to $11.8 million for the three months ended June 30, 2024 from $16.4 million for the three months ended June 30, 2023 largely due to lower legal fees and lower staffing costs due to a reduction in headcount, partially offset by an increase in non-cash stock compensation expense. All of the above contributed to the Company's operating loss of $2.7 million for the three months ended June 30, 2024, which included a non-cash impairment charge of $1.1 million, non-cash charges of $2.6 million for depreciation and amortization, and non-cash charges of $3.3 million for stock-based compensation. The Company's operating loss of $6.4 million for the three months ended June 30, 2023 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. OTHER INCOME Other income for the three months ended June 30, 2024 was $3.1 million compared to $1.5 million for the three months ended June 30, 2023. This increase is due to higher interest income partially offset by the absence of profit earned under our manufacturing expansion contract with the U.S. government which ended at the end of 2023. 20 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 three months ended June 30, 2024 and 2023, the Company recorded U.S. state income tax expense of $3.0 thousand and $1.5 million, respectively. For the three months ended June 30, 2024 and 2023, the state income tax expense was partially offset by foreign income tax expense and benefit of $0.4 million and $1.6 million, respectively. Results of Operations For the six months ended June 30, 2024 compared to June 30, 2023. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the six months ended June 30, 2024 and 2023: For the Six Months Ended June 30, Dollars % Change Percentage of Total Net Revenues 2024 2023 2024 2023 COVID-19 Diagnostics $ 42,031 $ 165,731 (75) % 39 % 69 % Diagnostics (1) 35,139 36,924 (5) 33 15 Molecular Sample Management Solutions (2) 23,431 25,992 (10) 22 11 Other products and services (3) 5,408 6,087 (11) 5 3 Molecular Services 1,683 2,733 (38) 2 1 COVID-19 Molecular Products 36 185 (81) — — Net product and services revenues 107,728 237,652 (55) 99 99 Non-product and services revenues (4) 739 2,752 (73) 1 1 Net revenues $ 108,467 $ 240,404 (55) % 100 % 100 % (1) Includes HIV, HCV and Syphilis product revenues. (2) Includes Genomics, Microbiome and Novosanis product revenues. (3) Includes Risk assessment testing and other product and services revenues. (4) Includes funded research and development contracts, royalty income and grant revenues. Product and Services Revenues Consolidated net product and services revenues decreased 55% to $108.5 million for the six months ended June 30, 2024 from $240.4 million for the six months ended June 30, 2023. COVID-19 Diagnostics revenues decreased 75% to $42.0 million for the six months ended June 30, 2024 compared to $165.7 million for the six months ended June 30, 2023 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 throughout 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing. Sales of the Company's Diagnostics products decreased 5% to $35.1 million for the six months ended June 30, 2024 from $36.9 million for the six months ended June 30, 2023. This decrease in revenue was primarily driven by lower HIV revenues in both the domestic and international markets of $2.8 million as a result of fluctuations in customer ordering patterns. The decline in HIV revenue was partially offset by a combined increase in HCV and Syphilis revenues of $1.1 million . Molecular Sample Management Solutions revenues decreased 10% to $23.4 million for the six months ended June 30, 2024 from $26.0 million for the six months ended June 30, 2023. Sales of the Company's Molecular Sample Management Solutions Products are being impacted by reduced consumer demand for products in which our genomics collection devices are used, economic pressures and reduction on funding for programs in which our collection devices are used, and the overall decline in the microbiome market. 21 Table of Contents Other products and services revenues decreased 11% to $5.4 million for the six months ended June 30, 2024 from $6.1 million for the six months ended June 30, 2023. This decrease is driven by lower Risk Assessment testing revenue due to the loss of customers to competing products. Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 38% to $1.7 million for the six months ended June 30, 2024 from $2.7 million for the six months ended June 30, 2023. The decrease in services revenues was due to the decision to exit this line of business. We expect minimal molecular services revenues in the second half of 2024. Non-Product and Services Revenues Non-product and services revenues decreased 73% to $0.7 million for the six months ended June 30, 2024 from $2.8 million for the six months ended June 30, 2023 as a result of lower royalty income in the first half of 2024 as one of the Company's royalty agreement for sample collection kits expired in June 2023. Further reducing the Company's non-product and services revenue is a result of lower funding for research and development activities largely as a result of the end of our agreement with Biomedical Advanced Research Authority ("BARDA") which provided funding to obtain clearance of a premarket notification ("510(k)") and Clinical Laboratory Improvement Amendments of 1988 waiver of our InteliSwab® tests. The Company has communicated to BARDA that it does not intend to pursue further development of this clearance. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin increased to 44.9% for the six months ended June 30, 2024 from 38.3% for the six months ended June 30, 2023. This improvement in margins was due to $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. In addition, reduced salary and benefits due to the reduction in workforce experienced in 2023 contributed to improved overhead absorption and lower product scrap expense also contributed to the increased margins in the first half of 2024. These improvement in margins were partially offset by the decline in other non-product revenues which contribute 100% to gross margin and a shift in product mix of increased revenues from lower margin products. Consolidated operating loss for the six months ended June 30, 2024 was $9.8 million, compared to $17.9 million operating income reported for the six months ended June 30, 2023. Results for the six months ended June 30, 2024 were negatively impacted by the decrease in revenues and were positively impacted by reduced operating expense and negatively impacted by the higher impairment losses. Results for the six months ended June 30, 2024 included $4.4 million of impairment losses compared to $1.3 million for the six months ended June 30, 2023. Operating expenses for the six months ended June 30, 2024, excluding the impairment charge, decreased 25.7% to $54.2 million from $73.0 million for the six months ended June 30, 2023 reflecting the impact of the Company's cost saving measures and headcount reductions. Research and development expenses decreased 21% to $14.3 million for the six months ended June 30, 2024 from $18.2 million for the six months ended June 30, 2023, largely due to lower staffing costs due to a decrease in headcount, decrease in spend on COVID-19 product development, and no related project management fees for our $109 million manufacturing expansion contract which ended during the fourth quarter of 2023, partially offset by an increase in severance costs for those employees impacted by the Company's decisions to exit the molecular services business offered by its Diversigen subsidiary and wind-down operations located in Belgium. Sales and marketing expenses decreased 21% to $16.4 million for the six months ended June 30, 2024 from $20.7 million for the six months ended June 30, 2023 primarily due to decreased employee costs associated with the reduction in headcount and lower advertising, consulting, and amortization expense. General and administrative expenses decreased 31% to $23.5 million for the six months ended June 30, 2024 from $34.1 million for the six months ended June 30, 2023 largely due to lower legal fees relating to the Spectrum litigation (discussed further in Part II. Other Information, Item 1. Legal Proceedings, below) and lower employee costs associated with reduced headcount partially offset by an increase in non-cash stock compensation expense. 22 Table of Contents All of the above contributed to the Company's operating loss of $9.8 million for the six months ended June 30, 2024, which included non-cash impairment charges of $4.4 million, non-cash charges of $5.3 million for depreciation and amortization, and $6.3 million for stock-based compensation. The Company's operating income of $17.9 million for the six months ended June 30, 2023 included a non-cash impairment charge of $1.3 million, non-cash charges of $14.0 million for depreciation and amortization, and $5.0 million for stock-based compensation. OTHER INCOME Other income for the six months ended June 30, 2024 was $6.6 million compared to $4.1 million for the six months ended June 30, 2023. This increase is largely due to higher interest income and offset by absence of profit earned under our manufacturing expansion contract with the U.S. government which ended at the end of 2023. 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, 2024 and 2023, the Company recorded U.S. state tax benefit and expense of $0.2 million and $1.3 million, respectively. For the six months ended June 30, 2024 and 2023, the state tax expense was partially offset by foreign tax expense and benefit of $0.6 million and $1.6 million. Liquidity and Capital Resources June 30, 2024 December 31, 2023 (in thousands) Cash and cash equivalents $ 258,239 $ 290,407 Short-term investments 9,142 — Working capital 322,210 346,923 The Company's cash and cash equivalents and short-term investments decreased to $267.4 million at June 30, 2024 from $290.4 million at December 31, 2023. $87.1 million or 33% of the $267.4 million in cash and cash equivalents and short-term investments is held by DNAG, the Company's Canadian subsidiary. The Company's working capital decreased to $322.2 million at June 30, 2024 from $346.9 million at December 31, 2023. The decrease in cash and cash equivalents and working capital was primarily due to the investment in Sapphiros of $28.3 million during the six months ended June 30, 2024. Analysis of the Company's Cash Flows Operating Activities During the six months ended June 30, 2024, net cash provided by operating activities was $14.6 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 loss of $4.2 million included non-cash charges of depreciation and amortization expense of $5.3 million, stock-based compensation expense of $6.3 million, impairment losses of $4.4 million, and loss on equity investment of $0.6 million. Cash provided by the working capital accounts included a decrease in accounts receivable of $1.8 million largely associated with lower overall sales and collections of balances due, a decrease in inventory of $9.2 million as the Company fulfilled demand for its InteliSwab® product, and a decrease in prepaid expense and other current assets of $1.7 million. Uses of cash included a decrease in accounts payable of $3.5 million due to lower inventory purchases and timing of vendor invoice payments and a decrease in accrued expenses of $7.1 million as the Company paid out year-end bonuses in March 2024. Investing Activities Net cash used in investing activities was $40.9 million for the six months ended June 30, 2024, which reflects proceeds from the maturities of investments of $43.9 million, offset by $53.2 million in purchases of investments. Investing 23 Table of Contents activities also include a $28.3 million investment in Sapphiros, and $3.2 million to acquire property and equipment to support the normal operations of the business. Financing Activities Net cash used in financing activities was $3.3 million for the six months ended June 30, 2024, which is largely comprised of $3.4 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 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, 2023 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, 2023. As of June 30, 2024, 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, 2023 filed with the SEC. No material changes have been made to such critical accounting policies during the six months ended June 30, 2024. 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, 2023.