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 nine months ended September 30, 2024 and contributed $4.5 million to revenues for the full year of 2023. In October 2024, the Company announced the discontinuance of the sales of its risk assessment product line which is expected to be completed by end of year. Sales of its risk assessment products contributed $6.3 million to revenues during the nine months ended September 30, 2024 and contributed $9.7 million to revenues for the full year of 2023. 20 Table of Contents Results of Operations For the three months ended September 30, 2024 compared to September 30, 2023. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended September 30, 2024 and 2023: For the Three Months Ended September 30, Dollars % Change Percentage of Total Net Revenues 2024 2023 2024 2023 Diagnostics (1) 22,023 19,551 13 % 55 % 22 % Molecular Sample Management Solutions (2) 12,806 15,238 (16) 32 17 COVID-19 Diagnostics 2,155 50,145 (96) 5 56 Risk assessment testing (3) 1,911 2,554 (25) 5 3 Other products and services 748 638 17 2 1 Molecular Services 9 834 (99) — 1 COVID-19 Molecular Products — 54 (100) — — Net product and services revenues 39,652 89,014 (55) 99 100 Non-product and services revenues (4) 263 173 52 1 — Net revenues $ 39,915 $ 89,187 (55) % 100 % 100 % (1) Includes HIV, HCV and Syphilis product revenues. (2) Includes Genomics, Microbiome and Novosanis product revenues. (3) Includes substance abuse testing product revenues. (4) Includes funded research and development contracts, royalty income and grant revenues. Product and Services Revenues Consolidated net revenues decreased 55% to $39.9 million for the three months ended September 30, 2024 from $89.2 million for the three months ended September 30, 2023. Sales of the Company's Diagnostics products increased 13% to $22.0 million for the three months ended September 30, 2024 from $19.6 million for the three months ended September 30, 2023. This increase in revenues is largely due to higher international HIV revenues of approximately $2.4 million primarily driven by customer ordering patterns of sales in Africa. Molecular Sample Management Solutions revenues decreased 16% to $12.8 million for the three months ended September 30, 2024 from $15.2 million for the three months ended September 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. COVID-19 Diagnostics revenues decreased by 96% to $2.2 million for the three months ended September 30, 2024 compared to $50.1 million for the three months ended September 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 the remainder of 2024 and for the foreseeable future due to the fulfillment of these contracts and lower overall demand for COVID-19 testing. Risk assessment revenue decreased 25% due to the loss of customers to competing products. The Company has announced that it will discontinue this line of business by the end of 2024. Molecular Services revenues, which are derived from the Company's microbiome molecular sequencing services, decreased 99% to $9 thousand for the three months ended September 30, 2024 from $0.8 million for the three months ended September 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 remainder of 2024. 21 Table of Contents Non-Product and Services Revenues Non-product and services revenues increased 52% to $0.3 million for the three months ended September 30, 2024 from $0.2 million for the three months ended September 30, 2023 due to recognizing royalty income in the third quarter of 2024 and none in the third quarter of 2023. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin decreased to 42.8% for the three months ended September 30, 2024 from 49.7% for the three months ended September 30, 2023. The largest driver of the margin decline was due to the lower volume in InteliSwab® sales driven by less units produced and sold and a lower average selling price based on contractual pricing. Furthermore, the lower units produced resulted in lower overhead absorption of fixed costs as compared to the prior year period. Gross margin was also negatively impacted by the increased sales of international product which generate lower margins coupled with the lower margins contributed by genomics products. The decline in gross margins was partially offset by the impact of the exit of the Molecular Services business which historically caused a drag on consolidated gross margin. Consolidated operating loss for the three months ended September 30, 2024 was $6.0 million, a decline from the $10.9 million operating income reported for the three months ended September 30, 2023. The operating income reported in the third quarter of 2023 was largely a result of higher revenues and gross margins generated by the Company's InteliSwab® product and was partially offset by the inclusion of $6.2 million in impairment loss. In 2023, the Company began implementing cost cutting measures and has benefited from this in the three months ended September 30, 2024 with a $4.2 million reduction in operating expense compared to the three months ended September 30, 2023. Research and development expenses decreased 34% to $5.6 million for the three months ended September 30, 2024 from $8.5 million for the three months ended September 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. Sales and marketing expenses decreased 13% to $7.6 million for the three months ended September 30, 2024 from $8.7 million for the three months ended September 30, 2023 due to lower employee costs associated with a decrease in headcount, decreased bad debt expense and consulting fees and lower amortization expense partially offset by an increase in severance expense due to the third quarter 2024 reduction in workforce. General and administrative expenses decreased 2% to $9.8 million for the three months ended September 30, 2024 from $10.1 million for the three months ended September 30, 2023 largely due lower employee costs due to a reduction in headcount, partially offset by an increase in legal fees and in non-cash stock compensation expense. All of the above contributed to the Company's operating loss of $6.0 million for the three months ended September 30, 2024, which included non-cash charges of $3.0 million for depreciation and amortization, and non-cash charges of $2.9 million for stock-based compensation. The Company's operating income of $10.9 million for the three months ended September 30, 2023 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. OTHER INCOME Other income for the three months ended September 30, 2024 was $2.8 million compared to $2.6 million for the three months ended September 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. 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 September 30, 2024 and 2023, the Company recorded U.S. state income tax expense of $18.0 thousand and $1.1 million, respectively and foreign tax expense of $0.7 million and $1.2 million, respectively. 22 Table of Contents Results of Operations For the nine months ended September 30, 2024 compared to September 30, 2023. CONSOLIDATED NET REVENUES The table below shows an outline of total consolidated net revenues (dollars in thousands) for the nine months ended September 30, 2024 and 2023: For the Nine Months Ended September 30, Dollars % Change Percentage of Total Net Revenues 2024 2023 2024 2023 Diagnostics (1) $ 57,162 $ 56,475 1 % 39 % 17 % COVID-19 Diagnostics 44,186 215,876 (80) 30 65 Molecular Sample Management Solutions (2) 36,237 41,230 (12) 24 13 Risk assessment testing (3) 6,265 7,540 (17) 4 2 Other products and services 1,802 1,739 4 1 1 Molecular Services 1,692 3,567 (53) 1 1 COVID-19 Molecular Products 36 239 (85) — — Net product and services revenues 147,380 326,666 (55) 99 99 Non-product and services revenues (4) 1,002 2,925 (66) 1 1 Net revenues $ 148,382 $ 329,591 (55) % 100 % 100 % (1) Includes HIV, HCV and Syphilis product revenues. (2) Includes Genomics, Microbiome and Novosanis product revenues. (3) Includes substance abuse testing product 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 $148.4 million for the nine months ended September 30, 2024 from $329.6 million for the nine months ended September 30, 2023. Sales of the Company's Diagnostics products increased 1% to $57.2 million for the nine months ended September 30, 2024 from $56.5 million for the nine months ended September 30, 2023. This increase in revenue was primarily driven by higher HIV and HCV revenues in international markets of $1.4 million as a result of customer ordering patterns. Also contributing to the diagnostic revenue increase is a combined increase in HCV domestic and Syphilis revenues of $1.4 million. A decline in our HIV domestic revenue resulting from funding delays or reductions in funding for HIV products and customer order patterns partially offset the increased revenues from the other product lines. COVID-19 Diagnostics revenues decreased 80% to $44.2 million for the nine months ended September 30, 2024 compared to $215.9 million for the nine months ended September 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 for the remainder of 2024 and for the foreseeable future due to the fulfillment of these contracts and lower overall demand for COVID-19 testing. Molecular Sample Management Solutions revenues decreased 12% to $36.2 million for the nine months ended September 30, 2024 from $41.2 million for the nine months ended September 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. Risk assessment revenue decreased 17%, due to the loss of customers to competing products. The Company has announced that it will discontinue this line of business by the end of 2024. Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 53% to $1.7 million for the nine months ended September 30, 2024 from $3.6 million for the nine months ended September 30, 2023. 23 Table of Contents The decrease in services revenues was due to the decision to exit this line of business. We expect minimal molecular services revenues in the remainder of 2024. Non-Product and Services Revenues Non-product and services revenues decreased 66% to $1.0 million for the nine months ended September 30, 2024 from $2.9 million for the nine months ended September 30, 2023 as 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. Further contributing to the decline in non-product revenues is lower royalty income in 2024 as one of the Company's royalty agreements for sample collection kits expired in June 2023. CONSOLIDATED OPERATING RESULTS Consolidated gross profit margin increased to 44.4% for the nine months ended September 30, 2024 from 41.4% for the nine months ended September 30, 2023. Gross margins in 2023 included $7.0 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company began to on-shore and automate manufacturing of this product at its Pennsylvania facilities. In addition, reduced salary and benefits due to the reduction in workforce experienced in 2023 and 2024 contributed to improved overhead absorption. Lastly, lower product scrap expense helped to increase margins for the nine months ended September 30, 2024. These improvement in margins were partially offset by the decline in InteliSwab® revenues and a shift in product mix of increased revenues from lower margin product. Other non-product revenues which contribute 100% to gross margins also declined for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Consolidated operating loss for the nine months ended September 30, 2024 was $15.8 million, compared to $28.8 million operating income reported for the nine months ended September 30, 2023. Results for the nine months ended September 30, 2024 were negatively impacted by the decrease in revenues and were positively impacted by reduced operating expense. Results for the nine months ended September 30, 2024 included $4.4 million of impairment losses compared to $7.5 million for the nine months ended September 30, 2023. Operating expenses for the nine months ended September 30, 2024, excluding the impairment charge, decreased 22.9% to $77.3 million from $100.2 million for the nine months ended September 30, 2023 reflecting the impact of the Company's cost saving measures and headcount reductions. Research and development expenses decreased 25% to $20.0 million for the nine months ended September 30, 2024 from $26.7 million for the nine months ended September 30, 2023, largely due to lower staffing costs due to a decrease in headcount and no related project management fees for our $109 million manufacturing expansion contract which ended during the fourth quarter of 2023, and a decrease in spend on COVID-19 product development. This overall decrease in spend is 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 of operations located in Belgium. Sales and marketing expenses decreased 18% to $24.0 million for the nine months ended September 30, 2024 from $29.4 million for the nine months ended September 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 25% to $33.3 million for the nine months ended September 30, 2024 from $44.2 million for the nine months ended September 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. All of the above contributed to the Company's operating loss of $15.8 million for the nine months ended September 30, 2024, which included non-cash impairment charges of $4.4 million, non-cash charges of $8.4 million for depreciation and amortization, and $9.2 million for stock-based compensation. The Company's operating income of $28.8 million for the nine months ended September 30, 2023 included a non-cash impairment charge of $7.5 million, non-cash charges of $17.4 million for depreciation and amortization, and $7.6 million for stock-based compensation. 24 Table of Contents OTHER INCOME Other income for the nine months ended September 30, 2024 was $9.3 million compared to $6.8 million for the nine months ended September 30, 2023. This increase is largely due to higher interest income 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 nine months ended September 30, 2024 and 2023, the Company recorded U.S. state tax benefit and expense of $0.2 million and $2.4 million, respectively. For the nine months ended September 30, 2024 and 2023, the Company recorded foreign tax expense and benefit of $1.3 million and $0.4 million, respectively. Liquidity and Capital Resources September 30, 2024 December 31, 2023 (in thousands) Cash and cash equivalents $ 278,571 $ 290,407 Working capital 322,367 346,923 The Company's cash and cash equivalents decreased to $278.6 million at September 30, 2024 from $290.4 million at December 31, 2023. $93.7 million or 34% of the $278.6 million in cash and cash equivalents is held by DNAG, the Company's Canadian subsidiary. The Company's working capital decreased to $322.4 million at September 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 $30.0 million during the nine months ended September 30, 2024. Analysis of the Company's Cash Flows Operating Activities During the nine months ended September 30, 2024, net cash provided by operating activities was $27.3 million. Cash flows from operations can be significantly impacted by factors such as timing of receipt from customers, inventory purchases, and payments to vendors. The Company's net loss of $8.7 million included non-cash charges of depreciation and amortization expense of $8.4 million, stock-based compensation expense of $9.2 million, impairment losses of $4.4 million, and loss on equity investment of $1.2 million. Cash provided by the working capital accounts included a decrease in accounts receivable of $12.7 million largely associated with lower overall sales and collections of balances due, a decrease in inventory of $8.7 million as the Company fulfilled demand for its InteliSwab® product, and a decrease in prepaid expense and other current assets of $2.6 million. Uses of cash included a decrease in accounts payable of $3.4 million due to lower inventory purchases and timing of vendor invoice payments and a decrease in accrued expenses of $7.6 million as the Company paid out year-end bonuses in March 2024. Investing Activities Net cash used in investing activities was $33.5 million for the nine months ended September 30, 2024, which reflects proceeds from the maturities of investments of $53.1 million, offset by $53.2 million in purchases of investments. Investing activities also include a $30.0 million investment in Sapphiros, and $3.3 million to acquire property and equipment to support the normal operations of the business. Financing Activities Net cash used in financing activities was $4.1 million for the nine months ended September 30, 2024, which is largely comprised of $3.5 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. 25 Table of Contents 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 September 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 nine months ended September 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.