UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022.
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 001-16537
ORASURE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
36-4370966
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer Identification No.)
220 East First Street, Bethlehem, Pennsylvania
18015
(Address of Principal Executive Offices)
(Zip code)
Registrant’s telephone number, including area code: (610) 882-1820
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, $0.000001 par value per share
OSUR
The NASDAQ Stock Market LLC
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5, 2022, the registrant had 72,455,507 shares of common stock, $.000001 par value per share, outstanding.
PART I. FINANCIAL INFORMATION
PageNo.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2022 and December 31, 2021
3
Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021
4
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021
5
Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021
6
Notes to the Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
26
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
27
Signatures
28
Item 1.FINANCIAL STATEMENTS
ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
March 31, 2022
December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents
$
70,721
116,762
Short-term investments
41,503
36,279
Accounts receivable, net of allowance for doubtful accounts of $3,789 and $3,418
59,671
45,323
Inventories
61,536
53,138
Prepaid expenses
8,906
7,939
Other current assets
26,027
28,990
Total current assets
268,364
288,431
Noncurrent Assets:
Property, plant and equipment, net
97,572
88,164
Operating right-of-use assets, net
12,169
9,056
Finance right-of-use assets, net
2,240
2,493
Intangible assets, net
13,692
14,343
Goodwill
40,389
40,279
Long-term investments
—
17,009
Other noncurrent assets
1,106
1,215
Total noncurrent assets
167,168
172,559
TOTAL ASSETS
435,532
460,990
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
27,057
28,024
Deferred revenue
2,906
2,936
Accrued expenses and other current liabilities
21,911
33,778
Finance lease liabilities
1,699
939
Operating lease liabilities
1,815
2,181
Acquisition-related contingent consideration obligation
199
206
Total current liabilities
55,587
68,064
Noncurrent Liabilities:
1,207
1,952
10,727
7,202
117
354
Other noncurrent liabilities
552
651
Deferred income taxes
2,456
2,234
Total noncurrent liabilities
15,059
12,393
TOTAL LIABILITIES
70,646
80,457
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.000001, 25,000 shares authorized, none issued
Common stock, par value $.000001, 120,000 shares authorized, 72,307 and 72,069 shares issued and outstanding
Additional paid-in capital
513,553
511,063
Accumulated other comprehensive loss
(8,247
)
(10,077
Accumulated deficit
(140,420
(120,453
Total stockholders' equity
364,886
380,533
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2022
2021
NET REVENUES:
Products and services
65,236
56,579
Other
2,471
2,003
67,707
58,582
COST OF PRODUCTS AND SERVICES SOLD
43,435
20,256
Gross profit
24,272
38,326
OPERATING EXPENSES:
Research and development
8,413
8,992
Sales and marketing
12,717
9,530
General and administrative
19,156
10,188
Change in the estimated fair value of acquisition-related contingent consideration
(36
(806
40,250
27,904
Operating income (loss)
(15,978
10,422
OTHER INCOME (LOSS)
(53
(119
Income (loss) before income taxes
(16,031
10,303
INCOME TAX EXPENSE
3,936
6,529
NET INCOME (LOSS)
(19,967
3,774
INCOME (LOSS) PER SHARE:
BASIC
(0.28
0.05
DILUTED
SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE:
72,194
71,878
72,766
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS)
Currency translation adjustments
1,756
1,352
Unrealized gain on marketable securities
74
21
COMPREHENSIVE INCOME (LOSS)
(18,137
5,147
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation
3,524
1,464
Depreciation and amortization
3,682
2,489
Other non-cash amortization
80
138
Provision for doubtful accounts
347
598
Inventory reserve
1,092
129
Unrealized foreign currency (gain) loss
169
(100
Interest expense on finance leases
32
14
200
(94
Loss on disposal of fixed assets
710
Payment of acquisition-related contingent consideration
(142
Changes in assets and liabilities
Accounts receivable
(15,295
2,188
(9,374
(8,511
Prepaid expenses and other assets
(736
(766
4,398
(253
(44
(262
Accrued expenses and other liabilities
(4,603
(4,253
Net cash used in operating activities
(35,821
(4,393
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investments
12,135
33,745
Purchases of property and equipment
(20,219
(11,061
Purchase of property and equipment under government contracts
(28,188
Proceeds from funding under government contract
26,333
Other investing activities
(19
Net cash (used in) provided by investing activities
(9,939
22,665
FINANCING ACTIVITIES:
Cash payments for lease liabilities
(153
(282
Proceeds from exercise of stock options
15
92
(208
(264
Repurchase of common stock
(1,049
(1,730
Net cash used in financing activities
(1,395
(2,184
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
1,114
786
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(46,041
16,874
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
160,802
CASH AND CASH EQUIVALENTS, END OF PERIOD
177,676
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes
3,570
3,671
Non-cash investing and financing activities
Accrued property and equipment purchases
642
4,267
Accrued property and equipment purchases under government contracts
1,905
(in thousands, except per share amounts, unless otherwise indicated)
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 our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Results of operations for the three months ended March 31, 2022 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 that have had a material impact on the consolidated financial statements and related notes except as discussed herein.
Investments. We consider all investments in debt securities to be available-for-sale securities. These securities consist of guaranteed investment certificates and corporate bonds with purchased maturities greater than ninety days. 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.
We record an allowance for credit loss for our available-for-sale securities when a decline in investment market value is due to credit-related factors. When evaluating an investment for impairment, we review 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. During the three months ended March 31, 2022, we recognized a provision for expected credit losses for our available-for-sale securities of $65.
The following is a summary of our available-for-sale securities as of March 31, 2022 and December 31, 2021:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Fair Value
Guaranteed investment certificates
33,578
Corporate bonds
8,285
(360
7,925
Total available-for-sale securities
41,863
33,249
20,473
(434
20,039
53,722
53,288
At March 31, 2022, maturities of our available-for-sale securities were as follows:
Less than one year
Greater than one year
Fair Value of Financial Instruments. As of March 31, 2022 and December 31, 2021, 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.
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 our available-for-sale debt securities are measured as Level 2 instruments as of March 31, 2022 and December 31, 2021. Our available-for-sale guaranteed investment certificates are measured as Level 1 instruments as of March 31, 2022 and December 31, 2021.
Included in cash and cash equivalents at March 31, 2022 and December 31, 2021, was $2,386 and $1,160 invested in government money market funds. These funds have investments in government securities and are measured as Level 1 instruments.
We offer a nonqualified deferred compensation plan for certain eligible employees and members of our 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 March 31, 2022 and December 31, 2021 was $1,660 and $1,763, 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.
Property, Plant and Equipment. Property, plant and equipment are stated at cost. Additions or improvements are capitalized, while repairs and maintenance are charged to expense. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. Buildings are depreciated over twenty years, while computer equipment, machinery and equipment, and furniture and fixtures are depreciated over two to ten years. Building improvements are amortized over their estimated useful lives. When assets are sold, retired, or discarded, the related property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statements of operations. Accumulated depreciation of property, plant and equipment as of March 31, 2022 and December 31, 2021 was $63,984 and $61,157, respectively.
Intangible Assets. Intangible assets consist of customer relationships, patents and product rights, acquired technology and tradenames. Patents and product rights consist of costs associated with the acquisition of patents, licenses, and product distribution rights. Intangible assets are amortized using the straight-line method over their estimated useful lives of five to fifteen years. Accumulated amortization of intangible assets as of March 31, 2022 and December 31, 2021 was $31,142 and $30,412, respectively. The decrease in intangible assets from $14,343 as of December 31, 2021 to $13,692 as of March 31, 2022 was due to $568 in amortization expense and foreign currency translation losses of $83.
Foreign Currency Translation. The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected in accumulated other comprehensive loss, which is a separate component of stockholders’ equity.
Transaction gains and losses resulting from exchange rate changes on transactions denominated in currencies other than a functional currency are included in our consolidated statements of income in the period in which the change occurs. Net foreign exchange losses resulting from foreign currency transactions that are included in other income (loss) in our consolidated statements of income were $729 and $576 for the three months ended March 31, 2022 and 2021, respectively.
Accumulated Other Comprehensive Loss. We classify items of other comprehensive loss by their nature and disclose the accumulated balance of other comprehensive loss separately from accumulated deficit and additional paid-in capital in the stockholders’ equity section of our consolidated balance sheets.
We have defined the Canadian dollar as the functional currency of our Canadian subsidiary, DNAG, and we have defined the Euro as the functional currency of our Belgian subsidiary, Novosanis. The results of operations for those subsidiaries are translated into U.S. dollars, which is the reporting currency of the Company. Accumulated other comprehensive loss at March 31, 2022 consisted of $7,888 of currency translation adjustments and $359 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investment portfolio. Accumulated other comprehensive loss at December 31, 2021 consists of $9,643 of currency translation adjustments and $434 of net unrealized losses on marketable securities, which represents the fair market value adjustment for our investments portfolio.
Recent Accounting Pronouncements.
In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The purpose of this update is to provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments provide
8
optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are elective and are effective upon issuance for all entities. Management is evaluating the impact of this ASU and does not expect this update to have a material impact on the Company's Consolidated Financial Statements.
2. Government Capital Contracts
In September 2021, we entered into an agreement for $109,000 in funding from the U.S. Department of Defense (the “DOD”), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our 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 March 2024 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 funded until the completion of the final equipment validation, which is scheduled to occur in late 2023 or early 2024. We began making payments to vendors for the capital project during the fourth quarter of 2021 and began receiving funds from the DOD in January 2022.
Additionally, during 2021, we received $531 in funding from the Commonwealth of Pennsylvania, acting through the Department of Community and Economic Development, for the purchase of machinery and equipment as part of an expansion of manufacturing operations in Pennsylvania. All related purchases were completed in 2021.
Activity for these capital contracts is accounted for pursuant to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. Funding earned 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. Amounts earned in excess of our expected cost of the project for project management are recognized straight-line in other income over the term of the government contract. We recognized $561 of such income, which is reported as other income (loss) in our consolidated statement of operations for the three months ended March 31, 2022.
The balances corresponding to government contracts included in our consolidated balance sheet are as follows:
Other current assets:
Billed receivables
-
9,913
Unbilled receivables
16,857
9,716
Total other current assets
19,629
Property, plant and equipment, net:
Cost of assets
41,588
11,495
Reduction for funding earned, not yet received
(14,724
(10,964
Reduction for funding received
(26,864
(531
Total property, plant and equipment, net
(788
(8,103
3. Inventories
Raw materials
40,211
33,168
Work in process
2,507
2,252
Finished goods
18,818
17,718
4. Earnings (Loss) Per Share
Basic earnings (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
9
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.
The computations of basic and diluted earnings (loss) per share are as follows:
Weighted-average shares of common stock outstanding:
Basic
Dilutive effect of stock options, restricted stock, and performance stock units
888
Diluted
Earnings (loss) per share:
For the three months ended March 31, 2022, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 463 shares were excluded from the computation of diluted loss per share. For the three months ended March 31, 2021, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 421 shares were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive.
5. Revenues
Revenues by product line. The following table represents total net revenues by product line:
COVID-19 (1)
31,032
27,972
Genomics (1)
15,093
10,818
HIV
8,166
8,778
HCV
3,257
2,367
Substance abuse
2,560
1,962
Microbiome (1)
1,990
1,751
Laboratory services
1,733
2,497
Other product and service revenues
1,405
434
Net product and services revenues
Royalty income
685
1,261
Other non-product revenues
1,786
742
Other revenues
Net revenues
(1) 2021 COVID-19, Genomics and Microbiome revenues were reclassified to reflect the correct classification of the product line sales. The reclassification increased (decreased) the product line revenues for the three months ended March 31, 2021 by $583, $(246) and $(337), respectively.
Revenues by geographic area. The following table represents total net revenues by geographic area, based on the location of the customer:
United States
57,987
49,100
Europe
4,286
4,552
Other regions
5,434
4,930
Customer and Vendor Concentrations. At March 31, 2022, one non-commercial customer accounted for 21% of our accounts receivable. No customers accounted for more than 10% of our accounts receivable as of December 31, 2021. One non-commercial customer accounted for 18% of net consolidated revenues for the three months ended March 31, 2022. Another customer accounted for 17% of net consolidated revenues for the three months ended March 31, 2021.
10
We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Third-party suppliers also manufacture certain products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations.
Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of March 31, 2022 and December 31, 2021 includes customer prepayments of $1,900 and $1,843, respectively. Deferred revenue as of March 31, 2022 and December 31, 2021 also includes $1,006 and $1,093, 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.
6.Accrued Expenses and other current liabilities
March 31,2022
December 31,2021
Payroll and related benefits
11,279
15,570
Commitment to purchase under government contract
8,103
Deferred income for government contract
788
Professional fees
3,537
3,335
Sales tax payable
1,725
2,227
4,582
4,543
7. Leases
We determine whether an arrangement is a lease at inception. We have operating and finance leases for corporate offices, warehouse space and equipment (including vehicles). As of March 31, 2022, we are the lessee in all agreements. Our leases have remaining lease terms of 1 to 11 years, some of which include options to extend the leases based on agreed upon terms, and some of which include options to terminate the leases within 1 year.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.
We have lease agreements that contain both lease and non-lease components (e.g., common-area maintenance). For these agreements, we account for lease components separate from non-lease components.
The components of lease expense are as follows:
Operating lease cost
699
420
Variable and short-term lease cost
75
Finance lease cost:
Amortization of right-of use assets
385
127
Interest on lease liabilities
Total finance lease cost
417
141
Total lease cost
1,191
561
Supplemental cash flow information related to leases is as follows:
11
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
1,186
408
Operating cash flows from financing leases
Financing cash flows from financing leases
153
282
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations
3,666
629
Right-of-use assets obtained in exchange for finance lease obligations
Supplemental balance sheet information related to leases is as follows:
Operating Leases
Right-of-use assets
Lease liabilities:
Current lease liabilities
Non-current lease liabilities
Total operating lease liabilities
12,542
9,383
Finance Leases
Total finance lease liabilities
2,891
Weighted Average Remaining Lease Term
Weighted-average remaining lease term—operating leases
6.86 years
5.26 years
Weighted-average remaining lease term—finance leases
2.04 years
2.21 years
Weighted Average Discount Rate
Weighted-average discount rate—operating leases
4.09
%
3.90
Weighted-average discount rate—finance leases
3.54
3.57
As of March 31, 2022, minimum lease payments by period are expected to be as follows:
Finance
Operating
2022 (excluding the three months ended March 31, 2022)
951
1,936
2023
1,285
1,729
2024
2,337
2025
20
1,968
2026
12
1,750
Thereafter
4,871
Total minimum lease payments
3,010
14,591
Less: imputed interest
(104
(2,049
Present value of lease liabilities
8. Stockholders’ Equity
Reconciliation of the changes in stockholders' equity for the three months ended March 31, 2022 and 2021
Common Stock
AdditionalPaid-in
AccumulatedOtherComprehensive
Accumulated
Shares
Amount
Capital
Loss
Deficit
Total
Balance at December 31, 2021
72,069
Common stock issued upon exercise of options
2
Vesting of restricted stock and performance stock units
352
Purchase and retirement of common shares
(116
Net loss
Balance at March 31, 2022
72,307
Balance at December 31, 2020
71,738
505,123
(9,097
(97,455
398,571
318
(111
Net income
Balance at March 31, 2021
71,956
504,949
(7,724
(93,681
403,544
Stock-Based Awards
We grant stock-based awards under the OraSure Technologies, Inc. Stock Award Plan, as amended (the “Stock Plan”). The Stock Plan permits stock-based awards to employees, outside directors and consultants or other third-party advisors. Awards which may be granted under the Stock Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. We account for stock-based compensation to employees and directors using the fair value method. We recognize compensation expense for stock option and restricted stock awards issued to employees and directors on a straight-line basis over the requisite service period of the award. We recognize compensation expense related to performance-based restricted stock units based on assumptions as to what percentage of each performance target will be achieved. We evaluate these target assumptions on a quarterly basis and adjust compensation expense related to these awards, as appropriate. To satisfy the exercise of options, issuance of restricted stock, or redemption of performance-based restricted stock units, we issue new shares rather than shares purchased on the open market.
Total compensation expense related to stock options for the three months ended March 31, 2022 and 2021 was $348 and $250, respectively.
The following table summarizes the stock option activity for the three months ended March 31, 2022:
Options
Outstanding on January 1, 2022
1,410
Granted
589
Exercised
(2
Expired
(6
Forfeited
(95
Outstanding on March 31, 2022
1,896
13
Compensation expense of $2,706 and $1,036 related to restricted shares was recognized during the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes time-vested restricted stock award and restricted stock unit activity for the three months ended March 31, 2022:
Units
Issued and unvested, January 1, 2022
701
1,332
Vested
(243
(120
Issued and unvested, March 31, 2022
1,670
We grant performance-based restricted stock units (“PSUs”) to certain executives. Vesting of these PSUs is dependent upon achievement of certain performance-based metrics during a one-year or three-year period from the date of grant. Assuming achievement of each performance-based metric, the executive must also generally remain employed for three years from the grant date. If the one-year target is achieved, the PSUs will then vest three years from grant date. If the three-year target is achieved, the corresponding PSUs will then vest three years from grant date. PSUs are converted into shares of our common stock once vested.
Compensation expense of $470 and $178 related to PSUs was recognized during the three months ended March 31, 2022 and 2021, respectively.
The following table summarizes the PSU activity for the three months ended March 31, 2022:
622
Granted (1)
Performance adjustment (2)
36
(109
(152
603
(1) Grant activity for all PSUs disclosed at target
(2) Reflects the performance adjustment based on actual performance measured at the end of the performance period
Stock Repurchase Program
On August 5, 2008, our Board of Directors approved a share repurchase program pursuant to which we are permitted to acquire up to $25,000 of our outstanding common shares. No shares were purchased and retired during the three months ended March 31, 2022 and 2021.
9.Transition costs
On December 31, 2021, the Company's Board of Directors approved the termination of Stephen S. Tang, the Company’s former President and Chief Executive Officer, without cause under his existing employment agreement with the Company, with such termination effective as of March 31, 2022. On January 2, 2022, Dr. Tang and the Company entered into a transition agreement ("Transition Agreement") providing for the terms of the cessation of Dr. Tang’s employment with the Company, including the cessation of his service as President and Chief Executive Officer of the Company and as a member of the Board. Dr. Tang’s service to the Company in all capacities ended on March 31, 2022.
Pursuant to the Transition Agreement, Dr. Tang received severance of $1,569, which was accrued in the consolidated financial statements at December 31, 2021 and paid in April 2022. Additionally, in accordance with his Transition Agreement, certain of his unvested time-vesting restricted stock awards and unvested PSUs that were outstanding at March 31, 2022 vested on April 8, 2022. His remaining unvested time-vesting restricted stock awards and PSUs totaling were forfeited on March 31, 2022. These payments, rights and benefits are substantially similar to the severance benefits contemplated by his previous employment agreement in respect to a termination without cause thereunder. In aggregate, we recognized a net $1,380 of expense in relation to Dr. Tang's stock compensation during the three months ended March 31, 2022.
On April 1, 2022 the Company's Board of Directors appointed Nancy J. Gagliano, M.D., M.B.A., to serve as the Company’s Interim Chief Executive Officer. In connection therewith, the Company and Dr. Gagliano entered into an employment agreement, dated as of March 21, 2022 (the “Employment Agreement”). Pursuant to the Employment Agreement, starting on April 1, 2022, Dr. Gagliano began receiving a monthly base salary of $56 per month. Additionally, she was granted a one-time award of fully vested shares of the Company’s common stock with a
grant date fair value of $100 and a one-time restricted stock unit award with a grant date fair value of $670, which vest in twelve equal monthly installments (with the first installment vesting on April 30, 2022 and subsequent installments vesting on the last day of the following eleven calendar months), subject to Dr. Gagliano’s continued employment as Interim Chief Executive Officer through the applicable vesting dates.
10.Income Taxes
During the three months ended March 31, 2022 and 2021, we recorded income tax expense of $3,936 and $6,529, respectively. Tax expense for 2022 includes $1,702 of withholding tax due on the repatriation of $65,000 of unremitted earnings from Canada to the United States. The remaining balance of $2,234 for the first quarter of 2022 primarily consisted of foreign tax expense. Income taxes for the first quarter of 2021 also primarily consisted of foreign tax expense.
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 our total deferred tax liability as of March 31, 2022 and December 31, 2021 relate to the tax effects of the basis difference between the intangible assets acquired in our acquisitions for financial reporting and for tax purposes along with basis differences arising from accelerated tax depreciation of fixed assets.
In 2008, we established a full valuation allowance against our U.S. deferred tax asset. Management believes the full valuation allowance is still appropriate at both March 31, 2022 and December 31, 2021 since the facts and circumstances necessitating the allowance have not changed.
11. Commitments and Contingencies
Litigation
From time to time, we are 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 our future financial position or results of operations.
In March 2021, we 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 has filed an answer to the initial complaint, asserting that its device does not infringe our patent and that our patent is invalid. In August 2021, we amended our complaint to add a second patent to this litigation. Spectrum responded to our amended complaint and asserted counterclaims for inequitable conduct and antitrust violations with respect to one of the patents in the litigation. DNAG filed a motion to dismiss Spectrum’s counterclaims in October 2021, which was denied by the Court on March 30, 2022. On April 8, 2022, the Court assigned a new judge to preside over the matter, which vacated all dates for the trial. We await new dates to be set by the Court.
12.Business Segment Information
Our business consists of two segments: our “Diagnostics” business, which primarily consists of the development, manufacture, and sale of rapid diagnostic tests used to determine if a person has a variety of infectious diseases including, HIV, HCV, and COVID-19. The Diagnostic business also manufactures and sells oral fluid substance abuse testing products. Our “Molecular Solutions” business is operated by our wholly-owned subsidiaries DNAG, Diversigen, and Novosanis. This segment of the business consists of the development, manufacture, and sale of kits that are used to collect, stabilize, transport and store a biological sample of genetic material for molecular testing. In addition, our Molecular Solutions business provides microbiome laboratory services.
We organized our operating segments according to the nature of the products included in those segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). We evaluate performance of our operating segments based on revenue and operating income. We do not allocate interest income, interest expense, other income, other expenses or income taxes to our operating segments. Reportable segments have no inter-segment revenues and inter-segment expenses have been eliminated.
The following table summarizes operating segment information for the three months ended March 31, 2022 and 2020, and asset information as of March 31, 2022 and December 31, 2021:
Net revenues:
Diagnostics
38,310
14,546
Molecular Solutions
29,397
44,036
Operating income (loss):
(19,787
(12,118
3,809
22,540
Depreciation and amortization:
1,727
890
1,955
1,599
Capital expenditures:
Diagnostics(1)
19,132
7,637
1,087
3,424
20,219
11,061
(1) Excludes $28,188 for purchases of property and equipment under government contracts for the three months ended March 31, 2022.
Total assets:
245,961
209,674
189,571
251,316
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements below regarding future events or performance are “forward-looking statements” within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings, losses, expenses, or other financial performance, future product performance or development, expected regulatory filings and approvals, planned business transactions, expected manufacturing performance, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” “will,” “should,” “could,” or similar expressions. Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to:
These and other factors that could affect our results are discussed more fully in our Securities and Exchange Commission (“SEC”) filings, including our registration statements, Annual Report on Form 10-K for the year ended December 31, 2021, Quarterly Reports on Form 10-Q, and other filings with the SEC. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The forward-looking statements are made as of the date of this Report, and we undertake no duty to update these statements.
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of OraSure.
The following discussion should be read in conjunction with our consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below.
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Overview and Business Segments
The overall goal of our Company is to empower the global community to improve health and wellness by providing access to accurate essential information. Our business consists of two segments: our “Diagnostics” segment and our “Molecular Solutions” segment.
Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using our proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. The Diagnostics business includes tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse that are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations, and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities. Our 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. Through our Diagnostics business we are also developing and commercializing products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medications in a patient’s urine or blood, as well as point-of-care products currently in development. We began recording revenues on the sales of our InteliSwab® COVID-19 Rapid Tests during the third quarter of 2021.
Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek, Inc. ("DNAG"), Diversigen, Inc. ('Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets.
We have expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. We have also developed new collection devices for the emerging microbiome market, which focuses on studying microbes and their effect on human health. Our primary product offering in the microbiome market, OMNIgene® • GUT, is focused on the human gut microbiome (microbes living in human stool). In 2021, the OMNIgene® • GUT collection device (OMD-200) was granted “FDA De Novo classification for the preservation and stabilization of the relative abundance of microbial nucleic acids in clinical samples.” We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type.
Our Molecular Solutions segment includes the Colli-Pee® device, developed and sold by our Novosanis subsidiary, 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. Our Molecular Solutions business also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions.
Recent Developments
Impact of COVID-19
As COVID-19 continues to impact the economy of the United States and other countries around the world, we are committed to being a part of the response to this unprecedented challenge. We have made substantial investments to expand our operations in order to manufacture product used for COVID-19 testing in the United States.
Due to COVID-19, we have experienced volatility, including periods of material decline compared to prior year periods in testing volume of our base business (which excludes COVID-19 testing) and periods of significant demand for COVID-19 testing product, with demand generally fluctuating in line with changes in prevalence of the virus and related variants. It is difficult for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations.
Exploration of Strategic Alternatives
The COVID-19 pandemic has provided us an opportunity to fundamentally transform into a higher growth, more innovative and efficient organization with broader customer reach, both within and outside the United States. We believe we are well positioned to address current public health challenges and capitalize on diagnostic trends in the market and enhance its operational and competitive profile. Against this backdrop, our Board of Directors is exploring and evaluating a broad range of strategic alternatives with the goal of maximizing value for stockholders.
19
There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.
CEO Recruitment
We have hired an external search firm and are in the process of looking for a permanent full time Chief Executive Officer. Nancy J. Gagliano has been appointed as interim President and CEO by our Board of Directors but is not a candidate for the full-time position.
Current Consolidated Financial Results
During the three months ended March 31, 2022, our consolidated net revenues increased 16% to $67.7 million, compared to $58.6 million for the three months ended March 31, 2021. Net product and services revenues during the three months ended March 31, 2022 increased 15% when compared to the same period of 2021, largely due to the inclusion of $22.1 million of InteliSwab® COVID-19 rapid test revenues. We began selling this product in August of 2021 resulting in no comparable revenues in the first quarter of 2021. Also contributing to the increase in revenues was higher genomics sales and increased international sales of our HIV product. Declines in sales of our molecular sample collection kits for COVID-19 testing and in domestic sales of our HIV products partially offset these positive drivers of revenue. Other revenues for the three months ended March 31, 2022 were $2.5 million compared to $2.0 million in the same period of 2021. This increase was largely due to research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test partially offset by lower royalty income.
Our consolidated net loss for the three months ended March 31, 2022 was $20.0 million, or $(0.28) per share on a fully diluted basis, compared to consolidated net income of $3.8 million, or $0.05 per share on a fully diluted basis, for the three months ended March 31, 2021. Results for the three months ended March 31, 2022 were impacted by lower gross margins rates caused by manufacturing inefficiencies and nonrecurring costs associated with our strategic alternatives process and our CEO transition.
Cash used in operating activities during the three months ended March 31, 2022 was $35.8 million. Cash used in operating activities during the three months ended March 31, 2021 was $4.4 million. During the first quarter of 2022, our cash flow used in operating activities increased significantly as a result of our net loss, increased receivables due from the U.S government for end of quarter shipments, and increased investment in building InteliSwab® inventory levels to support expected demand. As of March 31, 2022, we had $112.2 million in cash, cash equivalents and available-for-sale securities.
Results of Operations
Three months ended March 31, 2022 compared to March 31, 2021
CONSOLIDATED NET REVENUES
The table below shows a breakdown of total consolidated net revenues (dollars in thousands) generated by each of our business segments during the three months ended March 31, 2022 and 2021.
For the Three Months Ended March 31,
Dollars
Percentage of Total Net Revenues
% Change
36,396
13,333
173
54
23
28,840
43,246
(33
43
97
100
Consolidated net product and services revenues increased 15% to $65.2 million for the three months ended March 31, 2022 from $56.6 million for the three months ended March 31, 2021. The increase in revenues is largely due to the inclusion of $22.1 million of InteliSwab® COVID-19 rapid test revenues. We began selling this product in August of 2021 resulting in no comparable revenues in the first quarter of 2021. Also contributing to the increase in revenues was higher genomics sales and increased international sales of our HIV product. Declines in sales of our molecular sample collection kits for COVID-19 testing and in domestic sales of our HIV products partially offset these positive drivers of revenue. Other revenues for the three months ended March 31, 2022 increased 23% to $2.5 million from $2.0 million for the three months ended March 31, 2021 due to research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test partially offset by lower royalty income.
Consolidated net revenues derived from products sold to customers outside of the United States were $9.7 million and $9.5 million, or 14% and 16% of total net revenues, for the three months ended March 31, 2022 and 2021, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our total consolidated net revenues.
Net Revenues by Segment
Diagnostics Segment
The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Diagnostics segment during the three months ended March 31, 2022 and 2021.
Market
Infectious disease testing:
COVID-19
22,136
NM
58
0
11,700
11,371
30
78
Total infectious disease testing
33,836
198
88
Substance abuse testing
Net product revenues
95
91
1,914
1,213
163
NM - not meaningful
Infectious Disease Testing Market
COVID-19 revenues were $22.1 million for the three months ended March 31, 2022, driven by sales of our InteliSwab® COVID-19 rapid test. We first began selling this product in August of 2021 and there are no comparable sales in the first quarter of 2021.
Sales to the other infectious disease testing markets increased 3% to $11.7 million for the three months ended March 31, 2022 from $11.4 million for the three months ended March 31, 2021. This increase resulted from higher international OraQuick® HIV and world-wide OraQuick® HCV product sales, partially offset by lower domestic OraQuick® HIV sales.
The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during the three months ended March 31, 2022 and 2021.
Domestic HIV
3,765
5,293
(29
International HIV
4,401
3,486
Net HIV revenues
8,779
(7
Domestic HCV
2,036
1,182
72
International HCV
1,221
1,184
Net HCV revenues
2,366
38
Net OraQuick® revenues
11,423
11,145
Domestic OraQuick® HIV sales decreased 29% to $3.8 million for the three months ended March 31, 2022 from $5.3 million for the three months ended March 31, 2021, primarily as a result of a large first quarter 2021 order of our OraQuick® In-Home HIV test shipped to the Center for Disease Control and Prevention ("CDC") and used in an initiative to drive increased in-home HIV testing. A similar order did not occur in the first quarter of 2022.
International sales of our OraQuick® HIV tests increased 26% to $4.4 million for the three months ended March 31, 2022 from $3.5 million for the three months ended March 31, 2021 due to customer ordering patterns and increased sales into Africa as the COVID-19 impact lessens. These increases to revenues were partially offset by the absence of the Gates Foundation subsidy which expired in June 2021 and is not included in revenues in the first quarter of 2022.
Domestic OraQuick® HCV sales increased 72% to $2.0 million for the three months ended March 31, 2022 from $1.2 million for the three months ended March 31, 2021, driven by the timing of certain orders which occurred in the first quarter of 2022, compared to the second quarter of 2021.
International OraQuick® HCV sales remained largely flat at $1.2 million for both the three months ended March 31, 2022 and 2021.
Substance Abuse Testing Market
Sales to the substance abuse testing assessment market increased 30% to $2.6 million for the three months ended March 31, 2022 compared to $2.0 million for the three months ended March 31, 2021 due to market share gains.
Other Revenues
Other revenues for the three months ended March 31, 2022 increased to $1.9 million from $1.2 million for the three months ended March 31, 2021, due to research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test partially offset by lower royalty income.
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the three months ended March 31, 2022 and 2021.
Genomics
40
Microbiome
8,896
(68
(31
1,128
208
442
Net molecular product and services revenues
557
790
Net molecular revenues
Sales of our genomics products increased 40% to $15.1 million for the three months ended March 31, 2022, compared to $10.8 million for the three months ended March 31, 2021, as result of increased sales to several commercial customers due to customer ordering patterns, organic growth, and a return to pre-COVID-19 ordering levels.
Microbiome kit sales increased 14% to $2.0 million for the three months ended March 31, 2022 compared to $1.8 million for the three months ended March 31, 2021, as the company has expanded the number of customers and clinical research studies it is supporting.
Sales of our molecular sample collection kits for COVID-19 testing decreased 68% to $8.9 million for the three months ended March 31, 2022 compared to $28.0 million during the comparable period in 2021 due to lower COVID-19 PCR testing sales to our core customers, driven by the availability of antigen tests, the wider availability of vaccines and high inventory levels held by some of those customers.
Laboratory services revenues declined 31% to $1.7 million for the three months ended March 31, 2022 compared to $2.5 million for the three months ended March 31, 2021 as the business continues to be impacted by delays in customer clinical trials due to COVID-19.
Other product and service revenues increased 442% to $1.1 million for the three months ended March 31, 2022 compared to $208,000 for the three months ended March 31, 2021 largely due to increased sales by our Novosanis subsidiary.
Other revenues for the three months ended March 31, 2022 decreased 29% to $557,000 from $790,000 for the three months ended March 31, 2021, largely as a result of lower royalty income received under a litigation settlement agreement.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit margins were 36% for the three months ended March 31, 2022 compared to 65% for the three months ended March 31, 2021. The decrease in gross profit margins was primarily due to a less favorable product mix, increased scrap expense, lower absorption of labor, and no subsidies for the international sale of our HIV Self-Test under the charitable support agreement with the Gates Foundation which expired in June 2021.
Consolidated operating loss for the three months ended March 31, 2022 was $16.0 million, a $26.4 million decrease from the $10.4 million operating income reported for the three months ended March 31, 2021. Results for the three months ended March 31, 2022 were negatively impacted by the lower gross profit margin described above coupled with an increase in operating expenses as described below.
22
OPERATING INCOME (LOSS) BY SEGMENT
We evaluate performance of our operating segments based on revenue and operating income. Reportable segments have no inter-segment revenue and inter-segment expenses are eliminated in consolidation, including the fees associated with an intercompany service agreement between the U.S. and Canadian entities.
The gross profit margin for the Diagnostics segment was 19% for the three months ended March 31, 2022 compared to 43% for the three months ended March 31, 2021. This decrease is due to inefficiencies in our InteliSwab® manufacturing process including high scrap rates at the beginning of 2022 and under-absorption of labor costs as well a less favorable product mix and the June 2021 expiration of subsidies under the support agreement with the Gates Foundation. The inefficiencies in our InteliSwab® manufacturing process were largely corrected by the end of the first quarter of 2022.
Research and development expenses decreased 16% to $5.5 million for the three months ended March 31, 2022 compared to $6.6 million for the three months ended March 31, 2021 largely due to clinical study activities in the first quarter of 2021 related to our InteliSwab® rapid test which did not repeat in the first quarter of 2022 as we received EUA authorization in June 2021. Sales and marketing expenses increased 30% to $8.1 million for three months ended March 31, 2022 from $6.2 million for the three months ended March 31, 2021 due to an increase in spend associated with our InteliSwab® test, increased staffing costs associated with higher head count, and increased travel expenses as travel has resumed as COVID-19 restrictions have been lifted. These increases in spend were partially offset by a decline in reserves for uncollectible accounts. General and administrative expenses increased 112% to $13.7 million for the three months ended March 31, 2022 from $6.4 million for the three months ended March 31, 2021 largely due to increased consulting costs, higher stock compensation expense associated with accelerated vesting of shares under our former CEO's employment agreement, increased legal costs, higher staffing costs associated with increased head count, and higher recruitment expense largely associated with our CEO search.
All of the above contributed to the Diagnostics segment’s operating loss of $19.8 million for the three months ended March 31, 2022, which included non-cash charges of $1.7 million for depreciation and amortization and $3.1 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $36,000 associated with the change in the fair value of acquisition-related contingent consideration. This is in comparison to an $806,000 benefit recorded in the first quarter of 2021.
The gross profit margins for the Molecular Solutions segment was 58% for the three months ended March 31, 2022 compared to 73% for the three months ended March 31, 2021. This decrease was due to a less favorable product mix.
Research and development expenses increased 20% to $2.9 million for the three months ended March 31, 2022 from $2.4 million for the three months ended March 31, 2021 due to higher staffing costs. Sales and marketing expenses increased 39% to $4.6 million for the three months ended March 31, 2022 from $3.3 million for the three months ended March 31, 2021 due to higher staffing costs related to increased head count, increased consulting expense associated with business strategy planning, and an increase in our reserve for uncollectible accounts. These increases in expenses were partially offset by lower amortization expense associated with an intangible asset that was fully amortized at the end of 2021. General and administrative expenses increased 47% to $5.5 million for the three months ended March 31, 2022 from $3.7 million for the three months ended March 31, 2021 due to increased legal fees and staffing costs.
All of the above contributed to the Molecular Solutions segment’s operating income of $3.8 million for the three months ended March 31, 2022, which included $2.0 million for depreciation and amortization and $396,000 for stock-based compensation.
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the three months ended March 31, 2022, we recorded U.S. state tax expense of $216,000 compared to $169,000 of state income tax expense for the three months ended March 31, 2021. Additionally, in the first quarter of 2022, we recorded approximately $1.7 million of withholding taxes due to the Canada Revenue Agency associated with our repatriation of $65.0 million of cash from Canada to the United States. For the three months ended March 31, 2022, we recorded foreign tax expense of $2.0 million compared to foreign tax expense of $6.4 million for the three months ended March 31, 2021. This overall decrease in foreign tax expense is largely a result of the decrease in income before taxes generated by our Canadian subsidiary.
Liquidity and Capital Resources
March 31,
December 31,
(In thousands)
Available for sale securities
Working capital
212,777
220,367
Our cash and cash equivalents and available-for-sale securities decreased to $112.2 million at March 31, 2022 from $170.1 million at December 31, 2021. Our working capital decreased to $212.8 million at March 31, 2022 from $220.4 million at December 31, 2021.
During the three months ended March 31, 2022, net cash used in operating activities was $35.8 million. Our net loss of $20.0 million included non-cash charges for depreciation and amortization expense of $3.7 million, stock-based compensation expense of $3.5 million, an inventory reserve of $1.1 million, and other non-cash expense of $1.5 million. Cash used to fund our working capital accounts included an increase in accounts receivable of $15.3 million largely associated with end of the quarter shipments of product to the U.S. government, an increase in inventory of $9.4 million to meet anticipated demand to support COVD-19 testing programs, and a $4.6 million decrease in accrued expenses and other liabilities largely due to payment of our 2021 bonuses. Offsetting these uses of cash was a $4.4 million increase in accounts payable due to the timing of invoices received and payments made.
Net cash used in investing activities was $9.9 million for the three months ended March 31, 2022, which reflects proceeds from the maturities and redemptions of investments of $12.1 million. This was offset by $20.2 million to acquire property and equipment largely to increase our manufacturing capacity. Cash used in investing activities also reflects net cash used of $1.8 million to build additional manufacturing capacity as required by our $109 million agreement with the U.S. Department of Defense (the “DOD”), which is expected to be reimbursed in the second quarter of 2022.
Net cash used in financing activities was $1.4 million for the three months ended March 31, 2022, which is largely comprised of $1.0 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to our employees.
We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current and foreseeable operating and capital needs. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under our $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of our 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. In addition, $72.7 million or 65% of our $112.2 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In the first quarter of 2022, we repatriated $65.0 million of cash from Canada into the United States and incurred approximately $1.7 million of Canadian withholding tax. Further repatriation of cash from Canada into the United States could have additional adverse tax consequences. It is our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.
A summary of our obligations to make future payments under contracts existing at December 31, 2021 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2021. As of March 31, 2022, there were no significant changes to this information.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our judgments and estimates, including those related to the bad debts, customer sales returns, inventories, intangible assets, income taxes, revenue recognition, performance-based compensation, contingencies and litigation. We base our judgments and estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A more detailed review of our critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. During the first three months of 2022, there were no material changes to our critical accounting policies.
24
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any amounts of derivative financial instruments or derivative commodity instruments and, accordingly, we have no material derivative risk to report under this Item.
As of March 31, 2022, we did not have any foreign currency exchange contracts or purchase currency options to hedge local currency cash flows. Sales denominated in foreign currencies comprised 5.1% of our total revenues for the three months ended March 31, 2022. We do have foreign currency exchange risk related to our operating subsidiaries in Canada and in Belgium. The principal foreign currencies in which we conduct business are the Canadian dollar and the Euro. Fluctuations in the exchange rate between the U.S. dollar and these foreign currencies could affect year-to-year comparability of operating results and cash flows. Our foreign subsidiaries had net assets, subject to translation, of $139.4 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of March 31, 2022. A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have decreased our comprehensive income by approximately $13.9 million in the three months ended March 31, 2022.
Item 4.CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of March 31, 2022. Based on that evaluation, the Company’s management, including such officers, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022 to provide reasonable assurance that material information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 was accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and was recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1.LEGAL PROCEEDINGS
From time to time, we are involved in certain legal actions arising in the ordinary course of business. In management’s opinion, based upon the advice of counsel, the outcomes of such actions are not expected, individually or in the aggregate, to have a material adverse effect on our future financial position or results of operations.
Spectrum Patent Litigation
Item 1A.RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A, entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Period
Total number ofshares purchased
Average pricepaid per Share
Total number ofshares purchasedas part of publiclyannounced plansor programs
Maximum number (orapproximate dollar value)of shares that may yet berepurchased under the plansor programs (1, 2)
January 1, 2022 - January 31, 2022
(3)
11,984,720
February 1, 2022 - February 28, 2022
116,149
8.86
March 1, 2022 - March 31, 2022
636
6.92
116,785
Item 3.DEFAULTS UPON SENIOR SECURITIES
None
Item 4.MINE SAFETY DISCLOSURES
Not applicable
Item 5.OTHER INFORMATION
Item 6.EXHIBITS
Exhibit
Number
10.1**
Transition Agreement dated as of January 2, 2022, between OraSure Technologies, Inc. and Stephen S. Tang, Ph.D. is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 6, 2022.
10.2**
Employment Agreement dated as of March 21, 2022 between OraSure Technologies, Inc. and Nancy J. Gagliano, M.D., M..B.A. is incorporated by reference to Item 10.1 to the Company's Current Report on Form 8-K Filed on March 23, 2022.
10.3
Industrial Lease between Core5 at Laughman Farms Phase 1, LLC as Landlord and OraSure Technologies, Inc. as Tenant, dated January 3, 2022, is incorporated by reference to Exhibit 10.30 to the Company's Annual Report on form 10-K filed March 1, 2022.
31.1*
Certification of Nancy J. Gagliano, M.D., M.B.A. required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Scott Gleason required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1*+
Certification of Nancy J. Gagliano, M.D., M.B.A. required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*+
Certification of Scott Gleason a required by Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document – the Instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page from the Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2021 has been formatted in Inline XBRL
*Filed herewith
** Management contract or compensatory plan or arrangement.
+This certification is deemed not filed for purposes of section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Scott Gleason
Date: May 10, 2022
Scott Gleason
Interim Chief Financial Officer
(Principal Financial Officer)
/s/Michele M. Miller
Michele M. Miller
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)