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 June 30, 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 August 5, 2022, the registrant had 72,619,055 shares of common stock, $.000001 par value per share, outstanding.
PART I. FINANCIAL INFORMATION
PageNo.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2022 and December 31, 2021
3
Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021
4
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021
5
Consolidated Statements of Cash Flows for the six months ended June 30, 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
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
31
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
32
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
33
Signatures
34
Item 1.FINANCIAL STATEMENTS
ORASURE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except per share amounts)
June 30, 2022
December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents
$
66,159
116,762
Short-term investments
29,625
36,279
Accounts receivable, net of allowance for doubtful accounts of $3,222 and $3,418
62,886
45,323
Inventories
71,304
53,138
Prepaid expenses
5,477
7,939
Other current assets
31,855
28,990
Total current assets
267,306
288,431
Noncurrent Assets:
Property, plant and equipment, net
93,697
88,164
Operating right-of-use assets, net
16,451
9,056
Finance right-of-use assets, net
1,887
2,493
Intangible assets, net
12,851
14,343
Goodwill
36,038
40,279
Long-term investments
—
17,009
Other noncurrent assets
1,024
1,215
Total noncurrent assets
161,948
172,559
TOTAL ASSETS
429,254
460,990
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
36,226
28,024
Deferred revenue
2,660
2,936
Accrued expenses and other current liabilities
23,165
33,778
Finance lease liabilities
1,182
939
Operating lease liabilities
2,054
2,181
Acquisition-related contingent consideration obligation
199
206
Total current liabilities
65,486
68,064
Noncurrent Liabilities:
1,445
1,952
14,978
7,202
117
354
Other noncurrent liabilities
489
651
Deferred income taxes
2,547
2,234
Total noncurrent liabilities
19,576
12,393
TOTAL LIABILITIES
85,062
80,457
Commitments and contingencies (Note 12)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.000001, 25,000 shares authorized, none issued
Common stock, par value $.000001, 120,000 shares authorized, 72,572 and 72,069 shares issued and outstanding
Additional paid-in capital
515,928
511,063
Accumulated other comprehensive loss
(12,514
)
(10,077
Accumulated deficit
(159,222
(120,453
Total stockholders' equity
344,192
380,533
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
Six Months Ended June 30,
2022
2021
NET REVENUES:
Products and services
79,167
55,741
144,403
112,320
Other
1,064
1,866
3,535
3,869
80,231
57,607
147,938
116,189
COST OF PRODUCTS AND SERVICES SOLD
52,647
26,934
96,082
47,190
Gross profit
27,584
30,673
51,856
68,999
OPERATING EXPENSES:
Research and development
9,068
7,682
17,481
16,674
Sales and marketing
11,684
10,420
24,401
19,950
General and administrative
17,579
10,993
36,735
21,181
Loss on impairment
10,542
Change in the estimated fair value of acquisition-related contingent consideration
(220
(36
(1,026
48,873
28,875
89,123
56,779
Operating income (loss)
(21,289
1,798
(37,267
12,220
OTHER INCOME
1,318
448
1,265
329
Income (loss) before income taxes
(19,971
2,246
(36,002
12,549
INCOME TAX EXPENSE (BENEFIT)
(1,169
3,610
2,767
10,139
NET INCOME (LOSS)
(18,802
(1,364
(38,769
2,410
INCOME (LOSS) PER SHARE:
BASIC
(0.26
(0.02
(0.54
0.03
DILUTED
SHARES USED IN COMPUTING INCOME (LOSS) PER SHARE:
72,496
71,983
72,361
71,931
72,683
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS)
Currency translation adjustments
(4,349
1,403
(2,593
2,755
Unrealized gain (loss) on marketable securities
82
(122
156
(101
COMPREHENSIVE INCOME (LOSS)
(23,069
(83
(41,206
5,064
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation
6,804
2,937
Depreciation and amortization
7,464
5,144
Other non-cash amortization
313
380
Provision for doubtful accounts
(152
747
Inventory reserve
1,989
1,168
Unrealized foreign currency gain
(62
(364
Interest expense on finance leases
55
35
361
(218
Loss on disposal of fixed assets
718
Payment of acquisition-related contingent consideration
(142
Changes in assets and liabilities
Accounts receivable
(18,646
3,680
(20,385
(17,233
Prepaid expenses and other assets
(4,416
154
11,942
4,400
(252
(630
Accrued expenses and other liabilities
(2,959
(4,914
Net cash used in operating activities
(45,489
(3,472
INVESTING ACTIVITIES:
Purchases of investments
(10,428
Proceeds from maturities and redemptions of investments
23,017
43,745
Purchases of property and equipment
(25,440
(22,929
Purchase of property and equipment under government contracts
(33,803
Proceeds from funding under government contract
33,962
Other investing activities
(18
Net cash (used in) provided by investing activities
(2,264
10,370
FINANCING ACTIVITIES:
Cash payments for lease liabilities
(392
(510
Proceeds from exercise of stock options
15
121
(208
(264
Repurchase of common stock
(1,954
(1,877
Net cash used in financing activities
(2,539
(2,530
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH
(311
(7,050
NET DECREASE IN CASH AND CASH EQUIVALENTS
(50,603
(2,682
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
160,802
CASH AND CASH EQUIVALENTS, END OF PERIOD
158,120
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes
9,107
10,329
Non-cash investing and financing activities
Accrued property and equipment purchases
1,900
896
Accrued property and equipment purchases under government contracts
2,023
(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 and six months ended June 30, 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 purchased with 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 six months ended June 30, 2022, we recognized a provision for expected credit losses for our available-for-sale securities of $72.
The following is a summary of our available-for-sale securities as of June 30, 2022 and December 31, 2021:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Fair Value
Guaranteed investment certificates
24,860
Corporate bonds
5,043
(278
4,765
Total available-for-sale securities
29,903
33,249
20,473
(434
20,039
53,722
53,288
At June 30, 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 June 30, 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 June 30, 2022 and December 31, 2021. Our available-for-sale guaranteed investment certificates are measured as Level 1 instruments as of June 30, 2022 and December 31, 2021.
Included in cash and cash equivalents at June 30, 2022 and December 31, 2021, was $5,636 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 June 30, 2022 and December 31, 2021 was $1,576 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 June 30, 2022 and December 31, 2021 was $66,468 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 June 30, 2022 and December 31, 2021 was $30,988 and $30,412, respectively. The decrease in intangible assets from $14,343 as of December 31, 2021 to $12,851 as of June 30, 2022 was due to $1,120 in amortization expense and foreign currency translation losses of $372.
Impairment of Long-Lived Assets. Long-lived assets, which include property and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We assess the recoverability of our long-lived assets by determining whether the carrying value of such assets can be recovered through the sum of the undiscounted future cash flows generated from the use and eventual disposition of the asset. If indicators of impairment exist, we measure the amount of such impairment by comparing the carrying value of the assets to the fair value of these assets, which is generally determined based on the present value of the expected future cash flows associated with the use of the assets. Expected future cash flows reflect our assumptions about selling prices, volumes, costs and market conditions over a reasonable period of time.
During the three months ended June 30, 2022, management decided to move three idle manufacturing cells to storage due to changes in forecasted demand for the products the cells are intended to produce. As a result of this decision, we determined that the carrying values of the equipment is not recoverable and recorded an aggregate pre-tax asset impairment charge of $6,938 during the three months ended June 30, 2022 to write the assets down their estimated fair values. This charge is reported within loss on impairments in the consolidated statement of operations.
We estimated the fair value of the impaired long-lived assets using a market approach, which required us to estimate the value that would be received for the equipment in the principal or most advantageous market for that equipment in an orderly transaction between market participants. Due to the extremely specialized nature of the manufacturing equipment and various market data points, the estimated fair value was not significant. Our fair value estimates were representative of Level 3 measurements within the fair value hierarchy due to the significant level of estimation involved and the lack of transparency as to the inputs used.
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 operations in the period in which the change occurs. Net foreign exchange gains resulting from
8
foreign currency transactions that are included in other income (loss) in our consolidated statements of operations were $783 and $198 for the three months ended June 30, 2022 and 2021, respectively. Net foreign exchange gains (losses) were $54 and $(379) for the six months ended June 30, 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 June 30, 2022 consisted of $12,236 of currency translation adjustments and $278 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 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 ASU were effective upon issuance and could be applied prospectively through December 31, 2022. The FASB issued a proposed amendment to the ASU in April 2022 which, if approved, will extend the date for prospective application to December 31, 2024. Management has evaluated this ASU and concluded that it will not 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 and $1,123 of such income for the three and six months ended June 30, 2022, respectively, which is reported as other income (loss) in our consolidated statement of operations.
The balances corresponding to government contracts included in our consolidated balance sheet are as follows:
9
Other current assets:
Billed receivables
9,913
Unbilled receivables
15,748
9,716
Total other current assets
19,629
Property, plant and equipment, net:
Cost of assets, cumulative
47,321
11,495
Reduction for funding earned to date, not yet received
(12,828
(10,964
Reduction for funding received to date
(34,493
(531
Total property, plant and equipment, net
(620
(8,103
3. Inventories
Raw materials
37,292
33,168
Work in process
2,348
2,252
Finished goods
31,664
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 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
752
Diluted
Earnings (loss) per share:
For the three months ended June 30, 2022, three months ended June 30, 2021 and six months ended June 30, 2022, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 226, 603, and 381 shares, respectively, were excluded from the computation of diluted loss per share. For the six months ended June 30, 2021, outstanding common stock options, unvested restricted stock, and unvested performance stock units representing 604 shares were excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive.
10
5. Revenues
Revenues by product line. The following table represents total net revenues by product line:
COVID-19 (1)
43,378
12,070
74,411
40,215
Genomics (1)
15,486
19,498
30,578
30,316
HIV
10,357
10,944
18,523
19,722
HCV
3,691
4,300
6,948
6,668
Substance abuse
2,630
2,629
5,191
4,591
Microbiome (1)
1,832
2,447
3,822
4,198
Laboratory services
1,204
3,114
2,938
5,611
Other product and service revenues
589
739
1,992
999
Net product and services revenues
Royalty income
642
875
1,326
2,136
Other non-product revenues
422
991
2,209
1,733
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 June 30, 2021 by $490, $(84) and $(406), respectively. The reclassification increased (decreased) the product line revenues for the six months ended June 30, 2021 by $1,073, $(330) and $(743), respectively.
Revenues by geographic area. The following table represents total net revenues by geographic area, based on the location of the customer:
United States
70,320
47,601
128,307
96,700
Europe
2,436
3,325
6,722
7,877
Other regions
7,475
6,681
12,909
11,612
Customer and Vendor Concentrations. At June 30, 2022, one non-commercial customer accounted for 48% of our accounts receivable and another commercial customer accounted for 10% 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 56% and 39% of net consolidated revenues for the three and six months ended June 30, 2022. One customer accounted for 14% of net consolidated revenues for the three months ended June 30, 2021. Another customer accounted for 10% and 14%, respectively, of net consolidated revenues for the three and six months ended June 30, 2021.
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 June 30, 2022 and December 31, 2021 includes customer prepayments of $1,746 and $1,843, respectively. Deferred revenue as of June 30, 2022 and December 31, 2021 also includes $914 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.Goodwill
The following table represents the changes in goodwill by operating segment for the six months ended June 30, 2022:
11
Diagnostics
Molecular Solutions
Balance as of January 1
3,604
36,675
Impairment
(3,604
Change related to foreign currency translation
(637
Balance as of June 30
We perform an annual goodwill impairment assessment as of July 31 each year by comparing the estimated fair values of our reporting units to their respective carrying values. A more frequent evaluation is performed if an event occurs or circumstances change between annual tests that could more likely than not reduce the fair value of a reporting unit below its carrying amount.
During the three months ended June 30, 2022, we determined that a triggering event occurred in relation to the depressed market price of the Company's common stock and corresponding significant decline in our market capitalization. As a result, we performed an interim goodwill impairment test and concluded that the carrying value of our Diagnostics reporting unit exceeded its estimated fair value and the goodwill balance for that segment was fully impaired. Thus, we recognized a pre-tax impairment charge of $3.6 million during the three months ended June 30, 2022, which is reported in loss on impairments in our condensed consolidated statement of operations.
We estimated fair values of both of our reporting units using a combined income-based approach and market-based approach. Our income approach utilized projected future cash flows that were discounted at a rate of 22% for the Diagnostic reporting unit and 20% for the Molecular Solutions reporting unit based on a weighted-average cost of capital analysis that reflected current market conditions. The market comparable approach primarily considered earnings, revenue and other multiples of comparable companies and applied those multiples to certain key drivers of the reporting units. This market approach utilized a revenue multiple weighted by year for the Diagnostics reporting unit and both a revenue and EBITDA multiple for the Molecular Solutions reporting unit. We assigned a weight of 75% to the results of our income-based approach and 25% to the results from the market-based approach for estimation of the reporting units' fair value. Our fair value estimates utilize significant unobservable inputs and thus represent Level 3 fair value measurements.
7.Accrued Expenses and other current liabilities
June 30,2022
December 31,2021
Payroll and related benefits
11,636
15,570
Commitment to purchase under government contract
8,103
Deferred income for government contract
620
Professional fees
3,799
3,335
Sales tax payable
1,807
2,227
5,303
4,543
8. 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 June 30, 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.
12
The components of lease expense are as follows:
Operating lease cost
811
499
1,510
919
Variable and short-term lease cost
152
227
Finance lease cost:
Amortization of right-of use assets
306
212
691
339
Interest on lease liabilities
23
21
Total finance lease cost
233
746
374
Total lease cost
1,292
732
2,483
1,293
Supplemental cash flow information related to leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
1,027
416
2,213
824
Operating cash flows from financing leases
Financing cash flows from financing leases
239
228
392
510
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations
5,131
7,205
8,797
7,834
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
17,032
9,383
Finance Leases
Total finance lease liabilities
2,627
2,891
Weighted Average Remaining Lease Term
Weighted-average remaining lease term—operating leases
7.73 years
5.26 years
Weighted-average remaining lease term—finance leases
1.82 years
2.21 years
Weighted Average Discount Rate
Weighted-average discount rate—operating leases
4.27
%
3.90
Weighted-average discount rate—finance leases
3.52
3.57
13
As of June 30, 2022, minimum lease payments by period are expected to be as follows:
Finance
Operating
2022 (excluding the six months ended June 30, 2022)
710
1,496
2023
1,283
1,879
2024
740
2,969
2025
2,619
2026
2,422
Thereafter
9,021
Total minimum lease payments
2,763
20,406
Less: imputed interest
(136
(3,374
Present value of lease liabilities
9. Stockholders’ Equity
Reconciliation of the changes in stockholders' equity for the three and six months ended June 30, 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
(1,049
3,524
Net loss
(19,967
1,756
Unrealized gain on marketable securities
74
Balance at March 31, 2022
72,307
513,553
(8,247
(140,420
364,886
407
(905
3,280
Balance at June 30, 2022
72,572
14
Balance at December 31, 2020
71,738
505,123
(9,097
(97,455
398,571
92
318
(111
(1,730
1,464
Net income
3,774
1,352
Balance at March 31, 2021
71,956
504,949
(7,724
(93,681
403,544
29
64
(15
(147
1,473
Unrealized loss on marketable securities
Balance at June 30, 2021
72,008
506,304
(6,443
(95,045
404,816
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 six months ended June 30, 2022 and 2021 was $879 and $521, respectively.
The following table summarizes the stock option activity for the six months ended June 30, 2022:
Options
Outstanding on January 1, 2022
1,410
Granted
Exercised
(2
Expired
(20
Forfeited
(173
Outstanding on June 30, 2022
1,804
Compensation expense of $5,071 and $2,066 related to restricted shares was recognized during the six months ended June 30, 2022 and 2021, respectively.
The following table summarizes time-vested restricted stock award and restricted stock unit activity for the six months ended June 30, 2022:
Units
Issued and unvested, January 1, 2022
701
2,782
Vested
(571
(249
Issued and unvested, June 30, 2022
2,663
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 $854 and $350 related to PSUs was recognized during the six months ended June 30, 2022 and 2021, respectively.
The following table summarizes the PSU activity for the six months ended June 30, 2022:
622
Granted (1)
532
Performance adjustment (2)
36
(188
(171
831
(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 six months ended June 30, 2022 and 2021.
10.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 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 $128 and $1,508 of expense in relation to Dr. Tang's stock compensation during the three and six months ended June 30, 2022, respectively.
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, on April 1, 2022, Dr. Gagliano began receiving a monthly base salary of $56 per month and was also granted a one-time award of fully vested shares of the Company’s common stock with a grant date fair value of $100. Additionally, she was granted a one-time restricted stock unit award with a grant date fair value of $670 scheduled to vest in twelve equal monthly installments starting in April through her employment term, of which $168 vested during the three months ended June 30, 2022 and the remainder was forfeited when her employment ceased in June 2022.
16
On May 20, 2022, the Company entered into an employment agreement with Carrie Eglinton Manner, and in connection therewith, the Company's Board of Directors appointed Ms. Eglinton Manner as the Company’s President and Chief Executive Officer, effective June 4, 2022 (the “Effective Date”). Pursuant to the Employment Agreement, Ms. Eglinton Manner’s initial annual base salary is $700 and she will participate in the Company’s annual incentive plan with a target annual incentive amount of at least 100% of her annual base salary. Additionally, she received inducement grants comprised of (i) a restricted stock unit award with a grant date fair value of $4,000, which vests on the second anniversary of the Effective Date (ii) a restricted stock award with a grant date fair value of $1,600, which vests annually starting on the first anniversary of the Effective Date and (iii) a PSU award with a grant date fair value of $1,600, which will be subject to the same vesting and performance conditions as are applicable to the 2022 performance-based restricted stock unit awards granted to the Company’s other executive officers.
11.Income Taxes
During the three and six months ended June 30, 2022, we recorded an income tax expense (benefit) of $(1,169) and $2,767, 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 tax expense for the first half of 2022 is comprised of U.S. state income taxes of $400 and foreign taxes of $665. During the three and six months ended June 30, 2021, we recorded income tax expense of $3,610 and $10,139, which primarily consists 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 June 30, 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 June 30, 2022 and December 31, 2021 since the facts and circumstances necessitating the allowance have not changed.
12.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. The final pretrial conference is set for September 7, 2023.
13.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.
17
The following table summarizes operating segment information for the three and six months ended June 30, 2022 and 2021, and asset information as of June 30, 2022 and December 31, 2021:
Net revenues:
60,455
19,311
98,765
33,857
19,776
38,296
49,173
82,332
Operating income (loss):
(11,776
(11,850
(31,563
(23,967
(9,513
13,648
(5,704
36,187
Depreciation and amortization:
1,903
3,630
1,829
1,716
3,834
3,315
3,782
2,655
Loss on impairment:
8,517
2,025
Capital expenditures:
Diagnostics(1)
4,302
8,513
23,434
16,150
3,355
2,006
6,779
5,221
11,868
25,440
22,929
(1) Excludes $5,615 and $33,803 for purchases of property and equipment under government contracts for the three and six months ended June 30, 2022, respectively.
Total assets:
249,123
209,674
180,131
251,316
18
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.
20
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 ("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. Demand for COVID-19 PCR testing has declined driven by the availability of antigen tests and the wider availability of vaccines, thereby negatively impacting the sales of the collection products. 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 our 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.
Appointment of New CEO
Carrie Eglinton Manner was appointed President and Chief Executive Officer, effective June 4, 2022. Ms. Eglinton Manner also joined the OraSure Board of Directors (the "Board"). She succeeded Dr. Nancy Gagliano, who was appointed interim CEO in March 2022. Dr. Gagliano continues to serve on the OraSure Board.
Ms. Eglinton Manner, age 48, has years of leadership experience across multiple disciplines. Prior to joining the Company, Ms. Eglinton Manner served as Senior Vice President, Advanced & General Diagnostic and Clinical Solutions at Quest Diagnostics since January 2017. Prior to Quest, Ms. Eglinton Manner spent over 20 years in various leadership roles in healthcare businesses at GE Healthcare. From 2009 through 2016, she served as President & CEO of four distinct GE Healthcare global businesses in the areas of diagnostic imaging, lab services and medical devices. She has served as a director of Repligen Corporation since June 2020. Ms. Eglinton Manner holds a B.S. in mechanical engineering from the University of Notre Dame.
Exploration of Strategic Alternatives
Ms. Eglinton Manner’s appointment as CEO came in tandem with a decision by the OraSure Board to conclude its previously announced review of strategic alternatives and for the Company to move forward under her leadership. Market conditions and the Board’s belief in the Company’s ability to further build upon recent operational successes with Ms. Eglinton Manner’s leadership were factors in the decision.
Current Consolidated Financial Results
During the six months ended June 30, 2022, our consolidated net revenues increased 27% to $147.9 million, compared to $116.2 million for the six months ended June 30, 2021. Net product and services revenues during the six months ended June 30, 2022 increased 29% when compared to the same period of 2021, largely due to the inclusion of $65.3 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 half of 2021. Declines in sales of our molecular sample collection kits for COVID-19 testing, lower laboratory services revenues, and a decline in domestic sales of our HIV products partially offset this positive driver of revenue. Other revenues for the six months ended June 30, 2022 were $3.5 million compared to $3.9 million in the same period of 2021. This decrease was largely due to lower royalty income.
Our consolidated net loss for the six months ended June 30, 2022 was $38.8 million, or $0.54 per share on a fully diluted basis, compared to consolidated net income of $2.4 million, or $0.03 per share on a fully diluted basis, for the six months ended June 30, 2021. Results for the six months ended June 30, 2022 were impacted by lower gross margins rates caused by an unfavorable product mix of higher sales of lower margin products, increases in inventory reserves associated with excess inventory levels and manufacturing inefficiencies that occurred in the first quarter of 2022, lower absorption of labor costs and the absence of the Gates subsidy which expired in June 2021. Also contributing to our net loss is an increase in operating expense as a result of impairment charges taken in the second quarter of 2022 on idle manufacturing lines and goodwill, severance charges and accelerated stock compensation expense associated with our CEO transition and termination of our general counsel, and nonrecurring costs associated with our strategic alternatives process.
Cash used in operating activities during the six months ended June 30, 2022 was $45.5 million. Cash used in operating activities during the six months ended June 30, 2021 was $3.5 million. During the first half of 2022, our cash flow used in operating activities increased significantly as a result of our net loss and increased working capital requirements we scale our InteliSwab® manufacturing capacity to meet higher demand. As of June 30, 2022, we had $95.8 million in cash, cash equivalents and available-for-sale securities.
Results of Operations
Three months ended June 30, 2022 compared to June 30, 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 June 30, 2022 and 2021.
For the Three Months Ended June 30,
Dollars
Percentage of Total Net Revenues
% Change
59,976
18,252
229
75
19,191
37,489
(49
24
65
42
99
97
(43
1
39
100
Consolidated net product and services revenues increased 42% to $79.2 million for the three months ended June 30, 2022 from $55.7 million for the three months ended June 30, 2021. The increase in revenues is largely due to the inclusion of $43.1 million of InteliSwab® COVID-19 rapid test revenues. We began selling this product in August of 2021 resulting in no comparable revenues in the second quarter of 2021. Declines in
22
revenues across all other product line partially offset this positive driver of revenue. Other revenues for the three months ended June 30, 2022 decreased 43% to $1.1 million from $1.9 million for the three months ended June 30, 2021 due to lower research and development funding associated with the development of our InteliSwab® COVID-19 rapid test and lower royalty income.
Consolidated net revenues derived from products sold to customers outside of the United States were $9.9 million and $10.0 million, or 12% and 17% of total net revenues, for the three months ended June 30, 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 June 30, 2022 and 2021.
Market
Infectious disease testing:
COVID-19
43,114
89
NM
71
0
14,232
15,534
(8
80
Total infectious disease testing
57,346
15,623
267
95
81
Substance abuse testing
Net product revenues
479
1,059
(55
213
NM - not meaningful
Infectious Disease Testing Market
COVID-19 revenues were $43.1 million for the three months ended June 30, 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 second quarter of 2021.
Sales to the other infectious disease testing markets decreased 8% to $14.2 million for the three months ended June 30, 2022 from $15.5 million for the three months ended June 30, 2021. This decrease resulted from lower worldwide OraQuick® HIV and international OraQuick® HCV product 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 June 30, 2022 and 2021.
Domestic HIV
3,741
4,135
(10
International HIV
6,616
6,809
(3
Net HIV revenues
(5
Domestic HCV
2,537
2,571
(1
International HCV
1,154
1,729
(33
Net HCV revenues
(14
Net OraQuick® revenues
14,048
15,244
Domestic OraQuick® HIV sales decreased 10% to $3.7 million for the three months ended June 30, 2022 from $4.1 million for the three months ended June 30, 2021, primarily as a result of a large second quarter 2021 order of our OraQuick® In-Home HIV test shipped to the CDC and used in an initiative to drive increased in-home HIV testing. A similar order did not occur in the second quarter of 2022.
International sales of our OraQuick® HIV tests decreased 3% to $6.6 million for the three months ended June 30, 2022 from $6.8 million for the three months ended June 30, 2021 due to the absence of the Gates Foundation subsidy which expired in June 2021 and is not included in revenues in the second quarter of 2022, initial stocking orders into Asia that did not recur in 2022, and the impact of the Russian and Ukraine war. These decline in revenues were partially offset by increased sales into Africa as the COVID-19 impact lessens.
Domestic OraQuick® HCV sales remained largely flat at $2.5 million for the three months ended June 30, 2022 compared to $2.6 million for the three months ended June 30, 2021.
International OraQuick® HCV sales decreased 33 % to $1.2 million for the three months ended June 30, 2022 compared to $1.7 million for the three months ended June 30, 2021 due to a stock order into Korea which did no repeat in 2022.
Substance Abuse Testing Market
Sales to the substance abuse testing assessment market remained flat at $2.6 million for both the three months ended June 30, 2022 and 2021.
Other Revenues
Other revenues for the three months ended June 30, 2022 decreased 55% to $479,000 from $1.1 million for the three months ended June 30, 2021, due to lower research and development funding associated with our InteliSwab® COVID-19 rapid test.
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the three months ended June 30, 2022 and 2021.
Genomics
(21
Microbiome
(25
264
11,981
(98
(61
405
449
Net molecular product and services revenues
585
807
(28
Net molecular revenues
(48
Sales of our genomics products decreased 21% to $15.5 million for the three months ended June 30, 2022, compared to $19.5 million for the three months ended June 30, 2021, as result of customer ordering patterns.
Microbiome kit sales decreased 25% to $1.8 million for the three months ended June 30, 2022 compared to $2.4 million for the three months ended June 30, 2021, due to lower sales to certain Clinical Research Organizations ("CROs") as a result of delays in microbiome clinical studies.
Sales of our molecular sample collection kits for COVID-19 testing decreased 98% to $264,000 for the three months ended June 30, 2022 compared to $12.0 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 and the termination of public funding for PCR testing.
Laboratory services revenues declined 61% to $1.2 million for the three months ended June 30, 2022 compared to $3.1 million for the three months ended June 30, 2021 as a result of a large customer ceasing its operations and due to timing of clinical trials.
Other product and service revenues remained largely unchanged at $405,000 in the second quarter of 2022 compared to $449,000 in the second quarter of 2021.
Other revenues for the three months ended June 30, 2022 decreased 28% to $585,000 from $807,000 for the three months ended June 30, 2021, largely as a result of lower royalty income received under a litigation settlement agreement.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit margins were 34% for the three months ended June 30, 2022 compared to 53% for the three months ended June 30, 2021. The decrease in gross profit margins was primarily due to a less favorable product mix and increased scrap expense associated with reserves for excess inventory.
Consolidated operating loss for the three months ended June 30, 2022 was $21.3 million, a $23.1 million decrease from the $1.8 million operating income reported for the three months ended June 30, 2021. Results for the three months ended June 30, 2022 were negatively impacted by the
lower gross profit margin described above coupled with an increase in operating expenses as described below, including an aggregate impairment charge of $10.5 million.
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 36% for the three months ended June 30, 2022 compared to 34% for the three months ended June 30, 2021. This increase is due to improved product mix of higher margin product sales partially offset by the June 2021 expiration of subsidies under the support agreement with the Gates Foundation.
Research and development expenses increased 26% to $6.3 million for the three months ended June 30, 2022 compared to $5.0 million for the three months ended June 30, 2021 largely due to increased staffing costs associated with higher head count, increased clinical study activities related to obtaining CE mark for our InteliSwab® rapid test and higher subscription costs associated with our new quality system. Sales and marketing expenses increased 19% to $7.8 million for three months ended June 30, 2022 from $6.6 million for the three months ended June 30, 2021 due to increased staffing costs associated with higher head count and increased travel, trade show, and annual meetings expenses as travel and in person events have resumed as COVID-19 restrictions have been lifted. These increases in spend were partially offset by a decline in advertising and market research costs associated with our InteliSwab® test. General and administrative expenses increased 54% to $11.0 million for the three months ended June 30, 2022 from $7.1 million for the three months ended June 30, 2021 largely due to severance costs and accelerated stock compensation expense associated with our former general counsel's employment and termination agreements, stock compensation costs associated with restricted stock awards granted to certain board members with immediate vesting provisions, and higher legal, accounting, and information technologies contract fees.
Operating expenses for the Diagnostic segment also include an impairment charge of $4.9 million associated with an idle manufacturing line for which it has no projected cash flow and minimal resale or salvage value. Diagnostic operating expenses also included a goodwill impairment charge of $3.6 million. The decline in the Company's stock price was identified as a triggering event which required the Company to perform an quantitative goodwill impairment analysis. The results of this analysis indicated the Diagnostic segment's goodwill was impaired and was written down to $0.
All of the above contributed to the Diagnostics segment’s operating loss of $11.8 million for the three months ended June 30, 2022, which included the non-cash impairment charges of $8.5 million, non-cash charges of $1.9 million for depreciation and amortization and $2.8 million for stock-based compensation. The Diagnostics segment operating loss in the second quarter of 2021 included a $220,000 non-cash pre-tax benefit associated with the change in the fair value of acquisition-related contingent consideration. There was no similar benefit recorded in the second quarter of 2022.
The gross profit margin for the Molecular Solutions segment was 31% for the three months ended June 30, 2022 compared to 63% for the three months ended June 30, 2021. This decrease was due to an increase in reserves for excess inventory as result of a forecasted decline in demand of certain products used in COVID PCR testing and a less favorable product mix.
Research and development expenses remained relatively flat at $2.8 for the three months ended June 30, 2022 from $2.7 million for the three months ended June 30, 2021 . Sales and marketing expenses also remained flat at $3.9 million for the three months ended June 30, 2022 and 2021. General and administrative expenses increased 70% to $6.6 million for the three months ended June 30, 2022 from $3.9 million for the three months ended June 30, 2021 due to increased legal fees.
Operating expenses for the Molecular segment also include an impairment charge of $2.0 million for the three months ended June 30, 2022 associated with two idle manufacturing lines for which there are no projected cash flow and minimal resale or salvage value.
All of the above contributed to the Molecular Solutions segment’s operating loss of $9.5 million for the three months ended June 30, 2022, which included the non-cash impairment charge of $2.0 million, non-cash charges of $1.9 million for depreciation and amortization and $529,000 for stock-based compensation.
CONSOLIDATED INCOME TAXES
25
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 June 30, 2022, we recorded U.S. state tax expense of $183,000 compared to $54,000 of state income tax benefit for the three months ended June 30, 2021. For the three months ended June 30, 2022, we recorded a foreign tax benefit of $1.3 million compared to foreign tax expense of $3.7 million for the three months ended June 30, 2021. This overall decrease in foreign tax expense is largely a result of the decrease in income before taxes generated by our Canadian subsidiary.
Six months ended June 30, 2022 compared to June 30, 2021
The table below shows a breakdown of total consolidated net revenues (dollars in thousands) generated by each of our business segments during the six months ended June 30, 2022 and 2021.
For the Six Months Ended June 30,
96,372
31,585
205
27
48,031
80,735
(41
69
98
96
(9
Consolidated net product and services revenues increased 29% to $144.4 million for the six months ended June 30, 2022 from $112.3 million for the six months ended June 30, 2021. The increase in revenues is largely due to the inclusion of $65.3 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 half of 2021. Declines in sales of our molecular sample collection kits for COVID-19 testing partially offset this positive driver of revenue. Other revenues for the six months ended June 30, 2022 decreased 9% to $3.5 million from $3.9 million for the six months ended June 30, 2021 largely due to lower royalty income.
Consolidated net revenues derived from products sold to customers outside of the United States were $19.6 million and $19.5 million, or 13% and 17% of total net revenues, for the six months ended June 30, 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.
The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Diagnostics segment during the six months ended June 30, 2022 and 2021.
2020
65,250
262
66
25,931
26,732
79
91,181
26,994
238
94
2,393
2,272
192
COVID-19 revenues were $65.3 million for the six months ended June 30, 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 half of 2021.
26
Sales to the other infectious disease testing markets decreased 3% to $25.9 million for the six months ended June 30, 2022 from $26.7 million for the six months ended June 30, 2021. This decrease resulted from lower domestic OraQuick® HIV and international OraQuick® HCV product sales, partially offset by higher international OraQuick® HIV and domestic OraQuick® HCV sales.
The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during the six months ended June 30, 2022 and 2021.
7,506
9,050
(17
11,017
10,672
(6
4,574
3,754
2,374
2,914
(19
25,471
26,390
Domestic OraQuick® HIV sales decreased 17% to $7.5 million for the six months ended June 30, 2022 from $9.1 million for the six months ended June 30, 2021, primarily as a result of a large order fulfilled in the first half of 2021 for our OraQuick® In-Home HIV test shipped to the CDC and used in an initiative to drive increased in-home HIV testing. A similar order did not occur in the first half of 2022.
International sales of our OraQuick® HIV tests increased 3% to $11.0 million for the six months ended June 30, 2022 from $10.7 million for the six months ended June 30, 2021 due to increased sales into Africa as the COVID-19 impact lessens. This increase to revenues was 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, as well as the impact of the Russia and Ukraine war.
Domestic OraQuick® HCV sales increased 22% to $4.6 million for the six months ended June 30, 2022 from $3.8 million for the six months ended June 30, 2021, driven by new funding granted by certain state governments, increased legislation regarding drug testing and rise in drug use requiring more testing.
International OraQuick® HCV sales decreased 19% to $2.4 million for the six months ended June 30, 2022 from $2.9 million for the six months ended June 30, 2021 due to large stock ordering shipped to Korea that did not repeat in 2022.
Sales to the substance abuse testing assessment market increased 13% to $5.2 million for the six months ended June 30, 2022 compared to $4.6 million for the six months ended June 30, 2021 due to market share gains.
Other revenues for the six months ended June 30, 2022 increased minimally to $2.4 million from $2.3 million for the six months ended June 30, 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.
The table below shows a breakdown of our total net revenues (dollars in thousands) during the six months ended June 30, 2022 and 2021.
9,161
39,953
(77
Other product revenues
1,532
657
133
1,142
1,597
(40
Sales of our genomics products remained largely flat and increased only 1% to $30.6 million for the six months ended June 30, 2022, compared to $30.3 million for the six months ended June 30, 2021.
Microbiome kit sales decreased 9% to $3.8 million for the six months ended June 30, 2022 compared to $4.2 million for the six months ended June 30, 2021, due to a decline in revenues to CROs driven by the timing of microbiome clinical studies.
Sales of our molecular sample collection kits for COVID-19 testing decreased 77% to $9.2 million for the six months ended June 30, 2022 compared to $40.0 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, lower public funding for PCR testing, and high inventory levels held by some of those customers.
Laboratory services revenues declined 48% to $2.9 million for the six months ended June 30, 2022 compared to $5.6 million for the six months ended June 30, 2021 as a result of a large customer ceasing its operations and a slowdown in clinical trials.
Other product and service revenues increased 133% to $1.5 million for the six months ended June 30, 2022 compared to $657,000 for the six months ended June 30, 2021 largely due to increased sales by our Novosanis subsidiary.
Other revenues for the six months ended June 30, 2022 decreased 28% to $1.1 million from $1.6 million for the six months ended June 30, 2021, largely as a result of lower royalty income received under a litigation settlement agreement.
Consolidated gross profit margins were 35% for the six months ended June 30, 2022 compared to 59% for the six months ended June 30, 2021. The decrease in gross profit margins was caused by an unfavorable product mix of higher sales of lower margin product, increases in inventory reserves associated with excess inventory levels and manufacturing inefficiencies that occurred in the first quarter of 2022, lower absorption of labor costs and the absence of the Gates subsidy which expired in June 2021.
Consolidated operating loss for the six months ended June 30, 2022 was $37.3 million, a $49.5 million decrease from the $12.2 million operating income reported for the six months ended June 30, 2021. Results for the six months ended June 30, 2022 were negatively impacted by the lower gross profit margin described above coupled with an increase in operating expenses as described below, including an aggregate impairment charge of $10.5 million.
The gross profit margin for the Diagnostics segment was 29% for the six months ended June 30, 2022 compared to 38% for the six months ended June 30, 2021. This decrease is due to inefficiencies in our InteliSwab® manufacturing process experienced in the beginning of the year causing high scrap rates, under-absorption of labor costs, and the June 2021 expiration of subsidies under the support agreement with the Gates Foundation, and a less favorable product mix.
Research and development expenses increased 2% to $11.8 million for the six months ended June 30, 2022 compared to $11.5 million for the six months ended June 30, 2021 largely due to higher staffing costs associated with increased head count offset by lower product development activities related to our InteliSwab® rapid test which did not repeat in the first half of 2022 as we received EUA authorization in June 2021. Sales and marketing expenses increased 25% to $15.9 million for six months ended June 30, 2022 from $12.8 million for the six months ended June 30, 2021 due to increased staffing costs associated with higher head count, increased travel and annual meetings expenses as travel and in person events have resumed as COVID-19 restrictions have been lifted, increased consultant costs, higher advertising and market research expenses and higher subscription costs associated with our new CRM system. This increase in spending was partially offset by a decline in our reserve for uncollectible accounts, lower recruiting fees and a decrease in commission expense. General and administrative expenses increased 82% to $24.7 million for the six months ended June 30, 2022 from $13.6 million for the six months ended June 30, 2021 largely due to increased consulting costs, higher stock compensation expense associated with accelerated vesting of shares under our former CEO's and general counsel's employment agreements, higher staffing costs associated with increased head count, increased legal costs, severance costs associated with our former general counsel, increased accounting fees, and higher recruitment expense largely associated with our CEO search.
28
All of the above contributed to the Diagnostics segment’s operating loss of $31.6 million for the six months ended June 30, 2022, which included the non-cash impairment charge of $8.5 million, non-cash charges of $3.6 million for depreciation and amortization and $5.9 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 $1.0 million benefit recorded in the first half of 2021.
The gross profit margin for the Molecular Solutions segment was 47% for the six months ended June 30, 2022 compared to 68% for the six months ended June 30, 2021. This decrease was due to an increase in reserves for excess inventory as result of a forecasted decline in demand and a less favorable product mix.
Research and development expenses increased 11% to $5.7 million for the six months ended June 30, 2022 from $5.1 million for the six months ended June 30, 2021 due to higher staffing costs. Sales and marketing expenses increased 18% to $8.5 million for the six months ended June 30, 2022 from $7.2 million for the six months ended June 30, 2021 due to higher staffing costs related to increased head count, increased consulting expense associated with business strategy planning, and an increase in travel costs as COVID-19 restrictions are lifted. 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 58% to $12.1 million for the six months ended June 30, 2022 from $7.6 million for the six months ended June 30, 2021 due to increased legal fees and staffing costs.
Operating expenses for the Molecular segment also includes an impairment charge of $2.0 million for the six months ended June 30, 2022 associated with two idle manufacturing lines for which there are no projected cash flow and minimal resale or salvage value.
All of the above contributed to the Molecular Solutions segment’s operating loss of $5.7 million for the six months ended June 30, 2022, which included the non-cash impairment charge of $2.0 million, $3.8 million for depreciation and amortization and $924,000 for stock-based compensation.
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 six months ended June 30, 2022, we recorded U.S. state tax expense of $400,000 compared to $115,000 of state income tax expense for the six months ended June 30, 2021. Additionally, in the first half 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 six months ended June 30, 2022, we recorded foreign tax expense of $665,000 compared to foreign tax expense of $10.0 million for the six months ended June 30, 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
June 30,
December 31,
(In thousands)
Available for sale securities
Working capital
201,820
220,367
Our cash and cash equivalents and available-for-sale securities decreased to $95.8 million at June 30, 2022 from $170.1 million at December 31, 2021. Our working capital decreased to $201.8 million at June 30, 2022 from $220.4 million at December 31, 2021.
During the six months ended June 30, 2022, net cash used in operating activities was $45.5 million. Our net loss of $38.8 million included non-cash charges of $10.5 million associated with impairment charges taken against idle manufacturing lines and goodwill, depreciation and amortization expense of $7.5 million, stock-based compensation expense of $6.8 million, an inventory reserve of $2.0 million, and other non-cash expense of $1.2 million. Cash used to fund our working capital accounts included an increase in inventory of $20.4 million to meet
anticipated demand to support COVID-19 testing program, an increase in accounts receivable of $18.6 million largely associated with product shipped to the U.S. government, a $4.1 million increase in prepaid expenses and other assets associated with tax installments made to the Canadian Revenue Agency and a $2.9 million decrease in accrued expenses and other liabilities largely due to payment of our 2021 bonuses and severance payments to our former CEO. Offsetting these uses of cash was a $11.9 million increase in accounts payable due to the timing of invoices received and payments made.
Net cash used in investing activities was $2.3 million for the six months ended June 30, 2022, which reflects proceeds from the maturities and redemptions of investments of $23.0 million. This was offset by $25.4 million to acquire property and equipment largely to increase our manufacturing capacity.
Net cash used in financing activities was $2.5 million for the six months ended June 30, 2022, which is largely comprised of $2.0 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 operating and capital needs as well as those arising over the next twelve months. 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, $74.7 million or 78% of our $95.8 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 June 30, 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. Except as presented below, no material changes have been made to such critical accounting policies during the six months ended June 30, 2022.
Goodwill is not amortized, but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment and If it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.
The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit.
30
.
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 June 30, 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 3.5% of our total revenues for the six months ended June 30, 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 $130.9 million in U.S. Dollars, which are included in the Company’s consolidated balance sheet as of June 30, 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 $13.1 million in the six months ended June 30, 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 Interim 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 June 30, 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 June 30, 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 Interim 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 June 30, 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
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.
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, other than as set forth below.
Customer Concentration Creates Risk for Our Business.
One non-commercial customer accounted for 56% and 39% of net consolidated revenues for the three and six months ended June 30, 2022. We
expect that sales to the large non-commercial customer will continue to be a significant contributor to our net consolidated revenue. Certain parts of our business may continue to have a high customer concentration and depend disproportionately on a few large customers. To the extent that such a large customers fail to meet their purchase commitments, change their ordering patterns or business strategies, or otherwise reduce their purchases or stop purchasing our products, or if we experience difficulty in meeting the high demand by these larger customers for our products, our revenues and results of operations could be adversely affected.
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)
April 1, 2022 - April 30, 2022
107,316
(3)
7.08
11,984,720
May 1, 2022 - May 31, 2022
21,979
5.17
June 1, 2022 - June 30, 2022
12,311
3.83
141,606
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**
Amended and Restated OraSure Technologies, Inc. 2000 Stock Award Plan is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 18, 2022.
10.2**
Employment Agreement dated as of May 20, 2022, between OraSure Technologies, Inc. and Carrie Eglinton-Manner is incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 26, 2022.
31.1*
Certification of Carrie Eglinton-Manner 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 Carrie Eglinton-Manner 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: August 9, 2022
Scott Gleason
Senior Vice President, Investor Relations and Corporate Communications
(Principal Financial Officer)
/s/Michele M. Miller
Michele M. Miller
Senior Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)