OraSure Technologies(OSUR) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Net revenues increased to $147.9 million, but a $38.8 million net loss was incurred due to lower gross margins and higher operating expenses Consolidated Balance Sheets - Total assets decreased from $461.0 million at year-end 2021 to $429.3 million as of June 30, 2022, primarily due to a reduction in cash, cash equivalents, and investments[8] - Current assets decreased slightly, with a significant drop in cash and short-term investments ($153.0M to $95.8M) being partially offset by increases in accounts receivable ($45.3M to $62.9M) and inventories ($53.1M to $71.3M)[8] Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Current Assets | | | | Cash and cash equivalents | $66,159 | $116,762 | | Inventories | $71,304 | $53,138 | | Total current assets | $267,306 | $288,431 | | Total Assets | $429,254 | $460,990 | | Total Liabilities | $85,062 | $80,457 | | Total Stockholders' Equity | $344,192 | $380,533 | Consolidated Statements of Operations - For the six months ended June 30, 2022, the company reported a net loss of $38.8 million, a significant downturn from the $2.4 million net income in the same period of 2021[10] - A loss on impairment of $10.5 million was recorded in the first six months of 2022, with no comparable charge in 2021, contributing significantly to the operating loss[10] Statement of Operations Summary (in thousands, except per share data) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Revenues | $147,938 | $116,189 | | Gross Profit | $51,856 | $68,999 | | Operating Income (Loss) | $(37,267) | $12,220 | | Net Income (Loss) | $(38,769) | $2,410 | | Diluted EPS | $(0.54) | $0.03 | Consolidated Statements of Cash Flows - Net cash used in operating activities increased significantly to $45.5 million for the six months ended June 30, 2022, compared to $3.5 million in the prior-year period[16] - The increase in cash used for operations was driven by the net loss of $38.8 million and significant investments in working capital, including a $20.4 million increase in inventories and an $18.6 million increase in accounts receivable[16] - Cash and cash equivalents decreased by $50.6 million during the first half of 2022, ending the period at $66.2 million[16] Notes to the Consolidated Financial Statements Key notes detail asset and goodwill impairment charges, $109 million DOD funding for InteliSwab® manufacturing, and significant COVID-19 product revenue - The company recorded a pre-tax asset impairment charge of $6.9 million during Q2 2022 to write down three idle manufacturing cells to their estimated fair values due to changes in forecasted demand[30] - In September 2021, the company entered an agreement for $109 million in funding from the U.S. Department of Defense (DOD) to build additional manufacturing capacity for its InteliSwab® COVID-19 Rapid Tests[38] - A goodwill impairment test triggered by a decline in market capitalization resulted in a pre-tax impairment charge of $3.6 million, fully impairing the goodwill of the Diagnostics reporting unit[53] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 27% revenue growth to InteliSwab® sales, but a net loss resulted from lower gross margins (35% vs 59%) and increased operating expenses Overview and Recent Developments - The company operates through two segments: Diagnostics (rapid tests for COVID-19, HIV, HCV, and substance abuse) and Molecular Solutions (sample collection kits and lab services)[89][90][91] - Carrie Eglinton Manner was appointed President and CEO, effective June 4, 2022, succeeding interim CEO Dr Nancy Gagliano[96] - In conjunction with the new CEO appointment, the Board of Directors concluded its review of strategic alternatives, opting to move forward under the new leadership[98] Results of Operations Q2 2022 revenues grew 39% to $80.2 million, driven by InteliSwab®, despite a 49% decline in Molecular Solutions, with gross margin falling to 34% Consolidated Net Revenues - Q2 (in thousands) | Segment | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Diagnostics | $59,976 | $18,252 | 229% | | Molecular Solutions | $19,191 | $37,489 | (49)% | | Total Product & Services | $79,167 | $55,741 | 42% | Consolidated Net Revenues - H1 (in thousands) | Segment | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Diagnostics | $96,372 | $31,585 | 205% | | Molecular Solutions | $48,031 | $80,735 | (41)% | | Total Product & Services | $144,403 | $112,320 | 29% | - Consolidated gross profit margin decreased to 34% in Q2 2022 from 53% in Q2 2021, primarily due to a less favorable product mix and increased scrap expense associated with reserves for excess inventory[123] - For the six-month period, consolidated gross margin fell to 35% from 59% in the prior year, caused by unfavorable product mix, manufacturing inefficiencies, inventory reserves, and the expiration of the Gates Foundation subsidy[159] Liquidity and Capital Resources Liquidity Position (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $66,159 | $116,762 | | Available for sale securities | $29,625 | $53,288 | | Total Cash & Investments | $95,784 | $170,050 | | Working capital | $201,820 | $220,367 | - Net cash used in operating activities was $45.5 million in the first six months of 2022, a significant increase from $3.5 million in the same period of 2021[101][174] - The company repatriated $65.0 million of cash from its Canadian subsidiary to the U.S. in Q1 2022, incurring approximately $1.7 million in Canadian withholding tax[178] - Management expects current cash, equivalents, and securities to be sufficient to fund operating and capital needs for the next twelve months[178] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exchange from Canadian and Belgian subsidiaries, with $130.9 million in net assets subject to translation risk - The company's main market risk is foreign currency exchange risk from its Canadian and Belgian subsidiaries, with business conducted in Canadian dollars and Euros[185] - As of June 30, 2022, foreign subsidiaries had net assets of $130.9 million subject to currency translation risk[185] - A 10% adverse change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have reduced comprehensive income by about $13.1 million in the first half of 2022[185] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[186] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[187] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ongoing patent litigation with Spectrum Solutions, LLC, concerning saliva collection devices, with counterclaims filed - The company filed a patent infringement lawsuit against Spectrum Solutions, LLC in March 2021 regarding saliva collection devices[189] - Spectrum has responded with counterclaims, including assertions that the patent is invalid and alleging inequitable conduct and antitrust violations[189] Item 1A. Risk Factors The company faces significant customer concentration risk, with a single non-commercial customer accounting for 56% and 39% of net revenues for Q2 and H1 2022, respectively - A single non-commercial customer accounted for 56% of net consolidated revenues for the three months and 39% for the six months ended June 30, 2022[191] - The company's business is at risk due to this high customer concentration, as a reduction in purchases from this customer could adversely affect financial results[192] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 141,606 shares in Q2 2022, primarily to satisfy tax withholdings for vested employee shares, not under its public repurchase program Share Repurchases Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | 107,316 | $7.08 | | May 2022 | 21,979 | $5.17 | | June 2022 | 12,311 | $3.83 | | Total | 141,606 | N/A | - The shares purchased were retired to satisfy minimum tax withholdings in connection with the vesting of restricted and performance shares, not as part of the public repurchase plan[194]