OraSure Technologies(OSUR) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, and cash flows, along with detailed notes explaining significant accounting policies, government contracts, revenue breakdowns, goodwill, leases, and segment information Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Total Assets | $432,208 | $460,990 | $(28,782) | -6.24% | | Total Liabilities | $90,318 | $80,457 | $9,861 | 12.26% | | Total Stockholders' Equity | $341,890 | $380,533 | $(38,643) | -10.15% | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Revenues | $116,463 | $53,917 | $264,401 | $170,106 | | Gross Profit | $46,192 | $21,468 | $98,048 | $90,467 | | Operating Income (Loss) | $875 | $(13,013) | $(36,392) | $(793) | | Net Income (Loss) | $5,273 | $(15,015) | $(33,496) | $(12,605) | | Basic EPS | $0.07 | $(0.21) | $(0.46) | $(0.18) | | Diluted EPS | $0.07 | $(0.21) | $(0.46) | $(0.18) | Consolidated Statements of Comprehensive Loss Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | $5,273 | $(15,015) | $(33,496) | $(12,605) | | Currency translation adjustments | $(9,828) | $(4,117) | $(12,421) | $(1,362) | | Unrealized gain (loss) on marketable securities | $11 | $(161) | $167 | $(262) | | Comprehensive Loss | $(4,544) | $(19,293) | $(45,750) | $(14,229) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(29,190) | $(22,598) | | Net cash (used in) provided by investing activities | $(4,488) | $776 | | Net cash used in financing activities | $(3,027) | $(3,052) | | Net decrease in cash and cash equivalents | $(41,557) | $(25,840) | | Cash and cash equivalents, end of period | $75,205 | $134,962 | Notes to the Consolidated Financial Statements 1. Summary of Significant Accounting Policies This section outlines the company's significant accounting policies, including principles of consolidation, investment classification (available-for-sale), fair value measurements (Level 1, 2, 3), property, plant and equipment depreciation, intangible asset amortization, impairment testing for long-lived assets, and foreign currency translation. It also notes no material changes to policies except as discussed Available-for-Sale Securities (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Total available-for-sale securities (Fair Value) | $26,432 | $53,288 | - Intangible assets decreased from $14,343 thousand as of December 31, 2021, to $11,919 thousand as of September 30, 2022, primarily due to $1,617 thousand in amortization expense and $807 thousand in foreign currency translation losses[29] - An aggregate pre-tax asset impairment charge of $6,559 thousand was recorded during the three months ended September 30, 2022, due to changes in forecasted demand for products, rendering several manufacturing lines and associated assets unutilized[31] Net Foreign Exchange Gains (in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $2,342 | $7 | | Nine Months Ended Sep 30 | $2,396 | $(371) | 2. Government Capital Contracts The company has agreements for funding from the U.S. Department of Defense (DOD) and the Commonwealth of Pennsylvania to expand manufacturing capacity for COVID-19 rapid tests and other operations. Funding earned for capital-related costs reduces the cost of property, plant and equipment, while project management income is recognized straight-line - Received $109 million in funding from the U.S. Department of Defense (DOD) to build additional manufacturing capacity for InteliSwab® COVID-19 Rapid Tests[38] Income Recognized from Government Contracts (in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $561 | N/A | | Nine Months Ended Sep 30 | $1,684 | N/A | Government Contract Balances (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total other current assets (receivables) | $15,329 | $19,629 | | Property, plant and equipment, net | $0 | $0 | | Other non-current assets (unbilled receivables) | $2,489 | $0 | | Accrued expenses and other current liabilities | $(404) | $(8,103) | 3. Inventories This section provides a breakdown of the company's inventory, categorized into raw materials, work in process, and finished goods, showing an overall increase from the prior year-end Inventory Breakdown (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :--------------- | :----------- | :----------- | :----- | :------- | | Raw materials | $37,137 | $33,168 | $3,969 | 11.97% | | Work in process | $2,499 | $2,252 | $247 | 10.97% | | Finished goods | $39,169 | $17,718 | $21,451 | 121.07% | | Total Inventories | $78,805 | $53,138 | $25,667 | 48.30% | 4. Earnings (Loss) Per Share This section details the computation of basic and diluted earnings (loss) per share, including the weighted-average shares outstanding and the impact of dilutive securities. It notes that in periods of net loss, basic and diluted EPS are the same as dilutive effects would be anti-dilutive Earnings (Loss) Per Share (in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $5,273 | $(15,015) | $(33,496) | $(12,605) | | Basic EPS | $0.07 | $(0.21) | $(0.46) | $(0.18) | | Diluted EPS | $0.07 | $(0.21) | $(0.46) | $(0.18) | | Basic Shares | 72,616 | 72,023 | 72,448 | 71,962 | | Diluted Shares | 72,785 | 72,023 | 72,448 | 71,962 | - For the three months ended September 30, 2022, 1,734 shares from stock options, restricted stock, and performance stock units were excluded from diluted EPS computation as their inclusion would have been anti-dilutive[45] 5. Revenues This section provides a detailed breakdown of net revenues by product line (e.g., COVID-19, Genomics, HIV, HCV) and geographic area. It also highlights significant customer and vendor concentrations, noting that one non-commercial customer accounted for a substantial portion of accounts receivable and net consolidated revenues Net Revenues by Product Line (in thousands) | Product Line | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | COVID-19 | $79,920 | $13,930 | $154,331 | $54,147 | | Genomics | $13,980 | $19,018 | $44,558 | $49,333 | | HIV | $9,054 | $10,022 | $27,577 | $29,745 | | HCV | $3,234 | $2,715 | $10,182 | $9,382 | | Substance abuse | $2,595 | $2,674 | $7,786 | $7,265 | | Microbiome | $1,761 | $1,693 | $5,583 | $5,888 | | Laboratory services | $1,957 | $2,406 | $4,895 | $8,017 | | Other product and service revenues | $320 | $771 | $2,312 | $1,772 | | Net product and services revenues | $112,821 | $53,229 | $257,224 | $165,549 | | Other revenues | $3,642 | $688 | $7,177 | $4,557 | | Total Net Revenues | $116,463 | $53,917 | $264,401 | $170,106 | Net Revenues by Geographic Area (in thousands) | Geographic Area | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | $108,941 | $42,969 | $237,248 | $139,669 | | Europe | $2,207 | $2,411 | $8,929 | $10,288 | | Other regions | $5,315 | $8,537 | $18,224 | $20,149 | | Total Net Revenues | $116,463 | $53,917 | $264,401 | $170,106 | - One non-commercial customer accounted for 47% of accounts receivable at September 30, 2022, and 69% and 53% of net consolidated revenues for the three and nine months ended September 30, 2022, respectively[48] 6. Goodwill This section details the changes in goodwill by operating segment, including an impairment charge for the Diagnostics reporting unit due to a decline in market capitalization. It describes the quantitative impairment test methodology, which combines income-based and market-based approaches Goodwill by Operating Segment (in thousands) | Segment | Balance as of Jan 1, 2022 | Impairment | Foreign Currency Translation Change | Balance as of Sep 30, 2022 | | :------------------ | :------------------------ | :--------- | :---------------------------------- | :------------------------- | | Diagnostics | $3,604 | $(3,604) | $0 | $0 | | Molecular Solutions | $36,675 | $0 | $(2,199) | $34,476 | | Total | $40,279 | $(3,604) | $(2,199) | $34,476 | - A pre-tax impairment charge of $3.6 million was recognized during the three months ended June 30, 2022, fully impairing the goodwill balance for the Diagnostics segment, triggered by a significant decline in the company's market capitalization[52] - Fair values of reporting units were estimated using a combined income-based (75% weight) and market-based (25% weight) approach, with discount rates of 22% for Diagnostics and 20% for Molecular Solutions[53] 7. Accrued Expenses and other current liabilities This section provides a breakdown of accrued expenses and other current liabilities, showing a decrease in total from the prior year-end, primarily due to a reduction in the commitment to purchase under government contracts Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Payroll and related benefits | $11,263 | $15,570 | $(4,307) | -27.66% | | Commitment to purchase under government contract | $0 | $8,103 | $(8,103) | -100.00% | | Professional fees | $4,771 | $3,335 | $1,436 | 43.06% | | Sales tax payable | $1,372 | $2,227 | $(855) | -38.39% | | Other | $8,006 | $4,543 | $3,463 | 76.22% | | Total | $25,412 | $33,778 | $(8,366) | -24.77% | 8. Leases This section details the company's operating and finance leases for offices, warehouse space, and equipment, including lease expense components, cash flow information, balance sheet impact, and future minimum lease payments. It also notes the termination of a warehouse lease in October 2022, resulting in significant annual cash savings Total Lease Cost (in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $1,536 | $1,275 | | Nine Months Ended Sep 30 | $4,019 | $2,568 | Lease Liabilities and Terms | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total operating lease liabilities (in thousands) | $16,431 | $9,383 | | Total finance lease liabilities (in thousands) | $2,177 | $2,891 | | Weighted-average remaining lease term—operating leases | 7.46 years | 5.26 years | | Weighted-average remaining lease term—finance leases | 1.59 years | 2.21 years | | Weighted-average discount rate—operating leases | 4.25% | 3.90% | | Weighted-average discount rate—finance leases | 3.45% | 3.57% | - The company terminated a warehouse lease effective October 31, 2022, resulting in annual cash savings of approximately $735 thousand and a reduction of operating right-of-use assets and lease liabilities by $4,927 thousand and $5,146 thousand, respectively[61] 9. Stockholders' Equity This section provides a reconciliation of changes in stockholders' equity, detailing movements in additional paid-in capital, accumulated other comprehensive loss, and accumulated deficit. It also outlines stock-based award activity (options, restricted stock, PSUs) and the company's stock repurchase program Stockholders' Equity Changes (in thousands) | Metric | Dec 31, 2021 | Sep 30, 2022 | Change | | :-------------------------- | :----------- | :----------- | :----- | | Total Stockholders' Equity | $380,533 | $341,890 | $(38,643) | | Additional Paid-in Capital | $511,063 | $518,170 | $7,107 | | Accumulated Other Comprehensive Loss | $(10,077) | $(22,331) | $(12,254) | | Accumulated Deficit | $(120,453) | $(153,949) | $(33,496) | Stock-Based Compensation Expense (in thousands) | Award Type | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :-------------------------- | :-------------------------- | | Stock options | $1,213 | $793 | | Restricted shares | $7,047 | $2,891 | | PSUs | $840 | $1,471 | | Total | $9,100 | $5,155 | - The company has a share repurchase program approved in 2008 for up to $25 million of common shares. No shares were purchased and retired under this program during the nine months ended September 30, 2022 and 2021, but 19,470 shares were purchased in July 2022 to satisfy tax withholdings related to restricted share vesting[68][194] 10. Transition costs This section details the costs and compensation arrangements related to the transition of the company's Chief Executive Officer, including severance for the former CEO, compensation for the interim CEO, and the employment agreement and inducement grants for the new CEO - Former CEO Stephen S. Tang received $1,569 thousand in severance and recognized a net $1,508 thousand of expense in relation to his stock compensation during the nine months ended September 30, 2022, due to termination without cause[70][71] - Interim CEO Nancy J. Gagliano received a monthly base salary of $56 thousand, a one-time award of fully vested common stock with a fair value of $100 thousand, and a restricted stock unit award with a fair value of $670 thousand (of which $168 thousand vested)[72] - New CEO Carrie Eglinton Manner's compensation package includes an initial annual base salary of $700 thousand, participation in an annual incentive plan (target 100% of base salary), and inducement grants totaling $5,600 thousand in fair value (restricted stock unit award of $4,000 thousand, restricted stock award of $1,600 thousand, and a PSU award)[73] 11. Income Taxes This section reports the income tax expense or benefit for the periods, highlighting the impact of withholding tax on repatriated earnings from Canada and the decrease in foreign tax expense due to lower income from the Canadian subsidiary. The company maintains a full valuation allowance against its U.S. deferred tax asset Income Tax Expense (Benefit) (in thousands) | Period | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $(1,143) | $2,102 | | Nine Months Ended Sep 30 | $1,624 | $12,241 | - Tax expense for the nine months ended September 30, 2022, includes $1,683 thousand of withholding tax paid on the repatriation of $65 million of unremitted earnings from Canada to the United States[74] - The company maintains a full valuation allowance against its U.S. deferred tax asset, as management believes the facts and circumstances necessitating the allowance have not changed[76] 12. Commitments and Contingencies This section addresses the company's involvement in legal actions arising in the ordinary course of business, specifically detailing the ongoing patent litigation against Spectrum Solutions, LLC regarding saliva collection devices - The company is involved in patent litigation against Spectrum Solutions, LLC, filed in March 2021, alleging infringement of patents related to saliva collection devices. Fact discovery is ongoing, with the final pretrial conference set for September 7, 2023[78][191] 13. Business Segment Information This section describes the company's two business segments: Diagnostics (rapid diagnostic tests for infectious diseases and substance abuse) and Molecular Solutions (collection kits for genetic material and microbiome laboratory services). It provides segment-level financial data for revenues, operating income/loss, depreciation, impairment losses, capital expenditures, and total assets Net Revenues by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Diagnostics | $97,651 | $23,511 | $196,416 | $57,368 | | Molecular Solutions | $18,812 | $30,406 | $67,985 | $112,738 | | Total | $116,463 | $53,917 | $264,401 | $170,106 | Operating Income (Loss) by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Diagnostics | $11,289 | $(18,446) | $(20,274) | $(42,413) | | Molecular Solutions | $(10,414) | $5,433 | $(16,118) | $41,620 | | Total | $875 | $(13,013) | $(36,392) | $(793) | Loss on Impairment by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Diagnostics | $0 | $0 | $8,517 | $0 | | Molecular Solutions | $6,559 | $0 | $8,584 | $0 | | Total | $6,559 | $0 | $17,101 | $0 | Total Assets by Segment (in thousands) | Segment | Sep 30, 2022 | Dec 31, 2021 | | :------------------ | :----------- | :----------- | | Diagnostics | $265,790 | $209,674 | | Molecular Solutions | $166,418 | $251,316 | | Total | $432,208 | $460,990 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of business segments, recent developments, detailed analysis of consolidated and segment-level financial performance for the three and nine months ended September 30, 2022, liquidity and capital resources, and critical accounting policies Overview and Business Segments The company aims to improve global health through accurate information, operating with two segments: Diagnostics (rapid tests for infectious diseases like COVID-19, HIV, HCV, and substance abuse) and Molecular Solutions (collection kits and services for genomics and microbiome research). The Diagnostics segment includes OTC products and PrEP adherence tests, while Molecular Solutions focuses on clinical, direct-to-consumer, and research markets, including the Colli-Pee® device - The Diagnostics business develops, manufactures, and sells rapid diagnostic products and specimen collection devices for diseases like COVID-19, HIV, and Hepatitis C, as well as drugs of abuse tests. It also includes OTC products and tests for HIV medication adherence[91] - The Molecular Solutions business, operated by DNA Genotek Inc., Diversigen, Inc., and Novosanis NV, sells collection kits and services for clinical laboratories, direct-to-consumer labs, researchers, and pharmaceutical companies, with a focus on genomics and the emerging microbiome market, including the Colli-Pee® device[92][93][94] Recent Developments Recent developments include the ongoing volatility in demand for COVID-19 testing products, new BARDA funding for a second-generation Ebola test, and a contract with the CDC to provide OraQuick® In-Home HIV tests for a self-test program targeting underserved communities - Demand for COVID-19 PCR testing declined in 2022 due to the availability of antigen tests and wider vaccine access, leading to volatility in COVID-19 testing product sales[93][96] - Received up to $8.6 million in funding from BARDA to develop a second-generation Ebola test on the OraQuick® testing platform[97] - Selected to provide up to 1 million OraQuick® In-Home HIV tests over five years for the CDC's "Together Take Me Home" HIV self-test program, targeting disproportionately affected populations[99][100] Current Consolidated Financial Results For the nine months ended September 30, 2022, consolidated net revenues increased significantly, primarily driven by InteliSwab® COVID-19 rapid test sales. However, the company reported a higher consolidated net loss due to lower gross margins from unfavorable product mix, increased inventory reserves, manufacturing inefficiencies, and higher operating expenses, including impairment charges and CEO transition costs. Cash used in operating activities also increased Consolidated Financial Highlights (9 Months Ended Sep 30, in millions) | Metric | 2022 | 2021 | Change | % Change | | :-------------------------------- | :----- | :----- | :----- | :------- | | Consolidated Net Revenues | $264.4 | $170.1 | $94.3 | 55.44% | | Consolidated Net Loss | $(33.5) | $(12.6) | $(20.9) | 165.87% | | Cash used in operating activities | $(29.2) | $(22.6) | $(6.6) | 29.20% | | Cash, cash equivalents and available-for-sale securities | $101.6 | N/A | N/A | N/A | - Net loss was impacted by lower gross margins due to an unfavorable product mix (higher sales of lower margin products), increased inventory reserves, manufacturing inefficiencies, lower absorption of labor costs, and the absence of the Gates subsidy. Operating expenses also increased due to impairment charges, legal fees, severance, accelerated stock compensation, increased staffing, and strategic alternatives process costs[102] Results of Operations Three months ended September 30, 2022 compared to September 30, 2021 For the three months ended September 30, 2022, consolidated net revenues significantly increased, primarily driven by InteliSwab® COVID-19 rapid test sales. Gross profit margins remained flat, but operating income improved from a loss in the prior year, despite impairment charges and increased operating expenses in certain areas Consolidated Net Revenues Consolidated Net Revenues (3 Months Ended Sep 30, in thousands) | Metric | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | Net product and services revenues | $112,821 | $53,229 | 112% | | Other revenues | $3,642 | $688 | 429% | | Total Net Revenues | $116,463 | $53,917 | 116% | - The increase in consolidated net revenues was largely due to $79.6 million of InteliSwab® COVID-19 rapid test revenues in Q3 2022, compared to $7.7 million in Q3 2021. Higher HCV product sales also contributed, while other product lines saw declines[106] - International sales accounted for 6% of total net revenues in Q3 2022, down from 20% in Q3 2021[108] Net Revenues by Segment Diagnostics Segment Diagnostics Segment Net Revenues (3 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | COVID-19 | $79,559 | $7,675 | 937% | | Other infectious disease testing | $12,248 | $12,932 | -5% | | Substance abuse testing | $2,595 | $2,674 | -3% | | Other revenues | $3,249 | $230 | NM | | Total Net Revenues | $97,651 | $23,511 | 315% | OraQuick® HIV and HCV Product Revenues (3 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :---------------- | :----- | :----- | :------- | | Domestic HIV | $4,609 | $3,440 | 34% | | International HIV | $4,445 | $6,582 | -32% | | Domestic HCV | $1,866 | $1,827 | 2% | | International HCV | $1,368 | $888 | 54% | Molecular Solutions Segment Molecular Solutions Segment Net Revenues (3 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | Genomics | $13,980 | $19,018 | -26% | | Microbiome | $1,761 | $1,693 | 4% | | COVID-19 | $361 | $6,255 | -94% | | Laboratory services | $1,957 | $2,406 | -19% | | Other product and service revenues | $360 | $576 | -38% | | Other revenues | $393 | $458 | -14% | | Total Net Revenues | $18,812 | $30,406 | -38% | Consolidated Operating Results - Consolidated gross profit margins remained flat at 40% for both the three months ended September 30, 2022 and 2021[126] - Consolidated operating income was $875 thousand for the three months ended September 30, 2022, a $13.9 million increase from the $13.0 million operating loss in the prior year, positively impacted by increased revenues despite $6.6 million in impairment charges[127] Operating Income (Loss) by Segment Diagnostics Segment - Diagnostics segment gross profit margin increased to 38% in Q3 2022 from 16% in Q3 2021, driven by improved product mix, better quality-yield for InteliSwab® tests, and higher non-product revenues[130] Diagnostics Segment Operating Expenses (3 Months Ended Sep 30, in thousands) | Expense Category | 2022 | 2021 | % Change | | :----------------- | :----- | :----- | :------- | | Research and development | $7,400 | $5,900 | 26% | | Sales and marketing | $9,700 | $9,000 | 8% | | General and administrative | $8,900 | $8,100 | 5% | - The Diagnostics segment reported an operating income of $11.3 million for the three months ended September 30, 2022, including $8.5 million in non-cash impairment charges, $2.1 million for depreciation and amortization, and $1.6 million for stock-based compensation[132] Molecular Solutions Segment - Molecular Solutions segment gross profit margin decreased to 49% in Q3 2022 from 58% in Q3 2021 due to a less favorable product mix[133] Molecular Solutions Segment Operating Expenses (3 Months Ended Sep 30, in thousands) | Expense Category | 2022 | 2021 | % Change | | :----------------- | :----- | :----- | :------- | | Research and development | $2,400 | $2,700 | -13% | | Sales and marketing | $3,800 | $4,900 | -23% | | General and administrative | $7,000 | $4,400 | 58% | - Operating expenses for the Molecular segment included an impairment charge of $6.6 million for idle manufacturing lines[135] - The Molecular Solutions segment reported an operating loss of $10.4 million for the three months ended September 30, 2022, including $6.6 million in non-cash impairment charges, $1.8 million for depreciation and amortization, and $0.7 million for stock-based compensation[136] Consolidated Income Taxes Consolidated Income Tax (Benefit) Expense (3 Months Ended Sep 30, in thousands) | Tax Type | 2022 | 2021 | | :---------------- | :----- | :----- | | U.S. state tax benefit | $(40) | $(102) | | Foreign tax (benefit) expense | $(1,100) | $2,200 | - The decrease in foreign tax expense is largely due to a decrease in income before taxes generated by the Canadian subsidiary[138] Nine months ended September 30, 2022 compared to September 30, 2021 For the nine months ended September 30, 2022, consolidated net revenues increased significantly, primarily driven by InteliSwab® COVID-19 rapid test sales. However, gross profit margins decreased due to unfavorable product mix and manufacturing inefficiencies, leading to a substantial consolidated operating loss Consolidated Net Revenues Consolidated Net Revenues (9 Months Ended Sep 30, in thousands) | Metric | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | Net product and services revenues | $257,224 | $165,549 | 55% | | Other revenues | $7,177 | $4,557 | 57% | | Total Net Revenues | $264,401 | $170,106 | 55% | - The increase in consolidated net revenues was largely due to $144.8 million of InteliSwab® COVID-19 rapid test revenues in the first nine months of 2022, compared to $7.9 million in the comparable period of 2021. This was partially offset by declines in molecular sample collection kits for COVID-19 testing and international HIV product sales[141] - International sales accounted for 10% of total net revenues in the first nine months of 2022, down from 18% in the comparable period of 2021[142] Net Revenues by Segment Diagnostics Segment Diagnostics Segment Net Revenues (9 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | COVID-19 | $144,809 | $7,938 | NM | | Other infectious disease testing | $38,179 | $39,664 | -4% | | Substance abuse testing | $7,786 | $7,265 | 7% | | Other revenues | $5,642 | $2,501 | 126% | | Total Net Revenues | $196,416 | $57,368 | 242% | OraQuick® HIV and HCV Product Revenues (9 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :---------------- | :----- | :----- | :------- | | Domestic HIV | $12,115 | $12,490 | -3% | | International HIV | $15,462 | $17,255 | -10% | | Domestic HCV | $6,440 | $5,580 | 15% | | International HCV | $3,742 | $3,802 | -2% | Molecular Solutions Segment Molecular Solutions Segment Net Revenues (9 Months Ended Sep 30, in thousands) | Market | 2022 | 2021 | % Change | | :-------------------------- | :----- | :----- | :------- | | Genomics | $44,558 | $49,333 | -10% | | Microbiome | $5,583 | $5,888 | -5% | | COVID-19 | $9,522 | $46,209 | -79% | | Laboratory services | $4,895 | $8,017 | -39% | | Other product revenues | $1,892 | $1,235 | 53% | | Other revenues | $1,535 | $2,056 | -25% | | Total Net Revenues | $67,985 | $112,738 | -40% | Consolidated Operating Results - Consolidated gross profit margins decreased to 37% for the nine months ended September 30, 2022, from 53% in the prior year, due to an unfavorable product mix, increased inventory reserves, manufacturing inefficiencies, lower labor cost absorption, and the expiration of the Gates Foundation subsidy[161] - Consolidated operating loss for the nine months ended September 30, 2022, was $36.4 million, a $35.6 million decrease from the $793 thousand recorded in the prior year, primarily due to lower gross profit margins and an aggregate impairment charge of $17.1 million[162] Operating Income (Loss) by Segment Diagnostics Segment - Diagnostics segment gross profit margin improved to 33% for the nine months ended September 30, 2022, from 29% in the prior year, due to a more favorable product mix and increased non-product revenues, partially offset by manufacturing inefficiencies and the expiration of the Gates Foundation subsidy[165] Diagnostics Segment Operating Expenses (9 Months Ended Sep 30, in thousands) | Expense Category | 2022 | 2021 | % Change | | :----------------- | :----- | :----- | :------- | | Research and development | $19,200 | $17,400 | 10% | | Sales and marketing | $25,600 | $21,700 | 18% | | General and administrative | $33,600 | $21,600 | 55% | - Operating expenses for the Diagnostics segment included an impairment charge of $4.9 million for an idle manufacturing line and a goodwill impairment charge of $3.6 million, writing down the segment's goodwill to $0[167] - The Diagnostics segment reported an operating loss of $20.3 million for the nine months ended September 30, 2022, including $8.5 million in non-cash impairment charges, $5.7 million for depreciation and amortization, and $7.5 million for stock-based compensation[168] Molecular Solutions Segment - Molecular Solutions segment gross profit margin decreased to 47% for the nine months ended September 30, 2022, from 66% in the prior year, due to increased reserves for excess inventory and a less favorable product mix[169] Molecular Solutions Segment Operating Expenses (9 Months Ended Sep 30, in thousands) | Expense Category | 2022 | 2021 | % Change | | :----------------- | :----- | :----- | :------- | | Research and development | $8,100 | $7,900 | 3% | | Sales and marketing | $12,300 | $12,100 | 1% | | General and administrative | $18,600 | $12,100 | 53% | - Operating expenses for the Molecular Solutions segment included impairment charges of $8.6 million for several idle manufacturing lines[171] - The Molecular Solutions segment reported an operating loss of $16.1 million for the nine months ended September 30, 2022, including $8.6 million in non-cash impairment charges, $5.6 million for depreciation and amortization, and $1.6 million for stock-based compensation[172] Consolidated Income Taxes Consolidated Income Tax (Benefit) Expense (9 Months Ended Sep 30, in thousands) | Tax Type | 2022 | 2021 | | :---------------- | :----- | :----- | | U.S. state tax expense | $379 | $13 | | Withholding taxes on repatriation | $1,700 | $0 | | Foreign tax (benefit) expense | $(438) | $12,200 | - The overall decrease in foreign tax expense is largely a result of the decrease in income before taxes generated by the Canadian subsidiary[174] Liquidity and Capital Resources The company's cash, cash equivalents, and available-for-sale securities decreased, and net cash used in operating activities increased, primarily due to the net loss and increased working capital requirements for COVID-19 testing. Investing activities included proceeds from maturities and purchases of property and equipment, while financing activities mainly involved common stock repurchases for tax withholdings. The company expects current liquidity to be sufficient for the next twelve months, but notes potential impacts from various factors including government contracts, acquisitions, and foreign currency Liquidity and Capital Resources (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------------------- | :----------- | :----------- | :----- | :------- | | Cash and cash equivalents | $75,205 | $116,762 | $(41,557) | -35.59% | | Available for sale securities | $26,432 | $53,288 | $(26,856) | -50.40% | | Working capital | $208,035 | $220,367 | $(12,332) | -5.60% | Net Cash Flows (9 Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Net cash used in operating activities | $(29,190) | $(22,598) | | Net cash used in investing activities | $(4,488) | $776 | | Net cash used in financing activities | $(3,027) | $(3,052) | - Cash used in operating activities increased due to the net loss and increased working capital requirements, including a $27.6 million increase in inventory and a $19.2 million increase in accounts receivable[176] - As of September 30, 2022, $75.2 million (74%) of the $101.6 million in cash, cash equivalents, and available-for-sale securities belonged to the Canadian subsidiary. Repatriated $65.0 million from Canada to the U.S. in Q1 2022, incurring $1.7 million in Canadian withholding tax[179] Critical Accounting Policies and Estimates This section reiterates the company's critical accounting policies and estimates, emphasizing the highly subjective nature and significant judgment involved in evaluating goodwill for impairment, including identifying reporting units and estimating fair value - The process of evaluating goodwill impairment is highly subjective and requires significant judgment, including identifying reporting units, performing qualitative evaluations, and estimating the fair value of applicable reporting units[185] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company does not hold derivative financial instruments. Its primary market risk is foreign currency exchange risk, mainly from operations in Canada (Canadian dollar) and Belgium (Euro). Fluctuations in these exchange rates can affect operating results and cash flows - The company has no material derivative risk as it does not hold derivative financial instruments[186] - Foreign currency exchange risk primarily relates to operations in Canada (Canadian dollar) and Belgium (Euro). A 10% unfavorable change in the Canadian-to-U.S. dollar and Euro-to-U.S. dollar exchange rates would have decreased comprehensive income by approximately $11.7 million for the nine months ended September 30, 2022[187] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2022, concluding they were effective. There were no material changes in internal control over financial reporting during the three months ended September 30, 2022 - The company's disclosure controls and procedures were evaluated as effective as of September 30, 2022, providing reasonable assurance that material information is accumulated and communicated timely[188] - There were no material changes in the company's internal control over financial reporting during the three months ended September 30, 2022[189] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section provides an update on legal proceedings, specifically detailing the ongoing patent litigation against Spectrum Solutions, LLC, regarding alleged infringement of patents related to saliva collection devices - The company is involved in patent litigation against Spectrum Solutions, LLC, filed in March 2021, alleging infringement of patents related to saliva collection devices. Fact discovery is ongoing, with the final pretrial conference set for September 7, 2023[191] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K, but highlights customer concentration as a significant risk, with one non-commercial customer accounting for a large portion of net consolidated revenues - One non-commercial customer accounted for 69% and 53% of net consolidated revenues for the three and nine months ended September 30, 2022, respectively, creating a significant customer concentration risk[193] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the repurchase of common stock during the period, which was primarily to satisfy minimum tax withholdings related to the vesting of restricted shares awarded to employees, under an existing share repurchase program Common Stock Repurchases (July 1 - Sep 30, 2022) | Period | Total shares purchased | Average price paid per Share | | :-------------------------------- | :--------------------- | :--------------------------- | | July 1, 2022 - July 31, 2022 | 19,470 | $2.78 | | August 1, 2022 - August 31, 2022 | — | — | | September 1, 2022 - September 30, 2022 | — | — | | Total | 19,470 | N/A | - Shares were purchased and retired to satisfy minimum tax withholdings related to the vesting of restricted and performance shares, under a share repurchase program approved in 2008 for up to $25.0 million[194][195] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities[196] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[196] Item 5. Other Information No other information is reported under this item - No other information to report[197] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including employment agreements, certifications required by the Securities Exchange Act, and XBRL-related documents - Exhibits include employment agreements (e.g., Kenneth J. McGrath), certifications (e.g., Carrie Eglinton-Manner, Kenneth J. McGrath) required by Rule 13a-14(a) and 13a-14(b) of the Securities Exchange Act, and Inline XBRL documents[197]