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: ability to successfully manage and integrate acquisitions of other companies in a manner that complements or leverages our existing business, or otherwise expands or enhances our portfolio of products and our end-to-end service offerings, and the diversion of management’s attention from our ongoing business and regular business responsibilities to effect such integration; the expected economic benefits of acquisitions (and increased returns for our stockholders), including that the anticipated synergies, revenue enhancement strategies and other benefits from the acquisitions may not be fully realized or may take longer to realize than expected and our actual integration costs may exceed our estimates; impact of increased or different risks arising from the acquisition of companies located in foreign countries; ability to market and sell products, whether through our internal, direct sales force or third parties; impact of significant customer concentration in the genomics business; failure of distributors or other customers to meet purchase forecasts, historic purchase levels or minimum purchase requirements for our products; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; ability to effectively resolve warning letters, audit observations and other findings or comments from the U.S. Food and Drug Administration (“FDA”) or other regulators; the impact of the novel coronavirus (“COVID-19”) pandemic on our business and our ability to successfully develop new products, validate the expanded use of existing collection products, receive necessary regulatory approvals and authorizations and commercialize such products for COVID-19 testing; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; ability to meet increased demand for the Company’s products; impact of replacing distributors; inventory levels at distributors and other customers; ability of the Company to achieve its financial and strategic objectives and continue to increase its revenues, including the ability to expand international sales; ability to identify, complete, integrate and realize the full benefits of future acquisitions; impact of competitors, competing products and technology changes; reduction or deferral of public funding available to customers; competition from new or better technology or lower cost products; ability to develop, commercialize and market new products; market acceptance of oral fluid or urine testing, collection or other products; market acceptance and uptake of microbiome informatics, microbial genetics technology and related analytics services; changes in market acceptance of products based on product performance or other factors, including changes in testing guidelines, algorithms or other recommendations by the Centers for Disease Control and Prevention (“CDC”) or other agencies; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; impact of contracting with the U.S. government; impact of negative economic conditions; ability to maintain sustained profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of the Company’s stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to attract and retain qualified personnel; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. 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, 2020, 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.
18
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 oral fluid 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 HIV and Hepatitis C that are performed on a rapid basis at the point of care and tests 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 HIV product is also sold in a consumer-friendly format in the OTC market in the U.S. and as a self-test to individuals in a number of other countries. Our Diagnostics business includes the operations of UrSure, which was acquired and merged into OraSure in 2020. This part of the Diagnostics business develops and commercializes products that measure adherence to HIV medications including pre-exposure prophylaxis or PrEP, the daily medication to prevent HIV, and anti-retroviral medications to suppress HIV. These products include laboratory-based tests that can measure levels of the medication in a patient’s urine or blood, as well as point- of-care products currently in development.
Our Molecular Solutions business is operated by our subsidiaries, DNAG, Diversigen and Novosanis. In this business, we manufacture and sell kits that are used to collect, stabilize, transport and store a biological sample of genetic material for molecular testing. Our products are used for academic research and commercial applications, including ancestry, disease risk management, lifestyle and animal testing. Included in the disease risk management area are pharmacogenomics testing, hereditary disease screening, prenatal or cancer screening, population health initiatives and other molecular testing using DNA or RNA for diagnosis of acute disease. We also sell research-use-only collection products into the microbiome market. We offer our customers a suite of genomics and microbiome services that range from package customization and study design optimization to extraction, analysis and reporting services. The microbiome laboratory and bioinformatics services are provided by Diversigen, which includes the operations of CoreBiome, a subsidiary we acquired in early 2019. CoreBiome and Diversigen were merged together in 2020. Novosanis manufactures and sells the Colli-Pee® collection device for the volumetric collection of first-void urine for use in research, screening and diagnostics in the liquid biopsy and sexually transmitted infection markets. Our Molecular Solutions business serves customers in many countries worldwide, including many leading research universities and hospitals.
Recent Developments
Impact of COVID-19
The COVID-19 pandemic continues to impact our business operations and it is not possible for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations. During 2020, traditional HIV and HCV testing programs and drug testing in the workplace market were reduced or terminated as a result of the various “stay-at-home” orders and social distancing guidelines issued by federal, state and local governments to contain the spread of the COVID-19 pandemic and we continued to see this impact our business in early 2021. However, during the second quarter of 2021, we began to see a resumption of HIV and HCV testing in the U.S. as domestic sales of our non-COVID diagnostic products began returning to pre-pandemic levels. On the international front, while professional HIV and HCV testing in Europe and Asia also started to pick up, more recently, we have experienced some reduction and stoppages of HIV self-testing in Southern and Eastern African countries due to the COVID-19 pandemic. In our molecular segment, COVID-related disruption in clinical and research work, particularly in the academic market, had reduced demand for our products in 2020 and early 2021, but demand levels started to return to normal in the second quarter of 2021. Although the negative trends that materially impacted our results of operations during 2020 and early 2021 are starting to abate, it is impossible to predict if this improvement will continue and these negative trends may adversely impact certain parts of our business in future periods and for an indeterminate time period, depending on the duration and severity of the COVID-19 pandemic, the impact of COVID-19 variants and the scope and success of vaccination programs globally.
We also have experienced significant opportunities, and continue to believe there are potentially more significant opportunities, for increased revenues as a result of the COVID-19 pandemic. In 2020, we began selling our saliva collection devices for use in molecular COVID-19 testing. In the first half of 2021, we generated revenues of approximately $38.9 million from sales of our molecular collection devices related to COVID-19 testing. In the U.S., public health customers purchased increased quantities of our OraQuick® In-Home HIV Test in order to permit continued HIV testing while allowing clients and patients to adhere to “stay-at-home” and social distancing requirements. In addition, we saw increased demand for our molecular collection products from customers who conduct both saliva and blood-based testing. As it becomes more difficult to collect blood in clinics or healthcare settings, these customers are increasingly relying on the saliva collection alternative. However, demand for molecular COVID-19 testing during the second quarter of 2021 began to decline primarily due to the availability of vaccines. This trend is expected to continue in future periods.
In June 2021, we received three Emergency Use Authorizations ("EUAs") from the U.S. Food and Drug Administration ("FDA") for our InteliSwabTM COVID-19 Rapid Tests for non-prescription over-the-counter ("OTC"), professional point-of-care and prescription use. These
19
lateral flow, rapid diagnostic tests are designed to detect active COVID-19 infection with a simple, easy-to-use workflow, using samples self-collected from the lower nostrils. After users swab their lower nostrils, the test stick is swirled in a pre-measured buffer solution. No instrumentation, batteries, smart phone or laboratory analysis is needed to read the result, which appears on the test stick a short time later. Because of the timing of EUA receipt and the time needed to implement final labeling for these tests, we did not report any sales of InteliSwabTM in the second quarter of 2021 and expect sales to begin in the third quarter.
Following discussions with the FDA and their de-prioritization of antibody testing in the U.S. we have decided to no longer pursue EUAs for a COVID-19 antibody enzyme-linked immunosorbent assay ("ELISA") for use in laboratory settings. We will, however, continue to offer this product for research use only to labs and other parties interested in COVID antibody surveillance and research applications.
Current Consolidated Financial Results
During the six months ended June 30, 2021, our consolidated net revenues increased 91% to $116.2 million, compared to $60.9 million for the six months ended June 30, 2020. Net product and services revenues during the six months ended June 30, 2021 increased 90% when compared to the same period of 2020, due to higher sales of our molecular sample collection kits for COVID-19 testing, commercial genomics products, microbiome kits, domestic OraQuick® HIV tests and domestic and international OraQuick® HVC tests and higher revenues from laboratory services. Partially offsetting these increases were lower sales of our international OraQuick® HIV Self-Tests. Other revenues for the six months ended June 30, 2021 were $3.9 million compared to $1.6 million in the same period of 2020. This increase was largely due to increased research and development funding for the development of our COVID-19 tests and our HIV medication adherence tests and higher royalty income.
Our consolidated net income for the six months ended June 30, 2021 was $2.4 million, or $0.03 per share on a fully diluted basis, compared to a consolidated net loss of $17.8 million, or $0.28 per share on a fully diluted basis, for the six months ended June 30, 2020. Results for the six months ended June 30, 2021 included an $1.0 million non-cash pre-tax benefit associated with the change in the fair value of acquisition-related contingent consideration which accounted for approximately $0.01 per share. Results for the six months ended June 30, 2020 included a $450,000 non-cash pre-tax charge associated with the change in the fair value of acquisition-related contingent consideration and $343,000 of acquisition related transaction costs associated with the UrSure acquisition, which together accounted for approximately $0.01 per share.
Cash used in operating activities during the six months ended June 30, 2021 and 2020 was $3.5 million and $2.2 million, respectively. As of June 30, 2021, we had $229.4 million in cash, cash equivalents, and available-for-sale securities, compared to $257.1 million at December 31, 2020.
Results of Operations
Three months ended June 30, 2021 compared to June 30, 2020
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, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
Dollars
|
|
|
|
|
|
|
Percentage of Total Net Revenues
|
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
|
2021
|
|
|
|
2020
|
|
|
Diagnostics
|
|
$
|
18,252
|
|
|
$
|
10,270
|
|
|
|
78
|
|
%
|
|
|
32
|
|
%
|
|
|
35
|
|
%
|
Molecular Solutions
|
|
|
37,489
|
|
|
|
18,067
|
|
|
|
107
|
|
|
|
|
65
|
|
|
|
|
62
|
|
|
Net product and services revenues
|
|
|
55,741
|
|
|
|
28,337
|
|
|
|
97
|
|
|
|
|
97
|
|
|
|
|
97
|
|
|
Other
|
|
|
1,866
|
|
|
|
922
|
|
|
|
102
|
|
|
|
|
3
|
|
|
|
|
3
|
|
|
Net revenues
|
|
$
|
57,607
|
|
|
$
|
29,259
|
|
|
|
97
|
|
%
|
|
|
100
|
|
%
|
|
|
100
|
|
%
|
Consolidated net product and services revenues increased 97% to $55.7 million for the three months ended June 30, 2021 from $28.3 million for the three months ended June 30, 2020. All net product and service revenues in each of our business segments experienced double digit growth compared to the prior year period. This growth is a result of sales of all our non-COVID product lines starting to return to pre-pandemic levels. Other revenues for the three months ended June 30, 2021 increased 102% to $1.9 million from $922,000 for the three months ended June 30, 2020 due to increased research and development funding for the development of our COVID-19 tests and our HIV medication adherence tests and higher royalty income.
Consolidated net revenues derived from products sold to customers outside of the United States were $10.0 million and $7.3 million, or 17% and 25% of total net revenues, in the three months ended June 30, 2021 and 2020, 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.
20
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, 2021 and 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
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|
|
|
|
Dollars
|
|
|
|
|
|
|
Percentage of Total Net Revenues
|
|
|
Market
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
|
2021
|
|
|
|
2020
|
|
|
Infectious disease testing
|
|
$
|
15,623
|
|
|
$
|
8,737
|
|
|
|
79
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|
%
|
|
|
81
|
|
%
|
|
|
84
|
|
%
|
Risk assessment testing
|
|
|
2,629
|
|
|
|
1,533
|
|
|
|
71
|
|
|
|
|
14
|
|
|
|
|
15
|
|
|
Net product revenues
|
|
|
18,252
|
|
|
|
10,270
|
|
|
|
78
|
|
|
|
|
95
|
|
|
|
|
99
|
|
|
Other
|
|
|
1,059
|
|
|
|
157
|
|
|
|
575
|
|
|
|
|
5
|
|
|
|
|
1
|
|
|
Net revenues
|
|
$
|
19,311
|
|
|
$
|
10,427
|
|
|
|
85
|
|
%
|
|
|
100
|
|
%
|
|
|
100
|
|
%
|
Infectious Disease Testing Market
Sales to the infectious disease testing market increased 79% to $15.6 million for the three months ended June 30, 2021 from $8.7 million for the three months ended June 30, 2020. This increase resulted from higher world-wide OraQuick® HIV and 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, 2021 and 2020.
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|
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|
|
|
|
|
|
Three Months Ended June 30,
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|
|
Market
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Domestic HIV
|
|
$
|
4,135
|
|
|
$
|
3,197
|
|
|
|
29
|
|
%
|
International HIV
|
|
|
6,809
|
|
|
|
3,883
|
|
|
|
75
|
|
|
Net HIV revenues
|
|
|
10,944
|
|
|
|
7,080
|
|
|
|
55
|
|
|
Domestic HCV
|
|
|
2,571
|
|
|
|
757
|
|
|
|
240
|
|
|
International HCV
|
|
|
1,729
|
|
|
|
641
|
|
|
|
170
|
|
|
Net HCV revenues
|
|
|
4,300
|
|
|
|
1,398
|
|
|
|
208
|
|
|
Net OraQuick® revenues
|
|
$
|
15,244
|
|
|
$
|
8,478
|
|
|
|
80
|
|
%
|
Domestic OraQuick® HIV sales increased 29% to $4.1 million for the three months ended June 30, 2021 from $3.2 million for the three months ended June 30, 2020. This increase was primarily the result of higher sales of our OraQuick® In-Home HIV test as a result of Centers for Disease Control and Prevention (“CDC”) guidance recommending the use of an OTC product for testing in lieu of in-person testing as a result of the COVID-19 pandemic and the re-opening of physician offices and clinics for HIV testing during the current quarter.
International sales of our OraQuick® HIV tests increased 75% to $6.8 million for the three months ended June 30, 2021 from $3.9 million for the three months ended June 30, 2020. This increase was primarily due to customer ordering patterns of our HIV Self-Test in Africa.
Domestic OraQuick® HCV sales increased 240% to $2.6 million for the three months ended June 30, 2021 from $757,000 for the three months ended June 30, 2020, due to the re-opening of testing programs closed as a result of the COVID-19 pandemic and as resources used for COVID-19 testing and vaccinations were redirected back to HCV testing.
International OraQuick® HCV sales increased 170% to $1.7 million for the three months ended June 30, 2021 from $641,000 for the three months ended June 30, 2020 as sales into certain international markets started to return back to pre-pandemic levels.
Risk Assessment Market
Sales to the risk assessment market increased 71% to $2.6 million for the three months ended June 30, 2021 compared to $1.5 million for the three months ended June 30, 2020 due to hiring increases driven by the economic recovery from the COVID-19 pandemic.
Other Revenues
Other revenues for the three months ended June 30, 2021 increased to $1.1 million from $157,000 for the three months ended June 30, 2020, largely due to research and development funding for our COVID-19 and HIV medication adherence tests, which was not present in the prior year period, and the inclusion of royalty income under the terms of a new licensing agreement related to our proprietary buffer solution used for the preservation and stabilization of oral fluid specimens.
21
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the three months ended June 30, 2021 and 2020.
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|
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
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|
|
Market
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Genomics
|
|
$
|
19,582
|
|
|
$
|
6,471
|
|
|
|
203
|
|
%
|
Microbiome
|
|
|
2,853
|
|
|
|
853
|
|
|
|
234
|
|
|
COVID-19
|
|
|
11,491
|
|
|
|
8,472
|
|
|
|
36
|
|
|
Laboratory services
|
|
|
3,114
|
|
|
|
2,103
|
|
|
|
48
|
|
|
Other product and service revenues
|
|
|
449
|
|
|
|
168
|
|
|
|
167
|
|
|
Net molecular product and services revenues
|
|
$
|
37,489
|
|
|
$
|
18,067
|
|
|
|
107
|
|
|
Other
|
|
|
807
|
|
|
|
765
|
|
|
|
5
|
|
|
Net molecular product and services revenues
|
|
$
|
38,296
|
|
|
$
|
18,832
|
|
|
|
103
|
|
%
|
Sales of our genomics products increased 203% to $19.6 million for the three months ended June 30, 2021 compared to $6.5 million for the three months ended June 30, 2020, as we started to see our customer's businesses recover from the COVID-19 pandemic.
Microbiome kit sales increased 234% to $2.9 million for the three months ended June 30, 2021 compared to $853,000 for the three months ended June 30, 2020, also largely a result of the recovery in the market from the COVID-19 pandemic.
Sales of our molecular sample collection kits for COVID-19 testing increased to $11.5 million for the three months ended June 30, 2021 compared to $8.5 million during the comparable period in 2020 due to increased demand since the pandemic began late in the first quarter of 2020. However, we are seeing demand for molecular COVID-19 testing during the second quarter of 2021 begin to decline sequentially primarily due to the availability of vaccines and this trend is expected to continue in future periods.
Laboratory services revenues increased 48% to $3.1 million for the three months ended June 30, 2021 compared to $2.1 million for the three months ended June 30, 2020, due to customers resuming activities delayed by the COVID-19 pandemic.
Other revenues for the three months ended June 30, 2021 increased 5% to $807,000 from $765,000 the three months ended June 30, 2020, largely as a result of higher royalty income under a litigation settlement agreement.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit percentage was 53% for the three months ended June 30, 2021 compared to 59% for the three months ended June 30, 2020. This decrease is due to lower funding that subsidizes the international sale of our HIV Self-Test under the charitable support agreement with the Gates Foundation and higher scrap and manufacturing costs. The Gates agreement and the subsidy provided thereunder expired on June 30, 2021.
Consolidated operating income for the three months ended June 30, 2021 was $1.8 million, an $11.2 million increase from the $9.4 million operating loss reported for the three months ended June 30, 2020. Results for the three months ended June 30, 2021 were positively impacted by the increase in revenues dollars partially offset by lower gross profit percentages and an increase spending in operating expenses.
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 Diagnostics and Molecular Solutions.
Diagnostics Segment
The gross profit percentage for the Diagnostics segment was 34% for the three months ended June 30, 2021 compared to 42% for the three months ended June 30, 2020. This decrease is due to an increase in scrap costs, lower absorption of labor and fixed overhead costs as we built capacity in advance of the sale of our COVID-19 antigen test, and lower funding under the charitable support agreement with the Gates Foundation partially offset by the increase in other revenues which contribute 100% to our gross profit percentage and an improvement in product mix due to increased sales of higher gross profit percentage products.
22
Research and development expenses increased 16% to $5.0 million for the three months ended June 30, 2021 from $4.3 million for the three months ended June 30, 2020, largely due to higher staffing costs as a result of increased headcount to support COVID product development and the inclusion of employees from the UrSure acquisition which occurred in July 2020. Sales and marketing expenses were $6.6 million for both the three months ended June 30, 2021 and 2020. General and administrative expenses increased 2% to $7.1 million for the three months ended June 30, 2021 from $7.0 million for the three months ended June 30, 2020 largely due to higher staffing and consulting costs offset by lower legal and accounting fees.
All of the above contributed to the Diagnostics segment’s operating loss of $11.9 million for the three months ended June 30, 2021, which included non-cash charges of $939,000 for depreciation and amortization and $1.4 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $220,000 associated with the change in the fair value of acquisition-related contingent consideration.
Molecular Solutions Segment
The gross profit percentage for the Molecular Solutions segment was 63% for the three months ended June 30, 2021 compared to 68% for the three months ended June 30, 2020. This decrease is attributable to an increase in third party manufacturing costs at our subcontractors and a change in product mix of increased sales of lower gross profit product.
Research and development expenses increased 3% to $2.7 million for the three months ended June 30, 2021 from $2.6 million for the three months ended June 30, 2020 due to the timing of spending on laboratory services and microbiome projects. Sales and marketing expenses increased 10% to $3.9 million for the three months ended June 30, 2021 from $3.5 million for the three months ended June 30, 2020 due to higher staffing costs partially offset by a decrease in our reserve for uncollectible accounts. General and administrative expenses increased 18% to $3.9 million for the three months ended June 30, 2021 from $3.3 million for the three months ended June 30, 2020 due to increased staffing costs and higher legal fees.
All of the above contributed to the Molecular Solutions segment’s operating income of $13.7 million for the three months ended June 30, 2021, which included $1.7 million for depreciation and amortization and $113,000 for stock-based compensation.
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the three months ended June 30, 2021, a U.S. state tax benefit of $54,000 was recorded compared to $9,000 of state income tax expense recorded for the three months ended June 30, 2020. For the three months ended June 30, 2021, foreign tax expense of $3.7 million was recorded compared to foreign tax expense of $1.3 million recorded for the three months ended June 30, 2020. The overall increase in tax expense is largely a result of the increase in income before taxes generated by our Canadian subsidiary.
Six months ended June 30, 2021 compared to June 30, 2020
CONSOLIDATED NET REVENUES
The table below shows a breakdown of total consolidated net revenues (dollars in thousands) generated by each of our business segments for the six months ended June 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
Dollars
|
|
|
|
|
|
Percentage of Total Net Revenues
|
|
|
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
2021
|
|
|
|
2020
|
|
|
Diagnostics
|
|
$
|
31,585
|
|
|
$
|
27,933
|
|
|
|
13
|
|
%
|
|
27
|
|
%
|
|
|
46
|
|
%
|
Molecular Solutions
|
|
|
80,735
|
|
|
|
31,290
|
|
|
|
158
|
|
|
|
69
|
|
|
|
|
51
|
|
|
Net product and services revenues
|
|
|
112,320
|
|
|
|
59,223
|
|
|
|
90
|
|
|
|
96
|
|
|
|
|
97
|
|
|
Other
|
|
|
3,869
|
|
|
|
1,632
|
|
|
|
137
|
|
|
|
4
|
|
|
|
|
3
|
|
|
Net revenues
|
|
$
|
116,189
|
|
|
$
|
60,855
|
|
|
|
91
|
|
%
|
|
100
|
|
%
|
|
|
100
|
|
%
|
Consolidated net product and services revenues increased 90% to $112.3 million for the six months ended June 30, 2021 from $59.2 million for the comparable period of 2020. Higher sales of our molecular sample collection kits for COVID-19 testing, commercial genomics products, microbiome kits, domestic OraQuick® HIV tests, and domestic and international OraQuick® HVC tests and higher revenues from laboratory services were partially offset by lower sales of our international OraQuick® HIV Self-Tests. Other revenues for the six months ended June 30, 2021 increased 137% to $3.9 million from $1.6 million for the six months ended June 30, 2020 due to increased research and development funding for the development of our COVID-19 tests and our HIV medication adherence tests and higher royalty income.
23
Consolidated net revenues derived from products sold to customers outside of the United States were $19.5 million and $17.3 million, or 17% and 28% of total net revenues, in the first six months of 2021 and 2020, 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 six months ended June 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
Dollars
|
|
|
|
|
|
|
Percentage of Total Net Revenues
|
|
|
Market
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
|
2021
|
|
|
|
2020
|
|
|
Infectious disease testing
|
|
$
|
26,994
|
|
|
$
|
23,400
|
|
|
|
15
|
|
%
|
|
|
80
|
|
%
|
|
|
83
|
|
%
|
Risk assessment testing
|
|
|
4,591
|
|
|
|
4,533
|
|
|
|
1
|
|
|
|
|
14
|
|
|
|
|
16
|
|
|
Net product revenues
|
|
|
31,585
|
|
|
|
27,933
|
|
|
|
13
|
|
|
|
|
94
|
|
|
|
|
99
|
|
|
Other
|
|
|
2,272
|
|
|
|
286
|
|
|
|
694
|
|
|
|
|
6
|
|
|
|
|
1
|
|
|
Net revenues
|
|
$
|
33,857
|
|
|
$
|
28,219
|
|
|
|
20
|
|
%
|
|
|
100
|
|
%
|
|
|
100
|
|
%
|
Infectious Disease Testing Market
Sales to the infectious disease testing market increased 15% to $27.0 million for the six months ended June 30, 2021 from $23.4 million for the six months ended June 30, 2020. This increase resulted from higher domestic sales of our OraQuick® HIV and HCV products and higher international OraQuick® HVC product sales partially offset by lower sales of our international OraQuick® HIV Self-Tests.
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, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Market
|
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Domestic HIV
|
|
$
|
9,050
|
|
|
$
|
7,414
|
|
|
|
22
|
|
%
|
International HIV
|
|
|
10,672
|
|
|
|
10,832
|
|
|
|
(1
|
)
|
|
Net HIV revenues
|
|
|
19,722
|
|
|
|
18,246
|
|
|
|
8
|
|
|
Domestic HCV
|
|
|
3,754
|
|
|
|
2,251
|
|
|
|
67
|
|
|
International HCV
|
|
|
2,914
|
|
|
|
1,738
|
|
|
|
68
|
|
|
Net HCV revenues
|
|
|
6,668
|
|
|
|
3,989
|
|
|
|
67
|
|
|
Net OraQuick® revenues
|
|
$
|
26,390
|
|
|
$
|
22,235
|
|
|
|
19
|
|
%
|
Domestic OraQuick® HIV sales increased 22% to $9.0 million for the six months ended June 30, 2021 from $7.4 million for the six months ended June 30, 2020. This increase was primarily the result of higher sales of our OraQuick® In-Home HIV test as a result of CDC guidance recommending the use of an OTC product for testing in lieu of in-person testing due to the COVID-19 pandemic.
International sales of our OraQuick® HIV tests decreased 1% to $10.7 million for the six months ended June 30, 2021 from $10.8 million for the six months ended June 30, 2020 largely due to the timing of customer orders.
Domestic OraQuick® HCV sales increased 67% to $3.8 million for the six months ended June 30, 2021 from $2.3 million for the six months ended June 30, 2020 due to the re-opening of testing programs closed as a result of the COVID-19 pandemic and as resources used for COVID-19 testing and vaccinations were redirected back to HCV testing.
International OraQuick® HCV sales increased 68% to $2.9 million for the six months ended June 30, 2021 from $1.7 million for the six months ended June 30, 2020 as sales into certain international markets are returning to pre-pandemic levels.
Risk Assessment Market
Sales to the risk assessment market increased 1% to $4.6 million for the six months ended June 30, 2021 compared to $4.5 million for the six months ended June 30, 2020 due to hiring increases driven by the economic recovery from the COVID-19 pandemic.
24
Other Revenues
Other revenues for the six months ended June 30, 2021 increased to $2.3 million from $286,000 for the six months ended June 30, 2020, largely due to research and development funding for our COVID-19 and HIV medication adherence tests, which was not present in the prior year period, and the inclusion of royalty income under the terms of a new licensing agreement related to our proprietary buffer solution used for the preservation and stabilization of oral fluid specimens.
Molecular Solutions Segment
The table below shows a breakdown of our total net revenues (dollars in thousands) during the six months ended June 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Market
|
2021
|
|
|
2020
|
|
|
% Change
|
|
|
Genomics
|
|
$
|
30,646
|
|
|
$
|
14,863
|
|
|
|
106
|
|
%
|
Microbiome
|
|
|
4,941
|
|
|
|
2,430
|
|
|
|
103
|
|
|
COVID-19
|
|
|
38,880
|
|
|
|
8,866
|
|
|
|
339
|
|
|
Laboratory services
|
|
|
5,611
|
|
|
|
4,517
|
|
|
|
24
|
|
|
Other product revenues
|
|
|
657
|
|
|
|
614
|
|
|
|
7
|
|
|
Net molecular product and services revenues
|
|
$
|
80,735
|
|
|
$
|
31,290
|
|
|
|
158
|
|
|
Other
|
|
|
1,597
|
|
|
|
1,346
|
|
|
|
19
|
|
|
Net molecular product and services revenues
|
|
$
|
82,332
|
|
|
$
|
32,636
|
|
|
|
152
|
|
%
|
Sales of our genomics products increased 106% to $30.6 million for the six months ended June 30, 2021 compared to $14.9 million for the six months ended June 30, 2020 as we start to see our customer's businesses recover from the COVID-19 pandemic and due to strong organic growth from customers in the commercial animal markets.
Microbiome kit sales increased 103% to $4.9 million for the six months ended June 30, 2021 compared to $2.4 million for the six months ended June 30, 2020 due to a recovery in the market from the COVID-19 pandemic.
Sales of our molecular sample collection kits for COVID-19 testing increased to $38.9 million for the six months ended June 30, 2021 compared to $8.9 million during the comparable period in 2020 due to increased demand as the COVID-19 pandemic began late in the first quarter of 2020.
Laboratory services revenues increased 24% to $5.6 million for the six months ended June 30, 2021 compared to $4.5 million for the six months ended June 30, 2020, due to customers resuming activities delayed by the COVID-19 pandemic.
Other revenues for the six months ended June 30, 2021 increased 19% to $1.6 million from $1.3 million for the six months ended June 30, 2020 largely as a result of higher royalty income under a litigation settlement agreement.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit percentage was 59% for the six months ended June 30, 2021 compared to 55% for the six months ended June 30, 2020. Gross profit percentage for the six months ended June 30, 2021 benefited from an improved product mix associated with an increase in higher gross profit percentage product sales and the increase in other revenues which contribute 100% to our gross profit percentage partially offset by lower absorption of labor and fixed over-head costs as we build capacity in advance of sales of the COVID-19 antigen test, lower funding under the charitable support agreement with the Gates Foundation, and an increased scrap expense.
Consolidated operating income for the six months ended June 30, 2021 was $12.2 million, a $29.6 million increase from the $17.4 million operating loss reported for the six months ended June 30, 2020. Results for the six months ended June 30, 2021 were positively impacted by the
25
increased revenues and the inclusion of an $1.0 million non-cash benefit related to the fair value change in acquisition-related contingent consideration partially offset by the lower gross profit percentage and increased operating expenses.
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 Diagnostics and Molecular Solutions.
Diagnostics Segment
The gross profit percentage for the Diagnostics segment was 38% for the six months ended June 30, 2021 compared to 43% for the six months ended June 30, 2020. This decrease is due lower absorption of labor and fixed overhead costs as we built capacity in advance of sales of the COVID-19 antigen test, lower funding under the charitable support agreement with the Gates Foundation and, increased scrap costs partially offset by an increase in other revenues which contribute 100% to our gross profit percentage and an improvement in product mix due to increased sales of higher gross profit percentage products.
Research and development expenses increased 49% to $11.6 million for the six months ended June 30, 2021 from $7.8 million for the six months ended June 30, 2020, largely due to increased spending associated with COVID-19 product development and higher staffing costs. Sales and marketing expenses increased 14% to $12.8 million for the six months ended June 30, 2021 from $11.2 million for the six months ended June 30, 2020, due to higher market research, consulting and advertising spending to prepare for the sale of the COVID-19 rapid antigen tests partially offset by a lower reserve adjustment for uncollectible accounts. General and administrative expenses decreased 5% to $13.6 million for the six months ended June 30, 2021 from $14.3 million for the six months ended June 30, 2020 due to lower legal fees and increased intercompany service fees allocated to the Molecular Solutions segment, partially offset by increased staffing costs.
All of the above contributed to the Diagnostics segment’s operating loss of $24.1 million for the six months ended June 30, 2021, which included non-cash charges of $1.8 million for depreciation and amortization and $2.7 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $1.0 million associated with the change in the fair value of acquisition-related contingent consideration.
Molecular Solutions Segment
The gross profit percentage for the Molecular Solutions segment was 68% for the six months ended June 30, 2021 compared to 65% for the six months ended June 30, 2020. This increase is due to higher gross profit percentage product sales partially offset by increased manufacturing costs at our third party contract manufacturers.
Research and development expenses increased 7% to $5.1 million for the six months ended June 30, 2021 from $4.8 million for the six months ended June 30, 2020 due to increased spending associated with projects within our laboratory services business. Sales and marketing expenses increased 15% to $7.2 million for the six months ended June 30, 2021 from $6.3 million for the six months ended June 30, 2020 due to higher staffing costs. General and administrative expenses increased 25% to $7.6 million for the six months ended June 30, 2021 from $6.1 million for the six months ended June 30, 2020 due to increased intercompany service fees allocated from the Diagnostics segment, estimated penalties incurred on delinquent sales tax filings that were not incurred in the prior year period, and higher staffing costs.
All of the above contributed to the Molecular Solutions segment’s operating income of $36.3 million for the six months ended June 30, 2021, which included $3.3 million for depreciation and amortization and $195,000 for stock-based compensation.
CONSOLIDATED INCOME TAXES
We continue to believe the full valuation allowance established against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the six months ended June 30, 2021, U.S. state tax expense of $115,000 was recorded compared to $18,000 of state income tax expense recorded for the six months ended June 30, 2020. For the six months ended June 30, 2021, foreign tax expense of $10.0 million was recorded compared to foreign tax expense of $2.0 million recorded for the six months ended June 30, 2020. The overall increase in tax expense is largely a result of the increase in income before taxes generated by our Canadian subsidiary.
26
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents
|
|
$
|
158,120
|
|
|
$
|
160,802
|
|
Available for sale securities
|
|
|
71,316
|
|
|
|
96,317
|
|
Working capital
|
|
|
238,478
|
|
|
|
242,404
|
|
Our cash and cash equivalents and available-for-sale securities decreased to $229.4 million at June 30, 2021 from $257.1 million at December 31, 2020. Our working capital decreased to $238.5 million at June 30, 2021 from $242.4 million at December 31, 2020.
During the six months ended June 30, 2021, net cash used in operating activities was $3.5 million. Our net income of $2.4 million included non-cash charges for depreciation and amortization expense of $5.1 million, stock-based compensation expense of $2.9 million, a provision for doubtful accounts of $747,000, and other non-cash benefits of $167,000. Operating activities also included a benefit for the change in the estimated fair value of acquisition-related contingent consideration of $1.0 million and a $142,000 contingent consideration payment representing the excess of the total contingent consideration payment made during the six months ended June 30, 2021 over the fair value of the liability estimated at the time of acquisition. Sources of cash generated from our working capital accounts included a $4.4 million increase in accounts payable due to the timing of invoice received and in payments, a $3.7 million decrease in accounts receivable as a result of the collection of large outstanding balances, and a $154,000 decrease in prepaid expenses and other assets. Offsetting these sources of cash were an increase in inventory of $16.1 million to meet anticipated demand to support COVID-19 testing programs, a decrease in accrued expenses and other liabilities of $4.9 million largely due to payment of our 2020 management incentive bonuses and payment of outstanding sales tax liabilities and a decrease in deferred revenue of $630,000 due to the recognition of customer prepayments.
Net cash provided by investing activities was $10.4 million for the six months ended June 30, 2021, which reflects proceeds from the maturities and redemptions of investments of $43.7 million offset by $22.9 million used to acquire property and equipment largely to increase our manufacturing capacity and $10.4 million used to purchase investments.
Net cash used in financing activities was $2.5 million for the six months ended June 30, 2021, which reflects $1.9 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to our employees, payments of lease liabilities of $510,000 and $264,000 used for payment of our contingent consideration obligation offset by proceeds from stock option exercises of $121,000.
We expect current balances of cash and cash equivalents and available-for-sale securities to be sufficient to fund our current and foreseeable operating and capital needs. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the 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 including continued investment to expand our capacity to manufacture products for COVID-19 testing, 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, $124.8 million or 54% of our $229.4 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. Repatriation of such cash into the United States exceeding certain levels could have adverse tax consequences.
A summary of our obligations to make future payments under contracts existing at December 31, 2020 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, 2020. As of June 30, 2021, except as described in note 11 within the notes to the consolidated financial statements, 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.
27
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, 2020 filed with the SEC. During the first six months of 2021, there were no material changes to our critical accounting policies.