Results of Operations
Three months ended March 31, 2023 compared to March 31, 2022
CONSOLIDATED NET REVENUES
The table below shows an outline of total consolidated net revenues (dollars in thousands) for the three months ended March 31, 2023 and 2022:
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Three Months Ended March 31, |
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Dollars |
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Percentage of Total Net Revenues |
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2023 |
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2022 |
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% Change |
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2023 |
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2022 |
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COVID-19 Diagnostics |
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$ |
118,254 |
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$ |
22,136 |
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434 |
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% |
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76 |
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% |
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33 |
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% |
Diagnostics (1) |
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17,090 |
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11,423 |
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50 |
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11 |
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17 |
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Molecular Products |
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12,942 |
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17,933 |
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(28 |
) |
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8 |
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26 |
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Other products and services (2) |
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3,094 |
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3,115 |
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(1 |
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2 |
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5 |
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Molecular Services |
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1,379 |
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1,733 |
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(20 |
) |
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1 |
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3 |
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COVID-19 Molecular Products |
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155 |
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8,896 |
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(98 |
) |
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1 |
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12 |
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Net product and services revenues |
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152,914 |
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65,236 |
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134 |
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99 |
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96 |
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Non-product and services revenues |
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2,049 |
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2,471 |
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(17 |
) |
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1 |
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4 |
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Net revenues |
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$ |
154,963 |
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$ |
67,707 |
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129 |
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% |
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100 |
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% |
$ |
100 |
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% |
(1) Includes HIV and HCV product revenues.
(2) Includes Risk assessment testing and other product and services revenues.
Product and Services Revenues
Consolidated net product and services revenues increased 134% to $152.9 million for the three months ended March 31, 2023 from $65.2 million for the three months ended March 31, 2022. The Company expects total net product and services revenues to taper off throughout 2023 as demand for its COVID-19 Diagnostic product has declined.
COVID-19 Diagnostics revenues increased by 434% to $118.3 million for the three months ended March 31, 2023 compared to $22.1 million in the three months ended March 31, 2022 due to increased sales of the Company's InteliSwab® tests through its government procurement contracts.
Sales of the Company's Diagnostics products increased 50% to $17.0 million for the three months ended March 31, 2023 from $11.4 million for the three months ended March 31, 2022. This increase in revenues was primarily driven by higher sales of the Company's OraQuick® In-Home HIV tests in support of the CDC's "Together Take Me Home" HIV self-test program which commenced during the first quarter of 2023 and higher sales of the Company's OraQuick® HIV Self-Test in the international markets due to customer ordering patterns.
Molecular Products revenues decreased 28% to $12.9 million for the three months ended March 31, 2023 from $17.9 million for the three months ended March 31, 2022. Sales of the Company's Molecular Products are being impacted by macro-economic factors in the markets in which its customers operate. One of the Company's largest customer scaled down purchasing after they reorganized their business in the second half of 2022 and certain other customers placed large orders in Q1 2022 which did not repeat in the first quarter of 2023. Furthermore revenues are impacted by customer ordering patterns whereby customers purchased at the end of 2022 and did not require further inventory in the first quarter of 2023.
Other products and services revenues were largely flat at $3.1 million for the three months ended March 31, 2023 and 2022.
Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 20% to $1.4 million for the three months ended March 31, 2023 from $1.7 million for the three months ended March 31, 2022. The decline in services revenues was the direct result of loss of two large customers in 2022. One customer ceased operations in 2022 and the other deprioritized microbiome studies.
Sales of the Company's COVID-19 Molecular Products collection kits decreased significantly by 98% to $0.2 million for the three months ended March 31, 2023 from $8.9 million for the three months ended March 31, 2022 due to decline in demand for COVID PCR testing given the availability of rapid antigen tests.
Non-product and Services Revenues
15
Non-product and services revenues decreased 17% to $2.0 million for the three months ended March 31, 2023 from $2.5 million for the three months ended March 31, 2022 as a result the timing of activities under the Company's funded research and development agreements for the development of a second generation Ebola test and to obtain 510(k) clearance and CLIA waiver for our InteliSwab® test coupled with lower royalty income.
CONSOLIDATED OPERATING RESULTS
Consolidated gross profit margin increased to 42.5% for the three months ended March 31, 2023 and 2022 from 36% for the three months ended March 31, 2022. This improvement in margins was driven by InteliSwab® sales which generated higher margins due to reduced costs associated with the correction of manufacturing inefficiencies which occurred during the first quarter of 2022, a packaging change implemented during the first quarter of 2023, and lower freight charges. These improved margins were partially offset by lower COVID-19 Molecular Products revenue which historically generated higher margins. Lower scrap expense in the first quarter of 2023 compared to the first quarter of 2022 also contributed to the improved margins.
Consolidated operating income for the three months ended March 31, 2023 was $24.3 million, a $40.5 million increase from the $16.2 million operating loss reported for the three months ended March 31, 2022. Results for the three months ended March 31, 2023 were positively impacted by the increase in revenues and gross margins described above and were partially offset by impairment charges of $1.1 million taken for idle manufacturing lines.
Operating expenses in the first quarter of 2023, excluding the impairment charge, remained largely flat compared to the first quarter of 2022. Research and development expenses increased 22% to $10.6 million for the three months ended March 31, 2023 from $8.6 million for the three months ended March 31, 2022 largely due to an increase in clinical study activities related to obtaining 510(k) clearance and CLIA waiver for our InteliSwab® rapid test, severance costs associated with our reduction in workforce that occurred during the quarter and higher costs incurred under our DOD expansion contract. Increased spend in research and development was offset by lower sales and marketing and general and administrative costs.
Sales and marketing expenses decreased 5% to $12.1 million for the three months ended March 31, 2023 from $12.7 million for the three months ended March 31, 2022 due to a decrease in our reserve for expected credit losses and lower consulting fees offset by severance cost related to our reduction in workforce. General and administrative expenses decreased 8% to $17.7 million for the three months ended March 31, 2023 from $19.2 million for the three months ended March 31, 2022 largely due to lower consulting fees, stock compensation expense and recruitment fees. In the first quarter of 2022, the company incurred high stock compensation expense associated with the accelerated vesting of shares under our former CEO's employment agreement and higher recruitment expense associated with the new CEO search. These decreases in expense were partially offset by increased legal fees and severance costs associated with the reduction in workforce.
All of the above contributed to the Company's operating income of $24.3 million for the three months ended March 31, 2023, which included the non-cash impairment charge of $1.1 million related to equipment that will no longer be used in production, non-cash charges of $3.7 million for depreciation and amortization and $2.7 million for stock-based compensation. The Company's operating loss of $16.2 million for the three months ended March 31, 2022 included non-cash charges of $3.7 million for depreciation and amortization and $3.5 million for stock-based compensation.
Other income for the three months ended March 31, 2023 was $2.7 million compared to $0.2 million for the months ended March 31, 2022. This increase is largely due to the reimbursement of costs incurred under our DOD expansion contract which are presented in research and development expenses as discussed above.
CONSOLIDATED INCOME TAXES
The Company continues to believe the full valuation allowance established against its total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the three months ended March 31, 2023, the Company recorded a U.S. state tax benefit of $0.2 million compared to $3.9 million of tax expense for the three months ended March 31, 2022. The 2022 tax expense is comprised of U.S. state tax expense of $0.2 million, $1.7 million of withholding taxes associated with our repatriation of $65.0 million of cash from Canada to the United States, and Canadian income tax expense of $2.0 million. No foreign taxes were recorded for the three months ended March 31, 2023 due to it being more likely than not that the Canadian subsidiary will not produce sufficient income to receive a tax benefit for the year to date loss.
16
Liquidity and Capital Resources
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March 31, |
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December 31, |
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2023 |
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2022 |
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(In thousands) |
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Cash and cash equivalents |
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$ |
90,194 |
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$ |
83,980 |
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Available-for-sale securities |
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22,178 |
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26,867 |
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Working capital |
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288,472 |
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256,127 |
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The Company's cash and cash equivalents and available-for-sale securities increased to $112.4 million at March 31, 2023 from $110.8 million at December 31, 2022. $72.8 million or 65% of the $112.4 million in cash, cash equivalents and available-for-sale securities is held by DNAG, the Company's Canadian subsidiary. In 2022, the Company repatriated $65.0 million of cash into the United States and incurred $1.7 million of Canadian withholding tax. Further repatriation of cash from Canada into the United States could have additional adverse tax consequences. It is still the Company's intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.
The Company's working capital increased to $288.5 million at March 31, 2023 from $256.1 million at December 31, 2022. Working capital increased primarily due to increased accounts receivable of $36.6 million. Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms.
Analysis of Our Cash Flows
Operating Activities
During the three months ended March 31, 2023, net cash provided by operating activities was $6.0 million. Cash flows from operations can be significantly impacted by factors such as timing of receipt from customers, inventory purchases, and payments to vendors. The Company's net income of $27.2 million included non-cash charges of depreciation and amortization expense of $3.7 million, stock-based compensation expense of $2.7 million, and impairment charges taken for idle equipment of $1.1 million. Cash used to fund the working capital accounts included an increase in accounts receivable of $36.6 million largely associated with product shipped to the U.S. government at the end of the first quarter 2023, a decreases in accounts payable of $12.1 million due to reduced inventory purchasing and the timing of payments made and invoices received, and a decrease in accrued expenses of $3.5 million largely associated with the payment of the Company's 2022 year-end bonuses. Offsetting these uses of cash was a decrease in inventory of $18.5 million as demand for the Company's InteliSwab® COVID-19 rapid test is declining, and a $5.3 million decrease in prepaid and other assets as the Company received payment of its Employee Retention Credit filed for in 2021.
Investing Activities
Net cash used in investing activities was $1.0 million for the three months ended March 31, 2023, which reflects proceeds from the maturities of investments of $27.3 million offset by $22.3 million used to purchase investments, $2.8 million to build additional manufacturing capacity as required by the $109 million agreement with the DOD and, $1.2 million to acquire property and equipment to support the normal operations of the business.
Financing Activities
Net cash used in financing activities was $1.3 million for the three months ended March 31, 2023, which is largely comprised of $1.2 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares awarded to the Company's employees.
Resources
The Company expects existing cash and cash equivalents and available-for-sale securities will be sufficient to fund its operating expenses and capital expenditure requirements over the next twelve months. The Company's cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the timing of reimbursement under its $109 million DOD contract, the scope and timing of future strategic acquisitions, the progress of its research and development programs, the scope and results of clinical testing, the cost of any future litigation, the magnitude of capital expenditures, changes in existing and potential relationships with business partners, the timing and cost of obtaining regulatory approvals, the timing and cost of future stock purchases, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the cost and timing of expansion of sales and marketing activities, market acceptance of new products, competing technological and market developments, the impact of the current economic environment and other factors.
A summary of the Company's obligations to make future payments under contracts existing at December 31, 2022 is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of its Annual Report on Form 10-K for the year ended December 31, 2022. As of March 31, 2023, there were no significant changes to this information.
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Critical Accounting Policies and Estimates
A more detailed review of the Company's critical accounting policies is contained in its Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. No material changes have been made to such critical accounting policies during the three months ended March 31, 2023.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Some of these statements can be identified by the use of terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “projects,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans, assumptions, or intentions may also include forward-looking statements. Readers should not place undue reliance on forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to update or revise our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, factors described in the Risk Factors discussion in Item 1A of Part I of our most recently filed Annual Report.