OraSure Technologies, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with the same period in 2017. OraSure operates two businesses: OSUR, which sells diagnostic and cryosurgical products, and DNAG, which sells molecular sample collection systems and related services.
Financial results and liquidity
- Revenue: $42.0 million, up 29% year over year. Product revenue was $38.3 million, up 22%; other revenue was $3.7 million, versus $1.1 million. Oragene revenue rose to $17.1 million from $9.9 million. OraQuick revenue declined 8% to $13.0 million, notably reflecting lower international HCV sales.
- Profit and margins: Gross profit was $24.5 million; gross margin was 58%, down from 62%. Operating loss was $0.5 million, versus operating income of $15.9 million. Net loss was $2.1 million, or $0.03 per share, versus net income of $12.4 million, or $0.21 diluted earnings per share. Income tax expense was $2.0 million despite a pretax loss.
- Segment performance: DNAG reported $8.4 million of operating income on $20.0 million of segment revenue; OSUR reported an $8.9 million operating loss on $22.0 million of segment revenue. DNAG’s commercial genomics growth was largely driven by higher demand from a large consumer-genetics customer. The segment revenue figures include other revenue allocations; product-only revenue was $18.4 million for DNAG and $20.0 million for OSUR.
- Cash flow: Operating cash flow was $7.6 million, versus $12.6 million. Investing activities used $13.8 million, including investment purchases net of maturities and redemptions; financing activities used $2.0 million, primarily for shares withheld for taxes on vesting awards. Cash, cash equivalents and restricted cash decreased $8.8 million to $64.1 million.
- Liquidity and debt: Cash, cash equivalents, restricted cash and available-for-sale securities totaled $178.4 million at quarter-end, versus $176.6 million at December 31, 2017. Working capital was $175.6 million. No borrowings were outstanding on the $10 million revolving credit facility; the company reported compliance with covenants. The facility matures September 30, 2019.
- Balance sheet: Total assets were $285.9 million and stockholders’ equity was $258.7 million. The filing reports no significant change in contractual obligations and no off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue growth was led by DNAG molecular collection systems and higher international OraQuick HIV self-test sales. International HIV revenue increased 117%; international HCV revenue fell 85%, following a non-renewed government supply contract, a customer loss, and a prior-year one-time order.
- Other revenue included $1.6 million of Ancestry-related royalty income, $1.5 million of BARDA funding for Ebola and Zika work, and $0.5 million of Gates Foundation cost reimbursement. The Ancestry royalty and Gates reimbursement were not present in Q1 2017.
- Q1 2018 results included approximately $6.4 million of executive transition costs, primarily non-cash stock compensation and onboarding costs. Q1 2017 operating results included a $12.5 million gain from the Ancestry litigation settlement. These unusual items materially affect the year-over-year earnings comparison.
- Stock-based compensation was $7.5 million, versus $1.5 million, including about $5.9 million of additional expense from modifications to retiring executives’ awards.
Outlook, commentary and risks
- Management said existing cash, investments and available borrowing capacity should fund operating and capital needs for the foreseeable future. The filing provides no specific revenue or earnings guidance.
- Management cited lower-margin sales and reduced fixed-cost absorption as pressures on gross margin, partly offset by other revenue and lower scrap and spoilage costs. It also noted higher R&D and sales and marketing spending.
- Key business risks include reliance on a large DNAG customer, sole-source suppliers and third-party manufacturing; competition and changing demand; regulatory and product-quality requirements; and reliance on government funding and customer purchasing programs. One customer represented approximately 23% of Q1 revenue and 18% of quarter-end receivables.
- About $48.4 million, or 27%, of cash, cash equivalents, restricted cash and securities was held by the Canadian subsidiary; management warned that repatriation above certain levels could have adverse tax consequences. A 10% unfavorable Canadian-dollar exchange-rate change was estimated to reduce quarterly comprehensive income by $8.5 million.
- The company was preparing for the EU General Data Protection Regulation, effective May 25, 2018, and warned that compliance could increase costs; potential penalties were described as up to the greater of 4% of worldwide turnover or €20 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Leadership changed during the period: Stephen S. Tang became CEO on April 1, 2018; CFO/COO Ronald Spair was scheduled to retire and Roberto Cuca to become CFO on June 8, 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether DNAG’s large-customer demand and strong commercial-genomics growth are sustainable, and how customer concentration evolves.
- Whether the sharp decline in international HCV sales and weakness in domestic professional HIV and cryosurgical sales persist.
- The extent to which reported revenue and earnings depend on Ancestry royalties, BARDA funding and Gates Foundation support, and the timing or renewal of those arrangements.
- The recurring cost base after executive transition charges, the impact of award modifications, and progress toward sustained profitability.
- Liquidity and cash conversion, including working-capital movements, investment maturities, Canadian cash and foreign-exchange exposure.
- Compliance with GDPR and other regulatory requirements, and continuity of supply from sole-source vendors and third-party manufacturers.