ORASURE TECHNOLOGIES INC (OSUR)

ITEM 7.    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 Private Securities Litigation Reform Act of 1995. The Company's actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to

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provide complete information about the Company, 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 Company undertakes no duty to update any forward-looking statements made herein after the date of this Annual Report.

The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2024 (this "Annual Report") generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Business Overview

The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. These products include tests for diseases including COVID-19, HIV, Hepatitis C, and Syphilis that are performed on a rapid basis at the point of care, and tests for drugs of abuse 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. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe.

The Company's business also includes sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets.

Recent Developments

Diversigen

During the first quarter of 2024, the Company initiated steps to wind down and exit the molecular services business offered by its Diversigen subsidiary. This strategic action was largely completed in June 2024. Diversigen contributed $1.7 million and $4.5 million, to revenues during the years ended December 31, 2024 and 2023, respectively.

Novosanis

During the first quarter of 2024, the Company also made a strategic decision to commence wind-down of its operations at it Novosanis subsidiary located in Belgium. The Company intends to continue to sell and manufacture its Colli-Pee® product under the DNAG product line of collection devices. As of December 31, 2024, this strategic plan was largely completed.

Sapphiros

In January 2024, the Company announced that it led the Series B financing and entered into wide-ranging strategic distribution agreements with Sapphiros, a privately held consumer diagnostic portfolio company based in Boston, and certain of its related entities. Through this strategic relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic test and sample management solutions to the Company's customers globally. The Company has funded $30.0 million for its interest in Sapphiros.

Risk Assessment Testing

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In October 2024, the Company announced the discontinuance of the sales of its risk assessment product line which is expected to be completed in the first half of 2025. Sales of its risk assessment products contributed $8.4 million and $9.7 million to revenues during the years ended December 31, 2024, and 2023, respectively.

Sherlock Acquisition

In December 2024, the Company acquired Sherlock and its subsidiaries. The Sherlock acquisition expands the Company's innovation pipeline with the addition of Sherlock’s molecular diagnostics platform, which is in Phase 3 clinical trials and is expected to provide rapid results with strong sensitivity and specificity in a disposable format that is well-suited for OTC usage. Sherlock has operations in the United States and the United Kingdom.

Results of Operations

The Company's consolidated net loss for the year ended December 31, 2024 was $19.5 million, or $0.26 per share on a fully diluted basis, compared to consolidated net income of $53.7 million, or $0.72 per share on a fully diluted basis, for the year ended December 31, 2023.

Year ended December 31, 2024 compared to December 31, 2023.

CONSOLIDATED NET REVENUES

The table below shows a summary of total consolidated net revenues (dollars in thousands) for the years ended December 31, 2024 and 2023.

(1)Includes HIV, HCV and Syphilis product revenues.

(2)Includes Genomics, Microbiome and Colli-Pee product revenues.

(3)Includes substance abuse testing product revenues.

(4)Includes funded research and development contracts, royalty income and grant revenues.

Product and Services Revenues

Consolidated net revenues decreased 54% to $185.8 million for the year ended December 31, 2024 from $405.5 million for the year ended December 31, 2023.

Sales of the Company's Diagnostics products increased 3% to $75.9 million for the year ended December 31, 2024 from $73.7 million for the year ended December 31, 2023. This increase in revenues is largely due to higher international HIV revenues primarily driven by customer ordering patterns in Africa offset by lower sales into Asia. Also contributing to the diagnostic revenue increase is an increase in sales of the Company's HCV domestic product and higher Syphilis revenues. Offsetting these increases in revenues is a decline in HIV domestic revenue resulting from funding delays or reductions in funding for HIV products and customer ordering patterns.

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Sample Management Solutions revenues decreased by 6% to $51.0 million for the year ended December 31, 2024 compared to $54.3 million for the year ended December 31, 2023. Sales of the Company's Sample Management Solutions are being impacted by reduced consumer demand for products in which the Company's genomics collection devices are used, economic pressures, and the overall decline in the microbiome market.

COVID-19 Diagnostics revenues decreased 82% to $45.1 million for the year ended December 31, 2024 from $257.5 million for the year ended December 31, 2023 due to decreased sales of the Company's InteliSwab® tests through its U.S. government procurement contracts. The Company experienced a significant decline in COVID-19 revenues during 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing, and expects further declines in 2025.

Risk assessment testing revenues decreased 14% to $8.4 million for the year ended December 31, 2024 from $9.7 million for the year ended December 31, 2023 due to the loss of customers to competing products. The Company has announced the discontinuance this product line and expects minimal sales through the first half of 2025 as it fulfills existing customer orders.

Molecular Services revenues, which are largely derived from the Company's microbiome molecular sequencing services, decreased 62% to $1.7 million for the year ended December 31, 2024 from $4.5 million for the year ended December 31, 2023. The decrease in services revenues was due to the decision to exit this line of business.

Non-Product and Services Revenues

Non-product and services revenues decreased 63% to $1.2 million for the year ended December 31, 2024 from $3.3 million for the year ended December 31, 2023 as a result lower funding for research and development activities and lower royalty income.

CONSOLIDATED OPERATING RESULTS

Consolidated gross profit margin increased to 43% for the year ended December 31, 2024 from 42% for the year ended December 31, 2023. Gross margins increased in 2024 despite the significant decrease in revenues due to following factors. Results for the year ended December 31, 2024 included lower depreciation expense as a result of the inclusion in 2023 results of $6.9 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company on-shored and automated the manufacturing of this product at its Pennsylvania facilities and $0.5 million from the exit from one of its leased warehouse in an effort to consolidate facilities and further lower costs. Results for the year ended December 31, 2024 also included improved manufacturing overhead absorption largely resulting from reduced salary and benefits due to the reduction of workforce put in place in 2024 and 2023. 2024 also included lower product scrap expense as compared to the prior year. Offsetting these improvement to margins was lower gross margins generated from product mix primarily driven by the decline in InteliSwab® revenues and the mix of higher international sales of the Company's HIV products. Other non-product revenues which contribute 100% to gross margins also declined for the year ended December 31, 2024.

Consolidated operating loss for the year ended December 31, 2024 was $28.3 million, a $60.9 million decline from the $32.7 million operating income reported for the year ended December 31, 2023. Results for the year ended December 31, 2024 were negatively impacted by the decrease in revenues and were positively impacted by reduced operating expenses. Results for the year ended December 31, 2024 included $4.4 million of impairment losses compared to $10.8 million for the year ended December 31, 2023.

Operating expenses for the year ended December 31, 2024, excluding the impairment charges, decreased by $25.0 million to $103.2 million compared to $128.2 million the year ended December 31, 2023, reflecting the impact of the Company's cost saving measures and headcount reductions.

Research and development expenses decreased 23% to $26.0 million for the year ended December 31, 2024 from $33.7 million for the year ended December 31, 2023 largely due to lower staffing costs due to a decrease in headcount and no related project management fees for our $109 million manufacturing expansion contract which ended during the fourth quarter of 2023, and a decrease in spend on COVID-19 product development. This overall decrease in spend is partially offset by an increase in severance costs for those employees impacted by the Company's decisions to exit the molecular services business offered by its Diversigen subsidiary and wind-down of operations located in Belgium. The Company expects research and development expense to increase in 2025 as we invest in the development of Sherlock's test for CT/NG and other innovative projects.

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Sales and marketing expenses decreased 15% to $31.0 million for the year ended December 31, 2024 from $36.3 million for the year ended December 31, 2023 primarily due to decreased employee costs associated with a reduction in headcount, and lower advertising and consulting spend. Amortization also decreased as $6.2 million of intangibles were impaired in 2023. These decreases are partially offset by increases in bad debt expense and severance charges related to the discontinuance of the risk assessment product line.

General and administrative expenses decreased 21% to $46.2 million for the year ended December 31, 2024 from $58.2 million for the year ended December 31, 2023 largely due to lower legal fees relating to the Spectrum litigation (discussed further in Note 15, Commitments and Contingencies, to the consolidated financial statements included herein) and lower employee costs associated with reduced headcount partially offset by increase in non-cash stock compensation expense and transaction expenses associated with the Company's acquisition of Sherlock in December.

All of the above contributed to the Company's operating loss of $28.3 million for the year ended December 31, 2024, which included non-cash impairment charges of $4.4 million, non-cash charges of $10.9 million for depreciation and amortization, and $11.9 million for stock-based compensation. The Company's operating income of $32.7 million for the year ended December 31, 2023 included a non-cash impairment charge of $10.8 million, non-cash charges of $20.9 million for depreciation and amortization, and $10.7 million for stock-based compensation.

CONSOLIDATED OTHER INCOME

Other income for the year ended December 31, 2024 was $12.2 million compared to $23.6 million for the year ended December 31, 2023. This decrease is largely due to the inclusion in 2023 results of $12.8 million of additional profit earned above the guaranteed profit earned under the $109 million DOD manufacturing expansion contract that was completed in the fourth quarter of 2023. This additional profit resulted from lower spend under the fixed firm contract than originally budgeted. Other income in 2023 also included $2.8 million of guaranteed profit which covered project management costs recognized straight-line over the term of the contract. These amounts included in 2023 other income, which were not repeated in 2024, were partially offset by higher interest income and foreign currency gains for the year ended December 31, 2024 as compared to 2023.

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. Although the Company has achieved U.S. cumulative pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in its judgement, support the release of the valuation allowance. For the year ended December 31, 2024, the Company recorded income tax expense of $1.8 million. 2024 income tax expense is comprised of $0.4 million of U.S. federal and state income tax expense, and foreign income tax expense of $1.4 million. For the year ended December 31, 2023, the Company recorded income tax expense of $2.6 million. 2023 income tax expense is comprised of U.S. state income tax expense of $1.9 million, and foreign income tax expense of $0.7 million.

Liquidity and Capital Resources

The Company's cash and cash equivalents decreased to $267.8 million at December 31, 2024 from $290.4 million at December 31, 2023. $82.0 million, or 31%, of the Company's $267.8 million in cash, cash equivalents and available-for-sale securities is held by DNAG, the Company's Canadian subsidiary.

The Company's working capital decreased to $299.7 million at December 31, 2024 from $346.9 million at December 31, 2023. The decrease in cash and cash equivalents and working capital is primarily due to the investment in Sapphiros of $30.0 million and the initial payment for the acquisition of Sherlock for $5.0 million. Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms.

Analysis of the Company's Cash Flows

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Operating Activities

During the year ended December 31, 2024, net cash provided by operating activities was $27.4 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 loss of $19.5 million included non-cash charges of depreciation and amortization expense of $10.9 million, stock-based compensation expense of $11.9 million, impairment charges taken for idle equipment and right-of-use assets associated with Diversigen and Novosanis of $4.4 million, a loss on equity investment of 1.7 million and other non-cash charges aggregating to $0.8 million.

Cash provided by the Company's working capital accounts included a decrease in accounts receivable of $15.9 million largely associated with lower overall sales and collections of balances due, a decrease in inventory of $13.1 million as the Company fulfilled demand for its InteliSwab® product, and a decrease in prepaid and other assets of $4.1 million. Offsetting these increases in cash was a $7.6 million decrease in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $6.4 million.

Investing Activities

Net cash used in investing activities was $39.0 million for the year ended December 31, 2024, which reflects proceeds from the maturities and redemptions of investments of $53.1 million, offset by $53.2 million used to purchase investments and $30.0 million used to purchase an equity stake in Sapphiros. Investing activities also included $3.8 million to acquire property and equipment to support normal operations of the business and the acquisition of Sherlock of $5.0 million.

Financing Activities

Net cash used in financing activities was $4.2 million for the year ended December 31, 2024, which reflects $3.5 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted awarded to the Company's employees and payments for lease liabilities of $0.8 million.

Resources

The Company's contractual obligations are included in Note 15 of its consolidated financial statements. The Company expects existing cash and cash equivalents 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 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.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's 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 the Company make judgments and estimates 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. The Company bases its 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.

The Company's significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. The Company considers the following accounting policies, which have been discussed with its Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition, and cash flows.

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Revenue Recognition.

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates.

The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of its OraQuick® In-Home HIV test to the retail trade, and InteliSwab® products to the retail trade and certain customers.

Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred.

Service Revenues

Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when it satisfies its performance obligations for services rendered.

Arrangements with multiple-performance obligations

In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied.

Inventories

The Company's inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of its inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. It also considers items identified through specific identification procedures in assessing the adequacy of its reserve. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results.

Goodwill

Goodwill is not amortized, but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit.

Business Combinations and Contingent Consideration

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Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting guidance. As part of our consideration for the Sherlock acquisition, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates.

Examples of critical estimates used in valuing the intangible asset and contingent consideration include:

• future expected cash flows from sales and acquired in-process and research developed technologies;

• the probability of meeting the future events; and

• discount rates used to determine the present value of estimated future cash flows.

These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.

ITEM 7.    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 Private Securities Litigation Reform Act of 1995. The Company's actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to

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provide complete information about the Company, 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 Company undertakes no duty to update any forward-looking statements made herein after the date of this Annual Report.

The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2023 (this "Annual Report") generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Business Overview

The Company's business consists of the development, manufacture, marketing and sale of simple, easy to use diagnostic products and specimen collection devices using the Company's proprietary technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types. These products include tests for diseases including COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse 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. The Company's COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries, including as an oral swab in-home test for HIV-1 and HIV-2 in Europe.

The Company's business also includes molecular sample management solutions and services that are used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. The revenues from sample management solutions are derived from product sales to commercial customers and sales into the academic and research markets. Customers span the disease risk management, diagnostics, pharmaceutical, biotech, companion animal and environmental markets. The Company has also developed collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. The Company also has a urine collection device which allows for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. Additionally, the Company offers laboratory and bioinformatics services for both genomics and microbiome customers. These services are primarily provided to pharmaceutical, biotech companies, and research institutions.

Recent Developments

In 2022, the Company's business consisted of two segments: the “Diagnostics” segment, and the “Molecular Solutions” segment. In February 2023, the Company announced a corporate restructuring to combine the commercial and innovation teams across two segments, being the "Diagnostics" segment and the "Molecular Solutions" segment, into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. As a result, all products and services reside under one reporting hierarchy. The Company's product portfolio is broadly divided into diagnostics products and sample management solutions.

In January 2024, the Company announced that it is leading the Series B financing and have entered wide-ranging strategic distribution agreements with KKR Sapphiros L.P. ("Sapphiros"), a privately held consumer diagnostics portfolio company based in Boston, and certain of its related entities. Through this strategic relationship, the Company expects to be able to offer a more comprehensive range of low-cost diagnostic tests and molecular sample management solutions to the Company's customers globally.

The Company has funded approximately $28.3 million for a minority interest in Sapphiros, with an aggregate commitment of up to $30.0 million to be funded by June 2024, contingent on certain terms and conditions being met.

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Results of Operations

The Company's consolidated net income for the year ended December 31, 2023 was $53.7 million, or $0.72 per share on a fully diluted basis, compared to a consolidated net loss of $17.1 million, or $0.24 per share on a fully diluted basis, for the year ended December 31, 2022.

Year ended December 31, 2023 compared to December 31, 2022.

CONSOLIDATED NET REVENUES

The table below shows a summary of total consolidated net revenues (dollars in thousands) for the years ended December 31, 2023 and 2022.

(1)Includes HIV and HCV product revenues.

(2)Includes Genomics, Microbiome and Novosanis product revenues.

(3)Includes Risk assessment testing and other product and services revenues.

(4)Includes funded research and development contracts, royalty income and grant revenues.

Product and Services Revenues

Consolidated net revenues increased 5% to $405.5 million for the year ended December 31, 2023 from $387.5 million for the year ended December 31, 2022.

COVID-19 Diagnostics revenues increased by 10% to $257.5 million for the year ended December 31, 2023 compared to $233.7 million for the year ended December 31, 2022 due to increased sales of the Company's InteliSwab® tests through its U.S. government procurement contracts. The Company expects a significant decline in COVID-19 revenues during 2024 due to the fulfillment of these contracts and lower overall demand for COVID-19 testing.

Sales of the Company's Diagnostics products increased 41% to $73.7 million for the year ended December 31, 2023 from $52.2 million for the year ended December 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 international markets due to increased adoption of the Company's self-test in several new African countries and due to customer ordering patterns.

Molecular Sample Management Solutions revenues decreased 14% to $54.3 million for the year ended December 31, 2023 from $63.3 million for the year ended December 31, 2022. Sales of the Company's Molecular Sample Management Solutions are being impacted by macro-economic factors in the market in which the customers operate such as a decline in discretionary consumer spend. Sample Management Solutions revenues are also impacted by customer ordering patterns.

Other products and services revenues increased 1% to $12.0 million for the year ended December 31, 2023 from $11.9 million for the year ended December 31, 2022.

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Molecular Services revenues, which are largely derived from the Company's laboratory services, decreased 39% to $4.5 million for the year ended December 31, 2023 from $7.3 million for the year ended December 31, 2022. The decline in services revenues was largely the result of the loss of two customers in 2022: one customer ceased operations in 2022 and the other deprioritized microbiome studies. These loss of customers is coupled with the completion of certain large clinical trial studies which have not been replaced with new studies.

Sales of the Company's COVID-19 Molecular Products collection kits decreased by 97% to $0.3 million for the year ended December 31, 2023 from $9.7 million for the year ended December 31, 2022 due to decline in demand for COVID-19 PCR testing given the availability of rapid antigen tests.

Non-Product and Services Revenues

Non-product and services revenues decreased 66% to $3.3 million for the year ended December 31, 2023 from $9.4 million for the year ended December 31, 2022 as a result lower funding for research and development activities and lower royalty income.

CONSOLIDATED OPERATING RESULTS

Consolidated gross profit margin increased to 42% for the year ended December 31, 2023 from 38% for the year ended December 31, 2022. This increase in margins was driven by the higher InteliSwab® sales which also generated higher margins due to reduced costs associated with manufacturing efficiencies and a packaging change implemented during the first quarter of 2023. Also contributing to improved margins is lower product scrap expense. These improvements in margins were partially offset by $6.9 million of accelerated depreciation associated with the wind-down of InteliSwab® manual assembly in Thailand as the Company on-shores and automates the manufacturing of this product at its Pennsylvania facilities and $0.5 million from the exit from one of its leased warehouse in an effort to consolidate facilities and further lower costs.

Consolidated operating income for the year ended December 31, 2023 was $32.7 million, a $54.8 million improvement from the $22.2 million operating loss reported for the year ended December 31, 2022. Results for the year ended December 31, 2023 were positively impacted by lower operating expenses and lower impairment losses. Results for the year ended December 31, 2023 included $10.8 million of impairment losses compared to $17.1 million for the year ended December 31, 2022. Impairment losses in 2023 were comprised of impairments of intangible assets and idle manufacturing equipment.

Operating expenses for the year ended December 31, 2023, excluding the impairment charges, decreased by $25.4 million to $128.2 million compared to $153.7 million the year ended December 31, 2022, reflecting the impact of the Company's cost saving measures and headcount reductions.

Research and development expenses decreased 7% to $33.7 million for the year ended December 31, 2023 from $36.2 million for the year ended December 31, 2022 largely due a decrease in spend on COVID-19 product development, a decrease in employee costs associated with a reduction in headcount, partially offset by increased engineering consulting spend associated with the Company's $109 million DOD manufacturing expansion contract.

Sales and marketing expenses decreased 26% to $36.3 million for the year ended December 31, 2023 from $49.2 million for the year ended December 31, 2022 due to lower advertising spend, lower employee costs associated with a decrease in headcount, a decrease in the Company's provision for uncollectible accounts, lower commissions, and lower sales meeting and consulting spend.

General and administrative expenses decreased 15% to $58.2 million for the year ended December 31, 2023 from $68.2 million for the year ended December 31, 2022 largely due a decrease in consulting fees, lower employee costs associated with lower headcount and severance, lower project management fees associated with the $109 million DOD manufacturing expansion contract, and lower sales tax penalties, board of directors fees, legal fees, and recruitment fees. In 2022, the Company incurred high severance expense associated with the Company's former CEO's and general counsel's employment agreements and higher recruitment expense associated with the new CEO search.

All of the above contributed to the Company's operating income of $32.7 million for the year ended December 31, 2023, which included non-cash impairment charges of $10.8 million, non-cash charges of $20.9 million for depreciation and amortization, and $10.7 million for stock-based compensation. The Company's operating loss of $22.2 million for the year ended December 31, 2022 included a non-cash impairment charge of $17.1 million, non-cash charges of $15.3 million for depreciation and amortization, and $11.6 million for stock-based compensation.

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CONSOLIDATED OTHER INCOME

Other income for the year ended December 31, 2023 was $23.6 million compared to $6.5 million for the year ended December 31, 2022. This increase is largely due to $12.8 million of additional profit earned above the guaranteed profit earned under the $109 million DOD manufacturing expansion contract that completed in the fourth quarter. This additional profit resulted from lower spend under the fixed firm contract than originally budgeted. Also contributing to the higher other income is higher interest income offset by lower foreign currency gains.

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. Although the Company has achieved another quarter of U.S. cumulative pre-tax earnings based on a rolling three year window the Company has not achieved a level of sustained profitability that would, in its judgement, support the release of the valuation allowance. For the year ended December 31, 2023 the Company recorded income tax expense of $2.6 million. 2023 income tax expense is comprised of $1.9 million of U.S. state income tax expense, and foreign income tax expense of $0.7 million. For the year ended December 31, 2022, the Company recorded income tax expense of $1.5 million. The Company's 2022 income tax expense is comprised of U.S. state income taxes of $1.0 million, Canadian withholding taxes paid on the repatriation of Canadian earnings of $1.7 million, and a foreign income tax benefit of $1.2 million associated with the Company's Canadian subsidiary. The overall increase in tax expense is associated with an increase in earnings in both the U.S. and in Canada.

Liquidity and Capital Resources

The Company's cash and cash equivalents and available-for-sale securities increased to $290.4 million at December 31, 2023 from $110.8 million at December 31, 2022. $84.9 million, or 29%, of the Company's $290.4 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 the Company's foreign subsidiaries.

The Company's working capital increased to $346.9 million at December 31, 2023 from $256.1 million at December 31, 2022. Working capital increased primarily due to the increase in cash and cash equivalents and lower accounts receivable, inventory, and lower accounts payable balances. Working capital improved also as a result of receiving final payment under the Company's $109 million manufacturing expansion contract. Working capital is primarily a function of sales, purchase volumes, inventory requirements, and vendor payment terms.

Analysis of the Company's Cash Flows

Operating Activities

During the year ended December 31, 2023, net cash provided by operating activities was $141.6 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 $53.7 million included non-cash charges of depreciation and amortization expense of $20.9 million, stock-based compensation expense of $10.7 million, impairment charges taken for idle equipment and intangible assets of $10.8 million, and a decrease in reserve for uncollectible accounts of $0.5 million.

Cash provided by the Company's working capital accounts included a decrease in inventory of $48.2 million as the Company fulfilled demand for its InteliSwab® product and a decrease in accounts receivable of $31.1 million largely associated with collections of monies due from the U.S. government for InteliSwab® shipments. Offsetting these increases

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of cash was a $27.0 million decrease in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $3.4 million.

Investing Activities

Net cash provided by investing activities was $66.2 million for the year ended December 31, 2023, which reflects proceeds from the maturities and redemptions of investments of $102.4 million, $48.7 million in reimbursement received under the Company's $109 million contract with the U.S. government offset by $74.7 million used to purchase investments. Investing activities also included $5.8 million to acquire property and equipment to support normal operations of the business and $4.5 million used to build additional manufacturing capacity as required by the government contract.

Financing Activities

Net cash used in financing activities was $3.0 million for the year ended December 31, 2023, which reflects $1.9 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted awarded to the Company's employees and payments of lease liabilities of $1.3 million.

Resources

The Company's contractual obligations are included in Notes 8 and 13 of its consolidated financial statements. Additionally, the Sapphiros agreement entered into during 2024 has an aggregate commitment of up to $30.0 million to be funded by June 2024, contingent on certain terms and conditions being met. $28.3 million of that commitment has been paid within the first two months of 2024. The Company expects existing cash and cash equivalents will be sufficient to fund this obligation and 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 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.

Critical Accounting Policies and Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's 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 the Company make judgments and estimates 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. The Company bases its 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.

The Company's significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. The Company considers the following accounting policies, which have been discussed with its Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing its financial statements and the uncertainties that could impact its results of operations, financial condition, and cash flows.

Revenue Recognition.

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration the Company is entitled to, net of allowances for any discounts or rebates.

The Company generally does not grant product return rights to its customers, except for warranty returns and return rights on sales of its OraQuick® In-Home HIV test to the retail trade, and InteliSwab® products to the retail trade and certain customers.

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Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, the Company expenses warranty returns as incurred.

Service Revenues

Service revenues represent microbiome laboratory testing and analytical services. The Company recognizes revenues when it satisfies its performance obligations for services rendered.

Arrangements with multiple-performance obligations

In arrangements involving more than one performance obligation, which largely applies to the Company's service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied.

Inventories

The Company's inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of the Company's inventories are subject to expiration dating, which can be extended in certain circumstances. The Company continually evaluates quantities on hand and the carrying value of its inventories to determine the need for net realizable value adjustments for excess and obsolete inventories, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. The Company reserves for unidentified scrap or spoilage based on historical write-off rates. It also considers items identified through specific identification procedures in assessing the adequacy of its reserve. Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of its inventories and reported operating results.

Goodwill

Goodwill is not amortized, but rather is tested annually for impairment or more frequently if the Company believes that indicators of impairment exist. Current generally accepted accounting principles permit the Company to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit.

ITEM 7. 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 Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, 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. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report.

The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2022 (this "Annual Report") generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Business Overview

Our primary goal is to empower the global community to improve health and wellness by providing access to accurate essential information through effortless tests, collection kits and services. Through December 31, 2022 our business consisted of two segments: our “Diagnostics” segment and our “Molecular Solutions" segment.

In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the two segments into one business unit, with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operational synergies. Beginning with the first quarter of 2023, we will report financial results on a non-segmented basis.

Our Diagnostics business primarily consists of the development, manufacture, marketing and sale of simple, easy to use 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 COVID-19, HIV and Hepatitis C that are performed on a rapid basis at the point of care, and tests for drugs of abuse 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 COVID-19 and HIV products are also sold in a consumer-friendly format in the over-the-counter (“OTC”) market in the U.S. and, in the case of the HIV product, as a self-test to individuals in a number of other countries. In 2022, after obtaining a CE mark, we launched our OraQuick® HIV Self-Test, an oral swab in-home test for HIV-1 and HIV-2, in Europe, making it available in several European countries. Through our Diagnostics business we are also developing and commercializing diagnostic products that measure adherence to HIV medications including pre-exposure prophylaxis ("PrEP"). In September 2022, we entered into an agreement with the Biomedical Advanced Research Development Authority ("BARDA"), pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform, with the objective of developing increased sensitivity and shelf life, with new chemistry and higher degrees of automation in the test's manufacturing process.

Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek Inc. ("DNAG"), Diversigen, Inc. ("Diversigen"), and Novosanis NV ("Novosanis"). Our Molecular Solutions business sells its products and services directly to its customers, primarily through its internal sales force in the U.S. domestic market, and in many international markets, also through distributors. Our products primarily consist of collection kits and services used by clinical laboratories, direct-to-consumer laboratories, researchers, pharmaceutical companies, and animal health service and product providers. Most of our Molecular Solutions revenues are derived from product sales to commercial customers and sales into the academic and research markets. A significant portion of our total sales is from repeat customers in both markets. Molecular Solutions customers span the disease risk management, diagnostics, pharmaceutical, biotech, nutrition, companion animal and environmental markets.

In 2020, we expanded the market focus of our Molecular Solutions business by selling existing collection products for use with COVID-19 tests. In 2022, demand for COVID-19 PCR testing declined, which was primarily driven by the availability of antigen tests, the reduction in the number of COVID-19 cases, and the wider availability of vaccines which negatively impacted the sales of the collection products. We have also developed additional collection devices for the emerging microbiome market, which focuses on studying microbiomes and their effect on human and animal health. In 2022, we launched the OMNIgene® • GUT Dx collection device (OMD-200), which was granted De Novo authorization from the FDA for collection of human fecal samples and the stabilization of DNA from the bacterial community for subsequent assessment of the microbiome profile by an assay validated for use with OMNIgene®·GUT Dx

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device. Additionally, our OMNIgene® • GUT DNA and RNA collection device (OMR-205), became available to gut microbiome researchers, allowing for self-collection, stabilization, storage and transportation of microbial DNA and RNA at ambient temperature for gut microbiome profiling. We leverage our existing sales force and global research connections to engage microbiome customers worldwide to establish ourselves among the leaders in ease-of-collection, stabilization, and transport of this challenging sample type. Through our partnership with Grifols, we received FDA clearance for our ORAcollect®•Dx saliva collection device for OTC use, which allows our commercial partners to use and market the device with their therapeutics or devices.

Our Molecular Solutions products include the Colli-Pee® device, developed and sold by our Novosanis subsidiary, for the volumetric collection of first void urine. This product is in its early stages, and initial sales are occurring primarily through distributors and collaborations in the liquid biopsy and sexually transmitted disease markets. In 2022, Novosanis obtained a CE mark for its Colli-Pee® device containing a prefilled tube with UAS® chemistry, which is designed to stabilize urinary analytes. Our Diversigen subsidiary, also offers laboratory and analytical services for both genomics and microbiome customers to more fully meet their needs. These services are primarily provided to pharmaceutical, biotech companies, and research institutions.

In 2022, Diversigen launched its metatranscriptomics sequencing and analysis services for gut microbiome samples, which generate a microbial community's gene expression profile to provide information about the interactions between an individual and their microbiome, creating a holistic picture of a sample's microbial functions and expression levels.

Recent Developments

Restructuring

In February 2023, we announced a corporate restructuring to combine the commercial and innovation teams across the Molecular and Diagnostics segments into one business unit with sales, marketing, product development and research teams covering multiple product lines. This change is intended to accelerate innovation, enhance customer experience and result in operation synergies.

Impact of COVID-19

As COVID-19 continues to impact the economy of the United States and other countries around the world, we are committed to being a part of the response to this unprecedented challenge. We have made substantial investments to expand our operations in order to manufacture product used for COVID-19 testing in the United States.

Due to COVID-19, we have experienced volatility, including periods of material decline compared to prior year periods in testing volume of our base business (which excludes COVID-19 testing) and periods of significant demand for our COVID-19 testing product, with demand generally fluctuating in line with changes in prevalence of the virus and related variants. It is difficult for us to predict the duration or magnitude of the outbreak’s effects on our business or results of operations.

We expect that, if and when the current COVID-19 pandemic subsides, there could be significantly reduced demand for testing, and thus, for our InteliSwab® COVID-19 Rapid Tests. Further, if the COVID-19 pandemic becomes a seasonal virus or experiences fluctuations in prevalence, we could experience fluctuations in our revenues associated with our InteliSwab® COVID-19 Rapid Tests For additional information on COVID-19 related risks we face, see the “Risk Factors - Risks Relating to Products, Marketing and Sales - The COVID-19 pandemic continues to cast uncertainty over our consolidated results of operations, financial position and cash flows, while the consequences of COVID-19 and the governmental response to the pandemic and pandemic-related macroeconomic impacts could negatively affect our operations and share price.” section of this Annual Report

Appointment of New CEO

Carrie Eglinton Manner was appointed President and Chief Executive Officer ("CEO"), effective June 4, 2022. Ms. Eglinton Manner also joined the OraSure Board of Directors (the "Board"). She succeeded Dr. Nancy Gagliano, who was appointed Interim CEO in March 2022. Dr. Gagliano continues to serve on the OraSure Board.

Exploration of Strategic Alternatives

During 2022 our Board of Directors explored and evaluated a broad range of strategic alternatives with the goal of maximizing value for stockholders. Ms. Eglinton Manner’s appointment as CEO came in tandem with a decision by the OraSure Board to conclude its

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review of the strategic alternatives and for the Company to move forward under her leadership. Market conditions and the Board of Directors' belief in our ability to further build upon recent operational successes with Ms. Eglinton Manner’s leadership were factors in the decision.

BARDA Funding for Ebola Product

In September 2022, we entered into an agreement with BARDA, which is part of the office of the Assistant Secretary for Preparedness and Response, pursuant to which BARDA will provide up to $8.6 million in funding to us to develop a 2nd generation Ebola test on the OraQuick® testing platform. Our current OraQuick® Ebola Rapid Antigen Test is de novo authorized for use with whole blood or cadaveric oral fluid. The test received de novo authorization from the FDA in 2019, making it the first and only rapid antigen test to receive authorization for the detection of Ebola virus.

New Contract for In-Home HIV Tests

In September 2022, we were selected to provide our OraQuick® In-Home HIV tests in support of the CDC's “Together Take Me Home,” HIV self-test program. Under the program, the CDC will provide $41.5 million over a five-year period to support community testing. Emory University will manage the program and closely collaborate with a number of partner organizations, including OraSure, to supply tests to communities not equitably reached by HIV testing services across the United States. Under the "Together Take Me Home" HIV self-test program, we will provide up to 1 million OraQuick® In-Home HIV tests over a five-year period. A free HIV self-test will be mailed in discreet packages to people who enroll through its website. The program will target populations that are disproportionately affected by HIV and less likely to have access to key prevention services.

U.S. Government Contract Awards

In September 2021, we entered into a contract with the DLA for the procurement of our InteliSwab® COVID-19 Rapid Test for OTC use, which the DLA estimated to have a value of $205 million. Under the terms of the contract, we are providing our InteliSwab® COVID-19 Rapid Tests to up to 20,000 sites throughout the United States. The contract period was October 2021 through September 2022, however the DLA has provided delivery orders against which it can continue to issue shipping instructions into 2023.

In November 2022, the DLA awarded us a second procurement contract for our InteliSwab® COVID-19 Rapid Test for OTC use. Under the terms of this award, the contract estimate is 18 million InteliSwab® COVID-19 Rapid Tests; with a maximum award of 36 million tests and a guaranteed minimum award of 3.6 million tests. The contract will run from November 2022 through November 2023.

In December 2022, the HHS awarded a third procurement contract for our InteliSwab® COVID-19 Rapid Test for OTC use. Under the terms of this contract we were awarded a fully funded firm fixed price contract for a total of 3.2 million tests to be delivered in the first quarter of 2023.

DOD Manufacturing Capacity Funding

In September 2021, we entered into an agreement for $109 million in funding from the DOD, in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab® COVID-19 Rapid Test as part of the nation's pandemic preparedness plan. Under this agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding is received based on the achievement of milestones for the design, acquisition, installation, housing, qualification and acceptance of the manufacturing equipment as set forth in the agreement. We continue to invest time and money to build the additional manufacturing capacity as required under this agreement. We anticipate that we will complete the requirements of the contract by the end of 2023. Since the inception of the contract, we have received $60.3 million in funding.

Current Consolidated Financial Results

During the year ended December 31, 2022, our consolidated net revenues increased 66% to $387.5 million, compared to $233.7 million for the year ended December 31, 2021. Net product and services revenues during the year ended December 31, 2022 increased 67% when compared to the same period of 2021, largely due to $233.7 million of InteliSwab® COVID-19 Rapid Test revenue recorded in 2022, compared to $22.7 million in 2021. We first began selling this product in August of 2021. Also contributing to the increased revenues were higher sales of our hepatitis C ("HCV") and substance abuse testing products. Declines in sales of our molecular sample collection kits for COVID-19 testing, lower genomics product revenue, lower laboratory services revenues and a decline in international sales of our HIV products offset these positive drivers of revenue. Other revenues for the year ended December 31, 2022 were $9.4 million compared to $6.8 million in the same period of 2021. This increase was largely due to increased research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income.

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Our consolidated net loss for the year ended December 31, 2022 was $17.9 million, or $0.25 per share on a fully diluted basis, compared to a consolidated net loss of $23.0 million, or $0.32 per share on a fully diluted basis, for the year ended December 31, 2021. Results for the full-year 2022 benefited from the increased revenues in 2022 compared to 2021. The benefit of the higher revenues was offset by the negative impact of $17.1 million of impairment charges taken for idle manufacturing lines and goodwill. There were no similar charges in the 2021. 2022 results also included higher spending in operating expenses across all categories.

Cash used in operating activities during the year ended December 31, 2022 was $47.2 million compared to $35.4 million used in the year ended December 31, 2021. The use of cash in 2022 reflected the significant investment in inventory purchases in anticipation of future demand of our COVID-19 testing products as well the increase in our accounts receivable balances resulting largely from COVID-19 shipments made toward the end of the fourth quarter of 2022. As of December 31, 2022, we had $110.8 million in cash, cash equivalents, and available-for-sale securities, compared to $170.1 million at December 31, 2021.

Results of Operations

YEAR ENDED DECEMBER 31, 2022 COMPARED TO DECEMBER 31, 2021

CONSOLIDATED NET REVENUES

The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments.

Consolidated net product and services revenues increased 67% to $378.0 million for the year ended December 31, 2022 from $226.9 million for 2021. This increase was largely driven by higher sales of our InteliSwab® COVID-19 Rapid Tests, and our HCV and substance abuse testing products. The increase was partially offset by declines in revenues of our molecular product use for COVID-19 testing, our molecular product used for genomic testing, and lower laboratory services revenues. Other revenues for the year ended December 31, 2022 were $9.4 million compared to $6.8 million in 2021. This increase was largely due to increased research and development funding associated with our InteliSwab® COVID-19 rapid test offset by a decrease in royalty income.

Consolidated net revenues derived from products sold to customers outside of the United States were $37.3 million and $45.3 million, or 10% and 19% of total net revenues, during the years ended December 31, 2022 and 2021, 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 the amount of total net revenues (dollars in thousands) generated by our Diagnostics segment.

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Infectious Disease Testing Market

COVID-19 revenues were $233.7 million and $22.7 million for the years ended December 31, 2022 and 2021, respectively. This growth was driven largely through fulfillment of our government procurement contracts for InteliSwab® tests. We first began selling this product in August 2021. We are anticipating higher COVID-19 revenues in the first half of 2023 followed by lower revenues in the second half of 2023, as we work down our government InteliSwab® COVID-19 rapid test contracts.

Sales to other infectious disease testing markets decreased 4% to $52.7 million for the year ended December 31, 2022 from $54.6 million for the year ended December 31, 2021. This decline resulted from lower world-wide sales of our OraQuick® HIV product offset by increased world-wide sales of our OraQuick® HCV products.

The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during 2022 and 2021.

Domestic OraQuick® HIV sales decreased 2% to $16.2 million for the year ended December 31, 2022 from $16.6 million for the year ended December 31, 2021. The decline is primarily a result of a large order fulfilled in the first half of 2021 for our OraQuick® In-Home HIV tests shipped to the CDC and use in an initiative to drive increased in-home HIV testing, which was not repeated in 2022. This negative impact to sales was partially offset by improved distribution strategy with our distribution partners.

International sales of our OraQuick® HIV products during 2022 decreased 11% to $22.6 million from $25.5 million in 2021. This decrease was largely due to customer order timing. This was partially offset by Our OraQuick® HIV Self-Test expansion into Europe.

Domestic OraQuick® HCV sales increased 21% to $8.4 million in 2022 from $6.9 million in 2021, driven by new funding granted by certain state governments, increased legislation regarding drug testing and a rise in drug use requiring more testing. Furthermore this part of our business also benefited from an improved distribution strategy with our distribution partners.

International OraQuick® HCV sales remained largely flat at $5.0 million in 2022 compared to $4.9 million in 2021.

Substance Abuse Testing Market

Sales to the substance abuse testing markets increased 6% to $10.3 million for the year ended December 31, 2022 from $9.7 million for the year ended December 31, 2021 due to market share gains.

Other revenues

Other revenues for the year ended December 31, 2022 increased 133% to $7.0 million from $3.0 million for the year ended December 31, 2021 largely due to higher research and development funding for 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test. This was offset by lower royalty income from a licensing agreement related to our proprietary buffer solution used for the preservation and stabilization of oral fluid specimens.

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Molecular Solutions Segment

The table below shows a breakdown of total net revenues (dollars in thousands) generated by our Molecular Solutions segment for the year ended December 31, 2022 and 2021.

Sales of our genomics products decreased 14% to $54.3 million in 2022 compared to $63.4 million in 2021, largely as a result of a shift in market prioritization at our larger commercial customers and a reduction in demand in the animal genetics market.

Microbiome revenues decreased 6% to $7.5 million in 2022 compared to $7.9 million in 2021, due to decreased sales in the commercial microbiome market. This was partially offset by the onboarding of new customers in the academic market.

Sales of our molecular sample collection kits for COVID-19 testing decreased 82% to $9.7 million in 2022 compared to $54.2 million in 2021 due to lower COVID-19 PCR testing sales to our core customers, driven by the availability of antigen tests, the wider availability of vaccines, lower public funding for PCR testing, and high inventory levels held by some of those customers.

Laboratory services revenues decreased 38% to $7.3 million in 2022 compared to $11.8 million in 2021, as a result of a large customer ceasing its operations and the timing of clinical trials activity.

Other revenues decreased 36% to $2.4 million in 2022 compared to $3.8 million in 2021 due to lower royalty income received under a litigation settlement agreement.

CONSOLIDATED OPERATING RESULTS

Consolidated gross profit percentage was 38% for the year ended December 31, 2022 compared to 50% for 2021. The decrease in gross margins rates was caused by an unfavorable product mix of higher sales of lower margin products driven by the decline in molecular COVID-19 revenues offset by an increase in InteliSwab® revenues. In addition, 2021 margins benefited from lower payroll taxes as result of applying for an Employee Retention Credit under the Coronavirus Aid, Relief and Economic Security Act, which increased gross profit by $2.5 million.

Consolidated operating loss in 2022 was $23.0 million, which was a $12.8 million increase from the $10.2 million of operating loss reported in 2021. Results in 2022 were negatively impacted by the decline in gross margin described above coupled with impairment charges of $17.1 million and the increased operating expenses described below.

OPERATING INCOME BY SEGMENT

Diagnostic Segment

The gross profit percentage of the Diagnostics business was 36% in 2022 compared to 29% in 2021. This increase was driven by an improved product mix associated with the higher sales of InteliSwab® COVID-19 Rapid Tests. This was partially offset by lower payroll taxes in 2021 as result of applying for the Employee Retention Credit which increased gross profit by $2.5 million in that year.

Research and development expenses increased 8% to $26.0 million in 2022 from $24.1 million in 2021, due to higher staffing costs associated with increased head count, cost incurred under our DOD expansion contract which did not occur in 2021, and increased clinical study activities related to obtaining CE mark for our InteliSwab® rapid test, partially offset by lower product development activities related to our InteliSwab® rapid test as we received EUA authorization in June 2021. Also contributing to the higher spend are consulting fees required under our DOD expansion contract. Similar fees did not occur in 2021.

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Sales and marketing expenses increased 18% to $33.5 million in 2022 from $28.5 million in 2021, due to increased staffing costs associated with higher head count, increased severance costs, and the inclusion of the Employee Retention Credit in 2021 results, which did not repeat in 2022. Furthermore, travel and annual meeting expenses increased as travel and in person events have resumed as COVID-19 restrictions have been lifted. In addition, we also recorded an increase in our reserve for uncollectible accounts. These higher spend items were partially offset by a decrease in consulting fees.

General and administrative expenses increased 31% to $42.8 million in 2022 from $32.6 million in 2021 largely due to higher stock compensation expense associated with accelerated vesting of shares under our former CEO's and general counsel's employment agreements, higher staffing costs associated with increased head count and severance costs, increased legal costs, and increased consulting and accounting fees.

Operating expenses for the Diagnostic segment also include an impairment charge of $4.9 million associated with an idle manufacturing line for which it has no projected cash flows and minimal resale or salvage value. Diagnostic operating expenses also included a goodwill impairment charge of $3.6 million. The decline in the Company's stock price was identified as a triggering event which required the Company to perform a quantitative goodwill impairment analysis. The results of this analysis indicated the Diagnostic segment's goodwill was impaired and was written down to $0.

All of the above contributed to the Diagnostics segment’s operating loss of $0.6 million for the year ended December 31, 2022, which included non-cash charges of $8.1 million for depreciation and amortization, impairment charges of $8.5 million, and $9.3 million for stock-based compensation.

Molecular Solutions Segment

The gross profit percentage of the Molecular Solutions segment was 46% in 2022 compared to 63% in 2021. This decrease was due to a less favorable product mix and an increase in reserves for excess inventory as result of a forecasted decline in demand.

Research and development expenses remained relatively flat at $10.3 million in 2022 compared to $10.1 million in 2021.

Sales and marketing expenses decreased 4% to $15.7 million in 2022 compared to $16.3 million in 2021 largely due to lower amortization expense associated with an intangible asset that was fully amortized at the end of 2021, lower commission expense associated with the decline in sales, lower consulting costs, and a decrease in expense related to the cancellation of a marketing loyalty program. These decreases in spend were partially offset by higher staffing costs related to increased head count.

General and administrative expenses increased 44% to $25.4 million in 2022 compared to $17.7 million in 2021, due primarily to higher legal fees.

Operating expenses for the Molecular Solutions segment also includes impairment charges of $8.6 million in 2022 associated with several idle manufacturing lines for which there are no projected cash flows and minimal resale or salvage value.

All of the above contributed to an operating loss of $22.4 million for 2022, which included non-cash charges of $7.2 million for depreciation and amortization, the impairment charges of $8.6 million, and $2.3 million for stock-based compensation.

CONSOLIDATED INCOME TAXES

We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2022 and 2021, we recorded income tax expense of $1.5 million and $13.7 million, respectively. 2022 income tax expense is comprised of $1.7 million of Canadian withholding taxes paid on the repatriation of Canadian earnings which occurred in the first quarter of 2022, $0.9 million of U.S. state income taxes, and a foreign income tax benefit of $1.2 million associated with our Canadian subsidiary. Our 2021 expense is comprised of U.S. state income taxes of $0.2 million and foreign tax expense associated with our Canadian subsidiary of $13.5 million.

Liquidity and Capital Resources

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Our cash and cash equivalents and available-for-sale securities decreased to $110.8 million at December 31, 2022 from $170.0 million at December 31, 2021. Our working capital increased to $255.3 million at December 31, 2022 from $231.2 million at December 31, 2021.

During the year ended December 31, 2022, net cash used in operating activities was $47.2 million. Our net loss of $17.9 million included non-cash charges of $17.1 million associated with impairment charges taken for idle manufacturing lines and goodwill, depreciation and amortization expense of $15.3 million, stock-based compensation expense of $11.6 million, deferred income tax benefit of $1.7 million, a decrease in reserve for uncollectible accounts of $1.0 million, and a decrease in inventory reserves of $0.8 million. Cash used to fund our working capital accounts included an increase in inventory of $43.0 million to meet anticipated demand to support COVID-19 testing programs, an increase in accounts receivable of $25.2 million due to orders placed in the fourth quarter, an increase in prepaid expenses and other assets of $7.1 million associated with tax installments made to the Canadian Revenue Agency and a decrease in deferred revenue of $0.6 million due to the recognition of revenue from customer prepayments. Offsetting these uses of cash was a $4.0 million increase in accounts payable due to the timing of invoices received and payments made and a decrease in accrued expenses and other liabilities of $1.4 million.

Net cash provided by investing activities was $21.1 million for the year ended December 31, 2022, which reflects proceeds from the maturities and redemptions of investments of $47.4 million, offset by $22.9 million used to purchase investments. Investing activities also included $6.8 million to acquire property and equipment and $57.1 million used to build additional manufacturing capacity as required by the $109 million agreement with the DOD. This is offset by $60.3 million received from the DOD as reimbursement under that contract.

Net cash used in financing activities was $3.8 million for the year ended December 31, 2022, which reflects $2.3 million used for the repurchase of common stock to satisfy withholding taxes related to the vesting of restricted shares and performance stock units awarded to our employees, payments of lease liabilities of $1.4 and payment of our contingent consideration obligation of $0.2 million.

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 timing of reimbursement under our $109 million DOD contract, 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, 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, $71.0 million, or 64%, of our $110.8 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In 2022, we repatriated $65 million of such cash into the United States and incurred approximately $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 our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.

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 judgments and estimates 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. 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.

Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition, and cash flows.

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Revenue Recognition.

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates.

We generally do not grant product return rights to our customers, except for warranty returns and return rights on sales of our OraQuick® In-Home HIV test to the retail trade, and InteliSwab® products to the retail trade and certain customers.

Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred.

Service Revenues

Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligation for services rendered.

Arrangements with multiple-performance obligations

In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied.

Inventories

Our inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for net realizable value adjustments, based primarily on prior experience with consideration of expected changes in the business and estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results.

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Goodwill

Goodwill is not amortized, but rather is tested annually for impairment or more frequently if we believe that indicators of impairment exist. Current generally accepted accounting principles permit us to make a qualitative evaluation about the likelihood of goodwill impairment and if it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. An impairment charge is recognized in the amount by which the carrying amount exceeds the reporting unit’s fair value, provided the impairment charge does not exceed the total amount of goodwill allocated to the reporting unit.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit.

ITEM 7. 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 Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect results are discussed more fully under the Item 1A, entitled “Risk Factors,” and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, 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. We undertake no duty to update any forward-looking statements made herein after the date of this Annual Report.

The following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto, along with the Section entitled “Critical Accounting Policies and Estimates,” set forth below. This section of this Annual Report on Form 10-K for the year ended December 31, 2021 (this "Annual Report") generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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 Collection Systems” 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 over-the-counter (“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, Inc. (“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 medications in a patient’s urine or blood, as well as point-of-care products currently in development. In 2020, we began developing a rapid antigen self-test for COVID-19 and a COVID-19 antibody enzyme-linked immunosorbent assay (“ELISA”) for use in laboratory settings. In June 2021, we received three Emergency Use Authorizations ("EUA") from the U.S. Food and Drug Administration ("FDA") for our InteliSwab® COVID-19 Rapid Tests for non-prescription OTC, professional point-of-care and prescription use. We began recording revenues on the sales of our InteliSwab® COVID-19 Rapid Tests during the third quarter of 2021. Following discussions with the FDA and their de-prioritization of antibody testing in the U.S., we decided to no longer pursue an EUA for the ELISA laboratory antibody test. We have, however, continued to offer the product for research use to labs and other parties interested in COVID antibody surveillance and research applications.

Our Molecular Solutions business is operated by our wholly-owned subsidiaries, DNA Genotek Inc. (“DNAG”), Diversigen, Inc. (“Diversigen”), and Novosanis NV (“Novosanis”). In our Molecular Solutions 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. Three of our collection devices are used in connection with COVID-19 molecular testing. 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, Inc. (“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.

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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 and third quarters of 2021, we saw 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, professional HIV and HCV testing in Europe and Asia also started to pick up. More recently we have experienced logistics and distribution delays, which have impacted our ability to provide our HIV self-tests in Southern and Eastern African countries due to the COVID-19 pandemic. In our Molecular Solutions 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 and third quarters 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 2021, we generated revenues of approximately $54.2 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 became more difficult to collect blood in clinics or healthcare settings, these customers increasingly relied on the saliva collection alternative. However, demand for molecular COVID-19 testing during 2021 began to decline primarily due to the availability of vaccines and other testing options. We believe this trend will 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 InteliSwab® COVID-19 Rapid Tests for non-prescription OTC, professional point-of-care (Clinical Laboratory Improvements Amendment of 1988, "CLIA" waived) and prescription use. These lateral flow, rapid antigen 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. During the second half of 2021, we recorded $22.4 million of InteliSwab® sales.

Following discussions with the FDA and their de-prioritization of antibody testing in the U.S., we decided to no longer pursue an EUA for a COVID-19 antibody enzyme-linked immunosorbent assay ("ELISA") for use in laboratory settings. We are, however, continuing to offer this product for research use only to labs and other parties interested in COVID antibody surveillance and research applications.

Exploration of Strategic Alternatives

The COVID-19 pandemic has provided us an opportunity to fundamentally transform into a higher growth, more innovative and efficient organization with broader customer reach, both within and outside the United States. We believe we are well positioned to address current public health challenges and capitalize on diagnostic trends in the market and enhance its operational and competitive profile. Against this backdrop, our Board of Directors is exploring and evaluating a broad range of strategic alternatives with the goal of maximizing value for stockholders. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.

DLA Procurement Contract

In September 2021, we entered into a contract with the Defense Logistics Agency ("DLA") for the procurement of our OTC InteliSwab® COVID-19 Rapid Test, which the DLA estimated to have a value of $205 million. Under the terms of the contract, the Company will provide its InteliSwab® COVID-19 Rapid Test to up to 25,000 sites throughout the United States. The contract will run from October 2021 through September 2022. We recognized revenue of $1.9 million during the fourth quarter of 2021 related to this arrangement.

BARDA 510(k) Funding

In September 2021, we entered into an agreement with the Biomedical Advanced Research Development Authority (“BARDA”), which is part of the office of the Assistant Secretary for Preparedness and Response at the U.S. Department of Health and Human Services

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(“HHS”), pursuant to which BARDA will provide up to $13.6 million in funding for us to obtain 510(k) clearance and CLIA waiver of our InteliSwab® COVID-19 rapid test from the U.S. Food and Drug Administration (“FDA”).

DOD Manufacturing Capacity Funding

In September 2021, we also entered into an agreement for $109 million in funding from the U.S. Department of Defense (the “DOD”), in coordination with the Department of Health and Human Services, to build additional manufacturing capacity in the United States for our InteliSwab® COVID-19 Rapid Tests as part of the nation’s pandemic preparedness plan. Under this agreement, the funding will be used to expand our production capacity by 100 million tests annually. Funding will be paid to the Company based on achievement of milestones through March 2024 for the design, acquisition, installation, qualification and acceptance of the manufacturing equipment, as set forth in the agreement. We began receiving funds from the DOD in January 2022 and had received $15.4 million as of the date of this report.

Current Consolidated Financial Results

During the year ended December 31, 2021, our consolidated net revenues increased 36% to $233.7 million, compared to $171.7 million for the year ended December 31, 2020. Net product and services revenues during the year ended December 31, 2021 also increased 36% when compared to the same period of 2020, largely due to increased revenues across all product lines, other than our international HIV self-test. Other revenues for the year ended December 31, 2021 were $6.8 million compared to $5.3 million in the same period of 2020. This increase was largely due to increased research and development funding for our COVID-19 tests and higher royalty income.

Our consolidated net loss for the year ended December 31, 2021 was $23.0 million, or $(0.32) per share on a fully diluted basis, compared to a consolidated net loss of $14.9 million, or $(0.22) per share on a fully diluted basis, for the year ended December 31, 2020. Results for the full-year 2021 reflect the negative impact of inefficiencies in our InteliSwab® manufacturing process as we worked through our tech transfer issues and scale up and increased spending on research and development of COVID-19 products as well as higher sales and marketing spend to get our new COVID-19 product to market.

Cash used by operating activities during the years ended December 31, 2021 was $35.4 million compared to cash provided by operating activities for the year ended December 31, 2020 of $5.8 million. The use of cash in 2021 reflected the significant investment in inventory purchases in anticipation of future demand of our COVID-19 testing products. As of December 31, 2021, we had $170.0 million in cash, cash equivalents, and available-for-sale securities, compared to $257.1 million at December 31, 2020.

Results of Operations

YEAR ENDED DECEMBER 31, 2021 COMPARED TO DECEMBER 31, 2020

CONSOLIDATED NET REVENUES

The table below shows a breakdown of total net revenues (dollars in thousands) generated by each of our business segments.

Consolidated net product and services revenues increased 36% to $226.9 million for the year ended December 31, 2021 from $166.4 million for 2020 due to increased revenues across all product lines, other than our international HIV self-test. Other revenues for the year ended December 31, 2021 were $6.8 million compared to $5.3 million in 2020. This increase was largely due to increased research and development funding for our COVID-19 tests and higher royalty income.

Consolidated net revenues derived from products sold to customers outside of the United States were $45.3 million and $40.9 million, or 19% and 24% of total net revenues, during the years ended December 31, 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.

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Net Revenues by Segment

Diagnostics Segment

The table below shows the amount of total net revenues (dollars in thousands) generated by our Diagnostics segment.

Infectious Disease Testing Market

Sales to the infectious disease testing market remained largely flat at $54.6 million in 2021 compared to $54.4 million in 2020. What difference there was resulted from increased world-wide sales of our OraQuick® HCV products and higher domestic sales of our OraQuick® HIV products partially offset by lower international sales of our OraQuick® HIV products.

The table below shows a breakdown of our total net OraQuick® HIV and HCV product revenues (dollars in thousands) during 2021 and 2020.

Domestic OraQuick® HIV sales increased 10% to $16.6 million for the year ended December 31, 2021 from $15.2 million for the year ended December 31, 2020. This increase was primarily the result higher sales of our OraQuick® In-Home HIV test used in a Centers for Disease Control and Prevention ("CDC") initiative to drive increased in-home testing and the increased number of stores from which this product is sold. Domestic HIV sales into the public health, hospital, and physicians markets also increased due to the recovery of these markets post the COVID-19 pandemic impact in 2020.

International sales of our OraQuick® HIV products during 2021 decreased 12% to $25.5 million from $29.0 million in 2020. This decrease was largely due to the expiration of the Gates Foundation subsidy for certain international tests and challenges presented by the COVID-19 pandemic causing shipping delays and staffing issues at our customers.

Domestic OraQuick® HCV sales increased 44% to $6.9 million in 2021 from $4.8 million in 2020 due to the re-opening of testing programs previously closed as a result of the COVID-19 pandemic and as resources used for COVID-19 testing and vaccinations were starting to be redirected back to HCV testing.

International OraQuick® HCV sales increased 34% to $4.9 million in 2021 from $3.7 million in 2020 as sales into certain international markets continued to return to pre-pandemic levels.

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COVID-19 Testing Market

During the year ended December 31, 2021, COVID-19 revenues were $22.7 million driven by the first time sales of our InteliSwab® COVID-19 Rapid Test which we began shipping to customers in August.

Risk Assessment Market

Sales to the risk assessment market increased 5% to $9.7 million for the year ended December 31, 2021 from $9.2 million for the year ended December 31, 2020 due to hiring increases driven by the economic recovery from the COVID-19 pandemic.

Other revenues

Other revenues for the year ended December 31, 2021 increased 84% to $3.0 million from $1.6 million for the year ended December 31, 2020 largely due to higher research and development funding for our COVID-19 tests 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 total net revenues (dollars in thousands) generated by our Molecular Solutions segment for the year ended December 31, 2021 and 2020.

Sales of our genomics products increased 72% to $63.4 million in 2021 compared to $36.9 million in 2020 as we continued to see our customers' businesses recover from the COVID-19 pandemic and strong organic growth from customers in the commercial animal markets.

Microbiome revenues increased 45% to $7.9 million in 2021 compared to $5.5 million in 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 7% to $54.2 million in 2021 compared to $50.7 million in 2020 due to increased demand as the COVID-19 pandemic began late in the first quarter of 2020 and testing ramped up in the second and third quarters of 2020 and continued into the first half of 2021 contributing to the revenue growth for the full year period. Demand for COVID-19 PCR testing, in which our product is used, has shown declines in the second half of 2021 as a result of the increased availability of rapid tests.

Laboratory services revenues increased 35% to $11.8 million in 2021 compared to $8.7 million in 2020, due to customers resuming activities delayed by the COVID-19 pandemic.

Other revenues in 2021 remained largely flat at $3.8 million in 2021 compared to $3.7 million in 2020 since it is largely made up of royalty income received under a litigation settlement agreement.

CONSOLIDATED OPERATING RESULTS

Consolidated gross profit percentage was 50% for the year ended December 31, 2021 compared to 59% for 2020. The decrease in gross profit percentage was primarily due to increased scrap expense, including adjustments to inventory due to excess inventory or

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obsolescence, lower labor utilization, lower subsidies for the international sale of our HIV Self-Test under the charitable support agreement with the Gates Foundation, and a less favorable product mix as a result of the decline in sales of higher gross profit percentage product, partially offset by lower payroll taxes as result of applying for an Employee Retention Credit under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which increased gross profit by $2.5 million.

Consolidated operating loss in 2021 was $10.2 million, which was a $5.0 million increase from the $5.2 million of operating loss reported in 2020. Results in 2021 were negatively impacted by the decline in gross margin described above coupled with increased operating expenses described below.

OPERATING INCOME BY SEGMENT

Diagnostic Segment

The gross profit percentage of the Diagnostics business was 29% in 2021 compared to 42% in 2020. This decrease was due to an increase in scrap costs associated with production and tech transfer issues associated with our InteliSwab® test and the recording of adjustments for COVID-19 antibody inventory which will not be sold, lower absorption of labor costs due to production inefficiencies, and the lower subsidies received from the Gates Foundation, partially offset by a more favorable product mix of higher gross profit percentage product sales, and lower payroll taxes resulting from the Employee Retention Credit under the CARES act.

Research and development expenses increased 13% to $24.1 million in 2021 from $21.3 million in 2020, due to higher staffing costs as a result of increased headcount and increased COVID-19 product development expenses.

Sales and marketing expenses increased 27% to $28.5 million in 2021 from $22.4 million in 2020, due to higher marketing spending associated with the introduction of our InteliSwab® test into the market, higher commissions directly related to the increase in revenues and increased consulting costs associated with business strategy planning. These increases were partially offset by a decline in our reserve for uncollectible accounts associated primarily with one of our distributors located in Africa who has paid its over-due balance.

General and administrative expenses increased 16% to $32.6 million in 2021 from $28.1 million in 2020 largely due to higher staffing costs associated with increased headcount and higher consulting costs. These increases were partially offset by lower legal fees, lower employee bonuses, a lower allocation of building costs as administrative space was repurposed for manufacturing, and increased intercompany services fees allocated to the Molecular Solutions segment.

All of the above contributed to the Diagnostics segment’s operating loss of $57.2 million for the year ended December 31, 2021, which included non-cash charges of $4.3 million for depreciation and amortization and $4.7 million for stock-based compensation. The Diagnostics segment operating loss also included a non-cash pre-tax benefit of $1.5 million associated with the change in the fair value of acquisition-related contingent consideration.

Molecular Solutions Segment

The gross profit percentage of the Molecular Solutions segment was 63% in 2021 compared to 70% in 2020. This decrease is due to a less favorable product mix associated with increased sales of lower gross profit percentage products, increased costs at our third party contract manufacturers and an increase in inventory adjustments associated with expiring or excess inventory levels.

Research and development expenses increased 4% to $10.1 million in 2021 from $9.8 million in 2020 due to increased staffing and consulting costs.

Sales and marketing expenses increased 35% to $16.3 million in 2021 compared to $12.0 million in 2020 largely due to higher staffing costs, increased consulting costs associated with business strategy planning, and an increase in our reserve for uncollectible accounts.

General and administrative expenses increased 22% to $17.7 million in 2021 compared to $14.6 million in 2020, due higher legal fees, increased intercompany service fees allocated from the Diagnostics segment, increased sales tax costs, and higher staffing costs.

All of the above contributed to operating income of $47.0 million for 2021, which included non-cash charges of $7.3 million for depreciation and amortization and $673,000 for stock-based compensation.

CONSOLIDATED INCOME TAXES

We continue to believe the full valuation allowance established in 2008 against our total U.S. deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have not changed. For the year ended December 31, 2021 and 2020, we recorded income tax expense of $13.7 million and $11.4 million, respectively. Our overall tax expense recorded in both periods is largely comprised of foreign tax expense associated with our Canadian subsidiary.

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Liquidity and Capital Resources

Our cash and cash equivalents and available-for-sale securities decreased to $170.0 million at December 31, 2021 from $257.1 million at December 31, 2020. Our working capital decreased to $220.4 million at December 31, 2021 from $242.4 million at December 31, 2020.

During the year ended December 31, 2021, net cash used in operating activities was $35.4 million. Our net loss of $23.0 million included non-cash charges for depreciation and amortization expense of $11.7 million, stock-based compensation expense of $7.8 million, an inventory reserve of $6.7 million, deferred income tax expense of $1.0 million and other non-cash expense of $456,000. Operating activities also included a benefit for the change in the estimated fair value of acquisition-related contingent consideration of $1.5 million and a $142,000 contingent consideration payment representing the excess of the total contingent consideration payment made during the year ended December 31, 2021 over the fair value of the liability estimated at the time of acquisition. Cash used to fund our working capital accounts included an increase in inventory of $27.9 million to meet anticipated demand to support COVID-19 testing programs, an increase in prepaid expenses and other assets of $8.7 million due to an asset recorded to reflect the future receipt of an Employee Retention Credit filed with the U.S. Government under the CARES Act in 2021 and prepayments made on a manufacturing contract, an increase in accounts receivable of $6.5 million due to orders placed late in the quarter and a decrease in deferred revenue of $1.9 million due to the recognition of revenue from customer prepayments. Offsetting these uses of cash were an $3.2 million increase in accounts payable due to the timing of invoices received and payments made and an increase in accrued expenses and other liabilities of $3.3 million.

Net cash used in investing activities was $5.5 million for the year ended December 31, 2021, which reflects proceeds from the maturities and redemptions of investments of $67.9 million, offset by $25.8 million used to purchase investments. Investing activities also include $36.6 million to acquire property and equipment largely to increase our manufacturing capacity and $10.9 million used to build additional manufacturing capacity as required by the $109 million agreement with the DOD. This cash outlay will be reimbursed in 2022 and represents the timing of cash used in the fourth quarter of 2021 and submitted for reimbursement.

Net cash used in financing activities was $2.8 million for the year ended December 31, 2021, which reflects $2.1 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 $686,000 and payment of our contingent consideration obligation of $264,000, partially offset by proceeds from stock option exercises of $246,000.

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 timing of reimbursement under our $109 million DOD contract, 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, $135.8 million, or 80%, of our $170.0 million in cash, cash equivalents and available-for-sale securities belongs to our Canadian subsidiary. In 2022, we repatriated $65 million of such cash into the United States and will be required to pay withholding taxes to the Canada Revenue Agency. It is still our intention going forward to continue to permanently reinvest the historical undistributed earnings of our foreign subsidiaries.

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 judgements and estimates 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. We base our judgments and estimates on historical experience and on various other factors

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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.

Our significant accounting policies are described in Note 2 of the Notes to the consolidated financial statements included in Item 15 of this Annual Report. We consider the following accounting policies, which have been discussed with our Audit Committee, to be most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Revenue Recognition.

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates.

We generally do not grant product return rights to our customers, except for (i) warranty returns, (ii) return rights on sales of our OraQuick® In-Home HIV test and (iii) return rights on some of the sales of our InteliSwab®COVID-19 Rapid Test to the retail trade.

Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred.

We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold.

Service Revenues. Service revenues represent microbiome laboratory testing and analytical services. We recognize revenues when we satisfy our performance obligation for services rendered.

Arrangements with multiple-performance obligations. In arrangements involving more than one performance obligation, which largely applies to our service revenue stream, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on each respective relative stand-alone selling price. The estimated selling price of each deliverable is determined using an observable cost plus margin approach. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services or when the performance obligation has been satisfied.

Other revenues. Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements.

Inventories.

Our inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating, which can be extended in certain circumstances. We continually evaluate quantities on hand and the carrying value of our inventories to determine the need for reserves for excess and obsolete inventories, based on prior experience as well as estimated forecasts of product sales. We reserve for unidentified scrap or spoilage based on historical write-off rates. We also consider items identified through specific identification procedures in assessing the adequacy of our reserve. When factors indicate that impairment has occurred, either a reserve is established against the inventories’ carrying value or the inventories are completely written off, as in the case of lapsing expiration dates. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results.

Deferred Tax Assets and Liabilities.

At December 31, 2021, we had federal Net Operating Loss (“NOL”) carryforwards of $188.0 million. The net deferred tax assets, before the valuation allowance, associated with these NOLs and other temporary differences were $46.8 million at December 31, 2021. Net operating losses will begin to expire in 2022. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible or the NOLs

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and credit carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

We currently have a full valuation allowance recorded against our total U.S. deferred tax asset as we had determined in 2008 that it was more likely than not that we would not realize the benefits associated with our deferred tax assets. Each year, we continue to reevaluate our valuation allowance position and believe that it is more likely than not that our U.S. deferred income tax asset will not be realized. As such, we maintain a full valuation allowance as of December 31, 2021 and 2020 against our deferred tax assets associated with the operations subject to income tax in the U.S.

The Tax Reform Act of 1986 contains provisions under Internal Revenue Code (“IRC”) Section 382 that limit the annual amount of federal and state NOLs available to be used in any given year in the event of a significant change in ownership. Our ability to use our federal and state NOL carryforwards to offset future federal income tax obligations could be limited by changes in the ownership of our stock. The Company does not believe, however, that there is a Section 382 limitation that will impair our future ability to utilize NOLs to offset our future taxable income and the Company continues to review ownership changes on an annual basis.

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Business Combinations and Contingent Consideration.

Acquired businesses are accounted for using the acquisition method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Amounts allocated to contingent consideration are recorded to the balance sheet at the date of acquisition based on their relative fair values. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date, with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

We account for contingent consideration in accordance with applicable guidance provided within the business combination accounting guidance. As part of our consideration for our recent acquisitions, we are contractually obligated to pay certain consideration resulting from the outcome of future events. Therefore, we are required to update our underlying assumptions each reporting period, based on new developments, and record such contingent consideration liabilities at fair value until the contingency is resolved. Changes in the fair value of the contingent consideration liabilities are recognized each reporting period and included in our consolidated statements of operations. Our estimates of fair value are based on assumptions we believe to be reasonable, but the assumptions are uncertain and involve significant judgment by management. Updates to these assumptions could have a significant impact on our results of operations in any given period and any updates to the fair value of the contingent consideration could differ materially from the previous estimates.

Examples of critical estimates used in valuing certain intangible assets and contingent consideration include:

•
future expected cash flows from sales and acquired developed technologies;

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the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's portfolio;

•
the probability of meeting the future events; and

•
discount rates used to determine the present value of estimated future cash flows.

These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates, and if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.