(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended December 31, 2020 included in our final prospectus, or the Final Prospectus, that forms a part of the Registration Statement on Form S-1 (File No. 333-259250) for our initial public of offering, or our IPO, dated as of September 23, 2021, and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) under the Securities Act on September 27, 2021. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Forward-Looking Statements" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Overview We are a health technology company, and our mission is to enable personalized, proactive and informed healthcare that empowers people to live their healthiest lives. Our proprietary platform, the Cue Integrated Care Platform, which is comprised of our Cue Health Monitoring System, Cue Data and Innovation Layer, Cue Virtual Care Delivery Apps, and Cue Ecosystem Integrations and Apps, enables lab-quality diagnostics-led care at home, at work or at the point of care. Our platform is designed to empower stakeholders across the healthcare ecosystem, including consumers, providers, enterprises and payors with paradigm-shifting access to diagnostic and health data to inform care decisions. We are helping pioneer a new continuous care model that we believe has the potential to significantly improve the user experience, provide measurable and actionable clinical insights, and increase efficiency within the healthcare ecosystem. We believe this model, powered by our platform, will allow users to actively manage their health, which we believe will lead to improved health outcomes and a more resilient, connected, and efficient healthcare ecosystem for all stakeholders. The Cue Integrated Care Platform consists of the following hardware and software components: (1) our revolutionary Cue Health Monitoring System, made up of a portable, durable and reusable reader, or Cue Reader, a single-use test cartridge, or Cue Cartridge, and a sample collection wand, or Cue Wand, (2) our Cue Data and Innovation Layer, with cloud-based data and analytics capability, (3) our Cue Virtual Care Delivery Apps, including our consumer-friendly App and our Cue Enterprise Dashboard, and (4) our Cue Ecosystem Integrations and Apps, which allow for integrations with third party applications and sensors. Our Cue Health Monitoring System is designed to deliver a broad menu of tests through one system, enabling two major testing modalities, nucleic acid amplification tests, or NAAT, and immunoassays, in one device. Our system is designed to handle different sample types, including saliva, blood, urine and swabs, and can detect nucleic acids, small molecules, proteins and cells. We believe this will enable us to address many of the diagnostic tests conducted in clinical laboratories, such as tests addressing indications in respiratory health, sexual health, cardiac and metabolic health, women's health, men's health, and chronic disease management. Initial Public Offering
The Company's registration statement related to its initial public offering ("IPO") was declared effective on September 23, 2021, and the Company's common stock began trading on the Nasdaq Global Stock Market ("Nasdaq") on September 24, 2021. On September 28, 2021, the Company completed its IPO of 14,375,000 shares of the Company common stock at an offering price of $16.00 per share, including 1,875,000 shares purchased by the IPO underwriters. The Table of Contents
Upon completion of the IPO, Convertible Notes outstanding in the principal amount of $235.5 million and accrued interest of $2.7 million were automatically converted into 18,611,914 shares of common stock. All outstanding shares of the Company's redeemable convertible preferred stock were converted into 83,605,947 shares of common stock. Immediately prior to the IPO, all of the Company's outstanding warrants to purchase redeemable convertible preferred stock were converted into the redeemable convertible preferred stock and the related warrant liabilities were reclassified to additional paid-in capital.
Certain Key Factors Affecting Our Performance
U.S. Department of Defense Agreement
Our agreement with the U.S. DoD represents the majority of our current product revenue. Subject to exceptions, the U.S. government is entitled to be the exclusive purchaser of our entire production through the completion of the project, though we have received a waiver from the U.S. DoD allowing us to distribute commercially up to 50% of our COVID-19 Test production, measured monthly in arrears on a calendar month basis, to non-U.S. federal government customers and other recipients. As a result, for at least the duration of the initial U.S. DoD Agreement, we expect that at least 50% of our manufacturing capabilities will be dedicated to meet the demand from the U.S. DoD Agreement. In addition, the U.S. DoD Agreement also provides that we and the U.S. government are expected to negotiate in good faith to enter into a follow-on supply agreement, which would provide the U.S. DoD with the right to purchase up to 45% of our quarterly production for the duration of the contract. Until we can diversify our customer base, the success of our business depends in large part on our ability to fulfill our obligations under the U.S. DoD Agreement.
Expanding Our Manufacturing Capacity
The growth of our business depends on our ability to rapidly expand our current manufacturing capacity to meet the demand for our platform and tests, in particular our COVID-19 test, since at least 50% of our current production capacity is dedicated to fulfilling our current contractual obligations under the U.S. DoD Agreement. We manufacture all of our Cue Cartridges in our vertically integrated facilities in San Diego, California. We also produce all of our biochemistry in-house, including critical enzymes, antibodies and primers for our Cue Cartridges. Production of our Cue Readers is performed for us by third-party contract manufacturers and production of our Cue Wands is performed by both us and by third-party contract manufacturers. We are currently scaling our manufacturing capabilities, including our fully automated production pods. A production pod is a free standing, modular environmentally controlled structure containing an automated cartridge production line. As we expand our manufacturing capacity, we expect to see a reduction in per unit manufacturing costs in 2021 and thereafter.
Investments in Our Growth
We expect to make continued significant investments in our business to drive growth, and therefore we expect our expenses to increase going forward. We expect to invest significant resources in sales and marketing to drive demand for
Expanding Our Customer Base
The future commercial success of our diagnostic products is dependent on our ability to broaden our customer base beyond the U.S. government to markets including individuals, enterprises and healthcare providers. While our agreement with the U.S. DoD is in place, a substantial portion of our current production capacity is dedicated to fulfilling our contractual obligations under the U.S. DoD Agreement and our ability to acquire new customers will be constrained. Upon conclusion of the U.S. DoD Agreement, we anticipate that our revenue may decline significantly, at least in the short term (if not longer). As a result, our long term growth depends on our ability to acquire new customers. In addition to the U.S. DoD, other current key strategic relationships include the U.S. Biomedical Advanced Research and Development Authority, or BARDA, Google LLC, or Google, the Mayo Clinic, the National Basketball Association, and Henry Schein, Inc. We intend to leverage our success with our COVID-19 Test and the expansion of our manufacturing capabilities to enable broad distribution of our Cue Readers and awareness of our platform across different groups of customers and to enhance pull-through of our future tests. In the three-month period ending September 30, 2021 we sold approximately 56,000 readers and have sold over 120,000 readers since our first FDA EUA in June 2020.
Enhancing and Expanding Our Menu of Tests and Software Capabilities
Currently, our only commercially available test is our molecular COVID-19 test. A key part of our growth strategy is to expand our menu of tests to include other diseases, ailments and general health markers, which we expect will support our growth and continue to contribute to the utility of our platform, including the Cue Health Monitoring System. We are currently developing tests in the fields of respiratory health, sexual health, cardiac and metabolic health, women's health, men's health, and chronic disease management. As we continue to develop and expand our menu of tests, we have made, and will continue to make, significant investments in our business, particularly in research and development, sales and marketing and the hiring of additional personnel. Investing in research and development will allow us to develop new tests as well as enhance our current product offerings and our Cue Integrated Care Platform. To build out our menu of tests and bring additional products to market, we will need to hire additional personnel, such as engineers and researchers, as well as develop robust sales and marketing and customer support teams to be able to sell our products.
Regulatory Clearance of Our Diagnostic Products
Our commercial success will depend upon a number of factors, some of which are beyond our control, including the receipt of regulatory clearances, approvals or authorizations for existing or new product offerings by us, product enhancements, or additions to our proprietary intellectual property portfolio. While we have received two EUAs for our COVID-19 test, a CE mark in the European Union, an Interim Order authorization from Health Canada, and regulatory approval from CDSCO, our COVID-19 test has not been FDA cleared or approved and is only authorized for emergency use during the declaration that circumstances exist justifying the authorization of emergency use, and this declaration could be terminated, or our authorization could be revoked in the future. We will need to seek additional regulatory approval for our COVID-19 test if the EUA declaration or Interim Order is terminated or otherwise revised or revoked, and we will need to seek regulatory authorization, clearance or approval for our other diagnostic products in development. In addition, we will not be able to commercialize any other tests for our platform unless we obtain required regulatory clearances or other necessary approvals or authorizations. As such, our ability to navigate, obtain and maintain the required regulatory clearances, approvals or authorizations, as well as comply with other regulatory requirements, for our products will in part drive our results of operations and impact our business.
Reimbursement and Insurance Coverage
We have been granted two EUAs by the FDA for our COVID-19 test for point-of-care and at-home and over-the-counter indications. The commercial success of our COVID-19 test, and any of our subsequently developed tests, is dependent on a customer's ability to be able to pay for or otherwise be reimbursed for the purchase of a test, whether out-of-pocket, by insurance or from a governmental or other third-party payor. We believe payment for our products, including our COVID-19 Test Kits, will be billable by a physician, reimbursable by government payors or insurance companies, paid for by a self-insured employer, or eligible under FSA and HSA guidelines. For example, most of our contemplated future tests that are currently offered by others through central labs are reimbursable by health plans and governmental payors if properly ordered by a physician. These third-party payors decide which products will be covered and establish reimbursement levels for those products. Coverage criteria and reimbursement rates for clinical laboratory tests are subject to adjustment by payors, and current reimbursement rates could be reduced, or coverage criteria restricted in the future. If
We anticipate that fluctuations in customer and user demand for our COVID-19 test may be similar to those related to influenza, which typically increases during the fall and winter seasons. Although our products will be available throughout the year, we anticipate that we may experience higher sales during the fall and winter seasons, relative to the spring and summer seasons. However, as our portfolio of diagnostic offerings increases beyond our COVID-19 test, we expect the impact of this seasonality on our results to decrease. Third Quarter 2021 Summary (on a comparative basis) Key GAAP financial results for the three months ended September 30, 2021 were as follows as compared to the three months ended June 30, 2021:
Results of Operations The following table sets forth a summary of our results of operations for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (dollars in thousands) (unaudited) Revenue: Product revenue $ 222,594 $ 2,128 $ $ 424,516 $ 2,128 Grant and other revenue 1,085 2,602 1,085 7,562 Total revenue 223,679 4,730 425,601 9,690 Operating costs and expenses: Cost of product revenue(1)(2) 88,569 2,641 173,746 2,641 Sales and marketing(1) 5,572 19 7,531 64 Research and development(1) 9,079 6,878 21,150 26,558 General and administrative(1) 33,084 3,694 56,336 7,458 Total operating costs and expenses 136,304 13,232 258,763 36,721 Income (loss) from operations 87,375 (8,502) 166,838 (27,031) Interest expense (1,786) 514 (9,752) (274) Change in fair value of redeemable 243 20 53 - convertible preferred stock warrants Change in fair value of convertible notes (36,306) - (59,560) - Loss on extinguishment of debt - (610) (1,998) (610) Other income (expense), net (80) 40 (19) 99 Net income (loss) before income taxes 49,446 (8,538) 95,562 (27,816) Income tax expense 30,098 - 43,374 - Net income (loss) $ 19,348 $ (8,538) $ 52,188 $ (27,816) Net income (loss) per share attributable to common stockholders - diluted $ 0.13 $ (0.52) $ 0.35 $ (1.72) __________________
Nine Months Ended Three Months Ended September 30, September 30, 2021 2020 2021 2020 (dollars in thousands) (unaudited) Cost of product revenue $ 302 $ - $ 1,500 $ - Sales and marketing 11 - 37 - Research and development 294 41 884 59 General and administrative 19,359 104 23,136 183 Total stock-based compensation expense $ 19,967 $ 145 $ 25,558 $ 242
(2)Includes $7.9 million and $18.4 million of depreciation and amortization expense for the three and nine months ended September 30, 2021, respectively.
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Three Months Ended September 30, 2021 2020 $ Change % Change (dollars in thousands) (unaudited) Revenue: Product revenue $ 222,594 $ 2,128 $ 220,466 10,360% Grant and other revenue 1,085 2,602 (1,517) (58%) Total revenue 223,679 4,730 218,949 4,629% Operating costs and expenses: Cost of product revenue 88,569 2,641 85,928 3,254% Sales and marketing 5,572 19 5,553 29,226% Research and development 9,079 6,878 2,201 32% General and administrative 33,084 3,694 29,390 796% Total operating costs and expenses 136,304 13,232 123,072 930% Income (loss) from operations 87,375 (8,502) 95,877 (1,128%) Interest expense (1,786) 514 (2,300) (447%) Change in fair value of redeemable convertible preferred stock warrants 243 20 223 1,115% Change in fair value of convertible notes (36,306) - (36,306) n.m Loss on extinguishment of debt - (610) 610 (100%) Other income (expense), net (80) 40 120 300% Net income (loss) before income taxes 49,446 (8,538) 57,984 (679) % Income tax expense 30,098 - (30,098) n.m Net income (loss) $ 19,348 $ (8,538) $ (27,886) 327 % Net income (loss) per share attributable to common stockholders - diluted $ 0.13 $ (0.52) $ - (120) %
n.m. = not meaningful Revenue increased to $223.7 million in the three months ended September 30, 2021, from $4.7 million in the three months ended September 30, 2020. This increase was due to the start of product sales in August 2020. Of the $222.6 million of product revenue recorded in the three months ended September 30, 2021, $190.1 million related to sales of our COVID-19 test and $32.5 million was related to the amortization of the U.S. DoD Advance. There were no sales to the U.S. DoD during the three month ended September 30, 2020 because we entered into our agreement with U.S. DoD in October 2020. Cost of Product Revenue increased to $88.6 million in the three months ended September 30, 2021, from $2.6 million in the three months ended September 30, 2020. This increase was primarily due to the fact that we did not incur cost of product revenue until we began to generate product revenue in August 2020 after receiving our first FDA EUA in June 2020. Our product gross profit margin, or product gross profit as a percentage of product revenue was approximately 60% in the three months ended September 30, 2021 compared to approximately (24)%, in the three months ended September 30, 2020. This increase was primarily due to higher absorption of fixed costs related to higher production volumes and efficiencies.
Sales and Marketing Expense increased to $5.6 million in the three months ended September 30, 2021 from $0 in the three months ended September 30, 2020. This increase was due to the launch of our COVID-19 test in August 2020 and increased sales and marketing personnel costs to support the expected growth and demand for our products, higher expenses related to digital marketing services and increased headcount to support the growth of our business.
Nov 10, 2021
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