CUE HEALTH INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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, 2021included in our Annual Report on Form 10-K. 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. 22
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, 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 $16.00per share, including 1,875,000 shares purchased pursuant to the exercise in full of the underwriters' option to purchase additional shares. The Company received aggregate net proceeds of approximately $206.0 millionafter deducting underwriting commissions and legal, accounting, and consulting fees related to the IPO. Upon completion of the IPO, Convertible Notes outstanding in the principal amount of $235.5 millionand accrued interest of $2.8 millionwere 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.
Impact of COVID-19
While the ongoing global COVID-19 pandemic has adversely impacted global commercial activity, it served as a catalyst to accelerate our product pipeline and commercialization of our platform. We began selling and recording product revenue for our COVID-19 test in
August 2020after obtaining our first FDA EUA in June 2020. Currently, all of our product revenue is related to sales of our Cue COVID-19 test. In December 2020, the FDA issued EUA for two COVID-19 vaccines and in February 2021, the FDA issued a third EUA for a COVID-19 vaccine. The widely-administered use of an efficacious vaccine or the availability of therapeutic treatments for COVID-19 may reduce the demand for our COVID-19 test and could cause the COVID-19 diagnostic testing market to fail to grow or to decline. However, we believe the need for ongoing detection and monitoring will continue even after effective vaccines have been widely distributed and administered. We also believe COVID-19 will remain endemic for the foreseeable future and demand for a fast and accurate test to confirm a diagnosis and seek timely and appropriate treatment may fluctuate based on COVID-19 infection rates and variants. Even while vaccine efforts are underway, public health measures, like testing, will likely need to stay in effect to protect against COVID-19. However, given the unpredictable nature of the COVID-19 pandemic, the development and potential size of the COVID-19 diagnostic testing market is highly uncertain. 23
Certain key factors affecting our performance
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 continue to optimize 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.
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 our products and services as well as research and development to enhance our platform and bring additional tests to market. We also intend to continue investing in our supply chain and logistics operations. As we continue to scale our business, we expect to hire additional personnel and incur additional expenses, including those expenses in connection with our becoming a public company.
Expand our customer base
Following the completion of our obligations under the
U.S.DoD Agreement in December 2021, the future commercial success of our diagnostic products is dependent on our ability to broaden our customer base beyond the U.S.government and public sector to include enterprise employers, healthcare providers and direct-to-consumer. As a result, our long term growth depends on our ability to renew and acquire new customers. Current key strategic relationships include 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.
Improve and expand our menu of testing 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 Cue 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 the Cue Health Monitoring System, including any of our current or future tests, are not reimbursable or covered by insurance, our business may be materially and adversely impacted.
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.
Summary of the first quarter of 2022 (on a comparative basis)
Key GAAP financial results for the three months ended
• Turnover was
The following table sets forth a summary of our results of operations for the periods indicated: Three Months Ended March 31, 2022 2021 (dollars in thousands) (unaudited) Revenue: Product revenue
$ 177,454 $ 64,499Grant and other revenue 1,956 - Total revenue 179,410 64,499 Operating costs and expenses: Cost of product revenue(1) 86,697 30,035 Sales and marketing 34,168 430 Research and development 28,787 7,409 General and administrative 26,910 11,870 Total operating costs and expenses 176,562 49,744 Income from operations 2,848 14,755 Interest expense (51) (535) Other income, net 6 37 Net income before income taxes 2,803 14,257 Income tax expense - 1,226 Net income $ 2,803 $ 13,031Net income per share attributable to common stockholders - diluted $ 0.02 $ 0.08 __________________
Comparison of three months ended
The following table provides a summary of our operating results for the three months ended
Three months completed
2022 2021 $ Change % Change (dollars in thousands) (unaudited) Revenue: Product revenue $ 177,454 $ 64,499 $ 112,955 175% Grant and other revenue 1,956 - 1,956 n.m Total revenue 179,410 64,499 114,911 178% Operating costs and expenses: Cost of product revenue 86,697 30,035 56,662 189% Sales and marketing 34,168 430 33,738 7,846% Research and development 28,787 7,409 21,378 289% General and administrative 26,910 11,870 15,040 127% Total operating costs and expenses 176,562 49,744 126,818 255% Income from operations 2,848 14,755 (11,907) (81%) Interest expense (51) (535) 484 (90%) Other income, net 6 37 (31) (84%) Net income before income taxes 2,803 14,257 (11,454) (80) % Income tax expense - 1,226 (1,226) n.m. Net income $ 2,803 $ 13,031 $ (10,228) (78) % Net income per share attributable to common stockholders - diluted $ 0.02 $ 0.08 $ - (78) % n.m. = not meaningful Revenue increased to
$179.4 millionin the three months ended March 31, 2022, from $64.5 millionin the three months ended March 31, 2021. The increase was primarily due to the continued expansion of our customer base and increases in production capacity. Revenue during the three months ended March 31, 2022was primarily driven by product sales to private sector customers of $175.8 millionalong with product sales to public sector clients of $1.6 million. Cost of Product Revenue increased to $86.7 millionin the three months ended March 31, 2022, from $30.0 millionin the three months ended March 31, 2021. This increase was primarily due to a substantial increase in the sales of our products. Our product gross profit margin, or product gross profit as a percentage of product revenue was approximately 51% in the three months ended March 31, 2022compared to approximately 53%, in the three months ended March 31, 2021. This decrease was primarily related to supply chain constraints and associated higher component, transport costs as well as customer mix. Sales and Marketing Expense increased to $34.2 millionin the three months ended March 31, 2022, from $0.4 millionin the three months ended March 31, 2021. This increase related to increased sales and marketing personnel costs to support a broadening of our customer base, planned additions to our product offering and higher expenses related to our overall marketing and brand expansion efforts. Research and Development Expense increased to $28.8 millionin the three months ended March 31, 2022, from $7.4 millionin the three months ended March 31, 2021. This increase was primarily driven by additional headcount, materials and other resource utilization associated with the expansion of our platform, including new test development and overall enhancement of our software platform for products under development, as well as costs related to clinical studies for 510(k) approval of our COVID-19 and influenza tests.
General and administrative expenses increased to
compensation expenses, headcount growth to support our overall expansion as well as accounting and other consulting-related costs to support our operations as a public company. Interest Expense decreased to
$0.1 millionin the three months ended March 31, 2022from $0.5 millionin the three months ended March 31, 2021. This decrease was primarily driven by debt repayment activity in the prior year. Our interest expense prior to February 2021primarily consisted of expense related to our prior loan and security agreement with Comerica Bank. In February 2021, we entered into the Revolving Credit Agreement. In connection with the Revolving Credit Agreement, we repaid outstanding amounts of $5.4 millionand terminated the 2015 Credit Agreement we initially entered into in May 2015. In May 2021, we repaid the outstanding balance under the Revolving Credit Agreement. In June 2021, we terminated the Revolving Credit Agreement. Income Tax Expense was $0in the three months ended March 31, 2022compared to $1.2 millionin the three months ended March 31, 2021, and our effective tax rate was 0% in the three months ended March 31, 2022, compared to 8.6% in the three months ended March 31, 2021. The fluctuation in our provision and effective tax rate was primarily due to the Company maintaining a full valuation allowance against its net deferred tax assets. The tax expense recorded for the three months ended March 31, 2021was related to deferred tax liabilities arising from accelerated depreciation deductions for federal tax purposes and current state income taxes in jurisdictions for which the Company did not have available tax attributes.
Cash and capital resources
March 31, 2022, we held $426.5 millionof cash and cash equivalents as a result of our IPO proceeds and other financing activities. Our primary cash needs are for the funding of day-to-day operations, financing capital investments and to address our working capital needs. Our largest source of operating cash generation is from sales to our customers. Our primary uses of cash from operating activities are for personnel-related expenses, material and supply costs for manufacturing, direct costs to deliver our products, and sales and marketing expenses and research and development initiatives. Based on our current business plan, we believe our anticipated operating cash flows, together with our existing cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We expect that our near and longer-term liquidity requirements will consist of working capital and general corporate expenses associated with the growth of our business, including, without limitation, expenses associated with scaling up our operations and continuing to increase our manufacturing capacity, sales and marketing expense associated with rollout of our over-the-counter, at home COVID-19 test to commercial customers, including directly to consumers, increasing market awareness of our platform and brand generally to individual consumers, enterprises and other target customers, additional research and development expenses associated with expanding our care offerings, expenses associated with continuing to build out our corporate infrastructure and expenses associated with being a public company. Our short-term capital expenditure needs relate primarily to the expansion of our research and development capabilities, expanding production capacity and optimization of existing business processes.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31, 20222021 (dollars in thousands) (unaudited)
Net cash, cash equivalents and restricted from (used in) operating activities
Net cash, cash equivalents and restricted cash used in investing activities
Net cash, cash equivalents and restricted (used) cash from financing activities
Net change in cash, cash equivalents and restricted cash
Cash flow from operating activities
Net cash, cash equivalents and restricted cash provided by operating activities was
$31.5 millionin the three months ended March 31, 2022, primarily reflecting our net income of $2.8 million, net of non-cash cost items and changes in operating working capital. Non-cash cost adjustments were primarily driven by depreciation and amortization expenses of $10.6 millionand stock-based compensation expense of 16.0 million. The timing of our revenue and collections decreased our accounts receivable. Inventory increase was driven by our effort to limit the effects of a potential future supply chain disruption combined with a tempering of COVID-19 testing demand in the latter part of the first quarter. Net cash, cash equivalents and restricted cash used in operating activities was $35.1 millionin the three months ended March 31, 2021, primarily reflecting our net income of $13.0 millionoffset by increases in inventory and accounts receivable of $14.8 millionand $9.4 million, respectively. In addition, there were decreases in accounts payable and deferred revenue of $14.8 millionand $16.0 million, respectively. These fluctuations were due to the expansion of production facilities and increases in product revenue.
Cash flow from investing activities
Net cash, cash equivalents and restricted cash used in investing activities was
$14.1 millionfor the three months ended March 31, 2022, reflecting purchases of property and equipment of $12.8 millionto expand our R&D and production capabilities. We also invested $1.3 millionin the development of internal-use software related to COVID-19 Testing apps for commercial customers. Net cash, cash equivalents and restricted cash used in investing activities was $31.8 millionin the three months ended March 31, 2021, primary reflecting purchases of property and equipment of $30.5 millionto expand our production capabilities of our COVID-19 Test Kits in relation to the U.S.DoD Agreement.
Cash flow from financing activities
Net cash used in financing activities for the three months ended
March 31, 2022of $0.9 millionwas primarily driven by $0.7 millionin tax withholding on stock option exercises and RSU vesting and $0.7 millionin payments for finance leases. These cash outflows were offset by proceeds of $0.3 millionfrom stock options exercised. Net cash, cash equivalents and restricted cash provided by financing activities was $56.6 millionfor the three months ended March 31, 2021, primarily reflecting proceeds received from the Revolving Credit Agreement in February 2021partially offset by repayment of the borrowings under the 2015 Credit Agreement.
Commitments and contingencies
See Note 15, Commitments and Contingencies, to our unaudited interim condensed financial statements included elsewhere in this quarterly report for a summary of our commitments as of
March 31, 2022. Our material cash commitments at March 31, 2022related to finance leases of manufacturing equipment totaling $6.5 million, real estate leases under non-cancelable operating lease agreements in the amount of $69.9 million, that expire at various dates through 2031 and a legal settlement of a contract dispute totaling $9.0 million, of which $4.5 millionhas not been paid. We expect to fund these commitments using our existing cash on hand.
Off-balance sheet arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the
Significant Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended
December 31, 2021. There have been no 29
material changes to the company’s significant accounting policies and estimates from its annual report on Form 10-K for the year ended
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 to our financial statements included elsewhere in this document.
Emerging Growth Company Status
We are an "emerging growth company" (as defined in the JOBS Act). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies who have adopted new or revised accounting pronouncements.
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