ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995.
These statements involve a number of risks and uncertainties. Words such as “may,” “expects,” “intends,” “anticipates,” “believes,” “estimates,” “plans,” “seeks,” “could,” “should,” “continue,” “will,” “potential,” “targeted,” “projects,” “aim” and similar expressions are intended to identify such forward-looking statements. Readers are cautioned that these forward-looking statements speak only as of the date on which this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (the “SEC”), and, except as required by law, Aspira Women’s Health Inc. (“Aspira” and, together with its subsidiaries, the “Company,” “we,” “our,” or “us”) does not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after such date.
Examples of forward-looking statements include, without limitation:
projections or expectations regarding our future test volumes, revenue, price, cost of revenue, operating expenses, research and development expenses, gross profit margin, cash flow, results of operations and financial condition;
our plan to broaden our commercial focus from ovarian cancer to differential diagnosis of women with a range of gynecological diseases, including additional pelvic disease conditions such as endometriosis and, benign pelvic mass monitoring;
our planned business strategy and strategic business drivers and the anticipated effects thereof, including partnerships such as those based on our Aspira Synergy product, as well as other strategies, specimen collaboration and licensing;
plans to expand our existing products Ova1, Overa, Ova1Plus and Aspira Synergy on a global level, and to launch and commercialize our new products, OvaWatch, EndoCheck and OvaInherit;
plans to develop new algorithms, molecular diagnostic tests, products and tools and otherwise expand our product offerings, including plans to develop a product using genetics, proteins and other modalities to assess the risk of developing cancer when carrying a pathogenic variant associated with hereditary ovarian cancer that is difficult to detect through a diagnostic test;
plans to establish payer coverage and secure contracts for current and new products, including OvaWatch, EndoCheck and OvaInherit separately and expand current coverage and secure additional contracts for Ova1, Overa and Ova1Plus;
expectations regarding coverage under Novitas, the Company’s Medicare Administrative Carrier for Ova1;
plans that would address clinical questions related to early disease detection, treatment response, monitoring of disease progression, prognosis and other issues in the fields of oncology and women’s health;
anticipated efficacy of our products, product development activities and product innovations, including our ability to improve sensitivity and specificity over traditional diagnostic biomarkers;
expected competition in the markets in which we compete;
plans with respect to Aspira Labs, Inc. (“ASPiRA LABS”), including plans to expand or consolidate ASPiRA LABS’ testing capabilities;
expectations regarding continuing future services provided by Quest Diagnostics Incorporated;
expectations regarding continuing future services provided by BioReference Health, LLC;
plans to develop informatics products and develop and perform laboratory developed tests (“LDTs”);
Food and Drug Administration (“FDA”) oversight changes of LDTs;
plans to develop a race or ethnicity-specific pelvic mass risk assessment;
expectations regarding existing and future collaborations and partnerships for our products, including plans to enter into decentralized arrangements for our Aspira Synergy product and provide and expand access to our risk assessment tests;
plans regarding future publications;
expectations regarding potential collaborations with governments, legislative bodies and advocacy groups to enhance awareness and drive policies to provide broader access to our tests;
our ability to continue to comply with applicable governmental regulations, expectations regarding pending regulatory submissions and plans to seek regulatory approvals for our tests within the United States and internationally, as applicable;
our continued ability to expand and protect our intellectual property portfolio;
anticipated liquidity and capital requirements;
anticipated future losses and our ability to continue as a going concern;
expectations regarding raising capital and the amount of financing anticipated to be required to fund our planned operations;
expectations regarding the results of our clinical research studies and our ability to recruit patients to participate in such studies;
our ability to use our net operating loss carryforwards and anticipated future tax liability under U.S. federal and state income tax legislation;
expected market adoption of our diagnostic tests, including Ova1, Overa, Ova1Plus, OvaWatch, as well as our Aspira Synergy platform;
expectations regarding our ability to launch new products we develop or license, co-market or acquire new products;
expectations regarding the size of the markets for our products;
expectations regarding reimbursement for our products, and our ability to obtain such reimbursement, from third-party payers such as private insurance companies and government insurance plans;
plans to use each of AbbVie Inc. serum samples and ObsEva S.A. plasma samples in EndoCheck product validation studies as well as procure serum samples from other potential partnerships or studies;
potential plans to pursue clearance designation with the FDA with respect to EndoCheck and OvaWatch;
expected target launch timing for OvaWatch and EndoCheck;
expectations regarding compliance with federal and state laws and regulations relating to billing arrangements conducted in coordination with laboratories;
plans to advocate for legislation and professional society guidelines to broaden access to our products and services;
expectations regarding the impacts resulting from or attributable to the COVID-19 pandemic and actions taken to contain it;
plans regarding discontinuing the Aspira GenetiX product and related genetics testing offerings; and
expectations regarding the results of our academic research agreements.
Forward-looking statements are subject to significant risks and uncertainties, including those discussed in Part I Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by the section entitled “Risk Factors” in this Quarterly Report on Form 10-Q, that could cause actual results to differ materially from those projected in such forward-looking statements due to various factors, including our ability to continue as a going concern; our ability to comply with Nasdaq’s continued listing requirements; impacts resulting from potential changes to coverage of Ova1 through our Medicare Administrative Carrier for Ova1; impacts resulting from or relating to the COVID-19 pandemic and actions taken to contain it; anticipated use of capital and its effects; our ability to increase the volume of our product sales; failures by third-party payers to reimburse for our products and services or changes to reimbursement rates; our ability to continue
developing existing technologies and to develop, protect and promote our proprietary technologies; plans to develop and perform LDTs; our ability to comply with FDA regulations that relate to our products and to obtain any FDA clearance or approval required to develop and commercialize medical devices; our ability to develop and commercialize additional diagnostic products and achieve market acceptance with respect to these products; our ability to compete successfully; our ability to obtain any regulatory approval required for our future diagnostic products; or our suppliers’ ability to comply with FDA requirements for production, marketing and post-market monitoring of our products; our ability to maintain sufficient or acceptable supplies of immunoassay kits from our suppliers; in the event that we succeed in commercializing our products outside the United States, the political, economic and other conditions affecting other countries; changes in healthcare policy; our ability to comply with environmental laws; our ability to comply with the additional laws and regulations that apply to us in connection with the operation of ASPiRA LABS; our ability to use our net operating loss carryforwards; our ability to use intellectual property; our ability to successfully defend our proprietary technology against third parties; our ability to obtain licenses in the event a third party successfully asserts proprietary rights; the liquidity and trading volume of our common stock; the concentration of ownership of our common stock; our ability to retain key employees; our ability to secure additional capital on acceptable terms to execute our business plan; business interruptions; the effectiveness and availability of our information systems; our ability to integrate and achieve anticipated results from any acquisitions or strategic alliances; future litigation against us, including infringement of intellectual property and product liability exposure; and additional costs that may be required to make further improvements to our laboratory operations.
Company Overview
Corporate Vision
Our core mission is to transform women’s gynecologic health through the development of technology-enabled diagnostic tools, starting with ovarian cancer. We aim to eradicate late-stage detection of ovarian cancer and to ensure that our solutions will meet the needs of women of all ages, races, ethnicities and stages of the disease.
We plan to broaden our focus to the differential diagnosis of other gynecologic diseases that typically cannot be assessed through traditional non-invasive clinical procedures. We expect to continue commercializing our existing and new technology and to distribute our tests through our decentralized technology transfer service platform, Aspira Synergy. We also intend to continue to raise public awareness regarding the diagnostic superiority of Ova1Plus as compared to cancer antigen 125 (“CA-125”) on its own for all women, but especially for racially diverse women with adnexal masses, as well as the superior performance of machine learning algorithms in detecting ovarian cancer in different racial and ethnic populations. We plan to continue to expand access to our tests among Medicaid patients as part of our corporate mission to make the best care available to all women, and we plan to advocate for legislation and the adoption of our technology in professional society guidelines to provide broad access to our products and services.
Throughout 2022, we have focused on three key initiatives: growth, innovation, and operational excellence:
Growth. In 2022, we have continued to grow Ova1Plus product volume and revenue through our commercial team. In addition, in October 2022, we launched a co-marketing and distribution collaboration with BioReference Health, LLC (formerly known as BioReference Laboratories, Inc.), a subsidiary of OPKO Health, Inc. (“BRL”), as a new channel for volume growth. We aim not only to increase the number of physicians ordering for the first time but also to increase repeat orders from existing physician customers. Positive trends in the tenure of our sales professionals have led to year-over-year volume growth.
Innovation. Innovation is fundamental to the long-term success of any diagnostics company. For Aspira, it starts with the expansion of our ovarian cancer portfolio, which is now branded as OvaSuite. Our first Lab Developed Test (“LDT”), OvaWatch, is a non-invasive ovarian cancer risk assessment for women with adnexal masses with an initial clinical assessment that is either benign or indeterminate. This assay will significantly expand our patient population beyond the population that existed with our current Ova1Plus test. OvaWatch is expected to be launched in the fourth quarter of 2022. The OvaWatch
manuscript, "Analytical Validation of a Deep Neural Network Algorithm for the Detection of Ovarian Cancer," has been published online in the Journal of Clinical Oncology Clinical Cancer Informatics.
We plan to accelerate the development of our endometriosis product portfolio, by partnering with Harvard’s Dana-Farber Cancer Institute (“DFCI”), Brigham & Women’s Hospital (“BWH”), and Medical University of Lodz through a sponsored research agreement that we entered into in the third quarter of 2022. We plan to launch EndoCheck, our first non-invasive endometriosis diagnostic tool, in the second half of 2023.
Operational Excellence. We expect to achieve our cash utilization goals for 2022 by focusing on spending that fuels innovation and growth. Since March 1, 2022, we identified redundant or unnecessary roles in our workforce and eliminated approximately 19% of our headcount. The personnel actions we will have taken by the end of the year will reduce base salary costs by more than $3,000,000 in 2023. We plan, however, to continue to hire individuals to fill key roles, especially in commercial and research and development.
Our Business and Products
We currently market and sell the following products and related services: (1) Ova1, a blood test intended as an aid to further assess the likelihood of malignancy in women with an ovarian adnexal mass for which surgery is planned when the physician’s independent clinical and radiological evaluation does not indicate malignancy; (2) Overa, a second-generation biomarker reflex test intended to maintain Ova1’s high sensitivity while improving specificity; (3) Ova1Plus, a reflex offering which uses Ova1 as the primary test and Overa as a confirmation for Ova1 intermediate range results and leverages the strengths of Ova1’s multivariate index assay (“MIA”) sensitivity and Overa’s (MIA2G) specificity and as a result reduces false elevations by over 40%; and (4) Aspira Synergy, our decentralized testing platform and cloud service for decentralized global access of protein biomarker testing. We continue to make Ova1, Overa, and Ova1Plus, and plan to make future technology available through Aspira Synergy. Our Ova1 test received FDA de novo classification in September 2009. Ova1 comprises instruments, assays, reagents, and the OvaCalc software, which includes a proprietary algorithm that produces a risk score. Our Overa test, which includes an updated version of OvaCalc, received FDA 510(k) clearance in March 2016. Ova1 and Overa each use the Roche Cobas 4000, 6000 and 8000 platforms for analysis of proteins. Revenue from these sources (in addition to revenue from Aspira GenetiX) is included in the results of operations in total revenue for the nine months ended September 30, 2022.
In 2021, we began entering into decentralized arrangements with large healthcare networks and physician practices for our Aspira Synergy platform. The modules available under Aspira Synergy include our flagship Ova1Plus risk assessment and genetics carrier screening. As described further below, as of September 2022, genetics carrier screening will no longer be available. The Company has entered into four technology transfer agreements since the launch of Aspira Synergy. Two of the agreements are with independent regional laboratories and are in the process of being launched and piloted. One of the agreements is with one of the nation’s largest and leading independent women’s healthcare groups which has already launched and is contributing to our Ova1Plus volume. The last of the four agreements with Axia Women’s Health, which had been intended to deliver genetics carrier screening, was cancelled by the customer in the third quarter of 2022. This cancellation, along with the general deterioration of commercial opportunities in the genetics carrier screening market, has led us to cease providing Aspira GenetiX, including genetics carrier screening, on our Aspira Synergy platform, effective as of September 30, 2022. This is not expected to have a material impact on our revenues in 2022 or in any future periods.
We are developing three additional products and related services, including two diagnostic algorithms, OvaWatch and EndoCheck, as well as a high-risk diagnostic algorithm, OvaInherit. These products may be launched as LDTs or FDA-cleared tests.
OvaWatch has been developed and is validated for use in Aspira’s CLIA-certified lab as a non-invasive blood-based risk assessment test for use in conjunction with clinical assessment and imaging to determine ovarian cancer risk for patients with an adnexal mass who are not yet scheduled for surgery. The commercialization plan for OvaWatch will occur in two phases. Phase
I is a single use, point-in-time risk assessment test and Phase II will allow for serial monitoring. We will focus on the commercial phase of the OvaWatch single use risk assessment test, including driving provider adoption, during the fourth quarter of 2022. We believe OvaWatch has the potential to significantly expand the addressable market compared to Ova1Plus. The launch of the serial monitoring test is targeted for the fourth quarter of 2023 following the expected publication of data from the ongoing prospective serial monitoring clinical study.
We plan to continue to support research related to the impact of race and ethnicity on the detection of ovarian cancer. In June 2022, a manuscript arising from clinical research efforts in the Philippines, which we sponsored, was accepted for publication in the International Journal of Environmental Research and Public Health. The study was designed to validate the effectiveness of a multivariate index assay (“MIA2G”) Overa in the assessment of ovarian cancer in Filipino women. The resulting data indicated that MIA2G (Overa) exhibited better overall performance in detecting ovarian cancer, regardless of menopausal status, compared to CA-125 test measures. Notably, MIA2G (Overa) was shown to be more sensitive in detecting early-stage disease for this population than CA-125. The study also showed that MIA2G (Overa) had the best overall performance of all individual classifiers, including in some of the most difficult to detect cancers cohorts such as premenopausal women, and early-stage disease.
EndoCheck, an in-development non-invasive blood test to be used in conjunction with other non-surgical modalities, is designed to be an aid in the detection of endometriosis and address the patient population of women who are experiencing moderate to severe pelvic pain to provide non-invasive confirmation that their symptoms are indicative of endometriosis. The goal of this test is to support an early diagnosis and direct appropriate medical management that potentially reduces the progression of disease. Current detection methods for endometriosis require surgery and a surgical biopsy diagnosis and/or visualization diagnosis. EndoCheck is intended to address this large patient population by using a non-invasive solution with comparable sensitivity and specificity when compared to surgical biopsy and/or visualization. We expect that our research collaboration agreement with DFCI, BWH, and Medical University of Lodz will bolster our research and development efforts and scientific resources to accelerate commercialization of our endometriosis product portfolio. Our goal is to launch EndoCheck in the second half of 2023 as an LDT.
OvaInherit will be designed as a non-invasive, high-risk diagnostic tool, intended for those patients with or without a pelvic mass who are genetically predisposed to ovarian cancer. It will use genetics, proteins and other modalities to assess the likelihood that a woman has an early-stage gynecological cancer that is not visible using traditional ultrasound methodologies, and thereby to aid in early diagnoses. Our OvaInherit related clinical studies, OvaNex and Ova360, initiated in late 2019 and early 2020, respectively, are focused on developing data to support a diagnostic test for the early detection of ovarian cancer.
We ultimately plan to commercialize OvaSuite and EndoCheck on a global scale. We currently hold CE marks for Ova1 and Overa.
Outside of the United States, there are studies in process in both the Philippines and Israel, which are intended to validate Overa and Ova1 in specific populations. The study occurring in the Philippines includes Aspira’s first agreement regarding Aspira Synergy for Overa specimen testing. The first paper from the Philippines study was published in the third quarter of 2022.
We own and operate ASPiRA LABS, based in Austin, Texas, a Clinical Chemistry and Endocrinology Laboratory accredited by the College of American Pathologists, which specializes in applying biomarker-based technologies to address critical needs in the management of gynecologic cancers and disease. ASPiRA LABS provides expert diagnostic services using a state-of-the-art biomarker-based risk assessment to aid in clinical decision making and advance personalized treatment plans. The lab currently performs our Ova1, Overa and additional tumour and hormone tests, and we plan to expand the testing to other gynecologic conditions with high unmet need. We also plan to develop and perform LDTs at ASPiRA LABS. ASPiRA LABS holds a CLIA
Certificate of Accreditation and a state laboratory license in California, Maryland, New York, Pennsylvania and Rhode Island. The Centers for Medicare & Medicaid Services (“CMS”) issued a supplier number to ASPiRA LABS in 2015.
In the United States, revenue for diagnostic tests comes from several sources, including third-party payers such as insurance companies, government healthcare programs, such as Medicare and Medicaid, client bill accounts and patients. Novitas Solutions, a Medicare contractor, covers and reimburses for Ova1 tests performed in certain states, including Texas. Due to Ova1 tests billed by the Company being performed exclusively at ASPiRA LABS in Texas, the local coverage determination from Novitas Solutions essentially provides national coverage for patients enrolled in Medicare as well as Medicare Advantage health plans. ASPiRA LABS also bills third-party commercial and other government payers as well as client bill accounts and patients for Ova1.
In November 2016, the American College of Obstetricians and Gynecologists (“ACOG”) issued Practice Bulletin Number 174 which included Ova1, defined as the “Multivariate Index Assay”, outlining ACOG’s clinical management guidelines for adnexal mass management. Practice Bulletin Number 174 recommends that obstetricians and gynecologists evaluating women with adnexal masses who do not meet Level A criteria of a low risk transvaginal ultrasound should proceed with Level B clinical guidelines. Level B guidelines state that the physician may use risk assessment tools such as existing CA-125 technology or Ova1 (“Multivariate Index Assay”) as listed in the bulletin. Based on this, Ova1 achieved parity with CA-125 as a Level B clinical recommendation for the management of adnexal masses.
Practice Bulletins summarize current information on techniques and clinical management issues for the practice of obstetrics and gynecology. Practice Bulletins are evidence-based documents, and recommendations are based on the evidence. This is also the only clinical management tool used for adnexal masses. Although there are Practice Bulletins, guidelines do not exist for adnexal masses. ACOG guidelines do exist, however, for ovarian cancer management.
Recent Developments
Business and Listing Updates
On August 8, 2022, we entered into a sponsored research agreement with DFCI, BWH, and Medical University of Lodz for the generation of a multi-omic, non-invasive diagnostic aid to identify endometriosis based on circulating microRNAs and proteins. This collaboration is expected to accelerate our development and commercialization of future endometriosis products, such as EndoCheck. Under the terms of the agreement, payments of approximately $1,252,000 have or will become due from us to the counterparties upon the successful completion of deliverables as defined in the agreement in 2022 and 2023 as follows: 68% was paid in August 2022, 15% will become payable upon completion of certain deliverables estimated to occur in the fourth quarter of 2022, and 17% will become payable upon completion of certain deliverables estimated to occur in the second quarter of 2023. As of September 30, 2022 approximately $852,000 has been recorded as expense for the project.
We have prepared an application for a Proprietary Laboratory Analyses code with the American Medical Association for OvaWatch to distinguish it from Ova1Plus with the expectation that Novitas and other payers will apply the Ova1Plus Centers for Medicare & Medicaid Services fee to OvaWatch, ensuring consistent coverage and pricing for both Ova products.
On June 1, 2022, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market notifying us that, for the preceding 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Rule”). As provided in the Nasdaq rules, we have 180 calendar days, or until November 28, 2022, to regain compliance with the Minimum Bid Price Rule. We may achieve compliance during this period if the closing bid price of our common stock is at least $1.00 per share for a minimum of 10 consecutive business days. If we fail to regain compliance on or prior to November 28, 2022, we may be eligible for an additional 180-calendar day compliance period, which would extend the deadline until May 27, 2023. There is no assurance that we will be able to regain compliance by the
November 28, 2022 deadline or the additional 180-calendar day extended deadline, and there is no assurance that we will otherwise maintain compliance with this or any of the other Nasdaq continued listing requirements.
Recent Publications
As part of our support of research related to the impact of race and ethnicity on the detection of ovarian cancer, a manuscript arising from clinical research efforts in the Philippines, which we sponsored, was accepted for publication in the International Journal of Environmental Research and Public Health in June 2022. The resulting data indicated that Overa exhibited better overall performance in detecting ovarian cancer, regardless of menopausal status, compared to CA-125. The study also showed that Overa had the best overall performance of all individual classifiers, including in some of the most difficult to detect cancer cohorts such as premenopausal women, and early-stage disease.
COVID-19 Pandemic
The COVID-19 pandemic has severely impacted global economic activity, and many countries and many states in the United States reacted to it by instituting quarantines, mandating business and school closures and restricting travel periodically throughout the pandemic. Patient enrollment for our planned clinical research studies has been slower than originally planned due to the impact of clinic closures and patients not seeking medical care in some states, which has led to delays in the completion of such studies.
Given the potential for future resurgences of COVID-19 cases and the variety of federal and state actions taken to contain them, we are unable to estimate the potential future impact of the COVID-19 pandemic on our business, results of operations or cash flows as of the date of the filing of this Form 10-Q.
Critical Accounting Policies and Estimates
Our product revenue is generated by performing diagnostic services using our Ova1, Overa or Ova1Plus tests, and the service is completed upon the delivery of the test result to the prescribing physician. The entire transaction price is allocated to the single performance obligation contained in a contract with a patient. Under ASC Topic 606, Revenue from Contracts with Customers, all revenue is recognized upon completion of the Ova1, Overa or Ova1Plus test and delivery of test results to the physician based on estimates of amounts that will ultimately be realized. In determining the amount of revenue to be recognized for a delivered test result, we consider factors such as payment history and amount, payer coverage, whether there is a reimbursement contract between the payer and us, and any developments or changes that could impact reimbursement. These estimates require significant judgment by management. For Ova1, Overa and Ova1Plus tests, we also review our patient account population and determine an appropriate distribution of patient accounts by payer (i.e., Medicare, patient pay, other third-party payer, etc.) into portfolios with similar collection experience. When evaluated for collectability, this results in a materially consistent revenue amount for such portfolios as if each patient account were evaluated on an individual contract basis.
Results of Operations - Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The selected summary financial and operating data of the Company for the three months ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| | Three Months Ended | | |
| | September 30, | | Increase (Decrease) |
(dollars in thousands) | | 2022 | | 2021 | | Amount | | % |
Revenue: | | | | | | | | | | | |
Product | | $ | 2,037 | | $ | 1,617 | | $ | 420 | | 26 |
Genetics | | | 35 | | | 49 | | | (14) | | (29) |
Total revenue | | | 2,072 | | | 1,666 | | | 406 | | 24 |
Cost of revenue: | | | | | | | | | | | |
Product | | | 875 | | | 715 | | | 160 | | 22 |
Genetics | | | 41 | | | 202 | | | (161) | | (80) |
Total cost of revenue | | | 916 | | | 917 | | | (1) | | (0) |
Gross profit | | | 1,156 | | | 749 | | | 407 | | 54 |
Operating expenses: | | | | | | | | | | | |
Research and development | | | 2,157 | | | 1,518 | | | 639 | | 42 |
Sales and marketing | | | 3,950 | | | 5,083 | | | (1,133) | | (22) |
General and administrative | | | 4,746 | | | 3,839 | | | 907 | | 24 |
Total operating expenses | | | 10,853 | | | 10,440 | | | 413 | | 4 |
Loss from operations | | | (9,697) | | | (9,691) | | | (6) | | 0 |
Change in fair value of warrant liabilities | | | 5,004 | | | - | | | 5,004 | | - |
Interest income (expense), net | | | 18 | | | (14) | | | 32 | | 229 |
Other (expense), net | | | 117 | | | (2) | | | 119 | | 5,950 |
Net loss | | $ | (4,558) | | $ | (9,707) | | $ | 5,149 | | (53) |
Product Revenue. Product revenue was $2,037,000 for the three months ended September 30, 2022, compared to $1,617,000 for the same period in 2021. Revenue for ASPiRA LABS is recognized when the Ova1, Overa, or Ova1Plus test is completed based on estimates of what we expect to ultimately realize. The 26% product revenue increase is due to an increase in Ova1 test volume compared to the prior year, partially offset by a lower revenue average unit price (“AUP”), which decreased from $378 in the third quarter of 2021 to $369 in the third quarter of 2022.
Medicaid represents approximately 13.6% of volume in the three months ended September 30, 2022, at an AUP of $88. This is compared to 12.0% of volume in the same period in 2021, at an AUP of $94. Our Ova1Plus AUP without Medicaid was $415 for the three months ended September 30, 2022, compared to $410 for the same period in 2021. Product revenue increased 1% sequentially for the third quarter of 2022 as compared to the second quarter of 2022.
The number of product tests performed increased 29% to 5,524 during the three months ended September 30, 2022, compared to 4,281 product tests for the same period in 2021. The number of product tests performed increased 2% sequentially during the third quarter 2022 as compared to the second quarter 2022. These increases are a result of increased access to provider offices and increased investment in our current commercial channel. We expect revenue to continue to increase in 2022 due to our investment in key salesforce hires and strategic product development.
Genetics Revenue. Genetics revenue was $36,000 for the three months ended September 30, 2022, compared to $49,000 for the same period in 2021. Revenue for Aspira GenetiX is recognized when the Aspira
GenetiX test is completed based on estimates of what we expect to ultimately realize. The 27% genetics revenue decrease is primarily due to decreased volumes and decreased AUP as compared to the same period in 2021. The Company has discontinued offering genetics testing effective September 30, 2022.
Cost of Revenue – Product. Cost of product revenue was $875,000 for the three months ended September 30, 2022, compared to $715,000 for the same period in 2021, representing an increase of $160,000, or 22%, due primarily to increased personnel costs, lab supply costs, and software license fees resulting from the increase in tests performed compared to the prior year. The cost of revenue increased at a rate lower than the revenue percent increased as we leveraged our fixed laboratory costs.
Cost of Revenue – Genetics. Cost of genetics revenue, which consisted primarily of personnel costs and consulting expense related to the launch of Aspira GenetiX, was $41,000 for the three months ended September 30, 2022, compared to $202,000 for the same period in 2021. The decrease in cost was due to a decrease of $104,000 in personnel costs, and a decrease in volume of tests performed as compared to the same period in 2021. The Company has discontinued the genetics testing offering effective September 30, 2022.
Gross Profit Margin. Gross profit margin for Ova1Plus remained relatively flat at 57.0% for the three months ended September 30, 2022, and 56% for the same period in 2021.
Research and Development Expenses. Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses for the three months ended September 30, 2022 increased by $639,000, or 42%, compared to the same period in 2021. This increase was primarily due to clinical validity and product development costs related to OvaWatch in addition to approximately $852,000 of costs related to our collaboration with DFCI, BWH and Medical University of Lodz, which relates to our endometriosis product portfolio, partially offset by a decrease in clinical trial expenses of $134,000 and a decrease of recruiting expenses of $112,000. We expect research and development expenses to increase in 2022, sequentially as well as relative to 2021, as a result of increased projects, clinical studies and our research collaboration agreements.
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses. These expenses include the costs of educating physicians and other healthcare professionals regarding Ova1, Overa and Ova1Plus. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses for the three months ended September 30, 2022 decreased by $1,133,000, or 22%, compared to the same period in 2021. This decrease was primarily due to decreased personnel in the marketing area, decreases in recruiting expenses and decreases in external marketing expenses. We expect sales and marketing expenses to modestly increase sequentially in 2022 as we prepare to launch OvaWatch.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses for the three months ended September 30, 2022 increased by $907,000, or 24%, compared to the same period in 2021. This increase was primarily due to issuance costs associated with issuance of warrants of $1,117,000 (see Note 2 to the unaudited condensed consolidated financial statements), personnel expenses of $491,000, partially offset by decreased consulting and legal expenses of $571,000 and $102,000, respectively. We expect general and administrative expenses to remain relatively flat sequentially in 2022.
Change in fair value of warrant liabilities. The fair values of the warrants as of August 22, 2022, the issuance date, and September 30, 2022 were $7,752,000 and $2,748,000, respectively, for a net change in fair value of $5,004,000.
Results of Operations – Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The selected summary financial and operating data of the Company for the nine months ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| | Nine Months Ended | | |
| | September 30, | | Increase (Decrease) |
(dollars in thousands) | | 2022 | | 2021 | | Amount | | % |
Revenue: | | | | | | | | | | | |
Product | | $ | 5,890 | | $ | 4,753 | | $ | 1,137 | | 24 |
Genetics | | | 141 | | | 208 | | | (67) | | (32) |
Total revenue | | | 6,031 | | | 4,961 | | | 1,070 | | 22 |
Cost of revenue: | | | | | | | | | | | |
Product | | | 2,768 | | | 2,209 | | | 559 | | 25 |
Genetics | | | 180 | | | 704 | | | (524) | | (74) |
Total cost of revenue | | | 2,948 | | | 2,913 | | | 35 | | 1 |
Gross profit | | | 3,083 | | | 2,048 | | | 1,035 | | 51 |
Operating expenses: | | | | | | | | | | | |
Research and development | | | 4,915 | | | 3,861 | | | 1,054 | | 27 |
Sales and marketing | | | 12,027 | | | 12,209 | | | (182) | | (1) |
General and administrative | | | 13,305 | | | 9,627 | | | 3,678 | | 38 |
Total operating expenses | | | 30,247 | | | 25,697 | | | 4,550 | | 18 |
Loss from operations | | | (27,164) | | | (23,649) | | | (3,515) | | 15 |
Change in fair value of warrant liabilities | | | 5,004 | | | - | | | 5,004 | | - |
Interest (expense), net | | | (10) | | | (35) | | | 25 | | (71) |
Other income, net | | | 101 | | | 983 | | | (882) | | (90) |
Net loss | | $ | (22,069) | | $ | (22,701) | | $ | 632 | | (3) |
Product Revenue. Product revenue was $5,890,000 for the nine months ended September 30, 2022, compared to $4,753,000 for the same period in 2021. Revenue for ASPiRA LABS is recognized when the Ova1, Overa, or Ova1Plus test is completed based on estimates of what we expect to ultimately realize. The 24% product revenue increase is primarily due to an increase in Ova1 test volume compared to the prior year, partially offset by a decrease in AUP, which decreased from $377 for the nine months ended September 30, 2021 to $373 in the same period of 2022.
Medicaid represents approximately 12.4% of volume in the nine months ended September 30, 2022, at an AUP of $89. This is compared to 11.8% of volume for the same period in 2021, at an AUP of $91. Our Ova1Plus AUP without Medicaid was $416 for the nine months ended September 30, 2022, compared to $413 for the same period in 2021.
The number of product tests performed increased 25% to 15,781 during the nine months ended September 30, 2022, compared to 12,609 product tests for the same period in 2021. This increase was due to increased access to provider offices and focused investment in our current commercial channel.
Genetics Revenue. Genetics revenue was $142,000 for the nine months ended September 30, 2022, compared to $208,000 for the same period in 2021. Revenue for Aspira GenetiX is recognized when the Aspira GenetiX test is completed based on estimates of what we expect to ultimately realize. The 32% genetics revenue decrease is primarily due to decreased volumes as compared to the same period in 2021, in addition to the AUP decreased to $420 from $478 from the same period in 2021. The Company has discontinued the genetics testing offering effective September 30, 2022.
Cost of Revenue – Product. Cost of product revenue was $2,768,000 for the nine months ended September 30, 2022, compared to $2,209,000 for the same period in 2021, representing an increase of $559,000, or 25%, due primarily to proportionate increases in personnel costs, lab supply costs, and software license fees resulting from the increase in tests performed compared to the prior year.
Cost of Revenue – Genetics. Cost of genetics revenue, which consisted primarily of personnel costs and consulting expense after the launch of Aspira GenetiX, was $180,000 for the nine months ended September 30, 2022, compared to $704,000 for the same period in 2021. The decrease in cost was due to a decrease of $322,000 in personnel costs and a decrease in volume of tests performed as compared to the same period in 2021. The Company has discontinued the genetics testing offering effective September 30, 2022.
Gross Profit Margin. Gross profit margin for Ova1Plus decreased slightly to 52.9% for the nine months ended September 30, 2022, compared to 54.4% for the same period in 2021. This decrease was primarily related to increased personnel costs, lab supply costs, and software license fees.
Research and Development Expenses. Research and development expenses represent costs incurred to develop our technology and carry out clinical studies, and include personnel-related expenses, regulatory costs, reagents and supplies used in research and development laboratory work, infrastructure expenses, contract services and other outside costs. Research and development expenses for the nine months ended September 30, 2022 increased by $1,054,000, or 27%, compared to the same period in 2021. This increase was primarily due to clinical validity, product development costs related to OvaWatch, in addition to approximately $852,000 of costs related to our collaboration with DFCI, BWH and Medical University of Lodz, which relates to our endometriosis product portfolio, increases in employment related expenses of $283,000, partially offset by a decrease in clinical trial expenses of $118,000. In addition, there was severance paid in relation to our commercial reorganization and job eliminations of $152,000. We expect research and development expenses to increase in 2022, sequentially as well as relative to 2021, as a result of increased projects and clinical studies.
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of personnel-related expenses, education and promotional expenses. These expenses include the costs of educating physicians and other healthcare professionals regarding Ova1, Overa and Ova1Plus. Sales and marketing expenses also include the costs of sponsoring continuing medical education, medical meeting participation, and dissemination of scientific and health economic publications. Sales and marketing expenses for the nine months ended September 30, 2022 decreased by $182,000, or 1%, compared to the same period in 2021. This decrease was primarily due to decreased recruiting and marketing expense, partially offset by increased personnel, severance paid in relation to our reorganization, commissions, sales meetings and travel and entertainment costs. We expect sales and marketing expenses to increase sequentially in 2022, due to investing in key strategic hires and product portfolio expansion.
During the first quarter of 2022, we executed a commercial reorganization resulting in the separation of a number of employees. The changes were aimed at enhancing our national sales force and driving the accelerated adoption of Ova1Plus as the standard of care for early risk detection of ovarian cancer in women who have been planned for surgery. The organizational changes resulted in the recording of one-time severance, separation, and settlement payments in the first quarter of 2022 of approximately $1,284,000 including estimated future payouts, of which $1,085,000 paid related to sales and marketing, partially offset by insurance reimbursement of $523,000, of which $503,000 related to sales and marketing.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel-related expenses, professional fees and other costs, including legal, finance and accounting expenses and other infrastructure expenses. General and administrative expenses for the nine months ended September 30, 2022 increased by $3,678,000, or 38%, compared to the same period in 2021. This increase was primarily due to issuance costs associated with issuance of warrants of $1,117,000 (see Note 2 to the unaudited condensed consolidated financial statements), increased personnel related expenses of $2,803,000 and legal fees of $220,000. Severance paid to general and administrative-related personnel was immaterial. We expect general and administrative expenses to remain relatively flat sequentially in 2022.
Change in fair value of warrant liabilities. The fair values of the warrants as of August 22, 2022, the issuance date, and September 30, 2022 were $7,752,000 and $2,748,000, respectively, for a net change in fair value of $5,004,000.
Liquidity and Capital Resources
We plan to continue to expend resources selling and marketing Ova1, Overa and Ova1Plus and developing additional diagnostic tests and service capabilities. We plan to launch our next generation ovarian cancer risk assessment test, OvaWatch, in the fourth quarter of 2022.
We have incurred significant net losses and negative cash flows from operations since inception, and as a result have an accumulated deficit of approximately $493,797,000 as of September 30, 2022. We also expect to incur a net loss and negative cash flows from operations for 2022. Working capital levels may not be sufficient to fund operations as currently planned through the next twelve months, absent a significant increase in revenue over historic revenue or additional financing. Given the above conditions, there is substantial doubt about our ability to continue as a going concern.
We expect to raise capital through sources that may include public or private equity offerings, debt financings, the exercise of common stock warrants, collaborations, licensing arrangements, grants and government funding and strategic alliances. However, additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may not be able to continue sales and marketing, research and development, or other operations on the scope or scale of current activity, and that could have a material adverse effect on our business, results of operations and financial condition.
As discussed in Note 2 to the condensed consolidated financial statements, in March 2016, we entered into a loan agreement (as amended on March 7, 2018 and April 3, 2020, the “DECD Loan Agreement”) with the State of Connecticut Department of Economic and Community Development (the “DECD”), pursuant to which we may borrow up to $4,000,000 from the DECD.
The loan may be prepaid at any time without premium or penalty. An initial disbursement of $2,000,000 was made to us on April 15, 2016 under the DECD Loan Agreement. On December 3, 2020, we received a disbursement of the remaining $2,000,000 under the DECD Loan Agreement, as we had achieved the target employment milestone necessary to receive an additional $1,000,000 under the DECD Loan Agreement and the DECD determined to fund the remaining $1,000,000 under the DECD Loan Agreement after concluding that the required revenue target would likely have been achieved in the first quarter of 2020 in the absence of the impacts of COVID-19.
Under the terms of the DECD Loan Agreement, we may be eligible for forgiveness of up to $1,500,000 of the principal amount of the loan if we achieve certain job creation and retention milestones by December 31, 2022. Conversely, if we are either unable to retain 25 full-time employees with a specified average annual salary for a consecutive two-year period or do not maintain our Connecticut operations through March 22, 2026, the DECD may require early repayment of a portion or all of the loan plus a penalty of 5% of the total funded loan. For additional information, see Note 2 of our consolidated financial statements.
As discussed in Note 2 to the condensed consolidated financial statements, on May 1, 2020, we obtained the Paycheck Protection Program loan (the “PPP Loan”) from BBVA USA in the aggregate amount of approximately $1,006,000. We applied for forgiveness of the PPP Loan in March 2021, and, effective May 27, 2021, the SBA confirmed the waiver of our repayment of the PPP Loan, which was recognized as a gain in other income in 2021. We remain subject to an audit of the PPP loan. There is no assurance that we will not be required to repay all or a portion of the PPP Loan as a result of any such audit.
As discussed in Note 3 to the condensed consolidated financial statements, on February 8, 2021, the Company completed a public offering (the “2021 Offering”) resulting in net proceeds of approximately
$47,858,000, after deducting underwriting discounts and offering expenses. There was a change in estimate in the third quarter of 2021 in the amount of $138,000 relating to an expense reversal of offering costs.
As discussed in Note 3 to the condensed consolidated financial statements, on August 22, 2022, the Company completed a public offering (the “2022 Offering”) resulting in net proceeds of approximately $7,704,000, after deducting underwriting discounts and offering expenses of $1,296,000.
In connection with a private placement offering of common stock and warrants we completed in May 2013, we entered into a stockholders agreement which, among other things, granted two of the primary investors in that offering the right to participate in any future equity offerings by the Company on the same price and terms as other investors. In addition, the stockholders agreement prohibits us from taking certain material actions without the consent of at least one of the two primary investors in that offering. These material actions include:
Making any acquisition with a value greater than $2 million;
Offering, selling or issuing any securities senior to Aspira’s common stock or any securities that are convertible into or exchangeable or exercisable for securities ranking senior to Aspira’s common stock;
Taking any action that would result in a change in control of the Company or an insolvency event; and
Paying or declaring dividends on any securities of the Company or distributing any assets of the Company other than in the ordinary course of business or repurchasing any outstanding securities of the Company.
The foregoing rights terminate for a primary investor when that investor ceases to beneficially own less than 50% of the shares and warrants (taking into account shares issued upon exercise of the warrants), in the aggregate, that were purchased at the closing of the 2013 private placement. We believe that the rights of one of the primary investors have so terminated.
As mentioned, we have incurred significant net losses and negative cash flows from operations since inception, and we expect to continue to incur a net loss and negative cash flows from operations in 2022. At September 30, 2022 we had an accumulated deficit of ($493,797,000) and stockholders’ equity of $11,178,000. As of September 30, 2022, we had $20,551,000 of cash and cash equivalents (excluding restricted cash of $250,000), $7,297,000 of current liabilities, and working capital of $15,679,000. There can be no assurance that we will achieve or sustain profitability or positive cash flow from operations. While we expect to grow revenue through ASPiRA LABS, there is no assurance of our ability to generate substantial revenues and cash flows from ASPiRA LABS’ operations. We expect revenue from our products to be our only material, recurring source of cash in 2022. In addition, the impact of the COVID-19 pandemic and actions taken to contain it on our liquidity for 2022 cannot be estimated as of the date of the filing of this Form 10-Q.
Our future liquidity and capital requirements will depend upon many factors, including, among others:
resources devoted to sales, marketing and distribution capabilities;
the rate of Ova1, Overa and Ova1Plus product adoption by physicians and patients;
the rate of product adoption by healthcare systems and large physician practices of the decentralized distribution agreements for Ova1, Overa and Ova1Plus;
the insurance payer community’s acceptance of and reimbursement for our products;
our plans to acquire or invest in other products, technologies and businesses;
the potential need to add study sites to access additional patients to maintain clinical timelines; and
the impact of the COVID-19 pandemic and the actions taken to contain it, as discussed above.
The first quarter of 2022 had higher, non-recurring costs, including personnel costs associated with our commercial reorganization, in addition to costs related to our annual performance plan payout. In the third quarter of 2022, the impact of our operational excellence strategic initiatives began, most notably with respect to reduced consulting costs as we focused on innovation, and specifically on OvaWatch and EndoCheck. We also enhanced our sales and marketing in preparation for the BRL collaboration and the launch of OvaWatch. We expect to see
sequential improvement in net cash utilization in the fourth quarter of 2022 compared to the third quarter as we do not plan to incur one-time research and collaboration costs, which was incurred in the third quarter of 2022, and as we start to see the impact of our anticipated top line growth.
Net cash used in operating activities was $25,109,000 for the nine months ended September 30, 2022, resulting primarily from the net loss reported of $22,069,000, which includes non-cash expenses in the amount of $5,004,000 relating to a change in warrant fair value (see Note 2 to the unaudited condensed consolidated financial statements), $1,994,000 related to stock compensation expense and $195,000 related to depreciation and amortization, offset by changes in prepaid expense and other assets of $694,000 and changes in accounts payable, accrued liabilities and other liabilities of $653,000, and changes in accounts receivable of $174,000 and inventory of $106,000.
Net cash used in operating activities was $19,746,000 for the nine months ended September 30, 2021, resulting primarily from the net loss reported of $22,701,000, which includes non-cash items such as stock compensation expense of $2,949,000, PPP loan forgiveness of $1,006,000 and depreciation and amortization of $238,000, offset by changes in prepaid expense and other assets of $262,000 and changes in accounts payable, accrued liabilities and other liabilities of $821,000, partially offset by changes in accounts receivable of $238,000 and inventory of $107,000.
Net cash used in investing activities was $158,000 and $154,000 for the nine months ended September 30, 2022 and 2021, respectively, which consisted of property and equipment purchases.
Net cash provided by financing activities was $8,638,000 for the nine months ended September 30, 2022, stemming primarily from the 2022 Offering, resulting in net proceeds of $8,821,000, after deducting allocated underwriting discounts and offering expenses of $179,000, in addition to principal payments on the DECD loan. Net cash provided by financing activities was $48,389,000 for the nine months ended September 30, 2021, which resulted primarily from the 2021 Offering, resulting in net proceeds to the Company of approximately $47,858,000, after deducting underwriting discounts and offering expenses of $378,000. There was a change in estimate in the third quarter of 2021 in the amount of $137,000 relating to an expense reversal of offering costs.
Based on the available objective evidence, we believe it is more likely than not that net deferred tax assets will not be fully realizable. Accordingly, we have provided a full valuation allowance against the Company’s net deferred tax assets. Therefore, there was no deferred income tax expense or benefit for the period.
Legislation commonly referred to as the Tax Cuts and Jobs Act was enacted in December 2017. As a result of the Tax Cuts and Jobs Act of 2017, federal NOLs arising before January 1, 2018, and federal NOLs arising after January 1, 2018, are subject to different rules. The Company’s pre- 2018 federal NOLs will expire in varying amounts from 2022 through 2037, if not utilized; and can offset 100% of future taxable income for regular tax purposes. Any federal NOLs arising after January 1, 2018, can generally be carried forward indefinitely and can offset up to 80% of future taxable income. State NOLs will expire in varying amounts from 2022 through 2037 if not utilized. Our ability to use our NOLs during this period will be dependent on our ability to generate taxable income, and the NOLs could expire before the Company generates sufficient taxable income.
Our ability to use the Company’s net operating loss and credit carryforwards to offset future taxable income is restricted due to ownership change limitations that have occurred in the past, as required by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), as well as similar state provisions. Net operating losses which are limited from offsetting any future taxable income under Section 382 are not included in the gross deferred tax assets. Due to the existence of a valuation allowance, it is not expected that such limitations, if any, will have an impact on our results of operations or financial position.
Our unrecognized tax benefits attributable to research and development credits will increase during the period for tax positions taken during the year and will/ decrease for expiration of a portion of the carryforwards during the period.
Off-Balance Sheet Arrangements
As of September 30, 2022, we had no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our condensed consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Per Item 305(e) of Regulation S-K, the information called for by this Item 3 is not required.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2022, our disclosure controls and procedures were effective.
Changes in internal controls over financial reporting.
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.