SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarter ended September 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . ------- ------- Commission File Number 1-10492 ORASURE TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 36-4370966 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 150 Webster Street, Bethlehem, Pennsylvania 18015 (Address of Principal Executive Offices) (Zip code) (610) 882-1820 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock, par value $.000001 per share, outstanding as of November 6, 2001: 37,208,445
PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements (unaudited) 3 Balance Sheets at September 30, 2001 and December 31, 2000.... 3 Statements of Operations for the three months and nine months ended September 30, 2001 and 2000.......................... 4 Statements of Stockholders' Equity for the nine months ended September 30, 2001................................... 5 Statements of Cash Flows for the nine months ended September 30, 2001 and 2000.......................... 6 Notes to Financial Statements................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds................ 21 Item 5. Other Information........................................ 21 Item 6. Exhibits and Reports on Form 8-K......................... 21 2
Item 1. FINANCIAL STATEMENTS ORASURE TECHNOLOGIES, INC. BALANCE SHEETS (Unaudited) <TABLE> September 30, 2001 December 31, 2000 ------------------ ----------------- ASSETS CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents $ 2,295,719 $ 5,095,639 Short-term investments 13,410,799 14,956,779 Accounts receivable, net of allowance for doubtful accounts of $207,138 and $114,685 7,306,719 5,276,772 Notes receivable from officer 75,000 175,649 Inventories 3,420,102 1,495,604 Prepaid expenses and other 1,171,417 1,189,210 -------------- --------------- Total current assets 27,679,756 28,189,653 -------------- --------------- PROPERTY AND EQUIPMENT, net 7,523,851 6,738,034 PATENTS AND PRODUCT RIGHTS, net 2,132,496 2,402,386 OTHER ASSETS 1,141,492 406,099 -------------- -------------- $ 38,477,595 $ 37,736,172 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,098,707 $ 1,125,138 Accounts payable 2,125,285 1,522,295 Accrued expenses 3,291,433 4,047,231 -------------- --------------- Total current liabilities 6,515,425 6,694,664 -------------- --------------- LONG-TERM DEBT 3,829,899 4,644,098 -------------- --------------- OTHER LIABILITIES 117,834 225,334 -------------- --------------- STOCKHOLDERS' EQUITY: Preferred stock, par value $.000001, 25,000,000 shares authorized, none issued - - Common stock, par value $.000001, 120,000,000 shares authorized, 37,195,877 and 36,434,004 shares issued and outstanding 37 36 Additional paid-in capital 151,818,602 148,767,789 Accumulated other comprehensive loss (14,422) (231,247) Accumulated deficit (123,789,780) (122,364,502) -------------- --------------- Total stockholders' equity 28,014,437 26,172,076 -------------- --------------- $ 38,477,595 $ 37,736,172 ============== =============== </TABLE> The accompanying notes are an integral part of these statements. 3
ORASURE TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS (Unaudited) <TABLE> Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- REVENUES: <S> <C> <C> <C> <C> Product $8,236,352 $6,867,729 $23,207,345 $20,397,691 Licensing and product development 362,302 354,649 1,303,129 604,608 --------- --------- ---------- ---------- 8,598,654 7,222,378 24,510,474 21,002,299 --------- --------- ---------- ---------- COSTS AND EXPENSES: Cost of products sold 2,872,753 3,096,668 8,579,752 8,210,484 Research and development 2,247,975 2,800,366 6,838,056 6,632,699 Sales and marketing 1,961,817 1,791,039 5,888,432 4,995,080 General and administrative 1,527,081 1,827,928 4,594,217 5,502,178 Merger-related - 5,919,764 - 5,919,764 Restructuring-related - - 450,000 - --------- ---------- ---------- ---------- 8,609,626 15,435,765 26,350,457 31,260,205 --------- ---------- ---------- ---------- Operating loss (10,972) (8,213,387) (1,839,983) (10,257,906) INTEREST EXPENSE (101,555) (122,869) (310,279) (375,677) INTEREST INCOME 241,805 396,686 742,818 943,869 FOREIGN CURRENCY GAIN (LOSS) (114,819) 28,418 2,911 19,750 GAIN ON SALE OF SECURITIES - - - 600,000 --------- --------- ---------- ---------- Income (loss) before income taxes 14,459 (7,911,152) (1,404,533) (9,069,964) INCOME TAXES 1,199 (12,673) (20,745) (24,363) --------- --------- ---------- ---------- NET INCOME (LOSS) $ 15,658 $(7,923,825) $(1,425,278) $(9,094,327) ========= ========== ========== ========== EARNINGS (LOSS) PER SHARE: BASIC $ 0.00 $ (0.22) $ (0.04) $ (0.26) ========= ========== ========== ========== DILUTED $ 0.00 $ (0.22) $ (0.04) $ (0.26) ========= ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC 37,057,079 35,369,781 36,740,600 34,546,219 ========== ========== ========== ========== DILUTED 39,009,095 35,369,781 36,740,600 34,546,219 ========== ========== ========== ========== </TABLE> The accompanying notes are an integral part of these statements. 4
ORASURE TECHNOLOGIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> Common Stock Other -------------- Additional Comprehensive Accumulated Shares Amount Paid-in Capital Income (Loss) Deficit Total ------ ------ --------------- -------------- ----------- ----- <S> <C> <C> <C> <C> Balance at December 31, 2000 36,434,004 $36 $148,767,789 $(231,247) $(122,364,502) $26,172,076 Common stock issued upon exercise of options 76,729 - 219,196 - - 219,196 Compensation expense for stock option grants - - 70,580 - - 70,580 Comprehensive loss: ---------- Net loss - - - - (996,759) (996,759) Currency translation adjustment - - - (108,213) - (108,213) Unrealized loss on marketable securities - - - (50,275) - (50,275) ---------- Total comprehensive loss (1,155,247) ---------- ----- ----------- ---------- ----------- ---------- Balance at March 31, 2001 36,510,733 36 149,057,565 (389,735) (123,361,261) 25,306,605 Common stock issued upon exercise of options 417,733 1 1,544,513 - - 1,544,514 Comprehensive loss: ---------- Net loss - - - - (444,177) (444,177) Currency translation adjustment - - - (70,409) - (70,409) Unrealized gain on marketable securities - - - 29,624 - 29,624 ---------- Total comprehensive loss (484,962) ---------- ----- ---------- ----------- ----------- ---------- Balance at June 30, 2001 36,928,466 37 150,602,078 (430,520) (123,805,438) 26,366,157 Common stock issued upon exercise of options 267,411 - 1,216,524 - - 1,216,524 Comprehensive income: ---------- Net income - - - - 15,658 15,658 Currency translation adjustment - - - 118,241 - 118,241 Unrealized gain on marketable securities - - - 297,857 - 297,857 ---------- Total comprehensive income 431,756 ---------- ----- ----------- --------- ----------- ---------- Balance at September 30, 2001 37,195,877 $ 37 $151,818,602 $(14,422) $(123,789,780) $28,014,437 ========== ===== =========== ========= =========== ========== </TABLE> The accompanying notes are an integral part of these statements. 5
ORASURE TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> Nine Months Ended September 30, 2001 2000 ---- ---- OPERATING ACTIVITIES: <S> <C> <C> Net loss $(1,425,278) $(9,094,327) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation expense 70,580 792,685 Amortization of deferred revenue (107,500) (107,500) Depreciation and amortization 1,537,873 1,332,532 Loss on disposition of property and equipment 11,353 914 Gain on disposition of investment in affiliated company (16,853) - Changes in assets and liabilities: Accounts receivable (2,367,200) (689,870) Inventories (1,924,498) 630,065 Prepaid expenses and other assets 118,442 55,647 Accounts payable and accrued expenses (152,808) 4,173,744 --------- --------- Net cash used in operating activities (4,255,889) (2,906,110) ----------- ---------- INVESTING ACTIVITIES: Purchases of short-term investments (23,250,109) (19,891,729) Proceeds from the sale of short-term investments 24,810,795 20,974,026 Purchases of property and equipment (2,094,220) (2,542,540) Proceeds from the sale of property and equipment 29,067 - Purchase of patents and product rights - (136,038) Increase in other assets (224,888) (20,404) Proceeds from disposition of investment in affiliated company 106,102 - ----------- ---------- Net cash used in investing activities (623,253) (1,616,685) ----------- ---------- FINANCING ACTIVITIES: Repayments of term debt (840,630) (783,609) Proceeds from issuance of common stock 2,980,233 19,876,012 ----------- ---------- Net cash provided by financing activities 2,139,603 19,092,403 ----------- ---------- EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (60,381) (133,075) ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,799,920) 14,436,533 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,095,639 2,049,644 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $2,295,719 $ 16,486,177 =========== ============ - ------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES Increase in fair value of securities available for sale $ 277,206 $ 131,250 =========== ============ Non-cash investment in a non-affiliated entity $ 337,253 $ - =========== ============ </TABLE> The accompanying notes are an integral part of these statements. 6
Notes to Financial Statements (Unaudited) 1. The Company OraSure Technologies, Inc. (the "Company") develops, manufactures and markets oral specimen collection devices using its proprietary oral fluid technologies, oral fluid assays, proprietary diagnostic products including in vitro diagnostic tests, and other medical devices. These products are sold to public and private-sector clients, clinical laboratories, physician offices, hospitals, and for workplace testing in the United States and certain foreign countries. 2. Summary of Significant Accounting Policies BASIS OF PRESENTATION. The accompanying financial statements are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the results for these interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and Quarterly Reports on Form 10-Q for the three-month periods ended March 31 and June 30, 2001. Results of operations for the period ended September 30, 2001 are not necessarily indicative of the results of operations expected for the full year. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES. Inventories are stated at the lower of cost or market determined on a first-in, first-out basis and are comprised of the following: September 30, December 31, 2001 2000 ------- ---------- Raw materials $1,082,957 $473,575 Work-in-process 797,669 348,819 Finished goods 1,539,476 673,210 ---------- ---------- $3,420,102 $1,495,604 ========== ========== REVENUE RECOGNITION. The Company recognizes product revenues when products are shipped. The Company does not grant price protection or product return rights to its customers. Up-front licensing fees are deferred and recognized ratably over the related license period. Product development revenues are recognized over the period the related product development efforts are performed. Amounts received prior to the performance of product development efforts are recorded as deferred revenues. In December 1999, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 draws on existing accounting rules and provides specific guidance on revenue recognition of up-front, non-refundable license and development fees. The Company has applied the provisions of SAB 101 in the accompanying financial statements. SIGNIFICANT CUSTOMER CONCENTRATION. For the three and nine-month periods ended September 30, 2001, one customer accounted for 20.8 and 21.8 percent of total revenues, respectively, as compared to 23.4 percent for each of the same periods in 2000. 7
RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense as incurred. FOREIGN CURRENCY TRANSLATION. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," the assets and liabilities of the Company's foreign operations are translated into U.S. dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are reflected as a separate component of stockholders' equity. NET LOSS PER COMMON SHARE. The Company has presented basic and diluted earnings (loss) per common share pursuant to SFAS No. 128, "Earnings per Share" ("SFAS 128"), and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. In accordance with SFAS 128, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the reported period. Diluted earnings per share is computed in a manner similar to basic earnings per share except that the weighted average number of shares outstanding is increased to include incremental shares from the assumed exercise of stock options and warrants, if dilutive. The number of incremental shares is calculated by assuming that outstanding stock options and warrants were exercised and the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. The computations of basic and diluted earnings (loss) per share are as follows: <TABLE> Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income (loss) $ 15,658 $(7,923,825) $(1,425,278) $(9,094,327) ======== =========== =========== =========== Weighted average shares of common stock outstanding: Basic 37,057,079 35,369,781 36,740,600 34,546,219 Dilutive effect of stock options and warrants 1,952,016 - - - --------- -------- ---------- --------- Diluted 39,009,095 35,369,781 36,740,600 34,546,219 ========== ========== ========== ========== Earnings (loss) per share: Basic $ 0.00 $ (0.22) $ (0.04) $ (0.26) ========== ========== ========== ========== Diluted $ 0.00 $ (0.22) $ (0.04) $ (0.26) ========== ========== ========== ========== </TABLE> The computations of diluted earnings (loss) per share for the three-month period ended September 30, 2001 and 2000 and for the nine-month periods ended September 30, 2001 and 2000 exclude the effect of outstanding common stock options and warrants to purchase 89,750, 2,948,364, 4,010,811 and 3,036,026 shares, respectively, because the effect of including such shares is anti-dilutive. OTHER COMPREHENSIVE INCOME (LOSS). The Company follows SFAS No. 130, "Reporting Comprehensive Income." This statement requires the classification of items of other comprehensive income (loss) by their nature, and disclosure of the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. RESTRUCTURING-RELATED EXPENSES. In February, 2001, the Company announced plans to realign certain of its manufacturing operations. Accordingly, during the three months ended March 31, 2001, the Company incurred $450,000 in non-recurring restructuring costs, primarily comprised of expenses for employee severance, travel and transport resulting from relocating and consolidating manufacturing operations. All restructuring-related expenses were paid by June 30, 2001. 8
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS. Commencing in May 2001, the Company entered into foreign currency forward exchange contracts to offset certain operational and balance sheet exposures from changes in foreign currency exchange rates. Such exposures result from the portion of the Company's operations, assets and liabilities located in the Netherlands and denominated in guilders. The Company accounts for these foreign currency forward exchange contracts in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The contract amount of foreign currency forward exchange contracts outstanding at September 30, 2001 was $242,807. During the three-month and nine-month periods ended September 30, 2001, gains or losses associated with these contracts were not material. 3. Segment and Geographic Area Information Under the disclosure requirements of SFAS No. 131, "Segment Disclosures and Related Information," the Company operates within one segment, medical devices and products. The Company's products are sold principally in the United States and Europe. Operating income and identifiable assets for geographic regions outside of the United States are not included herein since all of the Company's revenues outside the United States are export sales. The following table represents total revenues by geographic area (amounts in thousands): <TABLE> For the three months For the nine months ended September 30, ended September 30, 2001 2000 2000 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> United States $7,355 $6,512 $20,650 $18,059 Europe 814 555 2,586 1,766 Other regions 430 155 1,275 1,177 ---- ----- ----- ------ $8,599 $7,222 $24,511 $21,002 ====== ====== ======= ======= </TABLE> 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements below regarding future events or performance are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements about expected revenues, earnings, expenses, cash flow, capital expenditures or other measures of financial performance, and regulatory filings. Forward-looking statements are not guarantees of future performance or results. Factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to market products; impact of competitors, competing products and technology changes; ability to develop, commercialize and market new products; market acceptance of oral fluid testing products and up-converting phosphor technology products; ability to fund research and development and other projects and operations; ability to obtain and timing of obtaining necessary regulatory approvals; ability to develop product distribution channels; uncertainty relating to patent protection and potential patent infringement claims; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally; loss or impairment of sources of capital; exposure to product liability and other types of litigation; changes in international, federal or state laws and regulations; changes in relationships with strategic partners and reliance on strategic partners for the performance of critical activities under collaborative arrangements; changes in accounting practices and interpretation of accounting requirements; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors that could cause the forward-looking statements to be materially different are described in greater detail in the Sections entitled, "Forward-Looking Statements" and "Risk Factors," in Item 1 and elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Although forward-looking statements help to provide information about future prospects, they may not be reliable. The forward-looking statements are made as of the date of this Report and the Company undertakes no duty to update these statements. 10
Results of Operations Three months ended September 30, 2001 compared to September 30, 2000 Comparative results of operations (in thousands, except %) are summarized as follows: Three Months Ended September 30, ---------------------------------------------------- Dollars Percentage of Total Revenues (%) ------------------- ------------------- Percent Change (%) 2001 2000 Inc.(Dec.) 2001 2000 --------- --------- ---------- --------- --------- Revenues Product $8,237 $ 6,867 20 96 95 License and product development 362 355 2 4 5 --------- --------- --------- --------- 8,599 7,222 19 100 100 --------- --------- --------- --------- Cost and expenses Cost of products sold 2,873 3,097 (7) 33 43 Research and development 2,248 2,800 (20) 26 39 Sales and marketing 1,962 1,791 10 23 25 General and administrative 1,527 1,828 (16) 18 25 Merger-related - 5,920 (100) - 82 --------- --------- --------- --------- 8,610 15,436 (44) 100 214 --------- --------- --------- --------- Operating loss (11) (8,214) (100) - (114) Interest expense (102) (123) (17) (1) (2) Interest income 242 397 (39) 3 6 Foreign currency gain (loss) (115) 29 (496) (1) - Gain on sale of securities - - N/A - - --------- --------- ---------- --------- --------- Income (loss) before income taxes 14 (7,911) 100 - (110) Income taxes 2 (13) 115 - - --------- --------- --------- --------- Net Income (loss) $ 16 $(7,924) 100 - (110) ========= ========= ========= ========= Total revenues increased 19% to approximately $8.6 million in the third quarter of 2001 from approximately $7.2 million in 2000, primarily as a result of increased sales of oral fluid collection devices and related immunoassay tests due to the continued market penetration of Intercept, initial shipments of OraQuick(R) into Sub-Saharan Africa for the Centers for Disease Control and Prevention's ("CDC") LIFE Initiative, and increased sales of the Company's Histofreezer(R) cryosurgical delivery system. Excluding revenues in the prior period from the discontinued Serum Western Blot product line, total revenues would have increased approximately 27%. 11
The table below shows the amount of the Company's total revenues (in thousands, except for %) generated by each of its principal products and by license and product development activities. Three Months Ended September 30, ---------------------------------------------------- Dollars Percentage of Total Revenues (%) -------------------- ------------------- Percent Change(%) 2001 2000 Inc. (Dec.) 2001 2000 ---------- --------- ----------- --------- --------- Product revenues Oral specimen collection devices $ 3,139 $2,856 10 36 40 OraQuick(R) 415 - N/A 5 - Histofreezer(R) cryosurgical systems 1,954 1,737 12 23 24 Immunoassay tests 2,027 1,445 40 23 20 Western Blot HIV confirmatory tests 143 538 (73) 2 7 Other product revenue 559 291 92 7 4 ---------- --------- --------- --------- 8,237 6,867 20 96 95 License and product development 362 355 2 4 5 ---------- --------- --------- --------- Total revenues $ 8,599 $7,222 19 100 100 ========== ========= ========= ========= Product revenues increased 20% to approximately $8.2 million for the third quarter of 2001 from approximately $6.9 million in 2000. Sales of oral specimen collection devices and immunoassay tests increased 10% and 40% to approximately $3.1 million and $2.0 million, respectively, as a result of increased sales to the public health and substance abuse testing markets. Histofreezer(R) revenues increased 12% to approximately $2.0 million, reflecting higher domestic sales. OraQuick(R) generated approximately $415,000 of revenues for the third quarter, primarily reflecting product shipped internationally to the CDC under the LIFE Initiative. Sales of the Western Blot confirmatory tests, which were comprised exclusively of the oral Western Blot in 2001, declined 73% to approximately $143,000 for the third quarter as a result of the discontinuation of the Serum Western Blot product in January 2001. Other product revenues, which consisted primarily of sales of the Q.E.D.(R) saliva alcohol test and certain Intercept(R)-related sales to criminal justice and drug rehabilitation clients, increased 92% to approximately $559,000 from approximately $291,000 in 2000. Total Intercept(R) sales, including devices, immunoassay tests, and related equipment, equaled approximately $889,000 for the quarter, as compared to approximately $45,000 in 2000. As a percentage of total revenues, international revenues increased 75% to approximately $1.2 million primarily as a result of the market introduction of OraQuick(R) into Sub-Saharan Africa. 12
The table below shows the amount of the Company's total revenues (in thousands, except %) generated in each of its principal markets and by license and product development activities. Three Months Ended September 30, ---------------------------------------------------- Percentage of Dollars Total Revenues (%) ------------------- ------------------- Percent Change(%) 2001 2000 Inc. (Dec.) 2001 2000 ---------- --------- ----------- --------- --------- Market revenues Insurance testing $2,775 $2,990 (7) 32 41 Public health 1,686 1,348 25 20 19 Physician offices 1,954 1,736 12 23 24 Substance abuse testing 1,695 676 151 20 9 Other markets 127 117 9 1 2 --------- --------- --------- --------- 8,237 6,867 20 96 95 License and product development 362 355 2 4 5 --------- --------- --------- --------- Total revenues $8,599 $7,222 19 100 100 ========= ========= ========= ========= Sales to the insurance testing market declined by 7% to approximately $2.8 million in the third quarter of 2001 as a result of an overall decline in the number of life insurance applications. Sales to the public health market increased 25% to approximately $1.7 million in the third quarter as a result of continued penetration by the Company's laboratory-based HIV test. Sales to physician offices, which consisted solely of the Histofreezer(R) cryosurgical delivery system, increased 12% to approximately $2.0 million, reflecting higher domestic sales. Sales to the substance abuse testing market increased 151% to approximately $1.7 million in the third quarter of 2001 as a result of the continued market penetration of Intercept(R) and increased forensic toxicology sales. Sales to other markets increased 9% to approximately $127,000. License and product development revenues increased 2% to approximately $362,000 in the third quarter of 2001 from approximately $355,000 in 2000. During the third quarter of 2001, license and product development revenues primarily consisted of revenue from UPT development agreements and a grant from the National Institutes of Health for an oral fluid based syphilis test. On June 29, 2001, the Company filed with the U.S. Food and Drug Administration ("FDA") an application for pre-market approval of its OraQuick(R) rapid HIV test using whole blood and an application for 510(k) clearance for the UPlink(TM) drugs of abuse rapid detection system, including six drug assays. During the third quarter, the FDA responded to the OraQuick(R) submission with certain questions. The Company provided answers to the questions and the review is proceeding as expected. The FDA also responded to the UPlink(TM) submission. Because this product is the first reader-based, oral fluid point of care testing system submitted to the FDA, and because of the broad clinical utility of the UPlink(TM) system, the FDA has requested sixty additional trial samples for each of the six drug assays. The time required to collect and submit the additional data is expected to delay receipt of FDA clearance until the first quarter of 2002. Despite the increase in third quarter revenues, the Company experienced unforeseen delays in sales of the OraQuick(R) HIV test to the Company's African distributor. These delays were caused by delays in the government purchase process in Africa. As a result of the Company's reliance upon third party distributors to develop and penetrate the African market for OraQuick(R) and the fact that significant potential customers are government entities, it is difficult for the Company to accurately forecast the timing of international OraQuick(R) revenues. The Company's gross margin increased to approximately 67% in the third quarter of 2001 from 57% in 2000. Excluding a one-time write-off of obsolete inventory in the third quarter of 2000, the gross margin for the third quarter of 2000 would have been 65%. The gross margin increase in the third quarter of 2001 was primarily the result of negotiated contract savings and cost savings as a result of the Company's manufacturing reorganization. 13
Gross margin, based upon product revenues, was 65% in the third quarter of 2001 as compared to 63% in 2000, excluding the one-time inventory write-off. Research and development expenses decreased 20% to approximately $2.2 million in the third quarter of 2001 from approximately $2.8 million in 2000, as a result of improved internal efficiencies resulting from the merger of Epitope, Inc. and STC Technologies, Inc. into the Company in September 2000. Research and development efforts in the third quarter of 2001 were focused on the development of drugs of abuse and infectious disease assays for UPlink(TM) and the ongoing development of oral fluid-based tests for a variety of diseases or conditions, such as hepatitis C, syphilis, and diabetic markers. Research and development expenses, as a percentage of third quarter revenues, declined to approximately 26% from 39% in 2000. Research and development expenses are expected to increase slightly during the remainder of 2001 as clinical trials for OraQuick(R) and UPlink(TM) research activities continue. Sales and marketing expenses increased 10% to approximately $2.0 million in the third quarter of 2001 from approximately $1.8 million in 2000. This increase was primarily the result of costs including increased staffing and related charges associated with the development of foreign markets for OraQuick(R), the continued marketing of the Intercept(R) drugs of abuse service, and initial UPlink(TM) criminal justice marketing efforts. Sales and marketing expenses, as a percentage of third quarter revenues, declined to approximately 23% from 25% in 2000. General and administrative expenses decreased 16% to approximately $1.5 million in the third quarter of 2001 from approximately $1.8 million in 2000. This decrease reflects cost savings from the elimination of duplicative overhead structures as a result of the merger. General and administrative expenses, as a percentage of third quarter revenues, declined to approximately 18% from 25% in 2000. Merger-related expenses were approximately $5.9 million in 2000. These non-recurring costs included fees for investment banking, attorneys, and accountants. The operating loss of approximately $11,000 in the third quarter of 2001 improved from a loss of approximately $8.2 million in 2000, which included approximately $5.9 million of one-time merger-related expenses. Excluding the one-time merger-related expenses, the operating loss improved by $2.3 million from the third quarter of 2000, as a result of increasing revenues, improving gross margins, and lower operating expenses. Interest expense decreased by 17% to approximately $102,000 in the third quarter of 2001 from approximately $123,000 in 2000 as a result of principal loan repayments. Interest income decreased to approximately $242,000 in the third quarter of 2001 from approximately $397,000 in 2000 as a result of lower cash and cash equivalents available for investment and lower interest rates. Foreign currency loss was approximately $115,000 in the third quarter of 2001 compared to a gain of approximately $29,000 in 2000. Net income was approximately $16,000 in the third quarter of 2001 compared to a loss of approximately $7.9 million in 2000, which included one-time merger-related expenses of approximately $5.9 million. 14
Results of Operations Nine months ended September 30, 2001 compared to September 30, 2000 Comparative results of operations (in thousands, except %) are summarized as follows: Nine Months Ended September 30, ---------------------------------------------------- Dollars Percentage of Total Revenues (%) ------------------- ------------------- Percent Change(%) 2001 2000 Inc. (Dec.) 2001 2000 ---------- --------- ----------- --------- --------- Revenues Product $23,207 $20,397 14 95 97 License and product development 1,303 605 115 5 3 --------- --------- --------- --------- 24,510 21,002 17 100 100 --------- --------- --------- --------- Cost and expenses Cost of products sold 8,580 8,211 4 35 39 Research and development 6,838 6,632 3 28 32 Sales and marketing 5,888 4,995 18 24 24 General and administrative 4,594 5,502 (17) 19 26 Merger-related - 5,920 (100) - 28 Restructuring-related 450 - N/A 2 - --------- --------- --------- --------- 26,350 31,260 (16) 108 149 --------- --------- --------- --------- Operating loss (1,840) (10,258) (82) (8) (49) Interest expense (310) (376) (18) (1) (2) Interest income 743 944 (21) 3 5 Foreign currency gain 3 20 (85) - - Gain on sale of securities - 600 (100) - 3 --------- --------- --------- --------- Loss before income taxes (1,405) (9,070) (85) (6) (43) Income taxes (21) (24) (13) - - --------- --------- --------- --------- Net loss $(1,426) $(9,094) (84) (6) (43) ========= ========= ========= ========= Total revenues increased 17% to approximately $24.5 million for the first nine months of 2001 from approximately $21.0 million in the comparable period in 2000, primarily as a result of increased sales of oral fluid collection devices and related immunoassay tests, and increased license and product development revenues. Excluding revenues in the prior period from the discontinued Serum Western Blot product line, total revenues would have increased approximately 24%. 15
The table below shows the amount of the Company's total revenues (in thousands, except for %) generated by each of its principal products and by license and product development activities. Nine Months Ended September 30, ---------------------------------------------------- Dollars Percentage of Total Revenues (%) ------------------- ------------------- Percent Change(%) 2001 2000 Inc. (Dec.) 2001 2000 ---------- --------- ----------- --------- --------- Product revenues Oral specimen collection devices $9,855 $8,271 19 40 39 OraQuick(R) 655 - N/A 3 - Histofreezer(R) cryosurgical systems 4,733 4,681 1 19 22 Immunoassay tests 5,835 4,959 18 24 24 Western Blot HIV confirmatory tests 471 1,424 (67) 2 7 Other product revenue 1,658 1,062 56 7 5 ------- ------- -------- -------- 23,207 20,397 14 95 97 License and product development 1,303 605 115 5 3 -------- -------- -------- -------- Total revenues $24,510 $21,002 17 100 100 ======== ======== ======== ======== Product revenues increased 14% to approximately $23.2 million for the first nine months of 2001 from approximately $20.4 million in the first nine months of 2000. Sales of oral specimen collection devices and immunoassay tests increased 19% and 18% to approximately $9.9 million and $5.8 million, respectively, as a result of increased sales to the public health and substance abuse testing markets. Histofreezer(R) revenues remained flat at approximately $4.7 million. OraQuick(R) generated approximately $655,000 of revenues during the nine months ended September 30, 2001. Sales of the Western Blot confirmatory tests, which were comprised exclusively of the oral Western Blot in 2001, declined 67% to approximately $471,000 as a result of the discontinuation of the Serum Western Blot product in January 2001. Other product revenues, which consisted primarily of sales of the Q.E.D.(R) saliva alcohol test and certain Intercept(R)-related equipment sales to criminal justice and drug rehabilitation clients, increased 56% to approximately $1.7 million from approximately $1.1 million in 2000. Total Intercept(R) sales for the first nine months of 2001, including devices, immunoassay tests, and related equipment, totaled approximately $2.5 million as compared to approximately $218,000 in 2000. As a percentage of total revenues, international revenues increased to approximately 31% in the first nine months of 2001 to approximately $3.9 million, as a result of the market introduction of OraQuick(R) into Sub-Saharan Africa and increased oral fluid collection devices and related assays. 16
The table below shows the amount of the Company's total revenues (in thousands, except %) generated in each of its principal markets and by license and product development activities. Nine Months Ended September 30, ---------------------------------------------------- Percentage of Dollars Total Revenues (%) ------------------- ------------------- Percent Change(%) 2001 2000 Inc. (Dec.) 2001 2000 ---------- --------- ----------- --------- --------- Market revenues Insurance testing $8,665 $9,736 (11) 36 46 Public health 4,525 3,321 36 18 16 Physician offices 4,733 4,680 1 19 22 Substance abuse testing 4,893 2,268 116 20 11 Other markets 391 392 - 2 2 --------- --------- --------- --------- 23,207 20,397 14 95 97 License and product development 1,303 605 115 5 3 --------- --------- --------- --------- Total revenues $24,510 $21,002 17 100 100 ========= ========= ========= ========= Sales to the insurance testing market declined by 11% to approximately $8.7 million for the first nine months of 2001 as a result of an overall decline in the number of insurance applications. Sales to the public health market increased 36% to approximately $4.5 million for the first nine months of 2001 as a result of the continued penetration of the Company's laboratory-based HIV test. Sales to physician offices, which consisted solely of the Histofreezer(R) cryosurgical delivery system, remained flat at approximately $4.7 million in the first nine months of 2001. Sales to the substance abuse testing market increased 116% to approximately $4.9 million in the first nine months of 2001 as a result of the continued market penetration of Intercept(R) and increased forensic toxicology sales. Sales to other markets remained flat at approximately $391,000. License and product development revenues increased 115% to approximately $1.3 million for the first nine months of 2001 from approximately $605,000 in 2000. This increase was attributable principally to additional revenues resulting from the recognition of milestone payments under existing development arrangements. The Company's gross margin increased to approximately 65% in the first nine months of 2001 from 61% in 2000. Excluding a one-time write-off of obsolete inventory in the third quarter of 2000, the gross margin for the first nine months of 2000 would have been 63%. This increase was primarily the result of negotiated contract savings, cost savings as a result of the Company's manufacturing reorganization, and higher license and product development revenues, partially offset by incremental costs associated with the ramp up of OraQuick(R) manufacturing. Gross margin, based upon product revenues, was 63% in the first nine months of 2001 compared to 62% for 2000, excluding the one-time inventory write-off. Research and development expenses increased 3% to approximately $6.8 million for the first nine months of 2001 from approximately $6.6 million in 2000, as a result of continued development of the UPlink(TM) reader, test cassette and collector, DNA feasibility studies, and clinical trial expenses for the OraQuick(R) HIV rapid test, partially offset by improved internal efficiencies and cost savings as a result of the merger. Research and development expenses, as a percentage of revenues, declined to approximately 28% from 32% in 2000. Sales and marketing expenses increased 18% to approximately $5.9 million in the first nine months of 2001 from approximately $5.0 million in 2000. This increase was primarily the result of additional costs associated with the development of foreign markets for OraQuick(R), the continued marketing of the Intercept(R) drugs-of-abuse service, and the launch of UPlink(TM) in the criminal justice market. Sales and marketing expenses, as a percentage of revenues, remained constant at 24%. 17
General and administrative expenses decreased 17% to approximately $4.6 million for the first nine months of 2001 from approximately $5.5 million in 2000. This decrease reflects cost savings from the elimination of duplicative overhead structures as a result of the merger. General and administrative expenses, as a percentage of revenues, declined to approximately 19% from 26% in 2000. Merger-related expenses were approximately $5.9 million in 2000. These non-recurring costs primarily included fees for investment bankers, attorneys, and accountants. Restructuring related expenses were approximately $450,000 as a result of the first quarter manufacturing restructuring in 2001. These non-recurring costs primarily included expenses for employee severance, travel and transport resulting from relocating and consolidating manufacturing operations. Operating loss improved to approximately $1.8 million in the nine months ended September 30, 2001, from approximately $10.3 million in 2000, which included approximately $5.9 million of one-time merger expenses. This improvement is the result of increasing revenues, improving gross margins and lower general and administrative expenses, partially offset by increased sales and marketing, research and development expenses, and restructuring related charges. Interest expense decreased by 18% to approximately $310,000 in the first nine months of 2001 from approximately $376,000 in 2000 as a result of principal loan repayments. Interest income decreased by 21% to approximately $743,000 in the first nine months of 2001 from approximately $944,000 in 2000 as a result of lower cash and cash equivalents available for investment and lower interest rates. Foreign currency gain was approximately $3,000 in the first nine months of 2001 compared to a gain of approximately $20,000 in 2000. In the second quarter of 2000, the Company recorded a gain on the sale of securities of $600,000, as a result of the sale of Andrew & Williamson Sales Company ("A&W") preferred stock the Company had received as part of a settlement with A&W in 1997. Net loss was approximately $1.4 million in the first nine months of 2001 compared to a net loss of approximately $9.1 million in 2000, which included $5.9 million of one-time merger-related expenses. Liquidity and Capital Resources <TABLE> September 30, December 31, 2001 2000 ------------ ------------ (In thousands) <S> <C> <C> Cash and cash equivalents $ 2,296 $5,096 Short-term investments 13,411 14,957 Working capital 21,164 21,495 </TABLE> The Company's cash, cash equivalents and short-term investments position decreased approximately $4.3 million from December 31, 2000 to approximately $15.7 million at September 30, 2001, primarily as a result of increased working capital requirements, partially offset by proceeds from the exercise of stock options. At September 30, 2001, the Company's working capital was approximately $21.2 million. 18
The combination of the Company's current cash position, available borrowings under the Company's credit facilities, and the Company's cash flow from operations is expected to be sufficient to fund the Company's foreseeable operating and capital needs. However, the Company's cash requirements may vary materially from those now planned due to many factors, including, but not limited to, the progress of the Company's research and development programs, the scope and results of clinical testing, changes in existing and potential relationships with strategic partners, the time and cost in obtaining regulatory approvals, the costs involved in obtaining and enforcing patents, proprietary rights and any necessary licenses, the ability of the Company to establish development and commercialization capacities or relationships, the costs of manufacturing, market acceptance of new products, the need for increased capital expenditures, and other factors. Net cash used in operating activities was approximately $4.3 million for the first nine months of 2001, as a direct result of increased accounts receivable and inventory levels. The increased accounts receivable is the result of higher sales in 2001. The increased inventory levels reflect the buildup of OraQuick(R) and UPlink(TM) inventory in anticipation of future sales opportunities. Net cash used in investing activities during the first nine months of 2001 was approximately $623,000 as a result of approximately $2.1 million in capital expenditures, primarily reflecting the Company's investment to expand OraQuick(R) manufacturing in Bethlehem, Pennsylvania. Capital expenditures are anticipated to increase during the remainder of 2001 and into the first half of 2002 as a result of additional commitments the Company has made for the purchase and installation of fully automated lateral flow manufacturing equipment for UPlink(TM), additional space for research and development activities, and expanded manufacturing capacity. Partially offsetting the capital expenditures was the sale of short-term investments to fund operating and capital expenditure requirements. Net cash provided by financing activities was approximately $2.1 million during the first nine months of 2001, principally reflecting $3.0 million of proceeds from the exercise of stock options, partially offset by term debt repayments. At September 30, 2001, the Company had a $1.0 million working capital line of credit in place that accrues interest at LIBOR plus 235 basis points and a $3.0 million equipment line of credit in place that accrues interest at a rate fixed at prime at the time of draw down. There were no borrowings under these lines of credit at September 30, 2001. These lending facilities have been extended through April 30, 2002. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company does not hold any material derivative financial instruments or derivative commodity instruments. Accordingly, the Company has no material market risk to report under this Item. The Company holds approximately $13.4 million of financial instruments comprised of U.S. corporate debt, certificates of deposit, government securities and commercial paper. All such instruments are classified as securities available for sale. The Company's debt security portfolio represents funds held temporarily pending use in its business and operations. The Company seeks reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while at the same time seeking to achieve a favorable rate of return. Market risk exposure consists principally of exposure to changes in interest rates. If changes in interest rates would affect the investments adversely, the Company continues to hold the security to maturity. The Company's holdings are also exposed to the risks of changes in the credit quality of issuers. The Company typically invests in the shorter end of the maturity spectrum. The Company has entered into approximately $243,000 of foreign currency forward exchange contracts to offset certain operational and balance sheet exposures from changes in foreign currency exchange rates. Such exposures result from the portion of the Company's operations, assets and liabilities located in the Netherlands and denominated in guilders. Based upon the fixed-exchange-rate nature of these contracts, the Company is exposed to potential risk of loss based upon fluctuations in the exchange rate of the guilder and U.S. dollar during the term of the contract. Furthermore, as currency rates change, translation of income statements for these operations from guilders to U.S. dollars affects year-to-year comparability of operating results. The Company's operations in the 19
Netherlands represented approximately $0.5 million (6.3% of total revenues) and $1.5 million (6.2% of total revenues) for the three months and nine months ended September 30, 2001, respectively. Management does not expect the risk of foreign currency fluctuations to be material. 20
PART II. OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On September 27, 2001, the Board of Directors of the Company amended the Amended and Restated Bylaws (the "Bylaws") of the Company to increase the notice period required for stockholders to submit proposals or nominate directors for consideration at meetings of stockholders. The Bylaws, as so amended, provide that in order to be timely, a stockholder's notice of a proposal or director nomination must be received by the Company not less than ninety (90) days nor more than one hundred twenty (120) days prior to the meeting; provided that in the event that less than one hundred (100) days notice or prior disclosure of the date of the meeting is given or made to stockholders, the stockholder's notice must be received by the Company no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. A complete copy of the amended and restated Bylaws is filed as an Exhibit to this Report. Item 5. OTHER INFORMATION The Company has scheduled its 2002 Annual Meeting of Stockholders (the "2002 Annual Meeting") for May 9, 2002, in Bethlehem, Pennsylvania. The record date for determining stockholders entitled to notice of and to vote at the 2002 Annual Meeting is March 28, 2002. Stockholders desiring to submit proposals for inclusion in the Company's proxy materials for the 2002 Annual Meeting must meet the eligibility and other requirements imposed by rules issued by the Securities and Exchange Commission. To be included, proposals must be received by the Company at 150 Webster Street, Bethlehem, Pennsylvania 18015, Attention: Secretary, not later than December 20, 2001. If a stockholder proposal or director nomination is to be presented without inclusion in the Company's proxy materials for the 2002 Annual Meeting, the Company must receive the proposal or nomination no later than February 9, 2002, in accordance with the advance notice provisions of the Company's Bylaws. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. Exhibits are listed on the attached exhibit index following the signature page of this report. (b) Reports on Form 8-K. None. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. ORASURE TECHNOLOGIES, INC. /s/ Ronald H. Spair ------------------------------------ Date: November 13, 2001 Ronald H. Spair Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Mark L. Kuna ------------------------------------ Date: November 13, 2001 Mark L. Kuna Controller (Principal Accounting Officer) /s/ Richard D. Hooper ------------------------------------ Date: November 13, 2001 Richard D. Hooper Vice President, Finance 22
EXHIBIT INDEX Exhibit 3 Amended and Restated Bylaws of OraSure Technologies, Inc., Effective as of September 27, 2001. 10 Employment Agreement dated as of November 1, 2001 between OraSure Technologies and Ronald H. Spair. 23