SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2002.
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 July 26, 2002: 37,533,013
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements (unaudited) ....................................... 3
Balance Sheets at June 30, 2002 and December 31, 2001 ..................... 3
Statements of Operations for the three months and six months
ended June 30, 2002 and 2001 .......................................... 4
Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 .......................................... 5
Notes to Financial Statements ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .................... 17
Item 6. Exhibits and Reports on Form 8-K ....................................... 17
2
Item 1. FINANCIAL STATEMENTS
ORASURE TECHNOLOGIES, INC.
BALANCE SHEETS
(Unaudited)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,437,446 $ 2,426,346
Short-term investments 10,873,890 12,764,903
Accounts receivable, net of allowance for doubtful
accounts of $328,386 and $209,492 4,869,849 6,057,927
Note receivable from officer - 75,000
Inventories 4,989,357 4,444,772
Prepaid expenses and other 878,709 1,038,511
------------- -------------
Total current assets 23,049,251 26,807,459
PROPERTY AND EQUIPMENT, net 7,566,375 7,800,137
PATENTS AND PRODUCT RIGHTS, net 2,060,084 2,042,533
OTHER ASSETS 634,967 634,546
------------- ---------------
$ 33,310,677 $ 37,284,675
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,000,879 $ 1,057,572
Accounts payable 1,528,842 2,874,061
Accrued expenses 3,516,371 3,111,886
------------- --------------
Total current liabilities 6,046,092 7,043,519
LONG-TERM DEBT 3,142,995 3,586,458
OTHER LIABILITIES 179,480 114,025
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.000001, 25,000,000 shares authorized,
none issued - -
Common stock, par value $.000001, 120,000,000 shares authorized,
37,532,137 and 37,403,269 shares issued and outstanding 38 37
Additional paid-in capital 153,146,605 152,758,591
Accumulated other comprehensive loss (238,409) (125,664)
Accumulated deficit (128,966,124) (126,092,291)
------------- -------------
Total stockholders' equity 23,942,110 26,540,673
------------- -------------
$ 33,310,677 $ 37,284,675
============= =============
The accompanying notes are an integral part of these statements.
3
ORASURE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Product $ 7,874,076 $ 8,080,266 $ 15,342,697 $ 14,970,993
Licensing and product development 55,956 427,530 312,809 940,827
----------- ------------- ------------ ------------
7,930,032 8,507,796 15,655,506 15,911,820
COST OF PRODUCTS SOLD 3,200,451 3,013,355 6,094,681 5,706,998
----------- ------------- ------------ ------------
Gross profit 4,729,581 5,494,441 9,560,825 10,204,822
----------- --------- ------------ ------------
COSTS AND EXPENSES:
Research and development 2,210,224 2,423,422 4,630,487 4,590,080
Sales and marketing 2,392,325 2,066,253 4,380,506 3,926,615
General and administrative 1,481,580 1,601,626 3,565,881 3,067,137
Restructuring-related - - - 450,000
----------- ------------- ------------ ------------
6,084,129 6,091,301 12,576,874 12,033,832
----------- ------------- ------------ ------------
Operating loss (1,354,548) (596,860) (3,016,049) (1,829,010)
INTEREST EXPENSE (79,096) (103,159) (163,345) (208,724)
INTEREST INCOME 150,749 207,383 303,984 501,012
FOREIGN CURRENCY GAIN 1,759 54,435 1,577 117,730
------------ ------------- ------------ ------------
Loss before income taxes (1,281,136) (438,201) (2,873,833) (1,418,992)
INCOME TAXES - 5,976 - 21,944
------------ ------------- ------------ -------------
NET LOSS $ (1,281,136) $ (444,177) $ (2,873,833) $ (1,440,936)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.03) $ (0.01) $ (0.08) $ (0.04)
============ ============= ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 37,493,741 36,701,511 37,464,073 36,579,738
============ ============= ============ ============
The accompanying notes are an integral part of these statements.
4
ORASURE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss $ (2,873,833) $ (1,440,936)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation expense - 70,580
Amortization of deferred revenue (107,500) (71,667)
Depreciation and amortization 1,084,451 1,001,046
Loss on disposition of property and equipment 2,053 11,353
Gain on sale of investment in affiliated company - (16,853)
Write-off of inventory 482,056 -
Changes in assets and liabilities:
Accounts receivable 1,188,078 (1,380,339)
Inventories (1,026,641) (673,818)
Prepaid expenses and other assets 159,802 151,071
Accounts payable and accrued expenses (892,779) (94,573)
------------- ------------
Net cash used in operating activities (1,984,313) (2,444,136)
------------- ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (3,710,389) (17,165,067)
Proceeds from the sale of short-term investments 5,490,428 18,593,150
Purchases of property and equipment (651,896) (1,471,445)
Proceeds from the sale of property and equipment 2,393 27,964
Proceeds from sale of investment in affiliated company - 106,102
Increase in other assets (21,211) -
------------- ------------
Net cash provided by investing activities 1,109,325 90,704
------------ ------------
FINANCING ACTIVITIES:
Repayments of term debt (500,156) (553,387)
Proceeds from issuance of common stock 388,015 1,763,709
------------ ------------
Net cash provided by (used in) financing activities (112,141) 1,210,322
------------- ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (1,771) (178,622)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (988,900) (1,321,732)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,426,346 5,095,639
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,437,446 $ 3,773,907
============ ============
The accompanying notes are an integral part of these statements.
5
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,
proprietary diagnostic products including in vitro diagnostic tests, and other
medical devices. These products are sold in the United States and certain
foreign countries to clinical laboratories, physician offices, hospitals,
commercial and industrial entities, government agencies, and various
distributors.
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 fiscal year ended December 31, 2001. Results of
operations for the three-month and six-month periods ended June 30, 2002 are not
necessarily indicative of the results of operations expected for the full year.
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:
June 30, December 31,
2002 2001
----------- -----------
Raw materials $ 3,504,196 $ 2,918,825
Work-in-process 764,328 644,397
Finished goods 720,833 881,550
----------- -----------
$ 4,989,357 $ 4,444,772
=========== ===========
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, except for warranty returns. Historically, returns arising from
warranty issues have been infrequent and immaterial. Accordingly, the Company
expenses warranty returns as incurred.
The Company follows U.S. Securities and Exchange Commission 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 licensing and development fees. In
accordance with SAB 101, up-front licensing fees are deferred and recognized
ratably over the related license period. Product development revenues are
recognized over the period in which the related product development efforts are
performed. Amounts received prior to the performance of product development
efforts are recorded as deferred revenues and are included in the accrued
expenses caption on the accompanying balance sheet. Grant revenue is recognized
as the related work is performed and costs are incurred.
In accordance with Emerging Issues Task Force (`EITF") Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs," the Company records
shipping and handling charges billed to customers as revenue, and the related
expense as cost of products sold.
Significant Customer Concentration. For the three-month and six-month periods
ended June 30, 2002, one customer accounted for 26 and 25 percent of total
revenues, respectively, as compared to 29 percent for each of the same periods
of 2001.
6
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 from Euros 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 net loss
per common share pursuant to SFAS No. 128, "Earnings per Share" ("SFAS No.
128"). In accordance with SFAS No. 128, basic and diluted net loss per common
share has been computed using the weighted-average number of shares of common
stock outstanding during the period. Diluted loss per common share is generally
computed assuming the conversion or exercise of all dilutive securities such as
common stock options and warrants; however, outstanding common stock options and
warrants to purchase 4,572,515 and 4,225,751 shares were excluded from the
computation of diluted net loss per common share for both the three-month and
six-month periods ended June 30, 2002 and 2001, respectively, because they were
anti-dilutive due to the Company's losses.
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 restructure certain of its manufacturing operations. As a result of this
restructuring, the Company incurred an infrequent charge of $450,000 for
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.
Recent Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS No.
141"), which requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. Business combinations accounted for under the pooling of
interests method prior to June 30, 2001 will not be changed. The adoption of
SFAS No. 141 by the Company did not have any impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired in a business combination and the
accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized, and that goodwill and intangible assets with indefinite
lives not be amortized, but rather tested at least annually for impairment. The
adoption of SFAS No. 142 did not have any impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability associated with an asset retirement be recognized in the
period in which it is incurred, with the associated retirement costs capitalized
as part of the carrying amount of the long-lived asset and subsequently
depreciated over its useful life. The adoption of SFAS No. 143 did not have any
impact on the Company's financial position or results of operations.
7
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and termination benefits provided to employees
that are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. Given that SFAS No. 146
was issued in June 2002 and is not yet effective, the impact on the Company's
financial position or results of operations from adopting SFAS No. 146 has not
been determined.
3. Related Party Transactions
Officer Note and Employment Agreement. In March 2000, the Company issued a note
receivable to an executive officer of the Company ("Officer Note") for $75,000,
for relocation purposes. The Officer Note did not bear interest if it was repaid
on or before the earlier of the tenth day following the close of sale on the
officer's previous residence or the due date of the Officer Note, as extended.
On January 31, 2002, the Company terminated an employment agreement with this
executive officer and the Company recorded $480,063 in severance-related
expenses. These expenses include continued salary and benefit premium payments
to this officer, related employment taxes, and the value of certain computer
equipment transferred to this individual. As part of his severance agreement,
this executive officer agreed to repay the Officer Note in bi-weekly principal
installments of approximately $7,000, commencing in April 2002. For
financial statement presentation purposes, at June 30, 2002 the remaining
balance of accrued severance expenses payable to this former officer has been
offset by the $39,892 remaining balance receivable under the terms of this
Officer Note.
Facility Lease.
Effective March 1, 2002, the Company signed a 10-year operating lease with Tech
III Partners, LLC, an entity owned and controlled by two of the Company's
executive officers. Under the terms of this lease, the Company will lease an
approximate 48,000 square foot facility currently being constructed on land
adjacent to the Company's headquarters, at a base rent of $480,000 per year,
increasing to $528,000 per year, during the initial 10-year term. The lease also
provides for certain renewal and purchase options.
4. 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. Segmentation of operating income and identifiable assets is not
applicable 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):
For the three month For the six months
ended June 30, ended June 30,
--------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
United States $6,864 $7,333 $13,661 $13,295
Europe 816 822 1,481 1,772
Other regions 250 353 514 845
------ ------ ------- -------
$7,930 $8,508 $15,656 $15,912
====== ====== ======= =======
8
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 or other financial performance, products, markets, and regulatory
filings and approvals. 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: 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; 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; customer
inventory practices and consolidations; equipment failures and ability to obtain
needed raw materials and components; the impact of terrorist attacks and civil
unrest; and general business, political 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 Company's filings with the
Securities and Exchange Commission, including its registration statements, its
Annual Report on Form 10-K for the year ended December 31, 2001, and its
Quarterly Reports on Form 10-Q. 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.
Results of Operations
Three months ended June 30, 2002 compared to June 30, 2001
Total revenues decreased 7% to approximately $7.9 million in the second quarter
of 2002 from approximately $8.5 million in the comparable quarter in 2001,
primarily as a result of lower licensing and product development revenue, lower
analytical equipment sales in the substance abuse testing market, and decreased
sales of the Histofreezer(R) portable cryosurgical system in the physicians'
office therapies market, partially offset by increased sales of OraSure(R) oral
fluid collection devices and test kits in the infectious disease testing market.
Product revenues for the second quarter of 2002 decreased approximately 3% to
$7.9 million compared to $8.1 million for the second quarter of 2001.
9
The table below shows the amount of the Company's total revenues (in thousands,
except %) generated in each of its principal markets and by licensing and
product development activities.
Three Months ended June 30,
-----------------------------------------------------
Percentage of
Dollars % Total Revenues
-------------------- ---------------------
Market Revenues 2002 2001 Change 2002 2001
--------- --------- ------ --------- ---------
Insurance risk assessment $ 3,120 $ 3,255 -4% 39% 39%
Infectious disease testing 1,564 1,277 22% 20% 15%
Substance abuse testing 1,776 1,990 -11% 22% 23%
Physicians' office therapies 1,414 1,559 -9% 18% 18%
--------- --------- ---- ----
Product revenues 7,874 8,081 -3% 99% 95%
Licensing and product development 56 427 -87% 1% 5%
--------- --------- ---- ----
Total revenues $ 7,930 $ 8,508 -7% 100% 100%
========= ========= ==== ====
Sales to the insurance risk assessment market declined by 4% to approximately
$3.1 million in the second quarter of 2002 as a result of continuing efficiency
in processing urine tests at LabOne, Inc., the Company's largest customer. This
efficiency is expected to have a continuing effect on the Company, resulting in
an annualized revenue reduction of up to $1.0 million during 2002, based on the
Company's 2001 urine test sales volumes.
Sales to the infectious disease testing market increased 22% to approximately
$1.6 million in the second quarter of 2002, primarily as a result of an
approximate 25% increase in the sale of OraSure(R) oral fluid HIV-1 collection
devices and test kits. Offsetting this increase were reduced sales of the
Company's OraQuick(R) rapid HIV antibody test.
Sales to the infectious disease testing market are expected to increase as a
result of the Company's recently announced agreement with Abbott Laboratories
("Abbott") for the distribution of the Company's OraQuick(R) rapid HIV-1
antibody test. Under the terms of the agreement, Abbott was appointed as
co-exclusive distributor of the OraQuick(R) HIV-1 device in the United States
and is required to meet certain minimum purchase commitments. Pursuant to these
commitments, the Company expects to receive product revenues of approximately
$4.0 million through the end of 2003. These expected revenues and the timing of
their receipt are subject to the Company's receipt of final U.S. Food and Drug
Administration ("FDA") approval of the OraQuick(R) test during the third quarter
of 2002.
Sales to the substance abuse testing market declined 11% to approximately $1.8
million as a result of a reduction of approximately $400,000 in analytical
equipment sales and lower oral fluid collection device sales, partially offset
by increased sales of Intercept(R) oral fluid drug assays for workplace testing
and sales of the Company's toxicology testing products.
During the second quarter of 2002, the Company devoted significant efforts to
assisting its three newest Intercept(R) laboratory distributors, Quest
Diagnostics, Clinical Reference Laboratory and NWT, Inc., with the installation
of their oral fluid testing equipment and the training of their sales and
technical personnel. These distributors are now able to process oral fluid
samples and have begun selling the Intercept(R) drug testing system into the
workplace testing market. Subject to the continued successful startup of sales
efforts by these distributors, the Company expects Intercept(R) revenues to
increase in the second half of 2002 and during 2003.
Sales of the Company's Histofreezer(R) portable cryosurgical system in the
physicians' office therapies market decreased 9% to approximately $1.4 million
in the second quarter of 2002. This decrease was primarily the result of
distributors increasing their inventory levels in the first quarter of 2002 as a
result of an announced price increase in
10
the U.S. market, which became effective on April 1, 2002. It is expected that
the quarterly sales level in the U.S. will return to a more normal pattern
beginning in the third quarter of 2002.
Licensing and product development revenue decreased 87% to $56,000 in the second
quarter of 2002 from $427,000 in 2001. During the first quarter of 2001, the
Company received certain development milestone payments from Meridian
BioSciences and Drager Safety and certain funded research and development
payments from the National Institutes of Health pursuant to a Phase II Small
Business Innovation Research ("SBIR") grant. There were no such payments during
the second quarter of 2002.
The Company's gross margin decreased to 60% in the second quarter of 2002 from
65% in 2001. This decrease was primarily attributable to the lower amount of
licensing and product development revenues and higher scrap rates in the second
quarter of 2002.
Research and development expenses decreased 9% to approximately $2.2 million in
the second quarter of 2002 from approximately $2.4 million in 2001, primarily as
a result of lower consulting fees.
Sales and marketing expenses increased 16% to approximately $2.4 million in the
second quarter of 2002 from approximately $2.1 million in 2001. This increase
was primarily the result of higher consulting fees for the development of
strategic marketing plans partially offset by lower travel costs.
General and administrative expenses decreased 7% to approximately $1.5 million
in the second quarter of 2002 from approximately $1.6 million in 2001. This
decrease was primarily attributable to lower investor relations expenses and
executive recruiting fees.
Interest expense decreased to approximately $79,000 in the second quarter of
2002 from approximately $103,000 in 2001 as a result of lower outstanding loan
balances. Interest income decreased to approximately $151,000 in the first
quarter of 2002 from approximately $207,000 in 2001, as a result of lower cash
and cash equivalents available for investment and lower interest rates on the
Company's investments.
The Company recorded a foreign currency gain of approximately $2,000 in the
second quarter of 2002 compared to a foreign currency gain of approximately
$54,000 in the second quarter of 2001.
During the second quarter of 2001, a provision for foreign income taxes of
approximately $6,000 was recorded.
Results of Operations
Six months ended June 30, 2002 compared to June 30, 2001
Total revenues decreased 2% to approximately $15.7 million for the six months
ended June 30, 2002 from approximately $15.9 million in the comparable six month
period in 2001, primarily as a result of lower licensing and product development
revenue and lower assay sales in the insurance risk assessment market, partially
offset by increased sales of OraSure(R) oral fluid collection devices and test
kits in the infectious disease testing market and increased sales of the
Histofreezer(R) portable cryosurgical product in the physicians' office
therapies market. Product revenues for the first six months of 2002 increased
approximately 2% to $15.3 million compared to $15.0 million for the first six
months of 2001.
11
The table below shows the amount of the Company's total revenues (in thousands,
except %) generated in each of its principal markets and by licensing and
product development activities.
Six months ended June 30,
-----------------------------------------------------
Percentage of
Dollars % Total Revenues
---------------------- --------------------
Market Revenues 2002 2001 Change 2002 2001
---------- ---------- ------ --------- --------
Insurance risk assessment $ 5,913 $ 6,391 -7% 38% 40%
Infectious disease testing 3,034 2,652 14% 19% 17%
Substance abuse testing 3,003 3,150 -5% 19% 20%
Physicians' office therapies 3,393 2,779 22% 22% 17%
---------- ---------- ---- ----
Product revenues 15,343 14,972 2% 98% 94%
Licensing and product development 313 940 -67% 2% 6%
---------- ---------- ---- ----
Total revenues $ 15,656 $ 15,912 -2% 100% 100%
========== ========== ==== ====
Sales to the insurance risk assessment market declined by 7% to approximately
$5.9 million for the six months ended June 30, 2002 from approximately $6.4
million in the comparable period in 2001, as a result of continuing efficiency
in processing urine tests at LabOne, Inc., the Company's largest customer.
Sales to the infectious disease testing market increased 14% to approximately
$3.0 million for the six months ended June 30, 2002 from approximately $2.7
million in the comparable period in 2001, primarily as a result of an
approximate 28% increase in the sale of OraSure(R) oral fluid HIV-1 collection
devices and test kits. Offsetting this increase were reduced sales of the
Company's OraQuick(R) rapid HIV test, which accounted for approximately $300,000
in revenues for the first six months of 2001.
Sales to the substance abuse testing market declined 5% to approximately $3.0
million for the six months ended June 30, 2002 from approximately $3.2 million
in the comparable period in 2001, as a result of a reduction of approximately
$400,000 in analytical equipment sales and lower oral fluid collection device
sales offset by increases in sales of Intercept(R) oral fluid drug assays for
workplace testing and sales of the Company's toxicology testing products.
Sales of the Company's Histofreezer(R) products in the physicians' office
therapies market increased 22% to approximately $3.4 million for the six months
ended June 30, 2002 from approximately $2.8 million in the comparable period in
2001. This increase was primarily the result of distributors increasing their
inventory levels in the first quarter of 2002 as a result of an announced price
increase in the U.S. market, which became effective on April 1, 2002.
Licensing and product development revenue decreased 67% to approximately
$300,000 for the six months ended June 30, 2002 from approximately $0.9 million
in the comparable period in 2001. During the six months ended June 30, 2001, the
Company received certain development milestone payments from Meridian
BioSciences and Drager Safety and certain funded research and development
payments from the National Institutes of Health pursuant to a Phase II SBIR
grant. There were no such payments during the six months ended June 30, 2002.
The Company's gross margin decreased to approximately 61% for the six months
ended June 30, 2002 from 64% for the comparable period in 2001. The decrease was
primarily attributable to the lower amount of licensing and product development
revenues and higher scrap rates in the first six months of 2002.
Research and development expenses remained flat at approximately $4.6 million
for the six months ended June 30, 2002. Increased costs associated with clinical
trials and the Company's efforts to obtain FDA approval of the OraQuick(R) HIV-1
rapid antibody test were offset by decreased expenditures for consulting and
travel.
12
Sales and marketing expenses increased 12% to approximately $4.4 million for the
six months ended June 30, 2002 from approximately $3.9 million in the comparable
period in 2001. This increase was primarily the result of consulting fees for
the development of strategic marketing plans, partially offset by lower travel
costs.
General and administrative expenses increased 16% to approximately $3.6 million
for the six months ended June 30, 2002 from approximately $3.1 million for the
comparable period in 2001. This increase was primarily attributable to an
approximate $0.5 million severance charge related to the departure of the
Company's former Chief Executive Officer.
Restructuring-related expenses were $450,000 in the six months ended June 30,
2001 as a result of a manufacturing restructuring. There was no such charge in
the first six months of 2002.
Interest expense decreased to approximately $163,000 for the six months ended
June 30, 2002 from approximately $209,000 for the comparable period in 2001, as
a result of lower outstanding loan balances. Interest income decreased to
approximately $304,000 for the six months ended June 30, 2002 from approximately
$501,000 for the comparable period in 2001, as a result of lower cash and cash
equivalents available for investment and lower interest rates on the Company's
investments.
The Company recorded a foreign currency gain of approximately $2,000 for the six
months ended June 30, 2002 compared to a foreign currency gain of approximately
$118,000 for the comparable period in 2001.
During the six months ended June 30, 2001, a provision for foreign income taxes
of approximately $22,000 was recorded.
Liquidity and Capital Resources
June 30, December 31,
2002 2001
---------- ------------
(In thousands)
Cash and cash equivalents $ 1,437 $ 2,426
Short-term investments 10,874 12,765
Working capital 17,003 19,764
The Company's cash, cash equivalents and short-term investments decreased
approximately $2.9 million during the first six months of 2002 to approximately
$12.3 million at June 30, 2002, primarily as a result of the Company's net loss
for the first six months of 2002, a reduction of accounts payable and accrued
expenses, the repayment of long-term debt, certain capital expenditures, and an
increase in inventory levels. Offsetting these uses of cash were an increase in
accounts receivable collections and proceeds from stock option exercises. At
June 30, 2002, the Company's working capital was approximately $17.0 million.
The combination of the Company's current cash position and borrowings under the
Company's existing and planned credit facilities 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,
the magnitude of capital expenditures, changes in existing and potential
relationships with business 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, the success of the Company's sales and marketing efforts, market
acceptance of new products and other factors.
13
Net cash used in operating activities was approximately $2.0 million for the six
months ended June 30, 2002, primarily as a result of the net loss for the
period, increased inventory levels and the reduction of accounts payable and
accrued expenses, offset by increased accounts receivable collections.
Net cash provided by investing activities for the six months ended June 30, 2002
was approximately $1.1 million, primarily as a result of $1.8 million in net
proceeds received from the sale of short-term investments offset by the purchase
of approximately $0.7 million of capital equipment.
Net cash used in financing activities was approximately $100,000 for the six
months ended June 30, 2002 as a result of approximately $0.5 million of term
debt repayments offset by approximately $400,000 in proceeds from the exercise
of stock options.
At June 30, 2002, 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 June 30, 2002. These lending facilities expire on August 31, 2002 and are
expected to be replaced with other credit or bank facilities, although there can
be no assurance that the Company will be successful in this effort.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
judgments and estimates, including those related to bad debts, inventories,
investments, intangible assets, income taxes, revenue recognition,
contingencies, and litigation. Management bases its judgments and estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management considers the following policies to be most critical in understanding
the more complex judgments that are involved in preparing the Company's
financial statements and the uncertainties that could impact its results of
operations, financial condition, and cash flows.
Revenue Recognition. The Company follows U.S. Securities and Exchange Commission
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 licensing and
development fees. The Company licenses certain products or technology to outside
third parties, in return for which the Company receives up-front licensing fees,
some of which can be significant. In accordance with SAB 101, the Company is
required to defer immediate recognition of these fees as revenue, and instead
ratably recognize this revenue over the related license period.
The Company also enters into research and development contracts with corporate,
government or private entities. These contracts generally provide for payments
to the Company upon achievement of certain research or development milestones.
Product development revenues from these contracts are recognized only if the
specified milestone is achieved and accepted by the customer and payment from
the customer is probable. Any amounts received prior to the performance of
product development efforts are recorded as deferred revenues. Recognition of
revenue under these contracts can be sporadic, as it is the result of achieving
specific research and development milestones. Furthermore, revenue from future
milestone payments will not be recognized if the underlying research and
development milestone is not achieved.
14
The Company recognizes product revenues when products are shipped. The Company
does not grant price protection or product return rights to its customers,
except for warranty returns. Where a product fails to comply with its limited
warranty, the Company can either replace the product or provide the customer
with a refund of the purchase price or credit against future purchases.
Historically, returns arising from warranty issues have been infrequent and
immaterial. Accordingly, the Company expenses warranty returns as incurred.
While such returns have been immaterial in the past, management cannot guarantee
that the Company will continue to experience the same low rate of warranty
claims as it has in the past. Any significant increase in product warranty
claims could have a material adverse impact on the Company's operating results
for the period in which such claims occur.
Allowance for Uncollectible Accounts Receivable. Accounts receivable are reduced
by an estimated allowance for amounts that may become uncollectible in the
future. On an ongoing basis, management performs credit evaluations of the
Company's customers and adjusts credit limits based upon the customer's payment
history and creditworthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments from its
customers. Based upon the Company's historical experience and any specific
customer collection issues that are identified, management uses its judgment to
establish and evaluate the adequacy of the Company's allowance for estimated
credit losses. While such credit losses have been within the Company's
expectations and the allowance provided, the Company cannot guarantee that it
will continue to experience the same credit loss rates as it has in the past.
Furthermore, some of the Company's accounts receivable have resulted from sales
to distributors located in foreign countries. Any significant changes in the
liquidity or financial position of its customers, or the economies of certain
foreign nations, could have a material adverse impact on the collectibility of
the Company's accounts receivable and its future operating results.
Inventories. The Company's inventories are valued at the lower of cost or
market, determined on a first-in, first-out basis, and include the cost of raw
materials, labor and overhead. The majority of the Company's inventories are
subject to expiration dating. The Company continually evaluates the carrying
value of its inventories and when, in the opinion of management, factors
indicate that impairment has occurred, either a reserve is established against
the inventories' carrying value or the inventories are completely written off.
Management bases these decisions on the level of inventories on hand in relation
to the Company's estimated forecast of product demand, production requirements
over the next twelve months and the expiration dates of raw materials and
finished goods. Although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant unanticipated changes
in demand could have a significant impact on the carrying value of the Company's
inventories and its reported operating results.
Contingencies. In the ordinary course of business, the Company has entered into
various contractual relationships with strategic corporate partners, customers,
distributors, research laboratories and universities, licensors, licensees,
suppliers, vendors and other parties. As such, the Company could be subject to
litigation, claims or assessments arising from any or all of these
relationships. The Company accounts for contingencies such as these in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies". SFAS No. 5 requires the Company to record an
estimated loss contingency when information available prior to issuance of the
Company's financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies arising from contractual or legal proceedings requires Company
management to use its best judgment when estimating an accrual related to such
contingencies. As additional information becomes known, the Company's accrual
for a loss contingency could fluctuate, thereby creating variability in the
Company's results of operations from period to period. Likewise, an actual loss
arising from a loss contingency which significantly exceeds the amount accrued
for in the Company's financial statements could have a material adverse impact
on the Company's operating results for the period in which such actual loss
becomes known.
Income Taxes. The Company has a history of losses, which has generated a
sizeable federal tax net operating loss ("NOL") carryforward of approximately
$69.1 million as of December 31, 2001. Generally accepted accounting principles
require the Company to record a valuation allowance against the deferred tax
asset associated with this NOL carryforward if it is more likely than not that
the Company will not be able to utilize the NOL carryforward to offset future
taxes. Due to the size of the NOL carryforward in relation to the Company's
history of unprofitable operations, the Company has not recognized any of this
net deferred tax asset.
It is possible that the Company could be profitable in the future at levels
which would cause management to conclude that it is more likely than not that
the Company will be able to realize all or a portion of the NOL carryforward.
Upon reaching such a conclusion, the Company would immediately record the
estimated net realizable value of the deferred tax asset at that time and would
then begin to provide for income taxes at a rate equal to the Company's combined
federal and state effective rates, which management believes would approximate
40%. Subsequent revisions to the estimated net realizable value of the deferred
tax asset could cause the Company's provision for income taxes to vary
significantly from period to period.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not hold any amounts of derivative financial instruments or
derivative commodity instruments, and accordingly, has no material derivative
risk to report under this Item.
15
The Company's holdings of financial instruments are 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
could decide to hold the security to maturity or sell the security. The
Company's holdings are also exposed to the risk of change in the credit quality
of issuers. The Company typically invests in the shorter end of the maturity
spectrum.
The Company does not currently have any foreign currency exchange contracts or
purchase currency options to hedge local currency cash flows. The Company has
operations in The Netherlands that are subject to foreign currency fluctuations.
As currency rates change, translation of revenues and expenses for these
operations from Euros to U.S. dollars affects year-to-year comparability of
operating results. Revenues generated in The Netherlands represented
approximately $530,000 and $908,000 or 6.7% and 5.8% of the Company's total
revenues for the three months and six months ended June 30, 2002, respectively.
Management does not expect the risk of foreign currency fluctuations to be
material.
16
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2002 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 20, 2002, the following individuals were elected by the votes
indicated as Class II directors of the Company for terms expiring at the 2005
Annual Meeting of Stockholders:
Votes Votes
Nominee For Withheld
William W. Crouse 34,271,886 980,750
Roger L. Pringle 34,303,127 949,509
Following the Annual Meeting, Michael G. Bolton retired from the Board and his
service as a Director of the Company ended at that time. The other directors
whose terms of office continued after the Annual Meeting are: Michael J.
Gausling, Frank G. Hausmann, Gregory B. Lawless, and Carter H. Eckert. At a
meeting of the Board following the Annual Meeting, Richard J. Lane and Douglas
G. Watson were elected to fill vacancies on the Board.
At the Annual Meeting, stockholders also approved an amendment to the OraSure
Technologies, Inc. 2000 Stock Award Plan (the "Plan"), which increased the
number of shares authorized for issuance under the Plan by 1,800,000 shares,
from 2,500,000 shares to 4,300,000 shares, plus other shares that become
available under the terms of the Plan. Voting results on the amendment were as
follows: 32,433,741 shares were voted for the amendment, 2,695,181 shares were
voted against this amendment, and 123,714 shares abstained. There were no broker
non-votes.
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.
Current Report on Form 8-K, dated April 30, 2002, reporting the Company's
announcement of financial results for the quarter ended March 31, 2002, and
certain other matters.
Current Report on Form 8-K, dated May 13, 2002, reporting the Company's
announcement of its receipt of notification from the U.S. Food and Drug
Administration that the Company's OraQuick(R) Rapid HIV-1 Antibody Test is
approvable, subject to the Company meeting certain conditions.
Current Report on Form 8-K, dated May 21, 2002, reporting the Company's
announcement of its dismissal of Arthur Andersen LLP as its independent public
accountants and the appointment of KPMG LLP as the Company's independent public
accountants for the year ending December 31, 2002.
Current Report on Form 8-K, dated June 17, 2002, reporting the Company's
announcement of its agreements with Abbott Laboratories for the co-exclusive
distribution of the Company's OraQuick(R) rapid test for the detection of
antibodies of the Human Immunodeficiency Virus Type I, and for a non-exclusive
sublicense of certain lateral-flow patents for which Abbott Laboratories is the
exclusive licensor.
17
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: July 31, 2002 Ronald H. Spair
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Mark L. Kuna
------------------------------------
Date: July 31, 2002 Mark L. Kuna
Controller
(Principal Accounting Officer)
18
EXHIBIT INDEX
Exhibit
- -------
10.1 OraSure Technologies, Inc. 2000 Stock Award Plan, amended effective
as of May 20, 2002.
10.2 Description of OraSure Technologies, Inc. 2002 Employee Cash Bonus
Plan
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19