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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 quarterly period ended September 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 November 6, 2002: 37,546,308
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (unaudited) .................................. 3
Balance Sheets at September 30, 2002 and December 31, 2001 ............. 3
Statements of Operations for the three months and nine months
ended September 30, 2002 and 2001 .................................. 4
Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 .................................. 5
Notes to Financial Statements .......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 19
Item 4. Controls and Procedures ........................................... 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .................................. 20
2
Item 1. FINANCIAL STATEMENTS
ORASURE TECHNOLOGIES, INC.
BALANCE SHEETS
(Unaudited)
September 30, 2002 December 31, 2001
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,231,118 $ 2,426,346
Short-term investments 8,136,638 12,764,903
Accounts receivable, net of allowance for doubtful
accounts of $187,271 and $209,492 4,805,664 6,057,927
Note receivable from officer - 75,000
Inventories 4,583,159 4,444,772
Prepaid expenses and other 577,443 1,038,511
------------- -------------
Total current assets 23,334,022 26,807,459
PROPERTY AND EQUIPMENT, net 7,449,252 7,800,137
PATENTS AND PRODUCT RIGHTS, net 1,967,719 2,042,533
OTHER ASSETS 615,253 634,546
------------- -------------
$ 33,366,246 $ 37,284,675
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,004,192 $ 1,057,572
Accounts payable 2,031,604 2,874,061
Accrued expenses 3,082,675 3,111,886
------------- -------------
Total current liabilities 6,118,471 7,043,519
------------- -------------
LONG-TERM DEBT 3,479,239 3,586,458
------------- -------------
OTHER LIABILITIES 114,025 114,025
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.000001, 25,000,000 shares authorized,
none issued - -
Common stock, par value $.000001, 120,000,000 shares authorized,
37,545,287 and 37,403,269 shares issued and outstanding 38 37
Additional paid-in capital 153,210,127 152,758,591
Accumulated other comprehensive loss (202,686) (125,664)
Accumulated deficit (129,352,968) (126,092,291)
------------- -------------
Total stockholders' equity 23,654,511 26,540,673
------------- -------------
$ 33,366,246 $ 37,284,675
============= =============
The accompanying notes are an integral part of these statements.
3
ORASURE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Product $ 8,103,274 $ 8,236,352 $ 23,445,971 $ 23,207,345
Licensing and product development 3,259 362,302 316,068 1,303,129
------------ ------------ ------------ ------------
8,106,533 8,598,654 23,762,039 24,510,474
COSTS OF PRODUCTS SOLD 3,349,522 2,872,753 9,444,203 8,579,752
------------ ------------ ------------ ------------
Gross profit 4,757,011 5,725,901 14,317,836 15,930,722
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 1,890,266 2,247,975 6,520,753 6,838,056
Sales and marketing 1,947,388 2,061,817 6,327,894 5,988,432
General and administrative 1,320,649 1,427,081 4,886,530 4,494,217
Restructuring-related - - - 450,000
------------ ------------ ------------ ------------
5,158,303 5,736,873 17,735,177 17,770,705
------------ ------------ ------------ ------------
Operating loss (401,292) (10,972) (3,417,341) (1,839,983)
INTEREST EXPENSE (70,108) (101,555) (233,453) (310,279)
INTEREST INCOME 86,827 241,805 390,811 742,818
FOREIGN CURRENCY GAIN (LOSS) (2,271) (114,819) (694) 2,911
------------ ------------ ------------ ------------
Income (loss) before income taxes (386,844) 14,459 (3,260,677) (1,404,533)
INCOME TAXES - 1,199 - (20,745)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (386,844) $ 15,658 $ (3,260,677) $ (1,425,278)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
BASIC $ (0.01) $ 0.00 $ (0.09) $ (0.04)
============ ============ ============ ============
DILUTED $ (0.01) $ 0.00 $ (0.09) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
BASIC 37,536,302 37,057,079 37,488,419 36,740,600
============ ============ ============ ============
DILUTED 37,536,302 39,009,095 37,488,419 36,740,600
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
4
ORASURE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss $ (3,260,677) $ (1,425,278)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 50,939 70,580
Amortization of deferred revenue (107,500) (107,500)
Depreciation and amortization 1,639,857 1,537,873
Loss on disposition of property and equipment 2,053 11,353
Gain on disposition of investment in affiliated company - (16,853)
Write-off of inventory 949,752 -
Changes in assets and liabilities:
Accounts receivable 1,252,263 (2,367,200)
Notes receivable from officer 75,000 100,649
Inventories (1,088,139) (1,924,498)
Prepaid expenses and other assets 461,068 118,442
Accounts payable and accrued expenses (764,168) (253,457)
------------ ------------
Net cash used in operating activities (789,552) (4,255,889)
------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (3,761,117) (23,250,109)
Proceeds from the sale of short-term investments 8,316,007 24,810,795
Purchases of property and equipment (987,419) (2,094,220)
Proceeds from the sale of property and equipment 2,393 29,067
Purchase of patent sublicense (200,000) -
Proceeds from disposition of investment in affiliated company - 106,102
Increase in other assets (11,892) (224,888)
------------ ------------
Net cash provided by (used in) investing activities 3,357,972 (623,253)
------------ ------------
FINANCING ACTIVITIES:
Borrowings of long-term debt 4,078,982 -
Repayments of term debt (4,239,581) (840,630)
Proceeds from issuance of common stock 400,598 2,980,233
------------ ------------
Net cash provided by financing activities 239,999 2,139,603
------------ ------------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (3,647) (60,381)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,804,772 (2,799,920)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,426,346 5,095,639
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,231,118 $ 2,295,719
============ ============
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 nine-month periods ended September 30, 2002
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,
2002 2001
---------- ----------
Raw materials $3,425,060 $2,918,825
Work-in-process 578,092 644,397
Finished goods 580,007 881,550
---------- ----------
$4,583,159 $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.
6
Significant Customer Concentration. For the three-month and nine-month periods
ended September 30, 2002, one customer accounted for 28 and 26 percent of total
revenues, respectively, as compared to 25 and 28 percent for each of the same
periods of 2001.
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 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:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ (386,844) $ 15,658 $ (3,260,677) $ (1,425,278)
============= ============= ============ =============
Weighted average shares of common
stock outstanding:
Basic 37,536,302 37,057,079 37,488,419 36,740,600
Dilutive effect of stock options
and warrants - 1,952,016 - -
------------ ------------- ------------ -------------
Diluted 37,536,302 39,009,095 37,488,419 36,740,600
============ ============= ============ =============
Earnings (loss) per share:
Basic $ (0.01) $ 0.00 $ (0.09) $ (0.04)
============ ============= ============ =============
Diluted $ (0.01) $ 0.00 $ (0.09) $ (0.04)
============ ============= ============ =============
The computations of diluted earnings (loss) per share for the three-month period
ended September 30, 2002 and for the nine-month periods ended September 30, 2002
and 2001 exclude the effect of outstanding common stock options and warrants to
purchase 984,983, 2,974,620 and 4,207,396 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
restructure certain of its manufacturing operations. As a result of this
restructuring, the Company incurred an infrequent charge of $450,000
7
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 2002, the Financial Accounting
Standards Board ("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. The adoption of SFAS No.
146 is not expected to have any impact on the Company's financial position or
results of operations.
3. Long-Term Debt
In September 2002, the Company entered into a new $10.9 million credit facility
("New Credit Facility") with a new bank, pursuant to which the Company
refinanced substantially all of its previously outstanding mortgage and term
debt and increased its equipment and working capital lines of credit. The New
Credit Facility is comprised of an $887,000 mortgage loan, a $3.0 million term
loan, a $3.0 million non-revolving equipment line of credit, and a $4.0 million
revolving working capital line of credit.
The $887,000 mortgage loan matures in September 2012, bears interest at an
annual floating rate equal to the bank's prime rate, and is repayable in fixed
monthly principal and interest installments of $7,426 through September 2007, at
which time the interest rate and fixed monthly repayment amount will be reset
for the remaining 60 monthly installments.
The $3.0 million term loan matures in March 2006, bears interest at a fixed rate
of 4.99% and is repayable in forty-two consecutive equal monthly principal
payments of $71,429, plus interest.
Under the non-revolving equipment line of credit, the Company can borrow up to
$3.0 million to finance eligible equipment purchases through September 11, 2003.
Interest on outstanding borrowings shall accrue at a rate, selected at the
Company's option, equal to the bank's prime rate, 180-day or 360-day LIBOR plus
2.625%, or the 4-year Treasury Note Rate plus 2.30%, determined at the time of
each borrowing. Borrowings are repayable in 48 consecutive, equal monthly
principal installments, plus interest. As of September 30, 2002, the Company had
an outstanding balance of approximately $192,000 under this facility with a
fixed annual interest rate of 5.07%.
Under the revolving working capital line of credit, the Company can borrow up to
$4.0 million to finance working capital and other needs. Interest on outstanding
borrowings shall accrue at a rate, selected at the Company's option, equal to
the bank's prime rate less 0.25% or 30-day LIBOR plus 2.55%, determined at the
time of the initial borrowing. Borrowings are repayable by September 9, 2003,
with interest payable monthly. The Company had no outstanding borrowings under
this facility at September 30, 2002.
All borrowings under the New Credit Facility are collateralized by a first
priority security interest in all of the assets of the Company, including
present and future accounts receivable, chattel paper, contracts and contract
rights, equipment and accessories, general intangibles, investments,
instruments, inventory, and a mortgage on the Company's manufacturing facility
in Bethlehem, Pennsylvania. Borrowings under the equipment and working-capital
lines of credit are limited to commercially standard percentages of equipment
purchases and accounts receivable, respectively. The New Credit Facility
contains certain covenants containing minimum requirements for the Company's
quick ratio, liquidity, and tangible net worth and requires the Company to
achieve positive consolidated net income for the year ending December 31, 2003
and for each year thereafter. The New Credit Facility also restricts the
Company's ability to pay dividends, to make certain investments, to incur
additional indebtedness, to sell or otherwise dispose of a substantial portion
of assets, and to merge or consolidate operations with an unaffiliated entity,
without the consent of the bank.
8
4. 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 he agreed to repay the Officer Note in bi-weekly principal
installments of approximately $7,000, commencing in April 2002. As of September
30, 2002, this Officer Note had been repaid.
Facility Lease and Amendment.
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 the original agreement, the Company will
lease a 48,000 square foot facility 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. As a result of Tech rII Partners, LLC investing an additional $2.5
million in tenant fit-out costs for the leased facility, the original operating
lease was amended in October 2002, pursuant to which the base rent was increased
to $780,000 per year, increasing to $858,000 per year, during the initial
10-year term. The Company's purchase option was also amended to reflect the cost
of the tenant fit-out expenditures.
5. 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. 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 (in thousands,
except %):
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------
2002 % 2001 % 2002 % 2001 %
---- - ---- - ---- - ---- -
United States $7,158 88% $7,355 86% $20,819 88% $20,650 84%
Europe 538 7% 814 9% 2,018 8% 2,586 11%
Other regions 411 5% 430 5% 925 4% 1,275 5%
------ ---- ------ ---- ------- ---- ------- ----
$8,107 100% $8,599 100% $23,762 100% $24,511 100%
====== ==== ====== ==== ======= ==== ======= ====
6. Distribution and Supply Agreements
In October 2002, the Company entered into new agreements with bioMerieux, Inc.
("BMX"), which replaced existing agreements between the parties, for the supply
by BMX of HIV-1 antigen required to manufacture the Company's oral fluid Western
Blot HIV-1 confirmatory test, and for the distribution by BMX of the oral fluid
Western Blot product on an exclusive worldwide basis. These agreements have an
initial term ending December 31, 2005, which may be extended until December 31,
2007 under certain circumstances. As consideration for BMX entering into the new
agreements, the Company will pay BMX three installments of $250,000 each, the
last of which will occur on March 31, 2003. The Company will record the $750,000
in aggregate payments as Patent and Product
9
Rights on the Balance Sheet and will amortize this amount through December 2005,
the initial term of the agreements. In addition, the Company paid BMX an
additional $250,000 to settle certain pending contract disputes which has been
accrued as of September 30, 2002 in the accompanying Balance Sheet.
10
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; availability of licenses to patents or other technology; ability to
enter into international manufacturing agreements; obstacles to international
marketing and manufacturing of products; loss or impairment of sources of
capital; ability to meet financial covenants in agreements with financial
institutions; 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 September 30, 2002 compared to September 30, 2001
Total revenues decreased 6% to approximately $8.1 million in the third quarter
of 2002 from approximately $8.6 million in the comparable quarter in 2001,
primarily as a result of lower licensing and product development revenue
together with lower international sales of the OraQuick(R) rapid HIV antibody
test, partially offset by increased sales of OraSure(R) oral fluid collection
devices and test kits. Product revenues for the third quarter of 2002 decreased
approximately 2% to $8.1 million compared to $8.2 million for the third quarter
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.
Three months ended September 30,
------------------------------------------------------------------
Percentage of
Dollars % Total Revenues
------------------------- --------------------------
Market Revenues 2002 2001 Change 2002 2001
---------- ---------- -------- ---------- ----------
Insurance risk assessment $ 2,987 $ 2,986 0% 37% 35%
Infectious disease testing 1,472 1,604 -8% 18% 18%
Substance abuse testing 1,805 1,692 7% 22% 20%
Physicians' offices therapies 1,840 1,955 -6% 23% 23%
---------- ---------- --------- ----------
Product revenues 8,104 8,237 -2% 100% 96%
Licensing and product development 3 362 -99% 0% 4%
---------- ---------- --------- ----------
Total revenues $ 8,107 $ 8,599 -6% 100% 100%
========== ========== ========= ==========
Sales to the insurance risk assessment market remained flat at approximately
$3.0 million in the third quarter of 2002. Increased sales of OraSure(R) oral
fluid collection devices internationally were offset by lower assay revenues
resulting from 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 decreased 8% to approximately
$1.5 million in the third quarter of 2002, primarily as a result of reduced
sales of the Company's OraQuick(R) rapid HIV antibody test in the international
marketplace, partially offset by an approximate 20% increase in the sale of
OraSure(R) oral fluid collection devices and test kits.
Sales to the infectious disease testing market are expected to increase as a
result of the Company's agreement with Abbott Laboratories ("Abbott") for the
distribution of the Company's OraQuick(R) rapid HIV-1 antibody test, which was
signed in June 2002. 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. On November 7, 2002, the Company received
U.S. Food and Drug Administration ("FDA") approval of the OraQuick(R) test for
detecting HIV-1 antibodies in finger-stick whole blood samples. Pursuant to this
approval, the Company is authorized to manufacture and sell the OraQuick(R) test
in the United States.
Sales to the substance abuse testing market increased 7% to approximately $1.8
million as a result of increased sales of Intercept(R) collection devices and
oral fluid drug assays for workplace and criminal justice testing, partially
offset by lower analytical equipment sales and lower sales of the Company's
Q.E.D.(R) saliva alcohol test.
During the third quarter of 2002, the Company's three newest Intercept(R)
laboratory distributors, Quest Diagnostics, Clinical Reference Laboratory and
NWT, Inc., began selling the Intercept(R) drug testing system into the workplace
testing market. If the sales efforts by these distributors are successful, the
Company would expect Intercept(R) revenues to increase above current levels.
Sales of the Company's Histofreezer(R) portable cryosurgical system in the
physicians' office therapies market decreased 6% to approximately $1.8 million
in the third quarter of 2002. This decrease was primarily the result of
significantly lower international distributor sales, partially offset by an
increase in distributor sales in the United States.
12
Licensing and product development revenue decreased to $3,000 in the third
quarter of 2002 from $362,000 in 2001. During the third quarter of 2001, the
Company received certain development milestone payments from Meridian
Bioscience, a one-time payment from a potential corporate partner 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 third quarter of 2002.
The Company's gross margin decreased to 59% in the third quarter of 2002 from
67% in 2001. This decrease was primarily attributable to the lower amount of
licensing and product development revenues, higher costs associated with the
advanced preparation for OraQuick(R) manufacturing, and higher scrap rates in
the third quarter of 2002. The higher scrap rates were caused by several
factors, including product expiration and obsolescence and unexpected changes in
product demand. The Company is implementing remedial measures, which are
intended to reduce scrap rates in the future.
Research and development expenses decreased 16% to approximately $1.9 million in
the third quarter of 2002 from approximately $2.2 million in 2001, primarily as
a result of lower staffing costs and lower consulting fees.
Sales and marketing expenses decreased 6% to approximately $1.9 million in the
third quarter of 2002 from approximately $2.1 million in 2001. This decrease was
primarily the result of lower staffing and related expenses. Sales and marketing
expenses are expected to increase in the future as the Company launches new
products and attempts to maximize sales of its existing product lines.
General and administrative expenses decreased 7% to approximately $1.3 million
in the third quarter of 2002 from approximately $1.4 million in 2001. This
decrease was primarily attributable to lower executive recruiting fees.
Interest expense decreased to $70,000 in the third quarter of 2002 from $102,000
in 2001 as a result of lower outstanding loan balances. Interest income
decreased to $87,000 in the third quarter of 2002 from $242,000 in 2001, as a
result of lower cash and cash equivalents available for investment and lower
interest rates on the Company's investments.
In September 2002, the Company refinanced certain existing term and mortgage
debt, and entered into a new credit facility, with Comerica Bank. As a result of
the refinancing of term and mortgage debt, the Company lowered the effective
interest rate on its outstanding indebtedness by approximately 300 basis points,
which is expected to result in a reduction in interest expense of over $100,000
per year, based on the Company's current level of outstanding indebtedness.
The Company recorded a foreign currency loss of $2,000 in the third quarter of
2002 compared to a foreign currency loss of $115,000 in the third quarter of
2001.
Results of Operations
Nine months ended September 30, 2002 compared to September 30, 2001
Total revenues decreased 3% to approximately $23.8 million for the nine months
ended September 30, 2002 from approximately $24.5 million in the comparable nine
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 nine months of 2002
increased approximately 1% to $23.4 million compared to $23.2 million for the
first nine months of 2001.
13
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.
Nine months ended September 30,
------------------------------------------------------------------
Percentage of
Dollars % Total Revenues
--------------------------- ---------------------------
Market Revenues 2002 2001 Change 2002 2001
------------ ------------ -------- ------------ ------------
Insurance risk assessment $ 8,900 $ 9,376 -5% 38% 38%
Infectious disease testing 4,505 4,257 6% 19% 18%
Substance abuse testing 4,808 4,841 -1% 20% 20%
Physicians' offices therapies 5,233 4,733 11% 22% 19%
------------ ------------ ------------ ------------
Product revenues 23,446 23,207 1% 99% 95%
Licensing and product development 316 1,303 -76% 1% 5%
------------ ------------ ------------ ------------
Total revenues $ 23,762 $ 24,510 -3% 100% 100%
============ ============ ============ ============
Sales to the insurance risk assessment market declined by 5% to approximately
$8.9 million for the nine months ended September 30, 2002 from approximately
$9.4 million in the comparable period in 2001, primarily as a result of lower
assay sales due to 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 6% to approximately
$4.5 million for the nine months ended September 30, 2002 from approximately
$4.3 million in the comparable period in 2001, primarily as a result of an
approximate 23% increase in the sale of OraSure(R) oral fluid collection devices
and test kits. Offsetting this increase were reduced international sales of the
Company's OraQuick(R) rapid HIV antibody test, which accounted for approximately
$650,000 in revenues for the first nine months of 2001.
Sales to the substance abuse testing market were flat at approximately $4.8
million for the nine months ended September 30, 2002, as a result of a increased
sales of Intercept(R) collection devices and oral fluid drug assays, offset by
approximately $600,000 of lower analytical equipment sales and lower sales of
the Company's Q.E.D.(R) saliva alcohol test.
Sales of the Company's Histofreezer(R) products in the physicians' office
therapies market increased 11% to approximately $5.2 million for the nine months
ended September 30, 2002 from approximately $4.7 million in the comparable
period in 2001. This increase was the result of an increase in distributor sales
in the United States, partially offset by significantly lower international
distributor sales.
Licensing and product development revenue decreased 76% to $316,000 for the nine
months ended September 30, 2002 from approximately $1.3 million in the
comparable period in 2001. During the nine months ended September 30, 2001, the
Company received certain development milestone payments from Meridian Bioscience
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 nine months ended September 30, 2002.
The Company's gross margin decreased to approximately 60% for the nine months
ended September 30, 2002 from 65% 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 nine months of 2002.
The higher scrap rates were caused by several factors, including product
expiration and obsolescence and unexpected changes in product demand. The
Company is implementing remedial measures, which are intended to reduce scrap
rates in the future.
14
Research and development expenses decreased 5% to approximately $6.5 million
from approximately $6.8 million in the comparable period in 2001. Decreased
expenditures for staffing, consulting and travel were partially offset by
increased costs associated with clinical trials related to the Company's efforts
to obtain FDA approval of the OraQuick(R) rapid HIV-1 antibody test.
Sales and marketing expenses increased 6% to approximately $6.3 million for the
nine months ended September 30, 2002 from approximately $6.0 million in the
comparable period in 2001. This increase was primarily the result of higher
consulting fees for the development of strategic marketing plans. Sales and
marketing expenses are expected to increase in the future as the Company
launches new products and attempts to maximize sales of its existing product
lines.
General and administrative expenses increased 9% to approximately $4.9 million
for the nine months ended September 30, 2002 from approximately $4.5 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 nine months ended September
30, 2001 as a result of a manufacturing restructuring. There was no such charge
in the first nine months of 2002.
Interest expense decreased to $233,000 for the nine months ended September 30,
2002 from $310,000 for the comparable period in 2001, as a result of lower
outstanding loan balances. Interest income decreased to $391,000 for the nine
months ended September 30, 2002 from $743,000 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.
In September 2002, the Company refinanced certain existing term and mortgage
debt, and entered into a new credit facility, with Comerica Bank. As a result of
the refinancing of term and mortgage debt, the Company lowered the effective
interest rate on its outstanding indebtedness by approximately 300 basis points,
which is expected to result in a reduction in interest expense of over $100,000
per year, based on the Company's current level of outstanding indebtedness.
Liquidity and Capital Resources
September 30, December 31,
2002 2001
------------- ------------
(In thousands)
Cash and cash equivalents $ 5,231 $ 2,426
Short-term investments 8,137 12,765
Working capital 17,216 19,764
The Company's cash, cash equivalents and short-term investments decreased
approximately $1.8 million during the first nine months of 2002 to approximately
$13.4 million at September 30, 2002, primarily as a result of the Company's net
loss for the first nine months of 2002, a reduction of accounts payable and
accrued expenses, and certain capital expenditures. Offsetting these uses of
cash were an increase in accounts receivable collections and proceeds from stock
option exercises. At September 30, 2002, the Company's working capital was
approximately $17.2 million.
In September 2002, the Company entered into a new $10.9 million credit facility
("New Credit Facility") with Comerica Bank, pursuant to which the Company
refinanced substantially all of its previously outstanding mortgage and term
debt and increased its equipment and working capital lines of credit. The New
Credit Facility is comprised of an $887,000 mortgage loan, a $3.0 million term
loan, a $3.0 million non-revolving equipment line of credit, and a $4.0 million
revolving working capital line of credit.
15
The $887,000 mortgage loan matures in September 2012, bears interest at an
annual floating rate equal to Comerica's prime rate, and is repayable in fixed
monthly principal and interest installments of $7,426 through September 2007, at
which time the interest rate and fixed monthly repayment amount will be reset
for the remaining 60 monthly installments.
The $3.0 million term loan matures in March 2006, bears interest at a fixed rate
of 4.99% and is repayable in forty-two consecutive equal monthly principal
payments of $71,429, plus interest.
Under the non-revolving equipment line of credit, the Company can borrow up to
$3.0 million to finance eligible equipment purchases through September 11, 2003.
Interest on outstanding borrowings shall accrue at a rate, selected at the
Company's option, equal to Comerica's prime rate, 180-day or 360-day LIBOR plus
2.625%, or the 4-year Treasury Note Rate plus 2.30%, determined at the time of
each borrowing. Borrowings are repayable in 48 consecutive, equal monthly
principal installments, plus interest. As of September 30, 2002, the Company had
an outstanding balance of approximately $192,000 under this facility with a
fixed annual interest rate of 5.07%.
Under the revolving working capital line of credit, the Company can borrow up to
$4.0 million to finance working capital and other needs. Interest on outstanding
borrowings shall accrue at a rate, selected at the Company's option, equal to
Comerica's prime rate less 0.25%, or 30-day LIBOR plus 2.55%, determined at the
time of the initial borrowing. Borrowings are repayable by September 9, 2003,
with interest payable monthly. The Company had no outstanding borrowings under
this facility at September 30, 2002.
All borrowings under the New Credit Facility are collateralized by a first
priority security interest in all of the assets of the Company, including
present and future accounts receivable, chattel paper, contracts and contract
rights, equipment and accessories, general intangibles, investments,
instruments, inventory, and a mortgage on the Company's manufacturing facility
in Bethlehem, Pennsylvania. Borrowings under the equipment and working capital
lines of credit are limited to commercially standard percentages of equipment
purchases and accounts receivable, respectively. The New Credit Facility
contains certain covenants containing minimum requirements for the Company's
quick ratio, liquidity, and tangible net worth and requires the Company to
achieve positive consolidated net income for the year ending December 31, 2003
and for each year thereafter. The New Credit Facility also restricts the
Company's ability to pay dividends, to make certain investments, to incur
additional indebtedness, to sell or otherwise dispose of a substantial portion
of assets, and to merge or consolidate operations with an unaffiliated entity,
without the consent of Comerica.
The combination of the Company's current cash position and available borrowings
under the Company's 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 of 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.
In October 2002, the Company entered into new agreements with bioMerieux, Inc.
("BMX"), which replaced existing agreements between the parties, for the supply
by BMX of HIV-1 antigen required to manufacture the Company's oral fluid Western
Blot HIV-1 confirmatory test, and for the distribution by BMX of the oral fluid
Western Blot product on an exclusive worldwide basis. These agreements have an
initial term ending December 31, 2005, which may be extended until December 31,
2007 under certain circumstances. As consideration for BMX entering into the new
agreements, the Company will pay BMX three installments of $250,000 each, the
last of which will occur on March 31, 2003. In addition, the Company paid BMX an
additional $250,000 to settle certain pending contract disputes.
Net cash used in operating activities was approximately $800,000 for the nine
months ended September 30, 2002, primarily as a result of the loss for the
period, net of depreciation, increased inventory levels, and the reduction of
accounts payable and accrued expenses, offset by increased accounts receivable
collections.
16
Net cash provided by investing activities for the nine months ended September
30, 2002 was approximately $3.4 million, primarily as a result of $4.6 million
in net proceeds received from the sale of short-term investments, offset by the
purchase of approximately $1.0 million of capital equipment and a $200,000
payment to secure a sublicense to certain lateral flow technology patents.
Net cash provided by financing activities was approximately $240,000 for the
nine months ended September 30, 2002 as a result of approximately $160,000 of
term debt repayments, offset by approximately $400,000 in proceeds from the
exercise of stock options.
Certain Relationships and Related Transactions
The Company has entered into a Commercial Lease (the "Lease") with Tech III
Partners, LLC ("Tech Partners"), which provides for the construction of a 48,000
square foot facility on land adjacent to the Company's Bethlehem, Pennsylvania
headquarters, and the lease of that facility to the Company. Tech Partners is
owned and controlled by Michael J. Gausling, the Company's President and Chief
Executive Officer, and Dr. R. Sam Niedbala, the Company's Executive Vice
President and Chief Science Officer. The facility will house manufacturing,
warehousing, and administrative operations required to support the expected
growth of the Company's business. Construction of the facility is now complete.
In October 2002, the Company entered into an amendment of the Lease with Tech
Partners in order to reflect an increase in the base rental rate required to
reflect certain additional tenant fit-out costs.
The Lease, as amended, has an initial ten-year term ending in October 2012 and a
base rent starting at $780,000 and increasing to $858,240 per year over that
term. The base rental rate may be increased after the fifth year of the initial
term in order to reflect changes in the interest rate on debt incurred by Tech
Partners to finance construction of the leased facilities. The Company has not
guaranteed any debt incurred by Tech Partners. The Lease also provides the
Company with options to renew the Lease for an additional five years at a rental
rate of $975,360 per year, and to purchase the facility at any time during the
initial ten-year term based on a formula set forth in the Lease. Prior to
deciding to enter into the Lease and the Amendment, the Company's Board of
Directors retained Imperial Realty Appraisal LLC, an independent commercial real
estate appraisal firm, to evaluate the proposed base rental rate. Imperial
Realty issued opinions indicating that the annual base rent set forth in the
Lease, as amended, is below the market rental rate the Company could otherwise
expect to pay to lease a comparable commercial property in the same general
geographic market. The terms of the Lease are otherwise substantially similar to
the commercial lease entered into by the Company with a third party for its
existing Bethlehem, Pennsylvania headquarters.
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.
17
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.
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 or political
climate 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
18
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.
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 $400,000 and $1.3 million or 4.9% and 5.5% of the Company's total
revenues for the three months and nine months ended September 30, 2002,
respectively. Management does not expect the risk of foreign currency
fluctuations to be material.
Item 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Within the 90 days
preceding the filing of this Report, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation
19
of the Company's disclosure controls and procedures. Based on that evaluation,
the Company's management, including such officers, concluded that the Company's
disclosure controls and procedures were effective in timely alerting them to
material information relating to the Company, which is required to be included
in its periodic filings with the Securities and Exchange Commission.
(b) Changes in Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls (including any corrective actions with regard to significant
deficiencies or material weaknesses) subsequent to the date of the evaluation
referred to in paragraph (a) of this Item.
PART II. OTHER INFORMATION
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.
20
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, 2002 Ronald H. Spair
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Mark L. Kuna
----------------------------------
Date: November 13, 2002 Mark L. Kuna
Controller
(Principal Accounting Officer)
Certification
I, Michael J. Gausling, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OraSure Technologies,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
21
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Michael J. Gausling
----------------------------------------
Michael J. Gausling
President and Chief Executive Officer
(Principal Executive Officer)
Certification
I, Ronald H. Spair, certify that:
1. I have reviewed this quarterly report on Form 10-Q of OraSure Technologies,
Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
22
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses
Date: November 13, 2002
/s/ Ronald H. Spair
------------------------------------
Ronald H. Spair
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
- -------
10.1 Loan and Security Agreement, dated as of September 10, 2002, between
Comerica Bank - California and OraSure Technologies, Inc.
10.2 Amendment No. 1 to Commercial Lease, dated as of October 21, 2002,
between Tech III Partners, LLC and OraSure Technologies, Inc.
10.3 Distribution Agreement, dated as of October 11, 2002, between OraSure
Technologies, Inc. and bioMerieux, Inc.*
10.4 Supply Agreement, dated as of October 11, 2002, between OraSure
Technologies, Inc. and bioMerieux, Inc.*
99.1 Certification pursuant to 18 U.S.C.(S) 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C.(S) 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
________________
*Portions of this Exhibit were omitted and filed separately with the Securities
and Exchange Commission pursuant to an application for confidential treatment.
24