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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004.

OR

For the transition period from              to             .

Commission File Number 001-16537

ORASURE TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

(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  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Number of shares of Common Stock, par value $.000001 per share, outstanding as of October 29, 2004: 44,549,167

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Item 1. FINANCIAL STATEMENTS

ORASURE TECHNOLOGIES, INC.

BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these statements.

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ORASURE TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these statements.

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ORASURE TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these statements.

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OraSure Technologies, Inc.

Notes to Financial Statements (Unaudited)

1. The Company

We develop, manufacture and market oral specimen collection devices using our proprietary oral fluid technologies, diagnostic products including in vitro diagnostic tests, and other medical devices. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians’ offices, and commercial and industrial entities.

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, 2003. Results of operations for the three-month and nine-month periods ended September 30, 2004 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 of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.

Cash and Cash Equivalents. We consider all highly liquid investments with a purchased maturity of ninety days or less to be cash equivalents. As of September 30, 2004 and December 31, 2003, cash equivalents consisted of certificates of deposit, commercial paper and U.S. government and agency obligations.

Short-term Investments. We consider all short-term investments to be available-for-sale securities, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are comprised of certificates of deposits, commercial paper, U.S. government and agency obligations, state and local government agency obligations, corporate bonds, and asset-backed obligations, all with purchased maturities greater than ninety days. Available-for-sale securities are carried at fair value, based upon quoted market prices, with unrealized gains and losses reported in stockholders’ equity as a component of accumulated other comprehensive loss.

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The following is a summary of our available-for-sale securities at September 30, 2004 and December 31, 2003:

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:

Revenue Recognition. We recognize product revenues when there is persuasive evidence that an arrangement exists, the price is fixed or determinable, title has passed and collection is reasonably assured. Product revenues are net of allowances for any discounts or rebates. We do not grant price protection or product return rights to our customers, except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred.

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. Grant revenue is recognized as the related work is performed and costs are incurred. We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold.

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Significant Customer Concentration. For the three-month and nine-month periods ended September 30, 2004, one customer accounted for 28 percent and 26 percent, respectively, of total revenues as compared to 16 percent and 10 percent, respectively, for the same periods of 2003. The same customer accounted for approximately 31 percent and 23 percent of accounts receivable as of September 30, 2004 and December 31, 2003, respectively.

For the three-month and nine-month periods ended September 30, 2004, another customer accounted for 10 percent and 12 percent, respectively, of total revenues as compared to 20 percent for the same periods of 2003. This customer accounted for approximately 5 percent and 8 percent of accounts receivable as of September 30, 2004 and December 31, 2003, respectively.

Research and Development. Research and development costs are charged to expense as incurred.

Foreign Currency Translation. Pursuant to SFAS No. 52, “Foreign Currency Translation,” the assets and liabilities of our 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 in accumulated other comprehensive loss, which is a separate component of stockholders’ equity.

Earnings (Loss) Per Common Share. We have presented basic and diluted earnings (loss) per common share pursuant to SFAS No. 128, “Earnings per Share.” In accordance with SFAS No. 128, basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share is computed in a manner similar to basic earnings (loss) per share, except that the weighted average number of shares outstanding is increased to include incremental shares from the assumed conversion or exercise of all dilutive securities, such as common stock options, warrants, and unvested restricted stock. The number of incremental shares is calculated by assuming that outstanding stock options and warrants were exercised and unvested restricted shares were vested, and the proceeds from such exercises or conversions 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:

The computation of diluted earnings (loss) per share exclude the effect of outstanding common stock options, warrants and unvested restricted stock representing 5,630,221 and 374,460 common shares, for the three-month periods ended September 30, 2004 and 2003, respectively, and 5,630,221 and 4,097,326 common shares, for the nine-month periods ended September 30, 2004 and 2003, respectively, as their inclusion would have been anti-dilutive.

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Stock-Based Compensation. We account for stock-based compensation to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. We account for stock-based compensation to nonemployees using the fair value method in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

We have elected to adopt the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under SFAS No. 123, compensation expense related to stock awards granted to employees and directors is computed based on the fair value of the award at the date of grant using an option valuation methodology, typically the Black-Scholes option pricing model. Pursuant to the disclosure requirements of SFAS No. 123, had compensation expense for our common stock awards been determined based upon the fair value of the awards at the date of grant, our net income (loss) for the three-month and nine-month periods ended September 30, 2004 and 2003 would have been as follows:

Other Comprehensive Income (Loss). We follow 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 accumulated deficit and additional paid-in capital, in the stockholders’ equity section of our balance sheet.

3. Patents and Product Rights

In June 2004, we entered into a sublicense agreement with a third party, pursuant to which we have been granted a limited, worldwide, non-exclusive sublicense to certain HIV-2 patents held by such party. The agreement requires us to pay the third party a one-time non-refundable license fee of $900,000, $600,000 of which was paid in August 2004. The remaining $300,000 obligation is payable by June 30, 2005 and is included in Accrued Expenses in the accompanying balance sheet at September 30, 2004. The $900,000 was recorded as additional Patent and Product Rights and is being amortized through June 30, 2014.

Under the terms of this sublicense agreement, we are also obligated to pay royalties based upon a percentage of our net sales of certain products, which incorporate the technology covered by the licensed patents. Commencing in June 2005, our minimum annual royalty obligation is $100,000, increasing to $300,000 in the second contract year and $500,000 for the third contract year through 2018, when the last of the applicable patents expire. Royalties from our commercial sale of products covered by the sublicense can be credited against these minimum royalty obligations.

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4. Long-Term Debt

In September 2003, we executed an amendment to our $10.9 million credit facility with Comerica Bank, pursuant to which the maturity date of our $4.0 million revolving working capital line of credit (the “Revolving Line”) was extended until September 10, 2004. On September 27, 2004, we executed a letter agreement with Comerica Bank extending the maturity date of the Revolving Line until April 30, 2005. All other terms of the Revolving Line agreement, as amended, remain in effect.

5. Accrued Expenses:

At September 30, 2004 and December 31, 2003, accrued royalties and advertising expenses are related to launching two new products during 2003. For the nine months ended September 30, 2004, accrued royalties decreased as a result of $2.2 million in royalty payments and a $575,000 favorable resolution of an estimated prior period royalty obligation, offset by $2.1 million in accruals for recurring royalty obligations. License fees at September 30, 2004 are related to the new sublicense agreement, which we entered into in June 2004, as discussed in Note 3. Professional fees at September 30, 2004 are primarily comprised of legal, accounting, and consulting fees related to current litigation, Sarbanes-Oxley Act compliance and strategic planning.

6. Stockholders’ Equity

During the nine-month period ended September 30, 2004, we granted 410,000 restricted shares of our common stock to certain key officers. These shares are nontransferable and are subject to vesting requirements, in varying increments, over varying periods of time, spanning one to ten years. Upon granting of these restricted shares, deferred compensation expense equivalent to the market value at the date of grant was charged to stockholders’ equity and is being amortized over the related vesting period during which the restrictions lapse. In connection with these restricted share grants, we recorded $3,176,150 of deferred compensation during the nine-month period ended September 30, 2004. Amortization of deferred compensation related to these and previous grants was $338,105 and $536,057 during the three-month and nine-month periods ended September 30, 2004, respectively. No such expense was recorded in the same periods of 2003.

7. Commitments and Contingencies

On June 22, 2004, Michael J. Gausling resigned from his position as President, Chief Executive Officer and a Director of the Company and his successor was named. Pursuant to a transition agreement we entered into with Mr. Gausling in March 2004, he will continue to be employed by the Company for the purpose of transferring his responsibilities to his successor as needed until December 31, 2004, unless his employment is terminated earlier for cause, as defined in the transition agreement. During the remainder of 2004, Mr. Gausling will receive his annual base salary of $333,864, will be entitled to full executive benefits under our group health and other benefit arrangements, and will be entitled to a cash bonus under our 2004 Self-Funding Annual Bonus Plan, payable, if at all, at the same time as other executives participating in the plan receive bonuses. Mr. Gausling was also granted a

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non-qualified option to purchase 100,000 shares of common stock, pursuant to our 2000 Stock Award Plan. During 2005, Mr. Gausling will receive salary continuation payments in an aggregate amount of $333,864, payable in four equal installments at the end of each fiscal quarter during 2005. Also, beginning January 1, 2005, if Mr. Gausling elects to obtain continuing coverage under our health benefit plan pursuant to COBRA, we will reimburse Mr. Gausling for the cost of his COBRA premiums for the 12-month period ending December 31, 2005.

In June and July 2004, we entered into several new employment agreements with certain officers of our Company. Under the terms of these agreements, we are required to pay each individual a base salary for continuing employment with our Company, through either 2006 or 2007. Collectively, these employment agreements and the transition agreement discussed above require salary payments of $448,752 during the remaining three months of 2004 and $1,795,008, $930,572 and $200,000 in the years ending December 31, 2005, 2006 and 2007, respectively.

8. Geographic Area Information

Under the disclosure requirements of SFAS No. 131, “Segment Disclosures and Related Information,” we operate within one segment. Our products are sold principally in the United States and Europe. Segmentation of operating income and identifiable assets is not applicable since our revenues outside the United States are export sales and we do not have significant operating assets outside the United States.

The following table represents total revenues by geographic area (amounts in thousands):

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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 Federal securities laws. 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 maintain new or existing product distribution channels; reliance on sole supply sources for critical product components; availability of related products produced by third parties; ability to obtain and timing of obtaining necessary regulatory approvals; ability to comply with applicable regulatory requirements; history of losses and ability to achieve sustained profitability; volatility of our stock price; 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; ability to sell products internationally; loss or impairment of sources of capital; ability to meet financial covenants in agreements with financial institutions; ability to retain qualified personnel; 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 or 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, war and civil unrest; ability to identify, complete and realize the full benefits of potential acquisitions; 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 our filings with the Securities and Exchange Commission, including our registration statements, our Annual Report on Form 10-K for the year ended December 31, 2003 and our 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 we undertake no duty to update these statements.

The following discussion should be read in conjunction with the financial statements contained herein and the notes thereto, along with the Section entitled, “Critical Accounting Policies and Estimates,” set forth below.

Overview

Our Company operates primarily in the worldwide $22 billion in vitro diagnostics business. We develop, manufacture and market oral fluid specimen collection devices using proprietary oral fluid technologies, diagnostic products including immunoassays, and other in vitro diagnostic tests. We also manufacture and sell a medical device for the removal of warts and other benign skin lesions by cryosurgery, or freezing.

Our diagnostic product offerings primarily target the infectious disease and substance abuse testing segments of the in vitro diagnostic market, and are used in both laboratories as well as the emerging, and rapidly growing, point-of-care marketplace. Our OraSure^® and Intercept^® oral fluid collection devices, and their related assays, are processed in a laboratory, while the OraQuick^® rapid HIV antibody test and UPlink^® oral fluid rapid drug detection system are designed for use at the point-of-care. Our cryosurgical products, which are sold under the names Histofreezer^® and Freeze Off^™, are also used at the point-of care.

In vitro diagnostics have traditionally used blood or urine as the bodily fluids upon which tests are conducted. However, we have targeted the use of oral fluid in our products as a differentiating competitive factor, and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity comparable to blood and/or urine tests. In addition, because of their ease of use, non-invasive and dignified nature, and cost effectiveness, we believe these tests represent a competitive alternative to the more traditional testing methods in the diagnostic space.

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During the third quarter and first nine months of 2004, we continued to increase our sales and gain market acceptance for most of our products.

Sales into the infectious disease testing market during the third quarter and first nine months of 2004 increased significantly due to the continued market acceptance of our OraQuick^® device. This resulted largely from sales directly to various public health organizations, sales to the Centers for Disease Control and Prevention (“CDC”) for further distribution in the public health market, and sales to Abbott Laboratories (“Abbott”) for distribution primarily to hospitals. There were also international sales of this product during these periods.

In 2003, the CDC placed purchase orders totaling approximately $4.0 million for 500,000 OraQuick^® devices, with equal amounts to be shipped in 2003 and 2004. We completed our shipment of devices in satisfaction of these orders by September 30, 2004, and we will continue to pursue an additional bulk purchase order from the CDC during the final months of 2004.

In the first quarter of 2004, our agreement with Abbott to distribute OraQuick^® in the United States was converted from co-exclusive to non-exclusive. Abbott has continued to purchase and sell OraQuick^® devices in the United States throughout the first nine months of 2004. Early in the second quarter, we established an internal sales force for selling OraQuick^® directly into the hospital market. We also intend to address the market potential of physicians’ offices by engaging one or more distribution partners, as we believe it would be impractical to build and sustain an internal sales force large enough to adequately service that market.

During 2003, two competitors received U.S. Food and Drug Administration (“FDA”) approval for rapid HIV tests. Based on their current FDA approvals, these tests are being sold, and compete with our OraQuick^® test, primarily in the hospital market in the United States. One competitor has recently received FDA approval for a finger stick whole blood test for use in detecting antibodies to HIV-1 and has applied for CLIA (Clinical Laboratory Improvements Amendments of 1988) waiver. Under CLIA, laboratories are precluded from performing in vitro diagnostic tests unless there is in effect for such laboratories a certificate issued by the U.S. Department of Health and Human Services applicable to the category of examination or procedure performed. A CLIA waiver allows non-laboratory customers to use waived products that may not have been available for use by these customers without complying with the quality control and other requirements mandated for certified laboratories under CLIA. If this competitor is successful in obtaining CLIA waiver for its finger stick whole blood test, it could compete with our OraQuick^® test in the public health market.

During March 2004, we received FDA approval to use the OraQuick^® test to detect HIV-2 antibodies in finger stick whole blood and venipuncture whole blood samples, HIV-1 antibodies in oral fluid samples and both HIV-1 and HIV-2 antibodies in plasma samples. In June 2004, we received FDA approval to use the OraQuick^® test to detect antibodies to HIV-2 in oral fluid and we also obtained a CLIA waiver for the OraQuick^® HIV-1/2 test for all specimen types except plasma.

Additionally, in June 2004 we received a nonexclusive, worldwide sublicense to certain HIV-2 patents held by Bio-Rad Laboratories (“Bio-Rad”). We believe that the recent FDA approvals, together with the sublicense from Bio-Rad, will provide a significant competitive advantage by allowing us to sell a versatile rapid HIV test that is capable of detecting antibodies to both the HIV-1 and HIV-2 strains of the virus in oral fluids, finger stick whole blood, venous whole blood and plasma.

In mid July 2004, we received data from an investigational clinical trial that indicated a higher rate of unconfirmed positive results from the use of our OraQuick^® test in oral fluid samples than was shown in the clinical data that we compiled in support of our FDA approval of an oral fluid claim, including data from Company-sponsored trials and independent CDC studies. Similar results were not indicated for blood samples tested with the device. We conducted a multi-faceted assessment including an evaluation of this particular study site, a review of manufacturing records, testing of device retains, and a thorough analysis of oral fluid testing data generated to date with the product which included several multiple-site studies. Additionally, as part of the assessment, we performed both clinical and non-clinical studies to determine whether such unusual results are likely to reoccur. Data from over 7,000 oral fluid samples from multiple study sites were analyzed in detail and over 12,000 additional test readings were reviewed.

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The results from these studies indicated that the test device is working as per specifications and with an accuracy of greater than 99%. After carefully reviewing this data and after consultation with both the FDA and CDC, we announced the launch of the OraQuick^® ADVANCE Rapid HIV-1/2 Antibody Test in late October, with initial shipments of this product expected to begin in early November 2004. OraQuick^® ADVANCE is the only FDA approved, CLIA waived rapid test that can test for antibodies to both HIV-1 and HIV-2 in oral fluid, fingerstick whole blood, venipuncture blood and plasma.

In July 2004, we responded to a Request for Proposal (“RFP”) issued by the Substance Abuse and Mental Health Services Administration (“SAMHSA”) for the sole source supply of oral fluid rapid HIV tests along with lab-based oral fluid test kits for confirmatory testing purposes. In early August 2004, we were awarded a $4.0 million contract under which SAMHSA committed to purchase the Company’s OraQuick^® rapid HIV antibody tests and HIV confirmatory test services. The OraQuick^® tests and related confirmatory services purchased by SAMHSA are expected to be deployed to over 22,000 substance abuse treatment and prevention sites throughout the United States. We expect to begin supplying product in the fourth quarter of 2004.

Sales to the substance abuse testing market also increased during the third quarter and first nine months of 2004, reflecting the growing acceptance of our Intercept^® collection device and related oral fluid drug assays, as corporate and criminal justice customers continued to shift to oral fluid and away from traditional urine-based drug testing. We expect continuing growth in the utilization of our Intercept^® product line, primarily in the United States and United Kingdom. This increase was partially offset by lower sales of our drug assays to the forensic toxicology market.

In March 2004, the FDA responded to our application for 510(k) clearance of the UPlink^® rapid oral fluid drugs of abuse detection system, by indicating that additional performance data would be needed in order to obtain clearance. We are evaluating the FDA’s requirements and whether any modifications to our UPlink^® system will be required in order to provide that data. At this time, we cannot predict if or when we will be able to resubmit an application for 510(k) clearance of the UPlink^® system. However, the absence of 510(k) clearance will not affect our ability to sell the UPlink^® system internationally. In April 2004, we launched our UPlink^® system in Germany and other European countries, primarily in the roadside testing market, with our partner, Dräger Safety.

In April 2004, SAMHSA published proposed guidelines that would, if adopted, include oral fluid testing as an accepted drug testing method for federal employees. We have responded to SAMHSA’s proposed guidelines with a comment letter and await the final guidelines that will apply to both our Intercept^® and UPlink^® drugs of abuse test. We are unable to predict at this time whether additional modifications may be required to bring our UPlink^® or Intercept^® drug testing systems into compliance with the guidelines when finally adopted or what affect, if any, non-compliance with the final guidelines will have on our product offerings outside of the federal workplace.

Sales to the cryosurgical systems market during the third quarter and first nine months of 2004 have grown substantially. The cryosurgical systems market represents sales of Histofreezer^® into both the domestic and international physicians’ office markets and sales of the over-the-counter (“OTC”) formulation of this product, called Freeze Off^™, to our partner, Medtech Holdings, Inc. (“Medtech”), a wholly-owned subsidiary of Prestige Brands, Inc. Medtech distributes Freeze Off^™ to consumers under its Compound W^® trademark in the OTC market.

While we are pleased with the level of Freeze Off^™ sales and hope that they continue at the same or higher levels, these sales were received in anticipation of and during the wart season in the U.S., which runs from Spring to Fall. Because of the seasonality of this product as well as increasing competition in the OTC cryosurgical market, Freeze Off^™ sales are not expected to continue at the same level during the fourth quarter of 2004 and the first quarter of 2005.

In July 2004, we filed a lawsuit against Schering-Plough Healthcare Products, Inc. (“Schering-Plough”) for infringement of several of our patents relating to the technology for the cryosurgical removal (i.e., freezing) of warts and other benign skin lesions. The suit was commenced in the United States District Court for the Eastern District of Pennsylvania, and alleges that Schering-Plough’s manufacture and sale of its Dr. Scholl’s^® Freeze Away^™ cryosurgical wart removal product in the over-the-counter market infringes three of our patents. In late September 2004, we announced that a final trial on the merits in this matter is expected to occur in February 2005.

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Sales to the insurance risk assessment market continued to decline in the third quarter of 2004, primarily as a result of lower device and assay sales to our largest customer, LabOne, Inc. The assays have experienced substantial competitive pressure from “home-brew” assays internally developed by this customer. Sales of these products are not expected to recover. We anticipate little growth and we may continue to experience declines in the insurance risk assessment market until we are successful in developing new oral fluid based diagnostic tests for additional predictive health markers desired by the insurance industry.

In March 2004, we received all necessary FDA approvals to transfer the manufacture of our Intercept^® and OraSure^® collection devices and our oral fluid Western blot HIV-1 confirmatory test from Oregon to our facilities in Bethlehem, Pennsylvania. This transfer has been completed and is expected to reduce our annual operating expenses and improve our ability to control the quality of the transferred products.

Because of the regulatory approvals needed for most of our products, we often are required to rely on sole source providers for critical components and materials. This is particularly true for our OraQuick^® test and oral fluid Western blot HIV-1 confirmatory product. If we are unable to obtain necessary components or materials from these sole sources, the time required to develop replacements and obtain the required FDA approvals could disrupt our ability to sell the affected products. In addition, any delay or interruption in our ability to manufacture the oral fluid Western blot HIV-1 confirmatory test would adversely affect sales of our OraSure^® oral fluid collection device, as our customers are not expected to purchase OraSure^® devices if an oral fluid Western blot HIV-1 confirmatory test is not readily available.

Results of Operations

Three months ended September 30, 2004 compared to September 30, 2003

Total revenues increased 37% to approximately $14.2 million in the third quarter of 2004 from approximately $10.3 million in the comparable quarter in 2003, primarily as a result of increased sales of our Freeze Off^™ cryosurgical product, OraQuick^® rapid HIV-1 antibody test and Intercept^® oral fluid drug test, partially offset by lower sales in the insurance risk assessment market. Product revenues for the third quarter of 2004 increased 38% to approximately $14.1 million compared to approximately $10.2 million for the third quarter of 2003. International sales accounted for 12% of total revenues in the third quarter of 2004.

The table below shows the amount of total revenues (in thousands, except %) generated in each of our principal markets and by licensing and product development activities.

Sales to the insurance risk assessment market decreased 36% to approximately $1.8 million in the third quarter of 2004 as a result of lower sales of assays and OraSure^® oral fluid collection devices. We expect that sales of our assays, including oral fluid assays, will continue to come under competitive pressure. Our laboratory customers have

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reduced and are expected to continue to reduce their purchases of these products and instead use lower cost, internally-developed (i.e., “home-brew’) assays or testing products purchased from our competitors. We do not expect to recover this business, and our revenues are expected to be negatively impacted by as much as $1.5 million in 2004, when compared to 2003 revenues in the insurance risk assessment market.

Sales to the infectious disease testing market increased 61% to approximately $3.7 million in the third quarter of 2004, primarily as a result of the continued strength of our OraQuick^® rapid HIV-1 antibody test in the public health marketplace. We sell the OraQuick^® test directly to public health entities and to the CDC, which in turn distributes the product in the public health marketplace. OraQuick^® sales totaled approximately $2.6 million and $1.1 million in the third quarters of 2004 and 2003, respectively. OraSure^® sales totaled approximately $1.1 million and $1.2 million in the third quarters of 2004 and 2003, respectively.

In the third quarter of 2004, we recorded approximately $909,000 in direct sales of OraQuick^® to the U.S. public health market and approximately $610,000 to the CDC. We also had OraQuick^® sales of approximately $350,000 to Abbott, approximately $230,000 directly to hospital customers, and approximately $495,000 to the international marketplace.

During the remaining months of 2004, we will pursue an additional bulk purchase order for OraQuick^® from the CDC as we have fulfilled all CDC requirements under previously received purchase orders. In August 2004, we were awarded a $4.0 million contract from SAMHSA for the purchase of our OraQuick^® rapid HIV antibody tests and HIV confirmatory test services. We expect to begin supplying product to SAMHSA in the fourth quarter of 2004.

Although sales of our OraQuick^® test are expected to increase, such sales are expected to negatively impact sales of our OraSure^® oral fluid collection device in the infectious disease testing market. Customers who now or in the future may purchase our OraSure^® device for HIV-1 testing may elect instead to purchase our OraQuick^® test. It is not possible at this time, however, to estimate the timing or extent of such change in purchasing patterns or the financial impact of replacing OraSure^® sales with sales of our OraQuick^® test.

In March 2004, we received approval from the FDA for use of the OraQuick^® device to detect HIV-2 antibodies in finger stick and venipuncture whole blood samples, HIV-1 antibodies in oral fluid samples and both HIV-1 and HIV-2 antibodies in plasma samples. In June 2004, we received approval from the FDA for use of the OraQuick^® device to detect antibodies to HIV-2 in oral fluid and we received a CLIA waiver for the OraQuick^® HIV-1/2 device for use with oral fluids, finger stick whole blood and venipuncture whole blood.

In June 2004, we received a worldwide, non-exclusive sublicense to certain HIV-2 patents held by Bio-Rad that provides us rights to sell a test to detect antibodies to the HIV-2 virus on the OraQuick^® platform. The sublicense expires upon the expiration of the last-to-expire licensed patent, is royalty bearing and requires upfront and milestone based fees and minimum annual royalties.

We believe that an OraQuick^® device which is approved for detecting antibodies to both HIV-1 and 2 in oral fluid, finger stick and venous whole blood, and plasma samples, and is CLIA-waived for use with all sample types except plasma, will enhance the versatility of our OraQuick^® test, provide a significant competitive advantage, and allow us to more fully implement a strategy to sell OraQuick^® internationally. The OraQuick^® ADVANCE rapid HIV-1/2 antibody test, which has all of the above claims, was commercially launched in late October and initial shipments of this product are expected to begin in early November 2004.

Sales to the substance abuse testing market increased 52% to approximately $2.7 million in the third quarter of 2004, primarily as a result of increased sales of our Intercept^® oral fluid drug testing service in the U.S. workplace and criminal justice market and sales of our UPlink^® rapid point-of-care oral fluid drug detection system to Dräger Safety. Sales of Intercept^® into the U.S. workplace and criminal justice markets increased 88% and 42% to approximately $1,068,000 and $358,000, respectively, in the third quarter of 2004, compared to 2003. Sales of drug assays into the forensic toxicology market totaled approximately $410,000 and $450,000 in the third quarters of 2004 and 2003, respectively.

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In April 2004, we launched our UPlink^® rapid oral fluid drug detection system, including assays for the detection of drugs of abuse commonly identified by the National Institute for Drug Abuse (“NIDA”) as the NIDA-5 (i.e. cocaine, opiates, amphetamines/methamphetamines, PCP and marijuana) with our partner, Dräger Safety. This product is being initially sold to the roadside testing market in Europe. Revenues from this product were approximately $269,000 in the third quarter of 2004.

Sales of our products in the cryosurgical systems market (which includes both the physicians’ office and OTC markets) increased 77% to approximately $5.8 million in the third quarter of 2004, compared to 2003. This increase was primarily the result of $3.9 million in sales of our OTC cryosurgical system, called Freeze Off^™, to Medtech, the owner of the Compound W^® line of wart removal products. In 2003, we entered into a distribution agreement with Medtech following receipt of FDA 510(k) clearance for the sale of our cryosurgical system in the OTC market in the U.S. The Freeze Off^™ product was launched by Medtech in the third quarter of 2003, and there were $1.6 million of sales to Medtech during the three months ended September 30, 2003.

The Freeze Off^™ product is being sold under Medtech’s Compound W^® trademark. Our five-year distribution agreement with Medtech requires minimum purchases of at least $2.0 million each year over the life of the contract in order for Medtech to maintain its exclusive distribution rights to the OTC market in the U.S. Based on purchase orders received to date, we expect sales of Freeze Off^™ to Medtech to total at least $12.5 million for the full year 2004.

Sales of our Histofreezer^® product to physicians’ offices in the U.S. increased 5% to approximately $1.5 million in the third quarter of 2004, when compared to the same period in 2003, primarily as a result of higher distributor sales. We are investing in promotional programs to raise the brand awareness of Histofreezer^® in the U.S. professional marketplace and expect our 2004 full-year revenues for this product to increase by approximately $1.0 million over 2003. Sales of Histofreezer^® in the international market increased by 80% to approximately $411,000 in the third quarter of 2004, but on an annual basis are expected to remain at approximately 2003 levels until we are able to secure additional distributors in countries where this product is currently not sold.

It is possible that sales of the Freeze Off^™ product in the U.S. OTC market may reduce the number of individuals that will seek to obtain treatment of their warts by a physician, which in turn could negatively affect sales of our Histofreezer^® product in the professional market. To date, we have not seen evidence of this and it is not possible at this time to estimate the timing or financial impact of such a change, if it occurs at all.

Licensing and product development revenues decreased by 18% to $90,000 during the third quarter of 2004, compared to the same period in 2003, primarily as a result of lower payments for our collaborative UPlink^® and oral fluid research project with The University of Pennsylvania, under a grant awarded by the National Institutes of Health. The current annual phase of this grant expires in June 2005 and our share of funding is expected to be approximately $308,000 for that period.

Gross margin in the third quarter of 2004 was approximately 60%, a decrease from the gross margin of approximately 61% recorded in the third quarter of 2003. Gross margin was positively affected by both a favorable resolution of an outstanding royalty obligation and a more efficient utilization of our manufacturing capacity, offset by a less favorable product sales mix, higher production costs associated with our recently-launched UPlink^® oral fluid drug detection system and higher scrap and spoilage charges.

Research and development expenses decreased 33% to approximately $1.5 million in the third quarter of 2004 from approximately $2.2 million in the same period in 2003, primarily as a result of lower staffing related expenses, a decrease in expenses related to the transfer of manufacturing operations to our Bethlehem, Pennsylvania facilities, and lower clinical trial costs. We expect research and development expenses during the remainder of 2004 to be slightly higher than the level incurred during the third quarter.

Sales and marketing expenses increased 57% to approximately $4.0 million in the third quarter of 2004 from approximately $2.5 million in the same period in 2003. This increase was primarily the result of higher product advertising expenditures, costs associated with our hospital sales force, increased staffing related expenses and higher consulting fees.

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Included in advertising expenses for the third quarters of 2004 and 2003 were amounts payable to Medtech as reimbursement for marketing expenses incurred for the Freeze Off^™ product, totaling approximately $918,000 and $376,000, respectively. Pursuant to our agreement with Medtech, we will continue to co-invest in Medtech’s marketing activities for the Freeze Off^™ product, and we will reimburse Medtech, on a declining basis over the first four years of the agreement, for a portion of Medtech’s out-of-pocket costs of advertising and promoting this product in the OTC market.

We expect sales and marketing expenses to remain at the current quarterly level for the remainder of 2004.

General and administrative expenses increased 119% to approximately $3.5 million in the third quarter of 2004 from approximately $1.6 million in the same period in 2003. This increase was primarily attributable to legal fees associated with the Schering-Plough litigation, transition costs for the retirement of our former Chief Executive Officer and the additional costs of hiring our new Chief Executive Officer, consulting fees for strategic planning, increased staffing related expenses and increased professional fees related to compliance with the requirements of the Sarbanes-Oxley Act of 2002. General and administrative expenses are expected to increase further in 2004 as a result of significantly higher legal fees associated with the Schering-Plough patent litigation, additional strategic planning consulting fees, and costs associated with complying with the requirements of the Sarbanes-Oxley Act of 2002.

In July 2004, we filed a lawsuit against Schering-Plough Healthcare Products, Inc. (“Schering-Plough”) for infringement of several of our patents that cover our Histofreezer^® and Freeze Off^™ products. This suit relates to the Dr. Scholls^® Freeze Away^™ wart removal product sold by Schering-Plough in the United States OTC market, which competes with our Freeze Off^™ product. This litigation is expected to result in a significant increase in legal fees during the term of the litigation. We expect to incur a minimum of $300,000 in incremental legal fees for this matter in the fourth quarter of 2004 and an additional $200,000 to $400,000 during the first quarter of 2005, when compared to the level of legal fees incurred in the third quarter of 2004.

Interest expense decreased to $32,000 in the third quarter of 2004 from $45,000 in the same period in 2003, primarily as a result of lower outstanding debt balances. Interest income increased to $229,000 in the third quarter of 2004 from $78,000 in the same period in 2003, as a result of substantially larger balances available for investment.

During the third quarters of 2004 and 2003, we recorded provisions for foreign income taxes of approximately $5,000 and $3,000, respectively.

Results of Operations

Nine months ended September 30, 2004 compared to September 30, 2003

Total revenues increased 39% to approximately $39.8 million for the nine months ended September 30, 2004 from approximately $28.6 million in the comparable period in 2003, primarily as a result of increased sales of our Freeze Off^™ and Histofreezer^® cryosurgical products, OraQuick^® rapid HIV-1 antibody test and Intercept^® oral fluid drug test, partially offset by lower sales in the insurance risk assessment market. Product revenues for the first nine months of 2004 increased 41% to approximately $39.5 million compared to approximately $28.0 million for the same period in 2003. International sales accounted for 12% of total revenues during the first nine months of 2004.

The table below shows the amount of total revenues (in thousands, except %) generated in each of our principal markets and by licensing and product development activities.

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Sales to the insurance risk assessment market decreased 28% to approximately $6.0 million for the nine months ended September 30, 2004 as a result of lower sales of assays and OraSure^® oral fluid collection devices. We expect that sales of our assays, including oral fluid assays, will continue to come under competitive pressure. Our laboratory customers have reduced and are expected to continue to reduce their purchases of these products and instead use lower cost, internally-developed (i.e., “home-brew’) assays or testing products purchased from our competitors. We do not expect to recover this business, and our revenues are expected to be negatively impacted by as much as $1.5 million in 2004, when compared to 2003 revenues in the insurance risk assessment market.

Sales to the infectious disease testing market increased 42% to approximately $11.0 million for the nine months ended September 30, 2004, primarily as a result of the continued strength of our OraQuick^® rapid HIV-1 antibody test in the public health marketplace. We sell the OraQuick^® test directly to public health entities and to the CDC, which in turn distributes the product in the public health marketplace. OraQuick^® sales totaled approximately $7.1 million and $3.6 million in the first nine months of 2004 and 2003, respectively. OraSure^® sales totaled approximately $3.9 million and $4.2 million in the first nine months of 2004 and 2003, respectively.

In the first nine months of 2004, we recorded OraQuick^® sales of approximately $2.3 million to the CDC, approximately $2.2 million to the U.S. public health market and approximately $1.4 million to Abbott. We also sold approximately $944,000 of OraQuick^® to the international marketplace and approximately $296,000 directly to hospital customers. OraQuick^® revenues from the hospital market during the first nine months of 2004 were generated by our new direct sales force, which was not fully deployed until early in the second quarter of 2004.

During the remaining months of 2004, we will pursue an additional bulk purchase order for OraQuick^® from the CDC as we have fulfilled all CDC requirements under previously received purchase orders. In August 2004, we were awarded a $4.0 million contract from SAMHSA for the purchase of our OraQuick^® rapid HIV antibody tests and HIV confirmatory test services. We expect to begin supplying product to SAMHSA in the fourth quarter of 2004.

Although sales of our OraQuick^® test are expected to increase, such sales are expected to negatively impact sales of our OraSure^® oral fluid collection device in the infectious disease testing market. Customers who now or in the future may purchase our OraSure^® device for HIV-1 testing may elect instead to purchase our OraQuick^® test. It is not possible at this time, however, to estimate the timing or extent of such change in purchasing patterns or the financial impact of replacing OraSure^® sales with sales of our OraQuick^® test.

In March 2004, we received approval from the FDA for use of the OraQuick^® device to detect HIV-2 antibodies in finger stick and venipuncture whole blood samples, HIV-1 antibodies in oral fluid samples and both HIV-1 and HIV-2 antibodies in plasma samples. In June 2004, we received approval from the FDA for use of the OraQuick^® device to detect antibodies to HIV-2 in oral fluid and we received a CLIA waiver for the OraQuick^® HIV-1/2 device for use with oral fluids, finger stick whole blood and venipuncture whole blood.

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In June 2004, we received a worldwide, non-exclusive sublicense to certain HIV-2 patents held by Bio-Rad that provides us rights to sell a test to detect antibodies to the HIV-2 virus on the OraQuick^® platform. The sublicense expires upon the expiration of the last-to-expire licensed patent, is royalty bearing and requires upfront and milestone based fees and minimum annual royalties.

We believe that an OraQuick^® device which is approved for detecting antibodies to both HIV-1 and 2 in oral fluid, finger stick whole blood, venous whole blood, and plasma, and is CLIA-waived for use with all sample types except plasma, will enhance the versatility of our OraQuick^® test, provide a significant competitive advantage, and allow us to more fully implement a strategy to sell OraQuick^® internationally. The OraQuick^® ADVANCE rapid HIV-1/2 antibody test, which has all of the above claims, was commercially launched in late October and initial shipments of this product are expected to begin in early November 2004.

Sales to the substance abuse testing market increased 40% to approximately $7.3 million in the nine months ended September 2004, primarily as a result of increased sales of our Intercept^® oral fluid drug testing service in the U.S. workplace and criminal justice markets and sales of our UPlink^® drug detection system to Dräger Safety. Sales of Intercept^® into the U.S. workplace and criminal justice markets increased 83% and 61% to approximately $2.1 million and $1.2 million, respectively, in the nine months ended September 2004, compared to 2003. Partially offsetting these increases were lower than expected sales of our drug assays into the forensic toxicology market, which were down 16% compared to the same period in 2003.

In April 2004, we launched our UPlink^® rapid oral fluid drug detection system, including assays for the detection of drugs of abuse commonly known as the NIDA-5 (i.e. cocaine, opiates, amphetamines/methamphetamines, PCP and marijuana) with our partner, Dräger Safety. This product is being initially sold to the roadside testing market in Europe. Revenues from this product were approximately $542,000 for the nine months ended September 2004.

Sales of our products in the cryosurgical systems market (which includes both the physicians’ office and OTC markets) increased 126% to approximately $15.2 million in the nine months ended September 2004, compared to 2003. This increase was primarily the result of $10.3 million in sales of our OTC cryosurgical system, called Freeze Off^™, to Medtech, the owner of the Compound W^® line of wart removal products. In 2003, we entered into a distribution agreement with Medtech following receipt of FDA 510(k) clearance for the sale of our cryosurgical system in the OTC market in the U.S. The Freeze Off^™ product was launched by Medtech in the third quarter of 2003, and there were $2.9 million of sales to Medtech during the nine-months ended September 30, 2003.

The Freeze Off^™ product is being sold under Medtech’s Compound W^® trademark. Our five-year distribution agreement with Medtech requires minimum purchases of at least $2.0 million each year over the life of the contract in order for Medtech to maintain its exclusive distribution rights to the OTC market in the U.S. Based on purchase orders received to date, we expect sales of Freeze Off^™ to Medtech to total at least $12.5 million for the full year 2004.