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 may include statements about our expected revenues, earnings/loss per share, net income (loss), expenses, cash flow or other financial performance or developments, clinical trial or development
activities, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position.
These statements often include the words believes, expects, anticipates, intends, plans, estimates, may, will, should, could, or
similar expressions. Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these
statements include, but are not limited to: ability to market and sell products, whether through an internal, direct sales force or third parties; ability to manufacture products in accordance with applicable specifications, performance standards
and quality requirements; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements;
changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; failure of distributors or other
customers to meet purchase forecasts or minimum purchase requirements for the Companys products; impact of replacing distributors and success of direct sales efforts; inventory levels at distributors and other customers; ability to integrate
and realize the full benefits of the Companys acquisition of DNA Genotek; ability of DNA Genotek to achieve its financial and strategic objectives; ability to identify, complete, integrate and realize the full benefits of future acquisitions;
impact of competitors, competing products and technology changes; impact of the economic downturn, high unemployment and poor credit conditions; reduction or deferral of public funding available to customers; competition from new or better
technology or lower cost products; ability to develop, commercialize and market new products, including the
OraQuick
®
In-Home HIV Test; market acceptance of oral fluid testing or other products; changes in market
acceptance of products based on product performance, extended shelf life or other factors; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels;
reliance on sole supply sources for critical products and components; availability of related products produced by third parties or products required for use of our products; history of losses and ability to achieve sustained profitability; ability
to utilize net operating loss carry forwards or other deferred tax assets; volatility of our stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and
other intellectual property; 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, including the impact of changes in international funding sources and testing algorithms; adverse movements in foreign currency exchange rates; loss or impairment of sources of capital; ability to retain qualified personnel; exposure
to product liability and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the
impact of terrorist attacks and civil unrest; and general political, business and economic conditions. These and other factors are discussed more fully in our Securities and Exchange Commission (SEC) filings, including our registration
statements, Annual Report on Form 10-K for the year ended December 31, 2011, Quarterly Reports on Form 10-Q, and other filings with the SEC. Although forward-looking statements help to provide information about future prospects, readers should
keep in mind that forward-looking statements 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 our consolidated financial statements contained herein and the notes thereto, along with the
Section entitled Critical Accounting Policies and Estimates, set forth below.
Overview
We operate primarily in the
in vitro
diagnostic business. Our business principally involves the development, manufacture, marketing and sale of
oral fluid diagnostic products and specimen collection devices using our proprietary oral fluid technologies, as well as other diagnostic products including immunoassays and
in vitro
16
diagnostic tests that are used on other specimen types. We also manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our diagnostic
products include tests which are performed on a rapid basis at the point of care and tests which are processed in a laboratory. 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. One of our cryosurgery products is sold in the over-the-counter
(OTC) or consumer retail market in North America, Europe, Central and South America, and Australia. In September 2012, we began selling our OraQuick
®
In-Home HIV Test in the domestic OTC marketplace.
We also manufacture and sell kits that are used to collect, stabilize, and store samples of genetic material for molecular testing in the academic research, clinical genetic testing, pharmacogenomics,
personalized medicine, animal and livestock genetics markets. Our OraGene
®
DNA sample collection kit provides an
all-in-one system for the collection, stabilization and transportation of DNA from human saliva. We serve customers in multiple countries worldwide, including many leading research universities and hospitals.
In vitro
diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific
substances or markers for infectious diseases, drugs of abuse or other conditions. However, we have targeted the use of oral fluid in our products as a differentiating 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. When combined with their ease of use, non-invasive nature, and cost effectiveness, our oral fluid tests represent a very competitive
alternative to the more traditional testing methods in the diagnostic space.
We rely heavily on distributors to purchase
and resell many of our products. For example, Genomma Labs (Genomma) has exclusive rights to our wart removal product in the OTC market in Mexico, Argentina, Brazil and various other Central and South American countries and Reckitt
Benckiser (formerly SSL International plc) has similar rights to our wart removal product in the OTC footcare market in Europe, Australia and New Zealand. We have contracted with several distributors to sell our OraQuick
ADVANCE
®
HIV-1/2 test to the U.S. physician office market and our
Intercept
®
and OraSure
®
product lines are sold by several laboratory distributors. We use distributors to sell our Histofreezer
®
product into the domestic and international physician office markets and we have engaged distributors to sell our OraQuick
®
rapid HIV and HCV tests in Europe. We expect to enter into additional distribution agreements for existing and
future products in the U.S. and internationally. If our distributors are unable or unwilling to meet the minimum purchase commitments set forth in their agreements or otherwise substantially reduce the volume of their purchases, our revenues and
results of operations could be adversely affected.
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 and on related products supplied by third parties. This is particularly true for our OraQuick
ADVANCE
®
HIV-1/2 test, our OraQuick
®
HCV test, our OraQuick
®
In-Home HIV test, our OraSure
®
oral fluid collection device and our oral fluid Western blot HIV-1 confirmatory
product. If we are unable to obtain necessary components or materials from these sole sources, the time and expense required to develop replacements and obtain the required U.S. Food and Drug Administration (FDA) approvals could disrupt
our ability to sell the affected products and could adversely impact our revenues and results of operations. We also utilize contract manufacturers to supply all of the OraGene
®
DNA and Oragene
®
RNA products
and certain components to these products. Any disruption in the ability of these parties to manufacture and supply finished goods or product components for us could adversely impact our revenues and results of operations.
Current Consolidated Financial Results
During the nine months ended September 30, 2012, our total consolidated revenues were $65.7 million compared to $58.2 million in the nine months
ended September 30, 2011. The first nine months of 2012 included $10.0 million in revenues from our molecular collection systems subsidiary, DNAG, acquired on August 17, 2011. DNAG revenues from the acquisition date through
September 30, 2011 were $2.0 million. Product revenues during the nine months ended September 30, 2012 increased 12% when compared to the first nine months of 2011, primarily as a result of the inclusion of DNAG revenues for all of 2012.
17
Licensing and product development revenues for the first nine months of 2012 increased primarily as a result of a $1.0 million milestone payment received as a result of our achievement of certain
regulatory and commercial objectives pursuant to the terms of our HCV collaboration agreement with Merck & Co., Inc. (Merck). The milestone payment was partially offset by a decrease in royalties paid on domestic outsales of
Mercks OTC cryosurgical wart removal product, pursuant to a license and settlement agreement executed in January 2008.
Our consolidated
net loss for the nine months ended September 30, 2012 was $9.2 million, or $0.18 per share, compared to a net loss of $8.9 million, or $0.19 per share, for the nine months ended September 30, 2011. Our consolidated net loss for the nine
months ended September 30, 2011 included transaction costs associated with the acquisition of DNAG.
Cash used in operating activities for the
nine months ended September 30, 2012 was $4.0 million, compared to the $4.1 million used during the nine months ended September 30, 2011. As of September 30, 2012, we had $89.4 million in cash compared to $23.9 million at
December 31, 2011. During the third quarter of 2012, we completed a public offering of 6,100,000 common shares and received $70.3 million in proceeds, net of offering expenses. During the third quarter of 2011, we used $53.0 million of our cash
to fund the DNAG acquisition and related transaction expenses.
Recent Developments
OraQuick
®
In-Home HIV Test
On
July 3, 2012, the FDA issued a pre-market approval (PMA) for our OraQuick
®
In-Home HIV Test for
sale directly to consumers in the OTC market, making it the first and only rapid OTC HIV test approved in the U.S. The
OraQuick
®
In-Home HIV Test can detect antibodies to both HIV-1 and HIV-2 with an oral swab, providing a
confidential in-home testing option with results in as little as 20 minutes. It is the first rapid diagnostic test for any infectious disease that has been approved by the FDA for sale over the counter. This test was approved following extensive
clinical trials conducted during the past several years. The test was approved by the FDA for use by individuals who are 17 years old and older.
The OraQuick
®
In-Home HIV Test is an over-the-counter version of
our OraQuick ADVANCE
®
HIV 1/2 Antibody Test, the market leading rapid HIV test with millions of units sold since
2002 to hospitals, clinics, community-based organizations and physician offices.
The OraQuick
®
In-Home HIV Test has been available for purchase since October at retailers throughout the country, such as CVS,
Walgreens, Rite Aid, Wal-Mart and Kroger. The product is also available for purchase on-line through certain retailers and our website,
www.oraquick.com
.
We also began our national public relations and advertising campaign in connection with the October launch. These activites are expected to substantially increase our sales and marketing expenses during
the fourth quarter of 2012 and in 2013, particularly during the first quarter of that year.
To support individuals that purchase and use our
test, we have established a toll-free customer support center that operates on a 24/7, 365-day per year basis. Through this center, consumers will have access to highly trained, bi-lingual representatives who can answer questions about HIV/AIDS and
the use of our test, and refer consumers to appropriate resources for follow-up confirmatory testing, counseling and medical treatment.
Our revenue recognition practices with respect to the OraQuick
®
In-Home HIV Test will initially be different than those customarily used in the consumer package goods industry. Because this is a new product for which we do not have a track record of returns, we will initially only recognize revenue upon the
consummation of a sale to the retail customer either in a store or over the internet. We are working with our retail distribution partners to gain access to out-sales data to obtain greater transparency into the effectiveness of our launch and the
actual uptake of our product in the hands of the consumer.
Competitive and Economic Outlook
Competition in the U.S. market for HIV testing in medical settings is intense and is expected to increase. We believe that our principal competition will
come from existing and new point-of-care rapid blood tests, automated laboratory-based blood tests, or other oral fluid-based tests that may be developed. Our competitors include medical
18
diagnostic companies and specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions. Competing rapid blood tests are often sold at a lower price than we
charge for our OraQuick
®
HIV test. This competition can result in lost sales and degradation of the price (and
therefore the profit margin) we can charge for our product.
Outside the U.S., our rapid HIV and HCV tests compete against
other rapid and laboratory-based tests. Significant sales of these products in Europe have not materialized principally because of differences in European healthcare systems compared to our U.S. systems. Unlike the U.S., adoption of rapid
point-of-care diagnostics is not widespread in Europe because laboratory testing is entrenched and healthcare systems are structured around centralized testing models. In addition, many competing tests in international markets are sold at very low
prices. We intend to continue to build awareness and develop strategies to expand sales of our OraQuick
®
HIV and
HCV tests in European and other international markets.
In the substance abuse testing market, we expect competition for
our products to intensify. Other domestic and international companies have developed, and will continue to develop, competing oral fluid drug testing products. In particular, there are at least two competitors that sell high-throughput fully
automated oral fluid drug testing products in unregulated settings in the United States. In addition, one of these competitors has received 510(k) clearance of its product. This 510(k) cleared product is being offered by one of our large laboratory
distributors and we expect this distributor to stop selling our Intercept
®
product during 2012. These new
products will compete against our current Intercept
®
product.
Our professional cryosurgical product is sold primarily to physicians, including family practitioners, pediatricians and podiatrists. This product
competes against portable cryosurgical systems used for the removal of benign skin lesions in both the U.S. and Europe. Our OTC cryosurgical products compete against other cryosurgical products in certain international OTC markets.
Our
Oragene
®
collection system, competes against other types of collection devices used for molecular testing, such
as blood collection devices and buccal swabs, that often are sold for prices lower than the prices charged for the
Oragene
®
products. Although we believe the Oragene
®
device offers a number of advantages over these other products, the availability of lower price competitive devices can result in lost sales and degradation in
pricing and profit margin.
Current unfavorable economic conditions, may continue for the foreseeable future and could intensity. These
conditions have adversely affected and could continue to adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could adversely affect our access to liquidity needed to conduct or expand
our business or conduct future acquisitions or make other discretionary investments. Many of our customers rely on public funding provided by federal, state and local governments, and this funding has been and may continue to be reduced or deferred
as a result of current economic conditions. These circumstances may adversely impact our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or
components.
In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the
payment for, the availability of and reimbursement for healthcare services in the United States. One example is the Patient Protection and Affordable Care Act, the Federal healthcare reform law enacted in 2010 (Affordable Care Act). The
Affordable Care Act imposes a 2.3% excise tax on certain transactions, including U.S. sales of many new medical devices, which we expect will include domestic non-retail sales of at least some of our products. This new tax is schedule to take effect
in 2013.
Also, on August 2, 2011, President Obama signed into law the Budget Control Act of 2011, which was designed to reduce federal
spending over the next 10 years by $2.5 trillion. Under that law, a select committee of Congress was tasked with identifying and recommending $1.2 trillion in spending cuts by late November 2011. Because the committee did not agree on spending cuts
within that time frame, certain automatic cuts to discretionary, national defense and Medicare spending will be implemented beginning in January 2013 unless Congress takes further action. These cuts would result in Medicare payment reductions of up
to 2% per fiscal year with a uniform percentage reduction across all Medicare programs starting in 2013. We cannot predict whether Congress will attempt to suspend or restructure the automatic budget cuts or what other deficit reduction
initiatives may be proposed by Congress. Although the full impact is uncertain, spending cuts implemented under this new law could adversely affect our customers ability to purchase our products.
19
Results of Operations
Three months ended September 30, 2012 compared to September 30, 2011
Business Segments
We operate our
business within two reportable segments: our OraSure business, which consists of the development, manufacture and sale of oral fluid diagnostic products, specimen collection devices, and medical devices used for the removal of benign
skin lesions by cryosurgery; and our DNAG or molecular collection systems business, which consists of the development, manufacture and sale of oral fluid collection devices that are used to collect, stabilize, and store samples of
genetic material for molecular testing. OraSure revenues consist primarily of product sold into 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. OraSure also derives revenues from licensing and product development activities. DNAG revenues consist of product sold into the
academic research, clinical genetic testing, pharmacogenomics, personalized medicine, animal and livestock genetics markets.
Consolidated Revenues
The table
below shows the amount of total product revenues (dollars in thousands) generated by each of our business segments and by licensing and product development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012,
|
|
|
|
Dollars
|
|
|
|
|
|
Percentage of Total
Revenues
|
|
|
|
2012
|
|
|
2011
|
|
|
%
Change
|
|
|
2012
|
|
|
2011
|
|
OraSure
|
|
$
|
18,375
|
|
|
$
|
19,413
|
|
|
|
(5
|
)%
|
|
|
83
|
%
|
|
|
90
|
%
|
DNAG
|
|
|
3,353
|
|
|
|
2,022
|
|
|
|
66
|
|
|
|
15
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
21,728
|
|
|
|
21,435
|
|
|
|
1
|
|
|
|
98
|
|
|
|
99
|
|
Licensing and product development
|
|
|
387
|
|
|
|
279
|
|
|
|
39
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
22,115
|
|
|
$
|
21,714
|
|
|
|
2
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues increased 2% to $22.1 million in the third quarter of 2012 from $21.7 million in the comparable
quarter of 2011. The current quarter included $3.3 million in revenues from our molecular collection systems segment compared to $2.0 million in the third quarter of 2011. Our molecular collection systems business was acquired in August 2011.
Product revenues increased 1% during the three months ended September 30, 2012 when compared to the third quarter of 2011, primarily as a result of the higher molecular collection system sales and higher sales of our cryosurgical systems
products. These increases were partially offset by lower sales of our infectious disease testing, substance abuse testing and insurance risk assessment products. Licensing and product development revenues also increased in the quarter as compared to
the prior year period.
Consolidated revenues derived from products sold to customers outside the U.S. were $4.8 million and $4.1 million, or
22% and 19% of total revenues, in the third quarters of 2012 and 2011, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates was not material to our
operating results.
20
Revenues by Segment
OraSure Segment
The table below shows the amount of total revenues (dollars in thousands)
generated by our OraSure segment in each of our principal markets and by licensing and product development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Revenues
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
|
2012
|
|
|
2011
|
|
Infectious disease testing
|
|
$
|
10,717
|
|
|
$
|
11,854
|
|
|
|
(10
|
)%
|
|
|
57
|
%
|
|
|
61
|
%
|
Substance abuse testing
|
|
|
2,331
|
|
|
|
2,765
|
|
|
|
(16
|
)
|
|
|
12
|
|
|
|
14
|
|
Cryosurgical systems
|
|
|
4,199
|
|
|
|
3,395
|
|
|
|
24
|
|
|
|
22
|
|
|
|
17
|
|
Insurance risk assessment
|
|
|
1,128
|
|
|
|
1,399
|
|
|
|
(19
|
)
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
18,375
|
|
|
|
19,413
|
|
|
|
(5
|
)
|
|
|
97
|
|
|
|
99
|
|
Licensing and product development
|
|
|
387
|
|
|
|
279
|
|
|
|
39
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
18,762
|
|
|
$
|
19,692
|
|
|
|
(5
|
)%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease Testing Market
Sales to the infectious disease testing market decreased 10% to $10.7 million in the third quarter of 2012 from $11.9 million in the third quarter of 2011, primarily due to lower OraQuick
®
sales. OraQuick
®
sales totaled $10.3 million in the third quarter of 2012 compared to $11.3 million in the third quarter of 2011.
The table below shows a breakdown of our total OraQuick
®
revenues (dollars in thousands) during the third quarters of 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Domestic HIV
|
|
$
|
8,527
|
|
|
$
|
10,010
|
|
|
|
(15
|
)%
|
International HIV
|
|
|
884
|
|
|
|
878
|
|
|
|
1
|
|
Domestic HCV
|
|
|
678
|
|
|
|
332
|
|
|
|
104
|
|
International HCV
|
|
|
241
|
|
|
|
93
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OraQuick
®
revenues
|
|
$
|
10,330
|
|
|
$
|
11,313
|
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic OraQuick
®
HIV sales decreased 15% to $8.5 million for the three months ended September 30, 2012 from $10.0 million for the three months ended September 30, 2011. The
decrease in domestic sales was due to changes in public health testing programs and their timing of purchases, reductions in government funding, price competition and a shift to automated laboratory-based blood tests. International sales of our
OraQuick
®
HIV test remained relatively flat.
OraQuick
®
revenues for the third quarter of 2012 included $919,000 from sales of our OraQuick
®
HCV test, compared
to $425,000 in 2011. We received a CLIA waiver for this product in November 2011, enabling us to sell our HCV product to many non-CLIA certified customers, such as outreach clinics, community-based organizations and physician offices. While we
believe the CLIA waiver provides an expanded opportunity for sales growth, demand for our HCV product has been, and will likely continue to be, tempered by the limited availability of government funding allocated to HCV testing efforts and the time
and effort required to build awareness and demand for rapid HCV testing.
We previously entered into domestic and
international collaboration agreements with Merck, under which Merck agreed to detail our OraQuick
®
HCV product
to physician offices. The initial term of our domestic agreement
21
expired in September 2012 and will not be renewed. We are also in discussions with Merck regarding the termination of our international agreement, which has a longer term than the domestic
agreement. Termination of these agreements is not expected to materially impact sales of our HCV test, either in the U.S. or in international markets.
Substance Abuse Testing Market
Substance abuse testing revenues
decreased 16% to $2.3 million in the third quarter of 2012 from $2.8 million in the third quarter of 2011, primarily as a result of lower sales of our Intercept
®
drug testing system. These lower sales were partially offset by an increase in sales of our Q.E.D.
®
rapid point-of-care saliva alcohol test. During the third quarter of 2011, we experienced a temporary disruption of Q.E.D.
®
production, which resulted in an approximate $274,000 decrease in Q.E.D.
®
sales for that quarter. Production of our Q.E.D.
®
test resumed in October 2011.
The
table below shows a breakdown of our total Intercept
®
revenues (dollars in thousands) generated in each market
during the third quarters of 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Domestic
|
|
$
|
1,499
|
|
|
$
|
1,947
|
|
|
|
(23
|
)%
|
International
|
|
|
279
|
|
|
|
438
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intercept
®
revenues
|
|
$
|
1,778
|
|
|
$
|
2,385
|
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Intercept
®
revenues decreased 23% to $1.5 million in the third quarter of 2012 from $1.9 million in the third quarter of 2011. In 2011, our largest laboratory distributor began
selling its own competing oral specimen collection device and a panel of oral fluid drug assays suitable for use on fully-automated high throughput homogenous processing systems. As a result, this distributor has reduced its purchases of Intercept
®
and is expected to completely stop purchasing this product line by the end of 2012. Sales of Intercept
®
to this distributor were $296,000 in the third quarter of 2012 compared to $759,000 in the third quarter of 2011.
International Intercept
®
revenues decreased 36% to $279,000 in the third quarter of 2012 from $438,000 in 2011, as a result of lower purchases by our UK distributor as it has also begun
selling its own competing oral specimen collection device. We expect sales to this distributor to continue to decrease through the end of 2012 and into 2013. Sales of Intercept
®
to this distributor were $245,000 in the third quarter of 2012 compared to $438,000 in the third quarter of 2011.
Cryosurgical Systems Market
Sales in
the cryosurgical systems market (which includes both the physicians office and OTC markets) increased 24% to $4.2 million in the third quarter of 2012, compared to $3.4 million in the same period of the prior year.
22
The table below shows a breakdown of our total cryosurgical systems revenues (dollars in thousands)
generated in each market during the third quarters of 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Professional domestic
|
|
$
|
2,025
|
|
|
$
|
2,042
|
|
|
|
(1
|
)%
|
Professional international
|
|
|
453
|
|
|
|
402
|
|
|
|
13
|
|
Over-the-counter
|
|
|
1,721
|
|
|
|
951
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cryosurgical systems revenues
|
|
$
|
4,199
|
|
|
$
|
3,395
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Histofreezer
®
sales remained flat at $2.0 million in both the third quarter of 2012 and 2011. During the three months ended September 30, 2012, international sales of
Histofreezer
®
increased 13% to $453,000 from $402,000 in 2011, largely as a result of higher sales in Europe,
Australia, and Asia.
Sales of our OTC cryosurgical products during the third quarter of 2012 increased 81% to $1.7 million from $951,000 in
the third quarter of 2011. This increase was largely the result of higher sales to both our Latin American distributor, Genomma, and our European distributor, Reckitt Benckiser.
In the third quarter of 2012, Genomma purchased $921,000 compared to $264,000 during the third quarter of 2011. Early in 2011, the Mexican government placed limitations on the advertising Genomma could
use for our product. At the same time, the Brazilian government also required changes to our package insert. Both of these events negatively impacted sales of our product to Genomma during 2011, but were resolved by the end of that year.
Sales to Reckitt Benckiser increased to $750,000 in the third quarter of 2012 from $670,000 in the third quarter of 2011 as a result of increased
advertising and promotional activities and expansion into additional European countries. Our distribution contract with Reckitt Benckiser has expired and we are currently negotiating the final terms of the renewal of this agreement.
Insurance Risk Assessment Market
Sales
to the insurance risk assessment market decreased 19% to $1.1 million in the third quarter of 2012 from $1.4 million in the third quarter of 2011, largely due to the loss of one of our larger customers who changed its underwriting methodologies in
2011.
Licensing and Product Development
Licensing and product development revenues increased 39% to $387,000 in the third quarter of 2012 from $279,000 in the third quarter of 2011. Licensing revenues for these periods represent royalties paid
on domestic outsales of Mercks OTC cryosurgical wart removal product, pursuant to a license and settlement agreement executed in January 2008. Royalties under this license will no longer be payable after certain of our cryosurgical patents
expire in August 2013.
DNAG Segment
Molecular Collection Systems
Molecular collection systems
revenues primarily represent sales of the Oragene
®
product line by our subsidiary, DNA Genotek, which we
acquired in August 2011.
Consolidated Operating Results
Consolidated gross margin remained flat at 63% in the third quarters of 2012 and 2011.
23
Consolidated operating loss decreased $1.3 million to $2.9 million in the third quarter 2012, compared to
$4.2 million in the third quarter of 2011. The loss was the result of lower research and development expenses and lower general and administrative costs, partially offset by higher sales and marketing expenses.
Operating Loss by Segment
OraSure Segment
OraSures gross margin decreased to 62% in the third quarter of 2012 from 66% in the third quarter of 2011. The current
quarters gross margin was negatively impacted by the overall decrease in sales volume and an unfavorable change in product mix from our higher margin products, such as Intercept
®
devices and assays, to our lower margin cyrosurgical OTC products. The decrease in sales volume caused a decline in absorption of our labor and fixed overhead costs.
In addition, during the quarter, we experienced an increase in scrap and spoilage expense related to our
OraQuick
®
products.
Beginning in January 2013 and through February 2015, sales of our
OraQuick
®
product into the professional market will be subject to an increase in lateral flow patent royalties
which we agreed to as part of a litigation settlement in 2009. This increase will negatively impact our gross margin during those years.
Research and development expenses declined 56% to $2.3 million in the third quarter of 2012 from $5.1 million in the third quarter of 2011, primarily as a result of lower clinical trial costs related to
the development of our OraQuick
®
In-Home HIV Test.
Sales and marketing expenses increased 42% to $7.1 million in the third quarter of 2012 from $5.0 million in the third quarter of
2011. This increase was primarily the result of approximately $1.8 million of spending associated with the commercialization of our OraQuick
®
In-Home HIV Test.
General and administrative expenses
decreased 28% to $4.4 million in the third quarter of 2012 from $6.2 million in the third quarter of 2011. General and administrative expenses in the third quarter of 2011 included $2.1 million of transaction costs associated with the acquisition of
DNAG.
All the above contributed to OraSures operating loss of $2.2 million, which included $798,000 of depreciation and amortization
expense and $1.3 million of stock-based compensation expense.
DNAG Segment
DNAGs gross margin increased to 68% in the third quarter of 2012 from 33% in the third quarter of 2011. DNAGs third quarter 2011 gross margin
included $763,000 of increased product cost associated with non-cash fair-value inventory adjustments resulting from the acquisition. Third quarter 2012 gross margin included $337,000 of amortization expense compared to $164,000 recorded for the
partial period in the third quarter of 2011.
DNAG incurred $3.1 million in operating expenses during the third quarter of 2012 compared to
$1.5 million incurred during the 2011 period from the August 17, 2011 acquisition date through September 30, 2011. Third quarter 2012 expenses included $731,000 of research and development costs, $1.5 million of sales and marketing
expenses and $801,000 of general and administrative expenses. Expenses for the period August 17, 2011 through September 30, 2011 included $432,000 of research and development costs, $768,000 of sales and marketing expenses and $338,000 of
general and administrative expenses.
All of the above contributed to DNAGs 2012 third quarter operating loss of $772,000, which
included $1.0 million of depreciation and amortization expense and $37,000 of stock-based compensation expense.
24
Consolidated Income Taxes
We continue to believe the full valuation allowance established in 2008 against OraSures total net deferred tax asset is appropriate as the facts and circumstances necessitating the allowance have
not changed. As a result, no U.S. income tax benefit was recorded for OraSures pre-tax loss in the third quarter of 2012. A Canadian income tax benefit of $526,997 was recorded in the third quarter of 2012 which was associated with the DNAG
loss before income taxes and certain Canadian research and development and investment tax credits.
Nine months ended September 30,
2012 compared to September 30, 2011
Consolidated Revenues
The table below shows the amount of total product revenues (dollars in thousands) generated by each of our business segments and by licensing and product development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Revenues
|
|
|
|
2012
|
|
|
2011
|
|
|
|
2012
|
|
|
2011
|
|
OraSure
|
|
$
|
53,814
|
|
|
$
|
55,163
|
|
|
|
(2
|
)%
|
|
|
82
|
%
|
|
|
95
|
%
|
DNAG
|
|
|
9,992
|
|
|
|
2,022
|
|
|
|
394
|
|
|
|
15
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
63,806
|
|
|
|
57,185
|
|
|
|
12
|
|
|
|
97
|
|
|
|
98
|
|
Licensing and product development
|
|
|
1,869
|
|
|
|
1,006
|
|
|
|
86
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
65,675
|
|
|
$
|
58,191
|
|
|
|
13
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues increased 13% to $65.7 million for the first nine months of 2012 from $58.2 million in the
comparable period of 2011. The current period included $10.0 million in revenues from our molecular collection systems segment compared to $2.0 million in the comparative period of 2011. Our molecular collection systems business was acquired in
August 2011. Product revenues increased 12% during the first nine months of 2012 when compared to the first nine months of 2011, primarily as a result of the higher molecular collection system sales and higher sales of our cryosurgical systems
products. These increases were partially offset by lower sales of our infectious disease testing, substance abuse testing and insurance risk assessment products. Licensing and product revenues also increased in the current nine-month period as
compared to the prior year period.
Consolidated revenues derived from products sold to customers outside the U.S. were $15.8 million and
$10.0 million, or 24% and 17% of total revenues, during the nine months ended September 30, 2012 and 2011, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency
exchange rates was not material to our operating results.
Revenues by Segment
OraSure Segment
The table below shows
the amount of total revenues (dollars in thousands) generated by our OraSure segment in each of our principal markets and by licensing and product development activities.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
Dollars
|
|
|
%
Change
|
|
|
Percentage of Total
Revenues
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
|
2012
|
|
|
2011
|
|
Infectious disease testing
|
|
$
|
30,880
|
|
|
$
|
33,100
|
|
|
|
(7
|
)%
|
|
|
56
|
%
|
|
|
59
|
%
|
Substance abuse testing
|
|
|
7,305
|
|
|
|
9,011
|
|
|
|
(19
|
)
|
|
|
13
|
|
|
|
16
|
|
Cryosurgical systems
|
|
|
12,181
|
|
|
|
8,907
|
|
|
|
37
|
|
|
|
22
|
|
|
|
16
|
|
Insurance risk assessment
|
|
|
3,448
|
|
|
|
4,145
|
|
|
|
(17
|
)
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
53,814
|
|
|
|
55,163
|
|
|
|
(2
|
)%
|
|
|
97
|
|
|
|
98
|
%
|
Licensing and product development
|
|
|
1,869
|
|
|
|
1,006
|
|
|
|
86
|
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
55,683
|
|
|
$
|
56,169
|
|
|
|
(1
|
)%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infectious Disease Testing Market
Sales to the infectious disease testing market decreased 7% to $30.9 million in the first nine months of 2012 from $33.1 million in the first nine months of 2011, primarily due to lower OraQuick
®
sales. OraQuick
®
sales totaled $30.1 million in first nine months of 2012 compared to $32.0 million in the first nine months of 2011.
The table below shows a breakdown of our total OraQuick
®
revenues (dollars in thousands) during the nine months ended September 30, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
%
Change
|
|
Domestic HIV
|
|
$
|
25,106
|
|
|
$
|
28,948
|
|
|
|
(13
|
)%
|
International HIV
|
|
|
2,287
|
|
|
|
2,290
|
|
|
|
0
|
|
Domestic HCV
|
|
|
1,958
|
|
|
|
464
|
|
|
|
322
|
|
International HCV
|
|
|
734
|
|
|
|
284
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OraQuick
®
revenues
|
|
$
|
30,085
|
|
|
$
|
31,986
|
|
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic OraQuick
®
HIV sales decreased 13% to $25.1 million for the nine months ended September 30, 2012 from $28.9 million for the nine months ended September 30, 2011. The
decrease in domestic sales was due to changes in public health testing programs and their timing of purchases, reductions in government funding, price competition and a shift to automated laboratory-based blood tests. International sales of our
OraQuick
®
HIV test remained flat.
OraQuick
®
revenues for the first nine months of 2012 included $2.7
million of sales of our OraQuick
®
HCV test, compared to $748,000 in 2011. We received a CLIA waiver for this
product in November 2011, enabling us to sell our HCV product to many non-CLIA certified customers, such as outreach clinics, community-based organizations and physician offices. While we believe the CLIA waiver provides an expanded opportunity for
sales growth, demand for our HCV product has been, and will likely continue to be, tempered by the limited availability of government funding allocated to HCV testing efforts and the time and effort required to build awareness and demand for rapid
HCV testing.
We previously entered into domestic and international collaboration agreements with Merck, under which Merck
agreed to detail our OraQuick
®
HCV product to physician offices. The initial term of our domestic agreement
expired in September 2012 and will not be renewed. We are also in discussions with Merck regarding the termination of our international agreement, which has a longer term than the domestic agreement. Termination of these agreements is not expected
to materially impact sales of our HCV test, either in the U.S. or in international markets.
26
Substance Abuse Testing Market
Substance abuse testing revenues decreased 19% to $7.3 million in the first nine months of 2012 from $9.0 million in the first nine
months of 2011, primarily as a result of lower sales of our Intercept
®
drug testing system. The lower sales were
partially offset by an increase in sales of our Q.E.D.
®
rapid point-of-care saliva alcohol test. During the
third quarter of 2011, we experienced a temporary disruption of Q.E.D.
®
production, which resulted in a decrease
in Q.E.D.
®
sales for the nine month period ended September 30, 2011. Production of our Q.E.D. test resumed
in October 2011.
The table below shows a breakdown of our total
Intercept
®
revenues (dollars in thousands) generated in each market during the nine months ended
September 30, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Domestic
|
|
$
|
4,981
|
|
|
$
|
5,909
|
|
|
|
(16
|
)%
|
International
|
|
|
616
|
|
|
|
1,472
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intercept
®
revenues
|
|
$
|
5,597
|
|
|
$
|
7,381
|
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Intercept
®
revenues decreased 16% to $5.0 million in the first nine months of 2012 from $5.9 million in the first nine months of 2011. In 2011, our largest laboratory
distributor began selling its own competing oral specimen collection device and a panel of oral fluid drug assays suitable for use on fully-automated high throughput homogenous processing systems. As a result, this distributor has reduced its
purchases of Intercept
®
and is expected to completely stop purchasing this product line by the end of 2012.
Sales of Intercept
®
to this distributor were $1.4 million in the first nine months of 2012 compared to $2.5
million in the first nine months of 2011.
International Intercept
®
revenues decreased 58% to $616,000 in the first nine months of 2012 from $1.5 million in 2011, as a result of lower purchases by our UK distributor as it has also
begun selling its own competing oral specimen collection device. We expect sales to this distributor to continue to decrease through the end of 2012 and into 2013. Sales of Intercept
®
to this distributor were $534,000 in the first nine months of 2012 compared to $1.5 million in the first nine months of 2011.
Cryosurgical Systems Market
Sales in
the cryosurgical systems market (which includes both the physicians office and OTC markets) increased 37% to $12.2 million in the nine months ended September 30, 2012, compared to $8.9 million in the same period of the prior year.
The table below shows a breakdown of our total cryosurgical systems revenues (dollars in thousands) generated in each market during the nine
months ended September 30, 2012 and 2011.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Market
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Professional domestic
|
|
$
|
5,342
|
|
|
$
|
5,097
|
|
|
|
5
|
%
|
Professional international
|
|
|
1,110
|
|
|
|
989
|
|
|
|
12
|
|
Over-the-counter
|
|
|
5,729
|
|
|
|
2,821
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cryosurgical systems revenues
|
|
$
|
12,181
|
|
|
$
|
8,907
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Histofreezer
®
sales increased 5% to $5.3 million in the first nine months of 2012 from $5.1 million in the first nine months of 2011 due to the increased success of the sales and
promotional efforts of our distributors and manufacturers sales representatives. During the nine months ended September 30, 2012, international sales of Histofreezer
®
increased 12% to $1.1 million compared to $989,000 in the same period of the prior year, largely as a result of higher sales in Australia and Africa.
Sales of our OTC cryosurgical products during the first nine months of 2012 increased 103% to $5.7 million in the first nine months of 2012 from $2.8
million in the first nine months of 2011. This increase was largely the result of higher sales to both our Latin American distributor, Genomma, and our European distributor, Reckitt Benckiser.
In the first nine months of 2012, Genomma purchased $2.6 million compared to $686,000 during the first nine months of 2011. Early in 2011, the Mexican
government placed limitations on the advertising Genomma could use for our product. At the same time, the Brazilian government also required changes to our package insert. Both of these events negatively impacted sales of our product to Genomma
during 2011, but were resolved by the end of that year.
Sales to Reckitt Benckiser increased to $3.0 million in the first nine months of 2012
from $1.9 million in the first nine months of 2011 as a result of increased advertising and promotional and expansion into additional European countries. Our distribution contract with Reckitt Benckiser has expired and we are currently negotiating
the final terms of the renewal of this agreement.
Insurance Risk Assessment Market
Sales to the insurance risk assessment market decreased 17% to $3.4 million in the first nine months of 2012 from $4.1 million in the first nine months of
2011, largely the result of the loss of one of our larger customers who changed its underwriting methodologies in 2011.
Licensing and
Product Development
Licensing and product development revenues increased 86% to $1.9 million in the first nine months
of 2012 from $1.0 million in the first nine months of 2011. During the first quarter of 2012, we received a $1.0 million milestone payment as a result of our achievement of certain regulatory and commercial objectives pursuant to our collaboration
agreement with Merck for the development and promotion of our OraQuick
®
rapid HCV test in international markets.
No such milestone payments were received in the prior year.
The remaining licensing revenues for these periods represent royalties paid on
domestic outsales of Mercks OTC cryosurgical wart removal product, pursuant to a license and settlement agreement executed in January 2008. In the latter half of 2011,
t
he royalty rate decreased pursuant to the terms of our license.
Royalties under this license will no longer be payable after certain of our cryosurgical patents expire in August 2013.
28
DNAG Segment
Molecular Collection Systems
Molecular collection systems
revenues primarily represent sales of the Oragene
®
product line by our subsidiary, DNA Genotek, which we
acquired in August 2011.
Consolidated Operating Results
Consolidated gross margin remained unchanged at 64% for the first nine months of 2012 and 2011.
Consolidated operating loss increased $1.0 million to $10.1 million in the nine months ended September 30, 2012, compared to $9.1 million in the
nine months ended September 30, 2011. The increased loss was primarily caused by higher sales and marketing expenses and higher general and administrative costs, partially offset by a decrease in research and development expenses.
Operating Loss by Segment
OraSure Segment
OraSures
gross margin was 64% in first nine months of 2012 compared to 65% in the first nine months of 2011. The current periods gross margin was negatively impacted by the overall decrease in sales volume which caused a decline in absorption of our
labor and fixed overhead costs. This decline in margin was partially offset by the beneficial impact of the $1.0 million HCV milestone payment received in the first quarter of 2012.
Beginning in January 2013 and through February 2015, sales of our OraQuick
®
product into the professional market will be subject to an increase in certain lateral flow patent royalties which we agreed to as part of a litigation settlement in
2009. This increase will negatively impact our gross margin during those years.
Research and development expenses
declined 50% to $7.3 million in the first nine months of 2012 from $14.7 million in the first nine months of 2011, primarily as a result of lower clinical trial costs related to the development of our OraQuick
®
In-Home HIV Test.
Sales and marketing expenses increased 35% to $20.6 million in the first nine months of 2012 from $15.3 million in the first nine months of 2011. This increase was primarily the result of approximately
$4.7 million of spending associated with the commercialization of our OraQuick
®
In-Home HIV Test.
General and administrative expenses increased 2% to $15.0 million in the first nine months of 2012 from $14.8 million in the first nine months of 2011.
Expenses in 2011 included $2.5 million of transaction costs associated with the DNAG acquisition. The absence of DNAG transaction costs were more than offset by higher staffing, consulting, and administrative costs during the 2012 period.
All the above contributed to OraSures operating loss of $7.4 million, which included $2.6 million of depreciation and amortization
expense and $3.7 million of stock-based compensation expense.
DNAG Segment
DNAGs gross margin increased to 68% in first nine months of 2012 from 33% in comparative period of 2011. DNAGs 2011 gross margin included
$763,000 of increased product cost associated with non-cash fair-value inventory adjustments resulting from the acquisition. 2012 gross margin included $1.0 million of amortization expense compared to $164,000 recorded for the period August 17,
2011 through September 30, 2011.
DNAG incurred $9.4 million in operating expenses during the nine months of 2012 compared to $1.5
million incurred during the 2011 period from the August 17, 2011 acquisition date through September 30, 2011. Expenses for 2012 included $2.2 million of research and development costs, $4.9 million of sales and marketing expenses and $2.4
million of general and administrative expenses. Expenses for the period August 17, 2011 through September 30, 2011 included $432,000 of research and development costs, $768,000 of sales and marketing expenses and $338,000 of general and
administrative expenses.
29
All of the above contributed to DNAGs 2012 operating loss of $2.7 million, which included $2.9 million
of depreciation and amortization expense and $115,000 of stock-based compensation expense.
Consolidated Income Taxes
We continue to believe the full valuation allowance established in 2008 against OraSures total net deferred tax asset is
appropriate as the facts and circumstances necessitating the allowance have not changed. As a result, no U.S. income tax benefit was recorded for OraSures pre-tax loss in the first nine month of 2012. A Canadian income tax benefit of $1.1
million was recorded in the nine months ended September 30, 2012 which was associated with the DNAG loss before income taxes and certain Canadian research and development and investment tax credits. The income tax benefit for the nine months
ended September 30, 2012 was negatively impacted by an $427,633 adjustment recorded in the second quarter of 2012 to DNAGs deferred tax liability to reflect a change in the enacted Canadian provincial tax rates.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
89,416
|
|
|
$
|
23,878
|
|
Working capital
|
|
|
106,608
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|
|
30,860
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|
Our cash increased $65.5 to $89.4 million at September 30, 2012 from $23.9 million at December 31, 2011,
primarily due to receipt of $70.3 million in net proceeds received from our public equity offering completed during the third quarter of 2012. Our working capital also increased to $106.6 million at September 30, 2012 from $30.9 million at
December 31, 2011.
During the first nine months of 2012, we used $4.0 million in cash to finance our operating
activities. Our net loss of $9.2 million and a deferred income tax benefit of $1.1 million were partially offset by non-cash stock-based compensation expense of $3.8 million and depreciation and amortization expense of $5.5 million. Additional uses
of cash in operating activities included a $2.1 million increase in accounts receivable largely due to the shipment of our
OraQuick
®
In-Home HIV test to retailers during the last week of September and a $3.2 million increase in
inventory largely due to the stocking of our professional and OTC OraQuick
®
HIV tests. Offsetting these uses of
cash were a $953,000 increase in accounts payable primarily related to inventory purchases, and a $3.4 million increase in deferred revenue related to the late September shipments of our OraQuick
®
In-Home test to retailers. During the current nine-month period, we also used $2.1 million in cash to pay our 2011 royalty obligations, management incentive bonuses
and other year-end accruals.
We used a total of $1.4 million in investing activities during the first nine months of 2012 to acquire property
and equipment.
Net cash provided by financing activities was $70.9 million for the nine months ended September 30, 2012, which primarily
resulted from the $70.3 million of net proceeds received from our secondary offering of 6.1 million shares of our common stock in July 2012 and $9.5 million in proceeds received from the exercise of stock options. These increases in cash were
partially offset by $7.3 million in loan principal repayments and $1.5 million used for the repurchase of common stock related to the vesting of restricted shares.
On July 30, 2012, we repaid the $7,041,680 principal balance outstanding under our $10,000,000 credit facility with Comerica Bank and we have no ability to make additional borrowings under this
facility.
Our current cash balance is expected to be sufficient to fund our current operating and capital needs through at least the next
twelve months. Our cash requirements, however, may vary materially from those now planned due to many factors, including, but not limited to, the scope and timing of future strategic acquisitions, the cost and timing of the expansion of our
manufacturing capacity, the progress of our research and development programs, the scope and
30
results of clinical testing, the cost of any future litigation, 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 cost and timing of expansion of sales and marketing activities, the timing and amount of costs to commercially
launch new products including our OraQuick
®
In-Home HIV Test, market acceptance of new products,
competing technological and market developments, the impact of the ongoing economic downturn and other factors.
Summary of Contractual
Obligations
A summary of our obligations to make future payments under contracts existing at December 31, 2011 is included in
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2011. As of September 30, 2012, there were no significant changes to
this information, including the absence of any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
This Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires that we 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, we evaluate our
judgments and estimates, including those related to the valuation of accounts receivable, inventories and intangible assets, as well as calculations related to contingencies and accruals. We base our 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.
A more detailed review of our critical accounting
policies is contained in our 2011 Annual Report on Form 10-K filed with the SEC. During the first nine months of 2012, there were no material changes in our critical accounting policies.