SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - -
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended December 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ----to-----.
Commission File Number 1-10492
EPITOPE, INC.
(Exact name of registrant as specified in its charter)
OREGON NO. 93-0779127
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8505 SW Creekside Place
Beaverton, Oregon 97008-7108
(Address of principal executive offices) (Zip code)
(503) 641-6115
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock, no par value, outstanding as of December
31, 1997: 13,461,041
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
PAGE NO.
--------
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Condensed Combined Balance Sheets
at December 31, 1997 and September 30, 1997............................ 3
Condensed Combined Statements of Operations
for the three months ended December 31, 1997 and 1996 ................. 4
Condensed Combined Statements of Changes in Shareholders' Equity
for the three months ended December 31, 1997........................... 5
Condensed Combined Statements of Cash Flows
for the three months ended December 31, 1997 and 1996.................. 6
Notes to Condensed Financial Statements.................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................. 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 11
</TABLE>
2
<PAGE>
EPITOPE, INC.
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
12/31/97 9/30/97
(Unaudited)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents ............................................ $ 723,077 $ 1,934,480
Marketable securities ................................................ 5,378,725 7,141,640
Trade accounts receivable, net ........................................ 802,056 928,047
Other receivables (Note 2)............................................. 1,063,325 128,949
Inventories (Note 2) .................................................. 1,359,521 1,324,647
Prepaid expenses ...................................................... 86,030 78,240
----------- -------------
9,412,734 11,536,003
Property and equipment, net ........................................... 1,073,462 1,200,988
Patents and proprietary technology, net ............................... 632,179 657,487
Other assets and deposits ............................................ 42,354 55,099
Net assets of discontinued operations (Note 3)......................... - 3,562,726
------------ ------------
$ 11,160,729 $ 17,012,303
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ...................................................... $ 250,450 $ 110,285
Salaries, benefits and other accrued liabilities ...................... 2,406,223 1,887,825
----------- -----------
2,656,673 1,998,110
Commitments and contingencies ......................................... - -
Shareholders' equity (Note 4)
Contributed capital ................................................... 110,576,942 110,439,726
Accumulated deficit.................................................... (102,072,886) (95,425,533)
------------- ------------
8,504,056 15,014,193
$ 11,160,729 $ 17,012,303
</TABLE>
3
<PAGE>
EPITOPE, INC.
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
THREE MONTHS ENDED DECEMBER 31 1997 1996
Revenues
<S> <C> <C>
Product sales ......................................................... $ 1,591,442 $ 2,359,151
Grants and contracts .................................................. 11,381 281,610
---------- -----------
1,602,823 2,640,761
Costs and expenses
Product costs ......................................................... 655,769 969,258
Research and development costs ........................................ 679,847 803,973
Selling, general and administrative expenses........................... 1,318,012 1,477,697
---------- -----------
2,653,628 3,250,928
Loss from operations .................................................. (1,050,805) (610,167)
Other income (expense), net
Interest income........................................................ 114,895 319,334
Interest expense....................................................... (7,673) -
Other, net............................................................. (11,753) (62)
----------- -----------
95,469 319,272
Net loss from continuing operations.................................... $ (955,336) $ (290,895)
Loss from discontinued operations...................................... - (4,093,519)
---------- -----------
Net loss .............................................................. (955,336) (4,384,414)
Basic and diluted loss per share from continuing operations............ $ (.07) $ (.02)
Basic and diluted loss per share....................................... $ (.07) $ (.33)
Weighted average number of shares outstanding ......................... 13,454,403 13,149,498
</TABLE>
4
<PAGE>
EPITOPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
COMMON STOCK ACCUMULATED
SHARES DOLLARS DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1997.............. 13,454,330 $ 110,439,726 $ (95,425,533) $ 15,014,193
Common stock issued as
compensation.............................. 6,711 24,160 - 24,160
Compensation expense for
stock option grants....................... - 113,056 - 113,056
Spin-off of Agritope, Inc. ................. (5,692,017) (5,692,017)
Net loss for the period..................... - - (955,336) (955,336)
----------- ----------- ----------- ---------
BALANCES AT DECEMBER 31, 1997............... 13,461,041 110,576,942 (102,072,886) 8,504,056
</TABLE>
<PAGE>
EPITOPE, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
THREE MONTHS ENDED DECEMBER 31 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss .............................................................. $ (955,336) $ (4,384,414)
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss from discontinued operations ..................................... 4,093,519
Depreciation and amortization ......................................... 178,207 181,013
Increase in accounts receivable and other receivables ................. (811,631) (654,460)
Increase in inventories ............................................... (34,874) (11,422)
Increase in prepaid expenses .......................................... (7,790) (263,059)
Increase in accounts payable and accrued liabilities .................. 655,608 296,025
Common stock issued as compensation for services....................... 24,160 11,693
Compensation expense for stock option grants and
deferred salary increases .......................................... 113,056 147,624
Other, net ............................................................ 14,800 15
------------ ------------
Net cash used in operating activities.................................. (823,800) (583,466)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities ................................... (3,907,727) (8,211,809)
Proceeds from sale of marketable securities ........................... 5,673,063 10,285,196
Additions to property and equipment ................................... (13,150) (89,912)
Expenditures for patents and proprietary technology ................... (29,443) (63,922)
Investment in affiliated companies .................................... 18,945 (2,936,234)
------------ -------------
Net cash provided by (used in) investing activities.................... 1,741,688 (1,016,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................ - 54,194
Advances in connection with spin off .................................. (2,129,291) (1,913,761)
------------- -------------
Net cash used in financing activities.................................. (2,129,291) (1,859,567)
Net decrease in cash and cash equivalents ............................. (1,211,403) (3,459,714)
Cash and cash equivalents at beginning of period ...................... 1,934,480 5,699,263
------------ ------------
Cash and cash equivalents at end of period............................. $ 723,077 $ 2,239,549
</TABLE>
6
<PAGE>
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 THE COMPANY
Epitope, Inc. (the Company or Epitope) is an Oregon corporation which develops
and markets medical diagnostic products. Epitope's principal products, including
the OraSure(R) oral specimen collection device, focus on the use of oral fluid
to detect HIV infection and other conditions, and are marketed primarily in the
life insurance and public health sectors.
The interim condensed combined financial statements included herein are
unaudited; however, in the opinion of the Company, the interim data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results of operations for the interim periods. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K. Results of operations for the period ended December 31, 1997 are not
necessarily indicative of the results of operations expected for the full fiscal
year.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying combined financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated and the results of
the former Agritope, Inc. subsidiary (Agritope) have been shown as discontinued
operations in the 1997 fiscal quarter.
Other Receivables. Other receivables includes $916,705 which represents funds
advanced by Epitope to cover Agritope's December operating losses and for cash
outlays incurred prior to December 1, 1997 that had been specifically identified
in the Separation Agreement between Epitope and Agritope.
Inventories. Inventory components are summarized as follows:
<TABLE>
12/31/97 9/30/97
(Unaudited)
<S> <C> <C>
Raw materials.......................................................... $ 330,087 $ 296,432
Work-in-process ....................................................... 382,782 343,585
Finished goods ........................................................ 632,197 670,175
Supplies .............................................................. 14,455 14,455
----------- -----------
$ 1,359,521 $ 1,324,647
</TABLE>
Net Loss Per Share. Net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents were excluded from the computation of diluted earnings per
share because their effect is anti-dilutive.
NOTE 3 DISCONTINUED OPERATIONS
The Company has distributed all of its shares of Agritope common stock to
Epitope shareholders of record as of December 26, 1997. The costs of the
spin-off and Agritope's operating losses in fiscal 1998 were accounted for in
fiscal year 1997. The comparable quarter in fiscal 1997 included the loss from
discontinued operations of Agritope and Andrew and Williamson Sales, Co., the
Company's former subsidiary (A&W).
Bank Line of Credit. The Company has guaranteed a bank line of credit maintained
by A&W. The $6.5 million revolving line of credit is secured by A&W's accounts
receivable, inventory and equipment. The terms of Epitope's
7
<PAGE>
guarantee require that it maintain certain tangible net worth levels. In
addition, the principals of A&W have each personally guaranteed the line of
credit. The line of credit also contains various financial covenants for A&W
including minimum working capital and tangible net worth levels and maximum
debt-to-net-worth ratios. The balance outstanding under the line was $1,550,000
as of December 31, 1997. In January 1998, the maturity date of the line of
credit was extended from February 5, 1998 to April 5, 1998. A&W has agreed that
Epitope may terminate the guaranty as to future advances unless A&W has obtained
a new line of credit not guaranteed by Epitope by November 1, 1998.
NOTE 4 SHAREHOLDERS' EQUITY
The costs of the spin-off and Agritope's operating losses in fiscal 1998 were
accounted for in fiscal 1997 as expenses of discontinued operations. The overall
reduction in retained earnings as a result of the spin-off was $5,692,017,
including spin-off related costs. No additional material charges are expected
related to the Agritope spin-off.
NOTE 5 SUBSEQUENT EVENTS
In January 1998, Agritope repaid Epitope $976,885 for funds advanced by Epitope
as described in Note 2 and for additional advances made in January 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of operations and financial condition should be read in
conjunction with the Financial Statements and Notes thereto included in the
Company's 1997 Annual Report on Form 10-K and with the Financial Statements and
Notes thereto included in this Form 10-Q. Statements set forth below about
future events or performance constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. These factors with respect to the Company include loss or impairment
of sources of capital; ability of the company to develop product distribution
channels; development of competing products; market acceptance of oral testing
products; changes in federal or state law or regulations; and loss of key
personnel. Although forward-looking statements help to provide complete
information about the company, readers should keep in mind that forward-looking
statements are much less reliable than historical information.
RESULTS OF OPERATIONS
Revenues. Total revenues decreased by $1,038,000 or 39% in the current quarter
as compared with the first quarter of fiscal 1997. Revenues by product line are
shown below:
<TABLE>
THREE MONTHS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT %) 1997 1996
DOLLARS PERCENT DOLLARS PERCENT
Product sales
<S> <C> <C> <C> <C>
Oral collection device................................. $ 1,130 70% $ 1,900 72%
Western blot HIV confirmatory test..................... 461 29 459 17
------ ---- --- ----
1,591 99 2,359 89
Grants and contracts...................................... 11 1 282 11
----- --- --- ----
$ 1,602 100% $ 2,641 100%
</TABLE>
Sales of the Company's OraSure(R) oral specimen collection device decreased by
$770,000 or 41% in the current quarter as compared to the first quarter in
fiscal 1997. The decrease is attributable to inventory build-up in the
prior-year quarter by major testing laboratories as insurance companies made
initial decisions about adoption of the Company's OraSure device and expansion
of use beyond pilot programs. Inventory levels are expected to be in line with
current customer requirements by the third quarter of fiscal 1998. As of
December 31, 1997, the Company had firm orders for the device totaling $1.2
million scheduled for shipment before March 31, 1998.
Sales of the Company's Western blot HIV confirmatory test increased slightly in
the current quarter as compared to the first quarter in fiscal 1997. As of
December 31, 1997, the Company had firm orders for the confirmatory HIV test
totaling $460,000 scheduled for shipment before March 31, 1998.
Grant and contract revenues decreased by $271,000 or 96% in the current quarter
as compared to the first quarter of fiscal 1997 primarily due the termination of
the Company's Development, License and Supply Agreement with its former
strategic partner, SmithKline Beecham plc (SB). Selected research projects are
continuing, directed at developing new applications for the OraSure oral
collection device with a focus on tests needed to expand the use of the OraSure
device with existing customers in life insurance and public health markets.
9
<PAGE>
Gross margins remained at 59% of sales in the first quarter of fiscal 1998, the
same level as achieved in the comparable period of fiscal 1997.
Research and development costs decreased by $124,000 or 15% as a result of cost
containment measures in research and development and a narrowing of the focus of
these projects to those that were judged to be commercially viable in the
shortest timeframe. Expenditures for these projects can vary significantly from
quarter to quarter as new projects are started while other projects may be
extended or completed.
Selling, general and administrative expenses decreased by $160,000 or 11% in the
current quarter as compared to the first quarter in fiscal 1997 primarily as a
result of a reduction in compensation expense and cost containment measures put
in place during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
(IN THOUSANDS) 12/31/97 9/30/97
<S> <C> <C>
Cash and cash equivalents.............................................. $ 723 $ 1,934
Marketable securities.................................................. 5,379 7,142
Working capital........................................................ 6,756 9,538
</TABLE>
During the current quarter, proceeds from the sale of marketable securities
represented the primary source of funds for meeting the Company's requirements
for operations and business expansion. Trade accounts receivable decreased
during the quarter by $125,991 or 14%. Although product sales increased relative
to the quarter ended September 30, 1997, generating higher trade receivables,
the September 30, 1997 balance included a receivable from SmithKline Beecham for
development work which has subsequently been paid. Other receivables increased
during the quarter by $943,376 or 725% primarily because Epitope was funding
Agritope's operating expenses during the month of December; these expenses were
reimbursed by Agritope when Agritope received its outside funding after the
spin-off was complete.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are listed on the attached exhibit index following the signature page
of this report.
(b) Reports on Form 8-K
Current report on Form 8-K dated December 10, 1997, reporting under Item 5 the
signing of a research and development agreement between Agritope, Inc., the
Company's wholly owned subsidiary, and Vilmorin & Cie., and a related agreement
for sale of Agritope, Inc. preferred stock to Vilmorin & Cie.
Current report on Form 8-K dated December 24, 1997, reporting under Item 5 the
record date of December 26, 1997 for the spin-off of Agritope, Inc., providing
other information regarding the spin-off, and reporting the adoption of a
Shareholder Rights Plan by Epitope.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPITOPE, INC., an Oregon corporation
February 17, 1998 JOHN W. MORGAN.
Date John W. Morgan
President and Chief Executive Officer
(Principal Executive Officer)
February 17, 1998 CHARLES E. BERGERON
Date Charles E. Bergeron
Chief Financial Officer
(Principal Financial & Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
10 Second Amendment to Credit Agreement between Andrew and Williamson Sales,
Co., and Wells Fargo Bank, National Association, with acknowledgement by
the Company, dated as of November 3, 1997.
27 Financial Data Schedule
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of November 3, 1997, by and between ANDREW AND WILLIAMSON SALES, CO., a
California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION
("Bank").
RECITALS
--------
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms
and conditions of that certain Credit Agreement between Borrower and Bank dated
as of December 17, 1995, as amended from time to time ("Credit Agreement").
WHEREAS, Bank and Borrower have agreed to certain changes in the terms
and conditions set forth in the Credit Agreement and have agreed to amend the
Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Credit
Agreement shall be amended as follows:
1. Section 6.1(i) is hereby deleted in its entirety, and the following
substituted therefor:
"(i) The failure of Guarantor to maintain Tangible Net Worth
at all times greater than or equal to $10,000,000.00, with "Tangible
Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less any intangible assets."
2. Except as specifically provided herein, all terms and conditions of
the Credit Agreement remain in full force and effect, without waiver or
modification. All terms defined in the Credit Agreement shall have the same
meaning when used in this Amendment. This Amendment and the Credit Agreement
shall be read together, as one document.
3. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein. Borrower
further certifies that as of the date of this Amendment there exists no Event of
Default as defined in the Credit Agreement, nor any condition, act or event
which with the giving of notice or the passage of time or both would constitute
any such Event of Default.
- 1 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
ANDREW AND WILLIAMSON SALES, CO.
By /s/ FRED L. WILLIAMSON
FRED L. WILLIAMSON
President
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ SETH D. MOLDOFF
SETH D. MOLDOFF
Vice President
- 2 -
<PAGE>
Acknowledged by the undersigned ("Guarantor"), which specifically
acknowledges that the failure of Guarantor to maintain Tangible Net Worth
(defined as the aggregate of total stockholders' equity plus subordinated debt
less any intangible assets) at all times greater than or equal to $10,000,000.00
shall constitute an "Event of Default" under the foregoing Credit Agreement.
EPITOPE, INC.
By: /s/ GILBERT N. MILLER
GILBERT N. MILLER
Executive Vice President/
Chief Financial Officer
- 3 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements included herein and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 723,077
<SECURITIES> 5,378,725
<RECEIVABLES> 1,751,045
<ALLOWANCES> 32,284
<INVENTORY> 1,359,521
<CURRENT-ASSETS> 9,412,734
<PP&E> 7,014,112
<DEPRECIATION> 5,940,650
<TOTAL-ASSETS> 11,160,729
<CURRENT-LIABILITIES> 2,656,673
<BONDS> 0
0
0
<COMMON> 110,576,942
<OTHER-SE> (102,072,886)
<TOTAL-LIABILITY-AND-EQUITY> 11,160,729
<SALES> 1,591,442
<TOTAL-REVENUES> 1,602,823
<CGS> 655,769
<TOTAL-COSTS> 2,653,268
<OTHER-EXPENSES> 95,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,673
<INCOME-PRETAX> (955,336)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (955,336)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
