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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FIRST QUARTER ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-10492
EPITOPE, INC.
Incorporated in IRS Employer
the State of Oregon Identification No. 93-0779127
8505 SW Creekside Place
Beaverton, Oregon 97008-7108
(503) 641-6115
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, 1999: 14,261,887
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<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets at December 31, 1999 (unaudited)
and September 30, 1999................................................. 2
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended December 31, 1999 and 1998.................. 3
Condensed Consolidated Statements of Changes in Shareholders' Equity
(unaudited) for the three months ended December 31, 1999............... 4
Condensed Consolidated Statements of Cash Flows(unaudited)
for the three months ended December 31, 1999 and 1998.................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)........... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............. 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................... 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 10
</TABLE>
<PAGE>
EPITOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
12/31/99 9/30/99
(Unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.............................................. $ 795,169 $ 1,075,898
Marketable securities.................................................. 4,124,346 4,532,594
Trade accounts receivable, net ........................................ 1,377,466 1,489,884
Other receivables...................................................... 92,186 73,356
Inventories (Note 2) .................................................. 1,463,997 1,504,050
Prepaid expenses....................................................... 421,909 329,958
------------- --------------
8,275,073 9,005,740
Property and equipment, net............................................ 1,183,418 1,030,595
Patents and proprietary technology, net ............................... 449,403 487,085
Other assets and deposits.............................................. 162,008 170,895
------------- --------------
$ 10,069,902 $ 10,694,315
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable....................................................... $ 329,116 $ 474,713
Salaries, benefits and other accrued liabilities....................... 1,518,135 1,643,573
------------- --------------
1,847,251 2,118,286
Commitments and contingencies.......................................... - -
Shareholders' equity (Note 4)
Contributed capital.................................................... 114,987,278 114,827,231
Accumulated deficit.................................................... (106,764,627) (106,251,202)
------------- --------------
8,222,651 8,576,029
$ 10,069,902 $ 10,694,315
2
<PAGE>
EPITOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1999 1998
Revenues
Product sales.......................................................... $ 2,584,756 $ 2,244,410
Grants and contracts................................................... 42,270 59
------------- --------------
2,627,026 2,244,469
Costs and expenses (Note 2)
Product costs.......................................................... 1,021,065 829,446
Operations............................................................. 425,658 373,204
Research and development costs......................................... 537,221 537,855
Selling, general and administrative expenses........................... 1,221,082 1,262,914
------------- --------------
3,205,026 3,003,419
Loss from operations .................................................. (578,000) (758,950)
Other income (expense), net
Interest income........................................................ 67,860 65,235
Interest expense....................................................... (97) (342)
Other, net............................................................. (3,188) (5,921)
------------- --------------
64,575 58,972
Net loss............................................................... (513,425) $ (699,978)
Basic and diluted net loss per share................................... $ (0.04) $ (0.05)
Weighted average number of shares outstanding ......................... 14,246,975 13,594,798
</TABLE>
3
<PAGE>
EPITOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
COMMON STOCK ACCUMULATED
SHARES DOLLARS DEFICIT TOTAL
<S> <C> <C> <C> <C>
BALANCES AT SEPTEMBER 30, 1999................. 14,245,097 $114,827,231 $(106,251,202) $ 8,576,029
Common stock issued upon
exercise of options.......................... 12,846 58,250 - 58,250
Common stock issued as
matching savings plan contributions....... 2,691 17,492 - 17,492
Common stock issued under Employee
Stock Purchase Plan.......................... 1,253 4,197 - 4,197
Compensation expense for
stock option grants.......................... - 80,108 - 80,108
Net loss for the year.......................... - - (513,425) (513,425)
---------- ------------ ------------- -----------
BALANCES AT DECEMBER 31, 1999 (UNAUDITED)...... 14,261,887 $ 114,987,278 $(106,764,627) $ 8,222,651
</TABLE>
4
<PAGE>
EPITOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
THREE MONTHS ENDED DECEMBER 31 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss............................................................... $ (513,425) $ (699,978)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization.......................................... 162,779 151,546
Loss on disposition of assets.......................................... - 5,927
Decrease in accounts receivable and other receivables.................. 93,588 400,699
Decrease (increase) in inventories..................................... 40,053 (292,134)
(Increase) decrease in prepaid expenses................................ (91,951) 45,599
Decrease in accounts payable and accrued liabilities .................. (271,035) (271,004)
Compensation expense for stock option grants and
deferred salary increases........................................... 80,108 77,242
Other, net ............................................................ 41,070 24,860
----------- -----------
Net cash used in operating activities.................................. (458,813) (557,243)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities.................................... (959,979) (1,499,587)
Proceeds from sale of marketable securities............................ 1,368,227 1,459,329
Additions to property and equipment.................................... (259,898) (154,979)
Expenditures for patents and proprietary technology.................... (18,024) (51,131)
Investment in affiliated companies..................................... (32,181) (7,897)
----------- -----------
Net cash provided by (used in) investing activities.................... 98,145 (254,265)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock................................. 79,939 184,873
----------- -----------
Net cash provided by (used in) financing activities.................... 79,939 184,873
Net decrease in cash and cash equivalents.............................. (280,729) (626,635)
Cash and cash equivalents at beginning of period...................... 1,075,898 1,164,275
----------- -----------
Cash and cash equivalents at end of period............................. $ 795,169 $ 537,640
</TABLE>
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 THE COMPANY
Epitope, Inc. (Epitope or the Company) develops, manufactures and markets oral
specimen collection devices and diagnostic products using its proprietary oral
fluid technologies. These products are sold to public and private-sector clients
in the United States and certain foreign countries. The Company's primary focus
is on the detection of antibodies to the Human Immunodeficiency Virus (HIV), the
cause of Acquired Immune Deficiency Syndrome (AIDS). The Company's technology is
also being used to test for drugs-of-abuse and other analytes. Commercial
distribution of the Company's oral specimen collection device as part of a test
for the five major drugs-of-abuse was launched on February 2, 2000.
The interim condensed consolidated financial statements included herein are
unaudited; however, in the opinion of the Company's management, 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 consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 1999 Annual Report on Form 10-K. Results of operations for the period
ended December 31, 1999 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 financial statements include the
accounts of the Company and its joint venture subsidiary. All significant
intercompany balances and transactions have been eliminated.
<TABLE>
Inventories. Inventory components are summarized as follows: 12/31/99 9/30/99
(Unaudited)
<S> <C> <C>
Raw materials................................... $ 329,790 $ 360,806
Work-in-process ................................ 403,983 441,952
Finished goods ................................. 730,224 701,292
----------- -----------
$ 1,463,997 $ 1,504,050
</TABLE>
Net Loss Per Share. Basic and diluted loss per share has been computed using the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock consists of the number of
shares issuable upon exercise of outstanding warrants, and options less the
number of shares assumed to have been purchased for the treasury with the
proceeds from such exercise. Potential common stock is excluded from the
computation if its effect is anti-dilutive. Basic and diluted net income (loss)
per share are the same for the three months ended December 31, 1999 and 1998. On
December 31, 1999 and 1998 the weighted average shares outstanding were
14,246,975 and 13,594,798, respectively. Shares of potential common stock on
December 31, 1999 and 1998, respectively of 5,967,735 and 6,385,245 were not
included in the calculation of diluted loss per share as the effect would have
been anti-dilutive.
Statement of Cash Flows. Cash paid for interest approximated interest expense in
the quarters ended December 31, 1999 and 1998. No cash was paid for income taxes
in fiscal 1999 or 1998. Compensation expense related to the issuance of
compensatory equity securities, which also represent non-cash transactions,
amounted to $80,108 and $77,242 in the first quarter of fiscal 1999 and 1998,
respectively.
Management Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
relating to assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates.
6
<PAGE>
Reclassifications. Certain reclassifications have been made to prior years' data
to conform with the current year's presentation. These reclassifications had no
impact on previously reported results of operations or shareholders' equity.
Regulatory affairs, quality assurance, materials management and purchasing were
reclassified as Operations. In the first quarter of fiscal 1999 these
departments were included in either Research and Development or Selling, general
and administrative expenses. Management believes these reclassifications provide
a more meaningful presentation.
NOTE 3 SEGMENT AND GEOGRAPHIC AREA INFORMATION
The following disclosures are required by the Statement of Financial Accounting
Standards No. 131, "Segment Disclosures and Related Information" (SFAS 131):
The Company's products are all included in the medical products industry
segment. See Note 1 for a description of the Company's business. The Company's
products are sold principally in the United States, Canada, Asia and Latin
America. Operating loss represents revenues less product costs and operating
expenses. No operating income or loss is reflected for geographic areas other
than the United States as all revenues for other geographic areas are exports
from the United States. Most sales to Canada are for the life insurance market
and have been made through U.S. laboratories since third quarter 1998.
IN THOUSANDS
<TABLE>
FOR THE THREE MONTHS ENDED REVENUES OPERATING LOSS IDENTIFIABLE ASSETS
DECEMBER 31, 1999 1998 1999 1998 1999 1998
GEOGRAPHIC AREA
<S> <C> <C> <C> <C> <C> <C>
United States..................................... 2,444 2,142 $(578) $(759) $9,648 $11,161
Canada............................................ 7 - - - - -
Asia.............................................. 133 97 - - - -
Latin America..................................... - 3 - - - -
Europe............................................ 1 - - - - -
Other............................................. - 2 - - - -
------ ------ ----- ----- ------ -------
$2,585 $2,244 $(578) $(759) $9,648 $11,161
</TABLE>
Customer Concentration. In the first quarter of fiscal 2000 four customers
accounted for 52 percent of product revenues as compared to 69 percent for the
same quarter of fiscal 1999. The Company believes that its relationship with
each of these customers is strong and believes that they will purchase
comparable or increasing volumes of the Company's products for the foreseeable
future. There can be no assurance, however, that sales to these customers will
not decrease or that these customers will not choose to replace the Company's
products with those of competitors. The loss of any of these customers or a
significant decrease in the volume of products purchased by them would have a
material adverse effect on the Company.
NOTE 4 SUBSEQUENT EVENTS
Stock option exercises. Between December 31, 1999 and February 8, 2000 the
Company received nearly $2.6 million in cash from the exercise of warrants and
options to purchase 553,568 shares of common stock.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements below regarding future events or performance are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could be quite different from those
expressed or implied by the forward-looking statements. Factors that could
affect results include: loss of key personnel; failure to comply with
regulations of the FDA or other regulatory agencies; obstacles to international
marketing of the Company's products; loss or impairment of sources of capital;
ability of the Company to develop product distribution channels; ability of the
Company to develop new products; development of competing products; market
acceptance of oral testing products; and changes in federal or state law or
regulations. These factors are discussed more fully under "Forward-Looking
Statements; Risk Factors" in Item 1 and elsewhere in the Company's Annual Report
on Form 10-K. 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. Readers are
cautioned not to place undue reliance on the forward-looking statements.
RESULTS OF OPERATIONS
The table below shows the amount (in thousands) and percentage of Epitope's
total revenue contributed by each of its principal products and by grants and
contracts.
THREE MONTHS ENDED DECEMBER 31 1999 1998
Product Sales
Oral specimen collection devices............. $2,130 81% $1,519 68%
Western blot HIV confirmatory tests.......... 400 15 666 30
Other product sales.......................... 55 2 59 2
------ --- ------ ---
2,585 98% 2,244 100%
Grants and contracts........................... 42 2 - -
------ --- ------ ---
$2,627 100% $2,244 100%
Revenues. Total product sales increased by $341,000 or 15 percent in the current
quarter as compared to the first quarter of fiscal 1999. This increase was
primarily a result of expanded sales volume of Epitope's lead product, the
OraSure oral specimen collection device, which increased by $611,000 or 40
percent in the current quarter as compared to the first quarter of fiscal 1999.
Total product sales revenues decreased from the fourth quarter of fiscal 1999 by
$483,000 or 15 percent primarily as a result of the seasonality of the life
insurance testing market and reduced sales of the Western blot HIV confirmatory
tests to Organon Teknika.
OraSure device and other product sales into the public health markets in the
quarter ended December 31, 1999 totaled $965,000 or 37 percent of product sales
as compared to $572,000 or 25 percent in the same period of fiscal 1999. The
life insurance testing market in the first quarter of fiscal 2000 contributed
$1,079,000 or 42 percent of total product sales for the period as compared to
$902,000 or 40 percent in the first quarter of fiscal 1999. Sales into
international markets in the current quarter were $141,000 or 5 percent of
product sales as compared to $102,000 or 4 percent of product sales in the same
quarter of fiscal 1999.
Sales of the Company's Western blot HIV confirmatory tests decreased by $266,000
or 40 percent in the current quarter as compared to the first quarter of fiscal
1999. With reduced sales of Western blot HIV confirmatory tests to Organon
Teknika, and OraSure sales to a broader customer base, the total sales to the
Company's top 4 customers decreased to 52% of total sales in the first quarter
of fiscal 2000. (see Note 3 to the Consolidated Financial Statements in Item 1.)
Fiscal year sales are anticipated to rise in 2000, compared to fiscal year 1999.
However, sales may be affected by economic factors and seasonality of certain
market segments. Expectations for future sales are based primarily on forecasts
provided to the Company by individual customers rather than firm orders, as many
of the customers in the public health and international markets do not have
contractual arrangements with the Company.
Grant and contract revenues increased by $42,000 or approximately 100 percent in
the current quarter as compared to the first quarter of fiscal 1999 due to
funding from the grant provided by the National Institute for Health (NIH) for
the development of a syphilis test.
8
<PAGE>
Gross Margin. Gross margin on product sales was 61 percent in the first quarter
of fiscal 2000 compared to 63 percent in the comparable period of fiscal 1999.
The decline in gross margin is attributable to decreases in sales and production
volumes of the Western blot HIV confirmatory tests.
Operations. Operation expenses increased by $52,000 or 14 percent in the current
quarter as compared to last year's first quarter due primarily to costs
associated with efforts to achieve compliance with FDA Quality System
Regulations and process improvements.
Research and Development Expenses. Research and development expenses were
approximately the same as last year's first quarter. R&D expenses for fiscal
year 2000 are expected to exceed the 1999 level as spending for the syphilis
test and clinical trials for OraQuick are planned although some of this
increased expense will be offset by grant funding.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first quarter of fiscal 1999 decreased by
$42,000 or 3 percent as compared to last year's first quarter. The decrease was
primarily a result of decreased compensation costs related to the departure of
the Company's former chief executive officer and is not expected to continue.
LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 12/31/99 9/30/99
Cash and cash equivalents....................... $ 795 $ 1,076
Marketable securities........................... 4,124 4,533
Working capital................................. 6,428 6,887
Net cash flows used in operating activities decreased by $98,000 compared to the
same quarter in fiscal 1999. The total of cash and cash equivalents plus
marketable securities decreased by $689,000 during the quarter due primarily to
the need to fund operating activities and timing of the collection of accounts
receivable. Collections of accounts receivable due at December 31, 1999 and
received in the first two weeks of January 2000 amounted to over $600,000.
Proceeds from current assets, primarily the collection of accounts receivable,
represented the primary sources of funds for meeting the Company's requirements
for operations, working capital and business expansion in the current quarter.
In addition, the Company received proceeds of $58,000 from the exercise of
options to purchase common stock in the quarter. Subsequent to December 31,
1999, the Company received nearly $2.6 million in cash from the exercise of
warrants and options to purchase 553,568 shares of common stock.
The Company anticipates that it will continue to need funds to support ongoing
research and development projects, to provide additional manufacturing capacity,
and to increase working capital to support growth. The Company believes that its
operating liquidity requirements for the foreseeable future can be met by
existing resources, including marketable securities and cash generated by
operations. The Company may also receive funds through the exercise of
additional stock options and warrants as well as research grants; however, there
can be no assurances that funding from these sources will be available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not hold material amounts of derivative financial instruments,
other financial instruments, or derivative commodity instruments, and
accordingly has no material market risk to report under this item.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER INFORMATION
In January 2000, Epitope announced the appointment of Robert D. Thompson, 38, as
the Company's president and chief executive officer. Prior to joining the
Company, Mr. Thompson was chief operating officer and chief financial officer at
LabOne, Inc. (Nasdaq NM: LABS), a $102 million, Kansas City, Mo.-based insurance
testing laboratory. Mr. Thompson originally joined LabOne as chief financial
officer, treasurer, and executive vice president, finance, in 1993. He added the
title of chief operating officer in 1996. LabOne is one of the pioneers in the
use of Epitope's OraSure(R) device for HIV testing in the insurance market and
supplies HIV testing services to support Epitope's public health market. Before
joining LabOne, Mr. Thompson served as chief financial officer of Metwest, Inc.,
a Dallas-based clinical laboratory, and worked for seven years as an
international business consultant. Mr. Thompson received an MBA degree from
Harvard Graduate School of Business Administration and a BS degree in Economics
from the Wharton School of Business at the University of Pennsylvania.
In December 1999, Frank G. Hausmann, 42, was appointed to the Company's Board of
Directors. Mr. Hausmann is President and Chief Executive Officer of CenterSpan
Communications Corporation (Nasdaq NM: CSCC), a Hillsboro, Oregon-based
developer and marketer of Internet voice and text messaging software solutions.
He joined CenterSpan in July 1998 as chief financial officer and was appointed
president and CEO in October 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are listed on the attached exhibit index following the signature page
of this report.
(b) Reports on Form 8-K
None.
10
<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.
February 10, 2000 /S/CHARLES E. BERGERON
- ------------------------------------ --------------------------------
Date Charles E. Bergeron
Chief Financial Officer
(Principal Financial Officer)
February 10, 2000 /S/THEODORE R. GWIN
- ------------------------------------ --------------------------------
Date Theodore R. Gwin
Controller
(Principal Accounting Officer)
11
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule
12
<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-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 795,169
<SECURITIES> 4,124,346
<RECEIVABLES> 1,519,652
<ALLOWANCES> 50,000
<INVENTORY> 1,463,997
<CURRENT-ASSETS> 8,275,073
<PP&E> 6,144,436
<DEPRECIATION> 4,961,018
<TOTAL-ASSETS> 10,069,902
<CURRENT-LIABILITIES> 1,847,251
<BONDS> 0
0
0
<COMMON> 114,987,278
<OTHER-SE> (106,764,627)
<TOTAL-LIABILITY-AND-EQUITY> 10,069,902
<SALES> 2,584,756
<TOTAL-REVENUES> 2,627,026
<CGS> 1,021,065
<TOTAL-COSTS> 3,205,026
<OTHER-EXPENSES> 64,672
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (97)
<INCOME-PRETAX> (513,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (513,425)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
