SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 -- or -- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ______ ---------------- 0-25250 COMMISSION FILE NUMBER OSTEX INTERNATIONAL, INC. NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER STATE OF WASHINGTON 91-1450247 STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER 2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134 206-292-8082 ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES [N/A] FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT ---------------- Indicate by checkmark 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 [ ] THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF MAY 8, 2000 WAS 12,472,139. ---------------- OSTEX INTERNATIONAL, INC. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION Page ----- ITEM 1 - FINANCIAL STATEMENTS Condensed Balance Sheets F-1 Condensed Statements of Operations F-2 Condensed Statements of Cash Flows F-3 Notes to Condensed Financial Statements F-4 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 4 PART II -- OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 4 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 4 OSTEX INTERNATIONAL, INC. CONDENSED BALANCE SHEETS March 31, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,609,000 $ 1,562,000 Short-term investments 6,221,000 6,838,000 Trade receivables and other current assets, net 793,000 1,142,000 Inventory, at cost 684,000 251,000 ------------ ------------ Total current assets 9,307,000 9,793,000 ------------ ------------ Property, Plant and Equipment, net 1,792,000 1,905,000 Other Assets 599,000 599,000 ------------ ------------ Total assets $ 11,698,000 $ 12,297,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 247,000 $ 278,000 Accrued expenses 256,000 195,000 Current portion of note payable 58,000 115,000 ------------ ------------ Total current liabilities 561,000 588,000 ------------ ------------ Shareholders' Equity: Common stock, $.01 par value, 50,000,000 authorized; 12,479,139 and 12,469,050 issued and outstanding at March 31, 2000 and December 31, 1999 respectively 125,000 125,000 Additional paid-in capital 45,542,000 45,494,000 Accumulated items of comprehensive loss (125,000) (117,000) Accumulated deficit (34,405,000) (33,793,000) ------------ ------------ Total shareholders' equity 11,137,000 11,709,000 ------------ ------------ Total liabilities and shareholders' equity $ 11,698,000 $ 12,297,000 ============ ============ The accompanying notes are an integral part of these condensed financial statements. F-1 OSTEX INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Quarter Ended ---------------------------- March 31, March 31, 2000 1999 ------------ ------------ Revenues: Product sales and research testing services $ 887,000 $ 901,0000 Cost of products sold 78,000 246,000 ------------ ------------ Gross Profit 809,000 655,000 Operating Expenses: Research and development 374,000 471,000 Selling, general and administrative 1,137,000 944,000 ------------ ------------ Total operating expenses 1,511,000 1,415,000 ------------ ------------ Loss from operations (702,000) (760,000) Other Income, net 90,000 126,000 ------------ ------------ Net loss $ (612,000) $ (634,000) ============ ============ Basic and diluted net loss per common share $ (0.05) $ (0.05) Weighted average shares used in calculation 12,472,000 12,585,000 of net loss per share The accompanying notes are an integral part of these condensed financial statements. F-2 OSTEX INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Quarter Ended -------------------------- March 31, March 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ (491,000) $(1,048,000) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (2,057,000) (4,091,000) Proceeds from sales and maturities of short-term investments 2,666,000 3,956,000 Proceeds from sale of property, plant and equipment -- 15,000 Purchases of property, plant and equipment (40,000) -- ----------- ----------- Net cash provided by (used in) investing activities 569,000 (120,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the exercise of stock options 26,000 1,000 Repurchase of common stock -- (211,000) Payments on note payable (57,000) (50,000) ----------- ----------- Net cash used in financing activities (31,000) (260,000) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 47,000 (1,428,000) CASH AND CASH EQUIVALENTS, beginning of period 1,562,000 2,744,000 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 1,609,000 $ 1,316,000 =========== =========== The accompanying notes are an integral part of these condensed financial statements. F-3 OSTEX INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited condensed financial statements include the accounts of Ostex International, Inc., a Washington corporation (the "Company"). These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1999. 2. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income", which was effective for the Company beginning January 1, 1998, establishes standards for reporting and disclosure of comprehensive income. The components of comprehensive income for the three months ended March 31, 2000 and March 31, 1999, are as follows: March 31, March 31, 2000 1999 ------------- -------------- Net Loss $(612,000) $ (634,000) Unrealized (loss) on short-term investments (8,000) (1,000) ------------- -------------- Total comprehensive loss $(620,000) $ (635,000) ============= ============== F-4 PART I -- FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results or the timing of certain events to differ materially from historical results or those anticipated. Words used herein such as "believes," "anticipates," "expects," "intends," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. In addition, the disclosures in this Item 2 under the caption "Other Factors that May Affect Operating Results" consist principally of a brief discussion of risks which may affect future results and are thus, in their entirety, forward-looking in nature. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports previously filed with the Securities and Exchange Commission (the "Commission"), including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, that attempt to advise interested parties of the risks and factors that may affect the Company's business. OVERVIEW Ostex was incorporated in the State of Washington in 1989. The Company is engaged in the discovery and commercialization of products associated with osteoporosis and other collagen-related diseases. The Company believes that its lead product, the OSTEOMARK(R) test, now available in multiple test formats, incorporates breakthrough and patented technology in the area of bone resorption measurement. As of March 31, 2000, the Company had 35 employees. Osteoporosis is a significant health problem. One hundred million people worldwide are currently at risk of osteoporotic fracture. Twenty-five percent of all postmenopausal women are affected by osteoporosis. Thirty-five million people suffer from bone loss from other diseases. According to the National Osteoporosis Foundation (the "NOF"), annual osteoporosis-related costs in the U.S. exceed $14 billion. In spite of the serious human and economic consequences of these diseases (according to the NOF, the direct healthcare and indirect lost productivity costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical intervention usually commences only after pain, immobility, fractures, or other symptoms have appeared. The Company expects the osteoporosis therapeutic market will continue to increase as the elderly population grows. The Company also believes new therapeutic products are under development for osteoporosis, some of which are in late-stage clinical trials, and that the Osteomark test can be used to effectively predict a patient's response to osteoporosis therapy and monitor existing therapies and other therapies which may be developed. The Company is the exclusive licensee of the Osteomark technology, known clinically as the NTx test, which is available in urine and serum formats that can aid in healthcare decision-making at early menopause and beyond. The Osteomark test is a non-invasive diagnostic test which quantitatively indicates the level of bone resorption. Individuals who are losing bone collagen at accelerated rates may progress to low bone mass, a major cause of osteoporosis. The Company believes that early identification of high levels of bone resorption provides the opportunity to predict skeletal response (bone mineral density) to hormonal antiresorptive therapy in postmenopausal women which are intended to prevent the onset of osteoporosis. The Company also believes that the Osteomark test aids clinicians in monitoring the effects of antiresorptive therapies in postmenopausal women, as well as in older patients who have already lost significant bone mass. In May 1995, the Company's Osteomark test became commercially available in the United States as a urinary test that provides a quantitative measure of the excretion of cross-linked N-telopeptides of Type I collagen (NTx) as an indicator of human bone resorption. In July 1996, the Company received expanded claims for the urine test. The 1996 claims allow that an Osteomark test measurement, if taken prior to the initiation of hormonal 1 antiresorptive therapy, can be utilized to predict a patient's response to that therapy, in terms of its effect on bone mineral density. Additionally, the claims allow that the test can be used to measure the effect of antiresorptive therapies in postmenopausal women, as well as individuals diagnosed with osteoporosis and Paget's disease, and for the effect of estrogen-suppressing therapies. In March 1998 the claims were further expanded by allowing that, in addition to the 1996 claims, an Osteomark test measurement can identify the probability of a decrease in bone mineral density in postmenopausal women taking calcium supplements relative to those treated with hormonal antiresorptive therapy. In February 1999, Osteomark NTx Serum became the first and only commercially available test in the United States that measures specific bone breakdown by osteoclasts using a blood sample. The Company believes that the use of a serum NTx test provides a number of advantages to testing laboratories, including the elimination of the requirement to normalize NTx values to creatinine concentration. The Company is manufacturing and marketing the Osteomark test in an Enzyme-linked Immunosorbent Assay ("ELISA") format for testing urine or serum samples. Worldwide promotion of the Osteomark urine test kits is also supported by Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the Company entered into research, development, license and supply agreements with Johnson & Johnson. These agreements grant Johnson & Johnson a license to manufacture, sell and distribute certain products using Ostex's bone resorption technology. Currently, Johnson & Johnson distributes in the United States and certain foreign countries the Osteomark test in the existing microtiter plate format. Ortho-Clinical Diagnostics, a Johnson & Johnson company, announced in March 1999 the commercial availability of the NTx test on its Vitros(R) automated analyzer. Ostex receives material transfer payments and royalties on Johnson & Johnson's sales of products incorporating the Ostex technology. Under the Johnson & Johnson license agreement, the Company has the right to license its technology for use on automated instruments to one other company in addition to Johnson & Johnson. In 1992, Ostex entered into a research and development agreement and a license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese pharmaceutical company, for the commercialization of the Osteomark test in Japan. Under the research and development agreement, Mochida has an option to license the NTx serum test and has paid Ostex $3,350,000 in development fees to date. Future payments of $750,000 under the agreement are contingent upon Mochida's decision to exercise its option. Under the license agreement, Ostex granted Mochida exclusive marketing and distribution rights to certain Ostex products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing fees for the Osteomark test. In January 1998, Mochida launched the Osteomark test in Japan for the management of patients with hyperparathyroidism and for patients with metastatic bone tumors. In December 1999, Mochida received an additional regulatory indication from the Japanese Ministry of Health and Welfare for the Osteomark test for selecting suitable drugs for the treatment of osteoporosis and monitoring efficacy of drug therapy for osteoporosis. During 1999, Ostex sold Mochida the critical reagents to be assembled into finished products in Japan by Mochida. In first quarter 2000, Ostex began selling the finished product to Mochida. The Company has, through an agreement with Metrika, Inc. ("Metrika") a diagnostic device company, developed a physician's office "point-of-care" Osteomark test device. The Company and Metrika developed the fully disposable point-of-care NTx test as an indicator of bone resorption that computes a NTx value and displays it digitally. In October 1999, the Osteomark NTx Point-of-Care device became commercially available. At the same time, the Company signed an agreement with PSS World Medical, Inc. as its exclusive U.S. distribution partner of the NTx Point-of-Care device. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999 Total revenues were $887,000 for the quarter ended March 31, 2000, compared to $901,000 for the quarter ended March 31, 1999. The decrease in product sales was due primarily to the timing of orders and a delay in the shipment of NTx urine kits in late March. 2 The gross profit as a percentage of sales increased to 91% for the quarter ended March 31, 2000 compared to 73% for the quarter ended March 31, 1999. The increase was due to a ramp up in production, improved manufacturing processes, and certain inventory adjustments. The gross profit percentage can also fluctuate depending on the average sales price per kit and sales mix for both urine and serum. Management does not expect future quarterly results to generate a gross profit percentage as favorable as that generated in the quarter ended March 31, 2000. The Company's research and development expenditures totaled $374,000 for the quarter ended March 31, 2000, compared to $471,000 for the quarter ended March 31, 1999. The $97,000 decrease was attributable primarily to a reduction in outside services and lower labor and labor related expenses resulting from fewer personnel in first quarter 2000 versus the same period in 1999. Selling, general and administrative expenses totaled $1,137,000 for the quarter ended March 31, 2000, compared to $944,000 for the quarter ended March 31, 1999. The $193,000 increase was due primarily to higher professional service fees and increased legal expenses related to the Company's 1996 patent infringement lawsuit against a European competitor and its U.S. distributor. Net other income consists primarily of interest income and totaled $90,000 for the quarter ended March 31, 2000, compared to $126,000 for the quarter ended March 31, 1999. The decrease is due to a lower investment base which resulted from using cash to fund the Company's operating losses. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2000, the Company had cash and cash equivalents and short-term investments of $7,830,000, working capital of $ 8,746,000 and total shareholders' equity of $11,137,000. As a result of funding operating losses during the three months ended March 31, 2000, cash, cash equivalents and short-term investments decreased by $570,000, working capital decreased by $459,000 and shareholders' equity decreased by $572,000. During the three-month period ended March 31, 2000, the Company purchased $40,000 in property, plant and equipment and reduced notes payable by $57,000. The Company's future capital requirements depend upon many factors, including the effectiveness of Osteomark NTx Serum and Urine tests and the new point-of-care device's commercialization activities and arrangements; continued scientific progress in its research and development programs; the costs involved in filing, prosecuting and enforcing patent claims; and the time and costs involved in obtaining regulatory approvals. Depending on the expenses associated with these activities and their effectiveness on sales growth realization, additional funds from equity or debt financing may be required in the future. There can be no assurance that such additional funds will be available on favorable terms, if at all. If additional funds become necessary, the Company may seek to raise additional capital if conditions in the public equity markets are favorable or through private placements, even if the Company does not have an immediate need for additional cash at that time. If additional financing is not available, the Company believes that its existing available cash, its future license and research revenues from existing collaboration agreements, its current level of product sales and interest income from short-term investments, and the impact of current cost reduction activities, will be adequate to fund operations into the foreseeable future. OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS The Company's operating results may fluctuate due to a number of factors including, but not limited to: volume and timing of product sales, pricing, market acceptance of the Company's products, changing economic conditions in the healthcare industry, activities of competitors, delays and increased costs of product and technology development, increased production costs of the new point-of-care device, the Company's ability to develop and maintain collaborative arrangements, the outcome of litigation, and the effect of the Company's accounting policies and other risk factors detailed in the Company's 1999 Form 10-K and other SEC filings. All of the foregoing 3 factors are difficult for the Company to predict and can materially adversely affect the Company's business and operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the board for approval this quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed herewith: 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K None 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. OSTEX INTERNATIONAL, INC. DATED: May 15, 2000 By /s/ Thomas A. Bologna --------------------------------------------------- Thomas A. Bologna Chairman, President and Chief Executive Officer (Principal financial and principal accounting officer) 4