SECURITIES AND EXCHANGE COMMISSION
Washington,D.C. 20549
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FORM 10-Q
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
-- or --
/ / TRANSITION REPORT
FOR THE TRANSITION PERIOD FROM ____ TO ____
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OSTEX INTERNATIONAL, INC.
Name of Registrant as specified in Its Charter
0-25250
Commission File Number
STATE OF WASHINGTON
State or Other Jurisdiction of Incorporation or Organization
91-1450247
I.R.S. Employer 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
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THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF
AUGUST 7, 1996 WERE 12,441,617.
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1 - FINANCIAL STATEMENTS........................................2
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...............2
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS...........................................4
ITEM 2 - CHANGES IN SECURITIES.......................................5
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.............................5
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........5
ITEM 5 - OTHER INFORMATION...........................................5
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K............................6
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached hereto are the Registrant's unaudited
condensed balance sheet as of June 30, 1996, the audited
condensed balance sheet as of December 31, 1995, and the
unaudited condensed statements of operations and cash flows
for the six month period ended June 30, 1996 and 1995. Also
attached are notes to the unaudited financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
It is suggested that this management's discussion be
read in conjunction with the management discussion included
in the Registrant's Annual Report to shareholders for the
fiscal year ended December 31, 1995, previously filed with
the Securities and Exchange Commission.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Ostex International, Inc. (the "Company") had revenues
of $854,000 for the quarter ended June 30, 1996, compared to
$1,059,000 for the quarter ended June 30, 1995. There were
no research and development fees received during the second
quarter 1996 compared to $590,000 in the second quarter 1995
which included $500,000 from Johnson & Johnson Clinical
Diagnostics, Inc. ("Johnson & Johnson"), and $90,000 from
Mochida Pharmaceutical Co., Ltd. ("Mochida"). On May 8,
1995 the Company's lead product, the Osteomark-Registered
Trademark- test first became commercially available in the
United States as a urinary assay 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. Prior to becoming commercially
available, the Osteomark test was not available in the U.S.
except for research purposes only.
Product sales for the quarter ended June 30, 1996 were
$854,000 compared to $469,000 for the quarter ended June 30,
1995. The increase in 1996 is attributable to higher volumes
of kits sold to laboratories and physicians in the U.S.,
Europe, and Canada during the quarter. During the second
quarter of 1996, domestic and European sales were $854,000
compared to $396,000 in the same period of 1995 and research
testing decreased from $73,000 in 1995 to zero in 1996.
There were no research testing services sales during the
quarter due to the completion of an existing contract in
December 1995, and the continuing trend to sell kits rather
than contract testing services which is consistent with the
Company's marketing plan.
The Company's product costs totaled $267,000 for the
quarter ended June 30, 1996 compared to $189,000 for the
same period of 1995. Product costs have increased 41% while
production volume has increased 112%. Cost per unit of
output for the quarter ended June 30, 1996 decreased 33%
compared to the second quarter 1995 largely as a result of
increased volume as well as continued efficiency gains made
in the production process during the second quarter of 1996
compared to the second quarter of 1995.
The Company's research and development expenditures
totaled $701,000 for the quarter ended June 30, 1996,
compared to $782,000 for the quarter ended June 30, 1995.
The decrease is due primarily to a decline in expenses
associated with the completion of one of the Company's
clinical trials in November 1995, while research and
development activities associated with the Osteomark
immunoassay and research and development expenses associated
with the Company's monoclonal antibody laboratory have
remained constant. The Company intends to expand its
research and development activities during the next several
years.
Selling, general and administrative expenses totaled
$2,512,000 for the quarter ended June 30, 1996, compared to
$1,314,000 for the same period ended June 30, 1995. The
higher expense level during the three months ended June 30,
1996 was due to the implementation of marketing programs to
support Osteomark in the U.S., the addition of sales
personnel to support in these efforts, and increased legal
costs in preparation for the upcoming arbitration hearing
for the Boehringer Mannheim dispute. The Company intends to
continue its marketing efforts during the next several years
and expects to incur significant expense to stimulate
product sales in the U.S. and Europe.
Interest income totaled $325,000 for the quarter ended
June 30, 1996, compared to $475,000 for the three month
period ended June 30, 1995. The decrease is the result of
the fact that cash available for investment was less in the
quarter ended June 30, 1996 compared to the same period 1995
as funds have been used for operations.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
The Company had revenues of $1,441,000 for the six
month period ended June 30, 1996, compared to $1,439,000 for
the six month period ended June 30, 1995. There were no
research and development fees received during the first six
months of 1996 compared to $604,000 in the first six months
of 1995 including $500,000 from Johnson & Johnson and
$90,000 from Mochida. Research testing services and product
sales for the six month period ended June 30, 1996 were
$1,441,000 compared to $835,000 for the period ended June
30, 1995. Higher volumes of kits sold in the U.S., Europe
and Canada for research purposes attributed to $1,441,000 of
product revenues for the six month period ended June 30,
1996, compared to $687,000 for same period ended 1995, while
research testing services performed during the same period
declined by $148,000.
The Company's product costs totaled $435,000 for the
six month period ended June 30, 1996, compared to $323,000
for the same period ended June 30, 1995. Product costs have
increased 35% while production volume has increased 142% for
the six month period ended June 30, 1996. The resulting
unit cost reduction of 45% is a function of the increased
volume as well as overall efficiency gains made in the
production process during the six month period ended June
30, 1996 compared to the six month period ended June
30,1995.
The Company's research and development expenditures
totaled $1,446,000 for the six month period ended June 30,
1996, compared to $1,616,000 for the same period ended June
30, 1995. The decrease is due primarily to a decline in
expenses associated with the completion of one of the
Company's clinical trials in November 1995, while research
and development activities associated with the Osteomark
immunoassay and research and development expenses associated
with the Company's monoclonal antibody laboratory have
remained constant.
Selling, general and administrative expenses totaled
$4,367,000 for the six month period ended June 30, 1996,
compared to $2,423,000 for the six months ended June 30,
1995. The higher expense level was due to the
implementation of marketing programs to support Osteomark in
the U.S., the addition of marketing personnel to support the
product launch, foreign selling costs and increased costs
associated with being a public company.
Interest income totaled $737,000 for the six month
period ended June 30, 1996, compared to $793,000 for the
same period ended June 30, 1995. The decrease is the result
of decreased levels of cash available for investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception
primarily through an initial public offering of 3,645,642
shares of common stock, which generated net proceeds of
approximately $32,000,000, and three private placements of
preferred stock aggregating approximately $12,800,000.
Additional funds of approximately $10,100,000 have been
generated through collaborative research and licensing
agreements, sales of the Osteomark immunoassay kits and
research testing services. As of June 30, 1996, the Company
had $23,536,000 in cash and cash equivalents and short-term
investments, working capital of $24,213,000 and total
shareholder' equity of $27,327,000.
During the six month period ended June 30, 1996 the
Company used $3,918,000 of cash for operating activities as
compared to $2,057,000 during the six month period ended
June 30, 1995. The primary reason for the change was the
increased net loss partially being offset by collections of
significant trade receivable balances during the six month
period ended June 30, 1996. Total cash provided by
investing activities was $1,845,000 for the six months ended
June 30, 1996 compared to $13,277,000 used in the same
period of 1995. The proceeds provided by investing
activities in the six month period ended June 30, 1996 were
primarily the result of more short-term investments maturing
during the period than were purchased. During the same
period ended June 30, 1995, most investing activities
focused on using cash made available by the Company's
initial public offering to purchase short-term investments.
The Company expects its cash requirements to increase in
future periods. The Company's future capital requirements
depend upon many factors, including effective
commercialization activities and arrangements, continued
scientific progress in its research and development
programs, progress toward development of the O-CSF
technology, which potentially has therapeutic uses, the
costs involved in filing, prosecuting and enforcing patent
claims, the costs involved in enforcing and arbitrating
distribution agreements, and the time and costs involved in
obtaining regulatory approvals.
The Company intends to seek additional collaborative or
license agreements with suitable corporate partners. There
can be no assurance, however, that the Company will be able
to enter into such agreements or that the amounts received
under such agreements will materially reduce the Company's
funding requirements. Additional equity or debt financing
may be required. There can be no assurance that such
additional funds will be available on favorable terms, if at
all. Because of the Company's significant long-term cash
requirements, it may seek to raise additional capital if
conditions in the public equity markets are favorable, even
if the Company does not have an immediate need for
additional cash at that time. If additional financing is
not available, the company anticipates that its existing
available cash, its future license and research revenues
from existing collaboration agreements, product sales and
interest income from short-term investments will be adequate
to satisfy its capital requirements and to fund operations
through at least 1998.
Forward looking statements in this Form 10-Q involve a
number of risks and uncertainties including, but not limited
to, product demand, pricing, market acceptance, changing
economic conditions, risks in product and technology
development, the effect of the Company's accounting policies
and other risk factors detailed in the Company's SEC
filings.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1994, the Company and Boehringer Mannheim, a
division of Corange International, Ltd, executed a license
agreement which granted to Boehringer Mannheim a co-
exclusive, 10-year license for worldwide distribution of
Osteomark kits in the existing microtiter plate (MTP)
format, except in countries where the Company has prior
exclusive distribution agreements. Additionally, Boehringer
Mannheim was granted a co-exclusive, 10-year license to
adapt the Osteomark test for use on automated systems and to
manufacture and market it worldwide, except in Japan.
On August 25, 1995, the Company filed an action in the
United States District Court for the Western District of
Washington (the "District Court") to compel Boehringer
Mannheim to participate in arbitration and to enforce any
arbital award of damages or other relief. The Company
believes that Boehringer Mannheim concentrated its efforts
on adapting the Company's Osteomark test for use on
Boehringer Mannheim's proprietary, automated instruments,
but has failed to meet its marketing and other obligations
under the agreement for the distribution of the Osteomark
test in the existing, Company-manufactured MTP format. On
October 26, 1995, Boehringer Mannheim filed an answer in the
District Court, denying that requisites to arbitration under
the agreement have been met, counterclaiming for damages
against the Company for breach of contract, and requesting
that the Company's motion to compel arbitration be denied,
or, in the alternative, that the parties be compelled to
mediate their disputes as a prerequisite to arbitration.
On December 5, 1995 a United States District Court
judge ruled against Boehringer Mannheim and ordered it to
proceed with the arbitration. The federal court retained
jurisdiction over the dispute to enforce any award issued by the
arbitrators. The hearing before the American Arbitration
Association is scheduled for September 1996. At the present
time management cannot estimate the amount of damages, if
any, which may be awarded to either party.
In June 1996, the Company filed an action in the United
States District Court for the Western District of Washington
against Osteometer Biotech A/S, a biotechnology company
based in Denmark, and Diagnostic Systems Laboratories Inc.
for patent infringement. The Company believes Osteometer's
Crosslaps immunoassay incorporates technology which
infringes on the Company's technology which is protected by
the United States Letters Patent No. 5,455,179. The Company
expects the case will be scheduled for trial in late 1997.
At the present time management cannot estimate the amount of
damages, if any, which may be awarded to either party.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1996, the Company held its 1996 Annual
Meeting of Shareholders (the "Annual Meeting"), at which the
following members were elected to the Board of Directors:
Affirmative Votes
Votes Withheld
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Thomas J. Cable 9,785,948 226,330
H. Raymond Cairncross 9,785,323 226,955
Robert J. Glaser 9,785,948 226,330
Gregory D. Phelps 9,785,948 226,330
The following member continued his term on the Board of
Directors:
David R. Eyre
The following proposal was also approved at the Annual Meeting:
Affirmative Votes Votes
Votes Against Withheld
----------- ----------- ----------
Ratification of Arthur Andersen LLP 9,984,073 21,170 7,035
as the Company's independent
auditors for the fiscal year ending
December 31, 1996
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS **
The following exhibit is filed herewith:
3.1* Articles of Incorporation, as amended and in effect
3.2* Bylaws, as amended and in effect
27.1 Financial Data Schedule
* Incorporated herein by reference from Item 16(a) of Registrant's Form
S-1 Registration Statement as declared effective January 24, 1995,
(No. 33-86118).
** Copies of the exhibits may be obtained at prescribed rates from the
Public Reference Section of the Securities and Exchange Commission at
450 5th Street NW, Room 1024, Washington, D.C., 20549.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter for which this
Form 10-Q is filed.
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.
DATE: August 12, 1996 By /S/ H. RAYMOND CAIRNCROSS
----------------------------------
H. Raymond Cairncross
Chairman of the Board of Directors
and Chief Executive Officer
(principal executive officer)
DATE: August 12, 1996 By /S/ JOHN M. BRENNEMAN
----------------------------------
John M. Brenneman
Secretary and Treasurer
Director of Finance and Operations
(principal financial and principal
accounting officer)
OSTEX INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, June 30,
1995 1996
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(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 6,241 $ 4,209
Short-term investments 21,553 19,327
Trade receivables and other current assets 1,654 1,305
Inventory, at cost 236 212
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Total current assets 29,684 25,053
NET FURNITURE AND EQUIPMENT, at cost 2,481 2,439
OTHER ASSETS 676 675
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Total assets $ 32,841 $ 28,167
============= ============
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,323 $ 840
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000
authorized; 12,432,667 and 12,441,617 issued
and outstanding 125 125
Additional paid-in capital 45,187 45,066
Accumulated deficit (13,794) (17,864)
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Total shareholders' equity 31,518 27,327
Total liabilities and shareholders' equity $ 32,841 $ 28,167
============= ============
The accompanying notes are an integral part of these condensed balance sheets.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Quarter Ended Year to Date
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE:
Research testing services and product sales $ 469 $ 854 $ 835 $ 1,441
Research and development fees 590 - 604 -
------------ ------------ ------------ ------------
Total revenues 1,059 854 1,439 1,441
OPERATING EXPENSES:
Product costs 189 267 323 435
Research and development 782 701 1,616 1,446
Selling, general and administrative 1,314 2,512 2,423 4,367
------------ ------------ ------------ ------------
Total operating expenses (1) 2,285 3,480 4,362 6,248
------------ ------------ ------------ ------------
Loss from operations (1,226) (2,626) (2,923) (4,807)
OTHER INCOME:
Interest income 475 325 793 737
------------ ------------ ------------ ------------
Net loss $ (751) $ (2,301) $ (2,130) $ (4,070)
============ ============ ============ ============
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.06) $ (0.18) $ (0.18) $ (0.33)
Shares used in calculation 12,165 12,441 11,557 12,441
<FN>
(1) Includes legal and consulting fees for services provided by a related party totaling $81,026 and $55,838 for
the quarters ended June 1995 and 1996, respectively, and $145,538 and $73,914 for the six months ended June 1995 and
1996, respectively.
</FN>
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year to Date
-----------------------------
June 30, June 30,
1995 1996
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES $ (2,057) $ (3,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (27,068) (12,576)
Proceeds from sales of short-term investments 14,747 14,623
Purchase of furniture and equipment (956) (202)
------------ ------------
Net cash provided by (used in) investing activities (13,277) 1,845
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and
exercise of options on common stock 31,789 41
Proceeds from stock subscription receivable 165 -
------------ ------------
Net cash provided by financing activities 31,954 41
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 16,620 (2,032)
CASH AND CASH EQUIVALENTS, beginning of period 1,706 6,241
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 18,326 $ 4,209
============ ============
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 period, 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,
1995.
Net Loss per Common and Common Equivalent Share
For the three months ended June 30, 1996, and the six months
ended June 30, 1996, net loss per common and common
equivalent share was based on the weighted average number of
common shares outstanding during each period. Common stock
equivalents include shares issuable upon the exercise of
outstanding stock options or warrants. These shares are not
included in the computation of net loss per share because
the effect of including such shares would be antidilutive.
2. CONTINGENCIES
Legal
Refer to Part II, Item 1 for Legal Proceedings