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 QUATERLY PERIOD ENDED SEPTEMBER 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
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
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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 NOVEMBER 5, 1996 WAS 12,441,617.
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OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
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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 ............................ 2
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS......................... 4
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.......... 5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached hereto are the Registrant's unaudited condensed
balance sheet as of September 30, 1996, the audited condensed
balance sheet as of December 31, 1995, the unaudited condensed
statements of operations for the quarter and nine month periods
ended September 30, 1996 and 1995, and condensed statement of
cash flows for the nine month periods ended September 30, 1996
and 1995. Notes follow the unaudited financial statements and
are an integral part thereof.
ITEM 2. MANAGEMENTS'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 for the fiscal year ended December 31,
1995, previously filed with the Securities and Exchange
Commission.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Ostex International, Inc. (the "Company") had revenues of
$1,859,000 for the quarter ended September 30, 1996, compared to
$717,000 for the quarter ended September 30, 1995. Research and
development fees amounted to $1,083,000 during the 1996 third
quarter, including two milestone payments totaling $1,080,000
from Mochida Pharmaceutical Co., Ltd. ("Mochida"). Third quarter
1995 research and development fees totaled $429,000 which
included milestone payments of $405,000 from 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.
Revenues from product sales and research testing services for
the quarter ended September 30, 1996 were $776,000, compared to
$288,000 for the quarter ended September 30, 1995. The increase
in 1996 is attributable to higher volumes of kits sold to
laboratories and distributors worldwide during the quarter.
During the third quarter of 1996, worldwide sales were $776,000
compared to $224,000 in the same period of 1995 while research
testing decreased from $64,000 in 1995 to zero in 1996. There
were no research testing services sales during the 1996 quarter
due to the completion of an existing contract in December 1995.
The Company's cost of products sold totaled $247,000 for the
quarter ended September 30, 1996 compared to $101,000 for the
same period of 1995. The gross profit rate on product sales for
the 1996 third quarter was 68% compared to 55% for the third
quarter in 1995. The change in gross profit rate is a result of an
increase in the Company's average selling price as well as a
decline in unit manufacturing costs resulting from increased
production volume that caused fixed manufacturing costs to be
spread over the higher number of units produced during the
third quarter 1996.
The Company's research and development expenditures totaled
$757,000 for the quarter ended September 30, 1996, compared to
$869,000 for the quarter ended September 30, 1995. The decrease
is due primarily to the completion of one of the Company's
clinical trials in November 1995.
Selling, general and administrative expenses totaled
$2,328,000 for the quarter ended September 30, 1996, compared to
$1,769,000 for the same period ended September 30, 1995. The
higher expense level during the three months ended September 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, increased legal costs involved with the
arbitration hearing with Boehringer Mannheim, and patent
litigation.
Interest income totaled $299,000 for the quarter ended
September 30, 1996, compared to $466,000 for the three month
period ended September 30, 1995. The decrease is due to lower
invested balances resulting from using cash to fund the Company's
operating losses.
Interest expense totaled $23,000 for the quarter ended
September 30, 1996, compared to zero for the three month period
ended September 30, 1995. Interest expense is attributed to the
Company entering into a note agreement in the amount of $746,000
that provided funds required for expansion of manufacturing and
administrative facilities during 1995 and 1996.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
The Company had revenues of $3,300,000 for the nine month
period ended September 30, 1996, compared to $2,156,000 for the
nine month period ended September 30, 1995. Research and
development fees amounted to $1,083,000 during the first nine
months of 1996, compared to $1,033,000 in the first nine months
of 1995. The 1996 period included fees of $1,080,000 from
Mochida for attainment of two milestones under a research and
development agreement. The 1995 period included $500,000 from
Johnson & Johnson Clinical Diagnostics and $495,000 from Mochida.
Higher volumes of kits sold worldwide resulted in $2,217,000 of
product revenues for the nine month period ended September 30,
1996, compared to $911,000 for same period in 1995. Research
testing services decreased from $212,000 in 1995 to zero in 1996
due to the completion of an existing contract in December 1995.
The Company's cost of products sold totaled $682,000 for the
nine month period ended September 30, 1996, compared to $424,000
for the nine months ended September 30, 1995. The gross profit
rate on product sales for the nine months ended September 30,
1996 was 69% compared to 53% for the same period in 1995. The change
in gross profit rate is a result of an increase in the Company's
average selling price as well as a decline in unit manufacturing
costs resulting from increased production volume that caused fixed
manufacturing costs to be spread over the higher number of units
produced during the during nine months ended September 30, 1996.
The Company's research and development expenditures totaled
$2,203,000 for the nine month period ended September 30, 1996,
compared to $2,485,000 for the same period ended September 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.
Selling, general and administrative expenses totaled
$6,695,000 for the nine month period ended September 30, 1996,
compared to $4,192,000 for the nine months ended September 30,
1995. The higher expense level 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, increased legal
costs involved with the arbitration hearing with Boehringer
Mannheim, and patent litigation.
Interest income totaled $1,036,000 for the nine month period
ended September 30, 1996, compared to $1,259,000 for the same
period ended September 30, 1995. The decrease is due to lower
invested balances resulting from using cash to fund the Company's
operating losses.
Interest expense totaled $23,000 for the nine month period
ended September 30, 1996, compared to zero for the nine month
period ended September 30, 1995. Interest expense is attributed
to the Company entering into a note agreement in the amount of
$746,000 that provided funds required for expansion of
manufacturing and administrative facilities during 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception
primarily through three private placements of preferred stock
aggregating approximately $12,800,000 and an initial public
offering of 3,645,642 shares of common stock, which generated net
proceeds of approximately $32,000,000. Additional funds of
approximately $11,900,000 have been generated through
collaborative research and licensing agreements, sales of the
Osteomark immunoassay kits and research testing services. As of
September 30, 1996, the Company had $22,341,000 in cash and cash
equivalents and short-term investments, working capital of
$23,677,000 and total shareholder' equity of $26,174,000.
During the nine month period ended September 30, 1996 the
Company used $5,786,000 of cash for operating activities as
compared to $3,743,000 during the nine month period ended
September 30, 1995. The primary reason for the change was the
increased net loss. During the nine month period ending
September 30, 1996 the Company entered into a note agreement in
the amount of $746,000 that provided funds required for expansion
of manufacturing and administrative facilities during 1995 and
1996. Monthly payments will be made against the principal balance
and interest for a period of four years.
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 legal efforts to enforce patent rights and
distribution contracts, and the time and costs involved in
obtaining regulatory approvals. Additional funds from 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 mid 1998.
Forward looking statements in this Form 10-Q involve a number
of risks and uncertainties including, but not limited to, level
of product sales, 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 arbitrated 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 a panel of the American
Arbitration Association was held in Seattle on September 3-11, 1996.
Post-trial briefs are scheduled for filing during November, 1996, and a
decision by the arbitrators is expected at the end of
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 that infringes on Company
technology protected by the United States Letters Patent No.
5,455,179. In September 1996 the defendants filed a response
denying infringement and counterclaimed that the subject
patent is invalid and unenforceable. The Company expects the case
will be scheduled for trial in early 1998. At the present time management
cannot estimate the amount of damages, if any, which may be
awarded to either party.
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: November 12, 1996 By: /S/ H. RAYMOND CAIRNCROSS
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H. Raymond Cairncross
Chairman of the Board of
Directors and Chief
Executive Officer
(principal executive officer)
DATE: November 12, 1996 By: /S/ ROBERT M. LITTAUER
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Robert M. Littauer
Senior Vice President of
Finance and Operations
(principal financial and principal
accounting officer)
OSTEX INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
September 30, 1996 December 31, 1995 -----------------
(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,681 $ 6,241
Short-term investments 20,660 21,553
Trade receivables and other current assets 2,419 1,654
Inventory, at cost 161 236
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Total current assets 24,921 29,684
FURNITURE AND EQUIPMENT, at cost less 2,387 2,481
accumulated depreciation and amortization
OTHER ASSETS 675 676
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Total assets $ 27,983 $ 32,841
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CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,244 $ 1,323
NONCURRENT LIABILITIES:
Note payable, net of current portion 565 -
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000
authorized; 12,441,617 and 12,432,667
issued and outstanding 125 125
Additional paid-in capital 45,110 45,187
Accumulated deficit (19,061) (13,794)
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Total shareholders' equity 26,174 31,518
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Total liabilities and shareholders' equity $ 27,983 $ 32,841
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The accompanying notes are an integral part of these condensed balance sheets.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Quarter Ended Year to Date
----------------------------- -----------------------------
September 30, September 30, September 30, September
1996 1995 1996 1995
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REVENUE:
Product sales and research testing services $ 776 $ 288 $ 2,217 $ 1,123
Research and development fees 1,083 429 1,083 1,033
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Total revenues 1,859 717 3,300 2,156
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OPERATING EXPENSES:
Cost of products sold 247 101 682 424
Research and development 757 869 2,203 2,485
Selling, general and administrative 2,328 1,769 6,695 4,192
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Total operating expenses 3,332 2,739 9,580 7,101
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Loss from operations (1,473) (2,022) (6,280) (4,945)
OTHER INCOME (EXPENSE):
Interest income 299 466 1,036 1,259
Interest expense (23) - (23)
------------- ------------- ------------- -------------
Net loss $ (1,197) $ (1,556) $ (5,267) $ (3,686)
============= ============= ============= =============
NET LOSS PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.10) $ (0.13) $ (0.42) $ (0.31)
============= ============= ============= =============
Weighted average shares outstanding 12,442 12,172 12,441 11,762
============= ============= ============= =============
The accompanying notes are an integral part of these condensed financial statements.
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(unaudited)
Nine Months Ended September 30,
-------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES $ (5,786) $ (3,743)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (16,872) (37,652)
Proceeds from sales of short-term investments 17,622 22,340
Purchase of furniture and equipment (275) (1,107)
Investment in other assets - (500)
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Net cash provided by investing activities 475 (16,919)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
and exercise of options on common stock 41 31,825
Proceeds from borrowings on note payable 746 -
Payments on note payable (36) -
Proceeds from stock subscription - 165
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Net cash provided by financing activities 751 31,990
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,560) 11,328
CASH AND CASH EQUIVALENTS, beginning of period 6,241 1,706
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CASH AND CASH EQUIVALENTS, end of period $ 1,681 13,034
============== =============
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 September 30, 1996, and the nine
months ended September 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. RELATED PARTY TRANSACTIONS
Legal and Consulting Services
Total operating expenses include legal and consulting fees for
services provided by a related party totaling $96,000 and
$167,000 for the quarters ended September 1996 and 1995,
respectively, and $170,000 and $312,000 for the nine months
ended September 1996 and 1995, respectively.
3. CONTINGENCIES
Legal Proceedings
Refer to Part II, Item 1 of this Form 10-Q.