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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-18231
ATRIX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1043826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (970) 482-5868
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
--- ---
The number of shares outstanding of the registrant's common stock as of
October 14, 1998 was 11,287,760.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATRIX LABORATORIES, INC.
BALANCE SHEETS
September 30, December 31,
1998 1997
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 17,285,276 $ 15,185,841
Marketable securities, at fair market value 50,638,857 50,233,553
Accounts receivable, net of allowance for doubtful accounts of
$11,360 and $111,479 852,454 1,553,427
Interest receivable 797,252 340,346
Inventories 2,827,503 1,309,519
Prepaid expenses and deposits 830,743 196,574
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Total current assets 73,232,085 68,819,260
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PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 9,036,253 8,332,671
Leasehold improvements 605,107 605,107
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Total property, plant and equipment 9,641,360 8,937,778
Accumulated depreciation and amortization (3,021,432) (2,381,908)
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Property, plant and equipment, net 6,619,928 6,555,870
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OTHER ASSETS:
Intangible assets, net of accumulated amortization of $138,207 and $96,355 1,122,736 1,024,953
Deferred finance costs, net of accumulated amortization of $233,073 and
$22,814 1,740,116 1,893,576
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Total other assets 2,862,852 2,918,529
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TOTAL ASSETS $ 82,714,865 $ 78,293,659
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 1,042,335 $ 1,052,362
Interest payable 1,155,479 287,671
Accrued salaries and payroll taxes 230,774 155,200
Other accrued liabilities 56,123 95,508
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Total current liabilities 2,484,711 1,590,741
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CONVERTIBLE SUBORDINATED NOTES PAYABLE 50,000,000 50,000,000
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued
or outstanding -- --
Common stock, $.001 par value; 25,000,000 shares authorized; 11,287,760 and
11,177,261 shares issued and outstanding 11,323 11,177
Additional paid-in capital 73,456,858 73,224,442
Unrealized holding gain (loss) on marketable securities 377,943 (177,867)
Treasury stock (435,001) ---
Accumulated deficit (43,180,969) (46,354,834)
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Total shareholders' equity 30,230,154 26,702,918
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TOTAL $ 82,714,865 $ 78,293,659
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See Notes to Financial Statements
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ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
REVENUE: 1998 1997
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Sales $ 571,783 $ 355,203
Contract revenue 231,656 368,095
Sale of marketing rights 5,000,000 ---
Interest income 931,305 314,913
Other income (loss), net (2,366) (28,305)
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Total revenue 6,732,378 1,009,906
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EXPENSES:
Cost of goods sold 353,885 292,521
Research and development
* ATRIDOX(TM)product 503,227 1,465,679
* Other 2,061,590 1,576,260
Interest expense 882,192 6,672
Administrative and marketing 545,148 494,234
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Total expenses 4,346,042 3,835,366
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NET INCOME (LOSS) $2,386,336 $(2,825,460)
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BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ .21 $ (.25)
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BASIC AND DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING 11,280,246 11,128,756
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See Notes to Financial Statements
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ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
REVENUE: 1998 1997
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Sales $ 2,281,124 $ 1,108,871
Contract revenue 423,521 656,635
Sale of marketing rights 12,000,000 7,100,000
Interest income 2,838,843 1,108,632
Other income (loss), net 57,317 (14,954)
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Total revenue 17,600,805 9,959,184
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EXPENSES:
Cost of goods sold 1,466,822 867,061
Research and development
* ATRIDOX(TM)product 2,656,980 4,376,405
* Other 5,764,323 4,610,255
Interest expense 2,669,720 6,672
Administrative and marketing 1,869,095 1,575,955
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Total expenses 14,426,940 11,436,348
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NET INCOME (LOSS) $ 3,173,865 $ (1,477,164)
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BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ .28 $ (.13)
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BASIC AND DILUTED
WEIGHTED AVERAGE SHARES OUTSTANDING 11,293,149 11,119,312
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See Notes to Financial Statements
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ATRIX LABORATORIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
Additional Unrealized Total
Common Stock Paid-In Holding Accumulated Treasury Shareholder's
Shares Amount Capital Gain Deficit Stock Equity
------- ------ ------- ---- ------- ----- ------
Balance, December 31, 1997 11,177,261 $ 11,177 $ 73,224,442 $(177,867) $(46,354,834) $ --- $ 26,702,918
Exercise of stock options 145,499 146 232,416 --- --- --- 232,562
Treasury stock (35,000) --- --- --- --- (435,001) (435,001)
Unrealized holding gain --- --- --- 555,810 --- --- 555,810
Net income --- --- --- --- 3,173,865 --- 3,173,865
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Balance, September 30, 1998 11,287,760 $ 11,323 $ 73,456,858 $ 377,943 $(43,180,969) $ (435,001) $ 30,230,154
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See Notes to Financial Statements
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ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,173,865 $ (1,477,164)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 696,604 568,970
Amortization of intangible assets 41,853 18,687
Amortization of bond premiums 60,751 ---
Amortization of deferred financing costs 210,259 ---
Gain on sale of marketable securities (28,186) ---
Loss on sale of property, plant and equipment 26,812 28,104
Write-off of obsolete patents 14,828 ---
Net changes in current assets and liabilities:
Restricted cash equivalents --- 7,000,000
Accounts receivable 700,973 (302,936)
Interest receivable (456,906) 71,656
Inventories (1,517,984) (647,582)
Prepaid expenses and deposits (634,169) (225,179)
Accounts payable - trade (10,027) 501,830
Interest payable 867,808 ---
Accrued salaries and payroll taxes 75,575 7,031
Other accrued liabilities (39,385) (40,690)
Short-term debt --- 452,932
Deferred revenue --- (7,002,192)
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Net cash provided by (used in) operating activities 3,182,671 (1,046,533)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (790,187) (1,913,372)
Acquisition of leasehold improvements --- (39,499)
Investments in intangible assets (211,263) (162,398)
Proceeds from sale of equipment 2,713 5,856
Proceeds from sale of marketable securities 20,158,186 ---
Proceeds from maturity of marketable securities 28,618,987 991,127
Investment in marketable securities (48,659,233) (3,191,584)
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Net cash used in investing activities (880,797) (4,309,870)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by the issuance of common stock and
exercise of stock options 232,562 279,938
Treasury stock acquired (435,001) ---
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Net cash provided by (used in) financing activities (202,439) 279,938
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,099,435 (5,076,465)
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,185,841 18,368,472
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,285,276 $ 13,292,007
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See Notes to Financial Statements
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ATRIX LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements of Atrix Laboratories,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial statements and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments considered necessary (which consist only of normal recurring
accruals) for a fair presentation have been included. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto for the year ended December 31, 1997, filed with the Securities and
Exchange Commission in the Company's Annual Report Form on 10-K.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. The components of inventories at
September 30, 1998 and December 31, 1997 are as follows:
September 30, 1998 December 31, 1997
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Raw Materials $ 1,659,131 $ 563,503
Work in Process 691,324 500,198
Finished Goods 477,048 245,818
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$ 2,827,503 $ 1,309,519
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NOTE 3. MILESTONE PAYMENTS
Pursuant to its agreement with Block Drug Company ("Block"), the
Company received a $5,000,000 milestone payment on September 15, 1998 for the
sale of marketing rights. The milestone payment was paid as a result of the U.S.
Food and Drug Administration's ("FDA") September 4, 1998 approval for the
ATRIDOX(TM) drug product. Total milestone payments for the nine months ended
September 30, 1998 were $12,000,000.
NOTE 4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Accordingly,
components of other comprehensive income (loss) are as follows:
Balance January 1 Current Period Change Balance September 30
1998 1997 1998 1997 1998 1997
Unrealized gain (loss) on
securities $ (177,867) $ (152,641) $ 555,810 $ 57,795 $ 377,943 $(94,846)
Net income (loss) 3,173,865 (1,477,164)
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Comprehensive income (loss) $3,729,675 $(1,419,369)
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NOTE 5. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share excludes dilution and is computed
by dividing net income (loss) by the weighted average number of common shares
outstanding during the periods presented. Diluted income (loss) per common share
reflects the potential dilution of securities that could share in the earnings.
For the periods presented, the effect of dilutive stock options is not
significant and the effect of the assumed conversion of convertible subordinated
notes would be antidilutive. Therefore, diluted income (loss) per share is not
materially different from basic income (loss) per common share.
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NOTE 6. STOCK REPURCHASE
In February 1998, the Company's Board of Directors authorized the
Company to repurchase up to $10,000,000 of the Company's common stock. Pursuant
to this program, the Company purchased 35,000 shares of the Company's common
stock on the open market in the third quarter of 1998 for a total of
approximately $435,000. The repurchase program expires on December 31, 1998.
NOTE 7. SUBSEQUENT EVENT
Pursuant to its agreement with Block Drug Company, the Company earned a
$5,000,000 milestone payment on October 5, 1998. The milestone payment was
earned as a result of Block's first commercial sale of the ATRIDOX(TM) drug
product. This will bring total milestone payments earned in the year to
$17,000,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) whether the Company will receive, and the timing of,
regulatory approvals or clearances to market the ATRIDOX(TM) product and any
other potential products, (ii) the results of current and future clinical
trials, and (iii) the time and expenses associated with the regulatory approval
process for products. The success of the Company's business operations is in
turn dependent on factors such as the receipt and timing of regulatory approvals
or clearances for potential products, the effectiveness of the Company's
marketing strategies to market its current and any future products, the
Company's ability to manufacture products on a commercial scale, the appeal of
the Company`s mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues for the three months ended September 30, 1998 were
approximately $6,732,000 compared to approximately $1,010,000 for the three
months ended September 30, 1997. The 567% increase was primarily due to the
receipt of a $5,000,000 milestone payment from Block Drug Company ("Block")
during the quarter related to the sale of marketing rights. Additionally,
interest income earned increased significantly due to the increase in principal
investments related to the November 1997 proceeds from issuance of 7%
Convertible Subordinated Notes due 2004 (the "Convertible Notes").
The Company had sales of approximately $572,000 during the three months
ended September 30, 1998 compared to approximately $355,000 for the three months
ended September 30, 1997. The 61% increase in sales was primarily the result of
the addition of sales for the ATRIDOX(TM) product and the ATRISORB(R) FreeFlow
GTR Barrier product both launched in September 1998.
Contract revenue represents revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities utilizing the ATRIGEL(R) system, and was approximately
$232,000 for the three months ended September 30, 1998 compared to approximately
$368,000 for the three months ended September 30, 1997, representing a 37%
decrease. The decrease was primarily due to the completion of several grants
during 1997.
Interest income for the three months ended September 30, 1998 was
approximately $931,000 compared to approximately $315,000 for the three months
ended September 30, 1997, representing a 196% increase. Interest income
increased due to additions in principal investments as a result of the proceeds
from the $50,000,000 convertible notes in the fourth quarter of 1997. In
addition, $12,000,000 milestone payments were received under the Block Agreement
in 1998. The majority of the Block milestone payments were invested in U.S.
government bond funds, long-term U.S. government and government agency
investments. The remaining cash and cash equivalents were invested in interest
bearing accounts to fund the Company's short-term operations.
Research and development expenses - ATRIDOX(TM) product for the three
months ended September 30, 1998 were approximately $503,000 compared to
approximately $1,466,000 for the three months ended September 30, 1997,
representing a 66% decrease. The decrease was the result of completion of
clinical studies related to the ATRIDOX(TM) product in the prior year.
Other research and development expenses for the three months ended
September 30, 1998 were approximately $2,062,000 compared to approximately
$1,576,000 for the three months ended September 30, 1997, representing a 31%
increase. The increase was primarily a result of increased expenses associated
with new research project opportunities.
Interest expense for the three months ended September 30, 1998 was
approximately $882,000 compared to approximately $7,000 for the three months
ended September 30, 1997. The increase was due to the $50,000,000 convertible
notes in the fourth quarter of 1997.
Administrative and marketing expenses for the three months ended
September 30, 1998 were approximately $545,000 compared to approximately
$494,000 for the three months ended September 30, 1997, representing a 10%
increase. The increase was primarily a result of administrative costs associated
with the preparation for the ATRIDOX(TM) market launch.
The Company recorded net income of approximately $2,386,000 for the
three months ended September 30, 1998 compared to a net loss of approximately
$(2,825,000) for the three months ended September 30, 1997, representing a 184%
increase. The increase was primarily due to the receipt of a $5,000,000
milestone payment by Block during the quarter and increased interest income.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Total revenues for the nine months ended September 30, 1998 were
approximately $17,601,000 compared to approximately $9,959,000 for the nine
months ended September 30, 1997, representing a 77% increase. The increase was
primarily due to $12,000,000 milestone payments received under the Block
Agreement in 1998. Additionally, interest income increased as a result of an
increase in principal investments related to the proceeds from the Convertible
Notes. The launching of Heska Periodontal Product in the fourth quarter of 1997,
ATRIDOX(TM) and ATRISORB(R) FreeFlow GTR Barrier products launched in September
1998 also contributed to the increase in total revenues.
The Company had sales of approximately $2,281,000 during the nine
months ended September 30, 1998 compared to approximately $1,109,000 for the
nine months ended September 30, 1997, representing a 106% increase. The increase
in sales was primarily the result of the addition of sales for the Heska
Periodontal Product launched in the fourth quarter of 1997, ATRIDOX(TM) and
ATRISORB(R) FreeFlow GTR Barrier sales commencing September 1998 immediately
following FDA approval for both products.
Contract revenue represents revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities utilizing the ATRIGEL(R) system, and was approximately
$424,000 for the nine months ended September 30, 1998 compared to approximately
$657,000 for the nine months ended September 30, 1997, representing a 35%
decrease. The decrease was primarily due to the completion of several grants
during 1997.
Interest income for the nine months ended September 30, 1998 was
approximately $2,839,000 compared to approximately $1,109,000 for the nine
months ended September 30, 1997, representing a 156% increase. Interest income
increased due to additions in principal investments as a result of the proceeds
from the $50,000,000 convertible notes in the fourth quarter of 1997 and the
$12,000,000 milestone payments received under the Block Agreement in 1998. The
majority of the funds were invested in U.S. government bond funds, long-term
U.S. government and government agency investments. The remaining cash and cash
equivalents were invested in interest bearing accounts to fund the Company's
short-term operations.
Cost of goods sold recorded for the nine months ended September 30,
1998 was approximately $1,467,000 compared to approximately $867,000 for the
period ended September 30, 1997, representing an increase of 69%. The increase
is primarily related to sales commencing for the Heska Periodontal Product,
ATRIDOX(TM) and ATRISORB(R) FreeFlow GTR Barrier products.
Research and development expenses - ATRIDOX(TM) product for the nine
months ended September 30, 1998 were approximately $2,657,000 compared to
approximately $4,376,000 for the nine months ended September 30, 1997,
representing a 39% decrease. This decrease is primarily the result of a shift in
research efforts to new projects as a result of the issuance of a second quarter
1998 Approvable Letter and subsequent third quarter 1998 approval from the FDA
for ATRIDOX(TM).
Other research and development expenses were approximately $5,764,000
for the nine months ended September 30, 1998 compared to approximately
$4,610,000 for the nine months ended September 30, 1997, representing a 25%
increase. The increase was primarily a result of increased expenses associated
with new research project opportunities.
Interest expense for the nine months ended September 30, 1998 was
approximately $2,670,000 compared to approximately $7,000 for the nine months
ended September 30, 1997. The increase was due to the $50,000,000 convertible
notes in the fourth quarter of 1997.
Administrative and marketing expenses for the nine months ended
September 30, 1998 were approximately $1,869,000 compared to approximately
$1,576,000 for the nine months ended September 30, 1997, representing a 19%
increase. The increase was primarily a result of administrative costs associated
with the preparation for the ATRIDOX(TM) market launch.
For the reasons described above, the Company recorded net income of
approximately $3,174,000 for the nine months ended September 30, 1998 compared
to a net loss of approximately $(1,477,000) for the nine months ended September
30, 1997, representing a 315% increase.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of
approximately $17,285,000, marketable securities (at fair market value) of
approximately $50,639,000 and other current assets of approximately $5,308,000
for total current assets of approximately $73,232,000. Current liabilities
totaled approximately $2,485,000, which resulted in working capital of
approximately $70,747,000.
In September 1998, the Company renewed a $1,000,000 line of credit with
a bank. Borrowings under the line bear interest at the prime rate. As of
September 30, 1998, there were no borrowings outstanding under this agreement.
During the nine months ended September 30, 1998, net cash provided by
operating activities was approximately $3,183,000. This was primarily a result
of the net income for the period of approximately $3,174,000, adjusted for
certain non-cash expenses, and changes in other operating assets and liabilities
as set forth in the statements of cash flows.
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Net cash used in investing activities was approximately $881,000 during
the nine months ended September 30, 1998, primarily as a result of the net
investment in marketable securities during the period and the acquisition of
property, plant and equipment. Net cash used in financing activities was
approximately $202,000 during the nine months ended September 30, 1998,
primarily as a result of the repurchase of the Company's stock.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products. The Company expended
approximately $790,000 for property, plant and equipment and leasehold
improvements, and approximately $211,000 for patent development in the nine
month period ending September 30, 1998. The Company expects its capital
expenditures to approximate $1,800,000 for the year ended December 31, 1998,
which will be used primarily to complete the automation of its manufacturing
facility and to upgrade laboratory equipment.
On September 4, 1998, the Company received FDA approval for the
ATRIDOX(TM) drug product. The approval also resulted in the Company's receipt of
a $5,000,000 milestone payment pursuant to the Company's agreement with Block
which was received on September 15, 1998. Total milestone payments for the
period ending September 30, 1998 were $12,000,000.
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PART II - OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on form 8-K were filed during the period ended
September 30, 1998.
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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.
ATRIX LABORATORIES, INC.
(Registrant)
October 29, 1998 By: /s/ John E. Urheim
---------------------------------------
John E. Urheim
Vice Chairman of the Board of
Directors and Chief Executive Officer
October 29, 1998 By: /s/ Brian G. Richmond
---------------------------------------
Brian G. Richmond
Vice President--Finance, Assistant
Secretary, and Assistant Treasurer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule