<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to _______________.
Commission file number: 000-24103
COHESION TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-3274368
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
2500 FABER PLACE, PALO ALTO, CA 94303
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (650) 320-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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 month (or 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 2000, the Registrant had 9,285,096 shares of common stock
outstanding, exclusive of 515,100 shares held by the Registrant as treasury
stock.
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COHESION TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements:
Condensed Balance Sheets -
September 30, 2000 and June 30, 2000 3
Condensed Consolidated Statements of Operations -
Three months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COHESION TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000*
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 18,452 $ 14,154
Accounts receivable, net ............................ 266 78
Inventories ......................................... 3,342 2,508
Other current assets ................................ 2,867 1,981
-------- --------
Total current assets ......................... 24,927 18,721
Property and equipment, net ........................... 5,410 5,881
Investment in equity securities ....................... 24,680 37,163
Other assets .......................................... 4,006 4,055
-------- --------
$ 59,023 $ 65,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 720 $ 920
Accrued compensation ................................ 601 629
Accrued liabilities ................................. 3,889 3,151
Income taxes payable ................................ 681 681
Current portion of capital lease obligation ......... 807 792
-------- --------
Total current liabilities .................... 6,698 6,173
Long-term liabilities:
Obligation under capital lease ...................... 2,427 2,639
Deferred income taxes ............................... 7,955 10,237
-------- --------
Total long-term liabilities .................. 10,382 12,876
Stockholders' equity:
Preferred stock ..................................... -- --
Common stock ........................................ 10 10
Additional paid-in capital .......................... 20,760 20,571
Retained earnings ................................... 12,580 14,611
Accumulated other comprehensive income .............. 10,567 13,553
Treasury stock, at cost ............................. (1,974) (1,974)
-------- --------
Total stockholders' equity ................... 41,943 46,771
-------- --------
$ 59,023 $ 65,820
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
* Amounts derived from audited financial statements at the date indicated.
3
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COHESION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Product sales .......................................... $ 754 $ 444
Other revenue .......................................... 38 --
-------- --------
792 444
Costs and expenses:
Cost of sales, including manufacturing start-up costs.... 1,195 669
Research and development ................................ 2,981 3,245
Selling, general and administrative ..................... 1,561 1,885
Compensation expense related to cancelled stock options.. 164 449
-------- --------
Total costs and expenses ........................ 5,901 6,248
-------- --------
Loss from operations ...................................... (5,109) (5,804)
Other income (expense):
Gain on investments ..................................... 1,465 12,699
Interest income ......................................... 387 93
Interest expense ........................................ (66) --
-------- --------
Income (loss) before taxes ................................ (3,323) 6,988
Provision (benefit) for income taxes ...................... (1,163) 2,795
-------- --------
Income (loss) before cumulative effect of change in
accounting principle..................................... (2,160) 4,193
Cumulative effect of change in accounting for
derivatives, net of tax ................................. 129 --
-------- --------
Net income (loss) ......................................... $ (2,031) $ 4,193
======== ========
Income (loss) per common share before cumulative
effect of accounting change ............................. $ (0.23) $ 0.50
Cumulative effect of accounting change, net of tax ........ 0.01 --
-------- --------
Net income (loss) per common share - basic ................ $ (0.22) $ 0.50
======== ========
Net income (loss) per common share - diluted .............. $ (0.22) $ 0.49
======== ========
Weighted average shares outstanding ....................... 9,276 8,445
======== ========
Weighted average shares outstanding assuming
dilution ................................................ 9,276 8,616
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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COHESION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ (2,031) $ 4,193
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization ................................ 678 372
Cumulative effect of change in accounting principle .......... (129) --
Gains on investments ......................................... (1,465) (12,699)
Decrease (increase) in assets:
Accounts receivable ........................................ (188) 613
Inventories ................................................ (834) (173)
Other ...................................................... (965) (98)
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities and other ............ 525 (1,414)
Income taxes payable ....................................... -- 2,265
-------- --------
Net cash used in operating activities ........................ (4,409) (6,941)
Cash flows from investing activities:
Proceeds from sale of equity investments ........................ 8,021 13,805
Purchase of investments ......................................... -- (4,205)
Proceeds (payment) on maturity of equity collars ................ 789 (353)
Expenditures for property and equipment ......................... (93) (386)
-------- --------
Net cash provided by investing activities .................... 8,717 8,861
Cash flows from financing activities:
Proceeds from exercise of stock options ......................... 186 192
Payment of capital lease obligation ............................. (196) --
Proceeds from sale-leaseback of manufacturing facility .......... -- 4,165
-------- --------
Net cash provided by (used in) financing activities .......... (10) 4,357
Net increase in cash and cash equivalents ......................... 4,298 6,277
Cash and cash equivalents at beginning of period .................. 14,154 4,239
-------- --------
Cash and cash equivalents at end of period ........................ $ 18,452 $ 10,516
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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COHESION TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed balance sheet as of September 30, 2000, the condensed
consolidated statements of operations for the three months ended September 30,
2000 and 1999, and the condensed consolidated statements of cash flows for the
three months ended September 30, 2000 and 1999, have been prepared by the
Company and are unaudited. In the opinion of management, all necessary
adjustments (which include only normal recurring adjustments) have been made to
present fairly the financial position, results of operations, and cash flows at
September 30, 2000 and for all periods presented. Interim results are not
necessarily indicative of results for a full fiscal year. The condensed balance
sheet as of June 30, 2000 has been derived from the audited consolidated
financial statements at that date.
Certain amounts in the financial statements for the prior fiscal period
have been reclassified to conform with the current year presentation. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2000.
Earnings Per Share
Basic earnings per share ("EPS") is calculated using the weighted
average number of common shares outstanding for the period. The computation of
diluted EPS includes the effects of stock options, warrants and convertible
preferred stock, if any, if such effect is dilutive. Options that had an
exercise price greater than the market price of the Company's common stock
during the quarters ended September 30, 2000 and 1999 were excluded, as their
inclusion would have been anti-dilutive. Below is a reconciliation between the
basic and diluted weighted average shares for the three months ended September
30, 2000 and 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 1999
----- -----
(IN THOUSANDS)
<S> <C> <C>
Basic (weighted average common shares
outstanding) .............................. 9,276 8,445
Dilutive effect of stock options .......... -- 171
----- -----
Weighted average common shares outstanding,
assuming dilution ......................... 9,276 8,616
===== =====
</TABLE>
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2. INVENTORIES
Inventories are valued at the lower of cost, determined on a standard
cost basis, which approximates average cost, or market.
Inventories comprise the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials ..................... $ 860 $ 692
Work-in-process ................... 1,632 925
Finished goods .................... 850 891
------ ------
$3,342 $2,508
====== ======
</TABLE>
3. EQUITY INVESTMENTS
The following is a summary of the aggregate estimated fair value, fair
value of equity collars, gross unrealized gains and cost of the Company's
investments in equity securities:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Cost ................................. $ 7,150 $14,316
Gross unrealized gains ............... 14,468 20,649
------- -------
21,618 34,965
Fair value of equity collars ......... 3,062 2,198
------- -------
Estimated fair value ................. $24,680 $37,163
======= =======
</TABLE>
The Company determines the appropriate classification of marketable
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. All of the Company's investments in equity securities are
classified as available-for-sale.
To hedge against fluctuations in the market value of a portion of the
Boston Scientific common stock, the Company entered into costless collar
instruments that expire quarterly through May 2001 and will require settlement
in cash. At September 30, 2000, 300,000 shares were hedged under these collars.
Shares of Boston Scientific common stock held by the Company collateralize the
put and call options.
4. ADOPTION OF NEW FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS 133 was
effective for the Company as of July 1, 2000. The cumulative effect of the
change in accounting related to the adoption of SFAS 133 resulted in a decrease
to the net loss of approximately $129,000, net of tax, for the three months
ended September 30, 2000.
Under SFAS 133, the Company's costless collar instruments on Boston
Scientific stock are
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considered to be derivatives and are carried on the balance sheet at fair value.
The fair value of the collar instruments is determined by broker quotes. The
Company has designated the collar instruments as a "fair value" hedge against
certain fluctuations in the market price of Boston Scientific stock. Changes in
the intrinsic values of the options underlying the collar (measured as the
difference between the current market price and the strike price) are expected
to be effective in offsetting the overall changes in the fair value of the
investment when the share price of Boston Scientific is outside the collar band
(approximately $22 to $49 per share) resulting in no net impact to earnings. The
difference between the intrinsic value and the fair value of the collar is
considered to be an ineffective portion of the hedge. The ineffective portion of
the hedge is recognized currently in earnings.
5. STOCKHOLDERS' EQUITY
Cohesion Corporation Stock Options
In September 1998, the Company's Board of Directors approved a program
to cancel options to purchase shares of the common stock of Cohesion
Corporation. In connection with such program, the Company offered to pay each
holder of these canceled options a per share amount equal to the excess of
$16.70 over the exercise price of the canceled option. The Company will make
this option payment ratably over the original vesting period of the canceled
option so long as the former holder thereof remains an employee or consultant of
the Company. The Company recorded $0.2 million and $0.4 million of compensation
expense related to these canceled options during the three months ended
September 30, 2000 and 1999, respectively. The Company expects to record an
additional $0.3 million of compensation expense related to these canceled
options through 2001.
6. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of related income
tax, for the three months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS)
2000 1999
------- -------
<S> <C> <C>
Net income (loss) .................... $(2,031) $ 4,193
Decrease in unrealized gains
on securities ...................... (2,986) (7,556)
------- -------
Comprehensive loss ................... $(5,017) $(3,363)
======= =======
</TABLE>
8
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7. SEGMENT INFORMATION
The Company develops proprietary surgical products, including
bioresorbable hemostatic devices and biosealants for tissue repair and
regeneration. The Company operated in the following two segments until it
reduced its ownership interest in the NeuColl orthopedics subsidiary during the
March 2000 quarter: (1) a surgical business segment, and (2) an orthopedic
business segment. Both segments reported to the Chief Executive Officer ("CEO")
of Cohesion who allocated resources to each business. The CEO was identified as
the Chief Operating Decision Maker as defined by SFAS 131. Management did not
allocate assets between, or evaluate operating profit or loss of the two
segments. As of March 31, 2000, Cohesion's ownership interest in NeuColl fell
below 50%. From that date forward NeuColl's operations were no longer
consolidated with the results of the Company and the Company has operated in
only one segment, the surgical business segment.
Information on reportable segments for the three months ended September
30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
(IN THOUSANDS)
SURGICAL ORTHOPEDIC TOTAL
-------- ------- --------
<S> <C> <C> <C>
Revenue ................................ $ 792 $ -- $ 792
Loss from operations ................... $ (5,109) $ -- $ (5,109)
Gain on investments .................... $ 1,465 $ -- $ 1,465
Total assets ........................... $ 59,023 $ -- $ 59,023
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
(IN THOUSANDS)
SURGICAL ORTHOPEDIC TOTAL
-------- ------- --------
<S> <C> <C> <C>
Revenue ................................ $ 115 $ 329 $ 444
Loss from operations ................... $ (5,225) $ (579) $ (5,804)
Gain on investments .................... $ 12,699 $ -- $ 12,699
Total assets ........................... 66,817 $ 1,363 $ 68,180
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
condensed consolidated financial statements contained herein and notes thereto.
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking. The forward-looking
statements contained herein are based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. These risks include,
but are not limited to, the rate of adoption and use by customers of CoStasis,
the timing of CoSeal launches in various European countries by our distributors,
our success in manufacturing CoStasis and CoSeal, the overall performance of
third-party sales representatives, receipt of regulatory approvals including the
approvals from the FDA, clinical efficacy of and market demand for our products,
the rate of the enrollment in our clinical studies and potential unfavorable
publicity regarding us, our products, or the medical device industry, among
other matters. In addition, differences in our actual results may be based upon
factors within our control, such as strategic planning decisions by management
and reallocation of internal resources, or on factors outside our control, such
as scientific advances by third parties, introduction of competitive products
and delays by regulatory authorities, including approvals from the FDA. For a
more detailed discussion of these and other business risks see "- Additional
Factors That Might Affect Future Results of Operations."
Cohesion was organized in June 1997 as a Delaware corporation and wholly
owned subsidiary of Collagen Aesthetics, Inc. formerly known as Collagen
Corporation, now known as McGhan Medical since Collagen was acquired by Inamed
Corporation. Effective January 1, 1998, Collagen contributed its research and
development programs for hemostatic devices, biosealants, orthopedics products
and programs, adhesion barriers and recombinant human collagen and thrombin and
other related businesses of its Collagen Technologies Group ("CTG") to Cohesion,
including various equity investments. On August 18, 1998, Collagen distributed
as a dividend to its stockholders, one share of Cohesion's common stock for each
share of Collagen common stock outstanding.
Cohesion is focused on developing and commercializing proprietary
surgical products, including bioresorbable hemostatic devices and biosealants
for tissue repair and regeneration, to increase the effectiveness of open and
minimally invasive surgeries. CoStasis(R) Surgical Hemostat, our hemostatic
product, is designed for use in cardiovascular, orthopedic and general surgery
indications. We received a CE Mark for CoStasis in fiscal 1999 and received FDA
approval in June 2000 to market the product in the United States. In November
1999, we announced an agreement with U.S. Surgical for the marketing and
distribution of CoStasis. The U.S. Surgical territories include the United
States, European Union, Eastern Europe, Latin America, Middle East, Australia,
New Zealand and India. In February 2000, we received a CE Mark for CoSeal(TM)
Surgical Sealant, our biosealant product candidate designed for sealing vascular
grafts. We have recently completed enrollment in our first pivotal clinical
trial for CoSeal in the United States and expect to file a pre-market approval
application with the FDA in the spring of 2001. We believe that our surgical
products will provide several distinct advantages over currently available
technologies, including ease of preparation and use, better delivery systems,
improved safety profiles and clinical effectiveness. Our products and programs
are based on a platform of proprietary technologies centered around collagen and
hydrophilic polymers that quickly polymerize in-vivo and bind to tissue. We also
have research and development programs in recombinant human collagen and
thrombin.
In February 1999, we formed a new subsidiary, NeuColl, Inc., to
commercialize products in the orthopedics field, which included Collagraft and
NeuVisc(TM), a collagen-based intra-articular implant for the treatment of pain
related to osteoarthritis. In connection with the formation, we granted NeuColl
an exclusive license to certain patents relating to collagen and polymer
technology for orthopedic
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applications. During the quarter ended March 31, 2000, NeuColl obtained a total
of $4 million in financing from a third party in two tranches, which reduced our
ownership from 100% to approximately 39% as of March 31, 2000. For the quarter
ended March 31, 2000, we consolidated NeuColl's operating loss in our results of
operations and reported the related minority interest for a two-month period.
Beginning March 31, 2000, we no longer consolidated NeuColl into our financial
results and instead, reported our share of NeuColl's operating income or loss
under the equity method of accounting.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
Revenues were $792,000 and $444,000 for the three months ended September
30, 2000 and 1999, respectively. Revenues for the current fiscal quarter
included product sales of $754,000 as well as $38,000 of contract revenue
related to CoStasis for the recognition of milestone payments from our marketing
partner. Product sales of $444,000 in the prior year quarter included $329,000
of Collagraft sales. As of March 31, 2000, we no longer consolidated NeuColl's
operations, which included Collagraft sales, into our financial results as our
ownership interest fell below 50%. The increase in product sales over the prior
year is due primarily to CoStasis sales in the United States which commenced in
July 2000, including sales of related delivery systems and equipment. Pursuant
to our agreement with our marketing partner, U.S. Surgical, our CoStasis product
sales include a fixed component as well as, in certain circumstances, a variable
component which is comprised of a percentage of the price received by U.S.
Surgical for sales of CoStasis to the end-customer. Our CoStasis product sales
for the quarter ended September 30, 2000 included sales of CoStasis where we
only received the fixed component since U.S. Surgical shipped the product to
their end customer at no-charge for demonstration and promotional purposes. A
number of uncertainties exist surrounding the marketing and distribution of our
products where the primary means of distribution is through third party firms,
such as U.S. Surgical, our marketing partner. Our business and financial results
could be adversely affected in the event a third party firm is unable to market
the product effectively, anticipate customer demand accurately, or effectively
manage industry-wide pricing and cost containment pressures in health care.
Cost of sales as a percentage of product sales was 151% for the three
months ended September 30, 2000 and 1999, primarily due to manufacturing startup
costs for the CoStasis and CoSeal products, respectively. Currently, we expect
to see negative gross margins through at least fiscal year 2001 as we bring our
CoSeal product into commercial production.
Research and development ("R&D") expenses were $3.0 million and $3.2
million for the three months ended September 30, 2000 and 1999, respectively.
R&D spending decreased 6% primarily due to lower spending in our orthopedics
segment as we no longer consolidate NeuColl's operations into our financial
results. Currently, we expect R&D spending in fiscal 2001 to be at similar
levels as fiscal 2000.
Selling, general and administrative ("SG&A") expenses of $1.6 million
for the quarter ended September 30, 2000 decreased 16% from $1.9 million during
the prior year quarter. SG&A expenses decreased as the prior year quarter
included spending for our orthopedics segment, NeuColl, which we no longer
consolidate, as well as direct marketing costs for CoStasis. Currently, we
expect SG&A expenses to increase in fiscal 2001 due to increased spending in
sales and marketing for resources required to support current and future
products. Future levels of SG&A spending will depend on various factors,
including the level of product sales and how future products are distributed
throughout the world.
During the three months ended September 30, 2000 and 1999, we recorded
$0.2 million and $0.4 million, respectively, of compensation expense in
connection with the cancellation of the remaining stock options of Cohesion
Corporation. In September 1998, our board of directors approved a program to
cancel options to purchase shares of the common stock of Cohesion Corporation.
In connection
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with this cancellation, we offered to pay each holder of canceled options a per
share amount equal to the excess of $16.70 over the exercise price of the
canceled option. We will make this option payment ratably over the original
vesting period of the canceled option so long as the former holder thereof
remains an employee or consultant of Cohesion. Currently, we expect to record an
additional $0.3 million of compensation expense with respect to the cash-out of
canceled options, which will be recognized through 2001.
Gains on investments were $1.5 million and $12.7 million for the three
months ended September 30, 2000 and 1999, respectively. The gains in the current
fiscal quarter were primarily from the sale of common stock of Johnson & Johnson
and maturities of our equity collar on the shares of Boston Scientific common
stock that we own. The timing and number of additional shares of common stock
sold will depend on market conditions and our anticipated cash needs.
Interest income was $387,000 and $93,000 for the three months ended
September 30, 2000 and 1999, respectively. The increase is due to higher average
cash balances in the current fiscal quarter.
Interest expense of $66,000 for the three months ended September 30,
2000 was related to the obligation under a capital lease. Interest expense was
$0 for the prior year quarter.
The Company recorded a benefit for income taxes of 35% for the three
months ended September 30, 2000 and a provision of 40% for the three months
ended September 30, 1999.
Effective July 1, 2000, the Company recorded the cumulative effect of a
change in accounting principle related to the adoption of SFAS 133 which
resulted in a decrease to the net loss of approximately $129,000, net of tax,
for the three months ended September 30, 2000.
SEGMENT INFORMATION
Historically, we have operated in two segments: (1) our surgical
business segment and (2) our orthopedics business segment. Our surgical segment
develops proprietary surgical products, including bioresorbable hemostatic
devices and biosealants, such as CoStasis and CoSeal, for tissue repair and
regeneration. In February 1999, we formed a new subsidiary, NeuColl, Inc., to
commercialize products in the orthopedics field, which included Collagraft(R)
and NeuVisc(TM), a collagen-based intra-articular implant for the treatment of
pain related to osteoarthritis. Our ownership in NeuColl decreased from 100% to
below 50% as of March 31, 2000 due to financing received by NeuColl from a third
party. Beginning March 31, 2000, we no longer consolidate NeuColl into our
financial results and instead, report our share of NeuColl's income or loss
under the equity method of accounting. Subsequent to March 31, 2000, we operate
in only one segment, our surgical business
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, cash and investments were $43.1 million compared
to $51.3 million at June 30, 2000. Net cash used in operating activities was
$4.4 million for the three months ended September 30, 2000 compared to $6.9 used
for the same prior-year period.
For the three months ended September 30, 2000, cash provided by
investing activities of $8.7 million was related to proceeds from the sale of
equity investments and the maturity of our equity collars. Currently, we
anticipate that capital expenditures will not exceed $2.0 million in fiscal
2001. Net cash used by financing activities for the three months ended September
30, 2000 was approximately $10,000 primarily due to payments of $196,000 for
capital lease obligations offset by proceeds of $186,000 from the exercise of
incentive stock options.
Our principal sources of liquidity include our marketable equity
investments, cash, and cash equivalents. We anticipate that stock sales will be
made from time to time, with the objective of
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generating cash for, among other things, further investments in both current and
new affiliate companies. We may defer sales of equity investments for tax
planning purposes or other reasons, although decisions concerning prospective
stock sales will also be affected by the then-current market price of the common
stock. As another source of financing, we may in the future establish a credit
facility, although there can be no assurance that a line of credit will be
available to us on acceptable terms, if at all.
In September 1998, our Board of Directors approved a stock repurchase
program to buy back up to 1.0 million shares of common stock at a price of up to
$4.25 per share. As of September 30, 2000, we had repurchased 515,100 shares of
our common stock under this program, none of which were repurchased in the
quarter ended September 30, 2000.
In September 1998, our Board of Directors approved a program to cancel
options to purchase shares of the common stock of Cohesion Corporation. In
connection with such program, Cohesion offered to pay each holder of canceled
options a per share amount equal to the excess of $16.70 over the exercise price
of the canceled option. Cohesion will make this option payment ratably over the
original vesting period of the canceled option so long as the holder thereof
remains an employee or consultant of Cohesion. Cohesion expects to record an
additional $0.3 million of compensation expense with respect to the cash-out of
canceled options through 2001.
We believe that our current sources of liquidity should be adequate to
fund our anticipated capital requirements through about the next two years.
However, during this period and thereafter, we may require additional financing.
Our capital requirements will depend on numerous factors, including the
achievement of targeted sales levels, progress of our clinical research and
product development programs, the extent to which we enter into collaborative
relationships with third parties and the scope of our obligations in such
relationships, the receipt of, and the time required to obtain, regulatory
clearances and approvals, the resources required to protect our intellectual
property and other factors. We cannot accurately predict the timing and amount
of such capital requirements. Additional financing may not be available to us on
acceptable terms, if at all.
In February 1999, we formed a new subsidiary, NeuColl, Inc., in order to
commercialize products in the orthopedics field, which included Collagraft and
NeuVisc, a collagen-based intra-articular implant. We provided the initial
funding for NeuColl; however, during the quarter ended March 31, 2000, NeuColl
obtained a total of $4 million in financing from a third party, reducing our
ownership from 100% to below 50%. Accordingly, NeuColl's operations were no
longer consolidated from that date forward and we began to report our share of
NeuColl's operating results under the equity method of accounting. As of June
30, 2000 and September 30, 2000, the carrying value of our investment in NeuColl
was zero. We hold a warrant to purchase an additional 3.0 million shares of
common stock in NeuColl, which expires in February 2006.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
For a discussion of other risks and uncertainties involving the
Company's business, see "Business - Government Regulations" in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
We have a history of operating losses and anticipate continued operating losses
Prior to July 1, 1998, our historical results of operations reflect the
historical operations of the transferred businesses contributed by Collagen (now
McGhan Medical) to Cohesion. The financial statements, prior to July 1, 1998,
may not necessarily reflect the results of operations, financial position and
cash flows of the transferred businesses had Cohesion been operated as an
independent entity during the periods presented. The transferred businesses
incurred operating losses in each of the past five years, including operating
losses of $21.2 million, $24.9 million and $31.5 million in fiscal
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2000, 1999 and 1998, respectively. Cohesion's operating losses have resulted
primarily from expenses incurred in connection with research and development
activities, including preclinical and clinical trials, development of
manufacturing processes and general and administrative expenses, and we expect
that such expenses will continue to increase for the foreseeable future. While
we had sales of Collagraft bone products of $1.2 million, $1.9 million, and $1.5
million for the years ended June 30, 2000, 1999, and 1998, respectively, we will
no longer reflect those product sales in future financial results as our
interest in NeuColl fell below 50% in March 2000. Our ability to achieve and
sustain operating profitability is highly dependent upon obtaining in a timely
and efficient fashion, regulatory approval for, and successfully commercializing
and marketing, our products in development, particularly CoSeal Surgical Sealant
and developing sales and marketing capabilities for our products, both in
Europe, the United States and other markets. There can be no assurance that we
will obtain required regulatory approvals in a timely fashion, if at all, or
successfully develop, manufacture, commercialize and market products or that we
will ever record significant product revenues or achieve operating
profitability.
We must develop and commercialize our products to generate revenues.
Except for CoStasis, CoSeal in Europe, and our line of Intermediate
Products, all of our products are in research or preclinical or clinical
development. We are dependent on the efforts and results from our marketing
partner, U.S. Surgical, for the commercialization of CoStasis and for CoSeal in
most of the larger European countries. The development and commercialization of
new products is highly uncertain, as is the timing associated with these
activities. Among other things, potential products that may appear to be
promising may not reach the market for a number of reasons, including the
possibilities that the potential products will be found to be ineffective or to
cause harmful side effects during preclinical testing or clinical trials, will
fail to receive necessary regulatory approvals, will be difficult to manufacture
on a commercial scale, will be uneconomical, will fail to achieve market
acceptance or will be precluded from commercialization by the proprietary rights
of third parties. We cannot assure you that any of our development programs will
be successfully completed, that clinical trials will generate anticipated
results or will commence or be completed as planned. Additionally, we cannot
assure you that we will be able to obtain CE Marks in Europe, on a timely basis,
if at all, or that any PMA application will be accepted or ultimately approved
by the FDA on a timely basis, if at all, or that any products for which approval
is obtained will be commercially successful. For example, we have a limited
history of CoStasis sales. We cannot reliably predict whether these sales will
continue at historical levels or be increased. If any of our development
programs are not successfully completed in a timely fashion, required regulatory
approvals are not obtained in a timely fashion, or products for which approvals
are obtained are not commercially successful, our business, financial condition
and results of operations will be materially and adversely affected.
We operate in an intense competitive environment.
We compete with many domestic and foreign medical device, pharmaceutical
and biopharmaceutical companies and organizations across each of our product
categories and areas in which we are conducting research and development
activities. In the hemostatic and biosealant areas, we believe in the United
States that we will face strong competition from existing methodologies for
controlling bleeding and sealing wounds resulting from surgery, such as
hemostatic powders and sponges, collagen-based hemostats and traditional sutures
and staples marketed by companies such as Johnson & Johnson, Tyco Healthcare
Group and American Home Products Corporation. In addition, a fibrin sealant
product is currently being marketed by Baxter Healthcare Corporation. Cohesion
faces competition from more recent products and technologies, such as those
developed by Focal, Inc. and Fusion Medical Technologies, Inc. Outside of the
United States, other competitive products currently being marketed include
fibrin sealants and another class of sealants, cyanoacrylates, which are sold in
Europe and the Pacific Rim countries by Immuno AG, Centeon L.L.C. and Cryolife.
In the United States, there are several fibrin sealants under development
including those by the American Red Cross and Haemacure Corporation. In addition
to conventional
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fibrin sealants, there are a number of other products in late-stage development
using either collagen or polymer technologies, made by Focal and Fusion, as well
as cyanoacrylates. Additionally, several companies and institutions are engaged
in the development of collagen-based materials, techniques, procedures and
products for use in medical applications we anticipate addressing with our
current and proposed products and research programs.
Many of these companies and organizations have or will have
substantially greater financial, technological, research and development,
regulatory and clinical, marketing and sales and personnel resources than we do.
They may also have greater experience in developing products, conducting
clinical trials, obtaining regulatory approvals, and manufacturing and marketing
such products. They may also develop alternative technologies and products that
are more effective, easier to use or more economical than those which have been
or are being developed by us or that render our technology and products obsolete
and non-competitive. Recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. There can be no assurance
that our current competitors or other parties will not succeed in developing
alternative technologies and products that are more effective, easier to use or
more economical than those which have been or are being developed by us or that
would render our technology and products obsolete and uncompetitive. In such an
event, our business, financial condition and results of operations would be
materially and adversely affected. Competitors may also obtain approval or
clearance by the FDA or foreign regulatory approval organizations, achieve
product commercialization or obtain patent protection earlier than Cohesion.
Additionally, there can be no assurance that any marketing or other strategic
partners that Cohesion may engage will not pursue parallel development of
technologies or products relating to or competitive with our planned product
portfolio. Also, to the extent Cohesion commences manufacturing activities, we
will also face competition with respect to manufacturing efficiency and
marketing capabilities, areas in which we currently have limited experience.
Failure to successfully address these factors and circumstances could have a
material adverse impact on Cohesion, its financial condition and results of
operations.
The market may not accept our products.
CoStasis Surgical Hemostat is a device designed to control diffuse
capillary and small vein bleeding, and CoSeal Surgical Sealant is a device
designed to seal anastomoses and sites of incision, in connection with surgery.
There can be no assurance that either of these products will gain significant
commercial acceptance among physicians, patients and health care payors, even
when and if necessary international and U.S. marketing approvals are obtained.
We believe that recommendations and endorsements by physicians will be essential
for market acceptance of our surgical products, and there can be no assurance
that any such recommendations or endorsements will be obtained. We believe that
surgeons will not use our products unless they determine, based on clinical data
and other factors, that the products are an effective means of controlling
bleeding and sealing anastomoses and sites of incision, and that the clinical
benefits to the patient and cost savings achieved through use of these systems
outweigh their cost. Acceptance among physicians may also depend upon our
ability to train surgeons and other potential users of our products in the
application of sprayable surgical products, which they typically have not used,
and the willingness of such users to learn these new techniques. Additional
factors in achieving market acceptance may include our ability to address
competition from U.S. and international medical device, pharmaceutical and
biopharmaceutical companies, to develop a marketing and sales force, to form
strategic partnerships and to manufacture cost-effective products. Failure of
our products to achieve significant market acceptance will have a material
adverse effect on our business, financial condition and results of operations.
We have limited marketing and sales capabilities.
We currently have limited experience in marketing and selling our
products, including those under development, and we do not have a significant
marketing and sales staff. In order to achieve
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<PAGE> 16
commercial success for any product approved by the FDA, we must either develop a
marketing and sales force or enter into arrangements with third parties to
market and sell our products. If we develop our own marketing and sales
capabilities, our SG&A expenses will increase significantly and we will be
competing with other companies that currently have experienced and well-funded
marketing and sales operations. To the extent that we enter into co-promotion or
other marketing and sales arrangements with other companies, any revenues we
receive will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful. Failure to develop a sales and
marketing force or enter into arrangements with other companies will reduce our
ability to generate revenues.
We depend on the sale of equity investments to fund operations.
The market prices of our equity investments are highly volatile. In
connection with our spin-off from Collagen, Collagen transferred to Cohesion,
effective January 1, 1998, all of its equity interest in Boston Scientific and
other investments. We have implemented a "hedge" strategy based on purchases of
put options and sales of call options in combination, commonly known as an
"equity collar," covering approximately 48% of our Boston Scientific holdings.
While the strategy is designed to minimize downside risk of loss should the
stock price decline below approximately $22.00 and allow for limited upside
participation should the stock price rise above approximately $49.00, there can
be no assurance that we will be able to sell any of the remaining unhedged
shares of Boston Scientific common stock at attractive prices if, when and as
needed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cohesion is exposed to financial market risks, including changes to
interest rates and equity security prices. To mitigate these risks, Cohesion
utilizes derivative financial instruments. Cohesion does not utilize derivative
financial instruments for speculative or trading purposes.
INTEREST RATE RISK
The primary objective of Cohesion's debt investment portfolio is to
preserve principal. Cohesion invests in debt instruments that meet high credit
quality standards and limits the amount of credit exposure to any one issue,
issuer, or type of instrument. Cohesion also limits the maturity of debt
investments to 400 days or less. As of September 30, 2000, Cohesion held
approximately $17.8 million of interest rate sensitive investments in debt
securities, respectively. A hypothetical 1% increase in interest rates would
result in a decrease in the fair value of investments in debt securities of less
than $20,000 as of September 30, 2000. This estimate is based on sensitivity
analyses performed on Cohesion's financial positions at September 30, 2000.
Actual results may differ materially.
EQUITY SECURITY PRICE RISK
Cohesion is exposed to equity security price risks on investments in
Boston Scientific common stock and equity instruments of other biotechnology or
biomedical device companies. To hedge against fluctuations in the market value
of the Boston Scientific common stock, Cohesion entered into costless collar
instruments that expire quarterly through May 2001 and will require settlement
in cash. Shares of Boston Scientific common stock held by Cohesion collateralize
the costless collar instruments. The collars hedge 300,000 shares at prices
between $22 and $49 and represent approximately 41% of the Boston Scientific
stock hedged. As of September 30, 2000, the market value of Boston Scientific
common stock was $16.44 per share.
<TABLE>
<CAPTION>
FAIR VALUE AT
EQUITY INVESTMENTS SEPTEMBER 30, 2000
(IN THOUSANDS)
--------------
<S> <C>
Boston Scientific $11,929
Equity collar on Boston 3,062
Scientific
Pharming Group N.V 9,689
-------
Total portfolio $24,680
</TABLE>
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PART II. OTHER INFORMATION
COHESION TECHNOLOGIES, INC.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27.1 Financial Data Schedule (EDGAR version only)
B. Reports on Form 8-K
None
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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.
COHESION TECHNOLOGIES, INC.
Dated: November 14, 2000 /s/ Sharon Kokubun
-----------------------------------
Sharon Kokubun
Vice President, Financial Operations
(Principal Accounting Officer)
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COHESION TECHNOLOGIES, INC.
FORM 10-Q QUARTERLY REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Page
------------------------------------------------------------------------------------------------
<S> <C> <C>
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
20
