<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
-- or --
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
------------------------
0-25250
COMMISSION FILE NUMBER
OSTEX INTERNATIONAL, INC.
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
STATE OF WASHINGTON 91-1450247
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER
2203 AIRPORT WAY SOUTH, SUITE 400, SEATTLE, WASHINGTON 98134
206-292-8082
ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
[N/A]
FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT
------------------------
Indicate by checkmark whether the registrant (1) has filed all Yes [ X ]
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or No [ ]
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.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF
MAY 7, 1999 WAS 12,537,500.
------------------------
<PAGE>
OSTEX INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets F-1
Condensed Statements of Operations F-2
Condensed Statements of Cash Flow F-3
Notes to Condensed Financial Statements F-4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 5
PART II -- OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 5
</TABLE>
- 1 -
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Attached hereto are Ostex International, Inc.'s (the "Company's" or
"Ostex'") unaudited condensed balance sheet as of March 31, 1999, and audited
condensed balance sheet as of December 31, 1998, the unaudited condensed
tatements of operations for the three months ended March 31, 1999 and 1998, and
the unaudited condensed statements of cash flow for the three months ended
March 31, 1999 and 1998. Notes follow the unaudited financial statements and
are an integral part thereof.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those discussed below, that could cause
actual results or the timing of certain events to differ materially from
historical results or those anticipated. Words used herein such as "believes,"
"anticipates," "expects," "intends," and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements. In addition, the disclosures in this Item 2 under
the caption "Other Factors that May Affect Operating Results", consist
principally of a brief discussion of risks which may affect future results and
are thus, in their entirety, forward-looking in nature. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports previously filed with the
Securities and Exchange Commission (the "Commission"), including the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.
OVERVIEW
Ostex was incorporated in the State of Washington in 1989. The Company is
engaged in the discovery and commercialization of products associated with
osteoporosis and other collagen-related diseases. The Company believes that its
lead product, the OSTEOMARK-Registered Trademark- test, incorporates
breakthrough technology in the area of bone resorption measurement. Ostex has
formed collaborative relationships with leading diagnostic and pharmaceutical
companies to aid in the commercialization of Osteomark. As of March 31, 1999,
the Company had 34 employees.
Osteoporosis is a significant health problem. According to the National
Osteoporosis Foundation (the "NOF"), osteoporosis afflicts approximately 30
million people in the U.S. alone. Additionally millions of people are at risk
of skeletal degradation associated with Paget's disease of bone, cancer that
metastasizes to bone, hyperparathyroidism (overactivity of the parathyroid
gland, characterized by a reduction of bone mass) and renal osteodystrophy. In
spite of the serious human and economic consequences of these diseases
(according to the NOF, the direct healthcare and indirect lost productivity
costs of osteoporosis exceed $10 billion annually in the U.S. alone), medical
intervention usually commences only after pain, immobility, fractures, or other
symptoms have appeared. The Company expects the osteoporosis therapeutic market
will increase significantly. The Company also believes new therapeutic products
are under development for osteoporosis, some of which are in late-stage clinical
trials, and that the Osteomark test can be used to effectively predict a
patient's response to osteoporosis therapy and monitor existing therapies and
other therapies which may be developed.
The Company is the exclusive licensee of the Osteomark technology, known
clinically as the NTx test, which is available in urine and serum formats
that can aid in healthcare decision-making at early menopause and beyond.
The Osteomark test is a non-invasive diagnostic test which quantitatively
indicates the level of bone resorption. Individuals who are losing bone
collagen at accelerated rates may progress to low bone mass, a major cause of
osteoporosis. The Company believes that early identification of high levels
of bone resorption provides the opportunity to predict skeletal response
(bone mineral density) to hormonal anti-resorpitive therapy in postmenopausal
women which are intended to prevent the onset of osteoporosis. The Company
also believes that the Osteomark test aids clinicians in monitoring the
- 2 -
<PAGE>
effects of antiresorptive therapies in postmenopausal women, as well as in
older patients who have already lost significant bone mass.
On May 8, 1995, the Company's Osteomark test became commercially available
in the United States as a urinary test that provides a quantitative measure of
the excretion of cross-linked N-telopeptides of Type I collagen (NTx) as an
indicator of human bone resorption and, in July 1996 the Company received
expanded claims from the Food and Drug Administration (the "FDA") for the test.
The 1996 claims allow that an Osteomark test measurement, if taken prior to the
initiation of hormonal antiresorptive therapy, can be utilized to predict a
patient's response to that therapy, in terms of its effect on bone mineral
density. Additionally, the claims allow that the test can be used for
therapeutic monitoring of antiresorptive therapies in postmenopausal women, as
well as individuals diagnosed with osteoporosis and Paget's disease, and for
therapeutic monitoring of estrogen-suppressing therapies. In March 1998 the
claims were further expanded by allowing that, in addition to the 1996 claims,
an Osteomark test measurement can identify the probability of a decrease in bone
mineral density in postmenopausal women taking calcium supplements relative to
those treated with hormonal antiresorptive therapy. The Company is
manufacturing and marketing the Osteomark test in an Enzyme-linked Immunosorbent
Assay ("ELISA") format for testing urine or serum samples.
In February 1999, the Company received clearance to market Osteomark NTx
Serum. Osteomark NTx Serum is the first and only commercially available test in
the United States that measures specific bone breakdown by osteoclasts using a
blood sample. The Company believes that the use of a serum NTx test provides a
number of advantages to testing laboratories, including the elimination of the
requirement to normalize NTx values to creatinine concentration.
Worldwide promotion of the Osteomark urine test kits is also supported by
Johnson & Johnson Clinical Diagnostics, Inc. ("Johnson & Johnson"). In 1995 the
Company entered into research, development, license and supply agreements with
Johnson & Johnson. These agreements grant Johnson & Johnson a license to
manufacture, sell and distribute certain products using Ostex's bone resorption
technology. Currently, Johnson & Johnson distributes in the United States and
certain foreign countries the Osteomark test in the existing microtiter plate
format. Ortho-Clinical Diagnostics, a Johnson & Johnson company, announced in
March 1999 that it had gained FDA clearance for the Osteomark test on its
Vitros-Registered Trademark- automated analyzer. Ostex will receive royalties
on Johnson & Johnson's sales of products incorporating the Ostex technology.
Under the Johnson & Johnson license agreement, the Company has the right to
license its technology for use on automated instruments to one other company in
addition to Johnson & Johnson. The Company is currently evaluating other
potential collaborators to adapt the Osteomark test to other high-speed
automated instruments.
In 1992, Ostex entered into a research and development agreement and a
license agreement with Mochida Pharmaceutical Co., Ltd. ("Mochida"), a Japanese
pharmaceutical company, for the commercialization of the Osteomark test in
Japan. Under the research and development agreement, Mochida has an option to
license the NTx serum test and has paid Ostex $3,350,000 in development fees to
date. Future payments of $750,000 under the agreement are contingent upon
Mochida's decision to exercise its option. Under the license agreement, Ostex
granted Mochida exclusive marketing and distribution rights to certain Ostex
products in Japan. Since 1992, Mochida has paid Ostex $2,500,000 in licensing
fees for the Osteomark test. In January 1998, Mochida launched the Osteomark
test in Japan for the management of patients with hyperparathyroidism and for
patients with metastatic bone tumors. Ostex sells Mochida the critical reagents
to be assembled into finished products in Japan by Mochida.
The Company also plans to develop the Osteomark test in other formats,
including formats suitable for use in the physician's office. The Company
has an agreement with Metrika, Inc. ("Metrika"), a diagnostic device company,
to develop a physician's office "point-of-care" Osteomark test device. The
Company and Metrika are developing this fully disposable point-of-care NTx
test as an indicator of bone resorption that computes NTx values and displays
them digitally.
- 3 -
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
MARCH 31, 1998
Total revenues were $901,000 for the quarter ended March 31, 1999, compared
to $581,000 for the quarter ended March 31, 1998. The increase in product sales
was due to higher orders for Osteomark urine kits from domestic reference
laboratories and initial sales of the Osteomark serum kits.
The Company's gross margin increased to 73% in the quarter ended March 31,
1999, compared to 67% in the first quarter of 1998. Cost of products sold
primarily includes labor costs, materials, equipment and facility costs. The
increase in cost of products sold in the first quarter of 1999 compared to the
same quarter in 1998 resulted from the 55% increase in total revenues. Cost of
products sold as a percentage of sales decreased in the first quarter of 1999
compared to the same quarter in 1998 due to higher production volume compared to
the 1998 first quarter. Since the majority of the product cost is fixed, the
higher the volume of production, the lower the cost per unit. Therefore, the
gross margin was higher in the first quarter of 1999 than 1998 since the cost
per unit allocated to cost of products sold was lower than the previous year.
The gross margin is expected to continue to fluctuate depending on the volume
and timing of customer orders and the associated production levels.
The Company's research and development expenditures totaled $471,000 for
the quarter ended March 31, 1999, compared to $835,000 for the quarter ended
March 31, 1998. The $364,000 decrease was attributable to lower labor and
overhead costs resulting from the restructuring plan implemented by the Company
in December 1998 and the Company's decision to reduce the level of funding to
outside companies for the NTx point-of-care development programs.
Selling, general and administrative expenses totaled $944,000 for the
quarter ended March 31, 1999, compared to $2,251,000 for the quarter ended March
31, 1998. The $1,307,000 decrease in the 1999 quarter was due to lower labor
and overhead costs resulting from the restructuring plan implemented by the
Company in December 1998, lower litigation costs, and a decrease in spending on
marketing programs.
Net other income consists primarily of interest income and totaled $126,000
for the quarter ended March 31, 1999, compared to $203,000 for the quarter ended
March 31, 1998. The decrease is due to lower invested balances resulting from
using cash to fund the Company's operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and cash equivalents and
short-term investments of $9,685,000, working capital of $9,923,000 and total
shareholders' equity of $12,668,000. As a result of funding operating losses
during the three months ended March 31, 1999, cash, cash equivalents and
short-term investments decreased by $1,294,000, working capital decreased by
$701,000 and shareholders equity decreased by $820,000.
During the quarter ended March 31, 1999, cash flows used in operating
activities decreased by $1,422,000 mainly due to a decrease in the Company's net
loss from $2,491,000 for the quarter ended March 31, 1998 to $634,000 for the
quarter ended March 31, 1999. This $1,857,000 increase in cash flows was offset
by an increase in trade receivables and other current assets of $193,000 and a
decrease in accounts payable of $389,000. Cash flows from financing activities
increased by $216,000 due to the Company repurchasing 175,000 shares of its
common stock for $211,000 and payments on notes payable of $50,000. During the
three months ended March 31, 1999 the Company did not purchase any property and
equipment.
The Company's future capital requirements depend upon many factors,
including the effectiveness of Osteomark NTx Serum and Urine tests
commercialization activities and arrangements; continued scientific progress
in its research and development programs; the costs involved in filing,
prosecuting and enforcing patent claims; and the time and costs involved in
obtaining regulatory approvals. Additional funds from equity or debt
financing will 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
or through private placements, even if the Company does not have an immediate
need for additional cash at that time. If additional financing is not
available, the Company believes that its existing available cash, its future
license and research revenues from existing collaboration agreements,
- 4 -
<PAGE>
its current level of product sales and interest income from short-term
investments will be adequate to fund operations through 2000.
OTHER FACTORS THAT MAY AFFECT OPERATING RESULTS
The Company's operating results may fluctuate due to a number of factors
including, but not limited to, volume and timing of product sales, pricing,
market acceptance of the Company's products, changing economic conditions in the
healthcare industry, activities of competitors, delays and increased costs of
product and technology development, the Company's ability to develop and
maintain collaborative arrangements, the outcome of litigation, and the effect
of the Company's accounting policies and other risk factors detailed in the
Company's 1998 Form 10-K and other SEC filings. All of the foregoing factors
are difficult for the Company to predict and can materially adversely affect the
Company's business and operating results.
The Company is currently upgrading its financial and manufacturing
information system software to a Year 2000 compliant version. The Company is in
the process of testing this system upgrade and expects it to be fully
implemented by December 31, 1999. The Company has assessed the Year 2000
compliance of its other computer system software and manufacturing equipment and
expects to complete all necessary upgrades to be Year 2000 compliant no later
than December 31, 1999. In addition, the Company has contacted all key vendors
and suppliers regarding Year 2000 compliance and has received no responses
indicating that any vendor or supplier will not be Year 2000 compliant. The
Company has also created a Year 2000 project team that periodically reviews
relevant issues regarding compliance. The costs of Year 2000 initiatives have
primarily been incurred and are not expected to be material to the Company's
results of operations or financial position in future periods. Failure to
timely complete the Company's Year 2000 initiatives could result in the
Company's software being rendered inoperative. Although the company has no
formal contingency plans in place, in such event, the Company would attempt to
perform its MIS functions, and other functions currently implemented by
software, manually through the dedication of additional personnel to performing
such functions. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no assurance that the systems and
products of other companies of which the Company's operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
- 5 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSTEX INTERNATIONAL, INC.
DATED: May 14, 1999 By /S/ Thomas A. Bologna
-----------------------------------------
Thomas A. Bologna
Chairman, President and Chief Executive Officer
(principal financial and principal accounting officer)
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<PAGE>
OSTEX INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,316,000 $ 2,744,000
Short-term investments 8,369,000 8,235,000
Trade receivables and other current assets, net 1,051,000 858,000
Inventory, at cost 259,000 247,000
-------------- --------------
Total current assets 10,995,000 12,084,000
-------------- --------------
Property, Plant and Equipment, net 2,204,000 2,382,000
Other Assets 599,000 599,000
-------------- --------------
Total assets $ 13,798,000 $ 15,065,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 188,000 $ 557,000
Accrued expenses 668,000 696,000
Current portion of note payable 216,000 207,000
-------------- --------------
Total current liabilities 1,072,000 1,460,000
-------------- --------------
Noncurrent Liabilities
Note payable, net of current portion 58,000 117,000
-------------- --------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 authorized;
12,537,500 and 12,696,250 issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 125,000 127,000
Additional paid-in capital 45,459,000 45,642,000
Accumulated items of comprehensive loss (59,000) (58,000)
Accumulated deficit (32,857,000) (32,223,000)
-------------- --------------
Total shareholders' equity 12,668,000 13,488,000
-------------- --------------
Total liabilities and shareholders' equity $ 13,798,000 $ 15,065,000
-------------- --------------
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
F - 1
<PAGE>
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------
March, 31 March, 31
1999 1998
-------------- --------------
<S> <C> <C>
Revenues:
Product sales and research testing services $ 901,000 $ 581,000
Operating Expenses:
Cost of products sold 246,000 189,000
Research and development 471,000 835,000
Selling, general and administrative 944,000 2,251,000
-------------- --------------
Total operating expenses 1,661,000 3,275,000
-------------- --------------
Loss from operations (760,000) (2,694,000)
Other Income, net 126,000 203,000
-------------- --------------
Net loss $ (634,000) $ (2,491,000)
-------------- --------------
-------------- --------------
Basic and diluted net loss per common share $ (0.05) $ (0.20)
Shares used in calculation of net loss per share 12,585,000 12,696,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
F - 2
<PAGE>
OSTEX INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
March, 31 March, 31
1999 1998
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (1,048,000) $ (2,470,000)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (4,091,000) (18,538,000)
Proceeds from sales and maturities of short-term investments 3,956,000 19,135,000
Proceeds from the sale of property, plant and equipment 15,000 -
Purchases of property, plant and equipment - (17,000)
---------------- ------------------
Net cash provided by (used in) investing activities (120,000) 580,000
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options 1,000 -
Repurchase of common stock (211,000) -
Payments on note payable (50,000) (44,000)
---------------- ------------------
Net cash used in financing activities (260,000) (44,000)
---------------- ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,428,000) (1,934,000)
CASH AND CASH EQUIVALENTS, beginning of period 2,744,000 2,201,000
---------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,316,000 $ 267,000
---------------- ------------------
---------------- ------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
F - 3
<PAGE>
OSTEX INTERNATIONAL, INC.
NOTES TO CONDENSED 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
periods, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report filed on Form 10-K for the year ended
December 31, 1998.
2. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", which was effective for the
Company beginning January 1, 1998, establishes standards for reporting and
disclosure of comprehensive income. The components of comprehensive income for
the three months ended March 31, 1999 and March 31, 1998, are as follows:
<TABLE>
<CAPTION>
March, 31 March, 31
1999 1998
---------------- ---------------
<S> <C> <C>
Net Loss $ (634,000) $ (2,491,000)
Unrealized loss on short-term investments (1,000) (30,000)
---------------- ---------------
Total comprehensive loss $ (635,000) $ (2,521,000)
---------------- ---------------
---------------- ---------------
</TABLE>
F - 4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,316,000
<SECURITIES> 8,369,000
<RECEIVABLES> 698,000
<ALLOWANCES> 80,000
<INVENTORY> 259,000
<CURRENT-ASSETS> 10,995,000
<PP&E> 4,755,000
<DEPRECIATION> 2,551,000
<TOTAL-ASSETS> 13,798,000
<CURRENT-LIABILITIES> 1,072,000
<BONDS> 0
0
0
<COMMON> 125,000
<OTHER-SE> 12,543,000
<TOTAL-LIABILITY-AND-EQUITY> 13,798,000
<SALES> 901,000
<TOTAL-REVENUES> 901,000
<CGS> 246,000
<TOTAL-COSTS> 246,000
<OTHER-EXPENSES> 1,415,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> (634,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (634,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (634,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
