NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE-MONTH PERIODS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
(IN
THOUSANDS, EXCEPT FOR SHARE DATA)
1.
OPERATIONS AND ORGANIZATION
Tutogen
Medical, Inc. with its consolidated subsidiaries (the "Company") processes,
manufactures and distributes worldwide, specialty surgical products and performs
tissue processing services for neuro, orthopedic, reconstructive and general
surgical applications. The Company's core business is processing human donor
tissue, utilizing its patented TUTOPLAST(R) process, for distribution to
hospitals and surgeons. The Company processes at its two manufacturing
facilities in Germany and the United States and distributes its products and
services in over 20 countries worldwide.
2. BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial reporting. In the
opinion of management, all adjustments necessary in order to make the financial
statements not misleading have been made. Operating results for the three-month
period ended December 31, 2007 are not necessarily indicative of the results for
the fiscal year ending September 30, 2008. The unaudited condensed consolidated
interim financial statements should be read in conjunction with the audited
consolidated financial statements of the Company included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2007.
3. NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). This standard defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. This standard is effective for
financial statements issued for fiscal years beginning after November 15,
2007. The Company is currently evaluating the requirements of SFAS 157 and has
not yet determined the impact on the Company’s financial
statements.
In
February 2007, the FASB issued SFAS No. 159, "
The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of FASB Statement No.
115
" which is effective for fiscal years beginning after November 15,
2007. This pronouncement permits an entity to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
Subsequent unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. Management
is currently evaluating the potential impact of this pronouncement on
our consolidated financial statements.
In
December 2007, the FASB issued SFAS 160 "
Noncontrolling Interests in Consolidated Financial
Statements - An Amendment of ARB No. 51''
(``SFAS 160''). SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company does not have any
noncontrolling interests in subsidiaries and believes that SFAS 160 will not
have a material impact on its financial statements.
In
December 2007, the FASB issued SFAS 141 (Revised 2007)
"Business Combinations''
(``SFAS 141R''). SFAS
141R establishes principles and requirements for the reporting entity in a
business combination, including recognition and measurement in the financial
statements of the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. SFAS 141R also establishes disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, and interim periods within those fiscal years.
4.
STOCK-BASED AWARDS
The
Company maintains a 1996 Stock Option Plan (the "Plan") (4,000,000 shares
authorized) under which incentive and nonqualified options have been granted to
employees, directors and certain key affiliates. Under the Plan, options may be
granted at not less than the fair market value of the underlying common stock on
the date of grant. Options may be subject to a vesting schedule and expire four,
five or ten years from grant. The Plan remains in effect for all options issued
during its life.
The Plan
was superseded by the Tutogen Medical, Inc. Incentive and Non-Statutory Stock
Option Plan (the "New Plan") (1,000,000 shares authorized), adopted by the Board
of Directors on December 5, 2005 and ratified by the shareholders on March 13,
2006. On March 19, 2007, the shareholders approved increasing the shares
authorized under the New Plan from 1,000,000 to 1,500,000. Under the
New Plan, options may be granted at not less than the fair market value of the
underlying common stock on the date of grant. Options may be subject to a
vesting schedule and expire four, five or ten years from grant.
Presented below is a summary of the activity of
the Company's stock options for the three-month period ending December 31,
2007:
|
|
|
Outstanding
Shares
|
|
|
Options
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at October 1, 2007
|
|
|
1,997,700
|
|
|
$
|
2.95
|
|
|
|
|
|
|
|
|
Granted
|
|
|
453,000
|
|
|
|
11.60
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(47,350
|
)
|
|
|
2.15
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(5,000
|
)
|
|
|
10.60
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,398,350
|
|
|
$
|
5.43
|
|
|
|
6.53
|
|
|
$
|
12,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,425,725
|
|
|
$
|
3.56
|
|
|
|
4.79
|
|
|
$
|
9,828
|
|
As of
December 31, 2007, 462,000 stock options were available for grant.
As of December 31, 2007, there was $2,524 of
total unrecognized compensation cost related to nonvested stock options that is
expected to be recognized over a weighted-average period of 2.24
years. The intrinsic value of options exercised during the
three-month period ended December 31, 2007 was $102. The fair value
of options vested during the three-month period ended December 31, 2007 was
$457. The weighted average fair value of options granted during
the three-month period ended December 31, 2007 was $5.00.
During
the quarters ended December 31, 2007 and 2006, stock-based compensation expense
of $350 and $414, respectively, is included in our Condensed Consolidated
Statements of (Loss) Income and Comprehensive (Loss) Income. The
Company also capitalized $95 of compensation expense to inventory at December
31, 2007.
5.
INVENTORIES
Major
classes of inventory were as follows:
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
4,676
|
|
|
$
|
3,602
|
|
|
Work in
process
|
|
|
9,908
|
|
|
|
7,356
|
|
|
Finished
goods
|
|
|
4,428
|
|
|
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,012
|
|
|
$
|
17,390
|
|
The increase in inventory from September 30, 2007 to December 31,
2007 was primarily due to higher inventory levels to support increased demand
for the Company’s products. At December 31, 2007 and September 30,
2007, the Company had inventory reserves of $2,660 and $2,315,
respectively. These amounts include write-downs for slow-moving,
excess and obsolete inventories based on historical experience, current product
demand, regulatory considerations, industry trends, changes and risks and the
remaining shelf life.
6. INCOME
TAXES
The
deferred tax asset balances consist primarily of net operating loss carry
forwards, deferred distribution fees and inventory reserves. As of
December 31, 2007, the Company had approximately $11,323 of federal net
operating loss carry forwards expiring beginning in 2012, a $79 alternative
minimum tax credit carry forward, and a $60 credit on research and development
that will begin to expire in 2013. The Company also had state net operating loss
carry forwards of approximately $4,617 that will begin to expire in
2025.
As of
December 31, 2007, the Company had a corporate net operating loss carry forward
for German income tax purposes of approximately $3,033 (2,059 Euros), and a
trade net operating loss carry forward for German income tax purposes of
approximately $613 (416 Euros), both of which can be carried forward
indefinitely. The Company continually reviews the adequacy and necessity of the
valuation allowance in accordance with the provisions of SFAS No. 109,
“Accounting for Income
Taxes”
.
Historically,
the Company has not recorded deferred income taxes on the undistributed earnings
of its foreign subsidiaries because it was management's intent to indefinitely
reinvest such earnings. During the 2006 fiscal year, the Company reduced certain
intercompany accounts, which resulted in a taxable dividend of $82 from Germany
to the U.S. The Company does not intend to record deferred income
taxes on future undistributed earnings of its foreign subsidiaries because it is
management's intent to indefinitely reinvest such earnings. Upon distribution of
these earnings, the Company may be subject to U.S. income taxes and/or foreign
withholding taxes.
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”),
“
Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109”
. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No.
109. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. In
connection with the Company's adoption of FIN 48 on October 1, 2007, the Company
reported a net decrease to retained earnings of $654 related to German
taxes. Unrecognized tax benefits were $654 at adoption. If
these unrecognized tax benefits were recognized, approximately $654 would impact
the effective tax rate.
During
the quarter ended December 31, 2007, the Company increased its FIN 48 liability
by $22. Unrecognized tax benefits were $676 at December 31,
2007. If these unrecognized tax benefits were recognized,
approximately $676 would impact the effective tax rate.
The
Company’s primary tax jurisdictions are U.S. federal, the state of Florida,
Germany and France. The Company is not currently under examination by
the U.S. federal government or the state of Florida and fiscal years ended
September 30, 2004 to September 30, 2007 remain open under the statute of
limitations. In Germany, tax years ending September 30, 2002 to
September 30, 2007 remain open, although the Company is currently under
examination for the fiscal years ended September 30, 2002 to September 30, 2005.
The fiscal years ended September 30, 2003 to September 30, 2007 remain open in
France. The Company’s policy is to recognize interest and/or
penalties related to income tax matters in income tax expense. Given
the Company’s current net operating loss positions in each of the tax
jurisdictions, there has never been interest or penalties recognized for tax
matters. The Company does not believe that its FIN 48 liability will
change materially in the next twelve-months.
7.
REVOLVING CREDIT ARRANGEMENTS AND SHORT TERM BORROWINGS
Under the
terms of revolving credit facilities with two German banks, the Company may
borrow up to 1,500 Euros (1,000 Euros and 500 Euros, respectively) or $2,209 for
working capital needs. These renewable credit lines allow the Company to borrow
at interest rates ranging from 7.5% to 10.25%. At December 31, 2007,
the Company had outstanding borrowings of 129 Euros or $190 in the aggregate. At
September 30, 2007, the Company had no outstanding borrowings under the
revolving credit agreements. The 500 Euro revolving credit facility is secured
by accounts receivable of the German subsidiary. The 1,000 Euros revolving
credit facility is collateralized by a mortgage on the Company's German facility
and a guarantee of up to 4,000 Euros or $5,892 by the Parent
Company.
In
November 2005, the Company entered into a revolving credit facility in the U.S.
for up to $1,500, expiring on November 18, 2008. At December 31, 2007 and
September 30, 2007, the Company had no outstanding borrowings on this credit
facility. The U.S. accounts receivable and inventory assets
collateralize the borrowing under the revolving credit facility. The Company is
required to maintain a maximum senior debt to tangible net worth ratio of 2.0 to
1.0. As of December 31, 2007, the Company was in compliance with this
covenant. In addition, the Company maintains a lock box arrangement with the
bank.
On June
30, 2006, the Company issued a $3,000 convertible debenture with detachable
warrants to purchase up to 175,000 shares of its common stock. The debenture
bore interest at 5.0% per year, was due upon the earlier of August 1, 2007, or
upon a change of control of the Company and was convertible into common stock at
a price of $5.15 per share at any time at the election of the holder. The
warrants were exercisable at $5.15 per share at any time at the election of the
shareholder until the earlier of the third anniversary of the date of issuance
or upon a change in control of the Company. In April and May of
2007, the $3,000 debenture was fully converted into common stock. In
November 2007, the 175,000 warrants were fully exercised into common
stock.
8.
DERIVATIVE INSTRUMENTS
The
Company accounts for its hedging activities in accordance with SFAS No. 133,
“Accounting for Derivatives
and Hedging Activities”
(“SFAS No. 133”)
as amended. SFAS No.
133 requires that all hedging activities be recognized in the balance sheet as
assets or liabilities and be measured at fair value. Gains or losses from the
change in fair value of hedging instruments that qualify for hedge accounting
are recorded in other comprehensive income. The Company's policy is to
specifically identify the assets, liabilities or future commitments being hedged
and monitor the hedge to determine if it continues to be effective. The Company
does not enter into or hold derivative instruments for trading or speculative
purposes. The fair value of the Company's interest rate swap agreement for its
1,500 Euro or $2,209 long-term loan is based on dealer quotes and was not
significant as of December 31, 2007. The loan is due on March 30, 2012 in
monthly installments of approximately 63 Euros or $93 including principal and
interest based on an adjustable rate as determined by one-month EURIBOR, fixed
by a swap agreement for the life of the loan with the lender at 3.7% as a cash
flow hedge. The proceeds were used to construct new facilities.
The
Company operates principally in one industry providing specialty surgical
products and tissue processing services. These operations include two
geographically determined segments: the United States and International. The
Company evaluates performance based on the operating income of each segment. The
accounting policies of these segments are consistent with prior periods. The
Company accounts for intersegment sales and transfers at contractually
agreed-upon prices.
The
Company's reportable segments are strategic business units that offer products
and services to different geographic markets. They are managed separately
because of the differences in these markets as well as their physical
location.
A summary
of the operations and assets by segment as of and for the quarters ended
December 31, 2007 and 2006 are as follows:
|
December
31, 2007
|
|
International
|
|
|
United
States
|
|
|
Consolidated
|
|
|
Gross
revenue
|
|
$
|
5,611
|
|
|
$
|
10,553
|
|
|
$
|
16,164
|
|
|
Less
- intercompany
|
|
|
(1,209
|
)
|
|
|
-
|
|
|
|
(1,209
|
)
|
|
Total
revenue - third party
|
|
|
4,402
|
|
|
|
10,553
|
|
|
|
14,955
|
|
|
Net
income (loss) before taxes
|
|
|
1,043
|
|
|
|
(2,315
|
)
|
|
|
(1,272
|
)
|
|
Net
income (loss)
|
|
|
677
|
|
|
|
(1,949
|
)
|
|
|
(1,272
|
)
|
|
Total
assets
|
|
|
20,639
|
|
|
|
39,185
|
|
|
|
59,824
|
|
|
Property,
Plant and Equipment
|
|
|
11,137
|
|
|
|
3,675
|
|
|
|
14,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
International
|
|
|
United
States
|
|
|
Consolidated
|
|
|
Gross
revenue
|
|
$
|
5,031
|
|
|
$
|
8,133
|
|
|
$
|
13,164
|
|
|
Less
- intercompany
|
|
|
(1,701
|
)
|
|
|
-
|
|
|
|
(1,701
|
)
|
|
Total
revenue - third party
|
|
|
3,330
|
|
|
|
8,133
|
|
|
|
11,463
|
|
|
Net
income before taxes
|
|
|
225
|
|
|
|
209
|
|
|
|
434
|
|
|
Net
income
|
|
|
152
|
|
|
|
209
|
|
|
|
361
|
|
|
Total
assets
|
|
|
18,885
|
|
|
|
22,539
|
|
|
|
41,424
|
|
|
Property,
Plant and Equipment
|
|
|
10,196
|
|
|
|
3,803
|
|
|
|
13,999
|
|
1
0. (LOSS)
EARNINGS PER SHARE
The
following is a reconciliation of the numerators and denominators of the basic
and diluted (loss) earnings per share computations for the three-month periods
ended December 31, 2007 and 2006. The Company has excluded 1,738,964 and 423,000
of stock options for the three-month periods ended December 31, 2007 and 2006,
respectively, as such stock options are anti-dilutive to the
calculation.
|
|
|
Three
Months Ended
|
|
|
|
|
December
31,
|
|
|
Numerator
|
|
2007
|
|
|
2006
|
|
|
Net
(loss) income used in calculation of basic and diluted
|
|
|
|
|
|
|
|
earnings
per share
|
|
$
|
(1,272
|
)
|
|
$
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
used
in calculation of basic earnings per share
|
|
|
19,281,684
|
|
|
|
16,390,100
|
|
|
Effect
of dilutive securites - stock options, warrants
|
|
|
|
|
|
|
|
|
|
and
convertible debentures
|
|
|
-
|
|
|
|
1,635,189
|
|
|
Weighted-average
shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
used
in calculation of diluted earnings per share
|
|
|
19,281,684
|
|
|
|
18,025,289
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
11. LEGAL
PROCEEDINGS
On
October 12, 2005, the Company issued a voluntary recall of all product units
which utilized donor tissue received from BioMedical Tissue Services/BioTissue
Recovery Services ("BioMedical"). This action was taken because the Company was
unable to satisfactorily confirm that BioMedical had properly obtained donor
consent. The Company quarantined all BioMedical products in its inventory,
having a value of $1,035 and notified all customers and distributors of record
regarding this action. In connection with the recall, the Company wrote off $174
of inventory during 2005, and $861 for quarantined inventory at September 30,
2006. Additionally, as of September 30, 2005, the Company had accrued $250 of
related costs in connection with the recall. As of December 31, 2007 and
September 30, 2007, the accrual for these costs was $0, due in part to actual
payments made for such costs and in part to an adjustment made by management
during the three-months ended March 31, 2006 to reduce the accrual by
approximately $150 as a result of a change in management's estimate of other
related costs. The effect of this adjustment was to reduce cost of revenue by
approximately $150.
In
January 2006, the Company was named as one of several defendants in a class
action suit related to the BioMedical recall. The Company intends to vigorously
defend this matter and does not believe that the outcome of this class action
will have a material adverse effect on the Company’s operations, cash flows,
financial position or financial statement disclosures.
The
Company is party to various claims, legal actions, complaints and administrative
proceedings arising in the ordinary course of business. In
management’s opinion, the ultimate disposition of these matters will not have a
material adverse effect on its financial condition, cash flows or results of
operations.
12.
RELATED PARTY TRANSACTIONS
As of
December 31, 2007, Zimmer CEP (formerly Centerpulse) USA Holding Co., a
subsidiary of Zimmer Holdings, Inc. (“Zimmer”) was the owner of 27% of the
Company's outstanding shares of common stock.
The
Company has an exclusive license and distribution agreement with Zimmer Spine,
Inc., a wholly owned subsidiary of Zimmer, whereby Zimmer Spine has been granted
the right to act as the Company's exclusive distributor of bone tissue for
spinal applications in the United States. For the three-months ended December
31, 2007 and 2006 product sales to Zimmer Spine totaled $1,150 and $1,293,
respectively. Accounts receivable from Zimmer Spine were $171 and
$209 at December 31, 2007 and September 30, 2007.
The
Company has also engaged Zimmer Dental, Inc. (“Zimmer Dental”) a wholly owned
subsidiary of Zimmer to act as an exclusive sales and marketing representative
for the Company's bone tissue for dental applications in the United States and
certain international markets. Under this distribution
agreement, the Company ships directly to Zimmer Dental’s
customers. For the three-month periods ended December 31, 2007 and
2006, Zimmer Dental was paid commissions aggregating approximately $2,532 and
$1,918 respectively. Accounts payable to Zimmer Dental total $2,779
and $2,532 at December 31, 2007 and September 30, 2007,
respectively. Accounts receivable from Zimmer Dental totaled $238 at
December 31, 2007 and $292 at September 30, 2007.
In August
2007, the Company entered into an exclusive distribution agreement with Zimmer
Dental, whereby Zimmer Dental will distribute dental products
internationally. For the three-month period ending December 31, 2007,
product sales under this new relationship totaled $61.
On
November 12, 2007, the Company entered into an Agreement and Plan of Merger
among Regeneration Technologies, Inc. (“Parent”), Rockets FL Corp. (“Merger
Sub”) and the Company. The proposed merger transaction is structured
as a tax free stock-for-stock exchange pursuant to which the Company’s
shareholders will receive 1.22 shares of the Parent’s common stock for each
share of the Company’s common stock. As a result, the Company will become a
wholly
-
owned
subsidiary of the Parent. Upon completion of the proposed merger, Parent
stockholders will own approximately 55% of the combined company and the
Company’s shareholders will own approximately 45% of the combined company, on a
fully diluted basis. The proposed merger is subject to approval by
the respective shareholders of the Parent and the Company, as well as customary
closing conditions and regulatory approvals. If the Company terminates the
Agreement and Plan of Merger, under certain limited conditions, the Company
could owe a termination fee of $6.5 million. The proposed merger is estimated to
be completed during the second quarter of the Company’s 2008 fiscal
year. Information about the proposed merger is set forth in the joint
proxy statement/prospectus filed with the Securities and Exchange Commission on
January 23, 2008.