Attached files
file | filename |
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EX-10.3 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex10-3.htm |
EX-10.4 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex10-4.htm |
EX-32.2 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex32-2.htm |
EX-32.1 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex32-1.htm |
EX-10.1 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex10-1.htm |
EX-10.2 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex10-2.htm |
EX-31.1 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex31-1.htm |
EX-10.5 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex10-5.htm |
EX-31.2 - BIOMIMETIC THERAPEUTICS, INC. | v164899_ex31-2.htm |
UNITED
STATES
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 quarterly period ended September 30, 2009
¨
|
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 000-51934
BioMimetic
Therapeutics, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
62-1786244
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
389
Nichol Mill Lane
Franklin,
TN
|
37067
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(615)
844-1280
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed
since
last report)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). ¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes x No
As of
November 3, 2009, there were issued and outstanding 21,791,310 shares of the
registrant's common stock.
BioMimetic
Therapeutics, Inc.
Table
of Contents
Page
|
|||||
PART
I — FINANCIAL INFORMATION
|
|||||
Item
1.
|
Condensed
Consolidated Financial Statements (Unaudited)
|
||||
Condensed
Consolidated Balance Sheets as of September 30, 2009 and December
31, 2008
|
1 | ||||
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 and 2008
|
2 | ||||
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008
|
3 | ||||
Notes
to Condensed Consolidated Financial Statements
|
4 | ||||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20 | |||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33 | |||
Item
4.
|
Controls
and Procedures
|
33 | |||
PART
II — OTHER INFORMATION
|
|||||
Item
1.
|
Legal
Proceedings
|
34 | |||
Item
1A.
|
Risk
Factors
|
34 | |||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
34 | |||
Item
3.
|
Defaults
Upon Senior Securities
|
34 | |||
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
34 | |||
Item
5.
|
Other
Information
|
34 | |||
Item
6.
|
Exhibits
|
35 |
i
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q, including but not limited to the notes to the
condensed consolidated financial statements and the sections titled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Risk Factors,” contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Statements in this Quarterly Report
that are not historical facts are hereby identified as “forward-looking
statements” for the purpose of the safe harbor provided by Section 21E of the
Exchange Act and Section 27A of the Securities Act. Forward-looking
statements convey our current expectations and forecasts of future
events. Forward-looking statements include statements regarding our
future results of operations and financial position, business strategy, budgets,
projected costs, plans and objectives of management for future operations that
are not historical facts. The words “may,” “continue,” “estimate,”
“intend,” “plan,” “will,” “believe,” “project,” “expect,” “anticipate” and
similar expressions may identify forward-looking statements, but the absence of
these words does not necessarily mean that a statement is not
forward-looking.
These
forward-looking statements include, among other things, statements
about:
|
§
|
success,
advancement and timing of clinical trials and studies and eventual
regulatory approval of our product candidates or other new product
introductions;
|
|
•
|
market
acceptance of and demand for our product
candidates;
|
|
•
|
regulatory
actions that could adversely affect the price of or demand for our
approved products;
|
|
•
|
our
intellectual property portfolio and licensing
strategy;
|
|
•
|
our
marketing and manufacturing capacity and
strategy;
|
|
•
|
estimates
regarding our capital requirements, and anticipated timing of the need for
additional funds;
|
|
•
|
product
liability claims;
|
|
•
|
economic
conditions that could adversely affect the level of demand for our product
candidates;
|
|
•
|
financial
markets, including the market for auction rate
securities;
|
|
•
|
the
competitive environment; and
|
|
•
|
the
current economic downturn.
|
Any or
all of our forward-looking statements may turn out to be
inaccurate. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. Forward-looking
statements may be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties, including the risks, uncertainties and
assumptions described in “Risk Factors.” In light of these risks,
uncertainties and assumptions, the forward-looking events and circumstances
contained in this Quarterly Report may not occur as contemplated and actual
results could differ materially from those anticipated or implied by the
forward-looking statements.
You
should read this Quarterly Report with the understanding that our actual future
results may be materially different from what we expect. We qualify
all of the forward-looking statements in this Quarterly Report by these
cautionary statements.
You
should not unduly rely on these forward-looking statements, which speak only as
of the date of this Quarterly Report. Unless required by law, we
undertake no obligation to publicly update or revise any forward-looking
statements to reflect new information or future events or
otherwise. You should, however, review the factors and risks we
describe in the reports we will file from time to time with the Securities and
Exchange Commission after the date of this Quarterly Report.
ii
PART
I — FINANCIAL INFORMATION
Item
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BIOMIMETIC
THERAPEUTICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 14,336,533 | $ | 17,534,963 | ||||
Investments
- short term
|
54,915,624 | 33,218,233 | ||||||
Receivables
- trade
|
- | 1,084 | ||||||
Receivables
- other
|
4,503,714 | 11,635,778 | ||||||
Inventory
|
1,361,334 | - | ||||||
Prepaid
expenses
|
591,126 | 503,032 | ||||||
Total
current assets
|
75,708,331 | 62,893,090 | ||||||
Investments
- long term
|
31,378,620 | 46,624,040 | ||||||
Inventory
|
- | 1,261,987 | ||||||
Prepaid
expenses - long term
|
15,663 | 58,673 | ||||||
Property
and equipment, net
|
6,270,787 | 7,014,262 | ||||||
Capitalized
patent license fees, net
|
3,329,706 | 4,983,729 | ||||||
Deposits
|
2,304,277 | 2,284,608 | ||||||
Total
assets
|
$ | 119,007,384 | $ | 125,120,389 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 1,646,299 | $ | 4,325,907 | ||||
Accrued
payroll, employee benefits and payroll taxes
|
2,009,226 | 2,304,016 | ||||||
Other
accrued expenses
|
1,085,305 | 2,392,236 | ||||||
Current
portion of capital lease obligations
|
18,840 | 18,187 | ||||||
Current
portion of note payable
|
4,760,000 | - | ||||||
Deferred
revenue
|
971,188 | 971,188 | ||||||
Total
current liabilities
|
10,490,858 | 10,011,534 | ||||||
Accrued
rent - related party
|
413,542 | 399,256 | ||||||
Capital
lease obligations
|
20,500 | 34,713 | ||||||
Deferred
revenue
|
15,794,471 | 16,520,866 | ||||||
Note
payable
|
25,030,000 | 39,100,000 | ||||||
Total
liabilities
|
51,749,371 | 66,066,369 | ||||||
Stockholders’
equity:
|
||||||||
Preferred
stock, $0.001 par value; 15,000,000 shares authorized; no shares issued
and outstanding as of September 30, 2009 and December 31,
2008
|
- | - | ||||||
Common
stock, $0.001 par value; 37,500,000 shares authorized; 21,790,787 shares
issued and outstanding as of September 30, 2009; 18,714,067 shares issued
and outstanding as of December 31, 2008
|
21,791 | 18,714 | ||||||
Additional
paid-in capital
|
159,246,371 | 131,262,570 | ||||||
Accumulated
other comprehensive income
|
2,605,070 | 135,542 | ||||||
Accumulated
deficit
|
(94,615,219 | ) | (72,362,806 | ) | ||||
Total
stockholders’ equity
|
67,258,013 | 59,054,020 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 119,007,384 | $ | 125,120,389 |
See
accompanying notes.
1
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Royalty
income
|
$ | 129,749 | $ | 169,017 | $ | 400,111 | $ | 605,012 | ||||||||
Sublicense
fee income
|
244,793 | 244,792 | 726,396 | 729,056 | ||||||||||||
Other
revenue
|
- | 5,160 | - | 30,301 | ||||||||||||
Total
revenues
|
374,542 | 418,969 | 1,126,507 | 1,364,369 | ||||||||||||
Costs
and expenses:
|
||||||||||||||||
Research
and development (a)
|
5,191,513 | 5,665,818 | 15,538,084 | 18,631,080 | ||||||||||||
General
and administrative (b)
|
2,755,003 | 2,198,393 | 7,534,323 | 7,056,214 | ||||||||||||
Depreciation
and capital lease amortization
|
333,458 | 355,235 | 1,015,424 | 1,067,209 | ||||||||||||
Patent
license fee amortization
|
549,025 | 665,825 | 2,018,444 | 1,898,268 | ||||||||||||
Total
costs and expenses
|
8,828,999 | 8,885,271 | 26,106,275 | 28,652,771 | ||||||||||||
Loss
from operations
|
(8,454,457 | ) | (8,466,302 | ) | (24,979,768 | ) | (27,288,402 | ) | ||||||||
Interest
(expense) income, net
|
(103,919 | ) | 97,903 | (264,299 | ) | 427,726 | ||||||||||
Investment
income (loss), net
|
642,243 | (9,598,379 | ) | 2,991,654 | (8,150,753 | ) | ||||||||||
Gain
on disposal of equipment
|
- | - | - | 5,025 | ||||||||||||
(Loss)
gain on disposal of orofacial therapeutic business
|
- | (1,875 | ) | - | 39,291,314 | |||||||||||
(Loss)
income before income taxes
|
(7,916,133 | ) | (17,968,653 | ) | (22,252,413 | ) | 4,284,910 | |||||||||
Income
taxes
|
- | - | - | 122,500 | ||||||||||||
Net
(loss) income
|
$ | (7,916,133 | ) | $ | (17,968,653 | ) | $ | (22,252,413 | ) | $ | 4,162,410 | |||||
Net
(loss) income per common share:
|
||||||||||||||||
Basic
|
$ | (0.36 | ) | $ | (0.97 | ) | $ | (1.11 | ) | $ | 0.23 | |||||
Diluted
|
$ | (0.36 | ) | $ | (0.97 | ) | $ | (1.11 | ) | $ | 0.22 | |||||
Weighted
average shares used to compute net (loss) income per
common share:
|
||||||||||||||||
Basic
|
21,751,983 | 18,566,073 | 20,074,256 | 18,481,388 | ||||||||||||
Diluted
|
21,751,983 | 18,566,073 | 20,074,256 | 19,241,894 | ||||||||||||
Related
party disclosures:
|
||||||||||||||||
(a)
Research and development includes professional fees to related
parties
|
$ | 5,000 | $ | 5,000 | $ | 5,000 | $ | 5,000 | ||||||||
(b)
General and administrative includes rent and operating expenses to related
parties
|
$ | 243,834 | $ | 233,105 | $ | 738,775 | $ | 763,762 |
See
accompanying notes.
2
BIOMIMETIC
THERAPEUTICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
months ended September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
(loss) income
|
$ | (22,252,413 | ) | $ | 4,162,410 | |||
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
||||||||
Depreciation
and capital lease amortization expense
|
1,015,424 | 1,067,209 | ||||||
Patent
license fee amortization
|
2,018,444 | 1,898,268 | ||||||
Gain
on disposal of equipment
|
- | (5,025 | ) | |||||
Other-than-temporary
impairment loss on investments
|
- | 10,224,655 | ||||||
Gain
on sale of investments
|
(2,091,650 | ) | - | |||||
Non-cash
compensation and consulting expense
|
3,053,839 | 2,481,348 | ||||||
Gain
on disposal of orofacial therapeutic business
|
- | (39,291,314 | ) | |||||
Other
|
(186,618 | ) | (228,994 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Receivables
|
1,319,766 | 3,135,948 | ||||||
Inventory
|
(99,347 | ) | (463,126 | ) | ||||
Prepaid
expenses
|
21,851 | 209,093 | ||||||
Accounts
payable, accrued payroll and other accrued expenses
|
(4,267,044 | ) | (780,136 | ) | ||||
Deferred
revenue
|
(726,395 | ) | (729,057 | ) | ||||
Net
cash used in operating activities
|
(22,194,143 | ) | (18,318,721 | ) | ||||
Cash
flows from investing activities
|
||||||||
Capitalized
patent license fees
|
(364,421 | ) | (1,522,625 | ) | ||||
Proceeds
from disposal of equipment
|
- | 7,887 | ||||||
Purchases
of property and equipment
|
(271,949 | ) | (543,913 | ) | ||||
Equipment
deposits
|
(19,669 | ) | (820,673 | ) | ||||
Purchases
of investments
|
(42,171,792 | ) | (28,800,000 | ) | ||||
Sales
of investments
|
40,281,000 | 10,600,000 | ||||||
Net
proceeds from disposal of business
|
6,000,000 | 29,816,021 | ||||||
Proceeds
from disposal of assets held for sale
|
- | 3,436,911 | ||||||
Net
cash provided by investing activities
|
3,453,169 | 12,173,608 | ||||||
Cash
flows from financing activities
|
||||||||
Payments
on capital lease obligations
|
(13,560 | ) | (12,937 | ) | ||||
Payments
on note payable
|
(9,310,000 | ) | - | |||||
Issuance
of common stock under compensation plans
|
358,785 | 636,760 | ||||||
Net
proceeds from issuance of common stock
|
24,507,319 | - | ||||||
Net
cash provided by financing activities
|
15,542,544 | 623,823 | ||||||
Net
decrease in cash and cash equivalents
|
(3,198,430 | ) | (5,521,290 | ) | ||||
Cash
and cash equivalents, beginning of period
|
17,534,963 | 25,482,587 | ||||||
Cash
and cash equivalents, end of period
|
$ | 14,336,533 | $ | 19,961,297 | ||||
Supplemental
disclosures of cash flow information
|
||||||||
Interest
paid
|
$ | 453,622 | $ | 2,291 |
See
accompanying notes.
3
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Nature
of the Business and Basis of
Presentation
|
Nature
of the Business
BioMimetic
Therapeutics, Inc. (the “Company” and formerly BioMimetic Pharmaceuticals, Inc.)
develops and commercializes regenerative protein therapeutic-device combination
products primarily used for bone and tissue regeneration for the repair and
healing of musculoskeletal injuries and conditions affecting bones, tendons,
ligaments and cartilage within orthopedic, spine and sports injury
applications.
Basis
of Presentation and Principles of Consolidation
The
accompanying unaudited condensed consolidated financial statements reflect the
operations of the Company and its wholly-owned subsidiaries, BioMimetic
Therapeutics Limited in the United Kingdom (formed in October 2005) and
BioMimetic Therapeutics Pty Ltd. in Australia (formed in October 2006).
Inter-company balances and transactions are eliminated in
consolidation. As of September 30, 2009, the subsidiaries have no
employees and have no operating activities other than making and maintaining
regulatory submissions for the Company’s product candidates in the European
Union (“EU”) and Australia.
The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, these
financial statements do not include all the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. The financial information as of September 30, 2009 and
for the three and nine months ended September 30, 2009 and 2008 is unaudited;
however, in the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine -month periods
ended September 30, 2009 are not necessarily indicative of the results that may
be expected for any other interim period or for the year ending
December 31, 2009.
The
condensed consolidated balance sheet at December 31, 2008 has been derived
from the audited consolidated financial statements at that date but does not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
For
further information and a summary of significant accounting policies, refer to
the consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008. Please refer also to Note 2 regarding the Company’s adoption of
recent accounting pronouncements.
2.
|
Recent
Accounting Pronouncements
|
The
FASB Accounting Standards CodificationTM
In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168,
The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles (“SFAS No. 168”), which establishes the
FASB Accounting Standards CodificationTM
(“Codification”). The Codification supersedes all existing accounting
standard documents and will become the single source of authoritative
non-governmental U.S. generally accepted accounting principles. The
Codification did not change U.S. generally accepted accounting principles but
reorganizes the literature. All other accounting literature not
included in the Codification will be considered
non-authoritative. The Codification was implemented on July 1, 2009
and is effective for interim and annual periods ending after September 15,
2009. Subsequent changes to the Codification will be released through
Accounting Standards Updates (“ASU”), which serve to update the Codification,
provide background information about the guidance and provide the basis for
conclusions on the changes in the Codification. The Company has
conformed its financial statements and related Notes to the new Codification for
the three and nine months ended September 30, 2009.
In
conjunction with the issuance of SFAS No. 168, the FASB issued ASU No. 2009-01
Topic 105, Generally Accepted
Accounting Principles (“ASC No. 2009-01”). ASU No. 2009-01
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with U.S. generally
accepted accounting principles. ASU No. 2009-01 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this ASU did not have a material
impact on the Company’s financial position or results of operation as of and for
the three and nine months ended September 30, 2009.
4
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
|
Recent
Accounting Pronouncements
(continued)
|
Fair
Value Measurements and Other-Than-Temporary Impairments
In April
2009, the FASB issued Accounting Standards Codification (“ASC”) 320-10, Investments – Debt and Equity
Securities (includes former Staff Position (“FSP”) No. FAS 115-2 and FAS
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). The ASC
changes existing guidance for determining whether impairment of debt securities
is other-than-temporary. The ASC requires other-than-temporary impairment to be
separated into the amount representing the decrease in cash flows expected to be
collected from a security (referred to as credit losses), which is recognized in
earnings, and the amount related to other factors, which is recognized in other
comprehensive income. The non-credit loss component of the impairment can only
be classified in other comprehensive income if the holder of the security
concludes (1) that it does not intend to sell the security and
(2) that it is more likely than not that it will not be required to sell
the security before the security recovers its value. If these two conditions are
not met, the non-credit loss component of the impairment must also be recognized
in earnings. Upon adoption of the ASC, the entity is required to
record a cumulative-effect adjustment, as of the beginning of the period of
adoption, to reclassify the non-credit loss component of previously recognized
other-than-temporary impairment from retained earnings to accumulated other
comprehensive income.
In April
2009, the FASB issued ASC 820-10, Fair Value Measurements and
Disclosures (includes former FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). This ASC,
while emphasizing that the objective of fair value measurement described in ASC
820 (formerly SFAS No. 157, Fair Value Measurements)
remains unchanged, provides additional guidance for determining whether market
activity for a financial asset or liability has significantly decreased, as well
as for identifying circumstances that indicate that transactions are not
orderly. The ASC reiterates that if a market is determined to be
inactive and the related market price is deemed to be reflective of a
“distressed sale” price, then management judgment may be required to estimate
fair value. The ASC identifies factors to be considered when determining whether
or not a market is inactive.
In April
2009, the FASB issued ASC 825-10, Financial Instruments
(includes former FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments). This ASC requires disclosures about fair
values of financial instruments in all interim financial statements,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Due to their short-term nature, the carrying
amounts reported in the Company’s condensed consolidated financial statements
approximate the fair value for cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued expenses and capital lease
obligations. The Company’s Time Promissory Note (the “Note”) credit
facility with Deutsche Bank AG (“Deutsche Bank”), upon which the Company
borrowed $39,100,000 in October 2008, had a carrying amount of $29,790,000 as of
September 30, 2009 that approximated the fair value. The Company’s
investments in student loan backed auction rate securities (“ARS”) are recorded
at a fair value of $39,004,600 as of September 30, 2009. See
Note 10 for information on fair value measurements.
The ASCs
set forth above were effective for interim and annual periods ending after June
15, 2009. The Company adopted the ASCs set forth above, and the
adoption of such ASCs did not have a material impact on the Company’s condensed
consolidated financial statements as of September 30, 2009.
Business
Combinations
In April
2009, the FASB issued ASC 805-10, Business Combinations
(includes former FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies). This ASC amends and clarifies the provisions of ASC 805,
formerly SFAS No. 141(R), Business Combinations, with
respect to the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
associated with a business combination. The provisions of the ASC are effective,
for the Company, for business combinations occurring after January 1, 2009.
The adoption of the ASC did not have a material impact on the Company’s
condensed consolidated financial statements as of September 30,
2009. The impact of adoption of the ASC on the Company’s future
condensed consolidated financial statements will depend on the nature, terms and
size of future business combinations, if any.
5
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
|
Recent
Accounting Pronouncements
(continued)
|
Subsequent
Events
In May
2009, the FASB issued ASC 855, Subsequent Events (formerly
SFAS No. 165, Subsequent
Events), which provides guidance on events that occur after the balance
sheet date but prior to the issuance of the financial
statements. This ASC distinguishes events requiring recognition in
the financial statements and those that may require disclosure in the financial
statements. Furthermore, ASC 855 requires disclosure of the date
through which subsequent events were evaluated. ASC 855 is effective
for interim and annual periods ending after June 15, 2009. The
Company has adopted ASC 855, and has evaluated subsequent events through
November 5, 2009. See Note 17.
3.
|
Net
(Loss) Income Per Share
|
The
Company calculates net (loss) income per share in accordance with ASC 260, Earnings Per Share (formerly
SFAS No. 128, Earnings Per
Share). Under the provisions of ASC 260, basic net (loss)
income per share is computed by dividing the net (loss) income attributable to
common stockholders for the period by the weighted average number of shares of
common stock outstanding for the period. Diluted net (loss) income
per share is computed by dividing the net (loss) income attributable to common
stockholders by the weighted average number of shares of common stock and
dilutive common stock equivalents then outstanding. Common stock equivalents
consist of shares of common stock issuable upon the exercise of outstanding
stock options.
Basic net
(loss) income per share is summarized as follows:
Three
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Historical
numerator:
|
||||||||
net
loss attributable to common stockholders
|
$ | (7,916,133 | ) | $ | (17,968,653 | ) | ||
Denominator:
|
||||||||
weighted
average shares of common stock outstanding
|
21,751,983 | 18,566,073 | ||||||
Basic
net loss per common share
|
$ | (0.36 | ) | $ | (0.97 | ) |
Nine
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Historical
numerator:
|
||||||||
net
(loss) income attributable to common stockholders
|
$ | (22,252,413 | ) | $ | 4,162,410 | |||
Denominator:
|
||||||||
weighted
average shares of common stock outstanding
|
20,074,256 | 18,481,388 | ||||||
Basic
net (loss) income per common share
|
$ | (1.11 | ) | $ | 0.23 |
Diluted
net (loss) income per share is summarized as follows:
Three
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Historical
numerator:
|
||||||||
net
loss attributable to common stockholders
|
$ | (7,916,133 | ) | $ | (17,968,653 | ) | ||
Denominator:
|
||||||||
weighted
average shares of common stock outstanding
|
21,751,983 | 18,566,073 | ||||||
Diluted
net loss per common share
|
$ | (0.36 | ) | $ | (0.97 | ) |
6
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.
|
Net
(Loss) Income Per Share (continued)
|
Nine
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Historical numerator: | ||||||||
net
(loss) income attributable to common stockholders
|
$ | (22,252,413 | ) | $ | 4,162,410 | |||
Denominator: | ||||||||
weighted
average shares of common stock outstanding
|
20,074,256 | 19,241,894 | ||||||
Diluted
net (loss) income per common share
|
$ | (1.11 | ) | $ | 0.22 |
The
Company had potentially dilutive common stock equivalents outstanding of
2,570,410 shares as of September 30, 2009 and 2,265,729 shares as of September
30, 2008. These common stock equivalents consist of issued and outstanding stock
options and non-vested stock. The common stock equivalents for the three and
nine months ended September 30, 2009 and for the three months ended September
30, 2008 are not included in the above diluted net loss per common share
historical calculations as the effect of their inclusion is
anti-dilutive. The common stock equivalents for the nine months ended
September 30, 2008 are included in the above diluted net income per common share
historical calculations on a weighted average basis.
4.
|
Luitpold
Pharmaceuticals, Inc.
|
The
Company has agreements with Luitpold Pharmaceuticals, Inc. (“Luitpold”) that
cover an exclusive worldwide sublicense and license, trademark license, supply
and royalty income relationship.
Sale
of Orofacial Therapeutic Business
In
January 2008, the Company sold its orofacial therapeutic business,
including GEM 21S, to
Luitpold. That transaction has enabled the Company to focus its
expertise and development efforts on its orthopedic and sports medicine product
candidates, including its lead product candidate, Augment TM Bone
Graft (“Augment”), and other product candidates in the Company’s pipeline.
Further, the transaction has provided the Company with additional capital
allowing it to aggressively advance its pipeline of product candidates through
clinical development and into commercialization.
During
the nine months ended September 30, 2008, the Company had recorded a $39,291,314
net gain on the sale of its orofacial therapeutic business, during which time
the Company had received $30,000,000 in cash from the sale transaction, and
$3,389,832 in cash from the sale of existing inventory. In July 2009,
the Company received a $6,000,000 time-based cash payment from Luitpold pursuant
to the terms of the asset purchase agreement. The Company expects to
receive a final time-based cash payment of $4,000,000 by the end of
2009.
As of
September 30, 2009, the Company had recorded a short-term receivable for
$3,968,933, which represents the discounted balance of the $4,000,000 due from
Luitpold by the end of 2009. The Company recorded $186,618 of
interest income from the accretion of the receivable during the nine months
ended September 30, 2009.
The
Company expects to receive ongoing royalty payments based on net sales of GEM 21S and other products
that are based on adapting the Company’s technology to future products in the
orofacial therapeutic field.
Agreements
with Luitpold Pharmaceuticals, Inc.
In
December 2003, the Company entered into three agreements with Luitpold that
created an exclusive worldwide sublicense, research and development, marketing
and distribution relationship. The resulting December 2003 exclusive
sublicense agreement granted to Luitpold the worldwide marketing, sales and
distribution rights for GEM
21S, the Company’s first commercial product. GEM21S is now known as GEMESISTM in
Europe but has retained the name GEM 21S in the United States
and Canada.
7
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
|
Luitpold
Pharmaceuticals, Inc. (continued)
|
In
January 2008, as noted above, the Company completed the sale of its
orofacial therapeutic business to Luitpold. This sale was completed pursuant to
a December 2007 asset purchase agreement with Luitpold. As part of this
transaction, Luitpold acquired the rights to the downstream formulation, fill,
finish, manufacturing and kitting of GEM 21S.
In
addition to the 2007 asset purchase agreement, at the transaction’s closing in
January 2008, the Company entered into the following ancillary agreements with
Luitpold:
1.
|
Amended and Restated Exclusive
Sublicense Agreement — This agreement supersedes the
December 2003 exclusive sublicense agreement between the parties and
grants Luitpold exclusive rights to utilize the intellectual property the
Company licenses from ZymoGenetics and Harvard in periodontal, oral, and
cranio-maxillofacial indications, as well as veterinary indications. The
term of this agreement extends until
2026.
|
2.
|
Exclusive License
Agreement — This agreement sets forth Luitpold’s exclusive rights
to utilize the intellectual property the Company currently owns or which
it may develop or license in the future in the applications above the neck
in humans and in veterinary applications. This agreement and Luitpold’s
royalty obligations will expire upon the later of the date when the
licensed patents have all expired or December 31,
2026.
|
3.
|
Agreement Terminating the
Manufacturing and Supply Agreement — This agreement terminates the
Company’s 2003 manufacturing and supply agreement with Luitpold, which
obligated Luitpold to purchase all of its requirements for GEM
21S from the Company and the Company was obligated to
meet these requirements to the extent they were consistent with Luitpold’s
forecasts.
|
4.
|
Agreement Terminating the
Research, Development and Marketing Agreement — This agreement
terminates the Company’s 2003 research, development and marketing
agreement, which outlined the Company’s obligations to Luitpold with
respect to the support of Luitpold’s marketing of products subject to the
2003 manufacturing and supply agreement and the 2003 exclusive sublicense
agreement. However, under this agreement the Company continues to seek EU
regulatory approval for
GEMESIS, and is obligated to transfer ownership of that approval to
Luitpold once it is obtained, if at all. In addition, Luitpold
remains obligated to pay the Company a $10,000,000 milestone payment
following the approval.
|
5.
|
Trademark License and
Concurrent Use Agreement — This agreement granted to the Company
the royalty-free right to continue to use GEM family trademarks
during a transition period that expired on January 4, 2009, and
granted to the Company a royalty-free perpetual license to use the GEM family trademarks
on its website and in investor and public relations materials referencing
Luitpold’s products and the Company’s historical development
work.
|
6.
|
Supply Agreement — This
agreement sets forth the terms under which the Company will supply
Luitpold with bulk supply of rhPDGF for use in manufacturing commercial
products within the dental and cranio-maxillofacial fields, which Luitpold
is obligated to purchase exclusively from the Company until the end of
2018.
|
As a
result of the January 2008 sale of the Company’s remaining orofacial
therapeutic business to Luitpold, no product sales revenue for net sales of GEM 21S have been recorded
by the Company for the three and nine months ended September 30, 2009 and
2008.
Under the
terms of the agreement to sell the Company’s orofacial therapeutic business to
Luitpold, the Company expects to receive ongoing royalty payments based on net
sales of GEM 21S and
other products that are based on adapting the Company’s technology to future
products in the orofacial therapeutic field. Royalty income of
$129,749 and $400,111 has been recognized for the three and nine months ended
September 30, 2009, respectively, and $169,017 and $605,012 has been recognized
for the three and nine months ended September 30, 2008,
respectively.
8
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
|
Luitpold
Pharmaceuticals, Inc. (continued)
|
The U.S.
Food and Drug Administration (“FDA”) approved the marketing of GEM 21S on November 18,
2005. As a result, the Company received an initial milestone payment
related to the 2003 exclusive sublicense agreement in the amount of $15,000,000
from Luitpold. In December 2007, the Company received an
additional $5,000,000 from Luitpold for the second anniversary of GEM 21S
approval. In accordance with the provisions of ASC 605-25, Revenue Recognition,
Multiple-Element Arrangements (formerly EITF 00-21, Revenue Arrangements with Multiple
Deliverables), and the specific accounting guidance regarding biotech
license, research and development and contract manufacturing agreements, the
Company is amortizing the $15,000,000 and $5,000,000 proceeds over the term of
the amended and restated sublicense agreement with Luitpold, which expires on
December 31, 2026. At September 30, 2009, the Company’s deferred
revenue balance was $16,765,659. Sublicense fee revenues, which
represent the current amortization of the $20,000,000 proceeds, were $244,793
and $726,396 for the three and nine months ended September 30, 2009, and were
$244,793 and $729,057 for the three and nine months ended September 30, 2008,
respectively.
In
addition, as established in a prior agreement between the Company and Luitpold,
the Company expects to receive a $10,000,000 milestone payment upon the European
Union (“EU”) regulatory approval of GEMESIS. The
Company’s Marketing Authorization Application (“MAA”) for GEMESIS has been under review
by the European Medicines Agency (“EMEA”). Because of uncertainties
in the EU regulatory review process, the Company has not recorded a receivable
for this amount and has excluded this milestone payment from its financial
guidance for 2009.
5.
|
Inventory
|
Inventory
is summarized as follows:
September
30,
2009
|
December
31,
2008
|
|||||||
Raw
materials
|
$ | 1,085,892 | $ | 1,261,987 | ||||
Finished
goods
|
275,442 | — | ||||||
$ | 1,361,334 | $ | 1,261,987 |
As of
September 30, 2009 and December 31, 2008, the Company’s inventory was comprised
of raw materials and finished goods that will be used in the vial manufacturing
process in anticipation of orthopedic product sales. No allowance has
been recorded for excess, obsolete, expired or scrapped inventory as of
September 30, 2009 or December 31, 2008.
6.
|
Property
and Equipment
|
Property
and equipment is summarized as follows:
September
30,
2009
|
December
31,
2008
|
|||||||
Equipment,
computers and purchased software
|
$ | 2,980,092 | $ | 2,811,856 | ||||
Equipment,
computers and purchased software not placed in service
|
2,277,164 | 2,302,516 | ||||||
Furniture
and fixtures
|
722,920 | 722,920 | ||||||
Leased
equipment
|
99,486 | 99,486 | ||||||
Construction
in process
|
924,760 | 795,696 | ||||||
Leasehold
improvements
|
4,047,159 | 4,047,159 | ||||||
11,051,581 | 10,779,633 | |||||||
Less
accumulated depreciation and amortization
|
(4,780,794 | ) | (3,765,371 | ) | ||||
$ | 6,270,787 | $ | 7,014,262 |
The
Company has purchased equipment which has not yet been placed into
service. The balance of equipment that is not placed in service but
is intended to be used in the new manufacturing facility in Franklin, Tennessee
was $2,261,933 as of September 30, 2009 and $2,282,573 as of December 31,
2008. The Company intends to move certain of its manufacturing
operations to the new facility. Prior to completion by the vendor of
the manufacture of other equipment, the amount paid by the Company for such
equipment is classified as “Deposits” on the Company’s condensed consolidated
balance sheets. See Note 7.
9
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.
|
Property
and Equipment (continued)
|
In
addition, under agreements with various equipment suppliers for the manufacture
of the equipment for the new manufacturing facility, as of September 30, 2009,
the Company has estimated purchase commitments of $961,657 remaining to be paid
through the year 2010. See Note 12.
In
August 2007, the Company entered into a new lease for approximately 30,000
square feet of space in a new building intended to house certain of its
manufacturing operations. The new building shell was completed in
October 2009, and rent expense has commenced. Equipment engineering
design and planning costs related to this new space totaling $924,760 have been
incurred as of September 30, 2009 and are included in construction in
process.
7.
|
Deposits
|
The
Company paid a refundable deposit of $10,000 related to its lease of office
space at its headquarters. In addition, the Company paid a refundable deposit of
$375,000 upon signing a lease agreement in August 2007 for approximately
30,000 square feet of space in the new manufacturing facility intended to house
certain of its manufacturing operations.
The
Company has paid deposits for equipment that will be used in the new
manufacturing facility. The Company intends to move certain of its
manufacturing operations to the new facility. As the manufacture of
this equipment is completed by the vendor, the deposits previously paid are
reclassified on the Company’s condensed consolidated balance sheets from
“Deposits” to “Property and equipment” and represent equipment not placed in
service. The Company’s balance of deposits paid for this new
equipment, but not yet completed by the vendor, was $1,919,277 as of September
30, 2009 and $1,899,608 as of December 31, 2008. See Note
6.
8.
|
Capitalized
Patent License Fees
|
The
Company has incurred, and continues to incur, costs related to patent license
fees and patent applications for Augment, Augment TM
Injectable Bone Graft (“Augment Injectable”) and the Company’s other product
candidates. These payments have been capitalized as patent license
fees and will be amortized over their remaining patent life.
In
October 2008, the Company paid a $1,250,000 milestone payment to ZymoGenetics,
Inc. (“ZymoGenetics”) as required upon filing the Device License Application
(“DLA”) with Health Canada. The DLA is required in Canada for
approval of the commercialization of Augment as a medical device for use in the
treatment of foot and ankle fusions. The Company has capitalized
costs totaling $12,487,229 as of September 30, 2009 related to the acquisition
of its patent licenses.
9.
|
Investments
|
As of
September 30, 2009, the Company had short-term investments of $54,915,624 that
are classified as available for sale and consist of U.S. government sponsored
enterprise (“GSE”) securities totaling $43,256,524, two U.S. Treasury Notes
totaling $2,523,100 and certain student loan backed auction rate securities
(“ARS”) totaling $9,136,000. The GSE securities have maturity dates
ranging from October 2009 through June 2010. The two U.S. Treasury
Notes have maturity dates of March 31, 2010 and April 30, 2010,
respectively. In October 2009, one ARS investment was partially
redeemed by the issuer and two ARS investments were sold at a discount to a
third party. As a result of the October 2009 activity, ARS investments
totaling $9,136,000 have been classified as short-term investments on the
condensed consolidated balance sheet at September 30, 2009.
Also as
of September 30, 2009, the Company had long-term investments of $31,378,620,
consisting of a GSE security of $1,510,020 and ARS investments of
$29,868,600. The GSE security has a maturity date of March
2011. The ARS investments are classified as available-for-sale and
recorded at fair value. Generally, the ARS investments held by the
Company are bonds sold by state guarantee agencies backed by student loans under
the Federal Family Education Loan Program (“FFELP”). The student
loans are guaranteed by the U.S. Department of Education at amounts representing
a substantial portion of the loans.
10
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.
|
Investments (continued)
|
The
combined fair value of the ARS investments (both short-term and long-term) held
by the Company as of September 30, 2009 totaled $39,004,600, and consisted of
$28,625,120 in bonds with a credit rating of “AAA,” $7,664,360 in bonds with a
credit rating of “A” and $2,715,120 in bonds with a credit rating of
“BBB.” The combined par value of the Company’s ARS investments was
$46,700,000 as of September 30, 2009.
During
the three months ended September 30, 2009, certain of the Company’s ARS
investments were partially redeemed at par, resulting in cash proceeds of
$1,400,000. In October 2009, one ARS investment was partially
redeemed by the issuer and two ARS investments were sold at a discount to a
third party, resulting in cash proceeds of $9,136,000. The Company
intends to hold the remaining ARS investments in its portfolio for at least the
next 12 months, and accordingly, the remaining ARS investments have been
classified as long-term investments on the condensed consolidated balance sheet
at September 30, 2009.
In 2008,
the Company had determined that its ARS investments had experienced an
“other-than-temporary” impairment in fair value. The Company had
estimated the fair value to be $46,624,040 as of December 31,
2008. Based on a cash flow discounting model, the subsequent sales,
redemptions and partial redemptions of certain ARS investments occurring during
2009, and other information as discussed in Note 10, the Company has estimated
the fair value to be $39,004,600 as of September 30, 2009, resulting in an
unrealized gain of $2,569,910 recorded in accumulated other comprehensive income
in its condensed consolidated balance sheet for the nine months ended September
30, 2009.
The
Company recorded aggregate net investment income (including realized gains and
losses) on its short-term and long-term investment portfolio of $2,991,654 for
the nine months ended September 30, 2009. At September 30, 2009, the
Company had accrued interest receivable of $385,968 related to its investment
portfolio. For the nine months ended September 30, 2008, the Company
recorded aggregate net investment losses (including realized gains and losses)
of $8,150,753 on its investment portfolio, including an impairment loss of
$10,224,655 recorded on its ARS investments.
10.
|
Fair Value
Measurements
|
As of
January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurements
(formerly SFAS No. 157, Fair Value Measurements),
which defines fair value, establishes a framework for measuring fair value
hierarchy for assets and liabilities measured at fair value, and requires
expanded disclosures about fair value measurements. The ASC
820 hierarchy ranks the quality and reliability of inputs, or assumptions,
used in the determination of fair value and requires financial assets and
liabilities carried at fair value to be classified and disclosed in one of the
following three categories:
Level 1 —
quoted prices in active markets for identical assets and
liabilities;
Level 2 —
inputs other than Level 1 quoted prices that are directly or indirectly
observable; and
Level 3 —
unobservable inputs that are not corroborated by market data.
The
Company evaluates assets and liabilities subject to fair value measurements on a
recurring basis to determine the appropriate level at which to classify them for
each reporting period. This determination requires significant judgments to be
made by the Company.
As of
September 30, 2009, financial assets and liabilities subject to fair value
measurements were as follows:
Assets
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
Cash
and cash equivalents
|
$ | 14,336,533 | $ | — | $ | — | $ | 14,336,533 | ||||||||
Short-term
investments (GSE, U.S. Treasury Notes and short-term auction rate
securities)
|
45,779,624 | — | 9,136,000 | 54,915,624 | ||||||||||||
Long-term
investments (GSE and auction rate securities)
|
1,510,020 | — | 29,868,600 | 31,378,620 | ||||||||||||
Total
cash and investments
|
$ | 61,626,177 | $ | — | $ | 39,004,600 | $ | 100,630,777 |
11
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10.
|
Fair Value Measurements
(continued)
|
Fair value
estimate
The
Company’s cash and cash equivalents include cash on hand, deposits in banks,
certificates of deposit and money market funds. Due to their
short-term nature, the carrying amounts reported in the condensed consolidated
balance sheets approximate the fair value of cash and cash
equivalents.
The
Company’s short-term investments include GSE securities, two U.S. Treasury Notes
and certain ARS investments classified as available for sale.
The
Company’s long-term investments consist of a GSE security and ARS
investments. ARS are debt securities for which interest rates reset
regularly at pre-determined intervals, typically 28 days, through an
auction process. However, auctions for these ARS investments have
failed since the ARS market collapsed in February 2008. Although
the auctions for these ARS investments have failed, the Company continues to
earn and receive interest on these investments.
During
the nine months ended September 30, 2009, certain of the Company’s investments
in ARS were sold or redeemed by the issuer. In April 2009, the
Company sold two of the ARS investments and two of the ARS investments were
redeemed by the issuer, representing total par value of $11,900,000, for total
proceeds of $10,881,000. In July 2009, two of the ARS investments
were partially redeemed at par by the issuer for total proceeds of
$200,000. In September 2009, two of the ARS investments were
partially redeemed at par by the issuer for total proceeds of
$1,200,000. In addition, in October 2009, one ARS investment was
partially redeemed by the issuer at par and two ARS investments were sold at a
discount to a third party. As a result of the October 2009 activity, ARS
investments totaling $9,136,000 have been classified as short-term investments
on the condensed consolidated balance sheet at September 30, 2009.
Fair
value measures for the Company’s investments in ARS have been estimated using
cash flow discounting with a Monte Carlo simulation and other
information. The valuation model reflects various assumptions that
market participants would use in pricing these ARS investments, including among
others, the collateralization underlying the ARS investments, the
creditworthiness of the counterparty, the expected future cash flows and the
risks associated with uncertainties in the current market.
The
following table provides the provisions of the Company’s ARS investments as of
September 30, 2009:
CUSIP
|
Auction
Reset
Period
|
Stated
Interest
Rate at
9/30/09 (1)
|
Original
Maturity
|
Moody Rating
as of
9/30/09
|
S&P Rating
as of
9/30/09
|
Fitch Rating
as of
9/30/09
|
Credit Backing
|
||||||||||
10620NBV9
|
7
days
|
1.746 | % |
6/25/2043
|
Aaa
|
AAA
|
AAA
|
FFELP
|
|||||||||
10623PDB3
|
28
days
|
1.753 | % |
3/1/2040
|
Aaa
|
-
|
AAA
|
FFELP
|
|||||||||
196777JZ0
|
28
days
|
1.496 | % |
12/1/2034
|
Aaa
|
AAA
|
AAA
|
FFELP
|
|||||||||
196777KF2
|
28
days
|
0.895 | % |
12/1/2037
|
Aaa
|
AAA
|
AAA
|
FFELP
|
|||||||||
207784AL3
|
28
days
|
1.550 | % |
6/1/2034
|
-
|
AAA
|
AAA
|
FFELP
|
|||||||||
28148NAT0
|
28
days
|
2.887 | % |
12/1/2035
|
Aaa
|
-
|
AAA
|
FFELP
|
|||||||||
604152AD0
|
28
days
|
1.246 | % |
5/1/2038
|
A2
|
-
|
-
|
MBIA
|
|||||||||
606072GD2
|
28
days
|
1.562 | % |
6/1/2031
|
Aaa
|
-
|
AAA
|
FFELP
|
|||||||||
606072HG4
|
28
days
|
1.091 | % |
9/1/2043
|
Aaa
|
-
|
AAA
|
FFELP
|
|||||||||
679110CL8
|
28
days
|
1.241 | % |
6/1/2030
|
Baa1
|
A
|
-
|
FFELP
|
|||||||||
709163EY1
|
28
days
|
0.916 | % |
12/1/2045
|
A3
|
-
|
AAA
|
FFELP
|
|||||||||
709163DK2
|
28
days
|
0.692 | % |
10/1/2042
|
A3
|
-
|
AAA
|
FFELP
|
|||||||||
917546FK4
|
28
days
|
0.000 | % |
11/1/2040
|
Aaa
|
AAA
|
-
|
FFELP
|
|||||||||
917546GJ6
|
28
days
|
1.744 | % |
5/1/2046
|
Aaa
|
AAA
|
-
|
FFELP
|
(1) Securities
have a maximum interest rate which is a function of one rate, the minimum of two
rates, or the minimum of three rates. Interest rates change upon each
reset period.
12
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10.
|
Fair Value Measurements
(continued)
|
Assumptions and
methodology
The
following assumptions and methodology were made when preparing the cash flow
discounting model for the Company’s ARS investments:
|
·
|
The
Company determined that the ARS investments were impaired using cash flow
discounting with a Monte Carlo simulation model. The cash flows were
calculated using each individual ARS Maximum Interest Rate formula. The
Maximum Interest Rate is paid when an auction
fails.
|
|
·
|
A
discount spread over the expected life of each bond was used to compute
cash flow.
|
|
·
|
Since
the majority of the student loans backing the bonds are government
guaranteed, the Company assumed that all required cash would be available
to pay the bond interest and
principal.
|
|
·
|
The
Monte Carlo simulation randomly generated the London Interbank Offered
Rate (“LIBOR”), U.S. Treasury Bill and Commercial Paper rates for each
month out to a bond’s expected life. In each month, a coupon
level was calculated using the Maximum Interest Rate formula, and applied
to the bond’s notional to obtain a cash flow. The cash flow was
then discounted using the realized (random) LIBOR rates, plus a
spread.
|
|
·
|
The
simulated rates were assumed to have a mean based on the yield curve for
each type of rate. For one-month LIBOR, 91-day U.S. Treasury Bills and
three-month Commercial Paper, the relevant rates were calculated as
forward rates for each month. A historical study of the three time series
over the past five years was run to determine the standard deviation and
correlation of each series, which were then used to drive the
simulation.
|
|
·
|
Commercial
paper rates beyond September 30, 2009 were not available, so the
commercial paper rates were estimated based on the equivalent LIBOR
forward rate.
|
|
·
|
The
last known market trade of an ARS investment or a bid offer received by
the Company functioned as a reference control or data point in assisting
the Company with the overall analysis of the fair value models
prepared.
|
Based on
the cash flow discounting model and other information, the Company’s ARS
investments are estimated to have a fair market value of $39,004,600 as of
September 30, 2009.
The
following table summarizes the activity related to the Company’s ARS investments
which have fair value measurements based on significant unobservable inputs
(Level 3) during the nine months ended September 30, 2009:
Balance
at December 31, 2008
|
$ | 46,624,040 | ||
Unrealized
gain reported in equity through accumulated other comprehensive income for
the three months ended March 31, 2009
|
1,479,160 | |||
Balance
at March 31, 2009
|
48,103,200 | |||
Realized
gain reclassified from unrealized gains and reported in earnings on
securities sold or redeemed
|
(1,688,840 | ) | ||
Redemption
and sales for the three months ended June 30, 2009
|
(9,192,160 | ) | ||
Unrealized
gain reported in equity through accumulated other comprehensive income for
the three months ended June 30, 2009
|
2,750,850 | |||
Balance
at June 30, 2009
|
39,973,050 | |||
Realized
gain reclassified from unrealized gains and reported in earnings on
securities redeemed
|
(402,810 | ) | ||
Redemptions
for the three months ended September 30, 2009
|
(997,190 | ) | ||
Unrealized
gain reported in equity through accumulated other comprehensive income for
the three months ended September 30, 2009
|
431,550 | |||
Balance
at September 30, 2009
|
$ | 39,004,600 |
13
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10.
|
Fair Value Measurements
(continued)
|
Other-than-temporary
impairment analysis
In
determining whether there was an other-than-temporary impairment of the ARS
investments, the Company relied upon guidance provided in ASC 320-10, Investments – Debt and Equity
Securities (includes former FSP 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments and SAB Topic
5M, Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities). Under
the ASC 320 model used to determine other-than-temporary impairments, the
Company determined that the ARS investments were impaired in 2008 using cash
flow discounting with a Monte Carlo simulation model.
As
required by ASC 320, the Company considered whether the impairment should be
deemed other-than-temporary. The Company believes its ARS investments
are not currently at risk of default since substantially all FFELP and student
loan-backed investments held by the Company maintain credit ratings of “AAA,”
“A” or “BBB” and there have been continued interest payments by the respective
issuers. However, due to the unprecedented events in the ARS market
and extended lack of liquidity, as well as the current economic downturn and the
related uncertainty in the financial markets, the Company cannot predict when
liquidity will return to the ARS market.
As a
result, the Company had concluded that its ARS investments had experienced an
other-than-temporary impairment in fair value during 2008. The
Company will continue to evaluate the value of its ARS investments and may
record future additional losses through earnings if the Company determines that
the fair value of the ARS investments has declined below the new cost
basis.
11.
|
Note
Payable
|
In
October 2008, the Company executed a Time Promissory Note (the “Note”)
credit facility with Deutsche Bank AG (“Deutsche Bank”) enabling the Company to
borrow up to $39,130,000. The Company had granted Deutsche Bank a
first priority security interest in certain of its ARS investments having a
total combined par value of $55,900,000 as collateral. Under the
terms of the Note, the Company is required to make monthly interest payments
during the two-year term of the Note. All outstanding principal
amounts are due and payable in full on the maturity date on October
27, 2010. The Company may elect to pay back the full principal
amount prior to the maturity date with no penalty. Absent a Company
default or a sale of part of the collateral ARS investments, Deutsche Bank has
no ability to withdraw, reduce or change the terms of the Note. Under
the terms of the Note, and at the Company’s option, the interest rate will be
based on either LIBOR plus 0.50% or Deutsche Bank’s Prime Rate minus
1.50%. The Note also provides that in the event that Deutsche Bank
later offers an ARS lending program or settlement loan program to institutional
clients that includes either a lower interest rate or permits borrowing of more
than 70% of the par value of the collateral securities, then the terms of the
Company’s Note and any existing loans issued under the Note will be modified to
include the lower interest rate or higher borrowing base.
During
the nine months ended September 30, 2009, certain of the Company’s ARS
investments were redeemed or sold, totaling $13,300,000 par value. In
accordance with the terms of the Note, as of September 30, 2009, the Company
repaid $9,310,000 against the Note payable, or 70% of the par value of the
redeemed and sold ARS investments.
In
October 2009, one ARS investment was partially redeemed by the issuer and two
ARS investments were sold at a discount to a third party, resulting in cash
proceeds of $9,136,000. In accordance with the terms of the
Note and as a result of the October 2009 activity, the Company repaid $4,760,000
against the Note payable, or 70% of the par value of the collateralized ARS
investments partially redeemed or sold.
As of
September 30, 2009, the Company’s outstanding balance borrowed against the Note
was $29,790,000, consisting of $4,760,000 classified as current and $25,030,000
classified as non-current. See Note 10 for more information on the
Company’s ARS investments.
14
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.
|
Commitments
and Contingencies
|
Litigation
In the
ordinary course of business, the Company is subject to legal claims and
assessments. In addition, in February 2009, the Company filed an
arbitration claim with the Financial Industry Regulatory Authority, Inc.
(“FINRA”) against Deutsche Bank Securities, Inc. (“DBSI”) asserting various
claims relating to investments in auction rate securities made on the Company’s
behalf including, among others, claims for violation of federal and state
securities laws, breach of contract, fraud, and breach of fiduciary and other
duties. On May 4, 2009, DBSI filed an Answer to the Statement of
Claim wherein they denied all allegations. An arbitration panel has
been selected and the parties are now proceeding with
discovery.
Manufacturing
Equipment
The
Company has executed agreements with various equipment suppliers for the
manufacture of equipment that will be used in the new manufacturing
facility. As of September 30, 2009, the Company has paid a total of
$4,181,210 for the equipment, consisting of $2,261,933 classified as equipment
not placed in service (see Note 6) and $1,919,277 classified as deposits (see
Note 7) as the title to the equipment remains with the supplier until delivery
to the Company. In addition, under these agreements, the Company has
estimated remaining purchase commitments of $46,760 for 2009 and $914,897 for
2010.
Employment
Agreements
The
Company has employment contracts with several individuals, which provide for
annual base salaries and potential bonuses. These contracts contain certain
change of control, termination and severance clauses that require the Company to
make payments to these employees if certain events occur as defined in their
respective contracts.
Supply
Agreements
The
Company has executed supply agreements with Novartis Vaccines and Diagnostics
(“Novartis”) and Kensey Nash Corporation (“Kensey Nash”). Under these
agreements, the Company has agreed to certain minimum purchase commitments of
which there are commitments of $4,097,860 remaining for 2009 and estimated
commitments of $2,938,466 and $3,085,389 for 2010 and 2011,
respectively.
13.
|
Capital
Shares
|
Sale
of Shares of Common Stock to InterWest Partners
On April
3, 2009, the Company entered into a purchase agreement with InterWest Partners
X, L.P., pursuant to which the Company sold to InterWest Partners X, L.P.
941,177 shares of common stock for an aggregate purchase price of approximately
$8,000,000, or $8.50 per share. The purchase closed on April 7,
2009. Prior to such purchase, affiliates of InterWest Partners X,
L.P., including InterWest Partners VIII, L.P., beneficially owned 4.7% of the
Company’s outstanding shares of common stock. After giving effect to
the purchase and to the rights offering discussed below, InterWest Partners X,
L.P. and its affiliates beneficially owned 8.4% of the Company’s outstanding
shares of common stock at September 30, 2009. Chris Ehrlich, one of
the Company’s directors, is a Venture Member of InterWest Management Partners
VIII, L.L.C., which serves as the general partner of InterWest Partners VIII,
L.P., InterWest Investors Q VIII, L.P. and InterWest Investors VIII, L.P. and as
Manager of InterWest Management Partners X, L.L.C., which serves as the general
partner of InterWest Partners X, L.P. In connection with the purchase
transaction, the Company agreed to pay the reasonable fees and expenses of
InterWest Partners X, L.P.’s counsel in connection with the purchase agreement,
in an amount not to exceed $15,000. In July 2009, the Company filed a
registration statement with the SEC in connection with the resale of the shares
purchased by InterWest Partners pursuant to the purchase agreement, and other
shares of common stock beneficially owned by its
affiliates.
15
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.
|
Capital
Shares (continued)
|
Rights
Offering
On June
25, 2009, the Company completed a rights offering to sell 2,000,000 shares of
the Company’s common stock to its existing stockholders of record as of April
21, 2009 (the “record date”), other than with respect to shares held in the
401(k) plan. Although the Company did not need the capital for its
immediate plans of operation, the Company believed that it was in its best
interest to raise capital in anticipation of its future needs. The
Company intends to use the net proceeds of the rights offering for general
corporate purposes, including funding additional product development and
potential commercialization activities.
The
Company received valid subscriptions for all of the shares purchasable in the
rights offering, including shares subscribed for by certain of the Company’s
stockholders in the exercise of their over-subscription rights, at a
subscription price of $8.50 per share. The Company issued the shares
to the participants in the rights offering on June 25,
2009. Concurrent with the rights offering, the Company sold to Novo
A/S, a stockholder of the Company, 343,406 shares of the Company’s common stock
in a private placement, which represents the number of shares that Novo A/S
could have purchased pursuant to its basic subscription privilege in the rights
offering. The purchase price of such shares was $8.50 per share, the
same as the subscription price of the shares in the rights
offering. Total gross proceeds of the rights offering, including the
private placement to Novo A/S, was $17,000,000.
Standby
Purchase Agreement with Novo A/S
On April
4, 2009, in conjunction with the rights offering, the Company entered into a
standby purchase agreement with Novo A/S, one of the Company’s
stockholders. Pursuant to the standby purchase agreement, Novo A/S
agreed to backstop the rights offering by purchasing up to $15,000,000 of the
Company’s common stock in the rights offering. The rights offering
was over-subscribed and, accordingly, Novo A/S did not purchase any shares in
its role as standby purchaser. Concurrent with the rights offering,
the Company sold to Novo A/S 343,406 shares of the Company’s common stock in a
private placement. Prior to the rights offering, Novo A/S
beneficially owned 17.2% of the Company’s outstanding shares of common
stock. After giving effect to the private placement, Novo A/S and its
affiliates beneficially owned 17.1% of the Company’s outstanding shares of
common stock at September 30, 2009. The Company agreed to reimburse
Novo A/S for all of its attorneys’ fees incurred in connection with the standby
purchase agreement and the standby purchase, subject to a maximum of
$20,000. In July 2009, the Company filed a registration statement
with the SEC in connection with the resale of the shares purchased by Novo
A/S.
Shelf
Registration Statement
On July
20, 2009, the Company filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission (“SEC”). Under the shelf
registration statement, the Company may from time to time, in one or more
series, separately or together, sell common stock, preferred stock, debt
securities or warrants to purchase its common stock or any combination of such
securities. The aggregate public offering price of the securities
that the Company may offer pursuant to the registration statement is up to
$150,000,000.
14.
|
Stock-Based
Compensation
|
2001
Long-Term Stock Incentive Plan
During
2001, the Company’s board of directors approved the adoption of the 2001
Long-Term Stock Incentive Plan (the “option plan”). The option plan
provides that awards of stock options, other equity interests or equity-based
incentives in the Company may be granted to key personnel at an exercise price
determined by the Company’s Compensation Committee, at the time the award is
granted, taking into account the fair value of the common stock at the date of
grant. The maximum term of any award granted pursuant to the option
plan is 10 years from the date of grant.
16
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.
|
Stock-Based
Compensation (continued)
|
The
employee stock options granted by the Company are structured to qualify as
“incentive stock options” (“ISOs”). Under current tax regulations,
the Company does not receive a tax deduction for the issuance, exercise or
disposition of ISOs if the grantee meets specific holding requirements. If the
grantee does not meet the holding requirements, a disqualifying disposition
occurs, at which time the Company will receive a tax deduction. The
Company does not record tax benefits related to ISOs unless and until a
disqualifying disposition occurs. Upon a disqualifying disposition,
the entire tax benefit is recorded as a reduction of income tax
expense. The Company has not recognized any income tax benefit for
the three and nine months ended September 30, 2009 and 2008 for share-based
compensation arrangements as the Company does not believe that it will recognize
any deferred tax assets from such compensation costs recognized in the current
period.
In
general, stock option awards granted under the option plan vest 25% per year for
four years. In March 2008, the Company’s board of directors
amended the option plan to provide that upon a change in control all outstanding
ISO awards held by a qualified employee may under certain circumstances be
accelerated and exercisable immediately. Upon a change in control,
the vesting percentage of the employee’s ISO award depends upon the number of
years of employment at the time of the change in control as follows: 25% vested
if employed less than one year, 50% vested if employed more than one year but
less than two years, 75% vested if employed more than two years but less than
three years, and 100% vested if employed three or more years.
As of
September 30, 2009, a total of 4,019,723 shares of common stock have been
authorized by the board of directors for issuance under the option
plan. Also as of September 30, 2009, a total of 2,570,410 options for
shares of common stock were issued and outstanding and a total of 831,427 shares
of common stock had been issued upon the exercise of outstanding options,
leaving a total of 617,886 shares of common stock remaining available for future
issuance in connection with the option plan. The options vest over a
period of not greater than five years and remain exercisable for up to 10 years
from the date of grant.
During
the three and nine months ended September 30, 2009, the Company granted stock
options to purchase an aggregate of 8,713 and 627,341 shares of its common
stock, respectively, to employees under the option plan at a weighted-average
exercise price of $10.90 and $8.70 per
share, respectively. During the three and nine months ended September
30, 2008, the Company granted stock options to purchase an aggregate of 20,613
and 612,631 shares of its common stock, respectively, to employees under the
option plan at a weighted-average exercise price of $10.90 and $13.66 per share,
respectively.
There
were 49,839 and 95,354 shares of common stock issued upon option exercises
during the three and nine months ended September 30, 2009,
respectively. There were 50,370 and 219,613 shares of common stock
issued upon exercises during the three and nine months ended September 30, 2008,
respectively.
Effective
January 1, 2006, the Company adopted ASC 505, Equity-Based Payments to
Non-Employees, and ASC 718, Compensation – Stock
Compensation (formerly included in SFAS No. 123(R), Share-Based Payment), using the modified
prospective method of transition. Under that transition method, compensation
expense recognized in the three and nine months ended September 30, 2009 and
2008 includes: (a) compensation costs for all share-based payments granted
prior to January 1, 2006, which are based on the intrinsic value method
proscribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and (b) compensation costs for all share-based payments
granted subsequent to January 1, 2006, which are based on the grant date
fair value estimated in accordance with the provisions of ASC 505 and ASC
718.
In
accordance with ASC 505 and ASC 718, the fair value of each option award is
estimated on the date of grant using the Black-Scholes option pricing model
using weighted average assumptions amortized to expense over the options'
vesting periods for the nine months ended September 30, 2009 and 2008 as
follows:
2009
|
2008
|
|||||||
Average
Risk free interest rate
|
2.11%
|
2.88%
|
||||||
Expected
dividend yield
|
—
|
—
|
||||||
Volatility
factor of the expected market price
|
77%
- 79%
|
79
- 80%
|
||||||
Forfeiture
rate
|
6.6%
|
4.1%
|
||||||
Weighted
average expected life of the option
|
8.5
years
|
7.9
years
|
Since the
trading market for the Company’s common stock has a limited history, the
expected volatility and forfeiture rates are based on historical data from three
companies similar in size and value to the Company. The expected terms of
options granted represent the period of time that options granted are expected
to be outstanding and are derived from the contractual terms of the options
granted. The fair value of each option is amortized over each option's vesting
period. The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of
the grant.
17
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14.
|
Stock-Based
Compensation (continued)
|
The
Company’s net (loss) income includes compensation costs related to its
stock-based compensation arrangements of $1,010,972 and $2,888,940 for the three
and nine months ended September 30, 2009, respectively, and $899,574 and
$2,481,348 for the three and nine months ended September 30, 2008,
respectively. No income tax benefit related to the Company’s
stock-based compensation arrangements is included in its net (loss)
income.
2005
Employee Stock Purchase Plan
During
2005, the Company’s board of directors approved the adoption of the 2005
Employee Stock Purchase Plan (the “purchase plan”). The Company’s purchase plan
incorporates the provisions of Section 423 of the Internal Revenue Code of
1986, as amended. The Company has reserved 200,000 shares of common
stock for purchase by employees under the purchase plan. The purchase plan
provides for offer periods of three months to eligible employees. Under the
purchase plan, eligible employees can purchase through payroll deductions up to
15% of their eligible base compensation, at a price equivalent to 85% of the
lower of the beginning or ending quarterly market price.
Employees
became eligible to participate in the purchase plan beginning July 1,
2006. As of September 30, 2009, there were 136,438 shares remaining
available for issuance under the purchase plan. In accordance with
the provisions of ASC 718, the Company recorded stock-based compensation expense
in connection with the purchase plan of $7,127 and $25,739 during the three and
nine months ended September 30, 2009, respectively, and $7,181 and $27,928
during the three and nine months ended September 30, 2008,
respectively.
401(k)
Profit Sharing Plan
Effective
January 1, 2004, the Company began sponsoring a defined contribution
retirement plan (the “401(k) plan”) covering substantially all its employees
fulfilling minimum age and service requirements. Participation in the
plan is optional. The Company provides matching contributions at the
discretion of the board of directors, and generally consists of matching
contributions in shares of the Company’s common stock valued at up to 4% of
eligible employee compensation. Such matching contributions, if
approved, are generally awarded during the first quarter of each calendar year,
and cover the previous calendar year just ended. As of September 30,
2009, there were 74,235 shares remaining available for issuance under the 401(k)
plan. In accordance with the provisions of ASC 718, the Company
recorded stock-based compensation expense in connection with the 401(k) plan of
$165,085 and $0 during the nine months ended September 30, 2009 and 2008,
respectively.
15.
|
Income
Taxes
|
At
September 30, 2009, the Company had federal net operating loss (“NOL”)
carryforwards of $59,245,806 that will begin to expire in 2022. State
NOL carryforwards at September 30, 2009 totaled $47,580,577 and will expire
between 2013 and 2028. The use of deferred tax assets, including
federal net operating losses, is limited to future taxable
earnings. Based on the required analysis of future taxable income
under the provisions of ASC 740, Income Taxes (formerly SFAS
No. 109), the Company’s management believes that there is not sufficient
evidence at September 30, 2009 indicating that the results of operations will
generate sufficient taxable income to realize the net deferred tax asset in
years beyond 2009. As a result, a valuation allowance was provided
for the entire net deferred tax asset related to future years, including loss
carryforwards.
The
Company’s ability to use its NOL carryforwards could be limited and subject to
annual limitations. In connection with future offerings, the Company
may realize a “more than 50% change in ownership” which could further limit its
ability to use its NOL carryforwards accumulated to date to reduce future
taxable income and tax liabilities. Additionally, because U.S. tax
laws limit the time during which NOL carryforwards may be applied against future
taxable income and tax liabilities, the Company may not be able to take
advantage of all or portions of its NOL carryforwards for federal income tax
purposes.
18
BIOMIMETIC
THERAPEUTICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15.
|
Income
Taxes (continued)
|
The
Company incurred net operating losses for the three and nine months ended
September 30, 2009, respectively, and for the three months ended September 30,
2008. The Company incurred net operating income for the nine months
ended September 30, 2008. As of September 30, 2009, no income tax
expense has been recorded. As of September 30, 2008, the Company had
estimated its federal income tax expense to be $122,500 related to the
tax-deferred installment obligation on the January 2008 sale of its
orofacial therapeutic business and had recognized the expense in the condensed
consolidated statement of operations for the nine months ended September 30,
2008.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, the Company is no longer subject to
U.S. federal examinations or state and local income tax examinations by tax
authorities for years before 2003.
16.
|
Comprehensive
(Loss) Income
|
FASB ASC
220, Comprehensive
Income (formerly SFAS No. 130), establishes standards for reporting and
display of comprehensive (loss) income and its components in the condensed
consolidated financial statements. The Company’s comprehensive (loss)
income as defined by ASC 220 is the total of net (loss) income and all other
changes in equity resulting from non-owner sources including unrealized
gains/losses on investments. The components of the Company’s
comprehensive (loss) income for the three and nine months ended September 30,
2009 and 2008 are as follows:
Three
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
(loss) income
|
$ | (7,916,133 | ) | $ | (17,968,653 | ) | ||
Other
comprehensive loss:
|
||||||||
Unrealized
gain (loss) on investments classified as available
for sale
|
12,085 | — | ||||||
Comprehensive
(loss) income
|
$ | (7,904,048 | ) | $ | (17,968,653 | ) |
Nine
months
ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Net
(loss) income
|
$ | (22,252,413 | ) | 4,162,410 | ||||
Other
comprehensive loss:
|
||||||||
Unrealized
gain (loss) on investments classified as available
for sale
|
2,469,529 | — | ||||||
Comprehensive
(loss) income
|
$ | (19,782,884 | ) | $ | 4,162,410 |
17.
|
Subsequent
Events
|
As of
November 5, 2009, there were no subsequent events that were considered to be
significant by the Company’s management.
19
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following
discussion and analysis of our financial condition and results of operations
together with our unaudited condensed consolidated financial statements and the
related notes appearing elsewhere in this report, and together with our audited
consolidated financial statements, related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” as of and for the
year ended December 31, 2008 included in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission (“SEC”) on March 12, 2009.
Overview
BioMimetic
Therapeutics, Inc. develops and commercializes innovative products to help
stimulate the body’s natural tissue regenerative process. We believe
our protein therapeutic-device combination products have the potential to
significantly improve the treatment of musculoskeletal injuries and conditions
affecting bones, tendons, ligaments and cartilage. Our platform
regenerative technology, which incorporates a potent version of one of the
body’s natural key stimulators of tissue repair, may offer physicians advanced
biological solutions to actively stimulate tissue healing and
regeneration.
We have
already demonstrated that this technology is safe and effective in stimulating
bone and periodontal regeneration in the jaws with the U.S. and Canadian
regulatory approvals of our first product, GEM 21S
® Growth-factor Enhanced Matrix (“GEM 21S”). Having
sold GEM 21S in January
2008, we are now focused on developing this technology to stimulate tissue
healing in orthopedic applications (such as certain types of bone fractures or
fusions of the bones in the foot and ankle to eliminate chronic pain from trauma
or arthritis), and potentially spine and sports injury
applications. Our current product candidates use the same key
stimulator as GEM 21S,
and are designed to target a broad range of clinical indications in bone,
ligament, tendon and cartilage repair.
Our
product candidates have been the subject of several orthopedic clinical studies
that have been completed or are on-going which seek to demonstrate the safety,
clinical utility and/or efficacy of the product candidates in our pipeline,
including our lead orthopedic product candidate Augment TM Bone
Graft (“Augment”), a fully synthetic, off-the-shelf bone growth factor product,
for the treatment of bone defects and injuries. In addition, we have
pre-clinical programs focused on the development of treatments for bone defects
in the spine and various sports injury applications, including those requiring
ligament, tendon and cartilage repair.
We have
reported the results of a number of these studies, including positive top-line
results from our North American pivotal (Phase III) randomized controlled trial
comparing Augment to autograft for use in hindfoot and ankle fusion surgery. The
primary study goal of this clinical study was to establish non-inferiority of
Augment compared to autograft. Autograft is the historical standard
of care but has the limitation that it must be obtained and transplanted from
another bone in the patient’s body, often requiring a second surgical
procedure. The positive top-line results indicate that, with the use
of Augment, patients can expect a comparable treatment outcome while being
spared the pain and potential morbidity associated with traditional autograft
bone harvesting and transplantation.
This
study and others suggests that our platform technology may be effective in our
target applications. If successful, we expect these clinical studies
should lead to regulatory approval of our regenerative product candidates in the
United States, Canada and Europe. If approved by the appropriate regulatory
authorities, we believe that our product candidates will offer new, effective
and less invasive treatment options in orthopedics, spine and sports related
injuries to improve the quality of life for millions of patients suffering
injuries or deterioration of bones, ligaments, tendons and
cartilage.
According
to the National Bureau of Economic Research, the U.S. economy has been in a
recession since December 2007. Although various economic indicators
have recently provided signs of potential economic recovery, the economic
downturn and the ensuing market instability have continued to impact us by
making it difficult to resolve the liquidity issues on our auction rate
securities (“ARS”) investments. Auctions for these securities have
failed since the ARS market collapsed in February 2008. During the
nine months ended September 30, 2009, we were able to sell two of our ARS
investments at a discount to par and certain of our ARS investments were
redeemed or partially redeemed at par by the issuer. There can be no
assurance, however, that the market will reform or that the remaining ARS
investments in our portfolio, which have a combined par value of $35.8 million
after deducting additional redemption and sales activities that occurred in
October 2009, will be liquidated in a timely manner. See “— Financial
Overview” section for a further discussion of our ARS
investments.
20
Our
general business strategy may be adversely affected if the current economic
conditions deteriorate further, or do not improve. For example, the
economy may impact the demand for elective medical procedures that we are
targeting with our product candidates, or may impact the pricing that we may set
for our products, if approved. However, since our anticipated product
launch in the United States for our lead product candidate is over a year
away, the impact of the recession on commercial opportunities for that product
remains uncertain.
We have
responded to the current economic crisis by investing our cash and cash
equivalents and our short-term investments conservatively, securing a short-term
credit facility to provide some liquidity for our ARS investments, and
initiating cost reduction measures such as scaling back growth in staff and
managing our expenses carefully. In addition, to the extent possible
given contractual commitments, in order to postpone major expenses, we have
delayed certain major equipment purchases as well as validation and delivery of
manufacturing equipment intended for the new manufacturing facility in the same
complex as our headquarters in Franklin, Tennessee. We have leased a
portion of this new facility and intend to move certain of our manufacturing
operations to the new facility. Also, we have filed an arbitration
claim against Deutsche Bank Securities, Inc. (“DBSI”) seeking to force DBSI to
repurchase the illiquid ARS investments that it purchased on our behalf as
manager of our discretionary cash management account.
Recent Developments - Clinical Trial
Updates
AugmentTM Bone
Graft
North American Augment
Pivotal Study — Foot and Ankle Fusions — In October 2009, we announced
positive top-line results from our North American pivotal (Phase III)
randomized, controlled trial comparing Augment to autograft for use in hindfoot
and ankle fusion surgery (“Augment Study”). The
study goal was to establish non-inferiority of Augment compared to
autograft. The primary endpoint of the study is the percentage of
patients achieving fusion at 24 weeks, with fusion defined as 50% or greater
bone bridging on CT scans, as evaluated by an independent musculoskeletal
radiologist. For the pre-specified primary endpoint, patients
treated with Augment experienced a similar fusion rate (61.2%) compared with
those receiving autograft (62.0%). These data met statistical
non-inferiority (p=0.037; n=397 patients). Since many patients
had multiple joints treated, analysis was also performed on a per joint
basis. Non-inferiority was also established on a per joint basis,
with 66.5% of joints treated with Augment fused on CT scans compared to 62.6% of
joints treated with autograft (p=<0.001; n=597 joints).
In the
second quarter of 2009, we submitted both the pre-clinical
pharmacology/toxicology and quality/manufacturing modules of a modular
pre-market approval (“PMA”) application for marketing of Augment in the United
States. A modular submission breaks the PMA document into three
sections or “modules” filed at different times that together become a complete
application. The modular approach allows the applicant to potentially
resolve any concerns noted by the U.S. Food and Drug Administration (“FDA”)
earlier in the review process than would occur with a traditional PMA
application, and may ultimately shorten the review and approval
timeline. We expect to file the third and final PMA module,
containing the data from the clinical trial, within three months from the
announcement of the top-line results of our clinical trial.
EU Augment Trial — Foot and
Ankle Fusions — As of November 2008, we completed enrollment in the EU
clinical study with Augment for the treatment of foot and ankle fusions with a
total enrollment of 108 patients. We expect that the data from the study
should be available in the first half of 2010. The data will be used
in conjunction with data from the North American pivotal trial and other trials
to achieve product registration worldwide.
Canadian Augment Pilot and
Registration Trial — Foot and Ankle Fusions — We received approval from
Health Canada to begin the marketing of our lead orthopedic product, Augment, as
an alternative to the use of autograft in foot and ankle fusion indications in
Canada. Joint Solutions Alliance Corporation is the exclusive
distributor of our Augment product in Canada. We will also deploy
product specialists in the Canadian market to work collaboratively with the
Joint Solutions Team. We expect the product will be available to
customers in Canada within 30 days.
21
AugmentTM
Injectable Bone Graft
We
previously announced results from both the Canadian Augment Injectable
Pilot Trial and the EU (Swedish) Augment Injectable Pilot Trial investigating
the use of Augment Injectable in patients being treated for foot and ankle
fusions and distal radius (wrist) fractures, respectively. The
results of these studies provide us with sufficient evidence of Augment
Injectable’s safety and clinical utility to allow us to progress Augment
Injectable forward in the development process.
Accordingly,
we have filed an Investigational Testing Authorization (“Augment Injectable
ITA”) application with Health Canada and an Investigational Device Exemptions
(“Augment Injectable IDE”) application with the FDA. Health Canada
has approved the Augment Injectable ITA and in October 2009, we initiated
patient enrollment in a North American pivotal study to assess the safety and
efficacy of Augment Injectable as a substitute for autograft in foot and ankle
fusion procedures (“Augment Injectable Study”). This randomized,
controlled study is intended to support the registration of Augment Injectable
in Canada and the United States. The Augment Injectable Study is designed
to incorporate approximately 300 patients, some of whom will be autograft
patients that were enrolled in our Augment Study. The Augment
Injectable Study protocol is similar to the Augment Study protocol so certain
control (autograft) patients enrolled in the Augment Study can be used to
supplement the control group in the new study. Up to 20 clinical centers
in North America will be involved, with five sites that have already begun
enrolling patients in Canada.
We are
finalizing the details of the protocol and the statistical plan of the Augment
Injectable Study with the FDA and will not commence patient enrollment in the
study in the United States until the details of the protocol and the
statistical plan are complete. Based on our most recent discussions
with FDA regarding the Augment Injectable IDE, we anticipate that there will not
be significant differences between the US Augment Injectable protocol and the
Canadian protocol. We cannot be certain, however, that the FDA will
approve the Augment Injectable IDE or, if approved, that the approved protocol
will permit the pooling of the study’s patients with the patients that we are
currently enrolling under the Canadian Augment Injectable ITA or with the
control patients included in our Augment Study. We expect to commence
patient enrollment at our United States study sites in the first quarter of 2010
and anticipate having the study fully enrolled by the end of the
year.
Other Recent
Developments
European
Medicines Agency Filing Update – GEMESIS (formerly GEM 21S) Bone
Graft
We
previously announced that the Marketing Authorization Application (“MAA”) for
GEM 21S (now known as
GEMESISTM in
Europe) was validated and under review by the European Medicines Agency
(“EMEA”). Approval of the MAA submission is required for distribution
and commercialization of GEMESIS as a medicinal (i.e.
drug) combination product in the European Union (“EU”). Upon the
approval of GEMESIS in
the EU, we expect to receive a $10.0 million milestone payment from
Luitpold Pharmaceuticals, Inc., a U.S. subsidiary of Daiichi Sankyo Co.,
Ltd, who now owns the GEM
21S and GEMESIS products, and
markets GEM 21S through
its Osteohealth Company. Because of uncertainties in the review process,
we have excluded this milestone payment from our financial guidance for
2009. In July 2009, the EMEA announced that our MAA would be
rejected, due in part to the different clinical and quality requirements of a
drug product in the EU compared to a medical device product in the United
States. We have appealed this decision and expect a response by the first
quarter of 2010.
Financial
Overview
From our
inception in 1999 through September 30, 2009, we have funded our operations from
the sale of capital stock (including redeemable preferred stock, our initial
public offering (“IPO”) in May 2006, our secondary public offering in
February 2007 and our rights offering in June 2009), from the licensing and
sale of our orofacial therapeutic business in January 2008, from a credit
facility with Deutsche Bank AG (“Deutsche Bank”) and from research and
development agreements, grants, product sales and royalties.
The
remaining proceeds of these activities are reflected in the balance of cash and
investments, which total $100.6 million as of September 30,
2009. Our cash and cash equivalents total $14.3 million and include
cash on hand, deposits in banks, certificates of deposit and money market
funds. Our short-term investments portfolio totals $54.9 million and
includes U.S. government sponsored enterprise (“GSE”) securities totaling $43.3
million, two U.S. Treasury Notes totaling $2.5 million and certain ARS
investments totaling $9.1 million. Our long-term investments
portfolio totals $31.4 million and includes GSE securities totaling $1.5 million
and ARS totaling $29.9 million.
Generally,
the ARS investments that we hold are bonds sold by state guarantee agencies
backed by student loans under the Federal Family Education Loan Program
(“FFELP”), and have credit ratings of “AAA,” “A,” and “BBB.” The
student loans are guaranteed by the U.S. Department of Education at amounts
representing a substantial portion of the loans. Our investments in
ARS are recorded at fair value. The fair value measures of our ARS
investments have been estimated using cash flow discounting with a Monte Carlo
simulation and other information. As of September 30, 2009, our
combined total of short-term and long-term investments in ARS, which are
classified as available for sale at a total par value of $46.7 million, have a
total estimated fair value of $39.0 million. The current economic
downturn and the ensuing instability of markets have impacted us by making it
difficult to resolve the liquidity issues on our ARS
investments. There is currently no viable market for these ARS
investments as auctions for ARS have failed since February
2008.
22
During
the nine months ended September 30, 2009, certain of our investments in ARS were
sold or redeemed by the issuer. In April 2009, we sold two of the ARS
investments and two of the ARS investments were redeemed by the issuer,
representing total par value of $11.9 million, for total proceeds of $10.9
million. In July 2009, two of the ARS investments were partially
redeemed at par, resulting in cash proceeds of $0.2 million. In
September 2009, two of the ARS investments were partially redeemed at par by the
issuer for total proceeds of $1.2 million. In addition, in October
2009, one ARS investment was partially redeemed at par by the issuer and two ARS
investments were sold at a discount to a third party for total proceeds of $9.1
million.
We cannot
be sure, however, when liquidity will return to the ARS market, if at
all. Therefore, we intend to hold the remaining ARS investments in
our portfolio, which have a combined par value of $35.8 million after deducting
the $10.9 million par value of the ARS investments that were partially redeemed
and sold in October 2009, for at least the next 12
months. Accordingly, the remaining ARS have been classified as
long-term investments on our condensed consolidated balance sheet at September
30, 2009.
In
October 2008, to address the liquidity issues associated with these ARS
investments in the short-term, we entered into a Time Promissory Note (“Note”)
credit facility with Deutsche Bank enabling us to borrow up to
$39.1 million with certain of our ARS investments serving as
collateral. During the nine months ended September 30, 2009, as
certain of our ARS investments were redeemed or sold, we repaid $9.3 million, or
70% of the par value of the redeemed and sold ARS investments, against the Note
payable in accordance with the terms of the Note. As of September 30,
2009, the outstanding balance of the Note payable was $29.8 million and is
reflected in the balance of cash and investments, as well as the related note
payable liability, on our condensed consolidated balance sheet.
We
continue to incur research and development expenses due to our internal research
capabilities and due to the numbers of patients we have enrolled and expect to
enroll in the clinical trials of Augment and our other product candidates. We
will make determinations as to which product candidates to advance and how much
funding to direct to each on an ongoing basis in response to their scientific
and clinical success. We expect that research and development expenses will
continue to increase as a result of new and ongoing clinical trials of Augment
and Augment Injectable in the United States, Canada and the EU, and pre-clinical
studies of Augment, Augment Injectable and our sports medicine product
candidates, as well as continuing expenses associated with regulatory filings,
including the EU regulatory filing for GEM 21S.
The
following table summarizes our research and development expenses for the three
and nine months ended September 30, 2009 and 2008. Direct external
costs represent significant expenses paid to third parties that specifically
relate to the development costs of our products, such as payments to contract
research organizations, clinical investigators, manufacture of clinical
material, consultants, contract manufacturing start-up costs, manufacturing
scale-up costs, milestone payments and insurance premiums for clinical
studies. In addition, employee costs (salaries, payroll taxes,
benefits, and travel) for employees of the manufacturing, regulatory affairs,
clinical affairs, quality assurance, quality control and research and
development are classified as research and development
costs. Research and development spending for past periods is not
indicative of spending in future periods.
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
Costs
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Direct
external:
|
||||||||||||||||
Periodontal
|
$ | 10,923 | $ | 194,191 | $ | 170,191 | $ | 836,479 | ||||||||
Orthopedic
|
1,881,270 | 2,223,510 | 5,541,508 | 8,309,653 | ||||||||||||
Sports
medicine
|
352,166 | 135,088 | 768,348 | 307,149 | ||||||||||||
2,244,359 | 2,552,789 | 6,480,047 | 9,453,281 | |||||||||||||
Internal:
|
||||||||||||||||
Periodontal
|
165,989 | 139,036 | 503,896 | 439,427 | ||||||||||||
Orthopedic
|
2,305,588 | 2,542,778 | 7,103,773 | 7,449,819 | ||||||||||||
Sports
medicine
|
475,577 | 431,215 | 1,450,368 | 1,288,553 | ||||||||||||
2,947,154 | 3,113,029 | 9,058,037 | 9,177,799 | |||||||||||||
Total
|
$ | 5,191,513 | $ | 5,665,818 | $ | 15,538,084 | $ | 18,631,080 |
23
We
anticipate that our general and administrative expenses will continue to
increase as we expand our operations, facilities and other administrative
activities related to our efforts to bring our product candidates into
commercialization.
Since
inception, we have incurred losses from operations each year. As of
September 30, 2009, we had an accumulated deficit of $94.6 million, which
includes a $13.4 million impairment loss on ARS investments recorded in
earnings in 2008. We recorded a $2.5 million unrealized gain on ARS
and other investments in accumulated other comprehensive income on our condensed
consolidated balance sheet for the nine months ended September 30,
2009. Although the size and timing of our future operating losses are
subject to significant uncertainty, we expect that operating losses may continue
over the next few years as we continue to fund our research and development
activities and clinical trials and as we prepare for a future marketing sales
and distribution network to represent our products, if
approved. Also, given the sale of our remaining orofacial therapeutic
business, we do not have an FDA approved product in
commercialization.
Even with
the cost reduction measures discussed in “— Overview,” the successful
development of Augment or any of our other product candidates is highly
uncertain. We cannot reasonably estimate the nature, timing and costs of the
efforts necessary to complete the development and approval of, or the period in
which material net cash flows are expected to commence from, any of our product
candidates due to the numerous risks and uncertainties associated with
developing product candidates, including the uncertainty of:
|
§
|
the
scope, rate of progress and cost of our clinical
trials;
|
|
§
|
future
clinical trial results;
|
|
§
|
the
cost and timing of regulatory
approvals;
|
|
§
|
the
establishment of marketing, sales and
distribution;
|
|
§
|
the
cost and timing associated with licensing, business relationships and
similar arrangements;
|
|
§
|
the
cost and timing of establishing clinical and commercial supplies of
Augment and our other product
candidates;
|
|
§
|
the
timing and results of our pre-clinical research
programs;
|
|
§
|
the
effects of competing technologies and market developments;
and
|
|
§
|
the
industry demand and patient wellness behavior as businesses and
individuals suffer from the current economic
downturn.
|
Any
failure to complete the development of Augment or any of our other product
candidates in a timely manner, or any failure to successfully market and
commercialize Augment or any of our other product candidates, could have a
material adverse effect on our operations, financial position and liquidity. A
discussion of the risks and uncertainties associated with completing our
projects on schedule, or at all, and some of the consequences of failing to do
so, are set forth under “Item 1A — Risk Factors.”
Results of
Operations
Three
Months Ended September 30, 2009 and 2008
Net loss
for the three months ended September 30, 2009 was $7.9 million, or $0.36
per diluted share, compared to net loss of $18.0 million, or $0.97 per
diluted share, for the same period in 2008. The net loss in 2008
included $10.2 million impairment loss on our ARS investments recorded to
earnings during the three months ended September 30, 2008.
Revenue and Cost of
Sales
§
|
No
product sales revenues, nor cost of sales, were recorded for the three
months ended September 30, 2009 and 2008 due to the January 2008 sale
of our orofacial therapeutic
business.
|
§
|
Royalty
income for the three months ended September 30, 2009 was
$0.1 million, compared to $0.2 million for the same period in
2008. Royalty income is earned and received based on Luitpold’s
sale of the GEM
21S product. In the three months ended September 30,
2009, Luitpold’s net sales of GEM 21S were
$1.3 million, down from $1.7 million in the same period in
2008. We believe that the current economic downturn may have
negatively impacted the demand for elective dental procedures, such as
regenerative procedures using GEM 21S, potentially
resulting in decreased sales compared to the same period in
2008.
|
24
§
|
Sublicense
fee income was $0.2 million for the three months ended September 30, 2009
and 2008. Sublicense fee income is based on the straight-line
amortization of certain milestone payments previously received from
Luitpold.
|
Research and Development
Expenses
§
|
Research
and development expenses for the three months ended September 30, 2009
were $5.2 million, compared to $5.7 million for the same period
in 2008. The $0.5 million decrease is due in part to a $0.4
million decrease in contract manufacturing costs in 2009. These
costs were higher in 2008 due to initial start-up costs of clinical trials
in 2008. In addition, our R&D costs have decreased in 2009
as certain orthopedic clinical trials came to a close in
2009.
|
§
|
We
expect that research and development expenses will start to increase in
the upcoming months as a result of new and ongoing clinical trials of
Augment and our other product candidates in the United States, Canada and
the EU, as well as continuing expenses associated with pre-clinical
studies and regulatory filings.
|
General and Administrative
Expenses
General
and administrative expenses for the three months ended September 30, 2009 were
$2.8 million, compared to $2.2 million for the same period in
2008. The increase of $0.6 million is due in part to:
§
|
an
increase of $0.1 million in salaries, benefits and payroll taxes and stock
compensation costs as a result of the increase in the number of options
awarded and hiring costs,
|
§
|
an
increase of $0.4 million in legal fees in connection with the Deutsche
Bank arbitration and ongoing patent licensing agreements, offset by a $0.1
million decrease in professional fees to other vendors,
and
|
§
|
a
decrease of $0.1 million in royalty expense as a result of lower sales of
GEM 21S by
Luitpold in the nine months ended September 2009 compared to the same
period in 2008.
|
We have
kept our organizational growth to a minimum as we are continuously monitoring
expenses and have implemented cost-conservation measures wherever
possible.
Depreciation and Capital
Lease Amortization
Depreciation
and capital lease amortization for the three months ended September 30, 2009 was
$0.3 million, compared to $0.4 million for the same period in
2008.
Patent License Fee
Amortization
Patent
license fee amortization for the three months ended September 30, 2009 was
$0.5 million, compared to $0.7 million for the same period in 2008.
Ongoing amortization expense is attributable to the capitalization of patent
license fees amounting to a cumulative $12.5 million as of September 30,
2009.
Interest and Investment
Income (Loss)
§
|
Total
net interest and investment income for the three months ended September
30, 2009 was $0.5 million, compared to a $9.5 million net interest
and investment loss for the same period in
2008.
|
§
|
The
July 2009 and September 2009 partial redemptions of certain ARS
investments resulted in a net realized gain on investments of $0.3 million
recorded to investment income. Excluding this, total net
interest and investments income was $0.2 million for the three months
ended September 30, 2009.
|
§
|
The
net interest and investment loss in 2008 included an other-than-temporary
impairment loss of $10.2 million on our ARS
investments. Excluding this, total net interest and investment
income was $0.7 million for the three months ended September 30,
2008.
|
25
§
|
Interest
rates earned on our cash and money market accounts ranged from 0.01% to
0.02% during the three months ended September 30, 2009, which is a
significant decrease from the same period in 2008 when interest rates
ranged from 1.60% to
1.85%.
|
§
|
Interest
expense on our note payable was $0.1 million for the three months ended
September 30, 2009. No such interest expense was incurred
during the same period in 2008 because the note payable was not incurred
until October 2008.
|
Nine
Months Ended September 30, 2009 and 2008
Net loss
for the nine months ended September 30, 2009 was $22.3 million, or $1.11
per diluted share, compared to net income of $4.2 million, or $0.22 per
diluted share, for the same period in 2008. The net income in 2008
included a $39.3 million net gain on the sale of our orofacial therapeutic
business, offset partially by a $10.2 million impairment loss on our ARS
investments recorded to earnings. Both of these 2008 items are
described in the paragraphs below. We anticipate that our operating
losses, which are only partially offset by revenues from royalty income,
sublicense fee income and investment income, may continue over the next few
years as we continue to fund our research and development activities and
clinical trials and as we prepare for a future sales network to represent our
products.
Disposal of Orofacial
Therapeutic Business
§
|
In
January 2008, we sold our orofacial therapeutic business (GEM 21S) to Luitpold,
and as a result, we recorded a $39.3 million net gain on the
transaction in 2008. As of September 30, 2008, we had received
$30.0 million in cash from the sale transaction and $3.4 million
in cash from the sale of existing
inventory.
|
§
|
Under
the terms of the sale agreement, in July 2009, we received a $6.0 million
time-based cash payment from Luitpold. We expect to receive a
final time-based cash payment of $4.0 million by the end of
2009. At September 30, 2009, we recorded a receivable of
$3.97 million, which represents the discounted balance of the
remaining $4.0 million which was due from Luitpold as of September
30, 2009. We recorded $0.2 million of interest income from
the accretion of the receivable during the nine months ended September 30,
2009.
|
§
|
Also
under the terms of the sale agreement, we expect to receive ongoing
royalty payments based on net sales of GEM 21S and other
products that are based on adapting our technology to future products in
the orofacial therapeutic field.
|
Revenue and Cost of
Sales
§
|
No
product sales revenues, nor cost of sales, were recorded for the nine
months ended September 30, 2009 and 2008 due to the January 2008 sale
of our orofacial therapeutic
business.
|
§
|
Royalty
income for the nine months ended September 30, 2009 was $0.4 million,
compared to $0.6 million for the same period in 2008. Royalty
income is earned and received based on Luitpold’s sale of the GEM 21S
product. In the nine months ended September 30, 2009,
Luitpold’s net sales of
GEM 21S were $3.9 million, down
from $6.0 million in the same period in 2008. We believe
that the current economic downturn may have negatively impacted the demand
for elective dental procedures, such as regenerative procedures using
GEM 21S,
potentially resulting in decreased sales compared to the prior
year.
|
§
|
Sublicense
fee income was $0.7 million for the nine months ended September 30, 2009
and 2008. Sublicense fee income is based on the straight-line
amortization of certain milestone payments previously received from
Luitpold. In December 2005, we received a
$15.0 million milestone payment from Luitpold following FDA approval
of GEM 21S, and
in December 2007, we received a $5.0 million milestone payment
from Luitpold following the second anniversary of FDA approval. The income
related to these payments, which begins upon receipt of the payments, is
being amortized on a straight-line basis over the remaining life of the
exclusive sublicense agreement with Luitpold which expires in
2026.
|
26
Research and Development
Expenses
Research
and development expenses for the nine months ended September 30, 2009 were $15.5
million, compared to $18.6 million for the same period in 2008. The
$3.1 million decrease resulted in part from:
§
|
our
focus on controlling costs in 2009,
|
§
|
a
decrease of $1.7 million in contract manufacturing costs as certain
clinical trials came to a close in 2009 and clinical supplies were no
longer needed, and since 2008 costs included initial start-up costs of
clinical trials,
|
§
|
a
decrease of $0.5 million in professional services for clinical costs as
certain orthopedic clinical trials came to a close in
2009,
|
§
|
a
decrease of $0.4 million in professional services expenses for validation
consulting, regulatory and outside R&D
costs,
|
§
|
a
decrease of $0.2 million in milestone expenses,
and
|
§
|
a
decrease of $0.3 million in salaries, payroll taxes, benefits, stock
compensation expense, insurance, recruiting and relocation expenses, and
general activities of the R&D
programs.
|
We expect
that research and development expenses will start to increase over the next few
months as a result of new and ongoing clinical trials of Augment and our other
product candidates in the United States, Canada and the EU, as well as
continuing expenses associated with pre-clinical studies and regulatory
filings.
General and Administrative
Expenses
General
and administrative expenses for the nine months ended September 30, 2009 were
$7.5 million, compared to $7.1 million for the same period in 2008.
The $0.4 million increase resulted in part from:
§
|
an
increase of $0.3 million in salaries, benefits, payroll taxes and stock
compensation costs as a result of the increase in the number of options
awarded and hiring cost,
|
§
|
an
increase of $0.1 million in fees paid to the board of directors resulting
from the April 2008 approval of an increase in retainers and meeting fee
payments,
|
§
|
an
increase of $0.4 million in legal fees due to the Deutsche Bank
arbitration and ongoing patent licensing agreements, offset by a $0.2
million decrease in professional fees to other
vendors,
|
§
|
a
decrease of $0.1 million in utilities, rent and common area maintenance as
a result of our focus on controlling costs in 2009,
and
|
§
|
a
decrease of $0.1 million in royalty expense as a result of lower sales of
GEM 21S by
Luitpold in the nine months ended September 2009 compared to the same
period in 2008.
|
We have
kept our organizational growth to a minimum as we are continuously monitoring
expenses and have implemented cost-conservation measures wherever
possible.
Depreciation and Capital
Lease Amortization
Depreciation
and capital lease amortization for the nine months ended September 30, 2009 was
$1.0 million, compared to $1.1 million for the same period in
2008.
Patent License Fee
Amortization
Patent
license fee amortization for the nine months ended September 30, 2009 was
$2.0 million, compared to $1.9 million for the same period in 2008.
Ongoing amortization expense is attributable to the capitalization of patent
license fees amounting to a cumulative $12.5 million as of September 30,
2009.
27
Interest and Investment
Income (Loss)
§
|
Total
net interest and investment income for the nine months ended September 30,
2009 was $2.7 million, compared to $7.7 million
net interest and investment loss for the same period in
2008.
|
§
|
The
2009 sales, redemption and partial redemptions of certain ARS investments
resulted in a net realized gain on investments of $2.1 million recorded to
investment income. Excluding this, total net interest and
investment income was $0.6 million for the nine months ended September 30,
2009.
|
§
|
The
net interest and investment loss in 2008 included an other-than-temporary
impairment loss of $10.2 million on our ARS
investments. Excluding this, total net interest and investment
income was $2.5 million for the nine months ended September 30,
2008.
|
§
|
Interest
rates earned on our cash and money market accounts ranged from 0.00% to
0.80% during the nine months ended September 30, 2009, which is a
significant decrease from the same period in 2008 when interest rates
ranged from 1.60% to 4.10%.
|
§
|
Interest
expense on our note payable was $0.5 million for the nine months ended
September 30, 2009. No such interest expense was incurred
during the same period in 2008 because the note payable was not incurred
until October 2008.
|
Provision for Income
Taxes
At
September 30, 2009, we had federal net operating loss carryforwards of
$59.2 million that will begin to expire in 2022. State net
operating loss carryforwards at September 30, 2009 totaled $47.6 million
and will expire between 2013 and 2028.
Our
ability to use our net operating loss carryforwards could be
limited. Our ability to use these net operating loss carryforwards to
reduce our future federal income tax liabilities could be subject to annual
limitations. Additionally, because U.S. tax laws limit the time
during which net operating loss carryforwards may be applied against future
taxable income and tax liabilities, we may not be able to take advantage of our
net operating loss for federal income tax purposes.
Liquidity
and Capital Resources
In
January 2008, we completed the sale to Luitpold of our remaining orofacial
therapeutic business, including the downstream formulation, fill, finish,
manufacturing and kitting of
GEM 21S. In 2008, we had received $30.0 million in cash
as a result of the transaction, plus $3.4 million in cash from the sale of
existing inventory. Under the terms of the sale agreement, we
received a $6.0 million time-based cash payment from Luitpold in July
2009. We expect to receive a final time-based cash payment of $4.0
million by the end of 2009. At September 30, 2009, we recorded a
receivable for $3.97 million, which represents the discounted balance of
the $4.0 million which was due from Luitpold as of September 30,
2009. In addition, we expect to receive ongoing royalty payments
based on net sales of GEM
21S and other products that are based on adapting our technology to
future products in the orofacial therapeutic field.
At
September 30, 2009, we had $14.3 million in cash and cash equivalents held
in three financial institutions and a certificate of deposit. Our
excess cash reserves are invested in overnight sweep accounts, operating
accounts and money market accounts.
In
addition to the balance of cash and cash equivalents at September 30, 2009, we
had $54.9 million in short-term investments that are classified as available for
sale and consist of GSE securities totaling $43.3 million, two U.S. Treasury
Notes totaling $2.5 million and $9.1 million consisting of one ARS investment
which was partially redeemed at par and two ARS investments which were sold at a
discount to a third party in October 2009. The GSE securities have
maturity dates ranging from October 2009 through June 2010.
Also at
September 30, 2009, our long-term investments portfolio totaled $31.4 million
and consisted of GSE securities totaling $1.5 million and ARS totaling $29.9
million. Our investments in student loan backed ARS are classified as
available-for-sale and recorded at fair value. As of September 30,
2009, the combined total fair value of our short-term and long-term ARS
investments was $39.0 million, consisting of $28.6 million in bonds with a
credit rating of “AAA,” $7.7 million in bonds with a credit rating of “A” and
$2.7 million in bonds with a credit rating of “BBB.” Generally,
the ARS investments that we hold are bonds sold by state guarantee agencies
backed by student loans under the FFELP. The majority of the student
loans are guaranteed by the U.S. Department of Education at amounts representing
a substantial portion of the loans.
28
During
the nine months ended September 30, 2009, certain of our investments in ARS were
sold, redeemed and partially redeemed by the issuer for total proceeds of $12.3
million. In October 2009, one ARS investment was partially redeemed
at par by the issuer and two ARS investments were sold at a discount to par to a
third party for total proceeds of $9.1 million. However, auctions for
these ARS investments have failed since February 2008, and the current economic
downturn and the ensuing instability of markets have impacted us by making it
difficult to resolve the liquidity issues on our ARS investments. We
cannot be sure when liquidity will return to the ARS
market. Therefore, we intend to hold the remaining ARS investments in
our portfolio for at least the next twelve months, and accordingly, they have
been classified as long-term on our condensed consolidated balance sheet at
September 30, 2009.
Fair
value measures of our ARS investments have been estimated using cash flow
discounting with a Monte Carlo simulation and other information. The valuation
model reflects various assumptions that market participants would use in
pricing, including among others, the collateralization underlying the
investments, the creditworthiness of the counterparty, the expected future cash
flows, and the risks associated with uncertainties in the current
market. In 2008, we had determined that our ARS investments had
experienced an other-than-temporary impairment in fair value and we had
estimated the fair value to be $46.6 million, representing an impairment loss of
$13.4 million, as of December 31, 2008. The 2009 redemptions and
sales of certain ARS investments have resulted in a net realized gain of $2.1
million as of the nine months ended September 30, 2009. Based on a
cash flow discounting model and other information, we have estimated the fair
value to be $39.0 million as of September 30, 2009, representing an unrealized
gain on investments of $2.6 million recorded in accumulated other comprehensive
income on our condensed consolidated balance sheet for the nine months ended
September 30, 2009.
In
October 2008, to address the liquidity issues associated with these ARS
investments in the short-term, we entered into a Time Promissory Note (“Note”)
credit facility with Deutsche Bank enabling us to borrow up to
$39.1 million with certain of our ARS investments serving as
collateral. We had granted Deutsche Bank a first priority security
interest in certain of our ARS investments having a total combined par value of
$55.9 million as collateral. Under the terms of the Note, we are
required to make monthly interest payments during the two-year term of the
Note. All outstanding principal amounts are due and payable in full
on the maturity date on October 27, 2010. We may elect to pay
back the full principal amount prior to the maturity date with no
penalty. Absent a default by our company or a sale of part of the
collateral ARS investments, Deutsche Bank has no ability to withdraw, reduce or
change the terms of the Note. Under the terms of the Note, and at our
option, the interest rate will be based on either LIBOR plus 0.50% or Deutsche
Bank’s Prime Rate minus 1.50%. The Note also provides that in the
event that Deutsche Bank later offers an ARS lending program or settlement loan
program to institutional clients that includes either a lower interest rate or
permits borrowing of more than 70% of the par value of the collateral
securities, then the terms of our Note and any existing loans issued under the
Note will be modified to include the lower interest rate or higher borrowing
base. As of September 30, 2009, as certain of our ARS investments
were redeemed or sold, we repaid $9.3 million, or 70% of the par value of the
redeemed and sold ARS investments, against the Note payable in accordance with
the terms of the Note.
In April
2009, we sold 941,177 shares of our common stock to InterWest Partners X,
LP, an affiliate of certain of our existing stockholders, for an aggregate
purchase price of approximately $8.0 million, or $8.50 per share.
In June
2009, we completed a rights offering to sell shares of our common stock, on a
pro rata basis, to our existing shareholders. Concurrent with the
rights offering, we sold to Novo A/S, one of our stockholders, 343,406 shares of
our common stock in a private placement. Total gross proceeds of the
rights offering, including the private placement to Novo A/S, was $17.0
million. Although we did not need the capital for our immediate plans
of operation, we believed that it was in our best interest to raise capital in
anticipation of our future needs. We intend to use the net proceeds
of the rights offering for general corporate purposes, including funding
additional product development and potential commercialization
activities.
In July
2009, we filed a shelf registration statement on Form S-3 with the
SEC. Under the shelf registration statement, we may from time to
time, in one or more series, separately or together, sell common stock,
preferred stock, debt securities or warrants to purchase our common stock or any
combination of such securities. The aggregate public offering price
of the securities that we may offer pursuant to the registration statement is up
to $150.0 million.
29
We expect
to devote substantial resources to continue our research and development
efforts, including clinical trials. Clinical study costs are comprised of
payments for work performed by contract research organizations, universities and
hospitals.
Because
of the significant time it may take for Augment or our other product candidates
to complete the clinical trial process, obtain approval from regulatory
authorities and successfully commercialize our products, we may require
substantial additional capital resources. We may raise additional
capital through public or private equity offerings, debt financings, corporate
collaborations or other means. We may attempt to raise additional
capital due to favorable market conditions or other strategic considerations
even if we have sufficient funds for planned operations. To the
extent that we raise additional funds by issuing equity securities, our
stockholders will experience dilution, and debt financings, if available, may
involve restrictive covenants or may otherwise constrain our financial
flexibility. To the extent that we raise additional funds through
collaborative arrangements, it may be necessary to relinquish some rights to our
intellectual property or grant licenses on terms that are not favorable to
us. In addition, payments made by potential collaborators or
licensors generally will depend upon our achievement of negotiated development
and regulatory milestones. Failure to achieve these milestones may
harm our future capital position. Additional financing may not be available on
acceptable terms, if at all. Capital may become difficult or
impossible to obtain due to poor market or other conditions outside of our
control. If at any time sufficient capital is not available, either
through existing capital resources or through raising additional funds, we may
be required to delay, reduce the scope of, eliminate or divest one or more of
our research, pre-clinical or clinical programs.
We
believe that the September 30, 2009 balance of our cash and investments, which
includes the gross proceeds of $8.0 million received in April 2009 in connection
with the transaction with InterWest Partners X, L.P. and the gross proceeds of
$17.0 million received in June 2009 in connection with our rights offering, in
addition to the $6.0 million time-based cash payment received in July 2009 from
Luitpold, and the expected $4.0 million time-based cash payment to be received
by the end of 2009 from Luitpold, will be sufficient to fund our business
operations through at least the third quarter of 2010.
For the
nine months ended September 30, 2009, net cash used in operating activities was
$22.2 million, primarily consisting of salaries, clinical trials, research and
development activities and general corporate operations. Net cash
provided by investing activities was $3.5 million for the nine months ended
September 30, 2009 and consisted of the $6.0 million time-based cash payment
from Luitpold, which was received in July 2009, offset in part by net purchases
of short-term investments, purchases of property and equipment and capitalized
patent costs. Net cash provided by financing activities was $15.5
million for the nine months ended September 30, 2009 and consisted of
$24.5 million in net proceeds from issuance of common stock, offset
partially by $9.3 million paid down on our Note payable.
Segment
Information
We have
determined that we are principally engaged in one operating segment. Our product
development efforts are primarily in the treatment of musculoskeletal injuries
and diseases, including orthopedic, spine and sports injury applications for the
repair and regeneration of orthopedic tissues, including bone, cartilage,
ligaments and tendons.
Recent
Accounting Pronouncements
The
FASB Accounting Standards CodificationTM
In June
2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168,
The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles (“SFAS No. 168”), which establishes the
FASB Accounting Standards CodificationTM
(“Codification”). The Codification supersedes all existing accounting
standard documents and will become the single source of authoritative
non-governmental U.S. generally accepted accounting principles. The
Codification did not change U.S. generally accepted accounting principles but
reorganizes the literature. All other accounting literature not
included in the Codification will be considered
non-authoritative. The Codification was implemented on July 1, 2009
and is effective for interim and annual periods ending after September 15,
2009. Subsequent changes to the Codification will be released through
Accounting Standards Updates (“ASU”), which serve to update the Codification,
provide background information about the guidance and provide the basis for
conclusions on the changes in the Codification. We have conformed our
financial statements and related Notes to the new Codification for the three and
nine months ended September 30, 2009.
30
In
conjunction with the issuance of SFAS No. 168, the FASB issued ASU No. 2009-01
Topic 105, Generally Accepted
Accounting Principles (“ASC No. 2009-01”). ASU No. 2009-01
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with U.S. generally
accepted accounting principles. ASU No. 2009-01 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this ASU did not have a material
impact on our financial position or results of operation as of and for the three
and nine months ended September 30, 2009.
Fair
Value Measurements and Other-Than-Temporary Impairments
In April
2009, the FASB issued ASC 320-10, Investments – Debt and Equity
Securities (includes former Staff Position (“FSP”) No. FAS 115-2 and FAS
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). The ASC
changes existing guidance for determining whether impairment of debt securities
is other-than-temporary. The ASC requires other-than-temporary impairment to be
separated into the amount representing the decrease in cash flows expected to be
collected from a security (referred to as credit losses), which is recognized in
earnings, and the amount related to other factors, which is recognized in other
comprehensive income. The non-credit loss component of the impairment can only
be classified in other comprehensive income if the holder of the security
concludes (1) that it does not intend to sell the security and
(2) that it is more likely than not that it will not be required to sell
the security before the security recovers its value. If these two conditions are
not met, the non-credit loss component of the impairment must also be recognized
in earnings. Upon adoption of the ASC, the entity is required to
record a cumulative-effect adjustment, as of the beginning of the period of
adoption, to reclassify the non-credit loss component of previously recognized
other-than-temporary impairment from retained earnings to accumulated other
comprehensive income.
In April
2009, the FASB issued ASC 820-10, Fair Value Measurements and
Disclosures (includes former FSP No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). This ASC,
while emphasizing that the objective of fair value measurement described in ASC
820 (formerly SFAS No. 157, Fair Value Measurements)
remains unchanged, provides additional guidance for determining whether market
activity for a financial asset or liability has significantly decreased, as well
as for identifying circumstances that indicate that transactions are not
orderly. The ASC reiterates that if a market is determined to be
inactive and the related market price is deemed to be reflective of a
“distressed sale” price, then management judgment may be required to estimate
fair value. The ASC identifies factors to be considered when determining whether
or not a market is inactive.
In April
2009, the FASB issued ASC 825-10, Financial Instruments
(includes former FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments). This ASC requires disclosures about fair
values of financial instruments in all interim financial statements,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. Due to their short-term nature, the carrying
amounts reported in our condensed consolidated financial statements approximate
the fair value for cash, cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and capital lease
obligations. Our credit facility with Deutsche Bank, upon which we
borrowed $39.1 million in October 2008, had a carrying amount of $29.8 million
as of September 30, 2009 that approximated the fair value. Our
investments in student loan backed auction rate securities (“ARS”) are recorded
at a fair value of $39.0 million as of September 30, 2009.
The ASCs
set forth above were effective for interim and annual periods ending after June
15, 2009. We adopted the ASCs set forth above, and the adoption of
such ASCs did not have a material impact on our condensed consolidated financial
statements as of September 30, 2009.
Business
Combinations
In April
2009, the FASB issued ASC 805-10, Business Combinations
(includes former FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies). This ASC amends and clarifies the provisions of ASC 805,
formerly SFAS No. 141(R), Business Combinations, with
respect to the initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
associated with a business combination. The provisions of the ASC are effective,
for our Company, for business combinations occurring after January 1, 2009.
The adoption of the ASC did not have a material impact on our condensed
consolidated financial statements as of September 30, 2009. The
impact of adoption of the ASC on our future condensed consolidated financial
statements will depend on the nature, terms and size of future business
combinations, if any.
31
Subsequent
Events
In May
2009, the FASB issued ASC 855, Subsequent Events (formerly
SFAS No. 165, Subsequent
Events), which provides guidance on events that occur after the balance
sheet date but prior to the issuance of the financial
statements. This ASC distinguishes events requiring recognition in
the financial statements and those that may require disclosure in the financial
statements. Furthermore, ASC 855 requires disclosure of the date
through which subsequent events were evaluated. ASC 855 is effective
for interim and annual periods ending after June 15, 2009. We have
adopted ASC 855, and have evaluated subsequent events through November 5,
2009.
Comprehensive
(Loss) Income
FASB ASC
220, Comprehensive
Income (formerly SFAS No. 130), establishes standards for reporting and
display of comprehensive (loss) income and its components in the condensed
consolidated financial statements. Our comprehensive (loss) income as
defined by ASC 220 is the total of net (loss) income and all other changes in
equity resulting from non-owner sources including unrealized gains/losses on
investments.
The
components of our comprehensive (loss) income for the three and nine months
ended September 30, 2009 and 2008 are as follows:
Three
months
ended September
30,
|
||||||||
2009
(in millions)
|
2008
(in millions)
|
|||||||
Net
(loss) income
|
$ | (7.9 | ) | $ | (18.0 | ) | ||
Other
comprehensive loss:
|
||||||||
Unrealized
gain (loss) on investments classified as available for
sale
|
— | — | ||||||
Comprehensive
(loss) income
|
$ | (7.9 | ) | $ | (18.0 | ) |
Nine
months
ended September
30,
|
||||||||
2009
(in millions)
|
2008
(in millions)
|
|||||||
Net
(loss) income
|
$ | (22.3 | ) | $ | 4.2 | |||
Other
comprehensive loss:
|
||||||||
Unrealized
gain (loss) on investments classified as available for
sale
|
2.5 | — | ||||||
Comprehensive
(loss) income
|
$ | (19.8 | ) | $ | 4.2 |
Off-Balance
Sheet Arrangements
Since
inception, we have not engaged in any off-balance sheet activities, including
the use of structured finance, special purpose entities or variable interest
entities.
Effects
of Inflation
Because
our assets are, to an extent, liquid in nature, they are not significantly
affected by inflation. However, the rate of inflation affects such expenses as
employee compensation, office space leasing costs and research and development
charges, which may not be readily recoverable during the period of time that we
are bringing the product candidates to market. To the extent inflation results
in rising interest rates and has other adverse effects on the market, it may
adversely affect our consolidated financial condition and results of operations
in certain businesses.
32
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our
exposure to market risk due to changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio. We attempt to increase the safety and
preservation of our invested principal funds by limiting default risk, market
risk and reinvestment risk. We mitigate default risk by investing in investment
grade securities. Declines in interest rates over time will, however,
reduce our interest income while increases in interest rates over time will
increase our interest expense. Due to the short-term nature of our
cash and cash equivalents, we do not believe that we have any material exposure
to interest rate risk arising from our cash and cash equivalents. Our
cash accounts earned interest rates ranging from 0.00% to 0.80% during the nine
months ended September 30, 2009. We have not used derivative
financial instruments for speculation or trading purposes.
As of
September 30, 2009, we had $54.9 million in short-term investments that are
classified as available for sale, consisting of U.S. government sponsored
enterprise (“GSE”) securities totaling $43.3 million, two U.S. Treasury
Notes totaling $2.5 million and certain student loan backed ARS investments
totaling $9.1 million which were partially redeemed or sold in October
2009. The GSE securities have maturity dates ranging from
October 2009 through June 2010. The two U.S. Treasury Notes have
maturity dates of March 31, 2010 and April 30, 2010,
respectively. Also as of September 30, 2009, we had long-term
investments totaling $31.4 million consisting of $1.5 million in GSE
securities and $29.9 million in ARS investments that are classified as
available-for-sale and recorded at fair value.
As of
September 30, 2009, the combined total fair value of our short-term and
long-term investments in ARS was $39.0 million, consisting of $28.6 million
in bonds with a credit rating of “AAA,” $7.7 million in bonds with a credit
rating of “A” and $2.7 million in bonds with a credit rating of
“BBB.” Generally, these ARS investments are bonds sold by state
guarantee agencies backed by student loans under the FFELP. The
majority of the student loans are guaranteed by the U.S. Department of Education
at amounts representing a substantial portion of the loans. Auctions
for these ARS investments have failed since the ARS market collapsed in
February 2008. In 2008, we had determined that our ARS
investments had experienced an other-than-temporary impairment in fair value and
we had estimated the fair value to be $46.6 million, representing an impairment
loss of $13.4 million, as of December 31, 2008. Certain of our ARS
have been sold, redeemed and partially redeemed during the nine months ended
September 30, 2009, resulting in a net realized gain of $2.1
million. Based on a cash flow discounting model and other
information, we have estimated the fair value to be $39.0 million as of
September 30, 2009, representing an unrealized gain on investments of $2.6
million recorded in accumulated other comprehensive income on our condensed
consolidated balance sheet for the nine months ended September 30,
2009.
Item
4.
|
CONTROLS
AND PROCEDURES
|
We
maintain disclosure controls and procedures, as defined in Rule 13a-15(e)
promulgated under the Exchange Act, that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. We carried out an evaluation under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as of the end of
the period covered by this report. Based on the evaluation of these
disclosure controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report. There
have been no changes in our internal control over financial reporting that
occurred during the period covered by this report that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
This
quarterly report does not include a report of management’s assessment regarding
our internal controls over financial reporting or an attestation report from our
registered independent public accounting firm. Our Annual Report on
Form 10-K filed with the SEC on March 12, 2009 for the fiscal year ended
December 31, 2008 included a report by our management on our internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002. The Annual Report contained an evaluation
by management, with the participation of the Chief Executive Officer and the
Chief Financial Officer, and concluded that, as of December 31, 2008, our
internal controls over financial reporting was effective. Our annual
report for the year ended December 31, 2008 also contained an attestation
opinion from our independent registered public accounting firm on the
effectiveness of internal controls over financial reporting.
33
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls over financial reporting will prevent or detect all error and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within a company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
PART
II — OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
In
February 2009, we filed an arbitration claim with the Financial
Industry Regulatory Authority, Inc. (“FINRA”) against Deutsche Bank
Securities, Inc. (“DBSI”) asserting various claims relating to investments
in auction rate securities made on our behalf including, among
others, claims for violation of federal and state securities laws, breach
of contract, fraud, and breach of fiduciary and other duties. On
May 4, 2009, DBSI filed an Answer to the Statement of Claim wherein they denied
all allegations. An arbitration panel has been selected and the
parties are now proceeding with discovery.
Item
1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider our risk factors as disclosed in “Part I, Item 1A. Risk Factors”
of our Annual Report on Form 10-K for the year ended December 31, 2008, as
well as our risk factors as disclosed in “Part II, Item 1A. Risk Factors” of our
Interim Reports on Form 10-Q for the three months ended March 31, 2009 and for
the three and six months ended June 30, 2009. The risks disclosed in
these risk factors could materially affect our business, financial condition
and/or operating results. The risks disclosed in our Annual Report on
Form 10-K, our Interim Reports on Form 10-Q and the risks described below may
not be the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial
condition and/or operating results.
Regulatory
Risks
Failure
to obtain regulatory approval for our Augment Injectable Investigational Device
Exemption will prevent us from enrolling patients in the United States for our
Augment Injectable pivotal study.
We have
filed the Augment Injectable ITA application with Health Canada and the Augment
Injectable IDE application with the FDA. Health Canada has approved
our Augment Injectable ITA and, in October 2009, we initiated patient enrollment
in the Augment Injectable Study, a North American pivotal study to assess the
safety and efficacy of Augment Injectable as a substitute for autograft in foot
and ankle fusion procedures. This randomized, controlled study is
intended to support the registration of Augment Injectable in Canada and the
United States.
We have
not yet finalized the details of the protocol and the statistical plan with the
FDA, and will not commence patient enrollment in the study in the United States
before we do so. Based on our most recent discussions with the FDA
regarding the Augment Injectable IDE, we anticipate that there will not be
significant differences between the United States Augment Injectable protocol
and the Canadian protocol, and that we will be permitted to use certain control
(autograft) patients enrolled in our North American Augment Bone Graft pivotal
study to supplement the control group in the new study. We cannot be
certain, however, that the FDA will approve the Augment Injectable IDE, or if
approved, that the protocol will permit the pooling of the study’s patients with
the patients that we are currently enrolling under the Canadian Augment
Injectable ITA or with the control patients included in our Augment
Study.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
Item
3. DEFAULTS UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item
5. OTHER INFORMATION
None.
34
Item
6.
|
EXHIBITS
|
Exhibit
No.
|
Filed
|
Description
|
||
10.1*
|
(a)
|
Employment
Agreement, effective as of July 17, 2009, between the registrant and Dr.
Samuel E. Lynch.
|
||
10.2*
|
(a)
|
Employment
Agreement, effective as of July 17, 2009, between the registrant and
Steven Hirsch.
|
||
10.3*
|
(a)
|
Employment
Agreement, effective as of July 17, 2009, between the registrant and Larry
Bullock.
|
||
10.4*
|
(a)
|
Employment
Agreement, effective as of July 17, 2009, between the registrant and Earl
Douglas.
|
||
10.5*
|
(a)
|
Employment
Agreement, effective as of July 17, 2009, between the registrant and Dr.
Russell Pagano.
|
||
|
||||
31.1
|
(a)
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Executive
Officer
|
||
31.2
|
(a)
|
Rule
13a-14(a)/15d-14(a) Certification of the Chief Financial
Officer
|
||
32.1
|
(a)
|
Section
1350 Certification of the Chief Executive Officer
|
||
32.2
|
(a)
|
Section
1350 Certification of the Chief Financial
Officer
|
(a)
|
Filed
herewith.
|
*
|
Indicates
a management contract or compensatory plan or
arrangement.
|
35
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.
Dated: November
5, 2009
BIOMIMETIC
THERAPEUTICS, INC.
|
|
By:
|
/s/ Samuel E. Lynch
|
Samuel
E. Lynch, D.M.D., D.M.Sc.
|
|
Chief
Executive Officer and President
|
|
By:
|
/s/ Larry Bullock
|
Larry
Bullock
|
|
Chief
Financial Officer
|