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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

 WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

For the period ended December 31, 2007

 

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

 

COMMISSION FILE NUMBER: 0-16128

 

TUTOGEN MEDICAL, INC.

 (Exact name of registrant as specified in its charter)

 

FLORIDA	59-3100165
(State of Incorporation)	(IRS Employer Identification Number)

13709 Progress Boulevard, Box 19, Alachua, Florida 32615

 (Address of Principal Executive Offices)

 

Registrant's telephone number, including area code (386) 462-0402

 

 

Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act). Large accelerated filer  Accelerated filer  x  Non-accelerated filer  Smaller reporting company

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As of January 30, 2008, there were 19,421,289 shares outstanding of the issuer's common stock, par value $.01 per share.

 

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TUTOGEN MEDICAL, INC. AND SUBSIDIARIES

INDEX

PART I.			Page
			No.
	ITEM 1.	Financial Statements.
		Unaudited - Condensed Consolidated Balance Sheets – December 31, 2007 and September 30, 2007.	1
		Unaudited - Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the three months ended December 31, 2007 and 2006.	2
		Unaudited - Condensed Consolidated Statements of Cash Flows for the three-months ended December 31, 2007 and 2006.	3
		Unaudited - Condensed Consolidated Statement of Shareholders’ Equity for the three-months ended December 31, 2007.	4
		Unaudited - Notes to Condensed Consolidated Financial Statements.	5
	ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	11
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk.	16
	ITEM 4.	Controls and Procedures.	16
PART II.
	ITEM 1.	Legal Proceedings.	17
	ITEM 1A.	Risk Factors.	17
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	17
	ITEM 3.	Defaults Upon Senior Securities.	17
	ITEM 4.	Submission of Matters to a Vote of Security-Holders.	17
	ITEM 5.	Other Information.	17
	ITEM 6.	Exhibits.	18
SIGNATURES			18

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PART I. FINANCIAL INFORMATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

(IN THOUSANDS, EXCEPT FOR SHARE DATA)

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1. OPERATIONS AND ORGANIZATION

 

Tutogen Medical, Inc. with its consolidated subsidiaries (the "Company") processes, manufactures and distributes worldwide, specialty surgical products and performs tissue processing services for neuro, orthopedic, reconstructive and general surgical applications. The Company's core business is processing human donor tissue, utilizing its patented TUTOPLAST(R) process, for distribution to hospitals and surgeons. The Company processes at its two manufacturing facilities in Germany and the United States and distributes its products and services in over 20 countries worldwide.

 

2. BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. In the opinion of management, all adjustments necessary in order to make the financial statements not misleading have been made. Operating results for the three-month period ended December 31, 2007 are not necessarily indicative of the results for the fiscal year ending September 30, 2008. The unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007.

 

3. NEW ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the requirements of SFAS 157 and has not yet determined the impact on the Company’s financial statements.

 

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115" which is effective for fiscal years beginning after November 15, 2007. This pronouncement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Management is  currently evaluating the potential impact of this pronouncement on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS 160 "Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51'' (``SFAS 160''). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not have any noncontrolling interests in subsidiaries and believes that SFAS 160 will not have a material impact on its financial statements.

 

In December 2007, the FASB issued SFAS 141 (Revised 2007) "Business Combinations'' (``SFAS 141R''). SFAS 141R establishes principles and requirements for the reporting entity in a business combination, including recognition and measurement in the financial statements of the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years.

 

4. STOCK-BASED AWARDS

 

The Company maintains a 1996 Stock Option Plan (the "Plan") (4,000,000 shares authorized) under which incentive and nonqualified options have been granted to employees, directors and certain key affiliates. Under the Plan, options may be granted at not less than the fair market value of the underlying common stock on the date of grant. Options may be subject to a vesting schedule and expire four, five or ten years from grant. The Plan remains in effect for all options issued during its life.

 

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The Plan was superseded by the Tutogen Medical, Inc. Incentive and Non-Statutory Stock Option Plan (the "New Plan") (1,000,000 shares authorized), adopted by the Board of Directors on December 5, 2005 and ratified by the shareholders on March 13, 2006. On March 19, 2007, the shareholders approved increasing the shares authorized under the New Plan from 1,000,000 to 1,500,000.  Under the New Plan, options may be granted at not less than the fair market value of the underlying common stock on the date of grant. Options may be subject to a vesting schedule and expire four, five or ten years from grant.

 

 

December 31, 2007		International				United States				Consolidated
Gross revenue		$	5,611			$	10,553			$	16,164
Less - intercompany			(1,209	)			-				(1,209	)
Total revenue - third party			4,402				10,553				14,955
Net income (loss) before taxes			1,043				(2,315	)			(1,272	)
Net income (loss)			677				(1,949	)			(1,272	)
Total assets			20,639				39,185				59,824
Property, Plant and Equipment			11,137				3,675				14,812
December 31, 2006		International				United States				Consolidated
Gross revenue		$	5,031			$	8,133			$	13,164
Less - intercompany			(1,701	)			-				(1,701	)
Total revenue - third party			3,330				8,133				11,463
Net income before taxes			225				209				434
Net income			152				209				361
Total assets			18,885				22,539				41,424
Property, Plant and Equipment			10,196				3,803				13,999

 

 

 

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10. (LOSS) EARNINGS PER SHARE

 

The following is a reconciliation of the numerators and denominators of the basic and diluted (loss) earnings per share computations for the three-month periods ended December 31, 2007 and 2006. The Company has excluded 1,738,964 and 423,000 of stock options for the three-month periods ended December 31, 2007 and 2006, respectively, as such stock options are anti-dilutive to the calculation.

 

 

		Three Months Ended
		December 31,
Numerator		2007				2006
Net (loss) income used in calculation of basic and diluted
earnings per share		$	(1,272	)		$	361
Denominator
Weighted-average shares of common stock outstanding
used in calculation of basic earnings per share			19,281,684				16,390,100
Effect of dilutive securites - stock options, warrants
and convertible debentures			-				1,635,189
Weighted-average shares of common stock outstanding
used in calculation of diluted earnings per share			19,281,684				18,025,289
Basic (loss) earnings per share		$	(0.07	)		$	0.02
Diluted (loss) earnings per share		$	(0.07	)		$	0.02

11. LEGAL PROCEEDINGS

 

On October 12, 2005, the Company issued a voluntary recall of all product units which utilized donor tissue received from BioMedical Tissue Services/BioTissue Recovery Services ("BioMedical"). This action was taken because the Company was unable to satisfactorily confirm that BioMedical had properly obtained donor consent. The Company quarantined all BioMedical products in its inventory, having a value of $1,035 and notified all customers and distributors of record regarding this action. In connection with the recall, the Company wrote off $174 of inventory during 2005, and $861 for quarantined inventory at September 30, 2006. Additionally, as of September 30, 2005, the Company had accrued $250 of related costs in connection with the recall. As of December 31, 2007 and September 30, 2007, the accrual for these costs was $0, due in part to actual payments made for such costs and in part to an adjustment made by management during the three-months ended March 31, 2006 to reduce the accrual by approximately $150 as a result of a change in management's estimate of other related costs. The effect of this adjustment was to reduce cost of revenue by approximately $150.

 

In January 2006, the Company was named as one of several defendants in a class action suit related to the BioMedical recall. The Company intends to vigorously defend this matter and does not believe that the outcome of this class action will have a material adverse effect on the Company’s operations, cash flows, financial position or financial statement disclosures.

 

The Company is party to various claims, legal actions, complaints and administrative proceedings arising in the ordinary course of business.  In management’s opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition, cash flows or results of operations.

 

12. RELATED PARTY TRANSACTIONS

 

As of December 31, 2007, Zimmer CEP (formerly Centerpulse) USA Holding Co., a subsidiary of Zimmer Holdings, Inc. (“Zimmer”) was the owner of 27% of the Company's outstanding shares of common stock.

 

The Company has an exclusive license and distribution agreement with Zimmer Spine, Inc., a wholly owned subsidiary of Zimmer, whereby Zimmer Spine has been granted the right to act as the Company's exclusive distributor of bone tissue for spinal applications in the United States. For the three-months ended December 31, 2007 and 2006 product sales to Zimmer Spine totaled $1,150 and $1,293, respectively.  Accounts receivable from Zimmer Spine were $171 and $209 at December 31, 2007 and September 30, 2007.

 

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The Company has also engaged Zimmer Dental, Inc. (“Zimmer Dental”) a wholly owned subsidiary of Zimmer to act as an exclusive sales and marketing representative for the Company's bone tissue for dental applications in the United States and certain international markets.   Under this distribution agreement, the Company ships directly to Zimmer Dental’s customers.  For the three-month periods ended December 31, 2007 and 2006, Zimmer Dental was paid commissions aggregating approximately $2,532 and $1,918 respectively.  Accounts payable to Zimmer Dental total $2,779 and $2,532 at December 31, 2007 and September 30, 2007, respectively.  Accounts receivable from Zimmer Dental totaled $238 at December 31, 2007 and $292 at September 30, 2007.

 

In August 2007, the Company entered into an exclusive distribution agreement with Zimmer Dental, whereby Zimmer Dental will distribute dental products internationally.  For the three-month period ending December 31, 2007, product sales under this new relationship totaled $61.

 

 

On November 12, 2007, the Company entered into an Agreement and Plan of Merger among Regeneration Technologies, Inc. (“Parent”), Rockets FL Corp. (“Merger Sub”) and the Company.  The proposed merger transaction is structured as a tax free stock-for-stock exchange pursuant to which the Company’s shareholders will receive 1.22 shares of the Parent’s common stock for each share of the Company’s common stock. As a result, the Company will become a wholly-owned subsidiary of the Parent. Upon completion of the proposed merger, Parent stockholders will own approximately 55% of the combined company and the Company’s shareholders will own approximately 45% of the combined company, on a fully diluted basis.  The proposed merger is subject to approval by the respective shareholders of the Parent and the Company, as well as customary closing conditions and regulatory approvals. If the Company terminates the Agreement and Plan of Merger, under certain limited conditions, the Company could owe a termination fee of $6.5 million. The proposed merger is estimated to be completed during the second quarter of the Company’s 2008 fiscal year.  Information about the proposed merger is set forth in the joint proxy statement/prospectus filed with the Securities and Exchange Commission on January 23, 2008.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands, except for share data).

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

 

The discussion contained in this report under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and “Risk Factors” as well as those discussed elsewhere in this Report. Statements contained in this Report that are not historical facts are forward-looking statements that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. A number of important factors could cause the issuer's actual results for 2008 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the issuer.

 

BUSINESS

 

 

										Growth Rates
		1st Qtr FY				1st Qtr FY				1st Qtr FY
		2008				2007				2008
Dental		$	6,720			$	5,286				27	%
Spine			1,150				1,293				-11	%
Surgical Specialties			2,683				1,554				73	%
Total U.S.			10,553				8,133				30	%
Gemany			1,231				891				38	%
Rest of World			2,608				1,899				37	%
France			409				403				1	%
Other - Distribution Fees			154				137				12	%
Total International			4,402				3,330				32	%
Total Consolidated		$	14,955			$	11,463				30	%

 

 

Revenue for the three-month period ended December 30, 2007 totaled $14,955 compared to $11,463 for the same period last year or a 30% increase.  U.S. revenues for the three-month period ended December 31, 2007 increased by $2,420  ($8,133 to $10,553) or 30%. The increase in U.S. revenues was fueled by the continuing increase in the demand for the Company's TUTOPLAST(R) bone products for dental applications sold by Zimmer Dental, the Company's sales and marketing representative, and increased demand for the Company’s new hernia repair and breast reconstruction products.  Dental revenues totaled $6,720, which was a record quarter for the Company.  Spine revenues for the quarter decreased slightly by $143 ($1,293 to $1,150) or 11% compared to the same period last year as the Company had multiple new product stocking orders during the first quarter of 2007.  Surgical Specialties revenues (primarily urology, ophthalmology, hernia, breast reconstruction and ENT) for the three-month period ended December 31, 2007 increased by $1,129 ($1,554 to $2,683) or 73% compared to the same period last year due primarily to the new hernia and breast reconstruction products. International revenues for the three-month period ended December 31, 2007 increased $1,072 ($3,330 to $4,402) or 32% compared to the same period last year. The increases are primarily due to increased sales efforts by several key distributors in various countries. In addition, international revenues received a positive impact during the first quarter of 2008 due to the declining exchange rate of the U.S. dollar against the Euro.

 

GROSS MARGIN

 

The Company’s gross margin for three-month period ended December 31, 2007 decreased from 61% to 54% over the same period in the prior year.  The lower margin was due to unfavorable product mix and yields and backorders of certain higher margin products.

 

GENERAL AND ADMINISTRATIVE

 

General and administrative expenses for the three-month period increased over the prior year period by $1,848 ($2,362 to $4,210).  Included in this increase are expenses of $1,615 associated with the proposed merger.  Excluding the merger expenses, general and administrative expenses for the three-month period increased over the prior year period by $233. The increase was primarily due to $227 associated with costs for the quarter related to the compliance with the Sarbanes Oxley Act of 2002.  The Company does not expect to incur any additional material Sarbanes Oxley costs in fiscal year 2008.  During the quarter, the Company incurred $445 in stock option expenses under SFAS 123(R) associated with stock option grants to employees, of which $256 was charged to general and administrative expenses or $158 lower than the same period last year.  The decrease in stock option expense in general and administrative expenses was offset by increased personnel costs. Exclusive of the merger expenses, general and administrative expenses as a percentage of sales declined from 21% to 17 % for the three months ended December 31, 2007 compared to the same period last year.

 

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DISTRIBUTION AND MARKETING

 

Distribution and marketing expenses for the three-month period ended December 31, 2007 increased over the prior year period by $1,112 ($3,441 to $4,553) or 32%. The increase was primarily due to higher marketing fees earned by Zimmer Dental of $580 ($2,164 to $2,744) which is consistent with overall increased dental sales.  The increase is also due to increased personnel costs of $193, stock option expense of $77 and charges related to the declining exchange rate of the U.S. dollar to the Euro of $142. As a percentage of sales, distribution and marketing expenses remained at 30% for the three-months ended December 31, 2007 compared to the same period last year.

 

RESEARCH AND DEVELOPMENT

 

Research and development expenses for the three-month period ended December 31, 2007 increased over the prior year period by $90. As a percentage of revenues, research and development expenses decreased from 5% to 4% for the three months ended December 31, 2007 when compared to the same period last year.

 

INTEREST AND OTHER INCOME

 

Interest and other income, which primarily represents interest income, increased to $130 for the three months ended December 31, 2007 compared to $34 for the prior year period.  This increase is related to interest income earned on the $11,494 net proceeds from the equity financing completed in April 2007.

 

INTEREST EXPENSE

 

Interest expense for the three-month period ended December 31, 2007 decreased over the prior year period by $188 ($274 to $86). The decrease was primarily due to full conversion of the $3,000 convertible debenture into common shares during the three months ended June 30, 2007 and the Company paying off substantially all outstanding balances on the lines of credit with the U.S. and German banks.

 

FOREIGN CURRENCY LOSS

 

The Company had nominal foreign currency exchange losses for the three-month period ended December 31, 2007.

 

INCOME TAX EXPENSE

 

Income tax expense for the three-month period ending December 31, 2007 was $0.  The Company did not receive a tax benefit for losses during the quarter due primarily to certain non-deductible merger related costs.

 

NET LOSS

 

Net loss for the three-month period ended December 31, 2007, totaled $1,272, or $.07 basic and diluted loss per share.  Exclusive of the expenses associated with the proposed merger of $1,615, net income for the three-month period ended December 31, 2007, totaled $343, or $.02 basic and diluted earnings per share compared to $361 or $.02 basic and diluted earnings per share for the same period last year.

 

ACCOUNTS RECEIVABLE

 

The accounts receivable balance increased by $1,015 from the September 30, 2007 balance of $6,477 to the December 31, 2007 balance of $7,492. The increase relates directly to the increased growth in revenues, exclusive of the Zimmer Dental stocking order in Germany last quarter that was paid early.

 

INVENTORY

 

 

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The Company maintains current working capital credit lines totaling 1,500 Euros or $2,209 with two German banks and a $1,500 credit line with a U.S. bank. At December 31, 2007, the Company had outstanding balances of $190 and $0 for the working capital lines in Germany and the U.S., respectively.  Management believes that the working capital as of December 31, 2007 will be adequate to fund ongoing operations.  The Company may seek additional financing to meet the needs of its long-term strategic plan. The Company can provide no assurance that such additional financing will be available, or if available, that such funds will be available on favorable terms. The Company's ability to generate positive operational cash flow is dependent upon increasing processing revenue through increased recoveries by tissue banks in the U.S. and Europe, controlling costs, and the development of additional markets and surgical applications for its products worldwide. While the Company believes that it continues to make progress in these areas, there can be no assurances.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For information regarding the Company’s exposure to certain market risks, see the Annual Report on Form 10-K for the year ended September 30, 2007.  There have been no significant changes to our market risk exposures.

 

In the United States and in Germany, the Company is exposed to interest rate risk. Changes in interest rates affect interest income earned on cash and cash equivalents and interest expense on revolving credit arrangements. Except for an interest rate swap associated with $2,209 of long term debt over six years starting March 31, 2006, the Company does not enter into derivative transactions related to cash and cash equivalents or debt. Accordingly, the Company is subject to changes in interest rates. Based on December 31, 2007 cash and cash equivalents and long-term debt balances, a 1% change in interest rates would have a de-minimus impact on the Company’s results of operations.

 

The value of the U.S. dollar compared to the Euro affects our financial results. Changes in exchange rates may positively or negatively affect revenues, gross margins, operating expenses and net income. The international operation currently transacts business primarily in the Euro.  Intercompany transactions translate from the Euro to the U.S. dollar. Based on December 31, 2007 outstanding intercompany balances, a 1% change in currency rates would have a de-minimus impact on our results of operations.

 

ITEM 4. CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended) that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

In connection with the filing of this Form 10-Q, management evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2007. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2007.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There has not been any change in the Company's internal control over financial reporting during the three-month period ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, those controls.

 

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PART II. OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

Refer to Note 11 of the Unaudited Condensed Consolidated Interim Financial Statements.

 

ITEM 1A. RISK FACTORS.

 

Refer to the section entitled “Risk Factors” contained in the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on January 23, 2008.  Such section is incorporated herein by reference.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

 

ITEM 5. OTHER INFORMATION.

 

None.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

		TUTOGEN MEDICAL, INC.
Date: February 7, 2008		/s/ Guy L. Mayer
		Chief Executive Officer
Date:  February 7, 2008		/s/ L. Robert Johnston, Jr.
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

 

 

 

 

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