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 Quarterly Period Ended: March 31, 2012
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Transition Period From to
Commission File Number: 001-34388
Kensey Nash Corporation
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
36-3316412
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
|
|
|
|
|
|
735 Pennsylvania Drive
Exton, Pennsylvania
|
|
19341
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code: (484) 713-2100
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. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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
x
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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
x
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
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
¨
No
x
As of April 30, 2012, there were 8,699,431 outstanding shares of Common Stock, par value $.001, of the registrant.
KENSEY NASH CORPORATION
QUARTER ENDED March 31, 2012
INDEX
2
PART I - FINANCIAL INFORMATION
Item 1.
|
Condensed Consolidated Financial Statements
|
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2012
|
|
|
June 30,
2011
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,560
|
|
|
$
|
10,219
|
|
Investments
|
|
|
14,817
|
|
|
|
11,722
|
|
Trade receivables, net of allowances for doubtful accounts of $6 for each of the periods ended March 31, 2012 and
June 30, 2011
|
|
|
5,255
|
|
|
|
5,804
|
|
Royalties receivable
|
|
|
5,070
|
|
|
|
6,218
|
|
Other receivables (including $18 and $10 as of March 31, 2012 and June 30, 2011, respectively, due from non-executive
employees)
|
|
|
483
|
|
|
|
509
|
|
Inventory
|
|
|
15,148
|
|
|
|
16,629
|
|
Deferred tax asset, current portion
|
|
|
2,935
|
|
|
|
1,564
|
|
Prepaid expenses and other
|
|
|
1,889
|
|
|
|
2,807
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
70,157
|
|
|
|
55,472
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost
|
|
|
94,372
|
|
|
|
91,891
|
|
Less accumulated depreciation
|
|
|
(37,415
|
)
|
|
|
(33,942
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
56,957
|
|
|
|
57,949
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Deferred tax asset, non-current portion
|
|
|
8,872
|
|
|
|
8,372
|
|
Acquired patents and other intangibles, net of accumulated amortization of $9,123 and $7,731 as of March 31, 2012 and
June 30, 2011, respectively
|
|
|
17,450
|
|
|
|
18,182
|
|
Goodwill
|
|
|
4,366
|
|
|
|
4,366
|
|
Other non-current assets
|
|
|
4,092
|
|
|
|
2,579
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
34,780
|
|
|
|
33,499
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
161,894
|
|
|
$
|
146,920
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,145
|
|
|
$
|
2,455
|
|
Accrued expenses
|
|
|
4,959
|
|
|
|
2,250
|
|
Other current liabilities
|
|
|
2,971
|
|
|
|
5
|
|
Short-term deferred acquisition payments
|
|
|
15,500
|
|
|
|
1,500
|
|
Current portion of debt
|
|
|
1,400
|
|
|
|
1,400
|
|
Deferred revenue
|
|
|
3,304
|
|
|
|
947
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,279
|
|
|
|
8,557
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
27,533
|
|
|
|
28,583
|
|
Deferred revenue, non-current
|
|
|
2,065
|
|
|
|
2,466
|
|
Long-term deferred acquisition payments
|
|
|
|
|
|
|
15,500
|
|
Other non-current liabilities
|
|
|
5,142
|
|
|
|
4,977
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
66,019
|
|
|
|
60,083
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (See Note 13)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 100,000 shares authorized, of which 25,000 shares are designated as Series A junior
participating preferred stock, $.001 par value, no shares issued or outstanding as of March 31, 2012 and June 30, 2011
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 25,000,000 shares authorized, 8,699,431 and 8,612,590 shares issued and outstanding as of
March 31, 2012 and June 30, 2011, respectively
|
|
|
9
|
|
|
|
9
|
|
Capital in excess of par value
|
|
|
11,005
|
|
|
|
7,065
|
|
Retained earnings
|
|
|
87,810
|
|
|
|
82,640
|
|
Accumulated other comprehensive loss
|
|
|
(2,949
|
)
|
|
|
(2,877
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
95,875
|
|
|
|
86,837
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
161,894
|
|
|
$
|
146,920
|
|
|
|
|
|
|
|
|
|
|
See notes to Condensed Consolidated Financial Statements.
3
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Nine Months
Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
16,063
|
|
|
$
|
12,120
|
|
|
$
|
48,073
|
|
|
$
|
33,900
|
|
Royalty income
|
|
|
6,096
|
|
|
|
6,472
|
|
|
|
17,097
|
|
|
|
19,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,159
|
|
|
|
18,592
|
|
|
|
65,170
|
|
|
|
52,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
7,868
|
|
|
|
5,707
|
|
|
|
23,930
|
|
|
|
16,267
|
|
Research and development
|
|
|
6,258
|
|
|
|
4,531
|
|
|
|
17,030
|
|
|
|
12,778
|
|
Selling, general and administrative
|
|
|
3,331
|
|
|
|
2,223
|
|
|
|
8,850
|
|
|
|
6,587
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
18,233
|
|
|
|
|
|
|
|
18,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
17,457
|
|
|
|
30,694
|
|
|
|
49,810
|
|
|
|
53,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) FROM OPERATIONS
|
|
|
4,702
|
|
|
|
(12,102
|
)
|
|
|
15,360
|
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
58
|
|
|
|
72
|
|
|
|
177
|
|
|
|
353
|
|
Interest expense
|
|
|
(460
|
)
|
|
|
(491
|
)
|
|
|
(1,431
|
)
|
|
|
(1,512
|
)
|
Other income
|
|
|
22
|
|
|
|
1
|
|
|
|
24
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(380
|
)
|
|
|
(418
|
)
|
|
|
(1,230
|
)
|
|
|
(1,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX
|
|
|
4,322
|
|
|
|
(12,520
|
)
|
|
|
14,130
|
|
|
|
(2,019
|
)
|
Income tax (expense)/benefit
|
|
|
(1,369
|
)
|
|
|
4,471
|
|
|
|
(4,617
|
)
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
$
|
2,953
|
|
|
$
|
(8,049
|
)
|
|
$
|
9,513
|
|
|
$
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS/(LOSS) PER SHARE
|
|
$
|
0.34
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.10
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS/(LOSS) PER SHARE
|
|
$
|
0.34
|
|
|
$
|
(0.94
|
)
|
|
$
|
1.09
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
8,675,958
|
|
|
|
8,525,786
|
|
|
|
8,651,082
|
|
|
|
8,692,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
8,751,937
|
|
|
|
8,525,786
|
|
|
|
8,747,491
|
|
|
|
8,692,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE
|
|
$
|
0.50
|
|
|
$
|
|
|
|
$
|
0.50
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to Condensed Consolidated Financial Statements.
4
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital
in Excess
of Par
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Value
|
|
|
Earnings
|
|
|
Loss
|
|
|
Income/(Loss)
|
|
|
Total
|
|
BALANCE, JUNE 30, 2011
|
|
|
8,612,590
|
|
|
$
|
9
|
|
|
$
|
7,065
|
|
|
$
|
82,640
|
|
|
$
|
(2,877
|
)
|
|
|
|
|
|
$
|
86,837
|
|
Exercise/Issuance of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
77,650
|
|
|
|
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,573
|
|
Nonvested stock awards
|
|
|
22,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share settlement of stock options
|
|
|
(12,928
|
)
|
|
|
|
|
|
|
(336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(336
|
)
|
Tax benefit from exercise/issuance of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
Nonvested stock awards
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Employee share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
2,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,195
|
|
Nonvested stock awards
|
|
|
|
|
|
|
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,513
|
|
|
|
|
|
|
$
|
9,513
|
|
|
|
9,513
|
|
Cash dividends declared to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,343
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,343
|
)
|
Change in unrealized gain on investments (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
(52
|
)
|
|
|
(52
|
)
|
Change in interest rate swap unrealized loss (net of tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, MARCH 31, 2012
|
|
|
8,699,431
|
|
|
$
|
9
|
|
|
$
|
11,005
|
|
|
$
|
87,810
|
|
|
$
|
(2,949
|
)
|
|
|
|
|
|
$
|
95,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
5
KENSEY NASH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
9,513
|
|
|
$
|
(871
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,740
|
|
|
|
5,013
|
|
Share-based compensation:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,195
|
|
|
|
2,770
|
|
Nonvested stock awards
|
|
|
384
|
|
|
|
411
|
|
Cash-settled stock appreciation rights
|
|
|
791
|
|
|
|
(23
|
)
|
Tax benefit from exercise/issuance of:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
87
|
|
|
|
683
|
|
Nonvested stock awards
|
|
|
35
|
|
|
|
48
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
(106
|
)
|
|
|
(354
|
)
|
Deferred income taxes
|
|
|
(1,634
|
)
|
|
|
(5,258
|
)
|
Loss/(Gain) on disposal/retirement of property, plant and equipment
|
|
|
18
|
|
|
|
(25
|
)
|
Acquired in-process research and development
|
|
|
|
|
|
|
18,233
|
|
Changes in assets and liabilities which provided/(used) cash:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,723
|
|
|
|
1,733
|
|
Prepaid expenses and other current assets
|
|
|
913
|
|
|
|
(2,201
|
)
|
Inventory
|
|
|
1,481
|
|
|
|
(865
|
)
|
Accounts payable and accrued expenses
|
|
|
2,931
|
|
|
|
(3,138
|
)
|
Deferred revenue
|
|
|
1,956
|
|
|
|
(680
|
)
|
Other current and non-current liabilities
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,963
|
|
|
|
15,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(2,604
|
)
|
|
|
(1,607
|
)
|
Acquisition of net assets of Nerites Corporation
|
|
|
(1,493
|
)
|
|
|
(17,068
|
)
|
Purchases of intangible assets
|
|
|
(660
|
)
|
|
|
(1,632
|
)
|
Proceeds from maturity/redemptions of investments
|
|
|
3,610
|
|
|
|
28,065
|
|
Purchases of investments
|
|
|
(7,064
|
)
|
|
|
|
|
Purchase of cost method investment
|
|
|
(481
|
)
|
|
|
(2,453
|
)
|
Note receivable from a cost method investee
|
|
|
(1,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities
|
|
|
(9,747
|
)
|
|
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments of long term debt
|
|
|
(1,050
|
)
|
|
|
(1,050
|
)
|
Cash dividends paid to common stockholders
|
|
|
(2,168
|
)
|
|
|
|
|
Stock repurchase
|
|
|
|
|
|
|
(30,035
|
)
|
Excess tax benefits from share-based payment arrangements
|
|
|
106
|
|
|
|
354
|
|
Proceeds from exercise of stock options
|
|
|
1,237
|
|
|
|
3,814
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,875
|
)
|
|
|
(26,917
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE/(DECREASE) IN CASH
|
|
|
14,341
|
|
|
|
(6,136
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
10,219
|
|
|
|
23,102
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
24,560
|
|
|
$
|
16,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,421
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
5,033
|
|
|
$
|
4,446
|
|
|
|
|
|
|
|
|
|
|
Accrual for purchases of property, plant and equipment
|
|
$
|
468
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
Accrual for Nerites asset acquisition hold-back payment
|
|
$
|
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Retirement of fully depreciated property, plant and equipment
|
|
$
|
534
|
|
|
$
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING INFORMATION:
|
|
|
|
|
|
|
|
|
Net share settlement of stock options
|
|
$
|
(336
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
6
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 1 Condensed Consolidated Financial Statements
Principles of Consolidation and Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (U.S. GAAP) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and notes required by U.S. GAAP
for complete annual financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations
for the three and nine months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the audited condensed
consolidated statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2011 (fiscal 2011).
The Condensed Consolidated Financial Statements include the accounts of Kensey Nash Corporation and its wholly-owned subsidiaries (the Company). All intercompany transactions and balances have been
eliminated.
The preparation of the financial statements in conformity with U.S. GAAP and the notes to the financial statements
requires management to make estimates and assumptions. These estimates and assumptions, which may differ from actual results, will affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues, expenses and cash flows for the periods presented.
All amounts in the Condensed Consolidated Financial Statements for the current and prior period, including these notes, have been
presented in thousands, except for share and per share data, or as otherwise noted. Certain reclassifications have been made to the prior period balances to conform to the current period presentation, such as the condensed aggregated presentation of
total Net plant, property and equipment within the Condensed Consolidated Balance Sheets, the aggregated presentation of Net sales within the Condensed Consolidated Statements of Operations and the aggregated presentation of the changes in current
and long-term deferred revenue within the Condensed Consolidated Statements of Cash Flows.
On May 2, 2012, the Company entered
into an Agreement and Plan of Merger (the Merger Agreement) with Koninklijke DSM N.V. (DSM) and Biomedical Acquisition Corporation, an indirect wholly-owned subsidiary of DSM, pursuant to which, among other things, DSM will commence a tender offer
for all the issued and outstanding shares of the Companys Common Stock, par value $0.001 per share, and following the completion of the tender offer, DSM will acquire the remaining outstanding shares of the Companys Common Stock through
a second step merger, all upon, and subject to, the terms and conditions of the Merger Agreement. See Note 15 for further discussion regarding the Companys Merger Agreement and transaction with DSM.
Revenue Recognition
Sales Revenue
The Company recognizes revenue in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 605-10-S99, Revenue Recognition (ASC 605-10-S99). Sales revenue is recognized when the products are shipped or the services are completed. Advance
payments received for products or services are recorded as deferred revenue and are recognized when the products are shipped or services are performed. The Company reduces sales revenue for estimated customer returns and other allowances. The
Company recorded no net sales return provisions, credits and discounts for the three months ended March 31, 2012 or 2011. For the nine months ended March 31, 2012 and 2011, the Company recorded net sales return provisions, credits and
discounts of $0 and $30, respectively.
In addition, the Company accounts for customer arrangements containing multiple revenue
elements in accordance with FASB ASC Subtopic 605-25, Multiple Element Arrangements (ASC 605-25). The Company considers a variety of factors in determining the appropriate method of accounting for its multiple element agreements,
including whether the various elements can be separated and accounted for individually as separate units of accounting. When the Companys multiple element arrangements are combined into a single unit of
7
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
accounting, revenues are deferred and recognized over the expected period of performance. The specific methodology for the recognition of the revenue is determined on a case-by-case basis
according to the facts and circumstances applicable to each agreement.
Up-front, non-refundable payments that do not have
stand-alone value are recorded as deferred revenue once received and recognized as revenue over the expected period of performance.
The Company evaluates milestone payments on an individual basis and recognizes milestone revenue from non-refundable milestone payments when the earnings process is complete and the payment is reasonably
assured. Non-refundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized using a contingency-adjusted performance model over the period of performance, where revenue is
recognized for the milestone proportionately to the extent of the performance period to date, and the remainder is spread ratably over the remaining performance period of the arrangement.
Royalty Income
The Company recognizes its royalty income at the end of each quarter when the relevant net total end-user product sales are reported by customers to the Company for the quarter, or, with respect to
royalty payments from St. Jude Medical, Inc. under the terms of the Settlement Agreement, on a straight line basis from January 2012 through April 2014. See Note 4 for further description of the Settlement Agreement entered into with, and royalty
income from, St. Jude Medical, Inc. Royalty payments are typically received within 45 days after the end of each calendar quarter.
Geographic Information
The Companys total revenues are attributed to a country based on the location of the customer. A portion of the Companys total revenues, including sales and royalties, are dependent on
U.S.-based customers selling to end-users outside the U.S. The Company primarily sells to U.S.-based customers, however, a portion of total revenues is attributable to European-based customers. The increase in the Companys revenue from
European-based customers in the Companys fiscal year ending June 30, 2012 (fiscal 2012) was primarily due to product sales to Synthes, Inc. (Synthes) resulting from the Companys May 2011 Norian Corporation (Norian) asset
acquisition. In addition, all of the Companys long-lived tangible assets are located in the U.S. The Companys revenues are categorized geographically below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Three
Months Ended March 31,
|
|
|
Revenues for the Nine
Months Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
19,490
|
|
|
$
|
18,407
|
|
|
$
|
57,015
|
|
|
$
|
51,887
|
|
Europe
|
|
|
2,669
|
|
|
|
185
|
|
|
|
8,155
|
|
|
|
1,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,159
|
|
|
$
|
18,592
|
|
|
$
|
65,170
|
|
|
$
|
52,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
Earnings per share are calculated in accordance with FASB ASC Topic 260, Earnings Per Share (ASC 260). Basic and diluted earnings per share (EPS) are computed using the weighted average number
of shares of Common Stock outstanding, with common equivalent shares from options and nonvested stock awards included in the diluted computation when their effect is dilutive. The effect of dilutive options and nonvested stock awards for the three
and nine months ended March 31, 2012 was 75,979 and 96,409 shares, respectively. For the three and nine months ended March 31, 2011, there was no effect of dilutive options and nonvested stock awards. Due to the Companys net loss for
the three and nine months ended March 31, 2011, all common equivalent shares from outstanding options are considered to have been anti-dilutive, and therefore, have been excluded from the computation of diluted EPS for that period. There were
no nonvested stock awards included for the three and nine months ended March 31, 2012 that were anti-dilutive. Options to purchase shares of the Companys Common Stock that were outstanding for the three and nine months ended
March 31, 2012 and 2011, but were not included in the computation of diluted EPS because the options would have been anti-dilutive, are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
Nine months ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
Number of shares underlying options
|
|
|
1,450,439
|
|
|
|
2,129,743
|
|
|
|
1,469,124
|
|
|
|
2,129,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercise price range
|
|
$
|
25.55 - $35.71
|
|
|
$
|
14.51 - $35.71
|
|
|
$
|
23.45 - $35.71
|
|
|
$
|
14.51 - $35.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Goodwill
The Company accounts for goodwill under the provisions of FASB ASC Topic 350, Intangibles Goodwill and Other (ASC 350). Goodwill is not amortized, but is subject to impairment tests on
an annual basis or at an interim date if certain events or circumstances indicate that the asset might be impaired. The most recent annual test as of June 30, 2011 indicated that goodwill was not impaired. There were no indicators of impairment
during the nine-month period ended March 31, 2012.
New Accounting Standards
Adopted:
In December 2010, the FASB issued Accounting Standards Update (ASU) 2010-29, Disclosure of Supplementary Pro Forma Information for
Business Combinations (Topic 805)Business Combinations (ASU 2010-29), to improve consistency in how pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires a description of the
nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. The Companys adoption of this new accounting update on July 1, 2011 did not have a significant impact on the
Companys Condensed Consolidated Financial Statements. The Company will apply ASU 2010-29 to any future business combinations.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS)
(Topic 820)Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 is effective for
the Company in its third quarter of fiscal 2012 and its adoption by the Company on January 1, 2012 did not have a material effect on its Condensed Consolidated Financial Statements.
To Be Adopted:
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to
present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220)Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the implementation of certain provisions of ASU 2011-05. ASU 2011-05 and ASU 2011-12 will be effective for the Company in its
first quarter of fiscal 2013 and the Companys pending adoption is not expected to have a material effect on its Condensed Consolidated Financial Statements, other than the change to the required presentation format.
In September 2011, the FASB issued ASU No. 2011-08, IntangiblesGoodwill and OtherTesting Goodwill for
Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise the two-step goodwill test is not required. ASU
2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which is the Companys fiscal 2013, with early adoption permitted. The Company is currently evaluating the
impact of the adoption of ASU 2011-08 on its Condensed Consolidated Financial Statements.
9
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 2 Investments
Investments as of March 31, 2012 consist of non-taxable high quality municipal obligations. In accordance with FASB ASC Topic 320, Investments Debt and Equity Securities, the
Company has classified its entire investment portfolio as available-for-sale securities with secondary or resale markets, and, as such, its portfolio is reported at fair value with unrealized gains and losses included in Comprehensive Income in
stockholders equity (see Note 11) and realized gains and losses included in Other income/(expense). The following is a summary of available-for-sale securities as of March 31, 2012 and June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
Description
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Fair Value
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
14,681
|
|
|
$
|
136
|
|
|
$
|
|
|
|
$
|
14,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
14,681
|
|
|
$
|
136
|
|
|
$
|
|
|
|
$
|
14,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
Description
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Fair Value
|
|
|
|
|
|
|
Municipal Obligations
|
|
$
|
11,506
|
|
|
$
|
216
|
|
|
$
|
|
|
|
$
|
11,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
11,506
|
|
|
$
|
216
|
|
|
$
|
|
|
|
$
|
11,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2012, the Companys investments had maturities ranging from less than one year to approximately
two years. The fair values of the Companys municipal obligations are obtained from broker quotes using pricing matrices based on inputs that may include quoted prices for identical or similar assets in the municipal bond market and based on
other various inputs that are directly or indirectly observable. As of March 31, 2012, there were no investments with unrealized losses in the Companys portfolio.
Note 3 Inventory
Inventory is stated at the lower of cost (determined by the
average cost method, which approximates first-in, first-out) or market value. Inventory primarily includes the cost of materials utilized in the processing of the Companys products and was as follows as of March 31, 2012 and June 30,
2011:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2012
|
|
|
June 30,
2011
|
|
Raw materials
|
|
$
|
13,126
|
|
|
$
|
14,196
|
|
Work in process
|
|
|
2,364
|
|
|
|
2,150
|
|
Finished goods
|
|
|
1,757
|
|
|
|
2,057
|
|
|
|
|
|
|
|
|
|
|
Gross inventory
|
|
|
17,247
|
|
|
|
18,403
|
|
Provision for inventory obsolescence
|
|
|
(2,099
|
)
|
|
|
(1,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
15,148
|
|
|
$
|
16,629
|
|
|
|
|
|
|
|
|
|
|
Adjustments to inventory are made at the individual part level for estimated excess, obsolescence or impaired balances,
to reflect inventory at the lower of cost or market. Factors influencing these adjustments include changes in demand, technological changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and
quality concerns. Revisions to these adjustments may be required if any of these factors differ significantly from the Companys estimates.
The Company, as a result of its May 2011 Norian asset acquisition (see Note 5), stepped-up the acquired inventory to its fair value as of the acquisition date, in accordance with FASB ASC
Topic 805, Business Combinations (ASC 805). The Companys purchase accounting adjustment to the fair value of inventory,
10
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
commonly referred to as stepped-up value, of $1,286 represented the estimated capitalized manufacturing profit in acquired inventory as of the date of acquisition. This non-recurring,
non-cash charge to Cost of products sold was recognized over the five month inventory turn-over period of June 2011 through October 2011 as the related inventory was sold. The Company expensed $257 during the fourth quarter of fiscal 2011 and $0 and
$1,029 for the three and nine months ended March 31, 2012, respectively.
Note 4 Select Customer Agreements
The following are select customer agreements not otherwise discussed elsewhere in the notes to the Condensed Consolidated Financial
Statements.
St. Jude Medical, Inc.
The License Agreements
Under license agreements with St. Jude Medical, Inc. (St. Jude Medical), St. Jude Medical has exclusive worldwide rights to manufacture and market the
Angio-Seal
TM
Vascular Closure Device (the Angio-Seal), for
which the Company receives a royalty from St. Jude Medical, which is reported within Royalty income.
Royalty income from St.
Jude Medical reported by the Company in prior periods through its second quarter of fiscal 2012 ended December 31, 2011 was based on a royalty percentage on end-user product sales by St. Jude Medical and was recorded by the Company when the
relevant net total end-user product sales were reported by St. Jude Medical to the Company and at the rate at which St. Jude Medical was actually paying royalties.
Effective November 2011, the rate at which St. Jude Medical paid royalties to the Company with respect to the Angio-Seal was reduced from 6% to 2% for U.S. and certain outside-U.S. end-user Angio-Seal
sales. Furthermore, St. Jude Medical informed the Company that they intended to continue to pay the royalty at this reduced rate. Such actions indicated that St. Jude Medical intended to assert that its obligation to pay any royalties to the Company
would end in April 2014. On December 16, 2011, the Company announced that it had agreed with St. Jude Medical to enter into non-binding mediation in an attempt to resolve disputes over royalty payments to the Company relating to the Angio-Seal
device, as well as other related claims.
On March 16, 2012, the Company entered into a settlement agreement (the
Settlement Agreement) with St. Jude Medical, pursuant to which the Company will receive a fixed amount of future royalties totaling $39.0 million from St. Jude Medical, payable in 12 equal quarterly payments beginning March 31, 2012. Royalty
income for the three months ended March 31, 2012 includes royalty income pursuant to the Settlement Agreement. The Company is recognizing the $39.0 million from the Settlement Agreement as royalty income on a straight line basis from January
2012 through April 2014, which is the expiration date of the last to expire of patents exclusively licensed by the Company to St. Jude Medical, which equates to royalty income of $4,179 on a quarterly basis. The Company evaluated the fair value of
the total royalties to be received in connection with the Settlement Agreement and determined the total royalties of $39.0 million from the Settlement Agreement are consistent with royalties the Company would have expected to earn had the royalty
continued to be based upon end-user product sales through April 2014.
The 2012 Collagen Supply Agreement
-
Effective March 16, 2012, as part of the Settlement Agreement, the Company entered into a new collagen supply agreement (the 2012 Collagen Supply Agreement), replacing and effectively extending the previous collagen supply agreement between the
parties which was set to expire on December 31, 2012. Pursuant to the 2012 Collagen Supply Agreement, the Company will continue to be the exclusive outside supplier of collagen plugs to St. Jude Medical for the Angio-Seal through December 2017.
The 2012 Collagen Supply Agreement expands the minimum order levels to be provided over the contract term to 5.0 million
cumulative units, with a minimum of 400,000 units to be provided each calendar year, beginning with calendar year 2013, over the contract term, unless the cumulative total units under the 2012 Collagen Supply Agreement have been met. In addition,
pursuant to the 2012 Collagen Supply Agreement, of the 5.0 million cumulative units, St. Jude Medical has committed to purchase 400,000 units to be shipped in the Companys first half of fiscal 2013 and 1.5 million units to be shipped during
calendar year 2013.
The Companys previous collagen supply agreement (the Previous Collagen Supply Agreement) was entered
into on June 23, 2010, with an initial term from January 1, 2011 to December 31, 2012, and provided for contractual minimum order levels of collagen plugs for calendar years 2011 and 2012. Under the Previous Collagen Supply
11
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Agreement, St. Jude Medical fulfilled its calendar year 2011 contractual minimum order levels during the Companys third and fourth quarters of fiscal 2011, resulting in approximately $4.0
million of collagen plug sales for the Company. Further, under the Previous Collagen Supply Agreement, St. Jude Medical had placed its calendar year 2012 order for approximately $6.4 million of collagen plugs, which includes approximately $4.0
million of orders expected to be shipped in the second half of fiscal 2012 and the remainder, along with the additional 400,000 units under the 2012 Collagen Supply Agreement, as described above, expected to be shipped in the first half of fiscal
2013. The Company recorded $2.2 million of collagen plug sales in the third quarter ended March 31, 2012. Collagen plug sales are recognized when the Company ships the product.
Prior to the Previous Collagen Supply Agreement, the Company was party to a supply agreement with St. Jude Medical in 2005, which expired
on December 31, 2010, pursuant to which the Company was the exclusive supplier of 100% of the collagen plugs and at least 30% of the bioresorbable polymer anchor components for the Angio-Seal.
Stryker Corporation / Orthovita, Inc.
The Company has a development, manufacturing and supply agreement with Orthovita, Inc. (Orthovita) under which the Company develops and commercializes products based on Orthovitas proprietary
Vitoss Bone Graft Substitute Material in combination with the Companys proprietary biomaterials (the Orthovita Agreement). Under the Orthovita Agreement, the Company manufactures the products, while Stryker Corporation (Stryker), which
acquired Orthovita in June 2011, markets and sells the products worldwide. Under the Orthovita Agreement, the Company receives royalty payments on co-developed Vitoss, Vitoss Foam and Vitoss Bioactive Foam products based upon
Strykers net total end-user sales of such products.
In a separate transaction in August 2004, the Company entered into
an agreement (the Assignment Agreement) whereby the Company acquired the intellectual property rights of a third party having rights in the Vitoss technology, an inventor of the Vitoss technology (the Inventor), for $2.6 million. Under
the Assignment Agreement, the Company received all intellectual property rights of the Inventor that had not previously been assigned to Orthovita. Also under the Assignment Agreement, the Company received a royalty on the sale of all Orthovita
products containing the Vitoss technology, up to a total cumulative royalty of $4,036, of which the Company received its final royalty payment in July 2011. The Company recognized $0 and $16 of royalty income during the three and nine months
ended March 31, 2012, respectively. The entire cost of these proprietary rights was amortized over an 83-month period through July 2011.
Synthes, Inc.
On
May 24, 2011, the closing date of the Companys Norian asset acquisition pursuant to an Asset Purchase Agreement (the Asset Purchase Agreement), the Company also entered into a Supply Agreement (the Supply Agreement) with Synthes USA
Sales, LLC, a subsidiary of Synthes. This Supply Agreement provides for the Company to be the exclusive manufacturer and supplier of the Norian product lines acquired by the Company under the Asset Purchase Agreement. Pursuant to the Supply
Agreement, Synthes will purchase all of its requirements for such products exclusively from the Company, on the terms set forth in the Supply Agreement. The Supply Agreement, which was effective on the date of acquisition, has a term of 10 years and
will automatically renew for successive two-year terms. Also, on May 24, 2011, the Company entered into a research and development agreement with Synthes to develop certain related future products.
The Spectranetics Corporation
In connection with the Companys sale of its Endovascular business to The Spectranetics Corporation (Spectranetics) on May 30, 2008, the Company entered into various agreements that provided the
Company with the opportunity for future milestone payments. In the second quarter ended December 31, 2011, the Company achieved a $6.0 million cumulative sales milestone payment in connection with Spectranetics reaching a cumulative $20.0
million in end-user sales from the product lines purchased by Spectranetics. The Company received the entire $6.0 million milestone cash payment in February 2012. In March 2012, the Company entered into an agreement with Spectranetics, pursuant to
which the Company received in March 2012 a final upfront cash milestone payment of $1.7 million from Spectranetics in connection with the Companys product development efforts. Further, the agreement terminated the principal responsibilities of
each party under the various agreements entered into in May
12
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
2008. The Company will recognize the $1.7 million payment as milestone revenue during its fourth quarter ended June 30, 2012 when the Company satisfies its performance obligations under the
terms of the agreement entered into in March 2012 and the earnings process is deemed to be complete. Prior to fiscal 2012, the Company had received total cash milestone payments of $2.5 million for product development and regulatory efforts.
The Company recognized total milestone revenue and other product sales of $560 and $5,897 for the three and nine months ended
March 31, 2012, respectively, and $144 and $433 for the three and nine months ended March 31, 2011, respectively, as a component of Net sales within the Condensed Consolidated Statements of Operations. The remaining deferred milestone
payments of $2,610 will be recognized as revenue over the expected remaining period of performance within the next three months through June 30, 2012.
Note 5 Acquisitions
Fiscal 2011 Asset Acquisitions
During the prior fiscal year ended June 30, 2011, in separate transactions, the Company acquired substantially all of the assets and certain operational liabilities of Nerites Corporation (Nerites)
and certain operational assets and certain liabilities relating to the business and product lines of Norian.
Asset Acquisition of
Nerites Corporation
In January 2011, the Company acquired substantially all of the assets and certain operational
liabilities of Nerites, a privately-held development stage company based in Wisconsin, for $19.7 million. Approximately $16.7 million of the purchase price was paid at the acquisition date, financed from the Companys available cash and
investments on hand. The remaining $3.0 million was held back by the Company under the terms of the acquisition as security for certain potential Nerites indemnification obligations and is expected to be financed with cash on hand; of such hold-back
amount, $1.5 million was released to Nerites in January 2012, upon the first anniversary of the acquisition date, and the remaining $1.5 million will be released in January 2013, the second anniversary of the acquisition date, to the extent that
such hold-back amount is not applied toward any such indemnification obligations. The remaining $1.5 million deferred payment has been classified by the Company as a component of Short-term deferred acquisition payments on the Condensed Consolidated
Balance Sheet as of March 31, 2012.
The Company accounted for the transaction as an asset acquisition based on an
evaluation of the accounting guidance (ASC 805) and considering the early research stage of Nerites technology. The Company concluded that the acquired net assets of Nerites did not constitute a business as defined under ASC 805 due to the
incomplete nature of the inputs and the absence of processes from a market participant perspective. The total purchase price of $19.7 million was allocated to the tangible and intangible acquired assets, such as acquired in-process research and
development (IPR&D), based on their respective estimated fair values as of the date of the acquisition. Acquired IPR&D in the asset acquisition was accounted for in accordance with FASB ASC Topic 730, Research and Development.
Management was responsible for the valuation and considered a number of factors including internal and third party valuations and appraisals. For further information on the transaction and the purchase price allocation, see Note 5
Acquisitions to the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended June 30, 2011.
Asset Acquisition of Norian Corporation
On May 24, 2011 (date
of acquisition), the Company completed its acquisition of certain operational assets and certain liabilities relating to the business and product lines of Norian, a wholly owned subsidiary of Synthes, pursuant to an Asset Purchase Agreement and
related Property Purchase Agreement, for a total purchase price of approximately $26.0 million ($22.0 million pursuant to the Asset Purchase Agreement and $4.0 million pursuant to the Property Purchase Agreement). On the date of acquisition, the
Company paid to Synthes total cash consideration of $11.9 million from the Companys available cash on hand. The Company is required to pay the remaining $14.0 million on the earlier of the date on which the transfer of the manufacturing
operation from the purchased West Chester, Pennsylvania facility to the Companys corporate headquarters facility located in Exton, Pennsylvania has been completed or the 18-month anniversary of the date of acquisition. The $14.0 million
deferred payment has been classified by the Company as a component of Short-term deferred acquisition payments on the Condensed Consolidated Balance Sheet as of March 31, 2012.
13
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
In accordance with ASC 805, the Company has accounted for the Norian asset acquisition
using the purchase method of accounting under U.S. GAAP. Under the purchase method of accounting, the total purchase price of approximately $26.0 million had been allocated to the tangible and intangible acquired assets and assumed liabilities of
Norian, based on their respective estimated fair values as of the date of the acquisition. Management was responsible for the valuation and considered a number of factors including internal and third party valuations and appraisals. For further
information on this transaction and the purchase price allocation, see Note 5 Acquisitions to the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended June 30,
2011.
The results of operations associated with the Norian asset acquisition have been consolidated with those of the Company
since the date of acquisition.
The following pro forma information sets forth the combined revenues and net income of the
Company and the historical unaudited Norian financial information for the prior comparative period for the three and nine months ended March 31, 2011, as if the acquisition had occurred as of July 1, 2010, and includes certain business
combination accounting adjustments for such expenses, including, but not limited to, amortization charges from acquired tangible and intangible assets, acquisition related transaction costs and tax related effects. Historically, Norian did not
maintain certain distinct and separate accounts from Synthes. The historical unaudited Norian financial information reflected the manufacturing and selling of the product lines through inter-company arms-length transactions with Synthes at
negotiated prices. Therefore, the pro forma information presented below is not necessarily indicative of that which would have been attained had the transaction occurred at an earlier date, nor are these results necessarily indicative of future
consolidated results of operations of the Company. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at
the beginning of fiscal 2011.
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
March 31, 2011
|
|
|
For the Nine
Months
Ended
March 31, 2011
|
|
|
|
|
Total revenues
|
|
$
|
22,599
|
|
|
$
|
66,988
|
|
|
|
|
Net (loss)/income
|
|
$
|
(7,800
|
)
|
|
$
|
153
|
|
|
|
|
Basic (loss)/earnings per share
|
|
$
|
(0.91
|
)
|
|
$
|
0.02
|
|
|
|
|
Diluted (loss)/earnings per share
|
|
$
|
(0.91
|
)
|
|
$
|
0.02
|
|
Note 6 Acquired Patents and Other Intangibles
The costs of internally developed patents are expensed when incurred due to the long development cycle for products and the
Companys inability to measure the recoverability of these costs when incurred. From time to time, the Company has acquired portfolios of patents and other intangibles that it believes are beneficial and complementary to the Companys
existing intellectual property and material processing knowledge platform. These acquisitions have included a portfolio of puncture closure patents acquired in November 1997, patents acquired in the asset purchase of THM Biomedical, Inc. (THM) in
2000, certain intellectual property and other rights related to the Vitoss product line acquired from a third party inventor in 2004 (See Note 4), and certain assets of MacroPore Biosurgery, Inc. (MacroPore) acquired in 2007, as well as other
smaller purchases of certain other intangibles.
In fiscal 2011, the Company acquired the following intangible assets:
On December 21, 2010, in addition to making a non-controlling minority equity investment in Orteq Ltd. (Orteq
Sports Medicine or Orteq) (see Note 7), the Company entered into a manufacturing and supply agreement with Orteq and acquired the exclusive worldwide manufacturing rights of the Actifit
®
(Actifit) product line for a period of 10 years beginning with the date of its first U.S. commercial sale. The Company assigned $1,632 to the cost of the
manufacturing rights and related costs associated with the transaction. Actifit is a biocompatible
14
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
synthetic meniscal scaffold, which received its CE Mark approval in 2008 for the treatment of irreparable partial meniscal tears and is currently being sold throughout Europe. The acquired
manufacturing rights are being amortized over the estimated period of economic benefit of approximately 12 years.
On
January 28, 2011, the Company acquired certain intangible assets of Nerites through an asset acquisition transaction (see Note 5). The Company assigned $1,813 of the total acquisition costs to the intangible assets, which are being amortized
over the estimated remaining period of economic benefit ranging from 2 to 25 years, depending on the intangible asset.
On
May 24, 2011, the Company acquired an intangible asset (customer relationship) of Norian through the Norian asset acquisition transaction (see Note 5). Under the purchase method of accounting, the Company assigned $13,790 of the total purchase
price to the intangible asset (customer relationship), which is being amortized over the estimated remaining period of economic benefit of 15 years.
The Company amortizes the entire cost of acquired patents and intangible assets over their respective estimated remaining periods of economic benefit, ranging from approximately 1 to 25 years as of
March 31, 2012. The gross carrying amount of such patents and intangible assets as of March 31, 2012 was $26,573, with accumulated amortization of $9,123. The gross carrying amount of such patents and intangible assets as of June 30,
2011 was $25,913, with accumulated amortization of $7,731.
Amortization expense on these patents and intangible assets was $492 and $1,392
for the three and nine months ended March 31, 2012, respectively, and $266 and $743 for the three and nine months ended March 31, 2011, respectively.
The table below details the estimated amortization expense as of March 31, 2012 for the next five fiscal years on the patents and intangible assets acquired by the Company:
|
|
|
|
|
Fiscal year ending June 30,
|
|
Amortization
Expense
|
|
|
|
2012
|
|
$
|
1,856
|
|
2013
|
|
|
1,505
|
|
2014
|
|
|
1,396
|
|
2015
|
|
|
1,215
|
|
2016
|
|
|
1,198
|
|
Thereafter
|
|
|
11,672
|
|
Note 7 Cost-Method Investment
The Company has made a long-term investment in Orteq, a privately-held medical device company headquartered in London, United Kingdom,
specializing in the field of biodegradable polymer technology for meniscus repair, through various transactions since December 2010, including a non-controlling minority cost-method investment, purchase of exclusive worldwide manufacturing rights
(See Note 6) and a cash advance, structured as convertible debt. As of March 31, 2012, the aggregate value of the Companys investments, net of amortization, was $5,584.
The Company made an initial cost-method investment recorded at a value of $2,453 in preferred shares of Orteq in December 2010 and an additional investment recorded at a value of $481 in January 2012. The
Company has accounted for these investments in Orteq under the cost method.
On August 19, 2011, at the Companys option, and
pursuant to an ancillary agreement, the Company made an additional investment in Orteq of approximately 637 British Pounds, or $1,055, in the form of a cash advance, structured as convertible debt, to Orteq, accounted for as a note receivable from a
cost-method investee and reported within Other non-current assets in the Condensed Consolidated Balance Sheet as of March 31, 2012. As previously disclosed, under the investment agreement with Orteq, the Company had committed to making an
additional minority cost-method investment of approximately 637 British Pounds, for preferred shares of Orteq, payable in U.S. Dollars, if Orteq receives approval or conditional approval from the FDA to conduct an investigational device exemption
for a product pivotal trial by the second anniversary of the Companys initial investment, which is December 21, 2012, or otherwise earlier, at the Companys option, prior to December 21, 2012. Under the ancillary
15
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
agreement, the Company has the option to convert its cash advance into preferred shares of Orteq as an additional cost-method investment to satisfy the prior obligation under the investment
agreement, or if it does not convert its cash advance to shares, the cash advance and accrued interest will be payable by Orteq to the Company prior to August 2016 and the Company would still be required to make the additional investment pursuant to
the investment agreement, subject to the terms and conditions thereof.
The cost-method investment was assessed for impairment, and it was
determined that, as of March 31, 2012, no impairment existed.
The Company does not have the ability to exercise significant influence
over Orteqs financial and operating policies. The Companys overall ownership interest is less than 20% as of March 31, 2012, and in the event the Company, pursuant to its agreements with Orteq, converts its investments into
preferred shares, the Companys ownership interest in Orteq is expected to continue to be less than 20%.
Note 8 Accrued Expenses
As of March 31, 2012 and June 30, 2011, accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
June 30, 2011
|
|
Accrued payroll and related compensation
|
|
$
|
2,326
|
|
|
$
|
1,134
|
|
Income taxes payable
|
|
|
673
|
|
|
|
|
|
Other
|
|
|
1,960
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,959
|
|
|
$
|
2,250
|
|
|
|
|
|
|
|
|
|
|
Note 9 Debt
Secured Commercial Mortgage
- On May 25, 2006, the Company entered into an agreement for a $35.0 million Secured
Commercial Mortgage (the Mortgage) with Citibank, F.S.B. The Mortgage is secured by the Companys facility and land in Exton, Pennsylvania and bears interest at one-month LIBOR plus an 0.82% Loan Credit Spread. At March 31, 2012, the
outstanding Mortgage balance was $28.9 million.
The Mortgage contains various conditions to borrowing, including affirmative, restrictive and
financial maintenance covenants. Certain of the more significant covenants require the Company to maintain a Minimum Fixed Charge Coverage Ratio of EBITDA (as defined in the Mortgage) to debt service equal to or greater than 1.50to1.0
and an interest rate hedge of at least 50 percent of the outstanding principal balance of the Mortgage through an interest rate protection product reasonably acceptable to Citibank, F.S.B.
Interest Rate Swap Agreement
-
In order to hedge its interest rate risk under the Mortgage, the Company entered into a $35.0 million aggregate 10-year fixed interest rate swap
agreement (the Swap) with Citibank, N.A. in May 2006. The Swap is secured by the Companys facility and land in Exton, Pennsylvania. The Company is using the Swap as a cash flow hedge of the Companys interest payments under the Mortgage.
The Swap converts the variable LIBOR portion of the Mortgage payments to a fixed rate of 6.44% (5.62% fixed interest rate plus a 0.82% Loan Credit Spread).
The Company follows the provisions of FASB ASC Topic 815, Derivatives and Hedging, to account for the Swap as a cash flow hedge due to the hedging of forecasted interest rate payments and to
record the Swap at its fair value on the Condensed Consolidated Balance Sheets. This value represents the estimated amount the Company would receive or pay to terminate the Swap. As such, the Company records a mark-to-market adjustment at the end of
each period. In establishing the fair value, the Company includes and evaluates dealer quotes, the counterpartys ability to settle the asset or liability and the counterpartys creditworthiness. Additionally, the Company considers current
interest rates, collateralization of the Mortgage and the Swap by the land and building and any adverse Company or industry specific events that would impact the fair value measurement.
16
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
The Company utilizes the Hypothetical Derivative Method in determining hedge effectiveness each period.
Transactions that would cause ineffectiveness would include the prepayment of the Mortgage or an adverse Company or industry specific event that would impact the fair value measurement, which would result in the Company reclassifying the ineffective
portion into interest expense within the Condensed Consolidated Statements of Operations and an impact to the Condensed Consolidated Statements of Cash Flows. If the conditions underlying the Swap or the hedge item do not change, the Swap will be
considered to be highly effective. The effective portion of the Swaps gain or loss, due to a change in the fair value, is reported as a component of Accumulated other comprehensive loss and has no impact on the Condensed Consolidated
Statements of Operations or Cash Flows.
As of March 31, 2012 and June 30, 2011, the fair value of the Swap was in an unrealized
loss position of $5,142 ($3,030, net of tax) and $4,920 ($3,009, net of tax), respectively, with the gross unrealized loss position included in Other non-current liabilities and the net of tax position included in Accumulated other comprehensive
loss on the Condensed Consolidated Balance Sheets. Interest expense under the Swap is recorded in earnings at the fixed rate set forth in the Swap.
For the three and nine months ended March 31, 2012 and 2011, no amounts were recognized in interest expense due to ineffectiveness or amounts excluded from the assessment of hedge effectiveness. The
Company does not currently anticipate any material unrealized losses to be recognized within the subsequent 12 months as the anticipated transactions under the Mortgage and Swap occur, unless the Mortgage, or a portion thereof, is prepaid.
The following table summarizes the fair value of the Swap as of March 31, 2012 and June 30, 2011 on the Condensed Consolidated
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
Derivative Designed as a Hedging Instrument
|
|
Location in the Condensed
Consolidated Balance
Sheet
|
|
Fair Value as of
March 31, 2012
|
|
|
Fair Value as of
June 30, 2011
|
|
|
|
|
|
Interest Rate Swap Contract
|
|
Other non-current liabilities
|
|
$
|
5,142
|
|
|
$
|
4,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative
|
|
|
|
$
|
5,142
|
|
|
$
|
4,920
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Swaps impact on Accumulated other comprehensive loss and earnings for the three
and nine months ended March 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in Other Comprehensive
Loss on Derivative
(Effective Portion)
|
|
|
|
For the Nine Months Ended March 31,
|
|
Derivative in Cash Flow Hedging Relationship
|
|
2012
|
|
|
2011
|
|
|
|
|
Interest Rate Swap Contract
|
|
$
|
(1,427
|
)
|
|
$
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,427
|
)
|
|
$
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain/(Loss) Reclassed From
Accumulated
Other Comprehensive Loss Into Income
(Effective Portion)
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
Location of Loss Reclassed From Accumulated Other Comprehensive
Loss Into Income
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(390
|
)
|
|
$
|
(400
|
)
|
|
$
|
(1,205
|
)
|
|
$
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(390
|
)
|
|
$
|
(400
|
)
|
|
$
|
(1,205
|
)
|
|
$
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain / (Loss) Recognized in Income on Derivative
(Ineffective Portion)
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
Location of Loss Reclassed From Accumulated Other Comprehensive
Loss Into Income
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
- On May 26, 2011, the Company entered into a Loan and Agency Agreement (the Credit
Agreement) with Wells Fargo Bank, National Association (Wells Fargo). The Credit Agreement provides for a three-year, unsecured revolving credit facility (Revolving Credit Facility) of $35.0 million, evidenced by a Revolving Credit Note, dated
May 26, 2011, issued by the Company in favor of Wells Fargo.
Under the terms of the Credit Agreement, the Company may borrow up to the
aggregate amount of the unused commitment under the Revolving Credit Facility. The Revolving Credit Facility may be used for the working capital and general corporate purposes of the Company, including permitted acquisitions and capital
expenditures.
Borrowings under the Revolving Credit Facility will, at the Companys option, bear interest at a rate based upon the
London Inter Bank Offering Rate (LIBOR) as in effect for one, two, three or six-month periods, as elected by the Company, plus an applicable margin, or if no election is made, the one-month LIBOR plus an applicable margin. The Credit Agreement will
terminate on May 25, 2014, unless the lenders elect to extend the Credit Agreement for up to two additional one-year periods upon the request of the Company, and contains customary representations, covenants and events of default. Certain of
the more significant covenants set forth in the Credit Agreement require the Company to maintain (i) a maximum funded debt to EBITDA calculation of 3.0to1.0; (ii) a minimum tangible net worth of $35.0 million; (iii) a
minimum fixed charge coverage ratio of 1.5to1.0; and (iv) impose restrictions on indebtedness and liens against the Companys assets. As of March 31, 2012, there were no borrowings on the Revolving Credit Facility.
Note 10 Fair Value of Financial Instruments
The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures, for fair value
measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a
recurring basis, including cash equivalents, available-for-sale securities and the Swap. The Companys assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of
financial assets and financial liabilities and their placement within the fair value hierarchy. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value, as follows
|
|
|
Level 1 - Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
|
|
Level 2 - Inputs that are other than quoted prices in active markets for identical assets and liabilities, inputs that are quoted prices for identical
or similar assets or liabilities in inactive markets, or other inputs that are either directly or indirectly observable; and
|
|
|
|
Level 3 - Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
18
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
The following table presents the Companys financial assets and liabilities measured at fair value
on a recurring basis as of March 31, 2012 and June 30, 2011:
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
Fair Value Measurements
as of
March 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a)
|
|
$
|
17,210
|
|
|
$
|
|
|
|
$
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations (See Note 2)
|
|
|
|
|
|
|
14,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value
|
|
$
|
17,210
|
|
|
$
|
14,817
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (See Note 9)
|
|
$
|
|
|
|
$
|
5,142
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities Measured at Fair Value
|
|
$
|
|
|
|
$
|
5,142
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
Fair Value Measurements
as of
June 30, 2011
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds (a)
|
|
$
|
9,594
|
|
|
$
|
|
|
|
$
|
|
|
Available-for-sale marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Obligations (See Note 2)
|
|
|
|
|
|
|
11,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value
|
|
$
|
9,594
|
|
|
$
|
11,722
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (See Note 9)
|
|
$
|
|
|
|
$
|
4,920
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities Measured at Fair Value
|
|
$
|
|
|
|
$
|
4,920
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a)
|
The Companys money market funds are classified along with the Companys cash balances as Cash and cash equivalents within the Condensed Consolidated Balance
Sheets. Money market funds are valued at quoted prices in active markets.
|
The Company follows the disclosure provisions of FASB
ASC Topic 825, Financial Instruments, for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of March 31, 2012, the financial assets and liabilities recorded on the Condensed
Consolidated Balance Sheets that are not measured at fair value on a recurring basis include the cost-method investment; accounts receivable, net; non-current assets; accounts payable; and debt obligations. The carrying values of accounts
receivable, net; accounts payable and current debt obligations approximate fair value due to the short-term nature of these instruments. The cost-method investment is carried at cost and its fair value is evaluated based on, among other factors, the
investees most recent financing and discounted cash flow models as of March 31, 2012. The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently
available to the Company for debt with similar terms, remaining payments and considerations of the Companys creditworthiness and are considered Level 2 inputs of the three-tier valuation hierarchy. The Company determined that the recorded book
value of long-term debt approximated fair value at March 31, 2012 due to the variable LIBOR portion of the Mortgage payments.
Note 11 Comprehensive Income
The Companys comprehensive income is shown on the Condensed Consolidated Statement of Stockholders Equity as of
March 31, 2012 and June 30, 2011, and is comprised of net income and the changes in net unrealized gains and losses on the Companys available-for-sale securities and the changes in the fair value of the Swap. The total comprehensive
income for the three and nine months ended March 31, 2012 was $3,079 and $9,441, respectively. The total comprehensive loss for the three and nine months ended March 31, 2011 was $7,744 and $409, respectively. The net tax benefit for the
nine months ended March 31, 2012 and 2011 of other comprehensive income was $229 and $249, respectively.
19
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 12 Stockholders Equity
Dividends
The
Companys Board of Directors adopted a dividend policy in January 2012, whereby the Board of Directors expected to declare a total annual dividend of $1.00 per share of the Companys Common Stock, to be paid in equal quarterly
installments. Pursuant to this dividend policy, the Board of Directors has declared two quarterly cash dividends during the quarter ended March 31, 2012, in each case of $0.25 per share of the Companys Common Stock. Total cash dividends
declared to stockholders of record of the Companys Common Stock were $4,343 during both of the three and nine months ended March 31, 2012. Cash dividends paid to stockholders of record were $2,168 during both of the three and nine months ended
March 31, 2012. However, under the Merger Agreement entered into with DSM, the Company is not permitted to (without the consent of DSM), and does not intend to, declare any additional dividends on the Companys Common Stock during the pendency
of the transaction. See Note 15 for further information regarding the Companys Merger Agreement and transaction with DSM.
The dividend
declared by the Board of Directors on March 13, 2012, and payable on May 31, 2012, is expected to approximate an aggregate amount of $2,175, and is included as a component of Other current liabilities on the Condensed Consolidated Balance
Sheets as of March 31, 2012. The Board of Directors declared the following dividends during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
Total Amount
Declared
|
|
|
Payment Date
|
January 3, 2012
|
|
$
|
0.25
|
|
|
January 31, 2012
|
|
$
|
2,168
|
|
|
February 29, 2012
|
March 13, 2012
|
|
$
|
0.25
|
|
|
April 30, 2012
|
|
$
|
2,175
|
|
|
May 31, 2012
|
Stock Repurchase Program
From time to time, the Company has made repurchases of its stock, as authorized by the various stock repurchase programs established by the Companys Board of Directors, and through equity incentive
plan transactions. On June 16, 2010, the Company announced that its Board of Directors had approved a stock repurchase program allowing the Company to repurchase up to a total of $30.0 million of its issued and outstanding shares of Common
Stock. This program was completed prior to the Companys second quarter ended December 31, 2010, and accordingly, as of March 31, 2012, there were no amounts remaining to repurchase shares of Common Stock under that stock repurchase
program.
During the prior fiscal year, for the nine months ended March 31, 2011, the Company repurchased and retired a total of
1,175,738 shares of Common Stock that were settled at a cost of $30.0 million, or an average price per share of $25.52, using available cash. Included in these totals were 34,400 shares that were repurchased in June 2010, but settled in July 2010 at
a cost of $811, or an average price per share of $23.58.
Share-Based Compensation
The Company accounts for its share-based compensation plans in accordance with FASB ASC Topic 718, Compensation Stock Compensation (ASC
718). Compensation expense related to share-based awards is classified on the Condensed Consolidated Statements of Operations within the same line items as salary or consulting expense with respect to the award recipients, and is recorded over the
awards relevant vesting periods. Compensation expense related to share-based awards granted to the members of the Board of Directors is recorded as a component of Selling, general and administrative expense on the Condensed Consolidated
Statements of Operations.
On December 7, 2011, the Company held its 2011 Annual Meeting of Stockholders at which the stockholders of the
Company considered and approved the Companys Ninth Amended and Restated Kensey Nash Corporation Employee Incentive Compensation Plan (the Amended Plan). The Amended Plan became effective immediately upon the stockholders approval. The
Amended Plan authorized an additional 600,000 shares of the Companys Common Stock for issuance under the Amended Plan of which only 85,000 shares may be issued as nonvested stock, bonus stock or stock-based awards other than stock options or
cash-settled stock appreciation rights (SARs).
20
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
The following table provides additional information related to the Companys share-based
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Estimated
Unrecognized
Share-based
Compensation
as of March 31,
|
|
|
Weighted Average
Period Remaining
of Share-based
Compensation
as of March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2012
|
|
Stock options
|
|
$
|
646
|
|
|
$
|
915
|
|
|
$
|
2,581
|
|
|
|
1.19
|
|
Non-vested stock awards
|
|
|
136
|
|
|
|
120
|
|
|
|
912
|
|
|
|
1.99
|
|
SARs
|
|
|
635
|
|
|
|
(121
|
)
|
|
|
3,725
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
|
|
$
|
1,417
|
|
|
$
|
914
|
|
|
$
|
7,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Stock options
|
|
$
|
2,195
|
|
|
$
|
2,770
|
|
Non-vested stock awards
|
|
|
384
|
|
|
|
411
|
|
SARs
|
|
|
791
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
|
|
$
|
3,370
|
|
|
$
|
3,158
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation
expense for the three and nine months ended March 31, 2012 was $496 and $1,180, respectively. The income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation expense for the three and nine
months ended March 31, 2011 was $320 and $1,105, respectively.
Stock Options
Stock options have historically been granted to executive officers, other employees and members of the Board of Directors of the Company, as well as
non-employee outside consultants (collectively referred to as participants), under the Amended Plan and prior versions of this incentive compensation plan (collectively, the Employee Plan). The Company also has a Non-employee Directors Stock
Option Plan (the Directors Plan). No shares are available for new awards under the Directors Plan, and any awards of the type granted previously under the Directors Plan are now granted under the Employee Plan. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes option-pricing model.
For its fiscal 2012 annual grants to
employees, the Company granted cash-settled stock appreciation rights (SARs) to employees of the Company under the Employee Plan. See Cash-Settled Stock Appreciation Rights (SARs) below. The Company may, from time to time, grant additional
share-based compensation under the Employee Plan to new and existing employees.
For the nine months ended March 31, 2012, the Company
granted options to an employee of the Company under the Employee Plan, with an exercise price equal to the fair market value of the Companys Common Stock on the grant date, to purchase an aggregate of 1,000 shares of the Companys Common
Stock. The total options granted were valued at $10.82 per share on the grant date under the Black-Scholes option-pricing model, using the fair value assumptions noted in the table below and are being expensed over the three-year vesting period.
During the nine months ended March 31, 2011, the Company granted options to employees of the Company under the Employee Plan, with
exercise prices equal to the fair market values of the Companys Common Stock on the respective grant dates, to purchase an aggregate of 385,825 shares of the Companys Common Stock, which included 2,200 shares underlying unvested stock
options that were modified. The total options granted were valued at a weighted average value of $11.15 per share on the grant date under the Black-Scholes option-pricing model, using the fair value assumptions noted in the table below and are being
expensed over the three-year vesting period applicable to all of these options.
21
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2012
|
|
2011
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
36%
|
|
35% - 39%
|
Weighted average volatility
|
|
36%
|
|
37.60%
|
Risk-free interest rate
|
|
1.408%
|
|
.13% - 2.255%
|
Expected term (years)
|
|
6.37
|
|
0.25 - 7.75
|
Options are exercisable over a maximum term of 10 years from the date of grant and typically vest over periods of zero to
four years from the grant date. Expected volatilities are based on historical volatility of the Companys Common Stock and other factors. The Company uses historical data to estimate option exercise and employee termination activity within the
valuation model; disparate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected terms of granted options are derived from historical exercise behavior and represent the
periods of time that granted options are expected to be outstanding.
A summary of the stock option activity under the Employee Plan for the
nine months ended March 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Plan
|
|
|
Directors Plan
|
|
|
|
Shares
|
|
|
Weighted
Avg
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Shares
|
|
|
Weighted
Avg
Exercise
Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
1,665,937
|
|
|
$
|
28.09
|
|
|
$
|
1,873
|
|
|
|
141,000
|
|
|
$
|
23.86
|
|
|
$
|
437
|
|
Granted
|
|
|
1,000
|
|
|
$
|
28.50
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Cancelled
|
|
|
(24,900
|
)
|
|
$
|
29.35
|
|
|
|
|
|
|
|
(9,000
|
)
|
|
$
|
32.00
|
|
|
|
|
|
Exercised
|
|
|
(38,650
|
)
|
|
$
|
18.93
|
|
|
|
|
|
|
|
(39,000
|
)
|
|
$
|
21.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
|
1,603,387
|
|
|
$
|
28.29
|
|
|
$
|
3,107
|
|
|
|
93,000
|
|
|
$
|
24.04
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares vested + expected to vest
|
|
|
1,594,576
|
|
|
$
|
28.29
|
|
|
$
|
3,101
|
|
|
|
93,000
|
|
|
$
|
24.04
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable portion
|
|
|
1,249,971
|
|
|
$
|
28.21
|
|
|
$
|
2,856
|
|
|
|
93,000
|
|
|
$
|
24.04
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at March 31, 2012
|
|
|
1,133,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Stock Awards
Nonvested stock awards have historically been granted to the non-employee members of the Board of Directors, executive officers, certain other management of the Company and a non-employee outside
consultant, pursuant to the Employee Plan, and generally vest in three equal annual installments based solely on continued employment or service, as applicable, with the Company. Nonvested stock awards are commonly referred to as
restricted
stock
, but ASC 718 reserves that term for fully vested and outstanding shares, the sale of which is contractually or governmentally prohibited for a specified period of time. Fair value is based upon the closing price of the Companys
Common Stock on the date of grant. The following table outlines the nonvested stock awards activity for the nine months ended March 31, 2012.
22
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nonvested Stock Awarded
Under the Employee Plan
|
|
|
|
Shares
|
|
|
Weighted
Average Price
Per Share
|
|
|
|
|
Balance at June 30, 2011
|
|
|
48,729
|
|
|
$
|
22.89
|
|
Granted:
|
|
|
|
|
|
|
|
|
Non-employee Directors
|
|
|
21,377
|
|
|
|
26.08
|
|
Issued:
|
|
|
|
|
|
|
|
|
Executive officers & management
|
|
|
(2,500
|
)
|
|
|
17.00
|
|
Non-employee Directors
|
|
|
(19,619
|
)
|
|
|
22.36
|
|
Forfeited:
|
|
|
|
|
|
|
|
|
Non-employee Directors
|
|
|
(5,518
|
)
|
|
|
20.84
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
|
42,469
|
|
|
$
|
25.36
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled Stock Appreciation Rights (SARs)
Cash-settled SARs awards are granted to executive officers and other eligible employees, providing each participant with the right to receive payment in cash, upon exercise, for the appreciation in market
value of a specified number of shares of the Companys Common Stock over the awards exercise price. The per-share exercise price of a cash-settled SAR is equal to the closing market price of a share of the Companys Common Stock on
the date of grant.
On September 20, 2011, the Company granted cash-settled SARs awards to executive officers and other eligible
employees under the Employee Plan. The Company granted a total of 484,900 cash-settled SARs, which are to vest over a period of three years, with a maximum term of seven years, in each case from the date of grant. On the date of grant, the per share
fair market value was $7.72. The number of cash-settled SARs awarded refers to the number of shares underlying the awards.
As of
March 31, 2012, the average per share fair market value of the cash-settled SARs from the September 20, 2011 grant was $9.79 and the related liability for these cash-settled SARs was $796. These cash-settled SARs will continue to be
remeasured at each reporting period until all awards are settled. The Company cannot predict the market value of its Common Stock at the time of exercise for these grants, nor the magnitude of exercises at any particular time over the terms of these
grants. Cash-settled SARs are classified as liability awards as a component of Other current liabilities on the Condensed Consolidated Balance Sheets, based on the vested status of the award, among other factors, with fluctuations in the fair market
value recorded as increases or decreases in compensation cost.
During the fiscal year ended June 30, 2007, the Company had granted
cash-settled SARs to eligible employees and executive officers. These awards expired in October 2011, and as of March 31, 2012, there was no remaining liability associated with these grants.
The following table outlines the cash-settled SAR activity for the nine months ended March 31, 2012.
23
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average Price
Per Share
|
|
Balance at June 30, 2011
|
|
|
94,700
|
|
|
$
|
31.35
|
|
Granted:
|
|
|
|
|
|
|
|
|
Executive officers
|
|
|
180,430
|
|
|
|
25.64
|
|
Eligible employees
|
|
|
304,470
|
|
|
|
25.64
|
|
Expired:
|
|
|
|
|
|
|
|
|
Executive officers
|
|
|
(94,000
|
)
|
|
|
31.36
|
|
Eligible employees
|
|
|
(700
|
)
|
|
|
29.88
|
|
Forfeited:
|
|
|
|
|
|
|
|
|
Eligible employees
|
|
|
(5,500
|
)
|
|
|
25.64
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
|
479,400
|
|
|
$
|
25.64
|
|
|
|
|
|
|
|
|
|
|
The fair value of each cash-settled SAR award is remeasured at each reporting period using the Black-Scholes
option-pricing model with the assumptions noted in the following table for the nine months ended March 31, 2012 and 2011.
|
|
|
|
|
|
|
Nine Months Ended
March
31,
|
|
|
2012
|
|
2011
|
Dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
35%
|
|
35%
|
Risk-free interest rate
|
|
0.625% - 0.892%
|
|
0.216% - 0.333%
|
Expected term (years)
|
|
4.00 - 4.50
|
|
0.78 - 1.13
|
Expected volatilities are based on historical volatility of the Companys Common Stock and other factors. The
Company uses historical data to estimate employee termination behavior within the valuation model; disparate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. As the Company does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected life, it uses the simplified method as permitted by ASC 718-10. The simplified method calculates the expected life of
an equity award equal to the time from grant to the midpoint between the vesting date and contractual term, taking into account all vesting tranches. The risk-free rate for periods within the contractual life of the cash-settled SAR is based on U.S.
treasuries with constant maturities in effect at the time of valuation.
Note 13 Commitments and Contingencies
Certain Compensation and Employment Agreements
The Company has entered into employment agreements with each of its executive officers. As of March 31, 2012, these employment agreements provided for, among other things, annual base salaries in an
aggregate amount of not less than $2,135, from that date through the end of fiscal 2014.
Purchase Commitments
As of March 31, 2012, the Company had outstanding non-cancelable and cancelable purchase commitments in the amount of $4,818 related to inventory,
capital expenditures and other goods and services.
Research and Development Contractual Obligations
The Company has entered into research and development service agreements with certain customers, pursuant to which the Company is to share certain
regulatory and clinical costs associated with future research and development activities. The amounts and timing of any such future payment obligations cannot currently be determined. Research and development costs, if any, under these agreements
will be expensed as they are incurred.
24
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Cost-Method Investment Obligations
The Company has a commitment to make an additional investment in Orteq of approximately 637 British Pounds in preferred shares of Orteq, which is payable
in U.S. Dollars. As of the date the Company entered into the investment agreement, the Company estimated the future payable amount to approximate $1.0 million; however, this future amount is dependent upon the future exchange rate in effect at the
date of the additional investment, upon the occurrence of future events specified within the investment agreement with Orteq. Pursuant to an ancillary agreement between the Company and Orteq entered into on August 19, 2011, the Company has the
option to convert its cash advance into preferred shares to satisfy this obligation under the investment agreement. See Note 7 for additional information.
Nerites Purchase Price Obligations
Pursuant to the terms of the asset purchase
agreement entered into with Nerites, the Company held back $3.0 million of the acquisition purchase price as security for certain potential indemnification obligations of Nerites, payable in two payments of $1.5 million each. The Company released
the first payment of $1.5 million to Nerites in January 2012, upon the first anniversary of the acquisition date, and will release the second and final payment of $1.5 million to Nerites in January 2013, upon the second anniversary of the
acquisition date, to the extent that the remaining hold-back amount is not applied toward such indemnification obligations. See Note 5 for additional information.
Norian Purchase Price Obligation
Pursuant to the terms of the asset purchase
agreement entered into with Norian, the Company is required to pay the remaining $14.0 million of the purchase price on the earlier of the date on which the transfer of the manufacturing operations from the purchased West Chester, Pennsylvania
facility to the Companys corporate headquarters facility located in Exton, Pennsylvania has been completed or the 18-month anniversary of the date of acquisition. See Note 5 for additional information.
Operating Lease Commitments
As a
result of the Companys Nerites asset acquisition, the Company became party to leased space in Madison, Wisconsin. In addition, pursuant to the Companys acquisition of certain assets of Norian, the Company entered into an 18-month
sublease agreement with Synthes to rent the manufacturing space in the Companys West Chester, Pennsylvania facility. As of March 31, 2012, the Companys total minimum future annual rental commitment under non-cancelable operating
leases was $658.
Product Liability Claims
From time to time, in the ordinary course of business, the Company has been, and in the future may be, involved in various claims, lawsuits and disputes with third parties involving various allegations
against the Company, including product liability claims, and claims following therefrom, all of which may be with or without merit. The clinical testing, manufacture of the Companys products or customers products and their sale entail
significant risk of product liability claims. The Company carries insurance that covers many of these risks, at coverage levels the Company believes to be appropriate, relative to the potential liabilities. Additionally, the Company has
indemnification provisions within certain of its agreements with customers to limit the amount of its liability, and generally is only liable under certain of its customer agreements for failure to meet the manufacturing specifications.
The Company previously disclosed that it was a named defendant in three product liability claims. With respect to the first of these claims, the Company
believes it is entitled to indemnification and defense pursuant to certain customer agreements. With respect to the second claim, the Company has, along with the other named defendants, reached a settlement with the plaintiff during mediation, the
terms of which are to be incorporated into a final settlement agreement. The Companys portion of this second claim is covered by the Companys insurance policies. The Company plans to vigorously defend against the third of these claims,
and resolve expeditiously any future claims that may arise. In its third quarter ended March 31, 2012, the Company was named in a fourth product liability claim specific to a product sold by Synthes, and previously manufactured by Norian, prior to
the Companys asset acquisition of certain assets of Norian. In connection with this matter, the Company has tendered its defense to Synthes and believes it is entitled to be fully indemnified pursuant to the Asset Purchase Agreement with
Synthes. Historically, the Company has not paid any amount related to product liability claims. While any litigation contains an element of uncertainty, it is reasonably possible that ultimate resolution of these claims may result in a loss.
Management believes the resultant losses, if any, associated with these claims will not have a material effect on the Companys financial position.
25
KENSEY NASH CORPORATION
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data, unless otherwise noted)
(Unaudited)
Note 14 Income Taxes
The Company accounts for taxes under the provisions of ASC Subtopic 740, Income Taxes. The amount of unrecognized tax
benefits at March 31, 2012 was $97, of which $95 would impact the Companys tax rate, if recognized.
Interest and penalties are
included in Interest expense and Other income/expense, respectively, on the Condensed Consolidated Statements of Operations. No material interest or penalty charges were recorded for the three or nine months ended March 31, 2012.
Changes in the Companys uncertain tax positions for the nine months ended March 31, 2012 were as follows:
|
|
|
|
|
Balance at June 30, 2011
|
|
$
|
104
|
|
Increases related to prior year tax positions
|
|
|
10
|
|
Reduction due to lapse in statute of limitations
|
|
|
(17
|
)
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
97
|
|
|
|
|
|
|
The Company and its subsidiaries file U.S. federal and various state income tax returns. The Company is no longer
subject to U.S. federal income tax examination for years prior to fiscal 2009 due to the expiration of applicable statutes of limitation. The Company does not expect the total amount of unrecognized tax benefits to change significantly in the next
12 months.
For the nine months ended March 31, 2012, the Companys estimated effective tax rate was approximately 33%, which
includes an estimate for the expiration of the December 2010 Congressional approval of an extension of the Research and Experimentation (R&E) Tax Credit on December 31, 2011. The Company anticipates its net effective tax rate for fiscal
2012 will be approximately 33%. In the course of estimating the Companys annual effective tax rate and recording its quarterly income tax provision, the Company considers many factors, including its expected earnings, state income tax
apportionment, estimated research and experimentation tax credits and manufacturing deductions, non-taxable interest income and other estimates. Material changes in, or differences from, these estimates, including the extension of the R&E tax
credit, could have a significant impact on the Companys effective tax rate.
Note 15 Subsequent Event
On May 2, 2012, the Board of Directors of the Company unanimously approved, and the Company entered into, the Merger Agreement with DSM
and Biomedical Acquisition Corporation, an indirect wholly-owned subsidiary of DSM (Merger Sub), pursuant to which, among other things, DSM will commence a tender offer for all the issued and outstanding shares of the Companys Common Stock,
par value $0.001 per share, subject to the terms and conditions of the Merger Agreement.
Pursuant to the Merger Agreement, and upon the terms
and subject to the conditions thereof, Merger Sub will commence, no earlier than May 17, 2012 and no later than May 31, 2012, a tender offer (the Offer) to acquire the issued and outstanding shares of the Companys Common Stock for a purchase
price of $38.50 per share in cash (the Offer Price). The Offer will remain open for a minimum of 20 business days from commencement, subject to possible extension on the terms set forth in the Merger Agreement. In addition, as soon as practicable
after the consummation of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the Merger), and the Company will become an indirect wholly-owned
subsidiary of DSM. In the Merger, the issued and outstanding shares of the Companys Common Stock remaining outstanding following the consummation of the Offer, other than shares held by DSM or its subsidiaries or by stockholders who have
validly exercised their appraisal rights under the Delaware General Corporation Law, will be converted into the right to receive the Offer Price. The Companys Board of Directors has resolved to unanimously recommend that the Companys
stockholders tender their shares of Common Stock pursuant to the Offer and, if applicable, for the Companys stockholders to approve and adopt the Merger Agreement and approve the Merger.
The obligation of Merger Sub to accept for payment and pay for the shares tendered in the Offer is subject to the satisfaction or waiver of a number of
conditions set forth in the Merger Agreement, including, among others, the expiration or early termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act, the absence of a Company Material Adverse Effect (as
defined in the Merger Agreement), and the Merger Agreement not being terminated in accordance with its terms. It is also a condition to Merger Subs obligation to accept for payment and pay for the shares tendered in the Offer that more than
50% of the outstanding shares of the Companys Common Stock on a fully-diluted basis shall have been validly tendered in accordance with the terms of the Offer and not properly withdrawn. There is no financing condition to the Offer.
The closing of the Merger is subject to the satisfaction of customary closing conditions, and, depending on the number of shares of Common
Stock held by DSM, Merger Sub and their affiliates after Merger Subs acceptance of the shares properly tendered in connection with the Offer, approval of the Merger by holders of outstanding shares of the Companys Common Stock.
Upon the consummation of the Offer, all unvested stock options, nonvested stock awards, and cash settled SARs will become fully vested, and
in the case of nonvested stock awards, the underlying shares of the Companys Common Stock will be issued. Upon the closing of the Merger, all then outstanding stock options and cash-settled SARs will terminate and each holder will receive in
cash, subject to applicable withholding for taxes, the difference between the exercise price of the stock option or the strike price of the cash-settled SAR, as applicable, and the Offer Price, multiplied by the number of shares subject to such
stock option or cash-settled SAR.
Under certain circumstances, if the Merger Agreement is terminated, the Company may be required to pay a
$12.6 million termination fee to DSM.
26
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in
this report and our audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 (fiscal 2011), as filed with the Securities and Exchange Commission. As used
herein, the terms the Company, we, us and our refer to Kensey Nash Corporation and its consolidated subsidiaries, collectively.
This discussion and analysis below contains forward-looking statements relating to future events or our future financial performance. These statements are only predictions and actual events or results
may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this report which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking
statements, including those factors set forth under the heading CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS at the end of this Item 2 in this Quarterly Report on Form 10-Q.
AGREEMENT AND PLAN OF MERGER
On May 2, 2012, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Koninklijke DSM N.V. (DSM) and Biomedical Acquisition Corporation, an indirect wholly-owned subsidiary of DSM,
pursuant to which, among other things, DSM will commence a tender offer for all the issued and outstanding shares of our Common Stock, par value $0.001 per share, and following the completion of the tender offer, DSM will acquire the remaining
outstanding shares of our Common Stock through a second step merger, all upon, and subject to, the terms and conditions of the Merger Agreement. See Note 15 to the Condensed Consolidated Financial Statements included in this Form 10-Q and Item 1A.
Risk Factors, for additional information regarding our Merger Agreement and our transaction with DSM.
OVERVIEW
Kensey Nash Corporation, incorporated in Delaware in 1984, is a medical device product development and manufacturing company with a
history of innovation and success in bringing new products to the market. We focus on regenerative medicine by creating products and technologies that help the human body heal. We are recognized as a leader for innovative product development, as
well as for our broad portfolio of resorbable biomaterials products. We have an extensive range of products, which are sold through strategic partners in multiple large medical markets, including cardiology, orthopaedic, sports medicine, spinal,
craniomaxillofacial (CMF), trauma and general surgery. We sell our products through strategic partners and generally do not sell direct to the end-user. Our revenues consist of two components: net sales and royalty income.
Net Sales
During the past 25 years, we
have established ourselves as a leader in designing, developing, manufacturing and processing proprietary medical devices, which include resorbable biomaterials products such as collagen and synthetic polymers. We have expanded our base of
technology, which has enabled us to develop multiple resorbable product platforms that can be used in a wide variety of applications. We have developed extensive expertise in tissue regeneration and tissue repair, and the ability to commercialize
and produce products with these capabilities.
We sell our biomaterials products to over 30 companies that ultimately sell
them into the end-user marketplace. Our largest biomaterials customers include Synthes, Inc. (Synthes), which is expected to be acquired by Johnson & Johnson, Inc. in June 2012, to which we supply our porcine dermis-based extracellular
matrix (ECM) products and spine, CMF and trauma products acquired through our Norian Corporation (Norian) asset acquisition, Arthrex, Inc. (Arthrex), to which we supply a broad range of sports medicine products, Stryker Corporation (Stryker), to
which we supply products for use in repair of the spine and orthopaedic trauma injuries, and St. Jude Medical, Inc. (St. Jude Medical), to which we supply the collagen component of the Angio-Seal
TM
Vascular Closure Device. We also supply biomaterials products and
development expertise to other orthopaedic companies, including BioMimetic Therapeutics, Inc., Johnson & Johnson, Inc. and its subsidiaries (Johnson & Johnson), Medtronic, Inc. (Medtronic), Zimmer, Inc. (Zimmer), and Devicor
Medical Products, Inc. (Devicor).
Our customer relationships are both short-term and long-term and, in most cases, are contractual in nature,
with contracts specifying various terms which govern the relationship, including, for example, product development, regulatory responsibilities and pricing. We often work with customers and potential customers at very early stages of feasibility and
provide significant input in co-development types of programs. Once a product is approved for sale, we generally provide our customers fully packaged and sterilized products ready for sale or further distribution. Our products often represent a key
strategic source for these customers and partners. In many cases, our proprietary technology is incorporated in the product and cannot be replicated by other companies.
27
The table below shows our orthopaedic product, cardiovascular product, general surgery and other product
sales, which for the period ended March 31, 2012, includes, among other items, cumulative sales milestone revenue, for the nine months ended March 31, 2012 and March 31, 2011, including as a percentage of our total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended March 31,
2012
|
|
|
% of Net Sales
|
|
|
Nine months
ended March 31,
2011
|
|
|
% of Net Sales
|
|
|
% Change
Prior Period to
Current Period
|
|
Net Sales of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orthopaedic Products
|
|
$
|
36,212
|
|
|
|
75
|
%
|
|
$
|
16,990
|
|
|
|
50
|
%
|
|
|
113
|
%
|
Cardiovascular Products
|
|
|
2,615
|
|
|
|
5
|
%
|
|
|
11,651
|
|
|
|
34
|
%
|
|
|
(78
|
%)
|
General Surgery Products
|
|
|
1,873
|
|
|
|
4
|
%
|
|
|
3,122
|
|
|
|
9
|
%
|
|
|
(40
|
%)
|
Other Products
|
|
|
7,373
|
|
|
|
16
|
%
|
|
|
2,137
|
|
|
|
7
|
%
|
|
|
245
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
48,073
|
|
|
|
100
|
%
|
|
$
|
33,900
|
|
|
|
100
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Our orthopaedic product sales increased 113% in the nine months ended March 31, 2012 over the comparable prior
fiscal year nine-month period. This increase was primarily due to the spine, CMF and trauma product sales to Synthes resulting from our acquisition of certain operational assets relating to the business and product lines of Norian. The first quarter
of the fiscal year ending June 30, 2012 (fiscal 2012), was the first full quarter of sales of these products following the Norian asset acquisition in May 2011. Excluding the sales resulting from our Norian asset acquisition, orthopaedic
product sales during the nine months ended March 31, 2012 of $23.4 million increased 38% from the prior year nine-month period. We saw further growth in sales of orthopaedic products in the spine market, specifically related to increased sales
to Stryker due to the impact of Strykers overall larger market presence and its marketing of Orthovita products, reflective of Strykers acquisition of Orthovita, which occurred in our fourth quarter of fiscal 2011. Additionally, sports
medicine and spine product sales in the comparable nine-month period of the prior fiscal year were negatively impacted by an overall weakness in their markets and reductions in inventory levels by two of our major customers.
Our net sales in the orthopaedic portion of our business are dependent on (1) our partners management of their inventory levels, (2) the
success of our current partners in the orthopaedic markets of sports medicine, spine, CMF, trauma and extremities, (3) the acceptance of biomaterials-based products in these markets, (4) competitive pricing, and (5) our ability to
offer new products and technologies and to attract new partners in these markets. Due to these dependencies and other factors, sales to our orthopaedic customers can vary significantly from quarter to quarter.
Our cardiovascular sales have historically consisted primarily of sales of Angio-Seal components to St. Jude Medical under various agreements. In fiscal
2011 and years prior, we supplied 100% of their requirements for the collagen plug, one of the key resorbable components of the Angio-Seal device, and at least 30% of their requirements for the polymer anchors under a supply agreement that expired
on December 31, 2010. In June 2010, we entered into a two-year supply agreement with St. Jude Medical, effective January 1, 2011, which provided that we would be the exclusive outside supplier of the collagen plugs during the term of such
agreement and required St. Jude Medical to purchase contractual minimum order levels of collagen plugs for calendar years 2011 and 2012 (the Previous Collagen Supply Agreement).
In connection with the March 16, 2012 settlement agreement with St. Jude Medical (the Settlement Agreement), we entered into a new collagen supply agreement (the 2012 Collagen Supply Agreement), which
replaced and effectively extended the terms of the Previous Collagen Supply Agreement, which was set to expire on December 31, 2012. Pursuant to the 2012 Collagen Supply Agreement, we will continue to be the exclusive outside supplier of collagen
plugs to St. Jude Medical for the Angio-Seal through December 2017. The 2012 Collagen Supply Agreement expands the minimum order levels to be provided over the contract term to 5.0 million cumulative units, with a minimum of 400,000 units to be
provided each calendar year, beginning with calendar year 2013, over the contract term, unless the cumulative total units under the 2012 Collagen Supply Agreement have been met. In addition, pursuant to the 2012 Collagen Supply Agreement, of the 5.0
million cumulative units, St. Jude Medical has committed to purchase 400,000 units to be shipped in our first half of fiscal 2013 and 1.5 million units to be shipped during calendar year 2013.
As of April 2011, under the Previous Collagen Supply Agreement, St. Jude Medical had filled their calendar year 2011 minimum order levels of $4.0 million
in collagen plugs, which were shipped in the second half of fiscal 2011. As of June 30, 2011, St. Jude Medical placed its calendar year 2012 order for approximately $6.4 million of collagen plugs, which includes $4.0 million of orders expected
to be shipped in the second half of fiscal 2012 and the remainder, along with the additional 400,000 units under the 2012 Collagen Supply Agreement, as described above, in the first half of fiscal 2013. For both the three and nine months ended
March 31, 2012, we recorded $2.2 million of collagen plug sales to St. Jude Medical.
28
See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional
information regarding our customer relationship with St. Jude Medical. For further disclosure regarding our royalty arrangements with St. Jude Medical, see Royalty Income below.
We also have developed and manufactured products used in the general surgery markets. These products primarily include products from our ECM program, as well as a resorbable collagen product for use in
breast biopsies. In our fiscal year ended June 30, 2010 (fiscal 2010), we announced two strategic agreements involving our Medeor Matrix porcine dermis ECM material, one with Synthes, and the other with Arthrex. Synthes launched the XCM
Biologic Tissue Matrix, initially focused on ventral hernia repair and plastic and reconstructive procedures, in the U.S. in May 2010 and outside the U.S. in August 2010. We expect to achieve increases in general surgery product sales in the
remainder of fiscal 2012 in ECM product sales from continued expansion of end-user sales in the U.S., as well as markets outside the U.S.
Other product sales includes, among other items, grant revenue generated from our research and development team acquired through the Nerites Corporation
(Nerites) asset acquisition. All grant revenues recorded are related to government programs under which the U.S. government funds the research of high risk, enabling technologies. Grant revenue under government programs are recognized in the period
that the related expenses are incurred. Other product sales also includes milestone revenue recognized from agreements with The Spectranetics Corporation (Spectranetics), as well as other product sales to Spectranetics. Other product sales increased
245% in the nine months ended March 31, 2012 over the comparable prior fiscal year nine-month period primarily due to our achievement in our second quarter ended December 31, 2011 of a $6.0 million cumulative sales milestone payment in
connection with Spectranetics reaching a cumulative $20.0 million in end-user sales of the product lines purchased by Spectranetics from us in May 2008. We recognized $5.4 million of cumulative sales milestone revenue during the nine months ended
March 31, 2012 with the remaining $0.6 million deferred and to be recognized as revenue within the next three months when we complete all of our remaining performance obligations under our agreement with Spectranetics and the earnings process
is deemed to be complete. In the nine months ended March 31, 2011, other product sales also include product sales to Spectranetics from our endovascular product line, which was sold to Spectranetics in May 2008. In our fourth quarter ended
June 30, 2011, Spectranetics assumed manufacturing responsibility of the ThromCat products. Therefore, fiscal 2011 was the final fiscal year in which we expected to have significant product revenues from the Endovascular business, other than
milestone payments.
During the quarter ended March 31, 2012, we entered into an agreement with Spectranetics, pursuant to which we received
in March 2012 a final upfront cash milestone payment of $1.7 million from Spectranetics in connection with our product development efforts. This milestone will be recognized during the fourth quarter of fiscal 2012 when we satisfy our performance
obligations under the terms of the agreement entered into in March 2012. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information on our customer relationship with Spectranetics.
Royalty Income
We also derive a
significant portion of our revenue and profitability from royalty income from proprietary products that we have developed or co-developed.
Angio-Seal
TM
Royalty Income.
We are the inventor and original developer of the Angio-Seal device, a vascular closure device that reduces recovery time and enhances patient comfort following both
diagnostic and therapeutic cardiovascular catheterizations. St. Jude Medical has the exclusive worldwide rights for the development, manufacturing and sales and marketing of the Angio-Seal device. Historically, we have received a royalty on end-user
product sales by St. Jude Medical. Royalty income for prior periods through December 31, 2011 was recorded when the relevant total net end-user product sales were reported by St. Jude Medical to us and at the rate at which St. Jude Medical was
actually paying royalties.
Royalty income for the quarter ended March 31, 2012 includes royalty income pursuant to
the Settlement Agreement entered into with St. Jude Medical on March 16, 2012. We will receive a fixed amount of future royalties totaling $39.0 million from St. Jude Medical, payable in 12 equal quarterly payments
29
beginning March 31, 2012. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information on our customer relationship with St. Jude
Medical. We are recognizing the $39.0 million as royalty income on a straight line basis from January 2012 through April 2014, which is the expiration date of the last to expire of patents exclusively licensed by us to St. Jude Medical.
Vitoss Foam, Vitoss, and Vitoss Bioactive Foam Royalty Income.
Since 2003, we have partnered
with Orthovita, which was acquired by Stryker in June 2011, to co-develop a series of unique and proprietary bone void filler products, branded Vitoss
TM
Foam, the first of which was launched in March 2004, and the most recent of which, Vitoss
TM
Bioactive Foam technology, was launched during the fourth quarter of
fiscal 2008. We receive a royalty on Strykers end-user sales of Vitoss
TM
Foam and Vitoss
TM
Bioactive Foam products. In addition, in August 2004, we entered into an agreement to acquire the proprietary rights of a third party inventor of the Vitoss
TM
technology for $2.6 million (the Assignment Agreement). Under the
Assignment Agreement, we received an additional royalty on the end-user sales of all Orthovita products containing the
Vitoss
TM
technology, up to a total royalty to be received
of $4.0 million, with less than $0.1 million received in the nine months ended March 31, 2012. As of July 2011, we had received the full amount of the $4.0 million royalty under the Assignment Agreement and, therefore, we will no longer receive
this royalty under the Assignment Agreement. We believe the unique technology associated with the Vitoss
TM
Foam and Vitoss
TM
Bioactive Foam products, including product extensions, as well as Strykers worldwide marketing efforts, will result in the Orthovita component of our royalty income continuing to grow over the next
fiscal year.
We have other royalty generating relationships, none of which materially contributes to revenue at this time, but which we
expect to provide increased revenue as the related products gain market acceptance and additional products are commercialized.
Share-Based
Compensation
The following table summarizes share-based compensation expense within each operating expense category of our Condensed
Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and 2011:
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|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation
|
|
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Cost of products sold
|
|
$
|
286
|
|
|
$
|
231
|
|
|
$
|
717
|
|
|
$
|
729
|
|
Research and development
|
|
|
609
|
|
|
|
361
|
|
|
|
1,407
|
|
|
|
1,236
|
|
Selling, general and administrative
|
|
|
522
|
|
|
|
322
|
|
|
|
1,246
|
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
1,417
|
|
|
$
|
914
|
|
|
$
|
3,370
|
|
|
$
|
3,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense consists of (a) stock options granted to employees and executive officers,
(b) nonvested stock awards (i.e., restricted stock) granted to non-employee members of our Board of Directors and an executive officer and (c) cash-settled stock appreciation rights (SARs) granted to employees and executive officers of our
Company. We cannot predict the market value of our Common Stock at the time of exercise for these grants, nor the magnitude of exercises at any particular time over the terms of these grants. Our cash-settled SARs, which are classified as current
liability awards, have been, and will continue to be, remeasured at each reporting period until all awards are settled. Fluctuations in the fair value of a liability award are recorded as increases or decreases in compensation cost, either
immediately or over the remaining service period, depending on the vested status of the award. See Note 12 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning our share-based
compensation.
Strategic Acquisitions and Investments
During fiscal 2011, in separate transactions, we broadened our product and technology portfolio both through successful investments in our internal research and development programs and strategic
acquisitions of Nerites and Norian, a subsidiary of Synthes, as well as our strategic investment in Orteq Ltd. Please refer to our Form 10-K for fiscal 2011 and Note 5 and 7 to the Condensed Consolidated Financial Statements included in this Form
10-Q for further information on these transactions.
30
See Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2011 for risks, uncertainties and other factors that could impact the success of our products relating to these strategic acquisitions and our strategic investment in Orteq.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are those that
require application of managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain and may change in future periods. We have identified the following
as our critical accounting policies: revenue recognition, accounting for share-based compensation, accounting for investments in debt securities, business combinations, cost-method investments, valuation of financial instruments, inventory valuation
and income taxes. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 contains a discussion of these critical accounting policies. There have been no significant changes in our critical accounting policies since June 30,
2011. See also Note 1 to our Condensed Consolidated Financial Statements for the nine months ended March 31, 2012 set forth herein.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 2012 and 2011
Total Revenues.
Total revenues of $22.2 million for the three months ended March 31, 2012 increased 19% from total revenues of $18.6 million for the three months ended March 31, 2011.
Total Net Sales.
Net sales increased 33% to $16.1 million in the three months ended March 31, 2012,
compared to net sales of $12.1 million in the three months ended March 31, 2011. Net sales include revenue recognized from products shipped or services completed and grant revenue, as well as revenue generated from product development programs
with and milestone revenue earned from customers.
Orthopaedic sales of $11.6 million for the three months ended
March 31, 2012 increased 68% from $6.9 million in the comparable period of the prior fiscal year. Excluding sales from our May 2011 acquisition of certain operational assets and certain liabilities relating to the business and product lines of
Norian, orthopaedic sales of $8.0 million for the three months ended March 31, 2012 increased 16% from the prior year comparable quarter. Both sports medicine and spine product sales in the prior year third quarter were negatively impacted by
an overall weakness in the markets and reductions in inventory levels by two of our major customers. Sports medicine product sales of $4.8 million for the three months ended March 31, 2012 increased 33% from $3.6 million in the comparable
period for the prior fiscal year. The increase from the prior year comparable quarter sales was primarily due to recent approvals for our largest sports medicine customers products in markets outside the United States. Spine product sales of
$4.1 million, including $1.0 million in product sales resulting from our Norian asset acquisition, for the three months ended March 31, 2012 increased 29% from $3.2 million in the comparable period of the prior fiscal year. Sales of trauma and
CMF products, consisting almost entirely of $2.6 million in sales resulting from the Norian asset acquisition, increased to $2.7 million in the quarter ended March 31, 2012 from $0.1 million in the prior year comparable quarter.
Cardiovascular sales of $2.3 million for the three months ended March 31, 2012 decreased 29% from $3.3 million in the prior year
comparable quarter. The decrease in sales of Angio-Seal components to St. Jude Medical was primarily attributable to ordering patterns under our Previous Collagen Supply Agreement that became effective January 1, 2011 which required St. Jude
Medical to purchase contractual minimum order levels of collagen plugs for calendar years 2011 and 2012 of which we recorded sales on those orders that were shipped. See Net Sales above for a further discussion of sales under the
Previous Collagen Supply Agreement for calendar years 2011 and 2012.
General surgery sales of $0.8
million for the three months ended March 31, 2012, decreased 28% from $1.1 million in the comparable period of the prior fiscal year primarily due to inventory stocking orders from Synthes in the second quarter of fiscal 2011 related to the
launch of our ECM product, XCM Biologic
TM
Tissue Matrix,
marketed by Synthes. Sales of ECM products were $0.6 million in the third quarter of fiscal 2012, compared to $0.8 million in the comparable period of the prior fiscal year.
31
Other product sales of $1.3 million for the three months ended March 31, 2012
increased from $0.8 million in the comparable period of the prior fiscal year.
In our second quarter ended December 31, 2011, we achieved a $6.0 million cumulative sales milestone payment in connection with Spectranetics reaching
a cumulative $20.0 million in end-user sales of the product lines purchased by Spectranetics from us in May 2008. In the three months ended March 31, 2012, we recognized $0.4 million of deferred cumulative sales milestone revenue. In each of
the quarters ended March 31, 2012 and 2011, we also recognized revenue of $0.1 million for two other milestones achieved in the fiscal year ended June 30, 2009 under our Development and Regulatory Service Agreement with Spectranetics.
Other product sales in the three months ended March 31, 2012 and 2011 also included $0.4 million and $0.2 million, respectively, of grant revenue related to research and development programs with the U.S. government.
Royalty Income.
Royalty income of $6.1 million in the three months ended March 31, 2012 decreased 6% from $6.5 million
in the three months ended March 31, 2011.
Royalty income of $4.1 million from St. Jude Medical
relating to the Angio-Seal device recognized in the quarter ended March 31, 2012 decreased 16% from $4.9 million in the same period of the prior fiscal year. This decrease in royalty income is primarily the result of royalty income becoming a fixed
amount pursuant to the Settlement Agreement with St. Jude Medical, as compared to being based on a percentage of St. Jude Medicals sales of the Angio-Seal device. See Note 4 to the Condensed Consolidated Financial Statements included in this
Form 10-Q for additional information on our customer relationship with St. Jude Medical. Royalty income for the prior three months ended March 31, 2011 was based on an approximate royalty rate of 6% of total net end-user sales reported by St. Jude
Medical. Royalty income of $1.7 million from Strykers net end-user sales of Vitoss
products in the three
months ended March 31, 2012 increased 20% from $1.3 million in the same period of the prior fiscal year.
Cost of Products
Sold.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
3/31/2012
|
|
|
Three
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
Cost of products sold (in thousands)
|
|
$
|
7,868
|
|
|
$
|
5,707
|
|
|
|
38
|
%
|
Gross Margin on Net Sales
|
|
|
51
|
%
|
|
|
53
|
%
|
|
|
|
|
Cost of products sold was $7.9 million in the three months ended March 31, 2012, which represented an increase of
$2.2 million, or 38%, from cost of products sold in the three months ended March 31, 2011. Gross margin on net sales was 51% for the three months ended March 31, 2012 and 53% for the same period of the prior fiscal year. Negative factors
affecting our gross margin in the three months ended March 31, 2012, included a change in product mix attributed to higher trauma and CMF products sales, as a result of our Norian asset acquisition, and higher sports medicine product sales as
compared to the same period of the prior fiscal year, of which both have lower margins, as well as lower cardiology product sales as compared to the same period of the prior fiscal year, which have higher margins. Offsetting this reduction in our
gross margin on sales for the three months ended March 31, 2012 was our recognition of milestone revenue of $0.4 million recorded in the three months ended March 31, 2012 related to our achievement of the total $6.0 million cumulative
sales milestone payment in connection with Spectranetics reaching a cumulative $20.0 million in end-user sales from the product lines purchased by Spectranetics from us in May 2008, which increased our gross margin on sales for the three months
ended March 31, 2012 by one percentage point.
We believe gross margin on net sales, exclusive of cumulative sales milestones, for fiscal
2012 will continue to be lower as compared to fiscal 2011 due to lower margins on our acquired Norian products (including inventory step-up charge), transition costs associated with the transition of the manufacturing operations of Norian products
to our Exton facility and the expected reduction of sales of Angio-Seal components, which have relatively higher margins.
32
Research and Development Expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
3/31/2012
|
|
|
Three
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
Research & Development (in thousands)
|
|
$
|
6,258
|
|
|
$
|
4,531
|
|
|
|
38
|
%
|
|
|
|
|
Research & Development as a % of Revenue
|
|
|
28
|
%
|
|
|
24
|
%
|
|
|
|
|
Research and development expense was $6.3 million in the three months ended March 31, 2012, an increase of $1.7
million, or 38%, from $4.5 million in the three months ended March 31, 2011. Research and development expense primarily increased due to an increase in expense related to our ECM and adhesives research and development efforts, as well as an
increase in patent-related costs. Research and development expense was 28% of our total revenue for the three months ended March 31, 2012 and 24% of revenue for the three months ended March 31, 2011.
Selling, General and Administrative Expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
3/31/2012
|
|
|
Three
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
|
|
|
|
Selling, General and Administrative (in thousands)
|
|
$
|
3,331
|
|
|
$
|
2,223
|
|
|
|
50
|
%
|
|
|
|
|
Selling, General and Administrative as a % of Revenue
|
|
|
15
|
%
|
|
|
12
|
%
|
|
|
|
|
Selling, general and administrative expense of $3.3 million in the three months ended March 31, 2012 increased $1.1
million, or 50%, from selling, general and administrative expense of $2.2 million in the three months ended March 31, 2011. This increase was primarily due to amortization and administrative transition services related to the Norian acquisition
and an increase in outside professional fees. The increase in outside professional fees in the three months ended March 31, 2012 was primarily related to approximately $0.3 million in legal costs associated principally with the Settlement
Agreement with St Jude Medical.
Acquired in-process research and development.
During the prior fiscal year quarter ended
March 31, 2011, in connection with our asset acquisition of Nerites, we allocated approximately $18.2 million of the cost of the acquisition to in-process research and development, which was charged to expense in our third quarter of fiscal
2011 because, at the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. At the acquisition date, Nerites had spent
approximately $14.2 million on ongoing research initiatives targeted at developing three potential platform technologies that they had been researching: liquid adhesives/sealants, thin film adhesives and anti-fouling/anti-bacterial coating
capabilities. See Note 5 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning the Nerites asset acquisition.
Interest Income.
Interest income of $0.1 million in the three months ended March 31, 2012 remained consistent with that of the comparable prior fiscal year quarter.
Interest Expense.
Interest expense in the three months ended March 31, 2012 and 2011 was $0.5 million. We have borrowed $35.0 million
under our Secured Commercial Mortgage (the Mortgage) with Citibank, F.S.B. The Mortgage is hedged by a fixed interest rate swap agreement (the Swap) bearing interest at a rate of 6.44%. The Mortgage balance was $28.9 million as of March 31,
2012. See Note 9 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning the Mortgage and the Swap.
33
Income Tax Expense/Benefit.
Our income tax expense for the three months ended March 31,
2012 was approximately $1.4 million, resulting in an effective tax rate of approximately 32%. Our income tax benefit for the three months ended March 31, 2011 was approximately $4.5 million, resulting in an effective tax rate of approximately
(36%), which is reflective of the reduction in fiscal 2011 net income as result of the acquired IPR&D charge expensed during the third quarter of fiscal 2011 in connection with our asset acquisition of Nerites, accounted for in accordance with
FASB ASC Topic 730, Research and Development. We anticipate our net effective tax rate for fiscal 2012 will be approximately 33%. See Note 14 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional
information concerning our effective tax rate.
Comparison of Nine Months Ended March 31, 2012 and 2011
Total Revenues.
Total revenues of $65.2 million for the nine months ended March 31, 2012 increased 23% from total revenues of $52.9 million
for the nine months ended March 31, 2011.
Total Net Sales.
Net sales increased 42% to $48.1 million in the
nine months ended March 31, 2012, compared to net sales of $33.9 million in the nine months ended March 31, 2011.
Orthopaedic sales of $36.2 million for the nine months ended March 31, 2012 increased 113% from $17.0 million in the comparable
period of the prior fiscal year. Excluding sales from our May 2011 Norian asset acquisition, orthopaedic sales of $23.4 million for the nine months ended March 31, 2012 increased 38% from the prior year comparable period. Both sports medicine
and spine product sales in the prior year were negatively impacted by an overall weakness in the markets and reductions in inventory levels by two of our major customers. Sports medicine product sales of $11.6 million for the nine months ended
March 31, 2012 increased 30% from $8.9 million in the comparable period of the prior fiscal year, primarily due to a recovery from the effect of reductions in customer inventory levels in the prior year and recent approvals by our largest
sports medicine customers products in markets outside the United States. Spine product sales of $14.5 million, including $3.0 million in product sales resulting from our Norian asset acquisition, for the nine months ended March 31, 2012,
increased 88% from $7.7 million in the comparable period for the prior fiscal year. We believe the increase in spine product sales was primarily due to the impact of Strykers June 2011 acquisition of Orthovita, our strategic partner, as a
result of Strykers significantly larger sales force and broader distribution channels relative to Orthovita. Sales of trauma and CMF products, consisting almost entirely of $9.8 million in sales resulting from the Norian asset acquisition,
increased to $10.1 million in the nine months ended March 31, 2012 from $0.4 million in the prior year comparable period.
Cardiovascular sales of $2.6 million for the nine months ended March 31, 2012 decreased 78% from $11.7 million in the prior year
comparable period. The decrease in sales of Angio-Seal components to St. Jude Medical was primarily attributable to ordering patterns under our Previous Collagen Supply Agreement with St. Jude Medical, as described above.
General surgery sales of $1.9 million for the nine months ended March 31, 2012 decreased 40% from $3.1 million
in the comparable period of the prior fiscal year primarily due to inventory stocking orders from Synthes in fiscal 2011 related to the launch of our ECM product, XCM Biologic
TM
Tissue Matrix, marketed by Synthes. Sales of ECM products were $1.0 million in the first nine months of fiscal 2012,
compared to $2.4 million in the comparable period of the prior fiscal year.
Other product sales of $7.4 million for the nine
months ended March 31, 2012 increased 245% from $2.1 million in the comparable period of the prior fiscal year.
As previously disclosed, in the quarter ended December 31, 2011, we achieved a $6.0 million cumulative sales
milestone payment in connection with Spectranetics reaching cumulative $20.0 million in end-user sales of the product lines purchased by Spectranetics from us in May 2008. In the nine months ended March 31, 2012, we recognized $5.4 million of
cumulative sales milestone revenue. In each of the nine months ended March 31, 2012 and 2011, we also recognized revenue of $0.5 million for two other milestones achieved in the fiscal year ended June 30, 2009 under our Development and
Regulatory Service Agreement with Spectranetics. Offsetting the milestone revenue increase, was the decrease in product sales to Spectranetics as the manufacturing of endovascular products was assumed by Spectranetics in June 2011. Other product
sales for the nine months ended March 31, 2012 and 2011 also included $0.6 million and $0.2 million, respectively, of grant revenue related to research and development programs with the U.S. government.
34
Royalty Income.
Royalty income of $17.1 million in the nine months ended
March 31, 2012 decreased 10% from $19.0 million in the nine months ended March 31, 2011.
Royalty income of $12.1
million from St. Jude Medical relating to the Angio-Seal device in the nine-month period ended March 31, 2012 decreased 16% from $14.4 million in the same period of the prior fiscal year. Royalty income for the nine months ended March 31, 2012
consisted of royalty income for the six months ended December 31, 2011 recognized upon total net end-user product sales reported by St. Jude Medical at an approximate royalty rate of 6% through mid-November 2011 and at a royalty rate of 2% for U.S.
and certain international end-user Angio-Seal sales from mid-November 2011 through December 31, 2011, as well as royalty income recognized for the three months ended March 31, 2012 as a result of royalty income becoming a fixed amount pursuant to
the Settlement Agreement with St. Jude Medical. See Note 4 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information on our customer relationship with St. Jude Medical. Royalty income for the prior nine
months ended March 31, 2011 was based on a royalty rate of 6% of total net end-user sales reported by St. Jude Medical.
Royalty income of $4.5 million from Strykers net end-user sales of Vitoss Foam and Vitoss Bioactive Foam products in the
nine months ended March 31, 2012 increased 16% from $3.9 million in the same period of the prior fiscal. This increase was offset by a $0.4 million decrease from the prior year comparable period in the royalty under the Assignment Agreement
based upon Vitoss technology that expired in July 2011.
Cost of Products Sold.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended
3/31/2012
|
|
|
Nine
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
Cost of products sold (in thousands)
|
|
$
|
23,930
|
|
|
$
|
16,267
|
|
|
|
47
|
%
|
Gross Margin on Net Sales
|
|
|
50
|
%
|
|
|
53
|
%
|
|
|
|
|
Cost of products sold was $23.9 million in the nine months ended March 31, 2012, a $7.7 million, or 41%, increase
from $16.3 million in the nine months ended March 31, 2011. Gross margin on net sales was 50% for the nine months ended March 31, 2012 and 53% for the same period of the prior fiscal year. Negative factors affecting our gross margin in the
nine months ended March 31, 2012, included a change in product mix attributed to higher trauma and CMF products sales, as a result of our Norian asset acquisition, and sports medicine product sales as compared to the same period of the prior
fiscal year, of which both have lower margins, as well as lower cardiology product sales as compared to the same period of the prior fiscal year, which have higher margins. Additionally contributing to a lower gross margin in the nine months ended
March 31, 2012 was the Norian inventory step-up charge of $1.0 million, as described below. Offsetting this reduction in our gross margin on net sales for the nine months ended March 31, 2012 was our recognition of milestone revenue of
$5.4 million recorded in the nine months ended March 31, 2012 related to the achievement of the total $6.0 million cumulative sales milestone payment in connection with Spectranetics reaching cumulative $20.0 million in end-user sales, as
described above, which increased our gross margin on sales for the nine months ended March 31, 2012 by six percentage points.
In
connection with our Norian asset acquisition in May 2011, we recorded the purchase accounting adjustment of the fair value of acquired inventory, commonly referred to as stepped-up value, of $1.3 million, representing the estimated
capitalized manufacturing profit in acquired inventory. This non-recurring, non-cash charge to cost of products sold was recognized over the five-month inventory turn-over period of June 2011 through October 2011, as the capitalized manufacturing
profit added to inventory under purchase accounting was sold within the same five months after the acquisition date.
35
Research and Development Expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended
3/31/2012
|
|
|
Nine
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
|
|
|
|
Research & Development (in thousands)
|
|
$
|
17,030
|
|
|
$
|
12,778
|
|
|
|
33
|
%
|
|
|
|
|
Research & Development as a % of Revenue
|
|
|
26
|
%
|
|
|
24
|
%
|
|
|
|
|
Research and development expense of $17.0 million in the nine months ended March 31, 2012 increased $4.3 million, or
47%, from $12.7 million in the nine months ended March 31, 2011. Research and development expense primarily increased due to an increase in expense related to our ECM and adhesives research and development efforts, as well as an increase in
patent-related costs and personnel related expenses. Research and development expense was 26% of our total revenue for the nine months ended March 31, 2012 and 24% of revenue for the nine months ended March 31, 2011.
Selling, General and Administrative Expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months
Ended
3/31/2012
|
|
|
Nine
Months
Ended
3/31/2011
|
|
|
% Change
Prior Period
to Current
Period
|
|
|
|
|
|
Selling, General and Administrative (in thousands)
|
|
$
|
8,850
|
|
|
$
|
6,587
|
|
|
|
34
|
%
|
|
|
|
|
Selling, General and Administrative as a % of Revenue
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
|
|
Selling, general and administrative expense of $8.8 million in the nine months ended March 31, 2012 increased $2.3
million, or 34%, from $6.6 million in the nine months ended March 31, 2011. This increase was primarily due to amortization and administrative transition services related to the Norian acquisition, an increase in outside professional fees and
personnel related expenses. The increase in outside professional fees in the nine months ended March 31, 2012 was primarily related to approximately $0.6 million in legal costs, associated principally with the Settlement Agreement with St. Jude
Medical.
Interest Income.
Interest income decreased by 50% to $0.2 million in the nine months ended March 31, 2012
from $0.4 million in the same period of the prior fiscal year. This decrease was due to a decrease in our average cash and investment balances from the same period of the prior fiscal year primarily due to our use of cash for strategic acquisitions
during the second half of fiscal 2011.
Interest Expense.
Interest expense in the nine months ended March 31, 2012 of $1.4
million decreased 7% from $1.5 million in the same period of the prior fiscal year due to the lower outstanding Mortgage balance. See Note 8 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information
concerning the Mortgage and the Swap.
Other Income/Expense.
Other Income in the nine months ended March 31, 2012
was negligible and decreased by $0.1 million from the same period of the prior fiscal year. This decrease was primarily due to the realized gain on the sale of selected available-for-sale municipal obligations during the nine months ended
March 31, 2011.
Income Tax Expense/Benefit.
Our income tax expense for the nine months ended March 31, 2012 was $4.6
million, resulting in an effective tax rate of approximately 33% for the nine-month period. Our income tax benefit for the nine months ended March 31, 2011 was approximately $1.1 million, resulting in an effective tax rate of approximately
(57%) for the nine-month period, which is primarily the result of the acquired IPR&D charge expensed during the third quarter of fiscal 2011 in connection with our asset acquisition of Nerites, accounted for in
36
accordance with FASB ASC Topic 730, Research and Development as well as the retroactive adjustments we recorded to our tax provision during our second fiscal quarter ended
December 31, 2011 as a result of the December 2010 Congressional approval of an extension of the Research & Experimentation (R&E) Tax Credit. The R&E Tax Credit was retroactive to January 1, 2010. See Note 13 to the
Condensed Consolidated Financial Statements included in this Form 10-Q for additional information concerning our effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our
cash, cash equivalents and investments were $39.4 million as of March 31, 2012, an increase of $17.4 million from our balance of $21.9 million at June 30, 2011, the end of our prior fiscal year. Our working capital was $38.9 million as of
March 31, 2012, a decrease of $8.0 million from our working capital of $46.9 million at June 30, 2011, primarily related to payments made and due associated with our fiscal 2011 strategic acquisitions.
Operating Activities
Net cash
provided by our operating activities was $26.0 million in the nine months ended March 31, 2012. For the nine months ended March 31, 2012, we had net income of $9.5 million, non-cash depreciation and amortization of $5.7 million, a net
effect of non-cash employee share-based compensation and related tax events of $3.4 million and a change in deferred income taxes of $1.6 million.
Cash provided by operations as a result of changes in asset and liability balances was $8.9 million. This was a result of an increase in accounts payable and accrued expenses of $2.9 million, principally
associated with increases in personnel benefits, legal costs and federal taxes payable, and deferred revenue of $2.0 million, stemming from milestone payments from Spectranetics. Also contributing to the cash provided by operations were decreases in
our accounts receivable balances of $1.7 million, principally attributed to reduced royalty income from St. Jude Medical, decreases in our inventory balance of $1.5 million, primarily associated with the Norian inventory step-up, and decreases in
our prepaid expenses and other assets of $0.9 million, primarily related to the prepayment of our health insurance in fiscal 2011, which was not prepaid in fiscal 2012.
Investing Activities
Cash used in investing activities was $9.7 million for the
nine months ended March 31, 2012. This use of cash was primarily the result of net investment activity of $3.5 million related to $7.1 million of purchased investments, offset by $3.6 million of cash maturities and redemptions of investments
within our investment portfolio. We used cash of $2.6 million to continue to expand our research and development and manufacturing capabilities and improve our information technology systems. In January 2012, upon the first anniversary of our asset
acquisition of Nerites, we released $1.5 million of the hold-back amount under the terms of the Asset Purchase Agreement. In addition, we made a $0.6 million payment to a vendor for exclusivity rights recorded as an intangible asset. In August 2011,
we made a $1.1 million cash advance to Orteq, structured as convertible debt and in January 2012 we made an additional cost-method investment in Orteq of $0.5 million. See Note 7 to the Condensed Consolidated Financial Statements included in this
Form 10-Q for additional information on our cost-method investment in Orteq.
Financing Activities
Cash used in financing activities was $1.9 million for the nine months ended March 31, 2012. This amount was primarily the result of our initial cash
dividend paid to holders of our Common Stock in February 2012 in an aggregate amount of $2.2 million and $1.1 million in repayments of long-term debt. These decreases in cash were offset in part by net cash proceeds of approximately $1.3 million
from the exercise of share-based awards, of which $0.4 million of the exercised shares were exchanged in a non-cash net share settlement.
Stock Repurchase Programs
From
time to time, we have made repurchases of our Common Stock, executed under various stock repurchase programs established by our Board of Directors, as well as equity incentive plan transactions.
On June 16, 2010, we announced that our Board of Directors approved a stock repurchase program allowing us to repurchase up to an additional $30
million of our issued and outstanding shares of Common Stock. The stock repurchase program was completed in the second quarter of fiscal 2011. We financed these repurchases using available cash, liquid investments and cash from operations. See Note
12 to the Condensed Consolidated Financial Statements included in this Form 10-Q for additional information on our stock repurchase programs.
37
Dividends
On January 3, 2012, our Board of Directors declared an initial cash dividend of $0.25 per share of our Common Stock, payable to stockholders of record on January 31, 2012. The total dividend
payment of $2.2 million was distributed on February 29, 2012.
On March 13, 2012, our Board of Directors declared a cash dividend of
$0.25 per share of our Common Stock, payable to stockholders of record on April 30, 2012. The dividend will be paid on May 31, 2012 and the total dividend payment is expected to approximate $2.2 million.
Our Board of Directors adopted a dividend policy in January 2012, whereby the Board of Directors expected to declare a total annual dividend of $1.00 per
share of our Common Stock, to be paid in equal quarterly installments, commencing with the dividend announced on January 3, 2012. However, under the Merger Agreement entered into with DSM, we are not permitted to (without the consent of DSM), and we
do not intend to, declare any additional dividends on our Common Stock during the pendency of the transaction. See Note 15 to the Condensed Consolidated Financial Statements included in this Form 10-Q and Item 1A. Risk Factors, for
additional information regarding our Merger Agreement and our transaction with DSM. Previously, there were no covenant restrictions on dividends declared to our stockholders. No dividends were declared in the first half of fiscal 2012 or in fiscal
2011.
General
We
plan to continue to increase our research and development spending for our biomaterials products as we expand our clinical activities relating to our ECM programs both in the U.S. and outside the U.S., our cartilage repair program outside the U.S.
and other new technologies, including those acquired in the acquisition of the net assets of Nerites. Furthermore, in fiscal 2012, we plan to build additional inventories related to the Norian product lines as we prepare for the transfer of
manufacturing of the Norian product lines from the West Chester facility to the Exton facility over the 18 to 24 months after the date of acquisition.
We continue to believe our current cash and investment balances and expected future cash generated from operations will be sufficient to meet our operating, financing and capital requirements for the next
12 months, which will include the cash disbursements related to any declared dividends, as well as deferred acquisition payments pursuant to the terms of the asset purchase agreements entered into with Norian and Nerites (See Note 13 to the
Condensed Consolidated Financial Statements included in this Form 10-Q). Although we believe our cash and investment balances will also be sufficient on a longer term basis, that will depend on numerous factors, including the following: continuation
of our existing customer relationships and royalty streams; market acceptance of our existing and future products; the successful commercialization of products in development; the costs associated with that commercialization; progress in our product
development efforts; the magnitude and scope of such efforts; progress with pre-clinical studies, future clinical trials and product clearance by the FDA and other agencies; the cost and timing of our efforts to expand our manufacturing, sales, and
marketing capabilities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competing technological and market developments; the development of strategic alliances for the marketing of
certain of our products; and the cost of entering into any future acquisitions or other similar strategic transactions.
On May 26, 2011,
we entered into a $35.0 million revolving credit facility (Revolving Credit Facility) with Wells Fargo Bank, National Association (Wells Fargo). During the first nine months of fiscal 2012, we had no borrowings under the Revolving Credit Facility.
As of March 31, 2012, the outstanding principal under the Mortgage was $28.9 million. See Note 9 to the Condensed Consolidated Financial Statements included in this Form 10-Q. As of March 31, 2012, we were in compliance with all of our
affirmative, restrictive and financial maintenance covenants relating to our Mortgage and Revolving Credit Facility.
The terms of any future
equity financing we undertake may be dilutive to our stockholders and the terms of any debt financing may contain restrictive covenants that limit our ability to pursue desired courses of action. Our ability to obtain financing is dependent on the
status of our future business prospects, as well as conditions prevailing in the relevant capital markets. No assurance can be given that any additional financing will be available to us, or will be available to us on acceptable terms, should such a
need arise.
38
Contractual Obligations and Other Contingent Commitments
Presented below is a summary of our approximate aggregate contractual obligations and other contingent commitments at March 31, 2012, for future
payments under contracts and other contingent commitments, for fiscal 2012 and beyond:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period ($ in thousands)
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
Long-Term Debt Obligations (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Commercial Mortgage
|
|
$
|
28,933
|
|
|
$
|
1,400
|
|
|
$
|
2,800
|
|
|
$
|
2,800
|
|
|
$
|
21,933
|
|
Interest on Mortgage
|
|
|
19,614
|
|
|
|
1,842
|
|
|
|
3,421
|
|
|
|
3,064
|
|
|
|
11,287
|
|
Operating Lease Obligations (2):
|
|
|
658
|
|
|
|
648
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Purchase Obligations (3):
|
|
|
4,818
|
|
|
|
4,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Method Invesment (4)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Agreements (5)
|
|
|
2,134
|
|
|
|
1,292
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
Research and Development Contractual Obligations (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities Reflected on Consolidated Balance Sheet Under U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue Non-Current (7)
|
|
|
2,065
|
|
|
|
|
|
|
|
628
|
|
|
|
628
|
|
|
|
809
|
|
Other Non-Current Liabilities (8)
|
|
|
5,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nerites Corporation Purchase Price Obligation (9)
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norian Corporation Purchase Price Obligation (10)
|
|
|
14,000
|
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 740 FIN 48 Tax Obligations (11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
80,713
|
|
|
$
|
26,349
|
|
|
$
|
7,701
|
|
|
$
|
6,492
|
|
|
$
|
34,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These obligations are related to the Mortgage and other agreements that are legally binding and enforceable against us.
(1)
|
The long-term debt obligations consist of principal and interest on the Mortgage outstanding principal balance of $28.9 million as of March 31, 2012. In accordance
with accounting principles generally accepted in the United States of America (U.S. GAAP), the future interest obligations are not recorded on our Condensed Consolidated Balance Sheet. See Note 9 to the Condensed Consolidated Financial Statements
included in this Form 10-Q.
|
(2)
|
We have become party to certain operating leases, to which Nerites was previously a party for the leased space in Madison, Wisconsin, and for which the minimum lease
payments of approximately $0.1 million are presented. Further, pursuant to our acquisition of certain assets of Norian, we entered into an 18-month agreement with Synthes to sublease from them manufacturing space in the West Chester, Pennsylvania
facility (which we purchased and leased back to Synthes), for which the remaining minimum lease payments of $0.5 million are presented.
|
(3)
|
These obligations consist of cancelable and non-cancelable purchase commitments related to inventory, capital expenditures and other goods or services. In accordance
with U.S. GAAP, these obligations are not recorded on our Condensed Consolidated Balance Sheets. See Note 13 to the Condensed Consolidated Financial Statements included in this Form 10-Q.
|
(4)
|
Under the investment agreement with Orteq, we have committed to make an additional minority equity investment of approximately 0.6 million British Pounds in
preferred shares of Orteq, which is payable in U.S. Dollars, if Orteq receives approval or conditional approval from the FDA to conduct an investigational device exemption for a product pivotal trial by the second anniversary of the our initial
investment, which is December 21, 2012, or otherwise at our option prior to December 21, 2012. As of the date we entered into the investment agreement, we estimated the future payable amount to approximate $1.0 million; however, this
future amount is dependent upon the future exchange rate in effect at the date of the additional investment. Pursuant to an ancillary agreement between us and Orteq, we have the option to convert our cash advance into preferred shares to satisfy
this obligation under the investment agreement. Our ownership in Orteq is expected to continue to be less than 20% upon the additional investment.
|
(5)
|
We have entered into employment agreements with each of our executive officers. As of March 31, 2012, these employment agreements provided for, among other things,
annual base salaries in an aggregate amount of not less than this amount, from that date through fiscal 2014. In accordance with U.S. GAAP, these obligations are not recorded on our Condensed Consolidated Balance Sheets. See Note 13 to the Condensed
Consolidated Financial Statements included in this Form 10-Q.
|
(6)
|
We entered into research and development service agreements with certain other customers which provide that we are to share certain regulatory and
clinical costs associated with future research and development activities. We are unable to
|
39
|
reliably estimate the amount and timing of these costs because they are dependent on the type and complexity of the clinical studies and intended uses of the products, which have not been
established. The amounts and timing of any such future payment obligations cannot currently be determined, and therefore, are not included in the table above. In accordance with U.S. GAAP, these obligations are not recorded on our Condensed
Consolidated Balance Sheets.
|
(7)
|
Non-current deferred revenue includes milestone payments received by us pursuant to customer agreements, as well as advance payments from customers for future services.
Several of these deferred milestone revenues are non-refundable and may not require future performance from us. These liabilities are recorded in accordance with U.S. GAAP, and are recorded on our Condensed Consolidated Balance Sheets.
|
(8)
|
This value represents the estimated amount we would pay to terminate the Swap if we were to prepay the Mortgage. We currently do not intend to prepay the Mortgage and,
therefore, are unable to reliably estimate the period of cash settlement of the Swap, if any. In accordance with U.S. GAAP, this liability is recorded on our Condensed Consolidated Balance Sheets. See Note 9 to the Condensed Consolidated Financial
Statements included in this Form 10-Q.
|
(9)
|
Under the Asset Purchase Agreement with Nerites, entered into on January 28, 2011, we acquired substantially all of the assets and certain operational liabilities
of Nerites for approximately $20.0 million, of which approximately $16.7 million was paid at the acquisition date, with the remaining approximately $3.0 million held back under the terms of the acquisition as security for certain potential
indemnification obligations; of such hold-back amount, $1.5 million was released to Nerites in January 2012, following the first anniversary of the acquisition date, and the remaining $1.5 million will be released on the second anniversary of the
acquisition date, to the extent that such hold-back amount is not applied toward such indemnification obligations.
|
(10)
|
Under the Asset Purchase Agreement with Norian, entered into on May 24, 2011, we acquired certain operational assets and certain liabilities of Norian for
approximately $26.0 million, of which approximately $12.0 million was paid at the acquisition date. We will pay the remaining $14.0 million on the earlier of the date on which the transfer of manufacturing operations from the purchased West Chester,
Pennsylvania facility to our facility located in Exton, Pennsylvania has been completed or the 18-month anniversary of the acquisition date.
|
(11)
|
Liabilities for uncertain tax positions in the aggregate amount of approximately $0.1 million have been omitted from the table above due to an inability to reliably
estimate the period of cash settlement of these liabilities. See Note 14 to the Condensed Consolidated Financial Statements included in this Form 10-Q.
|
40
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. We have based these forward-looking statements largely on our current expectations and forecasts about our prospects, opportunities, future events and trends affecting our business. In this report, the words
believe, may, will, should, estimate, continue, anticipate, intend, expect, project, forecast, plan and
similar expressions, as they relate to us, our business or our management, are intended to identify forward-looking statements, but they are not the exclusive means of identifying them.
A number of risks, uncertainties and other factors could cause our actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in,
or implied by, the forward-looking statements. These risks, uncertainties and other factors, most of which have been described in greater detail in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended
June 30, 2011, and Part II. Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, include but are not limited to the following:
|
|
risks and uncertainties relating to our proposed acquisition by DSM, including the risk that the conditions to the tender offer and/or the merger will
not be satisfied or the transaction will not otherwise be completed; the potential negative impact on our business, employee and customer relationships and the market price of our common stock in the event we fail to complete the transaction; and
potential disruption to, and other adverse consequences with respect to, our business during the pendency of the transaction.
|
|
|
our reliance on revenues, including both royalty income and product sales, from the Angio-Seal product line;
|
|
|
our reliance on four customers (Synthes, St. Jude Medical, Arthrex and Stryker) for a majority of our revenues;
|
|
|
future impact of announced pending acquisitions of certain of our key customers or other customers (such as Johnson & Johnsons pending
acquisition of Synthes);
|
|
|
the performance of St. Jude Medical as the manufacturer, marketer and distributor of the Angio-Seal product;
|
|
|
the extent to which St. Jude Medical is able to, and does in fact, rely on its internal manufacturing to fulfill its requirements for collagen plugs
for the Angio-Seal device and the uncertainty of the future performance of the Angio-Seal device in the marketplace;
|
|
|
our ability to declare and pay future dividends;
|
|
|
our dependence on the continued growth and success of our biomaterials products and customers;
|
|
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future success of our ability to integrate the recent acquisitions of assets from Nerites and Norian, and any other acquisitions that we undertake in
the future, without disruption to our business, dilution of stockholder value or harm to our operating results;
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future success of our research and development efforts with respect to biomaterials products, including our cartilage repair and extracellular matrix
technologies and the recently acquired adhesive technology from Nerites;
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Synthes success in selling our extracellular matrix products, and future market acceptance of our biomaterials products;
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the risk that our relationship with Orteq will not be successful and our investment in Orteq may become impaired;
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the competitive markets for our products and our ability to respond more quickly than our competitors to new or emerging technologies and changes in
customer requirements;
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the acceptance of our products by the medical community or new technology introduced replacing our products;
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the loss of, or interruption of supply from, key vendors;
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the successful initiation and completion of clinical trials to support regulatory approval of future generations of our existing products and new
products;
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risks that we have problems manufacturing and delivering our biomaterials products to our customers;
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our ability to scale up the manufacturing of our products to accommodate sales volumes;
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our dependence on our customers for planning their inventories, marketing and obtaining regulatory approval for their products;
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our dependence on key vendors and personnel;
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our use of hazardous materials, which could expose us to future environmental liabilities;
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international market risks that could harm future international sales of our products and our customers;
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the unpredictability of our future operating results;
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risks related to product recalls of, and other manufacturing issues relating to, ours or our partners biomaterials and endovascular products;
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risks related to our intellectual property, including patents, proprietary rights and trademarks;
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risks related to our industry, including potential for litigation, product liability claims, ability to obtain reimbursement for our products, changes
in applicable laws or regulations (including in particular, healthcare, tax laws and regulations and the FDAs 510(k) process), and our products exposure to extensive government regulation;
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risks related to reform of the U.S. healthcare system and its potential effects on our customers demand and our product pricing;
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risks related to our securities, including the fluctuations in our stock price and adherence and compliance with corporate governance laws, regulations
and other obligations affecting our business; and
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general economic and business conditions, nationally, internationally and within our markets.
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Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise after the date of this report. Our results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in
operating results may also result in fluctuations in the price of our Common Stock.
Item 3. Quantitative and
Qualitative Disclosures about Market Risk
Our interest income and expense are sensitive to changes in the general level of interest rates.
In this regard, changes in interest rates affect the interest earned on our cash, cash equivalents and investments, as well as the fair value of the Swap.
Investment Portfolio
Our investment portfolio consists of high quality municipal
securities. The majority of these investments have maturities ranging from less than one year to approximately two years. We mitigate default risk by investing in what we believe are safe and high credit quality securities and by monitoring the
credit rating of investment issuers. Our portfolio includes only securities with secondary or resale markets. We have an audit committee-approved investment strategy, which currently limits the duration and types of our investments. These
available-for-sale securities are subject to interest rate risk and decreases in market value if interest rates increase. As of March 31, 2012, our total investment portfolio consisted of approximately $14.8 million of investments. While
our investments generally may be sold at any time because the portfolio includes available-for-sale securities with secondary or resale markets, we generally hold securities until the earlier of their call date or their maturity. We do not expect
our results of operations or cash flows to be materially impacted due to a sudden change in interest rates. We review our investments to identify and evaluate investments that have an indication of possible impairment. We have no intent to sell any
of these investments until a recovery of their respective fair values, which may be at maturity, and we have no current requirement to sell any of these investments. Additional information regarding our investments is located in Note 2 to the
Condensed Consolidated Financial Statements included in this Form 10-Q.
Debt
On May 25, 2006, we entered into a $35.0 million aggregate ten-year fixed interest rate Swap, with Citibank, N.A., to manage the market risk from
changes in interest rates under the Mortgage. On May 25, 2006 and November 23, 2007, we obtained $8.0 million and $27.0 million advances, respectively, under the Mortgage (see Note 9 to the Condensed Consolidated Financial Statements
included in this Form 10-Q). Our objective and strategy for undertaking the Swap was to hedge our exposure to variability in cash flows and interest expense associated with the future interest rate payments under the Mortgage and to reduce our
interest rate risk in the event of an unfavorable interest rate environment. We currently utilize the Hypothetical Derivative Method in determining the hedge effectiveness of the hedged item each period. We do not expect our results of operations or
cash flows to be materially impacted due to a sudden change in interest rates. If the conditions underlying the Swap or the hedge item change, there is a risk that our hedged item would be deemed an ineffective hedge, and therefore, we would record
changes in the fair value of the Swap within our Condensed Consolidated Statements of Operations, as well as our Condensed Consolidated Statements of Cash Flows. Additional information regarding the Swap is located in Note 9 under the heading
Interest Rate Swap Agreement to the Condensed Consolidated Financial Statements included in this Form 10-Q.
On May 26, 2011,
we entered into a Loan and Agency Agreement (the Credit Agreement) with Wells Fargo, which provides for a three-year, unsecured revolving credit facility of $35.0 million (See Note 9 to the Consolidated Financial Statements included in this Form
10-Q). Under the terms of the Credit Agreement, we may borrow up to the aggregate amount of the unused commitment under the Revolving Credit Facility. The maturity date for the Revolving Credit Facility is May 25, 2014. Our objective in
entering into the Credit Agreement was to have available resources that may be used for the working capital and general corporate purposes of the Company,
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including permitted acquisitions and capital expenditures. As of March 31, 2012, there were no borrowings under the Revolving Credit Facility. If interest rates were to fluctuate, there is a
risk that any outstanding balance would be impacted by the prevailing rate, which could further impact our ability to repay the outstanding balance.
Foreign Currency Exchange Rate Risk
A portion of the Companys total revenues,
including sales and royalties, are dependent on U.S.-based customers selling to end-users outside the U.S. Our total revenues, including sales and royalties to foreign countries are denominated in and payable to us in U.S. dollars, and therefore, we
have not yet to date been subject to material foreign currency exchange rate fluctuation risk. However, there is a risk related to the changes in foreign currency exchange rates as it relates to royalties paid to us in U.S. dollars for which
royalties are received on end-user sales within foreign countries. In addition, we have a cost-method investment, and made additional investments structured as convertible debt, in Orteq, a United Kingdom-based company. We are not currently taking
any affirmative steps to hedge the risk of fluctuations in foreign currency exchange rates. We do not expect our financial position, results of operations or cash flows to be materially impacted due to a sudden change in foreign currency exchange
rates fluctuations relative to the U.S. Dollar.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
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 our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance 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 accurately and within the time frames specified in the SECs rules and forms and that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act 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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2012 at the reasonable
assurance level.
Changes In Internal Control Over Financial Reporting
There were not any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2012
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent
Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal
controls will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, 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. Because of the inherent limitations in a cost-effective control system, no controls can provide
absolute assurance that misstatements due to error or fraud will not occur, and no evaluation of any such controls can provide absolute assurance that control issues and instances of fraud, if any, within our 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 and procedures.
Part II OTHER INFORMATION
Item 1. Legal
Proceedings.
On March 16, 2012, we entered into a Settlement Agreement with St. Jude Medical, which resolves all disputes between
the two companies relating to the Angio-Seal device licenses as well as related claims. See Note 4 and its subsection St. Jude Medical Inc. to the Condensed Consolidated Financial Statements included in this Form 10-Q, which is hereby
incorporated by reference in this Item, for additional information regarding the proceedings and Settlement Agreement with respect to royalty payments and other matters relating to the Angio-Seal device. See Note 13 to the Condensed Consolidated
Financial Statements included in this Form 10-Q, which is hereby incorporated by reference in this Item, for additional information regarding product liability claims.
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Item 1A. Risk Factors.
The Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2011 includes a detailed discussion of our risk factors. There are
no material changes from the risk factors previously disclosed under the caption Risk Factors in Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2011, except that the first risk
factor below is hereby added, and the second risk factor below is hereby amended to read in its entirety as follows.
The transactions
contemplated by the Agreement and Plan of Merger entered into with Koninklijke DSM N.V. (DSM) and Biomedical Acquisition Corporation, an indirect wholly-owned subsidiary of DSM (Merger Sub), may be delayed or may not be consummated.
On May 2, 2012, we entered into an Agreement and Plan of Merger (the Merger Agreement) with DSM and Merger Sub, pursuant to which, among other things,
DSM will commence a tender offer for all the issued and outstanding shares of our common stock and, following the completion of the tender offer, DSM will acquire the remaining outstanding shares of our common stock through a second step merger, all
upon, and subject to, the terms and conditions of the Merger Agreement. There are a number of risks and uncertainties relating to DSMs proposed acquisition of us, including the following:
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uncertainties as to the timing of the tender offer and merger;
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the possibility that the tender offer will fail to meet the condition that at least a majority of the outstanding shares of our common stock on a fully
diluted basis are tendered or that various other conditions to the completion of the tender offer and the merger set forth in the Merger Agreement may not be satisfied or waived;
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the risk that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction;
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the risk that DSM will not perform its obligations under the Merger Agreement; and
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the possibility that the transaction may otherwise be delayed or may not be completed at all.
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Any delay in completing, or the failure to complete, the proposed transaction could have a negative impact on our business, the market price of our
common stock, and our relationships with customers and employees. During the pendency of the transaction, we also run the risk of loss of key employees, disruption in normal business relationships, and substantial distraction of management
attention. We also have incurred, and will incur, significant expenses associated with the transaction with DSM, including fees of professional advisors, and could also be involved in litigation relating to the transaction, which could be costly and
disruptive to our business.
We derive a substantial portion of our revenues from the Angio-Seal device, which is manufactured, marketed
and distributed by St. Jude Medical. Any adverse change in St. Jude Medicals sales of the Angio-Seal device or in our relationship with St. Jude Medical could have a material adverse impact on our business.
Historically, one of our significant sources of revenue has been royalty income from St. Jude Medical related to the Angio-Seal device. Pursuant to the
terms of the Settlement Agreement (the Settlement Agreement) that we entered into with St. Jude Medical on March 16, 2012, we are entitled to receive fixed royalty revenue in an amount equal to $39.0 million from St. Jude Medical, payable in 12
equal quarterly payments beginning March 31, 2012 through December 2014, in lieu of all future royalties for the Angio-Seal and all other related claims we had against St. Jude Medical. Accordingly, going forward, we will not receive any
royalty income from St. Jude Medicals sales of the Angio-Seal device other than the fixed payments they are required to make to us under the Settlement Agreement through December 2014; after the end of calendar 2014, we will not be entitled to
any Angio-Seal royalty payments.
In addition to royalty income recognized under the Settlement Agreement, we are also dependent on revenue
from our sales of components of the Angio-Seal device to St. Jude Medical. In connection with our entering into the Settlement Agreement, we also entered into a new collagen supply agreement (the 2012 Collagen Supply Agreement) with St. Jude
Medical, which runs through December 2017. Although we are the exclusive third party supplier of collagen plugs for the Angio-Seal device under the 2012 Collagen Supply Agreement, St. Jude Medical is not prohibited from producing the collagen plugs
itself. Our collagen plug sales to St. Jude Medical in excess of the contractual minimums provided for in the 2012 Collagen Supply Agreement will depend on the extent to which St. Jude Medical is able to, and does in fact, rely on its internal
manufacturing to fulfill requirements for collagen plugs for the Angio-Seal device. That may depend, at least in part, on their satisfaction with our product output and quality, and more generally on our ability to maintain a strong business
relationship with St. Jude Medical.
Additionally, we are dependent on the time, effort and attention that St. Jude Medical devotes to
the Angio-Seal device, and on their success in manufacturing, marketing and selling the device worldwide, as sales levels directly relate to their need for collagen plugs. We do not have any control over the pricing and marketing strategy for the
Angio-Seal product line. In addition, we depend on St. Jude Medical to successfully maintain levels of manufacturing sufficient to meet anticipated demand, abide by applicable manufacturing regulations and seek reimbursement approvals.
St. Jude Medical may not adequately perform its manufacturing, marketing and selling duties, and any such failure by St. Jude Medical may negatively impact Angio-Seal unit sales and, therefore, adversely impact any future collagen orders
in excess of the contractual minimums.
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Item 6. Exhibits.
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Exhibit
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Description
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Incorporation By Reference
To
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2.1
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Agreement and Plan of Merger, dated as of May 2, 2012, among Koninklijke DSM N.V., Biomedical Acquisition Corporation and Kensey Nash Corporation. The schedules and exhibits
(other than exhibits A and B) to the Agreement and Plan of Merger have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K but will be provided supplementally to the SEC upon request.
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Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on May 3, 2012.
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4.1
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Amendment, dated as of May 2, 2012, to the Rights Agreement, dated as of June 18, 2009, between Kensey Nash Corporation and Computershare Trust Company, N.A.
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Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on May 3, 2012.
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10.1
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Settlement Agreement between Kensey Nash Corporation and St. Jude Medical, Inc., dated as of March 16, 2012. *
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Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 19, 2012. *Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities Exchange Act of 1934 and Rule 406 under Securities Act of 1933.
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31.1
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Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).
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31.2
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Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).
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32.1
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Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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32.2
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Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
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101
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The following materials from Kensey Nash Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting
Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial
Statements
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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KENSEY NASH CORPORATION
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Date: May 10, 2012
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By:
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/s/ Michael Celano
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Michael Celano
Chief Financial
Officer
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