##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 FOR THE TRANSITION PERIOD FROM
 _____ 
to
 _____
 COMMISION FILE NUMBER: 001-34612
 OSTEOTECH, INC.
 (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 DELAWARE(STATE OR OTHER JURISDICTION OF 
INCORPORATION OR ORGANIZATION)
    
    13-3357370(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
 51 James Way, Eatontown, New Jersey, 07724  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
 (732) 542-2800  (REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



OSTEOTECH, INC.
 FORM 10-Q
 Table of Contents
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 6. Exhibits
    
    
    18Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
 OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (dollars in thousands)
 March 31,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,271
    
    
    $
    10,708Accounts receivable, net of allowance of $362 in 2010 and $304 in 2009
    
    
    16,424
    
    
    
    16,165Deferred processing costs
    
    
    34,123
    
    
    
    38,562Inventories
    
    
    1,589
    
    
    
    1,819Prepaid expenses and other current assets
    
    
    2,908
    
    
    
    3,247Total current assets
    
    
    65,315
    
    
    
    70,501Property, plant and equipment, net
    
    
    28,300
    
    
    
    29,575Other assets
    
    
    17,649
    
    
    
    16,861Total assets
    
    $
    111,264
    
    
    $
    116,937LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    12,302
    
    
    $
    16,206Current maturities of capital lease obligation
    
    
    1,020
    
    
    
    994Total current liabilities
    
    
    13,322
    
    
    
    17,200Capital lease obligation
    
    
    11,916
    
    
    
    12,181Other liabilities
    
    
    7,167
    
    
    
    7,270Total liabilities
    
    
    32,405
    
    
    
    36,651Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; no
shares
issued or outstandingCommon stock, $.01 par value; 70,000,000 shares authorized; issued
18,210,952 shares in 2010 and 18,179,180 shares in 2009
    
    
    182
    
    
    
    182Additional paid-in capital
    
    
    71,639
    
    
    
    71,337Treasury stock, at cost; 115,670 shares in 2010 and 2009
    
    
    (227
    )
    
    
    (227
    )Accumulated other comprehensive income
    
    
    1,264
    
    
    
    1,410Retained earnings
    
    
    6,001
    
    
    
    7,584Total stockholders equity
    
    
    78,859
    
    
    
    80,286Total liabilities and stockholders equity
    
    $
    111,264
    
    
    $
    116,937
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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  (dollars in thousands, except per share data)
 Three Months EndedMarch 31,2010
    
    
    2009Revenue
    
    $
    22,527
    
    
    $
    23,931Cost of revenue
    
    
    11,557
    
    
    
    11,964Gross profit
    
    
    10,970
    
    
    
    11,967Marketing, selling and general and
administrative expenses
    
    
    10,703
    
    
    
    11,618Research and development expenses
    
    
    1,208
    
    
    
    1,65311,911
    
    
    
    13,271Operating loss
    
    
    (941
    )
    
    
    (1,304
    )Other income (expense):Interest income
    
    
    25
    
    
    
    16Interest expense
    
    
    (364
    )
    
    
    (370
    )Other
    
    
    (187
    )
    
    
    (83
    )(526
    )
    
    
    (437
    )Loss before income taxes
    
    
    (1,467
    )
    
    
    (1,741
    )Income tax provision
    
    
    116
    
    
    
    55Net loss
    
    $
    (1,583
    )
    
    $
    (1,796
    )Loss per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.10
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.10
    )Shares used in computing loss per share:Basic
    
    
    18,073,471
    
    
    
    17,874,236Diluted
    
    
    18,073,471
    
    
    
    17,874,236
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OSTEOTECH, INC. and SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  (dollars in thousands)
 Three Months EndedMarch 31,2010
    
    
    2009Cash Flow From Operating ActivitiesNet loss
    
    $
    (1,583
    )
    
    $
    (1,796
    )Adjustments to reconcile net loss to net cash
provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,462
    
    
    
    1,566Stock-based compensation expense, net
    
    
    295
    
    
    
    407Changes in current assets and liabilities:Accounts receivable
    
    
    (259
    )
    
    
    (2,847
    )Deferred processing costs
    
    
    3,453
    
    
    
    (2,495
    )Inventories
    
    
    230
    
    
    
    (503
    )Receivable from license agreements
    
    
    600
    
    
    
    500Prepaid expenses and other current assets
    
    
    (4
    )
    
    
    564Accounts payable and other liabilities
    
    
    (3,981
    )
    
    
    623Net cash provided by (used in) operating activities
    
    
    213
    
    
    
    (3,981
    )Cash Flow From Investing ActivitiesCapital expenditures
    
    
    (136
    )
    
    
    (635
    )Other, net
    
    
    (233
    )
    
    
    (182
    )Net cash used in investing activities
    
    
    (369
    )
    
    
    (817
    )Cash Flow From Financing ActivitiesPurchase of treasury stock
    
    
    
    
    
    
    (102
    )Proceeds from issuance of common stock
    
    
    7
    
    
    
    47Principal payments on capital lease obligation
    
    
    (239
    )
    
    
    (215
    )Net cash used in financing activities
    
    
    (232
    )
    
    
    (270
    )Effect of exchange rate changes on cash
    
    
    (49
    )
    
    
    (58
    )Net decrease in cash and cash equivalents
    
    
    (437
    )
    
    
    (5,126
    )Cash and cash equivalents at beginning of period
    
    
    10,708
    
    
    
    18,823Cash and cash equivalents at end of period
    
    $
    10,271
    
    
    $
    13,697Supplementary cash flow data:Cash paid during the period for interest
    
    $
    362
    
    
    $
    382Cash paid (refunded) during the period for taxes
    
    $
    25
    
    
    $
    (149
    )
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OSTEOTECH, INC. and SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 (dollars in thousands, except per share data)
 1. Basis of Presentation
 General
  Recent Accounting Pronouncements
  2. Deferred Processing Costs
  March 31,
    
    
    December 31,2010
    
    
    2009Unprocessed donor tissue
    
    $
    12,989
    
    
    $
    16,692Tissue in process
    
    
    5,600
    
    
    
    4,062Implantable donor tissue
    
    
    15,534
    
    
    
    17,808$
    34,123
    
    
    $
    38,562
 $
 3. Inventories
  March 31,
    
    
    December 31,2010
    
    
    2009Supplies
    
    $
    309
    
    
    $
    428Raw materials
    
    
    752
    
    
    
    779Finished goods
    
    
    528
    
    
    
    612$
    1,589
    
    
    $
    1,819
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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 4. Revolving Credit Facility
    5. Shareholders Equity
 Stock Compensation Plans
   RSUs
    
    
    OptionsWeighted-AverageWeighted-
    
    
    
    
    
    
    Weighted-
    
    
    RemainingAverage
    
    
    
    
    
    
    Average
    
    
    ContractualNumber of
    
    
    Grant Date
    
    
    Number of
    
    
    Exercise
    
    
    TermShares
    
    
    Fair Value
    
    
    Shares
    
    
    Price
    
    
    (Years)Outstanding, January 1, 2010
    
    
    434,283
    
    
    $
    4.58
    
    
    
    1,386,812
    
    
    $
    6.04Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Vested RSUs or exercised
options
    
    
    (51,967
    )
    
    $
    3.53
    
    
    
    (2,000
    )
    
    $
    3.50Forfeited, cancelled or expired
    
    
    (48,594
    )
    
    $
    2.61
    
    
    
    (17,400
    )
    
    $
    5.92Outstanding, March 31, 2010
    
    
    333,722
    
    
    $
    5.03
    
    
    
    1,367,412
    
    
    $
    6.04
    
    
    
    3.9Options exercisable
    
    
    
    
    
    
    
    
    
    
    1,261,162
    
    
    $
    6.15
    
    
    
    3.5
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##### Table of Contents



OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
    6. Income Taxes
 Income Taxes
   7. Commitments and Contingencies
 Litigation
  Other Contingencies
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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 8. Comprehensive Loss
  Three Months EndedMarch 31,2010
    
    
    2009Net loss
    
    $
    (1,583
    )
    
    $
    (1,796
    )Currency translation adjustments
    
    
    (146
    )
    
    
    (114
    )Comprehensive loss
    
    $
    (1,729
    )
    
    $
    (1,910
    )
 9. Loss Per Share
  Three Months EndedMarch 31,2010
    
    
    2009Net loss available to common stockholders
    
    $
    (1,583
    )
    
    $
    (1,796
    )Denominator for basic loss per share,
weighted average common shares outstanding
    
    
    18,073,471
    
    
    
    17,874,236Effect of dilutive securities after
application of the treasury stock method:Restricted stock units
    
    
    
    
    
    
    Stock options
    
    
    
    
    
    
    Denominator for diluted loss per share
    
    
    18,073,471
    
    
    
    17,874,236Basic loss per share
    
    $
    (0.09
    )
    
    $
    (0.10
    )Diluted loss per share
    
    $
    (0.09
    )
    
    $
    (0.10
    )
  10. Fair Value Measurements
 Fair Value Measurements and Disclosures
     - 8 -




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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Asset:Money market funds
    
    $
    5,832
    
    
    $
    
    
    
    $
    
  11. Operating Segments
  Three Months EndedMarch 31,Revenue:
    
    2010
    
    
    2009DBM
    
    $
    13,133
    
    
    $
    14,026Hybrid/Synthetic
    
    
    2,380
    
    
    
    748Traditional Tissue
    
    
    5,070
    
    
    
    5,277Spinal Allograft
    
    
    1,699
    
    
    
    1,880Client Services
    
    
    12
    
    
    
    1,633Other
    
    
    233
    
    
    
    367$
    22,527
    
    
    $
    23,931
 Three Months EndedMarch 31,Operating income (loss):
    
    2010
    
    
    2009DBM
    
    $
    4,175
    
    
    $
    3,932Hybrid/Synthetic
    
    
    286
    
    
    
    102Traditional Tissue
    
    
    300
    
    
    
    290Spinal Allograft
    
    
    (279
    )
    
    
    244Client Services
    
    
    2
    
    
    
    1,193Other
    
    
    10
    
    
    
    (129
    )Corporate
    
    
    (5,435
    )
    
    
    (6,936
    )$
    (941
    )
    
    $
    (1,304
    )
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OSTEOTECH, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements  (dollars in thousands, except per share data)
 12. Other Income (Expense)
  Three Months EndedMarch 31,Other:
    
    2010
    
    
    2009Foreign exchange loss
    
    $
    (175
    )
    
    $
    (70
    )Other
    
    
    (12
    )
    
    
    (13
    )$
    (187
    )
    
    $
    (83
    )
  - 10 -




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussions should be read in conjunction with the condensed consolidated financial
statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q .
 Information included herein contains forward-looking statements which can be identified by the
use of forward-looking terminology such as believes, expects, may, will, should, or
anticipates or the negative thereof or variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. Some of the matters set forth in Item 1A, Risk
Factors, of our Annual Report on Form 10-K for the year ended December 31, 2009 constitute
cautionary statements identifying factors with respect to such forward-looking statements,
including certain risks and uncertainties, that could cause actual results to vary materially from
the future results indicated in such forward-looking statements. Other factors could also cause
actual results to vary materially from the future results indicated in such forward-looking
statements. Except as may be required by law, we undertake no obligation to update any
forward-looking statement to reflect events after the date of this report.
 FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 Results of Operations
 Critical Accounting Policies and Estimates
  Net loss
 Three Months EndedMarch 31,(dollars in thousands, except per share amounts)
    
    2010
    
    
    2009
    
    
    ChangeNet loss
    
    $
    (1,583
    )
    
    $
    (1,796
    )
    
    $
    213Loss per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.10
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.10
    )
  Revenue
   - 11 -




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Three Months EndedMarch 31,Percent(dollars in thousands,)
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeDBM
    
    $
    13,133
    
    
    $
    14,026
    
    
    $
    (893
    )
    
    
    -6
    %Hybrid/Synthetic
    
    $
    2,380
    
    
    $
    748
    
    
    $
    1,632
    
    
    
    218
    %Traditional Tissue
    
    $
    5,070
    
    
    $
    5,277
    
    
    $
    (207
    )
    
    
    -4
    %Spinal Allograft
    
    $
    1,699
    
    
    $
    1,880
    
    
    $
    (181
    )
    
    
    -10
    %Client Services
    
    $
    12
    
    
    $
    1,633
    
    
    $
    (1,621
    )
    
    
    -99
    %Other
    
    $
    233
    
    
    $
    367
    
    
    $
    (134
    )
    
    
    -37
    %$
    22,527
    
    
    $
    23,931
    
    
    $
    (1,404
    )
    
    
    -6
    %
 ® ®
 ® ® ®
  ® TM ®
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Gross Profit Margin
 Three Months EndedMarch 31,(dollars in thousands)
    
    2010
    
    
    2009Gross Profit
    
    $
    10,970
    
    
    $
    11,967Gross Margin
    
    
    49
    %
    
    
    50
    %
  Operating Expenses
 Three Months EndedMarch 31,Percent(dollars in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeMarketing, selling and
general and
administrative
    
    $
    10,703
    
    
    $
    11,618
    
    
    $
    (915
    )
    
    
    -8
    %Research and
development
    
    $
    1,208
    
    
    $
    1,653
    
    
    $
    (445
    )
    
    
    -27
    %$
    11,911
    
    
    $
    13,271
    
    
    $
    (1,360
    )
    
    
    -10
    %
  Operating Income (Loss) By Segment
 Three Months EndedMarch 31,Percent(dollars in thousands,)
    
    2010
    
    
    2009
    
    
    Change
    
    
    ChangeDBM
    
    $
    4,175
    
    
    $
    3,932
    
    
    $
    243
    
    
    
    6
    %Hybrid/Synthetic
    
    $
    286
    
    
    $
    102
    
    
    $
    184
    
    
    
    180
    %Traditional Tissue
    
    $
    300
    
    
    $
    290
    
    
    $
    10
    
    
    
    3
    %Spinal Allograft
    
    $
    (279
    )
    
    $
    244
    
    
    $
    (523
    )
    
    
    -214
    %Client Services
    
    $
    2
    
    
    $
    1,193
    
    
    $
    (1,191
    )
    
    
    -100
    %Other
    
    $
    10
    
    
    $
    (129
    )
    
    $
    139
    
    
    
    -108
    %Product Segment Operating Income
    
    $
    4,494
    
    
    $
    5,632
    
    
    $
    (1,138
    )
    
    
    -20
    %Corporate
    
    $
    (5,435
    )
    
    $
    (6,936
    )
    
    $
    1,501
    
    
    
    -22
    %Operating Loss
    
    $
    (941
    )
    
    $
    (1,304
    )
    
    $
    363
    
    
    
    -28
    %
   - 13 -




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Other Income (Expense)
  Income Tax Provision
 Income Taxes
   Liquidity and Capital Resources  (dollars in thousands)
 March 31,
    
    
    December 31,2010
    
    
    2009Cash and cash equivalents
    
    $
    10,271
    
    
    $
    10,708Working Capital
    
    $
    51,993
    
    
    $
    53,301Stockholders equity
    
    $
    78,859
    
    
    $
    80,286
  Three Months EndedMarch 31,2010
    
    
    2009Net cash provided by (used in) operating
activities
    
    $
    213
    
    
    $
    (3,981
    )Net cash used in investing activities
    
    $
    (369
    )
    
    $
    (817
    )Net cash used in financing activities
    
    $
    (232
    )
    
    $
    (270
    )Effect of foreign currency exchange
rates on cash
    
    $
    (49
    )
    
    $
    (58
    )Net decrease in cash and cash equivalents
    
    $
    (437
    )
    
    $
    (5,126
    )
  - 14 -




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Cash Flow From Operating Activities
  Cash Flow From Investing Activities
  Cash Flow From Financing Activities
  Financing Needs
  
    
    the progress of our product launch and product development programs and the need and
associated costs relating to regulatory approvals, if any, which may be needed to
commercialize some of our products under development;
 
    
    the timing and expansion of our internal sales and marketing efforts, including
additional field sales staff, to support our product launches; and
 
    
    the resources we devote to the development, manufacture and marketing of our
services and products.
  Credit Facility
   - 15 -




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Recent Accounting Developments
 Recent Accounting Pronouncements,
 Contractual Obligations
  Impact of Inflation and Foreign Currency Exchange Fluctuations
   Litigation
    - 16 -




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Government Proceedings
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
   - 17 -




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 6. EXHIBITS
  Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number3.1
    
    
    Restated Certificate of Incorporation of Osteotech, as amended (incorporated by
reference to Exhibit 3.1 to Registrants Annual Report on Form 10-K, filed on March
27, 2002)3.2
    
    
    Fifth Amended and Restated Bylaws of Osteotech (incorporated by reference to Exhibit
3.1 to Registrants Current Report on Form 8-K, filed on November 7, 2007)31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    +31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    +32.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    +32.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    +
 +
    
    Filed herewith.  - 18 -




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##### Table of Contents



SIGNATURES
  Date: May 10, 2010
    
    Osteotech, Inc.(Registrant)Date: May 10, 2010
    
    By:
    
    /s/ Sam Owusu-Akyaw

Sam Owusu-AkyawPresident and Chief Executive Officer(Principal Executive Officer)Date: May 10, 2010
    
    By:
    
    /s/ Mark H. Burroughs

Mark H. BurroughsExecutive Vice President,Chief Financial Officer(Principal Financial Officer andChief Accounting Officer)
  - 19 -




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number31.1
    
    
    Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
    
    +31.2
    
    
    Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
    
    +32.1
    
    
    Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    +32.2
    
    
    Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
    
    +
 +
    
    Filed herewith.  - 20 -