<PAGE>
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 September 30, 1998.
-------------------
[ ] 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 0-24517 .
------------------
ORTHOVITA, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2694857 .
-------------------------------- -------------------------
(State Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
45 Great Valley Parkway, Malvern, PA 19355 .
- ---------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 640-1775 .
------------------
Not Applicable .
--------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 ____
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30,1998
- ---------------------------- ---------------------------------------
Common Stock, par value $.01 11,216,628 Shares
This Report Includes a Total of 16 Pages
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
INDEX
PART I- PAGE
FINANCIAL NUMBER
INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 3
and December 31, 1997
Consolidated Statements of Operations - Three and 4
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows - Nine 5
months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of 9-16
Financial Condition and Results of Operations
PART II-
OTHER
INFORMATION
Item 2. Change in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------- ---------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,869,724 $ 2,257,902
Restricted cash -- 200,000
Short-term investments 6,014,023 --
Trade accounts receivable, net of allowance 579,984 469,363
of $136,028 and $110,078
Inventories 225,307 248,707
Other current assets 155,915 101,794
------------- -------------
Total current assets 17,844,953 3,277,766
PROPERTY AND EQUIPMENT, net 1,615,725 1,584,244
------------- -------------
$ 19,460,678 $ 4,862,010
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term bank borrowings -- $ 692,000
Current portion of long-term debt $ 666,762 690,985
Accounts payable 176,776 668,446
Deferred revenue 450,000 --
Accrued patent defense costs 470,970 1,003,236
Accrued compensation and related expenses 751,235 412,926
Other accrued expenses 720,009 891,032
------------- -------------
Total current liabilities 3,235,752 4,358,625
------------- -------------
LONG-TERM DEBT 545,223 832,991
------------- -------------
REDEEMABLE CLASS C CONVERTIBLE PREFERRED STOCK, 1,882,353 shares
issued and outstanding at December 31, 1997 and no shares issued and -- 7,383,090
outstanding at September 30,1998 ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (DEFICIT):
Class A Convertible Preferred Stock, $.01 par value, 606,060 shares -- 6,061
issued and outstanding at December 31, 1997 and no shares issued and
outstanding at September 30, 1998
Class B Convertible Preferred Stock, $.01 par value, 1,038,005 shares -- 10,380
issued and outstanding at December 31, 1997 and no shares issued and
outstanding at September 30, 1998
Common Stock, $.01 pare value, 15,000,000 shares authorized, 112,166 51,862
11,216,628 and 5,186,200 shares issued and outstanding
Additional paid-in capital 41,736,039 13,138,103
Accumulated deficit (26,168,081) (20,885,159)
Unrealized gain on investments available for sale 56,533 --
Cumulative translation adjustment (56,954) (33,943)
------------- -------------
Total stockholders' equity (deficit) 15,679,703 (7,712,696)
------------- -------------
$ 19,460,678 $ 4,862,010
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
NET REVENUES $ 377,428 $ 787,227 $ 2,314,622 $ 2,206,416
COST OF SALES 221,077 219,537 767,273 696,489
---------------- ---------------- ---------------- ----------------
Gross profit 156,351 567,690 1,547,349 1,509,927
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
General and administrative 1,159,280 809,776 2,229,301 2,842,888
Selling and marketing 700,875 1,030,100 2,472,658 3,117,145
Research and development 611,953 458,214 1,809,627 1,326,580
---------------- ---------------- ---------------- ----------------
Total operating expenses 2,472,108 2,298,090 6,511,586 7,286,613
---------------- ---------------- ---------------- ----------------
Operating loss (2,315,757) (1,730,400) (4,964,237) (5,776,686)
INTEREST EXPENSE (37,596) (10,964) (151,717) (98,275)
INTEREST INCOME 181,424 55,130 216,922 129,460
FOREIGN CURRENCY ADJUSTMENT 27,684 (54,158) 7,323 (252,526)
---------------- ---------------- ---------------- ----------------
Loss before extraordinary item (2,144,245) (1,740,392) (4,891,709) (5,998,027)
EXTRAORDINARY ITEM GAIN ON
EARLY EXTINGUISHMENT OF DEBT -- -- -- 397,402
---------------- ---------------- ---------------- ----------------
NET LOSS (2,144,245) (1,740,392) (4,891,709) (5,600,625)
ACCRETION OF REDEMPTION
PREMIUM ON PREFERRED STOCK -- 201,195 391,213 335,322
---------------- ---------------- ---------------- ----------------
NET LOSS APPLICABLE TO COMMON $(2,144,245) $(1,941,587) $(5,282,922) $(5,935,947)
STOCKHOLDERS ================ ================ ================ ================
NET LOSS PER COMMON SHARE
Before extraordinary item $(.19) $(.37) $(.72) $(1.25)
Extraordinary item -- -- -- .08
---------------- ---------------- ---------------- ----------------
NET LOSS PER COMMON SHARE $(.19) $(.37) $(.72) $(1.17)
================ ================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON 11,160,158 5,186,247 7,317,929 5,071,067
SHARES OUTSTANDING ================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,891,709) $(5,600,625)
Adjustments to reconcile net loss to net cash used in operating
activities -
Extraordinary gain -- (397,902)
Imputed interest -- 13,672
Depreciation 319,099 107,129
Services provided for Common Stock and Common Stock options 10,313 211,000
(Increase) decrease in -
Restricted cash 200,000 (200,000)
Trade accounts receivable, net (110,621) (222,478)
Inventories 23,400 (111,757)
Other current assets (54,122) (122,768)
Other assets -- 72,433
Increase (decrease) in -
Accounts payable (491,670) (192,861)
Deferred revenue 450,000 --
Accrued patent defense costs (532,266) --
Accrued compensation and related expenses 338,309 (343,612)
Other accrued expenses (171,021) 737,869
------------- -------------
Net cash used in operating activities (4,910,288) (6,049,900)
------------- -------------
INVESTING ACTIVITIES:
Purchases of investments, net (6,003,157) --
Purchases of property and equipment (93,167) (740,844)
------------- -------------
Net cash used in investing activities (6,096,324) (740,844)
------------- -------------
FINANCING ACTIVITIES:
Repayment of short-term bank borrowings (692,000) (410,000)
Repayment of long-term debt (375,000) (323,580)
Repayment of capital lease obligations (194,404) --
Proceeds from sale of Common Stock 20,259,751 2,250,579
Proceeds from sale of Class B Convertible Preferred Stock -- 1,025,390
Proceeds from sale of Class C Convertible Preferred Stock -- 7,609,204
Proceeds from exercise of common stock options and warrants 663,633 --
------------- -------------
Net cash provided by financing activities 19,661,980 10,151,593
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (43,546) 209,113
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,611,822 3,569,962
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,257,902 253,465
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $10,869,724 $ 3,823,427
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Orthovita, Inc. (the "Company") was incorporated in Pennsylvania in June 1992
and began operations in November 1993. The Company is engaged in the development
and commercialization of proprietary bioactive bone substitutes. The Company's
future results of operations involve a number of risks and uncertainties.
Factors that could affect the Company's future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, the uncertainty related to regulatory clearances, uncertainty of market
acceptance, limited clinical trials, uncertainty related to third-party
reimbursement, dependence on patents, trade secrets and proprietary rights,
limited manufacturing experience, dependence on suppliers, competition,
uncertainty of technological change, dependence on key personnel and advisors,
product liability and the availability of adequate insurance.
Basis of Consolidation
The consolidated financial statements include the accounts of Orthovita, Inc.,
its Belgian branch operations, and its wholly owned subsidiaries, Ortho, Inc.
and Vita Licensing, Inc. Ortho, Inc. and Vita Licensing, Inc. were formed on
June 29, 1998 for the purpose of managing the Company's investment and
intellectual property portfolios, respectively. On August 10, 1998 the Company
announced the formation of Partisyn Corporation, a wholly owned subsidiary, to
exploit the industrial and commercial applications of fine particle synthesis or
nano-structured technology through licensing and royalty arrangements. The
formation of the subsidiary will allow the Company to continue to maintain its
major focus in the development and commercialization of its core business of
biomaterials based bone substitutes and bone cements. Intercompany balances and
transactions have been eliminated in consolidation.
Basis of Presentation
The consolidated interim financial statements of Orthovita, Inc. are unaudited
and, in the opinion of management, include all adjustments (consisting only of
normal and recurring adjustments) necessary for a fair presentation of results
for these interim periods. The consolidated interim financial statements do not
include all of the information and footnote disclosures normally included in
financial statements prepared in accordance with United States generally
accepted accounting principles and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Prospectus dated June 25, 1998, filed with the Securities and Exchange
Commission, which includes financial statements as of and for the year ended
December 31, 1997. The results of the Company's operations for any interim
period are not necessarily indicative of the results of the Company's operations
for any other interim period or for a full year.
6
<PAGE>
Loss per share
Loss per share is computed using the weighted average number of common shares
outstanding during each operating period presented. Common stock equivalents
including stock options and warrants are excluded from the computation, as their
effect is antidilutive.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income", the
comprehensive loss for each three-month and nine-month period ended September 30
is not materially different from the net loss as reported.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
As of September 30, 1998 cash, cash equivalents and investments at cost and fair
market value consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair Market
Original Cost Gains Losses Value
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $10,869,724 -- -- $10,869,724
Short-term investments 5,957,490 $59,552 $(3,019) 6,014,023
---------------- ---------------- ----------------- ----------------
$16,827,214 $59,552 $(3,019) $16,883,747
================ ================ ================= ================
</TABLE>
The Company invests its excess cash in highly liquid investment-grade marketable
securities including corporate commercial paper and U.S. government agency
bonds. For financial reporting purposes, the Company considers all highly liquid
investment instruments purchased with an original maturity of three months or
less to be cash equivalents. All investments are considered available-for-sale
and accordingly unrealized gains and losses are included in a separate component
of stockholders' equity.
3. BANK BORROWINGS
As of December 31, 1997, $692,000 was outstanding under a $1 million line of
credit arrangement the Company has with a bank. The Company repaid the
outstanding line of credit on July 28, 1998. In addition, on August 31, 1998
the Company repaid in-full the Bank term loan.
4. COMMITMENTS AND CONTINGENCIES
In May 1996 a complaint was filed in the U.S. District Court for the Northern
District of Florida (the "Court") by the University of Florida Research
Foundation, Inc., U.S. Biomaterials Corporation and Block Drug Corporation (the
"Plaintiffs") against the Company, a distributor of the Company's BIOGRAN/R/
product and the Company's Chief Scientific Officer (the "Defendants"). This
action charged the Defendants with infringement of U.S. Patent No. 4,851,046,
said to be assigned to the University of Florida Research Foundation and said to
be exclusively licensed to U.S. Biomaterials Corporation (the "BIOGRAN Matter").
In April 1998, the Court granted the Company's summary judgement motion stating
that the Company's BIOGRAN product does not infringe this patent. The
complaints alleging false representation, unfair competition, false advertising
and trade disparagement under federal and Florida state law was settled with the
Plaintiffs in September 1998. In addition, during September 1998, the
Plaintiffs requested an appeal to the Court's summary judgement with respect to
the patent infringement claim. In response the Company filed a counter claim
alleging inequitable conduct.
7
<PAGE>
As of September 30, 1998, the Company had a reserve of approximately $471,000
for the estimated future cost of the BIOGRAN Matter.
During August 1998, the Company reserved approximately $425,000 for its
commitments under an employment and severance agreement that was effected
through the separation of an officer of the Company.
5. STOCKHOLDERS' EQUITY
During July 1998, in connection with the Company's initial public offering, the
Company sold 300,000 additional shares of common stock at $10.50 per share as
the underwriters' exercised their over-allotment option, raising net proceeds of
approximately $2.9 million.
During the three and nine months ended September 30, 1998, stock options and
warrants to purchase 277,630 shares and 333,596 shares of common stock were
exercised raising $449,281 and $663,633, respectively. Additionally during the
three and nine months ended September 30, 1998, the Company issued stock options
to purchase 14,000 shares and 58,600 shares of common stock, respectively, at
market values ranging from $4.25 to $11.63 per share to employees, consultants
and advisors. During 1998, the Company charged to expense $10,313 related to the
excess of the fair value of the Company's common stock at the dates the options
were granted over the options' aggregate exercise price.
6. NET PRODUCT REVENUE
In September 1998, the Company issued a voluntary product notice for certain lot
numbers of BIOGRAN packaged in glass syringes. The voluntary product
notification resulted from ten reported instances where difficulty in dispensing
the material from the glass syringes resulted in breakage. This breakage was
reported in less than two-tenths of one percent of the BIOGRAN products shipped.
As a result of the product notice, the Company has deferred the recognition of
$450,000 in product revenue from BIOGRAN syringe sales. Replacement product
began shipping in October to customers, and as replacement product is shipped to
customers, product revenue is being recognized.
On April 28, 1998 the Company and Implant Innovations, Inc. ("3i"), a US-based
company involved in the manufacture, marketing and sale of dental implant
products and oral health products, formed a global strategic alliance for the
sale and marketing of BIOGRAN. Effective as of May 1, 1998, all product revenue
has been derived from sales of BIOGRAN to 3i. Per the contract between the
Company and 3i, the Company's unit selling price is 50% of 3i's average selling
price per unit to 3i's customers for the prior quarter.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN RISKS RELATED TO ORTHOVITA'S BUSINESS
This Report contains certain forward-looking and cautionary statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and should
be read in conjunction with the forward-looking statements in this Report as
well as statements presented elsewhere by the Company. These statements include
those relating to future events and risks and the Company's financial condition,
results of operations, liquidity, and capital resources.
The Company's future results of operations involve a number of risks and
uncertainties. Actual events or results may differ materially from those
indicated by such forward-looking statements for a variety of reasons including,
but not limited to, the uncertainty related to regulatory clearances,
uncertainty of market acceptance, limited clinical trials, uncertainty related
to third-party reimbursement, dependence on patents, trade secrets and
proprietary rights, limited manufacturing experience, dependence on suppliers,
competition, uncertainty of technological change, dependence on key personnel
and advisors, and product liability and the availability of adequate insurance.
There is little historical data regarding the Company's market price for shares.
Future negative announcements concerning the Company, its competitors or other
companies in the bone substitute industry, including the results of testing and
clinical trials, regulatory decisions, or public concern as to the safety or
commercial value of the Company's products may have a material adverse effect
the market price of the Company's common stock.
RECENT DEVELOPMENTS
In April 1998, the Company entered into an exclusive global strategic alliance
with Implant Innovations, Inc. ("3i"). The arrangement provides for 3i to
purchase, and for the Company to supply, specified minimum monthly amounts of
BIOGRAN in 1998 for the dental market. The Company's sale of BIOGRAN to 3i has,
to date, exceeded the rate of product resale by 3i to its customers as the sales
transition and training period with 3i has taken longer than expected due to
turnover and management changes within 3i. Of the approximately $1.1 million in
product sales to 3i to-date, the Company estimates that $630,000 of product is
held in 3i's inventory as of September 30, 1998. This $630,000 represents
approximately $1.3 million in sales to 3i customers. While 3i has minimum
purchase requirements for the year 2000 and beyond, for 1999 3i has no such
minimum purchase requirements. Accordingly, additional sales of BIOGRAN by the
Company to 3i in 1999 will depend upon 3i's BIOGRAN inventory level relative to
its rate of product resale to its customers. Therefore, the Company decided,
and has reached an understanding with 3i, that some or all of the contract
purchase minimums specified for the fourth quarter of 1998 will be deferred into
1999. The decision was made to better match the Company's sales of BIOGRAN to
3i with 3i's sales to its customers. In addition, the deferral of any fourth
quarter 1998 contract purchase minimums will help to reduce the probability of
there being a period in the beginning of 1999 during which the Company might
record no product sales to 3i.
In September 1998, the Company issued a voluntary product notice for certain lot
numbers of BIOGRAN packaged in glass syringes. The voluntary product
notification resulted from ten reported instances where difficulty in dispensing
the material from the glass syringes resulted in breakage. This breakage was
reported in less than two-tenths of one percent of the BIOGRAN products shipped.
As a result of the product notice, the Company has deferred the recognition of
$450,000 in product revenue from BIOGRAN syringe sales. Replacement product
began
9
<PAGE>
shipping in October to customers, and as replacement product is shipped to
customers, product revenue is being recognized.
In June 1998, the Company submitted a 510(k) application to the United States
Food and Drug Administration (the "FDA") for using ORTHOCOMP as an augment to
screw fixation in fracture repair. The Company subsequently had discussions
with the FDA regarding the regulatory approval pathway for ORTHOCOMP for this
indication. In those discussions, the Company withdrew its 510(k) submission
for ORTHOCOMP, because it was agreed with the FDA that the FDA would first look
at the results of clinical studies that the Company previously planned to start
in early 1999 in Europe and in the U.S. At such time as the clinical results
are available, the FDA will then determine whether or not the request for
marketing clearance of ORTHOCOMP for this indication should be resubmitted under
a 510(k) or submitted under a PMA application. The Company currently believes
such clinical results will be available during the middle of 1999. At that
point in time, the Company also believes that it will be able to file for CE
Mark approval of ORTHOCOMP for this indication in Europe.
In April 1998, the U.S. District Court for the Northern District of Florida
granted the Company's summary judgment motion in the BIOGRAN matter related to a
patent infringement claim. The complaints alleging false representation, unfair
competition, false advertising and trade disparagement under federal and Florida
state law was settled with the Plaintiffs in September 1998. In addition,
during September 1998, the Plaintiffs requested an appeal to the Court's summary
judgement with respect to the patent infringement claim. In response the
Company filed a counter claim alleging inequitable conduct.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1998 and December 31, 1997 were
$10,869,724 and $2,257,902, respectively, representing 56% and 46%,
respectively, of total assets. Cash equivalents consist of highly liquid,
short-term investments with an original maturity of three months or less.
The following is a summary of selected cash flow information for the nine months
ended September 30:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
<S> <C> <C>
Net cash used for operating activities $(4,910,288) $(6,049,900)
Net cash used for investing activities (6,096,324) (740,844)
Net cash provided by financing activities 19,661,980 10,151,593
</TABLE>
Net cash used in operating activities
Operating Cash Inflows-
The principal source of the Company's current operating cash inflows has been
derived from the sale of BIOGRAN. BIOGRAN revenues to date have been realized
primarily from direct product sales in the U.S. and in Europe, and since May 1,
1998 exclusively through sales to 3i.
10
<PAGE>
A summary of cash receipts from operating activities for the nine months ended
September 30 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------------------ ---------------------
Product Sales Revenue for the period January 1 through
April 30, 1998:
BIOGRAN U.S. $1,022,037 $1,616,793
BIOGRAN Europe 169,251 589,623
Product Sales Revenue to 3i for the period May 1, 1998
through September 30, 1998:
BIOGRAN 1,123,334 --
Interest Income 216,922 129,460
</TABLE>
Operating Cash Inflows Outlook-
In April 1998, the Company entered into an exclusive global strategic alliance
with 3i. The arrangement provides for 3i to purchase, and for the Company to
supply, specified minimum monthly amounts of BIOGRAN in 1998 for the dental
market. The Company's sale of BIOGRAN to 3i has, to date, exceeded the rate of
product resale by 3i to its customers as the sales transition and training
period with 3i has taken longer than expected due to turnover and management
changes within 3i. Of the approximately $1.1 million in product sales to 3i to-
date, the Company estimates that $630,000 of product is held in 3i's inventory
as of September 30, 1998. This $630,000 represents approximately $1.3 million
in sales to 3i customers. While 3i has minimum purchase requirements for the
year 2000 and beyond, for 1999 3i has no such minimum purchase requirements.
Accordingly, additional sales of BIOGRAN by the Company to 3i in 1999 will
depend upon 3i's BIOGRAN inventory level relative to its rate of product resale
to its customers. Therefore, the Company decided, and has reached an
understanding with 3i, that some or all of the contract purchase minimums
specified for the fourth quarter of 1998 will be deferred into 1999. The
decision was made to better match the Company's sales of BIOGRAN to 3i with 3i's
sales to its customers. In addition, the deferral of any fourth quarter 1998
contract purchase minimums will help to reduce the probability of there being a
period in the beginning of 1999 during which the Company might record no product
sales to 3i.
In September 1998, the Company issued a voluntary product notice for certain lot
numbers of BIOGRAN packaged in glass syringes. The voluntary product
notification resulted from ten reported instances where difficulty in dispensing
the material from the glass syringes resulted in breakage. This breakage was
reported in less than two-tenths of one percent of the BIOGRAN products shipped.
As a result of the product notice, the Company has deferred the recognition of
$450,000 in product revenue from BIOGRAN syringe sales. Replacement product
began shipping in October to customers, and as replacement product is shipped to
customers, product revenue is being recognized.
Operating Cash Outflows-
The Company's cash outflows were primarily used for the commercialization of
BIOGRAN and for development and pre-clinical activities in preparation for
regulatory filings of ORTHOCOMP and VITOSS/TM/. Funds have been used for the
marketing and distribution of BIOGRAN and expansion of the Company from a
development-stage company.
Operating Cash Outflows Outlook-
The Company continues to expect that the reduction in cash outflows noted during
the second quarter of 1998 resulting from (i) the reduction of its sales force
due to the Company's arrangement with 3i and (ii) the settlement of all non-
patent related claims in the BIOGRAN
11
<PAGE>
Matter will be offset for the remainder of 1998 by increases in cash outflows
resulting from continued expansion of the Company's product development efforts.
Operating Cash Flow Requirements Outlook-
The Company expects its cash flow from operating activities to continue to be
negative until such time, if any, as regulatory clearances for ORTHOCOMP are
obtained and revenue received from product sales exceeds funding of operating
costs. The timing of such events is dependent upon a number of variables outside
of the Company's control, as described above. The Company has had discussions
with the United States Food and Drug Administration (the "FDA") regarding the
regulatory approval pathway for ORTHOCOMP as an augment to screw fixations in
fracture repair. In those discussions, the Company withdrew its 510(k)
submission for ORTHOCOMP, because it was agreed with the FDA that it would first
look at the results of clinical studies that the Company previously planned to
start in early 1999 in Europe and in the U.S. At such time as the clinical
results are available, the FDA will then determine whether or not the request
for marketing clearance of ORTHOCOMP for this indication should be resubmitted
under a 510(k) or submitted under a PMA application. The Company currently
believes such clinical results will be available during the middle of 1999. At
that point in time, the Company also believes that it will be able to file for
CE Mark approval of ORTHOCOMP for this indication in Europe. The Company also
expects to begin clinical trials both in Europe and the U.S. for the use of
ORTHOCOMP in spinal fractures due to osteoporosis in early 1999.
Net cash used in investing activities
The Company has invested $93,167 and $740,844 for the nine months ended
September 30, 1998 and 1997, respectively, in the purchase of property and
equipment for the expansion of its product development capabilities. In
addition during the three months ended September 30, 1998, $6,003,157 was used
to purchase investment quality marketable securities.
Investing Cash Outlook -
The Company expects that its use of cash for the purchase of property and
equipment for the remainder of 1998 will be comparable to that of prior periods.
However, the Company expects to invest up to $1 million in 1999 for the
expansion of its development and manufacturing facilities. The timing of such
expansion is dependent upon a number of variables outside of the Company's
control and include, but are not limited to, the timing of regulatory clearances
for marketing of the Company's future products, the rate of market acceptance
and growth of product sales, and the lead times required to bring additional
manufacturing capacity on line.
Net cash provided by financing activities
On June 25, 1998, the Company completed its Offering raising net proceeds of
approximately $13.8 million from the sale of 1.5 million shares of common stock
at $10.50 per share. On June 11, 1998, the Company sold 370,392 shares of
common stock to Howmedica, Inc. for $3.5 million. On July 28, 1998, the Company
sold 300,000 additional shares of common stock upon the exercise of the
underwriters' over-allotment option, raising net proceeds of approximately $2.9
million. Additionally, during the first nine months of 1998, stock options and
warrants were exercised to purchase 333,596 shares of common stock raising
$663,633.
During July 1998, the Company repaid the $692,000 balance under its line of
credit with its commercial bank. In addition, the Company repaid $375,000 on
the Bank term loan and $194,404 on capital lease obligations during the nine
months ended September 30, 1998.
12
<PAGE>
During the first six months of 1997, the Company sold 533,685 shares of common
stock for $4.25 per share, raising net proceeds of approximately $2.3 million;
sold 1,882,353 shares of Class C Preferred Stock, together with related warrants
exercisable for 215,025 shares of common stock, raising net proceeds of
approximately $7.6 million; and, issued Class B warrant shares raising net
proceeds of approximately $1.0 million. Proceeds from the equity financing
activities were used to retire debt of $733,580.
Funding Requirements Outlook
As described above, the Company expects to continue to use cash and investments
to fund operations. The Company also expects to use cash for the expansion of
property and equipment for additional manufacturing capacity. The Company
believes that its cash and investments are adequate to fund its anticipated
level of operations through the end of 1999. However, the Company's funding
requirements may change due to numerous factors including, but not limited to,
the decisions of regulatory authorities concerning the Company's marketing
applications as they as filed from time to time, the results of the Company's
clinical trials and other product development programs, the ability to meet
clinical and commercial supply requirements, the expansion of development and
manufacturing facilities, technological advances by the Company and by the
competition, and regulatory requirements.
RESULTS OF OPERATIONS
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources."
A summary of revenues and expenses for the nine months ended September 30 is as
follows:
<TABLE>
<CAPTION>
% Change
1998 1997 1998 vs. 1997
---------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues $ 2,314,622 $ 2,206,416 5%
Gross Profit 1,547,349 1,509,927 2
General and Administrative Expenses 2,229,301 2,842,888 (22)
Selling and Marketing Expenses 2,472,658 3,117,145 (21)
Research and Development Expenses 1,809,627 1,326,580 36
Net Loss (5,282,922) (5,935,947) (11)
</TABLE>
Product Recall In September 1998, the Company issued a voluntary product notice
for certain lot numbers of BIOGRAN packaged in glass syringes. The voluntary
product notification resulted from ten reported instances where difficulty in
dispensing the material from the glass syringes resulted in breakage. This
breakage was reported in less than two-tenths of one percent of the BIOGRAN
products shipped. As a result of the product notice, the Company has deferred
the recognition of $450,000 in product revenue from BIOGRAN syringe sales.
Replacement product began shipping in October to customers, and as replacement
product is shipped to customers, product revenue is being recognized.
Revenues The increase in revenues for the nine months ended September 30, 1998
as compared to the corresponding 1997 period reflects a 33% growth in domestic
sales of BIOGRAN with a 71% decrease in international BIOGRAN sales. Exclusive
of the glass syringe product notice, domestic revenues would have increased 61%.
Revenues for the three months ended September 30, 1998 and 1997 were $377,428
and $787,227, respectively. The decline is a direct result of the deferral of
product revenue related to the glass syringe notice and will be reversed in
future periods as replacement product is shipped to customers. The 1998
revenues include product sales to 3i at a selling price calculated as 50% of
3i's retail sales price to its customers for the prior quarter. The 1997
revenues reflect the Company's full selling price to its retail customers.
13
<PAGE>
Gross Profit The Company's nine month gross profit margin improvement year-
over-year is attributed to consolidation of its manufacturing of BIOGRAN to the
U.S. from Belgium and partially offset by the product recall. Gross profit for
the three months ended September 30, 1998 and 1997 was $156,351 and $567,690,
respectively. Exclusive of the product notice, an improvement in the gross
profit to $606,351 would have been achieved even with the 50% reduction in the
Company's selling price per unit to 3i.
General and Administrative Expenses The decrease in general and administrative
expenses year-over-year is primarily a result of reduced patent litigation
expenses of approximately $750,000 partially offset by severance expense related
to the separation of a Company officer. In May 1996 a complaint was against the
Company charging patent infringement, and in April 1998, the Court granted the
Company's summary judgement motion stating that the Company's BIOGRAN product
does not infringe the patent. The complaints alleging false representation,
unfair competition, false advertising and trade disparagement under federal and
Florida state law was settled in September 1998. In addition during September
1998, a request for an appeal to the Court's summary judgement was filed with
respect to the patent infringement claim. In response the Company filed a
counter claim alleging inequitable conduct. As of September 30, 1998, the
Company had a reserve of approximately $471,000 for the estimated future cost of
the patent litigation. General and administrative expenses for the three months
ended September 30, 1998 and 1997 were $1,159,280 and $809,776, respectively.
The increase is a result of the severance expense recorded during the third
quarter of 1998.
Selling and Marketing Expenses Selling and marketing expenses decreased year-
over-year as a result of the elimination of the direct sales force. For the
three months ended September 30, 1998 and 1997, sales and marketing expenses
were $700,875 and $1,030,100, respectively.
Research and Development Expenses The increase from 1997 to 1998 in research
and development expenses relates directly to the development and pre-clinical
activities in preparation for regulatory filings of ORTHOCOMP and VITOSS. For
the three months ended September 30, 1998 and 1997, research and development
expenses were $611,953 and $458,214, respectively.
Net Loss As a result of the foregoing factors, the Company's net loss for the
nine months ended September 30, 1998 and 1997 decreased from $5,282,922 to
$5,935,947, respectively. The net loss for the three months ended September 30,
1998 and 1997 increased to a loss of $2,144,245 from a loss of $1,941,587,
respectively.
Results of Operations Outlook
The Company's sale of BIOGRAN to 3i has, to date, exceeded the rate of product
resale by 3i to its customers as the sales transition and training period with
3i has taken longer than expected due to turnover and management changes within
3i. Of the approximately $1.1 million in product sales to 3i to-date, the
Company estimates that $630,000 of product is held in 3i's inventory as of
September 30, 1998. This $630,000 represents approximately $1.3 million in
sales to 3i customers. While 3i has minimum purchase requirements for the year
2000 and beyond, for 1999 3i has no such minimum purchase requirements.
Accordingly, additional sales of BIOGRAN by the Company to 3i in 1999 will
depend upon 3i's BIOGRAN inventory level relative to its rate of product resale
to its customers. Therefore, the Company decided, and has reached an
understanding with 3i, that some or all of the contract purchase minimums
specified for the fourth quarter of 1998 will be deferred into 1999. The
decision was made to better match the Company's sales of BIOGRAN to 3i with 3i's
sales to its customers. In addition, the deferral of any fourth quarter 1998
contract purchase minimums will help to reduce the probability of there being a
period in the beginning of 1999 during which the Company might record no product
sales to 3i.
14
<PAGE>
The Company expects to continue to have operating losses until such time as
regulatory clearances for ORTHOCOMP are obtained and the resultant revenue
received from product sales exceed operating costs. The timing of such events
is dependent upon a number of variables outside of the Company's control, as
described above. The Company has had discussions with the United States Food and
Drug Administration (the "FDA") regarding the regulatory approval pathway for
ORTHOCOMP as an augment to screw fixations in fracture repair. In those
discussions, the Company withdrew its 510(k) submission for ORTHOCOMP, because
it was agreed with the FDA that it would first look at the results of clinical
studies that the Company previously planned to start in early 1999 in Europe and
in the U.S. At such time as the clinical results are available, the FDA will
then determine whether or not the request for marketing clearance of ORTHOCOMP
for this indication should be resubmitted under a 510(k) or submitted under a
PMA application. The Company currently believes such clinical results will be
available during the middle of 1999. At that point in time, the Company also
believes that it will be able to file for CE Mark approval of ORTHOCOMP for this
indication in Europe. The Company also expects to begin clinical trials both in
Europe and the U.S. for the use of ORTHOCOMP in spinal fractures due to
osteoporosis in early 1999.
The Company expects to continue to use cash and investments to fund operations.
The Company believes that its cash and investments are adequate to fund its
anticipated level of operations through the end of 1999. However, the Company's
funding requirements may change due to numerous factors including, but not
limited to, the decisions of regulatory authorities concerning the Company's
marketing applications as they are filed from time to time, the results of the
Company's clinical trials and other product development programs, the ability to
meet clinical and commercial supply requirements, the expansion of development
and manufacturing facilities, technological advances by the Company and by the
competition, and regulatory requirements.
YEAR 2000 ISSUES
The Year 2000 issue results from the writing of computer programs using two
digits rather than four digits to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions or engage in other normal business activities.
Set forth below is a description of the Company's current state of readiness and
other information related to Year 2000 issues that may affect the Company.
Will Orthovita Be Ready?
Information Technology Systems The core information technology systems utilized
by the Company appear to be Year 2000 compliant. These information technology
systems support the Company's major business functions, including accounting and
financial reporting and internal and external electronic mail. The Great
Plains/Horizon accounting and financial reporting, purchasing and manufacturing
system software programs currently utilize a four-digit year that properly
recognizes the Year 2000. In addition, the Company's software to handle both
internal and external electronic mail uses a four-digit year. The Company's
third party payroll processor has certified to be Year 2000 compliant.
Non-Information Technology Systems Non-information technology systems include
embedded technology such as microcontrollers. The Company's non-technology
systems include HVAC systems, fax machines and certain process development
equipment. Based on its initial assessment of these systems at its facilities,
the Company has determined that the systems are not date sensitive and therefore
do not raise Year 2000 issues. However, the Company is
15
<PAGE>
continuing to examine all in-house equipment in greater detail to confirm
compliance or identify areas of potential non-compliance.
Material Third Party Relationships The Company has made inquiries of its
principal suppliers and service providers to determine its vulnerability if
these third parties fail to identify and remediate their own Year 2000 issues,
if any. The Company believes that third party service providers and suppliers
whose Year 2000 issues could have a material impact on the Company include its
telecommunications providers and key supply chain vendors.
The Company has defined its principal vendors, suppliers and service providers
and has made inquiries regarding Year 2000 compliance. Written letters to
approximately 110 vendors, suppliers and service providers were mailed by the
Company during October 1998. Responses regarding their respective Year 2000
issues are due to the Company no later than December 15, 1998. As responses are
received, the Company will individually address any and all Year 2000 issues
with each provider. The Company will determine if alternative vendors,
suppliers or service providers will need to be established after receipt of
response letters.
How Much Will It Cost to Address Year 2000 Issues
To date, the Company has not incurred any remediation costs associated with Year
2000 issues and future costs are uncertain and difficult to estimate. The
Company is in the process of determining future costs related to Year 2000
issue. All remediation costs will be expensed as incurred during the remainder
of 1998 and through the end of 1999.
What are the Possible Consequences of Year 2000 Issues Confronting the Company?
In the event that key suppliers, vendors or service providers are not compliant,
the Company would be required to migrate its services to compliant vendors.
This would require additional time and resources, resulting in additional
operating expenses through a transition period. In addition, if the Company
determines that key in-house equipment is not compliant, programming costs would
be necessary to upgrade or replace the equipment.
What is the Company's Contingency Plans?
The Company has not yet established a contingency plan with respect to non-
compliant in-house systems, or third party suppliers, vendors or service
providers. If by January 31, 1999, the Company determines a contingency plan is
required, it will formulate such contingency plan no later than March 31, 1999.
Forward-looking statements
The statements in the Company's Year 2000 disclosure contain forward-looking
statements and should be read in conjunction with the Company's disclosure under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Risks Related to Orthovita's Business."
16
<PAGE>
ITEM 2: CHANGE IN SECURITIES AND USE OF PROCEEDS
The Company's initial public offering was effected pursuant to a registration
statement on Form S-1 declared effective by the Securities and Exchange
Commission (the "SEC") on June 25, 1998. The offering commenced on June 25,
1998 and terminated after all securities were sold.
From June 25, 1998 through September 30, 1998, the Company has used the
following amount of such net proceeds for the following categories enumerated by
the SEC:
<TABLE>
<CAPTION>
Category Reasonable Estimated Amount
- -------- --------------------------------------
<S> <C>
Additions to plant, property and equipment $ 64,000
Repayment of indebtedness 1,235,000
Working capital 820,000
Investments 6,003,000
Investment spending for Research & Development 444,000
Investment spending for Clinical Studies 109,000
Investment spending for Process Development and Manufacturing 242,000
------------
Total $8,917,000
============
</TABLE>
None of the above-mentioned uses of proceeds represented direct or indirect
payments of directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity security of the Company or to
affiliates of the Company. Such uses do not represent a material change in the
use of proceeds described in the above-mentioned registration statement.
ITEM 6: EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
17
<PAGE>
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.
ORTHOVITA, INC.
(Registrant)
November 12, 1998 By: /s/ David S. Joseph
----------------------
David S. Joseph
President, Chief Executive Officer and Director
(Principal executive officer)
By: /s/ Joseph M. Paiva
----------------------
Joseph M. Paiva
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,869,724
<SECURITIES> 6,014,023
<RECEIVABLES> 579,984
<ALLOWANCES> 0
<INVENTORY> 225,307
<CURRENT-ASSETS> 115,915
<PP&E> 1,615,725
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,460,678
<CURRENT-LIABILITIES> 3,235,752
<BONDS> 545,223
0
0
<COMMON> 112,166
<OTHER-SE> 15,567,537
<TOTAL-LIABILITY-AND-EQUITY> 19,460,678
<SALES> 2,314,622
<TOTAL-REVENUES> 2,314,622
<CGS> 767,273
<TOTAL-COSTS> 767,273
<OTHER-EXPENSES> 6,678,554
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,717
<INCOME-PRETAX> (5,282,922)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,282,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,282,922)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
