<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 March 31, 1999.
[_] 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 Incorporation (I.R.S. Employer Identification
or Organization) 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 March 31, 1999
- ------------------------- --------------------------------
Common Stock, par value $.01 11,420,148 Shares
This Report Includes a Total of 17 Pages
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL PAGE
INFORMATION NUMBER
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 and 3
December 31, 1998
Consolidated Statements of Operations - Three 4
months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows - Three 5
months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 6 - 9
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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,522,442 $ 842,064
Short-term investments 12,352,662 14,513,744
Trade accounts receivable, net of allowance
of $85,671 and $90,726 339,972 8,468
Other receivables --- 635,188
Inventories 218,356 329,251
Other current assets 776,080 765,017
------------- -------------
Total current assets 15,209,512 17,093,732
------------- -------------
PROPERTY AND EQUIPMENT, net 1,851,693 1,709,506
OTHER ASSETS 96,971 85,394
------------- -------------
$ 17,158,176 $ 18,888,632
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 261,262 $ 287,412
Current portion of long-term liabilities 129,201 175,058
Current portion of long-term capital lease obligations 390,468 362,239
Accounts payable 385,937 381,144
Accrued patent defense costs 400,450 472,492
Accrued compensation and related expenses 350,719 342,453
Other accrued expenses 492,078 601,832
------------- -------------
Total current liabilities 2,410,115 2,622,630
------------- -------------
LONG-TERM LIABILITIES:
Capital lease obligations 599,460 608,562
Other liabilities 152,865 128,865
------------- -------------
Total long-term liabilities 752,325 737,427
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized,
11,420,148 and 11,372,700 shares issued and outstanding 114,201 113,727
Additional paid-in capital 42,464,925 42,289,024
Accumulated deficit (28,681,932) (26,977,160)
Accumulated other comprehensive income 98,542 102,984
------------- -------------
Total shareholders' equity 13,995,736 15,528,575
------------- -------------
$ 17,158,176 $ 18,888,632
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
NET REVENUES $ 562,532 $ 824,902
COST OF SALES 134,193 213,505
----------- -----------
Gross profit 428,339 611,397
----------- -----------
OPERATING EXPENSES:
General and administrative 758,093 590,305
Selling and marketing 439,543 939,219
Research and development 1,135,797 504,254
----------- -----------
Total operating expenses 2,333,433 2,033,778
----------- -----------
Operating loss (1,905,094) (1,422,381)
INTEREST EXPENSE (28,013) (65,751)
INTEREST INCOME 228,335 20,081
FOREIGN CURRENCY ADJUSTMENT --- (45,211)
----------- -----------
NET LOSS (1,704,772) (1,513,262)
ACCRETION OF REDEMPTION PREMIUM ON
PREFERRED STOCK -- (201,195)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(1,704,772) $(1,714,457)
=========== ===========
NET LOSS PER COMMON SHARE $ (.15) $ (.33)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 11,391,288 5,186,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net loss $(1,704,772) $(1,513,262)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation 138,330 98,189
Imputed interest --- 1,013
Services provided for common stock and common stock options 4,750 ---
(Increase) decrease in -
Accounts receivable (331,504) 48,277
Notes and other receivables 635,188 ---
Inventories 110,895 24,843
Other current assets (11,063) (25,375)
Other assets (11,577) ---
Increase (decrease) in -
Other liabilities (21,857) ---
Accounts payable (104,961) 203,969
Accrued patent defense costs (72,042) (368,233)
Accrued compensation and related expenses 8,266 103,077
----------- -----------
Net cash used in operating activities (1,360,347) (1,427,502)
----------- -----------
INVESTING ACTIVITIES:
Purchases of investments (5,225,742) ---
Proceeds from sale of investments 7,362,148 ---
Purchase of property and equipment (171,730) (73,189)
----------- -----------
Net cash provided by (used in) investing activities 1,964,676 (73,189)
----------- -----------
FINANCING ACTIVITIES:
Repayments of debt (26,150) (34,119)
Repayments of capital lease obligations (89,660) ---
Proceeds from exercise of common stock options and warrants 170,075 ---
Proceeds from Employee Stock Purchase Plan 1,550 ---
----------- -----------
Net cash provided by (used in) financing activities 55,815 (34,119)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 20,234
30,374
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 680,378 (1,504,436)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 842,064 2,257,902
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,522,442 $ 753,466
=========== ===========
</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") is a Pennsylvania corporation, which began
operations in November 1993. The Company develops, manufactures and markets bone
substitutes including BIOGRAN(R), its first commercialized product that is a
resorbable, granular biomaterial that biologically transforms to bone.
ORTHOCOMP(TM) and ORTHOBONE(TM) Putty are two products the Company is developing
based on the Company's non-resorbable resin cement composite platform. Orthovita
is developing Orthocomp for a number of indications including joint implants,
screw augmentation, vertebroplasty, oncology and craniofacial applications.
Orthovita has entered into a worldwide distribution agreement for joint implant
procedures with Howmedica, a subsidiary of Stryker Corp. and the PMMA market
leader for joint implants, and intends to initiate pre-clinical studies for this
indication during 1999. VITOSS(TM) Injectable and VITOSS(TM) Scaffold are two
product candidates derived from the Company's fine particle synthesis or
nanometer technology. Both products are currently in pre-clinical studies.
The Company is developing a broad platform of bone cements and bone substitutes
focused on multiple segments of the international orthopaedics market. The
Company is concentrating its internal efforts on advancing orthopaedic products
with near-term commercial potential that are targeted to the specific needs of
patients. Orthovita plans to commercialize its orthopaedic bone products through
strategic distribution partnerships with market leaders or by building its own
internal sales force. In addition, the Company is leveraging its large patent
portfolio by out-licensing non-orthopaedic applications.
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, limited clinical trials, the uncertainty related to regulatory
approvals, uncertainty of market acceptance, future Biogran sales, uncertainty
related to third-party reimbursement, dependence on patents, trade secrets and
proprietary rights, limited manufacturing experience, dependence on suppliers,
competition, capital availability, uncertainty of technological change,
dependence on key personnel and advisors, and 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. All material
intercompany balances have been eliminated in consolidation.
Basis of Presentation
The consolidated interim financial statements of the Company 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
6
<PAGE>
accounting principles and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form 10-K filed
with the Securities and Exchange Commission (the "SEC"), which includes
financial statements as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996. 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.
Loss per share
The Company has presented net loss per common share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic net loss per
share was computed by dividing net loss applicable to common shareholders by the
weighted average number of shares of common stock outstanding during each
operating period presented. Diluted loss per share has not been presented since
the impact on loss per share is anti-dilutive due to the Company's losses.
Diluted loss per share is computed using the treasury stock method that assumes
that the Company would use any proceeds it would received from the exercise of
options and warrants to repurchase shares at their fair market value.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
As of March 31, 1999 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 $ 1,522,442 -- -- $ 1,522,442
Short-term investments 12,277,989 $ 89,278 $ (14,605) 12,352,662
----------- --------- __________ -----------
$13,800,431 $ 89,278 $ (14,605) $13,875,104
=========== ========= ========== ===========
</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 accumulated other
comprehensive income of stockholders' equity.
3. COMMITMENTS AND CONTINGENCIES
In July 1992, the Company obtained a license from FBFC (the "FBFC License") that
allowed the Company to manufacture and sell its Biogran product. In May 1996,
the University of Florida Research Foundation, Inc., U.S. Biomaterials
Corporation and Block Drug Corporation (the "Plaintiffs") filed a complaint in
the U.S. District Court for the Northern District of Florida against the
Company, a distributor of the Company's Biogran product and the Company's
Chairman (the "Biogran Matter"). 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. This action also included complaints alleging false
representation, unfair competition, false advertising and trade disparagement
under Federal and Florida State laws. In April 1998, the court granted the
Company's summary judgment motion stating that the Company's Biogran product
does not infringe this patent. The complaints alleging false representation,
unfair competition, false advertising and trade
7
<PAGE>
disparagement were settled with the Plaintiffs in September 1998. During
September 1998, the Plaintiffs requested an appeal to the Court's summary
judgment with respect to the patent infringement claim. In response, the Company
filed a counterclaim alleging inequitable conduct. As of March 31, 1999 and
December 31, 1998, the Company had reserved $400,450 and $472,492, respectively,
for the estimated future cost of defending this litigation.
In accordance with the FBFC License, FBFC agreed to indemnify the Company for
all reasonable damages and costs incurred by the Company arising out of or
resulting from this action, for an amount not to exceed the maximum aggregate
royalty payments associated with this technology. Since 1996, the Company has
recorded patent litigation legal fees in excess of the maximum aggregate royalty
of $1.5 million and, based upon the royalty of 12% of net sales, a maximum
earned royalty of approximately $1,024,000 was due to FBFC. On December 23,
1998, the Company and FBFC entered into a Release and Termination Agreement (the
"Release") whereby, FBFC agreed to reimburse the Company $474,580 for patent
defense costs that exceeded the maximum earned royalty. This payment was
received in January 1999. The Release specified the Company had satisfied all of
its royalty obligations under the FBFC License, and that FBFC will transfer all
of its rights in the intellectual property, including the patents, to the
Company.
4. STOCKHOLDERS' EQUITY
During the three months ended March 31,1999, stock options and warrants to
purchase 47,100 shares of common stock were exercised raising $170,075.
Additionally during the three months ended March 31, 1999, the Company issued
stock options to purchase 149,750 shares of common stock at market values
ranging from $4.00 to $6.60 per share to employees, consultants and advisors.
In 1998, the Company established an Employee Stock Purchase Plan (the "ESPP") to
provide eligible employees an opportunity to purchase common stock of the
Company. Under the terms of the ESPP, eligible employees may have up to 10% of
eligible compensation deducted from their pay to purchase common stock. The per
share purchase price is 85% of the last trading price of common stock on the
EASDAQ Exchange on the last day of each calendar quarter. The amount that may be
offered pursuant to the ESPP is 300,000 common shares. During the first three
months of 1999, 320 shares of common stock were issued under the ESPP raising
$1,550.
5. NET PRODUCT REVENUE
Prior to April 28, 1998, the Company generally marketed Biogran through internal
direct sales efforts in the U.S. On April 28, 1998, the Company signed an
agreement with Implant Innovations Inc. ("3i") pursuant to which 3i obtained the
global distribution rights for Biogran and Orthocomp for the dental implant
surgery market. 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. For the years 2000 through 2003, inclusively, 3i also has minimum
purchase requirements of $2.4 million per year. Either party may terminate the
agreement if 3i fails to purchase at least $600,000 in a given calendar quarter
after 1999.
For 1999, 3i had no minimum purchase requirements; however, the Company reached
an understanding with 3i to defer all of the fourth quarter 1998 contract
purchase minimums of $815,000 until 1999. After 3i has fulfilled, in 1999, the
deferred fourth quarter 1998 contract purchase minimums, there may be a period
in 1999 of up to six months during which the Company may not have any Biogran
product sales to 3i. Additional 1999 Biogran product sales
8
<PAGE>
to 3i will be dependent upon 3i's ability to successfully market the product.
The global distribution agreement with 3i provides for a sales price for 1999 on
such additional product sales from the Company to 3i equal to 45% of 3i's
average sales price to its customers in the previous quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Orthovita, Inc. (the "Company") is a Pennsylvania corporation that began
operations in November 1993. The Company develops, manufactures and markets bone
substitutes including BIOGRAN(R), its first commercialized product that is a
resorbable, granular biomaterial that biologically transforms to bone.
ORTHOCOMP(TM) and ORTHOBONE(TM) Putty are two products the Company is developing
based on the Company's non-resorbable resin cement composite platform. Orthovita
is developing Orthocomp for a number of indications including joint implants,
screw augmentation, vertebroplasty, oncology and craniofacial applications.
Orthovita has entered into a worldwide distribution agreement for joint implant
procedures with Howmedica, a subsidiary of Stryker Corp. and the PMMA market
leader for joint implants, and intends to initiate pre-clinical studies for this
indication during 1999. VITOSS(TM) Injectable and VITOSS(TM) Scaffold are two
product candidates derived from the Company's fine particle synthesis or
nanometer technology. Both products are currently in pre-clinical studies.
The Company is developing a broad platform of bone cements and bone substitutes
focused on multiple segments of the international orthopaedics market. The
Company is concentrating its internal efforts on advancing orthopaedic products
with near-term commercial potential that are targeted to the specific needs of
patients. Orthovita plans to commercialize its orthopaedic bone products through
strategic distribution partnerships with market leaders or by building its own
internal sales force. In addition, the Company is leveraging its large patent
portfolio by out-licensing non-orthopaedic applications.
RECENT DEVELOPMENTS
During April 1999, the Company received clearance by the Comite Consultatif de
Protection des Personnes dans la Recherche Biomedicale de Picardie in Amiens,
France (the Ethics Committee of the Picardie Region) to commence its
percutaneous vertebroplasty clinical investigations for Orthocomp in treating
spinal compression fractures. In addition, also during April 1999, the Company
was cleared by the Norwegian Board of Health to commence its screw augmentation
clinical investigations for Orthocomp for treating long bone fractures.
Orthocomp is an injectable, non-resorbable bone bonding cement that Orthovita is
developing as a potential successor to PMMA, the cement most frequently used
during orthopaedic surgery.
9
<PAGE>
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 three months ended March 31 is as
follows:
<TABLE>
<CAPTION>
% Change
1999 1998 1999 vs. 1998
---- ---- -------------
<S> <C> <C> <C>
Revenues $ 562,532 $ 824,902 (32)%
Gross Profit 428,339 611,397 (30)
Gross Profit Percentage 76% 74% 2
General and Administrative Expenses 758,093 590,305 (28)
Selling and Marketing Expenses 439,543 939,219 53
Research and Development Expenses 1,135,797 504,254 (125)
Other (Income) Expense (200,322) 90,881 320
Net Loss (1,704,772) (1,513,262) (13)
</TABLE>
Revenues The decrease in revenues for the three months ended March 31, 1999 as
compared to the corresponding 1998 period reflects a 1999 selling price
calculated as 50% of 3i's retail sales price to its customers for the prior
quarter, whereas the 1998 revenues reflect the Company's full selling price to
its retail customers. The results reflect a 16% increase in unit volume sales of
Biogran, or approximately 363 units, in 1999 as compared to 1998. The $262,370
decrease in revenues is completely offset by savings in Selling and Marketing
Expenses of $499,676 relating to the reduction of the Biogran sales force.
Gross Profit The Company's gross profit margin percentage for the three months
ended March 31, 1999 improved by 2% from the comparable period in 1998.
General and Administrative Expenses The increase in general and administrative
expenses year-over-year is primarily a result of headcount additions and non-
litigation legal fees.
Selling and Marketing Expenses Selling and marketing expenses decreased year-
over-year as a result of the elimination of the direct dental sales force when
the Company entered into its global distribution arrangement for Biogran with
3i.
Research and Development Expenses The increase from 1998 to 1999 in research
and development expenses relates directly to the expanded development and pre-
clinical activities in preparation for commencing clinical studies and for the
regulatory filings of Orthocomp and Vitoss.
Other Income and Expenses Other income and expenses improved from net expense of
$90,881 for the three months ended March 31,1998 to net income of $200,322 for
the same period during 1999. The 320% improvement is a result of 1999 increased
interest income from proceeds of the Company's initial public offering.
Net Loss As a result of the foregoing factors, the Company's net loss for the
three months ended March 31, 1999 increased $191,510 from the same period a year
ago.
Results of Operations Outlook
To date, the Company's sale of Biogran to 3i has 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 sales force turnover and management
changes within 3i. The Company reached an
10
<PAGE>
understanding with 3i during the fourth quarter of 1998 to defer all of the
fourth quarter 1998 contract purchase minimums of $815,000 until 1999. After 3i
has fulfilled, in 1999, its deferred fourth quarter 1998 contract purchase
minimums, there may be a period in 1999 of up to six months during which the
Company may not have any Biogran product sales to 3i. Additional 1999 Biogran
product sales to 3i will be dependent upon 3i's ability to successfully market
the product. The global distribution agreement with 3i provides for a sales
price for 1999 on such additional product sales from the Company to 3i equal to
45% of 3i's average sales price to its customers in the previous quarter.
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. 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 that
the FDA would instead first look at the results of clinical studies that the
Company plans to start during the second quarter of 1999 in Europe. 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. If
the FDA determines that the submission should be under a PMA, the Company will
need to decide whether it chooses to commence the requisite clinical trials in
the U.S., if at all. The Company currently believes such clinical results from
its European studies will be available by the end 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 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 2000. 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
competitors and regulatory requirements. In addition, the Company's funding
requirements may also be affected by any acquisitions or significant
transactions with third parties.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31,1999 and December 31, 1998 were
$13,875,104 and $15,355,808, respectively, representing 81% of total assets at
both dates. 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 quarter
ended March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net cash used for operating activities $ (1,360,347) $ (1,427,502)
Net cash provided by (used in) investing activities 1,964,676 (73,189)
Net cash provided by (used in) financing activities 55,815 (34,119)
</TABLE>
11
<PAGE>
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 and interest income on short-term investments.
Since May 1, 1998 the Company has sold Biogran exclusively through Implant
Innovations Inc. ("3i"), a global distributor for the dental implant surgery
market.
Operating Cash Inflows Outlook -
Prior to April 28, 1998, the Company generally marketed Biogran through internal
direct sales efforts in the U.S. On April 28, 1998, the Company signed an
agreement with 3i pursuant to which 3i obtained the global distribution rights
for Biogran and Orthocomp for the dental implant surgery market. 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. For
the years 2000 through 2003, inclusively, 3i also has minimum purchase
requirements of $2.4 million per year. Either party may terminate the agreement
if 3i fails to purchase at least $600,000 in a given calendar quarter after
1999.
For 1999, 3i had no minimum purchase requirements; however, the Company reached
an understanding with 3i to defer all of the fourth quarter 1998 contract
purchase minimums of $815,000 until 1999. After 3i has fulfilled, in 1999, its
fourth quarter 1998 contract purchase minimums, there may be a period of up to
six months in 1999 during which the Company may not have any Biogran product
sales to 3i. Additional 1999 Biogran product sales to 3i will be dependent upon
3i's ability to successfully market the product. The global distribution
agreement with 3i provides for a sales price for 1999 on such additional product
sales from the Company to 3i equal to 45% of 3i's average sales price to its
customers in the previous quarter.
Operating Cash Outflows -
The Company's cash outflows were primarily used for development and pre-clinical
activities in preparation for regulatory filings of Orthocomp and Vitoss. In
addition, funds have been used for the further selling, marketing and
distribution of Biogran and the continued expansion of the Company.
Operating Cash Outflows Outlook -
The Company expects cash outflows to continue to be driven by the expansion of
the Company's product development efforts. 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 that the FDA would instead first
look at the results of clinical studies that the Company plans to start during
the second quarter of 1999 in Europe. 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. If the FDA determines that the submission
should be under a PMA, the Company will need to decide whether it chooses to
commence the requisite clinical trials in the U.S., if at all. The Company
currently believes such clinical results from its European studies will be
available by the end 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
12
<PAGE>
clinical trials both in Europe and the U.S. for the use of Orthocomp in spinal
fractures due to osteoporosis in 1999.
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.
Net cash provided by (used in) investing activities
The Company has invested $171,730 and $73,189 for the three months ended March
31, 1999 and 1998, respectively, in the purchase of property and equipment for
the expansion of its product development capabilities. In addition during the
three months ended March 31, 1999, $2.1 million was provided from the net sale
of 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 1999 will be comparable to that of prior periods.
The Company has a $1.5 million capital lease line for use as needed in 1999 to
fund 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 (used in) financing activities
During the first three months of 1999, stock options and warrants to purchase
47,100 shares of common stock were exercised resulting in proceeds of $170,075.
In addition during the first three months of 1999, 320 shares of common stock
were issued under the Company's Employee Stock Purchase Plan raising $1,550.
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 2000. 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.
13
<PAGE>
READINESS FOR THE YEAR 2000
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 Company uses the Great Plains/Horizon system for, accounting and financial
reporting, purchasing and manufacturing functions. This system's 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 the Company that it is 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 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. The Company mailed
written letters to approximately 110 vendors, suppliers and service providers
and no negative response has been received to-date. The Company will continue to
monitor existing and new vendors, suppliers and service providers to determine
if alternative vendors, suppliers or service providers will need to be
established.
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.
14
<PAGE>
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 and could possibly impact the
Company's ability to manufacture its products for clinical supply or for
commercial sale and could possible result in the delay of certain clinical
studies. 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?
Given the Company has not determined that a contingency plan with respect to
non-compliant in-house systems or third party suppliers, vendors or service
providers is necessary, no such plan has been established. If in the future the
Company determines a contingency plan is required, it will formulate such
contingency plan.
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."
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.
Pursuant to the Company's agreement with 3i, for the years 2000 through 2003,
inclusively, 3i has minimum purchase requirements of $2.4 million per year;
however, either party may terminate the agreement if 3i fails to purchase at
least $600,000 in a given calendar quarter after 1999. If 3i or the Company
were to terminate the agreement, the Company would need to establish a new
marketing and distribution network, either through an internal sales force or
through a distribution network, in order to sell Biogran. There are no
assurances as to the successfulness of these, or other, alternatives. In
addition, considerable expenditures may be required which could adversely effect
operating results.
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
15
<PAGE>
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.
PART II
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 March 31, 1999, the Company has used the following
amount of such net proceeds for the following categories enumerated by the SEC:
<TABLE>
<CAPTION>
Reasonable
Category Estimated Amount
-------- ----------------
<S> <C>
Additions to plant, property and equipment $ 283,000
Repayment of indebtedness 1,537,000
Operating expenses 1,936,000
Investments 9,998,000
Investment spending for Research & Development 1,208,000
Investment spending for Clinical Studies 503,000
Investment spending for Process Development and Manufacturing 1,235,000
____________
Total $ 16,700,000
============
</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 FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
16
<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)
May 4, 1999 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)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
DATED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,522,442
<SECURITIES> 12,352,662
<RECEIVABLES> 339,972
<ALLOWANCES> 0
<INVENTORY> 218,356
<CURRENT-ASSETS> 776,080
<PP&E> 1,851,693
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,158,176
<CURRENT-LIABILITIES> 2,410,115
<BONDS> 752,325
0
0
<COMMON> 114,201
<OTHER-SE> 13,881,535
<TOTAL-LIABILITY-AND-EQUITY> 17,158,176
<SALES> 562,532
<TOTAL-REVENUES> 562,532
<CGS> 134,193
<TOTAL-COSTS> 134,193
<OTHER-EXPENSES> 2,333,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,013
<INCOME-PRETAX> (1,704,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,704,772)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,704,772)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
