<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 June 30, 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)
<TABLE>
<S> <C>
Pennsylvania 23-2694857
- -------------------------------------------------------------- ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer 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
--------------------------------------
</TABLE>
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 June 30, 1999
- ---------------------------- -------------------------------
Common Stock, par value $.01 11,454,651 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> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets--June 30, 1999 and 3
December 31, 1998
Consolidated Statements of Operations--Three and 4
six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows--Three and 5
six months ended June 30, 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
<CAPTION>
PART II -
OTHER
INFORMATION
<S> <C> <C> <C>
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,677,463 $ 842,064
Short-term investments 10,257,775 14,513,744
Trade accounts receivable, net of allowance
of $59,838 and $90,726 215,008 8,468
Other receivables -- 635,188
Inventories 194,724 329,251
Other current assets 744,215 765,017
------------ ------------
Total current assets 13,089,185 17,093,732
------------ ------------
PROPERTY AND EQUIPMENT, net 1,952,325 1,709,506
OTHER ASSETS 98,390 85,394
------------ ------------
$ 15,139,900 $ 18,888,632
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 250,942 $ 287,412
Current portion of long-term capital lease obligations 438,652 362,239
Accounts payable 562,683 381,144
Accrued patent defense costs 267,218 472,492
Accrued compensation and related expenses 561,786 517,511
Other accrued expenses 361,489 601,832
------------ ------------
Total current liabilities 2,442,770 2,622,630
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations 634,633 608,562
Other liabilities 30,000 128,865
------------ ------------
Total long-term liabilities 664,633 737,427
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized,
11,454,651 and 11,372,700 shares issued and outstanding 114,547 113,727
Additional paid-in capital 42,668,569 42,289,024
Accumulated deficit (30,774,443) (26,977,160)
Accumulated other comprehensive income 23,824 102,984
------------ ------------
Total shareholders' equity 12,032,497 15,528,575
------------ ------------
$ 15,139,900 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited)
NET REVENUES $ 206,907 $ 1,112,292 $ 769,439 $ 1,937,194
COST OF SALES 68,497 332,691 202,690 546,196
----------- ----------- ----------- -----------
Gross profit 138,410 779,601 566,749 1,390,998
----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 961,766 479,715 1,719,859 1,070,020
Selling and marketing 361,535 832,564 801,078 1,771,783
Research and development 1,035,333 693,420 2,171,130 1,197,674
----------- ----------- ----------- -----------
Total operating expenses 2,358,634 2,005,699 4,692,067 4,039,477
----------- ----------- ----------- -----------
Operating loss (2,220,224) (1,226,098) (4,125,318) (2,648,479)
INTEREST EXPENSE (27,714) (48,370) (55,727) (114,121)
INTEREST INCOME 155,427 15,417 383,762 35,498
FOREIGN CURRENCY ADJUSTMENT -- 24,850 -- (20,361)
----------- ----------- ----------- -----------
NET LOSS (2,092,511) (1,234,201) (3,797,283) (2,747,463)
ACCRETION OF REDEMPTION PREMIUM ON
PREFERRED STOCK -- 190,018 -- 391,213
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(2,092,511) $(1,424,219) $(3,797,283) $(3,138,676)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $(.18) $(.26) $(.33) $(.59)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,446,083 5,459,130 11,418,686 5,342,180
=========== =========== =========== ===========
</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>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net loss $(3,797,283) $(2,747,463)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation 291,842 205,896
Services provided for common stock and common stock options 94,927 --
(Increase) decrease in -
Accounts receivable (206,540) 55,729
Notes and other receivables 635,188 (344,225)
Inventories 134,527 (220)
Other current assets 20,802 7,346
Other assets (12,996) --
Increase (decrease) in -
Other liabilities (339,208) (69,190)
Accounts payable 181,539 (7,229)
Accrued patent defense costs (205,274) (505,859)
Accrued compensation and related expenses 44,275 109,919
----------- -----------
Net cash used in operating activities (3,158,201) (3,295,296)
----------- -----------
INVESTING ACTIVITIES:
Purchases of investments (8,689,247) --
Proceeds from sale of investments 12,821,279 --
Purchase of property and equipment (240,627) (286,871)
----------- -----------
Net cash provided by (used in) investing activities 3,891,405 (286,871)
----------- -----------
FINANCING ACTIVITIES:
Proceeds (Repayments) of debt -- 26,223
Repayments of capital lease obligations (191,550) --
Proceeds from sale of Common Stock -- 18,386,587
Proceeds from exercise of common stock options and warrants 282,056 --
Proceeds from Employee Stock Purchase Plan 3,382 --
----------- -----------
Net cash provided by financing activities 93,888 18,412,810
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
8,307 (205,739)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 835,399 14,624,904
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 842,064 2,257,902
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,677,463 $16,882,806
=========== ===========
</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"), a Pennsylvania corporation, began operations
in November 1993. The Company seeks to develop, manufacture and market
orthopaedic products including bone substitutes based on novel materials and
technologies. The Company has two broad technology platforms -- Orthocomp(TM)
and Vitoss(TM) -- for developing bone substitutes, each providing the potential
for multiple product opportunities. The Company's product development programs
focus primarily on the spine, the fastest growing market in orthopaedics. In
addition, the Company is developing complementary bone products to address a
broad range of clinical needs in the trauma and joint implant fixation markets.
Within the Orthocomp platform the Company has three products under
development -- Cortoss(TM) Injectable, Cortoss(TM) Putty and Cortoss(TM)
Implants. Near-term, Orthovita plans to advance the development of its Cortoss
Injectable products for a variety of indications, including conducting clinical
trials of Cortoss Injectable for vertebroplasty and screw augmentation in
Europe. The Company has a worldwide marketing, sales and distribution agreement
for the co-development of Orthocomp(TM) for use in joint implant procedures with
Howmedica, a subsidiary of Stryker Corp. -- the PMMA market leader for joint
implants.
The Vitoss(TM) platform, Orthovita's other core technology, is being used to
develop synthetic cancellous resorbable, calcium phosphate products used to
correct non-weight bearing metaphyseal defects.
Outside the Company's core orthopaedic focus is BIOGRAN(R), its first
commercialized product that is a resorbable, granular biomaterial that
biologically transforms to bone and is used in the dental market and which is
sold through a global distribution arrangement with Implant Innovations, Inc.
The Company's future results of operations involve a number of risks and
uncertainties. The Company currently has negative cash flow from operations and
has depended primarily upon equity fund raising and sales of Biogran to maintain
operations. The Company's ability to raise money through the sale of additional
equity in the Company, as well as the price at which such equity may be sold, is
difficult to predict. There can be no assurances that future fund raising, if
any, will be successful. Other 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.
6
<PAGE>
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 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 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. Diluted loss per share has not been presented since the
impact on loss per share is anti-dilutive due to the Company's losses.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
As of June 30, 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 $ 1,677,463 -- -- $ 1,677,463
Short-term investments 10,282,362 $37,742 $(62,329) 10,257,775
----------- --------- -------- -----------
$11,959,825 $37,742 $(62,329) $11,935,238
=========== ========= ======== ===========
</TABLE>
The Company invests its 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 shareholders' equity.
7
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
The Company's board of directors has approved a program to repurchase up to
$1,000,000 worth of its common stock in open market transactions. The program is
subject to specific market conditions and other factors, on the EASDAQ exchange
or in negotiated transactions. As of June 30, 1999 the Company had not
repurchased any of its common stock.
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 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 June 30, 1999 and December 31, 1998, the Company had
reserved $267,218 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 of $1.5 million. Since 1996,
the Company has recorded patent litigation legal fees in excess of the $1.5
million. Additionally, based upon the royalty of 12% of net sales, a maximum
earned royalty of approximately $1,024,000 was due 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 net of the $1,024,000 due FBFC. 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. SHAREHOLDERS' EQUITY
During the three and six months ended June 30, 1999, stock options and warrants
to purchase 34,072 and 81,172 shares of common stock were exercised for proceeds
of $111,981 and $282,056, respectively. Additionally during the three months
ended June 30, 1999, the Company issued stock options to purchase 316,250 shares
of common stock at market values ranging from $5.00 to $6.25 per share to
employees, consultants and advisors. During May 1999 pursuant to the Company's
1997 Equity Compensation Plan, non-employee directors of the Company were each
granted 2,500 stock options at $5.11 per share which was the fair market value
on date of grant. For the six months ended June 30, 1999, the Company issued
stock options to purchase 466,000 shares of common stock at market values
ranging from $4.00 to $6.60.
8
<PAGE>
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 pay the Company 50% of their
Biogran average selling price through December 31, 1999, 45% for the year 2000
and 40% for the years 2001 through 2003. In 1998 and for the years 2000 through
2003, inclusively, 3i 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. During the first year of the agreement
between the Company and 3i, 3i purchased at a rate significantly higher than its
subsequent re-sale rate to its customers; therefore, the Company does not expect
any sales to 3i during the third quarter of 1999 and there may be a period of up
to six months during 1999 when 3i does not purchase any Biogran.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Orthovita, Inc. (the "Company"), a Pennsylvania corporation, began operations
in November 1993. The Company seeks to develop, manufacture and market
orthopaedic products including bone substitutes based on novel materials and
technologies. The Company has two broad technology platforms -- Orthocomp(TM)
and Vitoss(TM) -- for developing bone substitutes, each providing the potential
for multiple product opportunities. The Company's product development programs
focus primarily on the spine, the fastest growing market in orthopaedics. In
addition, the Company is developing complementary bone products to address a
broad range of clinical needs in the trauma and joint implant fixation markets.
Within the Orthocomp platform the Company has three products under
development -- Cortoss(TM) Injectable, Cortoss(TM) Putty and Cortoss(TM)
Implants. Near-term, Orthovita plans to advance the development of its Cortoss
Injectable products for a variety of indications, including conducting clinical
trials of Cortoss Injectable for vertebroplasty and screw augmentation in
Europe. The Company has a worldwide marketing, sales and distribution agreement
for the co-development of Orthocomp(TM) for use in joint implant procedures with
Howmedica, a subsidiary of Stryker Corp. -- the PMMA market leader for joint
implants.
The Vitoss(TM) platform, Orthovita's other core technology, is being used to
develop synthetic cancellous resorbable, calcium phosphate products used to
correct non-weight bearing metaphyseal defects.
Outside the Company's core orthopaedic focus is BIOGRAN(R), its first
commercialized product that is a resorbable, granular biomaterial that
biologically transforms to bone and is used in the dental market and which is
sold through a global distribution arrangement with Implant Innovations, Inc.
9
<PAGE>
CERTAIN RISKS RELATED TO ORTHOVITA'S BUSINESS
In addition to historical facts or statements of current condition, this report
contains certain forward-looking and cautionary statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide current expectations or forecasts of future events. These may include
statements regarding anticipated progress in research and development programs,
prospects for regulatory approval, manufacturing capabilities, market prospects
for products, sales and earnings projections and other statements regarding
matters that are not historical facts. The Company's performance and financial
results could differ materially from those reflected in these forward-looking
statements due to general financial, economic, regulatory and political
conditions affecting the medical device industry as well as more specific risks
and uncertainties such as those set forth below and in our reports to the SEC on
Form 10-K. Given these risks and uncertainties, any or all of these forward-
looking statements may prove to be incorrect.
Overview
The following factors could limit the Company's success:
. Inability to raise adequate funds to sustain the Company's research and
development efforts;
. Uncertainty related to regulatory clearances for the various products;
. Uncertainty of market acceptance of the products and the ability of our sales
and marketing efforts to inform the market of our products;
. Uncertainty regarding the size of any potential market for each product;
. The occurrence of any side effects or adverse reactions from our products
during clinical trials;
. Uncertainty regarding the availability and level of third-party reimbursement
for our products, including the Federal, state and foreign government
agencies;
. Dependence on patents, trade secrets and proprietary rights;
. Limited manufacturing experience and capacity as well as a lack of defined
distribution networks;
. Dependence on key suppliers and employees.
Orthovita and 3i distribution agreement
Since May 1, 1998 the Company has sold Biogran exclusively through Implant
Innovations Inc. ("3i"), a global distributor for the dental implant surgery
market. 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
at a transfer price equal to 40% of its average sales price to 3i's customers.
Additionally, 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 whether these or other alternatives will be successful. In
addition, considerable expenditures may be required which could adversely effect
operating results. In 1999, 3i fulfilled the balance of its 1998 minimum
purchase commitments that were deferred to 1999. There are no remaining minimum
purchase commitments for 3i in 1999. Additional sales to 3i in 1999 will be
dependent upon 3i's ability to successfully market the product and to reduce its
Biogran inventory and generate additional sales from the Company. The Company
does not expect any sales to 3i during the third quarter of 1999 and there may
be
10
<PAGE>
a period of up to six months during 1999 when 3i does not purchase any Biogran.
Substantial funds are necessary to continue operations
Since inception Orthovita has had negative cash flow from operations. Based upon
our historical use of funds and projected growth, the Company will need to raise
additional funds to continue operations. If the Company cannot raise adequate
funds, present and future projected spending will be curtailed or restricted.
Most of the funds raised to date have been through the sale of equity in the
Company. The ability to raise additional funds through equity transactions is
difficult to predict. In addition, the existing shareholders' percentage
ownership would be reduced if additional equity is issued.
Future negative announcements concerning the Company, its competitors or other
companies in the medical device 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 on
the market price of the Company's common stock and could impact the Company's
ability to raise additional funds in the equity markets.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments at June 30, 1999 and December
31, 1998 were $11,935,235 and $15,355,808, respectively, representing 79% and
81% of total assets, respectively. 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 six months
ended June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net cash used for operating activities $(3,158,201) $(3,295,296)
Net cash provided by (used in) investing activities 3,891,405 (286,871)
Net cash provided by financing activities 93,888 18,412,810
</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 sale of Biogran product and interest income on short-term
investments. In January 1999, the Company received a one-time reimbursement of
patent defense costs of $474,580 under the Release and Termination Agreement
with FBFC.
Operating Cash Outflows--
The Company's cash outflows were primarily used for development and pre-clinical
activities in preparation for regulatory filings of potential products. In
addition, funds have been used for the leasing and fit-up of expanded facilities
and the hiring and training of additional employees.
11
<PAGE>
Operating Cash Flow Requirements Outlook--
As further discussed under "Certain Risks Related to Orthovita's Business", the
level of further cash flow from sales of Biogran to 3i are uncertain.
The Company expects its cash flow from operating activities to continue to be
negative until such time, if any, as regulatory clearances for its products 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 will need to obtain
additional funding to adequately support its future operating needs.
The Company expects cash outflows to continue to be driven by the expansion of
its product development efforts. During the second quarter of 1999, the
Company was cleared to begin clinical trials in Europe for the use of Cortoss
Injectable in spinal fractures due to osteoporosis and for its use in screw
augmentation procedures. The Company expects its cash requirements for Cortoss
Injectable to increase significantly due to efforts associated with the clinical
trials and pre-commercial launch of Cortoss Injectable in Europe.
The Company expects to spend substantial funds on research and development
activities for its other orthopaedic products. If the Company is unable to
adequately fund such activities, certain programs may be curtailed or
restructured.
Net cash provided by (used in) investing activities
The Company has invested $240,627 and $286,871 for the six months ended June 30,
1999 and 1998, respectively, in the purchase of property and equipment for the
expansion of its product development capabilities. In addition during the six
months ended June 30, 1999, $4.1 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 and for 2000 may increase in comparison to
that of prior periods as the Company scales-up it manufacturing capacity for
Cortoss Injectable and Vitoss Scaffold. However, the Company has approximately
$1.3 million remaining on an existing capital lease line for use in 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 six months of 1999, stock options and warrants to purchase
81,172 shares of common stock were exercised resulting in proceeds of $282,056.
In addition during the first six months of 1999, 751 shares of common stock were
issued under the Company's Employee Stock Purchase Plan raising $3,382.
12
<PAGE>
Financing Requirements Outlook
As described above, the Company expects to continue to use cash and investments
to fund operating and investing activities. The Company's financing 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. Accordingly, the Company may seek to raise additional
funds through the sale of its stock whenever conditions are favorable; however,
there can be no assurance that such funds will be available at all or on terms
acceptable to the Company.
In addition, the Company's board of directors has approved a program to
repurchase up to $1,000,000 worth of its common stock in open market
transactions. The program is subject to specific market conditions and other
factors, on the EASDAQ exchange or in negotiated transactions. As of June 30,
1999 the Company had not repurchased any of its common stock.
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 six months ended June 30 is as
follows:
<TABLE>
<CAPTION>
% Change
1999 1998 1999 vs. 1998
---- ---- -------------
<S> <C> <C> <C>
Sales to End User Customers $ -- $ 1,191,014
Sales to 3i 769,439 746,180
----------- -----------
Total Product Revenue 769,439 1,937,194 (60)
Gross Profit 566,749 1,390,998 (59)
General and Administrative Expenses 1,719,859 1,070,020 (61)
Selling and Marketing Expenses 801,078 1,771,783 55
Research and Development Expenses 2,171,130 1,197,674 (86)
Other (Income) Expense (328,035) 98,984 431
Net Loss (3,797,283) (3,138,676) (21)
</TABLE>
Product Revenues Revenues for the six months ended June 30, 1999 reflect sales
to 3i at a transfer price equal to 50% of 3i's sales price to its retail
customers. For the same period in 1998, revenues reflect the Company's direct
sales to its customers through April plus the contract minimum sales to 3i in
May and June 1998. Under the global distribution agreement the Company entered
into with 3i, such sales to 3i in 1998 exceeded the rate of product re-sale by
3i to its customers and resulted in surplus inventory that is currently being
reduced through future product sales.
13
<PAGE>
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 of the
Company's product pipelines and pre-clinical and clinical activities of Cortoss
Injectable for vertebroplasty and screw augmentation in Europe.
Other Income and Expenses Other income and expenses improved from net expense of
$98,984 for the six months ended June 30,1998 to net income of $328,035 for the
same period during 1999. The 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
six months ended June 30, 1999 increased $658,607 or 21% from the same period a
year ago.
Results of Operations Outlook
The Company expects to continue to have operating losses until such time, if
any, as regulatory clearances for its product development candidates 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 initiated its clinical study in Norway
for the use of Cortoss Injectable as an augment to screw fixation in fracture
repair. The Company was also cleared to begin clinical trials in Europe for the
use of Cortoss Injectable in spinal fractures due to osteoporosis during the
second quarter of 1999.
14
<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" of 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. All
remediation costs, if any, will be expensed as incurred.
15
<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.
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."
PART II
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)
August 13, 1999 By: /s/ David S. Joseph
----------------------
David S. Joseph
Chairman and Chief Executive Officer
(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 JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,677,463
<SECURITIES> 10,257,775
<RECEIVABLES> 215,008
<ALLOWANCES> 0
<INVENTORY> 194,724
<CURRENT-ASSETS> 744,215
<PP&E> 1,952,325
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,139,900
<CURRENT-LIABILITIES> 2,442,770
<BONDS> 664,633
0
0
<COMMON> 114,547
<OTHER-SE> 11,917,950
<TOTAL-LIABILITY-AND-EQUITY> 15,139,900
<SALES> 769,439
<TOTAL-REVENUES> 769,439
<CGS> 202,690
<TOTAL-COSTS> 202,690
<OTHER-EXPENSES> 4,692,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,727
<INCOME-PRETAX> (3,797,283)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,797,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,797,283)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
