<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, 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
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ORTHOVITA, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania
- -----------------------------------------------------------
(State Other Jurisdiction of Incorporation or Organization)
23-2694857
- --------------------------------------
(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
-------------------------
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, 1999
- ---------------------------- ------------------------------------
Common Stock, par value $.01 11,403,344 Shares
This Report Includes a Total of 17 Pages
1
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ORTHOVITA, INC. AND SUBSIDIARIES
INDEX
PART I -
FINANCIAL Page
INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets - 3
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations - 4
Three and nine months ended September 30, 1999
and 1998
Consolidated Statements of Cash Flows - 5
Three and nine months ended September 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
PART II -
OTHER
INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------- -------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,071,195 $ 842,064
Short-term investments 6,984,604 14,513,744
Trade accounts receivable, net of allowance
of $47,773 and $90,726 --- 8,468
Other receivables --- 635,188
Inventories 192,374 329,251
Other current assets 678,081 765,017
------------ ------------
Total current assets 9,926,254 17,093,732
------------ ------------
PROPERTY AND EQUIPMENT, net 1,934,841 1,709,506
OTHER ASSETS 100,742 85,394
------------ ------------
$ 11,961,837 $ 18,888,632
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 254,735 $ 287,412
Current portion of long-term capital lease obligations 492,121 362,239
Accounts payable 366,780 381,144
Accrued patent defense costs 247,997 472,492
Other accrued expenses 838,229 1,119,343
------------ ------------
Total current liabilities 2,199,862 2,622,630
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations 635,233 608,562
Other liabilities --- 128,865
------- ------------
Total long-term liabilities 635,233 737,427
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 15,000,000 shares authorized, 11,403,344 and
11,372,700 shares issued and outstanding
114,033 113,727
Additional paid-in capital 42,422,945 42,289,024
Accumulated deficit (33,420,115) (26,977,160)
Accumulated other comprehensive income 9,879 102,984
------------ ------------
Total shareholders' equity 9,126,742 15,528,575
------------ ------------
$ 11,961,837 $ 18,888,632
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Unaudited)
NET REVENUES $ 5,410 $ 377,428 $ 774,849 $ 2,314,622
COST OF SALES 1,306 221,077 218,280 767,276
---------- ---------- ---------- ---------
Gross profit 4,104 156,351 556,569 1,547,349
---------- ---------- ---------- ---------
OPERATING EXPENSES:
General and administrative 959,031 1,159,280 2,664,606 2,229,301
Selling and marketing 476,126 700,875 1,277,204 2,472,658
Research and development 1,323,186 611,953 3,494,316 1,809,627
---------- ---------- ---------- ---------
Total operating expenses 2,758,343 2,472,108 7,436,126 6,511,586
---------- ---------- ---------- ---------
Operating loss (2,754,239) (2,315,757) (6,879,557) (4,964,237)
INTEREST EXPENSE (27,339) (37,596) (83,066) (151,717)
INTEREST INCOME 135,906 181,424 519,668 216,922
FOREIGN CURRENCY ADJUSTMENT --- 27,684 --- 7,323
---------- ---------- ---------- ---------
NET LOSS (2,645,672) (2,144,245) (6,442,955) (4,891,709)
ACCRETION OF REDEMPTION PREMIUM ON
PREFERRED STOCK --- --- --- 391,213
---------- ---------- ---------- ---------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $(2,645,672) $(2,144,245) $(6,442,955) $(5,282,922)
========== ========== ========== =========
NET LOSS PER COMMON SHARE $(.23) $(.19) $(.56) $(.72)
========== ========== ========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,437,600 11,160,158 11,424,990 7,317,929
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
OPERATING ACTIVITIES: (Unaudited)
<S> <C> <C>
Net loss $(6,442,955) $(4,891,709)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation 455,638 319,099
Services provided for common stock and common stock options 89,675 10,313
(Increase) decrease in -
Restricted cash --- 200,000
Accounts receivable 8,468 (110,621)
Notes and other receivables 635,188 ---
Inventories 136,877 23,400
Other current assets 86,936 (54,122)
Other assets (15,348) ---
Increase (decrease) in -
Other liabilities (128,865) ---
Accounts payable (14,364) (491,670)
Accrued patent defense costs (224,495) (532,266)
Other accrued expenses (281,114) 617,288
----------- ----------
Net cash used in operating activities (5,694,359) (4,910,288)
----------- ----------
INVESTING ACTIVITIES:
Purchases of investments (9,028,194) (6,003,157)
Proceeds from sale of investments 16,414,157 ---
Purchase of property and equipment (218,682) (93,167)
----------- ----------
Net cash provided by (used in) investing activities 7,167,281 (6,096,324)
----------- ----------
FINANCING ACTIVITIES:
Repayments of short-term bank borrowings --- (692,000)
Repayments of debt --- (375,000)
Repayments of capital lease obligations (305,738) (194,404)
Proceeds from sale of Common Stock --- 20,259,751
Repurchase of Common Stock (249,360) ---
Proceeds from exercise of common stock options and warrants 287,555 663,633
Proceeds from Employee Stock Purchase Plan 6,357 ---
----------- ----------
Net cash provided by (used in) financing activities (261,186) 19,661,980
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
17,395 (43,546)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,229,131 8,611,822
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 842,064 2,257,902
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,071,195 $10,869,724
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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. We seek to develop, manufacture and market orthopaedic products
including bone substitutes based on novel materials and technologies. We have
two broad technology platforms for developing bone substitutes, each providing
the potential for multiple product opportunities. Our product development
programs focus primarily on the spine, the fastest growing market in
orthopaedics. In addition, we are developing complementary bone products to
address a broad range of clinical needs in the trauma and joint implant fixation
markets.
Orthovita's synthetic cortical bone substitute platform is a technology for
developing nonresorbable, load-bearing, resin composite products. Orthovita
currently has four products under development that are derived from this
technology, and branded as ORTHOCOMP(TM) Injectable, CORTOSS(TM) Injectable,
CORTOSS(TM) Putty and CORTOSS(TM) Implants as well as ORTHOCOMP total joint bone
cement. Near-term, Orthovita plans to advance the development of its CORTOSS
products for a variety of indications, including conducting clinical trials of
CORTOSS Injectable for vertebroplasty and screw augmentation in Europe.
The synthetic cancelleous bone platform, Orthovita's other core technology, is
being used to develop resorbable, calcium phosphate products which include
VITOSS(TM) Injectable and VITOSS(TM) Scaffold.
Outside of our core orthopaedic focus is BIOGRAN(R), our 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 ("3i").
Our future results of operations involve a number of risks and uncertainties. We
currently have negative cash flow from operations and have depended primarily
upon equity fund raising and sales of Biogran to maintain operations. Our
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. We
cannot assure future fund raising, if any, will be successful. Other factors
that could affect our 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.
6
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Basis of Consolidation
Our consolidated financial statements include the accounts of Orthovita, Inc.,
our Belgian branch operations, and our wholly owned subsidiaries. We have
eliminated all material intercompany balances in consolidation.
Basis of Presentation
Our consolidated interim financial statements are unaudited and, in our opinion,
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 our 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 our operations for any interim period are not necessarily indicative
of the results of our operations for any other interim period or for a full
year.
Loss per share
We have presented the 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 we would use any proceeds we would receive
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 our losses.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
As of September 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 $2,071,195 --- --- $2,071,195
Short-term investments 7,028,430 --- $(43,826) 6,984,604
---------- ---------- ---------- ----------
$9,099,625 --- $(43,826) $9,055,799
========= ========= ========== =========
</TABLE>
We invest our cash in highly liquid investment-grade marketable securities
including corporate commercial paper and U.S. government agency bonds. For
financial reporting purposes we consider 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
Our board of directors approved a program to repurchase up to $1,000,000 worth
of our 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 September 30, 1999 we repurchased 54,000 shares
of our common stock at an aggregate cost of $249,360 or approximately $4.62 per
share.
In July 1992, we obtained a license from FBFC (the "FBFC License") that allowed
us to manufacture and sell our 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 us and our 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 U.S. District Court granted our summary judgment
motion stating that our 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. During October 1999, the U.S. Federal Court of Appeals rejected the
plaintiff's request and reaffirmed the summary judgement in our favor. In our
opinion, the reserve of $247,997 at September 30, 1999 is adequate for any
unbilled invoices to be received.
In accordance with the FBFC License, FBFC agreed to indemnify us for all
reasonable damages and costs that we incurred 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, we have 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, we entered into a Release and
Termination Agreement (the "Release") with FBFC whereby, FBFC agreed to
reimburse us $474,580 for patent defense costs net of the $1,024,000 due FBFC.
The Release specified we have satisfied all our royalty obligations under the
FBFC License, and that FBFC will transfer all of its rights in the intellectual
property, including the patents, to us.
4. SHAREHOLDERS' EQUITY
During the three and nine months ended September 30, 1999, stock options and
warrants to purchase 2,000 and 83,172 shares of common stock were exercised for
proceeds of $5,500 and $287,555, respectively. Additionally during the three
months ended September 30, 1999, we issued stock options to purchase 17,000
shares of common stock at market values ranging from $4.85 to $6.15 per share to
employees, consultants and advisors. For the nine months ended September 30,
1999 and 1998, we issued stock options and warrants to purchase 483,000 and
63,600 shares of common stock, respectively, at market values ranging from $4.00
to $6.60. During May 1999 pursuant to our 1997 Equity Compensation Plan, our
non-employee directors were each granted 2,500 stock options at $5.11 per share
which was the fair market value on date of grant.
8
<PAGE>
5. NET PRODUCT REVENUE
Prior to April 28, 1998, we generally marketed Biogran through internal direct
sales efforts in the U.S. On April 28, 1998, we 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 us 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, we 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
us and 3i, 3i purchased at a rate significantly higher than its subsequent
resale rate to its customers. While we did not have any significant sales to 3i
during the third quarter of 1999, we do expect to resume sales to 3i during the
fourth quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a Pennsylvania corporation that began operations in November 1993. We
seek to develop, manufacture and market orthopaedic products including bone
substitutes based on novel materials and technologies. We have two broad
technology platforms for developing bone substitutes, each providing the
potential for multiple product opportunities. Our product development programs
focus primarily on the spine, the fastest growing market in orthopaedics. In
addition, we are developing complementary bone products to address a broad range
of clinical needs in the trauma and joint implant fixation markets.
Orthovita's synthetic cortical bone substitute platform is a technology for
developing nonresorbable, load-bearing, resin composite products. Orthovita
currently has four products under development that are derived from this
technology, and branded as ORTHOCOMP(TM) Injectable, CORTOSS(TM) Injectable,
CORTOSS(TM) Putty and CORTOSS(TM) Implants as well as ORTHOCOMP total joint bone
cement. Near-term, Orthovita plans to advance the development of its CORTOSS
products for a variety of indications, including conducting clinical trials of
CORTOSS Injectable for vertebroplasty and screw augmentation in Europe.
The synthetic cancelleous bone platform, Orthovita's other core technology, is
being used to develop resorbable, calcium phosphate products which include
VITOSS/TM/ Injectable and VITOSS/TM/ Scaffold. Outside of our core orthopaedic
focus is BIOGRAN(R), our first commercialized product. BIOGRAN 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 ("3i").
9
<PAGE>
Certain Risks Related to Orthovita's Business
This Quarterly Report on Form 10-Q contains, and from time to time we expect to
make, certain forward-looking statements regarding our business, financial
condition and results of operations. These statements are in addition to
historical facts or statements of current condition and we claim protection for
these forward-looking statements under the Private Securities Litigation Reform
Act of 1995. Forward-looking statements provide current expectations,
predictions or forecasts of future events and actual events or results may
differ materially from such statements. 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, sales to 3i in the fourth quarter of 1999 and
other statements regarding matters that are not historical facts. Our
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 Annual Report on Form 10-K. Given these risks and uncertainties, any or
all of these forward-looking statements may prove to be incorrect. We undertake
no obligation to publicly release the results of any revisions to its forward-
looking statements to reflect subsequent events or circumstances or to reflect
the occurrence of unanticipated events.
Overview
The following important factors could limit our success and cause forward-
looking statements or predictions made in this Form 10-Q, and from time to time
by us to be materially different:
. inability to raise adequate funds to sustain our research and development
efforts;
. uncertainty related to regulatory clearances for the various products;
. healthcare reform and legislative and regulatory changes impacting the
healthcare market;
. 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;
. competitive factors that could affect our potential markets;
. 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 we have sold Biogran exclusively through 3i, a global
distributor for the dental implant surgery market. Pursuant to our agreement
with 3i, for the years 2000 through 2003, 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. Either party may terminate the agreement if 3i fails to
purchase at least $600,000 in any calendar quarter after 1999. If 3i or we
terminate this agreement, we 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,
10
<PAGE>
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 future periods will be
dependent upon 3i's ability to successfully market the product and to reduce its
Biogran inventory. However, while we did not have any significant sales to 3i
during the third quarter of 1999, we do expect to resume sales to 3i during the
fourth quarter of 1999.
Substantial funds are necessary to continue operations
Since inception we have had negative cash flow from operations. Based upon our
historical use of funds and projected growth, we will need to raise additional
funds to continue operations. If we 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. The ability to raise
additional funds through equity transactions is difficult to predict. In
addition, the existing shareholders' would own a smaller percentage of our
company if additional equity is issued.
Future negative announcements concerning us, our 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 our products may have a material adverse effect on the market price
of our common stock and could impact our ability to raise additional funds in
the equity markets.
Liquidity and Capital Resources
We continue to rely upon proceeds received from our initial public offering.
Cash, cash equivalents and short-term investments were $9,055,799 at September
30, 1999 and $15,355,808 at December 31, 1998, representing 76% and 81% of our
total assets at these 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 nine months
ended September 30:
1999 1998
---- ----
Net cash used for operating activities $(5,694,359) $(3,295,296)
Net cash provided by (used in) investing activities 7,167,281 (286,871)
Net cash provided by (used in) financing activities (261,186) 18,412,810
Net cash used in operating activities
Operating Cash Inflows -
The principal source of our current operating cash inflows has been derived from
sale of Biogran and interest income on short-term investments. In January 1999,
we received a one-time reimbursement of patent defense costs of $474,580 from
FBFC.
11
<PAGE>
Operating Cash Outflows -
Our 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 expanding our facilities and the hiring and
training of additional employees.
Operating Cash Flow Requirements Outlook -
As we discussed under "Certain Risks Related to Orthovita's Business", future
sales of BIOGRAN to 3i are uncertain.
Our 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 our control, as
described above. We will need to obtain additional funding to adequately support
our future operating needs.
We expect cash outflows to continue to be driven by the expansion of our product
development efforts. During the second quarter of 1999, we were cleared to begin
clinical trials in Europe for the use of Cortoss Injectable in spinal fractures
due to osteoporosis and for use in screw augmentation procedures. We expect our
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.
We expect to spend substantial funds on research and development activities for
our other orthopaedic products. If we are unable to adequately fund these
activities, we will have to curtail or restructure these activities.
Net cash provided by (used in) investing activities
We have invested $218,682 and $93,167 for the nine months ended September 30,
1999 and 1998, respectively, in the purchase of property and equipment for the
expansion of our product development capabilities. In addition during the nine
months ended September 30, 1999, $7.4 million was provided from the net sale of
investment grade marketable securities.
Investing Cash Outlook -
We expect that our 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 we scale-up manufacturing capacity for Cortoss Injectable and Vitoss
Scaffold. However, we have approximately $1.1 million remaining on an existing
capital lease line for use to fund the expansion of our development and
manufacturing facilities. The timing of such expansion is dependent upon a
number of variables outside of our control and include, but are not limited to,
the timing of regulatory clearances for marketing of our future products, and
the lead times required to bring additional manufacturing capacity on line.
12
<PAGE>
Net cash provided by (used in) financing activities
During the first nine months of 1999, stock options and warrants to purchase
83,172 shares of common stock were exercised resulting in proceeds of $287,555.
In addition during the first nine months of 1999, 1,444 shares of common stock
were issued under our Employee Stock Purchase Plan raising $6,357.
Our board of directors approved a program to repurchase up to $1,000,000 worth
of our 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 September 30, 1999, we have repurchased 54,000
shares of our common stock at an aggregate cost of $249,360 or approximately
$4.62 per share.
Financing Requirements Outlook
As described above, we expect to continue to use cash and investments to fund
operating and investing activities. We believe our current cash balances will be
adequate for at least the next twelve months. Our financing requirements may
change due to numerous factors including, but not limited to, the decisions of
regulatory authorities concerning our marketing applications as they as filed
from time to time, the results of our clinical trials and other product
development programs, the ability to meet clinical and commercial supply
requirements, the expansion of development and manufacturing facilities, our
technological advances and those by the competition, and regulatory
requirements. Accordingly, we will seek to raise additional funds through the
sale of our common stock whenever conditions are favorable. We cannot assure
you, however, that additional funds will be available at all or on terms
acceptable to us.
In addition, we have $750,000 remaining under our Board approved stock
repurchase program. These repurchases will be subject to market conditions, our
operating requirements and other limitations.
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
1999 1998 1999 vs. 1998
---- ---- -------------
<S> <C> <C> <C>
Sales to End User Customers $ --- $ 1,191,014
Sales to 3i 774,849 1,123,138
----------- -----------
Total Product Revenue 774,849 2,314,152 (67)
Gross Profit 556,569 1,547,349 (64)
General and Administrative Expenses 2,664,606 2,229,301 (20)
Selling and Marketing Expenses 1,277,204 2,472,658 48
Research and Development Expenses 3,494,316 1,809,627 (93)
Other (Income) Expense (436,602) (72,528) 502
Net Loss (6,422,955) (4,891,709) (31)
</TABLE>
13
<PAGE>
Product Revenues Product revenues for the nine months ended September 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 our direct sales
to customers through April plus the contract minimum sales to 3i for the period
May through September 1998. Under the global distribution agreement we entered
into with 3i, such sales to 3i in 1998 exceeded the rate of product resale by 3i
to its customers and resulted in surplus inventory that is currently being
reduced through future product sales.
General and Administrative Expenses The increase in general and administrative
expenses year-over-year is primarily a result of an increase in the number of
employees 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
we entered into our global distribution arrangement for Biogran with 3i.
Research and Development Expenses The increase from 1998 to 1999 in research
and development expenses is attributable to the expanded development of our
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 as a result of
increased interest income from proceeds of the our initial public offering
completed during late June 1998.
Net Loss As a result of the foregoing factors, our net loss for the nine months
ended September 30, 1999 increased $1,531,246 or 31% from the same period a year
ago.
Results of Operations Outlook
We expect 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 these events is dependent upon a number of variables outside of our
control. We have initiated our clinical study in Norway for the use of Cortoss
Injectable as an augment to screw fixation in fracture repair. We were 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 and
expect to begin enrolling patients during the fourth quarter of 1999.
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 our current state of readiness and other
information related to Year 2000 issues that may affect us.
14
<PAGE>
Will We Be Ready?
Information Technology Systems. The core information technology systems
utilized by us appear to be Year 2000 compliant. These information technology
systems support our major business functions, including accounting and financial
reporting and internal and external electronic mail. We use 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, our
software uses a four-digit year to handle both internal and external electronic
mail. The Company's third party payroll processor has certified to us that it is
Year 2000 compliant.
Non-Information Technology Systems Non-information technology systems include
embedded technology such as microcontrollers. Our non-technology systems include
HVAC systems, fax machines and certain process development equipment. Based on
our initial assessment of these systems at our facilities, we have determined
the systems are not date sensitive and therefore do not raise Year 2000 issues.
We continue to examine all in-house equipment in detail to confirm compliance or
identify areas of potential non-compliance.
Material Third Party Relationships We have made inquiries of our principal
suppliers and service providers to determine our vulnerability if these third
parties fail to identify and remediate their own Year 2000 issues, if any. We
believe third party service providers and suppliers whose Year 2000 issues could
have a material impact on us include our telecommunications providers and key
supply chain vendors.
We have defined our principal vendors, suppliers and service providers and have
made inquiries regarding Year 2000 compliance. We mailed written letters to
approximately 110 vendors, suppliers and service providers and no negative
response have been received to-date. We 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, we have 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.
What are the Possible Consequences of Year 2000 Issues Confronting Us?
In the event that key suppliers, vendors or service providers are not compliant,
we would be required to migrate our services to compliant vendors. This would
require additional time and resources, resulting in additional operating
expenses through a transition period and could possibly impact our ability to
manufacture our products for clinical supply or for commercial sale and could
possible result in the delay of certain clinical studies. In addition, if we
determine key in-house equipment is not compliant, programming costs would be
necessary to upgrade or replace the equipment.
15
<PAGE>
What Are Our Contingency Plans?
Because we have 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 plan has been established.
Forward-looking statements
The statements in our Year 2000 disclosure contain forward-looking statements
and should be read in conjunction with our 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)
November 15, 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 PRELIMINARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q DATED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,071,195
<SECURITIES> 6,984,604
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 192,374
<CURRENT-ASSETS> 678,081
<PP&E> 1,934,841
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,961,837
<CURRENT-LIABILITIES> 2,199,862
<BONDS> 635,233
0
0
<COMMON> 114,033
<OTHER-SE> 9,012,709
<TOTAL-LIABILITY-AND-EQUITY> 11,961,837
<SALES> 774,849
<TOTAL-REVENUES> 774,849
<CGS> 218,280
<TOTAL-COSTS> 218,280
<OTHER-EXPENSES> 6,916,458
<LOSS-PROVISION> 83,066
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,442,955)
<EPS-BASIC> (.56)
<EPS-DILUTED> (.56)
</TABLE>
