<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, 2000.
[ ] 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.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2694857
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(State Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
45 Great Valley Parkway, Malvern, PA 19355
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(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, 2000
---------------------------- ------------------------------------
Common Stock, par value $.01 13,317,989 Shares
This Report Includes a Total of 19 Pages
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
INDEX
PART I -
FINANCIAL Page
INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
Three and nine months ended 4
September 30, 2000 and 1999
Consolidated Statements of Cash Flows -
Nine months ended 5
September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II -
OTHER
INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and 6) $ 8,218,527 $ 2,487,343
Short-term investments (Notes 2 and 6) 2,340,477 6,386,202
Restricted cash (Note 3) 400,000 ---
Other current assets 106,507 303,236
------------ ------------
Total current assets 11,065,511 9,176,781
------------ ------------
PROPERTY AND EQUIPMENT, net 4,317,782 2,041,524
------------ ------------
OTHER ASSETS 123,034 103,141
------------ ------------
$ 15,506,327 $ 11,321,446
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (Note 6) $ 2,000,000 $ 2,000,000
Note payable 119,648 137,702
Current portion of long-term capital lease obligations 768,101 530,126
Accounts payable 1,401,000 1,327,825
Deferred gain (Note 3) 400,000 ---
Accrued compensation and related expenses 488,584 605,507
Other accrued expenses 579,774 456,891
------------ ------------
Total current liabilities 5,757,107 5,058,051
------------ ------------
CAPITAL LEASE OBLIGATIONS 656,279 616,726
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 4):
Preferred Stock, $.01 par value, 20,000,000 shares authorized,
no shares issued and outstanding --- ---
Common Stock, $.01 par value, 50,000,000 shares authorized,
13,317,989 and 11,331,632 shares issued
and outstanding 133,180 113,316
Additional paid-in capital 52,225,404 42,002,795
Accumulated deficit (43,331,217) (36,473,754)
Accumulated other comprehensive income 65,574 4,312
------------ ------------
Total shareholders' equity 9,092,941 5,646,669
------------ ------------
$ 15,506,327 $ 11,321,446
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
NET REVENUES (Note 5) $ --- $ 5,410 $ 532,967 $ 774,849
COST OF SALES --- 1,306 164,041 218,280
----------- ----------- ------------ -----------
Gross profit --- 4,104 368,926 556,569
----------- ----------- ------------ -----------
OPERATING EXPENSES:
General and administrative 939,142 959,031 2,983,049 2,664,606
Selling and marketing 719,873 476,126 2,228,043 1,277,204
Research and development 1,953,339 1,323,186 5,263,973 3,494,316
----------- ----------- ------------ -----------
Total operating expenses 3,612,354 2,758,343 10,475,065 7,436,126
----------- ----------- ------------ -----------
Operating loss (3,612,354) (2,754,239) (10,106,139) (6,879,557)
INTEREST EXPENSE (41,018) (27,339) (112,215) (83,066)
INTEREST INCOME 125,322 135,906 289,970 519,668
Net gain on sale of product
line (Note 3) --- --- 3,070,921 ---
----------- ----------- ------------ -----------
NET LOSS $(3,528,050) $(2,645,672) $ (6,857,463) $(6,442,955)
=========== =========== ============ ===========
NET LOSS PER COMMON SHARE,
BASIC AND DILUTED $(.28) $(.23) $(.58) $(.56)
=========== =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 12,799,049 11,437,600 11,924,318 11,424,990
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(6,857,463) $(6,442,955)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation 638,025 455,638
Services provided for Common Stock options 315,881 89,675
Net gain on sale of product line (3,070,921) ---
(Increase) decrease in -
Other current assets 196,729 867,469
Other assets (19,893) (15,348)
Increase (decrease) in -
Other liabilities --- (128,865)
Accounts payable 73,175 (14,364)
Accrued compensation and related expenses (182,923) 135,007
Other accrued expenses (45,841) (640,616)
----------- -----------
Net cash used in operating activities (8,953,231) (5,694,359)
----------- -----------
INVESTING ACTIVITIES:
Purchases of investments (199,886) (9,028,194)
Proceeds from sale of investments 4,284,455 16,414,157
Proceeds from sale of product line 3,900,000 ---
Increase in restricted cash (400,000) ---
Purchase of property and equipment (2,282,901) (218,682)
----------- -----------
Net cash provided by investing activities 5,301,668 7,167,281
----------- -----------
FINANCING ACTIVITIES:
Proceeds from short term bank borrowings 2,000,000 ---
Repayments on short term bank borrowings (2,000,000) ---
Repayments of capital lease obligations (473,209) (305,738)
Proceeds from issuance of Common Stock 8,943,949 ---
Repurchase of Common Stock --- (249,360)
Proceeds from exercise of Common Stock options and warrants 879,574 287,555
Proceeds from sales of Common Stock under the Employee Stock
Purchase Plan 28,069 6,357
----------- -----------
Net cash provided by (used in) financing activities 9,378,383 (261,186)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 4,364 17,395
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,731,184 1,229,131
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,487,343 842,064
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,218,527 $ 2,071,195
=========== ===========
</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. We seek to develop synthetic bone substitute products for
spine and other orthopaedic applications. Our products under development are
based on three patented technology platforms.
Our operations are subject to certain risks including but not limited to the
need to successfully develop, obtain regulatory approval for, and commercialize
our products, most of which are currently in development, and our need for
additional capital. We have incurred losses each year since our inception in
1993 and expect to continue to incur losses for at least the next couple of
years. Our products under development may never be commercialized or if
commercialized, may never generate substantial revenue.
In July 2000 we received a CE Certification allowing the sale of our
VITOSS/TM/ Scaffold product in all of the countries of the European Union, as
well as other countries such as Switzerland that have adopted the European
Union's regulatory standards. VITOSS Scaffold is our synthetic cancellous bone
void filler used to fill bony voids or gaps of the skeletal system (ie., the
extremities, spine and pelvis). During October 2000, we launched this product in
Europe.
In March 2000, we completed the sale of our BIOGRAN(R) dental grafting product
line to Implant Innovations, Inc. ("3i"), a Biomet company, for $3.9 million.
BIOGRAN generated all of our net product revenue (see Note 5) through September
2000.
During August 2000, we sold 508,475 shares of Common Stock and warrants to
purchase 762,712 shares of Common Stock at an exercise price of $5.90 per share.
The warrants expire on August 21, 2001. The securities were sold in a private
equity financing which raised net proceeds of $2.1 million for working capital
and research and development activities.
In addition, during July 2000, we received approximately $6.8 million in net
proceeds in a private equity financing under which we sold 1,186,441 shares of
our Common Stock. We believe our cash and short-term investments as of
September 30, 2000 will be sufficient to meet our currently estimated operating
and cash requirements through the second quarter of 2001. We will need to raise
additional funds and if adequate financing is not available, we may be required
to delay, scale back or eliminate certain operations.
Basis of Consolidation
Our consolidated financial statements include the accounts of Orthovita, Inc.,
our European branch operations, and our wholly owned subsidiaries. We have
eliminated all intercompany balances in consolidation.
6
<PAGE>
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, 1999 and 1998 and for the years ended December 31,
1999, 1998 and 1997. 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.
Reclassifications
We have reclassified certain amounts in prior period's financial statements to
conform to the presentation for the current period.
Per Share Data
We have presented per common share data pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic loss per
share excludes potentially dilutive securities and was computed by dividing net
loss applicable to common shareholders by the weighted average number of shares
of Common Stock outstanding for the period.
Diluted per share data is computed assuming the conversion or exercise of all
dilutive securities such as Common Stock options and warrants. Common Stock
options and warrants were excluded from the computation of diluted earnings per
share for the three and nine months ended September 30, 2000 and 1999 because
they were anti-dilutive.
The following table summarizes basic and diluted weighted average shares
outstanding used to compute the basic and diluted per share data.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------- ---------- ---------- ----------
Weighted average number of
shares outstanding, basic and
diluted 12,799,049 11,437,600 11,924,318 11,424,990
========== ========== ========== ==========
</TABLE>
2. CASH, CASH EQUIVALENTS AND INVESTMENTS:
We invest excess 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 a separate component of
shareholders' equity.
7
<PAGE>
As of September 30, 2000 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 Gains Value
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8,218,527 $--- $ --- $ 8,218,527
Short-term investments 2,361,900 249 (21,672) 2,340,477
----------- ---- -------- -----------
$10,580,427 $249 $(21,672) $10,559,004
=========== ==== ======== ===========
</TABLE>
3. SALE OF BIOGRAN:
On March 22, 2000, we sold our BIOGRAN dental grafting product line to 3i for
$3.9 million. We received proceeds of $3.5 million, for which we realized a net
gain of approximately $3.1 million, and received an additional $400,000 that is
being held in an escrow account as a deferred gain for one year. In connection
with this transaction, we have agreed to indemnify 3i for any potential
liabilities related to BIOGRAN activities prior to the sale. If no liabilities
for which we have agreed to indemnify 3i arise within one year from the close of
this sale, then the $400,000 held in escrow will be released to us.
4. SHAREHOLDERS' EQUITY:
During August 2000, we sold 508,475 shares of Common Stock and warrants to
purchase 762,712 shares of Common Stock at an exercise price of $5.90 per share.
The warrants expire on August 21, 2001. The securities were sold in a private
equity financing which raised net proceeds of $2.1 million for working capital
and research and development activities. In connection with the offering,
warrants to purchase a total of 63,559 shares of Common Stock were issued to
consultants.
During July 2000, we received approximately $6.8 million in net proceeds
through a private equity financing under which we sold 1,186,441 shares of our
Common Stock at $5.90 per share. In addition during August 2000, we listed our
Common Stock on the Nasdaq National Market.
During the three and nine months ended September 30, 2000, stock options and
warrants to purchase 9,566 and 273,457 shares of Common Stock were exercised for
proceeds of $36,905 and $879,574, respectively. Additionally, during three and
nine months ended September 30, 2000, we issued stock options for the purchase
of 5,000 and 77,500 shares of Common Stock with various exercise prices to
certain vendors in payment of services valued at $28,500 and $315,881,
respectively. In May 2000, a restricted stock award was made to an employee
under which 12,500 shares vested immediately, 16,250 shares will vest on
December 31, 2000 and 16,250 will vest on December 31, 2001. During the three
and nine months ended September 30, 2000, 1,856 and 5,484 shares of Common
Stock, respectively, were purchased by the Employee Stock Purchase Plan for
proceeds of $10,254 and $28,069, respectively.
5. NET PRODUCT REVENUE:
On April 29, 1998, we entered into a Global Distribution Agreement with 3i,
whereby 3i obtained the exclusive worldwide marketing, sales and distribution
rights for BIOGRAN for dental surgical applications. The arrangement provided
for 3i to pay us 45% and 40% of their BIOGRAN average selling price for 1999 and
2000, respectively, and accounted for 100% of our net revenue (See Note 3)
through September 2000.
8
<PAGE>
6. BANK BORROWINGS:
We have a one-year $2 million line of credit arrangement with our commercial
bank that expires at the end of 2000. The line of credit requires us to maintain
a minimum aggregate level of cash and investments of $4 million, minimum working
capital of $4 million and other specific financial covenants. Interest on the
line of credit is payable at the prime rate plus 1.0%. As of September 30,
2000, $2 million was outstanding under the line and was repaid in full during
October 2000.
7. COMMITMENTS AND CONTINGENCIES:
On July 23, 1994, U.S. Biomaterials Corporation filed with the U.S. Patent and
Trademark Office a Request for Reexamination of the FBFC U.S. Patent which
provided patent protection in the U.S. for BIOGRAN. FBFC filed a response in
this proceeding, establishing that the claims of the FBFC Patent were properly
allowed. As a result, a Certificate of Reexamination was issued by the U.S.
Patent and Trademark Office confirming the patentability of all claims of the
FBFC Patent without amendment. However, U.S. Biomaterials Corporation also
instituted a nullification proceeding against the European counterpart to the
FBFC U.S. Patent. The opposition division of the European Patent Office
tentatively decided in FBFC's favor, but the matter is still proceeding under an
appeal. This patent has now been assigned to 3i who purchased the BIOGRAN
product line in March 2000. In connection with the BIOGRAN sale to 3i, 3i has
assumed control of this matter and we have agreed to reimburse for the
associated legal costs and to provide them with certain indemnification with
respect to this matter.
8. SUBSEQUENT EVENT
In connection with the contractual obligations from our two private placement
transactions during July and August 2000, we filed a Form S-3 registration
statement on October 5, 2000 with the Securities and Exchange Commission
("SEC"). On November 9, 2000 the SEC declared effective our registration
statement. The registration statement covers the registration of up to
3,032,395 shares which consists of 1,715,679 shares of outstanding Common Stock
and up to 1,316,716 shares which consists of 1,715,679 shares of outstanding
Common Stock and up to 1,316,716 shares of Common Stock that may be issuable
upon the exercise of warrants. Of the shares registered, all 1,715,679
outstanding shares of Common Stock were purchased at $5.90 per share, and
warrants to purchase up to 826,271 shares of Common Stock at $5.90 per share
were issued in those two private placement transactions.
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. We seek to develop synthetic bone substitute products for
spine and other orthopaedic applications. Our products under development are
based on three patented technology platforms.
Our VITOSS/TM/ orthobiologic platform consists of a patented small particle
resorbable calcium phosphate, which is used to form synthetic cancellous bone.
The CORTOSS/TM/ synthetic cortical bone substitute platform, another of our core
technologies, is a technology for developing nonresorbable, load bearing, resin
composite products. We incorporate formulations derived from our CORTOSS and
VITOSS technologies into a third technology used to make our RHAKOSS/TM/
preformed implants.
In July 2000 we received a CE certification allowing the sale of our VITOSS
Scaffold product in all of the countries of the European Union, as well as in
other countries such as Switzerland that have adopted the European Union's
regulatory standards. We launched this product in Europe during October 2000.
Except for the CE mark received for our VITOSS Scaffold product in Europe, none
of our products are on the market. However, we have filed applications with the
United States Food and Drug Administration (the "FDA") for the approval of
VITOSS Scaffold for use as a bone void filler and for the approval of CORTOSS
Injectable for use in cranial defect repair.
9
<PAGE>
We recently filed with European regulatory authorities the results of our
human clinical studies in Europe to support our application for a CE
certification allowing the use of CORTOSS Injectable for screw augmentation. We
have not yet completed the application for this product, and cannot assure that
it will be approved. We currently are conducting human clinical studies in
Europe for the use of CORTOSS Injectable in vertebral fracture augmentation and
preclinical studies for the use of VITOSS Scaffold in spinal fusion. We expect
to commence preclinical studies for our RHAKOSS preformed implants by the end of
2000.
We plan to sell VITOSS Scaffold and other products that we develop through
independent distributors and agents in the U.S. and abroad. Our independent
distributor and agent network will also be responsible for educating physicians
about the uses for our products.
The first product we developed was BIOGRAN(R) for use in the dental market. In
order to better focus on the orthopaedic market, in March 2000 we sold our
BIOGRAN dental grafting product line to Implant Innovations Inc. ("3i"), a
Biomet company, for $3.9 million. We received proceeds of $3.5 million, and
received an additional $400,000 that is being held in an escrow account as a
deferred gain for one year, and realized a net gain on the transaction of
approximately $3.1 million.
Forward-Looking Statements
Various statements made in this report on Form 10-Q are forward-looking
statements. Forward-looking statements include, without limitation, information
about the following:
- costs relating to the development of products;
- obtaining regulatory approval for our products;
- healthcare reimbursement for procedures using our products;
- anticipated losses;
- anticipated legal fees relating to litigation;
- sufficiency of available resources to fund research and development; and
- planned marketing activities.
When used in this report on Form 10-Q, the words "may," "will," "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimates" and similar
expressions are generally intended to identify forward-looking statements, but
are not the exclusive expressions of forward-looking statements. Because
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including, but not
limited to:
- difficulties in obtaining regulatory approval for our products;
- lack of market acceptance by physicians of our products;
- unanticipated cash requirements to support operations;
- inability to attract qualified personnel to market and train physicians on
the use of our products;
- increased competition;
- enactment of new legislation or administrative regulation;
- application to our business of court decisions and regulatory
interpretations;
- adverse developments in pending litigation;
- claims that exceed our insurance coverage; and
- imposition of penalties for failure to comply with regulatory guidelines.
In addition, other factors that could cause actual events or results to differ
materially from those expressed or implied by forward-looking statements are
addressed in the Certain Risks Related to Orthovita's Business section of this
report on Form 10-Q.
10
<PAGE>
Certain Risks Related to Orthovita's Business
As further described above, our performance and financial results are subject
to risks and uncertainties including the following specific risks.
We have a history of operating losses and we will need additional funds that may
not be available in the future.
We have experienced negative operating cash flows since our inception. We plan
to continue to spend substantial funds for clinical trials in support of
regulatory and reimbursement approvals, for research and development, for the
establishment of our commercial scale manufacturing capabilities and in support
of potential product launch. Factors which may cause our future capital
requirements to be greater than anticipated include the extent to which
unforeseen developments arise with our clinical trials, timing of regulatory
approval, research and development or manufacturing activities, market
acceptance of our products, the acquisition and defense of intellectual property
rights or the development of strategic alliances for the marketing of certain of
our products. We believe our cash and investments as of September 30, 2000, will
be sufficient to meet our currently estimated operating and capital requirements
through the second quarter of 2001. We will need to obtain additional funds
through equity or debt financings, strategic alliances with third parties or
from other sources. Any such required financing may not be available on
satisfactory terms, if at all. The sale of additional equity or convertible debt
securities would result in additional dilution to our shareholders. If
additional funds are raised through the issuance of debt securities, these
securities could have certain rights senior to holders of Common Stock, and
could contain covenants that would restrict our operations. Any additional
financing may not be available in amounts or on terms acceptable to us, if at
all. If adequate financing is not available, we may be required to delay, scale
back or eliminate certain operations.
We have incurred substantial operating losses since inception and, at
September 30, 2000, had an accumulated deficit of approximately $43.3 million.
These losses have resulted principally from expenses incurred in developing and
testing our products, including the development and patenting of our
technologies, the conduct of preclinical and clinical studies, preparation of
submissions to the FDA and foreign regulatory bodies, and the development of
sales, marketing and manufacturing capabilities. We expect to continue to incur
significant operating losses in the future as we continue our product
development efforts, expand our marketing and sales activities and further
develop our manufacturing capabilities.
We may never become profitable. Our future sales of products from our
synthetic cortical and cancellous bone technology platforms, if any, may not
grow, and we may not be able to achieve or maintain profitability in the future.
Our results of operations may fluctuate significantly in the future as a
result of a number of factors, many of which are outside of our control. These
factors include, but are not limited to, the timing of governmental approvals,
unanticipated events associated with clinical and preclinical trials, the
medical community's acceptance of our products, the success of competitive
products, our ability to enter into strategic alliances with other companies,
expenses associated with development and protection of intellectual property
matters, establishment of commercial scale manufacturing capabilities, and the
timing of expenses related to commercialization of new products. The results of
our operations may fluctuate significantly from quarter to quarter and may not
meet expectations of securities analysts and investors.
11
<PAGE>
Additional specific risks, to which our performance and financial results are
subject, are detailed in our Form 10-K dated December 31, 1999 and include:
We are dependent on the commercial success of CORTOSS Injectable and VITOSS
Scaffold, and our ability to achieve this is subject to certain risks,
including:
o the need to obtain their regulatory approval,
o the need to develop commercial scale manufacturing capability and capacity
for these products,
o the need to build an effective sales and distribution network,
o the uncertainty of operating in international markets, and
o the need for the market place to commercially accept VITOSS and CORTOSS.
During July 2000, we received the FDA's comments and questions on both our
VITOSS and CORTOSS 510(k) filings. The FDA has requested additional data and
clarification on both products which we have recently submitted to them. There
can be no assurance that the FDA will not require additional data or require the
initiation of additional pre-clinical or clinical studies, either of which would
delay the receipt of FDA regulatory clearances.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products.
The orthopaedic market is highly competitive.
We may be sued in a product liability action.
Our business could suffer if we cannot attract and retain the services of key
employees.
In addition, there are other risks, which are also detailed in the Form 10-K,
which you should read in its entirety, that relate principally to the securities
market and ownership of our securities, including:
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring shareholder
approval.
We have not and do not intend to pay any dividends.
Our stock price is highly volatile.
Until August 1, 2000, our Common Stock traded exclusively on EASDAQ.
Beginning August 2, 2000, our Common Stock trades on both EASDAQ and the Nasdaq
National Market. We have experienced limited volume from time to time in the
trading of our Common Stock on both the EASDAQ and Nasdaq exchanges. The trading
of our shares, on both EASDAQ and Nasdaq, may continue to be relatively
illiquid. In addition, the Nasdaq National Market has continuing listing
requirements relative to stock price, which we may not be able to meet in the
future. Should the volatility of our stock price cause the stock price to drop
below certain levels, we could experience further illiquidity.
12
<PAGE>
Liquidity and Capital Resources
We have experienced negative operating cash flows since our inception, and we
have funded our operations primarily from the proceeds received from the sale of
our Common Stock. Cash, cash equivalents and short-term investments were
approximately $10.6 million at September 30, 2000 and $8.9 million at December
31, 1999, representing 68% and 78% of our 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 nine
months ended September 30:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
<S> <C> <C>
2000 1999
---------- -----------
Net cash used in operatin activities $(8,953,231) $(5,694,359)
Net cash provided by investing activities 5,301,668 7,167,281
Net cash (used in) provided by financing activities 9,378,383 (261,186)
</TABLE>
Net cash used in operating activities
Operating Cash Inflows -
Operating cash inflows have been derived from BIOGRAN product sales realized
prior to the close of the sale of BIOGRAN dental grafting product line to 3i in
March 2000. We realized a net gain of approximately $3.1 million on the sale
of the BIOGRAN dental grafting product line. In addition, we have received cash
inflows from interest income on short-term investments.
Operating Cash Outflows -
Our operating cash outflows were primarily used for development, pre-clinical
and 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.
Operating Cash Flow Requirements Outlook -
In July 2000, we received a CE Certification allowing the sale of our VITOSS
Scaffold product in all of the countries of the European Union, and we began
selling VITOSS in Europe during October 2000. We expect to continue to use cash
in operating activities and expect this use to increase due to increased efforts
associated with preclinical activities, clinical trials and pre-commercial
launch activities in the U.S. and Europe. Accordingly, we expect our cash flow
from operating activities to continue to be negative until such time, if ever,
as additional regulatory clearances for our products are obtained and revenue
received from product sales exceeds funding of operating costs.
Net cash provided by investing activities
We received $3.9 million, of which $400,000 is being held in escrow for one
year, in connection with the sale of the BIOGRAN dental grafting product line to
3i in March 2000.
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We have invested approximately $2,283,000 and $219,000 for the nine months
ended September 30, 2000 and 1999, respectively, primarily in the purchase of
leasehold improvements for the expansion of our product development and
manufacturing capabilities.
During the nine months ended September 30, 2000 and 1999, approximately $4.3
million and $7.4 million, respectively, were provided by the net sale of
investment grade marketable securities.
Investing Cash Outlook -
In order to provide funds for operations, we expect to continue to sell
marketable securities. We expect that our use of cash for the purchase of
property, equipment and leasehold improvements for 2000 may continue to increase
during the fourth quarter of 2000 in comparison to that of prior periods in 2000
as we scale-up manufacturing capacity for CORTOSS Injectable. We have
approximately $175,000 remaining on an existing capital lease line for use in
funding a portion of the equipment necessary for the expansion of our
development and manufacturing facilities.
Net cash provided by financing activities
During August 2000, we sold 508,475 shares of Common Stock and warrants to
purchase 762,712 shares of Common Stock at an exercise price of $5.90 per share.
The securities were sold in a private equity financing which raised net proceeds
of $2.1 million for working capital and research and development activities.
During July 2000, we received approximately $6.8 million in net proceeds through
a private equity financing under which we sold 1,186,441 shares of our Common
Stock. The transaction was sold to a private European foundation at $5.90 per
share.
In connection with the contractual obligations from these two private
placement transactions, we filed a Form S-3 registration statement on October 5,
2000 with the Securities and Exchange Commission ("SEC"). On November 9, 2000
the SEC declared effective our registration statement. The registration
statement covers the registration of up to 3,032,395 shares which consists of
1,715,679 shares of outstanding Common Stock and up to 1,316,716 shares of
Common Stock that may be issuable upon the exercise of warrants. Of the shares
registered, all 1,715,679 outstanding shares of Common Stock were purchased at
$5.90 per share, and warrants to purchase up to 826,271 shares of Common Stock
at $5.90 per share were issued in those two private placement transactions.
During the first nine months of 2000, options and warrants to purchase
273,457 shares of Common Stock were exercised resulting in proceeds of
approximately $880,000. In addition, approximately $473,000 was used to repay
capital lease obligations. In September 2000, we borrowed $2.0 million on a
line of credit with our bank, and we repaid the line in full during October
2000.
Financing Requirements Outlook
We expect to continue to use cash and investments to fund operating and
investing activities. We plan to continue to spend substantial funds for
preclinical studies and clinical trials in support of regulatory and
reimbursement approvals, research and development and establishment of
commercial scale manufacturing capabilities. We believe our existing cash and
investments as of September 30, 2000 will be sufficient to meet our currently
estimated operating and investing requirements through the second quarter of
2001. Our future capital requirements will depend upon numerous factors,
including the extent to which unforeseen clinical, regulatory, manufacturing or
sales and marketing difficulties arise or to which our products gain market
acceptance, the acquisition and defense of intellectual property rights, the
development of strategic alliances for the marketing of certain of our products,
and other competitive developments. In addition, although we have no present
commitments or understandings, we may seek to expand our operations and product
line via acquisitions or joint ventures and any such acquisitions or joint
ventures may increase our capital requirements. We will need to obtain
additional funds through equity or debt financings, strategic alliances with
third parties or from other sources. These financing activities could result in
substantial dilution to the holders of
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<PAGE>
Common Stock or significant financial or operational restrictions to us. In
addition, any such required financing may not be available on satisfactory
terms, if at all.
The extent and timing of proceeds from future stock option and warrant
exercises, if any, are primarily dependent upon our Common Stock's market price,
as well as the exercise prices and expiration dates of the stock options and
warrants.
Results of Operations
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources." A summary of net revenues and expenses
for the three and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
Three Months Ended % Increase Nine Months Ended % Increase
September 30, (Decrease) September 30, (Decrease)
2000 vs. 2000 vs.
2000 1999 1999 2000 1999 1999
----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ --- $ 5,410 (100) $ 532,967 $ 774,849 (31)
Gross Profit --- 4,104 (100) 368,926 556,569 (34)
General and
Administrative Expenses 939,142 959,031 (2) 2,983,049 2,664,606 12
Selling and Marketing
Expenses 719,873 476,126 51 2,228,043 1,277,204 74
Research and Development
Expenses 1,953,339 1,323,186 48 5,263,973 3,494,316 51
Total Operating Expenses 3,612,354 2,758,343 31 10,475,065 7,436,126 41
Net Interest Income 84,304 108,567 (22) 177,755 436,602 (59)
Net gain on sale of
product line --- --- --- 3,070,921 --- ---
Net Loss (3,528,050) (2,645,672) 33 (6,857,463) (6,442,955) 6
</TABLE>
Net Revenues Net revenues for the nine months ended September 30, 2000 were
approximately $533,000 in comparison to $775,000 for the same period in 1999.
Net revenues reflect sales of BIOGRAN product to 3i under a global distribution
agreement prior to the closing of the sale of our BIOGRAN dental grafting
product line to 3i in March 2000. As a result of this agreement, we have not
generated any additional revenues since March 2000.
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<PAGE>
Gross Profit Gross profit for the nine months ended September 30, 2000 was
approximately $369,000, or 69% of net revenues, compared to $557,000, or 72% of
net revenues, for the same period during 1999. As previously stated, we have
not generated any additional gross profit since the sale of the BIOGRAN product
line to 3i.
Operating Expenses Operating expenses for the nine months ended September 30,
2000 were approximately $10.5 million compared to $7.4 million during the same
period a year ago. Selling and marketing expenses increased year over year as a
result of the development of marketing materials and marketing-related
consulting costs in preparation for product launches. The increase from 1999 to
2000 in research and development expenses is attributable to pre-clinical
activities for VITOSS Scaffold, CORTOSS Injectable and RHAKOSS implants and
headcount additions related to the expanded development of our product
pipelines.
Operating expenses for the three months ended September 30, 2000 were
approximately $3.6 million compared to $2.8 million during the third quarter of
1999. Increases in selling and marketing expenses quarter over quarter are a
result of the development of marketing materials and marketing-related
consulting costs in preparation for product launches. Research and development
expenses increased from $1.3 million in the third quarter of 1999 to $2.0
million in the same quarter in 2000 as a result of pre-clinical activities for
VITOSS Scaffold, CORTOSS Injectable and RHAKOSS implants and headcount additions
related to the expanded development of our product pipelines.
Net interest income During the three and nine months ended September 30,
2000 and 1999, net interest income decreased as a result of lower interest
income due to lower average cash balances during 2000 in comparison to the same
period in 1999, as well as higher interest expense related to our capital lease
obligations.
Net gain on sale of product line In March 2000, we sold our BIOGRAN dental
grafting product line to 3i for $3.9 million. We received proceeds of $3.5
million, with an additional $400,000 that is being held in an escrow account for
one year, and realized a net gain on the transaction of approximately $3.1
million.
Net Loss As a result of the above noted items, we had a net loss for the nine
months ended September 2000 of approximately $6.9 million as compared to a net
loss of $6.4 million for the same period during 1999. The three month net loss
for 2000 was $3.5 million compared to $2.6 million for the same three month
period in 1999. We expect to continue incurring significant operating losses in
the future as we further our product development efforts, expand our marketing
and sales activities and develop our manufacturing capabilities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to fluctuations in foreign
currency, which may impact our operations. Our foreign currency risk exposure
results from fluctuating currency exchange rates, primarily the U.S. dollar
against the European currency, the Euro. We face currency exposure that arises
from translating the financial results of our European branch, both sales
revenue and operating expenses, to the U.S. dollar at exchange rates that may
have fluctuated from when the transactions actually occurred. Global sales
revenue earned in Euros may be impacted when converted to U.S. dollars at the
end of each reporting period. In addition, our European branch's operating
expenses are primarily funded by the U.S. operations. It is difficult to predict
the cost to fund those European operations given the fluctuations in foreign
currency.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 22, 2000, the Company sold 508,475 shares of Common Stock and warrants
to purchase 762,712 shares of Common Stock at an exercise price of $5.90 per
share and for a term of one year, for an aggregate purchase price of $3,000,000.
These securities are subject to adjustments upon the occurrence of certain
dilution events. In connection with this transaction, a brokerage fee was paid
of $225,000 and warrants to purchase 63,559 shares of Common Stock at an
exercise price of $5.90 per share with a term of five years. The issuance of
these securities was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D as an issuer transaction not
involving a public offering.
On July 20, 2000, the Company sold 1,186,441 shares of Common Stock to a private
foundation for aggregate proceeds of $7,000,000. The issuance of these
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D as an issuer transaction not
involving a public offering.
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