<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, 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.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2694857 .
---------------------------------------- ----------------------
(State Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
45 Great Valley Parkway, Malvern, PA 19355 .
---------------------------------------- ---------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 640-1775 .
---------------------
Not Applicable .
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding as of June 30, 2000
---------------------------- -------------------------------
Common Stock, par value $.01 11,611,651 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>
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
Three and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 16
PART II -
OTHER
INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
--
</TABLE>
2
<PAGE>
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------- -------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Notes 2 and 6) $ 3,123,675 $ 2,487,343
Short-term investments (Notes 2 and 6) 2,678,114 6,386,202
Restricted cash (Note 3) 400,000 ---
Other current assets 66,834 303,236
------------ ------------
Total current assets 6,268,623 9,176,781
------------ ------------
PROPERTY AND EQUIPMENT, net 2,721,037 2,041,524
------------ ------------
OTHER ASSETS 113,203 103,141
------------ ------------
$ 9,102,863 $ 11,321,446
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (Note 6) $ 2,000,000 $ 2,000,000
Note payable 136,052 137,702
Current portion of long-term capital lease obligations 673,560 530,126
Accounts payable 1,012,181 1,327,825
Deferred gain (Note 3) 400,000 ---
Accrued compensation and related expenses 343,033 605,507
Other accrued expenses 419,730 456,891
------------ ------------
Total current liabilities 4,984,556 5,058,051
------------ ------------
CAPITAL LEASE OBLIGATIONS 553,583 616,726
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Notes 4 and 8):
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,
11,611,651 and 11,331,632 shares issued
and outstanding 116,117 113,316
Additional paid-in capital 43,222,858 42,002,795
Accumulated deficit (39,803,715) (36,473,754)
Accumulated other comprehensive income 29,464 4,312
------------ ------------
Total shareholders' equity 3,564,724 5,646,669
------------ ------------
$ 9,102,863 $ 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 Six Months Ended
------------------------------------ -------------------------------------
June 30 June 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES (Note 5) $ --- $ 206,907 $ 532,967 $ 769,439
COST OF SALES --- 68,497 164,041 202,690
----------- ----------- ----------- -----------
Gross profit --- 138,410 368,926 566,749
----------- ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 1,077,867 961,766 2,044,455 1,719,859
Selling and marketing 679,419 361,535 1,508,170 801,078
Research and development 1,925,100 1,035,333 3,310,634 2,171,130
----------- ----------- ----------- -----------
Total operating expenses 3,682,386 2,358,634 6,863,259 4,692,067
----------- ----------- ----------- -----------
Operating loss (3,682,386) (2,220,224) (6,494,333) (4,125,318)
INTEREST EXPENSE (32,488) (27,714) (71,197) (55,727)
INTEREST INCOME 79,750 155,427 164,648 383,762
Net gain on sale of product
line (Note 3) --- --- 3,070,921 ---
----------- ----------- ----------- -----------
NET LOSS $(3,635,124) $(2,092,511) $(3,329,961) $(3,797,283)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE,
BASIC AND DILUTED $(.31) $(.18) $(.29) $(.33)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 11,584,563 11,446,083 11,486,953 11,418,686
=========== =========== =========== ===========
</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>
Six Months Ended June 30,
----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,329,961) $(3,797,283)
Adjustments to reconcile net loss to net cash used in operating
activities -
Depreciation 384,818 291,842
Services provided for Common Stock options 287,381 94,927
Net gain on sale of product line (3,070,921) ---
(Increase) decrease in -
Other current assets 236,402 583,977
Other assets (10,062) (12,996)
Increase (decrease) in -
Other liabilities --- (339,208)
Accounts payable (315,644) 181,539
Accrued compensation and related expenses (290,474) 44,275
Other accrued expenses (226,716) (205,274)
----------- -----------
Net cash used in operating activities (6,335,177) (3,158,201)
----------- -----------
INVESTING ACTIVITIES:
Purchases of investments (199,887) (8,689,247)
Proceeds from sale of investments 3,933,127 12,821,279
Proceeds from sale of product line 3,900,000 ---
Increase in restricted cash (400,000) ---
Purchase of property and equipment (822,772) (240,627)
----------- -----------
Net cash provided by investing activities 6,410,468 3,891,405
----------- -----------
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 (297,792) (191,550)
Proceeds from exercise of Common Stock options and warrants 842,668 282,056
Proceeds from sales of Common Stock to the Employee Stock Purchase Plan 17,815 3,382
----------- -----------
Net cash provided by financing activities 562,691 93,888
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (1,650) 8,307
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 636,332 835,399
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,487,343 842,064
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,123,675 $ 1,677,463
=========== ===========
</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, manufacture and market synthetic bone
products for the orthopaedic industry based on novel materials and technologies.
Our operations are subject to certain risks including but not limited to the
need to successfully develop 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.
On March 22, 2000, we completed the sale of our BIOGRAN/R/ dental grafting
product line to Implant Innovations, Inc. ("3i") for gross proceeds of $3.9
million. BIOGRAN has generated all of our net product revenue (see Note 5). On
July 11, 2000 we received a CE Certification allowing the sale of our VITOSSTM
Scaffold product in all of the countries of the European Economic Community.
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).
We plan to initiate a launch of this product in Europe during September 2000.
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 June 30, 2000 and
the proceeds from the private equity financing discussed above, 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 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, 1999 and 1998 and for the years ended
6
<PAGE>
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 six months ended June 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 June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding, basic
and diluted 11,584,563 11,446,083 11,486,953 11,418,686
========== ========== ========== ==========
</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.
As of June 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 Losses Value
--------------- ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $3,123,675 $ --- $ --- $3,123,675
Short-term investments 2,713,228 3,549 (38,663) 2,678,114
---------- ------ -------- ----------
$5,836,903 $3,549 $(38,663) $5,801,789
========== ====== ======== ==========
</TABLE>
7
<PAGE>
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 arise within one year from the close of this sale for which we have
agreed to indemnify 3i, then the $400,000 escrow, and related deferred gain,
will be released to us.
4. SHAREHOLDERS' EQUITY:
During the three and six months ended June 30, 2000, stock options and
warrants to purchase 40,500 and 263,891 shares of Common Stock were exercised
for proceeds of $124,100 and $842,668, respectively. Additionally during the
first three and six months of 2000, we issued stock options for the purchase of
17,500 and 72,500 shares of Common Stock with various exercise prices to certain
vendors in payment of services valued at $91,880 and $287,381, respectively. In
addition during May 2000, 50,000 shares of Common Stock were granted, under a
restricted stock award, to an employee. Of the 50,000 total shares granted,
12,500 immediately vested, 16,250 shares will vest on December 31, 2000 and the
remaining 16,250 will vest on December 31, 2001.
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 provides
for 3i to pay us 45% and 40% of their BIOGRAN average selling price for 1999 and
2000, respectively. In 1999 and 2000, 3i accounted for 100% of our net revenue
(See Note 3).
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 June 30, 2000, $2
million was outstanding under the line and was repaid in July 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
provides 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
8
<PAGE>
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 EVENTS:
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, which represents the average closing price of our common stock for
the 20 days prior to the date of purchase. In addition, subsequently we listed
our Common Stock on the Nasdaq National Market.
In August 2000, the worldwide marketing, sales and distribution agreement for
joint development of ORTHOCOMP/TM/ for use in joint implant procedures with
Howmedica, a subsidiary of Stryker Corp, was cancelled by mutual agreement of
the parties. All development and commercial rights to this product were returned
to us.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Orthovita is a biomaterials company with two broad technology platforms for
developing bone substitutes, each providing the potential for multiple product
opportunities. Our products under development focus primarily on indications
for spinal repair resulting from degenerative disease and trauma.
Our VITOSS/TM/ orthobiologic platform consists of a patented small particle
resorbable calcium phosphate, which is used to form osteoconductive synthetic
cancellous bone and can be delivered as an injectable or a scaffold. VITOSS/TM/
Injectable and VITOSS/TM/ Scaffold are under development in this platform. In
July 2000, we received a CE Certification allowing the sale of our VITOSS
Scaffold product in all of the countries of the European Economic Community. We
plan to initiate a launch of this product in Europe during September.
The synthetic cortical bone substitute platform, our other core technology,
is a technology for developing nonresorbable, load bearing, resin composite
products. We currently have four products under development that are derived
from this technology, and branded as ORTHOCOMPTM Injectable, CORTOSS/TM/
Injectable, CORTOSS/TM/ Putty and CORTOSS/TM/ Implants. We plan to
advance the development of CORTOSS products for a variety of indications. We
are currently conducting clinical trials of CORTOSS Injectable for
vertebroplasty and screw augmentation in Europe.
We are developing the CORTOSS and VITOSS product lines independently and have
retained all of the commercial rights to these products. In August 2000, the
worldwide marketing, sales and distribution agreement for joint development of
ORTHOCOMP/TM/ for use in joint implant procedures with Howmedica, a subsidiary
of Stryker Corp, was cancelled by mutual agreement of the parties. All
development and commercial rights to this product were returned to us.
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, with an
additional $400,000 held in an escrow account for one year, and realized a one-
time net gain on the transaction of approximately $3.1 million.
9
<PAGE>
FORWARD-LOOKING STATEMENTS
In addition to historical facts or statements of current conditions, this
report on Form 10-Q contains forward-looking statements. Forward-looking
statements provide our current expectations or forecasts of future events. These
may include statements regarding anticipated scientific progress in our research
programs, development of potential products, prospects for regulatory approval,
manufacturing capabilities, market prospects for our products, sales and
earnings projections and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified by
the use of words in the statements such as "anticipate", "estimate",
"expect", "project", "intend", "plan", "believe", or other words and
terms similar in meaning. 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
biotechnology, orthopaedic and medical device industries as well as more
specific risks and uncertainties such as set forth below. Given these risks and
uncertainties, any or all of these forward-looking statements may prove to be
incorrect. Therefore, you are cautioned not to place too much reliance on any
such forward-looking statements. Furthermore, we do not intend, and are not
obligated to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise. We claim the protections
afforded by the Private Securities Litigation Reform Act of 1995, as amended,
for our forward-looking statements. The use of the words "Orthovita", the
"Company", "we", "us" or "our" herein refers to Orthovita, Inc.,
together with its subsidiaries.
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, and 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 existing cash as of June 30, 2000, along with the
approximately $6.8 million in net proceeds received during July 2000 in
connection with the sale of 1,186,441 shares of our Common Stock in a private
placement, 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.
10
<PAGE>
We have incurred substantial operating losses since our inception and, at June
30, 2000, had an accumulated deficit of approximately $39.8 million. These
losses have resulted principally from expenses required to be incurred before we
can begin marketing 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.
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.
On July 19, 2000, we received the FDA's comments and questions on both our
VITOSS and CORTOSS 510(k) filings. The FDA has requested additional data on both
products. We are preparing responses to the FDA's requests, which responses
include additional data generated subsequent to our initial filing of the
510(k). There can be no assurance that after responding to the FDA's questions,
the FDA will not require additional new 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.
11
<PAGE>
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 the EASDAQ exchange and there is no history to indicate how
our shares will trade on Nasdaq. The trading of our shares, on both EASDAQ and
Nasdaq, may continue to be relatively illiquid.
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 our initial
public offering. Cash, cash equivalents and short-term investments were
approximately $5.8 million at June 30, 2000 and $8.9 million at December 31,
1999, representing 63% 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 six
months ended
June 30:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Net cash used in operating activities $(6,335,177) $(3,158,201)
Net cash provided by investing activities 6,410,468 3,891,405
Net cash provided by financing activities 562,691 93,888
</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 on
March 22, 2000 when we realized approximately $3.1 million in a one-time net
gain on the sale of the BIOGRAN dental grafting product line. In addition, we
have received cash inflows from interest income on short-term investments.
12
<PAGE>
Operating Cash Outflows -
Our operating 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.
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 Economic Community. We
expect to begin selling VITOSS in Europe during September 2000. However, 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. As
a result of the mutual termination of the collaberation with Howmedica, we are
now solely responsible for funding the development of ORTHOCOMP. However, we do
not expect this to significantly impact cash flow requirements for the next
several years. Accordingly, we expect our cash flow from operating activities to
continue to be negative until such time, if ever, as regulatory clearances for
our products are obtained and revenue received from product sales exceeds
funding of operating costs. In 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 on both products. We are preparing responses to the FDA's
requests, which responses include additional data generated subsequent to our
initial filing of the 510(k). After responding to the FDA's questions, the FDA
may require additional new data or require the initiation of additional pre-
clinical or clinical studies, either of which would delay the receipt of FDA
regulatory clearances. The timing of such events is dependent upon a number of
variables outside of our control.
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 on March 22, 2000.
We have invested approximately $823,000 and $241,000 for the six months ended
June 30, 2000 and 1999, respectively, primarily in the purchase of leasehold
improvements for the expansion of our product development and manufacturing
capabilities.
During the six months ended June 30, 2000 and 1999, approximately $3.7
million and $4.1 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 increase in
comparison to that of prior periods as we scale-up manufacturing capacity for
CORTOSS Injectable and VITOSS Scaffold. We have approximately $504,000 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 the first six months of 2000, options and warrants to purchase 263,891
shares of Common Stock were exercised resulting in proceeds of approximately
$843,000. In addition, approximately $298,000 was used to repay capital lease
obligations. In June 2000, we borrowed $2.0 million on a line of credit with
our bank, and we repaid the line in July 2000.
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<PAGE>
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 as of
June 30, 2000, along with the approximately $6.8 million in net proceeds
received during July 2000 in connection with the sale of 1,186,441 shares of our
Common Stock in a private placement, will be sufficient to meet our currently
estimated operating and capital 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 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.
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<PAGE>
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 six months ended June 30 are as follows:
<TABLE>
<CAPTION>
Three Months Ended % Increase Six Months Ended % Increase
June 30, (Decrease) June 30, (Decrease)
2000 vs. 2000 vs.
2000 1999 1999 2000 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ --- $ 206,907 (100) $ 532,967 $ 769,439 (31)
Gross Profit --- 68,497 (100) 368,926 566,749 (35)
General and Administrative
Expenses 1,077,867 961,766 12 2,044,455 1,719,859 19
Selling and Marketing
Expenses 679,419 361,535 88 1,508,170 801,078 88
Research and Development
Expenses 1,925,100 1,035,333 86 3,310,634 2,171,130 52
Net Interest Income 47,262 127,713 (63) 93,451 328,035 (72)
Net gain on sale of
product line --- --- --- 3,070,921 --- ---
Net Loss (3,635,124) (2,092,511) 74 (3,329,961) (3,797,283) (12)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Revenues Net revenues for the six months ended June 30, 2000 were
approximately $533,000 in comparison to $769,000 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 on March 22, 2000. As a result of this agreement, we have
not generated revenues from the BIOGRAN product line since March 2000.
Gross Profit Gross profit for the six months ended June 30, 2000 was
approximately $369,000, or 69% of net revenues, compared to $567,000, or 74% of
net revenues, for the same period during 1999. As previously stated, we have
not generated gross profit from the BIOGRAN product line since the sale of
BIOGRAN to 3i.
Operating Expenses Operating expenses for the six months ended June 30, 2000
were approximately $6.9 million compared to $4.7 million during the same period
a year ago. The increase in general and administrative expenses from the first
half of 1999 to the first half of 2000 is primarily a result of an increase in
the number of employees in this area. Selling and marketing expenses increased
from the first half of 1999 to the first half of 2000 as a result of the
development of marketing materials and marketing-related consulting costs in
preparation for potential product launches. The increase from the first half
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<PAGE>
of 1999 to the first half of 2000 in research and development expenses is
attributable to headcount additions related to the expanded development of our
product pipelines and pre-clinical and clinical activities of VITOSS Scaffold
and CORTOSS Injectable.
Operating expenses for the three months ended June 30, 2000 were approximately
$3.7 million compared to $2.4 million during the second quarter of 1999. The
general and administrative expense increases are primarily a result of an
increase in the number of employees in this area. 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
potential product launches. Research and development expenses increased from
the second quarter of 1999 to the same quarter in 2000 as a result of headcount
additions related to the expanded development of our product pipelines and pre-
clinical and clinical activities of VITOSS Scaffold and CORTOSS Injectable.
Net interest income During the three and six months ended June 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.
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 held in an escrow account for one year, and
realized a one-time net gain on the transaction of approximately $3.1 million.
Net Profit (Loss) As a result of the above noted items, we had a net loss for
the first six months of 2000 of approximately $3.3 million as compared to a net
loss of $3.8 million for the same period during 1999. The three month net loss
for 2000 was $3.6 million compared to $2.1 million for the three months in 1999.
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.
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<PAGE>
PART II
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
On July 20, 2000, the Registrant filed a Current Report on Form 8-K for the
following event:
(i) on July 20, 2000, Orthovita, Inc. announced that it had sold 1,186,441
shares of its Common Stock in a private equity financing, for aggregate proceeds
of $7,000,000. The shares were purchased by a private European foundation at
$5.90 per share, which represented the average closing price of Orthovita's
common stock for the 20 days prior to the date of purchase. The securities sold
have not been registered under the Securities Act of 1933, as amended, and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. Orthovita has agreed to file a
registration statement for these shares with the United States Securities and
Exchange Commission within ninety days of the date of the Form 8-K. Orthovita
is currently in discussions with various other potential investors regarding the
sale of additional shares of Common Stock. The funds raised are to be used for
working capital and research and development.
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 14, 2000 By: /s/ Bruce A. Peacock
-----------------------
Bruce A. Peacock
Chief Executive Officer and President
(Principal executive officer)
By: /s/ Joseph M. Paiva
----------------------
Joseph M. Paiva
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
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