SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 2002 .
----------------
[_] 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 or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
45 Great Valley Parkway, Malvern, PA 19355
- ---------------------------------------------- --------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area
Code (610) 640-1775
--------------------------------
Not Applicable
--------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If Changed Since
Last Report
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ____
-----
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding as of May 7, 2002
- ---------------------------- -----------------------------
Common Stock, par value $.01 20,012,311 Shares
This Report Includes a Total of 25 Pages
ORTHOVITA, INC. AND SUBSIDIARIES
INDEX
PART I -
FINANCIAL Page
INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2002 and December
31, 2001 3
Consolidated Statements of
Operations - Three months ended
March 31, 2002 and 2001 4
Consolidated Statements of Cash
Flows - Three months ended
March 31, 2002 and 2001 5
Notes to Consolidated Financial
Statements 6 - 12
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13 - 24
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 24
PART II -
OTHER
INFORMATION
Item 2. Changes in Securities and Use
of Proceeds 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 25
2
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
-------------- -----------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Notes 2 and 4) $ 8,883,705 $ 12,906,557
Accounts receivable, net 1,134,658 983,467
Inventories (Note 3) 1,762,388 1,606,333
Other current assets 166,508 125,022
-------------- -----------------
Total current assets 11,947,259 15,621,379
-------------- -----------------
PROPERTY AND EQUIPMENT, net 5,575,184 5,433,353
-------------- -----------------
OTHER ASSETS 158,111 158,111
-------------- -----------------
$ 17,680,554 $ 21,212,843
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term capital lease obligations $ 433,827 $ 482,420
Accounts payable 574,682 1,010,423
Accrued compensation and related expenses 590,411 624,168
Other accrued expenses 1,103,272 790,765
-------------- -----------------
Total current liabilities 2,702,192 2,907,776
-------------- -----------------
LONG-TERM LIABILITIES:
Other long-term liabilities 75,375 62,000
Capital lease obligations 388,427 350,519
Revenue interest obligation (Note 4) 7,167,700 5,222,107
-------------- -----------------
Total long-term liabilities 7,631,502 5,634,626
-------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Notes 4 and 5):
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, 20,873,193 and 20,874,536 shares issued 208,732 208,745
Additional paid-in capital 73,993,772 74,066,082
Less: Treasury stock, 860,882 shares (1,945,593) ---
Accumulated deficit (64,942,876) (61,599,522)
Accumulated other comprehensive income (loss) 32,825 (4,864)
-------------- -----------------
Total shareholders' equity 7,346,860 12,670,441
-------------- -----------------
$ 17,680,554 $ 21,212,843
============== =================
The accompanying notes are an integral part of
these statements.
3
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31
2002 2001
---- ----
(Unaudited)
PRODUCT SALES (Note 6) $ 1,838,389 $ 226,406
----------- ------------
COST OF SALES (Note 6) 333,961 19,400
----------- ------------
Gross profit 1,504,428 207,006
----------- ------------
OPERATING EXPENSES:
General and administrative 1,213,055 909,033
Selling and marketing 1,873,291 1,171,308
Research and development 1,728,740 1,821,394
----------- ------------
Total operating expenses 4,815,086 3,901,735
----------- ------------
Operating loss (3,310,658) (3,694,729)
INTEREST EXPENSE (7,346) (36,561)
REVENUE INTEREST EXPENSE (Note 4) (67,738) ---
INTEREST INCOME 42,388 65,493
NET GAIN ON SALE OF PRODUCT LINE (Note 6) --- 375,000
----------- ------------
NET LOSS $(3,343,354) $ (3,290,797)
=========== ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.16) $ (.23)
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED
20,773,190 14,175,731
=========== ============
The accompanying notes are an integral part of these statements.
4
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
2002 2001
---- ----
(Unaudited)
OPERATING ACTIVITIES:
Net loss $(3,343,354) $ (3,290,797)
Adjustments to reconcile net loss to net cash used in operating activities -
Depreciation and amortization 251,741 323,396
Amortization of deferred compensation --- 24,375
Common Stock options and warrants issued for services rendered 27,934 25,622
Loss on disposal of property and equipment 2,528 12,692
Net gain on sale of product line --- (375,000)
----------- -------------
Net cash used in operations (3,061,151) (3,279,712)
(Increase) decrease in -
Accounts receivable (151,191) (149,159)
Inventories (156,055) (492,483)
Other current assets (41,486) (1,129)
Other assets --- (25)
Increase (decrease) in -
Accounts payable (435,741) 228,578
Accrued compensation and related expenses (33,757) (367,693)
Other accrued expenses 198,406 250,347
----------- ------------
Net cash used in operating activities (3,680,975) (3,811,276)
----------- ------------
INVESTING ACTIVITIES:
Decrease in restricted cash --- 375,000
Purchase of property and equipment (271,100) (758,895)
----------- ------------
Net cash used in investing activities (271,100) (383,895)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from short term bank borrowings --- 1,440,000
Repayments of capital lease obligations (135,685) (183,337)
Net proceeds from sale of Common Stock and warrants --- 9,702,500
Proceeds from exercise of Common Stock options and warrants and
Common Stock purchased under the Employee Stock Purchase Plan 27,219 39,758
----------- ------------
Net cash (used in) provided by financing activities (108,466) 10,998,921
----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 37,689 (45,255)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,022,852) 6,758,495
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,906,557 3,614,626
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,883,705 $ 10,373,121
=========== ==========
The accompanying notes are an integral part of these statements.
5
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company:
Orthovita, Inc. ("Orthovita" or the "Company") is a Pennsylvania corporation
with proprietary technologies applied to the development of biostructures, which
are synthetic, biologically active, tissue engineering products for restoration
of the human skeleton. Our focus is on developing products for use in spine
surgery and in the repair of osteoporotic fractures. We are also addressing a
broad range of clinical needs in the trauma market. We have developed several
products to date:
. VITOSS(TM) Scaffold Synthetic Cancellous Bone Void Filler;
. IMBIBE(TM) Bone Marrow Aspirate Syringe to be used with VITOSS;
. CORTOSS(TM) Synthetic Cortical Bone Void Filler; and
. ALIQUOT(TM) Microdelivery System to be used with CORTOSS.
In addition, we are developing RHAKOSS(TM) Synthetic Bone Spinal Implants.
VITOSS is a resorbable, beta-tricalcium phosphate scaffold used as a bone void
filler in trauma and spinal procedures. CORTOSS is a high-strength,
bone-bonding, self-setting composite intended for use in the augmentation of
screws used in a variety of orthopaedic procedures and in vertebral
augmentation. RHAKOSS is under development as a high-strength, bone-bonding
preformed composite. RHAKOSS is being designed to address the needs of the
vertebral interbody fusion and spinal reconstruction markets.
We received regulatory clearance for VITOSS in the U.S. from the United States
Food and Drug Administration ("FDA") in December 2000 and the CE Mark in the
European Union from our Notified Body in July 2000. The CE Mark permits us to
sell VITOSS in all of the countries of the European Union, as well as in other
countries such as Switzerland and Israel that have adopted the European Union's
regulatory standards. These regulatory approvals allow us to market VITOSS for
use as a cancellous bone void filler for bony voids or gaps of the skeletal
system, including the extremities, spine and pelvis. We also received regulatory
approval in March 2001 to sell VITOSS for this use in Australia. We launched
VITOSS in Europe in October 2000 and in the United States in February 2001. In
April 2001, we entered into an agreement with Japan Medical Dynamic Marketing,
Inc. ("MDM"), an orthopaedic company, under which MDM will initiate clinical
studies necessary to apply for regulatory approval to market VITOSS in Japan.
These clinical studies in Japan have not yet been initiated.
In September 2001, we received regulatory clearance in the United States from
the FDA to market IMBIBE for use as a bone marrow aspiration syringe. IMBIBE
provides spine and trauma surgeons with a simple method for harvesting a
patient's own bone marrow, mixing it with VITOSS and delivering the mixture to
the bone graft site.
We received the CE Mark for CORTOSS in October 2001 in the European Union and
regulatory approval in March 2001 in Australia, which allows us to sell CORTOSS
in these territories, as well as in other countries, such as Switzerland and
Israel, that have adopted the European Union's regulatory standards, for use in
screw augmentation procedures. Screw augmentation is a procedure for the
fixation of bone screws used in patients with weak bone caused by
6
osteoporosis. We initiated a limited launch of CORTOSS in Europe in December
2001. In addition, we are conducting post-marketing human clinical studies in
Europe for the use of CORTOSS in hip compression screw augmentation. We are also
pursuing clinical studies of CORTOSS in Europe in order to seek approval for the
use of CORTOSS in vertebral augmentation. During 2001, we received conditional
approval from the FDA to conduct a pilot clinical study in the U.S. for the use
of CORTOSS for vertebral augmentation. In addition, during 2002, we received
approval from the FDA to conduct a pivotal clinical study in the U.S. for the
use of CORTOSS in long bone screw augmentation. There can be no assurance that
the data from any such clinical trials will support FDA clearance or approval to
market this product for these uses.
Our ALIQUOT Microdelivery System facilitates the effective delivery of our
CORTOSS product directly to the surgical site. A two-part system of catheter and
dispenser is designed to assure effective delivery of CORTOSS in screw
augmentation procedures.
RHAKOSS is under development and is designed to mimic the strength and
flexibility characteristics of bone, as well as its radiopacity, which means its
degree of transparency to x-rays and other radiation. RHAKOSS can be
manufactured into any size or shape to optimize anatomic fit. RHAKOSS is being
designed to address the needs of the vertebral interbody fusion and spinal
reconstruction markets. We initiated human clinical studies for our RHAKOSS
spinal implants during April 2002 in Europe. There can be no assurance that the
data from such clinical trials will result in obtaining the CE Mark necessary to
sell RHAKOSS in the European Union.
We have assembled a network of independent stocking distributors in Europe,
Australia and Israel and commissioned sales agencies in the U.S. in order to
market VITOSS, and we are utilizing this network for CORTOSS in Europe,
Australia and Israel. If MDM is successful in obtaining clearance to market
VITOSS, it will distribute, sell and market VITOSS in Japan. We plan to seek a
similar arrangement for CORTOSS in Japan.
We incorporated in Pennsylvania in 1992 and began operations in 1993. Our
principal offices are located at 45 Great Valley Parkway, Malvern, Pennsylvania
19355.
Our operations are subject to certain risks including, but not limited to, the
need to successfully commercialize both VITOSS in the U.S., Europe, Australia
and Israel, and CORTOSS in Europe, Australia and Israel. We also need to
successfully develop, obtain regulatory approval for, and commercialize CORTOSS
in the U.S. and RHAKOSS in the U.S. and Europe. We have incurred losses each
year since our inception in 1993, and we expect to continue to incur losses for
at least the next several years. As of March 31, 2002, we had an accumulated
deficit of $64,942,876. Our products under development may never be
commercialized or, if commercialized, may never generate substantial revenue. We
do not expect sales to generate cash flow in excess of operating expenses for at
least the next several years, if at all. We expect to continue to use cash, cash
equivalents and short-term investments to fund operating and investing
activities. We believe that our existing cash of $8,883,705 as of March 31,
2002, will be sufficient to meet our currently estimated operating and investing
requirements into early 2003; however, if we do not raise additional cash before
September 30, 2002, we may be required to curtail or limit certain marketing
support and research and development activities in order to remain compliant
with certain financial covenants (see Note 4). A curtailment of certain
activities would delay development of certain of our products. We will need to
raise additional funds by the fourth quarter of 2002 to meet the Nasdaq National
Market's continuing listing requirements if the per share bid price of our
Common Stock remains below $3.00. We may seek to obtain additional funds through
equity or debt financings, or strategic alliances with third parties either
alone or in combination with equity. These financings could result in
substantial
7
dilution to the holders of our Common Stock or require debt service and/or
royalty payment arrangements. Any such required financing may not be available
in amounts or on terms acceptable to us.
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
preparation of financial statements requires that we make assumptions and
estimates that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the interim
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates. The
consolidated interim financial statements do not include all of the information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States,
and should be read in conjunction with the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2001, filed with the Securities and Exchange Commission, which
includes financial statements as of December 31, 2001 and 2000, and for the
years ended December 31, 2001, 2000 and 1999. 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.
Basis of Consolidation
The consolidated financial statements include the accounts of Orthovita, Inc.,
our European branch operations, and our wholly-owned subsidiaries including,
Vita Licensing, Inc. and Vita Special Purpose Corp., which were established to
hold all intellectual property. We have eliminated all intercompany balances in
consolidation.
Net Loss Per Common Share
We have presented net loss per common share pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic net loss per
share excludes potentially dilutive securities and is computed by dividing net
loss applicable to common shareholders by the weighted average number of shares
of Common Stock outstanding for the period. Diluted net loss per common share
data is generally computed assuming the conversion or exercise of all dilutive
securities such as Common Stock options and warrants; however, Common Stock
options and warrants were excluded from our computation of diluted net loss per
common share for the three months ended March 31, 2002 and 2001, because they
were anti-dilutive due to our losses.
Revenue Recognition
Revenue from product sales is recognized upon the receipt of a valid order and
shipment to our distributor customers in Europe, Australia and Israel. In the
U.S., product sales revenue is recognized upon the receipt of a valid order and
shipment of the product to the end user hospital. We do not allow product
returns or exchanges. In addition, collection of the customers' receivable
balance must be deemed probable. We maintain an accounts receivable allowance
for an estimated amount of losses that may result from customers' inability to
pay for product purchased. If the financial condition of our customers was to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
8
Inventory
Inventory is stated at the lower of cost or market value using the first-in,
first-out basis, or FIFO, method. We would write down our inventory, if
necessary, by estimating the potential for future loss based on a variety of
factors, including the quantity of particular items, their prospect for
replacement or obsolescence and the remaining shelf life. If actual market
conditions were to be less favorable than those projected by management and
demand decreased, inventory write-downs would be required. As of March 31, 2002
and December 31, 2001, we have not needed to write down our inventory.
2. CASH AND CASH EQUIVALENTS:
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. As of March 31, 2002 and December 31, 2001, we invested all
excess cash in cash equivalents and short-term investments; however, if
long-term investments are held, such investments are considered
available-for-sale and, accordingly, unrealized gains and losses are included in
a separate component of shareholders' equity. As further discussed in Note 4,
covenants under our revenue interest agreement require us to maintain specified
levels of aggregate cash, cash equivalents and short-term investments.
As of March 31, 2002, cash and cash equivalents consisted of the following:
Gross Gross
Unrealized Unrealized Fair Market
Original Cost Gains Losses Value
------------- ----- ------ -----
Cash and cash equivalents $ 8,883,705 $ --- $ --- $ 8,883,705
Short-term investments --- --- --- ---
----------- ------- ------- -----------
$ 8,883,705 $ --- $ --- $ 8,883,705
=========== ======= ======= ===========
3. INVENTORIES:
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. As of March 31, 2002 and December 31, 2001, inventories consisted of the
following:
March 31, 2002 December 31, 2001
-------------- -----------------
Raw materials ................... $ 62,566 $ 108,960
Work-in-process ................. 361,673 752,079
Finished goods .................. 1,338,149 745,294
---------- -----------
$1,762,388 $ 1,606,333
========== ===========
The VITOSS product sold during the first three months of 2001 was produced prior
to the receipt of regulatory approval for VITOSS. In accordance with SFAS No. 2
"Accounting for Research and Development Costs," the costs of that material were
recorded in research and development expense when produced and, accordingly,
were not reflected in cost of sales when later sold.
9
4. REVENUE INTEREST OBLIGATION:
During October 2001, we completed a $10,000,000 product development and equity
financing with Paul Royalty. We will use the proceeds realized from this
financing for clinical development, marketing programs and working capital
relating to our VITOSS, CORTOSS and RHAKOSS products. In this financing, we sold
Paul Royalty a revenue interest and 2,582,645 shares of our Common Stock, for
aggregate gross proceeds of $10,000,000.
The net proceeds of the financing were first allocated to the fair value of the
Common Stock on the date of the transaction, and the $5,222,107 remainder of the
net proceeds was allocated to the revenue interest obligation. Given that the
products subject to the revenue interest have only recently been approved and
marketed or are still under development, we, as of March 31, 2002, and for the
forseeable future, cannot make a reasonable estimate of their future sales
levels and the related revenue interest obligation. Accordingly, in 2002 and the
foreseeable future, we will charge revenue interest expense as payments due
under the revenue interest obligation are incurred.
On March 22, 2002, the agreement with Paul Royalty was modified whereby Paul
Royalty exchanged 860,882 shares of our Common Stock for elimination of certain
potential credits allowable to us against our revenue interest obligation, as
well as a reduction in the amount required to repurchase Paul Royalty's revenue
interest if a repurchase event described below were to occur. This modification
was accounted for as a treasury stock transaction with a decrease to
shareholders' equity and an increase to the revenue interest obligation based
upon the fair market value of the Common Stock on the date of the modification
to the transaction of $2.26 per share, or $1,945,593.
The revenue interest provides for Paul Royalty to receive 3.5% on the first
$100,000,000 of annual sales plus 1.75% of annual sales in excess of
$100,000,000 of our VITOSS, CORTOSS and RHAKOSS products in North America and
Europe through 2016, subject to certain adjustments. Our obligation to pay the
revenue interest is secured by our licenses, patents and trademarks relating to
our VITOSS, CORTOSS and RHAKOSS products in North America and Europe and the 12%
royalty interest we pay to Vita Licensing, Inc., our wholly-owned subsidiary, on
the sales of our products (collectively, the "Pledged Assets"). We are also
required to maintain:
- -cash and cash equivalent balances equal to or greater than the product of (i)
1.5 and (ii) total operating losses, net of non-cash charges, for the preceding
fiscal quarter; and
- -total shareholders' equity of at least $8,664,374; provided, however, that
under the provisions of the agreement with Paul Royalty, when calculating
shareholders' equity for the purposes of the financial covenants, the revenue
interest obligation is included in shareholders' equity.
As of March 31, 2002 and December 31 2001, we were in compliance with all
financial covenants. However, if we fail to maintain such balances and
shareholders' equity, Paul Royalty can demand that we repurchase their revenue
interest.
In addition to the financial covenants described above, Paul Royalty has the
right to cause us to repurchase their revenue interest upon the occurrence of
certain events, including:
- -a judicial decision that has a material adverse effect on our business,
operations, assets or financial condition;
10
- -the acceleration of our obligations or the exercise of default remedies by a
secured lender under certain debt instruments;
- -a voluntary or involuntary bankruptcy that involves us or our wholly-owned
subsidiary, Vita Special Purpose Corp.;
- -our insolvency;
- -a change in control of our company;
- -the breach of a representation, warranty or certification made by us in the
agreements with Paul Royalty that, individually or in the aggregate, would
reasonably be expected to have a material adverse effect on our business,
operations, assets or financial condition, and such breach is not cured within
30 days after notice thereof from Paul Royalty.
We may not have sufficient cash funds to repurchase the revenue interest upon a
repurchase event. The exact amount of the repurchase price is dependent upon
certain factors, including when the repurchase event occurs. The repurchase
price targets an internal rate of return for Paul Royalty's $10,000,000
investment ranging up to 45% net of revenue interest amounts paid by us to Paul
Royalty during the term of the revenue sharing agreement. The March 22, 2002
amendment to our agreement with Paul Royalty reduced by $3,333,333 the amount
that would be due to Paul Royalty should any such repurchase event described
above occur in the future, and result in Paul Royalty requiring us to repurchase
its revenue interest. If we were unable to repurchase the revenue interest upon
a repurchase event, Paul Royalty could foreclose on the Pledged Assets, and we
could be forced into bankruptcy. Paul Royalty could also foreclose on the
Pledged Assets if we are insolvent or involved in a voluntary or involuntary
bankruptcy. No repurchase events or foreclosures have occurred as of March 31,
2002. As of March 31, 2002, if the repurchase event had been triggered and Paul
Royalty exercised their right to require us to repurchase their revenue
interest, we would have owed Paul Royalty $8,595,679.
If we know that we will not be in compliance with our covenants under the Paul
Royalty agreement, we will be required to adjust the revenue interest obligation
to equal the amount required to repurchase their revenue interest. As of March
31, 2002, we believe that we will remain in compliance for the foreseeable
future, with all covenants and terms of the revenue interest obligation.
5. SHAREHOLDERS' EQUITY:
Treasury Stock
On March 22, 2002, the agreement with Paul Royalty was modified whereby it
exchanged 860,882 shares of our Common Stock for elimination of certain
potential credits allowable to us against our revenue interest obligation, as
well as a reduction in the amount required to repurchase Paul Royalty's revenue
interest if a repurchase event were to occur (see Note 4). This modification was
accounted for as a treasury stock transaction with a decrease to shareholders'
equity and an increase to the revenue interest obligation based upon the fair
market value of the Common Stock on the date of the modification to the
transaction of $2.26 per share, or $1,945,593.
Stock Options
During the three months ended March 31, 2002, stock options to purchase 10,000
shares of Common Stock were exercised for proceeds of $17,000. Additionally,
during the three months ended March 31, 2002, we issued stock options for the
purchase of 20,000 shares of Common Stock with various exercise prices to
certain vendors in consideration for services valued at $27,934.
11
Employee Stock Purchase Plan
During the three months ended March 31, 2002, 4,907 shares of Common Stock were
purchased by the Employee Stock Purchase Plan for proceeds of $10,219.
Common Stock Purchase Warrants
During April 2002, warrants to purchase 547,010 shares of Common Stock at an
exercise price of $4.25 per share expired unexercised.
6. PRODUCT SALES, COST OF SALES AND NET GAIN ON SALE OF PRODUCT LINE:
We initiated sales of VITOSS in Europe and the United States in October 2000 and
February 2001, respectively. CORTOSS sales were initiated in Europe during
December 2001. For the three months ended March 31, 2002 and 2001, product sales
of VITOSS and CORTOSS by geographic market were as follows:
For the three months ended
PRODUCT SALES: March 31, 2002 March 31, 2001
-------------- --------------
United States $ 1,665,778 $ ---
Outside the United States 172,611 226,406
------------ ---------
Total product sales $ 1,838,389 $ 226,406
============ =========
In March 2000, we sold our BIOGRAN(TM) dental grafting product line for
$3,900,000 and received proceeds of $3,500,000 with an additional $400,000 held
in a restricted cash escrow account until March 2001. We realized a net gain on
the transaction of approximately $375,000 for three months ended March 31, 2001.
7. COMMITMENTS AND CONTINGENCIES:
Revenue Interest Expense
We are obligated to pay to Paul Royalty revenue interest of 3.5% on the first
$100,000,000 of annual sales plus 1.75% of annual sales in excess of
$100,000,000 of our VITOSS, CORTOSS and RHAKOSS products in North America and
Europe through 2016, subject to certain adjustments. In addition, Paul Royalty
has the right to cause us to repurchase its revenue interest upon the occurrence
of certain events (see Note 4).
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
The use of the words "Orthovita," the "Company," "we," "us" or "our" herein
refers to Orthovita, Inc. together with its subsidiaries. In addition to
historical facts or statements of current conditions, this report contains
forward-looking statements that address, among other things, the generation of
revenues through sales of our approved products, sufficiency of available
resources to fund operations, and the timing of regulatory approvals for our
products under development. When used in this Form 10-Q, the words "may,"
"will," "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate"
and similar expressions are generally intended to identify forward-looking
statements, but are not the exclusive expressions of forward-looking statements.
Forward-looking statements are based on current expectations of future events
that involve risks and uncertainties; therefore, readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. Furthermore, we undertake no obligation to publicly update any
forward-looking statements. We claim the protections afforded by the Private
Securities Litigation Reform Act of 1995, as amended, for our forward-looking
statements. There are important facts that could cause actual events or results
to differ materially from those expressed or implied by forward-looking
statements including, without limitation the following risk factors that are
addressed in greater detail in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Risks Related to Our
Business" section of our Annual Report on Form 10-K for the year ended December
31, 2001, which was filed with the U.S. Securities and Exchange Commission:
- - We are dependent on the commercial success of CORTOSS and VITOSS;
- - We may be unable to increase sales of our approved products;
- - We may not be able to operate an effective sales and distribution network;
- - We may not train a sufficient number of surgeons to create demand for our
products.
- - If healthcare providers cannot obtain third-party reimbursement for procedures
using our products, we may never become profitable;
- - We have experienced negative cash flows since our inception;
- - If we fail to obtain and maintain regulatory approvals necessary to sell our
products, sales could be delayed or never realized;
- - If we do not manage commercial scale manufacturing capability and capacity for
our products, our product sales may suffer;
- - It may be difficult to operate in international markets;
- - If losses continue in the long term, it could limit our growth and slow our
generation of revenues;
- - If we fail to meet our obligations under a revenue sharing agreement, the
investor thereunder could foreclose on certain assets that are essential to our
operations, and we may be required to repurchase from that investor its right to
receive revenues on certain of our product sales;
- - Our results of operations may fluctuate due to factors out of our control;
- - Our business will be damaged if we are unable to protect our proprietary
rights to the technologies used in our products;
- - We may lack the financial resources needed to respond to technological changes
and other actions by competitors;
- - We may acquire technologies or companies in the future, and these acquisitions
could result in dilution to our shareholders;
13
- - Provisions of Pennsylvania law or our Articles of Incorporation may deter a
third party from seeking to obtain control of us;
- - Our executive officers and directors own a large percentage of our voting
stock and could exert significant influence over matters;
- - We do not intend to pay cash dividends;
- - Our stock price is volatile;
- - If our shares are delisted from the Nasdaq National Market, it may be
difficult to sell your investment in our company;
- - If we are sued in a product liability action, we could be forced to pay
substantial damages; and
- - Our business could suffer if we cannot attract and retain the services of key
employees.
In addition, our performance and financial results could differ materially from
those reflected in the forward-looking statements due to general financial,
economic, regulatory and political conditions affecting the biotechnology,
orthopaedic and medical device industries, as well as the more specific risks
discussed in this report.
Overview
Orthovita, Inc. ("Orthovita" or the "Company") is a Pennsylvania corporation
with proprietary technologies applied to the development of biostructures, which
are synthetic, biologically active, tissue engineering products for restoration
of the human skeleton. Our focus is on developing products for use in spine
surgery and in the repair of osteoporotic fractures. We are also addressing a
broad range of clinical needs in the trauma market. We have developed several
products to date:
. VITOSS(TM) Scaffold Synthetic Cancellous Bone Void Filler;
. IMBIBE(TM) Bone Marrow Aspirate Syringe to be used with VITOSS;
. CORTOSS(TM) Synthetic Cortical Bone Void Filler; and
. ALIQUOT(TM) Microdelivery System to be used with CORTOSS.
In addition, we are developing RHAKOSS(TM) Synthetic Bone Spinal Implants.
VITOSS is a resorbable, beta-tricalcium phosphate scaffold used as a bone void
filler in trauma and spinal procedures. CORTOSS is a high-strength,
bone-bonding, self-setting composite intended for use in the augmentation of
screws used in a variety of orthopaedic procedures and in vertebral
augmentation. RHAKOSS is under development as a high-strength, bone-bonding
preformed composite. RHAKOSS is being designed to address the needs of the
vertebral interbody fusion and spinal reconstruction markets.
We received regulatory clearance for VITOSS in the U.S. from the United States
Food and Drug Administration ("FDA") in December 2000 and the CE Mark in the
European Union from our Notified Body in July 2000. The CE Mark permits us to
sell VITOSS in all of the countries of the European Union, as well as in other
countries such as Switzerland and Israel that have adopted the European Union's
regulatory standards. These regulatory approvals allow us to market VITOSS for
use as a cancellous bone void filler for bony voids or gaps of the skeletal
system, including the extremities, spine and pelvis. We also received regulatory
approval in March 2001 to sell VITOSS for this use in Australia. We launched
VITOSS in Europe in October 2000 and in the United States in February 2001. In
April 2001, we entered into an agreement with Japan Medical Dynamic Marketing,
Inc. ("MDM"), an orthopaedic company, under which MDM will initiate clinical
studies necessary to apply for regulatory approval to market VITOSS in Japan.
These clinical studies in Japan have not yet been initiated.
14
In September 2001, we received regulatory clearance in the United States from
the FDA to market IMBIBE for use as a bone marrow aspiration syringe. IMBIBE
provides spine and trauma surgeons with a simple method for harvesting a
patient's own bone marrow, mixing it with VITOSS and delivering the mixture to
the bone graft site.
We received the CE Mark for CORTOSS in October 2001 in the European Union and
regulatory approval in March 2001 in Australia, which allows us to sell CORTOSS
in these territories, as well as in other countries, such as Switzerland and
Israel, that have adopted the European Union's regulatory standards, for use in
screw augmentation procedures. Screw augmentation is a procedure for the
fixation of bone screws used in patients with weak bone caused by osteoporosis.
We initiated a limited launch of CORTOSS in Europe in December 2001. In
addition, we are conducting post-marketing human clinical studies in Europe for
the use of CORTOSS in hip compression screw augmentation. We are also pursuing
clinical studies of CORTOSS in Europe, in order to seek approval for the use of
CORTOSS in vertebral augmentation. During 2001, we received conditional approval
from the FDA to conduct a pilot clinical study in the U.S. for the use of
CORTOSS for vertebral augmentation. In addition, during 2002, we received
approval from the FDA to conduct a pivotal clinical study in the U.S. for the
use of CORTOSS in long bone screw augmentation. There can be no assurance that
the data from any such clinical trials will support FDA clearance or approval to
market this product for these uses.
Our ALIQUOT Microdelivery System facilitates the effective delivery of our
CORTOSS product directly to the surgical site. A two-part system of catheter and
dispenser is designed to assure effective delivery of CORTOSS in screw
augmentation procedures.
RHAKOSS is under development and is designed to mimic the strength and
flexibility characteristics of bone, as well as its radiopacity, which means its
degree of transparency to x-rays and other radiation. RHAKOSS can be
manufactured into any size or shape to optimize anatomic fit. RHAKOSS is being
designed to address the needs of the vertebral interbody fusion and spinal
reconstruction markets. We initiated human clinical studies for our RHAKOSS
during April 2002 in Europe. There can be no assurance that the data from such
clinical trials will result in obtaining the CE Mark necessary to sell RHAKOSS
in the European Union.
We have assembled a network of independent stocking distributors in Europe,
Australia and Israel and commissioned sales agencies in the U.S. in order to
market VITOSS, and we are utilizing this network for CORTOSS in Europe,
Australia and Israel. If MDM is successful in obtaining clearance to market
VITOSS, it will distribute, sell and market VITOSS in Japan. We plan to seek a
similar arrangement for CORTOSS in Japan.
We incorporated in Pennsylvania in 1992 and began operations in 1993. Our
principal offices are located at 45 Great Valley Parkway, Malvern, Pennsylvania
19355.
Our operations are subject to certain risks including but not limited to, the
need to successfully commercialize both VITOSS in the U.S., Europe, Australia
and Israel, and CORTOSS in Europe, Australia, and Israel. We also need to
successfully develop, obtain regulatory approval for, and commercialize CORTOSS
in the U.S. and RHAKOSS in the U.S. and Europe. We have incurred losses each
year since our inception in 1993, and we expect to continue to incur losses for
at least the next several years. As of March 31, 2002, we had an accumulated
deficit of $64,942,876. Our products under development may never be
commercialized or, if commercialized, may never generate substantial revenue. We
do not expect sales to generate cash flow in excess of operating expenses for at
least the next several years, if at all. We expect to continue to use cash, cash
equivalents and short-term investments to fund operating and investing
activities. We believe that our existing cash of $8,883,705 as of March 31,
2002, will
15
be sufficient to meet our currently estimated operating and investing
requirements into early 2003; however, if we do not raise additional cash before
September 30, 2002, we may be required to curtail or limit certain marketing
support and research and development activities in order to remain compliant
with certain financial covenants (see Note 4). A curtailment of certain
activities would delay development of certain of our products. We will need to
raise additional funds by the fourth quarter of 2002 to meet the Nasdaq National
Market's continuing listing requirements if the bid price per share of our
Common Stock remains below $3.00 per share. We may seek to obtain additional
funds through equity or debt financings, or strategic alliances with third
parties either alone or in combination with equity. These financings could
result in substantial dilution to the holders of our Common Stock or require
debt service and/or royalty payment arrangements. Any such required financing
may not be available in amounts or on terms acceptable to us.
Certain Risks Related to Our Business
Additional specific risks, to which our performance and financial results are
subject, are detailed in our Annual Report on Form 10-K for the year ended
December 31, 2001 and include the following:
We are dependent on the commercial success of CORTOSS and VITOSS.
We are highly dependent on successfully selling our products for which we
have received regulatory approval. We expect approvals for our products
under development, if obtained at all, to take several years. To date, we
have received regulatory approval to market VITOSS and CORTOSS for
specified uses in the European Union, Australia and countries adhering to
the regulatory standards of the European Union. We have also received
regulatory clearance to market VITOSS in the United States. Certain factors
that could affect sales of VITOSS and CORTOSS include the following:
We may be unable to increase sales of our approved products.
We may not be able to operate an effective sales and distribution network.
We may not train a sufficient number of surgeons to create demand for our
products.
If healthcare providers cannot obtain third-party reimbursement for procedures
using our products, or if such reimbursement is inadequate, we may never become
profitable.
If we are unable to raise additional capital in the future, our product
development will be limited and our long term viability may be threatened; if we
raise additional capital, your percentage ownership as a shareholder of
Orthovita will decrease and constraints could be placed on the operation of our
business.
We have experienced negative operating cash flows since our inception and have
funded our operations primarily from proceeds received from sales of our Common
Stock. We do not expect sales to generate cash flow in excess of operating
expenses for at least the next several years, if at all. We expect to continue
to use cash, cash equivalents and short-term investments to fund operating and
investing activities. We believe that our existing cash of $8,883,705 as of
March 31, 2002, will be sufficient to meet our currently estimated operating and
investing requirements into early 2003; however, if we do not raise additional
cash prior to September 30, 2002, we may be required to curtail or limit certain
marketing support and research and development activities in order to remain
compliant with our Paul Royalty financial covenants. A curtailment of certain
activities would delay development of certain of our products. We will need
16
to raise additional funds by the fourth quarter of 2002 to meet the Nasdaq
National Market's continuing listing requirements if the per share bid price of
our Common Stock remains below $3.00. We may seek to obtain additional funds
through equity or debt financings, or strategic alliances with third parties
either alone or in combination with equity. These financings could result in
substantial dilution to the holders of our Common Stock or require debt service
and/or royalty payment arrangements. Any such required financing may not be
available in amounts or on terms acceptable to us. Factors that may cause our
future capital requirements to be greater than anticipated include:
-unforeseen developments during our pre-clinical and clinical trials;
-timing of receipt of required regulatory approvals;
-unanticipated expenditures in research and development or manufacturing
activities;
-delayed market acceptance of our products;
-unanticipated expenditures in the acquisition and defense of intellectual
property rights; or
-the failure to develop strategic alliances for the marketing of some of
our products.
If adequate financing is not available, we may be required to delay, scale
back or eliminate certain operations. In addition, although we have no
present commitments or understandings to do so, we may seek to expand our
operations and product line via acquisitions or joint ventures. Any such
acquisitions or joint ventures may increase our capital requirements.
If we fail to obtain and maintain the regulatory approvals necessary to sell our
products, sales could be delayed or never realized.
If we do not manage commercial scale manufacturing capability and capacity for
our products, our product sales may suffer.
It may be difficult to operate in international markets.
If losses continue in the long term, it could limit our growth and slow our
generation of revenues.
If we fail to meet our obligations under a revenue sharing agreement, we may be
required to repurchase from an investor its right to receive revenues on certain
of our product sales, and the investor could foreclose on certain assets that
are essential to our operations.
During October 2001, we completed a $10,000,000 product development and
equity financing with Paul Royalty. In this financing, we sold Paul Royalty
a revenue interest and shares of our Common Stock.
The revenue interest provides for Paul Royalty to receive 3.5% on the first
$100,000,000 of annual sales plus 1.75% of annual sales in excess of
$100,000,000 of certain of our products, including VITOSS, CORTOSS and
RHAKOSS, in North America and Europe through 2016, subject to certain
adjustments. This royalty percentage can increase if we fail to meet
contractually specified levels of annual net sales of products for which
Paul Royalty is entitled to receive its revenue interest. Our obligation to
pay the revenue interest is secured by our licenses, patents and trademarks
relating to certain of our products, including VITOSS, CORTOSS and RHAKOSS,
in North America and Europe, and the 12% royalty interest we pay to Vita
Licensing, Inc., our wholly-owned subsidiary, on the sales of our products
(collectively, the "Pledged Assets"). We are also required to maintain:
17
-cash and cash equivalent balances equal to or greater than the product of
(i) 1.5 and (ii) total operating losses, net of non-cash charges, for the
preceding fiscal quarter; and
-total shareholders' equity of at least $8,664,374; provided, however, that
under the provisions of the agreement with Paul Royalty when calculating
shareholders' equity for the purposes of the financial covenants, the
revenue interest obligation is included in shareholders' equity.
As of March 31, 2002 and December 31, 2001, we were in compliance with all
financial covenants. However, if we fail to maintain such balances and
shareholders' equity, Paul Royalty can demand that we repurchase its
revenue interest.
In addition to the failure to comply with the financial covenants described
above, the occurrence of certain events, including those set forth below,
triggers Paul Royalty's right to cause us to repurchase its revenue
interest:
-a judicial decision that has a material adverse effect on our business,
operations, assets or financial condition;
-the acceleration of our obligations or the exercise of default remedies by
a secured lender under certain debt instruments;
-a voluntary or involuntary bankruptcy that involves us or our wholly-owned
subsidiary, Vita Special Purpose Corp.;
-our insolvency;
-a change in control of our company;
-the breach of a representation, warranty or certification made by us in
the agreements with Paul Royalty that, individually or in the aggregate,
would reasonably be expected to have a material adverse effect on our
business, operations, assets or financial condition, and such breach is not
cured within 30 days after notice thereof from Paul Royalty.
We may not have sufficient cash funds to repurchase the revenue interest
upon a repurchase event. The exact amount of the repurchase price is
dependent upon certain factors, including when the repurchase event occurs.
The repurchase price targets an internal rate of return for Paul Royalty's
$10,000,000 investment ranging up to 45% net of revenue interest amounts
paid by us to Paul Royalty during the term of the revenue sharing
agreement. The March 2002 amendment reduced by $3,333,333 the amount that
would be due to Paul Royalty should any such repurchase event described
above occur in the future, and result in Paul Royalty requiring us to
repurchase its revenue interest. If we were unable to repurchase the
revenue interest upon a repurchase event, Paul Royalty could foreclose on
the Pledged Assets, and we could be forced into bankruptcy. Paul Royalty
could also foreclose on the Pledged Assets if we are insolvent or are
involved in a voluntary or involuntary bankruptcy. No repurchase events or
foreclosures have occurred as of March 31, 2002. As of March 31, 2002, if
the repurchase event had been triggered and Paul Royalty exercised their
right to require us to repurchase their revenue interest, we would have
owed Paul Royalty $8,595,679.
Our results of operations may fluctuate due to factors out of our control.
The results of our operations may fluctuate significantly from quarter to
quarter and may not meet expectations of securities analysts and investors. This
may cause our stock price to be volatile.
18
Our business will be damaged if we are unable to protect our proprietary rights
to the technologies used in our products, and we may be subject to intellectual
property infringement claims by others.
We may lack the financial resources needed to respond to technological changes
and other actions by competitors, obtain regulatory approvals for our products
and efficiently market our products.
We may acquire technologies or companies in the future, and these acquisitions
could result in dilution to our shareholders and disruption of our business.
Provisions of Pennsylvania law or our Articles of Incorporation may deter a
third party from seeking to obtain control of us or may affect your rights as a
common stock holder.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval, including takeover attempts.
We do not intend to pay any cash dividends.
Our stock price may be volatile.
If our shares are delisted from the Nasdaq National Market, it may be difficult
to sell your investment in our company.
If we are sued in a product liability action, we could be forced to pay
substantial damages, and the attention of our management team may be diverted
from operating our business.
Our business could suffer if we cannot attract and retain the services of key
employees.
19
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 and cash equivalents were $8,883,705 at March 31, 2002,
and $12,906,557 at December 31, 2001, representing 50.2% and 60.8% of our total
assets, respectively. We invest excess cash in highly liquid investment-grade
marketable securities including corporate commercial paper and U.S. government
agency bonds.
The following is a summary of selected cash flow information for the three
months ended March 31, 2002 and 2001:
Three Months Ended March,
2002 2001
---- ----
Net loss $(3,343,354) $ (3,290,797)
Adjustments for non-cash operating items 282,203 11,085
----------- ------------
Net cash operating loss (3,061,151) (3,279,712)
Net change in assets and liabilities (619,824) (531,564)
----------- ------------
Net cash used in operating activities (3,680,975) (3,811,276)
=========== ============
Net cash used in investing activities (271,100) (383,895)
=========== ============
Net cash (used in) provided by financing activities (108,466) 10,998,921
=========== ============
Net cash used in operating activities
Operating Cash Inflows -
Operating cash inflows for the first quarter of 2002 have been derived from
VITOSS and CORTOSS product sales. We have also received cash inflows from
interest income on cash equivalents and short-term investments.
With respect to the first quarter of 2001, operating cash inflows have been
derived from VITOSS product sales, and we received cash inflows from interest
income on short-term investments.
Operating Cash Outflows -
Our operating cash outflows for 2002 have continued to be primarily used for
manufacturing process development, and pre-clinical and clinical activities in
preparation for regulatory filings of our products in development. In addition,
funds have been used for the production of inventory, increase in sales and
marketing staffing, development of marketing materials related to the
commercialization of VITOSS and CORTOSS products, and payment of sales
commissions.
Operating Cash Flow Requirements Outlook -
We do not expect sales to generate cash flow in excess of operating expenses for
at least the next several years, if at all. We expect to continue to use cash,
cash equivalents and short-term investments to fund operating activities. We
began selling VITOSS in Europe in the fourth quarter of 2000, and in the United
States late in the first quarter of 2001. During the third quarter
20
of 2001, we received a 510(k) FDA regulatory clearance to market the IMBIBE Bone
Marrow Aspirate Syringe in the United States. Late in the fourth quarter of
2001, we began selling CORTOSS in Europe for the fixation of bone screws under a
CE Mark.
Future cash flow levels from VITOSS, CORTOSS and IMBIBE product sales are
difficult to predict at this stage of the products' launches. None of our
product sales to date may be indicative of future sales levels. VITOSS and
CORTOSS sales levels in Europe may fluctuate due to the timing of any
distributor stocking orders and may experience seasonal slowdowns during the
summer months. Sales of VITOSS and IMBIBE in the U.S. may fluctuate due to the
timing of orders from hospitals and may fluctuate due to changes in our
distribution network and sales management.
Any future cash flows from CORTOSS are dependent upon the successful controlled
launch of the product in Europe during 2002. Beginning in December 2001, we
initiated a controlled launch of CORTOSS in selected European countries. CORTOSS
was sold to up to three teaching institutions in each of the selected European
countries. Our plan is to utilize these teaching institutions in each country as
centers for the training of surgeons from other institutions within their
respective countries. We expect to have CORTOSS available in most of the major
markets in Europe by the middle of 2002, and to have CORTOSS generally available
in Europe during the second half of 2002.
There may be future quarterly fluctuations in spending. We expect that our sales
commission expense may increase at a higher rate than any increase in VITOSS
product sales in the United States as we make enhancements to our sales
commission program. In addition, we expect increases in the use of cash to build
inventory and fund receivables. We also expect to continue to use cash in
operating activities associated with research and development, including
clinical trials for CORTOSS and RHAKOSS, manufacturing process development, and
pre-launch marketing activities in support of our other products under
development as well as the associated marketing and sales activities with VITOSS
in the United States, and with VITOSS and CORTOSS in Europe, Australia and
Israel.
Finally, we have entered into and may enter into additional financing
arrangements where we pay revenue sharing amounts on the sales of certain
products. These arrangements can increase expenses related to the sale of our
products.
Net cash used in investing activities
We have invested $271,100 and $758,895 for the three months ended March 31, 2002
and 2001, respectively, primarily for the purchase of leasehold improvements,
manufacturing equipment and research and development equipment in order to
further expand our product development and manufacturing capabilities.
During March 2001, we received $375,000 from the escrow account that had been
established in connection with the March 2000 sale of our BIOGRAN dental
grafting product line to Implant Innovations, Inc. Of the original escrow amount
of $400,000, $25,000 continues to be held in escrow for costs related to certain
patent litigation.
Investing Cash Outlook -
We anticipate capital spending for improvements to manufacturing processes at
our facilities. Accordingly, we expect the rate at which we invest funds in 2002
related to improvements to our leased office and manufacturing facilities to be
relatively stable compared to 2001. We anticipate new capital spending will be
required in support of the RHAKOSS program.
21
Net cash provided by financing activities
During the first three months of 2002 and 2001, we received $27,219 and $39,758,
respectively, from stock option exercises and purchases of Common Stock under
our Employee Stock Purchase Plan. In addition, $135,685 and $183,337 was used to
repay capital lease obligations during the first three months of 2002 and 2001,
respectively. In the first quarter of 2001, we borrowed $1,440,000 on a line of
credit with our bank, and we paid the line in full during April 2001.
Additionally, in the first quarter of 2001, we sold 2,541,894 shares of our
Common Stock in two separate private equity financings, raising aggregate net
proceeds of approximately $9,702,500.
Financing Requirements Outlook
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.
We do not expect sales to generate cash flow in excess of operating expenses for
at least the next several years, if at all. We expect to continue to use cash,
cash equivalents and short-term investments to fund operating and investing
activities. We believe that our existing cash of $8,883,705 as of March 31, 2002
will be sufficient to meet our currently estimated operating and investing
requirements into early 2003; however, if we do not raise additional cash by
September 30, 2002, we may be required to curtail or limit certain marketing
support and research and development activities in order to remain compliant
with our Paul Royalty financial covenants. A curtailment of certain activities
would delay development of certain of our products. We will need to raise
additional funds by the fourth quarter of 2002 to meet the Nasdaq National
Market's continuing listing requirements if the per share bid price of our
Common Stock remains below $3.00. We may seek to obtain additional funds through
equity or debt financings, or strategic alliances with third parties either
alone or in combination with equity. These financings could result in
substantial dilution to the holders of our Common Stock or require debt service
and/or royalty payment arrangements. Any such required financing may not be
available in amounts or on terms acceptable to us.
22
Results of Operations
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources." A summary of net product sales and
expenses for the three months ended March 31, 2002 and 2001, are as follows:
- --------------------------------------------------------------------------------
Three Months Ended % Increase
March 31, (Decrease)
2002 2001 2002 vs. 2001
---- ---- -------------
Product Sales $ 1,838,389 $ 226,406 712%
----------- ------------
Gross Profit 1,504,428 207,006 627
----------- -----------
General and Administrative Expenses 1,213,055 909,033 33
Selling and Marketing Expenses 1,873,291 1,171,308 60
Research and Development Expenses 1,728,740 1,821,394 (5)
----------- -----------
Total Operating Expenses 4,815,086 3,901,735 23
----------- -----------
Other (Expense) Income (32,696) 28,932 (213)
----------- -----------
Net loss from operations (3,343,354) (3,665,797) (9)
----------- -----------
Net gain on sale of product line -- 375,000 (100)
----------- -----------
Net Loss (3,343,354) (3,290,797) 2
=========== ===========
- --------------------------------------------------------------------------------
Product Sales. Product sales for the three months ended March 31, 2002, were
$1,838,389 compared to $226,406 for the three months ended March 31, 2001.
Product sales for 2002 consisted primarily of VITOSS sales in the U.S. and
Europe and initial CORTOSS sales in Europe. Product sales for 2001 consisted
primarily of sales of VITOSS in Europe. VITOSS was launched in the U.S. during
February 2001.
Gross Profit. Our gross profit for the three months ended March 31, 2002, was
$1,504,428, or 82% of product sales. Our VITOSS gross profit for the three
months ended March 31, 2001, was $207,006, or 91% of revenues. Since all VITOSS
product sold during the three months ended March 31, 2001, was produced prior
its regulatory approval, the costs of producing that product was recorded as
research and development expense in prior periods and in accordance with SFAS
No. 2 "Accounting for Research and Development Costs," which stipulates that the
costs of producing inventory prior to the receipt of regulatory approval be
recorded as research and development expense. Accordingly, a substantial portion
of the costs of producing the VITOSS product sold during the first quarter of
2001 was not reflected in cost of sales. VITOSS gross profit for the period
ended March 31, 2001 was not indicative of margins realized in future periods.
The gross profit as a percentage of revenues is expected to vary depending upon
the proportion of sales derived from stocking distributors outside of the U.S.,
where margins are lower, in comparison to sales derived from commissioned sales
agents in the U.S., where margins are higher, as well as from any changes in our
average selling price.
Operating Expenses. Operating expenses for the three months ended March 31,
2002, were $4,815,086 compared to $3,901,735 for the same period in 2001.
General & administrative expenses for the three months ended March 31, 2002,
were higher than the same period in
23
2001 due to increased spending for personnel-related expenses. Selling and
marketing expenses for same three-month periods from 2001 to 2002 increased as a
result of commission expense paid to the independent commissioned sales agencies
in the U.S. on VITOSS product sales, increased staffing and other spending
related to the support of product sales. Research and development expenses
decreased for the three months ended March 31, 2002, as compared to the same
period in 2001, primarily as a result of the completion of certain process
development activities primarily related to CORTOSS and the initiation of
commercial scale manufacturing.
Other (expense) income. Net other (expense) income includes interest income,
interest expense and revenue interest expense. We recorded $32,696 of net other
expense for the three months ended March 31, 2002, compared to $28,932 of net
other income for the three months ended March 31, 2001. The decrease in net
other income between 2002 and 2001 is attributed to lower average interest rates
earned on invested cash and revenue interest expense incurred in 2002 as a
result of the arrangement with Paul Royalty.
Net gain on sale of product line. In March 2000, we sold our BIOGRAN dental
grafting product line to Implant Innovations Inc. for $3,900,000. We received
proceeds of $3,500,000, with an additional $400,000 that was held in an escrow
account. During March 2001, an additional gain of $375,000 was realized when
these proceeds from the escrow account were released.
Net Loss. As a result of the foregoing factors, our net loss for the three
months ended March 31, 2002, was $3,343,354, compared to a net loss of
$3,290,797 for the three months ended March 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
The functional currency for our European branch operation is the Euro.
Accordingly, in accordance with SFAS No. 52 "Foreign Currency Translation," all
assets and liabilities related to this operation are translated at the current
exchange rates at the end of each period. The resulting translation adjustments
are accumulated in a separate component of shareholders' equity. Revenues and
expenses are translated at average exchange rates in effect during the period
with foreign currency transaction gains and losses, if any, included in results
of operations.
Market Risk
We may be exposed to market risk through changes in market interest rates that
could affect the value of our short-term investments. Interest rate changes
would result in unrealized gains or losses in the market value of the short-term
investments due to differences between the market interest rates and rates at
the inception of the short-term investment. We held no investments as of March
31, 2002 and December 31, 2001.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 22, 2002, the agreement with Paul Capital Royalty Acquisition Fund,
L.P. ("Paul Royalty") was modified whereby Paul Royalty exchanged 860,882 shares
of our Common Stock for elimination of certain potential credits allowable to us
against our revenue interest obligation, as well as a reduction in the amount
required to repurchase Paul Royalty's revenue interest if a repurchase event
were to occur (see Note 4). This modification was accounted for as a treasury
stock transaction with a decrease to shareholders' equity and an increase to the
revenue interest obligation based upon the fair market value of the Common Stock
on the date of the modification to the transaction of $2.26 per share, or
$1,945,593.
ITEM 5. OTHER INFORMATION
On April 23, 2002, Orthovita announced the appointment of Antony Koblish as its
President and Chief Executive Officer. Mr. Koblish replaced Bruce A. Peacock,
who resigned as President, Chief Executive Officer and a director of Orthovita
effective April 22, 2002. The press release concerning Mr. Koblish's appointment
is attached to this report as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Press Release of Registrant dated April 23, 2002.
(b) Reports on Form 8-K.
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ORTHOVITA, INC.
(Registrant)
May 13, 2002 By: /s/ Antony Koblish
-------------------
Antony Koblish
Chief Executive Officer and President
(Principal executive officer)
May 13, 2002 By: /s/ Joseph M. Paiva
--------------------
Joseph M. Paiva
Vice President and Chief Financial Officer
(Principal financial and accounting officer)
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