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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required] for the fiscal year ended December 31, 2000 or
. Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the transition period from
to .
COMMISSION FILE NUMBER 0-24517
ORTHOVITA, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA
(State or other jurisdiction of
INCORPORATION OR ORGANIZATION)
23-2694857
(I.R.S. Employer Identification No.)
45 GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA
(Address of principal executive offices)
19355
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 640-1775
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(Title of class) NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------------------- -------------------------------------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of class)
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 for 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. Yes X No
As of March 26, 2001, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $61,251,503. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market on such date. For purposes of making this
calculation only, the registrant has defined affiliates as including all
director, executive officers and beneficial owners of more than ten percent of
the registrant's Common Stock.
As of March 26, 2001, there were 16,189,078 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
As stated in Part III of this annual report on Form 10-K, portions of the
following document are incorporated herein by reference:
Definitive proxy statement to be filed within 120 days after the end of the
fiscal year covered by this annual report on Form 10-K.
Unless the context indicates otherwise, the terms "Orthovita" and
"Company" refer to Orthovita, Inc. and, where appropriate, one or more of its
subsidiaries.
TABLE OF CONTENTS
PART I
ITEM 1. Business ..................................................................... 4-13
ITEM 2. Properties ................................................................... 14
ITEM 3. Legal Proceedings ............................................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders .......................... 14
PART II
ITEM 5. Market for Registrant's Common Equity And Related Shareholder Matters 15
ITEM 6. Selected Consolidated Financial Data ......................................... 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 17-30
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk .................... 30-31
ITEM 8. Financial Statements and Supplemental Data ................................... 31
ITEM 9. Changes In and Disagreements with Accountants and Financial Disclosure......... 31
PART III
ITEM 10. Directors and Executive Officers of the Registrant ............................ 31
ITEM 11. Executive Compensation ........................................................ 31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ................ 31
ITEM 13. Certain Relationships and Related Transactions ................................ 32
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............. 33-34
SIGNATURES
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PART I
Item 1. BUSINESS
In addition to historical facts or statements of current conditions, this report
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 "anticipated," "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
discussed throughout this document. 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., a Pennsylvania corporation
organized in June 1992 that commenced operations in November 1993, together with
its subsidiaries.
Orthovita is a biomaterials company with proprietary techniques for the
development of novel products for use in orthopaedics. Our focus is on
developing products for use in surgical procedures in spine and osteoporotic
fractures. We are also addressing a broad range of clinical needs in the trauma
market. Our efforts to-date have resulted in the development of three products,
VITOSSTM Synthetic Cancellous Bone Void Filler, CORTOSSTM Cortical Bone Void
Filler and RHAKOSSTM Synthetic Bone Implants. VITOSS is a resorbable calcium
phosphate scaffold used as a bone graft in trauma and spinal fusion procedures.
CORTOSS is under development as a high strength bonding, self-setting composite
engineered specifically to mimic the strength characteristics of human cortical
bone. We are pursuing clinical studies for multiple indications of CORTOSS,
including the augmentation of screws used in a variety of orthopaedic procedures
and vertebral fractures. RHAKOSS is under development as a high strength bone
bonding preformed composite interbody fusion implant. RHAKOSS is designed to
mimic the radiolucency of bone, as well as, the strength and flexibility
characteristics of bone and 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 have built a network of independent distributors and sales agencies in the
U.S., Europe and Australia in order to market VITOSS and may utilize this
network for CORTOSS, if CORTOSS receives regulatory approval. Additionally, we
are pursuing a strategic alliance with an orthopaedic company in Japan for the
regulatory clearance, distribution, selling and marketing of VITOSS and CORTOSS.
On March 22, 2000, we sold our BIOGRAN dental grafting product line to Implant
Innovations, Inc. ("3i") for $3.9 million and received proceeds of $3.5 million
with an additional $400,000 held in an escrow account until March 23, 2001. The
escrow account funds were released on March 23, 2001.
ORTHOVITA'S TECHNOLOGY
We believe that applied biomaterials science technology can be applied to create
a new category of synthetic biologically active products engineered to restore
the human skeleton. Our development of novel materials extends over several
technology platforms: composites, solution derived bioceramics and glass-
ceramics. Patents have been issued and filed to protect our key biomaterial
technologies. Nanoparticulate scaffolds serve as ideal biologic composites for
bone repair and are carriers for tissue engineering applications. State-of-the-
art processing
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technologies differentiate our biologic composites, which are novel in their
ability to immediately restore function and create a living bond with adjacent
bone tissue.
OUR PRODUCT PIPELINE AND RELATED CLINICAL APPLICATIONS
As further discussed in GOVERNMENT REGULATION below, our product candidates are
subject to extensive regulation as medical devices by the FDA and European
regulatory authorities. For certain indications, marketing approval may be
granted if we can establish that the product is "substantially equivalent" to
certain approved medical devices and generally does not require submission of
data from clinical studies. However the authorities may require additional
information including data from clinical studies before a substantial
equivalence determination can be made. Product approval applications for other
products or other indications must be supported by valid scientific evidence
that typically includes clinical trial data, to demonstrate the safety and
effectiveness of the device.
VITOSS SYNTHETIC CANCELLOUS BONE VOID FILLER
VITOSS synthetic cancellous bone void filler is a resorbable calcium phosphate
scaffold used as a bone graft in trauma and spinal fusion procedures. We
initiated European sales of VITOSS in October 2000 following receipt of its CE
Certification allowing its sale in all of the countries of the European Union
("EU"). In December 2000, the U.S. Food and Drug Administration (the "FDA")
granted 510(k) marketing clearance for VITOSS and we began selling the product
in the U.S. during March 2001. During March 2001, we received regulatory
clearance for VITOSS in Australia. Our VITOSS platform is covered by two U.S.
issued patents and other U.S. and foreign patent applications are pending.
Bone Defect Repair. Injury or trauma to the bone, as well as degenerative
conditions, disease and aging, affect the health and viability of the human
skeleton. These conditions often result in the need for the repair of bone
defects through a bone grafting procedure. Approximately 500,000 bone-grafting
procedures occur each year in the spine, extremities and pelvis representing a
market potential of $300 million. The highly porous physical structure and
technology behind VITOSS allows for the product to be rapidly saturated with
marrow, blood and nutrients that are required for bone growth and remodeling.
VITOSS provides a three dimensional structure which, we believe, allows bone
healing for the patient and can reduce the morbidity linked to autograft harvest
and the potential problems associated with bank bone allografts.
Spinal Fusions. Many patients affected by severe back pain due to
degeneration of one or more discs are treated with a spinal fusion procedure.
Spinal fusion involves the fusing together of adjoining vertebrae in cases where
the patient has advanced disc degeneration or spinal instability. This procedure
involves surgical incision in the patient's back or abdomen. Fusions frequently
require the removal of the affected disc material and the surgical attachment of
a metal implant or a spinal fusion cage to join the two surrounding vertebrae.
The metal implant or spinal fusion cage is usually packed with bone grafting
material to help promote the union of the two adjacent vertebrae. Bone grafting
material is either autograft material, which is obtained or harvested from the
iliac crest region of the patient's own hip, or allograft material, which is
obtained from a cadaver or synthetically derived materials.
The autograft harvest is an additional procedure that extends surgical time,
adding to costs and increasing blood loss and patient risk of infection or
adverse reaction from the additional time under anesthesia. Of equal concern,
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harvesting bone for autograft sometimes causes protracted pain that may
necessitate a trip back to the surgeon several months after the fracture repair
procedure. Allograft and synthetically derived materials may be perceived by
some surgeons as less effective than autograft and allograft material may not be
accepted by all patients.
We estimate that 400,000 spinal fusions are done annually, many of which use
autograft, allograft or synthetic grafting material. We received from the FDA
510(k) approval of VITOSS for use as a synthetic cancellous bone void filler and
have initiated preclinical and clinical studies exploring the use of VITOSS
soaked with bone marrow aspirate as a spinal fusion graft material.
Iliac Crest Repair. The bone grafting material used to pack the metal implant
and cages used in spinal fusion procedure is often autograft material, obtained
or "harvested" from the iliac crest region of the patient's own hip through an
operating procedure. This procedure leaves an open space in the iliac crest,
which is often painful and slow healing. We estimate that 400,000 spinal fusions
are done annually, of which approximately 200,000 procedures use autograft
material and another 100,000 non-spinal fusion related procedures use harvested
material.
We believe that VITOSS can be used to repair the bone void left by the harvest
procedure at the time of surgery and may reduce pain and speed healing time, and
we have initiated clinical studies for this use.
CORTOSS SYNTHETIC CORTICAL BONE VOID FILLER
CORTOSS Synthetic Cortical Bone Void Filler is under development as a high
strength bonding, self-setting composite engineered specifically to mimic the
strength characteristics of human cortical bone. We are pursuing clinical
studies for multiple indications of CORTOSS, including the augmentation of
screws and vertebral fractures.
CORTOSS's simple mix-on-demand design allows for minimum waste and maximum ease
of use. CORTOSS is delivered aseptically through a prefilled, unit dose,
disposable cartridge. Delivery of CORTOSS to the surgical site may be started
and stopped for a prolonged period of time throughout the surgical procedure.
Polymerization is initiated when CORTOSS is expressed through the static mix-
tip. Laboratory tests demonstrate that CORTOSS exhibits compressive strength
similar to human cortical bone. CORTOSS provides two stages of fixation:
immediate mechanical interlock into porous bone, followed by intimate bone
growth along the contours of the surface. CORTOSS develops a calcium phosphate-
rich surface, which is equivalent in composition and structure to bone mineral.
Six month CORTOSS histology (preclinical studies) shows direct, intimate bony
contact. CORTOSS has a mix-on-demand delivery system which should allow the
surgeon much flexibility. CORTOSS is covered by two U.S. issued patents and
other U.S. and foreign patent applications are pending.
Long Bone Screw Augmentation. Each year, approximately 1,500,000 orthopaedic
procedures are performed using internal fixation devices that involve screws.
About 1,000,000 of these are long bone fractures that are treated with metal
plates and screws; the remainder includes hip fractures treated with compression
screws and spinal fractures treated with pedicle screws. In long bone
fractures, screws are placed into the plate and serve to compress the fracture,
permitting faster healing. These screws "strip" or fail to hold in
approximately 150,000 osteoporotic patients each year due to poor bone quality,
as is often the case in osteoporotic bone.
Where screws fail to hold, current treatment options include: (i) replacement of
the screw with a screw of larger diameter, which may further weaken the bone and
is not always possible because of the size of the screw holes and/or the bone,
(ii) replacing the plate with a longer plate with more screw holes to span the
failed screw holes, which adds considerable time to the procedure, creates a
larger wound area, increases the risk of other screws failing due to their
removal and reimplantation, and in certain situations is anatomically not
possible, (iii) leaving the plate with the failed screws as it is and giving the
patient a non-load bearing cast for a prolonged period of time, which increases
the risk of post-operative complications related to immobilization, such as deep
venous thrombosis, or (iv) augmenting the screws with bone cement, which is
cumbersome and time consuming because it needs to be manually mixed and
transferred into a syringe for application and after mixing there only is a
small time window in which it can be used before it sets, making it difficult to
augment more than one screw at a time.
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We believe the use of CORTOSS to anchor the screw in a quick and efficient way
will allow the full function of the screw to be restored. We do not know of any
cement products that have received FDA approval or CE marking that would be in
competition with CORTOSS for this indication.
A 24-patient multi-center clinical study of patients undergoing surgery to
repair bone fractures demonstrated that CORTOSS allowed the successful use of
metal screws in the repair procedures despite patients' poor bone quality. The
three-month study showed CORTOSS restored the holding power of 98 percent of
previously failed bone screws, permitting the use of a plate to stabilize the
fracture and healing in all 24 patients with no adverse events related to
CORTOSS reported. The results were included in the first part of an application
filed during August 2000 seeking regulatory clearance, through the European CE
Mark certification process, for CORTOSS in the 15 member countries of the
European Union. We have completed the construction of our CORTOSS manufacturing
facility and our goal is to produce commercial product in 2001. In order to
commercialize CORTOSS, its manufacturing facility must pass inspection by our
notified body and is subject to inspection by the FDA.
In March 2001, we filed an investigational device exemption ("IDE") with the FDA
to allow us to initiate clinical studies in the United States for the use of
CORTOSS for this indication.
Vertebroplasty. We estimate there are 660,000 patients worldwide with
compression of the vertebrae due to fractures caused by osteoporosic bone or
bone cancer resulting in severe pain and immobility. The traditional treatments,
e.g., bed rest, bracing, narcotics or injections do not address the underlying
fracture. Vertebroplasty is a procedure for repairing the fractured vertebrae.
When used in this procedure, CORTOSS is injected into the vertebrae, setting
within minutes to stabilize the fracture and becoming load bearing. The
procedure can be performed on an outpatient or short-stay basis.
Vertebroplasty provides almost immediate pain relief in over 90% of osteoporotic
patients. Early relief of pain provided by vertebroplasty allows patients to
maintain better functional capacity. Functional capacity, in turn, is believed
to be directly related to the ability to live independently and unassisted. We
are not aware of any products that have received FDA approval or European
approval for use in this procedure; however, surgeons currently use PMMA "off-
label". We believe that CORTOSS may have advantages over PMMA in vertebroplasty
such as the ability to be seen by the physician when using imaging equipment in
performing the procedure, lower temperature setting time, higher compression
strength and the ability to be mixed on demand.
We have initiated clinical studies of CORTOSS in vertebroplasty in Europe and
believe these are the only controlled studies in this field. For the patients
accrued to date, the product has been well tolerated and effective in
stabilizing the compressive fracture and in providing significant pain relief.
We intend to file IDEs with the FDA in 2001 to allow us to initiate clinical
studies in the United States for the use of CORTOSS for this indication.
Compression Screw Augmentation We estimate approximately 750,000 hip
fractures occur annually of which an estimated 250,000 patients are repaired
using compression screw augmentation.
Many osteoporotic patients, particularly elderly women, suffer a fracture of the
hip whereby the head or the "ball" of the hip ball and socket of the femur leg
bone is separated from the rest of the bone. These fractures are often treated
through the use of compression hip screws, which are placed through the bone and
into the femoral head to stabilize and compress the fracture to permit healing.
The healing of a fracture is directly proportional to the degree of
stabilization. The failure of screws to purchase or hold is common, especially
in osteoporotic bone. Such a failure during or after the surgical procedure
will result in the need for an artificial hip implant.
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We believe the use of CORTOSS to anchor the screw in a quick and efficient way
will allow the full function of the screw to be restored. We do not know of any
products approved for this indication that would be in competition with CORTOSS.
We have initiated clinical trials for this use in Europe.
Pedicle Screw Augmentation. Many spinal surgeries today have become possible
only because of the availability of instrumentation systems that allow
manipulation and fixation of the individual elements of the spine. These
instrumentation systems are attached to the spine by means of screws placed in
the pedicle region of the vertebrae. In patients with sub-optimal bone quality,
such as osteoporotic patients, the purchase or "bite" of these screws may be
insufficient to maintain the integrity of the construction.
There are approximately 280,000 patients in which pedicle screws are placed each
year. We estimate that approximately 35,000 may require the augmentation of
screws due to osteoporosis. We do not know of any approved product for this
procedure.
We believe CORTOSS has the potential to ensure secure fixation of the screws,
allowing the instrumentation systems to restore maximum fixation and stabilize
the spine. We believe CORTOSS's mix-on-demand delivery system makes its use here
convenient and practical.
RHAKOSS SYNTHETIC BONE IMPLANTS
We believe that RHAKOSS Synthetic Bone Implants represent the first potential
synthetic, bone-bonding, load bearing alternative to titanium/carbon fiber cages
and allograft cadaver bone implants. RHAKOSS is under development as a high
strength bone bonding preformed composite interbody fusion implant. RHAKOSS is
designed to mimic the radiolucency of bone, as well as, the strength and
flexibility characteristics of bone and 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
anticipate RHAKOSS to combine the best features of first generation interbody
fusion devices while eliminating many of the disadvantages of current available
materials, such as inconsistent structural integrity, inability to visualize the
graft materials, lack of mechanical bonding to bone, risk of disease
transmission and limited supply. RHAKOSS can be injection molded or machined
thus generating an unlimited supply and consistent material performance.
Spinal Fusion. The current market estimate for interbody fusion devices
including titanium cages, carbon fiber cages and cadaver bone dowels and spacers
is approximately $445 million. RHAKOSS is under development as a bone-bonding,
load-bearing, spinal fusion product that mimics the mechanical characteristics
of human bone for use in spinal repair procedures.
We believe RHAKOSS implants potentially offer the surgeon and patient the
consistency of engineered synthetics, plus the performance characteristics of
natural human bone. We have completed the final formulation, initial acute pre-
clinical studies and the design of the RHAKOSS synthetic implants. In December
2000 we began studies in primates. We plan to initiate RHAKOSS human clinical
studies in 2002 in Europe.
RESEARCH AND DEVELOPMENT
Our products under development to date have been the result of our internal
research and development activities which incorporate our expertise in
composites engineering, polymer science, solution chemistry and ceramic glass
science. These activities relate more to applied research than that of basic
research discovery. We have incurred $7.5 million, $5.3 million and $2.8 million
in research and development expenses in 2000, 1999 and 1998, respectively.
PATENTS AND PROPRIETARY INTELLECTUAL PROPERTY
An integral part of our product development strategy is to seek protection for
our product technologies and manufacturing methods through the use of United
States and foreign patents. We have filed or intend to file applications as
appropriate for patents covering our technologies, products and processes. We
cannot be certain that
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any of our patent applications will be issued, or if issued, that they will not
be challenged by third parties. Since patent applications filed prior to
December 2000 in the United States are maintained in secrecy until issued, and
patent applications filed after November 2000 are maintained in secrecy until
eighteen months from the date of filing, and since publication of discoveries in
the scientific or patent literature tends to lag behind actual discoveries, we
cannot be certain that we or any of our licensors were the first creator of
inventions covered by pending patent applications or that we or any of our
licensors were the first to file patent applications for such inventions.
Further, there can be no assurance that the claims allowed under any issued
patents will be sufficiently broad as to protect our proprietary position in the
technology. In addition, there can be no assurance that any patents issued to us
or any of our licensors will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide commercially useful competitive
advantages to us. As of February 28, 2001, we own or control three issued U.S.
patents, one allowed U.S. patent, six pending patent applications in the United
States and numerous counterparts of certain of these patents and pending patent
applications in Europe and Japan.
SPINE ADVISORY PANEL
We have an international Spine Advisory Panel of physician experts that provides
advice and guidance to us in our spinal product development programs regarding
potential clinical uses of our products. Certain members of the Spine Advisory
Panel have received options to purchase our Common Stock, a practice that we may
continue in the future.
MANUFACTURING AND PRODUCT SUPPLY
The manufacture of our products is subject to regulation and periodic inspection
by various regulatory bodies for compliance with Good Manufacturing Practice
("GMP") regulations, Quality System Requirements ("QSR"), International
Standards Organization ("ISO") 9000 Series standards and equivalent
requirements.
We have completed construction of our VITOSS manufacturing facility and have
successfully produced initial batches of commercial product. Our VITOSS
manufacturing facility is certified as meeting the requirements of ISO 9001 and
European Norm ("EN") 46001 for the period July 1, 2000 through July 1, 2003. We
have completed the construction of our CORTOSS manufacturing facility and our
goal is to produce commercial product during the second quarter of 2001. In
order to commercialize CORTOSS, its manufacturing facility must pass inspection
by our notified body and is subject to inspection by the FDA.
Our ability to manufacture VITOSS and CORTOSS is dependent on a limited number
of specialty suppliers of certain raw materials. The failure of a supplier to
continue to provide us with these materials at a price or quality acceptable to
us, or at all, would have a material adverse effect on our ability to
manufacture these products.
SALES AND MARKETING
We have built a network of independent distributors and sales agencies in the
U.S., Europe and Australia in order to market VITOSS and may utilize this
network for CORTOSS, if CORTOSS receives regulatory approval. Additionally, we
are pursuing a strategic alliance with an orthopaedic company in Japan for the
regulatory clearance, distribution, selling and marketing of VITOSS and CORTOSS.
As of March 16, 2001, we have arrangements with 12 independent distributors
throughout Europe and one distributor in Australia with combined sales force of
over 200 representatives. These distributors purchase products directly from
us, warehouse inventory of products purchased from us and hold title to the
products purchased. In the U.S., as of March 16, 2001, we are represented by 43
distributor agencies with over 300 sales representatives in the aggregate.
Distributors in the U.S. do not warehouse inventory. U.S. distributors are paid
commissions by us for selling our products to the end users. As of December 31,
2000, all VITOSS revenue was derived from the distributors outside of the U.S.
The independent distributors do not have any right to return or exchange any
products that they have purchased from us.
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In August 2000, the worldwide marketing, sales and distribution agreement for
joint development of ORTHOCOMPTM for use in joint implant procedures with
Howmedica, a subsidiary of Stryker Corp., was cancelled by mutual agreement of
both parties. All development and commercial rights to this product were
returned to us.
COMPETITION
Competition in the medical device industry is intense in both the U.S. and
Europe with rapid product development and technological advancement. Our
products could be rendered noncompetitive or obsolete by technological
advancements made by current or potential competitors. There can be no assurance
that we will be able to respond to technological advancements through the
development and introduction of new products. Moreover, many of our existing and
potential competitors have substantially greater financial, marketing, sales,
distribution and technological resources than us. Such existing and potential
competitors may be in the process of seeking FDA or other regulatory approvals,
or patent protection, for their respective products. They may also enjoy
substantial advantages over us in terms of research and development expertise,
experience in conducting clinical trials, experience in regulatory matters,
manufacturing efficiency, name recognition, sales and marketing expertise or the
development of distribution channels. The attributes of our products may cause
some changes to surgical techniques that have become standard within the medical
community, and there may be resistance to change. There can be no assurance
that we will be able to compete successfully against current or future
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations.
In the orthopaedic market, we face competition from existing products and
companies, and potential competition from emerging companies developing bone
substitutes. In orthopaedic applications for trauma, we believe VITOSS will face
competition from products currently on the market or that may enter the market
in the near future. There are no known products that have received FDA approval
or a CE Mark for screw augmentation and vertebroplasty that would be in
competition with CORTOSS for these indications; however, we may face off-label
use of PMMA bone cement products. RHAKOSS may compete against allograft products
which are established in the market place.
GOVERNMENT REGULATION
In order to market our products, we must apply for, be granted and maintain all
necessary regulatory approvals in each applicable jurisdiction. To date, we have
received 510(k) clearance to market VITOSS in the U.S., CE Mark certification
for VITOSS in Europe and regulatory clearance in Australia. In March 2001, we
filed an IDE with the FDA to allow us to initiate clinical studies in the United
States for the use of CORTOSS for long bone screw augmentation. We intend to
file an IDE with the FDA in 2001 for the use of CORTOSS for vertebroplasty.
Europe
In order to sell our products within the European Economic Area, we are required
to achieve compliance with the requirements of the European Union Medical
Devices Directive (the "MDD") and affix CE marking on our products to attest
such compliance. To achieve this, our products must meet the "essential
requirements" defined under the MDD relating to safety and performance and we
must successfully undergo a verification of our regulatory compliance
("conformity assessment") by an independent notified body. We have selected
the TNO, or the Netherlands Organization for Applied Scientific Research, as our
notified body. The nature of the conformity assessment will depend on the
regulatory class of our products. Under European law, our products are likely to
be in Class III. In the case of Class III products, we must (as a result of the
regulatory structure which we have elected to follow) establish and maintain a
complete quality system for design and manufacture as described in Annex II of
the MDD (this corresponds to a quality system for design in ISO 9001 and EN
46001 standards). The notified body has audited our quality system and
determined that it meets the requirements of the MDD. In addition, the notified
body must approve the specific design of each device in Class III. As part of
the design approval process, the notified body must also verify that the
products comply with the essential requirements of the MDD. In order to comply
with these requirements, we must, among other things, complete a risk analysis
and may be required to present sufficient clinical data. The clinical data
presented by us must provide evidence that the products meet the performance
10
specifications claimed by us, provide sufficient evidence of adequate assessment
of unwanted side effects and demonstrate that the benefits to the patient
outweigh the risks associated with the device. We will be subject to continued
surveillance by the notified body and will be required to report any serious
adverse incidents to the appropriate authorities. We also will be required to
comply with additional national requirements that are beyond the scope of the
MDD.
We have completed construction of our VITOSS manufacturing facility and have
successfully produced initial batches of commercial product. Our VITOSS
manufacturing facility is certified as meeting the requirements of ISO 9001 and
EN 46001 for the period July 1, 2000 through July 1, 2003. We have completed the
construction of our CORTOSS manufacturing facility and our goal is to produce
commercial product in 2001. In order to commercialize CORTOSS, its manufacturing
facility must pass inspection by our notified body and is subject to inspection
by the FDA.
United States
The medical devices that we intend to manufacture and market are subject to
extensive regulation by the FDA. Pursuant to the Federal Food, Drug and Cosmetic
Act ("FFD&C Act") and the regulations promulgated thereunder, the FDA regulates
the clinical testing, manufacture, labeling, distribution and promotion of
medical devices. Noncompliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing approvals and criminal prosecution.
In the United States, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls deemed necessary by the FDA to
reasonably assure their safety and effectiveness. Under FDA regulations, Class I
devices, the least regulated category, are subject to general controls and Class
II devices are subject to general and special controls. Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and effectiveness. Our products are either Class II or Class III
devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain market clearance through a 510(k) notification or premarket
approval through a premarket approval application ("PMA"). A 510(k) clearance
will be granted if the submitted information establishes that the proposed
device is "substantially equivalent" to a legally marketed Class I or II
medical device, or to a Class III medical device for which the FDA has not
called for a PMA. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information or data are needed before a substantial equivalence determination
can be made. A request for additional data may require that clinical studies be
performed to establish the device's "substantial equivalence."
Commercial distribution of a device for which a 510(k) notification is required
can begin only after the FDA issues an order finding the device to be
"substantially equivalent" to a predicate device. Pursuant to the Federal
Food, Drug, and Cosmetics Act, the FDA must make a determination with respect to
a 510(k) submission within 90 days of its receipt. The FDA may, and often does,
extend this time frame by requesting additional data or information.
A "not substantially equivalent" determination, or a request for additional
information, could delay or prevent the market introduction of new products for
which we file such notifications. For any of our products that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or efficacy of the device or that constitute a
major change to the intended use of the device will require new 510(k)
submissions. The FDA has implemented a policy under which certain device
modifications may be submitted as a "Special 510(k)," which will require only
a 30-day review. Special 510(k)'s are limited to those device modifications that
do not affect the intended use or alter the fundamental scientific technology of
the device and for which substantial equivalence can be demonstrated through
design controls.
11
A PMA must be filed if a proposed device is not substantially equivalent to a
legally marketed Class I or Class II device, or if it is a Class III device for
which FDA has called for PMA. A PMA must be supported by valid scientific
evidence that typically includes extensive data, including preclinical and
clinical trial data, to demonstrate the safety and effectiveness of the device,
as well as extensive manufacturing information.
FDA review of a PMA generally takes one to two years from the date the PMA is
accepted for filing, but may take significantly longer. The review time is often
significantly extended should the FDA ask for more information or clarification
of information already provided in the submission.
During the PMA review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendations of the advisory panel. Toward the
end of the PMA review process, the FDA generally will conduct an inspection of
the manufacturer's facilities to ensure that they are in compliance with
applicable GMP requirements.
If the FDA's evaluations of both the PMA and the manufacturing facilities are
favorable, the FDA will either issue an approval letter or an "approvable
letter," which usually contains a number of conditions which must be met in
order to secure final approval of the PMA. When and if those conditions have
been fulfilled to the satisfaction of the FDA, the agency will issue an approval
letter, authorizing commercial marketing of the device for certain indications.
If the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional clinical trials are necessary, in which
case PMA approval may be delayed up to several years while additional clinical
trials are conducted and submitted in an amendment to the PMA. The PMA process
can be expensive, uncertain and lengthy, and a number of devices for which other
companies have sought FDA approval have never been approved for marketing.
Modifications to a device that is the subject of an approved PMA (including
modifications to its labeling or manufacturing process) may require approval by
the FDA of PMA supplements or new PMAs. Supplements to a PMA often require the
submission of the same type of information required for an initial PMA, except
that the supplement is generally limited to that information needed to support
the proposed change from the product covered by the original PMA.
If clinical trials of a device are required in connection with either a 510(k)
notification or a PMA and the device presents a "significant risk," the
sponsor of the trial (usually the manufacturer or the distributor of the device)
is required to file an IDE application prior to commencing clinical trials. The
IDE application must be supported by data, typically including the results of
animal and laboratory testing. If the IDE application is reviewed and approved
by the FDA and one or more appropriate Institutional Review Boards ("IRBs"),
clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA. If the device presents a
"non-significant risk" to the patient, a sponsor may begin the clinical trial
after obtaining approval for the study by one or more appropriate IRBs, but not
the FDA. For "significant risk" devices, an IDE supplement must be submitted
to and approved by the FDA before a sponsor or an investigator may make a change
to the investigational plan that may affect its scientific soundness or the
rights, safety or welfare of human subjects. IRB approval may be required for
changes in the investigational plan for both non-significant risk and
significant risk devices.
Any products manufactured or distributed by us pursuant to FDA clearances or
approvals are subject to extensive regulation by the FDA, including reporting
and record keeping requirements. Device manufacturers are required to register
their establishments and list their devices with the FDA and certain state
agencies, and are subject to periodic inspections by the FDA and certain state
agencies. The FD&C Act requires devices to be manufactured in accordance with
GMP regulations that impose certain procedural and documentation requirements
upon us with respect to manufacturing and quality assurance activities. Medical
devices are also subject to post market reporting requirements for deaths or
serious injuries when the device may have caused or contributed to the death or
serious injury, and for certain device malfunctions that would be likely to
cause or contribute to a death or serious injury if
12
the malfunction were to recur. If safety or efficacy problems occur after the
product reaches the market, the FDA may take steps to prevent or limit further
marketing of the product.
Labeling and promotion activities are subject to scrutiny by the FDA and, in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved or uncleared uses.
We, as well as our products, are also subject to a variety of state laws and
regulations in those states or localities where our products are or will be
marketed. Any applicable state or local regulations may hinder our ability to
market our products in those states or localities. Manufacturers are also
subject to numerous federal, state and local laws relating to such matters as
safe working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances.
There can be no assurance that we will not be required to incur significant
costs to comply with such laws and regulations now or in the future or that such
laws or regulations will not have a material adverse effect upon our ability to
do business.
In order to market our products, we must apply for, be granted and maintain all
necessary regulatory approvals in each applicable jurisdiction. To date, we
have received 510(k) clearance to market VITOSS in the U.S., CE Mark
certification for VITOSS in Europe and regulatory clearance in Australia. For
CORTOSS, we have filed applications seeking regulatory clearance.
THIRD-PARTY REIMBURSEMENT
Successful sales of our products in the United States and other markets will
depend on the availability of adequate reimbursement from third-party payers. In
the United States, health care providers, such as hospitals and surgeons that
purchase medical devices for treatment of their patients, generally rely on
third-party payers to reimburse all or part of the costs and fees associated
with the procedures performed with these devices. Both public and private
insurance reimbursement plans are central to new product acceptance. For the
U.S. government, coverage and reimbursement decisions for patients eligible to
receive public health care benefits are made by the Health Care Financing
Administration ("HCFA"), which administers the U.S. Medicare and Medicaid
programs. The U.S. Medicare inpatient reimbursement system is a prospective
reimbursement system whereby rates are set in advance, fixed for a specific
fiscal period, constitute full institutional payment for the designated health
service and generally do not vary with hospital treatment costs. Medicare
reimburses outpatient services based on a predetermined fee schedule. The market
for our products could be adversely affected by U.S. legislation that reduces
reimbursements under the cost reimbursement system for the U.S. Medicare
program.
In addition, an increasing emphasis on managed care in the U.S. has placed, and
we believe will continue to place, greater pressure on medical device pricing.
Such pressures could have a material adverse effect on our ability to sell our
products. Failure by hospitals and other users of our products to obtain
coverage or adequate reimbursement from third-party payors or changes in
governmental and private third-party payors' policies toward reimbursement for
procedures employing our products would reduce demand for our products.
Member countries of the EU operate various combinations of centrally financed
health care systems and private health insurance systems. The relative
importance of government and private systems varies from country to country. The
choice of devices is subject to constraints imposed by the availability of funds
within the purchasing institution. Medical devices are most commonly sold to
hospitals or health care facilities at a price set by negotiation between the
buyer and the seller. A contract to purchase products may result from an
individual initiative or as a result of a competitive bidding process. In either
case, the purchaser pays the supplier, and payment terms vary widely throughout
the EU. Failure to obtain favorable negotiated prices with hospitals or health
care facilities could adversely affect sales of our products.
In Japan, at the end of the regulatory approval process, the Ministry of Health,
Labor and Welfare ("MHW") makes a determination of the reimbursement level of
the product. The MHW can set the reimbursement level for our products at their
discretion, and we may not be able to obtain regulatory approval in Japan or if
such approval is granted, we may not obtain a favorable per unit reimbursement
level.
13
PRODUCT LIABILITY AND INSURANCE
Our business involves the risk of product liability claims. While we have not
experienced any product liability claims to date, there can be no assurance that
product liability claims will not be asserted against our distributors or us.
Although we maintain product liability insurance in the annual aggregate amount
of up to $3 million, there can be no assurance that this coverage will be
adequate to protect us against future product liability claims. In addition,
product liability insurance is expensive and there can be no assurance that
product liability insurance will be available to us in the future on terms
satisfactory to us, if at all. A successful product liability claim or series of
claims brought against us in excess of our coverage could have a material
adverse effect on our business, financial condition and results of operations.
EMPLOYEES
As of December 31, 2000, we had 61 full-time employees, with 55 employees at our
Malvern, Pennsylvania headquarters and 6 employees in Europe. We had an average
of 51, 42 and 33 employees in 2000, 1999 and 1998, respectively. The steady
increase in number of employees for the period from 1998 through 2000 is
attributed to our continued development of manufacturing, process technology,
marketing and sales and research and development.
ITEM 2. PROPERTIES
Our headquarters are located at the Great Valley Corporate Center in Malvern,
Pennsylvania, which is a suburb of Philadelphia. We conduct all of our principal
activities at two adjacent facilities that total 32,000 square feet, and which
are leased through July 2007. We also have our international sales and marketing
activities based in our administrative office in Leuven, Belgium.
ITEM 3. LEGAL PROCEEDINGS
In July 1992, we obtained a license from FBFC International, a Belgian company,
that allowed us to manufacture and sell BIOGRAN dental grafting product. We
sold the rights to sell BIOGRAN to 3i in 2000. In 1994, U.S. Biomaterials
Corporation filed with the U.S. Patent and Trademark Office ("PTO") a Request
for Reexamination of the U.S. patent held by FBFC for BIOGRAN, of which we had
been the exclusive licensee. The PTO confirmed the patentability of all claims
of the FBFC patent without amendment. However, U.S. Biomaterials Corporation
instituted a nullification proceeding against the European counterpart to FBFC's
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. In
connection with the BIOGRAN sale to 3i, 3i has assumed control of this matter
and we have agreed to reimburse 3i for the associated legal costs and to provide
them with certain indemnification with respect to the matter. We do not believe
there are any material liabilities with respect to the indemnification for this
matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the fourth
quarter of 2000.
14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock is quoted on both the Nasdaq National Market ("Nasdaq") and the
European Association of Securities Dealers Automated Quotation ("EASDAQ")
under the symbol "VITA". We began trading on Nasdaq on August 2, 2000. The
following table reflects the ranges of high and low sale prices for our Common
Stock as reported on the Nasdaq and EASDAQ for the stated periods.
NASDAQ EASDAQ
------------------------------ ------------------------------
High LOW HIGH LOW
-------------- -------------- -------------- --------------
2000:
First Quarter ............ --- --- $9.50 $4.50
Second Quarter ............ --- --- 7.80 4.80
Third Quarter ............ $8.13 $5.50 7.90 5.80
Fourth Quarter ............ 6.38 3.56 6.40 3.05
1999:
First Quarter ............ --- --- $7.40 $4.00
Second Quarter ............ --- --- 6.50 5.00
Third Quarter ............ --- --- 6.40 3.85
Fourth Quarter ............ --- --- 6.25 4.30
As of March 26, 2001 there were 137 holders of record of our Common Stock. Since
a portion of our Common Stock is held in "street" or nominee name, we are unable
to determine the exact number of beneficial holders. On March 26, 2001, the last
reported sale price of the common stock as reported on the EASDAQ and Nasdaq was
$5.10 and $5.25 per share, respectively. We have never declared or paid cash
dividends on our capital stock and do not anticipate paying any cash dividends
in the foreseeable future.
In October 2000, we sold 20,763 shares of our Common Stock in a private
placement transaction at $5.90 per share. The $122,502 in gross proceeds
received from this sale are for working capital and research and development
purposes. The transaction was exempt from registration under the Securities Act
of 1933, as amended, pursuant to Section 4(2) of such Act and Regulation D
promulgated thereunder.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
that have been derived from the consolidated financial statements of Orthovita,
Inc. and subsidiaries as of and for each of the five years in the period ended
December 31, 2000 which have been audited by Arthur Andersen LLP, independent
public accountants. This data should be read in conjunction with our
consolidated financial statements, including notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included in this document.
Year Ended December 31,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Statement of Operations Data:
Revenues-BIOGRAN(1) ................... $ 532,967 $ 1,054,120 $ 2,780,658 $ 3,311,540 $ 1,860,326
Revenues-VITOSS......................... 207,693 -- -- -- --
Cost of sales (2) ..................... 170,041 324,590 927,792 1,096,848 887,236
Operating expense ..................... 15,191,162 10,755,317 7,897,961 9,998,945 7,162,104
Other (income) expenses ............... (214,273) (529,193) (344,307) 169,066 250,939
Extraordinary item--(gain) (1) ........ (3,070,921) -- -- (397,402) --
Accretion of preferred stock .......... -- -- 391,213 536,517 --
----------- ----------- ----------- ----------- -----------
Net loss applicable to common
shareholders ......................... $(11,335,349) $(9,496,594) $(6,092,001) $(8,092,434) $(6,439,953)
=========== ============ =========== =========== ===========
Net loss per common share, basic and
diluted .............................. $ (0.92) $ (0.83) $ (0.73) $ (1.60) $ (1.60)
=========== =========== =========== =========== ===========
Shares used in computing net loss per
common share, basic and diluted ...... 12,281,117 11,411,896 8,314,679 5,050,397 $ 4,036,150
=========== =========== =========== =========== ===========
As of December 31,
------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash, cash equivalents and short-term
investments (3) ...................... $ 3,814,992 $ 8,873,545 $15,355,808 $ 2,257,902 $ 253,465
Total assets .......................... 10,188,367 11,321,446 18,888,632 4,862,010 1,546,137
Working capital (deficit) ............. 747,835 4,118,730 14,471,102 (1,080,859) (3,140,323)
Long-term debt ........................ 1,307,425 616,726 737,427 832,991 1,588,539
Redeemable convertible preferred
stock ................................ -- -- -- 7,383,090 --
Total shareholders' equity (deficit) .. 5,129,615 5,646,669 15,528,575 (7,712,696) (4,088,685)
(1) From BIOGRAN product launch in 1994 until April 1998, we sold BIOGRAN
directly to our dental customers, and beginning in May 1998, we sold
BIOGRAN through our global distributor Implant Innovations, Inc. ("3i").
On March 22, 2000, we sold the BIOGRAN dental grafting product line to 3i
for $3,900,000 (See Note 10 of Notes to Consolidated Financial Statements).
(2) Primarily reflects cost of BIOGRAN revenues. All of the VITOSS sold in
Europe during 2000 was produced prior the receipt of its CE Certification
in July 2000. In accordance with SFAS No. 2 "Accounting for Research and
Development Costs," the costs of producing that material was recorded as
research and development expense prior to July 2000 and, accordingly, are
not reflected in cost of sales. Accordingly, VITOSS cost of sales for the
year ended December 31, 2000 of $6,000 is not indicative of margins to be
realized in future periods.
(3) Excludes $9.9 million in net proceeds which were received from private
equity financings in January and March 2001.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical facts or statements of current conditions, this report
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 "anticipated," "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
discussed throughout this document. 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.
OVERVIEW
Orthovita is a biomaterials company with proprietary techniques for the
development of novel products for use in orthopaedics. Our focus is on
developing products for use in surgical procedures in spine and osteoporotic
fractures. We are also addressing a broad range of clinical needs in the trauma
market. Our efforts to-date have resulted in the development of three products,
VITOSSTM Synthetic Cancellous Bone Void Filler, CORTOSSTM Cortical Bone Void
Filler and RHAKOSSTM Synthetic Bone Implants. VITOSS is a resorbable calcium
phosphate scaffold used as a bone graft in trauma and spinal fusion procedures.
CORTOSS is under development as a high strength bonding, self-setting composite
engineered specifically to mimic the strength characteristics of human cortical
bone. We are pursuing clinical studies for multiple indications of CORTOSS,
including the augmentation of screws used in a variety of orthopaedic procedures
and vertebral fractures. RHAKOSS is under development as a high strength bone
bonding preformed composite interbody fusion implant. RHAKOSS is designed to
mimic the radiolucency of bone, as well as, the strength and flexibility
characteristics of bone and 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 European sales of VITOSS in October 2000 following receipt of its
CE Certification allowing its sale in all of the countries of the European Union
("EU"). In December 2000, the U.S. Food and Drug Administration (the "FDA")
granted 510(k) marketing clearance for VITOSS and we began selling the product
in the U.S. in March 2001.
CERTAIN RISKS RELATED TO OUR BUSINESS
We are dependent on the commercial success of CORTOSS and VITOSS, and our
ability to achieve this is subject to certain risks, including:
o the need for the market place to commercially accept VITOSS and CORTOSS,
o the need to operate an effective sales and distribution network,
o the need to obtain and maintain regulatory approval for our products,
o the need to implement and manage commercial scale manufacturing
capability and capacity for our products, and
o the uncertainty of operating in international markets.
Each of these factors is described in more detail below.
17
The need for the market place to commercially accept VITOSS and CORTOSS
Because the markets for our products are evolving, we cannot accurately predict
either the future growth rate, if any, or the ultimate size of these markets.
Surgeons will not use our products unless they determine, based on experience,
clinical data and recommendations from prominent surgeons and mentors, that our
products are safe and effective. In addition, surgeons tend to be slow to change
their medical treatment practices because of perceived liability risks arising
from the use of new products and the uncertainty of third party reimbursement
for our products.
We may fail to gain market acceptance for our products, as a result of:
. our dependence on the continued publication of independent pre-clinical and
clinical data to support the use of our products;
. our failure to train a sufficient number of surgeons to create demand for
our products;
. the refusal of payors to authorize insurance reimbursement for procedures
using our products.
Surgeons may not support the use of our products because there is only limited
preclinical or clinical data to support their effectiveness. Our products are
based on new technologies which have not been previously used and must compete
with more established treatments and products currently accepted as the
standards of care. Market acceptance of our products will largely depend on our
ability to demonstrate their relative safety, efficacy, cost-effectiveness and
ease of use. We expect our initial product sales to be made to a group of early
adopting surgeons. Further sales may require us to convince surgeons who
currently favor existing techniques to switch to our products or to new
procedures that would use our products. Many surgeons will not purchase our
products until there is sufficient, long-term clinical evidence to convince them
to alter their existing treatment methods. We believe that recommendations and
endorsements by surgeons will be essential for market acceptance of our
products, and we are not certain that any such recommendations or endorsements
can be obtained. There has been no published clinical data for our products.
Thus, continued publication of positive clinical data and longer-term patient
follow-up are necessary for us to achieve significant sales growth.
Any failure in our physician training efforts could also significantly reduce
adoption rates. It is critical to the success of our sales effort to train a
sufficient number of surgeons and to provide them adequate instruction in the
use of our products. We will rely on surgeons to spend their time and money to
attend our training sessions. If surgeons are not properly trained they may
misuse or ineffectively use our products. This may result in unsatisfactory
patient outcomes, patient injury, negative publicity or lawsuits against us, any
of which could have an adverse effect on our product sales.
Successful sales of our products in the United States and other markets will
depend on the availability of adequate reimbursement from third-party payers. In
the United States, health care providers, such as hospitals and surgeons that
purchase medical devices for treatment of their patients, generally rely on
third-party payers to reimburse all or part of the costs and fees associated
with the procedures performed with these devices. Both public and private
insurance reimbursement plans are central to new product acceptance. For the
U.S. government, coverage and reimbursement decisions for patients eligible to
receive public health care benefits are made by the Health Care Financing
Administration ("HCFA"), which administers the U.S. Medicare and Medicaid
programs. The U.S. Medicare inpatient reimbursement system is a prospective
reimbursement system whereby rates are set in advance, fixed for a specific
fiscal period, constitute full institutional payment for the designated health
service and generally do not vary with hospital treatment costs. Medicare
reimburses outpatient services based on a predetermined fee schedule. The market
for our products could be adversely affected by any action that reduces
reimbursements under the cost reimbursement system for the U.S. Medicare
program.
18
In addition, an increasing emphasis on managed care in the U.S. has placed, and
we believe will continue to place, greater pressure on medical device pricing.
Such pressures could have a material adverse effect on our ability to sell our
products and to raise capital. Failure by hospitals and other users of our
products to obtain coverage or adequate reimbursement from third-party payors or
changes in governmental and private third-party payors' policies toward
reimbursement for procedures employing our products would reduce demand for our
products.
Member countries of the EU operate various combinations of centrally financed
health care systems and private health insurance systems. The relative
importance of government and private systems varies from country to country. The
choice of devices is subject to constraints imposed by the availability of funds
within the purchasing institution. Medical devices are most commonly sold to
hospitals or health care facilities at a price set by negotiation between the
buyer and the seller. A contract to purchase products may result from an
individual initiative or as a result of a competitive bidding process. In either
case, the purchaser pays the supplier, and payment terms vary widely throughout
the EU. Failure to obtain favorable negotiated prices with hospitals or health
care facilities could adversely affect sales of our products.
In Japan, at the end of the regulatory approval process, the MHW makes a
determination of the reimbursement level of the product. The MHW can set the
reimbursement level for our products at their discretion, and we may not be able
to obtain regulatory approval in Japan or if such approval is granted, we may
not obtain a favorable per unit reimbursement level.
The need to operate an effective sales and distribution network.
We have built a network of independent distributors and sales agencies in the
U.S., Europe and Australia in order to market VITOSS and may utilize this
network for CORTOSS, if CORTOSS receives regulatory approval. The following
describes the risks associated with these efforts:
Any failure to maintain and manage our distributor organization may
negatively affect our potential market share and revenues. There are
significant risks involved in managing our distribution network, including
the need to manage the development and growth of such a network and, the need
to adequately train both our employees and our outside sales agents and
distributors in the use and benefits of our products.
The amount and timing of resources that are devoted to the performance of the
contractual responsibilities by our distributors and agents will not be
within our control. There can be no assurance that third parties will perform
their obligations as expected or market any products under these agreements,
or that we will derive any revenue from such arrangements. Certain agreements
may also permit these third parties to pursue existing or alternative
products in preference to our products. There can be no assurance that our
interests will continue to coincide with those of these third parties or that
they will not distribute products that could compete with our products.
The need to obtain and maintain regulatory approvals for our products.
The jurisdictions in which we will seek to market our products will regulate
these products as medical devices. In most circumstances, we and our
distributors and agents must obtain various regulatory approvals and otherwise
comply with extensive regulations regarding safety, quality and efficacy
standards. These regulations vary from country to country, and the regulatory
review can be lengthy, expensive and uncertain. We may not ultimately obtain the
necessary regulatory approvals to market our products in any of our targeted
markets and any such regulatory approval may include significant restrictions on
the anatomic sites and types of procedures for which our products can be used.
In addition, we may be required to incur significant costs in obtaining or
maintaining our regulatory approvals. The regulatory requirements in some of the
jurisdictions where we currently market or intend to market our products are
outlined below.
19
Modification of our products or development of new products may require us to
conduct additional clinical trials for these new or modified products and to
revise our filings with the FDA and other regulatory authorities, which is time
consuming and expensive. If we were not successful in obtaining marketing
authorization, other regulatory authorization or redesigning our product, our
business could suffer.
Our failure to comply with applicable regulations could result in recalls of our
products, substantial fines and/or criminal charges against our employees and
us. Any of these actions could cause substantial harm to our business.
United States
Regulation by FDA. Pursuant to the U.S. Federal Food, Drug, and Cosmetic Act
(the "FD&C Act"), the FDA regulates the clinical testing, manufacturing,
labeling, sale, distribution and promotion of medical devices. Before we may
market our products in the U.S., we generally must obtain from the FDA either
market clearance through a Section 510(k) premarket notification or premarket
approval through a PMA. During December 2000, we received notice that the FDA
granted 510(k) marketing clearance for VITOSS. We launched VITOSS in the U.S.
during March 2001. In March 2001, we filed an Investigational Device Exemption
("IDE") application with the FDA to conduct clinical trials for CORTOSS for use
in long bone screw augmentation in the U.S. and to seek its FDA approval. We
intend to file an IDE application with the FDA during 2001 for use of CORTOSS in
vertebroplasty. There can be no assurance that the data from such clinical
trials will support FDA regulatory clearance or approval of the product.
European Union and Other International Markets
General. The introduction of our products in markets outside the U.S. will
also be subject to regulatory clearances in those jurisdictions, which may
entail substantial additional costs and burdens. International sales of medical
devices are subject to the regulatory requirements of each country. The
regulatory review process varies from country to country. Many countries also
impose product standards, packaging and labeling requirements and import
restrictions on devices. In addition, each country has its own tariff
regulations, duties and tax requirements. The approval by the foreign government
authorities is unpredictable and uncertain, and the necessary approvals or
clearances may not be granted on a timely basis, if at all. Delays in receipt
of, or failure to receive, such approvals or clearances, or the loss of any
previously received approvals or clearances, could substantially limit our
ability to market our products.
Requirement of CE marking in the EU. To market a product in the EU, we must
be entitled to affix a CE marking, an international symbol of adherence to
quality assurance standards and compliance with applicable European medical
device directives. A CE marking allows us to market a product in all of the
member states of the EU. We received a CE Mark for the use of VITOSS as a bone
void filler, and we intend to seek to obtain a CE Mark for the use of CORTOSS in
screw augmentation in 2001 and vertebroplasty in 2002 supported by the data from
completed and ongoing clinical trials in Europe. In addition to successful
review of this application, our manufacturing facility for CORTOSS will need to
pass inspection and there can be no assurance that we will obtain a CE Mark for
CORTOSS.
Requirement of MHW approval in Japan. In Japan, the approvals by the MHW of
VITOSS and CORTOSS are likely to require clinical trials conducted in Japan.
Accordingly, we intend to seek a third party strategic alliance to conduct such
trials, obtain the necessary regulatory approvals and to market our products in
Japan. There can be no assurance that we will be successful in entering into
such an alliance or that, if successful, such third party will succeed in
conducting such clinical trials or in obtaining the necessary regulatory
approvals in Japan.
The need to implement and manage commercial scale manufacturing capability and
capacity for our products.
We have completed construction of our VITOSS manufacturing facility and have
successfully produced initial batches of commercial product. Our VITOSS
manufacturing facility is certified as meeting the requirements of ISO 9001 and
European Norm ("EN") 46001 for the period July 1, 2000 through July 1, 2003. We
have completed the construction of our CORTOSS manufacturing facility and our
goal is to produce commercial product in
20
2001. In order to commercialize CORTOSS, its manufacturing facility must pass
inspection by our notified body and is subject to inspection by the FDA.
Our future success is dependent on our ability to manufacture our products in
commercial quantities, in compliance with regulatory requirements and in a cost-
effective manner. The manufacture of our products is subject to regulation and
periodic inspection by various regulatory bodies for compliance with Good
Manufacturing Practice ("GMP") regulations, Quality System Requirements ("QSR"),
ISO 9000 Series standards and equivalent requirements. There can be no assurance
that the regulatory authorities will not, during the course of an inspection of
existing or new facilities, identify what they consider to be deficiencies in
GMPs, QSRs or other requirements and request, or seek, remedial action. Failure
to comply with such regulations or delay in attaining compliance may adversely
affect our manufacturing activities and ability to distribute products, and
could prevent or delay regulatory approvals or clearances of our products.
Our ability to manufacture VITOSS and CORTOSS is dependent on a limited number
of specialty suppliers of certain raw materials. The failure of a supplier to
continue to provide us with these materials at a price or quality acceptable to
us, or at all, would have a material adverse effect on our ability to
manufacture these products. Although we believe that we maintain good
relationships with our suppliers, there can be no guarantee that such supplies
and services will continue to be available with respect to our current and
future commercialized products.
The uncertainty of operating in international markets.
We operate in international markets and a number of risks are inherent in
international operations including the limitation or disruption of operations by
the imposition of governmental controls, difficulties in managing international
operations, and fluctuations in foreign currency exchange rates. The
international nature of our business subjects us and our representatives, agents
and distributors to the laws and regulations of the jurisdictions in which they
operate, and in which our products are sold.
In Japan, the approval of VITOSS and CORTOSS is likely to require clinical
trials. Accordingly, we intend to seek a third party strategic alliance to
conduct such trials, obtain the necessary regulatory approvals and to market our
products in Japan. There can be no assurance that we will be successful in
entering into such an alliance or that, if successful, such third party will
succeed in marketing our products in Japan.
We have a history of operating losses and need to raise additional capital that
may not be available in the future.
We have experienced negative operating cash flows since our inception, and we
have funded our operations primarily from the proceeds received from sales of
our Common Stock. 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
approvals, research and development, the further development of marketing
product literature and sales activities. We believe our existing cash and short-
term investments as of December 31, 2000 of $3,815,000, along with $9,933,000 in
net proceeds raised in equity financings during the first quarter of 2001 will
be sufficient to meet our currently estimated operating and investing
requirements into 2002. 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.
21
We have incurred substantial operating losses since our inception and, at
December 31, 2000, had an accumulated deficit of approximately $47,800,000.
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, 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 and expand our marketing and sales activities.
Our product sales may fluctuate due to a number of factors.
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.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products.
General. Our success will depend in part on our ability to protect our
proprietary technology and related confidential information and we rely on
patent protection, as well as a combination of copyright, trade secret and
trademark laws, and nondisclosure and confidentiality agreements and other
contractual restrictions to do so.
However, these legal means afford only limited protection and may not adequately
protect our rights or permit us to gain or keep any competitive advantage. For
example, our patents that have been issued may be challenged, invalidated or
circumvented by third parties. In addition, while we have received notices of
allowance with respect to some patent claims for certain of our products, our
patent applications and the notices of allowance we have received may not issue
as patents in a form that will be advantageous to us. Our patents and
applications cover particular aspects of our products and technology. There may
be more effective technologies, designs or methods. If the most effective
treatment method is not covered by our products or applications, it could have
an adverse effect on our product sales. If we lose any key personnel, we may not
be able to prevent the unauthorized disclosure or use of our technical knowledge
or other trade secrets by those former employees. Furthermore, the laws of
foreign countries may not protect our intellectual property rights to the same
extent as the laws of the U.S. Finally, even if our intellectual property rights
are adequately protected, litigation may be necessary to enforce our
intellectual property rights, which could result in substantial costs to us and
result in a substantial diversion of management attention. If our intellectual
property is not adequately protected, our competitors could use the intellectual
property that we have developed to enhance their products and compete more
directly with us, which could result in a decrease in our market share.
Intellectual Property Rights of Others. We may be sued for violating the
intellectual property rights of others. While we attempt to ensure that our
products do not infringe other parties' patents and proprietary rights, our
products may infringe. Whether a product infringes a patent involves complex
legal and factual issues, the determination of which is, in many cases, not
certain. In addition, because patent applications filed in the U.S. prior to
December 2000 can take many years to issue and patent applications filed in the
U.S. after November 2000 are maintained in secrecy until eighteen months from
the date of filing, there may be applications now pending of which we are
unaware, which may later result in issued patents that our products may
infringe. There could also be existing patents that one or more of our products
may inadvertently be infringing of which we are unaware. As the number of
competitors in the markets for the treatment of spine and trauma grows, the
possibility of a patent infringement claims against us increases. There is a
substantial amount of litigation over patent and other intellectual property
rights in the medical device industry generally and in the spinal market
segments particularly.
22
Infringement and other intellectual property claims, whether with or without
merit, can be expensive and time-consuming to litigate and divert management
attention from our core business. Our products may be covered by U.S. patents
held by our competitors. Based on analyses made in consultation with our
experts, we believe that either such patents or claims are invalid or if valid
we do not infringe. If the holder of patents brought an infringement action
against us, the cost of litigating the claim could be substantial. In addition,
if the relevant patent claims were upheld as valid and enforceable and our
products were found to infringe the patent, we could be prevented from selling
the relevant product unless we could obtain a license from the owner of the
patent or we are able to redesign our product to avoid infringement. A license
may not be available or if available may be on terms unacceptable to us, or we
may not be successful in any attempt to redesign our products to avoid any
infringement. In addition, to determine the priority of inventions, we may have
to participate in interference proceedings declared by the U.S. Patent and
Trademark Office or in opposition, nullity or other proceedings before foreign
agencies with respect to any of our existing patents or patent applications or
any future patents or applications, which could result in substantial cost to
us. Further, we may have to participate at substantial cost in International
Trade Commission proceedings to abate importation of goods that would compete
unfairly with our products.
Company Patents. We intend to file applications as appropriate for patents
covering our technologies, products and processes. As of March 21, 2001, we own
or control three issued U.S. patents, one allowed U.S. patent, six pending
patent applications in the United States and numerous counterparts of certain of
these patents and pending patent applications in Europe and Japan. There can be
no assurance that patents will issue from any of the pending patent
applications. Since patent applications filed prior to December 2000 in the
United States are maintained in secrecy until issued and patent applications
filed in the U.S. after November 2000 are maintained in secrecy until eighteen
months from the date of filing, and since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries, we
cannot be certain that we or any of our licensors were the first creator of
inventions covered by pending patent applications or that we or any of our
licensors were the first to file patent applications for such inventions.
Further, there can be no assurance that the claims allowed under any issued
patents will be sufficiently broad as to protect our proprietary position in the
technology. In addition, there can be no assurance that any patents issued to us
or any of our licensors will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide commercially useful competitive
advantages to us.
Enforceability of Patents. Under Title 35 of the United States Code as amended
by the General Agreement on Tariffs and Trade implementing the Uruguay Round
Agreement Act of 1994 ("Title 35"), patents that issue from patent applications
filed prior to June 8, 1995, will enjoy a 17-year period of enforceability as
measured from the date of patent issue or a 20-year period of enforceability as
measured from the earliest effective date of filing, whichever is longer.
Patents that issue from applications filed on or after June 8, 1995 will enjoy a
20-year period of enforceability as measured from the date the patent
application was filed or the first claimed priority date, whichever is earlier.
Patents that issue from applications filed on or after June 8, 1995 may be
extended under the term extension provisions of Title 35 for a period up to five
years to compensate for any period of enforceability lost due to interference
proceedings, government secrecy orders or successful appeals to the Board of
Patent Appeals and Interferences or the Federal Courts. Under the Drug Price
Competition and Patent Term Restoration Act of 1984, including amendments
implemented under Title 35 (the ''Patent Term Restoration Act''), the period of
enforceability of the first patent for a product or use may be extended for up
to five years to compensate the patent holder for the time required for FDA
regulatory review of the product. Any extension under the Patent Term
Restoration Act and any extension under Title 35 are cumulative. There can be no
assurance that we will be able to take advantage of such patent term extension
provisions of these laws, either as now constituted or as they may be changed by
any future legislation, or that such extensions will adequately restore the time
lost to the FDA approval process. Furthermore, the possibility of shorter terms
of patent protection, combined with the lengthy FDA review process and
possibility of extensive delays in such process, could effectively further
reduce the term during which a marketed product could be protected by patents.
Trade Secrets and Know-how. We also rely on trade secrets and proprietary
know-how that we seek to protect, in part, by confidentiality agreements with
our corporate partners, collaborators, employees and consultants. There can
23
be no assurance that these agreements will not be breached, that we would have
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors.
FBFC Patent Challenge. 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. This
patent has been assigned to 3i, which purchased the BIOGRAN product line from us
in March 2000. 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. In connection with the BIOGRAN sale to 3i, 3i
has assumed control of this matter and we have agreed to reimburse 3i for the
associated legal costs and to provide them with certain indemnification with
respect to the matter. We do not believe there are any material liabilities with
respect to the indemnification for this matter.
The orthopaedic market is highly competitive.
Extensive research efforts and rapid technological change characterize the
market for products in the orthopaedic market. We anticipate that we will face
intense competition from medical device companies. Our products could be
rendered noncompetitive or obsolete by technological advances made by our
current or potential competitors. There can be no assurance that we will be able
to respond to technological advances through the development and introduction of
new products. Moreover, many of our existing and potential competitors have
substantially greater financial, marketing, sales, distribution, manufacturing
and technological resources than us. Such existing and potential competitors may
be in the process of seeking FDA or other regulatory approvals, or patent
protection, for their respective products or they may have such approvals. They
may also enjoy substantial advantages over us in terms of research and
development expertise, experience in conducting clinical trials, experience in
regulatory matters, manufacturing efficiency, name recognition, sales and
marketing expertise or the development of distribution channels. The attributes
of our products may cause some changes in surgical techniques that have become
standard within the medical community, and there may be resistance to change. In
addition, such competitors may obtain regulatory approval and introduce or
commercialize competing products in advance of our products. There can be no
assurance that we will be able to compete successfully against current or future
competitors or that competition will not have a material adverse effect on our
business, financial condition and results of operations.
We may be sued in a product liability action.
We manufacture medical devices that are used on patients in surgery, and we may
be subject to a product liability lawsuit. In particular, the market for spine
products has a history of product liability litigation. Any product liability
claim brought against us, with or without merit, could result in the increase of
our product liability insurance rates or the inability to secure coverage in the
future. In addition, we would have to pay any amount awarded by a court in
excess of policy limits. Although we maintain product liability insurance in the
annual aggregate amount of up to $3 million, our insurance policies have various
exclusions. Thus, we may be subject to a product liability claim for which we
have no insurance coverage, in which case we may have to pay the entire amount
of any award. Even in the absence of a claim, our insurance rates may rise in
the future to a point where we decide not to carry this insurance. Finally, even
a meritless or unsuccessful product liability claim would be time-consuming and
expensive to defend and could result in the diversion of management's attention
from our core business. A successful product liability claim or series of claims
brought against us in excess of our coverage could have a material adverse
effect on our business, financial condition and results of operations.
Our business could suffer if we cannot attract and retain the services of key
employees.
24
We depend substantially upon the continued service and performance of our
existing executive officers. We rely on our key personnel in formulating and
implementing our product research, development and commercialization strategies.
Our success will depend in large part on our ability to attract and retain
highly skilled employees. We compete for such personnel with other companies,
academic institutions, government entities and other organizations. We may not
be successful in hiring or retaining qualified personnel. If one or more of our
key employees resigns, it could harm our business. If we lose any key personnel,
we may not be able to prevent the unauthorized disclosure or use of our
technical knowledge or other trade secrets by those former employees. Other than
employment agreements with David S. Joseph, our Chairman, Bruce A. Peacock, our
Chief Executive Officer and President, and Dr. Erik M. Erbe, our Vice President,
Research and Development, we have not entered into any employment agreements
with any of our executive officers.
OTHER RISKS.
We may issue preferred stock as an anti-takeover provision.
Certain provisions of Pennsylvania law could make it more difficult for a third
party to acquire us, or could discourage a third party from attempting to
acquire us. These provisions could limit the price that certain investors might
be willing to pay in the future for shares of our Common Stock. In addition, as
an anti-takeover device, our Board of Directors may issue without shareholder
approval, shares of Preferred Stock having rights, privileges and preferences,
and on terms and conditions as determined by the Board of Directors. The rights
of the holders of any Preferred Stock that may be issued in the future may
adversely affect the rights of our Common Stockholders. We have no current plans
to issue any shares of preferred stock.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring shareholder
approval.
Our executive officers and directors own approximately 16.8% of our outstanding
Common Stock as of March 26, 2001. Accordingly, these shareholders may, as a
practical matter, be able to exert significant influence over matters requiring
approval by our shareholders, including the election of directors and the
approval of mergers or other business combinations. This concentration could
have the effect of delaying or preventing a change in control. Our certificate
of incorporation, our bylaws and Pennsylvania law contains provisions that could
discourage a takeover. Provisions of our certificate of incorporation, bylaws
and Delaware law may discourage, delay or prevent a merger or acquisition that a
shareholder may consider favorable.
We have not and do not intend to pay any dividends on our Common Stock.
We have never declared nor paid dividends on our Common Stock. We currently
intend to retain any future earnings for funding growth and, therefore, do not
intend to pay any cash dividends in the foreseeable future.
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 ("Nasdaq"). We have experienced limited volume from time to time in the
trading of our Common Stock on both the EASDAQ and Nasdaq markets and this may
continue to occur in the future. In addition, Nasdaq has continuing listing
requirements, which we may not be able to meet in the future. Should we fail to
meet the Nasdaq listing requirements in the future, our stock may then list on
the over-the-counter exchange which would further limit the trading volume and
liquidity of our stock.
Our stock price, like that of many early stage medical technology companies, may
be volatile. In general, equity markets, including Nasdaq and EASDAQ, have from
time to time experienced significant price and volume
25
fluctuations that are unrelated to the operating performance of particular
companies or existing economic conditions. These broad market fluctuations may
adversely affect the market price of our Common Stock. Additional factors such
as fluctuations in our results, under-performance in relation to analysts'
estimates, the product sales growth rate, changes in stock market analyst
recommendations regarding our stock, announcements of technological innovations
or new products by us or our competitors, FDA and international regulatory
actions, actions with respect to reimbursement matters, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by us or by others, changes in health care policy in the
United States and internationally, business conditions affecting medical device
companies or the medical device industry generally, and general market
conditions may cause the market price of our Common Stock to be highly volatile
or to be significantly adversely affected.
If our future quarterly operating results are below the expectations of
securities analysts or investors, the price of our Common Stock would likely
decline. Stock price fluctuations may be exaggerated if the trading volume of
our Common Stock is low.
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 sales of
our Common Stock. Cash, cash equivalents and short-investments decreased 57%
from December 31, 1999 to 2000 due to the use of cash in operating activities.
As of December 31, 2000 and 1999, cash, cash equivalents and short-term
investments consisted of the following:
Gross Unrealized
Unrealized Gross Fair Market
Original Cost Gains Losses Value
----------------- ----------------- ------------------ ------------------
December 31, 2000:
Cash and cash equivalents ................... $3,614,626 $ -- $ -- $3,614,626
Short-term investments ...................... 199,886 480 -- 200,366
---------- ----------------- ----------------- ----------
$3,814,512 $480 $ -- $3,814,992
========== ================= ================= ==========
Percentage of total assets .................. 37.4%
==========
December 31, 1999:
Cash and cash equivalents ................... $2,487,343 $ -- $ -- $2,487,343
Short-term investments ...................... 6,446,469 -- (60,267) 6,386,202
---------- ----------------- ----------------- ----------
$8,933,812 $ -- $(60,267) $8,873,545
========== ================= ================= ==========
Percentage of total assets .................. 78.4%
==========
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:
Year Ended December 31,
2000 1999 1998
------------ ----------- ------------
Net cash used in operating activities .................. $(13,066,702) $(7,460,789) $ (6,535,509)
Net cash provided by (used in) investing activities...... 6,440,248 7,614,063 (14,325,341)
Net cash provided by financing activities .............. 7,842,251 1,472,122 19,407,435
Effects of exchange rate changes on cash and cash
equivalents ........................................... (88,514) 19,883 37,577
------------ ----------- ------------
Net change in cash and cash equivalents ................ $ 1,127,283 $ 1,645,279 $ (1,415,838)
============ =========== ============
26
RECENT DEVELOPMENTS
During March 2001, we sold 1,975,000 shares of our Common Stock at $4.00 per
share in a private equity financing raising gross proceeds of $7.9 million and
net proceeds of $7.5 million. These securities 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. We have agreed to file a registration statement for these shares
with the U.S. Securities and Exchange Commission. In connection with the
financing, additional warrants to purchase a total of 59,250 shares of Common
Stock at an exercise price of $4.00 per share were issued to consultants as a
placement cost.
During January 2001, we completed a private placement for 566,894 shares of our
Common Stock and warrants to purchase 566,894 shares of Common Stock at an
exercise price of $4.41 per share. The gross proceeds of $2.5 million will be
used for working capital purposes. The net proceeds were $2.4 million. We sold
the securities to the Rennes Fondation which beneficially owns 16.3% of our
Common Stock as of March 26, 2001. We have agreed to file a registration
statement for the resale of these shares with the U.S. Securities and Exchange
Commission.
Pursuant to the terms of issuance of the warrants sold in a private equity
financing transaction in August 2000 and as a result of the 2001 financing
transaction described above, the number of shares of Common Stock issued upon
exercise of warrants and the exercise price were adjusted to 1,125,000 shares
and an exercise price of $4.00 per share. In addition, the investor in the
August 2000 private placement is now entitled to purchase an additional 206,830
shares of our Common Stock at a par value of $.01.
During March 2001, we received regulatory clearance in Australia to sell CORTOSS
Synthetic Cortical Bone Void Filler to augment orthopaedic screws that have
failed to hold in bone.
Net Cash Used in Operating Activities
OPERATING CASH INFLOWS-
In 2000, we had operating cash inflows from BIOGRAN product sales realized prior
to the close of the sale of BIOGRAN dental grafting product line to 3i in March
2000. In addition, we have received cash inflows from interest income on short-
term investments.
OPERATING CASH OUTFLOWS-
Our operating cash outflows were primarily used for development, pre-clinical
and clinical activities in preparation for regulatory filings of potential
products. In addition, funds have been used for the leasing and fit-up of
expanded facilities, the purchase of materials for the pre-approval manufacture
of VITOSS inventory, the development of marketing product literature and sales
activities in both Europe and the U.S. to support our VITOSS product launch.
OPERATING CASH FLOW REQUIREMENTS OUTLOOK--
We expect to continue to use cash in operating activities associated with pre-
clinical activities, clinical trials and further research and development
activities in support of our other products under development and expect this
use to increase due to efforts associated with VITOSS marketing and sales
activities in the U.S., Europe and Australia. We expect our cash flow from
operating activities to continue to be negative until such time, if ever, as
cash generated from product revenues exceeds funding of operating costs. There
can be no assurance that we will be able to achieve such level of product
revenues.
Net Cash Provided By Investing Activities
27
During the twelve months ended December 31, 2000 and 1999, approximately $6.2
million and $8.0 million, respectively, were provided by the net sale of
investment grade marketable securities. During the twelve months ended December
31, 1998, approximately $14.4 million was used in the net purchase of investment
grade marketable securities.
Additionally, we received $3.9 million, of which $400,000 was being held in
escrow until March 23, 2001, in connection with the sale of the BIOGRAN dental
grafting product line to 3i in March 2000.
We have invested approximately $3.3 million, $354,000 and $111,000 for the years
ended December 31, 2000, 1999 and 1998, respectively, primarily in the purchase
of leasehold improvements for the expansion of our product development and
commerical manufacturing capabilities.
INVESTING CASH OUTLOOK--
During 2001, we expect to purchase additional manufacturing equipment and incur
costs associated with improvements to our leased office and manufacturing space.
Net Cash Provided By Financing Activities
During 2000, we received approximately $6.5 million in net proceeds through a
private equity financing under which we sold 1,207,204 shares of our Common
Stock at $5.90 per share. During August 2000, we received approximately $2.6
million in net proceeds from a private equity financing under which we sold
508,475 shares of Common Stock at $5.90 per share and warrants to purchase
762,712 shares of Common Stock at an exercise price of $5.90 per share, subject
to certain anti-dilution adjustments.
During the year ended December 31, 2000, options and warrants to purchase an
aggregate 325,607 shares of Common Stock were exercised, as well as purchases of
our Common Stock through the Employee Stock Purchase Plan, resulting in proceeds
of approximately $1.1 million. Also during the year ended December 31, 2000,
approximately $683,000 was used to repay capital lease obligations. In January
2000, we repaid our $2 million bank line of credit which was outstanding at
December 1999. In November 2000, we borrowed $500,000 from our bank as a
capital financing term loan. In December 2000, we repaid in full our debt with
the Flemish government in the amount of approximately $140,000.
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 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 approvals,
research and development, the further development of marketing product
literature and sales activities. We believe our existing cash and short-term
investments as of December 31, 2000 of $3,815,000, along with $9,933,000 in net
proceeds raised in equity financings during the first quarter of 2001 will be
sufficient to meet our currently estimated operating and investing requirements
into 2002. 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
28
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.
RESULTS OF OPERATIONS
This section should be read in conjunction with the more detailed discussion
under ''Liquidity and Capital Resources.'' And as described therein, 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.
Comparison of the Year Ended December 31, 2000 to the Year Ended December 31,
1999
Revenues. Revenues for the year ended December 31, 2000 were $741,000 compared
to $1.1 million for the year ended December 31, 1999. Revenues for 2000
consisted of $533,000 from the sales of BIOGRAN product realized prior to the
sale of the BIOGRAN product line in March 2000. The remaining $208,000 of
revenues occurred during the fourth quarter of 2000 and relate to the initiation
of sales of VITOSS in Europe. Sales in Europe during 2000 were to distributors
and future sales will depend upon end user demand.
Gross Profit. Our gross profit for the year ended December 31, 2000 was
$571,000, or 77% of net revenues, compared to $730,000, or 69% of net revenues,
for 1999. BIOGRAN cost of sales was approximately $164,000 or a 69% gross
profit margin for the year ended December 31, 2000. All of the VITOSS sold in
Europe during 2000 was produced prior the receipt of its CE Certification in
July 2000. In accordance with SFAS No. 2 "Accounting for Research and
Development Costs," the costs of producing that material was recorded as
research and development expense prior to July 2000 and, accordingly, are not
reflected in cost of sales. Accordingly, VITOSS cost of sales for the year ended
December 31, 2000 of $6,000 is not indicative of margins to be realized in
future periods.
Operating Expenses. Operating expenses for the year ended December 31, 2000
were $15.2 million compared to $10.8 million for 1999. The increase in general
and administrative expenses year-over-year is primarily a result of an increase
in the number of employees during 2000. Selling and marketing expenses increased
year-over-year as a result of the development and printing of marketing and
sales literature in support of VITOSS product launch. The increase from 1999 to
2000 in research and development expenses is attributable to the expanded
development of our product pipelines and pre-clinical and clinical activities of
CORTOSS and RHAKOSS.
Other Income (Expense). Net other income, includes interest income and
interest expense. We recorded $214,000 of net other income for the year ended
December 31, 2000 compared to $529,000 of net other income for the year ended
December 31, 1999. The decrease in net other income between 1999 and 2000 is
attributed to lower average cash balances year over year.
Net Gain On Sale of Product Line. We received $3.9 million, of which $400,000
was being held in escrow until March 23, 2001, in connection with the sale of
the BIOGRAN dental grafting product line to 3i in March 2000. We realized a net
gain on the transaction of approximately $3.1 million.
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 2000 was $11.3 million compared to a net loss of $9.5 million
for 1999.
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
1998
29
Revenues. Revenues for the year ended December 31, 1999 were $1.1 million,
compared to $2.8 million for the year ended December 31, 1998. Product revenues
for 1999 reflect sales of BIOGRAN to 3i at a transfer price equal to 50% of 3i's
sales price to its retail customers. For the same period in 1998, revenues
reflect our direct sales to customers through April plus the contract minimum
sales to 3i for the period May through September 1998. Under the global
distribution agreement we entered into with 3i, such sales to 3i in 1998
exceeded the rate of product re-sale by 3i to its customers and resulted in
product inventory at 3i. In 1999, 3i fulfilled the balance of its 1998 minimum
BIOGRAN purchase commitments that were deferred to 1999 and purchased an
additional $250,000 of BIOGRAN. 3i had no contracted purchase minimums during
1999.
Gross Profit. Our gross profit for the year ended December 31, 1999 was
$730,000, or 69% of net revenues, compared to $1.9 million, or 67% of net
revenues, for 1998.
Operating Expenses. Operating expenses for the year ended December 31, 1999
were $10.8 million compared to $7.9 million for the prior year. The increase in
general and administrative expenses year-over-year is primarily a result of an
increase in the number of employees during 1999 and a one-time $900,000
reimbursement during 1998 of patent litigation fees which was netted against our
expenses. Selling and marketing expenses decreased year-over-year as a result of
the elimination of the direct dental sales force when we entered into our global
distribution arrangement for BIOGRAN with 3i. The increase from 1998 to 1999 in
research and development expenses is attributable to the expanded development of
our product pipelines and pre-clinical and clinical activities of CORTOSS for
vertebroplasty and screw augmentation in Europe.
OtherIncome (Expense). Net other income, includes interest expense, interest
income and, for 1998, currency translation losses. We recorded $529,000 of net
other income for the year ended December 31, 1999 compared to $344,000 of net
other income for the year ended December 31, 1998. The increase in net other
income between 1998 and 1999 is attributed to higher average cash balances from
our June 1998 initial public offering.
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 1999 was $9.5 million compared to a net loss of $6.1 million
for 1998.
COMMITMENTS AND CONTINGENCIES
We lease office space and equipment under non-cancelable operating leases. For
the years ended December 31, 2000, 1999 and 1998, lease expense was $321,000,
$305,000 and $213,000, respectively. As of December 31, 2000, future minimum
rent payments through the expiration of these leases are approximately $304,000
in 2001, $326,000 in 2002, $330,000 in 2003, $325,000 in 2004, $355,000 in 2005,
$370,000 in 2006 and $63,000 in 2007.
In addition, since operating expenses for our European branch are primarily
funded by Orthovita in the U.S., we entered into a foreign exchange contract in
order to minimize negative fluctuations in between the US dollar and the Euro
foreign exchange rate. The contract specifies that we will pay $300,000 on each
of the following dates to receive the following fixed number of Euros:
Contract Date US $ Amount Paid Euros Received Exchange Rate
- ------------- ---------------- -------------- -------------
February 9, 2001 $ 300,000 346,921 Euros .86475
May 9, 2001 300,000 345,682 Euros .86785
August 9, 2001 300,000 344,511 Euros .87080
November 9, 2001 300,000 343,367 Euros .87370
---------- --------------- ------
Total $1,200,000 1,380,481 Euros .86926
========== =============== ======
Exchange Rate at December 31, 2000 .93050
======
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
30
Foreign Currency Risk
The functional currency for our European branch operation is the Euro.
Accordingly, 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 (see Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Commitments and Contingencies."
Market Risk
We are 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.
As of December 31, 2000 and 1999, our investments consisted primarily of
commercial paper, United States government agency bonds and high credit quality
corporate bonds. We estimate that if the average yield of our investment
portfolio decreased by 100 basis points, interest income for the year ended
December 31, 2000 would have decreased by approximately $102,000 during the
year. This estimate assumes that the decrease occurred on the last day of each
month during the years and reduced the yield of each investment instrument by
100 basis points. The impact on our future interest income and future changes in
investment yields will depend on the gross amount of our investments and various
external economic factors. See Item 7--''Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources''.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements of the Company and its subsidiaries and
supplementary data required by this item are attached to this annual statement
on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 called for by Item 10 of Form 10-K will be set
forth under the captions ''Nominees for the Board of Directors'' and ''Section
16(a) Reports" in our definitive proxy statement, to be filed within 120 days
after the end of the fiscal year covered by this annual report on Form 10-K, and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Items 11 and 12 of Form 10-K will be set forth
under the captions ''Executive Compensation: Report of the Compensation
Committee,'' ''Summary Compensation Table,'' and ''Holders of 5% or More of
Orthovita's Stock and Directors' and Officers' Ownership of Orthovita's Stock,''
respectively, in our
31
definitive proxy statement, to be filed within 120 days after the end of the
fiscal year covered by this annual report on Form 10-K, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report
1. Financial Statements The following financial statements and notes
thereto which are attached hereto beginning on page F-1 have been
incorporated by reference into Item 8 of this part of the annual report on
Form 10-K:
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders'
Equity for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 F-5
and 1998
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules. All schedules are omitted because they
are inapplicable, or not required, or the information is shown in the
Financial Statements or notes thereto.
3. Exhibits. (see (c) below).
(b) Reports on Form 8-K.
The Company did not file a report on Form 8-K during the quarter ended
December 31, 2000.
(c) Exhibits
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
3.1 Amended and Restated Articles of Incorporation of the Company (3)
3.2 Amended and Restated Bylaws of the Company (3)
4.1 Specimen of Common Stock Certificate of the Company (1)
4.2 Registration Rights Agreement dated August 22, 2000 among the Company, Brown Simpson Partners I,
Ltd., Janney Montgomery Scott LLC, Emerging Growth Equities, Ltd. and VFT Special Ventures Ltd. (4)
10.1 Employment Agreement dated as of December 31, 1999 between the Company and Bruce A. Peacock (1)
10.2 Addendum to Employment Agreement dated January 1, 2001 between the Company and Bruce A. Peacock (1)
10.3 Employment Agreement dated as of December 31, 1999 between the Company and David S. Joseph (1)
10.4 Addendum to Employment Agreement dated January 1, 2001 between the Company and David S. Joseph (1)
10.5 Employment Agreement dated as of July 1, 2000 between the Company and Dr. Erik Erbe (1)
33
10.6 Master Equipment Lease Agreement dated as of July 11, 1997 between the Company and Finova
Technology Finance, Inc. (2)
10.7 Amendment to the Master Equipment Lease Agreement dated as of April 15, 1999 between the
Company and Finova Technology Finance, Inc. (5)
10.8 1993 Stock Option Plan (3)
10.9 Amended and Restated 1997 Equity Compensation Plan (3)
10.10 Amended and Restated Employee Stock Purchase Plan (3)
10.11 Line of Credit, Term Loan and Security Agreement dated as of September 19, 1997 between the Company
and Progress Bank (2)
10.12 Third Amendment to Line of Credit, Term Loan and Security Agreement dated October 25, 2000 between
the Company and Progress Bank (1)
10.13 Third Amended and Restated Line of Credit dated October 25, 2000 between the Company and Progress
Bank (1)
10.14 Capital Expenditure Loan Note dated October 25, 2000 between the Company and Progress Bank (1)
10.15 Asset Sale Agreement dated as of February 10, 2000 between the Company and Implant Innovations, Inc.
(5)
10.16 Subscription Agreement dated July 10, 2000 between the Company and Rennes Fondation (1)
10.17 Subscription Agreement dated August 22, 2000 between the Company and Brown Simpson Partners I, Ltd.
(4)
10.18 Subscription Agreement dated as of October 4, 2000 between the Company and Raimund Gabriel (1)
10.19 Subscription Agreement dated as of January 18, 2001 between the Company and Rennes Fondation (1)
10.20 Warrant to Purchase Shares of Common Stock dated as of November 3, 1999 in favor of Progress
Capital, Inc. (1)
10.21 Amended and Restated Warrant to Purchase 1,020,409 Shares of Common Stock dated as of August 22,
2000 in favor of Brown Simpson Partners I, Ltd. (1)
10.22 Warrant to Purchase 31,779 Shares of Common Stock dated August 22, 2000 in favor of Janney
Montgomery Scott LLC (4)
10.23 Warrant to Purchase 31,780 Shares of Common Stock dated August 22, 2000 in favor of VFT Special
Ventures Ltd. (4)
10.24 Warrant to Purchase 566,894 Shares of Common Stock dated January 18, 2001 in favor of Rennes
Fondation (1)
21.1 Subsidiaries (1)
23.1 Consent of Arthur Andersen LLP (1)
24.1 Power of Attorney (1) (included in the signature page).
(1) Filed herewith.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 333-51689) filed on May 1, 1998 and
incorporated herein by reference.
(3) Filed as an Exhibit to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-
51689) filed on June 15, 1998 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 333-47386) filed on
October 5, 2000 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference.
[CAPTION]
34
Copies of the exhibits are available to shareholders (upon payment of a $.20 per
page fee to cover the Company's expenses in furnishing the exhibits) from
Investor Relations, Orthovita, Inc., 45 Great Valley Parkway, Malvern,
Pennsylvania 19355.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 2001
/s/ Bruce A. Peacock
By: BRUCE A. PEACOCK
Chief Executive Officer and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Each person in so signing also makes, constitutes and appoints Bruce A.
Peacock, Chief Executive Officer of Orthovita, Inc. and subsidiaries and Joseph
M. Paiva, Vice President and Chief Financial Officer of Orthovita, Inc. and
subsidiaries, and each of them acting alone, as his true and lawful attorneys-
in-fact, in his name, place and stead, to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
Signature Capacity Date
- ------------------------------- ----------------------------------- -----------------
/s/ Bruce A. Peacock Chief Executive Officer and March 30, 2001
BRUCE A. PEACOK President
(principal executive officer)
/s/ David S. Joseph Chairman March 30, 2001
DAVID S. JOSEPH
/s/ Joseph M. Paiva Vice President and Chief Financial March 30, 2001
JOSEPH M. PAIVA Officer (principal financial
officer and accounting)
/s/ Paul Ducheyne, Ph.D. Director March 30, 2001
PAUL DUCHEYNE, PH.D.
/s/ Robert Levande Director March 30, 2001
ROBERT LEVANDE
/s/ James M. Garvey Director March 30, 2001
JAMES M. GARVEY
/s/ Richard M. Horowitz Director March 30, 2001
RICHARD M. HOROWITZ
/s/ Jos B. Peeters, Ph.D. Director March 30, 2001
JOS B. PEETERS, PH.D.
/s/ Howard Salasin, Ph.D. Director March 30, 2001
HOWARD SALASIN, PH.D.
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Orthovita, Inc.:
We have audited the accompanying consolidated balance sheets of Orthovita,
Inc. (a Pennsylvania corporation) and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, redeemable
convertible preferred stock and shareholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Orthovita, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania,
March 30, 2001
F-1
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2000 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 3, 6 and 15) .................... $ 3,614,626 $ 2,487,343
Short-term investments (Notes 3, 6 and 15) ....................... 200,366 6,386,202
Restricted cash (Note 10) ........................................ 400,000 --
Accounts receivable .............................................. 80,050 59,511
Inventories (Note 4) ............................................. 182,399 147,270
Other current assets ............................................. 21,721 96,455
------------ ------------
Total current assets .......................................... 4,499,162 9,176,781
------------ ------------
PROPERTY AND EQUIPMENT, net (Note 5) ............................... 5,321,228 2,041,524
------------ ------------
OTHER ASSETS (Note 6) ............................................. 367,977 103,141
------------ ------------
$ 10,188,367 $ 11,321,446
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (Notes 6 and 15) ...................... $ -- $ 2,000,000
Note payable (Note 6) ............................................ -- 137,702
Current portion of long-term capital lease obligations (Note 7) .. 654,063 530,126
Accounts payable ................................................. 1,156,533 1,327,825
Accrued compensation and related expenses ........................ 734,820 605,507
Deferred gain (Note 10) .......................................... 400,000 --
Other accrued expenses ........................................... 805,911 456,891
------------ ------------
Total current liabilities ..................................... 3,751,327 5,058,051
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligations (Note 7) ............................... 807,425 616,726
Bank term loan (Note 6) .......................................... 500,000 --
------------ ------------
Total long-term liabilities ................................... 1,307,425 616,726
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
SHAREHOLDERS' EQUITY (Notes 9 and 15):
Preferred Stock, $.01 par value, 20,000,000 shares authorized, no
shares issued and outstanding .................................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
13,426,988 and 11,331,632 shares issued and outstanding ........ 134,270 113,316
Additional paid-in capital ....................................... 52,929,538 42,002,795
Deferred compensation (Note 9) ................................... (97,500) --
Accumulated deficit .............................................. (47,809,103) (36,473,754)
Accumulated other comprehensive (loss) income .................... (27,590) 4,312
------------ ------------
Total shareholders' equity .................................... 5,129,615 5,646,669
------------ ------------
$ 10,188,367 $ 11,321,446
============ ============
The accompanying notes are an integral part of these statements.
F-2
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
2000 1999 1998
---- ---- ----
REVENUES (Note 10):
BIOGRAN .................................................. $ 532,967 $ 1,054,120 $ 2,780,658
VITOSS ................................................... 207,693 -- --
------------ ------------ ------------
Total revenues ....................................... 740,660 1,054,120 2,780,658
------------ ------------ ------------
COST OF SALES (Note 4):
Total cost of sales .................................. 170,041 324,590 927,792
------------ ------------ ------------
Gross profit ......................................... 570,619 729,530 1,852,866
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative ................................ 4,333,094 3,674,515 2,253,836
Selling and marketing ..................................... 3,357,903 1,807,212 2,879,804
Research and development .................................. 7,500,165 5,273,590 2,764,321
------------ ------------ ------------
Total operating expenses ............................. 15,191,162 10,755,317 7,897,961
------------ ------------ ------------
Operating loss ....................................... (14,620,543) (10,025,787) (6,045,095)
INTEREST EXPENSE .......................................... (151,161) (110,601) (174,898)
INTEREST INCOME ........................................... 365,434 639,794 511,882
FOREIGN CURRENCY TRANSACTION GAIN ......................... -- -- 7,323
------------ ------------ ------------
Loss before extraordinary item ....................... (14,406,270) (9,496,594) (5,700,788)
NET GAIN ON SALE OF PRODUCT LINE (Note 10) ................ 3,070,921 -- --
------------ ------------ ------------
NET LOSS .................................................. (11,335,349) (9,496,594) (5,700,788)
ACCRETION OF REDEMPTION PREMIUM ON PREFERRED STOCK ....... -- -- (391,213)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS ................ $(11,335,349) $ (9,496,594) $ (6,092,001)
============ ============ ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED:
Before extraordinary item ............................ $ (1.17) $ (.83) $ (.73)
Extraordinary item ................................... .25 -- --
------------ ------------ ------------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED .............. $ (.92) $ (.83) $ (.73)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC
AND DILUTED .............................................. 12,281,117 11,411,896 8,314,679
============ ============ ============
The accompanying notes are an integral part of these statements.
F-3
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Redeemable
Class C
Convertible Convertible Additional
Preferred Preferred Stock Common Paid-in
Stock Stock Stock Capital
----- ----- ----- -------
BALANCE, DECEMBER 31, 1997 ..............................$ 7,383,090 $ 16,441 $ 51,862 $ 13,138,103
Sale of 370,392 shares of common stock ................. -- -- 3,704 3,496,296
Sale of 1,800,000 shares of common stock, net of
offering costs of $89,103 ........................... -- -- 18,000 16,669,838
Conversion of preferred stock to common stock .......... (7,774,303) (16,441) 35,264 7,755,480
Accretion of redemption premium and dividends on
Class C Convertible Preferred stock ................... 391,213 -- -- --
Exercise of common stock options and warrants to
purchase common stock ................................. 4,897 1,163,760
Issuance of common stock options for services .......... -- -- -- 65,547
Comprehensive loss:
Net loss .............................................. -- -- -- --
Other comprehensive loss:
Unrealized gain on short-term investments, net ........ -- -- -- --
Currency translation adjustment ....................... -- -- -- --
Comprehensive loss .................................... -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 .............................. -- -- 113,727 42,289,024
Exercise of common stock options and warrants to
purchase common stock and common stock issued
under the Employee Stock Purchase Plan ................ -- -- 1,088 363,123
Issuance of common stock options and warrants for ...... -- -- -- 185,664
services
Repurchase of common shares ............................ -- -- (720) (348,920)
Receipt of common shares in repayment of loan .......... -- -- (779) (486,096)
Comprehensive loss:
Net loss .............................................. -- -- -- --
Other comprehensive loss:
Unrealized loss on short-term investments, net ........ -- -- -- --
Currency translation adjustment ....................... -- -- -- --
Comprehensive loss .................................... -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 .............................. -- -- 113,316 42,002,795
Exercise of common stock options and warrants to
purchase common stock and common stock issued
under the Employee Stock Purchase Plan ................ -- -- 3,347 1,112,145
Issuance of common stock options and warrants for ...... -- -- -- 510,431
services
Sale of 1,715,679 shares of common stock and warrants . -- -- 17,157 9,034,292
Issuance of common shares under restricted stock award . -- -- 450 269,875
Amortization of deferred compensation .................. -- -- -- --
Comprehensive loss:
Net loss .............................................. -- -- -- --
Other comprehensive loss:
Unrealized gain on short-term investments, net ........ -- -- -- --
Currency translation adjustment ....................... -- -- -- --
Comprehensive loss .................................... -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 ..............................$ -- $ -- $ 134,270 $ 52,929,538
============ ============ ============ ============
Shareholders' Equity
--------------------
Accumulated
Deferred Accumulated Comprehensive Comprehensive
Compensation Deficit (Loss) Income (Loss) Income Total
------------ ------- ------------- ------------- -----
BALANCE, DECEMBER 31, 1997 ............................$ -- $(20,885,159) $ (33,943) -- $ (7,712,696)
Sale of 370,392 shares of common stock ............... -- -- -- -- 3,500,000
Sale of 1,800,000 shares of common stock, net of
offering costs of $89,103 ......................... -- -- -- 16,687,838
Conversion of preferred stock to common stock ........ -- -- -- -- 7,774,303
Accretion of redemption premium and dividends on
Class C Convertible Preferred stock ................. -- (391,213) -- (391,213)
Exercise of common stock options and warrants to
purchase common stock ............................... -- -- -- -- 1,168,657
Issuance of common stock options for services ........ -- -- -- -- 65,547
Comprehensive loss:
Net loss ............................................ -- (5,700,788) -- $ (5,700,788) (5,700,788)
Other comprehensive loss:
Unrealized gain on short-term investments, net ...... -- -- 99,350 99,350 99,350
Currency translation adjustment ..................... -- -- 37,577 37,577 37,577
------------
Comprehensive loss .................................. -- -- -- $ (5,563,861) --
------------ ------------ ------------ ============ ------------
BALANCE, DECEMBER 31, 1998 ............................ -- (26,977,160) 102,984 15,528,575
Exercise of common stock options and warrants to
purchase common stock and common stock
under the Employee Stock Purchase Plan .............. -- -- -- 364,211
Issuance of common stock options and warrants for .... -- -- -- -- 185,664
services
Repurchase of common shares .......................... -- -- -- -- (349,640)
Receipt of common shares in repayment of loan ........ -- -- -- -- (486,875)
Comprehensive loss:
Net loss ............................................ -- (9,496,594) -- $ (9,496,594) (9,496,594)
Other comprehensive loss:
Unrealized loss on short-term investments, net ...... -- -- (60,267) (60,267) (60,267)
Currency translation adjustment ..................... -- -- (38,405) (38,405) (38,405)
------------
Comprehensive loss .................................. -- -- -- $ (9,595,266) --
------------ ------------ ------------ ============ ------------
BALANCE, DECEMBER 31, 1999 ............................ -- (36,473,754) 4,312 5,646,669
Exercise of common stock options and warrants to
purchase common stock and common stock
under the Employee Stock Purchase Plan .............. -- -- -- -- 1,115,492
Issuance of common stock options and warrants for .... -- -- -- -- 510,431
services
Sale of 1,715,679 shares of common stock and warrants -- -- -- -- 9,051,449
Issuance of common shares under restricted stock award (270,325) -- -- -- --
Amortization of deferred compensation ................ 172,825 -- -- -- 172,825
Comprehensive loss:
Net loss ............................................ -- (11,335,349) -- $(11,335,349) (11,335,349)
Other comprehensive loss:
Unrealized gain on short-term investments, net ...... -- -- 480 480 480
Currency translation adjustment ..................... -- -- (32,382) (32,382) (32,382)
------------
Comprehensive loss .................................. -- -- -- $(11,367,251) --
------------ ------------ ------------ ============ ------------
BALANCE, DECEMBER 31, 2000 ............................$ (97,500) $(47,809,103) $ (27,590) -- $ 5,129,615
============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
ORTHOVITA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
2000 1999 1998
============ ============ ============
OPERATING ACTIVITIES:
Net loss .................................................. $(11,335,349) $ (9,496,594) $ (5,700,788)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization .......................... 953,683 631,696 427,991
Amortization of deferred compensation................... 172,825 -- --
Imputed interest ....................................... -- -- 20,967
Services provided for common stock options and warrants 510,431 185,664 65,546
Net gain on sale of product line........................ (3,070,921) -- --
(Increase) decrease in--
Accounts receivable ................................. (20,539) (36,791) 348,728
Other receivables ................................... -- 744,959 (703,809)
Inventories ......................................... (35,129) 181,981 (80,544)
Other current assets ................................ 58,948 57,664 45,590
Other assets ........................................ (264,836) (17,747) (85,394)
Increase (decrease) in--
Accounts payable .................................... (171,292) 946,681 (287,302)
Accrued patent defense costs ........................ -- (402,977) (530,744)
Other liabilities ................................... (202,043) (128,865) 303,923
Other accrued expenses .............................. 337,520 (126,460) (359,673)
------------ ------------ ------------
Net cash used in operating activities ............ (13,066,702) (7,460,789) (6,535,509)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of investments ................................... (199,886) (10,346,255) (15,892,669)
Proceeds from sale of investments ......................... 6,446,469 18,314,180 1,478,275
Proceeds from sale of product line ....................... 3,900,000 -- --
(Increase) decrease in restricted cash ................... (400,000) -- 200,000
Purchase of property and equipment ........................ (3,306,335) (353,862) (110,947)
------------ ------------ ------------
Net cash provided by (used in) investing activities 6,440,248 7,614,063 (14,325,341)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds (repayments) of short-term bank borrowings ....... (2,000,000) 2,000,000 (692,000)
Repayment of debt ......................................... (141,837) (108,649) (487,507)
Proceeds from debt ........................................ 500,000 -- --
Repayments of capital lease obligations ................... (682,853) (433,800) (241,529)
Proceeds from exercise of common stock options and
warrants and common stock purchased under the Employee
Stock Purchase Plan ....................................... 1,115,492 364,211 640,633
Repurchase of common stock ................................ -- (349,640) --
Proceeds from sale of common stock and warrants ........... 9,051,449 -- 20,187,838
------------ ------------ ------------
Net cash provided by financing activities ........ 7,842,251 1,472,122 19,407,435
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS ........................................... (88,514) 19,883 37,577
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 1,127,283 1,645,279 (1,415,838)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................ 2,487,343 842,064 2,257,902
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 3,614,626 $ 2,487,343 $ 842,064
============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Orthovita, Inc. ("Orthovita" or the "Company"), a Pennsylvania corporation,
began operations in November 1993. Orthovita is a biomaterials company with
proprietary techniques for the development of novel products for use in
orthopaedics. Our focus is on developing products for use in surgical procedures
in spine and osteoporotic fractures. We are also addressing a broad range of
clinical needs in the trauma market. Our efforts to-date have resulted in the
development of three products, VITOSSTM Synthetic Cancellous Bone Void Filler,
CORTOSSTM Cortical Bone Void Filler and RHAKOSSTM Synthetic Bone Implants.
We initiated European sales of VITOSS in October 2000 following receipt of its
CE Certification allowing its sale in all of the countries of the European
Union. In December 2000, the U.S. Food and Drug Administration (the "FDA")
granted 510(k) marketing clearance for VITOSS, and we began selling VITOSS in
the U.S. during March 2001.
Our operations are subject to certain risks including but not limited to the
need to successfully commercialize VITOSS and to develop, obtain regulatory
approval for, and commercialize CORTOSS and RHAKOSS, and our need for additional
capital. 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
December 31, 2000, we had an accumulated deficit of $47,809,103. Our products
under development may never be commercialized or if commercialized, may never
generate substantial revenue.
We believe our existing cash and short-term investments as of December 31, 2000
of $3,815,000, along with $9,933,000 of net proceeds raised in equity financings
during the first quarter of 2001, will be sufficient to meet our currently
estimated operating and investing requirements into 2002 (see Note 15). However,
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.
In addition, any such required financing may not be available on satisfactory
terms, if at all. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Preparation of Financial Statements and Use of Estimates
Our financial statements have been prepared using United States generally
accepted accounting principles. This preparation 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 financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
We have reclassified certain amounts in prior years' financial statements to
conform to the presentation for the current year.
Basis of Consolidation
The consolidated financial statements include the accounts of Orthovita, Inc.,
our European branch operations, and our wholly owned subsidiaries. We have
eliminated all intercompany balances in consolidation.
F-6
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 years ended December 31, 2000, 1999 and 1998 because they
were anti-dilutive due to our losses.
Revenue Recognition
We sell VITOSS to distributors in Europe and through agents in the U.S. Revenue
is recognized upon the shipment of the product to the distributor, net of
applicable provisions for discounts and allowances. We do not allow product to
be returned from our distributors. In the U.S., revenue is recognized when the
product is sold to the end user.
We sold our BIOGRAN(R) dental grafting product line in March 2000 (see Note 10).
Research and Development Costs
Research and development costs are charged to expense as incurred.
Foreign Currency Translation
The functional currency for the Company's branch operation in Europe is the
Euro. In accordance with SFAS No. 52, "Foreign Currency Translation," assets and
liabilities related to this foreign operation are translated at the current
exchange rates at the end of each period. The resulting translation adjustments
are accumulated as 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.
Supplemental Cash Flow Information
During 2000, 1999 and 1998, respectively, we issued options and warrants for the
purchase of 117,500, 41,100 and 24,000 shares of Common Stock with various
exercise prices to certain vendors in consideration for services valued at
$510,431, $185,664 and $65,547, respectively.
In 1999, we received 77,900 shares of our Common Stock valued at $486,875 and
$103,800 in cash for full repayment of a loan.
In 2000, 1999 and 1998, we incurred capital lease obligations of $997,489,
$609,851 and $442,306, respectively. In 2000, 1999 and 1998, cash paid for
interest was $151,161, $110,601 and $174,898, respectively. The Company paid no
income taxes in 2000, 1999 and 1998.
F-7
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. CASH, CASH EQUIVALENTS AND SHORT-TERM 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 as a separate component of
shareholders' equity. As further discussed in Note 6, our debt covenants
require us to maintain a minimum level of aggregate cash, cash equivalents and
investments.
As of December 31, 2000 and 1999, cash and cash equivalents and short-term
investments consisted of the following:
Gross Gross Fair
Original Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 2000:
Cash and cash equivalents $ 3,614,626 $ -- $ -- $ 3,614,626
Short-term investments .. 199,886 480 -- 200,366
----------- ----------- ----------- -----------
$ 3,814,512 $ 480 $ -- $ 3,814,992
=========== =========== =========== ===========
December 31, 1999:
Cash and cash equivalents $ 2,487,343 $ -- $ -- $ 2,487,343
Short-term investments .. 6,446,469 -- (60,267) 6,386,202
----------- ----------- ----------- -----------
$ 8,933,812 $ -- $ (60,267) $ 8,873,545
=========== =========== =========== ===========
4. INVENTORIES:
Inventories are stated at the lower of cost or market on a first-in, first-out
basis. As of December 31, 2000 and 1999, inventories consisted of the following:
December 31
2000 1999
-------- --------
Raw materials .......................... $ 2,042 $134,356
Work-in-process ........................ 180,357 --
Finished goods ......................... -- 12,914
-------- --------
$182,399 $147,270
======== ========
All of the VITOSS sold in Europe during 2000 was produced prior the receipt of
its CE Certification in July 2000. In accordance with SFAS No. 2 "Accounting
for Research and Development Costs," the costs of producing that material was
recorded as research and development expense prior to July 2000 and,
accordingly, are not reflected in cost of sales. As of December 31, 2000, we
maintained inventory on hand that was charged to research and development
expense during the year and is not included in inventory balances at December
31, 2000. We expect this inventory to be sold during the first six months of
2001.
F-8
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment, including assets held under capitalized lease
obligations, are recorded at cost. Depreciation is calculated on a straight-line
basis over the estimated useful life of each asset, primarily three to five
years. The useful life for leasehold improvements is generally the remaining
term of the facility lease. Expenditures for major renewals and improvements are
capitalized and expenditures for maintenance and repairs are charged to
operations as incurred.
Property and equipment consisted of the following:
December 31
2000 1999
----------- -----------
Machinery and equipment ......................... $ 2,804,893 $ 1,853,969
Furniture and office equipment .................. 1,356,970 891,330
Leasehold improvements .......................... 3,456,526 716,619
----------- -----------
7,618,389 3,461,918
Less--Accumulated depreciation and amortization . (2,297,161) (1,420,394)
----------- -----------
$ 5,321,228 $ 2,041,524
=========== ===========
In the years ended December 31, 2000 and 1999, we acquired certain property and
equipment under capitalized lease obligations. Total assets under capital lease
are $2,836,080 and $1,838,591 with related accumulated amortization of
$1,107,574 and $634,715 at December 31, 2000 and 1999, respectively.
6. BORROWINGS:
At December 31, 1999, $2,000,000 was outstanding under a line of credit
arrangement with our commercial bank which was repaid in January 2000. The
weighted average interest rate was 9.5% for the year ended December 31, 1999. In
addition, at December 31, 1999, $137,702 was outstanding under a note payable to
the Flemish Government which was paid in full during 2000.
In October 2000, we renegotiated our bank credit arrangement and decreased our
line of credit from $2,0000,000 to $1,500,000. In addition, we obtained a
$500,000 captial expenditure term note ("Term Note"). The line of credit
expires on June 30, 2001. As of December 31, 2000, no amounts were outstanding
under the line of credit. The Term Note and line of credit bear interest at an
annual rate of the prime rate plus 1.0%. Prinicpal on the Term Note is due in 23
equal installments beginning November 1, 2001. Both the line of credit and Term
Note are secured by our general assets and a $250,000 certificate of deposit
which is included in Other Assets as of December 31, 2000. The line of credit
and Term Note require us to maintain a minimum aggregate level of cash and
investments of $3,000,000 and minimum working capital of $3,000,000 (see Notes 3
and 15). As of December 31, 2000 our bank waived compliance with the covenants
until March 31, 2001 at which time we were in compliance.
F-9
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL LEASE OBLIGATIONS:
In 1997, we secured a $1,200,000 capital asset lease financing arrangement with
a lending institution which was increased an additional $1,500,000 in December
1998. The term of each individual lease is 42 months from each individual
lease's inception and annual interest is approximately 10.85% and 9.4% under the
1997 and 1998 arrangements, respectively. As of December 31, 2000, we have
utilized all available financing under the capital lease arrangement. The leases
are secured by the underlying capital assets. Capital lease obligations
consisted of the following:
December 31
2000 1999
---- ----
Capital lease obligations ....................... $ 1,626,971 $ 1,308,690
Less--amount representing interest .............. (165,483) (161,838)
----------- -----------
Present value of minimum lease payments ......... 1,461,488 1,146,852
Less--current portion of minimum lease payments . (654,063) (530,126)
----------- -----------
$ 807,425 $ 616,726
=========== ===========
Capital lease obligation maturities as of December 31, 2000 are as follows:
2001 ................................ $ 757,145
2002 ................................ 501,662
2003 ................................ 334,759
2004 ................................ 33,405
----------
$1,626,971
==========
8. Profit Sharing Plan:
The Company has a Section 401(k) plan for all qualified employees, as defined.
Company contributions are discretionary and determined annually and were
$106,415, $67,541 and $65,860 for the years ended December 31, 2000, 1999 and
1998, respectively.
9. SHAREHOLDERS' EQUITY:
Common Stock
In August 2000, we listed our Common Stock on the Nasdaq National Market while
retaining our listing on the European Association of Securities Dealers
Automated Quotation Market.
In July and August 2000, we received approximately $9,100,000 in net proceeds
through private equity financings under which we sold 1,715,679 shares of our
Common Stock at $5.90 per share and warrants to purchase 762,712 shares of
Common Stock at an exercise price of $5.90 per share, subject to certain anti-
dilution adjustments (see Note 15). The warrants expire on August 21, 2001.
F-10
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 25, 1998, we completed the Initial Public Offering (the "Offering") of
our Common Shares on the Brussels-based EASDAQ stock exchange. The Offering
raised net proceeds of approximately $13,800,000 from the sale of 1,500,000
shares of Common Stock at $10.50 per share. In July 1998, in connection with the
Offering, we sold 300,000 additional shares of Common Stock at $10.50 per share
as the underwriters exercised their over-allotment option, raising net proceeds
of approximately $2,900,000. In connection with the Offering, all convertible
Preferred Stock then outstanding was converted to Common Stock.
In June 1998, in connection with a series of collaboration agreements that we
entered into with Howmedica, Inc., we sold 370,392 shares of Common Stock to
Howmedica, Inc., for $3,500,000. Subsequently, during August 2000, the
collaboration agreements were cancelled by mutual agreement.
Equity Compensation Plan
We have an Equity Compensation Plan that provides for incentive and nonqualified
stock options, restricted stock awards and other equity incentives to be granted
to key employees, consultants and advisors.
Stock Options
Options are granted with exercise prices equal to or greater than the fair
market value of the common stock on the date of grant. Generally, incentive
stock options become exercisable in equal installments over a four-year period
and nonqualified stock options to non-employee consultants are issued fully
vested. The options remain exercisable for a maximum period of ten years. As of
December 31, 2000, there were 163,781 options available for grant under the plan
and 923,875 exercisable options outstanding with a weighted average exercise
price of $3.55 per share. For all outstanding options, the weighted average
exercise price per share is $4.70 with a weighted average remaining contractual
life of approximately eight and one-quarter years. Summary stock option
information is as follows:
Exercise Aggregate
Number Price Range Exercise Price
----------- ------------ --------------
Outstanding, December 31, 1997 .... 1,079,144 $ 1.00- 4.25 $ 3,549,687
Granted ......................... 232,050 4.25-11.63 1,130,423
Exercised ....................... (227,000) 1.00- 4.25 (651,500)
Canceled ........................ (101,400) 1.00- 4.25 (404,950)
----------- ------------ -----------
Outstanding, December 31, 1998 .... 982,794 1.00-11.63 3,623,660
Granted ......................... 739,850 4.35- 6.60 3,869,778
Exercised ....................... (101,472) 2.75- 4.25 (332,830)
Canceled ........................ (33,950) 4.25- 4.75 (147,888)
----------- ------------ -----------
Outstanding, December 31, 1999 .... 1,587,222 1.00-11.63 7,012,720
Granted ......................... 421,100 4.13- 7.95 2,220,783
Exercised ....................... (220,547) 1.00- 4.25 (763,031)
Canceled ........................ (28,325) 4.25- 11.12 (195,916)
----------- ------------ -----------
Outstanding, December 31, 2000 .... 1,759,450 $ 1.00-11.63 $ 8,274,556
=========== ============ ===========
F-11
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
We apply Accounting Principal Board Opinion No. 25, ''Accounting for Stock
Issued to Employees,'' ("APB 25") and the related interpretations in accounting
for our stock option plans. Under APB 25, compensation cost related to stock
options is computed based on the intrinsic value of the stock option at the date
of grant, reflected by the difference between the exercise price and the fair
value of our Common Stock. Under SFAS No. 123, ''Accounting for Stock-Based
Compensation,'' compensation cost related to stock options is computed based on
the value of the stock options at the date of grant using an option valuation
methodology, typically the Black-Scholes model. SFAS No. 123 can be applied
either by recording the Black-Scholes model value of the options or by
continuing to record the APB 25 value and by disclosing SFAS No. 123. We have
applied the pro forma disclosure requirement of SFAS No. 123, ''Accounting for
Stock-Based Compensation''. Had compensation cost for our common stock option
plans been determined under SFAS No. 123, our net loss and net loss per common
share would have been adjusted as follows:
Year Ended December 31
2000 1999 1998
----------- ----------- ----------
Net loss applicable to common shareholders:
As reported .......................................... $11,335,349 $ 9,496,594 $6,092,001
Pro forma ............................................ 11,936,979 11,508,328 6,677,576
Net loss per common share, basic and diluted:
As reported ........................................... $ (.92) $ (.83) $ (.73)
Pro forma ............................................. (.97) (1.01) (.80)
The weighted average fair value of the options granted during 2000, 1999 and
1998 is estimated as $1.98, $2.87 and $2.64 per share, respectively, on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of zero, volatility of 50%, risk-free interest rate
of 5.0%, 6.4% and 5.0% during 2000, 1999 and 1998, respectively, and an expected
life of six years. The resulting pro forma compensation charge presented may not
be representative of that to be expected in the future years to the extent that
additional stock options are granted and the fair value of the common stock
increases or decreases.
Restricted Stock Award
During 2000, a restricted stock award was made to an employee under which an
award for 45,000 shares, then valued at $270,325, was granted. As of December
31, 2000, 28,750 shares of Common Stock were vested and the remaining 16,250
shares of Common Stock will vest in December 2001.
Employee Stock Purchase Plan
In November 1998, an Employee Stock Purchase Plan (the ''ESPP'') was established
to provide eligible employees an opportunity to purchase our Common Stock. Under
the terms of the ESPP, eligible employees may have up to 10% of eligible
compensation deducted from their pay to purchase Common Stock. The per share
purchase price is the 85% of the lower closing price on the first or last
trading day of each calender quarter. The amount that may be offered pursuant to
the ESPP is 300,000 shares of our Common Stock. There were 9,070 and 2,732
shares purchased under the ESPP during 2000 and 1999, respectively. No shares
were purchased under the ESPP in 1998.
Common Stock Purchase Warrants
During August 2000, in connection with a private equity offering, we issued
warrants to purchase 828,271 shares of Common Stock at an exercise price of
$5.90 per share subject to certain anti-dilution adjustments (see Note 15).
F-12
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary Common Stock warrant information as of December 31, 2000 is as follows:
Number of Warrant
Year of Expiration Shares Outstanding Exercise Price Range
- ------------------ ------------------ --------------------
2001 1,125,000 (1) $ 4.00 (1)
2002 547,010 $ 4.25
2003 26,583 $4.25 - $9.73
2004 10,067 $ 5.96
2005 63,559 $ 5.90
------------ -------------
Total 1,772,219 $4.00 - $9.73
============ =============
(1) As adjusted during 2001 (see Note 15).
10. REVENUES:
We initiated European sales of VITOSS in October 2000 following receipt of its
CE Certification allowing its sale in all of the countries of the European
Union. During the year ended December 31, 2000, we recognized approximately
$208,000 in VITOSS product sales.
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 our BIOGRAN product for dental surgical applications. The arrangement
provided for 3i to pay us 50% of their BIOGRAN average selling price through
December 31, 1998 and 45% for the year 1999. On March 22, 2000, we sold our
BIOGRAN dental grafting product line to 3i for $3,900,000 and received proceeds
of $3,500,000 with an additional $400,000 held in an escrow account until March
23, 2001. The $400,000 escrow amount has been reflected as a deferred gain and
restricted cash on the accompanying balance sheets as of December 31, 2000 and
will be recorded as a gain when received. BIOGRAN product sales of approximately
$533,000 were realized during 2000 prior to the sale of the product line in
March 2000.
11. INCOME TAXES:
We account for income taxes in accordance with SFAS No. 109, ''Accounting for
Income Taxes.'' SFAS No. 109 is an asset and liability approach that requires
the recognition of deferred tax assets and liabilities for the expected tax
consequences of events that have been recognized in the financial statements or
tax returns.
The components of income taxes are as follows:
Year Ended December 31
----------------------
2000 1999 1998
---- ---- ----
Current ....................................... $ -- $ -- $ --
Deferred ...................................... (1,583,490) (2,116,201) (2,015,603)
----------- ----------- -----------
(1,583,490) (2,116,201) (2,015,603)
Valuation allowance . 1,583,490 2,116,201 2,015,603
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
The difference between our federal statutory income tax rate and our effective
income tax rate is primarily due to state income taxes and the valuation
allowance.
F-13
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of our deferred tax asset as of December 31, 2000 and 1999 are as
follows:
December 31
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards .................... $ 9,288,321 $ 8,121,626
Accrued expenses not currently deductible ........... 981,904 294,217
Research, patent and organizational costs capitalized
for tax purposes .................................. 5,614,886 3,638,336
------------ ------------
15,885,111 12,054,179
Valuation allowance ...................................... (15,885,111) (12,054,179)
------------ ------------
Net deferred tax asset ................................... $ -- $ --
============ ============
SFAS No. 109 requires that deferred tax assets and liabilities be recorded
without consideration as to their realizability. The portion of any deferred tax
asset for which it is more likely than not that a tax benefit will not be
realized must then be offset by recording a valuation allowance against the
asset. A valuation allowance has been established against all of our deferred
tax assets since the realization of the deferred tax asset is not assured given
our history of operating losses. The deferred tax asset includes the cumulative
temporary difference related to certain research, patent and organizational
costs, which have been charged to expense in the accompanying Statements of
Operations but have been recorded as assets for federal tax return purposes.
These tax assets are amortized over periods generally ranging from 5 to 20 years
for federal tax purposes.
As of December 31, 2000, we had $27,053,884 of federal net operating loss
carryforwards, which begin to expire in 2008. Our annual utilization of net
operating loss carryforwards will be limited pursuant to the Tax Reform Act of
1986, since a cumulative change in ownership over a three-year period of more
than 50% occurred as a result of the cumulative issuance of our common stock and
common stock equivalents. We believe, however, that such limitation may not have
a material impact on the ultimate utilization of our carryforwards.
The federal net operating loss carryforwards are scheduled to expire
approximately as follows:
2008 ...................................... $ 7,729
2009 ...................................... 490,568
2010 ...................................... 2,976,405
2011 ...................................... 4,342,295
2012 ...................................... 4,574,051
2013 ...................................... 4,219,188
2014 ...................................... 5,874,561
2015 ...................................... 4,569,087
-----------
$27,053,884
===========
F-14
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES:
Operating Leases
We lease office space and equipment under noncancelable operating leases. For
the years ended December 31, 2000, 1999 and 1998, lease expense was $321,039,
$304,732, $212,948, respectively. At December 31, 2000, future minimum rental
payments under operating leases are as follows:
2001 ................................. $ 303,519
2002 ................................. 325,994
2003 ................................. 330,275
2004 ................................. 325,047
2005 ................................. 355,055
2006 and thereafter................... 433,293
----------
$2,073,183
==========
Foreign Exchange Contract
Operating expenses for our European branch are primarily funded by Orthovita in
the U.S. In order to minimize negative fluctuations between the US dollar and
the Euro foreign exchange rate, we entered into a foreign exchange contract
which specifies that we will pay $300,000 on each of the following dates to
receive the following fixed number of Euros:
Contract Date US $ Amount Paid Euros Received Exchange Rate
- ------------- ---------------- -------------- -------------
February 9, 2001 $ 300,000 346,921 Euros .86475
May 9, 2001 300,000 345,682 Euros .86785
August 9, 2001 300,000 344,511 Euros .87080
November 9, 2001 300,000 343,367 Euros .87370
---------- --------------- ------
Total $1,200,000 1,380,481 Euros .86926
========== =============== ======
Exchange Rate at December 31, 2000 .93050
======
13. LITIGATION AND PROCEEDINGS:
In July 1992, we obtained a license from FBFC International, a Belgian company,
that allowed us to manufacture and sell our BIOGRAN dental grafting product. We
sold the rights to sell BIOGRAN to 3i in 2000. In 1994, U.S. Biomaterials
Corporation filed with the U.S. Patent and Trademark Office ("PTO") a Request
for Reexamination of the U.S. patent held by FBFC for BIOGRAN, of which we had
been the exclusive licensee. The PTO confirmed the patentability of all claims
of the FBFC patent without amendment. However, U.S. Biomaterials Corporation
instituted a nullification proceeding against the European counterpart to FBFC's
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. In
connection with the BIOGRAN sale to 3i, 3i has assumed control of this matter
and we have agreed to reimburse 3i for the associated legal costs and to provide
them with certain indemnification with respect to the matter. We do not believe
there are any material liabilities with respect to the indemnification for this
matter.
F-15
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
FOR THE THREE MONTHS ENDED
2000: March 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----- -------- ------- ------------ -----------
Revenues $ 532,967 $ --- $ --- $ 207,693
Gross profit 368,926 --- --- 201,693
Total operating expenses 3,180,874 3,682,386 3,612,354 4,715,548
Net gain on sale of product line 3,070,921 --- --- ---
Net income (loss) 305,162 (3,635,124) (3,528,050) (4,477,337)
Net income (loss) per common
share, basic and diluted $ .03 $ (.31) $ (.28) $ (.36)
FOR THE THREE MONTHS ENDED
1999: March 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----- -------- ------- ------------ -----------
Revenues $ 562,532 $ 206,907 $ 5,410 $ 279,271
Gross profit 428,339 138,410 4,104 158,677
Total operating expenses 2,333,433 2,358,634 2,758,343 3,304,907
Net loss (1,704,772) (2,092,511) (2,645,672) (3,053,639)
Net loss per common share, basic
and diluted $ (.15) $ (.18) $ (.23) $ (.27)
15. SUBSEQUENT EVENTS:
During March 2001, we sold 1,975,000 shares of our Common Stock at $4.00 per
share in a private equity financing raising gross proceeds of $7,900,000 and net
proceeds of $7,500,000. These securities 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. We have agreed to file a registration statement for these shares
with the U.S. Securities and Exchange Commission. In connection with the
financing, additional warrants to purchase a total of 59,250 shares of Common
Stock at an exercise price of $4.00 per share were issued to consultants as a
placement cost.
During January 2001, we completed a private placement for 566,894 shares of our
Common Stock and warrants to purchase 566,894 shares of Common Stock at an
exercise price of $4.41 per share. The gross proceeds of $2,500,000 will be used
for working capital purposes. The net proceeds were $2,400,000. We sold the
securities to the Rennes Fondation which beneficially owns 16.3% of our Common
Stock as of March 26, 2001. We have agreed to file a registration statement for
the resale of these shares with the U.S. Securities and Exchange Commission.
F-16
ORTHOVITA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of issuance of the warrants sold in a private equity
financing transaction in August 2000 (see Note 9) and as a result of the 2001
financing transaction described above, the number of shares of Common Stock
issued upon exercise of warrants and the exercise price were adjusted to
1,125,000 shares and an exercise price of $4.00 per share. In addition, the
investor in the August 2000 private placement is now entitled to purchase an
additional 206,830 shares of our Common Stock at a par value of $.01.
During March 2001, we received regulatory clearance in Australia to sell CORTOSS
Synthetic Cortical Bone Void Filler to augment orthopaedic screws that have
failed to hold in bone.
F-17