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| VITA > SEC Filings for VITA > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Forward-Looking Statements
Forward-looking statements give our current expectations, forecasts of future events or goals. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "may," "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "seek" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Any or all of our forward-looking statements in this Form 10-Q may turn out to be incorrect. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. There are important factors that could cause actual events or results to differ materially from those expressed or implied by forward-looking statements including, without limitation, the development, regulatory approval, demand and market acceptance of our products; the amount of data that the FDA will require for our CORTOSS™ 510(k) application and whether any data will be sufficient to support approval; when and if we will become profitable; the cost to expand our manufacturing and operating facilities; the development of our sales network; capital expenditures; future liquidity; uses of cash; the achievement of product development goals and the amount and timing of related milestone and other payments; sales product mix and related margins; our ability to manage our manufacturing facilities and requirements; cost and availability of raw materials; inventory levels; development costs for existing and new products; changes in market interest and foreign currency exchange rates; fluctuations in our stock price; and the other risk factors addressed in ITEM 1A. "RISK FACTORS" in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the U.S. Securities and Exchange Commission (the "SEC").
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
OVERVIEW
Product sales for the three months ended March 31, 2009 increased 34% to $21,690,359 as compared to $16,164,282 for the same period in 2008. Increased product sales principally reflect increased sales of both our orthobiologics products and our biosurgery products in the United States. In the U.S., our current orthobiologics products are based on our proprietary VITOSS™ Bone Graft Substitute technology, and include the IMBIBE™ Bone Marrow Aspiration System. Our biosurgery products include our VITAGEL™ Surgical Hemostat, our VITASURE™ Absorbable Hemostat, the CELLPAKER™ Plasma Collection System used in conjunction with VITAGEL, and other accessories and delivery products that complement our VITAGEL product. We anticipate that our product sales will remain insufficient to support our operations at expected spending levels through the end of the third quarter of 2009. We expect to continue to incur operating losses through the end of the third quarter in 2009 as we plan to continue to expand our sales and marketing activities, pursue research and product development efforts and further develop our manufacturing capabilities. We believe product sales during the fourth quarter of 2009 should support the level of operating expenses we anticipate for that period. Our ability to achieve this goal is subject to uncertainties, including those referenced in "Forward-Looking Statements" above. As a result, we cannot assure that product sales will support operating expenses during that period or thereafter.
The following summarizes our principal cash commitments at March 31, 2009 and, as of the date of this report, our principal anticipated expenditures. For additional information on commitments and contingencies, see Note 9 to our consolidated interim financial statements included in this report.
• Operations. We expect to use cash, cash equivalents and short-term investments to fund our operations until we generate sufficient cash to support our operations. We have contractual commitments under our leases to pay approximately $583,000 in rent during the remainder of 2009. In addition, we expect to hire additional direct sales representatives to support not only the growth of our existing products, but to plan ahead for the possible clearance and commercial launch of CORTOSS in the United States. We believe that our investment in our sales force may also support opportunities to pursue the in-license or distribution of additional products. We also expect to build inventory in 2009 to plan for the possible clearance and launch of CORTOSS in the U.S. and to establish a strategic inventory stockpile for VITAGEL.
• Research and development. We expect to incur approximately $1,600,000 in external costs during the remainder of 2009 for research and development activities. Of this amount, we expect to incur approximately $500,000 in external costs for the CORTOSS 510(k) application that is currently under review by the FDA. The remainder relates to certain payment obligations based on the achievement of certain product development and other milestones in 2009 and beyond. See "Contractual Obligations and Commercial Commitments-Research and development" below for more information.
• Debt service obligation. We expect to pay $875,000 in interest payments during each quarter of 2009 under the $35,000,000 aggregate principal amount of notes issued under our debt facility with LB I Group Inc. See Note 10 to our consolidated interim financial statements included in this report for additional information.
• Expansion of manufacturing capacity and other facility renovations. We are committed to spend approximately $2,200,000 and expect to spend approximately $2,800,000 for plant renovations and equipment during the remainder of 2009, primarily to further expand our capacity to manufacture VITAGEL. We plan to finance the renovations and equipment through cash on hand.
• Medafor Agreement. We are obligated to spend $1,000,000 during the reminder of 2009 to purchase additional VITASURE product inventory under our distribution agreement with Medafor if certain conditions are met.
We believe our existing cash, cash equivalents, and short-term investments of $27,782,900 as of March 31, 2009 will be sufficient to meet our currently estimated operating and investing requirements for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated interim financial statements requires us to make assumptions, estimates and judgments which affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of our consolidated interim financial statements, and the reported amounts of revenues and expenses during the reporting periods. By their nature, these assumptions, estimates and judgments are subject to an inherent degree of uncertainty. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results will differ from those estimates. We have addressed our critical accounting policies in ITEM 7 of our Annual Report on Form 10-K for the year ended December 31, 2008 under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CRITICAL ACCOUNTING POLICIES." There were no changes in our critical accounting policies for the three months ended March 31, 2009.
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 and other debt and equity securities. Cash, cash equivalents and short-term investments were $27,782,900 and $32,290,503 at March 31, 2009 and December 31, 2008, respectively.
DISCUSSION OF CASH FLOWS
Cash Flows Used in Operating Activities
Net cash used in operating activities for the three months ended March 31, 2009 was $2,864,745, compared to $7,126,094 used in operating activities for the three months ended March 31, 2008. Our operating cash outflows for the three months ended March 31, 2009 primarily were used to fund our operations and include $873,381 used to fund increases in inventories. In addition, decreases in accounts payable and accrued expenses of $1,627,056 were a use of operating cash flows in the three months ended March 31, 2009.
We expect to continue to focus our efforts on sales growth under our orthobiologics and biosurgery product platforms in 2009. We launched our VITOSS Bioactive FOAM and VITASURE products in 2008. We may continue to add direct sales representatives to our organization for those territories in the U.S. where either we do not currently have independent distributor coverage or the territory is underserved in an effort to increase sales of our existing product lines and to plan ahead for the possible clearance of CORTOSS in the United States. Also, we intend to fund studies to collect and publish post-clinical data relating to the performance of VITOSS to support our marketing and sales efforts.
We expect to continue to use cash, cash equivalents and short-term investment proceeds to fund our operations until we are profitable. We anticipate that our product sales will remain insufficient to support our present operations at expected spending levels through the end of the third quarter of 2009. As a result, we expect to continue to incur operating losses through the end of the third quarter of 2009 as we continue to expand our sales and marketing activities, pursue research and product development efforts and further develop our manufacturing capabilities. We believe product sales during the fourth quarter of 2009 should support the level of operating expenses we anticipate for that period. Our ability to achieve this goal is subject to uncertainties, including those referenced in "Forward-Looking Statements" above. As a result, we cannot assure that product sales will support operating expenses during that period or thereafter.
We expect to use approximately $1,600,000 of cash in 2009 for external research and development activities. Of this amount, we expect to incur approximately $500,000 in external costs for the CORTOSS 510(k) application that is currently under review by the FDA. The remainder represents certain payment obligations based on the achievement of specified product development and other milestones in 2009 and beyond. See "CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS-Research and development" below for more information. The overall level of our research and development expense in future periods will depend upon the development status and cost of products currently in our pipeline and any new products that we may determine to pursue in the future. We also expect to incur additional expenses to support the U.S. launch of CORTOSS if it receives FDA clearance.
Our operating cash requirements are dependent heavily upon: (i) the timing of
receipt of regulatory clearance for new products, (ii) the rates at which we add
new direct sales representatives and our field sales network generates sales,
(iii) our product sales mix as relative increases in sales of our lower margin
products result in lower gross profit, which tends to increase our cash needs,
(iv) the amount of inventory, including raw materials and work-in-process, that
we maintain to support product sales, anticipated product sales and anticipated
product launches, and (v) the timing of subsequent product launches and market
acceptance of our new products. Accordingly, for the foreseeable future, our
operating cash requirements will continue to be subject to quarterly volatility.
We are obligated to use cash, cash equivalents and short-term investments to purchase and pay for $1,000,000 of VITASURE product during the remainder of 2009 in accordance with our distribution agreement with Medafor. We launched VITASURE in 2008.
Cash Flows Provided by Investing Activities
Net cash provided by investing activities was $4,270,922 for the three months ended March 31, 2009 compared to net cash provided by investing activities of $5,760,846 for the three months ended March 31, 2008. The decrease in cash provided by investing activities for the three months ended March 31, 2009 primarily reflects $1,226,242 to purchase equipment and leasehold improvements for the further expansion of our product development and manufacturing capabilities for VITAGEL and VITOSS and $515,000 for a license right intangible asset, as compared to $428,309 spent during the three months ended March 31, 2008 for equipment and leasehold improvements.
We invest our excess cash in highly liquid investment-grade marketable securities, including corporate debt securities and government-sponsored enterprise debt securities. Marketable securities having maturities greater than three months are classified as short-term investments.
We expect to spend approximately $2,800,000 during the remainder of 2009 to expand our manufacturing facility for VITAGEL, as well as for leasehold improvements and capital equipment. We plan to finance the expansion, renovations and equipment through cash on hand.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2009 was $51,594 compared to $41,799 for the three months ended March 31, 2008.
Until we achieve sales at levels to enable us to fund operating expenses, we expect to continue to use cash, cash equivalents and proceeds from sales of short-term investment to fund operating and investing activities. As of March 31, 2009, we had cash, cash equivalents and short-term investments of $27,782,900 and we had $10,000,000 available for additional borrowing under our debt facility with LBI Group Inc. However, in September 2008, Lehman Brothers Holding Inc., an affiliate of LB I Group, filed for bankruptcy relief under Chapter 11 of Title 11 in the U.S. Bankruptcy Code. Accordingly, as an affiliate of Lehman Brothers Holding Inc., LB I Group may not be able, or may be unwilling, to advance any additional funds under the debt facility.
We believe our existing cash, cash equivalents and investments will be sufficient to meet our currently estimated operating and investing requirements for the foreseeable future. The extent and timing of proceeds from future stock option and warrant exercises, if any, are primarily dependent upon future trading prices for our common stock and the expiration dates of these instruments.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Notes Payable. On July 30, 2007, we entered into a $45,000,000 senior secured note purchase facility, to which we refer as our "debt facility" or "facility" with LB I Group Inc., an affiliate of Lehman Brothers Inc. Notes issued under the facility are due July 30, 2012. We issued a $25,000,000 principal amount of notes under the facility on July 30, 2007 and used most of the proceeds to repurchase a revenue interest obligation. On July 31, 2008, we issued an additional $10,000,000 principal amount of notes under the facility. We applied the proceeds of this note toward payment of (i) the $6,552,000 purchase price for the collagen raw material, equipment and technology license acquired under our supply and license agreement with Allergan during the third quarter of 2008; and (ii) costs to expand our manufacturing capacity for VITAGEL and ancillary products such as ALIQUOT, IMBIBE and CELLPAKER.
Borrowings under the facility are guaranteed by us and one of our wholly-owned subsidiaries. The facility is secured by a first priority lien on substantially all of our assets (including intellectual property) other than those exclusively related to CORTOSS and ALIQUOT. We are required to make quarterly interest only payments to the note holder. Outstanding principal amounts under the notes bear annual interest at 10%, except that during the continuance of any event of defaults, interest would accrue at the rate of 12% per year and the notes be payable on demand. As of March 31, 2009, we expect to incur quarterly interest expense of $875,000 under our debt facility during 2009.
Agreement with Kensey Nash Corporation. Pursuant to our agreement with Kensey, we are obligated to pay Kensey for manufacturing VITOSS FOAM and VITOSS Bioactive FOAM, as well as certain royalties on the net sales of these products. As of March 31, 2009, we owed Kensey $2,414,853 for manufactured product inventory and royalties.
In addition, we pay royalties to Kensey on our VITOSS Bone Graft Substitute product sales, based on a royalty arrangement that Kensey purchased from the product's co-inventor effective April 2004, up to an aggregate payment of $5,000,000. From inception of the royalty arrangement through March 31, 2009, we have made aggregate royalty payments of $2,769,309.
Leases. We lease facilities under non-cancelable operating leases that are scheduled to expire on July 31, 2017. Our annual rental payments under the leases are approximately $800,000 for 2009 and are scheduled to increase over time up to approximately $975,000 in the year 2016.
Expansion of manufacturing capacity and other facility renovations. As of March 31, 2009, we have approximately $2,200,000 in commitments outstanding for plant expansion and equipment to increase our capacity at sites we currently lease to manufacture VITAGEL.
Research and development. In connection with the development of new products with business partners, we may contractually agree to make milestone payments upon achievement of specified developmental goals. The timing and actual amount of these payments can be difficult to determine as they depend upon satisfactory
achievement of product development and other milestones, which will be determined based on events that may occur in the future. We have paid $1,215,000 for non-recurring license fees and product development milestones pursuant to contractual obligations that we incurred during the three months ended March 31, 2009. Additional milestone payments may become due as early as 2009 if certain other milestones are met during the year. We expect to incur approximately $1,000,000 to $2,000,000 for milestone payments during the remainder of 2009 in addition to those already paid for research and development activities. In addition, if products under development are brought to market, we may be obligated to make certain launch-related milestone payments of up to $1,000,000, as well as additional payments which may be made depending upon the potential achievement of sales milestones in future periods.
Agreement with Medafor. In April 2008, we obtained certain non-exclusive rights in the United States and in certain limited territories outside of the United States to distribute VITASURE pursuant to an agreement with Medafor. Under the agreement, if certain conditions are met, we are obligated to purchase and pay for at least $1,000,000 of additional VITASURE product from Medafor during the reminder of 2009.
RESULTS OF OPERATIONS
This section should be read in conjunction with the more detailed discussion under "Liquidity and Capital Resources." As described therein, we expect to continue to incur significant operating losses in the foreseeable future as we continue our product development and sales efforts.
Product Sales. Product sales for the three months ended March 31, 2009 increased 34% to $21,690,359 as compared to $16,164,282 for the same period in 2008. Sales growth was primarily attributable to increased sales volume of our orthobiologics products in the United States. Approximately 76% of our product sales during the first three months of 2009 were from our orthobiologics products, as compared to approximately 74% of product sales during the first three months of 2008. Sales of our VITOSSTM Bioactive FOAM products, which were launched in 2008, contributed a substantial portion of overall orthobiologics product sales during the three months ended March 31, 2009, in part due to supplanting sales of our VITOSSTM FOAM products. Our biosurgery products contributed approximately 24% of product sales for the three months ended March 31, 2009 as compared to 26% for the same period in 2008.
For the three months ended March 31, 2009 and 2008, 95% and 93% of product sales, respectively, were in the U.S. from sales of our orthobiologics and biosurgery products. The remaining sales during 2009 and 2008 were the result of orthobiologics and biosurgery product sales outside the U.S, primarily in Europe.
Gross Profit. Gross profit for the three months ended March 31, 2009 was $14,680,201 as compared to $10,352,072 for the same period in 2008. As a percentage of sales, gross profit was 68% and 64% for the three months ended March 31, 2009 and 2008, respectively. The increase in the gross margin for 2009, as compared to 2008, primarily reflects more favorable product mix. Our gross margins may fluctuate from quarter to quarter based on the mix of products sold from period to period.
Operating Expenses. Operating expenses for the three months ended March 31, 2009 and 2008 were $15,052,465 and $14,370,389, respectively, which represents a 5% increase in operating expenses in the first quarter of 2009 over the same period in 2008. Operating expenses were 69% and 89% of product sales for the three months ended March 31, 2009 and 2008, respectively.
General and administrative expenses for the three months ended March 31, 2009 were $2,613,078, a 6% increase compared to $2,458,405 for the same period in 2008. The increase in expenses was primarily due to higher consulting costs. General and administrative expenses were 12% and 15% of product sales for 2009 and 2008, respectively.
Selling and marketing expenses were $10,499,271 for the three months ended March 31, 2009, a 3% increase from $10,208,375 for the three months ended March 31, 2008. The increase for the three months ended March 31, 2009 was primarily due to higher expenses incurred in order to support the growth and anticipated growth of U.S product sales, and higher commissions paid in the U.S. as a result of increased product sales during the quarter. Amounts for selling and marketing expenses were 49% and 63% of product sales for the three months ended March 31, 2009 and 2008, respectively.
Research and development expenses increased to $1,940,116 for the three months ended March 31, 2009 from $1,703,609 for the same period in 2008. The 14% increase for the three months ended March 31, 2009, as compared to the corresponding period in 2008, primarily was due to costs incurred for product development milestone payments for potential new products. Research and development expenses were 9% and 11%, respectively, of product sales for the three months ended March 31, 2009 and 2008.
Net other income (expense). Net other income (expense) was an expense of $789,765 for the three months ended March 31, 2009 and included interest income and interest expense. Net other income (expense) was an expense of $179,703 for the three months ended March 31, 2008 and included interest income and interest expense. Net other income (expense) for the three month period in 2009 was higher than that for the corresponding period in 2008 as a result of higher interest expense, due to higher notes payable in 2009, and lower interest income, due to lower interest rates earned on lower cash, cash equivalents and short-term investment balances in 2009.
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