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| VITA > SEC Filings for VITA > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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, demand and market acceptance of our products; our ability to successfully launch our Cortoss™ Bone Augmentation Material product in the U.S.; costs associated with the launch of Cortoss in the U.S.; 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
We are a medical device company primarily focused on developing and marketing proprietary, innovative orthobiologic and biosurgery technologies and products. Our mission is to improve surgical outcomes with products offering superior quality and demonstrated clinical benefit.
Product sales for the three and nine months ended September 30, 2009 increased 8% and 22% to $22,295,070 and $68,476,675, respectively, compared to product sales of $20,563,081 and $56,068,078 for the same periods in 2008. Increased product sales reflect higher sales of both our orthobiologics products and our biosurgery products in the United States.
In orthobiologics, our platform includes products for the fusion, regeneration and fixation of human bone. Our orthobiologics products are based on our proprietary Vitoss™ Bone Graft Substitute technology, and include the Imbibe™ Bone Marrow Aspiration System. Vitoss is the market-leading synthetic bone graft in the United States, with more than 275,000 implantations worldwide. Our orthobiologics products also include our Cortoss™ Bone Augmentation Material and the Aliquot™ Delivery System used with Cortoss, both of which were first available for sale in the U.S. in July 2009. CORTOSS is an advanced, synthetic biomaterial. Following injection into spinal vertebrae, Cortoss hardens to mimic weight-bearing, cortical bone. Cortoss is the first clinically-proven, injectable FDA-cleared alternative to polymethylmethacrylate (PMMA) bone cement for the treatment of vertebral compression fractures, an extremely painful condition that occurs in patients with osteoporosis and cancer.
Our biosurgery products include Vitagel™ Surgical Hemostat, Vitasure™ Absorbable Hemostat, the CellPaker™ Plasma Collection System used in conjunction with Vitagel, and other accessories and delivery products that complement our Vitagel product. These products incorporate advanced biosurgical materials and product engineering to help control bleeding during surgeries.
We anticipate that our product sales will remain insufficient to support our operations at expected spending levels and we will continue to incur an operating loss through the end of the fourth quarter of 2009. We cannot assure that product sales will support operating expenses thereafter.
The following summarizes our principal cash commitments at September 30, 2009 and, as of the date of this report, our principal anticipated expenditures. For additional information on commitments, 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 and capital expenditures unless we generate sufficient cash to support our operations. We have contractual commitments under our leases to pay $212,000 in rent during the fourth quarter of 2009. We have quarterly rental obligations in 2010 of $216,000. Also, we expect to hire additional direct sales representatives to support the growth of our existing products and the commercial launch of Cortoss in the United States. We believe that our investment in our sales force could also support opportunities to pursue licensing or distribution rights for additional products. We also expect to continue to build our inventory of Cortoss and Vitagel during the remainder of 2009.
• Research and Development. We could be contractually obligated to pay up to $2,000,000 under a license agreement in the event that certain product development and launch milestones are met. We do not expect to pay these milestones until late 2010 at the earliest, if at all. We may be required to make additional milestone payments under the license agreement after the product is commercialized if certain sales milestones for the product are achieved. 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 the fourth quarter of 2009 and in each quarter during 2010 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.
We believe our existing cash, cash equivalents, and short-term investments of $22,521,994 as of September 30, 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 The Financial Accounting Standards Board Standards Codification, 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 nine months ended September 30, 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 $22,521,994 and $32,290,503 at September 30, 2009 and December 31, 2008, respectively.
Discussion of Cash Flows
Cash Flows Used in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2009 was $5,968,863, compared to $11,737,273 used in operating activities for the nine months ended September 30, 2008. The decrease in cash used to fund operations was primarily due to the lower net loss in 2009. Our operating cash outflows for the nine months ended September 30, 2009 were used primarily to fund our net loss, increases in inventories and decreases in accounts payable and other accrued expenses, offset in part due to certain non-cash expenses such as depreciation, amortization, and compensation related to stock option accounting. For the nine months ended September 30, 2008, decreases in accounts payable and other accrued expenses were offset by certain non-cash expenses such as depreciation, amortization, and compensation related to stock option accounting.
We expect to continue to focus our efforts on sales growth from our orthobiologics and biosurgery product platforms. We launched our Vitoss Bioactive Foam and Vitasure products in 2008. After initiating a controlled launch of Cortoss in the U.S. in July, 2009 using a subset of our highly-trained sales force, we expanded the launch to our entire sales force at the end of the third quarter of 2009. We believe that the commercialization of Cortoss is benefiting and will continue to benefit from the Company's infrastructure, core competencies and the call patterns of the Company's sales force. Cortoss represents a new technology which will generally need to be approved by technology review boards of target hospitals in order for the hospitals to carry the product. The amount of time to obtain approvals from the technology review boards can be difficult to predict and we cannot guarantee that we will be able to secure widespread hospital approvals for Cortoss. We expect our U.S. Cortoss sales will increase as the product launch
progresses, we obtain further hospital approvals for the product and our sales force trains more physicians on the product. We expect to 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. Also, we intend to fund studies to collect and publish post-clinical data relating to the performance of our products 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. Our operating cash
requirements are dependent heavily upon: (i) the rates at which we add new
direct sales representatives and our field sales network generates sales;
(ii) 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;
(iii) 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 (iv) the overall level of our research and development
expense, which will depend on the development status and costs of products in
our pipeline and any new products that we could pursue in the future.
Accordingly, for the foreseeable future, our operating cash requirements will
continue to be subject to quarterly volatility.
In October 2009, our distribution agreement with Medafor was amended to eliminate our remaining minimum purchase commitments for Vitasure and our unilateral right to renew the agreement for an additional three year term in 2013 if certain purchase commitments were satisfied. The initial term of the agreement was unchanged and extends through December 31, 2013.
Cash Flows Provided by Investing Activities
Net cash provided by investing activities was $4,303,772 for the nine months ended September 30, 2009 compared to $2,980,710 for the nine months ended September 30, 2008. The increase in cash provided by investing activities for the nine months ended September 30, 2009, primarily reflects the net proceeds from the sale and maturity of short-term investments of $9,353,531, which was partially offset by expenditures of $4,539,754 for certain capital projects, including the purchase of equipment and leasehold improvements to manufacture Vitagel and $515,000 for a license right intangible. During the nine months ended September 30, 2008, we received net proceeds of $12,750,743 from the sale and maturity of short-term investments, which were partially offset by $3,418,033 in expenditures for equipment and leasehold improvements and $6,552,000 paid to acquire a collagen-processing business.
We invest our excess cash in highly liquid investment-grade marketable securities, including government-sponsored enterprise debt securities and corporate debt securities. Marketable securities having maturities greater than three months are classified as short-term investments.
Until we achieve sales at levels that enable us to fund operations and investing activities, we expect to continue to use cash, cash equivalents and proceeds from sales of short-term investments to fund operating and investing activities. We do not believe product sales during the fourth quarter of 2009 will support the level of operating expenses we anticipate for that period. We cannot assure that product sales will support operating expenses thereafter.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2009 was $1,238,475, which was derived primarily from the exercise of employee stock options. Net cash provided by financing activities for the corresponding year earlier was $10,146,948, which was derived primarily from the incurrence of $10,000,000 in debt under our debt facility (see Note 10). 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 Obligation 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 $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 that we acquired
during the third quarter of 2008 under a supply and license agreement 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 two 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%, provided the interest shall accrue at the annual rate of 12% during the continuance of any event of default and shall be payable on demand. We expect to pay $875,000 in interest payments under our debt facility during the fourth quarter of 2009 and in each quarter during 2010.
Agreement with Kensey Nash Corporation. Pursuant to our agreement with Kensey, we are obligated to pay Kensey transfer fees for manufacturing Vitoss Foam and Vitoss Bioactive Foam and royalties on the net sales of these products. As of September 30, 2009, we owed Kensey $1,465,752 for manufactured product inventory and royalties.
We pay additional royalties to Kensey pursuant to a separate royalty obligation that Kensey purchased from a co-inventor of Vitoss Bone Graft Substitute products. Under this arrangement, we are obligated to pay no more than $5,000,000 in aggregate payments. From inception of the royalty arrangements through September 30, 2009, we have made aggregate royalty payments of $3,102,086.
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 $1,006,000 in 2016.
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 $1,915,000 for license fees and product development milestones pursuant to contractual obligations that we incurred during the nine months ended September 30, 2009. We may be contractually obligated to pay up to $2,000,000 under a license agreement in the event that certain product development and launch milestones are met. We do not expect to pay these milestones until 2010 at the earliest, if at all.
Results of Operations
Product Sales. Product sales for the three and nine months ended September 30, 2009 increased 8% and 22% to $22,295,070 and $68,476,675, respectively, as compared to $20,563,081 and $56,068,078 for the same periods in 2008. During the third quarter of 2009, sales of our orthobiologics products increased 7% and sales of our biosurgery products increased 12% compared to the year earlier quarter. Total sales in the third quarter of 2009 increased over the corresponding 2008 quarter at a slower rate than in previous quarters. We believe that this lower growth was primarily due to two factors. First, the third quarter is typically affected by summer seasonality, but this had less of an impact in 2008 because of the rapid uptake of Vitoss Bioactive Foam launched earlier that year. Secondly, we believe that sales force productivity in the quarter was adversely affected by the launch of Cortoss in the U.S. and the time required to educate physicians and hospital new technology committees about Cortoss.
Approximately 76% and 77% of our product sales during the three and nine months ended September 30, 2009, respectively, were from our orthobiologics products, as compared to approximately 76% and 75%, respectively, of product sales during the same periods in 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 and nine months ended September 30, 2009. Our biosurgery products contributed approximately 24% and 23% of product sales for the three and nine months ended September 30, 2009, respectively, as compared to 24% and 25%, respectively, for the same periods in 2008.
For the three and nine months ended September 30, 2009, 95% and 94%, respectively, of product sales were in the U.S. compared to 94% and 93% for the same periods in 2008. The remaining sales during 2009 and 2008 were the result of product sales outside the U.S., primarily in Europe.
Gross Profit. Gross profit for the three and nine months ended September 30, 2009 was $15,145,252 and $46,650,146, respectively, compared to $13,880,884 and $37,217,765, respectively, for the same periods in 2008. As a percentage of sales, gross profit was 68% for the three and nine months ended September 30, 2009, compared to 68% and 66% for the same periods in 2008. The increase in the gross margin for the nine months ended September 30, 2009, compared to the same period in 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 September 30, 2009 and 2008 were $16,149,365 and 15,085,223, respectively, which represents a 7% increase year over year in quarterly operating expenses. Operating expenses for the nine months ended September 30, 2009 and 2008 were $48,123,974 and $45,731,236, respectively, which represents a 5% increase year over year in operating expenses for the first three quarters of 2009. Operating expenses were 72% and 70%, respectively, of product sales for the three and nine months ended September 30, 2009, as compared to 73% and 82%, respectively, for the same periods in 2008.
General and administrative expenses for the three and nine months ended September 30, 2009 were $3,443,940 and $9,148,039, respectively, a 29% and 12% increase compared to $2,671,559 and $8,202,293, respectively, for the same periods in 2008. The increase in expenses during the third quarter and first nine months of 2009 was primarily due to severance costs associated with the departure of a senior executive officer, combined with higher consulting costs. General and administrative expenses were 15% and 13% of product sales for the three and nine months ended September 30, 2009, respectively, as compared to 13% and 15% for the same periods in 2008.
Selling and marketing expenses for the three and nine months ended September 30, 2009 were $10,819,777 and $33,433,176, respectively, a 1% decrease and a 4% increase compared to $10,957,284 and $32,236,273, respectively for the same periods in 2008. The decrease in the third quarter of 2009 compared to the third quarter of 2008 is due to lower commission expense, combined with lower personnel-related and demonstration product costs, partially offset by increased training and education costs, Cortoss-related marketing costs and marketing expenditures outside the United States. The decrease in commission expense during the third quarter of 2009 compared to the corresponding quarter in 2008 was primarily due to a higher commission rate paid in the third quarter of 2008 resulting from the strong growth in Vitoss Bioactive Foam. The increase in selling and marketing expenses for the nine months ended September 30, 2009 compared to the prior period in 2008 is due to an increase in commission expense correlated with the increase in sales partially offset by the decrease in the overall commission rate from 2008 to 2009. Other than commissions, increases in costs related to the Cortoss launch were partially offset by more effective cost management of certain sales force discretionary spending.
Research and development expenses increased to $1,885,648 and $5,542,759 for the three and nine months ended September 30, 2009 respectively, compared to $1,456,380 and $5,292,670 for the same periods in 2008. The 29% and 5% increase for the three and nine months ended September 30, 2009, respectively, compared to the corresponding periods in 2008, primarily was due to higher costs associated with new product development, primarily for our Vitoss line of products. Research and development expenses were 8% of product sales for the three and nine months ended September 30, 2009 and 7% and 9% for the same periods in 2008.
Net other expense. Net other expense for the three and nine months ended September 30, 2009 was $722,514, and $2,098,708, respectively. Our net other expense for the three and nine months ended September 30, 2008 was $475,422 and $972,584. Net other expense for the three months ended September 30, 2009 was higher than the corresponding period in 2008 primarily due to lower interest income due to lower interest rates and lower cash, cash equivalents and short-term investment balances in 2009. Net other expense for the nine months ended September 30, 2009 was higher than the corresponding period in 2008 due to higher interest expense relating to outstanding notes payable as the principal amount was outstanding for a longer period of time during the nine months ended September 30, 2009 as compared to the prior period in 2008, combined with lower interest rates and lower cash, cash equivalents and short-term investments.
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