SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
Commission File Number: 333-22359
BIONX IMPLANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3458598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1777 Sentry Parkway West
Gwynedd Hall, Suite 400
Blue Bell, Pennsylvania 19422
(Address of principal executive office, including zip code)
215-643-5000
(Registrant's telephone number, including area code)
279B Great Valley Parkway, Malvern, Pennsylvania 19355
--------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 _____ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At May 31, 1997, there were 8,916,127 shares of Common Stock, par value $.0019
per share, outstanding.
<PAGE>
BIONX IMPLANTS, INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1997
(historical and pro-forma, unaudited) and
December 31, 1996 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 27
<PAGE>
Item 1. Financial Statements
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and March 31, 1997
(in thousands)
Pro Forma
December 31, March 31, March 31,
1996 1997 1997
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 1,593 1,278 23,748
Inventory, net 1,031 1,226 1,226
Trade accounts receivable, net
of allowance of $127 as
of March 31, 1997 and $97
as of December 31, 1996 1,708 2,198 2,198
Grants receivable 123 79 79
Deferred offering costs 195 508 0
Prepaid expenses and other
current assets 153 313 313
--- --- ---
Total current assets 4,803 5,602 27,564
Investments 100 90 90
Deposits 44 44 44
Plant and equipment, net 483 660 660
Goodwill and intangibles 3,939 3,879 3,879
----- ----- -----
Total assets $ 9,369 10,275 32,237
===== ===== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $ 848 1,653 1,653
Long-term debt, current portion 223 225 225
Related party 163 85 85
Current income tax liability 205 280 280
Accrued and other current
liability 1,317 1,114 1,114
----- ----- -----
Total current liabilities 2,756 3,357 3,357
----- ----- -----
Long-term debt 590 631 631
----- ----- -----
Contingencies
Series A mandatorily redeemable
convertible preferred stock,
par value $0.001 per share: 5,000 5,000 -
------ ----- ----- ----
Stockholders' equity
Preferred stock, par value $0.001
per share 8,000,000 authorized
and none issued and outstanding
Common stock, par value $0.0019 per
share, 31,600,000 shares
authorized and 5,018,424 shares
issued and outstanding as of
March 31, 1997 (8,916,127 pro
forma common shares as of
March 31, 1997 upon consummation
of the initial pubic offering) 10 10 17
Additional paid-in capital 8,968 8,968 35,923
Accumulated deficit (7,686) (7,464) (7,464)
Foreign currency translation
adjustment (269) (227) (227)
------ ----- -------
Total stockholders' equity 1,023 1,287 28,249
------ ----- ------
Total liabilities and stockholders'
equity $ 9,369 10,275 32,237
======= ======= =======
See accompanying notes to the Consolidated Financial Statements
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended March 31,
1996 1997
Revenues:
Product sales $ 666 3,218
License and grant revenues 50 -
--- -----
Total revenues 716 3,218
--- -----
Cost of good sold 458 803
--- ----
Gross profit 258 2,415
--- -----
Selling, general and administrative 620 1,940
Research and development 99 181
-- -----
Total operating expenses 719 2,121
Operating income (loss) (461) 294
---- ---
Other income and expenses:
Interest income (expense) (28) 3
--- ---
Total other income (expense), net (28) 3
Income (loss) before provision for
income taxes (489) 297
Provision for income taxes - 75
--------- -------
Net income (loss) $ (489) 222
========= =======
Pro forma net income (loss) per share $ (0.09) 0.02
Weighted average common and dilutive
equivalent shares outstanding 5,516 9,232
======== ========
See accompanying notes to the Consolidated Financial Statements
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31,
1996 1997
Cash flows from operating activities:
Net income (loss) $ (489) 222
---- ----
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Depreciation and amortization 30 99
Other non-cash charges
Change in assets and liabilities:
Increase in accounts receivable (160) (490)
(Increase) decrease in inventory 21 (195)
Decrease in grants receivable - 44
(Increase) in prepaid expense
and other assets (63) (160)
(Increase) decrease in investments (59) 10
Increase in trade accounts payable 37 805
Decrease in related party - (78)
Increase (decrease) in current tax
liability (16) 75
Increase (decrease) in accrued and
other liabilities 702 (203)
--- -----
492 ( 93)
--- ---
Net cash provided by operating activities 3 129
--- ---
Cash flows from investing activities
Purchases of plant and equipment (188) (216)
---- -----
Net cash used in investing activities (188) (216)
---- -----
Cash flow from financing activities:
Proceeds from long-term debt 362 43
Deferred offering costs - (313)
Net cash provided by (used in) financing
activities 362 (270)
Net effects of foreign exchange rate
differences 36 42
Net increase (decrease) in cash and cash
equivalents 213 (315)
Cash and cash equivalents at beginning
of period 51 1,593
--- ------
Cash and cash equivalents at end of
period $ 264 1,278
======== =======
See accompanying notes to the Consolidated Financial Statements
<PAGE>
BIONX IMPLANTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared by Bionx Implants,
Inc. (the "Company") and are unaudited. In the opinion of the Company's
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position as of
December 31, 1996 and March 31, 1997, and the Company's consolidated results of
operations and cash flows for the three months ended March 31, 1997 and 1996
have been made. Certain information and footnote disclosures required under
generally accepted accounting principles have been condensed or omitted from the
consolidated financial statements and notes thereto presented herein pursuant to
the rules and regulations of the Securities and Exchange Commission. The
consolidated financial statements and notes thereto presented herein should be
read in conjunction with the Company's audited consolidated financial statements
for the year ended December 31, 1996 and notes thereto included in the Company's
Registration Statement on Form S-1 (No. 333-22359) filed with the Securities and
Exchange Commission. The results of operations and the cash flows for the three
months ended March 31, 1997 are not necessarily indicative of the results to be
expected for any other interim period or the entire fiscal year.
2. Inventory
Inventory consists of the following components (000's):
December 31, March 31,
1996 1997
Raw materials................................. $ 101 125
Finished goods................................ 1,210 1,457
------- ------
1,311 1,582
Less reserves......................... (280) (356)
-------- ------
$ 1,031 1,226
======== =======
<PAGE>
3. Initial Public Offering and Related Transactions; Pro Forma Balance Sheet
During the second quarter of 1997, the Company consummated its initial
public offering of Common Stock (the "IPO"). A total of 2,300,000 shares of
Common Stock (including 300,000 shares issued upon exercise of the Underwriters'
over - allotment option) were issued pursuant to the IPO. In connection with the
IPO, all of the Company's outstanding shares of Series A Preferred Stock were
automatically converted into a total of 1,052,638 shares of Common Stock and an
additional 245,065 shares of Common Stock were issued upon the exercise of all
outstanding warrants. Net proceeds from the IPO and the exercise of warrants
were approximately $22.0 million.
The unaudited pro forma balance sheet as of March 31, 1997 presented herein
reflects the above-mentioned conversion of the Company's preferred stock and
exercise of warrants, and common stock issued pursuant to the IPO.
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding giving effect to certain adjustments described
below. Common equivalent shares from stock options are excluded from the
computation of pro forma net loss per share as their effect is anti-dilutive,
except that, pursuant to Securities and Exchange Commission (SEC) Staff
Accounting Bulletins and SEC staff policy, common stock and common stock
equivalent shares issued at prices below the initial public offering price
during the preceding twelve months of the offering have been included in the
computation as if they were outstanding for all periods presented (using the
treasury stock method and the offering price).
Pursuant to SEC staff policy, the calculation of shares used in computing
pro forma net loss per share also includes the weighted average number of common
equivalent shares of Series A Preferred Stock and warrants that automatically
converted into shares of common stock upon completion of the IPO (using the
if-converted method) from their respective original dates of issuance.
The weighted average shares used to compute the pro forma net loss per
share at March 31, 1977 includes the effect of the 2.3 million shares issued in
the Company's IPO as if outstanding as of the beginning of the three months
ended March 31, 1997.
4. Subsequent Events
New Facilities
On May 17, 1997, the Company relocated its headquarters facility from
Malvern, PA to a new location in Blue Bell, PA. The new leased space,
representing approximately 7,300 square feet, has been leased for a period of
five years, with an option to extend the lease for an additional five years. The
initial annual rent on this space will be approximately $120,000, representing
an approximate $90,000 increase over the previous annual rent on the Malvern
facility.
Spin-Off
Two of the Company's shareholders and the Company were each one third
equity owners in a business organized to engage in developing, manufacturing and
selling polymer-based advanced drug delivery systems (the "Business"). The
Company's Board of Directors concluded that in light of the substantial
expenditures that would be required in order to bring any of the Business'
products to market, it was in the best interests of the Company and its
shareholders for the Company to forego its development of the Business and to
spin-off the Business. The Company has distributed its interest in the Business
to shareholders of record of the Company as of April 29, 1997, a date prior to
consummation of the Company's initial public offering.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business
Statements regarding future performance in this Quarterly Report on Form
10-Q constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors, including those set forth under the caption "Risk Factors"
herein.
The Company was founded in 1984 to develop certain resorbable polymer
implants for orthopaedic uses. The Company has incurred substantial operating
losses since its inception and, at March 31, 1997, had an accumulated deficit of
approximately $7.5 million. Such losses have resulted principally from expenses
associated with the development, patenting and clinical testing of the Company's
Self-Reinforcing technologies and resorbable implant designs, preparation of
submissions to the U.S. Food and Drug Administration (the "FDA") and foreign
regulatory agencies, the development of sales, marketing and distribution
channels, the write-off of acquired in-process research and development, and the
development of its manufacturing capabilities. Although the Company's revenues
grew significantly in 1996 and in the first quarter of 1997, no assurance can be
given that this trend will continue or that revenues of any magnitude will
exceed expenses incurred in anticipation of future growth. Accordingly, the
Company may incur significant operating losses in the future as it continues its
product development efforts, expands its marketing, sales and distribution
activities and scales up its manufacturing capabilities. There can be no
assurance that the Company will be able to continue to successfully
commercialize its products or that continued profitability will be achieved.
The Company first introduced its polyglycolic acid ("PGA") polymer pins in
1984 and its PGA screws in 1986. In 1987, the Company introduced its first
poly-l-lactic acid ("PLLA") polymer products, PLLA pins. PLLA screws were
introduced in 1989. Since the introduction of these products, the Company has
expanded its PGA and PLLA pin and screw product lines to address additional
clinical indications. The Company's PGA membrane product was introduced in 1992,
and, in 1995, the Company launched its Meniscus Arrow, PLLA tacks, and PGA and
PLLA urology stents. Prior to 1996, the Company derived substantially all of its
revenue from sales of its PLLA and PGA screws and pins. A substantial portion of
the Company's revenues and revenue growth in the second half of 1996 and the
first quarter of 1997 resulted from U.S. sales of the Meniscus Arrow, which
received FDA clearance in March 1996. To date, all products sold by the Company
have been launched first in international markets. During the three months ended
March 31, 1997 and 1996, international product sales represented 13%, and 92%,
respectively, of the Company's total product sales.
<PAGE>
The Company typically sells implant grade, stainless steel surgical
instruments for use with each of its Self-Reinforced, resorbable products. The
margins for these instruments are typically lower than the margins applicable to
the Company's implant products. However, since orthopaedic companies operating
in the U.S. have traditionally loaned rather than sold instruments to their
customers, the Company anticipates that in the future, it will be necessary for
the Company to provide an increasing proportion of its instrumentation in the
U.S. on a loan basis. Similar practices are not common in international markets.
For financial statement purposes, revenues from the sale of instrumentation
systems are included within products sales and costs associated with the
Company's procurement of such systems are included within cost of goods sold.
The Company's instrumentation systems are reusable. Accordingly, sales and loans
of such systems are likely to be most pronounced in periods shortly after
product launches and likely to be less prevalent as penetration of the market
increases over the long term. Thus, the negative impact on the Company' gross
profit margins associated with sales and loans of a particular instrument system
is expected to decrease after a substantial market penetration has been
achieved. Similarly, such impact is likely to lessen to the extent that sales
and loans of instrument systems decrease as a percentage of total product sales.
However, no assurance can be given as to the extent to which instrumentation
sales will depress the Company's gross profit margins in the future.
The Company sells its products through managed networks of independent
sales agents, distributors and dealers. In the U.S., the Company handles all
shipping and invoicing functions directly and pays commissions to its sales
agents. Outside the U.S., the Company sells its products directly to
distributors and dealers at discounts that vary by product and by market.
Accordingly, the Company's U.S. sales result in higher gross margins than
international sales. The Company anticipates that during the next few years, the
relative percentage of its U.S. products sales to total product sales is likely
to continue to increase. Since the Company pays commissions on sales made
through its U.S. network, an increased percentage of U.S. sales in the future
will likely result in an increase in the percentage of selling, general and
administrative expenses to total sales. This increase will be partially offset
by the higher gross margins received on products sold in the U.S.
Outside of the orthopaedic market, the Company may seek to establish
licensing or distribution agreements with strategic partners to develop certain
products and to market and distribute products that the Company elects not to
distribute through its managed networks of independent sales agents,
distributors and dealers. The Company has licensed its membrane patent for use
in dental and two other applications in Europe to Ethicon GmbH, a subsidiary of
Johnson & Johnson. Ethicon GmbH has agreed to pay royalties to the Company upon
the initiation of commercial sales of its membrane products, which are targeted
for commercial release commencing in the second quarter of 1997. Revenues from
the Company's sales of such products have not been material. Accordingly, no
assurance can be given that royalty payments from Ethicon GmbH, when and if they
commence, will be material. Furthermore, no assurance can be given that the
<PAGE>
Company will be able to enter into other license arrangements regarding other
products on satisfactory terms.
The Company has entered into agreements pursuant to which the Company is
obligated to pay royalties based on net sales of certain of the Company's
products, including the Meniscus Arrow. To the extent that sales of the Meniscus
Arrow products and other licensed products increase in future periods, the
Company's license obligations are expected to increase.
The Company has benefited from the research and development activities of
Dr. Pertti Tormala, the founder of the Company, at the Technical University in
Tampere, Finland. Dr. Tormala is currently an Academy Professor at the Technical
University and is permitted by the University to devote his efforts to
developing products for the Company. Dr. Tormala utilizes a group of senior
researchers, graduate students and faculty at the Technical University to
perform research and development projects involving resorbable polymers and
other topics relating to the Company's technology and manufacturing processes.
This arrangement, permitted in Finland as a means of encouraging the
commercialization of technological development, has resulted in substantial cost
savings to the Company while greatly expanding its product development efforts.
The Company has hired certain senior researchers from the University program and
anticipates that, in the future, more of its product development work will be
performed and funded directly by the Company, thereby increasing the Company's
research and development expenses.
The Company currently manufactures its implant products solely at its
Tampere, Finland plant. The Company intends to establish a manufacturing
capability in the U.S. The Company plans to establish this capability either by
equipping and operating a leased facility or contracting with a third party to
provide a manufacturing capability to the Company. The Company believes that on
an interim basis, contract manufacturing may enable the Company to save certain
staffing costs and enable senior management to focus on other aspects of its
business. However, if the Company arranges for a third party to provide contract
manufacturing in the U.S., fees payable to such manufacturer may exceed any
savings in staffing costs and result in higher costs of goods sold and lower
gross profit. Ultimately, in operating a U.S. facility, the Company will incur
certain duplicative manufacturing costs which could result in higher costs of
goods sold and lower gross profit margins.
While the Company's operating losses have resulted in net operating loss
carryforwards of approximately $2.0 million for income tax reporting purposes,
the extent to which such carryforwards are available to offset future U.S. and
Finnish taxable income is significantly limited as a result of various ownership
changes that have occurred in recent years. Additionally, because U.S. tax laws
limit the time during which these carryforwards may be applied against future
taxes, the Company may not be able to take full advantage of the U.S. portion of
these carryforwards for federal income tax purposes. Furthermore, income earned
by a foreign subsidiary may not be offset against
<PAGE>
operating losses of Bionx Implants, Inc. or its U.S. subsidiaries. As a result,
the Company may incur tax obligations during periods when it reflects a
consolidated net operating loss. The statutory tax rates applicable to the
Company and its foreign subsidiaries vary substantially, presently ranging from
approximately 40% in the U.S. to 28% in Finland. Tax rates have fluctuated in
the past and may do so in the future.
The Company's results of operations have fluctuated in the past on an
annual and quarterly basis and may fluctuate significantly from period to period
in the future, depending on many factors, many of which are outside of the
Company's control. Such factors include the timing of government approvals, the
medical community's acceptance of the Company's products, the success of
competitive products, the ability of the Company to enter into strategic
alliances with corporate partners, expenses associated with patent matters, the
results of regulatory inspections and the timing of expenses related to product
launches.
Product sales trends will depend upon many factors, including demand and
market acceptance for the Company's existing and future products, the timing of
regulatory approvals, the timing and results of clinical trials, the timing of
the introduction of new products by the Company and by competing companies, and
the Company's ability to attract and retain highly qualified technical, sales
and marketing personnel. Accordingly, there can be no assurance that future
product sales will not vary significantly from quarter to quarter.
Results of Operations
Product Sales. The Company's product sales increased by 383% from
approximately $666,000 during the first three months of 1996 to $3.2 million
during the first three months of 1997. The increase primarily resulted from the
U.S. introduction of the Company's Meniscus Arrow products in the second quarter
of 1996; revenues from the sale of Meniscus Arrow products were approximately
$99,000 during the first three months of 1996 (generated solely from
international sales), as compared with $2.3 million during the first three
months of 1997. In addition, the 1997 product sales increase reflects increased
utilization of the Company's managed network of independent sales agents in the
U.S. and increased sales of the Company's existing products in international
markets. Revenues generated from the sale of instrumentation systems and related
loaner fees represented 22% of product sales during the first three months of
1996 as compared with 4% during the first three months of 1997, decreasing from
$145,000 to $143,000.
License and grant revenues. License and grant revenues totaled $50,000
during the first three months of 1996. The Company generated no such license or
grant revenues during the first three months of 1997. Royalty payments by
Ethicon GmbH based upon actual sales are expected to commence in the second
quarter of 1997, although no assurances can be given with respect to the timing
or amount of such payments. Upon the commencement of such sales by Ethicon GmbH,
the Company will be required to cease its dental membrane sales in Europe, which
historically have not been significant.
<PAGE>
Gross profit; gross margin. The Company's gross profit increased from
$258,000 during the first three months of 1996 to $2.4 million during the first
three months of 1997. The increase in the Company's gross profit primarily
reflected the increased sales of Meniscus Arrow products after their
introduction in the U.S. in the second quarter of 1996. Overall, the Company's
gross profit margin increased from 36% during the first three months of 1996 to
75% during the first three months of 1997. The increase in gross margin in 1997
is attributable to several factors, including an increase in sales of the higher
margin Meniscus Arrow product, an increase in the percentage of revenues
generated in the U.S., a decrease in the percentage of revenues generated by the
lower margin instrument products, and the leveraging of certain fixed
manufacturing costs over the Company's expanded revenue base.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 213% from $620,000 during the first three
months of 1996 to $1.9 million during the first three months of 1997. Such
expenses were 93% of product sales during the first three months of 1996 and
60% of product sales during the first three months of 1997. Selling, general and
administrative expenses consist primarily of commissions paid on product sales
in the U.S., patent and license related expenses, costs incurred in connection
with the regulatory process, expenses associated with supporting the Company's
managed networks of independent sales agents, distributors and dealers and, in
1997, amortization of goodwill and patents and depreciation of property and
equipment associated with the Company's September 1996 Reorganization (such
amortization and depreciation amounting to approximately $60,000 and expected to
be approximately $255,000 per year through 2017). The increase in the dollar
amount of selling, general and administrative expenses was primarily
attributable to increased commission payment obligations reflecting the
Company's increased product sales in the U.S. and increased expenses associated
with establishing and supporting a managed network of independent sales agents
in the U.S. The decrease in the percentage relationship of such expenses to
product sales reflects the leveraging of certain such expenses over the
Company's expanded revenue base.
Research and development. Research and development expenses increased by
83% from $99,000 during the first three months of 1996 to $181,000 during the
first three months of 1997. This increase reflected an increased volume of
product development work being performed by the Company and increased staffing
levels.
Interest expense. Interest expense was reduced as a result of the Company's
September 1996 private placement of Preferred Stock and warrants, which enabled
the Company to repay certain bank debt.
Income taxes. The provision for income taxes during the first quarter of
1997 reflects the Company's profitable operations during the period, and
anticipates partial utilization of certain net operating loss carryforwards.
<PAGE>
Net Income. The Company reported net income of $222,000 or $.02 per share
for the first three months of 1997, as compared with a net loss of $489,000 or
$.09 per share for the comparable period in 1996. No assurance can be given that
the Company will continue to be profitable during future periods.
Per Share Calculation. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings per
Share ("Statement No. 128"), effective for fiscal years commencing after
December, 1997. This Statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires the dual presentation of basic and
diluted EPS on the face of the income statement of all entities with complex
capital structures. Statement 128 also requires a reconciliation of the
numerator and denominator of the diluted EPS computation.
Had Statement 128 been adopted for the first quarter of 1997, basic and
diluted EPS would have been computed as follows (in thousands, except per share
amounts):
Income Share Per Share
(Numerator) (Denominator) Amount
Basic EPS $ 222 8,671 $0.03
Incremental shares from assumed
exercise of dilutive options
and warrants - 561 -
---------- ----------- --------
Diluted EPS 222 9,232 0.02
Liquidity and Capital Resources
Historically, the Company has relied upon bank loans (guaranteed in certain
instances by the Company's principal stockholders), capital contributions by its
principal stockholders and government grants to fund its operations. In
September 1996, the Company completed a private placement of preferred stock
(all of which was converted into Common Stock upon consummation of the Company's
initial public offering in April 1997) and warrants (all of which were exercised
during April 1997) in which it received net proceeds of approximately $4.9
million. These net proceeds were used to repay bank debt, to pay down trade
debt, to fund manufacturing and product development efforts and for other
working capital purposes. During April 1997, the Company consummated its initial
public offering. In May 1997, the Underwriters exercised in full their
over-allotment option granted in connection with the initial public offering.
Net proceeds from the initial public offering (including the exercise of the
over-allotment option) and the exercise of warrants during April 1997 are
estimated to be approximately $22.0 million. In addition, the Company recently
made arrangements for a $2 million credit line, secured by the personal property
of Bionx Implants, Inc. and its Biostent, Inc. subsidiary.
<PAGE>
Amounts to be advanced thereunder are subject to the lender's discretion and are
limited to specific percentages of certain domestic receivables and inventory.
To date, no amounts have been borrowed pursuant to this facility.
At March 31, 1997 and December 31, 1996, cash and cash equivalents totaled
$1.3 million and $1.6 million, respectively. The decrease in cash and cash
equivalents of approximately $300,000 has been used primarily to purchase
production equipment associated with the Company's manufacturing facility in
Finland and for working capital purposes.
As of March 31, 1997, the Company had working capital of $2.2 million. At
that date, the Company had outstanding approximately $856,000 of long-term
debt (including the current portion of such indebtedness); the Company
expects to repay a portion of such long-term debt out of the proceeds of its
initial public offering.
The Company believes that existing capital resources from its initial
public offering, its September 1996 private placement and its $2.0 million
credit line, together with cash flow from operations (if, and to the extent,
generated), will be sufficient to fund its operations through 1998. However, the
Company's future capital requirements and the adequacy of available funds will
depend on numerous factors, including market acceptance of its existing and
future products, the successful commercialization of products in development,
progress in its product development efforts, the magnitude and scope of such
efforts, progress with preclinical studies, clinical trials and product
clearances by the FDA and other agencies, the cost and timing of its efforts to
expand its manufacturing capabilities, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the development of
strategic alliances for the marketing of certain of its products. The Company's
operations did not produce positive cash flows during 1994, 1995 and 1996. To
the extent that funds generated from the Company's operations, together with its
existing capital resources (including such credit facility), and the net
interest earned thereon, are insufficient to meet current or planned operating
requirements, the Company will be required to obtain additional funds through
equity or debt financings, strategic alliances with corporate partners and
others, or through other sources. The terms of any equity financings may be
dilutive to stockholders and the terms of any debt financings may contain
restrictive covenants which limit the Company's ability to pursue certain
courses of action. Principal stockholders of the Company who previously provided
funding to the Company and provided guarantees to sources of credit have
indicated that they do not intend to continue furnishing such assistance. The
Company does not have any committed sources of additional financing beyond that
described above, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or eliminate
certain aspects of its operations or attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets. If adequate funds are not available, the
<PAGE>
Company's business, financial condition and results of operations could be
materially and adversely affected.
Risk Factors
Statements regarding future performance in this Quarterly Report on Form
10-Q constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors, including those set forth below:
History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Fluctuating Results of Operations. The Company has incurred
substantial operating losses since its inception and, at March 31, 1997, had an
accumulated deficit of approximately $7.5 million. Such losses have resulted
principally from expenses associated with the development, patenting and
clinical testing of the Company's Self-Reinforcing technologies and resorbable
implant designs, preparation of submissions to the FDA and foreign regulatory
bodies, the development of sales, marketing and distribution channels, the
write-off of acquired in-process research and development and the development of
manufacturing capabilities. Although the Company's revenues have grown
significantly during 1996 and the first three months of 1997, no assurance can
be given that this trend will continue or that revenues of any magnitude will
exceed expenses incurred in anticipation of future revenue growth. Accordingly,
the Company may incur significant operating losses in the future as the Company
continues its product development efforts, expands its marketing, sales and
distribution activities and scales up its manufacturing capabilities. There can
be no assurance that the Company will be able to continue to successfully
commercialize its products or that consistent profitability will be achieved.
The Company's results of operations have fluctuated in the past on an annual and
quarterly basis and may fluctuate significantly from period to period in the
future, depending upon a number of factors, many of which are outside of the
Company's control. Such factors include the timing of government approvals, the
medical community's acceptance of the Company's products the success of
competitive products, the ability of the Company to enter into strategic
alliances with corporate partners, expenses associated with patent matters, and
the timing of expenses related to product launches. Due to one or more of these
factors, in one or more future quarters, the Company's results of operations may
fall below the expectations of securities analysts and investors. In that event,
the market price of the Company's Common Stock could be materially and adversely
affected.
Uncertainty of Market Acceptance. The Company's success will depend in part
upon the acceptance of the Company's Self-Reinforced resorbable implants by the
medical community, including health care providers, such as hospitals and
physicians, and third-party payors. Such acceptance may depend upon the extent
to which the medical community perceives the Company's products as a safe,
reliable and cost-effective alternative to non-resorbable products, which are
widely accepted, have a long
<PAGE>
history of use and are generally sold at prices lower than the prices of the
Company's products. Such acceptance may also depend upon the extent to which the
medical community believes that the Company's Self-Reinforced, resorbable
implants have overcome the strength and composition difficulties experienced
with first generation resorbable implants. Ultimately, for the Company's
products to gain wide market acceptance, it will also be necessary for the
Company to convince surgeons that the benefits associated with the Company's
products justify the modification of standard surgical techniques in order to
use the Company's implants safely and effectively. There can be no assurance
that the Company's products will achieve market acceptance on a timely basis, or
at all. Failure of some or all of the Company's products to achieve significant
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary
Rights. The Company believes that its success is dependent in part upon its
ability to preserve its trade secrets, obtain and maintain patent protection for
its technologies, products and processes, and operate without infringing the
proprietary rights of other parties. As a result of the substantial length of
time and expense associated with developing and commercializing new medical
devices, the medical device industry places considerable importance on obtaining
and maintaining trade secret and patent protection for new technologies,
products and processes.
The Company's patent strategy has been to seek patent protection for the
technologies that produce the Company's Self-Reinforced resorbable polymer
products and, in certain instances, for the products themselves. The Company
owns or has licenses to patents issued in the U.S. and in various foreign
countries and has patent applications pending at the U.S. PTO and in the patent
offices of various foreign countries. Provided that all requisite maintenance
fees are paid, the Company's four principal U.S. patents (two of which are owned
by the Company and two of which are licensed to the Company on an exclusive
basis) will expire between 2004 and 2008. The two principal U.S. patents owned
by the Company relate to the Company's Self-Reinforced resorbable polymer
products, the Company's sintering process, and resorbable polymer products
produced from the Company's controlled drawing process. The Company also has
pending two principal U.S. patent applications that relate to the Company's
resorbable stent technology. The Company's other patents and patent applications
relate to various uses for Self-Reinforced resorbable polymers, either alone or
in combination with other resorbable polymers or biocompatible materials, and
generally involve specific applications or improvements of the technologies
disclosed in the Company's principal patents and patent applications. The
Japanese counterpart to one of the two principal patents owned by the Company is
currently the subject of opposition proceedings. A European counterpart to one
of the Company's two principal patents has been revoked by the European Patent
Office for lack of novelty based on an earlier publication. The Company has
filed an appeal of the European Patent Office's revocation decision. The
Japanese patent application is being challenged on lack of novelty and
inventiveness grounds on the basis of disclosures made in patent and
<PAGE>
other publications. The Company is vigorously defending its European and
Japanese patent positions in these proceedings. No assurance can be given as to
whether such appeal in Europe will be successful or as to the outcome of the
pending opposition proceeding. In order to clarify and confirm its U.S. patent
position, the Company has requested reexamination by the U.S. PTO of the two
principal U.S. patents owned by the Company. No assurance can be given as to
whether the issues raised in the reexamination proceedings will be resolved in
the Company's favor. The reexamination process is expected to take up to twelve
months or longer. Such reexamination could result in some or all of the patent
claims set forth in these two U.S. patents being altered to provide narrower
coverage or determined to be unpatentable. No assurance can be given as to the
outcome of the reexamination process. Narrowing of the coverage or a holding of
unpatentability in relation to one or both of these two principal U.S. patents
may significantly ease entry to the U.S. market for the products of the
Company's competitors and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon trade secret protection for certain unpatented
aspects of its proprietary technology, including its Self-Reinforcing
technology. Although the Company has taken steps to protect its trade secrets
and know-how, through the use of confidentiality agreements with its employees
and certain of its business partners and suppliers, there can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, that others will not independently develop or otherwise
acquire substantially equivalent proprietary technology, information or
techniques, that others will not otherwise gain access to or disclose the
Company's proprietary technologies or that any particular proprietary technology
will be regarded as a trade secret under applicable law. There can also be no
assurance that the steps taken by the Company will prevent misappropriation of
its trade secrets. As a result of the reliance that the Company places on its
trade secrets, loss of the Company's trade secret protection in this area would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Additionally, the Company is licensed under two principal U.S. patents.
Pursuant to this license agreement, the Company has the exclusive right in the
U.S. to manufacture, use and sell certain devices for fixation of meniscus
lesions. This license agreement, which requires the Company to pay periodic
royalties, has a term expiring in 2006, unless terminated earlier by the
licensor for breach by the Company. There can be no assurance that these patents
licensed to the Company are valid and enforceable, and, if enforceable, that
they cannot be circumvented or avoided by competitors.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid or narrow
in scope, or that the Company's present or future patents will provide
significant coverage for or protection to the Company's present or future
technologies, products or processes. Since patent applications are secret until
patents are issued in the U.S., or corresponding applications
<PAGE>
are published in foreign countries, and since publication of discoveries in the
scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make its inventions, or that
it was the first to file patent applications for such inventions.
In the event that a third party has also filed a patent application
relating to an invention claimed in a Company patent application, the Company
may be required to participate in an interference proceeding declared by the
U.S. PTO to determine priority of invention, which could result in substantial
uncertainties and cost for the Company, even if the eventual outcome is
favorable to the Company. In addition, there can be no assurance that others
will not obtain access to the Company's know-how or that others will not be, or
have not been, issued patents that may prevent the sale of one or more of the
Company's products or the practice of one or more of the Company's processes, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
There can be no assurance that the Company would be able to obtain a license on
terms acceptable to the Company or that the Company would be able to
successfully redesign its products or processes to avoid such patents. In either
such case, such inability could have a material adverse effect on the Company's
business, financial condition and results of operations.
Legal standards relating to the scope of claims and the validity of patents
in the medical device field are still evolving, and no assurance can be given as
to the degree of protection any patents issued to or licensed to the Company
would provide. The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain competitive advantage. The Company has initiated an
opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. No assurance can be given that these
oppositions will result in either the revocation of that patent or the narrowing
of its claims. If neither opposition is successful, then no assurance can be
given that the third party will not assert that its European patent is infringed
by sales of one or more of the Company's products or by the practice of one or
more of the Company's processes in any of the eight countries identified in the
European patent. Moreover, there can be no assurance that the Company will not
be subject to claims that one or more of its products or processes infringe
other patents or violate the proprietary rights of third parties. Defense and
prosecution of patent claims can be expensive and time consuming, regardless of
whether the outcome is favorable to the Company, and can result in the diversion
of substantial financial, management and other resources from the Company's
other activities. An adverse outcome could subject the Company to significant
liability to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related product development
activities or product sales. In addition, the laws of certain countries may not
protect the Company's patent rights, trade secrets, inventions, products or
processes to the same extent as in the U.S.
<PAGE>
The Company has certain trademark registrations and pending trademark
applications in the U.S. and in various countries. The Company's U.S. and
foreign trademark registrations have 5-20 year terms and are renewable for
additional terms for as long as the Company uses the registered trademark in the
manner recited in the registration and makes the appropriate filings to maintain
and renew registrations. There can be no assurance that any particular
registration, or the mark that is the subject of that registration, will not be
held to be invalid, narrow in scope or not owned exclusively by the Company. In
the past, the Company has agreed with third-parties that it will not use certain
trademarks in connection with certain devices. There can be no assurance that
the Company will not enter into other arrangements to avoid or terminate
infringement, opposition, cancellation or other proceedings, or to induce
third-parties to give up or limit the use of their trademarks, trade names or
other designations.
Uncertainties Relating to Product Development. Product development involves
a high degree of risk. There can be assurance that the Company's products under
development will prove to be safe and effective, will receive the necessary
regulatory approvals or will ultimately be commercially successful. These
products will require substantial additional investment, laboratory development,
clinical testing and regulatory approvals prior to their commercialization.
There can be no assurance that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
new products. The Company's inability to successfully develop and introduce
products under development on a timely basis or at all, or achieve market
acceptance of such products, could have a material adverse effect on the
Company's business, financial condition and results of operations.
FDA Submission Dates Subject to Change. Regulatory submissions can be
delayed, or plans to submit proposed products can be canceled, for a number of
reasons, including the receipt of unanticipated preclinical or clinical study
reports, a determination by the FDA that PMA approval (as described herein)
rather than 501(k) clearance (as described herein) is required with respect to a
particular submission, changes in regulations, adoption of new, or unanticipated
enforcement of existing, regulations, technological developments and competitive
developments. Accordingly, no assurances can be given that the Company's
anticipated regulatory submissions will be made on their target dates, or at
all. Delays in such submissions could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Key Personnel and Relationship with the Technical University
at Tampere. The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, managerial
and finance personnel, and its continuing ability to attract and retain
additional highly qualified scientific, technical, managerial and finance
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain existing personnel and to
attract or retain additional highly qualified employees in the future. At
present, the Company does not maintain key man life insurance on any of its
employees
<PAGE>
and only has employment agreements with two of it employees. The loss of key
personnel and the inability to hire and retain qualified personnel in key
positions could have a material adverse effect on the Company's business,
financial condition and results of operations.
Government Regulation. The Company's products are subject to extensive
regulation by the FDA and certain foreign regulatory agencies. Pursuant to the
Federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder (the "FDC Act"), the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the cost
of any device manufactured or distributed by the Company.
The Company is prohibited from marketing new devices in the U.S. until it
obtains clearance from the FDA under the premarket notification provisions of
Section 510(k) of the FDC Act ("Section 510(k)") or approval of a Premarket
Approval Application ("PMA") from the FDA. A 510(k) submission generally
requires supporting data, which may include clinical data. The process of
obtaining PMA approval is much more costly, lengthy and uncertain. A PMA
application requires extensive clinical data and other supporting information.
When clinical data is required for either a 510(k) submission or a PMA
application, the process of compiling the data can be expensive and
time-consuming, and there can be no assurance that any clinical study proposed
by the Company will be permitted by the FDA, will be completed, or, if
completed, will provide data and information that will support clearance or
approval. The Company believes that it usually takes from four to twelve months
from submission to obtain 510(k) clearance, although it can take longer, and
that the FDA's review of a PMA application after it is accepted for filing can
last from one to three years, or even longer. In all cases, there can be no
assurance that 510(k) clearance or PMA approval will ever be obtained. Moreover,
regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed.
To date, all of the Company's products sold in the U.S. have received
510(k) clearance. However, the FDA recently advised the Company that its urology
stent will require PMA approval. There can be no assurance that the FDA will not
determine that other products currently in development by the Company or future
products must also undergo the more costly, lengthy and uncertain PMA approval
process.
Current FDA enforcement policy prohibits the marketing of approved medical
devices for unapproved uses. The Company's PGA pins have received 510(k)
clearance for the general intended use of "maintenance of alignment of small
fragments of fractured non-load bearing bones in the presence of appropriate
immobilization." The Company
<PAGE>
has promoted this product for numerous specific indications within the general
framework of the language quoted above. Although the Company believes that these
specific indications are covered by the 510(k) clearance already received for
its PGA pins, there can be no assurance that the FDA would not consider
promotion of this product for the specific indications to be a change to the
intended use of the device requiring a new 510(k) submission.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Changes in existing requirements or adoption of new requirements could
adversely affect the ability of the Company to be in regulatory compliance.
Failure to comply with regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will not be required to incur
significant costs to comply with laws and regulations in the future or that laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations.
The FDC Act requires devices to be manufactured in accordance with good
manufacturing practices ("GMPs") which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing,
quality assurance and other matters. Enforcement of GMP regulations has
increased significantly in the last several years, and the FDA has publicly
stated that compliance will be more strictly scrutinized. The FDA has recently
finalized changes to the GMP regulations, including design controls, which will
likely increase the cost of compliance with GMP requirements.
In October 1994, the Company's facility in Finland was inspected by the
FDA. The inspector made several observations related to GMP's, which resulted in
a Warning Letter being issued to the Company on February 23, 1995. The Company
then began an exchange of correspondence with the FDA, which concluded with an
October 10, 1995 letter from the FDA stating, among other things, that the
Company's responses to the Warning Letter were "adequate" and that during the
next inspection, the FDA would "verify that the corrections have been
implemented." During April 14 through 17, 1997, the Company was inspected by the
FDA and received four observations related to GMP's, including one that was
deemed a recurring observation from the 1994 inspection. The Company responded
to the FDA in writing on April 17, 1997. In its response, the Company
acknowledged the observations and indicated that three had been corrected
(including the recurring observation) and that the correction for the fourth was
underway. No assurance can be given that the FDA will determine that the
Company's responses are satisfactory.
In addition, international regulatory bodies often establish regulations
governing product standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. As a
result of the Company's sales in Europe, the Company is required to receive a
"CE" marking certification, an international
<PAGE>
symbol of quality and compliance with the applicable European medical device
directive. In January 1997, the Company received an EC Design Examination and an
EC Quality System Certificate from a European Notified Body, which entitles the
Company to affix a CE marking on all of its currently marketed orthopaedic,
dental and maxillo-facial products. Submission of the required design dossier
for the Company's stent products is scheduled for late 1997. Failure to obtain
CE marking for the Company's stent products by June 14, 1998 would prohibit the
Company from selling such products in the European Economic Area unless and
until compliance is achieved. There can be no assurance that the Company will be
able to achieve and/or maintain compliance required for CE marking for any or
all of its products or that it will be able to produce its products in a timely
and profitable manner while complying with applicable requirements.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing use of hazardous materials. Any violation
of, and the cost of compliance with, these regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition. The medical device industry is subject to intense competition
in the U.S. and abroad. The Company's products compete against metal implants
and other resorbable products for orthopaedic surgery, urology, dentistry and
maxillo-facial surgery applications. Potential competitors may be able to
develop technologies that are as effective as, or more effective or easier to
use than, those offered by the Company, which could render the Company's
products noncompetitive or obsolete. Moreover, many of the Company's existing
and potential competitors have substantially greater financial, marketing,
sales, distribution and technological resources than the Company. Such existing
and potential competitors may be in the process of seeking FDA approval for
their respective products or may possess substantial advantages over the Company
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 distribution channels. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competition will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence Upon Independent Sales Agents, Distributors and Dealers. The
Company markets and sells its products through managed networks of independent
sales agents in the U.S. and independent distributors and dealers in foreign
countries. As a result, a substantial portion of the Company's revenues are
dependent upon the sales efforts of such sales agents, distributors and dealers.
The Company may also rely on its distributors to assist it in obtaining
reimbursement and regulatory approvals in certain international markets. There
can be no assurance that the Company's sales agents, distributors and dealers,
certain of which operate relatively small businesses, have the financial
stability to assure their continuing presence in their markets. The inability of
a sales agent, distributor or dealer to perform its obligations, or the
cessation of business by a sales agent, distributor or dealer, could materially
and adversely affect the Company's
<PAGE>
business, financial condition and results of operations. There can be no
assurance that the Company will be able to engage or retain qualified sales
agents, distributors or dealers in each territory targeted by the Company. The
failure to engage such entities in such territories would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Relating to International Operations. Approximately 32% of the
Company's sales during the year ended December 31, 1996 and 13% of sales in the
first three months of 1997 were generated in international markets. A number of
risks are inherent in international operations. International sales and
operations may be limited or disrupted by the imposition of government controls,
export license requirements, political instability, trade restrictions, changes
in tariffs, difficulties in managing international operations, import
restrictions and fluctuations in foreign currency exchange rates. The
international nature of the Company's business subjects it and its
representatives, agents and distributors to the laws and regulations of the
foreign jurisdictions in which they operate, and in which the Company's products
are sold. The regulation of medical devices in a number of such jurisdictions,
particularly in the European Union, continues to develop and there can be no
assurance that new laws or regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Product Liability Risks; Limited Insurance Coverage. The Company's business
is subject to product liability risks in the testing, manufacturing and
marketing of its products. There can be no assurance that product liability
claims will not be asserted against the Company, its strategic partners or its
licensees. While the Company maintains product liability insurance, there can be
no assurance that this coverage will be adequate to protect the Company against
future product liability claims. In addition, product liability insurance is
expensive and there can be no assurance that, in the future, product liability
insurance will be available to the Company on terms satisfactory to the Company,
if at all. A successful product liability claim or series of claims brought
against the Company in excess of its coverage could have a material adverse
effect on the Company's business, financial condition and results of operations.
No Assurance of Ability to Manage Growth. The Company's experienced
substantial growth in product sales during the second half of 1996 and the first
quarter of 1997. Although there can be no assurance that such growth can be
sustained, products in development may potentially lead to further growth. There
can be no assurance that the Company will be able to (i) develop the necessary
manufacturing capability, (ii) manage an expanded sales and marketing network,
(iii) attract, retain and integrate the required key personnel, or (iv)
implement the financial, accounting and management systems to meet growing
demand for its products should it occur. Failure of the Company to successfully
manage its growth could have a material adverse effect on the Company's
business, financial condition and results of operations.
<PAGE>
Uncertainties Regarding Manufacturing. The Company currently manufactures
its implant products solely in Finland. The Company intends to develop a
manufacturing capability in the U.S. in order to increase its manufacturing
capacity for its existing and new implant products. The Company anticipates that
it will establish this capability either by (i) equipping and operating a leased
facility in the eastern U.S. or (ii) contracting with a third party to provide a
manufacturing capability to the Company. The Company presently is exploring both
of these alternatives. If the Company pursues contract manufacturing, it will
solicit bids from reliable medical device manufacturers, including a subsidiary
of Vital Signs, Inc. ("Vital Signs"). Certain of the directors and principal
stockholders of the Company are directors, officers and stockholders of Vital
Signs. If the Company uses a contract manufacturer, the Company would equip the
manufacturer's facility, with the objective of ultimately transitioning to a
neighboring Company-owned or Company-leased facility. There can be no assurance
that the Company will be able to enter into a contract manufacturing agreement
or otherwise secure the use of suitable facilities in the U.S. on commercially
reasonable terms, or at all. Furthermore, regardless of the alternative
selected, the integration of the Company's existing operations with the U.S.
facility may result in inefficiencies and delays, especially as a result of the
technical requirements necessary to produce products in accordance with the
Company's specifications. There can be no assurance that the Company will not
encounter difficulties in scaling up production, including problems involving
production yield, quality control and assurance, and shortages of qualified
personnel. In addition, the U.S. facility will be subject to GMP regulations,
international quality control standards and other regulatory requirements.
Difficulties encountered by the Company in manufacturing scale-up, or the
failure by the Company to establish and maintain the U.S. facility in accordance
with such regulations, standards or other regulatory requirements, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has experienced occasional periods of delay
in filling product orders due to increases in demand beyond forecasted levels.
The Company is currently upgrading its production machinery and processes to
address this increased demand. No assurance can be given that the integration of
these machines into the production process will occur within the scheduled time
frame or will not result in difficulties in scale-up that could lead to further
delays in filling orders in the future. Difficulties experienced in integrating
such machinery on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
Limited Sources of Supply; Lack of Contractual Arrangements. The raw
materials for the Company's PLLA products are currently available to the Company
from three qualified sources, while the Company's PGA raw materials are
available from two qualified sources. The Company's raw materials have been used
in products cleared by the FDA and the Company's suppliers maintain Device
Master Files at the FDA that contain basic toxicology and manufacturing
information. The Company does not have long-term supply contracts with any of
its suppliers, although it is currently negotiating a supply agreement with its
principal PLLA supplier. In the event that the Company is unable to obtain
sufficient quantities of raw materials on commercially reasonable terms,
<PAGE>
or in a timely manner, the Company would not be able to manufacture its products
on a timely and cost-competitive basis which, in turn, would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the raw materials for the Company's PGA and
PLLA products are no longer available in the marketplace, the Company would be
forced to further modify its Self-Reinforcing processes to incorporate alternate
raw materials. The incorporation of new raw materials into the Company's
existing products would likely require the Company to seek clearance or approval
from the FDA. There can be no assurance that such development would be
successful or that, if developed by the Company or licensed from third parties,
products containing such alternative materials would receive regulatory
approvals on a timely basis, or at all.
Ability to Maintain Third-Party Reimbursement. In the U.S. and other
markets, health care providers, such as hospitals and physicians, that purchase
medical devices, such as the Company's products, generally rely upon third-party
payors, including Medicare, Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedures in which the medical devices
are being used. The Company believes that, to date, U.S. health care providers
have been reimbursed in full for the cost of procedures which utilize the
Company's products. However, there can be no assurance that third-party
reimbursement for such procedures will be consistently available for the
Company's products or that such third-party reimbursement will be adequate.
There is significant uncertainty concerning third-party reimbursement for
procedures which utilize any medical device incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that the use of the Company's products is
clinically useful and cost-effective, medically necessary and not experimental
or investigational. Since reimbursement approval is required from each payor
individually, seeking such approvals can be a time consuming and costly process
which, in the future, could require the Company to provide supporting
scientific, clinical and cost-effectiveness data for the use of the Company's
products to each payor separately. Federal and state governmental agencies are
increasingly considering limiting health care expenditures. For example, the
United States Congress is currently considering various proposals to
significantly reduce Medicaid and Medicare expenditures. Such proposals, if
enacted, could have a material adverse effect on the Company's business,
financial condition and results of operations. Outside the U.S., the Company
relies on distributors to establish reimbursement from third-party payors in
their respective territories. Health care reimbursement systems vary from
country to country and, accordingly, there can be no assurance that third-party
reimbursement available under any one system will be available for procedures
utilizing the Company's products under any other reimbursement system. Lack of
or inadequate reimbursement by governmental and other third-party payors for
procedures utilizing the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.
Uncertainties Relating to Strategic Partners. The Company anticipates that
it may be necessary for it to enter into arrangements with corporate partners,
licensees
<PAGE>
or others, in order to efficiently market, sell and distribute certain of its
products. Such strategic partners may also be called upon to assist in the
support of such products, including support of certain product development
functions. As a result, the success of such products may be dependent in part
upon the efforts of such third parties. The Company has negotiated one such
agreement with Ethicon GmbH, a subsidiary of Johnson & Johnson, pursuant to
which Ethicon GmbH has the right to market and sell in Europe certain products,
based upon the Company's membrane patent, in dentistry and two other unrelated
field of use. There can be no assurance that the Company will be able to
negotiate additional acceptable arrangements with strategic partners or that the
Company will realize any meaningful revenues pursuant to such arrangements.
Volatility of Stock Price. The stock markets have experienced price and
volume fluctuations that have particularly affected medical technology
companies, resulting in changes in the market prices of the stocks of many
companies that have not been directly related to the operating performance of
these companies. Such broad market fluctuations may materially and adversely
affect the market price of the Company's Common Stock. Factors such as
variations in the Company's results of operations, comments by securities
analysts, underperformance against analysts' estimates, announcements of
technological innovations or new products by the Company or its competitors,
changing government regulations and developments with respect to FDA or foreign
regulatory submissions, the results of regulatory inspections, patents,
proprietary rights or litigation may have a material adverse effect on the
market price of the Company's Common Stock.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On February 24, 1997, holders of a majority of the Company's outstanding
Common Stock and a majority of the Company's outstanding Series A Preferred
Stock executed written consents authorizing amendments to the Company's
Certificate of Incorporation which had the effect of changing the Company's name
to "Bionx Implants, Inc." and effecting a one for 1.9 stock split.
On March 17, 1997, the Company conducted its annual meeting of
shareholders. At the meeting, the shareholders:
(i) elected David W. Anderson and Terry D. Wall as directors for terms
expiring in 1998;
(ii) elected David J. Bershad and Pertti Tormala as directors for terms
expiring in 1999;
(iii) elected Anthony J. Dimun and David H. MacCallum as directors for
terms expiring in 2000;
<PAGE>
(iv) approved a Restated Certificate of Incorporation and subsequent
Amendment to such Restated Certificate of Incorporation; and
(v) approved certain amendments to the Company's Stock Option/Stock
Issuance Plan.
Copies of the restated Certificate of Incorporation and Stock Option/Stock
Issuance Plan reflecting all changes approved by the Company's shareholders were
filed as exhibits to the Company's Registration Statement on Form S-1 (No.
333-22359). At the annual meeting of shareholders, a total 5,165,981 shares of
Common Stock and a total of 1,520,000 shares of Series A Preferred Stock were
voted in favor of the above - mentioned matters. No shares were voted against
such matters or were subject to abstentions or broker non - votes with respect
to such matters.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of the Quarterly Report on
Form 10-Q
No. 11.1 Computation of Primary and Fully Diluted Earnings per Share
No. 27.1 Financial Data Schedule
(b) There were no Current Reports on Form 8-K filed by the Registrant
during the quarter ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIONX IMPLANTS, INC.
By: /s/David W. Anderson
_______________________
David W. Anderson
President and Chief Executive Officer
By: /s/Michael J. O'Brien
_______________________
Michael J. O'Brien
Vice President
Chief Financial Officer and
Chief Accounting Officer
Dated: June 9, 1997
<PAGE>
Exhibit No.
No. 11.1 Computation of Primary and Fully Diluted Earnings per Share
No. 27.1 Financial Data Schedule
BIONX IMPLANTS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Unaudited)
(in thousands, except per share data)
Computation of Earnings (Loss) per Common Share
For the Three Months Ended
March 31,
1996 1997
Primary:
Weighted average common shares outstanding 5,263 5,318
Weighted average incremental shares
assumed to be outstanding related to
common stock options and warrants granted
and convertible preferred stock based
on the treasury stock method 253 561
Weigted average convertible preferred stock
(if converted method) - 1,053
Pro forma effect of charge issued pursuant
to initial public offering as described
in note 3 of notes to the March 31, 1997
consolidated financial statements - 2,300
---- -----
Totals 5,516 9,232
===== =====
Net income (loss) $ (489) 222
======== =====
Per share amount $ (0.09) 0.02
======== ====
Fully Diluted:
Weighted average common shares outstanding 5,263 5,318
Weighted average incremental shares assumed
to be outstanding related to common stock
options and warrants granted and convertible
preferred stock based on the treasury stock
method 253 561
Weighted average convertible preferred stock
(if converted method) - 1,053
Pro forma effect of shares issued pursuant to
initial public offering as described
in note 3 of the notes to the March 31,
1997 consolidated financial statements - 2,300
---- -----
Totals 5,516 9,232
===== =====
Net income (loss) (489) 222
===== =====
Per share amount $ (0.09) 0.02
======== =====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This financial data schedule contains summary
financial information extracted from the financial
statements of Bionx Implants, Inc, and is qualified
in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001030418
<NAME> BIONX IMPLANTS, INC.
<MULTIPLIER> 1,000
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<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
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