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 June 30, 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)
- --------------------------------------------------------------------------------
(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 X No___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At July 31, 1997, there were 8,916,127 shares of Common Stock, par value $.0019
per share, outstanding.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1996
and June 30, 1997 (Unaudited) 4
Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1996 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
<PAGE>
Item 1. Financial Statements
<TABLE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and June 30, 1997
(in thousands)
<CAPTION>
December 31, June 30,
1996 1997
---- ----
(Unaudited)
Assets:
Current assets:
<S> <C> <C>
Cash and cash equivalents......................................... $1,593 22,610
Inventory, net.................................................... 1,031 1,426
Trade accounts receivable, net of allowance of $97 as of December
31, 1996 and $112 as of June 30, 1997 ............................ 1,708 2,312
Grants receivable................................................. 123 91
Deferred offering costs .......................................... 195 -
Prepaid expenses and other current assets......................... 153 39
--- --
Total current assets................................................... 4,803 26,478
Investments............................................................ 100 92
Deposits............................................................... 44 44
Plant and equipment, net............................................... 483 823
Goodwill and intangibles............................................... 3,939 3,819
----- -----
Total assets........................................................... $9,369 31,256
===== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable............................................ $ 848 1,597
Long-term debt, current portion................................... 223 58
Related party..................................................... 163 78
Current income tax liability...................................... 205 212
Accrued and other current liability............................... 1,317 928
----- ---
Total current liabilities.............................................. 2,756 2,873
----- -----
Long-term debt......................................................... 590 148
--- ---
Contingencies .........................................................
Series A mandatorily redeemable convertible preferred stock,
par value $0.001 per share; 2,000,000 shares authorized, 5,000 -
2,000,000 shares issued and outstanding at December 31, 1996..... ----- -----
Stockholders' equity:
Preferred stock, par value $0.001 per share 8,000,000 authorized
and none issued ..............................................
Common stock, par value $0.0019 per share, 31,600,000 shares
authorized and 5,318,424 and 8,916,127 shares issued and
outstanding as of December 31, 1996 and June 30, 1997,
respectively................................................. 10 17
Additional paid-in capital........................................ 8,968 35,613
Accumulated deficit............................................... (7,686) (7,010)
Foreign currency translation adjustment........................... (269) (385)
----- -----
Total stockholders' equity............................................. 1,023 28,235
----- ------
Total liabilities and stockholders' equity........................ $ 9,369 31,256
====== ======
See accompanying notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
1996 1997 1996 1997
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Product sales $ 730 3,822 1,396 7,040
License and grant revenues 19 108 69 108
-- --- -- ---
Total revenues 749 3,930 1,465 7,148
--- ----- ----- -----
Cost of goods sold 429 942 887 1,745
--- --- --- -----
Gross profit 320 2,988 578 5,403
--- ----- --- -----
Selling, general and administrative 705 2,333 1,325 4,273
Research and development 97 220 196 401
------ --- --- ---
Total operating expenses 802 2,553 1,521 4,674
------ ----- ----- -----
Operating income (loss) (482) 435 (943) 729
----- --- ----- ---
Other income and expense:
Interest income (expense) (27) 172 (55) 175
------- ---- ---- ---
Income (loss) before provision for income taxes (509) 607 (998) 904
Provision for income taxes - 153 - 228
------- ---- ----- ---
Net income (loss) $ (509) 454 (998) 676
======== ==== ===== ===
Pro forma net income (loss) per share $ (0.09) 0.05 (0.18) 0.07
Weighted average common and
dilutive equivalent shares outstanding 5,516 9,232 5,516 9,232
===== ===== ===== =====
See accompanying notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months ended June 30,
-----------------------------------------------------------
1996 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (998) 676
----- ---
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 60 203
Change in assets and liabilities:
Increase in inventory (105) (395)
Increase in accounts receivable (450) (604)
Decrease in grants receivable - 32
Decrease in deferred offering costs - 195
Decrease in prepaid expense and other current assets 29 114
(Increase) decrease in investments (59) 8
Increase in trade accounts payable 298 749
Decrease in related party - (85)
Increase in current tax liability - 7
Increase (decrease) in accrued and other liabilities 1,417 (389)
----- -----
1,190 ( 165)
----- ------
Net cash provided by operating activities 192 511
--- ---
Cash flows used in investing activities:
Purchases of plant and equipment (91) (423)
---- -----
Net cash used in investing activities (91) (423)
---- -----
Cash flow from financing activities:
Proceeds from initial public offering - 24,150
Exercise of warrants - 552
Offering costs from initial public offering - (3,050)
Proceeds from issuance of long-term debt - -
Repayment of long-term debt (129) (607)
---- -----
Net cash (used in) provided by financing activities (129) 21,045
Net effects of foreign exchange rate differences (18) (116)
----- -------
Net (decrease) increase in cash and cash equivalents (46) 21,017
Cash and cash equivalents at beginning of period 51 1,593
----- ------
Cash and cash equivalents at end of period $ 5 22,610
====== =======
Supplementary cashflow information:
Cash paid for interest $ 43 28
Cash paid for taxes $ 1 221
Non-cash financing activity:
Conversion of series A preferred shares to common shares upon
consummation of the initial public offering $ - 5,000
See accompanying notes to the Consolidated Financial Statements
</TABLE>
<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 June 30, 1997, and the Company's
consolidated results of operations and cash flows for the three and six months
ended June 30, 1996 and 1997 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 and six month periods ended June 30,
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, June 30,
1996 1997
Raw materials............................ $ 101 232
Finished goods........................... 1,210 1,509
----- -----
1,311 1,741
Less reserves................... (280) (315)
------ -------
$ 1,031 1,426
===== =====
<PAGE>
3. Initial Public Offering; Pro Forma Net Income (Loss) Per Share
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 $21.7 million.
The unaudited balance sheet as of June 30, 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 income (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 income (loss) per share when
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 IPO price during
the twelve months preceding 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 for periods prior to the Company's
initial public offering 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 income
per share at June 30, 1997 includes the effect of the 2.3 million shares issued
in the Company's IPO as if outstanding as of the beginning of 1997.
4. Long Term Debt
In April 1997, the Company entered into a $2.0 million credit line
agreement secured by the personal property of Bionx Implants, Inc. and a
subsidiary. 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.
<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 from its inception through December 31, 1996 and, at June 30, 1997, had
an accumulated deficit of approximately $7.0 million. Such losses 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 the second half of 1996
and in the first half 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 half 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
June 30, 1996 and 1997, international product sales represented 51% and 15%,
respectively, of the Company's total product sales.
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's gross
<PAGE>
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. product 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 third 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.
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
<PAGE>
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 $2.3 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 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 424% from
$730,000 during the quarter ended June 30, 1996 to $3.8 million during the
quarter ended June 30, 1997. For the first six months of 1997, product revenues
increased by 404% from the same period a year ago. These increases primarily
resulted from the U.S. introduction of the Company's Meniscus Arrow products in
June of 1996; revenues from the sale of Meniscus Arrow products were
approximately $180,000 during the second quarter of 1996, as compared with $2.6
million during the second quarter of 1997. In addition, the 1997 product sales
increases reflect 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
other products (including instrumentation systems and related loaner fees)
increased by 119%, from $550,000 during the second quarter of 1996, to
$1,202,000 during the second quarter of 1997. Revenues generated from the sale
of such other products during the first six months of 1997 increased by 84%,
totaling $2.2 million during such period as compared with $1.2 million during
the first six months of 1996.
<PAGE>
License and grant revenues. License and grant revenues totaled
$108,000 during the six months ended June 30, 1997, increasing from $69,000
during the same period one year ago. Revenues generated during both periods
relate to grants obtained from a Finnish government research organization, which
funds certain research and development projects. Royalty payments by Ethicon
GmbH based upon actual sales are expected to commence in the third 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.
Gross profit; gross margin. The Company's gross profit increased from
$320,000 during the second quarter of 1996 to $3.0 million during the second
quarter of 1997, and from $578,000 during the first six months of 1996 to $5.4
million during the first six months of 1997. The increases 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 (including the effects of grant revenue) increased
from 43% during the second quarter of 1996 and 39% during the first six months
of 1996 to 76% during the second quarter of 1997, and 76% during the first six
months of 1997. The increases in gross margin in 1997 are attributable to
several factors, including an increase in sales of the higher margin Meniscus
Arrow product, an increase in grant revenue, 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 231% from $705,000 during the second
quarter of 1996 to $2.3 million during the second quarter of 1997 and by 222%
from $1.3 million during the first six months of 1996 to $4.3 million during the
first six months of 1997. Such expenses were 97% of product sales during the
second quarter of 1996 and 95% of product sales during the first six months of
1996, as compared with 61% of product sales during the second quarter of 1997
and 61% during the first six 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 associated with the Company's September
1996 reorganization (such amortization and depreciation amounting to
approximately $65,000 per quarter 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 127% from $97,000 during the second quarter of 1996 to $220,000 during the
second quarter of 1997 and by 105% from $196,000 during the first six months of
1996 to $401,000 during the first six months of 1997. These increases reflected
an increased volume of product development work being performed by the Company
and increased staffing levels.
Interest income (expense). In the second quarter of 1997, the Company
generated interest income of $172,000, compared to an interest expense of
<PAGE>
$27,000 in the second quarter of 1996. Funds obtained from the proceeds of the
initial public offering in late April 1997 generated the interest income for the
quarter ended June 30, 1997.
Income taxes. The provision for income taxes during the second quarter
and first six months of 1997 reflects the Company's profitable operations during
the periods presented, and anticipates partial utilization of certain net
operating loss carryforwards.
Net Income. The Company reported net income of $454,000 or $.05 per
share for the second quarter of 1997, as compared with a net loss of $509,000 or
$(0.09) per share for the comparable period in 1996. Reported net income for the
six month period ended June 30, 1997 totaled $676,000 or $0.07 per share,
compared to a net loss of $998,000 or $(0.18) in the first six months of 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 second quarter of 1997, basic
and diluted EPS would have been computed as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Income Share Per Share
Income Share
Per Share
(Numerator) Denominator Amount
<S> <C> <C> <C>
Basic EPS $ 454 8,671 $ 0.05
Incremental shares from assumed exercise of
dilutive options and warrants - 561 -
--- --- -
Diluted EPS $ 454 9,232 $ 0.05
</TABLE>
Had Statement 128 been adopted for the first six months of 1997, basic and
diluted EPS would have been computed as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Income Share Per Share
Income Share
Per Share
(Numerator) Denominator Amount
<S> <C> <C> <C>
Basic EPS $ 676 8,671 $ 0.08
Incremental shares from assumed exercise of
dilutive options and warrants - 561 -
--- --- -
Diluted EPS $ 676 9,232 $ 0.07
</TABLE>
<PAGE>
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 $5.0
million in 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). The 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 were $21.7 million. In addition, the Company made
arrangements for a $2 million credit line, secured by the personal property of
Bionx Implants, Inc. and its Biostent, Inc. subsidiary. 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 December 31, 1996 and June 30, 1997, cash and cash equivalents
totaled $1.6 million and $22.6 million, respectively. The increase in cash and
cash equivalents of $21.0 million is primarily attributable to the net proceeds
received from the initial public offering transacted in April, 1997.
As of June 30, 1997, the Company had working capital of $23.6 million.
Long-term debt (including the current portion) was reduced by $607,000, from the
level at the beginning of the year to $206,000 as of June 30, 1997. The majority
of this debt was repaid from net proceeds generated from the initial public
offering. The interest rates on the debt remaining as of June 30, 1997 range
from 1 - 4% per annum.
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 2000. 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
<PAGE>
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 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 June 30, 1997, had an
accumulated deficit of approximately $7.0 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 six 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 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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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 and only has employment agreements with two of it employees. The loss
of key personnel and the inability to hire and retain qualified
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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 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 14% of sales in the
first six 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 has experienced
substantial growth in product sales during the second half of 1996 and the first
half 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
<PAGE>
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.
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, 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
<PAGE>
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 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,
<PAGE>
patents, proprietary rights or litigation may have a material adverse effect on
the market price of the Company's Common Stock.
<PAGE>
Part II. Other Information
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) The Registrant filed one Current Report on Form 8-K during the
quarter ended June 30, 1997. Such Current Report on Form 8-K was filed on May
20, 1997 and listed, under Item 5 Other Events, that the Registrant sold 300,000
shares of its Common Stock upon the exercise by the underwriters of the
over-allotment option in connection with the Registrant's initial public
offering.
<PAGE>
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: August 14, 1997
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
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
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1996 1997 1996 1997
----- ----------- ----------- ----
Primary:
<S> <C> <C> <C> <C>
Weighted average common shares outstanding........................ 5,263 5,318 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.............. 253 561 253 561
Weighted average convertible preferred stock
(if converted method)........................................... - 1,053 - 1,053
Pro forma effect of shares issued pursuant
to initial public offering as described in note
3 of notes to the June 30, 1997 consolidated
financial statements............................................ - 2,300 - 2,300
-------- ----- -------- -----
Totals............................................................ 5,516 9,232 5,516 9,232
========= ======== ========= ========
Net income (loss)................................................. $ (509) 454 $ (998) 676
========== ======== ========== ========
Per share amount.................................................. $ (0.09) $ 0.05 $ (0.18) $ 0.07
========= ======= ========= =======
Fully Diluted:
Weighted average common shares outstanding 5,263 5,318 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.............. 253 591 253 590
Weighted average convertible preferred stock
(if converted method)........................................... - 1,053 - 1,053
Pro forma effect of shares issued pursuant to
initial public offering as described in note 3
of the notes to the June 30, 1997 consolidated
financial statements............................................ - 2,300 - 2,300
-------- ----- ------- -----
Totals 5,516 9,262 5,516 9,261
-------- ----- ----- -----
Net income (loss) (509) 454 (998) 676
--------- --- -------- ---
Per share amount $ (0.09) 0.05 $ (0.18) 0.07
========= ======= ========= =======
</TABLE>
<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
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 22,610
<SECURITIES> 0
<RECEIVABLES> 2,424
<ALLOWANCES> 112
<INVENTORY> 1,426
<CURRENT-ASSETS> 26,478
<PP&E> 898
<DEPRECIATION> 75
<TOTAL-ASSETS> 31,256
<CURRENT-LIABILITIES> 2,873
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 28,218
<TOTAL-LIABILITY-AND-EQUITY> 31,256
<SALES> 7,040
<TOTAL-REVENUES> 7,148
<CGS> 1,745
<TOTAL-COSTS> 4,674
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 904
<INCOME-TAX> 228
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 676
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
