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 September 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 October 22, 1997, there were 8,916,812 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 September 30, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1996 and 1997
(Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1997 (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 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1997
(in thousands)
December 31, September 30,
1996 1997
(Unaudited)
Assets:
Current assets:
<S> <C> <C>
Cash and cash equivalents............................. $1,593 22,463
Inventory, net........................................ 1,031 1,555
Trade accounts receivable, net of
allowance of $97 as of December 31,
1996 and $111 as of September 30, 1997............. 1,708 2,644
Grants receivable..................................... 123 117
Deferred offering costs .............................. 195 -
Prepaid expenses and other current assets............. 153 230
--- ---
Total current assets..................................... 4,803 27,009
Investments.............................................. 100 90
Deposits................................................. 44 20
Plant and equipment, net................................. 483 832
Goodwill and intangibles, net............................ 3,939 3,759
----- -----
Total assets $9,369 31,710
====== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable............................... $ 848 1,232
Long-term debt, current portion..................... 223 58
Related party....................................... 163 78
Current income tax liability........................ 205 341
Accrued and other current liability................. 1,317 1,167
----- -----
Total current liabilities................................ 2,756 2,876
Long-term debt........................................... 590 155
Contingencies............................................
Series A mandatorily redeemable convertible
stock, par value $0.001 per share; 2,000,000
shares authorized, 2,000,000 shares issued
and outstanding at December 31, 1996................... 5,000 -
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 8,916,812 shares issued and
outstanding as of December 31, 1996 and
September 30, 1997, respectively................... 10 17
Additional paid-in capital............................... 8,968 35,616
Accumulated deficit...................................... (7,686) (6,527)
Foreign currency translation adjustment.................. (269) (427)
Total stockholders' equity............................... 1,023 28,679
----- ------
Total liabilities and stockholders' equity............ $ 9,369 31,710
======= ======
See accompanying notes to the Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
Revenues:
<S> <C> <C> <C> <C>
Product Sales $ 1,212 4,149 2,608 11,188
License and grant revenues 135 15 204 123
--- -- --- ---
Total revenues 1,347 4,164 2,812 11,311
----- ----- ----- ------
Cost of goods sold 680 1,018 1,567 2,762
--- ----- ----- -----
Gross profit 667 3,146 1,245 8,549
--- ----- ----- -----
Selling, general and administrative 985 2,538 2,310 6,811
Research and development 110 250 306 651
Acquired in-process research and
development 2,832 - 2,832 -
----- - ----- -
Total operating expenses 3,927 2,788 5,448 7,462
----- ----- ----- -----
Operating income (loss) (3,260) 358 (4,203) 1,087
------- --- ------- -----
Other income and expense:
Interest income (expense) (35) 284 (90) 459
---- --- ---- ---
Income (loss) before provision for
income taxes (3,295) 642 (4,293) 1,546
Provision for income taxes 186 158 186 387
--- --- --- ---
Net income (loss) $ (3,481) 484 (4,479) 1,159
========== === ======= =====
Pro forma net income (loss) per share $ (0.63) 0.05 (0.81) 0.12
========== ==== ====== ====
Weighted average common and
dilutive equivalent shares
outstanding 5,516 9,328 5,516 9,328
===== ===== ===== =====
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)
Nine Months Ended
September 30,
--------------------
1996 1997
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (4,479) $ 1,159
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities
Depreciation and amortization 70 367
Acquired in process research and development 2,832 -
Other non-cash charges 106 -
Change in assets and liabilities
Inventory (317) (524)
Accounts receivable (839) (936)
Grants receivable - 6
Deferred offering costs - 195
Prepaid expense and other
current assets (190) (77)
Investments (59) 10
Deposits - 24
Trade accounts payable 747 384
Related party (198) (85)
Current income tax liability 186 136
Accrued and other liabilities 651 (150)
--- -----
2,989 (650)
----- -----
Net cash (used in) provided by operating activities (1,490) 509
------- ---
Cash flows used in investing activities
Purchase of plant and equipment (236) (536)
----- -----
Net cash used in investing activities (236) (536)
----- -----
Cash flow from financing activities:
Proceeds from initial public offering - 24,150
Exercise of warrants - 552
Offering costs - (3,050)
Proceeds from issuance of long-term debt 727 -
Proceeds from exercise of employee stock
options - 3
Repayment of long-term debt (600)
Net proceeds from issuance of preferred stock 4,895 -
Net proceeds from issuance of common stock 50 -
-- -
Net cash provided by financing activities 5,672 21,055
Net effects of foreign exchange rate differences 36 (158)
-- -----
Net increase in cash and cash equivalents 3,982 20,870
Cash and cash equivalents at beginning of period 51 1,593
-- -----
Cash and cash equivalents at end of period 4,033 22,463
Supplementary cashflow information:
Cash paid for interest 119 28
Cash paid for taxes 1 251
Non-cash financing activity:
Conversion of series A preferred shares to
common shares upon consummation
of the initial public offering - 5,000
Issuance of common stock related to the
reorganization 7,109 -
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 as of September 30, 1997 and for the
three months and nine month periods ended September 30, 1996 and 1997. 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 September 30, 1997,
and the Company's consolidated results of operations and cash flows for the
three and nine months ended September 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 nine month periods ended September 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):
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
<S> <C> <C>
Raw materials $ 101 190
Finished goods 1,210 1,930
----- -----
1,311 2,120
Less reserves (280) (565)
----- -----
$ 1,031 1,555
========= =======
</TABLE>
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 September 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 for the periods ended September 30, 1997 include 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 September 30, 1997,
had an accumulated deficit of approximately $6.5 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 nine 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 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 nine months 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
September 30, 1996 and 1997, international product sales represented 51% and
15%, respectively, of the Company's total product sales.
Historically, the Company typically sold implant grade, stainless steel
surgical instruments for use with each of its Self-Reinforced, resorbable
products. The margins for these instruments were and are typically lower than
the margins applicable to the Company's implant products.
<PAGE>
However, since orthopaedic companies operating in the U.S. have traditionally
loaned rather than sold instruments to their customers, it has become 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 product 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
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 were released
for commercial use commencing in the third quarter of 1997; royalties on such
sales are payable to the Company in the following quarter. Revenues from the
Company's domestic or international 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.
<PAGE>
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 $2.3 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 several 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.
<PAGE>
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 242% from $1.2
million during the quarter ended September 30, 1996 to $4.1 million during the
quarter ended September 30, 1997. For the first nine months of 1997, product
revenues increased by 329% from the same period a year ago. These increases
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 worldwide were approximately $670,000 during the third quarter of 1996,
as compared with $2.9 million during the third quarter of 1997 and were
approximately $1.0 million during the first nine months of 1996 as compared with
$7.8 million during the first nine months 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 all other implants, instrumentation systems and
related loaner fees) increased by 123%, from $540,000 during the third quarter
of 1996, to $1.2 million, during the third quarter of 1997. Revenues generated
from the sale of such other products during the first nine months of 1997
increased by 110%, totaling $3.4 million during such period as compared with
$1.6 million during the first nine months of 1996.
License and grant revenues. License and grant revenues totaled $15,000 and
$123,000 during the three and nine months ended September 30, 1997,
respectively, decreasing from $135,000 and $204,000 during the same periods 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
initiated during the third quarter of 1997 are expected to be made during the
fourth quarter of 1997; however, such royalty payments are not expected to be a
material component of the Company's total revenues and no assurances can be
given with respect to the timing or amount of such payments. The Company has
been required by Ethicon GmbH 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
$667,000 during the third quarter of 1996 to $3.1 million during the third
quarter of 1997, and from $1.2 million during the first nine months of 1996 to
$8.5 million during the first nine 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 50% during the third
<PAGE>
quarter of 1996 and 44% during the first nine months of 1996 to 76% during the
third quarter of 1997 and 76% during the first nine 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
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 158% from $985,000 during the third quarter
of 1996 to $2.5 million during the third quarter of 1997 and by 195% from $2.3
million during the first nine months of 1996 to $6.8 million during the first
nine months of 1997. Such expenses were 81% of product sales during the third
quarter of 1996 and 89% of product sales during the first nine months of 1996,
as compared with 61% of product sales during the third quarter and during the
first nine 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
increases in the dollar amount of selling, general and administrative expenses
were 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 decreases in the percentage
relationship of such expenses to product sales reflect the leveraging of certain
such expenses over the Company's expanded revenue base.
Research and development. Research and development expenses increased
by 127% from $110,000 during the third quarter of 1996 to $250,000 during the
third quarter of 1997 and by 113% from $306,000 during the first nine months of
1996 to $651,000 during the first nine months of 1997. These increases reflected
an increased volume of product development work being performed by the Company
and increased staffing levels.
Acquired in-process research and development. During the third quarter
of 1996, the Company incurred $2.8 million in research and development expenses
relating to a write-off of certain research and development work in connection
with the Company's 1996 reorganization.
Interest income (expense). In the third quarter and the first nine
months of 1997, the Company generated interest income of $284,000 and $459,000,
respectively, compared to interest expense of $35,000 and $90,000 in the
comparable periods of 1996. Funds obtained from the proceeds of the initial
public offering in late April 1997 generated the interest income in the 1997
periods.
Income taxes. The provision for income taxes during the third quarter
and first nine months of 1997 reflects the Company's profitable operations
during the periods presented, and anticipates partial utilization of certain net
operating loss carryforwards. The provision for income taxes during the 1996
periods reflects the income generated by the Company's Finnish subsidiaries.
Net income. The Company reported net income of $484,000 or $.05 per
share for the third quarter of 1997, as compared with a net loss of $3.5 million
or $(0.63) per share for the comparable period in 1996. For the nine month
period ended September 30, 1997, net income totaled $1.2 million or $0.12 per
share, compared to a net loss of $4.5 million or $(0.81) per share, in the first
nine months of 1996. No assurance can be given that the Company will continue to
be profitable during future periods.
Per Share Calculations. 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 third 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 $ 484 8,916 $ 0.05
Incremental shares from assumed
exercise of dilutive options and
warrants - 412 -
- --- -
Diluted EPS $ 484 9,328 0.05
======= ===== =========
Had Statement 128 been adopted for the first nine 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
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS 1,159 8,916 0.13
Incremental shares from assumed
exercise of dilutive options and
warrants - 412 -
- --- -
Diluted EPS 1,159 9,328 0.12
===== ===== =====
</TABLE>
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 September 30, 1997, cash and cash equivalents
totaled $1.6 million and $22.5 million, respectively. The increase in cash and
cash equivalents of approximately $21 million is primarily attributable to the
net proceeds received from the initial public offering transacted in April,
1997.
As of September 30, 1997, the Company had working capital of $24.1
million. Long-term debt (including the current portion) was reduced by $600,000,
from the level at the beginning of the year to $213,000 as of September 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
September 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
<PAGE>
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 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 September 30, 1997, had
an accumulated deficit of approximately $6.5 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 nine 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
<PAGE>
capabilities. There can be no assurance that the Company will be able to
successfully commercialize its products or that profitability will continue
beyond the first three quarters of 1997. 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 continued
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 continued acceptance of the Company's Self-Reinforced resorbable
implants, particularly its Meniscus Arrow products, 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 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
<PAGE>
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. European
counterparts to the two principal U.S. patents that are owned by the Company and
the Japanese counterpart to one such patent are currently the subject of
opposition proceedings. The Company is vigorously defending its European and
Japanese patent positions in these proceedings. One of these European patents
has been revoked by the European Patent Office for lack of novelty based on an
earlier publication. The Company filed an appeal of the European Patent Office's
revocation decision. The appellaate board has allowed the Company to amend the
claims of the revoked patent and to present these amended claims to the European
Patent Office for a new determination of their patentability. No assurance can
be given as to whether such determination in Europe will be successful. The
other European patent and the Japanese patent application are being challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made in
patent and other publications. The validity of the European patent has been
recently upheld by the European Patent Office. No assurance can be given that
this favorable decision will not be appealed or that, if appealed, this
favorable decision will not be reversed. Further, no assurance may be given as
to the outcome of the pending Japanese opposition proceeding. In order to
clarify and confirm its U.S. patent position, the Company recently requested
reexamination by the U.S. PTO of the two principal U.S. patents owned by the
Company. 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 whether the
issues raised in the reexamination proceedings will be resolved in the Company's
favor or 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.
<PAGE>
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 is infringed
by sales of one or more of the Company's products or by the practice of one or
<PAGE>
more of the Company's processes in any of the eight countries identified in the
European patent. The Company has also initiated an opposition in the European
Patent Office challenging the grant of a third party's European patent relating
to a bioabsorbable membrane. No assurance can be given that this opposition will
result in either the revocation of this patent or the narrowing of its claims.
If this opposition is not 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 countries identified in this 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
<PAGE>
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 three of its 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.
The Company's product development efforts are dependent upon Pertti
Tormala, Ph.D., and the Technical University in Tampere, Finland. Dr. Tormala, a
founder, director and executive officer of the Company, is currently an Academy
Professor at the Technical University and has been permitted by the University
to devote his efforts to developing new 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 technologies 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. There can be no assurance that the University will allow
Dr. Tormala to continue to devote his efforts and University resources to the
Company's product development efforts. Any failure by the Company to obtain the
continued services of Dr. Tormala, or any requirement that the Company fund
research at the Technical University at a substantially increased level, 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.
<PAGE>
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 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 practice requirements ("GMPs") which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing,
quality assurance and other
<PAGE>
matters. Enforcement of GMP requirements 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
requirements, 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 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 and May 29, 1997, acknowledging the observations
and indicating that they had been corrected. On July 11, 1997, the FDA informed
the Company in writing that the observations did not appear to warrant
regulatory follow-up at that time.
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
<PAGE>
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 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 15% of sales in the
first nine 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
<PAGE>
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
nine months 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.
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 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 requirements, 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
is currently upgrading its production machinery and processes to address
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 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
<PAGE>
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
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 have utilized 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.
<PAGE>
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
fields 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.
Possible 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.
<PAGE>
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
The Company's initial public offering was effected pursuant to a
registration statement on Form S-1 (No. 333-22359) declared effective by the
Securities and Exchange Commission (the "SEC") on April 24, 1997. The offering
commenced on April 25, 1997 and terminated after all securities were sold.
Pursuant to Rule 463 promulgated by the SEC, the Company provides the following
information regarding its initial public offering:
(a) The managing underwriters were UBS Securities LLC, Hambrecht &
Quist LLC and Volpe Brown Whelan & Company, LLC.
(b) The title of the class of stock registered was Common Stock, par
value $.0019 per share. The Company sold all 2,300,000 shares that were
registered (i.e., there were no selling securityholders). The aggregate price of
the offering amount registered and sold was $24.2 million.
(c) From April 25, 1997 through September 30, 1997, the Company's
reasonable estimate of the amount of expenses incurred for the Company's account
in connection with the issuance and distribution of the securities registered
for underwriting discounts and commissions was $1.7 million, for finders' fees
was $ 0, for expenses paid to or for underwriters was $ 0 and for other expenses
was $1.3 million. Thus, the total amount of such expenses was $3.0 million and
the net proceeds to the Company was $21.2 million. Except as set forth in the
immediately following sentence, none of the above-mentioned expenses represented
direct or indirect payments to directors or officers of the Company or their
associates, to persons owning ten percent or more of any class of equity
security of the Company or to affiliates of the Company. As set forth in the
above-mentioned registration statement, one of the Company's directors (David H.
MacCallum) is a Managing Director at UBS Securities, one of the managing
underwriters of the Company's initial public offering.
(d) From April 25, 1997 through September 30, 1997, the Company has
used the following amount of such net proceeds for the following categories
enumerated by the SEC:
Reasonable Estimated
Categor Amount
(in thousands)
Construction of plant, building
and facilities -
Purchase and installation of
machinery and equipment $225
Purchases of real estate -
Acquisition of other businesses -
Repayment of indebtedness 600
Working capital -
Short term investments 20,375
Other purposes for which
at least $100,000 has been used -
None of the above-mentioned uses of proceeds represented direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity security of the Company or to
affiliates of the Company. Such uses do not represent a material change in the
use of proceeds described in the above-mentioned registration statement.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this 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 did not file any Current Report on Form 8-K during the
quarter ended September 30, 1997.
<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: November 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
<TABLE>
<CAPTION>
EX-11
COMPUTATION OF EARNINGS
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 For the Nine Months Ended
September 30 September 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding....................... 5,263 8,916 5,263 5,563
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............. 253 412 253 412
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 notes to the September 30, 1997 consolidated
financial statements........................................... - - - 2,300
Totals........................................................... 5,516 9,328 5,516 9,328
Net income (loss)................................................ (3,481) 484 (4,479) 1,159
Per share amount................................................. (0.63) 0.05 (0.81) 0.12
Fully Diluted:
Weighted average common shares outstanding 5,263 8,916 5,263 5,563
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............. 253 412 253 412
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 September 30, 1997 consolidated
financial statements........................................... - 2,300
Totals........................................................... 5,516 9,328 5,516 9,328
Net income (loss)................................................ (3,481) 484 (4,479) 1,159
Per share amount................................................. (0.63) 0.05 (0.81) 0.12
</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 REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 22,463
<SECURITIES> 0
<RECEIVABLES> 2,755
<ALLOWANCES> 111
<INVENTORY> 1,555
<CURRENT-ASSETS> 27,009
<PP&E> 1,004
<DEPRECIATION> 172
<TOTAL-ASSETS> 31,710
<CURRENT-LIABILITIES> 2,876
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 28,662
<TOTAL-LIABILITY-AND-EQUITY> 31,710
<SALES> 11,188
<TOTAL-REVENUES> 11,311
<CGS> 2,762
<TOTAL-COSTS> 7,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (459)
<INCOME-PRETAX> 1,546
<INCOME-TAX> 387
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<NET-INCOME> 1,159
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
