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, 1998 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 November 3, 1998, there were 8,922,076 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, 1997
and September 30, 1998 (Unaudited) 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
Item 1. Financial Statements
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and September 30, 1998
(in thousands, except share amounts)
December 31, September 30,
1997 1998
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 22,632 17,069
Inventory, net 2,550 6,339
Trade accounts receivable, net of
allowance of $111 and $150
as of December 31, 1997 and
September 30, 1998 3,070 3,937
Grants receivable 129 103
Prepaid expenses and other current assets 158 529
Deferred tax assets 355 607
Total current assets 28,894 28,584
Investments 87 87
Plant and equipment, net 849 2,218
Goodwill and intangibles, net 3,711 3,644
------- -------
Total assets $ 33,541 34,533
======= ======
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $ 1,775 2,233
Long-term debt, current portion 43 43
Related party 74 -
Current income tax liability 994 517
Accrued and other current liabilities 1,459 1,359
----- -----
Total current liabilities 4,345 4,152
Long-term debt 115 83
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,
8,916,812 and 8,922,076 shares
issued and outstanding as of
December 31, 1997 and September 30, 1998,
respectively 17 17
Additional paid-in capital 35,616 35,642
Accumulated deficit (5,527) (4,336)
Foreign currency translation adjustment (1,025) (1,025)
------ ------
Total stockholders' equity 29,081 30,298
Total liabilities and stockholders' equity $ 33,541 34,533
======= ======
See accompanying notes to the unaudited Consolidated Financial Statements.
<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,
1997 1998 1997 1998
Revenues:
<S> <C> <C> <C> <C>
Product Sales $ 4,149 5,265 $ 11,188 14,781
Grant revenues 15 128 123 290
----- ----- ------ ------
Total revenues 4,164 5,393 11,311 15,071
Cost of goods sold 1,018 1,157 2,762 3,200
----- ----- ------ ------
Gross profit 3,146 4,236 8,549 11,871
Selling, general and
administrative 2,538 3,274 6,811 9,416
Research and development 250 533 651 1,464
----- ----- ----- -----
Total operating expenses 2,788 3,807 7,462 10,880
----- ----- ----- ------
Operating income 358 429 1,087 9,91
Other income and expense 284 161 459 729
----- ----- ----- ------
Income before provision for
income taxes 642 590 1,546 1,720
Provision for income taxes 158 171 387 529
------ ---- ----- -----
Net income $ 484 419 $ 1,159 1,191
====== === ===== =====
Pro forma earnings per share:
Basic $ 0.05 0.05 0.13 0.13
Diluted $ 0.05 0.05 0.12 0.13
Shares used in computing pro forma
earnings per share:
Basic 8,916 8,922 8,916 8,921
Diluted 9,328 9,227 9,328 9,261
</TABLE>
See accompanying notes to the unaudited Consolidated Financial Statements.
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
1997 1998
Cash flows from operating activities:
Net income $ 1,159 1,191
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities:
Depreciation and amortization 367 427
Change in assets and liabilities:
Increase in inventory, net (524) (3,789)
Increase in trade accounts receivable, net (936) (867)
Decrease in grants receivable 6 26
Decrease in deferred offering costs 195 -
Increase in prepaid expense and other current
assets (43) (371)
Increase in deferred tax assets - (252)
Increase in trade accounts payable 384 458
Decrease in related party (85) (74)
Increase (decrease) in current income tax
liability 136 (477)
Decrease in accrued and other
current liabilities (150) (100)
----- -----
(650) (5,019)
----- -------
Net cash (used in) provided by operating activities 509 (3,828)
Cash flows from investing activities
Purchase of plant and equipment (536) (1,625)
----- -------
Cash flows from financing activities:
Proceeds from initial public offering 24,150 -
Capitalization of patents - (104)
Exercise of warrants 552 -
Offering costs from initial public offering (3,050) -
Repayment of long-term debt (600) (32)
Proceeds from exercise of employee
stock options 3 26
Net cash provided by (used in) financing
activities 21,055 (110)
Net effects of foreign exchange rate differences (158) -
Net increase (decrease) in cash and
cash equivalents 20,870 (5,563)
Cash and cash equivalents at
beginning of period 1,593 22,632
------ ------
Cash and cash equivalents at end of period $ 22,463 17,069
========= ======
Supplementary cashflow information:
Cash paid for interest 28 1
Cash paid for taxes 251 1,154
Conversion of series A preferred
shares to common shares
upon consummation of the
initial public offering 5,000 -
See accompanying notes to the unaudited Consolidated Financial Statements.
<PAGE>
BIONX IMPLANTS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared by Bionx Implants,
Inc. (the "Company") and are unaudited. In the opinion of the Company's
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position as of
December 31, 1997 and September 30, 1998, and the Company's consolidated results
of operations and cash flows for the nine months ended September 30, 1997 and
1998, 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, 1997 and notes thereto included in
the Company's Annual Report on Form 10-K (No. 33-22359) filed with the
Securities and Exchange Commission. The results of operations and the cash flows
for the three and nine months ended September 30, 1998 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, September 30,
1997 1998
Raw materials $ 437 599
Finished goods 2,778 6,640
----- -----
3,215 7,239
Less reserves (665) (900)
----- ------
$ 2,550 6,339
======= =====
3. Initial Public Offering; Pro Forma Net Income 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.
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per
Share (EPS). SFAS 128 establishes and simplifies the standards of computing
earnings per share previously found in Accounting Principles Board Opinion No.
15, Earnings per Share, and makes them comparable to international EPS
standards. Under SFAS 128, basic earnings per share is computed using the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed using the weighted average number of
common and dilutive potential common shares outstanding during the period.
Potential common shares consist of stock options and warrants using the treasury
stock method and are excluded if their effect is antidilutive.
<PAGE>
Pursuant to Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98 and SEC staff policy, all common shares issued during the
periods prior to the Company's IPO for nominal consideration are presumed to
have been issued in contemplation of the IPO and are to be included in the
calculation of basic earnings per share as if they were outstanding for all
periods presented. Similarly, common shares and potential common shares issued
during the period prior to the IPO for nominal consideration are presumed to
have been issued in contemplation of the IPO and are to be included in the
calculation of diluted earnings per share, even though anti-dilutive, as if
outstanding for all periods presented. The Company had no common or potential
common shares issued for nominal consideration during the periods prior to the
IPO.
The calculation of shares used in computing pro forma basic and diluted
earnings per share also includes the Company's mandatorily redeemable
convertible preferred stock and related warrants, assuming conversion into
shares of common stock (using the if-converted method) from the original date of
issuance in 1996. The calculation also assumes that the shares issued in the
Company's IPO were outstanding as of January 1, 1997.
The following table sets forth the calculation of the total number of
shares used in the computation of pro forma earnings per common share for the
three months ended September 30, 1997 and 1998 (in thousands):
1997 1998
Weighted average common shares outstanding 7,618 8,922
Assumed conversion of Series A Mandatorily
Redeemable Convertible Preferred Stock
and related warrants using the
if-converted method 1,298 -
Shares used in computing pro forma basic
earnings per share 8,916 8,922
Incremental shares from assumed exercise of
dilutive options and warrants 412 305
Shares used in computing pro forma diluted
earnings per share 9,328 9,227
===== =====
<PAGE>
The following table sets forth the calculation of the total number of shares
used in the computation of pro forma earnings per common share for the nine
months ended September 30, 1997 and 1998 (in thousands):
1997 1998
Weighted average common shares outstanding
7,618 8,922
Assumed conversion of Series A Mandatorily
Redeemable Convertible Preferred Stock
and related warrants using the
if-converted method 1,298 -
Shares used in computing pro forma basic
earnings per share 8,916 8,922
Incremental shares from assumed exercise of
dilutive options and warrants 412 340
Shares used in computing pro forma diluted
earnings per share 9,328 9,261
4. Foreign Currency Translation
Through December 31, 1997, the financial statements of the Company's
foreign subsidiaries were translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52, Foreign Currency Translation
(SFAS 52). Substantially all assets and liabilities of the foreign subsidiaries,
all of which are located in Finland, were translated at year-end exchange rates
and income and expense items were translated at an average exchange rate for the
year. Adjustments resulting from the translation of financial statements through
December 31, 1997 are reflected as a component of stockholders' equity in the
accompanying balance sheets.
Effective January 1, 1998, the functional currency of the Company's foreign
subsidiaries was changed from the Finnish Marrka to the U.S. dollar. The change
in functional currency was based on changes in certain salient economic factors
of the foreign subsidiaries including cash flows, sales prices of the products
being manufactured, the sales markets for the products being manufactured,
expenses being incurred, sources of financing, and intercompany transactions.
The change in these economic factors is primarily due to the increased reliance
of the foreign subsidiaries on the U.S. marketplace for sales of products being
manufactured.
In accordance with SFAS 52, the cumulative translation adjustment through
December 31, 1997 has been frozen, and remains as a component of stockholders'
equity.
5. Reporting Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of SFAS 130 had no impact on the Company's net
income or stockholders' equity. SFAS 130 requires the Company's foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income.
Following are the components of comprehensive income for the three month periods
ended September 30, 1997 and 1998 (in thousands):
September 30,
1997 1998
Net income $ 484 419
Foreign currency translation adjustments (42) -
---- ----
Comprehensive income $ 442 419
==== ====
Following are the components of comprehensive income for the nine month periods
ended September 30, 1997 and 1998 (in thousands):
September 30,
1997 1998
Net income $ 1,159 1,191
Foreign currency translation adjustments (158) -
------ -----
Comprehensive income $ 1,001 1,191
====== =====
<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 in Exhibit 99.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
The Company was founded in 1984 to develop certain resorbable polymer
implants for orthopaedic uses. The Company had incurred substantial operating
losses from its inception through December 31, 1996, with an accumulated deficit
of approximately $7.7 million as of December 31, 1996. 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.
As of September 30, 1998, the accumulated deficit has been reduced to $4.3
million. Although the Company's revenues have grown significantly in certain
recent periods, no assurance can be given that this trend will continue or that
revenues of any mag nitude 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. During the first nine months of 1998, the Company received
approval to market four additional products; a tack for shoulder repair, a
cannulated screw for wrist fractures, a screw for cosmetic surgery, and an
anchor for shoulder repair. 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 in more recent periods has resulted from U.S.
sales of the Me niscus 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, 1998, international product
sales represented 22% of the Company's total product sales compared with 16% in
the third quarter of 1997.
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. 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 inventory 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 of
such systems are likely to be most pronounced in periods shortly after product
launches and likely to be le ss prevalent as penetration of the market increases
over the long term. Loans of instrumentation are charged to cost of goods sold
over the life of the loaned asset, which is estimated to be between three and
four years. 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.
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 royalty obligations are expected to increase.
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 $900,000 for income tax reporting purposes, the
extent to which such carryforwards are available to offset future U.S. 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. 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.
Results of Operations
Product sales. The Company's product sales increased by 27% from $4.1
million during the quarter ended September 30, 1997 to $5.3 million during the
quarter ended September 30, 1998, and by 32% from $11.2 million during the first
nine months of 1997 to $14.8 million during the first nine months of 1998.
Product sales are comprised of three specific product categories; Meniscus
Arrows, Other Implants (screws, pins, tacks, stents) and Instruments and other
product-related revenue.
Meniscus Arrow revenues increased by 20% worldwide from $2.9 million during
the third quarter of 1997 to $3.5 million during the third quarter of 1998, and
increased by 4% from the second quarter 1998 level of $3.4 million. Worldwide
revenues from Meniscus Arrow sales for the first nine months of 1998 were $10.1
million, a 29% increase over revenues for the comparable period in 1997.
Meniscus Arrow performance in the U.S. continues to be impacted by competitive
pressures in the marketplace. U.S. revenues from Meniscus Arrow sales increased
by 2% during the three months ended September 30, 1998 compared to the second
quarter of 1998.
Other implant revenues increased by 82% worldwide from $731,000 during the
third quarter of 1997 to $1,336,000 during the third quarter of 1998, and by 64%
worldwide from $2.0 million during the first nine months of 1997 to $3.3 million
during the first nine months of 1998. The 1998 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.
Instruments and other product-related revenues declined from $478,000
during the third quarter of 1997 to $385,000, during the third quarter of 1998,
and remained unchanged at $1.4 million during the first nine months of 1997 and
1998.
Grant revenues. Grant revenues totaled $128,000 for the three months ended
September 30, 1998, compared with $15,000 recorded during the three month period
ended September 30, 1997. Grant revenues increased from $123,000 for the first
nine months of 1997 to $290,000 for the comparable period in 1998. This revenue
is generated from grants obtained from a Finnish government research
organization, which funds certain research and development projects.
Gross profit; gross margin. The Company's gross profit increased from $3.1
million during the third quarter of 1997 to $4.2 million during the third
quarter of 1998, and from $8.5 million during the first nine months of 1997 to
$11.9 million during the first nine months of 1998. The increases in the
Company's gross profit primarily resulted from the general increase in product
sales volume. Overall, the Company's gross margin (including the effects of
grant revenue) increased from 76% during the third quarter of 1997 to 79% during
the third quarter of 1998, and from 76% to 79% during the comparable nine month
periods. The increases in gross margin in 1998 are primarily attributable to 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 29% from $2.5 million during the third
quarter of 1997 to $3.3 million during the third quarter of 1998, and by 38%
from $6.8 million during the first nine months of 1997 to $9.4 million during
the first nine months of 1998. Such expenses were 61% of product sales during
the third quarter of 1997, 63% of product sales during the third quarter of
1998, 61% of product sales during the first nine months of 1997, and 64% of
product sales during the first nine months of 1998. Selling, general and
administrative expenses consist primarily of distributor 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 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 increase in the percentage
relationship of such expenses to product sales for the nine month periods
described herein reflects certain general and administrative expenses incurred
in anticipation of new product launches.
Research and development. Research and development expenses increased by
113% from $250,000 during the third quarter of 1997 to $533,000 during the third
quarter of 1998, and by 125% from $651,000 during the first nine months of 1997
to $1.5 million during the comparable period in 1998. These increases reflected
an increased volume of product development work being performed by the Company
and increased staffing levels in this area.
Other income and expense. In the third quarter of 1998, the Company
generated interest income of $271,000, compared to interest income of $284,000
in the comparable period of 1997. For the nine month periods, interest income
increased from $459,000 to $819,000. Funds obtained from the proceeds of the
initial public offering in late April 1997 generated the interest income in the
1997 and 1998 periods. During the third quarter of 1998, the Company incurred
foreign exchange gains of $93,000, compared with a foreign exchange gain of
$5,000 incurred during the third quarter of 1997.
Income taxes. Due primarily to the utilization of certain Finnish net
operating loss carryforwards during 1997, the effective tax rate increased from
25% during the third quarter and first nine months of 1997 to 29% during the
third quarter and 31% during the first nine months of 1998.
Net income. The Company reported net income of $419,000 or $.05 per share
(basic and diluted) for the third quarter of 1998, as compared with net income
of $484,000 or $.05 per share (basic and diluted) for the comparable period in
1997. For the nine month periods, diluted income per share increased from $.12
per share in 1997 to $.13 per share in 1998. 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. See note 3 of the
Notes to the Consolidated Financial Statements.
Liquidity and Capital Resources
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 subje ct 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, 1997 and September 30, 1998, cash and cash equivalents
totaled $22.6 million and $17.1 million, respectively. The decrease in cash and
cash equivalents of approximately $5.6 million is attributable to investments of
$1.1 million in machinery and equipment in the Finnish manufacturing facility,
as well as a $ 3.8 million increase in inventory levels in anticipation of new
product launches.
As of September 30, 1998, the Company had working capital of $24.4 million,
compared with $24.5 million as of December 31, 1997. Long-term debt of $126,000
decreased from the level at the beginning of the year of $158,000. This debt
represents loans obtained from the Finnish government, and carries interest
rates ranging from 1 - 3% 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 marke ting 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. 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 Compan y 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.
Year 2000 Compliance
Readiness
The Company's centralized corporate business and technical information
systems have been fully assessed as to year 2000 compliance and functionality.
Presently, these systems are nearly complete with respect to required software
changes, tests and migration to the production environment. The Company
anticipates that internal business and technical information system year 2000
compliance issues will be substantially remedied by the end of the second
quarter 1999. This expectation constitutes a Forward-Looking Statement.
The Company has satisfactorily completed the identification and review of
computer hardware and software suppliers and is in the process of verifying,
reviewing and logging year 2000 preparedness of general business partners,
suppliers, vendors, and/or service providers that the Company has identified as
critical.
Costs
The Company is expected to incur costs of approximately $250,000 in fiscal
1998 associated with the purchase of and modifications to the Company's existing
systems to make them Year 2000 ready. The Company expects to incur costs between
$100,000 and $200,000 in fiscal year 1999 for a total project cost of less than
$500,000. Most of these costs relate to the implementation of a new internal
business system and will be depreciated over its estimated life. Any other cost
relating to this undertaking will be expensed as incurred. Based on the
estimates and information currently available, the Company does not anticipate
that the cost associated with year 2000 compliance issues will be material to
the Company's consolidated financial position or results of operations.
Risks and Contingency Plans
Considering the substantial progress made to date, the Company does not
anticipate delays in finalizing internal year 2000 remediation within the
remaining time schedules. There can be no assurances, however, that the
Company's internal systems or those of a third party on which the Company relies
will be year 2000 compliant by the year 2000. An interruption of the Company's
ability to conduct its business due to a year 2000 readiness problem could have
a material adverse effect on the Company.
Anticipated completion of this review is estimated to be by the end of the
second quarter of 1999. Pending the results of the Company's review of the year
2000 preparedness of its critical third parties, the Company will then determine
what course of action and contingencies will need to be made, if any.
Forward-Looking Statements
This discussion of the Company's Year 2000 Compliance contains
Forward-Looking Statements. Actual results could differ materially from such
expectations as a result of a number of factors, including the responsiveness of
the Company's vendors and the existence of unanticipated technological problems.
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.
From April 25, 1997 through September 30, 1998, the Company has used the
following amount of such net proceeds for the following categories enumerated by
the SEC:
Reasonable Estimated Amount
Category (in thousands)
Construction of plant, building and facilities $ 275
Purchase and installation of machinery and
equipment 1,800
Purchase of real estate -
Acquisition of other businesses -
Repayment of indebtedness 650
Working capital 1,700
Short term investments (Cash Equivalents) 17,070
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. 27.1 Financial Data Schedule
(b) The Registrant did not file any Current Report on Form 8-K during the
quarter ended September 30, 1998.
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 16, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit No. 27.1 Financial Data Schedule
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