SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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)
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(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 April 29, 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 March 31, 1998 (Unaudited) 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998 (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 14
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 March 31, 1998
(in thousands, except share amounts)
December 31, March 31,
1997 1998
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 22,632 21,780
Inventory, net 2,550 2,940
Trade accounts receivable, net of
allowance of $111 as of December 31,
1997 and March 31, 1998 3,070 3,198
Grants receivable 129 61
Prepaid expenses and other current assets 158 320
Deferred tax assets 355 355
--- ---
Total current assets 28,894 28,654
Investments 87 87
Plant and equipment, net 849 1,287
Goodwill and intangibles, net 3,711 3,654
----- -----
Total assets $ 33,541 33,682
======== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable $ 1,775 1,900
Long-term debt, current portion 43 43
Related party 74 74
Current income tax liability 994 587
Accrued and other current liabilities 1,459 1,527
----- -----
Total current liabilities 4,345 4,131
Long-term debt 115 115
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 March 31, 1998,
respectively 17 17
Additional paid-in capital 35,616 35,642
Accumulated deficit (5,527) (5,198)
Foreign currency translation adjustment (1,025) (1,025)
------- -------
Total stockholders' equity 29,081 29,436
------ ------
Total liabilities and stockholders' equity $ 33,541 33,682
======== ======
See accompanying notes to the unaudited Consolidated Financial Statements
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1997 1998
---- ----
Revenues:
Product Sales $ 3,218 4,459
Grant revenues - 54
------ ------
Total revenues 3,218 4,513
------ ------
Cost of goods sold 803 969
------ ------
Gross profit 2,415 3,544
------ ------
Selling, general and administrative 1,940 3,018
Research and development 181 301
------ ------
Total operating expenses 2,121 3,319
------ ------
Operating income 294 225
------ ------
Other income and expense:
Interest income 3 281
------ ------
Income before provision for
income taxes 297 506
Provision for income taxes 75 177
------- ------
Net income $ 222 329
======== ======
Net income per share $ 0.02 0.04
======== ====
Pro forma earnings per share:
Basic $0.02 0.04
Diluted $0.02 0.04
Shares used in computing pro forma earnings
per share:
Basic 8,916 8,920
Diluted 9,232 9,278
See accompanying notes to the unaudited Consolidated Financial Statements
<PAGE>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
-------------------------
1997 1998
Cash flows from operating activities:
Net income $ 222 329
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 99 109
Change in assets and liabilities:
Increase in trade accounts receivable (490) (128)
Increase in inventory, net (195) (390)
Decrease in grants receivable 44 68
Increase in prepaid expenses and
other current assets (160) (162)
Decrease in investments 10 -
Increase in trade accounts payable 805 125
Decrease in related party (78) -
Increase (decrease) in current income tax liability 75 (407)
Increase (decrease) in accrued and other liabilities (203) 68
----- -----
(93) (717)
----- -----
Net cash (used in) provided by operating activities 129 (388)
----- -----
Cash flows from investing activities
Purchase of plant and equipment (216) (490)
----- -----
Cash flows from financing activities:
Proceeds from issuance of long-term debt 43 -
Proceeds from exercise of employee stock options - 26
Deferred offering cost (313) -
----- ----
Net cash (used in) provided by financing activities (270) 26
Net effects of foreign exchange rate differences 42 -
----- ----
Net decrease in cash and cash equivalents (315) (852)
Cash and cash equivalents at beginning of period 1,593 22,632
----- ------
Cash and cash equivalents at end of period $ 1,278 21,780
======== ======
Supplementary cashflow information:
Cash paid for interest 3 -
Cash paid for taxes 208 584
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 March 31, 1998, and the Company's
consolidated results of operations and cash flows for the three months ended
March 31, 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 months ended March 31, 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, March 31,
1997 1998
Raw materials $ 437 245
Finished goods 2,778 3,375
----- -----
3,215 3,620
Less reserves (665) (680)
----- -----
$ 2,550 2,940
========= =====
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 (loss) per share is computed using the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings (loss) 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.
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
<PAGE>
consideration are presumed to have been issued in contemplation of the IPO and
are to be included in the calculation of basic earnings (loss) 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 (loss) 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 March 31, 1997 and 1998 (in thousands):
1997 1998
---- ----
Weighted average common shares outstanding 7,618 8,920
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 8,920
Incremental shares from assumed exercise of
dilutive options and warrants 316 358
----- ---
Shares used in computing pro forma diluted
earnings per share 9,232 9,278
===== =====
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.
5. 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 Markka 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
<PAGE>
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.
6. 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 has 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 March 31, 1997 and 1998 (in thousands):
March 31,
1997 1998
---- ----
Net income $ 222 329
Foreign currency translation adjustments 42 -
----- ----
Comprehensive income $ 264 329
===== ====
<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 and, at March 31, 1998, had
an accumulated deficit of approximately $5.2 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 have grown significantly in recent periods, 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. During the first quarter of 1998, the Company received
approval to market three additional products; a tack for shoulder repair, a
cannulated screw for wrist fractures and a screw for cosmetic surgery. 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 more recent periods has resulted from U.S. sales of the
Meniscus Arrow, which received FDA clearance in March 1996. To date, all
products sold by the Company have been launched first in international markets.
During the three months ended March 31, 1997 and 1998, international product
sales represented 15% 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. 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.
<PAGE>
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. Since the Company pays commissions on sales made through
its U.S. network, any increase in the percentage of U.S. sales to total sales in
the future will likely result in an increase in the percentage of selling,
general and administrative expenses to total sales. This increase would 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 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
will be material.
The Company has entered into agreements pursuant to which the Company
is obligated to pay royalties based on net sales of certain of the Company's
products, including the Meniscus Arrow. To the extent that sales of the Meniscus
Arrow products and other licensed products increase in future periods, the
Company's license obligations are expected to increase.
The Company has benefited from the research and development activities
of Dr. Pertti Tormala, the founder of the Company, at the Technical University
in Tampere, Finland. Dr. Tormala is currently an Academy Professor at the
Technical University and is permitted by the University to devote his efforts to
developing products for the Company. Dr. Tormala utilizes a group of senior
researchers, graduate students and faculty at the Technical University to
perform research and development projects involving resorbable polymers and
other topics relating to the Company's technology and manufacturing processes.
This arrangement, permitted in Finland as a means of encouraging the
commercialization of technological development, has resulted in substantial cost
savings to the Company while greatly expanding its product development efforts.
The Company has hired certain senior researchers from the University program and
anticipates that, in the future, more of its product development work will be
performed and funded directly by the Company, thereby increasing the Company's
research and development expenses.
The Company currently manufactures its implant products solely at its
Tampere, Finland plant. The Company intends to establish a manufacturing
capability in the U.S. The Company plans to establish this capability either by
equipping and operating a leased facility or contracting with a third party to
provide a manufacturing capability to the Company. The Company believes that on
an interim basis, contract manufacturing may enable the Company to save certain
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.
<PAGE>
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 39% from $3.2
million during the quarter ended March 31, 1997 to $4.5 million during the
quarter ended March 31, 1998. Product sales are comprised of three specific
product categories; Meniscus Arrows, Other Implants (screws, pins, tacks and
stents) and Instruments and other product-related revenue.
Meniscus Arrow revenues increased by 38% worldwide from $2.3 million
during the first quarter of 1997 to $3.1 million during the first quarter of
1998. However, Meniscus Arrow revenues declined by 8% compared to the fourth
quarter, 1997 level of $3.4 million. This decline was attributed to the arrival
of new competition in the meniscal repair market. During the first quarter of
1998, the Company reported that discounting and other competitive practices by
competitors launching new products were adversely impacting sales of the
Meniscus Arrow. The Company estimates that for the first six months of 1998,
such practices (which are not expected to continue on a long-term basis) are
expected to reduce revenues from Meniscus Arrow sales by approximately $2.0
million from the Company's previous expectations. The immediately preceding
sentence constitutes a Forward-Looking Statement. Actual results could differ
materially from the projections in that sentence as a result of several factors,
including the nature and extent of the pricing practices of the Company's
competitors and other factors set forth in Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Other implant revenues increased by 45% worldwide from approximately
$620,000 during the first quarter of 1997 to approximately $890,000 during the
first quarter of 1998. Instruments and other product-related revenues increased
by 17% worldwide from approximately $370,000 during the first quarter of 1997 to
approximately $430,000 during the first quarter of 1998.
The 1998 product sales increases over the comparable 1997 period
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.
Grant revenues. Grant revenues totaled $54,000 for the three months
ended March 31, 1998. No grant revenue was recorded during the comparable period
ended March 31, 1997. The revenue generated during the first quarter of 1998 was
due to 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
$2.4 million during the first quarter of 1997 to $3.5 million during the first
quarter of 1998. The increase in the Company's gross profit primarily resulted
from the general increase in product sales volume. Overall, the Company's gross
profit margin (including the effects of grant revenue) increased from 75% during
the first quarter of 1997 to 78.5% during the first quarter of 1998. The
increase in gross margin in 1998 is 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 56% from $1.9 million during the first
quarter of 1997 to $3.0 million during the first quarter of 1998. Such expenses
were 60% of product sales during the first quarter of 1997, as compared with 68%
of product sales during the first quarter 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
<PAGE>
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 reflects an increase in certain
fixed expenses without a corresponding increase in product sales.
Research and development. Research and development expenses increased
by 66% from $181,000 during the first quarter of 1997 to $301,000 during the
first quarter of 1998. This increase reflected an increased volume of product
development work being performed by the Company and increased staffing levels.
Interest income. In the first quarter of 1998, the Company generated
interest income of $281,000, compared to interest income of $3,000 in the
comparable period of 1997. Funds obtained from the proceeds of the initial
public offering in late April 1997 generated the interest income in the 1998
period.
Income taxes. The provision for income taxes during the first quarter
of 1998 reflects the Company's profitable operations during the periods
presented. Due to the utilization of certain Finnish net operating loss
carryforwards during 1997, the effective tax rate increased from 25% during the
first quarter of 1997 to 35% during the first quarter of 1998.
Net income. The Company reported net income of $329,000 or $.04 per
share (basic and diluted) for the first quarter of 1998, as compared with net
income of $222,000 or $0.02 per share (basic and diluted) for the comparable
period in 1997. 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 ending
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 Company's Consolidated Financial Statements.
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, 1997 and March 31, 1998, cash and cash equivalents
totaled $22.6 million and $21.8 million, respectively. The decrease in cash and
cash equivalents of $852,000 is
<PAGE>
primarily attributable to investments made in facility expansion, and a payment
related to the 1997 Finnish income tax liability.
As of March 31, 1998, the Company had working capital of $24.5 million.
Long-term debt of $158,000 remained unchanged from the level at the beginning of
the year, representing loans obtained from the Finnish government. This debt
carries interest ranging in rates 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 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.
Year 2000 Compliance
For information regarding the Company's compliance with "Year 2000"
issues, see Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
<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.
From April 25, 1997 through March 31, 1998, the Company has used the
net proceeds of its initial public offering for the following categories
enumerated by the SEC:
Reasonable Estimated Amount
(in thousands)
Category
Construction of plant, building and facilities $ 157
Purchase and installation of machinery and equipment 683
Purchases of real estate -
Acquisition of other businesses -
Repayment of indebtedness 655
Working capital -
Short term investments 19,705
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.
<PAGE>
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 March 31, 1998.
<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: May 12, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit No. 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF BIONX IMPLANTS, INC., AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,780
<SECURITIES> 0
<RECEIVABLES> 3,198
<ALLOWANCES> 111
<INVENTORY> 2,940
<CURRENT-ASSETS> 28,654
<PP&E> 1,736
<DEPRECIATION> 449
<TOTAL-ASSETS> 33,682
<CURRENT-LIABILITIES> 1,900
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 29,419
<TOTAL-LIABILITY-AND-EQUITY> 33,682
<SALES> 4,459
<TOTAL-REVENUES> 4,513
<CGS> 969
<TOTAL-COSTS> 3,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (281)
<INCOME-PRETAX> 506
<INCOME-TAX> 177
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
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