SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1999 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: 0-22401
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 August 11, 1999, there were 8,895,576 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, 1998
and June 30, 1999 (Unaudited) 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
Item 1. Financial Statements
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- ---------
(Unaudited)
Assets:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 14,213 $ 5,641
Inventory, net 9,778 12,954
Trade accounts receivable, net of
allowance of $142 and $513 as of December 31,
1998 and June 30, 1999 4,643 3,955
Grants receivable 189 100
Related parties 239 339
Prepaid expenses and other current assets 726 865
Deferred tax assets 829 1,554
------ ------
Total current assets 30,617 25,408
Investments 87 87
Plant and equipment, net 2,561 3,269
Goodwill and intangibles, net 3,684 3,682
----- ------
Total assets $ 36,949 $32,446
======== =======
Liabilities and Stockholders' Equity:
Current Liabilities:
Trade accounts payable $ 4,176 $ 4,126
Long-term debt, current portion 41 10
Current income tax liability 578 695
Accrued and other current liabilities 1,839 1,783
----- -----
Total current liabilities 6,634 6,614
Long-term debt 75 50
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, 8,922,076 shares
issued and outstanding as of December 31, 1998
and June 30, 1999 17 17
Treasury stock, 20,500 and 26,500 shares as of December 31,
1998 and June 30, 1999, respectively (128) (161)
Additional paid-in capital 35,642 35,642
Accumulated deficit (4,266) (8,691)
Foreign currency translation adjustment (1,025) (1,025)
------- -------
Total stockholders' equity 30,240 25,782
------ ------
Total liabilities and stockholders' equity $ 36,949 $32,446
======== =======
See accompanying notes to the unaudited 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 Six Months Ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product Sales $5,057 4,907 9,516 10,014
Grant revenues 108 90 162 267
------ ----- ----- ------
Total revenues 5,165 4,997 9,678 10,281
----- ----- ----- ------
Cost of goods sold 1,074 1,454 2,043 2,802
Special charge related to instrument inventory - 929 - 929
-------- ----- ----- ------
Gross profit 4,091 2,614 7,635 6,550
-------- ----- ----- -----
Selling, general and administrative 3,124 5,049 6,142 8,998
Research and development 630 522 931 1,272
Severance charges - 275 - 275
Patent litigation - 706 - 1,093
-------- ----- ----- -------
Total operating expenses 3,754 6,552 7,073 11,638
-------- ----- ----- -------
Operating income (loss) 337 (3,938) 562 (5,088)
-------- ------ ----- --------
Other income and expense 287 378 568 663
------ ------ ----- ------
Income (loss) before provision for
income taxes 624 (3,560) 1,130 (4,425)
Provision for income taxes 181 - 358 -
----- ------- ----- -------
Net income (loss) $ 443 (3,560) 772 (4,425)
===== ======= ===== =======
Pro forma earnings (loss) per share:
Basic $ 0.05 $ (0.40) $ 0.09 $ (0.50)
Diluted 0.05 (0.40) 0.08 (0.50)
Shares used in computing pro forma earnings per share:
Basic 8,922 8,897 8,922 8,897
Diluted 9,266 8,897 9,272 8,897
</TABLE>
See accompanying notes to the unaudited Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
BIONX IMPLANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
-------------------------------
1998 1999
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 772 $(4,425)
Adjustments to reconcile net income (loss)
to net cash used in by operating activities:
Depreciation and amortization 234 364
Change in assets and liabilities:
(Increase) in inventory, net (1,718) (3,176)
Decrease (increase) in trade accounts receivable, net (585) 688
Decrease in grants receivable 12 89
(Increase) in related parties (74) (100)
(Increase) in prepaid expense and other current assets (435) (139)
(Increase) in deferred tax asset (252) (725)
Increase (decrease) in trade accounts payable 575 (50)
(Decrease) increase in current income tax liability (424) 117
(Decrease) in accrued and other current liabilities (53) (56)
----- -----
(2,720) (2,988)
Net cash used in operating activities (1,948) (7,413)
------- -------
Cash flows from investing activities
Purchase of plant and equipment (1,096) (955)
Purchase of intangible assets - (114)
-------- -------
Net cash used in investing activities (1,096) (1,069)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long term debt 13 -
Capitalization of patents (61) -
Repayment of long-term debt - (56)
Proceeds from exercise of employee stock options 26 -
Purchase of treasury shares - (34)
--------- -------
Net cash used in financing activities (22) (90)
Net decrease in cash and cash equivalents (3,066) (8,572)
Cash and cash equivalents at beginning of period 22,632 14,213
--------- -------
Cash and cash equivalents at end of period $ 19,566 $ 5,641
========= =======
Supplementary cashflow information:
Cash paid for interest $ 1 $ -
Cash paid for taxes $ 1,034 $ 155
===== ======
</TABLE>
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, 1998 and June 30, 1999, and the Company's
consolidated results of operations and cash flows for the three and six months
ended June 30, 1998 and 1999, 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 SEC. 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, 1998 and notes thereto included in the Company's
Annual Report on Form 10-K (SEC file no. 0-22401) filed with the SEC. The
results of operations and the cash flows for the three and six months ended June
30, 1999 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, June 30,
1998 1999
----------- --------
<S> <C> <C>
Raw materials/Semi-finished implants $1,781 $815
Finished goods - implants 2,570 2,783
Instruments 2,457 5,921
Instruments on consignment 3,944 6,448
------ ------
10,752 15,967
Inventory reserve (174) (1,003)
Special instrument inventory charge(a) -- (929)
Accumulated amortization
- consigned instruments (800) (1,081)
----- -------
$ 9,778 $12,954
======= =======
</TABLE>
- --------------
(a) This special charge of $929,000 was taken in the second quarter of 1999 to
reduce the current carrying value of certain of the Company's instrument
inventory due to changes in technology and the introduction of new instruments.
3. Net Income (loss) Per Share
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>
The following table sets forth the calculation of the total number of
shares used in the computation of net earnings (loss) per common share for the
three and six months ended June 30, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months Ended Three and Six Months
Ended June 30, June 30, Ended June 30,
1998 1998 1999
---- ---- ----
<S> <C> <C> <C>
Shares used in computing basic 8,922 8,922 8,897
earnings per share
Incremental shares from assumed exercise of 344 350 --
dilutive options and warrants
Shares used in computing diluted 9,266 9,272 8,897
earnings per share
</TABLE>
4. Reporting Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 Reporting Comprehensive Income (SFAS 130). 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.
Comprehensive income (loss) was the same as net income (loss) for the
three and six months ended June 30, 1998 and 1999.
5. Severance Charges
During the second quarter of 1999, the Company incurred a one-time
severance charge of $275,000. This severance charge relates to the
organizational restructuring of the Company, including severance payments to the
Company's former chief executive officer, chief financial officer and vice
president of sales. A majority of the severance accrual will be paid within the
next four months and the remainder will be paid within eight months thereafter.
<PAGE>
Item 2. 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, 1998.
The Company was founded in 1984 to develop certain resorbable polymer
implants for orthopedic 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 June 30, 1999, the accumulated deficit was approximately $8.7 million.
After recording profitable results for a number of quarters, the Company has
again recorded losses in recent periods. 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 successfully commercialize its products or that 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 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 June 30, 1999, international product sales
represented 19% of the Company's total product sales.
The Company typically sells or consigns implant grade, stainless steel
surgical instruments for use with each of its Self-Reinforced, resorbable
products. The sale of these instruments results in margins which are typically
lower than the margins applicable to the Company's implant products. However,
since orthopedic companies operating in the U.S. have traditionally loaned
rather than sold instruments to their customers, the Company anticipates that in
the future it will be necessary for the Company to provide an increasing
proportion of its instrumentation in the U.S. on a loan basis. In most cases
instrumentation is provided on a consignment basis to customers that commit to a
certain purchase level of implant products. The instruments are loaned on the
basis of a one-year consignment policy. 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 such systems are included within cost of goods sold. In the case
of a consigned product, the Company amortizes the cost of the instrumentation
over a three to four year period as 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 are likely to be less prevalent as penetration of the market
increases over the long term.
The Company sells its products through managed networks of independent
sales agents, direct sales representatives, distributors and dealers. In the
U.S., the Company handles all invoicing functions directly and pays commissions
to its sales agents or representatives. 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 its 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.
<PAGE>
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 invoices more than 85% of its consolidated revenues in U.S.
dollars. Approximately 80% of the expenses incurred by the Company are
denominated in U.S. dollars. The remaining portion of revenues and expenses are
denominated in European currencies, predominantly Finnish Markka. The Company
seeks to manage its foreign currency risk for these other currencies through the
purchase of foreign currency options and forward contracts. No assurances can be
given that such hedging techniques will protect the Company from exposure
resulting from relative changes in the economic strength of the foreign
currencies applicable to the Company. Foreign exchange transaction gains and
losses can vary significantly from period to period.
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.
During the second quarter of 1999, the Company began to implement
initiatives to refocus its business and reallocate critical resources to achieve
sales growth, profit improvement and a positive cash flow position. Management
initiatives include: development of a management-restructuring plan to add
critical resources in areas that will have the greatest impact on sales growth
and profit improvement; consolidation of sales efforts for craniofacial and
orthopedic products designed to improve sales efficiencies, increase market
coverage and reduce the Company's cost of sales; reduction in sales
administration to reduce the Company's overall cost of sales; refocus of R&D
investments on new product introductions that will provide complementary product
offerings for orthopedic and craniofacial products that are planned to be
introduced during 1999; consolidation of global inventories to reduce the
Company's overall investment in inventories and improve customer service levels;
reduction in inventory levels to improve inventory turn rates thereby reducing
the Company's cash requirements to support inventory investments; increases in
sales and marketing efforts designed to expand sales contributions from markets
outside of the US; and the implementation of surgeon educational programs
designed to increase surgeon awareness and use of the Company's products. In
addition to these initiatives, during the second quarter of 1999, four new
patents were issued for the application of the Company's technology for
orthopedic indications. During the balance of 1999, the Company will continue to
implement these initiatives and refocus its business in an attempt to improve
its profitability and operations. No assurances can be given that the Company's
initiatives will result in profitable operations.
Results of Operations
Product sales. The Company's product sales decreased by 3% from $5.1
million during the quarter ended June 30, 1998 to $4.9 million during the
quarter ended June 30, 1999, and increased by 5% from $ 9.5 million during the
first six months of 1998 to $10.0 million during the first six months of 1999.
Product sales are comprised of three specific product categories: Meniscus
Arrows; Other Implants (screws, pins, plates, tacks, and stents); and
Instruments and other product-related revenue.
Meniscus Arrow revenues decreased by 18% worldwide from $3.4 million
during the second quarter of 1998 to $2.8 million during the second quarter of
1999. Revenues from Meniscus Arrow sales for the first six months of 1999 were
<PAGE>
$5.9 million, a 9% decrease over revenues of the comparable period in 1998.
Meniscus Arrow performance in the U.S. continues to be impacted by competitive
pressures in the marketplace.
Other implant revenues increased by 88% worldwide from $1.1 million
during the second quarter of 1998 to $2.1 million during the second quarter of
1999, and increased by 84% worldwide from $2.0 million during the first six
months of 1998 to $ 3.7 million during the first six months of 1999. The 1999
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 $568,000
during the second quarter of 1998 to $230,000 for the comparable period in 1999
and from $1.0 million during the first six months of 1998 to $440,000 for the
comparable period in 1999. The 1999 instrument revenue decreases reflect the
result of market penetration that was achieved in 1998.
Grant and License revenues. Grant and license revenues totaled $90,000
for the three months ended June 30, 1999, compared with revenue of $108,000
recorded during the three-month period ended June 30, 1998. Grant and license
revenues increased from $162,000 for the first six months of 1998 to $267,000
for the comparable period in 1999. This revenue is generated primarily 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 decreased from
$4.1 million during the second quarter of 1998 to $2.6 million during the second
quarter of 1999, and from $7.6 million during the first six months of 1998 to
$6.5 million during the first six months of 1999. The decrease in gross profit
reflects a special charge of $929,000 taken in the second quarter of 1999
resulting from the reduction in the current carrying value of certain of the
Company's instrument inventory due to changes in technology and the introduction
of new instruments. Overall, the Company's gross margin (including the effects
of grant revenue) decreased from 79% during the second quarter of 1998 to 52%
during the second quarter of 1999, and from 79% during the first six months of
1998 to 64% during the comparable period of 1999. The decrease in gross margin
in 1999 is primarily attributable to the instrument inventory charge noted above
and to the change in the mix of product revenues with lower gross margins.
Excluding the instrument inventory charge, the Company's gross margin was 71%
during the second quarter of 1999.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 61% from $3.1 million during the second
quarter of 1998 to $5.0 million during the second quarter of 1999, and by 48%
from $6.1 million during the first six months of 1998 to $9.0 million during the
first six months of 1999. Such expenses were 61% of product sales during the
second quarter of 1998, 102% of product sales during the second quarter of 1999,
65% of product sales during the first six months of 1998 and 90% of product
sales during the first six months of 1999. 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, are 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 new employee salaries,
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., and
increases in employee benefits, travel and entertainment, marketing and
professional expenses. The increase in the percentage relationship of such
expenses to product sales for the periods described herein reflects the
increased general and administrative expenses incurred in connection with the
Company's implementation of new business initiatives related to the
restructuring of the Company's operations and organizations, and the
anticipation of new product launches.
Patent litigation. The Company incurred in the second quarter of 1999,
$706,000 in legal fees to prosecute (and in one instance settle) three patent
infringements suits. The Company has incurred $1.1 million in such legal fees
for the first six months of 1999. The Company did not incur substantial patent
litigation legal fees in either the second quarter or the first six months of
1998. The patent litigation legal fees incurred during 1999 are part of the
Company's efforts to protect and strengthen its proprietary intellectual
property position.
Severance charges. During the second quarter of 1999, the Company
incurred a one-time severance charge of $275,000. This severance charge relates
to the organizational restructuring of the Company, including severance payments
<PAGE>
to the Company's former chief executive officer, chief financial officer and
vice president of sales. A majority of the severance accrual will be paid within
the next four months and the remainder will be paid within eight months
thereafter.
Research and development. Research and development expenses decreased
by 17% from $630,000 during the second quarter of 1998 to $522,000 during the
second quarter of 1999, and increased by 37% from $931,000 during the first six
months of 1998 to $1.3 million during the comparable period in 1999. The
decrease in the second quarter of 1999 resulted from increased management
controls and project prioritization, while the increase in the first six months
of 1999 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 second quarter of 1999, the Company
generated interest income of $378,000, compared to interest income of $287,000
in the comparable period of 1998. For the six month periods, interest income
increased from $586,000 to $663,000. Funds obtained from the proceeds of the
Company's initial public offering in April 1997 ("IPO") generated the interest
income in both the 1998 and 1999 periods.
Income taxes. The Company recorded no tax provisions for the second
quarter or first six months of 1999, compared to tax provisions of $187,000 and
$358,000 in the comparable periods of 1998. The consolidated operating loss in
the second quarter 1999 was incurred by the U.S. entity. As a result, no
corresponding tax benefit was recognized due to the net operating loss position
in the U.S.
Net (loss) income. The Company reported a net loss of ($3.6) million or
($.40) per share (basic and diluted) for the second quarter of 1999, as compared
with net income of $443,000 or $.05 per share (basic and diluted) for the second
quarter of 1998. The Company reported a net loss of ($4.4) million or ($.50) per
share (basic and diluted) for the first six months of 1999, as compared with net
income of $772,000 or $.08 per share (diluted) during the first six months of
1998.
Per Share Calculations. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128), effective for fiscal years commencing after
December, 1997. SFAS 128 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. SFAS 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 IPO 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 IPO. In May 1997, the Underwriters exercised in full their over-allotment
option granted in connection with the IPO. Net proceeds from the IPO (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 (increased recently to $4.0 million), secured by the
personal property of the Company 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 credit facility.
At December 31, 1998 and June 30, 1999, cash and cash equivalents
totaled $14.2 million and $5.6 million, respectively. The decrease in cash and
cash equivalents of approximately $8.5 million is attributable to loss in net
income of $4.4 million, investments of approximately $700,000 in machinery and
equipment in the Finnish manufacturing facility and computer systems upgrades,
and a $3.2 million increase in inventory levels in anticipation of new product
launches and consignment of instrumentation.
As of June 30, 1999, the Company had working capital of $18.8 million,
compared with $24.0 million as of December 31, 1998. Long-term debt (including
the current portion) was reduced by $56,000 from the level at the beginning of
the year to $60,000 as of June 30, 1999. This debt represents loans obtained
from the Finnish government and carries interest rates ranging from 1-3% per
annum.
<PAGE>
The Company's liquidity has been weakened substantially during 1999.
The Company's liquidity is dependent primarily upon its ability to improve
operating results and thereby generate adequate cash flow from operations.
Management has taken several steps designed to improve future financial results
and reduce the amount of cash used by operations, including (i) developing a
management restructuring plan to add critical resources to areas having the
greatest impact in sales growth, (ii) consolidating sales efforts to improve
sales efficiencies, increase market coverage and reduce the cost of sales, (iii)
refocusing research and development investments on new product introductions,
(iv) consolidating and reducing inventory levels, (v) increasing sales and
marketing efforts outside the U.S., and (vi) where possible, reducing other
operating expenses. However, there can be no assurance that these steps will be
successful, and the Company's operations may not provide sufficient internally
generated cash flows to meet the Company's projected requirements. The Company's
ability to continue to finance its operations will depend on its ability to
achieve greater profitability by improving sales and margins, reducing cash
outflows and, if necessary, obtaining other sources of funding sufficient to
support the Company's operations. No assurances can be given that such funding
will be available on satisfactory terms or at all.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including management's ability to reverse
recent rends, market acceptance of the Company's 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, 1996, 1998 or during the first six months
of 1999. To the extent that funds generated from the Company's operations,
together with its existing capital resources (including its 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 financing, strategic alliances with corporate partners
and others, or through other sources. The terms of any equity financing may be
dilutive to stockholders and the terms of any debt financing 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 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
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 third quarter
of 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. The Company expects to complete its review of these third parties by
the third quarter of 1999.
Costs
The Company incurred 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, which 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.
<PAGE>
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, its operations, financial condition
and liquidity.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No change since filing of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
<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 SEC
on April 24, 1997. The offering commenced on April 25, 1997 and terminated after
all securities were sold.
From April 25, 1997 through June 30, 1999, the Company has used the
following amounts of the net proceeds from the initial public offering for the
following categories enumerated by the SEC:
<TABLE>
Reasonable Estimated Amount
(in thousands)
Category
<S> <C>
Construction of plant, building and facilities $1,933
Purchase and installation of machinery and equipment 2,607
Purchases of real estate -
Acquisition of other businesses -
Repayment of indebtedness 790
Working capital 16,672
Short term investments (Cash Equivalents) 5,641
Other purposes for which at least $100,000 has been used -
</TABLE>
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 Reports on Form 8-K during
the quarter ended June 30, 1999.
<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/ Gerard Carlozzi
Gerard Carlozzi, President and
Chief Operating Officer
By: /s/ Jim Hayden
Jim Hayden, Controller and
Principal Financial Officer
Dated: August 19, 1999
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit No. 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001030418
<NAME> BIONX IMPLANTS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,641
<SECURITIES> 0
<RECEIVABLES> 4,468
<ALLOWANCES> 513
<INVENTORY> 12,954
<CURRENT-ASSETS> 25,408
<PP&E> 3,269
<DEPRECIATION> 1,221
<TOTAL-ASSETS> 32,446
<CURRENT-LIABILITIES> 6,614
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 28,303
<TOTAL-LIABILITY-AND-EQUITY> 32,446
<SALES> 10,014
<TOTAL-REVENUES> 10,281
<CGS> 2,802
<TOTAL-COSTS> 11,638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> (4,425)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,425)
<EPS-BASIC> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
