Dear Shareholder,
2017 marks the first year since 2014 that the company has published financial information. You can now find financial information for 2015 and 2016 on our website, Kelyniam.com. Reporting financial information is just one example of the many positive changes happening at Kelyniam.
I am pleased to report that year over year revenues grew 21% in 2017, to $1,848,104, our strongest year since 2013, when sales peaked at $1,857,516. This increase is due to significant changes in how we work with distributor partners. We have strengthened relationships with our historic partners and are strategically adding partners in underserved markets. The consistent fit and finish of our implants and our commitment to customer service is making Kelyniam a preferred supplier in the market. We expect this growth momentum to continue, resulting in forecast revenue of $2,400,000 in 2018.
We implemented better financial controls in 2017 following a mid-year management change, resulting in gross profit increasing by 37%, to $1,101,026 from $803,293. Operating income grew to $103,328 from a loss of $13,577 in 2016. The company is in its best financial position in many years and is well positioned for future growth.
This outstanding performance is despite the company voluntarily withdrawing a line extension from the market that accounted for approximately 25% of revenue in the first half of the year. The FDA conducted an audit of our facility in May and found deficiencies in some of the documentation around the line extension and in some internal reporting controls. Based on the result of the audit, Kelyniam voluntarily stopped manufacturing this product line and recalled all the related promotional material.
The FDA issued a warning letter to Kelyniam in October that documented the reporting deficiencies. We are working closely with the FDA to address all the items noted in the letter and are incorporating the required documentation in a new 510k application for the line extension. We are on track to file this 510k with the FDA in early Q3. While we feel positive about our progress with our response to the warning letter and our interactions with the FDA, this action will remain open on their docket until it is fully resolved.
We are extremely pleased with the positive momentum the company has achieved. In addition to changing leadership, the company has invested in the personnel we need to continue to grow our business. Eric Boyea joined our team as Director of Quality and Regulatory and has made an immediate positive impact by improving our quality controls and documentation. Chief Operating Officer, Chris Breault, returned to the company in May and his management of the facility and interactions with the FDA contributed significantly to our positive financial performance. I must also note the personal contributions to the success of the company by Board member and Vice President of Sales and Business Development, Dr. Mark Smith. Dr. Smith was invaluable during the transition to new management and in executing the new sales strategy.
Market Update
Kelyniam currently captures approximately 1% of the $220M custom cranial implant market in the U.S. We believe that our unique, high performance manufacturing processes and expanded distributor relationships will allow us to continue to gain market share. Downward price pressure in the market is acute and often realized in situations where reduced prices are exchanged for increased volume or access to influential institutions. We recently signed a long-term agreement with a leading distributor that will help both organizations navigate this market reality. We have also restructured our independent sales representative agreements to provide regional pricing flexibility while maintaining profitability.
Growth in the custom cranial implant market is being driven internationally, particularly in Asia and Europe. We are evaluating how we can best enter these markets and learning the regulatory requirements of each. We believe the manufacturing process that allows us to deliver custom, high quality implants anywhere in the U.S. within 24 hours can be a differentiator in the international market.
We see other near term growth opportunities through partnerships with other manufacturers seeking distribution partners for products related to the cranial-maxillofacial market. Our strong distributor relationships and customer base is an ideal opportunity for international companies seeking a partner in the U.S.
New Platform Opportunities
Kelyniam’s proven technology of additive manufacturing in a regulated environment has many medical applications. Additive manufacturing, especially when the device is created through the interpretation of a CT or MRI scan, is an area of expertise limited to a few companies like Kelyniam. This expertise has created an opportunity to offer contract manufacturing opportunities to medical device companies needing services in a ISO 13485 compliant environment. Dr. Mark Smith is actively seeking companies and individuals interested in partnering with Kelyniam for this purpose.
Our manufacturing efficiency and current product line has given Kelyniam the capacity and 3D printing expertise to pursue near term opportunities in the medical modeling space. We are in early stage discussions with several potential clients and expect to produce a small number of medical models by Q4. Revenues for this product line will be minimal in 2018, but we believe this market is currently underserved and could be a significant growth driver in the future.
Ongoing Risks and Future Plans
The deficiencies noted by the FDA will not be resolved until a second audit is complete. This audit is not yet scheduled be we are preparing for a visit at any time. While we are hopeful that our systems and processes will be sufficient for the FDA, there is no guarantee this will be the case.
Kelyniam is engaged in legal proceedings it has commenced against certain individuals in the previous management. We intend to aggressively pursue all appropriate legal actions and remedies but cannot predict the outcome, nor what a positive or negative verdict could mean for the company.
Conclusion
As I enter my second engagement with Kelyniam, I continue to be inspired by our people and the opportunities ahead of us. In just a few months we have made significant progress in transforming the company into a growing business with a long-term plan for future success. The strategic moves we made in 2017 were validated by our financial performance in the last half of the year. The management team is committed to continuing this path and we will invest heavily in the infrastructure necessary to support our growth strategy.
Ross Bjella
Chairman and CEO