10-Q 1 w54031e10-q.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 09/30/01 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, 2001. 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) Pennsylvania 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 September 30, 2001 there were 10,864,906 shares of Common Stock, par value $.0019 per share, outstanding. BIONX IMPLANTS, INC. AND SUBSIDIARIES INDEX
Page Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets at December 31, 2000 and September 30, 2001 (Unaudited) 3 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 2001 (Unaudited) 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 2001 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 Part II. Other Information Signatures 13
BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31 September 30 2000 2001 --------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 7,050 $ 4,737 Trade accounts receivable, net of allowance $247 as of December 31, 2000, and $243 as of September 30, 2001 2,526 2,457 Inventory, net (Note 2) 4,679 3,732 Grants receivable 110 103 Related party receivables 402 489 Other receivables 77 62 Prepaid expenses and other current assets 392 630 Deferred tax assets 798 798 -------- -------- Total current assets 16,034 13,008 Plant and equipment, net 2,230 2,117 Goodwill and intangibles, net (Note 4) 3,915 3,832 -------- -------- Total assets 22,179 18,957 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable 2,673 1,458 Long - term debt, current portion 7 35 Accrued and other current liabilities 1,638 1,992 -------- -------- Total current liabilities 4,318 3,485 Long-term debt 186 351 Subordinated debt 145 145 -------- -------- Total liabilities 4,649 3,981 Preferred stock, par value $0.001 per share, -- -- 8,000,000 shares authorized, none issued and outstanding Common stock, par value $0.0019 per share, 31,600,000 21 21 authorized, 10,819,464 and 10,864,906 shares issued and outstanding as of December 31, 2000 and September 30, 2001 Additional paid-in-capital 39,872 39,986 Accumulated deficit (21,338) (24,006) Accumulated other comprehensive income (1,025) (1,025) -------- -------- Total stockholders' equity 17,530 14,976 ======== ======== Total liabilities and stockholders' equity $ 22,179 $ 18,957 ======== ========
See accompanying notes to unaudited consolidated financial statements -3- 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 2000 2001 2000 2001 ---- ---- ---- ---- Revenues: Product sales $ 4,111 $ 4,347 $ 13,213 $ 14,041 Grant revenues 143 40 583 169 -------- -------- -------- -------- Total Revenues 4,254 4,387 13,796 14,210 Cost of goods sold 1,370 1,210 4,781 4,647 -------- -------- -------- -------- Gross profit 2,884 3,177 9,015 9,563 Selling, general and administrative 2,758 3,017 8,575 9,353 Research and development 538 793 1,893 2,524 Restructuring Costs -- 343 -- 343 Patent & litigation expense 184 17 412 102 -------- -------- -------- -------- Total operating expenses 3,480 4,170 10,880 12,322 Operating loss (596) (993) (1,865) (2,759) Other income and expense Interest and other income (Note 5) 99 29 248 67 Foreign exchange gain (loss) (370) (9) (410) 30 -------- -------- -------- -------- Total other income and expense (271) 20 (162) 97 -------- -------- -------- -------- Loss before provision for income taxes (867) (973) (2,027) (2,662) Provision for income taxes -- 6 -- 6 Net Loss (Note 3) $ (867) $ (979) $ (2,027) $ (2,668) ======== ======== ======== ======== Loss per share: Basic $ (0.08) $ (0.09) $ (0.19) $ (0.25) Diluted (0.08) (0.09) (0.19) (0.25) Shares used in computing loss per share: Basic 10,780 10,826 10,408 10,822 Diluted 10,780 10,826 10,408 10,822
See accompanying notes to unaudited consolidated financial statements -4- BIONX IMPLANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited)
Nine Months Ended September 30 2000 2001 -------------------------- Cash flow from operating activities: Net Loss (Note 3) $(2,027) $(2,668) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 935 933 Consignment amortization 1,048 516 (Increase) decrease in inventory, net (766) 431 Decrease in accounts receivable, net 1,146 69 Decrease in grant receivable 68 7 (Increase) in related parties (66) (87) (Increase) decrease in prepaid expenses and other current assets 565 (223) Decrease in trade accounts payable (1,112) (1,215) Increase (decrease) in accrued and other current liabilities (510) 354 ------- ------- 1,308 785 ------- ------- Net cash used in operating activities (719) (1,883) Cash flow from investing activities: Purchases of plant and equipment (29) (487) Purchases of computer software and intangibles (292) (250) ------- ------- Net cash used in investing activities (321) (737) ------- ------- Cash flow from financing activities: Increase of long-term debt 271 193 Rights Offering, net 3,954 -- Proceeds from issuance of stock to employee benefit plan 81 114 Proceeds from treasury stock to employee benefit plan 29 -- ------- ------- Net cash provided by financing activities 4,335 307 ------- ------- Net (decrease) increase in cash and cash equivalents 3,295 (2,313) Cash and cash equivalents at beginning of period 3,186 7,050 ------- ------- Cash and cash equivalents at end of period $ 6,481 $ 4,737 ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest $ 8 $ 3 Cash paid for taxes $ -- $ 7
See accompanying notes to unaudited consolidated financial statements -5- 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 September 30, 2001, and the Company's consolidated results of operations for the three and nine months ended September 30, 2000 and 2001, and cash flows for the nine months ended September 30, 2000 and 2001, 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, 2000 and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC. The results of operations and the cash flows for the nine months ended September 30, 2001 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 as of December 31, 2000 and September 30, 2001 (in thousands):
December 31, 2000 September 30, 2001 ------------------------------------- Raw materials $ 745 $ 605 Finished goods - Implants 2,698 2,466 Finished goods - Instruments 3,855 3,461 Instruments on consignment 701 ------- ------- 7,999 6,532 Less: Inventory reserve for obsolete and excess Instruments and implants (3,320) (2,800) Accumulated amortization - consigned instruments 0 0 ------- ------- $ 4,679 $ 3,732 ======= =======
The Company had been amortizing the cost of instruments provided to distributors and dealers over their economic life. The Company periodically reviews instruments at dealers and distributors to determine the future utility of the instruments. During the second quarter of 2001, the Company wrote off instruments on consignment at distributors, resulting in a charge of approximately $0.2 million. 6 3. NET LOSS PER SHARE Basic loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted 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. These options and warrants have been excluded from the dilutive losses per share calculation as their effect would be antidilutive at September 30, 2000 and 2001. Shares used for both the basic loss per share and diluted loss per share were 10,780 and 10,826 respectively for quarters ended September 30, 2000 and September 30, 2001. The following tables set forth the calculation of the total number of shares used in the computation of net loss per common share for the three and nine months ended September 30, 2000 and 2001 (in thousands):
Three Months Ended September 30 ------------------------------- 2000 2001 ---- ---- Shares used in computing diluted 10,780 10,826 loss per share ====== ======
Nine Months Ended September 30 ------------------------------ 2000 2001 ---- ---- Shares used in computing diluted 10,408 10,822 loss per share ====== ======
4. GOODWILL & INTANGIBLES At September 30, 2001, the Company has net goodwill of $2.95 million and net intangibles (patents), of $0.85 million, which total net goodwill and intangibles of $3.8 million. 5. INTEREST AND OTHER INCOME In the third quarter of 2001, the Company generated interest income of $30 thousand and had interest expense of approximately $1 thousand, resulting in net other income and expense of $29 thousand, and for the nine months ended September 30, 2001, generated interest income of $70 thousand and had interest expense of approximately $3 thousand, resulting in net other income and expense of $67 thousand. 6. RESTRUCTURING During the third quarter ended September 30, 2001, the Company took a restructuring charge of $343 thousand. The charge related primarily to severance for sales and order entry personnel. This reduction was made to eliminate redundancies and streamline operations. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 ("Forward looking Statements"). 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, 2000. The Company was founded in 1984 to develop certain resorbable polymers for orthopedic uses. The Company has incurred substantial operating losses since its inception and, as of September 30, 2001 had an accumulated deficit of approximately $24.0 million. Such losses have resulted to a large extent from expenses associated with the development and patenting of the Company's Self-Reinforcing technologies and resorbable implant designs, pre-clinical and clinical studies, the write off and reserve of impaired inventory, preparation of submissions to 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 the Company's manufacturing capabilities. The Company has recorded losses in recent periods, including a loss of approximately $4.6 million in 2000 and $ 2.7 million for the nine months ended September 30, 2001. Although the Company's revenues grew significantly in the late nineties, sales of the Meniscus Arrow have stabilized and the Company reported a revenue decrease of $2.8 million in 2000. The Company has been focusing on expanding its market share within the procedure specific Sports Medicine market and has introduced several new products which have started to neutralize the sales decreases of the Meniscus Arrow. No assurance can be given that revenues will grow in the future or that revenues will exceed expenses. There can be no assurance that the Company will be able to successfully commercialize its products or that the Company will be profitable again. The Company has one business segment - bioabsorbable implants and instruments for orthopedic surgical use. Sports medicine, orthopedic trauma and craniofacial surgery are product lines sold for particular orthopedic surgical applications. Significantly, most surgeons that practice sports medicine and orthopedic trauma are orthopedic surgeons as are a significant number of the craniofacial surgeons. During 2000 and the nine months ended September 31, 2001 approximately 93% of the Company's sales were implants, 5% were associated instruments and 2% were other revenues. Instruments are needed for surgical procedures involving the Company's implants and are therefore inexorably linked to implant sales. A substantial portion of the Company's revenues result from sales of the Meniscus Arrow, which received FDA clearance in March 1996. During 1999, 2000, the nine months ended September 30, 2001, and the third quarter 2001, Meniscus Arrow sales were 62%, 59%, 45%, and 44%, respectively, of total Company product sales. During 2001, the Company continued to implement its initiatives, begun in 2000, to refocus its business and reallocate critical resources. During the third quarter ended September 30, 2001, the Company took a restructuring charge of $343 thousand. The charge related primarily to severance for sales and order entry personnel. This reduction was made to eliminate redundancies and streamline operations. Management has implemented operation improvement plans and during 2001 is continuing to focus on and evaluate monthly the effects of these initiatives. These plans have included the addition of critical resources in areas that will have the greatest impact on sales growth and profit improvement; consolidation of the sales organization 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 selling costs; a refocus of R&D investments on new product introductions that will provide complementary product offerings; 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. No assurances can be given that the Company's initiatives will result in profitable operations in the future. The Company typically sells, consigns, or provides free of charge to hospitals 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. 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. Included in these costs, prior to the fourth quarter of 1999 was the amortization of instrument inventory in hospitals. The Company had been amortizing the cost of instruments provided to distributors and dealers over their economic life. The Company periodically reviews instruments at dealers and distributors to determine the future utility of the instruments. During the second quarter of 2001, the Company wrote off instruments on consignment at distributors, resulting in a charge of approximately $0.2 million. The Company is not obligated on any sale of product to support or train. As a part of the Company's marketing efforts, the Company's marketing staff and regional sales managers participate in conventions attended by surgeons, demonstrate the products in models of human bone and show surgeons how to use the products. These individuals may also attend a surgical procedure to answer any questions the surgeon may have. None of these efforts are obligations related to a contract or a sale but are done to enhance customer relationships at the discretion of the Company. The Company sells its products through managed networks of sales agents, 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 international sales. 8 The Company is not obligated on any sale of product to support or train. As a part of the Company's marketing efforts, the Company's marketing staff and regional sales managers participate in conventions attended by surgeons, demonstrate the products in models of human bone and show surgeons how to use the products. These individuals may also attend a surgical procedure to answer any questions the surgeon may have. None of these efforts are obligations related to a contract or a sale but are done to enhance customer relationships at the discretion of the Company. The Company sells its products through managed networks of sales agents, 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 international sales. Bionx continues to evaluate the formation of strategic partnerships for craniofacial products. The Company believes that with the appropriate strategic partner who has a focused marketing and sales effort, coupled with key surgeon champions and a unique product portfolio, resorbable fixation products can effectively penetrate this market. Bionx currently participates in this market and has established a leadership position for resorbable pins and screws. The Company believes that it can leverage its current position and expand its market presence by introducing new and innovative products directed towards these surgical specialties. Outside of the orthopedic market, the Company has intellectual property and techniques for which it may seek to establish licensing or distribution agreements with strategic partners to fund and develop certain products and to market and distribute products that the Company elects not to distribute through its managed networks of independent sales agents, distributors and dealers. No assurance can be given that the Company will be able to enter into license arrangements on satisfactory terms. During 2000 the Company began invoicing European customers in Euro's. The majority of the Company's sales are in the United States, with most of the sales to international markets in Europe and Asia. During 1997, 1998, 1999, 2000, and the first nine months of 2001, international product sales represented approximately 15%, 20%, 18%, 18% and 21%, respectively, of the Company's total product sales. The Company has foreign operations in Finland consisting primarily of manufacturing and certain R&D and marketing functions. The Company invoices more than 85% of its consolidated revenues in US Dollars. Approximately 75% of the expenses incurred by the Company are denominated in US Dollars. The majority of other revenues and expenses are in Euro's - Euro denominated expenses exceed Euro denominated revenues. Consequently, a weakening in the Euro has a favorable impact on the Company while a strengthening has an unfavorable impact. Foreign exchange can currently reduce annual income before taxes by approximately $40 thousand if the Euro increases in value by 1% depending upon the extent of the Company's Euro denominated net expenses for the period under evaluation. The Company may seek to manage its foreign currency risk through the purchase of foreign currency options and forward contracts in the future. 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 Euro. Foreign exchange transaction gains and losses can vary significantly from period to period. Periodically the Company has evaluated constructing or leasing manufacturing facilities in the United States to supplement its Finnish manufacturing capabilities. At this time the Company has decided to supplement its Finnish manufacturing by using third party contract manufacturers, primarily in the United States, to produce specific implants or instruments. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives. The Company is required to adopt FAS 142 effective January 1, 2002. As of September 30, 2001, the Company had net goodwill of $2.95 million. At this time, the Company does not foresee any possible impairment of its goodwill in accordance to FAS 142, but understands that market conditions and other uncertainties may change the Company's exposure in 2002. While the Company's operating losses have resulted in net operating loss carryforwards of approximately $ 9.4 million for Federal, foreign and state income tax reporting purposes as of December 31, 2000, the extent to which such carryforwards are available to offset future U.S. and Finnish taxable income may be limited as a result of various ownership changes that have occurred in recent years. Additionally, because 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 these carryforwards for income tax purposes. Furthermore, income earned by a foreign subsidiary may not be offset against operating losses of U.S. entities. The statutory tax rates applicable to the Company and its foreign subsidiaries vary substantially. 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 many 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. In order to develop new products, and to satisfy the needs of surgeons, Bionx is committed to developing strong surgeon relationships and supporting medical education. In this regard, the Company recently continued its commitment to medical organizations in the country by becoming 9 a Founding Donor to AANA (Arthroscopy Association of North America), which is one of the largest Sports Medicine associations in North America. Also, during the second quarter of 2001, Bionx has joined ACFAS (American College of Foot and Ankle Surgeons). The Company introduced a 1.5mm Bone Fixation kit for the Orthopedic market in the 3rd quarter of 2001. Initially available only for Sports Medicine procedures, this new product introduction highlights the Company's ability to leverage its superior technology in resorbable polymer's across varied product lines and offerings. The Company recently formed a surgeon advisory board to assist in the development of procedure-specific resorbable products, and looks forward to its first meeting during the fourth quarter of 2001. There is no assurance that these actions will result in increased sales revenues. RESULTS OF OPERATIONS Total Revenues Total revenue increased by 3.1% from $4.3 million during the quarter ended September 30, 2000 to $4.4 million during the quarter ended September 30, 2001 and by 3.0% from $13.8 million during the nine months ended September 30, 2000 to $14.2 million during the nine months ended September 30, 2001. Product sales increased at a greater rate but other revenue, consisting of grant revenue, decreased by $0.1 million when comparing the third quarter of 2001 to the third quarter of 2000 and by $0.4 million when comparing the nine months ended September 31, 2001 to the nine months ended September 31, 2000. Product sales The Company's product sales increased by 5.7% from $4.1 million during the quarter ended September 30, 2000 to $4.3 million during the quarter ended September 30, 2001 and by 6.3% from $13.2 million during the nine months ended September 30, 2000 to $14.0 million during the nine months ended September 30, 2001. These increases resulted from our continuing focus on growing market share and diversifyication of our product line. Global Sports Medicine Consolidated sales of Sport Medicine products, including instruments, increased 6.7% from $2.9 million during the three months ended September 30, 2000 to $3.1 million during the three months ended September 30, 2001, and by 7.1% from $9.3 million during the nine months ended September 30, 2000, to $9.9 million during the nine months ended September 30, 2001. Non - Arrow sales accounted for 36% of the third quarter 2001 Sports Medicine sales, with sales growth of 156% over the nine months ended September 30, 2000. We will continue to expand our product lines offering the surgeon improved clinical solutions in all segments our business. Global Orthopedic Trauma Consolidated sales of Orthopedic Trauma products, including instruments, remained stable at $0.9 million during the three months ended September 30, 2000, and September 30, 2001, and remained stable at $3.0 million for the nine months ended September 30, 2000 and September 30, 2001. During the third quarter, the Company introduced a 1.5mm Bone Fixation kit as it continues to develop key procedure-specific products for its customers. Global Craniofacial Consolidated sales of Craniofacial products, including instruments, increased 28.7% from $0.3 million during the three months ended September 30, 2000 to $0.4 million, during the three months ended September 30, 2001 and increased 25.7% from $0.9 million for the nine months ended September 30, 2000 to $1.1 million for the nine months ended September 30, 2001. This is largely due to strong sales in the international markets utilizing new focused distributor partners. Other Sales Other sales are grant revenues totaling $40 thousand for the quarter ended September 30, 2001, compared with $143 thousand for the quarter ended September 30, 2000, and totaling $168 thousand for the nine months ended September 30, 2001, compared with revenue of $583 thousand recorded during the nine-month period ended September 30, 2000. This revenue is generated from grants obtained from a Finnish government research organization which funds certain research and development projects. These grants have declined due to increased in-house funding which enable the Company to meet short-term horizons for product introductions. International Sales International sales for the quarter ended September 30, 2001, comprise 20% of total product sales at $0.9 million, an 18.6% sales dollar increase from the quarter ended September 30, 2000. For the nine months ended September 30, 2001, international sales comprise 21% of total product sales at $2.9 million, a 21% sales dollar increase from the nine months ended September 30, 2000. The Company is beginning to capitalize on its aggressive marketing plans, including added resources to stimulate sales growth in future quarters, which it implemented during the first nine months of 2001, and achieve results with new country specific distributors. 10 Gross Profit The Company's gross profit increased 10.2% from $2.9 million to $3.2 million for the three months ended September 30, 2000, and September 30, 2001, respectively, and increased 6.1% from $9.0 million to $9.6 million for the nine months ended September 30, 2000, and September 30, 2001, respectively. Gross profit was 68% of sales for the nine months ended September 30, 2001, which is the same level for the nine months ended September 30, 2000. Selling, General, and Administrative Expenses Selling, general and administrative expenses increased by 9.4% from $2.8 million in the third quarter of 2000 to $3.0 million in the third quarter 2001, and increased by 9.1% from $8.6 million to $9.3 million for the nine months ended September 30, 2000, and September 30, 2001, respectively. Such expenses were 67% and 69% of product revenues for the third quarter of 2000 and 2001, respectively. Advertising expenses for the nine months ended September 30, 2001 were $322 thousand, compared to $351 thousand for the same period in 2000. The total SG&A increases stem primarily from the Company's continued focus and investment in its distributor channels and fulfillment process improvement teams. Research and Development Research and development expenses totaled $0.8 million or 18% of sales for the third quarter of 2001, up from $0.5 million or 13% of sales for the same period of 2000, and increased 33% from $1.9 million to $2.5 million for the nine months ended September 30, 2000, and September 30, 2001, respectively. The increase in research and development expenses is a result of the Company's commitment to providing cutting-edge products for an increasingly competitive environment. The Company has continued its expansion of partnering with key surgeon champions in the Sports Medicine, Orthopedic Trauma, Craniofacial, and Stenting fields. The Company's strategy of providing procedure specific surgical solutions depends on its ongoing product development in order to bring innovative new products to the market and its spending reflects spending on new products within its established market and on new products and technologies that are for therapeutic applications outside of established markets. The Company has determined that the resorbable stent business is potentially lucrative by virtue of the fact that it has a significant market size, a well-defined regulatory pathway, and has therapeutic outcome characteristics that may favor resorbable stents. However, given the Company's limited cash resources, management is exploring venture funding and other capital raising opportunities with respect to the Stent business. Through the nine months ended September 30, 2001, a total of $592 thousand was spent on stent research and development, including $145 thousand in the third quarter 2001. Patent and Litigation Expense Patent and litigation expense decreased 91% from $184 thousand to $17 thousand during the third quarter of 2000 and 2001, respectively, and has decreased 75% from $412 thousand to $102 thousand during the nine months ended September 30, 2000, and September 30, 2001, respectively. This is largely due to the current status of the proceedings and that negotiations are not requiring the legal assistance that was previously required when these matters were being more actively pursued. Other income and expense In the third quarter of 2001, the Company generated interest income of $29 thousand and other expense of approximately $9 thousand, resulting in net other income and expense of $20 thousand, and generated interest income of $67 thousand and other income of $30 thousand, resulting in net other income and expense of $97 thousand for the nine months ended September 30, 2001. Income Taxes The Company recorded no tax provisions for the first nine months of 2000, due to operating losses, and $6 thousand dollars related to foreign taxes for the nine months ended September 30, 2001. Net Loss The Company reported a net loss of $1.0 million or ($.09) per share (basic and diluted) for the quarter ended September 30, 2001 versus a net loss of $0.9 million or ($.08) per share (basic and diluted) for the third quarter of 2000, and a net loss of $2.7 million or ($.25) per share (basic and diluted) for the nine months ended September 30, 2001, versus a net loss of $2.0 million or ($.19) per share (basic and diluted) for the nine month period ended September 30, 2000. 11 LIQUIDITY AND CAPITAL RESOURCES The Company has relied primarily upon external (private and public) sources of equity to fund operations and development. At September 30, 2001, cash and cash equivalents totaled $4.7 million, which is a decrease of $2.3 million from $7.0 million at December 31, 2000. The decrease from December 31, 2000 is primarily due to decreases in accounts payable and slight increases in capital spending. At September 30, 2001, the Company had net working capital totaling $9.6 million, or a 4:1 ratio of current assets to current liabilities. 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 selling costs, (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. 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 profitability by improving sales and margins, its ability to reduce cash outflows and, if necessary, its ability to obtain 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. On March 3, 2000, the Company completed a shareholder rights offering, pursuant to which it raised, net of expenses, $3.9 million and issued 1,586,857 shares of Common Stock. The Company distributed 0.173 of a subscription right for each share of Common Stock outstanding on the January 10, 2000 record date for a total of 1,586,857 shares offered in the rights offering. The subscription price of $2.55 per share was established by the Board of Directors based on a 15% discount from the market price on January 14, 2000, at the time the offering was priced. To the extent that funds generated from the Company's operations, together with its existing capital resources, 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 further 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 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. 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. 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. The sufficiency of the Company's capital reserves with respect to operations beyond September 30, 2001 will depend primarily upon the Company's operating results and the extent to which such results are capable of funding anticipated growth. The Company is owed $0.357 million from Bionix B.V. at September 30, 2001. Twenty-nine percent of Bionix B.V. stock is owned by related parties. The Company believes that existing capital resources together with cash flow from operations (if, and to the extent, generated) will be sufficient to fund its operations during the remainder of 2001. This statement constitutes a Forward-Looking Statement. Actual results could differ materially from the Company's expectations regarding its capital requirements and its sources of capital. The Company's future capital requirements and the adequacy of available capital resources will depend on numerous factors, including the Company's ability to reverse recent trends and successfully perform management initiatives, 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, acquisition opportunities, progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies, the cost and timing of the Company's 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 the Company's products. The Company's operations did not produce positive cash flows during 1994, 1995, 1996, 1998, 1999 or 2000. To the extent that funds generated from the Company's operations, together with its existing capital resources, 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. No assurances can be given that such funds will be made available to the Company on acceptable terms or at all. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's functional currency is the US dollar, however, because the Company has revenues and expenses that are Euro-denominated the Company may seek to manage its foreign currency risk through the purchase of foreign currency options and forward contracts in the future. During 2001, the Company did not purchase financial instruments to manage foreign currency risk. Foreign exchange can currently reduce annual income before taxes by approximately $40 thousand if the Euro increases in value by 1% depending upon the extent of the Company's Euro denominated net expenses for the period under evaluation. The effect of the change in the value of the Euro relative to the U.S. dollar on the Company's operations is not significant currently and the Company will disclose the effect and any actions to initigate this effect in future filings. 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. No other change since filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION (a) The Registrant did not file any Current Reports on Form 8-K during the quarter ended September 30, 2001. (b) Exhibits - None 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 Executive Officer By: /s/ Andrew Karazin -------------------------- Andrew Karazin Chief Financial Officer Dated: November 14, 2001 13