Xtant Medical Holdings, Inc. — 2013 Form 10-K Summary
Filing entity and period: The filing is for Bacterin International Holdings, Inc., the company now known as Xtant Medical Holdings, Inc., for the fiscal year ended December 31, 2013. The source provides annual results rather than separate fourth-quarter financial statements.
Business Context
The company develops, manufactures and markets human tissue-based biologics, including bone grafts and acellular dermal scaffolds, as well as medical-device coatings, surgical instruments, drains and OsteoSelect DBM putty. Revenue is generated primarily from tissue sales, with limited royalty and other revenue. Approximately 98% of 2013 revenue was generated in the United States.
The company operated through biologics and medical-device divisions but reported as one segment because device revenue was immaterial. A new OsteoSTX product was launched in March 2014, after the reporting period.
Financial Results and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $33.07 million | $32.98 million | Up $0.09 million |
| Tissue sales | $32.56 million | $32.41 million | Up $0.15 million |
| Cost of sales | $14.19 million | $10.34 million | Up 37.2% |
| Gross profit | $18.89 million | $22.64 million | Down $3.75 million |
| Gross margin | 57.1% | 68.7% | Down 11.6 percentage points |
| Operating loss | $9.01 million | $4.94 million | Loss increased $4.06 million |
| Net loss | $12.69 million | $7.71 million | Loss increased $4.98 million |
| Basic and diluted loss per share | $0.27 | $0.18 | Higher loss per share |
| Cash used in operations | $5.62 million | $10.79 million | Use decreased $5.17 million |
Sales and marketing expense increased to $16.02 million, or 48.5% of revenue, from $15.62 million, or 47.4%, in 2012. General and administrative expense declined to $10.78 million from $11.14 million. Interest expense increased to $4.65 million from $1.86 million, primarily because of higher average debt and the ROS financing.
The company recorded a $728,618 goodwill impairment charge, reducing goodwill to zero. Cost of sales was affected by product mix, aged and expiring inventory adjustments, and scrap related to hMatrix process improvements. Management stated that cost of sales excluding those adjustments was 36.2% of revenue.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents at December 31, 2013 were $3.05 million; trade accounts receivable were $4.79 million.
- Total current assets were $19.17 million, compared with current liabilities of $9.65 million.
- Total liabilities were $32.72 million, while stockholders’ equity was negative $3.84 million, compared with positive equity of $4.23 million at December 31, 2012.
- Long-term debt, net of discount and current maturities, was $16.39 million. The underlying debt obligations totaled $22.08 million before debt discount.
- The ROS term loan carried interest at LIBOR plus 12.13%, subject to a 1% LIBOR floor, and was secured by substantially all company assets. The arrangement also included royalty payments of 1.75% on the first $45 million of net sales and 1% on sales above that level.
- The company issued approximately 8.51 million shares in June 2013 for net proceeds of approximately $4.45 million. It also issued 1.5 million shares to an affiliate of ROS in exchange for a debt covenant waiver and reduced revenue requirements.
- In March 2014, after year-end, the company borrowed an additional $4 million from ROS and issued another 1.5 million shares to an ROS affiliate.
Management believed cash on hand, accounts receivable, the March 2014 term loan and anticipated operating receipts would fund expected requirements through March 31, 2015. This assessment depended on achieving revenue targets and funding substantial sales and marketing spending through operating cash flow.
Material Changes Versus 2012
- Revenue was essentially flat, increasing 0.3%, while cost of sales rose 37.2%.
- Gross margin fell from 68.7% to 57.1%, driven by product mix and inventory-related adjustments.
- Operating loss widened from $4.94 million to $9.01 million, and net loss widened from $7.71 million to $12.69 million.
- Interest expense increased by $2.79 million because of the ROS debt financing and higher average debt.
- Cash used in operations improved, primarily because of decreases in inventory and accounts receivable.
- Stockholders’ equity declined from positive $4.23 million to negative $3.84 million.
- Outstanding common shares increased from 42.88 million to 53.43 million, and outstanding options and warrants increased materially, creating significant potential dilution.
Outlook, Risks, Contingencies and Unusual Items
- Management expected 2014 sales and marketing expense of approximately $17 million and anticipated $4 million to $5 million of facility and equipment investment over five years.
- The company was not profitable and stated that additional financing could be required if revenue did not increase or expenses were not reduced.
- ROS credit agreements included minimum cash and quarterly revenue covenants. The company received multiple waivers and amendments during 2013. A covenant breach could trigger default, acceleration of debt and potential loss of pledged assets.
- The NYSE MKT issued deficiency notices because of low stockholders’ equity and recurring losses. The company received an extension to November 13, 2014 to regain compliance, but continued delisting risk remained.
- The company received an OIG subpoena in February 2013 relating to possible improper Medicare claims and physician referral programs discontinued in 2010. The filing states that no further correspondence had been received, but the investigation could resume.
- A former CEO, who owned approximately 19.3% of the company, was associated with a competitor and had indicated interest in evaluating taking the company private, although no formal offer had been made.
- A former employee filed a Colorado lawsuit in March 2014 seeking damages in excess of $5 million. The company believed the claims lacked merit and intended to pursue counterclaims.
- The company was negotiating with Lacuna and Holgan concerning unpaid product obligations that had been written off in 2013.
- Key operating risks included donor-tissue availability, regulatory compliance, reimbursement and pricing pressure, product liability, competition, intellectual-property disputes, dependence on facilities and the need to raise capital.
Investor Verification Checklist
- Verify the company’s subsequent name change from Bacterin International Holdings, Inc. to Xtant Medical Holdings, Inc. and reconcile the historical securities information.
- Review the ROS credit agreement, amendments, covenant waivers, collateral provisions, interest rate and royalty obligations.
- Assess the effect of the March 2014 $4 million borrowing and 1.5 million share issuance on leverage, dilution and liquidity.
- Reconcile reported cash, receivables, inventory reserves and the company’s stated liquidity runway against projected operating cash needs.
- Evaluate the causes and sustainability of the sharp gross-margin decline, including inventory write-offs and hMatrix-related scrap.
- Review the NYSE MKT compliance plan and subsequent listing status.
- Monitor the OIG matter, Taggart litigation, Lacuna negotiations and other contingencies for potential cash exposure.
- Consider dilution from 10.88 million outstanding warrants, 7.58 million outstanding options and additional equity financing needs.