Business Context and Reporting Period
This unaudited Form 10-Q was filed by Bacterin International Holdings, Inc. (the filing entity identified in the source; the request metadata identifies Xtant Medical Holdings, Inc.) for the quarter and six months ended June 30, 2014. The company develops, manufactures and markets human allograft biologics and bioactive medical-device coatings. It reports as one segment because device revenue was immaterial.
Shares and per-share amounts were retroactively adjusted for a 1-for-10 reverse stock split effective July 25, 2014. The filing reported 6,669,892 common shares outstanding as of August 11, 2014, before considering the subsequent August offering.
Financial Results and Position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $8.884 million | $8.267 million | $17.797 million | $16.886 million |
| Gross profit | $5.593 million | $4.694 million | $11.096 million | $10.192 million |
| Gross margin | 63.0% | 56.8% | 62.3% | 60.4% |
| Operating loss | $(1.332) million | $(1.867) million | $(2.524) million | $(3.100) million |
| Net loss | $(1.900) million | $(2.483) million | $(6.041) million | $(4.152) million |
| Basic loss per share | $(0.35) | $(0.55) | $(1.11) | $(0.94) |
- Second-quarter revenue increased 7.5%, primarily from higher sales volume. Six-month revenue increased 5.4%, which management attributed to improved sales-force productivity following a sales-function restructuring.
- Six-month tissue sales were $17.466 million; royalties and other revenue were $0.331 million. Approximately 99% of six-month revenue came from the United States.
- Six-month cost of sales was $6.701 million, or 37.7% of revenue, versus 39.6% in the prior-year period. Management attributed the improvement to product and customer mix; second-quarter improvement also reflected fewer expired-inventory write-offs and improved processes.
- Six-month operating expenses increased to $13.620 million from $13.293 million. Sales and marketing expense rose 6% to $8.460 million, research and development increased 54% to $0.577 million, and general and administrative expense declined 8% to $4.383 million.
- Interest expense increased to $2.718 million for the six months, partly because of a higher average debt balance. The company also recorded a $0.615 million non-cash loss from revaluing its warrant derivative liability.
- Operating cash flow was negative $3.871 million, compared with negative $3.555 million in the prior-year period. Investing cash flow was negative $0.079 million. Financing cash flow was positive $3.893 million, principally from the additional ROS borrowing.
- Cash and cash equivalents were $2.989 million at June 30, 2014, compared with $3.046 million at December 31, 2013. Cash plus accounts receivable totaled approximately $7.888 million.
- Total assets were $28.417 million and total liabilities were $36.375 million at June 30, 2014. Stockholders’ deficit was $7.958 million, compared with a $3.842 million deficit at December 31, 2013.
- Gross debt was $26.051 million, including $24.0 million owed to ROS, before a $5.954 million debt discount. The ROS loan bears interest at LIBOR plus 12.13%, subject to a 1.0% LIBOR floor, matures in August 2019, is secured by substantially all company assets, and includes a sales-based royalty obligation.
Material Changes Versus the Prior Comparable Period
- Revenue increased while operating losses narrowed, supported by higher volume and improved gross margin.
- Net loss nevertheless increased for the first six months because of higher interest expense, a $0.615 million warrant-derivative revaluation loss, and other expense related to legal settlement costs accrued in the first quarter.
- Operating cash use increased by approximately $0.316 million year over year, and cash declined modestly despite the $4.0 million debt financing.
- Debt increased by approximately $4.0 million from year-end following the March 2014 ROS amendment. The company issued 150,000 common shares to an ROS affiliate in connection with that borrowing, with the issuance accounted for as debt discount.
- Inventory declined to $12.344 million from $12.874 million at year-end, while the allowance for doubtful accounts increased to $1.426 million from $1.310 million.
- The filing states that approximately 1,784,107 options and warrants were anti-dilutive for the six months ended June 30, 2014 and therefore excluded from diluted loss per share.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected 2014 sales and marketing expense of approximately $17 million, compared with approximately $16 million in 2013, and planned to fund these largely through operating cash flow.
- Management believed cash on hand, accounts receivable, proceeds from the subsequent offering and anticipated operating receipts would fund requirements through June 30, 2015. The company cautioned that failure to meet revenue objectives could require additional equity or debt financing.
- In August 2014, the company completed an offering of 1,143,000 shares at $5.70 per share and warrants for 571,500 shares at a $7.12 exercise price. Gross proceeds were approximately $6.5 million and net proceeds approximately $5.8 million, intended for working capital, sales-force expansion and inventory.
- The company remained subject to NYSE MKT deficiency notices related to stockholders’ equity and historical losses. It had until November 13, 2014 under its compliance plan to regain compliance, including achieving $6 million of stockholders’ equity; delisting remained possible.
- ROS debt agreements include minimum liquidity and quarterly revenue covenants, default provisions and potential acceleration. A default could lead to immediate repayment demands and loss of pledged assets.
- Pending litigation included a former employee claim seeking more than $5 million, an $80,000 fee and warrant claim by Middlebury Securities, and a $150,000 investment-banking fee claim by the Rodman & Renshaw bankruptcy trustee. The company stated that it believed each claim lacked merit.
- The company disclosed continuing risks involving an OIG subpoena concerning possible improper Medicare claims, prior FDA warning and inspection matters at its Montana facility, regulatory compliance, product recalls, reimbursement and pricing pressure, donor-tissue availability, competition, intellectual property and future financing.
- The warrant derivative liability was a significant non-cash, fair-value item: it was $2.210 million at June 30, 2014 versus $1.595 million at December 31, 2013.
Investor Verification Priorities
- Verify the filing entity and corporate name transition, because the source filing is under Bacterin International Holdings, Inc., while the request identifies Xtant Medical Holdings, Inc.
- Confirm post-quarter capitalization, including the 1-for-10 reverse split, the August equity and warrant offering, and resulting dilution.
- Review ROS loan covenants, minimum liquidity and revenue requirements, collateral provisions, interest burden and potential acceleration or royalty obligations.
- Assess the company’s ability to convert recurring revenue growth and improved gross margin into positive operating cash flow; six-month operating cash flow remained negative $3.871 million.
- Monitor NYSE MKT compliance and the company’s negative stockholders’ equity, as failure to satisfy the plan could result in delisting.
- Track the disclosed litigation, OIG inquiry and FDA warning-letter and inspection matters for potential cash costs, restrictions or operating disruption.
- Evaluate inventory reserves, accounts-receivable collectability, donor supply, reimbursement trends and the sustainability of substantial sales and marketing spending.