Business Context and Reporting Period
Registrant: Bacterin International Holdings, Inc. (the filing does not identify Xtant Medical Holdings, Inc.; investors should verify the issuer and historical name change). The company develops, manufactures and markets human-tissue allografts, biologics, medical devices and antimicrobial coatings. The unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparative periods ended June 30, 2010.
The company completed a reverse merger on June 30, 2010. Accordingly, the financial statements principally reflect the historical operations of Bacterin, while the prior-period comparability and share information reflect the recapitalization.
Financial Performance and Liquidity
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $7.5 million, versus $3.2 million | $13.5 million, versus $5.9 million |
| Gross profit | $5.8 million, versus $2.7 million | $10.8 million, versus $4.8 million |
| Gross margin | 77%, versus 84% | 80%, versus 81% |
| Operating loss | $0.3 million, versus $1.3 million | $2.2 million, versus $2.3 million |
| Net income (loss) | $(0.4) million, versus $(2.1) million | $4.5 million, versus $(3.7) million |
| Net income (loss) per share | $(0.01), versus $(0.07) | $0.12 basic and $0.10 diluted, versus $(0.13) basic |
- Revenue growth was attributed to market penetration, expansion of the direct sales force and a significant distributor stocking order. Approximately 99% of first-half 2011 sales were generated in the United States.
- Sales and marketing expense increased to $4.3 million in the second quarter and $8.6 million for the first half, representing 58% and 64% of revenue, respectively.
- Six-month net income was substantially affected by a $7.2 million non-cash gain from the decline in the fair value of the warrant derivative liability. The company remained loss-making from operations.
- Net cash used in operating activities was $4.4 million for the first half of 2011, compared with $4.0 million in the prior-year period. Working-capital uses included increases of $1.9 million in accounts receivable and $0.9 million in inventories.
- Cash and cash equivalents were $1.4 million at June 30, 2011. Trade accounts receivable were $5.5 million, and related-party receivables were $0.7 million. Total assets were $19.8 million, compared with $15.8 million at December 31, 2010.
- Debt consisted of approximately $6.5 million of gross long-term debt, including $2.6 million drawn under the Bridge Bank revolving facility, before debt discounts. Current maturities were $0.9 million and long-term debt, net of the current portion and discount, was $4.3 million.
- Net cash provided by financing activities was $5.9 million, including $3.0 million from a private placement and approximately $2.6 million from the Bridge Bank facility.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 128%, while gross profit increased 124%. The gross margin declined modestly because of lower-margin international distributor stocking sales.
- Six-month operating expenses increased 83%, driven primarily by a 175% increase in sales and marketing expense and higher personnel costs.
- Interest expense declined 62% in the first half because convertible notes had been converted into equity by June 30, 2010.
- The warrant derivative liability declined from $9.7 million at December 31, 2010 to approximately $1.5 million at June 30, 2011, producing the substantial non-cash accounting gain.
- The company raised $3.0 million in the second quarter through a Rule 506 private placement, issuing 939,377 common shares and warrants to purchase 375,747 shares.
- Common shares outstanding increased from 36.99 million at December 31, 2010 to 38.86 million at June 30, 2011; 39.65 million were outstanding at August 9, 2011.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected 2011 sales and marketing expense of approximately $20 million, compared with approximately $9 million in 2010, with effectiveness dependent on achieving revenue growth.
- Management stated that cash, receivables, new credit lines and anticipated operating receipts were expected to fund cash requirements through June 30, 2012. The filing also warns that failure to meet revenue objectives could require additional equity or debt financing.
- On July 11, 2011, the company agreed to acquire selected assets of Robinson MedSurg for $1.0 million in common stock, with up to an additional $1.0 million in stock contingent on revenue milestones.
- On July 29, 2011, the company entered into a $15 million MidCap/Silicon Valley Bank credit facility, with $7 million initially available and up to $8 million available for a permitted acquisition. The facility is secured by substantially all assets and bears interest at LIBOR plus 7.5%, subject to a 3% LIBOR floor. The filing states that existing Bridge Bank and WTI obligations were repaid and net proceeds were approximately $1.4 million.
- The company anticipated spending $4 million to $5 million over the following five years to expand or update facilities.
- Material risks include dependence on tissue donors, customer concentration, reimbursement and regulatory changes, product liability, recalls, intellectual-property claims, competition, the ability to retain personnel and the need for additional financing.
- One customer represented approximately 17% of first-half 2011 revenue and 23% of accounts receivable at June 30, 2011. The company also has related-party donor-supplier relationships and a $0.7 million related-party receivable.
- Pending litigation includes a patent infringement action brought by minSURG International and a Utah action seeking $300,000, shares and related relief. Management stated that it did not expect the minSURG matter to have a material effect, but the ultimate outcomes are uncertain.
- Disclosure controls and internal control over financial reporting were reported as ineffective because of material weaknesses involving accounting personnel and expertise, separate inventory and accounting systems, and documentation of equity transactions.
Investor Verification Checklist
- Confirm that this Bacterin International Holdings filing is the correct historical filing for Xtant Medical Holdings and reconcile the reverse-merger, name-change and ticker history.
- Separate operating performance from the $7.2 million non-cash warrant-liability gain when assessing profitability.
- Evaluate whether revenue growth and gross margins can support the planned increase in sales and marketing spending.
- Reconcile liquidity disclosures, including the reported cash-and-receivables totals, operating cash burn and the availability and covenants of the post-quarter-end credit facility.
- Assess dilution from issued and outstanding warrants, options, private placements and the contingent stock consideration for Robinson MedSurg.
- Review customer concentration, related-party transactions, inventory growth and collectability of receivables.
- Monitor remediation of the disclosed material weaknesses and the status of the pending litigation and patent claims.