Business Context and Reporting Period
This unaudited Form 10-Q was filed by Bacterin International Holdings, Inc. for the quarter and six months ended June 30, 2013. The company developed, manufactured and marketed biologics, human allografts and medical-device coatings. The filing entity was later associated with Xtant Medical Holdings, Inc.; the filing itself identifies the registrant as Bacterin International Holdings, Inc.
The company operated in biologics and devices, although it reported one segment because device revenue was immaterial. Approximately 98% of six-month revenue came from the United States.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenue | $8.27 million | $8.21 million | $16.89 million | $15.98 million |
| Gross profit | $4.69 million | $5.88 million | $10.19 million | $11.79 million |
| Gross margin | 56.8% | 71.6% | 60.4% | 73.8% |
| Loss from operations | $(1.87) million | $(0.35) million | $(3.10) million | $(1.62) million |
| Operating margin | (22.6%) | (4.2%) | (18.4%) | (10.1%) |
| Net income (loss) | $(2.48) million | $0.73 million | $(4.15) million | $(0.32) million |
| Net margin | (30.0%) | 8.9% | (24.6%) | (2.0%) |
| Loss per share | $(0.05) | $0.02 | $(0.09) | $(0.01) |
Six-month tissue sales increased 5.9% to $16.72 million, while royalties and other revenue declined to $0.17 million. Second-quarter revenue increased 0.7%, reflecting higher sales volume partly offset by lower prices from increased competition.
At June 30, 2013, cash and cash equivalents were $5.14 million, accounts receivable were $6.23 million and total current assets were $25.83 million. Total liabilities were $31.68 million, including $15.39 million of long-term debt and current debt, a $7.48 million royalty liability and a $1.37 million warrant derivative liability. Stockholders’ equity was $3.44 million, compared with $4.23 million at December 31, 2012.
For the six months, operating cash flow was negative $3.55 million, investing cash flow was negative $0.59 million and financing cash flow was positive $4.35 million. The company ended the period with $5.14 million of cash, versus $1.21 million at June 30, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue grew modestly, but cost of sales increased 53% in the second quarter and 60% for the six-month period. Management attributed the increase to higher production costs and approximately $0.5 million of second-quarter and $0.8 million of six-month expired-inventory write-offs.
- Gross margin declined sharply to 56.8% in the second quarter and 60.4% for the six months, from 71.6% and 73.8%, respectively.
- Sales and marketing expense increased 10% in the second quarter to $4.21 million, partly because distributors earned higher commission rates. Six-month sales and marketing expense was broadly flat at $8.00 million.
- Interest expense increased to $1.17 million in the second quarter and $2.24 million for the six months, primarily due to the higher debt balance and higher interest rate on the ROS facility.
- The company recorded a non-cash gain from changes in the warrant derivative liability of $0.46 million in the quarter and $1.10 million for the six months. This gain partly offset operating and interest losses but was not recurring operating cash flow.
- On June 10, 2013, the company issued approximately 8.51 million shares at $0.57 per share and warrants to purchase approximately 4.25 million shares at $0.72 per share. Net proceeds were approximately $4.45 million.
- Accounts receivable and cash totaled $11.36 million at June 30, 2013. Inventories totaled $15.04 million, including $1.24 million classified as non-current.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash, accounts receivable and expected operating receipts were expected to fund anticipated cash requirements through June 30, 2014, but cautioned that this depended on achieving expected sales and collecting receivables.
- Management expected approximately $16 million of sales and marketing expense for 2013 and anticipated $4 million to $5 million of facility investment over the following five years.
- The company violated two ROS loan covenants in the second quarter: it failed to achieve the required $8.5 million of quarterly revenue and failed to hire a chief executive officer within 90 days of the prior CEO’s resignation. Subsequent to quarter-end, ROS waived the violations in exchange for a $400,000 fee upon repayment or prepayment of principal and board observer rights for the management-related violation.
- The ROS facility carried interest at LIBOR plus 12.13%, was secured by substantially all company assets and included a sales-based royalty obligation. Debt principal was approximately $21.70 million before debt discount, and estimated future royalty payments totaled $13.45 million.
- Former CEO, president and chairman Guy Cook resigned effective April 5, 2013. The CFO and COO served as interim co-chief executive officers. Daniel Goldberger was announced as the incoming CEO on August 7, 2013.
- The FDA issued two January 2013 warning letters. Although the FDA found the company’s initial corrective actions appeared adequate, a July 2013 inspection resulted in two Form FDA 483s containing observations regarding product handling and aseptic techniques.
- The Department of Health and Human Services OIG subpoenaed records concerning prior physician referral and promotional programs. The company submitted an initial document production and reported no further OIG requests as of the filing date.
- The company settled its SeaArk litigation in June 2013. The settlement included payment for products sold, return of U.S. inventory and payment of 60% of proceeds from Puerto Rico product sales. The filing recognized related non-cash settlement items, including $1.83 million of accounts receivable and $0.41 million of inventory.
- Disclosure controls and internal control over financial reporting were ineffective because of material weaknesses involving insufficient accounting personnel and inadequate documentation of equity transactions.
- The company received a May 2013 NYSE MKT deficiency notice related to low stockholders’ equity and recurring losses. Its compliance plan was accepted, with an extension to November 13, 2014, subject to periodic review.
Most Important Facts for Investors to Verify
- Whether the company achieved sustained positive operating cash flow and profitability after the substantial 2013 gross-margin deterioration.
- The current status, terms and compliance requirements of the ROS debt facility, including covenant waivers, fees, collateral and potential acceleration risk.
- The financial impact and resolution of the FDA observations and the OIG investigation.
- Whether the company remediated the disclosed material weaknesses in financial reporting controls.
- The dilution and potential exercise impact of the approximately 8.51 million shares issued and approximately 4.25 million related warrants.
- The collectability of accounts receivable, the quality and turnover of the $15.04 million inventory balance, and the continuing need for inventory reserves.
- The company’s ability to meet future facility-investment needs and fund operations without additional dilutive equity or expensive debt.
- Whether the company regained compliance with NYSE MKT continued-listing requirements before the November 2014 deadline.