Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing is for Bacterin International Holdings, Inc., for the quarter ended March 31, 2015. The company develops, manufactures and markets biologic allograft products and related technologies for orthopedic, spine, neurosurgical and other applications. Following its exit from the device-coatings business at December 31, 2014, the company reported one operating segment in 2015.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 / Prior Period |
|---|---|---|
| Total revenue | $9.50 million | $8.91 million |
| Gross profit | $6.03 million | $5.50 million |
| Gross margin | 63.5% | 61.7% |
| Operating loss | $(1.73) million | $(1.19) million |
| Operating margin | (18.2%) | (13.4%) |
| Net loss | $(4.18) million | $(4.14) million |
| Net loss per share | $(0.62) | $(0.77) |
| Cash used in operating activities | $(2.08) million | $(2.19) million |
- Revenue increased 6.6%, primarily from greater sales-force productivity, increased sales headcount and manufacturer representatives. U.S. sales represented approximately 97% of revenue.
- Cost of sales increased only 0.1%, and tissue cost of sales declined to 36.5% of tissue revenue from 38.3%, reflecting improved manufacturing efficiency and product mix.
- Operating expenses increased 16.0% to $7.76 million. Sales and marketing increased 16.2% to $4.71 million, research and development increased 62.4% to approximately $0.43 million, and general and administrative expense increased 6.0% to $2.43 million.
- Interest expense increased to $1.44 million from $1.28 million. The company also recorded a $0.46 million non-cash loss from revaluation of warrant derivative liabilities and a $0.56 million non-cash commitment fee related to the Aspire Capital stock purchase agreement.
- Cash and cash equivalents declined to $2.90 million at March 31, 2015 from $4.47 million at December 31, 2014. Cash and accounts receivable totaled $8.40 million.
- Total current assets were $18.99 million versus current liabilities of $10.36 million. Total liabilities were $37.88 million, compared with a stockholders’ deficit of $10.47 million.
- Debt obligations before debt discount totaled $26.01 million, including a $24.0 million ROS loan bearing interest at LIBOR plus 12.13%. Royalty liabilities totaled approximately $7.34 million on the balance sheet, with estimated future royalty payments of $12.04 million.
Material Changes and Unusual Items
- The company issued 207,182 shares to Aspire Capital for $750,000 and issued 154,189 commitment-fee shares valued at $558,185. Aspire committed to purchase up to an aggregate of $10.0 million of common stock over approximately 24 months, subject to the agreement’s terms.
- On April 8, 2015, the NYSE MKT denied the company’s delisting appeal. Trading was suspended on the exchange, and the common stock began trading on OTCQX on April 9, 2015.
- The company completed its strategic exit from device coatings and CMF activities. Related assets had been fully impaired in 2014; those product lines represented less than 1% of revenue and gross profit in Q1 2015 and Q1 2014.
- The warrant derivative liability increased to $1.78 million from $1.32 million at December 31, 2014, producing a $462,208 non-cash loss.
Outlook, Liquidity, Risks and Contingencies
Management stated that cash on hand, accounts receivable, expected operating receipts and the Aspire Capital financing were expected to fund anticipated cash requirements through March 31, 2016. The company expected 2015 sales and marketing expense of approximately $19 million, largely variable and intended to be funded from operating cash flow. No formal revenue or earnings guidance was provided.
- The company remains unprofitable and expects it may need additional equity or debt financing if revenue objectives are not met. Additional equity could dilute shareholders, while additional debt could increase debt service and covenant restrictions.
- The ROS credit facility includes minimum cash and revenue covenants and other default provisions. A breach could permit acceleration of the debt and enforcement against substantially all pledged assets, including intellectual property.
- Key operating risks include donor-tissue availability, reimbursement and pricing pressure, competition, regulatory approvals and inspections, product liability, recalls, intellectual-property disputes and dependence on the company’s sales force and key personnel.
- The filing describes an ongoing FDA regulatory history involving a 2013 warning letter, subsequent inspections and Forms 483 relating to the Belgrade facility. The company states that it implemented corrective actions but could not predict whether additional FDA action or follow-up inspections would occur.
- Pending litigation includes a former employee claim seeking damages in excess of $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 believes these matters lack merit.
Investor Verification Checklist
- Verify the company’s legal name and corporate history, including the relationship between the filing registrant, Bacterin International Holdings, Inc., and Xtant Medical Holdings, Inc.
- Review the ROS loan agreement for current covenant compliance, interest terms, maturity provisions, collateral and potential acceleration triggers.
- Assess whether operating cash flow can support the planned sales and marketing spending and whether the Aspire facility provides sufficient funding without excessive dilution.
- Monitor the OTCQX listing, future access to registration statements and the potential impact of reduced exchange liquidity on financing capacity.
- Evaluate the status and potential exposure of the disclosed litigation, FDA warning-letter matters and other regulatory contingencies.