Xtant Medical Holdings, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing identifies the registrant as Bacterin International Holdings, Inc., which developed, manufactured and marketed biologics and allograft products for orthopedic, spine, wound-care and reconstructive applications. The filing is an annual report, not a standalone fourth-quarter filing.
Business context and strategic developments
- Revenue was primarily generated from tissue sales, including OsteoSponge, OsteoSelect DBM putty, OsteoWrap, OsteoLock, BacFast HD, OsteoSTX, hMatrix and 3Demin products.
- OsteoSTX was launched in March 2014, and the company continued expanding its donor-tissue supply, manufacturing capacity and hybrid direct/distributor sales model.
- During the fourth quarter, management decided to exit the medical-device coatings and craniomaxillofacial fixation businesses. These activities represented approximately 1.4% of 2014 revenue and less than 1% of gross profit.
- The company completed a 1-for-10 reverse stock split effective July 25, 2014. It also completed a public offering in August 2014, issuing 1,143,000 shares and warrants for approximately $5.9 million of net proceeds.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $35.3 million | $33.1 million | Up 6.8% |
| Tissue sales | $34.6 million | $32.6 million | Up 6.2% |
| Gross profit | $22.3 million | $18.9 million | Up 18.1% |
| Gross margin | 63.1% | 57.1% | Up 6.0 percentage points |
| Operating loss | $(6.3) million | $(9.0) million | Improved $2.7 million |
| Net loss | $(10.5) million | $(12.7) million | Improved $2.2 million |
| Basic loss per share | $(1.76) | $(2.80) | Improved |
| Net cash used in operations | $(7.3) million | $(4.9) million | Use increased $2.4 million |
Profitability, cash flow, debt and liquidity
- Cost of sales declined 8.1% to $13.0 million. Management attributed the improvement partly to a one-time aged and expiring inventory adjustment recorded in 2013.
- General and administrative expense declined 12.9% to $8.9 million following cost-reduction measures. Sales and marketing expense increased 5.6% to $16.9 million, while research and development expense increased 152% to $1.4 million.
- Interest expense increased to $5.7 million from $4.7 million, including higher loan interest and non-cash debt issuance expense. A $1.7 million non-cash gain from the change in warrant derivative liability reduced the reported net loss.
- Cash and cash equivalents were $4.5 million at December 31, 2014. Cash and accounts receivable totaled $8.9 million, compared with $7.8 million at December 31, 2013.
- Current assets were $19.1 million versus current liabilities of $8.5 million. Total liabilities were $35.7 million, resulting in stockholders’ deficit of $7.8 million.
- Debt consisted primarily of a $24.0 million ROS term loan bearing interest at LIBOR plus 12.13%, plus other debt. Reported long-term debt, net of discounts and current maturities, was $20.9 million. The ROS facility is secured by substantially all company assets and includes financial covenants and a sales-based royalty obligation.
- Management stated that cash on hand, accounts receivable and anticipated operating receipts were expected to fund requirements through March 31, 2016, but cautioned that additional equity or debt financing could be required if revenue objectives were not met.
Material changes versus the prior comparable period
- Revenue increased 6.8%, driven primarily by improved sales-force productivity and increased sales headcount and manufacturer representatives.
- Gross margin improved materially because of lower manufacturing costs and the absence of the significant 2013 inventory adjustment.
- Operating and net losses narrowed, although the company remained unprofitable.
- Operating cash consumption worsened despite the reduction in net loss, primarily because of changes in accrued liabilities and other working-capital items.
- Debt increased following an additional $4.0 million ROS term loan in March 2014. Equity increased through the August 2014 public offering, but shares outstanding also increased to 6,679,646 at year-end from approximately 5.35 million at year-end 2013.
- The company recorded a $912,549 impairment charge for assets held for sale related to the exited product lines.
Guidance, outlook, risks and contingencies
- No formal revenue or earnings guidance was provided. Management expected 2015 sales and marketing expense of approximately $19 million, subject to sales estimates, and expected these largely variable costs to be funded from operating cash flow.
- The company expected to operate as a single biologics segment in 2015 after exiting the device business.
- Liquidity remains a central risk because of recurring losses, negative operating cash flow, substantial debt service and restrictive ROS covenants. A covenant breach could accelerate repayment and permit the lender to terminate further credit commitments.
- The company was subject to NYSE MKT deficiency proceedings because of inadequate stockholders’ equity and recurring losses. In January 2015, a listing panel affirmed the delisting determination; management requested full committee review and anticipated OTCQX trading if delisted.
- The company disclosed an OIG subpoena relating to possible improper Medicare claims and physician referral programs discontinued in 2010. No further correspondence had been received, but the investigation could resume.
- The FDA had issued a January 2013 Warning Letter concerning quality-system matters at the Belgrade facility, particularly OsteoSelect DBM putty. Follow-up inspections and Form 483 observations remained subject to potential further FDA action.
- Other risks include donor-tissue availability, regulatory approvals and inspections, reimbursement and pricing pressure, competition, product liability or recalls, intellectual-property disputes, and the need to raise additional capital.
- Pending litigation included a claim seeking more than $5 million under an employment agreement, an alleged $80,000 fee plus warrants related to the ROS financing, and an alleged $150,000 investment-banking fee. Management stated that it believed these claims lacked merit.
- After year-end, the company entered into a Common Stock Purchase Agreement with Aspire Capital for up to $10.0 million over 24 months, subject to registration, NYSE MKT approval and other conditions. The arrangement included initial and commitment-share issuances and could result in dilution.
Most important facts for investors to verify
- Whether the NYSE MKT delisting was ultimately reversed and where the common stock trades.
- Current liquidity, operating cash burn and the availability and terms of the Aspire Capital financing.
- Compliance with ROS minimum-cash, revenue and other covenants, including the consequences of any default.
- Current debt, royalty obligations, interest expense and potential refinancing or repayment requirements.
- Status and financial impact of the OIG inquiry, FDA Warning Letter and follow-up inspections.
- Progress and economics of the exit from the device coatings and CMF product lines.
- Changes in donor-tissue supply, inventory reserves, reimbursement, product demand and sales-force productivity.
- Potential dilution from outstanding warrants, options and future equity financings.