SEC Form 10-Q Summary
Registrant and period: The provided filing is for Bacterin International Holdings, Inc. (not identified in the filing as Xtant Medical Holdings, Inc.), for the quarter and nine months ended September 30, 2013. The financial statements are unaudited. Bacterin develops, manufactures and markets human allograft biologics and medical-device coatings.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $7.9 million | $8.9 million | $24.8 million | $24.9 million |
| Gross profit | $4.6 million | $6.3 million | $14.8 million | $18.1 million |
| Gross margin | 58.2% | 70.7% | 59.7% | 72.7% |
| Operating income (loss) | $(2.3) million | $0.2 million | $(5.4) million | $(1.4) million |
| Net loss | $(4.4) million | $(2.5) million | $(8.5) million | $(2.8) million |
| Net loss per share | $(0.08) | $(0.06) | $(0.18) | $(0.07) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(5.2) million | $(7.8) million |
- At September 30, 2013, cash and cash equivalents were $3.4 million, accounts receivable were $4.6 million and total current assets were $21.8 million.
- Total assets were $31.0 million, compared with $34.5 million at December 31, 2012.
- Total liabilities were $31.7 million, including $16.1 million of long-term debt, $7.5 million of royalty liabilities and a $2.2 million warrant derivative liability.
- Stockholders’ equity was negative $0.6 million, compared with positive equity of $4.2 million at December 31, 2012.
- Debt was primarily a $20.0 million ROS term loan bearing interest at LIBOR plus 12.13%, subject to a 1.0% LIBOR floor, secured by substantially all company assets. Estimated future royalty payments totaled $13.25 million.
Material changes versus the prior comparable period
- Third-quarter revenue declined 11%, but management stated that revenue increased 14% excluding an approximately $1.5 million stocking order in the prior-year quarter. Nine-month revenue was essentially flat year over year.
- Cost of sales increased 28% in the quarter and 47% for the nine months. Gross margin fell primarily because of pricing pressure, contaminated dermis inventory write-offs, expired products and higher inventory reserves.
- Operating expenses increased 15% in the quarter and 4% for the nine months. Sales and marketing costs increased as commissions were earned on core revenue, while general and administrative expense included higher bad-debt expense associated with distributor stocking orders.
- Interest expense increased to $3.4 million for the nine months from $1.3 million, reflecting the higher-cost ROS financing.
- The company raised approximately $4.45 million net in June 2013 by issuing approximately 8.51 million shares at $0.57 per share, together with warrants exercisable at $0.72 per share. Shares outstanding increased from 42.9 million at December 31, 2012 to 51.8 million at September 30, 2013.
- Operating cash usage improved year over year, but remained substantial at $5.2 million for the first nine months.
Guidance, outlook, risks and unusual items
- Management expected cash on hand, receivables, operating receipts, expense reductions and additional capital resources to fund requirements through September 30, 2014, but stated that sales, collections, expense reductions and financing were not assured.
- Management expected approximately $18 million of sales and marketing expense for 2013 and anticipated $4 million to $5 million of facility and equipment spending over the following five years.
- The company violated ROS revenue and management-related covenants during the second quarter and received waivers. After quarter-end, ROS waived the failure to meet the third-quarter 2013 revenue covenant. In exchange, the company agreed to issue 1.5 million restricted shares to ROS by December 2, 2013; failure to do so would trigger an additional fee equal to 3.5% of principal payments required under the loan documents.
- Future revenue thresholds under the amended ROS agreement range from $7.5 million for the quarter ending December 31, 2013 to $9.5 million per quarter beginning March 31, 2015.
- The company received FDA warning letters in January 2013. The FDA later indicated that corrective actions for medical-device production appeared adequate, but July inspections produced a Form 483 observation for human tissue products and two observations during a routine inspection. Responses were submitted, but further regulatory scrutiny remained possible.
- An Office of Inspector General subpoena received in February 2013 sought documents concerning possible improper Medicare claims related to a discontinued physician referral program. The filing states that the company could not predict the outcome or timing of the investigation.
- The NYSE MKT notified the company that it failed continued-listing standards relating to stockholders’ equity and recurring losses. The exchange accepted a compliance plan and granted an extension through November 13, 2014, subject to periodic review.
- Management reported ineffective disclosure controls and material weaknesses in financial reporting, involving insufficient accounting personnel and inadequate documentation of equity transactions. Remediation efforts were expected to continue through year-end 2013.
- Unusual items included a $849,288 increase in the warrant derivative liability in the third quarter, a $246,337 gain for the nine-month period, a $1.2 million provision for accounts receivable and inventory losses, and significant non-cash debt-discount amortization.
- On November 5, 2013, the U.S. Patent and Trademark Office issued a patent covering a process related to the company’s demineralized bone matrix products.
Most important facts for investors to verify
- Confirm the registrant’s identity: the supplied filing is for Bacterin International Holdings, Inc., while the request identifies Xtant Medical Holdings, Inc.
- Assess liquidity relative to continuing operating losses, $5.2 million of nine-month operating cash burn, negative stockholders’ equity and the high-cost ROS debt.
- Review compliance with the amended ROS revenue covenants and the required 1.5 million-share issuance, including potential default, acceleration and additional-fee consequences.
- Evaluate whether pricing pressure, inventory write-offs, expiration reserves and bad-debt expense have been contained and whether gross margins can recover.
- Monitor FDA follow-up actions and the unresolved OIG investigation for potential penalties, restrictions, reimbursement consequences or litigation.
- Track remediation of the reported material weaknesses and the company’s progress toward retaining its NYSE MKT listing.