Business Context and Reporting Period
Bacterin International Holdings, Inc. (now associated with Xtant Medical Holdings, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company developed, manufactured and marketed human allograft biologics, stem-cell scaffolds and medical-device coatings. It reported biologics and devices as one segment because device revenue was immaterial.
Approximately 98% of first-quarter 2013 revenue was generated in the United States. One customer represented approximately 15% of revenue and 21% of accounts receivable.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $8.619 million | $7.770 million | Up 11% |
| Gross profit | $5.498 million | $5.911 million | Down 7% |
| Gross margin | 63.8% | 76.1% | Down 12.3 percentage points |
| Operating loss | $(1.233) million | $(1.273) million | Improved 3% |
| Operating margin | (14.3%) | (16.4%) | Improved 2.1 percentage points |
| Net loss | $(1.669) million | $(1.047) million | Loss increased 59% |
| Net loss per share | $(0.04) | $(0.03) | Loss increased |
| Cash used in operating activities | $(2.282) million | $(2.939) million | Use decreased 22% |
| Capital expenditures and intangible purchases | $(0.478) million | $(0.348) million | Use increased |
Revenue growth was attributed largely to a large order from a new distributor. Cost of tissue and medical-device sales increased 68% to $3.121 million, mainly because of higher sales volume, pricing discounts on the distributor order and industry pricing pressure.
General and administrative expense increased 10% to $2.857 million, partly due to costs supporting higher revenue and severance payments. Sales and marketing expense declined 8% to $3.798 million, and non-cash consulting expense changed from $328,253 of expense to $30,297 of income.
Interest expense increased to $1.064 million from $171,000, primarily because of the higher-cost ROS debt financing. A $635,355 non-cash gain from the decrease in the warrant derivative liability partially offset the increased interest burden.
At March 31, 2013, cash and cash equivalents were $2.119 million, accounts receivable were $7.164 million, and total current assets were $23.635 million. Total liabilities were $30.089 million versus stockholders’ equity of $2.657 million. The accumulated deficit was $49.335 million.
Debt included a $20.0 million ROS term loan bearing interest at LIBOR plus 12.13%, subject to a 1.0% LIBOR floor, and a $1.409 million bank loan. Reported long-term debt, net of discount and current maturities, was $14.720 million. The company also reported a royalty liability of approximately $7.512 million, including current and long-term portions, with estimated future royalty payments of $13.644 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 11%, but gross profit declined 7% because cost of sales rose substantially faster than revenue.
- Gross margin fell from 76.1% to 63.8%, reflecting distributor discounts and pricing pressure.
- Operating expenses declined 6%, primarily due to lower sales and marketing costs and substantially lower non-cash consulting expense.
- Net loss increased by $622,463, largely because interest expense increased by $893,207 and other income in the prior-year period did not recur.
- Operating cash use improved by $657,401, although the company continued to consume cash.
- Cash declined by $2.807 million during the quarter, from $4.926 million at December 31, 2012 to $2.119 million at March 31, 2013.
- Inventories increased to $14.847 million from $14.380 million, while accrued liabilities increased to $2.831 million from $2.400 million.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash on hand and accounts receivable, together with anticipated operating receipts, were expected to meet cash requirements through March 31, 2014, but cautioned that this depended on achieving projected sales and collecting receivables. Management expected approximately $16 million of sales and marketing expense in 2013 and anticipated $4 million to $5 million of facility investments over the following five years.
The company was not profitable and warned that it might need additional equity or debt financing if revenue objectives were not achieved. Additional equity could dilute shareholders, while additional debt could increase service obligations and covenant restrictions.
- On April 5, 2013, CEO, President and Chairman Guy Cook resigned. The CFO and COO became interim co-Chief Executive Officers, and an independent director became Acting Chairman.
- The company received FDA warning letters concerning quality-system, documentation, training, complaint-handling, reporting, product-control and marketing procedures. The FDA later stated that the company’s responses appeared adequate, but indicated that corrective actions would be evaluated during a future inspection.
- The HHS Office of Inspector General subpoenaed records concerning a discontinued physician referral and promotional program in an investigation into possible improper Medicare claims. The investigation remained ongoing.
- The company was pursuing litigation against SeaArk Capital seeking approximately $1.649 million for product delivered in 2011. Returned inventory had not been fully valued or recorded pending resolution.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective because of weaknesses in accounting personnel resources, the financial close process and documentation of equity transactions.
- The ROS credit facility contained minimum cash, revenue, management-departure and other covenants. A breach could lead to default, acceleration of debt and loss of substantially all pledged assets.
- Additional risks included donor-tissue availability, reimbursement and pricing pressure, FDA and other regulatory requirements, product liability, competition, healthcare reform, possible exchange delisting, customer concentration and future financing needs.
Important Facts for Investors to Verify
- Verify the company’s current legal name and corporate continuity relative to the Bacterin International Holdings, Inc. name used in this filing.
- Assess whether the new-distributor order was recurring and whether subsequent pricing and gross margins recovered from the Q1 2013 decline.
- Review liquidity, cash burn, accounts-receivable collections, inventory aging and the ability to satisfy ROS minimum-cash and revenue covenants.
- Confirm the status and financial impact of the FDA corrective actions and the OIG investigation.
- Determine whether the SeaArk litigation and returned inventory produced a recovery, loss or additional reserve.
- Track the CEO search, management transition and any resulting covenant or operating effects.
- Evaluate the unresolved material weaknesses in internal control and whether they were remediated.
- Consider potential dilution from the 6.8 million outstanding warrants, approximately 5.2 million stock options and possible future capital raises.