Business Context and Reporting Period
This unaudited Form 10-Q covers the three months ended March 31, 2012, filed May 4, 2012, by Bacterin International Holdings, Inc. The requested company name is Xtant Medical Holdings, Inc.; the filing identifies the registrant as Bacterin International Holdings, Inc. The company develops, manufactures and markets biologics, human allografts, medical devices and bioactive coatings. It reports biologics and devices as one segment because device revenue remained immaterial.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $7.770 million | $6.001 million | 29% increase |
| Gross profit | $5.911 million | $5.013 million | 18% increase |
| Gross margin | 76.1% | 83.5% | Down 7.4 percentage points |
| Loss from operations | $(1.273) million | $(1.936) million | 34% improvement |
| Operating margin | (16.4%) | (32.3%) | Improved |
| Net loss | $(1.047) million | $4.917 million net income | Prior period included large derivative gain |
| Basic loss/income per share | $(0.03) | $0.13 | Declined |
| Cash used in operating activities | $(2.939) million | $(1.589) million | Greater use of cash |
Revenue consisted primarily of tissue sales of $7.671 million, with royalties and other revenue of $99,052. Approximately 99% of Q1 2012 revenue was generated in the United States. One customer represented 7% of revenue and 19% of accounts receivable.
Cash and cash equivalents were $1.364 million at March 31, 2012, compared with $751,111 at December 31, 2011. Net accounts receivable were $7.603 million, producing reported cash plus accounts receivable of approximately $8.967 million. Inventories increased to $11.379 million from $9.400 million at year-end.
Total liabilities were $17.725 million and stockholders’ equity was $8.986 million at March 31, 2012. Debt totaled $8.454 million before debt discount, consisting principally of the MidCap/Silicon Valley Bank facility and a Valley Bank mortgage. Current debt maturities were $2.269 million, and capital lease obligations totaled $281,141.
Material Changes Versus the Prior Comparable Period
- Revenue increased $1.769 million, primarily from higher sales through the direct sales force and independent distributors under the company’s hybrid sales model.
- Cost of tissue and medical device sales increased 88% to $1.859 million, causing gross margin to decline to 76.1% from 83.5%. Management attributed the increase partly to higher production-related overhead allocated to cost of sales.
- Operating expenses increased 3% to $7.184 million. General and administrative expense increased 8%, while sales and marketing expense decreased 3% and declined to 53% of revenue from 71%.
- Depreciation and amortization increased 126% to $119,074, reflecting equipment purchases and the Robinson MedSurg acquisition. Non-cash consulting expense increased 36% to $328,253.
- The company recorded a $217,551 non-cash gain from the decrease in the fair value of its warrant derivative liability. The comparable 2011 period included a much larger $7.219 million derivative gain, materially distorting the year-over-year net income comparison.
- During Q1 2012, the company issued 1,475,037 shares to Lincoln Park Capital for proceeds of $3.900 million, increasing paid-in capital and contributing to dilution.
- Inventory growth and operating losses drove operating cash use of $2.939 million. Financing proceeds largely offset operating and investing cash needs.
Outlook, Commentary, Risks and Unusual Items
Management stated that cash on hand, accounts receivable, available credit facilities and anticipated operating receipts were expected to fund cash requirements through June 30, 2013. The company expected 2012 sales and marketing expense of approximately $26 million, compared with approximately $19 million in 2011, and anticipated spending $4 million to $5 million over five years to expand or update facilities.
Management cautioned that failure to meet revenue objectives could require additional equity financing or debt, potentially causing dilution, higher debt service and restrictive covenants. The company also depends on market acceptance, reimbursement and coverage, donor tissue availability, regulatory compliance, qualified personnel, intellectual property protection, sales-force performance and successful management of growth.
On April 23, 2012, the company obtained a revolving accounts receivable facility allowing borrowings of up to $5 million through January 1, 2015, subject to eligible receivables, and amended its existing facility to permit up to an additional $3 million for a permitted acquisition during the following six months. On May 3, 2012, it terminated the Lincoln Park Capital purchase agreement.
Disclosure controls and internal control over financial reporting were reported ineffective because material weaknesses had not been fully remediated. The weaknesses involved inventory-system controls, insufficient accounting personnel and technical expertise, and documentation of equity transactions. Management described remediation efforts, including implementation of an integrated system, use of an outside accounting consultant and planned hiring.
Pending matters included a Utah lawsuit seeking monetary damages and shares, trademark litigation concerning the “Sterisponge” and “Evosponge” marks, a suit seeking recovery of $1.649 million from SeaArk for product delivered in 2011, and litigation against a former regional vice president involving alleged contractual, fiduciary and trade-secret violations. The company stated that the Utah case lacked merit and that the Evologics matter had been settled with an agreement to discontinue use of “Evosponge.”
Unusual accounting items included Level 3 warrant derivative liabilities of $2.127 million, acquisition contingent consideration of $238,140, significant non-cash compensation, and a full valuation allowance against deferred tax assets because profitability could not be established.
Important Facts for Investors to Verify
- Reconcile the filing’s registrant name, Bacterin International Holdings, Inc., with the requested Xtant Medical Holdings, Inc. identity and any subsequent corporate changes.
- Assess whether the company could convert its $7.603 million receivable balance and $11.379 million inventory into cash without material write-offs or working-capital pressure.
- Review debt maturities, secured collateral, interest-rate provisions, revenue covenants and the availability and borrowing-base limitations of the post-quarter accounts receivable facility.
- Evaluate dilution from the 1.475 million shares issued to Lincoln Park, outstanding warrants and stock options, and the termination of the remaining equity purchase commitment.
- Investigate the disclosed material weaknesses and whether subsequent filings report effective remediation.
- Review the status and potential exposure of the pending litigation, particularly the SeaArk receivable recovery claim and the Utah damages and share claims.
- Distinguish recurring operating performance from non-cash gains related to warrant and acquisition-contingent-liability remeasurement.