Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The filing identifies the registrant as Bacterin International Holdings, Inc.; the requested company metadata identifies Xtant Medical Holdings, Inc., so the issuer identity should be verified. Bacterin develops, manufactures and markets human allografts, biologics, medical devices and antimicrobial coatings. Its common stock traded under the symbol BONE on the NYSE Amex beginning in March 2011.
The company completed a reverse merger in June 2010. Accordingly, the financial statements primarily reflect the historical operations of Bacterin and are not directly comparable to the predecessor public shell.
Financial Results and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $7.5 million in 2011 versus $4.2 million in 2010 | $21.0 million versus $10.1 million |
| Revenue growth | 80% | 108% |
| Gross profit | $6.2 million versus $3.5 million | $17.0 million versus $8.3 million |
| Gross margin | 82.5% versus 83.0% | 80.8% versus 81.9% |
| Operating loss | $1.6 million versus $2.1 million | $3.8 million versus $4.6 million |
| Net income (loss) | $(3.2) million versus $(9.0) million | $1.3 million versus $(12.7) million |
| Basic earnings (loss) per share | $(0.08) versus $(0.26) | $0.04 versus $(0.42) |
| Cash flow from operations | Not separately provided | $(6.4) million versus $(5.9) million |
Sales and marketing expense rose to $4.8 million in the quarter and $13.4 million for the nine months, representing approximately 64% of revenue in both periods. The company attributed the increase to commissions, travel, advertising and expansion of its direct sales force. Interest expense was $1.0 million for the nine months, including a $391,000 debt prepayment penalty. The nine-month net profit was significantly affected by a $7.5 million non-cash gain from the change in fair value of the warrant derivative liability.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.8 million at September 30, 2011, compared with $327,000 at December 31, 2010.
- Trade accounts receivable were $6.4 million, and related-party receivables were $675,000. The company reported cash plus trade accounts receivable of $8.2 million.
- Total assets were $23.4 million versus $15.8 million at year-end 2010. Inventories increased to $8.8 million from $6.9 million.
- Total liabilities were $14.7 million, including $8.2 million of current liabilities and long-term debt. Debt principal before discount was $8.5 million, compared with $4.0 million at December 31, 2010.
- In July 2011, the company entered into a secured $15 million MidCap/Silicon Valley Bank facility, borrowed $7 million initially, and used the financing to repay prior Bridge Bank and WTI obligations. The facility bears interest at LIBOR plus 7.5%, subject to a 3% LIBOR floor.
- Management stated that cash, receivables, financing availability and expected operating receipts should fund anticipated requirements through December 31, 2012, but cautioned that failure to meet revenue targets could require additional equity or debt financing.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled for the nine-month period, driven by market penetration and expansion of the direct sales force.
- Gross margin declined modestly, while operating expenses increased 61% for the nine months, primarily because sales and marketing expense increased 145%.
- The company reported nine-month net income in 2011 compared with a substantial net loss in 2010, primarily because of the non-cash warrant liability gain rather than improved operating profitability.
- Operating cash use increased to $6.4 million, reflecting the operating loss before non-cash items and increased accounts receivable and inventory.
- The company acquired certain assets of Robinson MedSurg in July 2011 for $1.0 million of common stock plus up to $1.0 million of contingent stock consideration. The acquired business generated immaterial third-quarter revenue.
- Stockholders’ equity improved to $8.7 million from a deficit of $619,000, principally due to equity issuances, retained earnings effects and the warrant liability revaluation.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2011 sales and marketing expense of approximately $20 million, compared with approximately $9 million in 2010, and anticipated facility investments of $4 million to $5 million over the next five years.
- The business depends on continued product acceptance, expansion of its direct sales organization, availability of donor cadavers, reimbursement and coverage decisions, regulatory compliance, intellectual property protection and access to capital.
- Customer concentration is material: one customer represented approximately 9% of nine-month revenue and 30% of accounts receivable at September 30, 2011. Approximately 98% of nine-month sales were generated in the United States.
- The warrant derivative liability was a Level 3 fair-value measurement. Its carrying value declined from $9.7 million to $1.3 million, producing a $7.5 million non-cash gain for the nine months.
- The company incurred a $1.3 million write-off of debt discount and a $391,000 debt prepayment penalty related to refinancing.
- Management disclosed that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving accounting personnel and complex accounting matters, separate inventory and accounting systems, and documentation of equity transactions.
- Pending litigation included a Utah claim seeking monetary damages, shares and punitive damages. The company believes the claim lacks merit. A separate patent case was settled for an immaterial amount, and the company initiated litigation against a former employee and his current employer involving alleged contract breaches and trade-secret misappropriation.
Important Facts for Investors to Verify
- Confirm that the filing belongs to the intended issuer, because the filing names Bacterin International Holdings, Inc., not Xtant Medical Holdings, Inc.
- Assess recurring operating profitability separately from the reported nine-month net income, which was substantially driven by the non-cash warrant liability gain.
- Review the terms, collateral, interest rate, covenants and repayment schedule of the MidCap/SVB credit facility and the company’s ability to access the additional $8 million tranche.
- Evaluate working-capital requirements, particularly the growth in receivables and inventories and the resulting negative operating cash flow.
- Monitor customer and related-party concentrations, donor-tissue availability, reimbursement exposure and the outcome of disclosed litigation.
- Review remediation of the disclosed material weaknesses in internal control and the potential effect on the reliability of future financial reporting.
- Consider dilution from approximately 40.2 million shares outstanding at September 30, 2011, outstanding options and approximately 7.1 million warrants.