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Business Context and Reporting Period

Company: Bacterin International Holdings, Inc. (formerly K-Kitz, Inc.)
Reporting Period: Quarter and six months ended June 30, 2010
Business Overview: The Company develops, manufactures, and markets biologics products (human allografts for tissue growth) and medical device coatings. On June 30, 2010, the Company completed a reverse merger with Bacterin International, Inc., effectively changing its business focus from emergency preparedness kits to biomaterials research and commercialization. The financial statements reflect the historical results of Bacterin International, Inc.

Key Financial Metrics

Note: Gross margin for six months calculated as Gross Profit / Total Revenue ($4,813,829 / $5,937,533).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 86% for the quarter and 55.4% for the six-month period compared to the prior year. This growth is attributed to the transition from a distributor model to a direct sales force model implemented in late 2009.
• Operating Expenses: Total operating expenses surged 87.7% for the quarter and 96.3% for the six-month period.
  • Sales & Marketing: Increased 313.4% (quarter) and 314.6% (six months) due to expanded sales force travel and advertising.
  • General & Administrative: Increased 37.7% (quarter) and 52.3% (six months), driven by one-time legal and professional fees related to the reverse merger and financing.
• Interest Expense: Interest expense increased 641.9% for the quarter and 547.6% for the six-month period. This spike is primarily due to non-cash interest expense from beneficial conversion features on convertible debt instruments.
• Liquidity: Cash and cash equivalents increased from $54,155 at year-end 2009 to $3,127,330 at June 30, 2010, following a private placement and debt conversion.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management believes cash on hand from recent private placements and operations will be sufficient to meet anticipated cash requirements through December 31, 2010. If revenue objectives are not met, the Company may need to sell additional equity (causing dilution) or seek loans. The Company has established 13 sales regions with 35 representatives.

Risks and Contingencies:

• Debt Maturity: Approximately $1,850,000 in convertible notes payable matures in September 2010 or upon demand. Failure to repay or convert could impact liquidity.
• Customer Concentration: One customer accounted for 11% of revenue for the six months ended June 30, 2010. Approximately 96% of sales are derived from the United States.
• Supply Chain: The business relies on West Coast Tissue Service, Inc. for donor tissue; a decline in available donors could materially harm operations.
• Internal Controls: While previously ineffective, management asserts that internal controls were remediated following the reverse merger and the appointment of new officers with public company experience.

Investor Verification Checklist

• Debt Repayment: Verify the Company's ability to repay or convert the $1.85 million convertible note due in September 2010.
• Revenue Sustainability: Assess whether the 55-86% revenue growth is sustainable given the significant increase in sales and marketing expenses (now ~53% of revenue).
• Cash Burn Rate: Monitor operating cash flow, which used $4.0 million in the first six months of 2010, against the $3.1 million cash balance.
• Reverse Merger Accounting: Confirm understanding that financial results reflect the historical operations of Bacterin International, Inc., not the shell company K-Kitz.
• Warrant Liability: Review the impact of the warrant derivative liability ($698,111) on future earnings volatility.