Business Context and Reporting Period
This Form 10-K, filed March 29, 2012, covers Bacterin International Holdings, Inc. for the fiscal year ended December 31, 2011. The request identifies Xtant Medical Holdings, Inc., but the filing itself names Bacterin International Holdings, Inc.; the filing does not clearly establish the later corporate relationship.
The company develops, manufactures and markets human allograft biologics, demineralized bone matrix products, antimicrobial-coated medical devices, surgical drains and related instruments. It operates through biologics and medical devices divisions, although it reports as one segment because device revenue was immaterial.
In 2011, the company expanded its direct sales force, acquired substantially all assets of Robinson MedSurg, LLC for $1.0 million of common stock, entered into a $7.0 million term-loan financing, and listed its common stock on NYSE Amex under the symbol BONE.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $30.1 million | $15.4 million | Up 96% |
| Tissue sales | $29.7 million | $15.2 million | Up 95% |
| Gross profit | $21.0 million | $12.1 million | Up 75% |
| Gross margin | 69.8% | 78.2% | Down 8.4 percentage points |
| Operating loss | $(6.5) million | $(8.6) million | Improved $2.2 million |
| Net loss | $(3.0) million | $(19.5) million | Improved $16.5 million |
| Basic loss per share | $(0.08) | $(0.61) | Improved |
| Cash used in operating activities | $(7.4) million | $(8.4) million | Improved $1.0 million |
| Cash used in investing activities | $(1.0) million | $(0.8) million | Higher use |
| Cash provided by financing activities | $8.8 million | $9.5 million | Down $0.7 million |
| Cash and cash equivalents | $0.8 million | $0.3 million | Up $0.4 million |
At December 31, 2011, cash and accounts receivable totaled approximately $7.8 million, consisting of $0.8 million of cash and $7.1 million of trade accounts receivable. Inventories totaled $9.4 million, including $8.5 million of current inventory.
Total assets were $23.2 million versus $15.8 million in 2010. Total liabilities were $17.7 million versus $16.4 million, while stockholders’ equity improved to $5.5 million from a deficit of $0.6 million.
Debt totaled $8.5 million before debt discount, including $7.0 million under the MidCap and Silicon Valley Bank facility and $1.5 million secured by the company’s Belgrade facility. Current debt maturities were $1.7 million, and the credit facility was secured by substantially all company assets.
Material Changes Versus the Prior Comparable Period
- Revenue nearly doubled, primarily from the direct sales force, independent distributors and approximately $2.9 million of stocking-order sales.
- Cost of tissue sales increased 171% to $9.1 million, reducing gross margin to 69.8% from 78.2%.
- Sales and marketing expense increased 108% to $18.5 million as the company expanded its sales force and marketing activities.
- General and administrative expense declined 23% to $6.6 million, primarily because 2010 included higher legal and professional costs associated with becoming public.
- The company recorded a $6.4 million non-cash gain from the reduction in the fair value of its warrant derivative liability, compared with a $9.2 million non-cash loss in 2010.
- Other expense included approximately $1.3 million of non-cash debt-discount write-offs related to the new term loan and approximately $0.8 million for the write-off of a related-party receivable from a donor-tissue provider.
- Inventory increased to $9.4 million from $6.9 million, while accounts receivable increased to $7.1 million from $3.5 million. The filing attributes operating cash use principally to these working-capital increases.
- Shares outstanding increased to 40.8 million at December 31, 2011 from 37.0 million, excluding subsequent first-quarter 2012 equity issuance.
Outlook, Risks, Contingencies and Unusual Items
Management expected sales and marketing expense to increase from approximately $19 million in 2011 to approximately $26 million in 2012. Management believed cash on hand, accounts receivable, available equity financing and anticipated operating receipts would fund anticipated requirements through June 30, 2013, but stated that weaker revenue could require additional equity or debt financing.
The company also expected to spend approximately $4 million to $5 million over the following five years on facility and equipment expansion. No formal revenue or earnings guidance was provided.
- Material weaknesses in internal control over financial reporting remained unresolved at December 31, 2011. The weaknesses involved accounting personnel capacity, separate inventory and accounting systems, and documentation of equity transactions. Disclosure controls were therefore deemed ineffective.
- The company depends on the availability of human donor tissue and faces risks from donor shortages, regulatory changes, negative publicity, contamination, recalls and market acceptance.
- Products and coating technologies are subject to FDA, state and potentially foreign regulation. OsteoSponge SC trials for a cartilage-regeneration indication were expected to take approximately two years, with no assurance of successful results or approval.
- The company competes with substantially larger medical-device and biologics companies and relies on the expansion and effectiveness of its direct sales channel.
- Reimbursement changes, pricing pressure, product liability claims, intellectual-property disputes and clinical-trial delays could adversely affect revenue and profitability.
- The company reported a pending Utah lawsuit seeking $300,000, 358,904 shares, fees and punitive damages, plus a separate claim seeking $5 million to $10 million and additional damages. Management believed the claims lacked merit. The filing stated that trademark lawsuits initiated in March 2012 were not expected to materially affect financial position, results or liquidity.
- The company issued approximately 1.5 million shares to Lincoln Park Capital in the first quarter of 2012 for approximately $3.9 million, creating additional dilution but providing working capital.
- The warrant derivative liability was $2.3 million at year-end and remained subject to valuation changes based on the company’s share price and anti-dilution provisions.
Most Important Facts for Investors to Verify
- Confirm the issuer’s corporate identity and whether this Bacterin filing is the appropriate historical filing for Xtant Medical Holdings, Inc.
- Review the audited financial statements and the effect of the non-cash warrant gain, debt-discount write-off, receivable write-off and inventory reserves on reported earnings.
- Assess whether revenue growth and gross-margin performance can support substantially higher planned sales and marketing spending.
- Evaluate liquidity after considering $7.4 million of operating cash burn, debt maturities, inventory and receivables, and the need for possible future financing.
- Monitor remediation of the disclosed material weaknesses in internal controls and any subsequent restatements or control deficiencies.
- Review donor-tissue supply arrangements, related-party transactions and the four-year right-of-first-refusal agreement with West Coast Tissue Service.
- Assess dilution from outstanding options, approximately 7.0 million warrants, the Lincoln Park equity facility and subsequent equity issuances.
- Track regulatory approvals, clinical-trial results, product withdrawals and the outcome of pending litigation.