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| RTIX > SEC Filings for RTIX > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
Cautionary Statement Relating to Forward Looking Statements
Information contained in this filing contains "forward-looking statements" which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates" or comparable terminology, or by discussions of strategy. We cannot assure you that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the "Risk Factors" section of our Form 10-K constitute cautionary statements which identify factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.
Management Overview
Given the macroeconomic climate, we are seeing a decline in elective surgery in some of our markets, resulting in a negative impact on our revenues.
Our principal goals for 2009 are to continue to develop revenue synergies resulting from the merger with TMI and building on the Company's competitive strengths. We are focused on several long-term strategies in order to meet our goals. Among them are:
• manage inventory levels while maintaining sufficient tissue for processing to meet customer demand;
• rigorous expense management;
• maintain our commitment to research and development;
• develop new strategically targeted allograft and xenograft implants and focus clinical efforts to support their market acceptance; and
• increase distribution in key markets.
Three and Six Months Ended June 30, 2009 Compared With Three and Six Months
Ended June 30, 2008
Three Months Ended Six Months Ended TMI
June 30, June 30, Jan 1 - Feb 27
2009 2008 2009 2008 (1) 2008 (2)
Fees from tissue distribution:
Spine $ 10,891 $ 10,052 $ 20,670 $ 18,792 $ 210
Sports medicine 10,121 9,987 19,718 19,202 53
Dental 7,322 8,217 14,615 11,700 4,957
Surgical specialties 6,389 4,947 11,216 6,505 2,148
Bone graft substitutes 3,757 3,959 7,619 8,731 -
General orthopedic 1,364 1,699 3,567 2,307 1,156
Other revenues 1,287 1,967 2,349 3,501 (31 )
Total revenues $ 41,131 $ 40,828 $ 79,754 $ 70,738 $ 8,493
Domestic revenues 35,692 34,456 68,001 60,521 5,452
International revenues 5,439 6,372 11,753 10,217 3,041
Total revenues $ 41,131 $ 40,828 $ 79,754 $ 70,738 $ 8,493
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(1) Includes revenues of the former TMI from February 28, 2008 to June 30, 2008; revenues for the period totaled $6,353.
(2) Revenues for TMI for the period January 1, 2008 to February 27, 2008.
Three Months Ended June 30, 2009 Compared With Three Months Ended June 30, 2008
Revenues. Our total revenues increased $303,000, or 0.7%, to a record level for the company of $41.1 million for the three months ended June 30, 2009 compared to $40.8 million for the three months ended June 30, 2008.
Spine - Revenues from spinal implants increased $839,000, or 8.3%, to $10.9 million for the three months ended June 30, 2009 compared to $10.1 million for the three months ended June 30, 2008. Spine revenues increased primarily due to revenues associated with $1.1 million of additional new products to distributors and higher average revenue per unit. Unit volumes were up 1.2% primarily as a result of higher distributions of cervical grafts to both current and new distributors. Average revenue per unit increased 7.1% due primarily to changes in product mix.
Sports Medicine - Revenues from sports medicine implants increased $134,000, or 1.3%, to $10.1 million for the three months ended June 30, 2009 compared to $10.0 million for the three months ended June 30, 2008. Sports medicine revenues increased primarily as a result of increases in average revenue per unit of 6.3% due to changes in product mix, offset by lower unit volumes of 4.7%.
Dental - Revenues from dental implants decreased $895,000, or 10.9%, to $7.3 million for the three months ended June 30, 2009 compared to $8.2 million for the three months ended June 30, 2008. Dental revenues decreased primarily as a result of a decrease in unit volumes of 7.4%, and a decrease in average revenue per unit due to changes in product mix of 3.8%.
Surgical Specialties - Revenues from surgical specialty implants increased $1.4 million, or 29.1%, to $6.4 million for the three months ended June 30, 2009 compared to $4.9 million for the three months ended June 30, 2008. Surgical specialties revenues increased primarily as a result of higher unit volumes of 6.1%, and an increase in average revenue per unit of 21.7% due to changes in product mix, introduction of new products with higher average revenue per unit and price increases.
Bone Graft Substitutes - Revenues from bone graft substitutes decreased $202,000, or 5.1%, to $3.8 million for the three months ended June 30, 2009 compared to $4.0 million for the three months ended June 30, 2008. Bone graft substitutes revenues decreased primarily due to delays in launching new products and an unfavorable impact on distribution mix resulting from higher unit volumes with Zimmer Dental which have lower average revenues per unit. Average revenue per unit decreased 29.3% due to changes in product mix, offset by higher unit volumes of 34.2%.
General Orthopedic - Revenues from general orthopedic implants decreased $335,000 or 19.7%, to $1.4 million for the three months ended June 30, 2009 compared to $1.7 million for the three months ended June 30, 2008. The decrease is primarily attributable to lower unit volumes associated with the TMI German operations and the weakening of the value of the U.S. dollar versus the Euro.
Other Revenues - Revenues from other sources, consisting of tissue recovery fees, biomedical laboratory fees, deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes, decreased by $680,000, or 34.6%, to $1.3 million for the three months ended June 30, 2009 compared to $2.0 million for the three months ended June 30, 2008.
For the three months ended June 30, 2009, foreign currency exchange fluctuations resulted in a decrease in total revenues of $547,000 due to a 12.9% decline in the value of the U.S. dollar versus the Euro as compared to the prior year period.
Costs of Processing and Distribution. Costs of processing and distribution increased by $916,000, or 4.3%, to $22.3 million for the three months ended June 30, 2009. As a percentage of revenues, costs of processing and distribution increased from 52.5% for the three months ended June 30, 2008 to 54.3% for the three months ended June 30, 2009.
The increase in cost of processing and distribution was primarily due to unfavorable changes in distribution mix as product lines with lower gross margins increased as a percentage of total revenues. In general, our sports medicine, dental and TMI German operations product lines have the highest gross margins. In addition, for the three months ended June 30, 2009, we were unable to process significant amounts of breast reconstruction implants since we had no ongoing breast reconstruction implant distributor. We also processed significant amounts of surgical specialty tissue recovered in prior periods that resulted in lower than anticipated tissue utilization. Both situations negatively impacted operating efficiencies for the three months ended June 30, 2009. Gross margin decreased from 47.5% for the three months ended June 30, 2008 to 45.7% for the three months ended June 30, 2009.
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased by $463,000, or 3.2%, to $15.1 million for the three months ended June 30, 2009 from $14.7 million for the three months ended June 30, 2008. Marketing, general and administrative expenses increased as a percentage of revenues from 35.9% for the three months ended June 30, 2008 to 36.8% for the three months ended June 30, 2009. Domestic expense increases included payroll and benefits expense of $354,000, an increase in legal expenses of $466,000 due primarily to on-going patent litigation; offset by a decrease in distributor commissions of $792,000, as a result of lower distributions on our dental implants as compared to the prior period.
Research and Development Expenses. Research and development expenses decreased by $354,000, or 16.2%, to $1.8 million for the three months ended June 30, 2009 from $2.2 million for the three months ended June 30, 2008. As a percentage of revenues, research and development expenses decreased from 5.4% for the three months ended June 30, 2008 to 4.5% for the three months ended June 30, 2009. The decrease was primarily due to lower studies and research expenses of $258,000, offset by an increase in domestic payroll and benefits expense of $102,000. Research and development expenses associated with the TMI German operations decreased $125,000 as compared to the prior period.
Restructuring Charges. As a result of the merger with TMI, we implemented a formal restructuring plan which resulted in $0 expense for the three months ended June 30, 2009 compared to $82,000 for the three months ended June 30, 2008. These expenses in the prior period represent severance benefits.
Asset Abandonments. Asset abandonments were $83,000 for the three months ended June 30, 2009, which was primarily due to the disposal of non-productive assets.
Net Other Expense. Net other expense was $185,000 for the three months ended June 30, 2009 compared to $26,000 for the three months ended June 30, 2008. Interest expense decreased by $68,000 for the three months ended June 30, 2009 to $130,000 from $198,000 for the three months ended June 30, 2008 due to lower interest paid on long-term obligations. Interest income decreased by $94,000 for the three months ended June 30, 2009 to $87,000 from $181,000 for the three months ended June 30, 2008 due to the lower interest earned on the investment of excess cash in interest bearing cash equivalents than the comparable prior year period. Foreign exchange loss increased $133,000 to $142,000 for the three months ended June 30, 2009 compared to $9,000 for the three months ended June 30, 2008 due to the weakening of the value of the U.S. dollar versus the Euro.
Income Tax Provision. Income tax provision for the three months ended June 30, 2009 was $551,000 compared to $950,000 for the three months ended June 30, 2008. Our effective tax rate for the three months ended June 30, 2009 and 2008 was 35.1% and 38.7%, respectively. Our effective tax rate for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 decreased primarily as a result of increased profitability with the TMI processing facility in Germany with lower associated tax rates.
Six Months Ended June 30, 2009 Compared With Six Months Ended June 30, 2008
Revenues. Our total revenues increased $9.0 million, or 12.7%, to $79.8 million for the six months ended June 30, 2009 compared to $70.7 million for the six months ended June 30, 2008.
Spine - Revenues from spinal implants increased $1.9 million, or 10.0%, to $20.7 million for the six months ended June 30, 2009 compared to $18.8 million for the six months ended June 30, 2008. Spine revenues increased primarily due to distributions of new products to distributors. Unit volumes were up 7.5% primarily as a result of higher distributions of cervical grafts to both current and new distributors. Average revenue per unit increased 2.3% due to changes in product mix.
Sports Medicine - Revenues from sports medicine implants increased $516,000, or 2.7%, to $19.7 million for the six months ended June 30, 2009 compared to $19.2 million for the six months ended June 30, 2008. Sports medicine revenues increased primarily as a result of increases in average revenue per unit of 5.4% due to changes in product mix, slightly offset by lower unit volumes of 2.6%.
Dental - Revenues from dental implants increased $2.9 million, or 24.9%, to $14.6 million for the six months ended June 30, 2009 compared to $11.7 million for the six months ended June 30, 2008. The increase is primarily attributable to six months of dental revenues for the period ended June 30, 2009 versus four months in 2008 as we did not offer dental implants prior to our merger with TMI, which closed on February 27, 2008.
Surgical Specialties - Revenues from surgical specialty implants increased $4.7 million, or 72.4%, to $11.2 million for the six months ended June 30, 2009 compared to $6.5 million for the six months ended June 30, 2008. Surgical specialty revenues increased primarily as a result of increases in average revenue per unit of 15.1% and higher unit volumes of 49.7%. However, we did not offer surgical specialty implants (hernia repair, breast reconstruction, ear, nose and throat, urology, and ophthalmology) prior to our merger with TMI, which closed on February 27, 2008.
Bone Graft Substitutes - Revenues from bone graft substitutes decreased $1.1 million, or 12.7%, to $7.6 million for the six months ended June 30, 2009 compared to $8.7 million for the six months ended June 30, 2008. Bone graft substitutes revenues decreased primarily due to delays in launching new products and an unfavorable impact on distribution mix resulting from higher unit volumes with Zimmer Dental which have lower average revenues per unit. Average revenue per unit decreased 32.2% due to changes in product mix, offset by higher unit volumes of 28.8%.
General Orthopedic - Revenues from general orthopedic implants increased $1.3 million or 54.6%, to $3.6 million for the six months ended June 30, 2009 compared to $2.3 million for the six months ended June 30, 2008. The increase is primarily attributable to revenues associated with TMI German operations for the six months ended June 30, 2009 versus four months in 2008.
Other Revenues - Revenues from other sources, consisting of tissue recovery fees, biomedical laboratory fees, deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes, decreased by $1.2 million, or 32.9%, to $2.3 million for the six months ended June 30, 2009 compared to $3.5 million for the six months ended June 30, 2008 primarily due to lower tissue recovery fees. Prior to the merger with TMI on February 28, 2008, we were also recovering tissue for TMI.
For the six months ended June 30, 2009, foreign currency exchange fluctuations resulted in a decrease in total revenues of $1.2 million due to a 12.8% decline in the value of the U.S. dollar versus the Euro as compared to the prior year period.
Costs of Processing and Distribution. Costs of processing and distribution increased by $5.3 million, or 14.1%, to $42.8 million for the six months ended June 30, 2009. As a percentage of revenues, costs of processing and distribution increased from 53.0% for the six months ended June 30, 2008 to 53.7% for the six months ended June 30, 2009.
The increase in cost of processing and distribution was primarily due to unfavorable changes in distribution mix as product lines with lower gross margins increased as a percentage of total revenues. In general, our sports medicine and dental product lines have the highest gross margins. Gross margin decreased from 47.0% for the six months ended June 30, 2008 to 46.3% for the six months ended June 30, 2009.
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased by $4.9 million, or 19.6%, to $30.1 million for the six months ended June 30, 2009 from $25.1 million for the six months ended June 30, 2008. Marketing, general and administrative expenses increased as a percentage of revenues from 35.5% for the six months ended June 30, 2008 to 37.7% for the six months ended June 30, 2009. The increase is primarily attributable to including six months of TMI expenses in 2009 versus four months in the prior year. Domestic increases included payroll and benefits expense of $1.0 million, an increase in legal expenses of $1.1 million due primarily to on-going patent litigation, an increase in travel of $262,000, an increase in marketing programs of $220,000, an increase in bank charges and bad debt expense of $346,000, and an increase in utilities, rent and insurance of $207,000. Marketing, general and administrative expenses associated with the TMI German and French business operations increased $1.4 million as compared to the prior period primarily attributable to including six months of TMI expenses in 2009 versus four months in the prior year.
Research and Development Expenses. Research and development expenses decreased by $447,000, or 10.9%, to $3.7 million for the six months ended June 30, 2009 from $4.1 million for the six months ended June 30, 2008. As a percentage of revenues, research and development expenses decreased from 5.8% for the six months ended June 30, 2008 to 4.6% for the six months ended June 30, 2009. The decrease was primarily due to lower studies and research expenses of $537,000, lower legal and consulting expenses of $187,000, offset by an increase in domestic payroll and benefits expense of $272,000.
Restructuring Charges. As a result of the merger with TMI we implemented a formal restructuring plan which resulted in $42,000 of expenses for the six months ended June 30, 2009 compared to $450,000 for the six months ended June 30, 2008. These expenses represent severance benefits.
Asset Abandonments. Asset abandonments were $83,000 for the six months ended June 30, 2009, which was primarily due to the disposal of non-productive assets.
Net Other Expense. Net other expense was $92,000 for the six months ended June 30, 2009 compared to $37,000 for the six months ended June 30, 2008. Interest expense decreased by $120,000 for the six months ended June 30, 2009 to $253,000 from $373,000 for the six months ended June 30, 2008 due to lower interest paid on long-term obligations. Interest income decreased by $165,000 for the six months ended June 30, 2009 to $198,000 from $363,000 for the six months ended June 30, 2008 due to the lower interest earned on the investment of excess cash in interest bearing cash equivalents than the comparable prior year period. Foreign exchange loss was $37,000 for the six months ended June 30, 2009 compared to $27,000 for the six months ended June 30, 2008 due to the weakening of the value of the U.S. dollar versus the Euro.
Income Tax Provision. Income tax provision for the six months ended June 30, 2009 was $960,000 compared to $1.3 million for the six months ended June 30, 2008. Our effective tax rate for the six months ended June 30, 2009 and 2008 was 31.9% and 38.4%, respectively. Our effective tax rate for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 decreased primarily as a result of increased profitability with the TMI processing facility in Germany with lower associated tax rates.
Liquidity and Capital Resources
Cash Flows - Three Months Ended June 30, 2009 Compared With Three Months Ended June 30, 2008.
Our cash provided by operating activities was $2.4 million for the three month period ended June 30, 2009, compared to cash used in operating activities of $689,000 for the three month period ended June 30, 2008. The cash provided by operating activities was primarily due to strong collections on accounts receivable and an increase in accounts payable due to the timing of payments to certain vendors, partially offset by an investment in inventories primarily due to the following: 1) to increase inventories of human dermis tissue to support the growing surgical specialties business, and 2) to build inventories of spine implants in both tissue in process and implantable donor tissue in anticipation of the installation of new processing equipment in late June and early July 2009.
At June 30, 2009, we had 36 days of revenues outstanding in trade accounts receivable, an increase of 1 day compared to December 31, 2008. At June 30, 2009, we had 334 days of inventory on hand, an increase of 40 days compared to December 31, 2008.
Our cash used in investing activities was $1.7 million for the three month period ended June 30, 2009, compared to cash provided by investing activities of $3.5 million for the three month period ended June 30, 2008. Our investing activities for the three month period ended June 30, 2009 consisted primarily of purchases of property, plant and equipment of $1.6 million. Our investing activities for the three months ended June 30, 2008 consisted primarily of purchases of property, plant and equipment of $1.3 million, offset by proceeds from the sale of marketable securities of $5.2 million.
Our cash provided by financing activities was $365,000 for the three months ended June 30, 2009 compared to cash used in financing activities of $359,000 for the three month period ended June 30, 2008. Cash provided by financing activities for the three months ended June 30, 2009 consisted primarily of net payments on short-term obligations of $1.6 million and payments on long-term obligations of $2.1 million, offset by proceeds from long-term obligations of $4.0 million. Cash used in financing activities for the three months ended June 30, 2008 consisted of payments on long-term obligations of $1.5 million, offset by proceeds from exercise of stock options of $1.2 million.
Cash Flows - Six Months Ended June 30, 2009 Compared With Six Months Ended June 30, 2008.
Our cash used in operating activities was $4.2 million for the six month period ended June 30, 2009, compared to $849,000 for the six month period ended June 30, 2008. The increase in cash used in operating activities was primarily due to an increase inventories of human dermis tissue to support the growing surgical specialties business, partially offset by an increase in accounts payable due to the timing of payments to certain vendors.
At June 30, 2009, we had 36 days of revenue outstanding in trade accounts receivable, an increase of 1 day compared to December 31, 2008. At June 30, 2009, we had 334 days of inventory on hand, an increase of 40 days compared to December 31, 2008.
Our cash used in investing activities was $2.1 million for the six month period ended June 30, 2009, compared to cash provided by investing activities of $4.3 million for the six month period ended June 30, 2008. Our investing activities for the six month period ended June 30, 2009 consisted primarily of purchases of property, plant and equipment of $1.9 million. Our investing activities for the six months ended June 30, 2008 consisted primarily of purchases of property, plant and equipment of $2.1 million, offset by cash acquired with the merger with TMI, net of transaction costs of $1.3 million, and proceeds from the sale of marketable securities of $5.2 million.
Our cash provided by financing activities was $348,000 for the six months ended June 30, 2009 compared to cash used in financing activities of $684,000 for the six month period ended June 30, 2008. Cash provided by financing activities for the six months ended June 30, 2009 consisted primarily of net payments on short-term obligations of $2.9 million and payments on long-term obligations of $2.4 million, offset by proceeds from long-term obligations of $5.5 million. Cash used in financing activities for the six months ended June 30, 2008 consisted of payments on long-term obligations of $2.2 million, offset by proceeds from exercise of stock options of $1.5 million.
Liquidity.
As of June 30, 2009, we had $14.2 million of cash and cash equivalents. In July 2009 we received $8.0 million in fees for new exclusive distribution rights. We believe that our working capital as of June 30, 2009, together with the subsequent payment in July, anticipated cash generated from operations and our borrowing ability under our revolving credit facilities, will be adequate to fund our on-going operations for the next twelve months.
Certain Commitments.
On November 24, 2008, we entered into a License Agreement with LifeNet Health, Inc. ("LifeNet") to license from LifeNet certain intellectual property rights that may be used in or useful to our tissue processing efforts. The term of the License Agreement is for seven years or the remaining life of any patent covered by the License Agreement, whichever is longer. Total monetary consideration for the License Agreement is $4.9 million, to be paid in five annual installments of $1.0 million in each of November 2008 through 2012.
On May 14, 2007, we entered into an exclusive distribution agreement with Zimmer with an initial term of 10 years, relating to certain new bone graft substitutes products. As part of the agreement, Zimmer has agreed to make three payments to us totaling $5.0 million for the aforementioned exclusive distribution rights, and maintain certain minimum order volumes commencing in 2010. The first payment of $1.0 million was made at the time of entering the agreement. The second payment of $2.0 million was made in the first quarter of 2008. As a result of a product launch delay, the final payment of $2.0 million is expected to be paid in the third quarter of 2009. The $5.0 million exclusivity payment has been deferred and is being recognized as other revenue on a straight-line basis over the initial term of the contract. The contract provides for repayment, on a pro rata basis, of the exclusivity payments during the initial contract term for specific events of non-performance, as defined in the agreement. The agreement also includes automatic two-year renewal terms, as well as buy-out provisions by both parties upon proper notice of cancellation.
The Company's short-term and long-term obligations and availability of credit at June 30, 2009 are as follows:
Outstanding Available
Balance Credit
(In thousands)
Short-term:
Revolving credit facilities $ 1,201 $ 1,187
Long-term:
Revolving credit facility 2,000 4,703
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