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BONE > SEC Filings for BONE > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for BACTERIN INTERNATIONAL HOLDINGS, INC.

Form 10-K for BACTERIN INTERNATIONAL HOLDINGS, INC.


27-Mar-2014

Annual Report


Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation

Safe Harbor Declaration

The comments made throughout this Annual Report on Form 10-K should be read in conjunction with our Financial Statements and the Notes thereto, and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words "believes," "anticipates," "expects," "plan," "possible," "should," "might," "may" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors that affect our business, which are described in the section entitled "Risk Factors" in Item 1A of this Form 10-K.

Comparison of Twelve Months Ended December 31, 2013 and December 31, 2012



                                                  Twelve Months Ended December 31,
                                               2013                              2012
                                                        % of                             % of
                                      Amount           Revenue          Amount          Revenue
Revenue
Tissue sales                       $  32,563,933           98.46 %   $ 32,414,026           98.28 %
Royalties and other                      509,481            1.54 %        565,873            1.72 %
Total Revenue                         33,073,414          100.00 %     32,979,899          100.00 %

Cost of sales                         14,185,719           42.89 %     10,337,303           31.34 %

Gross Profit                          18,887,695           57.11 %     22,642,596           68.66 %

Operating Expenses
General and administrative            10,777,020           32.34 %     11,135,058           33.76 %
Sales and marketing                   16,017,229           48.47 %     15,617,416           47.35 %
Depreciation and amortization            377,524            1.14 %        406,888            1.23 %
Impairment of Goodwill                   728,618            2.20 %              -            0.00 %
Non-cash consulting expense               (5,117 )         -0.02 %        427,787            1.30 %
Total Operating Expenses              27,895,274           84.15 %     27,587,149           83.65 %

Loss from Operations                  (9,007,579 )        -27.04 %     (4,944,553 )        -14.99 %

Other Income (Expense)
Interest expense                      (4,653,232 )        -14.07 %     (1,864,901 )         -5.65 %
Change in warrant derivative
liability                                875,041            3.06 %      1,360,160            4.12 %
Other income (expense)                    92,645            0.28 %     (2,264,528 )         -6.87 %

Total Other Income (Expense)          (3,685,546 )        -10.73 %     (2,769,269 )         -8.40 %

Net Loss Before Benefit
(Provision) for Income Taxes         (12,693,125 )        -37.77 %     (7,713,822 )        -23.39 %

Benefit (Provision) for Income
Taxes
Current                                        -            0.00 %              -            0.00 %
Deferred                                       -            0.00 %              -            0.00 %

Net Income (Loss)                  $ (12,693,125 )        -37.77 %   $ (7,713,822 )        -23.39 %

Revenue

Total revenue for the year ended December 31, 2013 increased slightly to $33,073,414 compared to $32,979,899 in the prior year. The increase of $93,515 was largely the result of increased sales generated from our direct sales force and independent distributors compared to 2012. Since 2009, we have been transitioning from a 100% distributor based sales model to a hybrid model which includes sales from our direct sales force as well as independent distributors which has increased the market penetration of our products.

Cost of tissue sales

Costs of tissue sales consist primarily of tissue and device manufacturing costs. Costs of tissue sales increased by 37.2% or $3,848,416 to $14,185,719 for the year ended December 31, 2013 from $10,337,303 for the year ended December 31, 2012. As a percentage of tissue sales, cost of tissue sales was 42.9% of revenues for 2013 compared to 31.3% in 2012. The increase is the result of changes in product mix, one time adjustments for aged and expiring inventory, and scrap resulting from process improvements for the hMatrix product line. Excluding the adjustments for aged and expiring inventory and the scrap related to process improvements, cost of tissue sales was 36.2% of revenues in 2013.

Operating Expenses

Operating expenses include general and administrative expenses, selling and marketing expenses, depreciation, research and development expenses, and compensation costs, including incentive compensation. Operating expenses increased 1%, or $308,125, for the year ended December 31, 2013 compared to the year ended December 31, 2012, primarily due to the reasons set forth below.

General and Administrative

General and administrative expenses consist principally of corporate personnel cash based and stock option compensation related costs and corporate expenses for legal, accounting and other professional fees as well as occupancy costs. General and administrative expenses decreased 3%, or $358,038, to $10,777,020, for the year ended December 31, 2013 compared to 2012.

Selling and Marketing

Selling and marketing expenses primarily consist of costs for trade shows, sales conventions and meetings, travel expenses, advertising and other sales and marketing related costs. In addition, stock option compensation expense associated with our sales force is also included in sales and marketing expenses. Selling and marketing expenses increased 3%, or $399,813, to $16,017,229 for the twelve months ended December 31, 2013 from $15,617,416 for the prior year. As a percentage of revenue, selling and marketing expenses increased slightly to 48.5% in 2013 from 47.4% in the prior year. The Company is in the process of dramatically reorganizing the sales function with the goal of increasing the efficiency and productivity of the sales force.

Depreciation

Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense decreased 7% to $377,524 for the year ended December 31, 2013 from $406,888 in 2012.

Non-cash Consulting Expense

Non-cash consulting expense consists of non-cash expense associated with granting restricted stock to consultants. Non-cash consulting expense decreased $432,904 to negative $5,117 for the year ended December 31, 2013 from $427,787 in the prior year, a decrease of 101%. The decrease is due to the lower closing price of the Company's common stock during 2013 which also resulted in previously accrued non-cash consulting expense to be revised downward.

Interest Expense

Interest expense is from our promissory notes and debt instruments. Interest expense for 2013 increased $2,788,331 to $4,653,232 as compared to $1,864,901 in 2012. The increase was the result a higher average debt balance in 2013 and the higher interest rate related to the 2012 debt financing with ROS Acquisition Offshore LP.

Change in Warrant Derivative Liability

For 2013, the Company recorded a gain from a decrease in its non cash warrant derivative liability of $875,041 which was primarily driven by the decrease in the closing price of the Company's common stock at December 31, 2013 compared to December 31, 2012 which was partially offset by the issuance of additional derivative warrants in 2013. The liability is associated with the issuance of warrants as part of the Company's prior convertible debt financing, the Company's 2010 financing and the Company's 2013 equity financing which contain anti dilution adjustment provisions and are accounted for as derivative instruments with any changes in fair value is recognized in the consolidated statement of operations during the period of change.

Write-off of Debt Related Expenses and Other Expense

Other Income for 2013 was $92,565 as compared to an expense of $2,264,528 in 2012. For 2012, the Company recorded a non-cash charge of approximately $706,000 of debt discounts and loan origination fees written off in addition to approximately $944,000 of prepayment penalties related to the term financing with MidCap and Silicon Valley Bank that was prepaid in connection with the new 2012 term loan financing withROS Acquisition Offshore LP. In addition, 2012 also included the amortization of the higher prepaid and loan origination fees from the 2012 ROS Acquisition Offshore LP financing as well as approximately $342,000 for warrants issued for services.

After reviewing the full year product line sales associated with the goodwill asset and the fact that the sales were not meeting original projections, management engaged an independent third party to review the asset for impairment in accordance with and pursuant to ASC 350 and ASC 360-10. The implied fair value of the goodwill was determined in the same manner as the amount of goodwill recognized in a business combination, as determined under ASC 805. The independent third party concluded that the goodwill asset was in fact impaired and should be written down fully to $0 indicating a goodwill impairment amount of $728,618.

Liquidity and Capital Resources

Since our inception, we have historically financed our operations through operating cash flows, as well as the private placement of equity securities and convertible debt, an equity credit line and other debt transactions. In March 2014, we received an additional $4 million in term loan debt from ROS Acquisition Offshore LP. In June 2013, the Company closed on a $4.5 million equity financing with existing and new investors. In August 2012, we closed on a $20 million term loan transaction with ROS Acquisition Offshore LP. The proceeds of the term loan transaction were used to pay off the previous loans with MidCap Financial LLC and Silicon Valley Bank of approximately $9.3 million with the remainder adding to our working capital. At December 31, 2013, we had $7,840,174 of cash and cash equivalents and accounts receivables.

Net cash used in operating activities for 2013 was $5,620,924, primarily related to funds required to finance the Company's operations. For 2012, net cash used in operating activities was $10,792,332. The decrease in net cash used in operations between 2013 and 2012 is primarily the result of decreases, net of reserve adjustments in the Company's inventory and accounts receivable balances between the two periods.

Net cash provided by investment activities for 2013 was $35,318 due to the purchase of property and equipment and increases in intangible assets offset by an impairment of goodwill charge of $728,618 recorded in the fourth quarter of 2013.

Net cash provided by financing activities was $3,705,880 for 2013 primarily due to proceeds from the sale of equity securities which is net of financing fees and warrants issued in conjunction with the equity securities and partially offset by payments and debt and capital lease obligations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that are material to an investor in our shares.

Cash Requirements

We believe that our December 31, 2013 cash on hand and accounts receivable balance of $7,840,174, net proceeds from the additional $4,000,000 of term loan debt received from ROS Acquisition Offshore LP in March 2014 and anticipated cash receipts from sales expected from operations will be sufficient to meet our anticipated cash requirements through March 31, 2015. We incurred approximately $16 million in sales and marketing expenses in 2013 and expect to incur $17 million in 2014 based upon our current sales estimates. The sales and marketing expenses are largely variable expenses and are anticipated to be funded from operating cash flow. An increase of these expenses may impact our operating results and there can be no assurance of their effectiveness. If we do not meet our revenue objectives over that period, we may need to sell additional equity securities, which could result in dilution to our stockholders, or seek additional loans. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

In addition, we currently anticipate that we will need to spend between $4 and $5 million over the next 5 years in order to increase, expand or update our existing facilities to meet our expected growth over that period.

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