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BONE > SEC Filings for BONE > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for BACTERIN INTERNATIONAL HOLDINGS, INC.

Form 10-Q for BACTERIN INTERNATIONAL HOLDINGS, INC.


12-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements relating to the intended usage and markets for our products and services, the market for our common stock, the ability of our sales force to achieve expected results; and our liquidity, results of operations, and ability to meet our anticipated cash requirements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including those set forth under "Risk Factors" in this Quarterly Report on Form 10-Q.

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes set forth in this report. Unless the context otherwise requires, "we," "our," "us" and similar expressions used in this Management's Discussion and Analysis of Financial Condition and Results of Operation section refer to Bacterin International, Inc., a Nevada corporation ("Bacterin").

Comparison of Three Months Ended March 31, 2014 and March 31, 2013

Revenue

Total revenue for the first quarter ended March 31, 2014 increased 3% to $8,912,970 compared to $8,618,807 for the first quarter of 2013. The first quarter of 2013 revenue included approximately $1,300,600 associated with a non-recurring stocking order sale. This increase in core recurring revenues is due to improved sales force productivity realized through a reorganization of the sales function, as well as increase revenues derived from our independent distributors.

Cost of tissue sales

Costs of tissue sales consist primarily of tissue and device manufacturing costs. Costs of tissue sales increased by 9% or $290,019 to $3,410,705 for the first quarter of 2014 from $3,120,686 for the first quarter of 2013. As a percentage of sales, cost of sales was 38.2% of revenues for the first quarter of 2014 compared to 36.2% for the first quarter of 2013. The increase is the result of a change in product and customer mix between the two periods.

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 decreased, $37,275 for the three months ended March 31, 2014 compared to the same period of 2013, 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 11%, or $283,199, to $2,288,803, for the first quarter of 2014 compared to the first quarter of 2013. The decrease is primarily due to headcount reductions made in March and May of 2013.

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. Stock option compensation expense associated with our sales force is also included in sales and marketing expenses. Selling and marketing expenses increased 6%, or $256,827, to $4,055,204 for the three months ended March 31, 2014 from $3,798,377 for the comparable prior year period. The increase is due to higher commissions earned by our direct sales force and independent distributors compared to the comparable prior period. As a percentage of revenue, selling and marketing expenses increased to 45.5% in the first quarter of 2014 from 44.1% in the first quarter of 2013 but decreased sequentially from 48.0% in the fourth quarter of 2013.

Research and development

Research and development expenses consist primarily of internal costs for the development of new technologies and processes for tissue and coatings. Research and development expenses decreased $30,497 or 11% from $285,080 for the three months ended March 31, 2013 to $254,583 for the same period of 2014.

Depreciation

Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense decreased 29% to $75,148 for the three months ended March 31, 2014 from $106,378 for the three months ended March 31, 2013. The decrease reflects more assets being fully depreciated as of March 31, 2014.

Non-cash Consulting Expense

Non-cash consulting expense consists of non-cash expense associated with granting restricted stock to consultants. Non-cash consulting expense increased $50,824 to $20,527 for the first quarter of 2014 from income of $30,297 in the first quarter of 2013. The increase is due to the higher closing price of the Company's common stock at for the three months ended March 31, 2014.

Other Income (Expense)

Other expenses include interest, warrant derivative liability changes and other miscellaneous items. Other expenses increased 576%, or $2,512,417, for the three months ended March 31, 2014 compared to the same period of 2013, primarily due to the reasons set forth below.

Interest Expense

Interest expense is from our promissory notes. Interest expense for the first three months of 2014 increased $211,624 to $1,275,612 as compared to $1,063,988 in the first three months of 2013. The increase was the result of a higher average debt balance in 2014.

Change in Warrant Derivative Liability

For the first quarter of 2014, the Company recorded a loss in its non cash warrant derivative liability of $1,485,729, which was primarily driven by the increase in the closing price of the Company's common stock at March 31, 2014 compared to December 31, 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.

Other Income (Expense)

Other expense for the first three months of increased $179,709 to $186,914 as compared to expense of $7,206 in the first three months of 2013. The increase was a result of legal settlement costs accrued as of the end of the quarter. See Note 10, "Commitments and Contingencies" above.

Liquidity and Capital Resources

In March 2014, we borrowed an additional $4 million from ROS Acquisition Offshore LP under our Credit Agreement with ROS. 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 withROS 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 March 31, 2014, we had $10,297,487 of cash and cash equivalents and accounts receivables.

Net cash used in operating activities the first quarter of 2014 was $2,188,889. This was primarily related to cash used to fund our operations offset by changes in accounts payable. For the comparable period of 2013, net cash used in operating activities was $2,281,598.

Net cash used in investing activities for the first quarter of 2014 was $18,860, primarily due to the purchase of property and equipment.

Net cash provided by financing activities was $3,930,031 for the first quarter of 2014, which was primarily related to the extension of credit by ROS in the first quarter of 2014.

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 March 31, 2014 cash on hand and accounts receivable balance of $10,297,487 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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