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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0-31271

 

 

RTI BIOLOGICS, INC.

 

 

 

Delaware		59-3466543
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

11621 Research Circle

Alachua, Florida 32615

(386) 418-8888

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.)    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    Large Accelerated Filer  ¨    Accelerated Filer   x    Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

Shares of common stock, $0.001 par value, outstanding on August 3, 2010: 54,806,762

 

 

 

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RTI BIOLOGICS, INC.

FORM 10-Q For the Quarter Ended June 30, 2010

Index

 

				Page #
Part I Financial Information
Item 1		Condensed Consolidated Financial Statements (Unaudited)		1 – 13
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations		14 – 20
Item 3		Quantitative and Qualitative Disclosures About Market Risk		21
Item 4		Controls and Procedures		21
Part II Other Information
Item 1		Legal Proceedings		22
Item 1A		Risk Factors		22
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3		Defaults Upon Senior Securities		22
Item 5		Other Information		23
Item 6		Exhibits		23

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RTI BIOLOGICS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share data)

(Unaudited)

 

		June 30, 2010				December 31, 2009
Assets
Current Assets:
Cash and cash equivalents		$	17,729			$	17,382
Accounts receivable - less allowances of $1,287 at June 30, 2010 and $1,296 at December 31, 2009			18,962				22,228
Inventories - net			90,777				93,935
Prepaid and other current assets			3,676				2,066
Deferred tax assets - net			16,490				17,331
Total current assets			147,634				152,942
Property, plant and equipment - net			43,955				46,562
Deferred tax assets - net			7,918				7,007
Goodwill			134,681				134,681
Other intangible assets - net			11,523				12,301
Other assets - net			893				1,014
Total assets		$	346,604			$	354,507
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable		$	17,074			$	19,844
Accrued expenses			11,434				11,707
Short-term obligations			827				2,101
Deferred tax liabilities			668				839
Current portion of deferred revenue			1,451				1,645
Current portion of long-term obligations			1,347				1,862
Total current liabilities			32,801				37,998
Long-term obligations - less current portion			9,912				11,029
Other long-term liabilities			3,956				5,104
Deferred tax liabilities			156				106
Deferred revenue			9,752				10,381
Total liabilities			56,577				64,618
Stockholders’ equity:
Common stock, $.001 par value: 150,000,000 shares authorized; 54,803,762 and 54,553,062 shares issued and outstanding, respectively			55				55
Additional paid-in capital			407,884				406,339
Accumulated other comprehensive loss			(2,675	)			(374	)
Accumulated deficit			(115,223	)			(116,117	)
Less treasury stock, 133,296 shares, at cost			(14	)			(14	)
Total stockholders’ equity			290,027				289,889
Total liabilities and stockholders’ equity		$	346,604			$	354,507

See notes to condensed consolidated financial statements.

 

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RTI BIOLOGICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Revenues:
Fees from tissue distribution		$	40,212			$	39,844			$	77,106			$	77,405
Other revenues			968				1,287				1,853				2,349
Total revenues			41,180				41,131				78,959				79,754
Costs of processing and distribution			22,322				22,332				43,044				42,804
Gross profit			18,858				18,799				35,915				36,950
Expenses:
Marketing, general and administrative			14,963				15,128				29,305				30,064
Research and development			2,254				1,831				4,934				3,656
Restructuring charges			—				—				—				42
Asset abandonments			—				83				15				83
Total expenses			17,217				17,042				34,254				33,845
Operating income			1,641				1,757				1,661				3,105
Other (expense) income:
Interest expense			(141	)			(130	)			(307	)			(253	)
Interest income			27				87				63				198
Foreign exchange gain (loss)			26				(142	)			48				(37	)
Total other expense - net			(88	)			(185	)			(196	)			(92	)
Income before income tax provision			1,553				1,572				1,465				3,013
Income tax provision			(605	)			(551	)			(571	)			(960	)
Net income		$	948			$	1,021			$	894			$	2,053
Net income per common share - basic		$	0.02			$	0.02			$	0.02			$	0.04
Net income per common share - diluted		$	0.02			$	0.02			$	0.02			$	0.04
Weighted average shares outstanding - basic			54,729,595				54,265,017				54,652,704				54,240,041
Weighted average shares outstanding - diluted			55,061,127				54,744,921				54,993,690				54,627,627

See notes to condensed consolidated financial statements.

 

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RTI BIOLOGICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Cash flows from operating activities:
Net income		$	948			$	1,021			$	894			$	2,053
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization expense			1,820				1,876				3,643				3,681
Amortization of deferred financing costs			19				18				38				35
Provision for bad debts and product returns			119				112				183				130
Provision for inventory write-downs			204				234				1,201				687
Amortization of deferred revenue			(343	)			(522	)			(803	)			(1,082	)
Deferred income tax provision (benefit)			336				166				(78	)			(133	)
Stock-based compensation			472				413				811				836
Tax benefit attributable from exercise of stock options			—				28				—				28
Excess tax benefit from exercise of stock options			—				(10	)			—				(10	)
Loss on asset abandonments			—				83				15				83
Change in assets and liabilities:
Accounts receivable			(1,505	)			2,468				2,573				(882	)
Inventories			2,207				(5,978	)			965				(14,333	)
Prepaid and other current assets			(561	)			(580	)			(1,710	)			(868	)
Other long-term assets			54				21				54				(437	)
Accounts payable			(2,224	)			3,483				(2,975	)			7,517
Accrued expenses			1,733				(352	)			84				(2,138	)
Other long-term liabilities			(821	)			(65	)			(1,119	)			671
Net cash provided by (used in) operating activities			2,458				2,416				3,776				(4,162	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(347	)			(1,600	)			(661	)			(1,908	)
Proceeds from sale of property, plant and equipment			—				18				—				18
Patent costs			(106	)			(112	)			(223	)			(224	)
Net cash used in investing activities			(453	)			(1,694	)			(884	)			(2,114	)
Cash flows from financing activities:
Proceeds from exercise of common stock options			483				80				745				99
Excess tax benefit from exercise of common stock options			—				10				—				10
Net payments on short-term obligations			(250	)			(1,647	)			(1,049	)			(2,882	)
Proceeds from long-term obligations			1,500				4,049				4,250				5,549
Payments on long-term obligations			(3,506	)			(2,127	)			(6,439	)			(2,428	)
Net cash (used in) provided by financing activities			(1,773	)			365				(2,493	)			348
Effect of exchange rate changes on cash and cash equivalents			(56	)			19				(52	)			19
Net increase (decrease) in cash and cash equivalents			176				1,106				347				(5,909	)
Cash and cash equivalents, beginning of period			17,553				13,061				17,382				20,076
Cash and cash equivalents, end of period		$	17,729			$	14,167			$	17,729			$	14,167

See notes to condensed consolidated financial statements.

 

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RTI BIOLOGICS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2010

(In thousands)

(Unaudited)

 

		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Accumulated Deficit				Treasury Stock				Total
Balance, December 31, 2009		$	55		$	406,339			$	(374	)		$	(116,117	)		$	(14	)		$	289,889
Net income			—			—				—				894				—				894
Foreign currency translation adjustment			—			—				(2,301	)			—				—				(2,301	)
Comprehensive income for the six months ended June 30, 2010			—			—				(2,301	)			894				—				(1,407	)
Exercise of common stock options			—			745				—				—				—				745
Stock-based compensation			—			811				—				—				—				811
Change in tax benefit from stock-based compensation			—			(11	)			—				—				—				(11	)
Balance, June 30, 2010		$	55		$	407,884			$	(2,675	)		$	(115,223	)		$	(14	)		$	290,027

See notes to condensed consolidated financial statements.

 

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RTI BIOLOGICS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share data)

 

1.	Operations and Organization

We are a leader in the use of natural tissues and innovative technologies to produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. We process human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue, and bovine animal tissue in producing allograft and xenograft implants utilizing proprietary BIOCLEANSE® and TUTOPLAST® sterilization processes, for distribution to hospitals and surgeons. We process at two facilities in Alachua, Florida and one facility in Germany and distribute our products and services in all 50 states and in over 31 countries worldwide.

 

2.	Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The condensed consolidated financial statements include the accounts of RTI Biologics, Inc. (“RTI”) and its wholly owned subsidiaries, Tutogen Medical, Inc. (“TMI”), RTI Biologics, Inc. – Cardiovascular (inactive), Biological Recovery Group (inactive), and RTI Services, Inc. The condensed consolidated financial statements also include the accounts of RTI Donor Services, Inc. (“RTIDS”), which is a controlled entity. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance serving as the single source of authoritative non-governmental accounting principles generally accepted in the United States of America (the “Codification”). The codification changes the referencing of financial standards and is effective for interim or annual financial periods ending after September 15, 2009. The Company adopted the codification during the three months ended September 30, 2009 with no impact to its condensed consolidated financial statements.

In May 2009, the FASB issued authoritative guidance that provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted this guidance as required in the second quarter of 2009 with no impact to its consolidated financial statements. The Company evaluated subsequent events as of the issuance date of the financial statements, August 9, 2010.

 

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3.	Other Intangible Assets

Other intangible assets are as follows:

 

		June 30, 2010						December 31, 2009
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Patents		$	4,391		$	930		$	4,433		$	879
Acquired exclusivity rights			2,941			1,485			2,941			1,300
Acquired licensing rights			5,850			1,156			5,850			758
Procurement contracts			1,755			369			1,755			331
Selling and marketing relationships			500			203			500			170
Customer lists			345			319			406			364
Non-compete agreements			275			96			275			83
Trademarks			58			34			58			32
Total		$	16,115		$	4,592		$	16,218		$	3,917

Amortization expense of other intangible assets for the three months ended June 30, 2010 and 2009 was $390 and $401, respectively, and for the six months ended June 30, 2010 and 2009 was $780 and $776, respectively. Management estimates amortization expense of $1,600 per year for the next five years.

 

4.	Stock-Based Compensation

The Company has five stock-based compensation plans under which employees, consultants and outside directors have received stock options and other equity-based awards. At June 30, 2010, awards relating to 6,535,217 shares were outstanding, and 5,048,781 shares remained available for grant of awards under our plans. For the three and six months ended June 30, 2010, 999,000 and 1,024,000 stock options, respectively, were granted under the plans. Stock options are granted with an exercise price equal to 100% of the market value of a share of common stock on the date of the grant, generally have ten-year contractual terms, and vest over a one to five year period from the date of grant.

2010 Equity Incentive Plan—On April 20, 2010, the Company’s stockholders approved and adopted the 2010 Equity Incentive Plan, (the “2010 Plan”). The 2010 Plan provides for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company, and consultants and advisors. The option price per share may not be less than 100% of the fair market value of such shares on the date granted. The 2010 Plan allows for up to 5,000,000 shares of common stock to be issued with respect to awards granted. Awards or shares which are forfeited, surrendered or otherwise terminated are available for further awards; provided, however, that any such shares that are surrendered in connection with any award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under Internal Revenue Service (“IRS”) Code Section 422.

2004 Equity Incentive Plan—In 2004, the Company adopted an equity incentive plan (the “2004 Plan”) which provides for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company, and consultants and advisors. The option price per share may not be less than 100% of the fair market value of such shares on the date granted. The 2004 Plan allows for up to 2,000,000 shares of common stock to be issued with respect to awards granted. Awards or shares which are forfeited, surrendered or otherwise terminated are available for further awards; provided, however, that any such shares that are surrendered in connection with any award or that are otherwise forfeited after issuance shall not be available for purchase pursuant to incentive stock options intended to qualify under IRS Code Section 422.

1998 Stock Option Plan—In July 1998, the Company adopted a stock option plan (the “1998 Plan”) which provides for the grant of incentive and nonqualified stock options to key employees, including officers and directors of

 

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the Company, and consultants and advisors. The option price per share may not be less than 100% of the fair market value of such shares on the date such option is granted. The 1998 Plan allows for up to 4,406,400 shares of common stock to be issued with respect to awards granted. New stock options may no longer be awarded under the 1998 Plan.

TMI 1996 Stock Option Plan and TMI 2006 Incentive and Non-Statutory Stock Option Plan—In connection with the merger with TMI, the Company assumed the TMI 1996 Stock Option Plan and the TMI 2006 Incentive and Non-Statutory Stock Option Plan (“TMI Plans”). The TMI Plans allow for 4,880,000 and 1,830,000 shares of common stock, respectively, which may be issued with respect to stock options granted to former TMI employees or employees of the Company hired subsequent to the TMI acquisition. New stock options may no longer be awarded under the TMI 1996 Stock Option Plan.

Stock options outstanding, exercisable and available for grant at June 30, 2010 are summarized as follows:

 

		Number of Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2010		6,259,952			$	6.20
Granted		1,024,000				4.07
Exercised		(250,700	)			3.02
Forfeited or expired		(498,035	)			7.82
Outstanding at June 30, 2010		6,535,217			$	5.86		5.47		$	428
Vested or expected to vest at June 30, 2010		6,232,277			$	5.95		5.28		$	428
Exercisable at June 30, 2010		4,659,217			$	6.43		4.07		$	428
Available for grant at June 30, 2010		5,048,781

Outstanding options under all option plans vest over a one to five year period. Options expire ten years from the date of grant. The weighted-average grant-date fair value of options granted for the six months ended June 30, 2010 and 2009 was $2.58 and $1.79, respectively. The total intrinsic value of options exercised for the six months ended June 30, 2010 and 2009 was $238 and $76, respectively. The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the stock option. This amount changes based on the fair market value of the Company’s stock. Cash received from option exercises for the six months ended June 30, 2010 was $745.

As of June 30, 2010, there was $3,838 of total unrecognized stock-based compensation related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 3.6 years.

 

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For the three and six months ended June 30, 2010 and 2009, the Company recognized stock-based compensation as follows:

 

		Three Months Ended June 30,						Six Months ended June 30,
		2010			2009			2010			2009
Stock-based compensation:
Costs of processing and distribution		$	38		$	72		$	77		$	144
Marketing, general and administrative			404			316			674			642
Research and development			30			25			60			50
Total		$	472		$	413		$	811		$	836

 

5.	Earnings Per Share

A reconciliation of the number of shares of common stock used in the calculation of basic and diluted earnings per share (“EPS”) is presented below:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2010		2009		2010		2009
Basic shares		54,729,595		54,265,017		54,652,704		54,240,041
Effect of dilutive securities:
Stock options		331,532		479,904		340,986		387,586
Diluted shares		55,061,127		54,744,921		54,993,690		54,627,627

For the three months ended June 30, 2010 and 2009, approximately 5,501,000 and 5,614,000 , respectively, and for the six months ended June 30, 2010 and 2009, approximately 5,293,000 and 5,673,000, respectively, of issued stock options were not included in the computation of diluted EPS because they were anti-dilutive since their exercise price exceeded their market price.

 

6.	Inventories

Inventories by stage of completion are as follows:

 

		June 30, 2010			December 31, 2009
Unprocessed donor tissue		$	26,214		$	26,986
Tissue in process			34,327			40,821
Implantable donor tissue			28,611			24,641
Supplies			1,625			1,487
		$	90,777		$	93,935

For the three months ended June 30, 2010 and 2009, the Company had inventory write-downs of $204 and $234, respectively, and for the six months ended June 30, 2010 and 2009, the Company had inventory write-downs of $1,201 and $687, respectively, relating primarily to product obsolescence.

 

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7.	Property, Plant and Equipment

Property, plant and equipment are as follows:

 

		June 30, 2010				December 31, 2009
Land		$	1,735			$	1,898
Buildings and improvements			43,653				44,713
Processing equipment			28,235				28,919
Office equipment, furniture and fixtures			2,330				2,351
Computer equipment and software			3,443				3,823
Construction in process			250				233
Equipment under capital leases:
Processing equipment			285				285
Computer equipment and software			744				—
			80,675				82,222
Less accumulated depreciation and amortization			(36,720	)			(35,660	)
		$	43,955			$	46,562

Depreciation and amortization expense of property, plant and equipment including amortization of assets held under capital leases, was $1,430 and $1,475 for the three months ended June 30, 2010 and 2009, respectively, and $2,863 and $2,905 for the six months ended June, 30, 2010 and 2009, respectively.

 

8.	Accrued Expenses

Accrued expenses are as follows:

 

		June 30, 2010			December 31, 2009
Accrued compensation		$	3,238		$	2,783
Accrued donor recovery fees			881			2,001
Accrued distributor fees and marketing commissions			1,273			1,237
Accrued severance			247			517
Accrued licensing fees			1,630			1,550
Accrued taxes			187			184
Accrued professional service fees			489			246
Other			3,489			3,189
		$	11,434		$	11,707

The Company accrues for the estimated donor recovery fees due to third party recovery agencies as tissue is received.

 

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9.	Short and Long-Term Obligations

Short and long-term obligations are as follows:

 

		Current Interest Rate				Maturity Date		June 30, 2010							December 31, 2009
								(Euro)			(US Dollar)				(Euro)			(US Dollar)
Short-term obligations
Germany
Credit facilities:
Line of credit - 1		5.25%		(1)		None		€	228		$	279			€	779		$	1,117
Line of credit - 2		3.15%		(1)		None			432			527				492			705
Line of credit - 3		6.18%		(1)		None			17			21				195			279
Total short-term obligations									€677		$	827			€	1,466		$	2,101
Long-term obligations
United States
Credit facility		2.75%		(3)		2/2011						7,254						$	8,004
Term loan - 1		3.25%		(4)		2/2011						—							500
Term loan - 2		4.55%		(5)		6/2013						636							741
Germany
Term loans:
Senior debt		5.00%		(2)		6/2011			97			118				147			211
Construction I		5.15%		(2)		3/2012			438			535				563			807
Construction II		5.60%		(2)		12/2016			715			873				770			1,104
Construction III		5.75%		(2)		9/2012			117			143				143			205
Construction IV		4.95%		(2)		6/2014			720			879				810			1,161
Capital leases		5.00%-8.46%				5/2010 - 5/2013			—			821				—			158
Total long-term obligations								€	2,087		$	11,259			€	2,433		$	12,891
Less current portion												(1,347	)						(1,862	)
Long-term portion											$	9,912						$	11,029

 

(1)	Fixed interest rate is negotiated periodically for terms no less than six months

(2)	Fixed interest rates

(3)	LIBOR plus 2.5% to 3.5%

(4)	LIBOR plus 3.0%

(5)	Prime plus 1.3%

On June 11, 2009, the Company entered into an amended credit agreement with Mercantile Bank, a division of Carolina First Bank. The amended agreement provided for an additional term loan to finance certain equipment of $848 maturing on June 11, 2013, subject to acceleration upon the occurrence of an event of default, including but not limited to a failure to maintain certain financial ratios. The additional term loan is payable monthly at $18 plus interest at prime rate plus 1.3%. On July 21, 2010, the Company entered into an amended credit agreement with Mercantile Bank, a division of Carolina First Bank. Accordingly, the Company has classified the credit facility as a long term obligation (see Note 14, Subsequent Events).

 

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The revolving credit facility with a U.S. bank contains various restrictive covenants which limit, among other things, indebtedness and liens and requires minimum cash balances. Under the agreement, the credit facility and term loans are secured by the Company’s domestic accounts receivable, inventory and certain processing equipment. The Company is required to maintain an average cash balance of $5,000 with the financial institution.

Under the terms of the revolving credit facilities with three German banks, the Company may borrow up to 1,700 Euros, or approximately $2,075 for working capital needs. The 1,000 Euro revolving credit facility is secured by a mortgage on the Company’s German facility and a 4,000 Euro guarantee by the Company. The 500 Euro revolving credit facility is secured by accounts receivable of the Company’s German subsidiary.

The Company was in compliance with all covenants related to its credit facilities and term loans as of June 30, 2010.

At June 30, 2010, the Company had an outstanding interest rate swap agreement relating to the German term loan of 438 Euro, or $535 maturing March 31, 2012. Under this agreement, the Company pays a fixed interest rate of 5.15%. Payments or receipts on the agreement are recorded as adjustments to interest expense. Such adjustments have not been significant.

As of June 30, 2010, contractual maturities of long-term obligations are as follows:

 

		Term Loans			Capital Leases			Credit Facilities			Total
2010		$	611		$	152		$	—		$	763
2011			928			275			7,254			8,457
2012			684			276			—			960
2013			439			118			—			557
2014 and beyond			522			—			—			522
		$	3,184		$	821		$	7,254		$	11,259

 

10.	Income Taxes

As of June 30, 2010, the Company has federal net operating loss carryforwards of $13,602 that will expire in the years 2025 through 2028, as well as state net operating loss carryforwards of $21,651 that will expire in the years 2021 through 2027.

As of June 30, 2010, the Company has research tax credit carryforwards of $4,425 that will expire in years 2018 through 2028, as well as alternative minimum tax credit carryforwards of $689 that are carried forward indefinitely.

The Company expects the domestic net deferred tax assets of approximately $24,408, including the valuation allowance at June 30, 2010 of $469, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences. Valuation allowances have been recorded for certain state tax loss carryforwards as the Company does not believe that it will have future income in the state to utilize the tax loss carryforwards.

United States income taxes have not been provided on the undistributed earnings of the Company’s German subsidiary. It is not practicable to estimate the amount of tax that might be payable. The Company’s intention is to reinvest these earnings permanently.

 

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11.	Supplemental Disclosures of Cash Flow and Noncash Investing and Financing Activities

Selected cash payments, receipts, and noncash activities are as follows:

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2010				2009			2010				2009
Cash paid for interest		$	121			$	117		$	260			$	191
Income taxes paid			33				40			172				158
Purchases of property, plant and equipment financed through capital leases			744				—			744				264
Accrual for purchases of property, plant and equipment			1,413				610			1,413				610
Income tax effect from non-qualified stock option exercises			(8	)			28			(8	)			28

 

12.	Segment Data

The Company processes human and bovine animal tissue and distributes the tissue through various distribution channels. The Company’s one line of business is comprised primarily of five product categories: sports medicine, spine, dental, surgical specialties, and BGS general orthopedic. The following table presents revenues from tissue distribution and other revenues:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
Fees from tissue distribution:
Sports medicine		$	11,525		$	10,121		$	21,864		$	19,718
Spine			8,221			10,891			14,731			20,670
Dental			7,315			7,322			14,347			14,615
Surgical specialties			5,930			6,389			12,085			11,216
BGS general orthopedic			7,221			5,121			14,079			11,186
Other revenues			968			1,287			1,853			2,349
Total revenues		$	41,180		$	41,131		$	78,959		$	79,754
Domestic revenues			36,207			35,692			69,198			68,001
International revenues			4,973			5,439			9,761			11,753
Total revenues		$	41,180		$	41,131		$	78,959		$	79,754

For the three months ended June 30, 2010 and 2009, the Company derived approximately 17% and 20%, respectively, and for the six months ended June 30, 2010 and 2009, the Company derived approximately 16% and 22%, respectively, of its total revenues from Medtronic, Inc.

For the three months ended June 30, 2010 and 2009, the Company derived approximately 23% and 25%, respectively, and for the six months ended June 30, 2010 and 2009, the Company derived approximately 21% and 24%, respectively, of its total revenues from Zimmer, Inc.

For the three months ended June 30, 2010 and 2009, the Company derived approximately 12% and 13%, respectively, and for the six months ended June 30, 2010 and 2009 the Company derived approximately 12% and 15%, respectively, of its total revenues from foreign distribution.

As of June 30, 2010, the Company had $33,653 of property, plant and equipment located domestically, and $10,302 of property, plant and equipment located at its processing facility in Germany.

 

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13.	Commitments and Contingencies

In 2008, the Company was audited by the German VAT authorities and received an assessment for 600 Euros, or $846, for the year ended December 31, 2008. The Company estimates additional potential assessments of 1,580 Euros and 704 Euros, or $2,265 and $859 for the year ended December 31, 2009 and six months ended June 30, 2010, respectively. The Company does not believe that it is probable that it will ultimately be required to pay the assessment to the German VAT authorities.

The Company leases certain facilities, items of office equipment and vehicles under non-cancelable operating lease arrangements expiring on various dates through 2016. The facility leases generally contain renewal options and escalation clauses based upon increases in the lessors’ operating expenses and other charges. The Company anticipates that most of these leases will be renewed or replaced upon expiration. Future minimum lease commitments under non-cancelable operating leases as of June 30, 2010 are as follows:

 

		Operating Leases
2010		$	799
2011			1,044
2012			668
2013			283
After 2013			95
		$	2,889

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of these claims that were outstanding as of June 30, 2010 will have a material adverse impact on its financial position or results of operations.

The Company’s accounting policy is to accrue for legal costs as they are incurred.

 

14.	Subsequent Events

On July 21, 2010, the Company entered into an amended credit agreement with Mercantile Bank, a division of Carolina First Bank. Under the amended agreement, 1) the revolving credit facility was increased from $10,000 to $15,000, available based on levels of accounts receivable and inventories, 2) the revolving credit facility’s maturity date was extended from February 3, 2011 to July 21, 2012, and accordingly the debt is classified as long-term on the balance sheet, and 3) a $5,000 compensating balance requirement was eliminated.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 not seeing significant growth in elective surgeries in most of our markets which is impacting the performance in several of our revenue categories.

Our principal goals for 2010 are to build on our competitive strengths in the marketplace to increase revenues, profitability and cash flow as we focus on improved operational efficiency, productivity and asset management.

During 2010 we will maintain our commitment to research and development and introduce new strategically targeted allograft and xenograft implants and focus clinical efforts to support their market acceptance.

 

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Three and Six Months Ended June 30, 2010 Compared With Three and Six Months Ended June 30, 2009

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
		(In thousands)
Fees from tissue distribution:
Sports medicine		$	11,525		$	10,121		$	21,864		$	19,718
Spine			8,221			10,891			14,731			20,670
Dental			7,315			7,322			14,347			14,615
Surgical specialties			5,930			6,389			12,085			11,216
BGS and General Orthopedic			7,221			5,121			14,079			11,186
Other revenues			968			1,287			1,853			2,349
Total revenues		$	41,180		$	41,131		$	78,959		$	79,754
Domestic revenues			36,207			35,692			69,198			68,001
International revenues			4,973			5,439			9,761			11,753
Total revenues		$	41,180		$	41,131		$	78,959		$	79,754

Three Months Ended June 30, 2010 Compared With Three Months Ended June 30, 2009

Revenues. Our total revenues increased $49,000, or 0.1%, to $41.2 million for the three months ended June 30, 2010 compared to $41.1 million for the three months ended June 30, 2009.

Sports Medicine - Revenues from sports medicine allografts increased $1.4 million, or 13.9%, to $11.5 million for the three months ended June 30, 2010 compared to $10.1 million for the three months ended June 30, 2009. Sports medicine revenues increased primarily as a result of higher unit volumes of 5.6%, and higher average revenue per unit of 7.8%, due primarily to changes in product mix.

Spine - Revenues from spinal allografts decreased $2.7 million, or 24.5%, to $8.2 million for the three months ended June 30, 2010 compared to $10.9 million for the three months ended June 30, 2009. Spine revenues decreased primarily as a result of lower unit volumes of 25.6% due to a continued inventory reduction of approximately $2.0 million in the second quarter from our largest distributor.

Dental - Revenues from dental allografts decreased 0.1%, to $7.3 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Dental revenues decreased primarily as a result of lower average revenue per unit of 2.7% due to changes in product mix, offset by an increase in unit volumes of 2.7%. Elective dental surgeries have been negatively impacted by the global economic slowdown as patients continue to defer procedures as a result of the lack of medical insurance reimbursements in this area.

Surgical Specialties - Revenues from surgical specialty allografts decreased $459,000, or 7.2%, to $5.9 million for the three months ended June 30, 2010 compared to $6.4 million for the three months ended June 30, 2009. Surgical specialties revenues decreased as a result of lower unit volumes of 1.7% due to inventory reductions from our distributors, and a decrease in average revenue per unit of 5.6% due primarily to changes in product mix.

Bone Graft Substitutes (BGS) and General Orthopedic - Revenues from BGS and general orthopedic allografts increased $2.1 million, or 41.0%, to $7.2 million for the three months ended June 30, 2010 compared to $5.1 million for the three months ended June 30, 2009. BGS general orthopedic revenues increased primarily due to higher average revenues per unit of 14.1% due to changes in product mix and increases in unit volumes of 23.7% due to growth in unit volumes from new products introduced in the last eighteen months, increased distributor orders and increased market penetration through our direct distribution force both domestically and internationally.

 

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Other Revenues - Revenues from other sources, consisting of tissue recovery fees, biomedical laboratory fees, deferred revenues, shipping fees and distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees, decreased by $319,000 to $1 million for the three months ended June 30, 2010 compared to $1.3 million for the three months ended June 30, 2009.

Foreign Currency Fluctuations - For the three months ended June 30, 2010, foreign currency exchange fluctuations resulted in a decrease in total revenues of $292,000 due to a 6.3% increase 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 amounts were similar for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. As a percentage of revenues, costs of processing and distribution decreased from 54.3% for the three months ended June 30, 2009 to 54.2% for the three months ended June 30, 2010.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses decreased by $165,000, or 1.1%, to $15.0 million for the three months ended June 30, 2010 from $15.1 million for the three months ended June 30, 2009. Marketing, general and administrative expenses decreased as a percentage of revenues from 36.8% for the three months ended June 30, 2009 to 36.3% for the three months ended June 30, 2010. The decrease was primarily due to lower legal expenses of $633,000 partially offset by an increase in distributor commissions of $544,000.

Research and Development Expenses. Research and development expenses increased by $423,000, or 23.1%, to $2.2 million for the three months ended June 30, 2010 from $1.8 million for the three months ended June 30, 2009. As a percentage of revenues, research and development expenses increased from 4.5% for the three months ended June 30, 2009 to 5.5% for the three months ended June 30, 2010. The increase was primarily due to higher studies expense and research supplies expense of $379,000.

Asset Abandonments. There were no asset abandonments for the three months ended June 30, 2010, compared to $83,000 of asset abandonments for the three months ended June 30, 2009, which was due to the disposal of non-productive assets.

Net Other Expense. Net other expense was $88,000 for the three months ended June 30, 2010 compared to $185,000 for the three months ended June 30, 2009. Interest expense increased for the three months ended June 30, 2010 to $141,000 from $130,000 for the three months ended June 30, 2009 due to higher interest paid on long-term obligations. Interest income decreased for the three months ended June 30, 2010 to $27,000 from $87,000 for the three months ended June 30, 2009 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 gain was $26,000 for the three months ended June 30, 2010 compared to a foreign exchange loss of $142,000 for the three months ended June 30, 2009 due to changes in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the three months ended June 30, 2010 was $605,000 compared to $551,000 for the three months ended June 30, 2009. Our effective tax rate for the three months ended June 30, 2010 and 2009 was 39.0% and 35.1%, respectively. Our effective tax rate for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 increased primarily as a result of research tax credits being recognized in 2009 with no comparable credits being recognized in the current period.

Six Months Ended June 30, 2010 Compared With Six Months Ended June 30, 2009

Revenues. Our total revenues decreased $795,000, or 1.0%, to $79.0 million for the six months ended June 30, 2010 compared to $79.8 million for the six months ended June 30, 2009.

Sports Medicine - Revenues from sports medicine allografts increased $2.1 million, or 10.9%, to $21.8 million for the six months ended June 30, 2010 compared to $19.7 million for the six months ended June 30, 2009. Sports medicine revenues increased primarily as a result of higher unit volumes of 5.9%, and higher average revenue per unit of 4.7%, due primarily to changes in product mix.

 

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Spine - Revenues from spinal allografts decreased $5.9 million, or 28.7%, to $14.7 million for the six months ended June 30, 2010 compared to $20.7 million for the six months ended June 30, 2009. Spine revenues decreased primarily as a result of unit volume decreases of 30.0% due to an inventory reduction of approximately $6.0 million in the first half of 2010 from our largest distributor.

Dental - Revenues from dental allografts decreased $268,000, or 1.8%, to $14.3 million for the six months ended June 30, 2010 compared to $14.6 million for the six months ended June 30, 2009. Dental revenues decreased primarily as a result of a decrease in average revenue per unit of 2.3% due to changes in product mix. Unit volumes were similar for both periods. Elective dental surgeries have been negatively impacted by the global economic slowdown as patients continue to defer procedures as a result of the lack of medical insurance reimbursements in this area.

Surgical Specialties - Revenues from surgical specialty allografts increased $869,000, or 7.7%, to $12.1 million for the six months ended June 30, 2010 compared to $11.2 million for the six months ended June 30, 2009. Surgical specialties revenues increased as a result of higher unit volumes of 1.9%, and an increase in average revenue per unit of 5.7%, offset by an inventory reduction from our distributor during the second quarter of 2010. These increases are the result of an introduction of new products with higher average revenue per unit related to a new arrangement with Davol in July 2009, whereby they are distributing our allografts for breast reconstruction procedures in addition to allografts for hernia repair.

BGS and General Orthopedic - Revenues from BGS and general orthopedic increased by $2.9 million, or 25.9%, to $14.1 million for the six months ended June 30, 2010 compared to $11.2 million for the six months ended June 30, 2009. BGS general orthopedic revenues increased primarily due to an increase in unit volumes of 9.1% and higher average revenues per unit of 15.4% due to changes in product mix. Growth in unit volumes resulted from new products introduced in the last eighteen months, increased distributor orders and increased market penetration through our direct distribution force both domestically and internationally.

Other Revenues - Revenues from other sources, consisting of tissue recovery fees, biomedical laboratory fees, deferred revenues, shipping fees and distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees, decreased by $496,000 to $1.9 million for the six months ended June 30, 2010 compared to $2.3 million for the six months ended June 30, 2009.

Foreign Currency Fluctuations - For the six months ended June 30, 2010, foreign currency exchange fluctuations resulted in a decrease in total revenues of $43,000 due to a 1.0% decrease 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 $240,000, or 0.6%, to $43.0 million for the six months ended June 30, 2010. As a percentage of revenues, costs of processing and distribution increased from 53.7% for the six months ended June 30, 2009 to 54.5% for the six months ended June 30, 2010

The increase in cost of processing and distribution as a percentage of revenues was due to lower production levels arising from tighter inventory management. The lower production levels negatively impacted operating efficiencies for the six months ended June 30, 2010.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses decreased by $759,000, or 2.5%, to $29.3 million for the six months ended June 30, 2010 from $30.1 million for the six months ended June 30, 2009. Marketing, general and administrative expenses decreased as a percentage of revenues from 37.7% for the six months ended June 30, 2009 to 37.1% for the six months ended June 30, 2010. The decrease was primarily due to lower legal and incentive compensation of $1.4 million and $350,000 respectively, partially offset by an increase in distributor commissions of $1.1 million.

 

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Research and Development Expenses. Research and development expenses increased by $1.3 million, or 35.0%, to $4.9 million for the six months ended June 30, 2010 from $3.7 million for the six months ended June 30, 2009. As a percentage of revenues, research and development expenses increased from 4.6% for the six months ended June 30, 2009 to 6.2% for the six months ended June 30, 2010. The increase was primarily due to higher research compensation, legal, and research supplies expense of $1.2 million.

Asset Abandonments. Asset abandonments were $15,000 for the six months ended June 30, 2010, compared to $83,000 for the six months ended June 30, 2009, which in both periods was due to the disposal of non-productive assets.

Net Other Expense. Net other expense was $196,000 for the six months ended June 30, 2010 compared to $92,000 for the six months ended June 30, 2009. Interest expense increased for the six months ended June 30, 2010 to $307,000 from $253,000 for the six months ended June 30, 2009 due to higher interest paid on long-term obligations. Interest income decreased for the six months ended June 30, 2010 to $63,000 from $198,000 for the six months ended June 30, 2009 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 gain was $48,000 for the six months ended June 30, 2010 compared to a foreign exchange loss of $37,000 for the six months ended June 30, 2009 due to changes in the value of the U.S. dollar versus the Euro and the timing of payments on foreign currency liabilities.

Income Tax Provision. Income tax provision for the six months ended June 30, 2010 was $571,000 compared to $1.0 million for the six months ended June 30, 2009. Our effective tax rate for the six months ended June 30, 2010 and 2009 was 39.0% and 31.9%, respectively. Our effective tax rate for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 increased primarily as a result of research tax credits being recognized in 2009 with no comparable credits being recognized in the current period.

Liquidity and Capital Resources

Cash Flows - Three Months Ended June 30, 2010 Compared With Three Months Ended June 30, 2009.

Our cash provided by operating activities was $2.5 million for the three months ended June 30, 2010, compared to $2.4 million for the three months ended June 30, 2009. The cash provided by operating activities in 2010 was primarily due to a $2.2 million of inventory distributions in excess of tissue procurement and production costs, while 2009 cash provided was primarily a result of strong collections on accounts receivable and the timing of payments to certain vendors.

At June 30, 2010, we had 42 days of revenues outstanding in trade accounts receivable, a decrease of 7 days compared to December 31, 2009. The decrease was due to higher cash receipts from customers than shipments to customers in the second quarter of 2010. At June 30, 2010, we had 382 days of inventory on hand, a decrease of 4 days compared to December 31, 2009.

Our cash used in investing activities was $453,000 for the three months ended June 30, 2010, compared to $1.7 million for the three months ended June 30, 2009. Our investing activities for the three months ended June 30, 2010 consisted of purchases of property, plant and equipment of $347,000 and patent costs of $106,000. Our investing activities for the three months ended June 30, 2009 consisted primarily of purchases of property, plant and equipment of $1.6 million and patent costs of $112,000. The decrease in purchases of property, plant and equipment was due to timing of payments to certain vendors and the timing of purchases under our annual capital acquisition plan.

Our cash used in financing activities was $1.8 million for the three months ended June 30, 2010 compared to cash provided by financing activities of $365,000 for the three months ended June 30, 2009. Cash used in financing activities for the three months ended June 30, 2010 consisted primarily of net payments on short-term obligations of $250,000 and payments on long-term obligations of $3.5 million partially offset by proceeds from long-term obligations of $1.5 million and proceeds from exercise of common stock options of $483,000.

 

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Cash Flows - Six Months Ended June 30, 2010 Compared With Six Months Ended June 30, 2009.

Our cash provided by operating activities was $3.8 million for the six months ended June 30, 2010, compared to cash used in operating activities of $4.2 million for the six months ended June 30, 2009. The cash provided by operating activities was primarily due to a $2.6 million decrease in accounts receivable as a result of strong collections of accounts receivable and $1.0 million of inventory distributions in excess of tissue procurement and processing costs. Cash used in 2009 related to an increase in inventories of human dermis tissue to support the growing surgical specialties business, partially offset by the timing of payments to certain vendors.

At June 30, 2010, we had 42 days of revenues outstanding in trade accounts receivable, a decrease of 7 days compared to December 31, 2009. The decrease was due to higher cash receipts from customers than shipments to customers in the first half of 2010. At June 30, 2010, we had 382 days of inventory on hand, a decrease of 4 days compared to December 31, 2009.

Our cash used in investing activities was $884,000 for the six months ended June 30, 2010, compared to $2.1 million for the six months ended June 30, 2009. Our investing activities for the six months ended June 30, 2010 consisted of purchases of property, plant and equipment of $661,000 and patent costs of $223,000. Our investing activities for the six months ended June 30, 2009 consisted primarily of purchases of property, plant and equipment of $1.9 million and patent costs of $224,000. The decrease in purchases of property, plant and equipment was due to timing of purchases and also payments to vendors.

Our cash used in financing activities was $2.5 million for the six months ended June 30, 2010 compared to cash provided by financing activities of $348,000 for the six months ended June 30, 2009. Cash used in financing activities for the six months ended June 30, 2010 consisted primarily of net payments on short-term obligations of $1.0 million and payments on long-term obligations of $6.4 million partially offset by proceeds from long-term obligations of $4.3 million, and proceeds from exercise of common stock options of $745,000.

Liquidity.

As of June 30, 2010, we had $17.7 million of cash and cash equivalents. We believe that our working capital as of June 30, 2010, together with our borrowing ability under our revolving credit facilities, will be adequate to fund our on-going operations for the next twelve months. During the quarter, we reclassified $7.3 million of current portion of long-term obligations to long-term obligations. The reclassification relates to our U.S. revolving credit facility which was recently renewed with an extended maturity date of July 21, 2012.

 

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Certain Commitments.

The Company’s short-term and long-term obligations and availability of credit as of June 30, 2010 are as follows:

 

		Outstanding Balance			Available Credit
		(In thousands)
Short-term obligations:
Credit facilities		$	827		$	1,249
Total short-term obligations			827			1,249
Long-term obligations:
Credit facility			7,254			2,746
Long-term obligations			3,184			—
Capital leases			821			—
Total long-term obligations			11,259			2,746
Total obligations		$	12,086		$	3,995

The following table provides a summary of our debt obligations, operating lease obligations, and other significant obligations as of June 30, 2010.

 

		Contractual Obligations Due by Period
		Total			2010			2011			2012			2013			After 2013
		(In thousands)
Debt obligations		$	12,086		$	1,590		$	8,457		$	960		$	557		$	522
Operating leases			2,889			799			1,044			668			283			95
Other significant obligations (1)			3,845			1,485			1,120			1,110			130			—
Total		$	18,820		$	3,874		$	10,621		$	2,738		$	970		$	617

 

(1)	These amounts consist of contractual obligations for tissue recovery, development grants and licensing fees.

The Company was in compliance with all covenants related to its credit facilities and term loans as of June 30, 2010.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2010. However, we cannot assure that interest rates will not significantly change in the future.

In the United States and Germany, the Company is exposed to interest rate risk. Changes in interest rates affect interest income earned on cash and cash equivalents and interest expense on revolving credit arrangements. Except for an interest rate swap associated with 438,000 Euros (or $535,000) of long-term debt over six years that was started March 31, 2006, the Company does not enter into derivative transactions related to cash and cash equivalents or debt. Accordingly, the Company is subject to changes in interest rates. Based on June 30, 2010 outstanding intercompany balances, a 1% change in interest rates would have had a de-minimis impact on our results of operations.

The value of the U.S. dollar compared to the Euro affects our financial results. Changes in exchange rates may positively or negatively affect revenues, gross margins, operating expenses and net income. The international operation currently transacts business primarily in the Euro. Assets and liabilities of foreign subsidiaries are translated at the period end exchange rate while revenues and expenses are translated at the average exchange rate for the period. Intercompany transactions are translated from the Euro to the U.S. dollar. Based on June 30, 2010 outstanding intercompany balances, a 1% change in currency rates would have had a de-minimis impact on our results of operations.

 

Item 4.

Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures include controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

We refer you to Part I, Item 1, note 13 entitled “Commitments and Contingencies” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings.

 

Item 1A.

Risk Factors

In addition to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, the following risk factor should be considered when reviewing other information set forth in this report and previously filed reports.

Impairment charges related to our goodwill could adversely affect our future operating results and/or financial position.

We test goodwill for impairment on an annual basis at the reporting unit level (or an interim basis if an event occurs that might more likely than not reduce the fair value of the reporting unit below its carrying value). We have one reporting unit and the annual impairment test is performed at the end of each year-end unless an indicator is present which would require more frequent testing. Goodwill is deemed to be impaired if the net book value of a reporting unit exceeds the estimated fair value. In concluding as to fair value of the reporting unit for purposes of testing goodwill, an income approach and market approach are utilized. The conclusion from these two approaches are weighted equally and adjusted to incorporate a control premium or acquisition premium that reflects the additional amount a buyer is willing to pay for elements of control and for premium that reflects the buyer’s perception of its ability to add value through synergies.

Potential events or changes in circumstances which could be indicators of other than temporary impairment of our goodwill include:

 

•

Fundamental changes in the business climate

 

•

Change in legal or regulatory environment relating to our products

 

•

Adverse regulatory actions

 

•

Unanticipated competition

 

•

Loss of key personnel

 

•

Dispositions of significant components of our business

 

•

A severe and sustained decline in market capitalization

We are not aware of any potential events and/or changes in circumstances that could more likely than not reduce the fair value of the reporting unit below its carrying value, except for a decline in market capitalization during the second quarter of 2010. Our common stock price declined late in the second quarter of 2010 and we are continuing to monitor the severity and the duration of the decline in our common stock price. A sustained and severe decline in our common stock price may be an indicator that the fair value of the reporting unit is below its carrying value. Should we determine that an indicator of an impairment of our goodwill exists, we will test the goodwill for impairment at that time.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

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Item 5.

Other Information

On July 21, 2010, we and certain of our subsidiaries entered into a second amendment to the credit agreement with Mercantile Bank, a division of Carolina First Bank. The second amendment to the credit agreement is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference. A summary of the second amendment to the credit agreement is set forth in Note 14 to the Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. The summary is qualified in its entirety by reference to the full text of the second amendment to the credit agreement.

 

Item 6.

Exhibits

 

10.1		Second Amendment to the Credit Agreement, dated July 21, 2010, between RTI Biologics, Inc. and Mercantile Bank.
31.1		Certification of the Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Executive Vice President and Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Periodic Financial Report by Chief Executive Officer Under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Periodic Financial Report by Executive Vice President and Chief Financial Officer Under Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 9, 2010

 

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