Xtant Medical Holdings
Annual Report 2011

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549 FORM 10-K (Mark One) xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 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: 001-34951 Bacterin International Holdings, Inc.(Exact Name of Registrant as Specified in Its Charter) Delaware 20-5313323(State or other jurisdiction ofincorporation or organization) (IRS Employer Identification No.) 600 Cruiser LaneBelgrade, Montana 59714(Address of Principal Executive Offices) (Zip Code) (406) 388-0480(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredCommon stock, par value $.000001 per share NYSE Amex LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No (cid:0) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No (cid:0) 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 duringthe 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 requirementsfor the past 90 days. Yes (cid:0) 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 tobe submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes (cid:0) No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer¨Accelerated filer¨Non-accelerated filer¨Smaller reporting company(cid:0)(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No (cid:0) The aggregate market value of the common stock held by non-affiliates as of June 30, 2011, the last day of the registrants most recently completed secondfiscal quarter, was $69,258,526 (based on the closing price of the Company’s common stock on that date, as reported on the NYSE Amex). The number of shares of the Company’s common stock, $0.000001 par value, outstanding as of March 13, 2012 was 42,076,553. DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS PART I 3 ITEM 1.Business 3ITEM 1A.Risk Factors 15ITEM 1B.Unresolved Staff Comments 23ITEM 2.Properties 24ITEM 3.Legal Proceedings 24ITEM 4.Mine Safety Disclosures 25 PART II 25 ITEM 5.Market For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities 25ITEM 6.Selected Financial Data 26ITEM 7.Management’s Discussion And Analysis of Financial Condition and Results of Operation 26ITEM 7AQuantitative and Qualitative Disclosures About Market Risk 30ITEM 8.Financial Statements 30ITEM 9.Changes in And Disagreements With Accountants on Accounting and Financial Disclosure 56ITEM 9A.Controls And Procedures 56ITEM 9B.Other Information 57 PART III 57 ITEM 10.Directors, Executive Officers and Corporate Governance 57ITEM 11.Executive Compensation 61ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 64ITEM 13.Certain Relationships and Related Transactions, and Director Independence 66ITEM 14.Principal Accounting Fees and Services 66 PART IV 67 ITEM 15.Exhibits, Financial Statements Schedules 67 SIGNATURES 68 Exhibit Index 69 1 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of applicable securitieslaws. Our forward-looking statements include, but are not limited to, statements regarding our “expectations,” “hopes,” “beliefs,” “intentions,” or “strategies”regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including anyunderlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”“might,” “plan,” “possible,” “potential,” “predict,” “project,” “should” and “would,” as well as similar expressions, may identify forward-lookingstatements, but the absence of these words does not mean that a statement is not forward looking. Forward-looking statements in this Form 10-K may include,for example, statements about: ¨the future performance and market acceptance of our products; ¨our ability to maintain our competitive position; ¨negative media publicity; ¨ ¨our ability to obtain donor cadavers for our products; our ability to expand our production capacity; ¨our efforts to innovate and develop new products; ¨our ability to engage and retain qualified technical personnel and members of our management team; ¨our reliance on our current facilities; ¨our ability to generate funds or raise capital to finance our growth; ¨ ¨our efforts to expand our sales force; the ability of our sales force to achieve expected results; ¨government regulations; ¨fluctuations in our operating results; ¨government and third-party coverage and reimbursement for our products; ¨our ability to manage our growth; ¨ ¨our ability to successfully integrate future business combinations or acquisitions; our ability to obtain regulatory approvals; ¨product liability claims and other litigation to which we may be subjected; ¨product recalls and defects; ¨timing and results of clinical trials; ¨our ability to obtain and protect our intellectual property and proprietary rights; ¨infringement and ownership of intellectual property; ¨our ability to attract broker coverage; ¨the trading market, market prices, dilution, and dividends of our common stock; ¨influence by our management; and ¨our ability to issue preferred stock. The forward-looking statements contained in this Form 10-K are based on our current expectations and beliefs concerning future developments andtheir potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-lookingstatements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control, which may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to,those factors described in the “Risk Factors” section of our Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of ourassumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake noobligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be requiredunder applicable securities laws. 2 PART I Item 1.Business Unless the context otherwise requires, “we,” “our,” “us” and similar expressions used in this Business section refer to BacterinInternational, Inc. (“Bacterin”) prior to the closing of the Reverse Merger on June 30, 2010, and Bacterin International Holdings, Inc., f/k/a K-Kitz,Inc. (the “Company”), as successor to the business of Bacterin, following the closing of the Reverse Merger transaction. Overview of Our Business We develop, manufacture and market biologics products to domestic and international markets through our biologics division. Our products areused in a variety of applications including enhancing fusion in spine surgery, relief of back pain with a facet joint stabilization, promotion of bone growth infoot and ankle surgery, promotion of skull healing following neurosurgery and subcondral bone defect repair in knee and other joint surgeries. Our medical devices division develops medical devices intended for use in several diverse clinical areas including orthopedic, plastic, andcardiovascular surgery. Our background and expertise is in the research, testing, and development of coatings for medical devices, particularly antimicrobial-based coatings. In addition to the manufacture and sales of coated medical devices, the medical devices division works with our biologics division to produceand distribute OsteoSelect® DBM putty, an osteoinductive product used by surgeons as a bone void filler in the extremities and pelvis. DBM putty isconsidered a combination product by regulatory agencies - both a tissue and a medical device. The medical devices division also develops custom surgical instrument kits for use with allografts processed by our biologics division. These kitsoffer state-of-the-art instrumentation that is designed based upon the needs and inputs of surgeons. The instrumentation is intended to be an optimal deliverysystem for the proper placement of our proprietary allografts. Objectives of allograft use include pain relief, aid in the regeneration of tissue, and to provide ascaffold for bone fusion in spinal and sports medicine procedures. The medical devices division actively develops intellectual property associated with our devices and coating platforms, for the purposes of protectingour Bacterin-branded devices and for use in alliance projects. The manufacturing and operations of the biologics and medical devices divisions are organizedseparately while products from both are marketed through several channels including independent distributors, joint development projects and our direct salesnetwork. Our Offices Our headquarters, laboratory and manufacturing facilities are located at 600 Cruiser Lane, Belgrade, Montana 59714. Our telephone number is(406) 388-0480 and our fax number is (406) 388-0422. We also own a facility located at 664 Cruiser Lane, Belgrade, Montana 59714, and lease office spaceat 732 Cruiser Lane, Belgrade, Montana 59714 and 8310 S. Valley Highway, No. 300, Englewood, Colorado 80112. Our History We began operations in 1998 as a sole proprietorship founded by Guy Cook, our Chief Executive Officer, as a spinout of the Center for BiofilmEngineering at Montana State University, or the CBE. Mr. Cook is an expert in microbial testing methods and has been recognized by the U.S. Food andDrug Administration, or the FDA, industry, and academia for his contributions to the development of bioactive coatings. This sole proprietorship waseventually incorporated as “Bacterin, Inc.” in the state of Montana in January 2000 to further Mr. Cook’s work. In March 2004, Bacterin, Inc.’s stockholderscompleted the terms of a share exchange agreement with a company called Oil & Gas Seekers, Inc., a Nevada corporation, or OGS, which subsequentlychanged its name to “Bacterin International, Inc.”, to effectively become a publicly-traded corporation. As a result of this transaction, the stockholders ofBacterin, Inc., the Montana corporation, became stockholders of Bacterin International, Inc., the Nevada corporation, and Bacterin, Inc., the Montanacorporation, became a wholly owned subsidiary of Bacterin International, Inc., the Nevada corporation. At the end of 2004, management concluded that thistransaction was problematic and did not deliver the expected result. Based on this determination, we entered into an agreement in 2005 to amend the terms ofthe exchange transaction with the former majority stockholder of OGS. In May 2005, we merged Bacterin, Inc., the Montana corporation, up and into BacterinInternational, Inc., the Nevada corporation. Leveraging off the “state of the art” research and development activities ongoing at the CBE in biofilm technology, we began as a biomaterials testinglaboratory and have systematically expanded our strategic vision towards the development of Bacterin-labeled medical devices. Our revenues were historicallyderived from testing services and milestone payments from collaborative product development agreements with various “blue chip” medical manufacturers. Today, however, we generate revenue from a number of sources including the following: sales from products developed and manufactured by us, sales ofproducts manufactured by a third party and sold and distributed by us, and contract revenue from analytical testing and development services provided tomedical device manufacturer clients, which tailor our coating process to the client’s specific product/medical application. 3 During 2008, we reached an important transition point in our history. Most of our business endeavors prior to that time had been devoted todeveloping our products with revenue generated from a variety of limited sources, including testing, government grants and unsubstantial product sales. In2008, however, revenue from product sales either under our name or “private label” became our primary source of revenue. We no longer generate revenue fromany private label arrangements. On June 30, 2010, we completed a reverse merger transaction, or the Reverse Merger, in which we caused Bacterin International, Inc. to be mergedwith and into a wholly-owned Nevada subsidiary of Bacterin International Holdings, Inc. f/k/a K-Kitz Incorporated, a Delaware corporation, created forpurposes of effecting the Reverse Merger, and the stockholders of Bacterin International, Inc. obtained control of Bacterin International Holdings, Inc., f/k/a K-Kitz Incorporated, a Delaware corporation. The Reverse Merger was consummated under Nevada corporate law pursuant to an Agreement and Plan of Merger,dated as of June 30, 2010. As a result of the Reverse Merger, Bacterin International, Inc. became our wholly owned subsidiary and we are now engaged,through Bacterin International, Inc., in the business of biomaterials research, development, and commercialization. Before the Reverse Merger, our corporate name was K-Kitz, Incorporated, and our trading symbol was KKTZ.OB. On June 29, 2010, we changedour corporate name to “Bacterin International Holdings, Inc.” which name change became effective for trading purposes on July 1, 2010. Effective July 21,2010, our trading symbol was changed from KKTZ.OB to BIHI.OB. On March 7, 2011, our common stock began trading on the NYSE Amex under theticker symbol “BONE.” Recent Developments On May 27, 2011, we entered into a Purchase Agreement and Registration Rights Agreement with Lincoln Park Capital Fund, LLC (“LPC”)whereby LPC agreed to purchase up to $31 million of our common stock from time to time pursuant to the terms of the Purchase Agreement and we agreed toregister the shares purchased by LPC. Upon signing the Purchase Agreement, LPC purchased 326,798 shares of our common stock for $1,000,002 and alsoreceived warrants to purchase 130,719 shares at an exercise price of $3.06 per share, the closing price on May 26, 2011, as part of a private placementtransaction pursuant to Rule 506 of Regulation D in the second quarter of 2011 in which we raised a total of $3,027,504 and issued 939,377 shares of ourcommon stock and warrants to purchase 375,747 shares of our common stock. Pursuant to the Purchase Agreement and Registration Rights agreement with LPC, we filed an S-3 Registration Statement which became effective onJuly 19, 2011, and we have the right to require LPC to purchase up to an additional $30 million of our common stock at prevailing market prices in limiteddaily amounts as specified under the terms of the Purchase Agreement. Although we did not draw on our equity line with LPC in 2011, during the first quarterof 2012, we issued approximately 1,475,037 shares of our common stock to LPC for aggregate proceeds of approximately $3,899,994. We intend to use theproceeds for working capital and general corporate purposes. In consideration for entering into the Purchase Agreement, we issued 128,506 shares of our common stock to LPC as initial commitment shares andwe agreed to issue up to 164,675 additional commitment shares on a pro rata basis when LPC purchases additional shares. We may terminate the PurchaseAgreement at any time at our sole discretion without any cost to us. On July 11, 2011, we acquired substantially all of the assets of Robinson MedSurg, LLC (“RMS”) for $1 million of our common stock. Inaddition, we agreed to pay RMS an additional $500,000 in common stock if gross revenue from the sale of products resulting from the purchased assetsequals or exceeds $1 million, and an additional $500,000 in common stock if gross revenue from the sale of products equals or exceeds $2 million, providedthat such gross revenue thresholds are achieved within 2 years. The Company also engaged the sole member of RMS as a consultant. On July 29, 2011, we entered into Loan and Security Agreement with MidCap Funding III, LLC (“MidCap”), whereby MidCap and Silicon ValleyBank (“SVB”) agreed to provide a $15 million credit facility which allowed us to borrow $7 million initially, and gave us the ability to borrow up to anadditional $8 million through December 31, 2011 in connection with a permitted acquisition (which did not occur). We also issued warrants to purchase192,157 shares of the Company’s common stock at an exercise price of $2.55 per share in connection with this transaction. 4 Industry and Market Overview The orthopedic biomaterials market consists of materials that are organic, inorganic or synthetic in nature. These materials are implanted or appliedin or near the indicated bone to facilitate healing, encourage bone tissue augmentation, compensate in areas where bone tissue is depleted and restore structure toallow for repair. Orthopedic biomaterials are capable of producing specific biological action or regenerative responses that are beyond what is observed innormal healing. These materials are often used as substitutes to autograft materials, which are taken from a harvest site in the patient to patch or repair thewounded or unhealthy site. Bone is a biologically active tissue and may or may not regenerate depending on the condition of the patient. The damage may be significant enoughthat a scaffold to help regenerate the surgical site may be necessary. In 2009, the orthopedic biomaterials market was valued at almost $3.5 billion. Thismarket is expected to grow at a CAGR of 8.9% by 2016. (Idata Research Inc. 2010, U.S. Market for Orthopedic Biomaterials). Products and Services We have developed and currently manufacture and sell several human tissue-based products, primarily allografts, in the medical marketplacethrough our biologics division. In addition, we also manufacture and sell, directly under our own name and indirectly through distributors, various coatingand surgical drain products through our medical devices division. Biologics Division Our biologics products include OsteoSponge®, OsteoSponge®SC, OsteoWrap®, OsteoLock®, BacFast® and hMatrix® as well as certain otherallograft products which are briefly described below: ¨OsteoSponge® is a form of demineralized bone matrix made from 100% human bone. Derived from trabecular (cancellous) bone, OsteoSponge®provides a natural scaffold for cellular in-growth and exposes bone-forming proteins to the healing environment. The malleable properties ofOsteoSponge® enable it to conform to, and fill, most defects. Upon compressing the allograft, OsteoSponge® springs back to completely fillthe void. Its unique mechanical and biological properties make OsteoSponge® an ideal bone graft for use in various orthopedic practicesincluding spine, neurology, cranial/maxillofacial, trauma, plastic/reconstruction and general procedures where new bone growth is needed. ¨OsteoSponge®SC is a form of OsteoSponge® designed to be used in joint surgery. Bacterin has shown, in goat studies, the ability to re-generatecartilage in joint repair and believes that this product has the potential to significantly change the standard of care in human joint surgery. Wehave received permission from the FDA to market this product as a subchondral bone void filler and are currently marketing it as such. Inorder to market OsteoSponge®SC as a cartilage re-generation scaffold, we would need to obtain FDA approval to begin marketing for thatindication. Surgeons are using the product and we have begun trials to establish the ability to market it as a cartilage re-generation scaffold. These trials are likely to take two years. There can be no assurance that these trials will be successful or lead to any FDA action. ¨OsteoWrap® is 100% human cortical bone demineralized through a proprietary process to make the graft flexible while maintaining allograftintegrity. This product has various applications in orthopedic, neurological, trauma, oral/maxillofacial and reconstructive procedures. OsteoWrap® can wrap around non-union fractures to assist with fusion, can act as a biologic plate or can be used in conjunction with ahardware plate system. Additionally, this product provides the surgeon with superior handling characteristics as the allograft can be easily sizedusing surgical scissors or a scalpel, and will withhold sutures or staples for fixation. ¨OsteoLock® and BacFast® are facet stabilization dowels made from human bone. The shape of our facet stabilization dowel is engineered tomaximize osteoconductivity and surface area contact, as well as provide stability to prevent migration from the surgical site. BacFast® HD,having the same design as OsteoLock®, is optimized through our proprietary demineralization technology. This technology increases thesurface area of the outer collagen matrix of the graft while exposing native bone morphogenic proteins (BMPs) and growth factors. Because ofthe hyper-demineralization technology, BacFast® HD has osteoinductive properties, as well as being osteoconductive. OsteoLock® andBacFast® can be used to augment spinal procedures, or as a stand-alone procedure for mild spinal conditions. 5 ¨hMatrix® dermal scaffold is an extension of Bacterin's core biologics technology and our third human acellular biological scaffold. hMatrix®is an acellular matrix made from donated human dermal tissue that is used to replace a patient's damaged tissue. hMatrix® provides a naturalcollagen tissue scaffold that promotes cellular ingrowth, tissue vascularization and regeneration. The hMatrix® scaffold tissue reabsorbs intothe patient's dermal tissue for a biocompatible, natural repair. In addition, we make and sell (i) sports allografts which are processed specifically for anterior and posterior cruciate ligament repairs, anteriorcruciate ligament reconstruction and meniscal repair, (ii) milled allografts which are comprised of cortical bone milled to desired shapes and dimensions, alsocalled milled spinal allografts, and (iii) traditional allografts for multi-disciplinary applications including orthopedics, neurology, podiatry, oral/maxillofacial,genitourinary and plastic/reconstructive. The Company has multiple physician-initiated studies that continue to prove expanded indications for our products. Medical Device Products Our medical devices division researches, tests and develops coatings for medical devices, particularly antimicrobial-based coatings. This divisionalso produces and distributes OsteoSelect® DBM putty, an osteoinductive product used by surgeons as a bone void filler in the extremities and pelvis. OsteoSelect® DBM putty is engineered with the surgeon in mind. With outstanding handling characteristics, OsteoSelect® can be easily moldedinto any shape and compressed into bony voids. Taking the design a step further, Bacterin has validated a low-dose, low-temperature gamma sterilizationprocess to provide maximum osteoinductive potential while still affording device level sterility. Every production batch of OsteoSelect® is tested for its bonegrowth characteristics allowing us to make that unique marketing claim. Our medical devices division also develops custom surgical instrument kits for use with allografts processed by our biologics division. These kitsoffer state-of-the-art instrumentation that is designed based upon the needs and inputs of surgeons who desire to use the most minimally invasive techniques.The instrumentation is intended to be an optimal delivery system for the proper placement of our proprietary allografts. Objectives of allograft use include painrelief, aid in the regeneration of tissue, and to provide a scaffold for bone fusion in spinal and sports medicine procedures. We currently sell a surgical drainseries called ViaTM, which is used to drain exudate from a surgical site. Building upon the ViaTM platform, Bacterin created a second generation productcalled Elutia® surgical drains which are performance enhanced via an antimicrobial coating to help reduce the incidence of surgical site infection. In a joint development project with RyMed, we treat RyMed’s InVision-Plus CS™ with our patented antimicrobial technology. The InVision-PlusCS™ is the only needleless IV connector to offer the combined antibacterial protection of chlorhexidine and silver. The device is designed to reduce potentiallydeadly, catheter-related bloodstream infections. We receive a fixed price for each InVision-Plus CS™ unit sold by RyMed on all devices treated for RyMed. Technology and Intellectual Property Patents Our patent efforts have been, and will continue to be, primarily focused in two key areas: ¨The delivery of bioactive agents impregnated into or onto metals, polymers or tissues which, when activated by bodily fluids, release the agentinto the surrounding environment; and ¨The development of innovative and novel, engineered tissue implants or constructs which employ acellular tissue and processes, and enhanceddemineralized bone matrix products. 6 The following table summarizes our current patent portfolio, including patents covering technology licensed by us for use or inclusion in certain ofour products: Serial or Patent Date Filed Title Business Purpose First Inventor Number or Granted Status 1. Pending U.S.Applications MEDICAL DEVICEINCLUDING A BIOACTIVEIN A NON-IONIC AND ANIONIC FORM ANDMETHODS OFPREPARATION THEREOF This application arose out of a now defunct project. Weretained rights as the technology may prove useful inthe future. The patent describes the modification ofelution profiles via active agent equilibration; it ispotentially applicable to many coated products. Mike Johnson 11/864,360 9/28/2007 Pending ANTIMICROBIAL COATINGFOR INHIBITION OFBACTERIAL ADHESIONAND BIOFILM FORMATION This application describes the coating used for theElutia wound drain and for the Bard BioBloc coatingon their HemoStar hemodialysis catheter. The efficacyperiod can be varied according to the desired outcome;the coating has shown in-vitro efficacy for between 7and 21 days. Guy Cook 10/891,885 7/15/2004 Pending 7 PROCESS FORDEMINERALIZATION OFBONE MATRIX WITHPRESERVATION OFNATURAL GROWTHFACTORS This application is intended to protect OsteoSponge, acore Bacterin product. OsteoSponge is a novel form ofdemineralized bone matrix which provides a naturalscaffold for cellular growth and exposes bone growthinducing proteins to the healing environment inorthopedic applications. Nancy J.Shelby 12/130,384 5/30/2008 Pending SURGICAL KIT ANDMETHOD FOR BONEREPAIR This application is intended to support theOsteoSponge SC Surgical Kit and Instruments. Thissurgical kit contains instruments that facilitate theplacement of OsteoSponge in the subchondral region ofarticulating joints for the purpose of repairing defects. Guy Cook To Be Assigned 7/19/2011 PendingCOMPOSITION OFDEMINERALIZED BONEMATRIX WITH CONTRASTAGENT AND/OR BIOGLASSADDITIVE This application is intended to expand the potentialapplications for and enhance the performance ofBacterin's demineralized bone matrix products. Gregory Juda To Be Assigned 12/30/2011 Pending 8 COMPOSITION OF ANDMETHOD FOR FORMINGREDUCED VISCOSITYPOLYMERIC COATINGS This application is intended to describe and protectseveral of our coating technologies, including thoseused on our orthopedic devices. These technologies arehighly biocompatible and demonstrate excellent elutioncharacteristics. MarkSchallenberger To Be Assigned 2/17/2012 Pending ADJUSTABLE BIOACTIVEAGENT DISPERSIONWITHIN A POLYMERICCOATING This application is intended to describe and protectseveral of our coating technologies, including thoseused on our orthopedic devices. These technologies arehighly biocompatible and demonstrate excellent elutioncharacteristics. MarkSchallenberger To Be Assigned 2/17/2012 PendingSURGICAL KIT WITHMULTIPLE POP-UP PRE-LOADABLE DRIVERS This application describes a unique strategy forenhanced accessibility of pre-loaded surgicalscrew/driver units. This kit will drive ourcraniomaxillofacial business by providing a highlyefficient means of accessing and implanting thesurgical screws required in such procedures. Mike Schneider To Be Assigned 3/2/2012 Pending 9 2. Pending ForeignApplications MEDICAL DEVICEINCLUDING ABIOACTIVE IN A NON-IONIC AND AN IONICFORM AND METHODS OFPREPARATION THEREOF This application arose out of a now defunct project.We retained rights as the technology may proveuseful in the future. The patent describes themodification of elution profiles via active agentequilibration and is potentially applicable to manycoated products. Mike Johnson PCT/US2007/079924 9/28/2007 Pending ANTIMICROBIALCOATING FORINHIBITION OFBACTERIAL ADHESIONAND BIOFILMFORMATION This application describes the coating used for theElutia wound drain and for the Bard BioBloccoating on their HemoStar hemodialysis catheter.The efficacy period can be varied according to thedesired outcome; the coating has shown in-vitroefficacy for between 7 and 21 days. Guy Cook PCT/US2005/015162 4/28/2005 Issued inAustralia,otherwisepending 10 PROCESS FORDEMINERALIZATION OFBONE MATRIX WITHPRESERVATION OFNATURAL GROWTHFACTORS This application is intended to protectOsteoSponge, a core Bacterin product.OsteoSponge is a novel form of demineralized bonematrix which provides a natural scaffold forcellular growth and exposes bone growth inducingproteins to the healing environment in orthopedicapplications. Nancy J.Shelby PCT/US2008/006942 6/2/2008 Pending AN ELASTOMERICARTICLE INCORPORATEDWITH A BROADSPECTRUMANTIMICROBIAL This application was generated as a means ofprotecting the technology used for impregnation ofelastomeric medical devices. We have observed longterm (over 30 days) in vitro efficacy with thistechnology. Benjamin P.Luchsinger PCT/US2009/005103 9/11/2009 Pending We believe our patent filings and patent position will facilitate growth and enhance our proprietary core competencies, enabling us to protect andexpand revenue growth and stockholder value in the future. We expect that additional patent applications will be filed and prosecuted as inventions arediscovered, technological improvements and processes are developed and specific applications are identified. The status of individual patents and patentjurisdiction is maintained in our internal records. We anticipate, however, that there may be instances in which we enter into collaborative research anddevelopment agreements with medical device companies under such terms that the medical device company may or will retain a right to make future patentfilings arising from such cooperative development agreement. In such instances, we will attempt to protect our overall patent use rights by agreements whichlimit the right of the collaborative party to an exclusive right only as it pertains to the field of use, as defined by the applicable project’s scope of work. In thismanner, we anticipate that we will receive future benefit and use of such intellectual property outside the field of use, as defined by any given scope of work. There can be no assurance that we will be able to obtain final approval of any patents. 11 Trademarks We believe in the superiority of our technology and products. As a result, we have invested in the development and protection of the names of ourproducts in order to drive consumer awareness and loyalty to the brand. To protect this investment, we have registered, and continue to seek registration, ofthese trademarks and continuously monitor and aggressively pursue users of names and marks that potentially infringe upon our registered trademarks. Wecurrently own registered trademarks to the following brand names of certain of our products: OsteoSponge®, OsteoWrap®, OsteoLock®, BacFast®,OsteoSelect®, Elutia® and hMatrix®. Trade Secrets To safeguard our proprietary knowledge and technology, we rely heavily upon trade secret protection and non-disclosure/confidentiality agreementswith employees, consultants and third party collaboration partners with access to our confidential information. There can be no assurance, however, that thesemeasures will adequately protect against the unauthorized disclosure or use of confidential information, or that third parties will not be able to independentlydevelop similar technology. Additionally, there can be no assurance that any agreements concerning confidentiality and non-disclosure will not be breached, orif breached, that we will have an adequate remedy to protect us against losses. Although we believe our proprietary technology has value, because of rapidtechnological changes in the medical industry, we also believe that proprietary protection is of less significance than factors such as the intrinsic knowledgeand experience of our management, advisory board, consultants and personnel and their ability to identify unmet market needs and to create, invent, developand market innovative and differentiated new medical devices. Donor Procurement We have agreements with multiple tissue banks and we continue to expand our network for donor tissue in anticipation of increased production. Weexpect to be able to continue to build our network for donor tissue as our production capabilities and sales increase. Sales and Marketing We are committed to building our direct sales channel into the primary method of distributing our products. We have one National Sales Managerand two executive vice-presidents to lead this effort and we have established 13 regions with a regional vice president in charge of all activities within theregion. We have hired and trained 52 sales representatives toward a near term goal of establishing four to five sales representatives in each region. While weincurred significant costs due to this initiative in 2009 through 2011, it is our expectation that this investment in the direct sales network will lead to higherrevenue in 2012 and beyond. No assurance can be given that these efforts will be successful. We also market our products through independent distributors who receive a discount off of our list price and then sell to their customer base. Because we have experienced a decline in revenue from this sales channel, we expect it will continue to represent a smaller portion of our overall revenue as ourdirect distribution channel grows. Growth Strategy After multiple years of product development, we believe that our technology has been largely market tested, and since 2009, we have beentransitioning our focus to appropriately market and distribute our products. In preparing the business to capitalize on our core markets, as well as newmarket opportunities, we have diversified our supply of donor tissue, expanded our production capabilities, developed the infrastructure of what we believewill grow into a formidable sales force, refined the message to our market and started gathering proof points on how to scale our revenue in these markets. 12 As discussed in “Sales and Marketing” above, we began implementing a direct sales network in July 2009. We have met our goal of growing thissales force to one National Sales Manager, two executive vice presidents, 13 regional vice presidents, and 52 sales representatives. In addition, we plan toutilize small independent sales representatives with entrenched physician relationships. We expect revenue to move towards 50% by employed salesrepresentatives and 50% by independent sales representatives. We are working on developing and implementing a high-level, national effort to present our products as a value proposition to hospital chains andother purchasing organizations. To this end, we have entered into agreements with Banner Hospitals, the Hospital for Special Surgery, MedAssets, ROi, andAccess Mediquip. These agreements are paving the way for our sales representatives to call on physicians, as the hospital process has already been approved. Competition Because the orthopedic biomaterials market overlaps with a number of medical fields - spine, trauma, joint reconstruction, sports medicine,pharmaceuticals and biotechnology - fragmentation is to be expected. However, there is one clear leader in the market: Medtronic. Medtronic’s lead is based onthe strength of their Infuse® growth factor product. However, the growth potential of Infuse® has been affected by some negative media attention regarding off-label usage and adverse events with specific indications. Beyond Medtronic, the orthopedic biomaterials market is comprised of a great number of players, each offering a multitude of products. It isexpected that several new products will emerge over the coming years. These assumptions are based on the advance of technology and the clinical promise ofregenerative therapies such as stem cells and bone marrow concentration. Specific competitors in the orthopedic biomaterials markets are: Medtronic, DePuy, Synthes, Arthrex, Smith & Nephew, Nuvasive, OrthoFix,Biomet, Osteotech, Orthovita, MTF, Stryker, RTI, AlloSource, Lifenet Health, Integra, ConMed/Linvatec, Wright, Exactech, ArthroCare, Harvest, andArteriocyte. (Idata Research Inc. 2010, U.S. Market for Orthopedic Biomaterials). Government Regulation We produce human allografts that are regulated and comply with all the criteria under both Sections 361 and 351 of the Public Health Service Act. Compliance is determined by the FDA during the inspection of our production facility. To date, we have successfully completed all of our FDA inspections. We are registered with the FDA as a manufacturer of human cellular and tissue products (HCT/Ps) as well as medical devices. We are an accredited memberof the American Association of Tissue Banks in good standing. We meet all licensing requirements for the distribution of HCT/Ps in the States of Florida,California, Maryland and New York. We cannot predict the impact of future regulations on either us or our customers. Human Tissue Our human tissue products, which are sold through our biologics division, have been regulated by the FDA since 1993. In May 2005, three new,comprehensive regulations went into effect that address manufacturing activities associated with HCT/Ps. The first requires that companies that produce anddistribute HCT/Ps register with the FDA. The second provides criteria that must be met for donors to be eligible to donate tissues and is referred to as the“Donor Eligibility” rule. The third rule governs the processing and distribution of the tissues and is often referred to as the “Current Good Tissue Practices”rule. Together, they are designed to ensure that sound, high quality practices are followed to reduce the risk of tissue contamination and of communicabledisease transmission to recipients. Our HCT/P products such as OsteoSponge® are regulated by the Center for Biologics Evaluation and Research. OurOsteoSponge® and OsteoWrap® products are regulated as a HCT/P as determined by the Tissue Reference Group and regulated solely under Section 361 ofthe Public Health Service Act and 21 CFR Part 1271. 13 Medical Devices Because our medical devices incorporate coating technologies, they are subject to regulation by the FDA. These medical devices require the approvalof the FDA prior to sale within the United States. The manufacturers and licensees who use our coating technology in their medical devices will have theburden of demonstrating the safety and efficacy of the medical devices, a burden which we will assist such manufacturers and licensees in demonstrating tothe extent our coating technologies are at issue. Sales of medical devices using our coating technology in the European Union will require the CE Markcertification and sales of such medical devices in Canada will require approval from the Medical Device Bureau of Canada. Within the United States, the FDA process requires a pre-market notification, or a 510(k) submission, be made to the FDA to demonstrate that themedical device is safe and effective and is substantially equivalent to a legally marketed device that is not subject to pre-market approval. Applicants mustcompare the device to one or more similar devices that are commercially available in the U.S. (known as the “predicate device”), and make and support aclaim of substantial equivalency to such predicate device. Support for such claims must include descriptive data and, when necessary, performance data. Insome cases, data from clinical trials must also be submitted in support of a 510(k) Submission. The FDA must then issue an order finding substantialequivalency before the devices may be commercially distributed in the U.S. This process can take anywhere from three months to two or three years, and canbe extremely expensive. The Center for Devices and Radiological Health regulates medical devices, including our OsteoSelect® DBM putty. ISO Certification In March 2010, we announced that we had received certification from the International Organization for Standardization, or ISO, for fulfilling therequirements of ISO 13485:2003. The Geneva based International Organization for Standardization is the world’s largest developer and publisher ofInternational Standards. ISO 13485:2003 specifies requirements for a quality management system. To obtain ISO 13485:2003 certification, an organizationmust demonstrate its ability to provide medical devices that consistently meet applicable customer and regulatory requirements. The primary objective of ISO13485:2003 is to facilitate harmonized medical device regulatory requirements for quality management systems. All requirements of ISO 13485:2003 arespecific to organizations providing medical devices, regardless of the type or size of the organization. The certification assures our customers and partners ofour commitment to quality, and in the quality of our innovative products and processes. Additionally, we believe that the ISO 13485:2003 certification offersnew markets and business opportunities for our products in the global marketplace. Employees As of March 5, 2012, we had 179 full-time employees and 184 total employees, of whom 72 were in production, 68 were in sales, 5 werein marketing, and 39 were in administrative functions. In addition, we make use of a varying number of outsourced services to manage normal businesscycles. None of these employees is covered by a collective bargaining agreement and management considers relations with employees and services partners tobe good. Facilities We lease approximately 16,000 square feet in a building located at 600 Cruiser Lane, Belgrade, Montana 59714. This space includes a clean room,fully equipped diagnostics laboratory, microbiology laboratory and testing laboratory. We lease the building under a ten-year operating lease which runsthrough August 2013 and has a monthly lease payment of $10,000. The lease also has a ten-year renewal option. In November 2007, we purchased a 14,000 square foot facility at 664 Cruiser Lane, Belgrade, Montana 59714. This building is an FDA registeredfacility with 5 “Class 1,000” clean rooms and currently houses our medical device coatings operations. The validated manufacturing areas and laboratoryfacilities located in this facility provide processing and testing space to manufacture medical devices pursuant to FDA, GMP regulations, and ISO13485:2003. We expect this facility to meet all of our regulatory requirements for the manufacture of future Bacterin-label products, including our surgicaldrains (ViaTM and Elutia®), as well as production requirements for coated medical devices from our medical device partners. The facility is registered withthe FDA for device design, device manufacture, and contract manufacture, as well as for screening, testing, storing, and distributing biological tissues. We also lease space at 732 Cruiser Lane, Belgrade, Montana 59714 and we lease office space in Englewood, Colorado, where certain of ouradministrative functions are housed. 14 ITEM 1A.RISK FACTORS Our business and an investment in our securities are subject to a variety of risks. The following risk factors describe some of the mostsignificant events, facts or circumstances that could have a material adverse effect upon our business, financial condition, results of operations, abilityto implement our business plan and the market price for our securities. Many of these events are outside of our control. If any of these risks actuallyoccurs, our business, financial condition or results of operations may be materially adversely affected. In such case, the trading price of our commonstock could decline and investors in our common stock could lose all or part of their investment. Risks Related to Our Business and Our Industry Our products are relatively new and long-term results are incomplete, thus, the future of our business still remains uncertain. Many of our current products are relatively new and have been in use for a relatively short period of time. The results of the use of these productswill be monitored for many years. While preliminary results have been good, there can be no assurance that any or all of these products will perform well overlonger periods of time. Future product issues may expose us to legal actions, removal of regulatory approvals or products being pulled from use. If we becomesubject to product or general liability or errors and omissions claims, they could be time-consuming and costly. The U.S. Food and Drug Administration, orthe FDA, and foreign regulatory authorities may impose significant restrictions on the use or marketing of our products or impose additional requirements. Later discovery of previously unknown problems with any of these products or their manufacture may result in further restrictions, including withdrawal ofthe product from the market. Any such restrictions or withdrawals could materially affect our ability to execute our business plan. In addition, governmentalauthorities could seize our inventory of products, or force us to recall any product already in the market if we, or any of our tissue bank suppliers, fail tocomply with FDA or other governmental regulations. Many competitive products exist and more will be developed, and we may not be able to successfully compete because we are smaller andhave fewer financial resources. Our business is in a very competitive and evolving field. Rapid new developments in this field have occurred over the past few years, and areexpected to continue to occur. Other companies already have competing products available or about to be available or may develop products to compete withours. Many of these products may have short regulatory timeframes and our competitors, many with more substantial development resources, may be ableto develop competing products that are equal to or better than ours. This may make our products obsolete or undesirable by comparison and reduce ourrevenue. Our success will depend, in large part, on our ability to maintain a competitive position concerning our intellectual property, and to develop newtechnologies and new applications for our technologies. Many of our competitors have substantially greater financial and technical resources, as well as greaterproduction and marketing capabilities, than us. The medical community and the general public may perceive synthetic materials and growth factors as safer, which could have a materialadverse effect on our business. Members of the medical community and the general public may perceive synthetic materials and growth factors as safer than our allograft-basedbone tissue products. Our products may be incapable of competing successfully with synthetic bone graft substitutes and growth factors developed and commercialized byothers, which could have a material adverse effect on our business, financial condition and results of operations. 15 Negative publicity concerning methods of human tissue recovery and screening of donor tissue in the industry in which we operate mayreduce demand for our allografts and impact the supply of available donor tissue. Media reports or other negative publicity concerning both improper methods of tissue recovery from donors and disease transmission from donatedtissue may limit widespread acceptance of our allografts. Unfavorable reports of improper or illegal tissue recovery practices, both in the United States andinternationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation andmarket acceptance of allograft technologies. Potential patients may not be able to distinguish our allografts, technologies and the tissue recovery and theprocessing procedures from those of our competitors or others engaged in tissue recovery. In addition, families of potential donors may become reluctant toagree to donate tissue to for-profit tissue processors. We are highly dependent on the availability of human donors; any disruptions could cause our customers to seek alternative providers ortechnologies. We are highly dependent on our ability to obtain donor cadavers as the raw material for many of our products. The availability of acceptable donorsis relatively limited and we compete with many other companies for this limited availability. The availability of donors is also impacted by regulatorychanges, general public opinion of the donor process and our reputation for our handling of the donor process. In addition, due to seasonal changes in themortality rates, some scarce tissues are at times in short supply. Any disruption in the supply of this crucial raw material could have significantconsequences for our revenue, operating results and continued operations. We will need to continue to innovate and develop new products to be desirable to our customers. The markets for our products and services are characterized by rapid technological change, frequent new introductions, changes in customers’demands and evolving industry standards. Accordingly, we will need to continue to innovate and develop additional products. These efforts can be costly,subject to long development and regulatory delays and may not result in products approved for sale. These costs may hurt operating results and may requireadditional capital. If additional capital is not available, we may be forced to curtail development activities. In addition, any failure on our behalf to react tochanging market conditions could create an opportunity for other market participants to capture a critical share of the market within a short period of time. Our success will depend on our ability to engage and retain qualified technical personnel who are difficult to attract. Our success will depend on our ability to attract and retain qualified technical personnel to assist in research and development, testing, productimplementation, low-scale production and technical support. Competition for qualified technical personnel is intense, and we may encounter difficulty inengaging and retaining qualified personnel needed to implement our growth plan. The demand for such personnel is high and the supply of qualified technicalpersonnel is limited. A significant increase in the wages paid by competing employers could result in a reduction of our technical work force and increases inthe wage rates that we must pay or both. If either of these events were to occur, our cost structure could increase and our growth potential could be impaired. Loss of key members of our management who we need to succeed could adversely affect our business. We are highly dependent on the services of Guy Cook, our President and Chief Executive Officer, and other key members of our management teamand the loss of his or any of their services could have an adverse effect on our future operations. We do not currently maintain a key-man life insurance policyinsuring the life of Mr. Cook or any other member of our management team. We are highly dependent on the continued availability of our facilities and would be harmed if they were unavailable for any prolongedperiod of time. Any failure in the physical infrastructure of our facilities or services could lead to significant costs and disruptions that could reduce our revenuesand harm our business reputation and financial results. We are highly reliant on our Belgrade, Montana facilities. Any natural or man-made event thatimpacts our ability to utilize these facilities could have a significant impact on our operating results, reputation and ability to continue operations. Theregulatory process for approval of facilities is time-consuming and our ability to rebuild facilities would take a considerable amount of time and expense andcause a significant disruption in service to our customers. Further, the FDA or some other regulatory agency could identify deficiencies in future inspectionsof our facilities or our supplies that could disrupt our business, reducing profitability. We carry business interruption insurance of up to $1 million perlocation to help in these instances, but it may not cover all costs or our standing in the market. 16 We will be required to invest in facilities and equipment on a continuing basis, which will put pressure on us to finance these investments. We have invested, and intend to continue to invest, in facilities and state-of-the-art equipment in order to increase, expand or update our capabilitiesand facilities. Changes in technology or sales growth beyond currently established production capabilities, which we anticipate, will require furtherinvestment. We currently anticipate that we will need to spend between $4 and $5 million over the next five years in order to increase, expand or update ourexisting facilities to meet our expected growth over that period. However, there can be no assurance that we will generate sufficient funds from operations tomaintain our existing facilities and equipment or to finance any required capital investments or that other sources of funding will be available. Additionally,there can be no guarantee that any future expansion will not negatively affect earnings. Future revenue will depend on our ability to develop new sales channels and there can be no assurance that these efforts will result insignificant sales. We are in the process of developing sales channels for our products but there can be no assurance that these channels can be developed or that we willbe successful in selling our products. We currently sell our products through direct sales by our employees and indirectly through distributor relationships. We recently engaged in a major initiative to build and further expand our direct sales force. The increased sales and marketing expenses are anticipated to befunded from operating cash flow. The incurrence of these additional expenses may impact our operating results and there can be no assurance of theireffectiveness. Many of our competitors have well-developed sales channels and it may be difficult for us to break through these competitors to take marketshare. If we are unable to develop these sales channels, we may not be able to grow revenue or maintain our current level of revenue generation. There may be fluctuations in our operating results, which will impact our stock price. Significant annual and quarterly fluctuations in our results of operations may be caused by, among other factors, our volume of revenues, the timingof new product or service announcements, releases by us and our competitors in the marketplace of new products or services, and general economicconditions. There can be no assurance that the level of revenues and profits, if any, achieved by us in any particular fiscal period will not be significantlylower than in other comparable fiscal periods. Our expense levels are based, in part, on our expectations as to future revenues. As a result, if future revenuesare below expectations, net income or loss may be disproportionately affected by a reduction in revenues, as any corresponding reduction in expenses may notbe proportionate to the reduction in revenues. We are dependent on the ability of our licensees and development partners for obtaining regulatory approvals and market acceptance oftheir products, for which we may have no control. Our success will depend on our ability, or that of our licensees, to obtain timely regulatory approval for products employing our technology. Moreover, our success will also depend on whether, and how quickly, our licensees gain market acceptance of products incorporating our technology,compared to competitors using competing technologies. Our revenues will depend upon prompt and adequate reimbursement from public and private insurers and national health systems. Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. The ability ofhospitals to pay fees for allograft bone tissue products depends in part on the extent to which reimbursement for the costs of such materials and relatedtreatments will continue to be available from governmental health administration authorities, private health coverage insurers and other organizations. We mayhave difficulty gaining market acceptance for our products if government and third-party payors do not provide adequate coverage and reimbursement tohospitals. Major third-party payors of hospital services and hospital outpatient services, including Medicare, Medicaid and private healthcare insurers,annually revise their payment methodologies, which can result in stricter standards for reimbursement of hospital charges for certain medical procedures or theelimination of reimbursement. Further, Medicare, Medicaid and private healthcare insurer cutbacks could create downward price pressure on our products. 17 Our operating results will be harmed if we are unable to effectively manage and sustain our future growth. We might not be able to manage our future growth efficiently or profitably. Our business is unproven on a large scale and actual revenue andoperating margins, or revenue and margin growth, may be less than expected. If we are unable to scale our production capabilities efficiently, we may fail toachieve expected operating margins, which would have a material and adverse effect on our operating results. Growth may also stress our ability to adequatelymanage our operations, quality of products, safety and regulatory compliance. If growth significantly decreases our reserves, we may be required to obtainadditional financing, which may increase our indebtedness or result in dilution to our stockholders. Further, there can be no assurance that we would be ableto obtain any additional financing. Future business combinations or acquisitions may be difficult to integrate and cause our attention to be diverted. We may pursue various business combinations with other companies or strategic acquisitions of complementary businesses, product lines ortechnologies. There can be no assurance that such acquisitions will be available at all, or on terms acceptable to us. These transactions may requireadditional financing which may increase our indebtedness or outstanding shares, resulting in dilution to stockholders. The inability to obtain such futurefinancing may inhibit our growth and operating results. Integration of acquisitions or additional products can be time consuming, difficult and expensive andmay significantly impact operating results. Furthermore, the integration of any acquisition may divert management’s time and resources from our corebusiness. We may sell some or all of our product lines to other companies or may agree to combine with another company. Selling some of our product linesmay inhibit our ability to generate positive operating results going forward. We may be subject to future product liability litigation that could be expensive and our insurance coverage may not be adequate in acatastrophic situation. Although we are not currently subject to any product liability proceedings, and we have no reserves for product liability disbursements, we mayincur material liabilities relating to product liability claims in the future, including product liability claims arising out of the usage of our products. Wecurrently carry product liability insurance, however, our insurance coverage and any reserves we may maintain in the future for product related liabilities maynot be adequate and our business could suffer material adverse consequences. We may implement a product recall or voluntary market withdrawal due to product defects or product enhancements and modifications,which would significantly increase our costs. The manufacturing and marketing of our biologic products, medical devices and coating technologies involves an inherent risk that our productsmay prove to be defective. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. Arecall or withdrawal of one of our products, or a similar product manufactured by another manufacturer, could impair sales of the products we market as aresult of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety. Risks Related to the Regulatory Environment in which We Operate U.S. governmental regulation could restrict the use of our products or our procurement of tissue. In the United States, the procurement and transplantation of allograft bone tissue is subject to federal law pursuant to the National Organ TransplantAct, or NOTA, a criminal statute which prohibits the purchase and sale of human organs used in human transplantation, including bone and related tissue,for “valuable consideration.” NOTA permits reasonable payments associated with the removal, transportation, processing, preservation, quality control,implantation and storage of human bone tissue. We provide services in all of these areas in the United States, with the exception of removal and implantation,and receive payments for all such services. We make payments to certain of our clients and tissue banks for their services related to recovering allograft bonetissue on our behalf. If NOTA is interpreted or enforced in a manner which prevents us from receiving payment for services we render or which prevents usfrom paying tissue banks or certain of our clients for the services they render for us, our business could be materially and adversely affected. 18 We are engaged through our marketing employees, independent sales agents and sales representatives in ongoing efforts designed to educate themedical community as to the benefits of our products, and we intend to continue our educational activities. Although we believe that NOTA permits paymentsin connection with these educational efforts as reasonable payments associated with the processing, transportation and implantation of our products, paymentsin connection with such education efforts are not exempt from NOTA’s restrictions and our inability to make such payments in connection with our educationefforts may prevent us from paying our sales representatives for their education efforts and could adversely affect our business and prospects. No federalagency or court has determined whether NOTA is, or will be, applicable to every allograft bone tissue-based material which our processing technologies maygenerate. Assuming that NOTA applies to our processing of allograft bone tissue, we believe that we comply with NOTA, but there can be no assurance thatmore restrictive interpretations of, or amendments to, NOTA will not be adopted in the future which would call into question one or more aspects of ourmethod of operations. Our business is subject to continuing regulatory compliance by the FDA and other authorities which is costly and could result in delaysin the commercialization of our products. As a manufacturer and marketer of medical devices, we are subject to extensive regulation by the FDA and the Center for Medicare Services of theU.S. Department of Health and Human Services and other federal governmental agencies and, in some jurisdictions, by state and foreign governmentalauthorities. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the design, manufacture,testing, labeling, promotion and sales of the devices, the maintenance of certain records, the ability to track devices, the reporting of potential product defects,the import and export of devices and other matters. We are facing an increasing amount of scrutiny and compliance costs as more states are implementingregulations governing medical devices, pharmaceuticals and/or biologics which affect many of our products. Medical devices that incorporate coatings technology are subject to FDA regulation and compliance. Generally, any medical device manufacturer thatwishes to incorporate our coatings technology into its products will be responsible for obtaining FDA approval for the medical devices it intends to marketthough we will assist in the 510(k) filing submitted by licensees. The FDA process can take several months to several years in the United States. The timerequired to obtain approval for international sales may be longer or shorter, depending on the laws of the particular country. There can be no assurance thatour licensees will be able to obtain FDA or international approval on a timely basis. The FDA may also require the more extensive Premarket ApprovalApplication, or PMA, process for certain products, which results, in effect, in a private license being granted to the applicant for marketing a particularmedical device and requires an additional level of FDA scientific review to ensure the safety and effectiveness of such devices. Approval or clearance mayplace substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed, warnings that may be required toaccompany the product or additional restrictions placed on the sale and/or use of the product. Changes in regulations or adoption of new regulations could alsocause delays in obtaining product approval. In addition, regulatory approval is subject to continuing compliance with regulatory standards, and productapproval is subject to withdrawal if a licensee fails to comply with standards, or if an unforeseen event should occur concerning a product. Significant delaysin obtaining product approval could have a significantly detrimental impact on our business. Human tissues intended for transplantation have been regulated by the FDA since 1993. In May 2005, three new comprehensive regulations wentinto effect that address manufacturing activities associated with human cells, tissues and cellular and tissue-based products, or HCT/Ps. The first requiresthat companies that produce and distribute HCT/Ps register with the FDA. The second provides criteria that must be met for donors to be eligible to donatetissues and is referred to as the “Donor Eligibility” rule. The third rule governs the processing and distribution of the tissues and is often referred to as the“Current Good Tissue Practices” rule. The “Current Good Tissue Practices” rule covers all stages of allograft processing, from procurement of tissue todistribution of final allografts. Together they are designed to ensure that sound, high quality practices are followed to reduce the risk of tissue contaminationand of communicable disease transmission to recipients. These regulations increased regulatory scrutiny within the industry in which we operate and havelead to increased enforcement action which affects the conduct of our business. In addition, these regulations can increase the cost of tissue recovery activities. Other regulatory entities include state agencies with statutes covering tissue banking. Regulations issued by Florida, New York, California andMaryland will be particularly relevant to our business. Most states do not currently have tissue banking regulations. However, recent incidents of allograftrelated infections in the industry may stimulate the development of regulation in other states. It is possible that others may make allegations against us oragainst donor recovery groups or tissue banks about non-compliance with applicable FDA regulations or other relevant statutes or regulations. Allegations likethese could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for our business and the industry inwhich we operate. 19 Our products may be subject to regulation in the EU as well should we enter that market. In the European Union, or EU, regulations, if applicable,differ from one EU member state to the next. Because of the absence of a harmonized regulatory framework and the proposed regulation for advanced therapymedicinal products in the EU, as well as for other countries, the approval process for human derived cell or tissue based medical products may be extensive,lengthy, expensive and unpredictable. Some of our products may be subject to European Union member states’ regulations that govern the donation,procurement, testing, coding, traceability, processing, preservation, storage, and distribution of human tissues and cells and cellular or tissue-basedproducts. Some EU member states have their own tissue banking regulations. Clinical trials can be long, expensive and ultimately uncertain which could jeopardize our ability to obtain regulatory approval andmarket our products. Clinical trials are required to develop products, gain market acceptance and obtain 510(k) certifications from the FDA. We have several clinicaltrials planned and will likely undertake future trials. These trials often take two years to execute and are subject to factors within and outside of our control.The outcome of these trials is uncertain and may have a significant impact on the success of our current and future products and future profits. The commencement or completion of any of our clinical trials may be delayed or halted for numerous reasons, including, but not limited to, aregulatory body placing clinical trials on hold, patients not enrolling in clinical trials at the rate we expect, patients experiencing adverse side effects, thirdparty contractors failing to perform in accordance with our anticipated schedule or consistent with good clinical practices, inclusive or negative interim trialresults or our inability to obtain sufficient quantities of raw materials to produce our products. Our development costs will increase if we have material delaysin our clinical trials or if we need to perform more or larger clinical trials than planned. If this occurs, our financial results and the commercial prospects forour products will be harmed and our prospects for profitability will be harmed. Product pricing (and, therefore, profitability) is subject to regulatory control which could impact our revenue and financial performance. The pricing and profitability of our products may become subject to control by the government and other third-party payors. The continuing effortsof governmental and other third-party payors to contain or reduce the cost of healthcare through various means may adversely affect our ability to successfullycommercialize our products. In most foreign markets, the pricing and/or profitability of certain diagnostics and prescription pharmaceuticals are subject togovernmental control. In the United States, we expect that there will continue to be federal and state proposals to implement similar governmental controlthough it is unclear which proposals will ultimately become law, if any. Changes in prices, including any mandated pricing, could impact our revenue andfinancial performance. Risks Related to Our Intellectual Property Failure to protect our intellectual property rights could result in costly and time consuming litigation and our loss of any potentialcompetitive advantage. Our success will depend, to a large extent, on our ability to successfully obtain and maintain patents, prevent misappropriation or infringement ofintellectual property, maintain trade secret protection, and conduct operations without violating or infringing on the intellectual property rights of third parties. There can be no assurance that our patented and patent-pending technologies will provide us with a competitive advantage, that we will be able to develop oracquire additional technology that is patentable, or that third parties will not develop and offer technologies which are similar to ours. Moreover, we canprovide no assurance that confidentiality agreements, trade secrecy agreements or similar agreements intended to protect unpatented technology will provide theintended protection. Intellectual property litigation is extremely expensive and time-consuming, and it is often difficult, if not impossible, to predict theoutcome of such litigation. A failure by us to protect our intellectual property could have a materially adverse effect on our business and operating results andour ability to successfully compete in this industry. 20 We may not be able to obtain or protect our proprietary rights relating to our products without resorting to costly and time consuminglitigation. We may not be able to obtain, maintain and protect certain proprietary rights necessary for the development and commercialization of our products orproduct candidates. Our commercial success will depend in part on obtaining and maintaining patent protection on our products and successfully defendingthese patents against third-party challenges. Our ability to commercialize our products will also depend in part on the patent positions of third parties,including those of our competitors. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legaland factual questions. Accordingly, we cannot predict with certainty the scope and breadth of patent claims that may be afforded to other companies’ patents. We could incur substantial costs in litigation if we are required to defend against patent suits brought by third parties, or if we initiate suits to protect ourpatent rights. In addition to the risks involved with patent protection, we also face the risk that our competitors will infringe on our trademarks. Any infringementcould lead to a likelihood of confusion and could result in lost sales. There can be no assurance that we will prevail in any claims we make to protect our intellectual property. Future protection for our proprietary rights is uncertain which may impact our ability to successfully compete in our industry. The degree of future protection for our proprietary rights is uncertain. We cannot ensure that: ¨we were the first to make the inventions covered by each of our patent applications; ¨we were the first to file patent applications for these inventions; ¨others will not independently develop similar or alternative technologies or duplicate any of our technologies; ¨any of our pending patent applications will result in issued patents; ¨any of our issued patents or those of our licensors will be valid and enforceable; ¨any patents issued to us or our collaborators will provide a basis for commercially viable products or will provide us with any competitiveadvantages or will not be challenged by third parties; ¨we will develop additional proprietary technologies that are patentable; ¨the patents of others will not have a material adverse effect on our business rights; or ¨the measures we rely on to protect the intellectual property underlying our products may not be adequate to prevent third parties from using ourtechnology, all of which could harm our ability to compete in the market. Our success depends on our ability to avoid infringing on the intellectual property rights of third parties which could expose us tolitigation or commercially unfavorable licensing arrangements. Our commercial success depends in part on our ability and the ability of our collaborators to avoid infringing patents and proprietary rights of thirdparties. Third parties may accuse us or our collaborators of employing their proprietary technology in our products, or in the materials or processes used toresearch or develop our products, without authorization. Any legal action against our collaborators or us claiming damages and/or seeking to stop ourcommercial activities relating to the affected products, materials and processes could, in addition to subjecting us to potential liability for damages, require ourcollaborators or us to obtain a license to continue to utilize the affected materials or processes or to manufacture or market the affected products. We cannotpredict whether we or our collaborators would prevail in any of these actions or whether any license required under any of these patents would be madeavailable on commercially reasonable terms, if at all. If we are unable to obtain such a license, we or our collaborators may be unable to continue to utilize theaffected materials or processes or manufacture or market the affected products or we may be obligated by a court to pay substantial royalties and/or otherdamages to the patent holder. Even if we are able to obtain such a license, the terms of such a license could substantially reduce the commercial value of theaffected product or products and impair our prospects for profitability. Accordingly, we cannot predict whether or to what extent the commercial value of theaffected product or products or our prospects for profitability may be harmed as a result of any of the liabilities discussed above. Furthermore, infringementand other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and can divert management’s attention from ourcore business. We may be unable to obtain and enforce intellectual property rights to adequately protect our products and related intellectual property. 21 Others may claim an ownership interest in our intellectual property which could expose us to litigation and have a significant adverseeffect on our prospects. A third-party may claim an ownership interest in one or more of our patents or intellectual property. While we believe we own 100% of the right, titleand interest in the patents for which we have applied and our other intellectual property, including that which we license from third parties, we cannotguarantee that a third-party will not, at some time, assert a claim or an interest in any of such patents or intellectual property. A successful challenge or claimby a third party to our patents or intellectual property could have a significant adverse effect on our prospects. The result of litigation may result in financial loss and/or impact our ability to sell our products going forward. We intend to vigorously defend any future intellectual property litigation that may arise but there can be no assurance that we will prevail in thesematters. An unfavorable judgment may result in a financial burden on us. An unfavorable judgment may also result in restrictions on our ability to sellcertain products and therefore may impact future operating results. Risks Related to Our Common Stock We have found material weaknesses in our system of internal controls over financial reporting that have not been fully remediated as ofDecember 31, 2011, which could adversely affect our ability to record, process, summarize and report certain financial data. In connection with the evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2011, managementdiscovered the following deficiencies: (i) insufficient number of personnel with the appropriate level of experience and technical expertise to appropriatelyresolve non-routine and complex accounting matters while completing the financial statement close process; (ii) our inventory records were kept separately fromour accounting system, requiring duplicate input and reconciliation, thereby increasing the risk of errors in recording inventory transactions and (iii) thedocumentation surrounding equity transactions for employees and consultants needs to be strengthened to comply with procedures outlined by the Company toensure that all equity transactions are properly recorded in the appropriate periods. In light of these material weaknesses, management has concluded that wedid not maintain effective internal control over our disclosure controls and procedures as of December 31, 2011, which constituted a material weakness in ourinternal controls over financial reporting because they resulted in a reasonable possibility that a material misstatement could occur in our annual or interimfinancial statements which could not be prevented or detected. Although we are working to remediate these deficiencies as outlined in Item 9A of this AnnualReport on Form 10-K, there can be no assurance that our remediation efforts will resolve all of our internal control deficiencies or that we will not discoveradditional material weaknesses or significant deficiencies as we evaluate and test such controls in the future. Such material weaknesses or deficiencies couldadversely affect our ability to record, process, summarize and report our financial information, which could cause current and potential stockholders to loseconfidence in our financial reporting which could have a negative effect on the trading price of our common stock. Because we became public through a reverse merger, we may not be able to attract the attention of major brokerage firms. There are coverage risks associated with our becoming public through a reverse merger, including, among other things, security analysts of majorbrokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. We cannotassure you that brokerage firms will want to conduct any public offerings on our behalf in the future. 22 The market price of our common stock may be volatile and may decline in value. The market price of our common stock has been and will likely continue to be highly volatile, as is the stock market in general. Some of the factorsthat may materially affect the market price of our common stock are beyond our control, such as changes in financial estimates by industry and securitiesanalysts, conditions or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the marketprice of our common stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to the operating performance of thespecific companies. These broad market fluctuations may adversely affect the market price of our common stock. Our stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementarybusinesses. If our future operations or acquisitions are financed through the issuance of equity securities, our stockholders could experience significant dilution.In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights andpreferences of our common stock. We also have established an equity incentive plan for our management and employees. We expect to grant options topurchase shares of our common stock to our directors, employees and consultants and we will grant additional options in the future. The issuance of shares ofour common stock upon the exercise of these options may result in dilution to our stockholders. Our current management can exert significant influence over us and make decisions that are not in the best interests of all stockholders. Our executive officers and directors beneficially own as a group approximately 38% of our outstanding shares of common stock. As a result, thesestockholders will be able to assert significant influence over all matters requiring stockholder approval, including the election and removal of directors and anychange in control. In particular, this concentration of ownership of our outstanding shares of common stock could have the effect of delaying or preventing achange in control, or otherwise discouraging or preventing a potential acquirer from attempting to obtain control. This, in turn, could have a negative effect onthe market price of our common stock. It could also prevent our stockholders from realizing a premium over the market prices for their shares of commonstock. Moreover, the interests of the owners of this concentration of ownership may not always coincide with our interests or the interests of otherstockholders and, accordingly, could cause us to enter into transactions or agreements that we would not otherwise consider. We do not anticipate paying dividends in the foreseeable future; you should not buy our stock if you expect dividends. We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, we do not anticipate paying any cashdividends on our common stock in the foreseeable future. We could issue “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interestsand impairing their voting rights, and provisions in our charter documents and under Delaware law could discourage a takeover thatstockholders may consider favorable. Our certificate of incorporation provides for the authorization to issue up to 5,000,000 shares of “blank check” preferred stock with designations,rights and preferences as may be determined from time to time by our board of directors. Our board of directors is empowered, without stockholder approval,to issue one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair thevoting power of, our common stockholders. The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing achange in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that couldimpede the success of any attempt to change control of our company. In addition, we have a staggered board of directors and advanced notice is required priorto stockholder proposals, which might further delay a change of control. Item 1B.Unresolved Staff CommentsNone 23 Item 2.Properties We lease approximately 16,000 square feet in a building located at 600 Cruiser Lane, Belgrade, Montana 59714. In addition to our corporateheadquarters, this space also includes a clean room, fully equipped diagnostics laboratory, microbiology laboratory and testing laboratory. We lease thebuilding under a ten-year operating lease which runs through October 2013 and has a monthly lease payment of $10,000. The lease also has a ten-year renewaloption. In November 2007, we purchased a 14,000 square foot facility at 664 Cruiser Lane, Belgrade, Montana 59714. This building is an FDA registeredfacility with 5 “Class 1,000” clean rooms and currently houses our medical device coatings operations. The validated manufacturing areas and laboratoryfacilities located in this facility provide processing and testing space to manufacture medical devices pursuant to FDA, GMP regulations, and ISO13485:2003. We expect this facility to meet all of our regulatory requirements for the manufacture of future Bacterin-label products, including our surgicaldrains (ViaTM and Elutia®), as well as production requirements for coated medical devices from our medical device partners. The facility is registered withthe FDA for device design, device manufacture, and contract manufacture, as well as for screening, testing, storing, and distributing biological tissues. We also lease space at 732 Cruiser Lane, Belgrade, Montana 59714 and office space in Englewood, Colorado, where certain of our administrativeand sales functions are housed. Item 3.Legal Proceedings In November 2009, a complaint was served on the Company in connection with the following court action filed in Utah state court: Yanaki and Activatek,Inc. v. Cook and Bacterin International, Inc., Case Number 090912772. The complaint involves attempts by one of the plaintiffs, Yanaki, to sell shares ofthe Company’s common stock to a third party in a private sale. Plaintiffs claim, as their primary allegation, that the Company intentionally interfered withthe sales contract. Yanaki seeks $300,000, 358,904 shares of the Company’s common stock, attorneys fees, costs and punitive damages. ActivaTek allegesthat Yanaki intended to invest the proceeds from his stock sale in ActivaTek and ActivaTek lost millions of dollars from not receiving that investment. ActivaTek seeks $5 to $10 million, attorneys fees, costs and punitive damages. The Company believes this case lacks merit and plans to vigorously defendthese claims. In January 2012, we settled a previously disclosed action we initiated against a former employee, Patrick Klingler, and his current employer, TissueTransplant Technology, Ltd., aka Bone Bank Allografts in the District Court for Douglas County, Colorado. The settlement agreement provides that Mr.Klingler and his employer will not use our proprietary information or solicit our employees, and both parties agreed not to disparage the other parties. On March 2, 2012, Bacterin International, Inc. ("Bacterin") filed a Complaint and Jury Demand in the United States District Court for the District ofColorado in Civil Action No. 12cv558-REB-MEH against Tissue Transplant Technology, Ltd, a Texas Limited Partnership and its general partner T-TOT,LLC, a Texas Limited Liability Company; and Transplant Technologies of Texas, Ltd, a Texas Limited Partnership, and its general partners TTT, LLC, aTexas Limited Liability Company and JWL Management, LLC, a Texas Limited Liability Company. Defendant Tissue Transplant Technology, LTD isusing the trademark "Sterisponge" to identify various allograft products in the marketplace. In view of Bacterin's prior and established rights in the mark"Osteosponge," Bacterin has asserted against Tissue Transplant Technology, LTD claims for trademark infringement under federal law, unfair competitionunder federal law, trademark infringement under Colorado common law, and unfair competition under Colorado common law. In addition, Bacterin has alsoasserted against Transplant Technologies of Texas, LTD a claim for cancellation of a Federal Registration for "Sterisponge". Bacterin seeks injunctive relief,damages and exemplary damages to be determined at trial. On March 2, 2012, Bacterin International, Inc. ("Bacterin") filed a Complaint and Jury Demand in the United States District Court for the District ofColorado in Civil Action No. 12cv555-REB-KLM against Evologics, LLC, a Texas limited liability company. Defendant Evologics is using the trademark"Evosponge" to identify various allograft products in the marketplace. In view of Bacterin's prior and established rights in the mark "Osteosponge," Bacterinhas asserted against Evologics claims for trademark infringement under federal law, unfair competition under federal law, trademark infringement underColorado common law, and unfair competition under Colorado common law. Bacterin seeks injunctive relief, damages and exemplary damages to bedetermined at trial.24 Item 4.Mine Safety Disclosures Not Applicable. PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information From July 1, 2010 to March 4, 2011, our common stock was traded on the OTC Bulletin Board under the symbol BIHI.OB. Beginning on March7, 2011, our common stock began trading on the NYSE Amex under the symbol BONE. The following table sets forth the range of the high and low pricesfor our common stock for each quarter, as reported by the OTC Bulletin Board from July 1, 2010 through March 4, 2011 and by the NYSE Amex fromMarch 7, 2011 through December 31, 2011. High Low Third Quarter 2010 (July 1, 2010 – September 30, 2010) $7.68 $2.50 Fourth Quarter 2010 (October 1, 2010 – December 31, 2010) $8.50 $5.86 First Quarter 2011 (January 1, 2011 – March 31, 2011) $9.00 $3.00 Second Quarter 2011 (April 1, 2011 – June 30, 2011) $4.90 $2.60 Third Quarter 2011 (July 1, 2011 – September 30, 2011) $2.99 $1.61 Fourth Quarter 2011 (October 1, 2011 – December 31, 2011) $3.93 $1.76 Holders of Record As of March 5, 2012, we had 364 holders of record. Dividends We have not paid any cash dividends and do not expect to do so in the foreseeable future. Securities authorized for issuance under equity compensation plans Plan category Number ofsecurities tobe issuedupon exerciseof outstandingoptions,warrants andrights Weighted-averageexercise priceof outstandingoptions,warrants andrights Number ofsecuritiesremainingavailable forfutureissuanceunder equitycompensationplans(excludingsecuritiesreflected incolumn (a)) Equity compensation plans approved by security holders 4,828,910 $2.14 2,538,190(1)Equity compensation plans not approved by security holders N/A $ N/A N/A Total $ (1) In addition to options outstanding, the Company also has 1,632,900 shares of restricted stock that have been issued under the Plan to consultants. 25 Bacterin International Equity Incentive Plan All of our stock options were granted under the Amended and Restated Bacterin International Equity Incentive Plan. The following is a summary ofthe material terms of that plan. The purpose of the Bacterin International Equity Incentive Plan is to enable us to attract, retain and motivate key employees, directors and, onoccasion, independent consultants, by providing them with stock options and restricted stock grants. Stock options granted under the incentive compensationplan may be either incentive stock options to employees, as defined in Section 422A of the Internal Revenue Code of 1986, or non-qualified stockoptions. The plan is administered by the compensation committee of our board of directors. The administrator of the plan has the power to determine theterms of any stock options granted under the incentive plan, including the exercise price, the number of shares subject to the stock option and conditions ofexercise. Stock options granted under the incentive plan are generally not transferable, vest in installments and are exercisable during the lifetime of theoptionee only by such optionee. The exercise price of all incentive stock options granted under the incentive plan must be at least equal to the fair market valueof the shares of common stock on the date of the grant. The specific terms of each stock option grant will be reflected in a written stock option agreement. There are 9,000,000 shares of our common stock authorized to be issued under the plan. As of December 31, 2011, we had outstanding options topurchase 4,828,910 shares granted to employees and executives (at exercise prices ranging from $0.10 to $7.40 per share). In addition, we have issued1,632,900 shares of restricted stock to consultants leaving an additional 2,538,190 shares available for issuance thereunder. Recent Sales of Unregistered (and Registered) Securities We did not sell any unregistered shares in the fourth quarter. However, during the first quarter of 2012, pursuant to our previously disclosed May 27, 2011Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”) and S-3 registration statement declared effective on July 19, 2011, we issuedapproximately 1,475,037 shares of our common stock to LPC for aggregate proceeds of approximately $3,899,994. We intend to use the proceeds forworking capital and general corporate purposes. Purchases of Equity Securities by the Issuer and Affiliated Purchasers We did not repurchase any shares of our common stock during the fourth quarter of 2011. Item 6 Selected Financial Data Not required. 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 partsof 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 tocertain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond ourcontrol. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that theindicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speakonly as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors that affect ourbusiness, which are described in the section entitled “Risk Factors” in Item 1A of this Form 10-K. Comparison of Twelve Months Ended December 31, 2011 and December 31, 201026 Twelve Months Ended December 31, 2011 2010 Amount % ofRevenue Amount % ofRevenue Revenue Tissue sales $29,657,423 98.37% $15,214,775 98.68%Royalties and other 492,059 1.63% 202,872 1.32%Total Revenue 30,149,482 100.00% 15,417,647 100.00% Cost of tissue sales 9,109,250 30.21% 3,363,876 21.82% Gross Profit 21,040,232 69.79% 12,053,771 78.18% Operating Expenses General and administrative 6,559,101 21.76% 8,546,193 55.43%Sales and marketing 18,501,204 61.36% 8,897,293 57.71%Depreciation and amortization 755,387 2.51% 633,827 4.11%Non-cash consulting expense 1,675,008 5.56% 1,560,324 10.12%Other expense - 0.00% 1,030,290 6.68%Total Operating Expenses 27,490,700 91.18% 20,667,927 134.05% Loss from Operations (6,450,468) -21.39% (8,614,156) -55.87% Other Income (Expense) Interest expense (1,162,597) -3.86% (1,646,940) -10.68%Change in warrant derivative liability 6,377,671 21.15% (9,206,826) -59.72%Other expense (1,771,075) -5.87% - 0.00% Total Other Income (Expense) 3,443,999 11.42% (10,853,766) -70.40% Net Loss Before Benefit (Provision) for Income Taxes (3,006,469) -9.97% (19,467,922) -126.27% Benefit (Provision) for Income Taxes Current - 0.00% - 0.00%Deferred - 0.00% - 0.00% Net Income (Loss) (3,006,469) -9.97% (19,467,922) -126.27% 27 Revenue Total revenue for the year ended December 31, 2011 increased 96% to $30,149,482 compared to $15,417,647 in the comparable prior year period.The increase of $14,731,835 was largely the result of increased sales generated from our direct sales force and independent distributors compared to the prioryear. In the middle of 2009, we transitioned from a 100% distributor based sales model to a hybrid model which includes sales from our direct sales force aswell as independent distributors which has increased the market penetration of our products. In addition, in 2011, the Company recorded stocking order salesto independent entities of approximately $2.9 million which also contributed to the increase in revenue compared to the prior year. Cost of tissue sales Costs of tissue sales consist primarily of tissue and device manufacturing costs. Costs of tissue sales increased by 171% or $5,745,374 to$9,109,250 from $3,363,876 for the twelve months ended December 31, 2010. The increase was largely the result of increased costs associated with ourhigher sales. During the fourth quarter of 2011, we extended a right of first refusal contract with one of our donor agencies for a four year period. In connectionwith the extension, we agreed to write off a receivable due from the donor agency in the amount of approximately $795,000 and recorded the write off as anincrease in cost of tissue sales. Also, during the fourth quarter, we increased our inventory reserve by approximately $200,000 associated with a voluntarymarket withdrawal of product during 2011 and recorded a write off of $200,000 of scrap inventory on a portion of our medical device inventory. In addition,we experienced an increase to the percentage of our general and administrative overhead expense allocated to cost of tissue sales based upon increasedproduction which resulted in a higher cost of tissue sales than the prior year. As a percentage of tissue sales, cost of tissue sales was 30 % of revenuescompared to 22% in the prior year. Excluding the above adjustments, cost of tissue sales for 2011 was 25% of revenue due to increased sales discounts onstocking orders to independent entities and an increase in the percentage of overhead costs allocated to inventory and cost of sales compared to the prior year. 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 40%, or $7,853,063, for the twelve months ended December 31,2011 compared to the twelve months ended December 31, 2010, 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 corporateexpenses for legal, accounting and other professional fees as well as occupancy costs. General and administrative expenses decreased 23 %, or $1,987,092, to$6,559,101, for the twelve months ended December 31, 2011 compared to 2010. The decrease is largely associated with decreased legal and professional feesincurred between the two periods as these costs were higher in 2010 when we became a public company. In addition, we increased the percentage of ourcorporate general and administrative overhead allocated to inventory and cost of sales which resulted in increased cost of sales and a decrease in general andadministrative expenses Selling and Marketing Selling and marketing expenses primarily consist of costs for trade shows, sales conventions and meetings, travel expenses, advertising and othersales and marketing related costs. In addition, stock option compensation expense associated with our sales force is also included in sales and marketingexpenses. Selling and marketing expenses increased 108%, or $9,603,911, to $18,501,204 for the twelve months ended December 31, 2011 from$8,897,293 for the comparable prior year period. As a percentage of revenue, selling and marketing expenses increased to 61% in 2011 from 58% in the prioryear. The increases were primarily the result of increased sales personnel costs, sales commissions and travel costs associated with the larger sales force aswell as an increase in marketing and advertising activities in 2011 as part of our switch to a direct sales force model from a distributor based model. 28 Depreciation Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense increased 19% to $755,387 for the twelvemonths ended December 31, 2011 from $633,827 in the comparable prior year period. The increase reflects increased equipment purchases made by usduring 2011. Non-cash Consulting Expense Non-cash consulting expense consists of non-cash expense associated with granting restricted stock to consultants. Non- cash consulting expenseincreased $114,684 to $1,675,008 for the twelve months ended December 31, 2011 from $1,560,324 in the comparable year period, an increase of 7%. As apercentage of revenues, restricted stock expense for the twelve months ended December 31, 2011 was 6%, compared to 10% in the prior year. Other Expense For 2011, the Company recorded a non cash charge of approximately $1,300,000 associated with the write off of unamortized debt discount inconnection with the repayment of outstanding debt during the year. Interest Expense Interest expense is from our promissory notes and convertible debt instruments. Interest expense for 2011 decreased $484,000 to $1,162,597, ascompared to $1,646,940 in 2010. The decrease was the result of the conversion of convertible debt instruments to equity in during 2010 resulting in reducedinterest expense between the periods. Change in Warrant Derivative Liability For 2011, the Company recorded a decrease in its non cash warrant derivative liability of $6,377,671 based upon the decrease in the closing priceof the Company’s common stock at December 31, 2011 compared to December 31, 2010. The liability is associated with the issuance of warrants as part ofits convertible debt financing, and WTI financing which contain anti dilution adjustment provisions requiring the Company to record a change in the warrantderivative liability from period to period. 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 securitiesand convertible debt, an equity credit line and other debt transactions. On June 30 and July 30, 2010, we raised approximately $9,272,000 through a privateplacement of equity securities and conversion of a portion of a bridge loan financing. In addition, during November 2010 and January 2011, we finalized adebt transaction with WTI which resulted in gross proceeds to the Company of $2,500,000 and established an accounts receivable credit facility of up to $5million with Bridge Bank. In May 2011, we established an equity credit facility with Lincoln Park Capital which provides access to up to $30 million in cashbased upon the sale of up to 5 million shares of our common stock from time to time at the Company’s option. In July 2011, we closed on a $7 million termloan transaction with Midcap Financial and Silicon Valley Bank and a portion of the proceeds were used to pay off the WTI loan and the Bridge Bank creditfacility. At December 31, 2011, we had approximately $7,834,000 of cash and cash equivalents and accounts receivables. Net cash used in operating activities for 2011 was $7,362,138. This was primarily related to cash used to fund our operations as well as an increaseof accounts receivable of $4,636,860 and an increase in our inventory balance of $2,365,403. For 2010, net cash used in operating activities was$8,371,968. Net cash used in investing activities for 2011 was $1,017,319 due largely to the purchase of property and equipment in the amount of $962,306. Net cash provided by financing activities was $8,803,087 and $9,461,666 for 2011 and 2010, respectively. The net cash provided from financingactivities during 2011 was primarily the result of the closing of the $7 million term loan financing with Midcap Financial and Silicon Valley Bank, a portionof the proceeds of which were used to pay off our WTI and Bridge Bank debt. In addition, we raised approximately $3 million through the private placementof equity securities and $1.4 million through the exercise of stock options and warrants. 29 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 investorin our shares. Cash Requirements We believe that our December 31, 2011 cash on hand and accounts receivable balance of $7,834,465, as well as credit lines available through ourequity credit facility with Lincoln Park Capital and anticipated cash receipts from sales expected from operations will be sufficient to meet our anticipated cashrequirements through June 30, 2013. We incurred approximately $19 million in sales and marketing expenses in 2011 and expect to incur $26 million in 2012as our revenues continue to increase. The increased sales and marketing expenses are largely variable expenses and are anticipated to be funded from operatingcash flow. The incurrence of these additional expenses may impact our operating results and there can be no assurance of their effectiveness. If we do not meetour revenue objectives over that period, we may need to sell additional equity securities, which could result in dilution to our stockholders, or seek additionalloans. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants thatwould 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 onterms 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 updateour existing facilities to meet our expected growth over that period. Item 7A Quantitative and Qualitative Disclosures About Market Risk Not required. Item 8 Financial Statements and Supplementary Data 30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and StockholdersBacterin International Holdings, Inc.Belgrade, Montana We have audited the accompanying consolidated balance sheet of Bacterin International Holdings, Inc. and subsidiary (the “Company”) as of December 31,2011 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. These financial statementsare the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bacterin InternationalHoldings, Inc. and subsidiary as of December 31, 2011, and the results of their operations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America. Ehrhardt Keefe Steiner & Hottman PC March 29, 2012Denver, Colorado 31 Report of Independent Registered Public Accounting Firm To the Board of Directors and Audit CommitteeBacterin International Holdings, Inc. We have audited the consolidated balance sheet of Bacterin International Holdings, Inc. (the Company) as of December31, 2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cashflows for the year then ended. These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal controls over financial reporting. Our audit included consideration ofinternal controls over financial reporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internalcontrols over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, thefinancial position of Bacterin International Holdings, Inc. as of December 31, 2010, and the results of its consolidatedoperations and its consolidated cash flows for the year then ended, in conformity with accounting principles generallyaccepted in the United States of America. Salt Lake City, UtahApril 7, 2011 32 BACTERIN INTERNATIONAL HOLDINGS, INC.Consolidated Balance Sheets as of December 31, 2011 and 2010 As of December 31, December 31, 2011 2010 ASSETS Current Assets: Cash and cash equivalents $751,111 $327,481 Trade accounts receivable, net of allowance for doubtful accounts of $1,232,806 and $157,269, respectively 7,083,354 3,522,031 Accounts receivable - related party - 613,034 Inventories, net 8,479,710 5,440,638 Prepaid and other current assets 289,326 572,015 Total current assets 16,603,501 10,475,199 Non-current inventories 920,542 1,439,384 Property and equipment, net 3,774,140 3,397,320 Intangible assets, net 656,133 355,639 Goodwill 728,618 - Note receivable - related party - 82,398 Other assets 486,914 13,675 Total Assets $23,169,848 $15,763,615 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $2,654,263 $2,260,237 Accounts payable - related party 513,193 573,036 Accrued liabilities 3,762,211 1,391,540 Warrant derivative liability 2,344,516 9,690,741 Current portion of capital lease obligations 33,791 30,105 Current portion of long-term debt 1,632,978 234,149 Total current liabilities 10,940,952 14,179,808 Long-term Liabilities: Capital lease obligation, less current portion 89,580 13,185 Long-term debt, less current portion 6,638,270 2,189,866 Total Liabilities 17,668,802 16,382,859 Commitments and Contingencies (Note 12) Stockholders' Equity (Deficit) Preferred stock, $.000001 par value; 5,000,000 shares authorized; no shares issued and outstanding - - Common stock, $.000001 par value; 95,000,000 shares authorized; 40,841,218 shares issued and outstanding as ofDecember 31, 2011 and 36,994,715 shares issued and outstanding on December 31, 2010 40 37 Additional paid-in capital 45,452,732 36,325,976 Retained deficit (39,951,726) (36,945,257)Total Stockholders’ Equity (Deficit) 5,501,046 (619,244) Total Liabilities & Stockholders’ Equity $23,169,848 $15,763,615 See notes to audited consolidated financial statements. 33 BACTERIN INTERNATIONAL HOLDINGS, INC.Consolidated Statements of OperationsFor the Years Ended December 31, 2011 and 2010 Twelve Months Ended December 31, 2011 2010 Revenue Tissue sales $29,657,423 $15,214,775 Royalties and other 492,059 202,872 Total Revenue 30,149,482 15,417,647 Cost of tissue and medical devices sales 9,109,250 3,363,876 Gross Profit 21,040,232 12,053,771 Operating Expenses General and administrative 6,559,101 8,546,193 Sales and marketing 18,501,204 8,897,293 Depreciation and amortization 755,387 633,827 Non-cash consulting expense 1,675,008 1,560,324 Other expense - 1,030,290 Total Operating Expenses 27,490,700 20,667,927 Loss from Operations (6,450,468) (8,614,156) Other Income (Expense) Interest expense (1,162,597) (1,646,940)Change in warrant derivative liability 6,377,671 (9,206,826)Other expense (1,771,075) - Total Other Income (Expense) 3,443,999 (10,853,766) Net Loss Before Benefit (Provision) for Income Taxes (3,006,469) (19,467,922) Benefit (Provision) for Income Taxes Current - - Deferred - - Net Income (Loss) $(3,006,469) $(19,467,922) Net income (loss) per share: Basic $(0.08) $(0.61)Dilutive (0.08) (0.61) Shares used in the computation: Basic 38,944,256 32,178,342 Dilutive 38,944,256 32,178,342 See notes to audited consolidated financial statements. 34 BACTERIN INTERNATIONAL HOLDINGS, INC.Consolidated Statements of Changes in Stockholders’ Equity (Deficit)For the Years Ended December 31, 2011, and 2010 Total Common Stock Additional Retained Treasury Shareholders' Shares Amount Paid-In-Capital Deficit Stock Equity (deficit) Balance at December 31, 2009 28,211,563 $28 $22,238,747 $(17,477,335) $(76,566) $4,684,874 Issuance of common stock, options and warrants: Private placement 3,618,750 4 4,937,517 - - 4,937,521 Purchase and reissuance of dissenter shares - - (595,152) - - (595,152)Conversion of notes to common stock 32,753 - 52,404 - - 52,404 Conversion of bridge notes to common stock 2,735,107 3 3,934,713 - - 3,934,716 Placement of agent shares 106,217 - 67,253 - - 67,253 Sale of common stock 6,250 - 10,000 - - 10,000 Purchase of treasury stock - - - - (135,470) (135,470)Retirement of treasury stock (69,044) - (212,036) - 212,036 - Exercise of warrants 853,858 - 2,902,720 - - 2,902,720 Issuance of warrants - - 405,000 - - 405,000 Stock-based compensation 264,165 1 1,672,128 - - 1,672,129 Warrants/shares issued in legal settlement 30,000 - 772,047 - - 772,047 Exercise of options 24,500 - 40,328 - - 40,328 Debt discount - WTI - - 100,308 - - 100,308 Reverse merger transactions 1,180,596 1 (1) - - - Net loss - - - (19,467,922) - (19,467,922)Balance at December 31, 2010 36,994,715 37 36,325,976 (36,945,257) - (619,244) Issuance of common stock, options and warrants: Private placement 939,377 1 2,974,618 - - 2,974,619 Exercise of warrants 977,679 1 1,358,459 - - 1,358,460 Stock grants 230,499 - 548,261 - - 548,261 Stock-based compensation 538,500 - 2,007,467 - - 2,007,467 Exercise of options 775,833 1 1,010,563 - - 1,010,564 Debt discount - WTI - - 227,388 - - 227,388 Acquisition of RMS 384,615 - 1,000,000 - - 1,000,000 Net loss - - - (3,006,469) - (3,006,469)Balance at December 31, 2011 40,841,218 $40 $45,452,732 $(39,951,726) $- $5,501,046 See notes to audited consolidated financial statements. 35 BACTERIN INTERNATIONAL HOLDINGS, INC.Consolidated Statements of Cash FlowsFor the Years Ended December 31, 2011 and 2010 Twelve Months Ended December 31, 2011 2010 Operating activities: Net income (loss) $(3,006,469) $(19,467,922)Noncash adjustments: Depreciation and amortization 755,387 682,544 Amortization of debt discount 302,465 - Write-off of debt discount 1,307,977 - Non-cash consulting expense/stock option expense 2,555,727 2,849,177 Provision for losses on accounts receivable and inventory 1,425,537 814,357 Write-off of accounts receivable-related party 795,000 - Non-cash interest expense - 870,655 Change in derivative warrant liability (6,377,671) 9,206,826 Loss on impairment of intangible assets 183,234 Changes in operating assets and liabilities: Accounts receivable (4,636,860) (2,283,079)Accounts receivable-related party (181,966) - Notes receivable - (342,469)Inventories (2,365,403) (2,618,200)Prepaid and other current assets (190,550) (624,414)Accounts payable 334,183 1,429,413 Accrued liabilities 1,920,505 927,910 Net cash used in operating activities (7,362,138) (8,371,968) Investing activities: Purchases of property and equipment (962,306) (783,051)Notes receivable from stockholder 82,398 - Intangible asset additions (137,411) (33,321)Net cash (used in) investing activities (1,017,319) (816,372) Financing activities: Proceeds from the issuance of long-term debt 9,579,687 3,973,435 Proceeds from the issuance of convertible notes - 4,700,000 Payments on long-term debt (5,115,504) (1,588,554)Payments on convertible debt - (1,790,000)Payments on notes payable - (1,074,289)Payments on capital leases (36,182) (68,855)Payments on related party notes - (183,461)Proceeds from issuance of stock 2,974,618 5,160,963 Proceeds from exercise of options 1,010,563 40,328 Proceeds from exercise of warrants 389,905 1,018,806 Purchase of treasury stock - (726,707)Net cash provided by financing activities 8,803,087 9,461,666 Net change in cash and cash equivalents 423,630 273,326 Cash and cash equivalents at beginning of period 327,481 54,155 Cash and cash equivalents at end of period $751,111 $327,481 See notes to audited consolidated financial statements. 36 Notes to Consolidated Financial Statements (1) Business Description and Summary of Significant Accounting Policies Business Description The accompanying consolidated financial statements include the accounts of Bacterin International Holdings, Inc., a Delaware corporation, and its whollyowned subsidiary, Bacterin International, Inc., a Nevada corporation, (collectively, the “Company” or “Bacterin”). All intercompany balances andtransactions have been eliminated in consolidation. Bacterin’s biologics division develops, manufactures and markets biologics products to domestic andinternational markets. Bacterin’s proprietary methods are used in human allografts to create stem cell scaffolds and promote bone and other tissuegrowth. These products are used in a variety of applications including enhancing fusion in spine surgery, relief of back pain with a facet joint stabilization,promotion of bone growth in foot and ankle surgery, promotion of skull healing following neurosurgery and cartilage regeneration in knee and other jointsurgeries. Bacterin’s device division develops anti-microbial coatings to inhibit infection based upon proprietary knowledge of the phenotypical changes made bymicrobes as they sense and adapt to changes in their environment. Bacterin develops, employs, and licenses bioactive coatings for various medical deviceapplications. Bacterin’s strategic coating initiatives include the inhibition of biofilm formation, local (as opposed to systemic) drug delivery, local (as opposedto systemic) pain management, and anti-thrombotic factors for medical device applications. An operating segment is a component of an enterprise whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to makedecisions about resources to be allocated to the segment and assess its performance. The primary performance measure used by management is net income orloss. The Company operates in two distinct lines of business consisting of the biologics and devices divisions. However, due to the immaterial revenue fromdevices to date, the Company reports as one segment. The Company's revenue is derived principally from the sale or license of its medical products, coatings and device implants. The markets in which theCompany competes are highly competitive and rapidly changing. Significant technological advances, changes in customer requirements, or the emergence ofcompetitive products with new capabilities or technologies could adversely affect the Company's operating results. The Company's business could be harmedby a decline in demand for, or in the prices of, its products or as a result of, among other factors, any change in pricing or distribution model, increased pricecompetition, changes in government regulations or a failure by the Company to keep up with technological change. Further, a decline in available tissuedonors could have an adverse impact on the business. Concentrations and Credit Risk The Company’s accounts receivable are due from a variety of health care organizations and distributors throughout the world. Approximately 98% and 97%of sales were in the United States for 2011 and 2010, respectively. One customer accounted for approximately 6% of the Company’s revenue for 2011 and2010, respectively. One customer represented 21% and 6% of accounts receivable at December 31, 2011 and 2010, respectively. The Company provides foruncollectible amounts when specific credit issues arise. Management’s estimates for uncollectible amounts have been adequate during prior periods, andmanagement believes that all significant credit risks have been identified at December 31, 2011. Revenue by geographical region is as follows: Year ended December 31, 2011 2010 United States $29,571,446 $14,941,562 Rest of World 578,036 476,085 $30,149,482 $15,417,647 37 Use of Estimates The preparation of the financial statements requires management of the Company to make a number of estimates and assumptions relating to the reportedamount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenueand expenses during the period; the carrying amount of property and equipment and intangible assets; valuation allowances for trade receivables and deferredincome tax assets; valuation of the warrant derivative liability; inventory reserve; contingent consideration from acquisitions; and estimates for the fair valueof stock options grants and other equity awards upon which the Company determines stock-based compensation expense. Actual results could differ fromthose estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. Cashequivalents are recorded at cost, which approximates market value. At times the Company maintains deposits in financial institutions in excess of federallyinsured limits. Accounts Receivable Accounts receivable represents amounts due from customers for which revenue has been recognized. Normal terms on trade accounts receivable are net 30 daysand some customers are offered discounts for early pay. The Company performs credit evaluations when considered necessary, but generally does not requirecollateral to extend credit. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing receivables. TheCompany determines the allowance based on factors such as historical collection experience, customer's current creditworthiness, customer concentration, ageof accounts receivable balance, general economic conditions that may affect a customer's ability to pay and management judgment. Actual customer collectionscould differ from estimates. Account balances are charged to the allowance after all means of collection have been exhausted and the potential for recovery isconsidered remote. Provisions to the allowance for doubtful accounts are charged to expense. The Company does not have any off-balance sheet credit exposurerelated to its customers. Accounts Receivable - Related Party Accounts receivable from a related party included amounts due from West Coast Tissue Service, a supplier of donors to the Company (See Note 3). Accounts Payable - Related Party Accounts payable to a related party included amounts due to American Donor Services, a supplier of donors to the Company (See Note 16). Inventories Inventories are stated at the lower of cost or market. Cost is determined using the specific identification method and includes materials, labor and overhead.The Company calculates an inventory reserve for estimated obsolescence or excess inventory based on historical usage and sales, as well as assumptionsabout future demand for its products. These estimates for excess and obsolete inventory are reviewed and updated on a quarterly basis. Increases in theinventory reserves result in a corresponding expense, which is generally recorded to cost of tissue and medical devices sales. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful livesof the assets, generally three to seven years for computers and equipment, and 30 years for buildings. Leasehold improvements are depreciated over the shorterof their estimated useful life or the remaining term of the lease. Repairs and maintenance are expensed as incurred. Goodwill Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase businesscombination and determined to have indefinite useful lives are not amortized, but instead are tested for impairment at least annually and whenever events orcircumstances indicate the carrying amount of the asset may not be recoverable. In its evaluation of goodwill, the Company performs an assessment ofqualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwillimpairment. The Company conducts its annual impairment test on December 31 of each year. See further discussion of goodwill in Note 4 below. Derivative Instruments The Company accounts for its derivative instruments in accordance with ASC 815 “Accounting for Derivative Instruments and Hedging Activities”. The onlyderivative instruments presented in the accompanying consolidated financial statements relates to warrants issued in connection with certain debt financings.The Company has not designated its warrant derivative liability as a hedging instrument as described in ASC 815 and any changes in the fair market valueof the warrant derivative liability is recognized in the statement of operations during the period of change. See Note 11, “Warrants” below. Intangible Assets Intangible assets with estimable useful lives must be amortized over their respective estimated useful lives to their estimated residual values, and reviewed forimpairment whenever events or circumstances indicate their carrying amount may not be recoverable. Intangible assets primarily consist of patents and includecosts to acquire and protect Company patents and are carried at cost less accumulated amortization. The Company amortizes these assets on a straight-linebasis over their estimated useful lives of 15 years. 38 Grants As part of the Company’s efforts to build the development of new technologies, tissue donation and expansion of tissue supply, the Company, may, fromtime-to-time either provide or receive grants. These grant receipts are used for research and development efforts and are recorded in royalties and other income.The Company recognizes revenue from grants from the government as related costs are incurred, as long as such costs are within the funding limits specifiedby the underlying grant agreement. No grants were received in 2011, while approximately $244,000 of grant revenue was received in 2010. Revenue Recognition Revenue is recognized when all of the following criteria are met: a) the Company has entered into a legally binding agreement with the customer; b) the productsor services have been delivered; c) the Company's fee for providing the products and services is fixed or determinable; and d) collection of the Company’s feeis probable. The Company’s policy is to record revenue net of any applicable sales, use, or excise taxes. If an arrangement includes a right of acceptance or a right tocancel, revenue is recognized when acceptance is received or the right to cancel has expired. The Company ships to certain customers under consignment arrangements whereby the Company’s product is stored by the customer. The customer isrequired to report the use to the Company and upon such notice, the Company invoices the customer and revenue is recognized when above criteria has beenmet. The Company also receives royalty revenue from third parties related to licensing agreements. The Company has royalty agreements with Nufix, RyMed andBard Access Systems. Revenue under these agreements represented less than 1% of total revenue for 2011 and 2010. Research and development services revenue is recognized as performed, based on the incurrence of qualifying costs or achievement of milestones as prescribedin the arrangement. Non Cash Consulting Expense From time to time, the Company issues restricted stock awards to consultants and advisors to the Company. These awards are marked to market ratably overthe vesting period and are recorded in Non cash consulting expense. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs of approximately $81,000 and $49,000 were expensed for the years ended December31, 2011 and 2010, respectively. Other Expense Other non-operating expense in 2011 consisted of a non cash charge of approximately $1,300,000 of debt discounts written off in connection with the new2011 term loan financing with MidCap Financial and Silicon Valley Bank. Other operating expense in 2010 consisted of a non cash charge of approximately$722,000 associated with a legal settlement with a former officer and other miscellaneous operating expenses. Research and Development Research and development costs, which are principally related to internal costs for the development of new technologies and processes for tissue and coatings,are expensed as incurred. Income Taxes The Company accounts for income taxes under the asset and liability method of accounting for deferred taxes as prescribed under FASB AccountingStandards Codification (“ASC”) 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactmentdate. When applicable, a valuation allowance is established to reduce any deferred tax asset when it is determined that it is more likely than not that someportion of the deferred tax asset will not be realized. ASC 740 also requires reporting of taxes based on tax positions that meet a more-likely-than-not standardand that are measured at the amount that is more-likely-than-not to be realized. Differences between financial and tax reporting which do not meet this thresholdare required to be recorded as unrecognized tax benefits. ASC 740 also provides guidance on the presentation of tax matters and the recognition of potential IRSinterest and penalties. The Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. There are no significantinterest and penalties recognized in the statement of operations or accrued on the balance sheet. See further discussion and disclosures in Note 13. 39 Impairment of Long-Lived Assets Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future netcash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount bywhich the carrying amount of the assets exceeds the estimated fair value of the assets. In 2010, the Company recorded loss on impairment of intangible assetsof $183,234, net of $105,074 of accumulated amortization on the impaired assets. This loss is reflected in General and Administrative expenses on theStatement of Operations. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Net Loss Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Shares issuedduring the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding. Diluted net income (loss) pershare is computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares outstanding duringthe period, which include the assumed exercise of stock options and warrants using the treasury stock method. Diluted net loss per share was the same asbasic net loss per share for the years ended December 31, 2011 and 2010 as shares issuable upon the exercise of stock options and warrants were anti-dilutiveas a result of the net losses incurred for those periods. A reconciliation of the denominator used in the calculation of basic and diluted net (loss) per share is as follows: Year Ended Net Loss Per Share: December 31, 2011 2010 Net Loss $(3,006,469) $(19,467,922)Basic net loss per share $(0.08) $(0.61)Weighted average common shares outstanding for basic net loss per share 38,944,256 32,178,342 Dilutive earnings per share are not reported as their effects of including 5,008,670 and 11,142,303 outstanding stock options and warrants for the twelvemonths ended December 31, 2011 and 2010, respectively are anti-dilutive. Stock-Based Compensation The Company records stock-compensation expense according to the provisions of ASC 718. Under ASC 718, stock-based compensation costs are recognizedbased on the estimated fair value at the grant date for all stock-based awards. The Company estimates grant date fair values using the Black-Scholes-Mertonoption pricing model, which requires assumptions of the life of the award and the stock price volatility over the term of the award. The Company recordscompensation cost of stock-based awards using the straight line method, which is recorded into earnings over the vesting period of the award. Pursuant to theincome tax provisions included in ASC 718-740, the Company has elected the “short cut method” of computing its hypothetical pool of additional paid-incapital that is available to absorb future tax benefit shortfalls. Comprehensive Income (Loss) Comprehensive loss includes net income or loss, as well as other changes in stockholders' equity that result from transactions and economic events other thanthose with stockholders. The Company currently does not have any transactions that qualify for accounting and inclusion as other comprehensive income(loss). Fair Value of Financial Instruments The carrying values of financial instruments, including trade accounts receivable, accounts receivable – related party, accounts payable, other accruedexpenses and long-term debt, approximate their fair values on terms and actual interest rates. 40 We follow a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used tomeasure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and thelowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observablefor the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Duringthe years ended December 31, 2011 and December 31, 2010, there was no reclassification in financial assets or liabilities between Level 1, 2 or 3 categories. The following tables set forth by level, within the fair value hierarchy, our assets and liabilities as of December 31, 2011 and December 31, 2010 that aremeasured at fair value on a recurring basis: Warrant derivative liability As of December 31,2011 As of December 31,2010 Level 1 - - Level 2 - - Level 3 $2,344,516 $9,690,741 Acquisition contingent consideration liability As of December 31, 2011 As of December 31, 2010 Level 1 - - Level 2 - - Level 3 $450,166 - The valuation technique used to measure fair value of the warrant liability and contingent consideration is based on a lattice model and significantassumptions and inputs determined by us. Level 3 Changes The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservableinputs (Level 3) during the period ending December 31, 2011: Balance at January 1, 2011 $9,690,741 Gain recognized in earnings (6,377,671)Warrant exercises (968,554)Balance at December 31, 2011 $2,344,516 During the year ended December 31, 2011, the Company did not change any of the valuation techniques used to measure its liabilities at fair value. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2011-04), which containsamendments to achieve common fair value measurement and disclosures in U.S. GAAP and International Financial Reporting Standards. ASU 2011-04explains how to measure fair value for financial reporting. The guidance does not require fair value measurements in addition to those already required orpermitted by other Topics. This ASU is effective for the Company beginning January 1, 2012. The adoption of ASU 2011-04 is not expected to have amaterial effect on the Company’s consolidated results of operation, financial position or liquidity. In September 2011, the FASB issued ASU 2011-08 on testing goodwill for impairment that will become effective for the Company in the first quarter of 2012;however, early adoption is permitted. Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence ofevents or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If theentity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. The Company elected to early adopt thispronouncement in 2011. (2)Equity 41 Reverse Merger/Financing Transactions On June 30, 2010, the Company completed a reverse merger transaction (the “Reverse Merger”), in which we caused Bacterin International, Inc., a Nevadacorporation (“BII”), to be merged with and into a wholly-owned Nevada subsidiary of Bacterin International Holdings, Inc. f/k/a K-Kitz Incorporated, aDelaware corporation (“BIHI”) whereby the stockholders of BII obtained control of BIHI. The Reverse Merger was consummated under Nevada corporate lawpursuant to an Agreement and Plan of Merger, dated as of June 30, 2010. As a result of the Reverse Merger, BII became a wholly-owned subsidiary of BIHIand we are now engaged, through BII, in the business of biomaterials research, development, and commercialization. Shortly before the Reverse Merger, K-Kitz Incorporated changed its name to Bacterin International Holdings, Inc. and the former business of K-Kitz Incorporated was discontinued following theReverse Merger transaction. When used herein, “Bacterin” refers to BII prior to the Reverse Merger and BIHI following the Reverse Merger. Pursuant to the terms of the Reverse Merger, the stockholders of BII immediately preceding the Reverse Merger received one share of BIHI common stock foreach two shares of BII common stock such stockholder held prior to the Reverse Merger (effectively resulting in a de facto one-for-two reverse stock split of thethen outstanding BII shares). The aggregate number of BIHI shares of common stock so issued to the BII stockholders, being 28,257,133 shares, representedapproximately 96% of our outstanding common stock as of the closing of the Reverse Merger on June 30, 2010, prior to taking into account the issuance ofany shares of our common stock pursuant to the private placement described below. All share amounts, including those for which any securities are exercisable or convertible, have been adjusted to reflect the conversion ratio used in the ReverseMerger. In addition, stockholders equity and earnings per share have been retroactively restated to reflect the number of shares of BIHI common stock receivedby BII stockholders in the Reverse Merger or the number of shares of BIHI common stock receivable by former BII stockholders upon exercise or conversionof other securities held by them, as applicable. BII was deemed to be the acquiring company for accounting purposes and, accordingly, the Reverse Merger has been accounted for as a recapitalization. Theconsolidated financial statements of the Company after the Reverse Merger reflect the historical financial results of BII before the consummation of the ReverseMerger and do not include the historical financial results of K-Kitz Incorporated before the consummation of the Reverse Merger. Private Placement Concurrently with the closing of the Reverse Merger on June 30, 2010, we also completed an initial closing of a private placement to selected qualified investorsof shares of our common stock at a purchase price of $1.60 per share and detachable warrants to purchase one-quarter share of our common stock (at anexercise price of $2.50 per share) for each share of common stock purchased in the private placement. In the initial closing on June 30, 2010, we sold 4,934,533 shares of our common stock and warrants to purchase 1,233,646 shares of common stock as partof this initial closing. We received gross proceeds of $7,508,329 in consideration for the sale of the shares of common stock and warrants, which consisted of(i) $4,026,000 in net cash from investors in the private placement and (ii) $3,482,329 from note holders in two earlier Bacterin bridge financings (conductedto fund working capital and capital expenditures during the months prior to the Reverse Merger) who converted their outstanding principal and interest into theprivate placement at a 10% discount to the purchase price, being $1.44 per share, and received identical warrant coverage as the cash investors except that theexercise price of the converting note holders’ warrants is $2.25 per share, a 10% discount to the exercise price of the warrants received by the cash investors.The note holders in the bridge financings also received warrants to purchase 1,482,256 shares of our common stock and our placement agent receivedwarrants to purchase 328,125 shares of our common stock as part of the bridge financings. In the second and final closing of this private placement on July 30, 2010, we sold a total of 1,102,500 additional shares of our common stock together withadditional warrants to purchase an aggregate of 275,625 shares of our common stock for total gross cash proceeds of $1,764,000. Our placement agents received an aggregate of $463,200 in cash fees in connection with the private placement ($322,080 from the initial closing and $141,120from the second and final closing) and were reimbursed for their out-of-pocket-expenses. In addition, the placement agents received an aggregate of 106,217shares of our common stock (84,167 shares from the initial closing and 22,050 shares from the second and final closing) and warrants to purchase 361,875shares of our common stock (251,625 shares from the initial closing and 110,250 shares from the second and final closing) at an exercise price of $1.60 pershare. 42 Following the private placement transaction, we permitted an additional $450,000 in principal amount outstanding under the bridge financing to convert into316,823 shares of our common stock and warrants to purchase 88,309 shares of our common stock on the same terms as if such debt had actually convertedin the private placement transaction. On August 6, 2010, we paid certain of Bacterin’s former stockholders, who held approximately 371,970 shares of Bacterin common stock in the aggregate,the fair value for such shares in connection with the exercise of their dissenters’ rights. As a result, and pursuant to the terms of the agreement governing theReverse Merger, the former Bacterin stockholders (excluding the dissenting shareholders) were issued 371,970 shares of our common stock ( i.e. , the samenumber of shares that the dissenting stockholders would have received had they not exercised their dissenters rights) in proportion to such stockholders’ pre-Reverse Merger share holding percentages in Bacterin. On November 19, 2010, we entered into financing arrangement with two subsidiaries of Western Technology Investment (“WTI”), whereby WTI, through itssubsidiaries, agreed to provide a credit facility which allowed us to draw down $2.5 million initially. In addition, upon the mutual agreement of Bacterin andWTI, WTI agreed to an additional commitment through December 31, 2011 of up to 25% of the next new round of equity financing or up to $3.0 million. Thecredit facility was secured by our personal property and carries an all-in interest rate of 12.5%. Repayment of the initial $2.5 million was interest only for thefirst nine months, with principal and interest for the subsequent 30 months. The WTI facility also allowed us to obtain separate accounts receivable financing.In connection with the financing, WTI also received warrants to purchase up to 375,000 shares of our common stock. The warrants have an exercise price ofthe lower of $4.00 per share or the price at which shares of our stock are sold in the next qualified financing, if applicable prior to the date of exercise. TheWTI warrants expire on April 30, 2018. WTI also had the right to receive additional warrants to purchase 125,000 shares of our common stock at the sameexercise price if we drew down the second $2.5 million tranche of the facility. In January 2011, Middlebury Securities LLC also received warrants to purchase25,000 shares of our common stock for placement agent service in connection with the WTI transaction. We repaid all amounts owed to WTI with our recentfinancing through MidCap Funding III, LLC. We also issued warrants to purchase a total of 489,710 shares of our common stock to a limited group of existing investors who exercised existing warrants.The new warrants have an exercise price of $4.00 per share and expire November 15, 2015. We received a total of $1,172,696 from the cash payments of theexercise price of the existing warrants. In the second quarter of 2011, we raised net $2,974,618 in a private placement transaction under Rule 506 of Regulation D. The transaction resulted in theissuance of 939,377 shares of our common stock and warrants to purchase 375,747 shares of our common stock.On May 27, 2011, we entered into a Purchase Agreement and Registration Rights Agreement with Lincoln Park Capital Fund, LLC (“LPC”) whereby LPCagreed to purchase up to $31 million of our common stock from time to time pursuant to the terms of the Purchase Agreement and we agreed to register theshares purchased by LPC. Upon signing the Purchase Agreement, LPC purchased 326,798 shares of our common stock for $1,000,002 and also receivedwarrants to purchase 130,719 shares at an exercise price of $3.06 per share, the closing price on May 26, 2011, as part of a private placement transactionpursuant to Rule 506 of Regulation D in the second quarter of 2011 in which we raised a total of $3,027,504 and issued 939,377 shares of our commonstock and warrants to purchase 375,747 shares of our common stock. In consideration for entering into the Purchase Agreement, we issued 128,506 shares of our common stock to LPC as initial commitment shares and we agreedto issue up to 164,675 additional commitment shares on a pro rata basis when LPC purchases additional shares. We may terminate the Purchase Agreementat any time at our sole discretion without any cost to us. In addition, the asset management firm has committed to invest, up to an additional $30 million through the purchase of shares of our common stock fromtime to time. The transactions will be at our sole option with no additional warrants granted.On July 29, 2011, we entered into Loan and Security Agreement with MidCap Funding III, LLC (“MidCap”), whereby MidCap and Silicon Valley Bank(“SVB”) agreed to provide a $15 million credit facility which allows us to borrow $7 million and up to an additional $8 million in connection with apermitted acquisition through December 31, 2011. The $8 million portion expired unused as of December 31, 2011. The credit facility is secured bysubstantially all of our assets and carries an interest rate of LIBOR plus 7.5%, subject to a LIBOR floor rate of 3%. Repayment will be interest only for thefirst nine months, with principal and interest for the subsequent 33 months. (3) Accounts Receivable - related party Our Chief Executive Officer serves as a Board member of West Coast Tissue Services. This entity recovers tissues from donors and we reimburse them forrecovery fees including labor costs. Accounts receivable - related party consist of the following: December 31,2011 December 31,2010 West Coast Tissue Service, Inc. $- $613,034 43 West Coast Tissue Service, Inc. is a non-profit corporation organized under Section 501(c)(3) of the Internal Revenue Code. The Company has contractedwith West Coast Tissue Service to acquire its donor tissue for use in the Company’s production. If the Company were unable to continue to receive donortissue, it may have a material effect on its financial statements and results of operations. The notes were non-interest bearing. In December 2011, theCompany entered into a four year extension agreement with West Coast Tissue Service which provides the Company with a right of first refusal on donortissue. As part of the agreement, the Company agreed to write-off the accounts receivable balance of $795,000 which was recorded in cost of tissue andmedical device sales. (4) Acquisition On July 11, 2011, we signed an Asset Purchase Agreement (“Agreement”) with Robinson MedSurg, LLC (“Seller”), a company engaged in the manufacture,distribution and sale of implantable medical devices for maxillofacial, craniofacial and orthopedic uses. These products are used by many of our currentcustomers and therefore represents an opportunity to expand our product offerings to these customers. Under the terms of the Agreement, we purchased certainassets from Seller, as described in the Agreement, for $1 million in common stock. In addition, we agreed to pay Seller an additional $500,000 in commonstock when gross revenue from the sale of products resulting from the purchased assets (“Products”) equals or exceeds $1 million, and an additional$500,000 in common stock when gross revenue from the sale of Products equals or exceeds $2 million, provided that such gross revenue thresholds areachieved within 2 years. We also engaged the sole member of Seller as a consultant. We accounted for this business combination under the acquisition methodin accordance with ASC 805 – Business Combinations, which requires the acquiring entity in a business combination to recognize all (and only) the assetsacquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired andliabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature andfinancial effect of the business combination. Revenue in the second half of 2011 was immaterial. The purchase price was allocated as follows: Finished inventory $504,827 Customer list 157,077 Trademark 59,644 Goodwill 728,618 Total purchase price $1,450,166 Goodwill is primarily made up of business synergies expected from the additional product offerings through our established distribution network. Goodwill isnot expected to be deductible for tax purposes. The consideration for the purchase price was made up of the following components: Stock issued $1,000,000 Contingent consideration 450,166 Total consideration $1,450,166 The initial valuation of the contingent consideration was based upon management’s estimates of the probability of reaching the milestones that would trigger therequirement to pay the contingent amounts. No changes to the assumptions made to value the contingent consideration were made in the second half of the yearended December 31, 2011, and there has been no change in the recognized amount of the contingent consideration liability. The useful lives of the Customer List and the Trademark are 5 years and 15 years, respectively resulting in the following amortization schedule: 2012 35,392 2013 35,392 2014 35,392 2015 35,392 Thereafter 57,457 Total $199,025 44 (5) Inventories Inventories consist of the following: December 31, Current inventories 2011 2010 Raw materials $1,612,901 $709,800 Work in process 2,586,047 1,212,468 Finished goods 5,107,400 4,239,972 9,306,348 6,162,240 Reserve (826,638) (721,602)Current inventories, total $8,479,710 $5,440,638 Non-current inventories Work in process $- $588,295 Finished goods 920,542 851,089 Non-current inventories, total $920,542 $1,439,384 Total inventories $9,400,252 $6,880,022 (6) Property and Equipment, Net Property and equipment, net are as follows: December 31, 2011 2010 Buildings $1,653,263 $1,613,628 Equipment 3,597,471 3,330,156 Computer equipment 392,375 255,170 Computer software 228,054 144,353 Furniture and fixtures 171,418 75,007 Leasehold improvements 1,357,218 902,916 Vehicles 68,306 68,306 Total cost 7,468,105 6,389,536 Less: accumulated depreciation (3,693,965) (2,992,216) $3,774,140 $3,397,320 The Company leases certain equipment under capital leases. For financial reporting purposes, minimum lease payments relating to the assets have beencapitalized. As of December 31, 2011, the Company has recorded $153,655 gross assets in Equipment, and $15,048 of accumulated depreciation relating toassets under capital leases. Maintenance and repairs expense for 2011 and 2010, was $109,171 and $86,251, respectively. Depreciation expense related to property and equipment,including property under capital lease for 2011 and 2010 was $701,748 and $633,828, respectively. (7) Intangible Assets Bacterin has been issued various patents with regards to processes for its products. The following table sets forth information regarding intangible assets: 45 Intellectual Property December 31, 2011 December 31, 2010 Gross carrying value $809,615 $455,483 Accumulated amortization $(153,482) $(99,844)Net carrying value $656,133 $355,639 Aggregate amortization expense: $53,638 $48,715 Estimated amortization expense: 2012 $71,130 2013 $71,130 2014 $71,130 2015 $71,130 2016 $71,130 Thereafter $300,483 In 2010, the Company recorded a loss on impairment of intangible assets of $183,234, net of $105,074 of accumulated amortization of the impaired assets. (8) Accrued Liabilities Accrued liabilities consist of the following: December 31, 2011 2010 Acquisition contingent liability $450,166 $- Accrued stock compensation 608,933 197,763 Wages/commissions payable 1,289,827 415,386 Other accrued expenses 1,413,285 778,391 $3,762,211 $1,391,540 (9) Long-term Debt On July 29, 2011, we entered into Loan and Security Agreement with MidCap Funding III, LLC (“MidCap”), whereby MidCap and Silicon Valley Bank(“SVB”) agreed to provide a $15 million credit facility which allows us to borrow $7 million and up to an additional $8 million in connection with apermitted acquisition through December 31, 2011. The $8 million portion expired unused as of December 31, 2011. The credit facility is secured bysubstantially all of our assets and carries an interest rate of LIBOR plus 7.5%, subject to a LIBOR floor rate of 3% and contains covenants based uponrevenue thresholds, which were met as of December 31, 2011. As of December 31, 2011, LIBOR was 0.295%. Repayment will be interest only for the firstnine months, with principal and interest for the subsequent 33 months. Long-term debt consists of the following: December31,2011 December31,2010 Loan payable to MidCap, LIBOR plus 7.5% maturing January 2015 $4,666,667 $- Loan payable to SVB, LIBOR plus 7.5% maturing January 2015 2,333,333 6.00% loan payable to Valley Bank of Belgrade, $10,746 monthly payments including interest, maturing December24, 2030; secured by building 1,464,183 1,500,000 12.553% loan payable to Venture Lending and Leasing, variable monthly payments, maturing in November, 2013,secured by equipment - 1,250,000 12.553% loan payable to Venture Lending and Leasing, variable monthly payments, maturing in November, 2013,secured by equipment - 1,250,000 8,464,183 4,000,000 Less: Current portion (1,632,978) (234,149)Debt discount (192,935) (1,575,985)Long-term debt $6,638,270 $2,189,866 46 The following is a summary of maturities due on the debt as of December 31, 2011: 2012 1,740,396 2013 2,591,806 2014 2,594,665 2015 264,363 Thereafter 1,272,953 Total $8,464,183 (10) Stock-Based Compensation Our Equity Incentive Plan ("The Plan") provides for stock awards, including options and performance stock awards, to be granted to employees, consultants,independent contractors, officers and directors. The purpose of the incentive compensation plan is to enable us to attract, retain and motivate key employees,directors and, on occasion, independent consultants, by providing them with stock options and restricted stock grants. Stock options granted under theincentive compensation plan may be either incentive stock options to employees, as defined in Section 422A of the Internal Revenue Code of 1986, or non-qualified stock options. The plan is currently administered by the compensation committee of our Board of Directors. The administrator of the plan has thepower to determine the terms of any stock options granted under the incentive plan, including the exercise price, the number of shares subject to the stockoption and conditions of exercise. Stock options granted under the incentive plan are generally not transferable, vest in installments over the requisite serviceperiod and are exercisable during the stated contractual term of the option only by such optionee. The exercise price of all incentive stock options granted underthe incentive plan must be at least equal to the fair market value of the shares of common stock on the date of the grant. 9 million shares are authorized underthe Plan and at December 31, 2011, we had approximately 2,538,190 shares available for issuance . Shares issued under the Plan may be authorized, butunissued, or reacquired shares. Stock compensation expense recognized in the statement of operations for the years ended December 31, 2011 and 2010 is based on awards ultimately expectedto vest and reflects an estimate of awards that will be forfeited. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. The estimated fair value of stock options granted is done using the Black-Sholes-Merton method applied to individual grants. Key assumptions used toestimate the fair value of stock awards are as follows: ·Risk-Free Rate: The risk-free rate is determined by reference to U.S. Treasury yields at or near the time of grant for time periods similar to theexpected term of the award. We used a weighted-average rate of 2.16% for year ended December 31, 2011. Expected Term: We do not have adequate history to estimate an expected term of stock-based awards, and accordingly, we use the short-cutmethod as prescribed by Staff Accounting Bulletin 107 to determine an expected term. We used a weighted-average expected term of 6.4 years forthe year ended December 31, 2011. ·Volatility: We estimate expected volatility based on peer-companies as prescribed by ASC 718. We used a weighted-average volatility rate of 46%for the year ended December 31, 2011. ·Dividend Yield: The dividend yield assumption is based on our history and expectation of dividend payouts and was 0% as of December 31,2011 and 2010. Activity under our stock option plans was as follows: 47 2011 2010 Shares Weighted AverageExercise Price Weighted AverageFair Value atGrant Date Shares Weighted AverageExercise Price Weighted AverageFair Value atGrant Date Outstanding at January1 3,850,743 $1.38 $0.84 3,353,493 $1.33 $0.64 Granted 2,261,750 2.90 1.39 1,228,000 1.60 1.27 Exercised (775,833) 1.31 0.66 (24,500) 1.34 0.52 Cancelled or expired (507,750) 2.42 1.23 (706,250) 1.52 0.70 Outstanding atDecember 31 4,828,910 $2.14 $1.01 3,850,743 $1.38 $0.84 Exercisable at December31 2,194,593 $1.63 $0.67 1,536,198 $1.13 $0.58 The total intrinsic value of options exercised in 2011 was $787,531. The aggregate intrinsic value of options outstanding as of December 31, 2011 is$4,937,117. The aggregate intrinsic value of exercisable options as of December 31, 2011 is $3,224,174. As of December 31, 2011, there were 2,634,317unvested options with a weighted average fair value at the grant date of $1.25 per option. As of December 31, 2011, the total compensation related to nonvestedawards not yet recognized is $2,955,740 and is expected to be recognized over 3.7 years. From time to time we may grant stock options and restricted stock grants to consultants. We account for consultant stock options in accordance with ASC505-50. Consulting expense for the grant of stock options to consultants is determined based on the estimated fair value of the stock options at themeasurement date as defined in ASC 505-50 and is recognized over the vesting period. The following table summarizes restricted stock award activity during the year ended December 31, 2011: Shares Outstanding at Jan. 1, 2011 536,000 Awarded 1,635,400 Vested (538,500)Outstanding at December 31, 2011 1,632,900 The restricted stock awards generally vest over three to five year periods. The Company recognized non cash consulting expense of $1,675,008 and$1,560,324 for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, the total expense related to nonvested restricted stockawards not yet recognized is $4,096,661 and is expected to be recognized over four years. (11) Warrants From January 1, 2010, through December 31, 2010, we issued warrants to purchase 1,570,565 shares of our common stock at an exercise price between$2.16 and $2.50 per share in connection with Bacterin’s two prior bridge financings and warrants to purchase 1,509,271 shares of our common stock inconnection with the closing of our private placement on June 30, 2010 and July 30, 2010 described above. Warrants to purchase 904,688 shares of ourcommon stock which were issued to investors who purchased shares for cash in the private placement have an exercise price of $2.50 per share and warrantsto purchase 604,583 shares of our common stock which were issued to note holders who converted debt they acquired in Bacterin’s two prior bridgefinancings into the private placement have an exercise price of $2.25 per share, a 10% discount to the exercise price of the investors for cash. Additionally, we issued warrants to our placement agents to purchase 328,125 shares of our common stock at an exercise price of $1.66 per share inconnection with Bacterin’s two prior bridge financings and 361,875 shares of our common stock at an exercise price of $1.60 per share in connection withthe private placements which closed on June 30, 2010 and July 30, 2010. In November 2010, we issued warrants to purchase 375,000 shares of common stock to WTI in connection with a financing transaction. The warrants havean exercise price of the lower of $4.00 per share or the price at which shares of our stock are sold in the next qualified financing, if applicable, prior to the dateof exercise. As a result of the second quarter of 2011 private placement, WTI received an additional 133,474 warrants resulting in a total of 508,474 warrantsowned by WTI and the strike price was reduced to $2.95. In the fourth quarter of 2010, we also issued warrants to purchase 489,710 shares of our common stock to a limited group of investors at an exercise price of$4.00 per share in exchange for those investors exercising their existing 489,710 warrants at exercise price ranging from $2.16 to $2.50 per share. Associated with the second quarter of 2011 private placement of common stock, 375,747 warrants with exercise prices ranging from $2.95 to $3.52 wereissued to the participants. Warrants issued with common stock under this private placement were recorded as additional paid in capital at their estimated fairmarket value of $312,285 during the second quarter of 2011. 48 In connection with the MidCap financing described above, MidCap and SVB received 192,157 warrants to purchase shares of our common stock equal to7% of the amount drawn on the credit facility divided by the exercise price of $2.55 per share. The warrants have a seven year term. MidCap and SVB alsohave the right to receive additional warrants if additional amounts are drawn under the facility. The fair value of these warrants, $227,388, was recorded as adiscount to the underlying debt and APIC. The following table summarizes our warrant activities for the period ended December 31, 2011: Weighted Average Exercise Shares Price Outstanding at January 1, 2011 7,291,560 $2.08 Issued 701,378 2.99 Exercised (1,025,409) 1.73 Cancelled or expired - - Outstanding at December 31, 2011 6,967,529 $2.22 We utilize a lattice model to determine the fair market value of the warrants. The 1,570,565 warrants issued in connection with the bridge financings and the375,000 warrants issued in connection with the WTI financing were accounted for as derivative liabilities in connection with the price protection provisions ofthe warrants in compliance with ASC 815. There were 133,474 additional warrants issued to WTI in the second quarter of 2011 as a result of the privateplacement triggering the anti-dilution clause in the original warrant agreement. The lattice model accommodates the probability of exercise price adjustmentfeatures as outlined in the warrant agreements. We recorded an unrealized gain of $6,377,671 resulting from the change in the fair value of the warrantderivative liability for the year ended December 31, 2011, respectively. Under the terms of the warrant agreement, at any time while the warrant is outstanding,the exercise price per share can be reduced to the price per share of future subsequent equity sales of our common stock or common stock equivalents that islower than the exercise price per share as stated in the warrant agreement. The estimated fair value was derived using the lattice model with the following weighted-average assumptions: Value of underlying common stock (per share) $1.56 Risk free interest rate 0.32%Expected term 4.67 years Dividend yield 0%Volatility 69% The following table summarizes our activities related to our warrants used in the derivative liability for the period ended December 31, 2011: Balance at January 1, 2011 1,595,473 Derivative warrants issued 133,474 Derivative warrants exercised (222,940)Balance at December 31, 2011 1,506,007 49 (12) Commitments and Contingencies Operating Leases We lease two office facilities under non-cancelable operating lease agreements with expiration dates in 2013. For one facility, we have the option to extend thelease for another ten year term and have right of first refusal on any sale. We lease additional office facilities under month-to-month arrangements. Futureminimum payments for the next five years and thereafter as of December 31, 2011, under these leases, are as follows: 2012 $185,167 2013 $93,000 Rent expense was $214,611 and $148,284 for the years ended December 31, 2011 and 2010, respectively. Rent expense is determined using the straight-linemethod of the minimum expected rent paid over the term of the agreement. We have no contingent rent agreements. Indemnifications Our arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities if our products or services infringea third-party's intellectual property rights. To date, we have not incurred any material costs as a result of such warranties or indemnifications and have notaccrued any liabilities related to such obligations in the accompanying financial statements. We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amountsincurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person'sservice as a director or officer, including any action by us, arising out of that person's services as our director or officer or that person's services provided toany other company or enterprise at our request. Litigation From time to time, we are involved in legal proceedings arising in the ordinary course of business. In November 2009, a complaint was served on theCompany in connection with the following court action filed in Utah state court: Yanaki and Activatek, Inc. v. Cook and Bacterin International, Inc., CaseNumber 090912772. The complaint involves attempts by one of the plaintiffs, Yanaki, to sell shares of the Company’s common stock to a third party in aprivate sale. Plaintiffs claim, as their primary allegation, that the Company intentionally interfered with the sales contract. Yanaki seeks $300,000, 358,904shares of the Company’s common stock, attorneys fees, costs and punitive damages. ActivaTek alleges that Yanaki intended to invest the proceeds from hisstock sale in ActivaTek and ActivaTek lost millions of dollars from not receiving that investment. ActivaTek seeks $5 to $10 million, attorneys fees, costsand punitive damages. The Company believes this case lacks merit and plans to vigorously defend these claims. In January 2012, we settled a previously disclosed action we initiated against a former employee, Patrick Klingler, and his current employer, TissueTransplant Technology, Ltd., aka Bone Bank Allografts in the District Court for Douglas County, Colorado. The settlement agreement provides that Mr.Klingler and his employer will not use our proprietary information or solicit our employees, and both parties agreed not to disparage the other parties. On March 2, 2012, Bacterin International, Inc. ("Bacterin") filed a Complaint and Jury Demand in the United States District Court for the District ofColorado in Civil Action No. 12cv558-REB-MEH against Tissue Transplant Technology, Ltd, a Texas Limited Partnership and its general partner T-TOT,LLC, a Texas Limited Liability Company; and Transplant Technologies of Texas, Ltd, a Texas Limited Partnership, and its general partners TTT, LLC, aTexas Limited Liability Company and JWL Management, LLC, a Texas Limited Liability Company. Defendant Tissue Transplant Technology, LTD isusing the trademark "Sterisponge" to identify various allograft products in the marketplace. In view of Bacterin's prior and established rights in the mark"Osteosponge," Bacterin has asserted against Tissue Transplant Technology, LTD claims for trademark infringement under federal law, unfair competitionunder federal law, trademark infringement under Colorado common law, and unfair competition under Colorado common law. In addition, Bacterin has alsoasserted against Transplant Technologies of Texas, LTD a claim for cancellation of a Federal Registration for "Sterisponge". Bacterin seeks injunctive relief,damages and exemplary damages to be determined at trial. 50 On March 2, 2012, Bacterin International, Inc. ("Bacterin") filed a Complaint and Jury Demand in the United States District Court for the District ofColorado in Civil Action No. 12cv555-REB-KLM against Evologics, LLC, a Texas limited liability corporation. Defendant Evologics is using the trademark"Evosponge" to identify various allograft products in the marketplace. In view of Bacterin's prior and established rights in the mark "Osteosponge," Bacterinhas asserted against Evologics claims for trademark infringement under federal law, unfair competition under federal law, trademark infringement underColorado common law, and unfair competition under Colorado common law. Bacterin seeks injunctive relief, damages and exemplary damages to bedetermined at trial. We believe that the resolution of these matters will not have a material effect on our financial position, results of operations or liquidity. Legal fees are chargedto expense as incurred, unless the probability of incurring a loss is probable and the amount can be reasonably estimated, in which case the estimated loss isaccrued. (13) Income Taxes The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate to income before taxes. The primary differenceresults from providing for state income taxes and from deducting certain expenses for financial statement purposes but not for federal income tax purposes. The components of income (loss) before provision for income taxes consist of the following: Year Ended December 31, 2011 2010 United States $(3,006,469) $(19,467,922) $(3,006,469) $(19,467,922) The components of the income tax provision are as follows: Year Ended December 31, 2011 2010 Current: Federal $- $- State - - Total current - - Deferred: Federal - - State - - Total deferred - - $- $- 51 The reconciliation of income tax attributable to operations computed at the U.S. Federal statutory income tax rate of 35% to income tax expense is as follows: Year Ended December 31, 2011 2010 Statutory Federal tax rate $(1,052,264) $(6,813,739)Valuation allowance 3,729,905 7,751,559 State income taxes, net of Federal benefit (172,752) (1,118,621)Change in Warrant Derivative Liability (2,598,646) - Nondeductible meals & entertainment expense 93,757 180,801 $- $- 52 Deferred tax components are as follows: At December 31, 2011 2010 Deferred tax assets: Current deferred tax assets Accrued liability for vacation $78,972 $99,352 Bad debt reserve 540,462 64,081 Charitable contributions carrforward 14,835 - Inventory reserve 362,399 294,024 Restricted stock compensation 266,957 - Total current deferred tax assets 1,263,625 457,457 Valuation Allowance (1,263,625) (457,457) Net current deferred tax assets - - Noncurrent deferred tax assets Net operating loss carryovers 9,673,993 5,941,272 Stock warrant expense - 820,095 Debt issuance expense and other - 1,090,381 Warrant derivative liability - 3,948,589 Stock option compensation 749,755 1,569,121 Total noncurrent deferred tax assets 10,423,748 13,369,458 Valuation allowance (10,407,184) (13,254,895) Net noncurrent deferred tax assets 16,564 114,563 Deferred tax liabilities: Goodwill Amortization (3,782) - Depreciation (31,037) (120,767)Amortization 18,255 6,204 Total deferred tax liabilities (16,564) (114,563) Net deferred tax assets $- $- The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differencesand net operating loss carryovers are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryover years,projected future taxable income, available tax planning strategies, and other factors in making this assessment. Based on available evidence, management doesnot believe it is more likely than not that all of the deferred tax assets will be realized. Accordingly, the Company has established a valuation allowance equal tothe net realizable deferred tax assets. The valuation allowance decreased by $2,041,543 in 2011 and increased by $6,081,174 in 2010. At December 31, 2011 and 2010, the Company had total domestic Federal and state net operating loss carryovers of approximately $22,069,461 and$14,687,050, respectively. Federal net operating loss carryovers expire at various dates between 2024 and 2031, while state net operating loss carryovers expirebetween 2024 and 2031. Under the Tax Reform Act of 1986, as amended, the amounts of and benefits from net operating loss carryovers and research and development credits may beimpaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any oneyear include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The Company does not believe thatsuch an ownership change has occurred in 2011 or 2010. 53 The 2008 through 2010 tax years remain open to examination by the Internal Revenue Service and the 2006 to 2010 tax years remain open to the MontanaDepartment of Revenue. These taxing authorities have the authority to examine those tax years until the applicable statute of limitations expire. The Company did not recognize any interest or penalties related to income taxes for the years ended December 31, 2011 and 2010. (14) Employee Benefit Plans As of January 1, 2011, we switched from a SIMPLE IRA to a 401(k) retirement plan. Qualified employees may defer their salary and the deferrals arematched up to 2%. The 2% matching was $92,000 for 2011 and was paid by December 31, 2011. Employees who made contributions in 2011 must havebeen employed as of December 31, 2011 to be eligible for the matching contribution. The plan covers substantially all full-time employees. Under the terms ofthe plan, participants may contribute up to the lower of $16,500 of their salary or the statutorily prescribed limit to the plan. Employees are eligible after sixmonths of employment and may enroll twice a year in January and July. (15) Supplemental Disclosure of Cash Flow Information Supplemental cash flow information is as follows: Year ended December 31, 2011 2010 Supplemental disclosure of cash flow information Cash paid during the period for: Interest $1,039,703 $511,757 Income taxes - - Non-cash activities: Acquisition contingent consideration $450,166 - Warrants issued with debt $227,388 - Issuance of stock for business acquisition $1,000,000 - Conversion of accounts payable into common stock $600,000 - Decrease in warrant derivative liability due to warrant exercises $968,554 - Capital lease acquisition $116,263 $- Conversion of convertible notes payable into common stock - $2,054,620 54 (16) Related Party Transactions Our Chief Executive Officer serves as a Board member of West Coast Tissue Services. In addition, one of our directors, Mitchell Godfrey, serves as a Boardmember of American Donor Services. Both of these entities recover tissues from donors and we reimburse them for recovery fees including labor costs. Theserelationships benefit us, thus insuring we have a pipeline of current and future donors which is necessary for our success. During 2011, we forgave a notereceivable amount of approximately $795,000 from West Coast Tissue. As of December 31, 2011, we had an accounts payable balance of $513,193 toAmerican Donor Services. Accounts payable to American Donor Services of $600,000 as of May 2, 2011 was converted to 170,454 shares of common stock.No compensation is paid to our Chief Executive Officer or our director for their services to those entities. At December 31, 2010, the Company has a note receivable from its Chief Executive Officer of $82,398 which existed prior to the reverse merger transaction inJune, 2010, before we became a public corporation. The Company collected this amount in 2011. (17) Subsequent Events During the first quarter of 2012, pursuant to our previously disclosed May 27, 2011 Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”) andS-3 registration statement declared effective on July 19, 2011, we issued approximately 1,475,037 shares of our common stock to LPC for aggregate proceedsof approximately $3,899,994. We intend to use the proceeds for working capital and general corporate purposes. 55 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our senior management with the participation of our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a – 15(e) under the Exchange Act) as of December 31, 2011. Based upon that evaluation, we concluded that as of December31, 2011, our disclosure controls and procedures were ineffective due to the material weakness in our internal controls over financial reporting detailed belowthat have not been fully remediated as of December 31, 2011. Management’s Report on Internal Control over Financial Reporting Management is responsible for maintaining adequate internal control over financial reporting as such term is defined in rule 13a-15 (f) under the Securities andExchange Act of 1934 as amended. Under the supervision and with the participation of senior and executive management, we conducted an evaluation of ourinternal controls over financial reporting based upon the framework Internal Control – Integrated Framework as outlined by COSO, the Committee ofSponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principlesgenerally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of an evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under the framework Internal Control – Integrated Framework, management concluded that our internal control over financialreporting was ineffective as of December 31,2011 due to material weaknesses in our internal control over financial reporting that have not been fully remediatedas of December 31, 2011 as detailed below: 1) During 2011, the Company kept its inventory records under a separate operating system than its accounting system. Accordingly, duplicate inputwas required for both systems, increasing the risk of errors in recording inventory transactions while requiring numerous reconciliations to be performed byCompany personnel. In addition, the inventory system did not have the capability to generate historical detailed inventory reports which limited our ability toreconcile discrepancies between the accounting system and the inventory system. Our efforts to remediate the weakness include the following: -During 2011, we purchased an integrated accounting operating and inventory system, and on December 28, 2011, we switched over to the newsystem. We believe our new system will substantially improve our ability to track our inventory. 2) Insufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve routine, including monthly andquarterly sales and accounts payable cutoff timing, as well as complex accounting matters while completing the financial statement close process. Until thisdesign deficiency in our internal control over financial reporting is remediated, there is a reasonable possibility that a material misstatement in our annual orinterim financial statements could occur and not be corrected or prevented by our internal control system in a timely manner. Our efforts to remediate this weakness include the following: -We hired an outside consultant to advise us on certain technical accounting issues -We plan to expand the hiring of qualified accounting and finance personnel throughout 2012. 56 3) The documentation surrounding equity transactions for employees and consultants needs to be strengthened to comply with procedures outlinedby the Company to ensure that all equity related transactions are properly recorded in the appropriate periods. -Our efforts to remediate the weakness include the following: --Development of a standard operating procedure for the grant of all equity securities including the approval process by the Compensation Committeeand the Board of Directors. Item 9B.Other Information None. PART III Item 10 Directors and Executive Officers of the Registrant Executive Officers and Directors The names, ages and positions of our executive officers and directors are as follows: Name Age Position Guy Cook 47 Chairman of the Board, Chief Executive Officer, President and Chief Scientific Officer Mitchell T. Godfrey 66 Director Kent Swanson 67 Director Michael Lopach 63 Director Jon Wickwire 68 Director John P. Gandolfo 51 Chief Financial Officer Darrel Holmes 58 Chief Operating Officer Nicholas Navarro 32 National Sales Manager The principal occupations for the past five years (and, in some instances, for prior years) of each of our executive officers and directors are asfollows. Guy Cook, Chairman of the Board, Chief Executive Officer, President and Chief Scientific Officer, is considered an international expert inbiofilm science and its application. He is widely published and has been invited to speak at many prominent biofilm conferences, including the “Anti-InfectiveMaterials” Seminar in Tokyo and the FDA-CDRH Antimicrobial Device Efficacy Testing Seminar. Mr. Cook started his career as a product specialist in theImage Analysis Department for Laboratory Equipment Company in Chicago. He later became President of Delta Resources in Crystal Lake, Illinois, whichspecialized in developing customized image analysis solutions for the academic community. In 1996, he moved to Montana and worked as a ConfocalMicroscopist for the Center for Biofilm Engineering at the Montana State University where he developed several proprietary testing models for the medicaldevice industry. Mr. Cook attended the University of Indiana and received Bachelor of Science degrees in Finance and Economics. 57 Mitchell T. Godfrey, Director, has been involved over the past 25 years in a number of private enterprises, including consulting for andparticipation in firms in the manufacturing, medical devices, nuclear, service and animal health industries. Mr. Godfrey graduated from the University ofUtah in 1968 with Bachelor of Science degrees in psychology and mathematics. He served as a Lieutenant in the U.S. Navy for a period of four years in the1960s. Upon his return from overseas duty, he served as a director of the Utah Vietnam Agent Orange Program. He currently is the Chairman of the Montanabased Crow Creek Falls Conservation Group and has been actively involved in many other organizations. Mr. Godfrey joined us in October 2003 as our ChiefFinancial Officer until December 2007, when his primary responsibility was changed to investor relations. Mr. Godfrey currently serves as a consultant. Kent Swanson, Director, was with Accenture for over 32 years, retiring from the firm in 2001 as a Senior Partner. He held global leadership andmanagement positions in a wide range of industries and geographies. From 2001 to 2008, he was the Board Chair of ALN Medical Management; providingoutsourced services for clinic-based physician practices. Also from 2001 to 2008, he was Board Chair for Boys Hope Girls Hope of Colorado, a charitableorganization providing a home and scholarship education for disadvantaged children with significant capabilities and promise. From 2002 to 2009, he was aBoard member, Audit Committee member and Compensation Committee Chair for MPC Computers. Mr. Swanson graduated with distinction from theUniversity of Minnesota earning an M.S. in Business and received an M.B.A. from the University of Chicago in 1969. Mr. Swanson serves as chairman ofthe Board’s Compensation Committee. Michael Lopach, Director, is a certified public accountant with over 30 years of accounting experience. Mr. Lopach spent 27 years of his careerwith Galusha, Higgens, Galusha & Co., the largest privately held accounting firm in Montana and northern Idaho, where he served as president and CEO. In1999, Mr. Lopach founded Lopach & Carparelli PC, an accounting firm that focuses on medical practitioners. Mr. Lopach received his MBA from theUniversity of Notre Dame. Mr. Lopach serves as chairman of the Board’s Audit Committee. Jon Wickwire, Director, is an attorney and founding shareholder of Wickwire Gavin, P.C., a national construction law firm which merged withAkerman Senterfitt, one of the top 100 law firms in the United States. Mr. Wickwire served as lead counsel on major infrastructure litigation and alternativedispute resolutions, both domestically and internationally, throughout his 35 year career, and was the founding fellow of the American College of ConstructionLawyers. Mr. Wickwire also served as the founding chairman of the College of Scheduling, an organization dedicated to advancing the techniques, practiceand profession of project scheduling, and has authored several books and articles on construction and public contract law, including ConstructionManagement: Law and Practice and The Construction Subcontracting Manual: Practice Guide with Forms. Mr. Wickwire currently serves on theadvisory board for Crunchies Food Company. Mr. Wickwire is a graduate of the University of Maryland and Georgetown University Law Center. Mr.Wickwire serves as chairman of the Nominations and Corporate Governance Committee. John P. Gandolfo, Chief Financial Officer, joined Bacterin as its interim Chief Financial Officer on a part-time basis, effective June 4, 2010, andfilled this position full time commencing on July 6, 2010. Mr. Gandolfo has 25 years of experience as chief financial officer of rapidly growing private andpublicly held companies with a primary focus in the life sciences, healthcare and medical device areas. Mr. Gandolfo has had direct responsibility overcapital raising, including four public offerings, financial management, mergers and acquisition transactions and SEC reporting throughout his professionalcareer. Prior to joining Bacterin, Mr. Gandolfo served as the Chief Financial Officer for Progenitor Cell Therapy LLC, a leading manufacturer of stem celltherapies. Prior to joining Progenitor, Mr. Gandolfo served as the Chief Financial Officer for Power Medical Interventions, Inc., a publicly held developer andmanufacturer of computerized surgical stapling and cutter systems, from January 2007 to January 2009. Prior to joining PMI, Mr. Gandolfo was the ChiefFinancial Officer of Bioject Medical Technologies, Inc., a publicly held supplier of needle-free drug delivery systems to the pharmaceutical and biotechnologyindustries, from September 2001 to May 2006, and served on the Bioject’s Board of Directors from September 2006 through May 2007. Prior to joiningBioject, Mr. Gandolfo was the Chief Financial Officer of Capital Access Network, Inc., a privately held specialty finance company, from 2000 throughSeptember 2001, and Xceed, Inc., a publicly held Internet consulting firm, from 1999 to 2000. From 1994 to 1999, Mr. Gandolfo was Chief FinancialOfficer and Chief Operating Officer of Impath, Inc., a publicly held, cancer-focused healthcare information company. From 1987 through 1994, he wasChief Financial Officer of Medical Resources, Inc., a publicly held manager of diagnostic imaging centers throughout the United States. A graduate of RutgersUniversity, Mr. Gandolfo is a certified public accountant (inactive status) who began his professional career at Price Waterhouse. 58 Darrel L. Holmes, Chief Operating Officer, Tissue Bank Director Mr. Holmes has over 25 years of experience in the medical device, biologics,and diagnostic industries. He previously served as Operations Executive for American Qualex, HYCOR Biomedical and Stratagene, and as Executive VicePresident and COO of Big Spring Water Company. Since joining Bacterin International, Inc. in 2003, Mr. Holmes has assumed responsibilities for all aspectsof medical device and biologic product design and development, process scale-up, and production. He is also responsible for the establishment andmaintenance of an FDA CFR Title 21 Part 820 and 1271-compliant quality system. Mr. Holmes has worked with numerous regulatory agencies at the federal,state, and local level and coordinates Bacterin’s ISO 13485 compliance and environmental health and safety programs. He is the primary regulatory interfacefor Bacterin’s operations and he oversees production, facility management, engineering and information technology (IT) to produce Bacterin’s medical devicesand biologic products, and to accommodate business growth. He directs the design, purchase, validation and implementation of capital assets and facilityexpansions for the company, and is responsible for strategic planning as well as the development and administration of division-level budgets. Currently, Mr.Holmes serves as the Tissue Bank Director and on Bacterin’s Medical Advisory Committee, as a member of Montana State University’s Employer AdvisoryBoard, and as a Scientific Advisory Board Member for Montana Molecular in Bozeman, Montana. Mr. Holmes graduated from California State University atLong Beach with a degree in Biological Science. Nicholas Navarro, National Sales Manager, has eight years of sales and management experience in the orthopedic industry. As the NationalSales Manager, Mr. Navarro is responsible for managing Bacterin’s hybrid distribution force by supporting product sales for all Bacterin divisions. Prior tobeing promoted to this position in February 2012, Mr. Navarro served in various roles at Bacterin, starting as a Direct Representative, advancing to a RegionalSales Manager, and relocating to headquarters to serve as Vice President of Devices. Mr. Navarro’s previous experience includes sales roles with Johnson andJohnson, specializing in wound and infection management, and at Wright Medical as a Foot and Ankle Hardware Specialist. Mr. Navarro has a Psychologydegree from the University of Iowa and a minor in Business. Mr. Navarro also contributes time and efforts to support Miracle Feet, which helps to correct clubfeet in developing countries. Scientific Advisory Board Our Scientific Advisory Board assists us with issues relating to the clinical development and exploitation of our coating and biologic technologies. As our needs evolve, members with required areas of interest and expertise are added. The members of our Scientific Advisory Board are compensated withstock options and shares of common stock under our equity incentive plan. David J. Jacofsky MD, is currently the Chairman of our Scientific Advisory Board and Chairman of The CORE Institute. Dr. Jacofsky is aninternational speaker and respected authority in complex adult joint reconstruction, total joint replacement, traumatology and oncology. He formerly served asDivision Director and Assistant Residency Director at the Mayo Clinic in Rochester, Minnesota. Dr. Jacofsky received highest honors at Lehigh Universityand was valedictorian graduating magna cum laude at the Medical College of Pennsylvania. He completed his orthopedic surgery residency at the Mayo Clinicin Rochester, Minnesota and a fellowship in orthopedic oncology and complex adult reconstruction with Johns Hopkins University in Baltimore, Maryland.During his medical education he received numerous awards including the 2001 Mayo Scholar award. Dr. Jacofsky also has 39 peer reviewed publications, 19book chapters and 1 orthopedic textbook to his credit. He routinely lectures at local, regional, national and international events. He is board certified by theAmerican Academy of Orthopaedic Surgeons. Board Composition and Terms of Office The composition of our board of directors, audit committee, compensation committee, and nominations and governance committee, is subject to thecorporate governance provisions of the NYSE Amex, including rules relating to the independence of directors. All of our board committee members areindependent directors. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers areelected by, and serve at the discretion of, the board of directors. Board Committees We have established an audit committee, compensation committee and nominations and corporate governance committee, in compliance withapplicable corporate governance requirements. Audit Committee. The purpose of the Audit Committee is to assist the oversight of our Board of Directors of the integrity of the financial statements of our company,our company’s compliance with legal and regulatory matters, the independent auditor’s qualifications and independence, and the performance of ourcompany’s independent auditor and internal audit function. The primary responsibilities of the Audit Committee are set forth in its charter and include variousmatters with respect to the oversight of our company’s accounting and financial reporting process and audits of the financial statements of our company. TheAudit Committee also selects the independent auditor to conduct the annual audit of the financial statements of our company; reviews the proposed scope ofsuch audit; reviews accounting and financial controls of our company with the independent auditor and our financial accounting staff; and reviews andapproves transactions between us and our directors, officers, and their affiliates. 59 The Audit Committee currently consists of Messrs. Lopach, Swanson and Wickwire, each an independent director of our company under NYSEAmex listing standards as well as under rules adopted by the SEC pursuant to the Sarbanes-Oxley Act of 2002. Mr. Lopach serves as the Chairman of theAudit Committee. The Board of Directors has determined that Messrs. Lopach and Swanson (whose backgrounds are detailed above) each qualify as an“audit committee financial expert” in accordance with applicable rules and regulations of the SEC. Compensation Committee. The primary purposes of the Compensation Committee are to determine or recommend the compensation of our CEO and other executive officers,and to oversee our Equity Incentive Plan. Our Compensation Committee currently consists of Kent Swanson and Michael Lopach, each of whom is anindependent director. Mr. Swanson serves as the Chairman of the Compensation Committee. Nominations and Corporate Governance Committee. The purposes of the Nominations and Corporate Governance Committee include the selection or recommendation to our Board of Directors ofnominees to stand for election as directors at each election of directors, the oversight of the selection and composition of committees of our Board of Directors,the oversight of the evaluations of our Board of Directors and management, and the development and recommendation to our Board of Directors of a set ofcorporate governance principles applicable to our company. The Nominations and Corporate Governance Committee currently consists of Messrs. Wickwireand Swanson, each of whom is an independent director of our company under NYSE Amex listing standards as well as under rules adopted by the SECpursuant to Sarbanes-Oxley. Mr. Wickwire serves as the Chairman of the Nominations and Corporate Governance Committee. Nominations to the Board of Directors Our directors take a critical role in guiding our strategic direction and overseeing the management of our company. Board candidates are consideredbased upon various criteria, such as their broad-based business and professional skills and experiences, a global business and social perspective, concern forthe long-term interests of the stockholders, diversity, and personal integrity and judgment. In addition, directors must have time available to devote to board activities and to enhance their knowledge in the growing business. Accordingly, weseek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities. Family Relationships There are no family relationships among our new directors and executive officers and any former or proposed directors or executive officers. Legal Proceedings During the past ten years, none of our directors or executive officers has been: othe subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officereither at the time of the bankruptcy or within two years prior to that time; oconvicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minoroffenses); osubject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities orbanking activities; 60 ofound by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to haveviolated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated; osubject of, or a party to, any order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to analleged violation of a federal or state securities or commodities law or regulation, law or regulation respecting financial institutions orinsurance companies, law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or osubject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization,any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members orpersons associated with a member. None of our directors, officers or affiliates, or any beneficial owner of 5% or more of our common stock, or any associate of such persons, is anadverse party in any material proceeding to, or has a material interest adverse to, us or any of our subsidiaries. Compliance with Section 16(a) of the Exchange Act Section 16(a) requires directors, executive officers and holders of more than 10% of an equity security registered pursuant to Section 12 of theExchange Act of 1934 to file various reports with the SEC. To the Company’s knowledge, based solely on our review of the Section 16 reports furnished to us in 2011, we believe all reports required pursuantto Section 16(a) were filed on a timely basis except for the following: (1) We asked Robert Taggart, our former Executive Vice President – National Sales, to begin filing Section 16 reports on September 7, 2011. Despiterepeated requests and reminders, Mr. Taggart did not file his Form 3 until December 12, 2011; and (2) Mr. Taggart failed to file a Form 4 for his sale of approximately 90,000 shares of our common stock on or about December 16, 2011 despite ourrequest for him to do so. Code of Ethics We have adopted a Code of Conduct and a Code of Ethics for our CEO and Senior Financial Officers, both of which are posted on our website atwww.bacterin.com. The contents of our website are not incorporated by reference into this annual report on Form 10-K. Procedures for Shareholder Recommendation of Nominees to the Board of Directors The procedures by which shareholders may recommend nominees to the Board of Directors are contained in our Bylaws, which are attached as anexhibit to this Form 10-K. Item 11. Executive Compensation The table below summarizes the compensation earned for services rendered to Bacterin International Holdings, Inc. f/ka/ K-Kitz, Inc. and BacterinInternational, Inc. in all capacities, for the fiscal years indicated, by its Chief Executive Officer and two most highly-compensated officers other than the ChiefExecutive Officer. 61 Change in Pension Value and Non-Equity Nonqualified Incentive Deferred Stock Option Plan Compensation All Other Name and Principal Position Year Salary Bonus Awards Awards Compensation Earnings Compensation Total Guy S. Cook 2011 $500,000 $50,000 $- $- $- $- $- $550,000 Chief Executive Officer 2010 240,000 - - - - - - - 240,000 John Gandolfo (1) 2011 290,000 35,000 - - - 325,000 Chief Financial Officer 2010 140,000 - - - 1,738,236(2) - - - 1,878,236 Darrel Holmes 2011 162,692 - - - - - - - 162,692 Chief Operating Officer 2010 100,000 30,000 - - - - - - 130,000 Robert Taggart (3) 2011 240,000 - - - - - - 298,578(4) 538,578 EVP – National Sales 2010 249,230 3,800 - - - - - 176,417(4) 429,447 (1)Mr. Gandolfo joined Bacterin as interim Chief Financial Officer on a part-time basis effective June 4, 2010 and filled the position full time commencingJuly 6, 2010. (2)The following assumptions were used in the valuation of this option award: Risk Free Rate of .82%,Expected Term of 2.5 years,Volatility of 52%, andDividend Yield 0% (3)We sent a 90 day notice of termination to Mr. Taggart on November 17, 2011 and Mr. Taggart’s last day of employment was February 15, 2012. (4)Commission Employment Agreements Employment agreements for our current executive officers are set forth as exhibits to this Form 10-K. The employment agreements require each of theexecutives to perform such duties as are customarily performed by one holding their positions and provide for a fixed annual base salary. In addition, eachexecutive is entitled to receive certain cash bonuses and grants under our equity incentive plan as may be determined by the compensation committee of ourboard of directors. The employment agreements also contain covenants (a) restricting the executives from engaging in any activity competitive with our business, (b)prohibiting the executive from disclosing confidential information regarding our company, and (c) requiring that all intellectual property developed by theexecutive and relating to our business constitutes our sole and exclusive property. Bacterin International Equity Incentive Plan The following is a summary of the material terms of the Bacterin International Equity Incentive Plan: The purpose of the incentive compensation plan is to enable us to attract, retain and motivate key employees, directors and, on occasion, independentconsultants, by providing them with stock options and restricted stock grants. Stock options granted under the incentive compensation plan may be eitherincentive stock options to employees, as defined in Section 422A of the Internal Revenue Code of 1986, or non-qualified stock options. The plan isadministered by our compensation committee. The administrator of the plan has the power to determine the terms of any stock options granted under theincentive plan, including the exercise price, the number of shares subject to the stock option and conditions of exercise. Stock options granted under theincentive plan are generally not transferable, vest in installments and are exercisable during the lifetime of the optionee only by such optionee. The exerciseprice of all incentive stock options granted under the plan must be at least equal to the fair market value of the shares of common stock on the date of thegrant. 62 There are 9,000,000 shares of our common stock authorized to be issued under the plan. As of December 31, 2011, we had outstanding options topurchase 4,828,910 shares (at exercise prices ranging from $0.10 to $7.40 per share) granted and 1,632,900 shares of restricted stock issued, to directors,executives, employees and consultants, leaving an additional 2,538,190 available for issuance thereunder. Except for the Equity Incentive Plan discussed above, we have not had a stock option plan or other similar incentive compensation plan for officers,directors and employees. Outstanding Equity Awards at Fiscal Year-End (December 31, 2011) Option Awards Number of Securities UnderlyingUnexercised Options Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Option Exercise Option Expiration Name Exercisable Unexercisable Options Price Date Guy Cook - - - - - John Gandolfo 50,000 - 200,000 $1.60 6/3/2020 Darrel Holmes 45,000 - - $0.10 10/9/2013 30,000 - - $1.34 10/9/2016 44,999 - 30,000 $1.50 12/29/2018 Robert Taggart 300,000 200,000 $1.50 11/17/2018 Potential Payments Upon Termination or Change-in-Control SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to ournamed executive officers in connection with any termination of employment or change in control of the company. Except for Mr. Gandolfo’s employmentagreement described below, we currently have no employment agreements with any of our named executive officers which have payments upon termination orchange in control, nor any compensatory plans or arrangements that provide for any payments or benefits upon the resignation, retirement or any othertermination of any of our named executive officers, as the result of a change in control, or from a change in any named executive officer’s responsibilitiesfollowing a change in control. Pursuant to the terms of Mr. Gandolfo’s employment agreement, if Mr. Gandolfo’s employment with our company is terminated by us in connectionwith a “Change of “Control” (as defined therein), Mr. Gandolfo shall be eligible to receive 12 months’ salary as severance, if he has delivered to us a completerelease of any claims against us in form and substance reasonably satisfactory to us and if Mr. Gandolfo has not breached any section of his employmentagreement. Mr. Gandolfo’s current salary under the employment agreement is $290,000 per year. The severance payments payable to Mr. Gandolfo will bepaid biweekly through automatic deposits; provided that the initial payment of any severance hereunder shall begin on the eighth day after Mr. Gandolfo hassigned the aforementioned release. A “Change of Control” is defined in Mr. Gandolfo’s employment agreement to consist of either Guy Cook no longer servingas the Chief Executive Officer or a sale of all or substantially all of the assets of the Company. 63 Retirement Plans The Company has a 401(k) plan available to all full-time employees following a six month probationary period. The Company matches up to 2% of employeecontributions at the end of the year. Director Compensation Name Fees Earnedor Paid inCash (1) Stock Awards OptionAwards(2) Non-Equity Incentive PlanCompensation Change in Pension Value and Nonqualified Deferred Compensation Earnings All Other Compensation Total Mitch Godfrey(3) $- $218,400 $213,257 - - $95,000 $526,657 Kent Swanson $43,500 $- 43,535 - - - $87,035 Michael Lopach (4) $50,000 $- 128,840 - - - $178,840 Jon Wickwire (4) $43,500 $- 128,840 - - - $172,340 (1)Our independent Board members receive an annual retainer of $40,000 per year, the Audit Committee Chair receives an additional $10,000 per year,and the other Committee Chairs receive an additional $3,500 per year. (2)New independent Board members receive options to purchase 50,000 shares of our common stock, vesting after one year, with an exercise price equalto the closing price of our common stock on the date of grant. Following the first year of service, independent Board members receive an annualcontinued service grant of options to purchase 30,000 shares with an exercise price equal to the closing price of our common stock on the date ofgrant. (3)Mitchell Godfrey serves as a consultant to the Company and all compensation paid to Mr. Godfrey was in payment for his services as a consultant.Mr. Godfrey does not receive any director fees or options for his service as a director. (4)Michael Lopach and Jon Wickwire became members of the Board in October of 2010, but did not receive their new director grants until 2011. Theyalso received a continued service grant following their first anniversary of service as directors. Compensation Committee Interlocks and Insider Participation No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, norhas any interlocking relationship existed in the past. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2011, by (a) each of ourdirectors and executive officers, (b) all of our directors and executive officers as a group, and (c) each person who is known by us to beneficially own 5% ormore of our common stock. 64 Name (1) Number of Shares Beneficially Owned (2) Percentage of Shares Beneficially Owned (3) Name of Beneficial Owner: Guy S. Cook 12,986,549(4) 31.86%Mitchell Godfrey 1,012,133(5) 2.48%Kent Swanson 541,065(6) 1.33%Michael Lopach 151,185(7) *Jon Wickwire 459,389(8) 1.13%John P. Gandolfo 63,920(9) * Darrel Holmes 119,999(10) * Nick Navarro 12,000(11) * All executive officers and directors as a group (8 persons) 15,346,240 37.65%Donald de Laski 2,915,769(12) 7.15% *Less than 1% of outstanding shares of common stock. (1)The address of each person is c/o Bacterin International, Inc., 600 Cruiser Lane, Belgrade Montana 59714. (2)Unless otherwise indicated, includes shares owned by a spouse, minor children and relatives sharing the same home, as well as entities owned orcontrolled by the named person. Also includes shares if the named person has the right to acquire those shares within 60 days after December 31, 2011,by the exercise or conversion of any warrant, stock option or convertible preferred stock. Unless otherwise noted, shares are owned of record andbeneficially by the named person. (3)The calculation in this column is based upon 40,763,323 shares of common stock outstanding on December 31, 2011. The shares of common stockunderlying warrants and stock options are deemed outstanding for purposes of computing the percentage of the person holding them, but are not deemedoutstanding for the purpose of computing the percentage of any other person. (4)Includes (a) 12,827,137 shares of our common stock, (b) warrants to purchase 134,412 shares of our common stock, and (c) options to purchase25,000 shares of our common stock held by Mr. Cook’s spouse. (5)Includes (a) 711,467 shares of our common stock, (b) 50,666 shares of common stock owned by Mr. Godfrey’s spouse, and (c) options to purchase250,000 shares of our common stock. (6)Includes (a) 221,223 shares of our common stock, (b) 200,000 shares held by a family limited partnership, (c) warrants to purchase 89,842 shares ofour common stock, and (d) options to purchase 30,000 shares of our common stock. (7)Includes (a) 16,949 shares of our common stock, (b) 33,898 shares held by a 401(k) plan, (c) warrants to purchase 20,338 shares, and (d) options topurchase 80,000 shares. (8)Includes (a) 85,509 shares of our common stock, (b) 257,630 shares of common stock held by trusts, (c) warrants to purchase 36,250 shares ofcommon stock, and (d) options to purchase 80,000 shares of our common stock. (9)Includes (a) 9,943 shares of our common stock held by an IRA, (b) warrants to purchase 3,977 shares of our common stock, and (c) vested options topurchase 50,000 shares of our common stock. (10)Includes vested options to purchase 119,999 shares of our common stock. (11)Includes vested options to purchase 12,000 shares of our common stock. (12)Based on Schedule 13G filed by Donald de Laski. Includes (a) 2,650,769 shares of our common stock and (b) warrants to purchase 265,000 shares topurchase shares of our common stock. 65 Item 13.Certain Relationships and Related Transactions, and Director Independence Transactions with Related Persons, Promoters and Certain Control Persons Guy Cook, our President and Chief Executive Officer, serves as a board member of West Coast Tissue Services (“WCTS”) and formerly served asa director for American Donor Services (“ADS”). Mitchell Godfrey, a director, is on the board of ADS and also serves as secretary and treasurer for ADS.Neither Mr. Cook nor Mr. Godfrey receive any compensation for their board service or work for either entity. Mr. Cook’s spouse also performs thebookkeeping and accounting services for ADS, but she received no compensation in 2011 or 2010 for her services. Both of these entities recover tissue fromdonors. We reimburse them for their recovery fees, which are comprised primarily of labor costs. The approximate aggregate amount of all transactions withWCTS was $510,500 for 2011 and $471,400 for 2010, and the approximate aggregate amount of all transactions with ADS was $1,765,908 for 2011 and$931,471 for 2010. These relationships benefit us, and thus Mr. Cook, as these entities provide us with donors, thus insuring that we have a pipeline ofcurrent and future donors, which is necessary to our success. In May of 2011, ADS converted a $600,000 accounts payable balance into 170,454 shares ofour common stock and warrants to purchase 68,181 shares of our common stock, under the same terms as outside third party investors in a privateplacement transaction, and in December 2011 we wrote off an accounts receivable balance from WCTS in the approximate amount of $795,000. Unless delegated to the Compensation Committee by the Board of Directors, the Audit Committee reviews and approves all related party transactionsand reviews and makes recommendations to the full Board of Directors, or approves, any contracts or other transactions with current or former executiveofficers of our company, including consulting arrangements, employment agreements, change-in-control agreements, termination arrangements, and loans toemployees made or guaranteed by our company. Director Independence The following board members are independent directors, as defined under the independence standards of the NYSE Amex LLC: Kent Swanson, MichaelLopach and Jon Wickwire. All of our board committees are comprised solely of independent directors, and the composition of our board committees isdescribed in Item 10 of this Form 10-K. Item 14. Principal Accountant Fees and Services Ehrhardt, Keefe, Steiner & Hottman PC (“EKS&H”) served as the independent registered public accounting firm to audit our books and accounts for thefiscal year ending December 31, 2011 and Child, Van Wagoner & Bradshaw, PLLC (“CVWB”) served as the independent registered public accounting firmto audit our books and accounts for the fiscal year ending December 31, 2010. The following table presents the aggregate fees billed for professional servicesrendered by EKS&H for the year ended December 31, 2011 and by CVWB for the year ended December 31, 2010. 2011 2010 Audit fees $ 144,000 $84,010 Audit-related fees 43,000 - Tax fees - - All other fees - - In the above table, “audit fees” are fees billed for services provided related to the audit of our annual financial statements, quarterly reviews of our interimfinancial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements forthose fiscal periods. “Audit-related fees” are fees not included in audit fees that are billed by the independent accountant for assurance and related services thatare reasonably related to the performance of the audit or review of our financial statements. “Tax fees” are fees billed by the independent accountant forprofessional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the independent accountant for products andservices not included in the foregoing categories. Audit Committee’s Pre-Approval Policy It is the Audit Committee’s policy to approve in advance the types and amounts of audit, audit-related, tax and any other services to be provided by ourindependent accountants. In situations where it is not possible to obtain full Audit Committee approval, the Audit Committee has delegated authority to theChairman of the Audit Committee to grant pre-approval of auditing, audit-related, tax and all other services. Any pre-approved decisions by the Chairman arerequired to be reviewed with the Audit Committee at its next scheduled meeting. 66 The Audit Committee approved 100% of the services provided by EKS&H and CVWB. PART IV Item 15.Exhibits and Financial Statement Schedules The following documents are filed as part of or are included in this Annual Report on Form 10-K: 1.Financial statements included in Item 8 of this Annual Report; and 2.Exhibits listed in the Exhibit Index filed as part of this Annual Report. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. BACTERIN INTERNATIONAL HOLDINGS, INC. By: /s/ Guy S. Cook Name:Guy S. Cook Title:Chief Executive Officer Date:March 29, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated. By:/s/ Guy S. Cook Name: Guy S. Cook Title: Chief Executive Officer Date: March 29, 2012 By:/s/ John Gandolfo Name: John Gandolfo Title: Chief Financial Officer Date: March 29, 2012 68 Exhibit Index ExhibitNo. Description2.1 Agreement and Plan of Merger, dated as of June 30, 2010, by and among K-Kitz, Inc., KB Merger Sub, Inc. and Bacterin International,Inc. (1)3.1 Certificate of Incorporation (7)3.2 Amended and Restated Bylaws, dated January 12, 2011(5)4.14.2 Form of Warrant to Purchase Common Stock (1)Form of Common Stock Certificate (8)10.1 Form of Private Placement Subscription Agreement to purchase Shares and Warrants (1)10.2 Form of Registration Rights Agreement (3)10.3 Form of Management Lock-Up Agreement for the officers and directors of Bacterin International Holdings, Inc. and BacterinInternational, Inc. (3)10.4 Form of Indemnification Agreement for the officers and directors of Bacterin International Holdings, Inc. and Bacterin International,Inc.(3)10.5 Amended and Restated Bacterin International Equity Incentive Plan (9)10.6 Guy Cook Employment Agreement (3) •10.7* Mitchell Godfrey Consulting Agreement •10.8 John Gandolfo Employment Agreement (3) •10.9* Nicholas Navarro Employment Agreement •10.10 Darrel Holmes Employment Agreement (3) •10.11 Loan and Security Agreement dated as of November 17, 2010 between Bacterin International Holdings, Inc. and Bacterin International,Inc. and Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI Inc. (4)10.12 Supplement to the Loan and Security Agreement dated as of November 17, 2010 among Bacterin International Holdings, Inc.and Bacterin International, Inc. and Venture Lending & Leasing V, Inc. and Venture Lending & Leasing VI, Inc. (4)10.13 Agreement for Bone Allograft, DBM, and Bone Graft Substitute Products between Broadlane, Inc. and Bacterin International, Inc. (4)10.14 Loan and Security Agreement dated as of January 14, 2011 between Bacterin International, Inc. and Bacterin International Holdings,Inc. and Bridge Bank, National Association (6)10.15 Purchase Agreement, dated as of May 27, 2011, by and between the Company and Lincoln Park Capital Fund, LLC (10)10.16 Registration Rights Agreement, dated as of May 27, 2011, by and between the Company and Lincoln Park Capital Fund, LLC (10)10.17 Asset Purchase Agreement between the Company and Robinson MedSurg, LLC(11)10.18 Loan and Security Agreement dated July 29, 2011 by and between the Company and MidCap Funding III, LLC(12)10.19* David Jacofsky Consulting Agreement •14.1 Code of Conduct (6)14.2 Code of Ethics for the CEO and Senior Financial Officials (6)16.1 Letter from W.T. Uniack & Co., CPA’s P.C., dated September 24, 2010 (2)21.1 Subsidiaries of the Registrant (3)23.1* Consent of Independent Accounting Firm, Ehrhardt, Keefe, Steiner & Hottman PC23.2* Consent of Independent Accounting Firm, Child, Van Wagoner & Bradshaw, PLLC31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1* Section 1350 Certification of Chief Executive Officer32.2* Section 1350 Certification of Chief Financial Officer101.1** Interactive Data Files - XBRL Documents •Compensation Agreement*Filed herewith**Furnished herewithXBRL (eXtensible Business Reporting Language) information is furnished and not filed as part of any registration statement or prospectus for purposesof Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, asamended, and otherwise is not subject to liability under these Sections. 69 (1)Incorporated herein by reference to the Registrant’s Form 8-K dated June 30, 2010, filed with the SEC on June 30, 2010. (2)Incorporated herein by reference to the Registrant’s Form 8-K dated September 24, 2010, filed with the SEC on September 24, 2010. (3)Incorporated herein by reference to the Registrant’s Form 8-K dated June 30, 2010, filed with the SEC on July 7, 2010. (4)Incorporated by reference to the Registrant’s Amendment No. 1 to Form S-1 Registration Statement filed with the SEC on December 7, 2010. (5)Incorporated by reference to the Registrant’s Form 8-K dated January 12, 2011, filed with the SEC on January 12, 2011. (6)Incorporated by reference to the Registrant’s Form 8-K dated January 14, 2011, filed with the SEC on January 21, 2011. (7)Incorporated by reference to the Registrant’s Form 10-Q filed with the SEC on November 14, 2011. (8)Incorporated by reference to the Registrant’s Form S-3 Registration Statement filed with the SEC on July 11, 2011. (9)Incorporated by reference to Appendix B of the Registrant’s Proxy Statement filed with the SEC on June 8, 2011. (10)Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on May 31, 2011. (11)Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on July 14, 2011. (12)Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on August 1, 2011. 70 INDEPENDENT CONTRACTOR SERVICES AGREEMENT THIS INDEPENDENT CONTRACTOR SERVICES AGREEMENT (this "Agreement") is made as of March 27, 2012, (the "Effective Date") by andbetween BACTERIN INTERNATIONAL, INC., a Nevada corporation with offices at 600 Cruiser Lane, Belgrade, Montana 59714 ("COMPANY") andMitchell Godfrey with an address at 1022 Boylan Drive Bozeman, MT 59718 (“CONSULTANT”). The parties agree as follows: 1. Engagement of Consultant. Subject to the terms and conditions of this Agreement, Company hereby engages Consultant as an independent contractor tocomplete the projects (the "Projects") and all related services (collectively, the "Services") as the parties will, from time to time, mutually set forth in aStatement of Work, substantially in the form attached hereto as Exhibit A. Consultant will not commence Services until a Statement of Work is signed anddelivered by an authorized representative of Company. 2. Principal Duties. During the term of this Agreement, Consultant will at all times use best efforts to provide the Services to Company in a timely andprofessional manner consistent with industry standards. Such work will be conducted at the facilities of the Consultant using Consultant's own equipment,tools and other materials at its own expense or as the parties agree. The manner and means by which Consultant chooses to complete the Services are inConsultant's sole discretion and control. 3. Compensation and Taxes. Company will pay all reasonably undisputed amounts due, at rates set forth in the applicable Statement of Work. BecauseConsultant is an independent contractor, Company will not withhold or make payments for state or federal income tax or social security, make unemploymentinsurance of disability insurance contributions, or obtain workers' compensation insurance on Consultant's behalf. Company will issue Consultant a 1099form with respect to Consultant's consulting fees, if required. Consultant accepts exclusive liability for complying with all applicable state and federal lawsgoverning self-employed individuals, including obligations such as payment of quarterly taxes, social security, disability and other contributions based on thefees paid to Consultant, his agents or employees under this Agreement. 4. Expenses. Company will additionally compensate Consultant for (a) such travel and other expenses relating to a Project as have been authorized in aStatement of Work, according to the Company's expense reimbursement policies and (b) reasonable out-of-pocket expenses, fees and costs incurred or involvedin assisting Company with the preparation, filing or prosecution of any application for patent or copyright (subject to Company's rights as set forth in Section8) or in the prosecution or defense of any litigation involving the same. Consultant will file an expense report that documents such expenses, including writtenexpense receipts, and Company will pay all reasonably undisputed amounts within 30 days of receipt of such report. 5. Other Activities; Non-Solicitation. During the term of this Agreement, Consultant shall not accept work, enter into a contract, or accept an obligation withany third party that is in any business that is competitive with the business conducted by Company or that otherwise would materially prevent or restrictConsultant from satisfying Consultant's obligations under this Agreement. During the term of this Agreement, Consultant will present himself only as anaffiliate of Company and not as an affiliate of any other competitive entity. Consultant, during the term of this Agreement and for two (2) years after itstermination, shall neither solicit nor induce any employee of Company to leave the employment of Company nor solicit any customer of Company. 6. Representations and Warranties. Consultant hereby represents and warrants that: (a) Consultant will not disclose to Company any information thatmay be deemed to be confidential or proprietary to any other pm1y for which Consultant may have rendered any services; (b) Consultant is not a party to anyagreement or arrangements that prohibit Consultant from performing the Services hereunder; (c) the Services to be rendered to Company hereunder will notconflict with any obligations that Consultant has or may have had to any party for whom Consultant has performed services; (d) the Work Product, asdefined below, will be an original work of authorship; (e) the Work Product, including any element thereof, will not infringe the Proprietary Rights of any thirdparty; (f) the Work Product, including any element thereof, will be free of all mortgages, liens, pledges, security interests, encumbrances or encroachments;(g) Consultant will not grant, directly or indirectly, any rights or interest whatsoever in the Work Product to third parties; (h) Consultant has full right andpower to enter into and perform its obligations under this Agreement without the consent of any third party; (i) Consultant will take reasonable precautions toprevent injury to any persons (including employees of Company) or damage to property (including Company's property) during the term of this Agreement;and (j) Consultant will perform all work hereunder in compliance with applicable law. 7. Confidential Information. Consultant acknowledges that it will be exposed to, have access to and be engaged in the development of confidential andproprietary information of Company (both in tangible and intangible manifestations), including but not limited to the patents, copyrights, trademarks, tradesecrets, technology and business of Company, any Work Product and Inventions, as defined below, confidential and proprietary information of or concerningcustomers of Company and any other information specifically identified in a Statement of Work (collectively the "Confidential Information"). All ConfidentialInformation and all the Proprietary Rights related thereto or embodied therein, whether presently existing or developed in the future, are the sale property ofCompany and its assigns. Consultant will hold all Confidential Information in the strictest confidence and will not use any Confidential Information except tothe limited extent necessary to perform the Services. Consultant shall not disclose Confidential Information or any copies, notes, summaries, excerpts oranything related to such information, without the written consent of Company. Consultant's obligations of non-disclosure contained herein, however, will notapply to Confidential Information that Consultant can demonstrate (a) is or becomes known by Consultant without an obligation to maintain itsconfidentiality, as shown by Consultant's competent written records, to the extent such information is not included in any Work Product or forms part of anyInventions, (b) is or becomes generally known to tile public through no act or omission of Consultant. 8. Rights in Work Product and Inventions (a) Work Product. Consultant acknowledges that any and all trade secrets, ideas, processes, formulas, know-how, developments, designsand techniques and all source and object code, data, programs and other works of authorship conceived, written, created or reduced to practice in theprovision of Services under this Agreement by Consultant or its subcontractors, whether or not patentable or registrable under copyright or similarstatutes ("Work Product"), will be the sale and exclusive property of Company, and Consultant hereby assigns to Company all right, title and interest inand to such Work Product including any and all patent, copyright, trade secret, trademark rights and all other intellectual property rights related to theWork Product (the "Proprietary Rights"). Consultant hereby waives and quitclaims to Company any and all claims, of any nature whatsoever, thatConsultant now or may hereafter have for infringement of any Proprietary Rights in the Work Product or Inventions assigned hereunder to Company. (b) Inventions. Consultant will disclose in writing to Company all inventions, discoveries, concepts, ideas, improvements and other innovations of anykind that Consultant or its employees may make, conceive, develop or reduce to practice, alone or jointly with others, in the course of performing theServices, or as a result of that work, whether or not they are eligible for patent, copyright, trademark, trade secret or other legal protection (collectively,"Inventions"). All Inventions made, conceived, or completed by Consultant or its employees, individual or with others, during the term of this Agreementwill be the sale and exclusive property of Company, provided such Inventions: (i) relate to any subject matter with which Consultant's work or Servicesto be rendered to Company hereunder may be concerned; (ii) relate to or are connected with the business, products or projects of Company of whichConsultant had knowledge by reason of Consultant's association with Company under this Agreement; or (iii) involve use of Company's time, materialor facilities. (c) Disclosure and License of Background Technology. Consultant will specifically describe and identify in Exhibit B all technology that Consultantor its subcontractors intend to use in performing the Services that are owned by, or licensed with a right to sublicense to, Consultant or itssubcontractors and that is in existence in a tangible form prior to the date of this Agreement ("Background Technology"). Consultant hereby grants toCompany a non-exclusive, royalty-free, perpetual, irrevocable, and world-wide right, with rights to sublicense through multiple tiers of sublicensees, toreproduce, make derivative works of, distribute, make, use, sell, publicly perform, and publicly display in any form or medium, whether now knownor later developed, the Background Technology incorporated or used by Consultant, or its subcontractors in providing the Services. (d) Assistance. Consultant shall cooperate with Company or its designee(s), both during and after the term of this Agreement, in the procurement,maintenance and enforcement of all Proprietary Rights in the Work Product and the Inventions in any and all countries. To that end Consultant (and allsubcontractors) will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as Company mayreasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof,including without limitation any assignments of such Proprietary Rights to Company or its designee. Consultant will be entitled to a fair and reasonable fee forrendering such services in addition to reimbursement of authorized expenses incurred at the prior written request of Company. In the event Company is unablefor any reason, after reasonable effort, to secure Consultant's signature on any document needed in connection with the actions specified in this Section 8,Consultant hereby irrevocably designates and appoints Company and its duly authorized officers and agents as its agent and attorney in fact, whichappointment is coupled with an interest, to act for and in its behalf to execute, verify and file any such documents and to do all other lawfully permitted acts tofurther the purposes of this Section 8 with the same legal force and effect as if executed by Consultant. 9. Indemnification and Insurance. Consultant will defend, indemnify and hold harmless Company, its officers, directors, employees and agents from anyand all claims, losses, liabilities, damages, expenses and costs (including reasonable attorneys' fees and court costs) that result from a breach or alleged breachof any obligation or representation or warranty of Consultant contained in this Agreement, provided that Company gives Consultant (a) written notice of anysuch claim and (b) the right to defend such claim at Consultant's expense Consultant shall waive all rights of subrogation against Company. 10. Term and Termination. (a) Term. This Agreement will be effective as of the Effective Date and continue October 4, 2014. (b) Termination for Cause. Company may immediately terminate Consultant's engagement for Cause upon written notice specifying theparticular Cause. "Cause" means (i) Consultant's failure or omission that has an adverse effect on Company; (ii) Consultant's act(s) amounting togross negligence to the detriment of Company; (iii) Consultant's fraud or embezzlement of funds or property; or (iv) Consultant's failure to observe orperform any covenant, condition or provision of this Agreement. (c) Upon any termination of this Agreement, Consultant will promptly deliver to Company all documents and other materials of any naturepertaining to tile Services (including the Work Product and Inventions as defined in Section 8), together with all copies, notes, summaries, excerpts andthe like of all documents and other items containing or pertaining to any Confidential Information. The following will survive termination of thisAgreement: the non-solicitation provision of Section 5 and Sections 7, 8, 9 and 12. 11. Independent Contractor. Consultant will be and act as an independent contractor and not as an employee of Company. Consultant provides Servicesunder this Agreement solely under its own supervision and will be subject to Company's direction only as to the specific areas of Company's interests forwhich Services are to be provided. Nothing herein will be construed as creating an employer/employee relationship between Company and the Consultant.Consultant will not be entitled to any benefits that Company may make available to its employees. Consultant will be solely responsible for all tax returns andpayments required to be filed with or made to any federal, state or local tax authority. Consultant has no authority to, and will not, obligate Company bycontract or otherwise. 12. Gencral Terms. Consultant may not assign this Agreement, or delegate or subcontract any of the Services to be provided under this Agreement,without Company's prior written consent; any such assignment or delegation will be void and of no effect. This Agreement is governed by the laws of the Stateof Montana, excluding conflicts of law principles. Consultant hereby expressly consents to the personal jurisdiction of the state and federal courts located inMontana for any lawsuit filed there against Consultant by Company arising from or related to this Agreement. All notices, requests and other communicationsunder this Agreement must be in writing, and must be personally delivered or sent by United States mail, registered or certified, return receipt requested. Themailing address for notice to either party will be the address shown on the signature page of this Agreement. This Agreement constitutes the parties' final,exclusive and complete understanding and agreement, and supersedes all prior and contemporaneous understandings and agreements relating to its subjectmatter. Any waiver, modification or amendment of any provision of this Agreement will be effective only if in writing and signed by the parties to thisAgreement. The provisions of this Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole orin part, the remaining provisions, and any partially enforceable provision to the extent enforceable, will nevertheless be binding and enforceable. In Witness Whereof, the parties have executed this Agreement as of the date first written above. Bacterin International, Inc. Consultant By:/s/ Guy Cook By:/s/ Mitchell Godfrey Name:Guy Cook Name:Mitchell Godfrey, individually Title:CEO EXHIBITAStatement of Work Projects: Tasks as assigned by John Gandolfo regarding potential financing transactions; special projects as assigned by Guy Cook; work related to UnitedStates Department of Defense ("DOD") relationships and potential ventures involving the DOD; relationships with members of the United States Congress;projects related to the investigation of investment in new technologies.Bacterin technologies to be disclosed: All technology relevant to Projects. Rate of payment: $95,000 annually Payment terms:Monthly Expenses to be paid:As pre-approved by an officer of Company Bacterin International, Inc. Consultant By:/s/ Guy Cook By:/s/ Mitchell Godfrey Name:Guy Cook Name:Mitchell Godfrey, individually Title:CEO Exhibit B Background Technology Disclosure The following is a list of all Background Technology that Consultant intends to use in performing Services under this Agreement: None. EMPLOYMENT AGREEMENT This Employment Agreement (“Agreement”) is entered into by and between Bacterin International, Inc. (“Company”), and Nick Navarro an Individual(“Employee”), and is effective on February 06, 2012 (“Effective Date”). In consideration of the mutual promises, covenants and agreements contained in this Agreement, and other good and valuable consideration, including but notlimited to Employee’s employment by the Company, the sufficiency and receipt of which is hereby acknowledged, the Parties agree as follows: 1. EMPLOYMENT AND DUTIES. A. Employment. Company hereby agrees to employ Employee, and Employee hereby accepts employment from Company, as VicePresident of Sales on the terms and subject to the conditions set forth in this Agreement. B. Employment “At-Will” Relationship. Employee is employed on an “at-will” basis, which means that the Company or Employee has theright to terminate Employee’s employment relationship with the Company at any time, with or without cause and with or without notice. C. Full-Time Best Efforts. Employee agrees to devote Employee’s full professional time and attention to the business of the Company (andits subsidiaries, affiliates, or related entities) and the performance of Employee’s obligations under this Agreement, and will at all times faithfully,industriously and to the best of Employee’s ability, experience and talent, perform all of Employee’s obligations hereunder. The Employee shall not, at anytime during Employee’s employment by the Company, directly or indirectly, act as a partner, officer, director, consultant, employee, or provide services inany other capacity to any other business enterprise without the prior written consent and approval of an authorized representative of the Company. D. Duty of Loyalty. Employee acknowledges that during Employee’s employment with the Company, Employee has participated in andwill participate in relationships with existing and prospective clients, customers, partners, suppliers, service providers and vendors of the Company that areessential elements of the Company’s goodwill. The parties acknowledge that Employee owes the Company a fiduciary duty to conduct all affairs of theCompany in accordance with all applicable laws and the highest standards of good faith, trust, confidence and candor, and to endeavor, to the best ofEmployee’s ability, to promote the best interests of the Company. E. Conflict of Interest. Employee agrees that while employed by the Company, and except with the advance written consent of a dulyauthorized officer of the Company, Employee will not enter into, on behalf of the Company, or cause the Company or any of its affiliates to enter into, directlyor indirectly, any transactions with any business organization in which Employee or any member of Employee’s immediate family may be interested as ashareholder, partner, member, trustee, director, officer, employee, consultant, lender or guarantor or otherwise; provided, however, that nothing in thisAgreement shall restrict transactions between the Company and any company whose stock is listed on a national securities exchange or actively traded in theover-the-counter market and over which Employee does not have the ability to control or significantly influence policy decisions. ConfidentialPage 1 2. COMPENSATION. A. Base Pay. During the Employee’s employment, the Company agrees to pay Employee gross annual compensation of $240,000.00, lessusual and customary withholdings, which shall be payable in arrears in accordance with the Company’s customary payroll practices. In addition, Employeeshall be eligible to receive bonus compensation in amounts to be determined by the Company’s Compensation Committee of the Board of Directors. B. Benefits. During Employee’s employment, Employee shall be eligible to participate in the Company’s benefits programs, if any, assummarized and as governed by any plan documents concerning such benefits. 3. CONFIDENTIAL INFORMATION. A. Company Information. The Company (including its affiliates, related entities, parent companies, subsidiaries, and successor entities)possesses and will continue to possess information, whether written or verbal, or in any other medium or expression, which has value and is treated by theCompany as confidential (“Confidential Information”). Confidential Information may be written, stored in a computer, merged with other information, orsimply memorized. Just because it is memorized, however, does not in any way reduce its confidentiality or its proprietary nature. While some of theConfidential Information may be in the public domain, its compilation in a form useful to the Company makes it unique and valuable. ConfidentialInformation may include information created, discovered or developed by Employee during the period of or arising out of Employee’s employment by theCompany, whether before or after the Effective Date of this Agreement. Confidential Information also may include any Company proprietary information,technical data, trade secrets or know-how; information concerning the Company’s past, current or prospective customers (including but not limited to lists,names, addresses, phone numbers, purchase history, accounts receivable concerning Company customers, customer preferences, and other financialinformation); information concerning the Company’s personnel, consultants, vendors, contractors, or other affiliates of the Company; financial information,projections, forecasts, budgets, sales and marketing strategies and information, research, pricing information and strategies, inventions, improvements andother intellectual property; products, systems, seminars, programs, procedures, manuals, guides, confidential reports, forecasts, designs, processes,formulae, communications, equipment, Rolodexes, business card files, computer discs or other digital media, video tapes, files, proposals, lists,correspondence, letters, notes, notebooks, reports, memoranda and other documents; fax, voice-mail and e-mail messages generated, received or transmittedthrough the use of the Company’s computer and/or telecommunications equipment; software or related code; new product design, search engine optimization,software design and development; and any other confidential information obtained during Employee’s employment or affiliation with the Company. B. Nondisclosure of Company Information. At all times, both during Employee’s employment by the Company and thereafter, Employeeshall keep in the strictest confidence and trust all Confidential Information. Employee may use Confidential Information as required in the performance ofEmployee’s duties for the Company, so long as (i) any disclosure that may occur in connection with the performance of Employee’s duties occurs only on a“need to know” basis, (ii) any such use is only for the benefit of the Company, and (iii) any such use will not result in any detriment or harm to the Companyor its ability to maintain the information as Confidential or as a trade secret. Other than as expressly provided in this Agreement, Employee shall not directly orindirectly, in one or a series of transactions, disclose or reveal to any person or organization, or use, divulge, publish, report, transfer, or otherwise exploit forhis/her own or anyone’s else’s benefit any of the Confidential Information without the express written consent of an authorized representative of the Company. ConfidentialPage 2 C. Duty to Safeguard Company Information. Employee shall take all reasonable safeguards to prevent unauthorized disclosure, replicationor reproduction of Confidential Information and shall not permit any person or entity to photocopy, transcribe, or otherwise reproduce or disclose ConfidentialInformation without the express written authorization of the Company. To the extent any such authorized disclosure or use of the Confidential Informationoccurs, Employee shall inform all recipients of such information that the Confidential Information is confidential and proprietary to the Company. Employeeshall affix, or shall cause to be fixed, appropriate notices or warnings to all such physical expressions of Confidential Information describing the Company’sproprietary rights thereto. Employee shall (i) notify the Company immediately of any unauthorized possession, use or knowledge of the ConfidentialInformation, (ii) promptly furnish full details of such possession, use or knowledge to the Company, and (iii) cooperate with the Company in any litigationconcerning such unauthorized possession, use or knowledge as may be deemed necessary by the Company to protect its proprietary rights in the ConfidentialInformation. Except as may be expressly authorized by the Company or as is consistent with Employee’s obligations with respect to the ConfidentialInformation as set forth in this Agreement, Employee shall not (i) develop any product or service that is based in whole or in part on the ConfidentialInformation, or (ii) modify, translate, reverse engineer, decompile, disassemble, create derivative works based on, or copy the Confidential Information or anyportion thereof. D. Third-Party Information. Employee recognizes that the Company has received, and in the future may receive, from third parties theirconfidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only forcertain limited purposes. Employee agrees to hold such confidential or proprietary information in the strictest confidence and not to disclose it to any person,other employees or another entity or to use it except as necessary in carrying out Employee’s work for the Company consistent with the Company’s agreementwith such third party. E. Non-Confidential Information. The obligations of Employee set forth in Section 3 of this Agreement shall not apply to information which(i) is generally known to the public, or which may later become generally known to the public, except where such knowledge is the result of an unauthorizeddisclosure by Employee or another person or entity; (ii) is lawfully and in good faith made available to Employee by a third party who, to Employee’sknowledge after inquiry, did not derive it from the Company and who imposed no obligation of confidence on Employee; (iii) is developed by Employeeindependent of any Confidential Information owned by the Company, as verified and evidenced by the prior written records of Employee; or (iv) is required tobe disclosed in a judicial or administrative proceeding, or is otherwise required to be disclosed by law, in any such case after all reasonable legal remedies formaintaining such information in confidence have been exhausted, including, but not limited to, giving the Company as much advance notice of the possibilityof such disclosure as practical so that the Company may attempt to stop such disclosure or obtain a protective order concerning such disclosure. Employeeshall provide the Company with written notice no less than ten (10) business days prior to the disclosure of any Confidential Information that may be requiredby law. For the purpose of this Section, a specific item of Confidential Information shall not be deemed to be within the foregoing exceptions merely because itis embraced by more general information in the public domain or in the possession of Employee. In addition, any combination of features shall not be deemedto be within the foregoing exceptions merely because individual features are in the public domain or in the possession of Employee, but only if the combinationitself is in the public domain or in the possession of Employee. If Employee is not sure whether certain information is Confidential Information, Employeeshall treat that information as Confidential unless Employee is informed by the Company in writing to the contrary. 4. COVENANT NOT TO COMPETE. A. Noncompetition Covenant. Employee agrees that during the Restricted Period (as defined below), Employee shall not, directly orindirectly within the Territory (as defined below): (i) personally, by agency, as an employee, independent contractor, consultant, officer, director, manager,agent, associate, investor, or by any other artifice or device, engage in any Competitive Business (as defined below), (ii) assist others, including but notlimited to employees of the Company, to engage in any Competitive Business, or (iii) own, purchase, finance, organize or take preparatory steps to own,purchase, finance, or organize a Competitive Business. ConfidentialPage 3 B. Definitions. 1. “Competitive Business” means (i) any person, entity or organization which is engaged in or about to become engaged in researchon, consulting regarding, or development, production, marketing or selling of any product, process, technology, device, invention or service which resembles,competes with or is intended to resemble or compete with a product, process, technology, device, invention or service of the Company; or (ii) any other line ofbusiness that was conducted or proposed to be conducted by the Company or any affiliate, successor or related entity at any time during the term ofEmployee’s employment with the Company. 2. “Territory” means the territory(ies) to which Employee was assigned during Employee’s employment with the Company. 3. “Restricted Period” means the period of Employee’s employment with the Company and for eighteen (18) months immediatelyfollowing the cessation of his/her employment (regardless of the reason or circumstances of that separation of employment) with the Company. 5. NON-SOLICITATION AND NON-INTERFERENCE COVENANTS. A. Nonsolicitation of Employees and Others. During the Restricted Period, Employee shall not, directly or indirectly, solicit, recruit, orinduce, or attempt to solicit, recruit or induce any employee, consultant, independent contractor, vendor, supplier, or agent to (a) terminate or otherwiseadversely affect his or her employment or other business relationship (or prospective employment or business relationship) with the Company, or (b) work forEmployee or any other person or entity, other than the Company or its affiliates or related entities. B. Nonsolicitation of Customers. During the Restricted Period, Employee shall not, directly or indirectly, solicit, recruit, or induce anyCustomer (as defined below) for the purpose of (i) providing any goods or services related to a Competitive Business, or (ii) interfering with or otherwiseadversely affecting the contracts or relationships, or prospective contracts or relationships, between the Company (including any related or affiliated entities)and such Customers. “Customer” means a person or entity with which Employee had contact or about whom Employee gained information while an Employeeof the Company, and to which the Company was selling or providing products or services, was in active negotiations for the sale of its products or services,or was otherwise doing business as of the date of the cessation of Employee’s employment with the Company or for whom the Company had otherwise donebusiness within the twelve (12) month period immediately preceding the cessation of Employee’s employment with the Company. 6. ACKNOWLEDGEMENTS. Employee acknowledges and agrees that: A. The geographic and duration restrictions contained in Sections 4 and 5 of this Agreement are fair, reasonable, and necessary to protectthe Company’s legitimate business interests and trade secrets, given the geographic scope of the Company’s business operations, the competitive nature of theCompany’s business, and the nature of Employee’s position with the Company; B. Employee’s employment creates a relationship of confidence and trust between Employee and the Company with respect to theConfidential Information, and Employee will have access to Confidential Information (including but not limited to trade secrets) that would be valuable oruseful to the Company’s competitors; ConfidentialPage 4 C. The Company’s Confidential Information is a valuable asset of the Company, and any violation of the restrictions set forth in thisAgreement would cause substantial injury to the Company; D. The restrictions contained in this Agreement will not unreasonably impair or infringe upon Employee’s right to work or earn a livingafter Employee’s employment with the Company ends, but Employee is prepared for the possibility that his/her standard of living may be reduced during theRestricted Period and assumes and accepts any risk associated with that possibility; E. Employee is aware of and understands the following provisions of Colorado law, set forth in Colorado Revised Statutes § 8-2-113(2),which states, in pertinent part: Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled laborfor any employer shall be void, but this subsection (2) shall not apply to: . . . Any contract for the protection of trade secrets; . . . [and] Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. F. This Agreement is a contract for the protection of trade secrets under applicable law and is intended to protect the ConfidentialInformation (including trade secrets) identified above; and 7. “BLUE PENCIL” AND SEVERABILITY PROVISION. If a court of competent jurisdiction declares any provision of this Agreement invalid,void, voidable, or unenforceable, the court shall reform such provision(s) to render the provision(s) enforceable, but only to the extent absolutely necessary torender the provision(s) enforceable and only in view of the Parties’ express desire that the Company be protected to the greatest possible extent under applicablelaw from improper competition and the misuse or disclosure of trade secrets and Confidential Information. To the extent such a provision (or portion thereof)may not be reformed so as to make it enforceable, it may be severed and the remaining provisions shall remain fully enforceable. 8. INVENTIONS. A. Inventions Retained and Licensed. Attached as Exhibit A is a list describing all inventions and information created, discovered ordeveloped by Employee, whether or not patentable or registrable under patent, copyright or similar statutes, made or conceived or reduced to practice or learnedby Employee, either alone or with others before Employee’s employment with the Company (“Prior Inventions”), which belong in whole or in part toEmployee, and which are not being assigned by Employee to the Company. Employee represents that Exhibit A is complete and contains no confidential orproprietary information belonging to a person or entity other than Employee. Employee acknowledges and agrees that Employee has no rights in any Inventions(as that term is defined below) other than the Prior Inventions listed on Exhibit A. If there is nothing identified on Exhibit A, Employee represents that there areno Prior Inventions as of the time of signing this Agreement. Employee shall not incorporate, or permit to be incorporated, any Prior Invention owned byEmployee or in which he/she has an interest in a Company product, process or machine without the Company’s prior written consent. Notwithstanding theforegoing, if, in the course of Employee’s employment with the Company, Employee directly or indirectly incorporates into a Company product, process ormachine a Prior Invention owned by Employee or in which Employee has an interest, the Company is hereby granted and shall have a non-exclusive, royalty-free, irrevocable, perpetual, world-wide license to make, have made, modify, use, create derivative works from and sell such Prior Invention as part of or inconnection with such product, process or machine. ConfidentialPage 5 B. Assignment Of Inventions. Employee shall promptly make full, written disclosure to the Company, will hold in trust for the sole rightand benefit of the Company, and hereby irrevocably transfers and assigns, and agrees to transfer and assign, to the Company, or its designee, all his/herright, title and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas,trademarks (and all associated goodwill), mask works, or trade secrets, whether or not they may be patented or registered under copyright or similar laws,which Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, duringEmployee’s employment by the Company (the “Inventions”). Employee further acknowledges that all original works of authorship which are made byEmployee (solely or jointly with others) within the scope of and during the period of his/her employment with the Company and which may be protected bycopyright are “Works Made For Hire” as that term is defined by the United States Copyright Act. Employee understands and agrees that the decision whetherto commercialize or market any Invention developed by Employee solely or jointly with others is within the Company’s sole discretion and the Company’s solebenefit and that no royalty will be due to Employee as a result of the Company’s efforts to commercialize or market any such invention. Employee recognizes that Inventions relating to his or her activities while working for the Company and conceived or made by Employee, whetheralone or with others, within one (1) year after cessation of Employee’s employment, may have been conceived in significant part while employed by theCompany. Accordingly, Employee acknowledges and agrees that such Inventions shall be presumed to have been conceived during Employee’s employmentwith the Company and are to be, and hereby are, assigned to the Company unless and until Employee has established the contrary. C. Maintenance of Records. Employee agrees to keep and maintain adequate and current written records of all Inventions made by Employee(solely or jointly with others) during his/her employment with the Company. The records will be in the form of notes, sketches, drawings and any otherformat that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. D. Patent, Trademark and Copyright Registrations. Employee agrees to assist the Company, or its designee, at the Company’s expense, inevery proper way to secure the Company’s rights in the Inventions and any copyrights, patents, trademarks, service marks, mask works, or any otherintellectual property rights in any and all countries relating thereto, including, but not limited to, the disclosure to the Company of all pertinent informationand data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments the Company deems necessary inorder to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns, and nominees the sole and exclusiverights, title, and interest in and to such inventions, and any copyrights, patents, trademarks, service marks, mask works, or any other intellectual propertyrights relating thereto. Employee further agrees that his/her obligation to execute or cause to be executed, when it is in his/her power to do so, any suchinstrument or paper shall continue after termination or expiration of this Agreement of the cessation of his/her employment with the Company. If the Companyis unable because of Employee’s mental or physical incapacity or for any other reason to secure Employee’s signature to apply for or to pursue any applicationfor any United States or foreign patents, trademarks or copyright registrations covering inventions or original works of authorship assigned to the Companyas above, then Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Employee’s agent andattorney-in-fact to act for and in his/her behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further theprosecution and issuance of letters, patent, trade marks or copyright registrations thereon with the same legal force and effect as if executed by Employee; thispower of attorney shall be a durable power of attorney which shall come into existence upon Employee’s mental or physical incapacity. ConfidentialPage 6 9. SURVIVAL AND REMEDIES. Employee’s obligations of nondisclosure, nonsolicitation, noninterference, and noncompetition under thisAgreement shall survive the cessation of Employee’s employment with the Company and shall remain enforceable. In addition, Employee acknowledges thatupon a breach or threatened breach of any obligation of nondisclosure, nonsolicitation, noninterference, or noncompetition of this Agreement, the Companywill suffer irreparable harm and damage for which money alone cannot fully compensate the Company. Employee therefore agrees that upon such breach orthreat of imminent breach of any such obligation, the Company shall be entitled to seek a temporary restraining order, preliminary injunction, permanentinjunction or other injunctive relief, without posting any bond or other security, barring Employee from violating any such provision. This Section shall notbe construed as an election of any remedy, or as a waiver of any right available to the Company under this Agreement or the law, including the right to seekdamages from Employee for a breach of any provision of this Agreement and the right to require Employee to account for and pay over to the Company allprofits or other benefits derived or received by the Employee as the result of such a breach, nor shall this Section be construed to limit the rights or remediesavailable under Colorado law for any violation of any provision of this Agreement. 10. RETURN OF COMPANY PROPERTY. All devices, records, reports, data, notes, compilations, lists, proposals, correspondence,specifications, equipment, drawings, blueprints, manuals, DayTimers, planners, calendars, schedules, discs, data tapes, financial plans and information,or other recorded matter, whether in hard copy, magnetic media or otherwise (including all copies or reproductions made or maintained, whether on theCompany’s premises or otherwise), pertaining to Employee’s work for the Company, or relating to the Company or the Company’s Confidential Information,whether created or developed by the Employee alone or jointly during his/her employment with the Company, are the exclusive property of the Company.Employee shall surrender the same (as well as any other property of the Company) to the Company upon its request or promptly upon the cessation ofemployment. Upon the separation of Employee’s employment, he/she agrees to sign and deliver the “Termination Certificate” attached as Exhibit B, whichshall detail all Company property that is surrendered upon separation of employment. 11. SETOFF. Employee agrees that, in addition to any other rights that the Company may have, the Company shall have the right to set off againstany commission payment or paycheck, including Employee’s final paycheck, the amount of any interim or final payment due to Employee, the amount ofany loans, advances, goods or services, and equipment or property provided by the Company to Employee; any amounts necessary to cover the replacementcost of a shortage due to theft by Employee; and any deduction that is authorized by Employee if the authorization is revocable, including but not limited todeductions for hospitalization and medical insurance, other insurance, savings plans, stock purchases, voluntary pension plans, charities, and deposits tofinancial institutions. This Agreement shall constitute a valid written agreement for the purposes of Colorado Revised Statutes § 8-4-105 and a validcompensation agreement for the purposes of Colorado Revised Statutes § 8-4-109(2). 12. NO CONFLICTING AGREEMENTS OR IMPROPER USE OF THIRD-PARTY INFORMATION. During her/his employment with theCompany, Employee shall not improperly use or disclose any proprietary information or trade secrets of any former employer or other person or entity, andEmployee shall not bring on to the premises of the Company any unpublished document or proprietary information belonging to any such former employer,person or entity, unless consented to in writing by the former employer, person or entity. Employee represents that he/she has not improperly used or disclosedany proprietary information or trade secrets of any other person or entity during the application process or while employed or affiliated with the Company.Employee also acknowledges and agrees that he/she is not subject to any contract, agreement, or understanding that would prevent Employee from performinghis/her duties for the Company or otherwise complying with this Agreement. To the extent Employee violates this provision, or his/her employment with theCompany constitutes a breach or threatened breach of any contract, agreement, or obligation to any third party, Employee shall indemnify and hold theCompany harmless from all damages, expenses, costs (including reasonable attorneys’ fees) and liabilities incurred in connection with, or resulting from, anysuch violation or threatened violation. ConfidentialPage 7 13. DUTY TO DISCLOSE SUBSEQUENT EMPLOYMENT. During the Restricted Period, Employee shall promptly provide the Companywith written notice identifying Employee’s new employer (or third party or entity for whom Employee might be performing services), and shall provide ageneral description in reasonable detail of Employee’s duties and responsibilities sufficient to inform the Company of whether there is a breach of thisAgreement or a need to request a court order to enforce the restrictive covenants contained in this Agreement. During the Restricted Period, Employee shallnotify his/her new employer (or person or entity for whom Employee provides goods or services) about Employee’s non-disclosure, non-solicitation, non-interference, and non-competition obligations under this Agreement. 14. GENERAL PROVISIONS. A. Governing Law; Consent To Personal Jurisdiction. The laws of the State of Colorado govern this Agreement without regard to conflict oflaws principles. Employee hereby consents to the personal jurisdiction of the state and federal courts located in the State of Colorado for any legal proceedingconcerning the Employee’s employment or termination of employment, or arising from or related to this Agreement or any other agreement executed between theEmployee and the Company. Should an action be brought to enforce the terms of this Agreement, the Company shall be entitled to recover reasonable attorneys’fees and costs incurred in prosecuting the action. B. Entire Agreement. This Agreement sets forth this entire Agreement between the Company (and any of its related or affiliated entities,officers, agents, owners or representatives) and the Employee relating to the subject matter herein, and supersedes any and all prior discussions andagreements, whether written or oral, on the subject matter hereof. To the extent that this Agreement may conflict with the terms of another written agreementbetween the Employee and the Company, the terms of this Agreement will control. C. Modification. No modification of or amendment to this Agreement will be effective unless in writing and signed by Employee and anauthorized representative of the Company. D. Waiver. The Company’s failure to enforce any provision of this Agreement shall not act as a waiver of its ability to enforce thatprovision or any other provision. The Company’s failure to enforce any breach of this Agreement shall not act as a waiver of that breach or any future breach.No waiver of any of the Company’s rights under this Agreement will be effective unless in writing. Any such written waiver shall not be deemed a continuingwaiver unless specifically stated, and shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or conditionfor the future or as to any act other than that specifically waived. E. Successors and Assigns. This Agreement shall be assignable to, and shall inure to the benefit of, the Company’s successors andassigns. Employee shall not have the right to assign his/her rights or obligations under this Agreement. F. Construction. The language used in this Agreement will be deemed to be language chosen by the Employee and the Company to expresstheir mutual intent, and no rules of strict construction will be applied against either party. ConfidentialPage 8 G. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable, and all of whichtogether shall constitute one agreement. Signatures of the Parties that are transmitted in person or by facsimile or e-mail shall be accepted as originals. H. Further Assurances. Employee agrees to execute any proper oath or verify any document required to carry out the terms of thisAgreement. I. Title and Headings. The titles, captions and headings of this Agreement are included for ease of reference only and will be disregarded ininterpreting or construing this Agreement. J. Notices. All notices and communications that are required or permitted to be given under this Agreement shall be in writing and shall besufficient in all respects if given and delivered in person, by electronic mail, by facsimile, by overnight courier, or by certified mail, postage prepaid, returnreceipt requested, to the receiving party at the addresses shown on the signature blocks below or to such other address as such party may have given to theother by notice pursuant to this Section. Notice shall be deemed given (i) on the date of delivery in the case of personal delivery, electronic mail or facsimile, or(ii) on the delivery or refusal date as specified on the return receipt in the case of certified mail or on the tracking report in the case of overnight courier. 15. EMPLOYEE’S ACKNOWLEDGMENTS.undue influence by the Company or anyone else, and that Employee has carefully read this Agreement and fully understands the terms, consequences, andbinding effect of this Agreement. EMPLOYEE BACTERIN INTERNATIONAL, INC. Print Name:Nick Navarro Signature:/s/ Nick Navarro By:/s/ Guy S. Cook Date:3/26/12 Name:Guy S. Cook Address:3609 Fieldstone Drive W Title:CEO Bozeman, MT S971S Phone:406-548-1229 Email:NNavarra@bacterin.com ConfidentialPage 9 EXHIBIT ALIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP IS A LIST ATTACHED? (PLEASE MARK): ¨ YES xx NO NOTE: The following is a list of all Prior Inventions made, conceived, developed or reduced to practice by Employee prior to his/her employment with theCompany. IF NO SUCH LIST IS ATTACHED, THAT MEANS EMPLOYEE IS NOT ASSERTING THE EXISTENCE OF ANY PRIOR INVENTIONS. ConfidentialPage 10 EXHIBIT B TERMINATION CERTIFICATE By signing below, I represent that I have returned all company property in my possession, custody and control, regardless of the form or format of any suchproperty, and that I have not retained any originals or copies of any information belonging to the company. I understand that company property includes, butis not limited to, documents, copies, electronic information, e-mails, equipment, keys, passwords, access codes, and any other property or informationbelonging to the company (as described more fully in paragraph 10 of the attached Agreement). I also represent that on or before my last day, I have specifically returned the following items: £Computer/laptop £Keys/access cards £Company credit card £Other equipment (please list) £Other information (please list) NAME: SIGNATURE: DATE: ConfidentialPage 11 FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT THIS FIRST AMENDMENT TO RESTRICTED STOCK AGREEMENT (this “Amendment”) is effective as of August 11, 2011 (the“Effective Date”) by and between Bacterin International Holdings, Inc. (the “Company”) and David Jacofsky (“Consultant”). The Company andConsultant are sometimes individually referred to herein as a “Party” and collectively as the “Parties”. RECITALS WHEREAS, the Parties recently entered into a Restricted Stock Agreement (the “Agreement”) with an effective date of June 1, 2011 even though theAgreement was not finally signed until August 11, 2011; and WHEREAS, there were not enough authorized shares under the Company’s Equity Incentive Plan (the “Plan”) to make the grant contemplated bythe Agreement on June 1, 2011; WHEREAS, the June 1, 2011 grant date and the June 1, 2011 effective date in the Agreement were errors of administrative oversight; and WHEREAS, the Parties wish to amend the Agreement to revise the grant date and the effective date from June 1, 2011 to August 11, 2011, the datethe Agreement was finally signed by the Parties. AGREEMENT NOW, THEREFORE, the Parties hereby agree to amend the Agreement as follows: 1. The effective date in the preamble to the Agreement and the date of grant in Section 2 of the Agreement shall be August 11, 2011 instead of June 1, 2011. 2. All other provisions of the Agreement shall remain unchanged. IN WITNESS WHEREOF, this First Amendment to Restricted Stock Agreement shall be effective as of the date first set forth above. Bacterin International, Inc.Consultant By:/s/ Guy S. Cook /s/ David Jacofsky Name:Guy S. Cook David Jacofsky Title:CEO CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the reference to our firm under the caption “Experts” in Registration Statement No. 333-175469 on Form S-3 and to the incorporation byreference therein and in Registration Statement No. 333-172891 on Form S-8 of Bacterin International Holdings, Inc. of our report dated March 29, 2012appearing in this Annual Report on Form 10-K of Bacterin International Holdings, Inc. for the year ended December 31, 2011. Ehrhardt Keefe Steiner & Hottman PC March 29, 2012Denver, Colorado CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of DirectorsBacterin International Holdings, Inc. We hereby consent to the incorporation by reference in Registration Statements No. 333-175469 on Form S-3 andNo. 333-172891 on Form S-8 of Bacterin International Holdings, Inc. of our report dated April 7, 2011, withrespect to the consolidated balance sheet of Bacterin International Holdings, Inc. as of December 31, 2010, andthe related consolidated statements of operations and comprehensive income, changes in stockholders’ equity andcash flows for the year ended December 31, 2010, included in this Annual Report on Form 10-K for the yearended December 31, 2011. /s/ CHILD, VAN WAGONER & BRADSHAW, PLLCCHILD, VAN WAGONER & BRADSHAW, PLLCSalt Lake City, UtahMarch 29, 2012 Exhibit 31.1 Certification of Chief Executive Officer I, Guy Cook, certify that: 1. I have reviewed this Annual Report on Form 10-K of Bacterin International Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting standards; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 29, 2012By: /s/ Guy Cook Guy Cook Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer I, John P. Gandolfo, certify that: 1. I have reviewed this Annual Report on Form 10-K of Bacterin International Holdings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting standards; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 29, 2012By:/s/ John P. Gandolfo John P. Gandolfo Chief Financial Officer Exhibit 32.1 Section 1350 Certification of Chief Executive Officer In connection with the Annual Report on Form 10-K of Bacterin International Holdings, Inc. (the "Company") for the annual period ended December 31,2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Guy Cook, Chief Executive Officer of the Company, certify,to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Guy Cook Guy Cook Chief Executive Officer March 29, 2012 Exhibit 32.2 Section 1350 Certification of Chief Financial Officer In connection with the Annual Report on Form 10-K of Bacterin International Holdings, Inc. (the "Company") for the annual period ended December 31,2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John P. Gandolfo, Chief Financial Officer of the Company,certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John P. Gandolfo John P. Gandolfo Chief Financial Officer March 29, 2012

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