XTNT

Business Context and Reporting Period

Company: Xtant Medical Holdings, Inc. (NYSE American: XTNT)
Reporting Period: Fiscal year ended December 31, 2017
Business Overview: Xtant develops, manufactures, and markets regenerative medicine products and medical devices for orthopedic and neurological surgeons. The portfolio includes orthobiologics (e.g., OsteoSponge, OsteoSelect) and spinal fixation systems (e.g., Axle, Silex, Xpress). The company operates as a single segment and is headquartered in Belgrade, Montana.
Corporate Status: The company is a "controlled company" under NYSE American rules, with OrbiMed Advisors LLC holding a majority of voting power. In February 2018, the company completed a 1-for-12 reverse stock split and a significant debt restructuring.

Key Financial Metrics

Liquidity: As of December 31, 2017, the company held $2.9 million in cash and $12.7 million in net accounts receivable. The company had approximately $2.2 million available to draw down on a delayed draw term loan. Net cash used in operating activities improved significantly to $(0.5) million in 2017 compared to $(14.4) million in 2016.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 8.2% to $82.6 million. This was driven by lower fixation revenue due to the elimination of unprofitable distributor relationships and a highly competitive environment, partially offset by above-market growth in biologics revenue.
• Margin Compression: Gross margin declined from 69.2% to 60.8%. Cost of sales increased 17.3% due to a shift in sales mix toward biologics (which have higher costs) and significant reserves for excess inventory, missing consigned assets, and impairment of surgical instruments ($4.0 million).
• Significant Non-Operating Charges: The 2017 net loss was heavily impacted by non-cash and restructuring items not present in 2016:
  • Intangible Asset Impairment: $17.6 million charge related to Technology and Tradename assets from the X-Spine acquisition.
  • Restructuring Expenses: $4.7 million related to personnel reductions and facility closures.
  • Separation Expenses: $1.9 million related to the Dayton facility closure.
• Interest Expense: Increased to $14.7 million (from $12.3 million) due to increased long-term and convertible debt and compounding non-cash interest.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary & Outlook:

• Management is focused on restructuring to improve liquidity, reduce inventory, and convert receivables to cash.
• The company entered into a Chief Restructuring Officer (CRO) agreement with Aurora Management Partners in May 2017.
• Following the filing, in February 2018, the company completed a restructuring agreement converting approximately $70 million of convertible notes into common stock and raised approximately $4.8 million in a private placement.
• Management believes cash on hand, receivables, and new financing are sufficient to meet requirements through March 31, 2019.

Risks and Contingencies:

• Debt Covenants: The company has a complex credit facility with OrbiMed affiliates containing strict covenants (minimum cash, EBITDA, leverage ratios). The company has required multiple waivers and amendments to defer interest payments and adjust covenants throughout 2017 and early 2018.
• Litigation: A civil suit was filed by Axis Spine NV, LLC alleging breach of contract and seeking damages in excess of $972,000. The company has reserved $1.3 million for receivables and consigned assets related to this dispute.
• Regulatory: The business is subject to extensive FDA regulation regarding medical devices and human tissue products. Failure to maintain clearances or compliance could result in recalls or shutdowns.
• Profitability: The company is not currently profitable and relies on operating cash flow and financing to fund operations. There is no assurance of future profitability.

Investor Verification Checklist

• Debt Restructuring Status: Verify the final terms of the February 2018 restructuring, specifically the conversion of the $70 million convertible notes and the new covenants attached to the credit facility.
• Liquidity Runway: Confirm current cash balances and the ability to meet the revised minimum liquidity covenants ($500,000 to $5.0 million depending on the period) post-restructuring.
• Revenue Mix: Monitor the shift between fixation and biologics revenue, as biologics have higher cost of sales and lower margins, impacting overall profitability.
• Inventory Valuation: Review subsequent inventory write-downs, given the $4.0 million in reserves recorded in 2017 for excess and missing consigned inventory.
• Litigation Resolution: Track the status of the Axis Spine NV, LLC lawsuit and any potential additional reserves required.
• Stock Split Impact: Ensure all financial data is viewed on a post-split basis (1-for-12 reverse split effective February 14, 2018).