Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical is a global medical technology company that develops, manufactures, and markets orthobiologics and spinal implant systems for complex spine, deformity, degenerative, and other orthopedic procedures. The filing covers the quarter and six months ended June 30, 2021. The company operates as one reportable segment, with approximately 99% of revenue generated in the United States.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $15.0 million vs. $10.5 million | $27.5 million vs. $25.3 million |
| Revenue change | Up 42.2% | Up 8.7% |
| Gross profit | $9.5 million vs. $6.6 million | $17.6 million vs. $16.2 million |
| Gross margin | 63.5% vs. 62.2% | 64.0% vs. 63.9% |
| Operating loss | $(0.5) million vs. $(0.4) million | $(0.5) million vs. $(1.7) million |
| Net loss | $(0.7) million vs. $(2.5) million | $(0.8) million vs. $(5.0) million |
| Net loss per share | $(0.01) vs. $(0.19) | $(0.01) vs. $(0.38) |
- Orthobiologics revenue was $11.5 million in the quarter and $20.5 million year to date; spinal implant revenue was $3.5 million and $7.0 million, respectively.
- Six-month operating cash flow was $0.9 million, compared with $(1.6) million in the prior-year period. Investing cash flow was $(1.0) million, primarily for property and equipment, and financing cash flow was $18.2 million.
- Cash and cash equivalents were $20.3 million at June 30, 2021, plus $0.2 million of restricted cash. Working capital was $36.5 million, compared with $5.7 million at December 31, 2020.
- Debt included $12.0 million under the new term facility and $4.1 million outstanding under the revolving line of credit, partially offset by $0.3 million of unamortized debt issuance costs. The term facility had an effective rate of 8.76% at June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Revenue improved substantially as elective procedures and market activity recovered from COVID-19-related restrictions. Management attributed the increase primarily to easing restrictions in key markets.
- Gross margin increased modestly due primarily to greater economies of scale.
- Quarterly general and administrative expense increased 42.4%, principally because of a $0.6 million legal settlement charge, higher stock-based compensation, and the absence of certain prior-year ERP-related costs. Six-month general and administrative expense decreased 0.7% because of lower severance costs, partly offset by the settlement charge.
- Quarterly sales and marketing expense increased 43.5%, primarily from higher commissions associated with increased revenue. Six-month sales and marketing expense increased 1.3%.
- Interest expense declined sharply from the prior year because of the October 2020 debt restructuring, which reduced outstanding principal and paid-in-kind interest.
- On February 24, 2021, the company raised approximately $18.4 million net through a private placement of 8,888,890 common shares and warrants for up to 6,666,668 shares. Placement-agent warrants for 444,444 shares were also issued. The transaction increased common shares outstanding to 86,707,286 and creates potential dilution.
- On May 6, 2021, the company refinanced its prior credit facility with a $12.0 million secured term facility and an $8.0 million secured revolving facility, both maturing May 1, 2026. The refinancing produced a $0.8 million gain recorded in additional paid-in capital because of the related-party nature of the prior debt.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects cash of approximately $20.5 million at June 30, 2021, together with facility availability, to fund anticipated requirements through at least August 2022. Management also stated that additional financing may be required or sought before then, with no assurance that financing will be available on acceptable terms.
- Growth initiatives include new product introductions, expansion of the distribution network, penetration of adjacent markets, and potential strategic acquisitions. Management planned four new biologic products for 2021, but provided no quantified revenue or earnings guidance.
- COVID-19 remains a material risk. Renewed restrictions, new variants, deferred elective procedures, reduced hospital access, or disruption affecting distributors, suppliers, contract manufacturers, and sales representatives could adversely affect revenue and operations.
- The credit agreements are secured by substantially all company and borrower assets and contain covenants covering minimum product revenue, adjusted EBITDA, and liquidity, as well as restrictions on additional debt, liens, acquisitions, asset sales, dividends, investments, and related-party transactions. The company reported compliance with all covenants at June 30, 2021.
- A confidential settlement of an alleged patent infringement matter required a one-time $0.55 million payment. The filing states that the charge was recorded in second-quarter general and administrative expense and accrued at June 30, 2021.
- Other significant risks include dependence on independent sales agents and third-party suppliers, donor cadaver availability, reimbursement and regulatory approvals, product liability and recalls, intellectual property claims, ability to retain personnel, debt service and liquidity, and maintenance of the NYSE American listing.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2021, and reported no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether revenue recovery following COVID-19 restrictions is sustainable and whether subsequent restrictions or procedure deferrals affect demand.
- Assess cash burn, facility availability, covenant headroom, and the stated expectation that liquidity will be sufficient through at least August 2022.
- Review the terms, borrowing-base limitations, interest rates, collateral, and financial covenants of the May 2021 credit agreements.
- Evaluate dilution from the February private placement, approximately 7.5 million outstanding warrants, stock options, and restricted stock units.
- Monitor gross-margin trends and whether sales, marketing, and product-development investments produce profitable growth.
- Review the legal settlement and any remaining litigation, regulatory, product liability, or intellectual property exposures.
- Consider concentration in the U.S. market and reliance on independent distributors, commissioned sales agents, hospitals, and third-party manufacturers.