Xtant Medical Holdings, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Xtant Medical develops, manufactures and commercializes orthobiologics, spinal implants and instrumentation for orthopedic spine and neurosurgical procedures. The filing covers the fiscal year ended December 31, 2018, with audited comparisons to 2017. The company operates as one reportable segment and generated approximately 95% of revenue in the United States.
In early 2018, Xtant completed a major restructuring, including the conversion or exchange of approximately $71.9 million of convertible debt into common stock, a $6.8 million private placement, a 1-for-12 reverse stock split and a change in board control. OrbiMed-affiliated lenders held approximately 70% of outstanding common stock at year-end and all outstanding long-term debt.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $72.2 million | $82.6 million | Down 12.6% |
| Gross profit | $43.5 million | $50.1 million | Down 13.2% |
| Gross margin | 60.2% | 60.6% | Down 40 basis points |
| Operating loss | $60.1 million | $37.8 million | Loss increased |
| Net loss | $70.1 million | $52.4 million | Loss increased |
| Basic net loss per share | $5.97 | $34.76 | Improved due primarily to higher share count |
| Cash flow from operations | $1.2 million provided | $0.5 million used | Improved |
| Cash and equivalents at year-end | $6.8 million | $2.9 million | Increased |
| Long-term debt, net of issuance costs | $77.9 million | $138.0 million | Decreased primarily through debt conversion |
| Stockholders’ equity | $(43.8) million | $(58.7) million | Deficit narrowed |
Orthobiologics revenue was $49.0 million, spinal implant revenue was $22.8 million and other revenue was $0.4 million. Independent agents generated approximately 87% of total revenue, direct sales 12% and other sources 1%.
Cost of sales declined to $28.7 million from $32.5 million, but the cost-of-sales ratio increased to 39.8% from 39.4%. The company recorded $4.6 million of excess and obsolete inventory charges in 2018, compared with $4.0 million in 2017. Net cash used in investing activities was $0.4 million, primarily for property and equipment. Net cash provided by financing activities was $3.1 million, including $6.8 million of private-placement proceeds and $3.4 million of restructuring and financing costs.
Material changes versus the prior comparable period
- Revenue declined by $10.4 million, primarily because of discontinued distributor arrangements, channel-management challenges, intense fixation-market competition and the absence of new product introductions during the prior two years.
- General and administrative expense decreased 15.5% to $12.9 million; sales and marketing expense decreased 20.9% to $32.1 million; and research and development expense decreased 30.3% to $1.7 million.
- Operating expenses increased to $103.6 million from $87.9 million, mainly because of significantly higher impairment charges.
- The company recorded a $38.3 million goodwill impairment charge and a $9.8 million impairment charge for tradenames, technology and customer relationships, primarily related to the 2015 X-spine acquisition. Remaining goodwill was $3.2 million at year-end.
- The company consolidated operations following closure of its Dayton, Ohio facility and continued restructuring and cost-reduction initiatives.
- Inventory declined to $17.3 million from $22.4 million, while the inventory-obsolescence reserve increased to $12.4 million from $7.7 million.
Debt, liquidity, outlook and risks
Management stated that the $6.8 million year-end cash balance, existing credit availability and subsequent availability under the amended credit facility were expected to fund anticipated cash requirements through the end of March 2020. The financial statements were prepared on a going-concern basis, but management acknowledged that additional financing may be required. Failure to obtain financing could require material reductions in operations or potentially a liquidation or bankruptcy filing.
On March 29, 2019, the company entered into a Second Amended and Restated Credit Agreement. The agreement provides for up to $10.0 million of additional term-loan availability, subject to lender discretion and specified conditions, suspends interest accrual from January 1, 2019 through March 31, 2020, and extends maturity to March 31, 2021. Beginning April 1, 2020, cash interest is scheduled at 10.00% plus the greater of the applicable LIBO rate or 2.3125%. The agreement adds a revenue-base covenant and restricts specified transactions, including additional debt, investments, asset sales, acquisitions, capital expenditures and dividends.
Key risks include continuing operating losses, negative stockholders’ equity, substantial secured debt, covenant compliance, dependence on additional financing, distributor concentration and turnover, competitive pressure, limited donor-tissue availability, reimbursement uncertainty, regulatory compliance, product liability and recalls, intellectual-property litigation, management turnover and possible NYSE American listing deficiencies.
- In December 2018, Xtant initiated a Class 2 recall of its Calix Lumbar Spine Implant System because of a risk of compromised sterilization. No device-related adverse events were reported, and the company expected closure in 2019.
- In March 2019, the company was informed that it was at risk of losing its CE mark on several products because of post-market clinical follow-up deficiencies. Remediation was ongoing, but the filing states that the outcome and timing were uncertain.
- RSB Spine filed a patent-infringement action in December 2018 involving certain Irix products and sought injunctive relief, damages and potentially treble damages. The company could not estimate a potential loss.
- Other contingencies included Axis Spine litigation involving an alleged distribution relationship and Phoenix Surgical arbitration scheduled for July 2019. The filing does not provide a clear estimated loss range for these matters.
- The company reported executive turnover, including the departure of its interim chief executive officer and chief financial officer during the first quarter of 2019. Greg Jensen was serving as interim chief financial officer and principal executive officer while replacements were sought.
Most important facts for an investor to verify
- Whether revenue stabilizes after distributor terminations and the loss of a consulting relationship associated with customers representing approximately 23% of 2018 revenue.
- Whether the company can satisfy the amended credit agreement’s revenue-base, liquidity and other covenants and access the additional $10.0 million commitment when needed.
- Whether cash usage and operating performance support management’s stated liquidity horizon through March 2020.
- The status and financial impact of the Calix recall, CE-mark remediation and RSB Spine, Axis Spine and Phoenix Surgical matters.
- Whether the company can restore positive stockholders’ equity and maintain compliance with NYSE American continued-listing requirements.
- The potential dilution from outstanding warrants, including the 1.2 million warrants issued in 2018 and the additional 1.2 million warrants associated with the 2019 credit agreement.