Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical develops, manufactures and markets orthopedic and neurological medical products, including orthobiologics, tissue grafts, implants and surgical instrumentation. This unaudited filing covers the quarter ended March 31, 2018, with comparison to the quarter ended March 31, 2017. The company reports one operating segment and approximately 96% of revenue was generated in the United States.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $17.9 million | $22.1 million | Down 19% |
| Gross profit | $12.2 million | $14.9 million | Down 18% |
| Gross margin | 68.2% | 67.5% | Up approximately 70 bps |
| Operating loss | $1.7 million | $2.6 million | Improved by $0.9 million |
| Operating margin | (9.2%) | (11.6%) | Improved |
| Net loss | $5.3 million | $5.8 million | Improved by $0.5 million |
| Net loss per share | $0.70 | $3.87 | Improved; share counts were affected by restructuring |
| Cash flow from operations | $0.2 million | $0.4 million | Down $0.2 million |
Orthopedic product sales were $17.8 million, compared with $22.0 million in the prior-year quarter. Cost of sales declined 20.5% to $5.7 million, and operating expenses declined 20.5% to $13.9 million. Interest expense was $3.5 million. Cash and cash equivalents were $6.2 million at March 31, 2018, compared with $2.9 million at December 31, 2017. The company reported $76.7 million of long-term debt, consisting primarily of $55.8 million under the credit facility and $21.1 million of capitalized PIK interest.
The company reported $3.2 million of net cash provided by financing activities, including $6.8 million of private-placement proceeds, partially offset by $3.5 million of restructuring-related expenses. Investing cash use was $0.1 million. The filing states that cash on hand and $2.2 million of available credit capacity were expected to fund anticipated requirements through June 30, 2019, but also warns that additional funding may be required earlier.
Material Changes Versus the Prior Comparable Period
- Revenue declined 19%, primarily because of competitive pressure in fixation products and management’s decision to exit unprofitable or heavily discounted reseller and distributor arrangements.
- Sales and marketing expense declined $2.7 million, driven by lower commissions, reduced sales personnel and lower travel and marketing costs.
- General and administrative expense declined $1.1 million, while research and development expense declined $0.3 million.
- Gross margin improved modestly because of lower product costs and a focus on more profitable distributor relationships.
- Restructuring expense was $0.7 million in Q1 2018, compared with none in Q1 2017. Non-cash compensation increased to $0.4 million from $0.1 million due largely to change-of-control-related vesting.
- All outstanding 6.00% convertible senior unsecured notes due 2021 were converted or exchanged for common stock. The transaction eliminated approximately $70.2 million of principal debt and related accrued interest from the balance sheet.
- Common shares outstanding increased substantially, including 10.4 million shares issued in the notes exchange and 0.9 million shares issued in a $6.8 million private placement. Investors obtained approximately 70% of the outstanding common stock and significant governance and consent rights.
- The company completed a 1-for-12 reverse stock split on February 13, 2018.
Guidance, Outlook, Risks and Unusual Items
No formal revenue or earnings guidance is provided. Management’s stated strategy emphasizes price optimization, profitable distribution channels, cost reduction and operating efficiencies. The company adopted ASC Topic 606 effective January 1, 2018 using the modified retrospective method and determined that the impact was immaterial.
- The amended credit facility permits, through December 31, 2018, either PIK interest at LIBOR plus 12% or cash interest at LIBOR plus 10%, subject to the agreement’s terms. Beginning in 2019, the interest terms become more onerous, and cash interest is required beginning July 1, 2019.
- Financial covenants now include minimum liquidity, leverage and EBITDA requirements. Failure to comply could affect liquidity and debt service capacity.
- The company remains dependent on future revenue growth, adequate liquidity and potential additional financing. New securities issuances and certain debt, asset, acquisition and capital expenditure decisions require investor approval while ownership thresholds are met.
- A rights offering commenced May 18, 2018 for up to approximately 1.1 million shares at $7.20 per share, with estimated net proceeds of approximately $8.0 million if fully subscribed.
- The company faces competitive, reimbursement, regulatory, product liability, product recall, intellectual property, donor availability and key-person risks.
- Axis Spine NV alleges damages exceeding $1.0 million in litigation concerning a distribution relationship. Xtant’s motion to dismiss was granted April 16, 2018, but Axis filed an amended complaint and the matter remained pending as of the filing.
- Goodwill was $41.5 million and intangible assets were $13.0 million at March 31, 2018. The filing states that goodwill was not impaired as of December 31, 2017, but impairment remains a risk if operating performance deteriorates.
Key Facts an Investor Should Verify
- Compliance with the amended credit facility’s liquidity, leverage and EBITDA covenants and the company’s ability to refinance or repay $76.9 million due in 2021.
- Actual proceeds and subscription levels from the May–June 2018 rights offering.
- Whether revenue stabilizes after exiting discounted and high-commission distribution channels.
- Whether the reported liquidity outlook remains valid given continuing net losses, limited operating cash generation and potential need for additional financing.
- The status and potential exposure of the Axis litigation and other product liability or routine litigation.
- The extent of dilution, control implications and investor consent rights resulting from the restructuring and approximately 70% ownership by the Investors.
- The filing’s working-capital disclosure: management reports working capital of $38.1 million, while the March 31, 2018 balance sheet totals imply approximately $28.1 million based on current assets less current liabilities; the filing text does not clearly reconcile this difference.