Xtant Medical Holdings, Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2016. Xtant develops, manufactures and markets orthopedic and neurological products, including orthobiologics, spinal implants, instrumentation and tissue grafts. Results include X-Spine Systems, acquired on July 31, 2015, only from the acquisition date; therefore, the reported year-over-year comparison is not fully comparable. Pro forma Q1 2015 revenue was $21.7 million and pro forma net loss was $6.0 million.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $21.0 million | $9.5 million |
| Gross profit | $14.1 million | $6.0 million |
| Gross margin | 67.2% | 63.5% |
| Operating loss | $(2.4) million | $(1.7) million |
| Operating margin | (11.3%) | (18.2%) |
| Net loss | $(5.6) million | $(4.2) million |
| Net loss per share | $(0.47) | $(0.62) |
| Cash flow from operations | $1.0 million provided | $2.1 million used |
Orthopedic product sales were $20.8 million, while other revenue was $0.2 million. Sales and marketing expense was $10.5 million, research and development expense was $0.9 million, depreciation and amortization was $1.2 million, and acquisition and integration expense was $0.3 million. Interest expense increased to $2.8 million from $1.4 million.
Cash and cash equivalents were $4.7 million at March 31, 2016, compared with $6.4 million at December 31, 2015. Cash, together with accounts receivable, totaled $19.6 million. Net cash used in investing activities was $2.7 million, primarily for property, equipment and intangible assets, including additional surgical trays. Net cash used in financing activities was $0.01 million.
Total assets were $141.4 million. Total liabilities were $138.0 million and stockholders’ equity was $3.4 million, down from $8.9 million at year-end 2015. Current assets were $44.7 million versus current liabilities of $25.6 million.
Gross debt before issuance costs was $114.4 million, consisting primarily of $68.0 million of 6% convertible senior notes due 2021, $42.0 million owed under the ROS facility, and $4.4 million of PIK interest. Debt maturities shown in the filing are $46.4 million in 2020 and $68.0 million thereafter.
Material changes versus the prior comparable period
- Reported revenue increased 121% to $21.0 million, primarily because of the X-Spine acquisition.
- Cost of sales increased 98%, but decreased to 32.8% of revenue from 36.5%, reflecting product and customer mix.
- Operating expenses increased 112%, driven principally by X-Spine-related sales and marketing, general and administrative costs, research and development, amortization and integration expenses.
- Sales and marketing expense increased 123% to $10.5 million and represented 50.1% of revenue versus 49.6% in Q1 2015.
- Net loss increased to $5.6 million from $4.2 million, although reported loss per share improved because the share count increased substantially following the acquisition.
- Operating cash flow improved from a $2.1 million use to $1.0 million provided, aided in part by a $3.7 million increase in accounts payable.
- Interest expense increased by $1.4 million due to acquisition-related debt.
- No shares were issued under the Aspire Capital equity facility in Q1 2016, compared with $0.8 million of proceeds from 207,182 shares in Q1 2015.
Guidance, outlook, risks and unusual items
Management stated that cash on hand and accounts receivable, anticipated operating receipts and potential proceeds from the Aspire Capital facility were expected to satisfy anticipated cash requirements through March 31, 2017. Management also stated that failure to meet revenue objectives could require additional equity or debt financing, potentially causing dilution or increasing debt-service and covenant constraints. No formal revenue or earnings guidance was provided.
The March 31, 2016 amendment to the ROS credit facility reduced the minimum liquidity requirement to $0.5 million through June 30, 2016 and $2.5 million from after June 30, 2016 through January 1, 2017. The facility includes revenue, liquidity and leverage covenants, is secured by substantially all company and subsidiary assets, and includes a 7.5% fee on amounts repaid.
The company anticipated additional X-Spine integration expenses in Q2 2016. On April 14, 2016, it issued $2.2 million of 6% convertible promissory notes in lieu of an interest payment to OrbiMed. The ROS lender also permitted approximately $1.0 million of interest to be added to PIK interest.
Key risks include high leverage and interest obligations, covenant compliance and liquidity, the need for additional financing, successful integration of X-Spine, competitive and technological changes, reimbursement and regulatory risks, product liability and recalls, intellectual property matters, availability of donor tissue, and the ability to retain sales and technical personnel. The company reported that the Taggart litigation was settled during the quarter and that other routine litigation, including product liability disputes, remained possible.
Important facts for investors to verify
- Confirm the company’s ability to maintain required liquidity and comply with ROS revenue, leverage and other covenants after June 30, 2016.
- Reconcile reported growth with the X-Spine acquisition and review the pro forma comparison rather than relying solely on reported year-over-year growth.
- Assess the sustainability of positive operating cash flow, particularly the impact of increased accounts payable and inventory investment.
- Review debt-service requirements, PIK interest accretion, the 2020 ROS maturity and the 2021 convertible notes.
- Monitor additional integration costs and whether expected operating efficiencies materialize.
- Evaluate potential equity dilution from the Aspire facility, convertible notes, stock options and warrants.
- Review inventory levels, obsolescence reserves, goodwill and intangible assets for potential impairment risk.
- Confirm subsequent interest deferrals and promissory-note issuance disclosed after quarter-end.