Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Xtant Medical develops, manufactures and markets orthopedic and spinal products, including orthobiologics, implants, instrumentation and tissue grafts. This unaudited quarterly report covers the three and six months ended June 30, 2016, with comparative periods ended June 30, 2015.
The results include X-Spine Systems, acquired on July 31, 2015, only from the acquisition date in the reported periods. The acquisition materially increased revenue, expenses, assets and debt.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $21.5 million | $9.9 million | $42.4 million | $19.4 million |
| Gross profit | $14.7 million | $6.5 million | $28.8 million | $12.5 million |
| Gross margin | 68.5% | 65.9% | 67.9% | 64.7% |
| Loss from operations | $(2.1) million | $(1.4) million | $(4.5) million | $(3.1) million |
| Net loss | $(4.5) million | $(2.9) million | $(10.1) million | $(7.1) million |
| Net loss per share | $(0.37) | $(0.41) | $(0.84) | $(1.02) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(7.8) million | $(4.1) million |
Q2 revenue increased 117%, while six-month revenue increased 119%, primarily because of the X-Spine acquisition. Orthopedic product sales represented nearly all revenue. Approximately 95% of six-month 2016 revenue was generated in the United States.
Gross margin improved to 68.5% in the quarter and 67.9% year to date, compared with 65.9% and 64.7%, respectively, primarily due to product and customer mix associated with X-Spine. Despite the higher gross profit, operating expenses exceeded gross profit, resulting in operating and net losses.
Six-month operating expenses were $33.3 million, including $20.9 million of sales and marketing expense, $7.4 million of general and administrative expense, $2.4 million of depreciation and amortization, and $752,528 of acquisition and integration expenses. Interest expense increased to $5.8 million from $2.8 million.
At June 30, 2016, the company had cash and cash equivalents of $2.2 million, trade accounts receivable of $14.7 million and total current assets of $43.7 million. Current liabilities were $25.6 million, including $5.5 million drawn under a revolving credit facility. Stockholders’ equity was a deficit of $496,338, compared with positive equity of $8.9 million at December 31, 2015.
Total gross long-term debt was $117.3 million before debt issuance costs, consisting primarily of $70.2 million of 6% convertible senior notes and $47.1 million owed under the ROS facility, including PIK interest. The balance sheet also reported the $5.5 million revolving line of credit and capital lease obligations.
Cash flow, liquidity and material changes
- Six-month operating cash use increased to $7.8 million from $4.1 million.
- Investing cash use was $4.4 million, primarily for property, equipment and intangible assets, including surgical trays and clean-room improvements.
- Financing activities provided $8.0 million, including $2.2 million of additional convertible debt, $5.5 million of revolving-credit borrowings and $300,000 from common-stock issuance.
- Cash declined by $4.2 million during the first six months, from $6.4 million to $2.2 million.
- Inventories increased to $27.0 million from $24.3 million at year-end 2015, while property and equipment increased to $15.6 million from $11.8 million.
- The company stated that cash, receivables, anticipated operating receipts, the Aspire Capital facility and the revolving line were expected to fund requirements through June 30, 2017. It also warned that failure to meet revenue objectives could require additional equity or debt financing.
The MD&A contains cash-flow figures that differ from the condensed statements of cash flows, including operating cash use of $7.98 million, investing cash use of $5.34 million and financing cash generation of $9.16 million. The filing text does not clearly reconcile these differences.
Guidance, outlook, risks and unusual items
- No formal revenue or earnings guidance was provided. Management anticipated additional acquisition and integration expenses in the third quarter of 2016.
- The X-Spine integration generated $752,528 of six-month integration expenses and $2.2 million of related intangible-asset amortization.
- The company recorded a $496,329 non-cash gain from the decrease in the fair value of its warrant derivative liability.
- The company remains dependent on financing while generating operating losses and negative operating cash flow. Its credit facilities contain liquidity, revenue and leverage covenants, and its debt is secured by substantially all operating assets under the ROS facility and certain assets under the Silicon Valley Bank facility.
- On May 25, 2016, the company obtained a $6.0 million revolving line of credit bearing interest at Prime plus 1%, with a May 25, 2019 maturity.
- On July 29, 2016, after quarter-end, the company amended the ROS facility to add up to $1.0 million of additional Tranche A commitments.
- Key business risks include competition, reimbursement and regulatory changes, product liability and recalls, donor availability, intellectual-property matters, acquisition integration, covenant compliance, debt service and the need for additional capital.
- The company reported that the Taggart litigation was settled during the quarter ended March 31, 2016; routine litigation, including product-liability disputes, remains possible.
Important facts for investors to verify
- Reconcile the MD&A cash-flow amounts with the reported statement of cash flows.
- Assess the company’s ability to meet liquidity, revenue and leverage covenants and to refinance or repay substantial debt.
- Review whether revenue growth from the X-Spine acquisition is translating into sustainable operating cash flow and profitability.
- Evaluate inventory levels, receivable collectability and the adequacy of reserves, including the $3.6 million total allowance for doubtful accounts and inventory obsolescence references in the filing.
- Confirm the timing and amount of additional integration costs, amortization and any potential impairment of goodwill or acquisition-related intangible assets.
- Consider potential dilution from convertible notes, warrants, stock issuance facilities and other equity awards.
- Review the terms and collateral requirements of the ROS, OrbiMed and Silicon Valley Bank facilities, including the post-quarter-end amendment.