Xtant Medical Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; comparative periods ended June 30, 2018. The unaudited statements cover the consolidated company and wholly owned subsidiaries. Xtant develops and markets orthobiologics, spinal implants, and related instrumentation for spinal fusion procedures.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $15.3 million | $18.7 million | $32.0 million | $36.7 million |
| Gross profit | $9.9 million | $12.5 million | $20.7 million | $24.7 million |
| Gross margin | 64.9% | 66.6% | 64.8% | 67.4% |
| Loss from operations | $(0.6) million | $(2.3) million | $(1.2) million | $(3.9) million |
| Net loss | $(1.9) million | $(5.0) million | $(4.7) million | $(10.3) million |
| Basic loss per share | $(0.15) | $(0.38) | $(0.36) | $(1.00) |
Cash flow and liquidity: Net cash provided by operating activities was $1.0 million in the first six months of 2019, compared with $0.3 million in the prior-year period. Investing activities used $0.05 million, while financing activities used $0.4 million. Cash and cash equivalents increased to $7.3 million from $6.8 million at December 31, 2018. Working capital was $22.4 million.
Balance sheet: Total assets were $44.5 million and total liabilities were $85.6 million at June 30, 2019. Stockholders’ deficit was $41.1 million. Accounts receivable were $8.6 million and net inventories were $15.8 million, including approximately $9.2 million of consigned inventory.
Debt and liquidity facility: Long-term debt, net of issuance costs, was $73.8 million. The debt matures March 31, 2021. The amended credit agreement provides for no interest accrual from January 1, 2019 through March 31, 2020, followed by cash interest at 10% plus the greater of LIBOR or 2.3125%. The company reported $12.2 million of unused availability and stated that cash plus available borrowing capacity should fund anticipated requirements for at least 12 months. The filing also discloses a principal balance of $55.8 million plus approximately $29.0 million of accrued PIK interest as of June 30, 2019.
Material changes versus the prior comparable period
- Revenue declined 18.5% in the second quarter and 12.8% for the first six months, primarily due to lower demand for hardware products and, in the quarterly comparison, lower biologics demand.
- Orthopedic product sales declined to $15.2 million in the quarter from $18.7 million and to $31.9 million for six months from $36.5 million. Six-month orthobiologics revenue declined 7.2%, while spinal implant revenue declined 24.0%.
- Gross margin contracted because of higher inventory reserves and manufacturing overhead absorption.
- Operating expenses decreased 29.0% in the quarter and 23.4% for six months, reflecting lower sales commissions, travel, headcount, restructuring costs, and amortization. Restructuring expenses did not recur in 2019.
- General and administrative expense increased 17.3% in the quarter and 27.4% for six months, driven in part by legal settlements, bad-debt expense, and executive recruiting costs.
- Interest expense declined to $1.3 million in the quarter and $3.3 million for six months, from $2.8 million and $6.4 million, respectively, because of credit agreement amendments.
- The March 2019 Second Amended and Restated Credit Agreement increased potential credit availability by up to $10.0 million, extended maturity to March 2021, modified financial covenants, and resulted in a debt extinguishment accounting adjustment that increased additional paid-in capital by $7.3 million.
- The company issued warrants to purchase 1.2 million shares at $0.01 per share, expiring in 2029, as a condition of the amended credit agreement.
Outlook, risks, contingencies, and unusual items
- Management expects available cash and credit capacity to cover anticipated needs for at least 12 months, but states that additional financing may be required and may not be available on acceptable terms. Additional financing would require Investor consent and could dilute existing holders.
- The company was notified that it did not comply with NYSE American stockholders’ equity continued-listing standards. Its compliance plan was accepted, with a plan period through October 4, 2020; failure to regain compliance or demonstrate adequate progress could result in delisting proceedings. The stock traded with a “.BC” designation.
- Revenue was affected by the December 2018 recall of the Calix Lumbar Spine Implant System, termination of an advisory agreement serving certain customers, and transition among independent sales agents.
- RSB Spine alleges patent infringement involving the Irix-ATM and Irix-CTM systems and seeks injunctions, damages, and potentially treble damages. Trial was scheduled for no sooner than June 21, 2021. Management intends to defend the matter, but cannot assure that an adverse resolution would not be material.
- Disputes with Axis Spine and Phoenix Surgical were settled in 2019 for amounts described as not material; the Phoenix settlement amount was undisclosed.
- The company recorded a $38.3 million goodwill impairment charge and a $9.8 million intangible-asset impairment charge in the fourth quarter of 2018; remaining goodwill was $3.2 million at June 30, 2019.
- Management deferred part of new-product development spending into the third and fourth quarters of 2019. The filing does not provide formal revenue or earnings guidance.
- Investors owning approximately 70% of the common stock also hold all outstanding long-term debt and have substantial consent, nomination, and approval rights under the Investor Rights Agreement.
Key facts investors should verify
- Whether revenue and hardware demand stabilize following the product recall, sales-channel changes, and distributor transitions.
- Actual borrowing capacity, compliance with the Revenue Base covenant, and the company’s ability to refinance or repay debt due March 31, 2021.
- The economic impact of accrued PIK interest and the difference between GAAP debt carrying value and the disclosed principal plus PIK obligations.
- Progress toward regaining NYSE American stockholders’ equity compliance before October 4, 2020.
- Potential exposure from the RSB Spine patent litigation and any additional product liability, regulatory, reimbursement, or recall-related matters.
- Whether operating cash flow remains positive while the company funds product development, inventory requirements, and future lease and debt obligations.