Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Xtant Medical develops, manufactures, and markets orthobiologics, spinal implants, and related instrumentation for spinal fusion procedures. The company operates as one reportable segment and sells primarily in the United States. This unaudited filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $15.7 million | $17.3 million | $47.7 million | $53.9 million |
| Gross profit | $10.5 million | $11.5 million | $31.2 million | $36.2 million |
| Gross margin | 66.6% | 66.7% | 65.4% | 67.2% |
| Operating loss | $(0.7) million | $(1.4) million | $(1.9) million | $(5.4) million |
| Net loss | $(1.9) million | $(3.2) million | $(6.6) million | $(13.4) million |
| Net loss per share | $(0.14) | $(0.24) | $(0.50) | $(1.19) |
- Q3 revenue declined 8.9% and nine-month revenue declined 11.5%, primarily because of lower demand for hardware products, the termination of an advisory agreement serving certain customers, and the transition of independent sales agents.
- Orthobiologics represented 72% of revenue in both the quarter and year-to-date period; spinal implant revenue declined to $4.3 million in Q3 and $13.2 million for nine months.
- Sales and marketing expense declined 14.8% in Q3 and 21.2% year to date, while general and administrative expense increased 33.1% and 25.1%, respectively.
- Operating margins were approximately negative 4.5% in Q3 and negative 4.1% for nine months, compared with approximately negative 8.3% and negative 9.9% in the prior-year periods.
- Net cash used in operating activities was $0.3 million for the first nine months of 2019, versus $0.8 million in 2018. Investing activities used $0.2 million; financing activities used $0.5 million.
- Cash and cash equivalents were $5.7 million at September 30, 2019, compared with $6.8 million at December 31, 2018. Working capital was $22.5 million, broadly unchanged from $22.6 million at year-end.
- Long-term debt, net of issuance costs, was $75.0 million. The company reported principal outstanding of $55.8 million plus $27.2 million of accrued PIK interest; the credit facility matures March 31, 2021.
- The company reported $12.2 million of unused credit-facility availability and total operating lease liabilities of $2.2 million.
- Stockholders’ deficit was $42.9 million at September 30, 2019, compared with $43.8 million at December 31, 2018.
Material changes versus the prior comparable period
- Revenue and gross profit decreased, driven primarily by weaker hardware demand, while gross margin remained relatively stable in Q3 but declined year to date due partly to higher inventory reserves.
- Operating and net losses improved substantially, helped by lower sales and marketing costs, reduced depreciation and amortization, the absence of restructuring expense, and lower interest expense.
- General and administrative costs increased due to legal settlements, bad debt expense, executive recruiting, and finance and accounting consultants.
- On March 29, 2019, the company entered into a Second Amended and Restated Credit Agreement. The agreement eliminated interest accrual through March 31, 2020, extended maturity to March 31, 2021, revised covenants, and increased potential credit availability by up to $10.0 million. The transaction was accounted for as a debt extinguishment and increased additional paid-in capital by $7.3 million.
- The company issued 1.2 million warrants to its investors in April 2019 at a $0.01 exercise price, increasing total outstanding warrants to 2.9 million.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide quantitative revenue or earnings guidance. Management stated that cash on hand and available credit were expected to fund anticipated requirements for at least 12 months, while acknowledging that additional financing may be needed. Any new financing could dilute existing shareholders or impose restrictive terms, and investor consent is required before raising additional equity or debt.
- The company was not in compliance with NYSE American stockholders’ equity 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.
- The company’s investors own approximately 70% of outstanding common stock and hold all outstanding long-term debt, creating significant related-party and control considerations.
- RSB Spine alleges that certain Irix-ATM and Irix-CTM products infringe patents. The company denies the claims; trial was scheduled for no sooner than June 21, 2021. Potential damages, injunctions, and treble damages were not quantified.
- Forward-looking risks include covenant compliance, liquidity and debt service, declining demand, sales-force effectiveness, reimbursement and regulatory changes, product liability, recalls including the December 2018 Calix Lumbar Spine Implant System recall, intellectual property disputes, donor-cadaver availability, personnel retention, and NYSE listing compliance.
- Effective October 30, 2019, stockholders approved increasing authorized common shares from 50 million to 75 million. On October 7, 2019, the company entered into a CEO employment agreement and subsequently granted options and restricted stock units; these events occurred after the reporting date.
Important facts for investors to verify
- Whether revenue stabilizes after the hardware-demand decline and sales-agent transition.
- The company’s ability to comply with the Revenue Base covenant and obtain or draw the remaining credit availability.
- The buildup of debt through PIK interest and the company’s ability to refinance or repay the March 2021 maturity.
- Progress toward restoring stockholders’ equity and maintaining NYSE American listing compliance before October 4, 2020.
- Potential financial and operational effects of the RSB Spine patent litigation and any product recalls or regulatory matters.
- Future dilution from the 2.9 million outstanding warrants, equity awards, and the increased authorized share count.