Xtant Medical Holdings, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Xtant Medical develops, manufactures and markets orthobiologics, spinal implants and related instrumentation for complex spine, deformity and degenerative procedures. The company operates in one segment, with approximately 99% of revenue generated in the United States. This filing covers the three and nine months ended September 30, 2022; the financial statements are unaudited.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $14.5 million | $13.8 million | $42.7 million | $41.3 million |
| Revenue growth | 5% | — | 3% | — |
| Gross profit | $7.9 million | $7.2 million | $23.8 million | $24.8 million |
| Gross margin | 54.6% | 52.2% | 55.8% | 60.0% |
| Loss from operations | $(1.9) million | $(1.4) million | $(5.0) million | $(1.9) million |
| Net loss | $(2.4) million | $(1.8) million | $(6.3) million | $(2.6) million |
| Net loss per share | $(0.03) | $(0.02) | $(0.07) | $(0.03) |
| Operating cash flow | Not separately provided | Not separately provided | $(3.1) million | $0.02 million |
Q3 operating margin was approximately negative 13.1% and net margin was approximately negative 16.3%. Nine-month operating margin was approximately negative 11.8% and net margin was approximately negative 14.7%.
- Q3 revenue consisted of $12.0 million of orthobiologics and $2.4 million of spinal implant sales. Nine-month revenue consisted of $34.6 million of orthobiologics and $8.1 million of spinal implant sales.
- At September 30, 2022, cash and cash equivalents were $17.4 million and restricted cash was $0.2 million. Accounts receivable were $9.8 million and inventory was $17.0 million.
- Total current assets were $45.1 million versus current liabilities of $11.4 million, producing reported net working capital of $33.7 million.
- Debt included $12.0 million of term loan principal, $0.7 million outstanding under the revolving facility and $1.3 million of current term-loan maturities. The company reported $7.3 million of remaining revolving-facility availability.
- The term facility had an effective rate of 11.53% and the revolving facility had an effective rate of 7.07% at September 30, 2022. The facilities mature May 1, 2026, with monthly term-loan principal payments of approximately $0.3 million beginning in June 2023.
Material changes versus the prior comparable period
- Revenue increased 5% in Q3 and 3% for the first nine months, primarily reflecting new products, including OsteoVive Plus and OsteoFactor.
- Q3 gross margin improved 240 basis points because of sales mix and better labor and overhead absorption, partly offset by excess and obsolete inventory reserves. Nine-month gross margin declined 420 basis points because of higher product costs and higher inventory reserves.
- Nine-month cost of sales increased 14% to $18.9 million, including approximately $1.0 million of additional excess and obsolete inventory reserves and $0.6 million of additional salaries and wages.
- Nine-month operating expenses increased 8% to $28.9 million. General and administrative expense rose 12%, including higher product-registration costs, stock-based compensation, bad-debt expense and ERP upgrade costs. Sales and marketing expense rose 6%, largely from higher headcount and commissions.
- Interest expense increased to $1.2 million for the first nine months from $0.5 million, reflecting the 2021 debt refinancing and higher reference rates.
- The company used $3.1 million of operating cash in the first nine months versus essentially breakeven operating cash flow in the prior-year period. Investing cash use declined to $1.1 million from $1.3 million.
Guidance, outlook, risks and unusual items
- Management stated that cash on hand, the October 2022 private-placement proceeds, available credit and expected operating cash flows should fund anticipated requirements through at least November 2023, but acknowledged that additional financing may be required sooner and may not be available on acceptable terms.
- On August 25, 2022, the company completed the first tranche of a private placement, issuing approximately 14.1 million shares and warrants for approximately 3.5 million shares. Net proceeds were approximately $6.3 million. On October 7, 2022, it completed a second tranche for approximately $3.0 million of gross proceeds, issuing approximately 6.2 million shares and warrants for approximately 1.6 million shares.
- The private-placement warrants are immediately exercisable at $0.48 per share and expire five years after the first closing, creating potential future dilution. Approximately 10.6 million warrants were outstanding at September 30, 2022.
- COVID-19-related hospital staffing shortages, procedure cancellations and deferrals may continue to reduce demand. Labor shortages also constrained production and delayed penetration of adjacent markets.
- Inflation, supply-chain disruption, higher interest rates and higher product costs could reduce procedures, increase expenses and pressure margins. Management expects higher product costs and interest expense to continue affecting future periods.
- The company relies substantially on independent sales agents, distributors, GPOs, IDNs, third-party suppliers and manufacturers. It also faces reimbursement, regulatory, product liability, intellectual property, inventory, donor-tissue availability and credit-covenant risks.
- The company reported no material litigation loss accruals, no goodwill or long-lived-asset impairments, and no material indemnification liabilities as of the filing date.
- On October 27, 2022, the credit agreements were amended to replace LIBOR with term SOFR for amounts outstanding and draws on or after November 1, 2022. The company stated that it was in compliance with all debt covenants at September 30, 2022.
- Management concluded that disclosure controls were effective as of September 30, 2022. A new ERP system was implemented during Q3.
Facts investors should verify
- Whether revenue growth from new products and orthobiologics can offset continued weakness in spinal implant sales.
- Whether gross-margin pressure from product costs, inventory reserves and labor constraints persists.
- The pace of operating-cash-flow improvement and the adequacy of liquidity before scheduled term-loan amortization begins in June 2023.
- Actual cash proceeds and dilution from the October 7, 2022 private-placement tranche and future warrant exercises.
- Compliance with minimum revenue, liquidity and adjusted-EBITDA covenants after the transition from LIBOR to term SOFR.
- Potential effects of COVID-19 resurgences, hospital staffing shortages, supply-chain constraints, inflation and rising interest rates on procedures, production and margins.