Xtant Medical Holdings, Inc. — Q1 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, degenerative, and other orthopedic procedures. The filing covers the three months ended March 31, 2022; comparative figures are for the three months ended March 31, 2021. The company operates in one reportable segment and generated approximately 98% of revenue in the United States.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $13.0 million | $12.5 million | 3% increase |
| Gross profit | $7.6 million | $8.1 million | 6.6% decrease |
| Gross margin | 58.3% | 64.5% | 620 basis-point decrease |
| Operating loss | $(1.8) million | $(0.01) million | Material deterioration |
| Net loss | $(2.2) million | $(0.03) million | Material deterioration |
| Net loss per share | $(0.03) | $(0.00) | — |
| Operating cash flow | $(1.0) million | $(1.3) million | Improvement |
- Orthobiologics revenue increased to $10.2 million from $9.0 million, while spinal implant revenue declined to $2.8 million from $3.5 million. Orthobiologics represented 78% of revenue versus 72% in the prior-year quarter.
- Cost of sales increased to $5.4 million from $4.5 million, reflecting higher product costs, greater revenue, and increased excess and obsolete inventory reserves.
- General and administrative expense rose 31% to $4.0 million, primarily due to higher bad-debt expense, licenses and fees, and enterprise resource planning system upgrade costs.
- Sales and marketing expense increased 7% to $5.2 million, driven by higher commissions and additional headcount. Research and development expense was approximately $0.2 million in both periods.
- Cash and cash equivalents were $16.8 million at March 31, 2022, compared with $18.2 million at December 31, 2021. Including restricted cash, total cash was $17.0 million.
- Net working capital was $31.5 million, compared with $33.3 million at year-end 2021. Accounts receivable increased to $7.5 million; inventory declined to $17.3 million.
- Debt included a $12.0 million term loan, $3.6 million drawn on the revolving line of credit, and approximately $11.8 million of long-term debt net of issuance costs and premium. Approximately $3.5 million remained available under the revolving facility.
- The term facility had an effective interest rate of 9.96% and the revolving facility had an effective rate of 5.5% at March 31, 2022. Cash interest paid during the quarter was $0.3 million.
- Investing cash flow was $(0.4) million, primarily for property and equipment purchases. Financing cash flow was $(0.02) million after $12.3 million of revolving borrowings and $12.3 million of repayments.
Material Changes Versus the Prior Comparable Period
- Revenue grew modestly, primarily from new products and increased private-label and OEM sales.
- Profitability deteriorated substantially despite revenue growth. Management attributed the gross-margin decline to higher production costs, lower-margin private-label and OEM mix, lower spinal implant sales, and increased excess and obsolete inventory reserves.
- Interest expense increased to $0.4 million from an immaterial amount because the company’s current debt facilities were entered into in May 2021.
- Operating cash use improved by approximately $0.3 million, although the company remained cash-flow negative.
- Shares outstanding increased to 87.3 million at March 31, 2022 from 87.1 million at December 31, 2021, primarily from restricted stock unit vesting.
Guidance, Outlook, Risks, and Unusual Items
- The company did not provide specific revenue or earnings guidance in the filing. Management stated that cash and cash equivalents, operating cash flows, and available facility capacity were expected to fund anticipated requirements through at least May 2023, while cautioning that additional financing may be needed sooner.
- COVID-19-related hospitalizations, elective-procedure restrictions, staffing shortages, and procedure cancellations continued to pressure procedure volumes and revenue in the first quarter. Further outbreaks or restrictions could worsen these effects.
- Inflation, supply-chain disruption, labor shortages, higher product costs, and reliance on third-party suppliers may continue to reduce margins or delay product availability.
- The March 7, 2022 credit agreement amendments waived the minimum adjusted EBITDA covenant while specified liquidity exceeded $14 million and no event of default existed. The company reported compliance with all covenants as of March 31, 2022.
- The credit facilities mature May 1, 2026, are secured by substantially all company assets, and contain restrictions on additional debt, liens, acquisitions, asset sales, dividends, investments, and related-party transactions.
- Management identified potential risks involving product liability, regulatory compliance, reimbursement, intellectual property, donor cadaver availability, sales-agent concentration, NYSE American listing, implementation of a new ERP system, and possible impairment or inventory write-downs if revenues do not recover.
- The company reported no goodwill or long-lived-asset impairment for the quarter. It stated that litigation accruals were adequate, but unfavorable resolutions could exceed current accruals.
- OrbiMed-affiliated funds beneficially owned approximately 84% of common stock, creating significant ownership concentration and potential financing or governance implications.
Investor Verification Checklist
- Verify whether revenue growth can continue without further deterioration in gross margin, particularly as private-label and OEM sales increase.
- Monitor elective-procedure volumes, hospital staffing, COVID-19 developments, and their effect on orthobiologics and spinal implant demand.
- Reconcile cash burn with the company’s stated liquidity runway through May 2023 and assess the likelihood and terms of future financing.
- Review compliance with minimum liquidity, revenue, and adjusted EBITDA covenants and the conditions attached to the EBITDA waiver.
- Track term-loan interest costs, revolving-facility availability, maturity obligations, and secured-lender restrictions.
- Assess inventory reserves, accounts-receivable collectability, and potential impairment charges if revenue recovery is delayed.
- Evaluate dilution risk from outstanding options, restricted stock units, and warrants, including approximately 7.1 million outstanding warrants.