Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Xtant Medical develops, manufactures, and markets orthobiologics, spinal implants, and instrumentation used in complex spine, deformity, and degenerative procedures. The filing covers the unaudited three months ended March 31, 2019, compared with the same period in 2018. The company operates as one reportable segment, with approximately 96% of revenue generated in the United States.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $16.7 million | $17.9 million | Down 7% |
| Gross profit | $10.8 million | $12.2 million | Down 11.6% |
| Gross margin | 64.6% | 68.2% | Down 3.6 percentage points |
| Loss from operations | $(0.7) million | $(1.7) million | Improved |
| Operating margin | (4.0%) | (9.2%) | Improved |
| Net loss | $(2.8) million | $(5.3) million | Improved 46.7% |
| Basic and diluted loss per share | $(0.21) | $(0.70) | Improved |
| Cash flow from operations | $0.5 million | $0.2 million | Improved |
- Orthopedic product sales were $16.7 million, compared with $17.8 million in Q1 2018; other revenue was $40,000.
- Cost of sales increased 3.7% to $5.9 million, and represented 35.4% of revenue versus 31.8% previously, primarily due to inventory reserves and manufacturing overhead absorption.
- Operating expenses declined 17.3% to $11.5 million. Sales and marketing expense fell to $6.7 million from $8.3 million, while general and administrative expense increased to $4.2 million from $3.0 million.
- Interest expense declined to $2.0 million from $3.5 million. The company also recorded a $15,000 loss from the change in the warrant derivative liability.
- Cash and cash equivalents were $7.1 million at March 31, 2019, compared with $6.8 million at December 31, 2018. Working capital was $22.3 million.
- Total assets were $47.1 million and total liabilities were $86.2 million. Stockholders’ deficit improved to $(39.2) million from $(43.8) million, primarily because of the debt extinguishment accounting adjustment recorded in additional paid-in capital.
- Net inventories were $16.5 million, including approximately $9.3 million of consigned inventory. Accounts receivable were $9.5 million.
Material changes versus the prior comparable period
- Revenue declined 7% because of continued softness in the hardware product line in both domestic and international markets.
- Gross margin compressed because cost of sales increased despite lower revenue.
- Operating results improved because of lower sales commissions, travel costs, headcount, depreciation and amortization, restructuring expense, and non-cash compensation. The company deferred part of its new-product development spending into the third and fourth quarters of 2019.
- General and administrative expense increased because of approximately $0.5 million of settlement expenses, $0.5 million of higher professional fees, and $0.2 million of higher legal expenses.
- Unlike Q1 2018, the company recorded no restructuring expense in Q1 2019.
- Q1 2018 included substantial financing activity from the private placement and debt restructuring; Q1 2019 financing cash flow was a $0.1 million use of cash.
Debt, liquidity, outlook, and risks
- On March 29, 2019, the company entered into a Second Amended and Restated Credit Agreement with its investor-lenders. The agreement extended maturity to March 31, 2021, eliminated interest accrual from January 1, 2019 through March 31, 2020, and provided approximately $12.2 million of unused availability at March 31, 2019, including additional delayed-draw commitments.
- Beginning April 1, 2020, cash interest will accrue at 10% plus the higher of LIBOR or 2.3125%. The company reported a $72.7 million carrying value for long-term debt, while stating that principal owed was $50.7 million plus $28.8 million of accrued PIK interest.
- The debt amendment was accounted for as a debt extinguishment. Because the lenders are related parties, the resulting $7.3 million increase was recorded in additional paid-in capital rather than as an operating gain.
- Management believes cash on hand and available credit will fund anticipated requirements through March 2020, but stated that additional financing may be required. There is no assurance that financing will be available on acceptable terms.
- The company received an NYSE American noncompliance notice on April 4, 2019 because stockholders’ equity was below applicable listing thresholds and the company had recurring net losses. It submitted a compliance plan on May 3, 2019, with a target of regaining compliance or qualifying for an exemption by October 4, 2020. The stock continued trading with a “.BC” designation.
- On April 1, 2019, the company issued warrants for 1.2 million shares to its investors at a $0.01 exercise price. Total outstanding warrants were 2.9 million as of that date, creating potential dilution.
- RSB Spine alleges patent infringement involving the Irix-ATM and Irix-CTM systems and seeks injunctive relief, damages, and potentially treble damages. The company cannot estimate a potential loss. An Axis Spine matter remains pending on an unjust enrichment claim, while a Phoenix Surgical dispute was settled after quarter-end for an undisclosed, immaterial amount.
- Additional risks include declining hardware revenue, dependence on independent sales agents and reimbursement conditions, inventory and consignment losses, donor-cadaver availability, regulatory and product-liability exposure, intellectual-property claims, debt service and covenant compliance, financing availability, and continued NYSE American listing.
Most important facts for investors to verify
- Whether revenue weakness in the hardware product line stabilizes and whether deferred product-development spending supports future growth.
- Available liquidity, compliance with the new Revenue Base covenant, access to the remaining credit commitments, and the company’s ability to address the March 2021 debt maturity.
- The economic effect of accrued PIK interest and the difference between the debt’s GAAP carrying value and the principal amount owed.
- Progress toward restoring NYSE American stockholders’ equity compliance by October 4, 2020.
- Potential dilution from the 2018 and 2019 warrants and any future equity or debt financing.
- Developments in the RSB Spine and Axis Spine litigation, including any estimated exposure or impact on product sales.