Xtant Medical Holdings, Inc. — Q3 2020 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 filing covers the three and nine months ended September 30, 2020. The company operates as one reportable segment, with approximately 98% of revenue generated in the United States during both periods.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $14.0 million | $15.7 million | $39.3 million | $47.7 million |
| Gross profit | $9.2 million | $10.4 million | $25.4 million | $31.1 million |
| Gross margin | 66.0% | 66.2% | 64.6% | 65.2% |
| Operating income (loss) | $0.8 million | $(0.7) million | $(1.0) million | $(1.9) million |
| Net loss | $(1.4) million | $(1.9) million | $(6.3) million | $(6.6) million |
| Net loss per share | $(0.10) | $(0.14) | $(0.48) | $(0.50) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(1.6) million | $(0.3) million |
- Q3 revenue comprised $10.5 million of orthobiologics, $3.4 million of spinal implants and $36,000 of other revenue. Nine-month revenue comprised $28.6 million of orthobiologics and $10.6 million of spinal implants.
- At September 30, 2020, cash and cash equivalents were $2.7 million, compared with $5.2 million at December 31, 2019. Working capital was $23.1 million, compared with $22.9 million at year-end.
- Current assets were $32.4 million and current liabilities were $9.3 million. Accounts receivable declined to $7.3 million, while inventories increased to $20.7 million from $16.1 million.
- Long-term debt, including premium and net of issuance costs, was $79.6 million at September 30, 2020, compared with $76.2 million at December 31, 2019. The filing states that cash interest was suspended through September 30, 2020 under the May 2020 amendment.
- The company had $2.2 million of potential delayed-draw availability and could request up to $10.0 million of additional term loans at September 30, 2020, in each case subject to lender discretion and applicable conditions.
Material changes versus the prior comparable period
- Revenue decreased 10.8% in Q3 and 17.6% for the first nine months, primarily because COVID-19 caused elective procedures to be cancelled or deferred. Management stated that Q3 revenue recovered to nearly 90% of the prior-year quarter.
- Gross margin declined modestly because of reduced economies of scale, partially offset by lower depreciation expense.
- Operating expenses declined 23.6% in Q3 and 20.1% for the nine-month period, primarily due to lower general and administrative and sales and marketing costs.
- Q3 operating results improved from a $0.7 million loss to $0.8 million of operating income, while the nine-month operating loss narrowed to $1.0 million.
- Interest expense increased to $2.1 million in Q3 and $5.3 million for the nine months, reflecting the First Amendment and related debt accounting.
- Operating cash flow worsened to a $1.6 million use for the first nine months, principally because inventory increased by $5.0 million and prepaid assets increased by $0.9 million.
Debt restructuring, outlook and risks
- On October 1, 2020, after quarter-end, the company exchanged approximately $61.9 million of principal and paid-in-kind interest for approximately 57.8 million common shares, plus approximately 0.9 million shares for prepayment fees. Remaining principal debt was approximately $15.6 million.
- The restructuring reduced the post-October 1 cash interest rate to 7.00% plus the greater of LIBOR or 1.00%, eliminated the Revenue Base covenant and reduced additional term-loan availability to $5.0 million. The lenders became the holders of approximately 94.5% of outstanding common stock.
- The company launched a proposed rights offering of up to $15 million at $1.07 per share. The filing describes subscription rights of 0.194539 per share held as of the November 5, 2020 record date, subject to the offering becoming effective and other conditions.
- Management believed that September 30 cash plus $5.0 million of lender-discretionary credit availability would fund anticipated needs for at least 12 months, but stated that additional financing may be required and may not be available on acceptable terms.
- COVID-19 remains the principal operating risk, including renewed procedure deferrals, distributor and customer financial distress, supply-chain disruption, increased credit risk and pressure on revenue and liquidity.
- Other risks include substantial leverage, dependence on lender consent for additional financing, product liability and intellectual-property claims, regulatory and reimbursement changes, donor tissue availability, recalls and continued operating losses.
- The company reported no long-lived asset or goodwill impairment for the periods presented. It adopted the expected-credit-loss standard on January 1, 2020, recording a $47,000 cumulative adjustment.
- The company settled an intellectual-property dispute with RSB Spine in February 2020 through an undisclosed payment and royalties on future sales of specified products.
Key facts investors should verify
- Whether procedure volumes and revenue continued recovering after Q3 2020 and how renewed COVID-19 disruptions affected demand.
- The final terms, proceeds and dilution from the rights offering and the effect of the October 2020 debt-for-equity restructuring.
- Post-restructuring debt balances, interest obligations, lender ownership and the company’s ability to satisfy remaining covenants.
- Cash burn, inventory conversion, accounts-receivable collections and the availability of lender-discretionary borrowing capacity.
- The extent of dilution from the approximately 57.8 million restructuring shares, warrants, equity awards and any subsequent issuances. The filing reports 13.24 million shares outstanding at September 30 and 72.06 million shares outstanding as of October 27, reflecting the post-quarter-end restructuring.
- Potential exposure from litigation, product recalls, regulatory matters and the RSB Spine settlement.