Xtant Medical Holdings, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Xtant Medical develops, manufactures and sells orthobiologics and spinal implant fixation systems used in spinal fusion and related orthopedic procedures. Products are sold primarily in the United States through independent distributors, stocking agents and direct employees, with international distribution in selected markets.
This Form 10-K covers the fiscal year ended December 31, 2019, filed March 5, 2020. The filing provides annual results for 2019 and 2018; it does not provide a separately stated fourth-quarter income statement.
- The company operated as one reportable segment.
- United States revenue represented approximately 96% of 2019 revenue; international revenue represented approximately 4%.
- OrbiMed-affiliated funds beneficially owned approximately 70% of outstanding common stock and held all outstanding long-term debt, making the company a controlled company under NYSE American rules.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $64.7 million | $72.2 million | Down 10.4% |
| Orthopedic product sales | $64.5 million | $71.8 million | Down 10.2% |
| Gross profit | $42.5 million | $43.5 million | Down 2.2% |
| Gross margin | 65.7% | 60.2% | Up 550 basis points |
| Operating loss | $2.3 million | $60.1 million | Improved materially |
| Net loss | $8.2 million | $70.1 million | Improved by $61.9 million |
| Net loss per share | $0.63 | $5.97 | Improved |
| Cash used in operations | $0.4 million | Cash provided of $1.2 million | Lower liquidity generation |
Orthobiologics revenue was $46.7 million, or 72% of total revenue, compared with $49.0 million, or 68%, in 2018. Spinal implant revenue was $17.9 million, or 28%, compared with $22.8 million, or 31%, in 2018.
- Cost of sales declined 22.8% to $22.2 million, primarily because excess inventory expense fell to $0.5 million from $4.9 million.
- General and administrative expense increased 25.6% to $17.9 million, including legal settlements and remediation, finance and accounting consultants, bad debt expense, executive recruiting and ERP-related fees.
- Sales and marketing expense decreased 17.9% to $25.8 million, reflecting lower commissions, travel costs and headcount.
- Research and development expense decreased 45.2% to $0.9 million.
- No goodwill, intangible asset, restructuring or separation-related impairment or expense was recorded in 2019. In 2018, the company recorded $48.1 million of goodwill and intangible asset impairment, $3.0 million of restructuring expense and $1.6 million of separation-related expense.
- Interest expense declined to $5.8 million from $10.1 million following amendments to the credit agreement.
Balance sheet, debt and liquidity
| Metric at December 31 | 2019 | 2018 |
|---|---|---|
| Cash and cash equivalents | $5.2 million | $6.8 million |
| Accounts receivable, net | $10.1 million | $10.0 million |
| Inventories | $16.1 million | $17.3 million |
| Net working capital | $22.9 million | $22.6 million |
| Long-term debt, less issuance costs | $76.2 million | $77.9 million |
| Stockholders’ equity/(deficit) | $(44.2) million | $(43.8) million |
| Accumulated deficit | $223.3 million | $215.0 million |
The company reported $55.8 million of principal and $21.1 million of accrued payment-in-kind interest at December 31, 2019. Gross debt is scheduled to mature on March 31, 2021. The amended facility provided up to $10.0 million of additional borrowing availability, subject to lender approval, forecasts and other conditions.
Management stated that cash on hand and available credit were expected to fund anticipated requirements through at least March 2021. However, management expects to refinance the debt and obtain additional credit availability and warned that additional financing may be required sooner. The financial statements were prepared on a going-concern basis.
Cash used in investing activities was $0.5 million, primarily for $0.9 million of property and equipment purchases. Cash used in financing activities was $0.6 million, primarily for capital lease payments and credit agreement costs.
Material changes versus the prior comparable period
- Revenue declined by $7.5 million, primarily from discontinued distributor arrangements and lower hardware demand, pricing pressure under new GPO and IDN contracts, and competition. Biologics growth partially offset the decline.
- Gross margin improved substantially because of lower excess and obsolete inventory charges and other cost reductions.
- Operating and net losses improved primarily because 2018 included large impairment and restructuring charges.
- The company rebuilt its senior management and commercial teams, reengaged its distributor network, launched Intice-C, Atrix-C and Calix-C products, and continued an ERP upgrade begun in the second quarter of 2019.
- On March 29, 2019, the company entered into a Second Amended and Restated Credit Agreement. Interest did not accrue from January 1, 2019 through March 31, 2020; beginning April 1, 2020, cash interest was scheduled at 10% plus the higher of the LIBO Rate or 2.3125%.
- The company issued warrants to purchase approximately 1.2 million shares at $0.01 per share as a condition to the amended credit agreement.
- The authorized common-stock limit increased from 50 million to 75 million shares in October 2019.
- A Class 2 recall of the Calix Lumbar Spine Implant System, initiated in December 2018, was closed in 2019. The company reported no device-related adverse events, but stated that the recall negatively affected 2019 sales and reputation.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management’s priorities were to improve revenue performance, operational efficiency and stockholders’ equity, expand distribution and product offerings, and maintain the NYSE American listing.
- The company was not in compliance with NYSE American continued-listing standards because stockholders’ equity was below the required $6.0 million threshold. It had a compliance plan extending to October 4, 2020; failure to regain compliance or demonstrate adequate progress could result in delisting.
- Management identified substantial refinancing and liquidity risk due to the March 31, 2021 debt maturity, significant leverage, restrictive covenants and dependence on lender consent for certain financing and corporate actions.
- The company’s ability to remain a going concern depends on revenue growth, expense control, continued credit availability and successful refinancing or additional financing.
- A consulting agreement terminated in March 2019 with an entity connected to customers representing approximately 23% of 2018 revenue. Management expected the termination to continue affecting revenue in 2020 and later periods.
- The company faced supply constraints affecting certain biologics and hardware products, donor-tissue availability risk, dependence on independent distributors, intense competition and reimbursement pressure.
- The company’s Notified Body advised in March 2019 that several products were at risk of losing their CE marks because of post-market clinical follow-up deficiencies. Remediation began in January 2020, but the filing states that success was not assured.
- The company was implementing a significant ERP upgrade expected to be completed in the first half of 2020; delays or failures could disrupt invoicing, shipping, inventory, collections and supplier payments.
- On February 28, 2020, after year-end, the company settled patent litigation with RSB Spine under a confidential agreement involving an undisclosed payment and royalties on future sales of two products. Management believed the settlement would not materially affect the company.
- The company has never paid dividends and its credit agreement prohibits dividend payments.
Most important facts for investors to verify
- Whether revenue stabilizes following distributor changes, the terminated consulting agreement and the decline in spinal implant sales.
- Whether the company can maintain sufficient liquidity and obtain refinancing before the March 31, 2021 debt maturity.
- Compliance with the credit facility’s revenue, liquidity and other covenants, including the effect of cash interest beginning April 1, 2020.
- Progress toward restoring stockholders’ equity and retaining the NYSE American listing.
- Remediation of CE-mark and post-market clinical follow-up deficiencies in Europe.
- Completion and operational effect of the ERP implementation.
- Availability of donor tissue and resolution of reported supplier constraints.
- Potential dilution from outstanding warrants, options and restricted stock units, as well as any future financing or debt restructuring.