Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
Xtant develops, manufactures and markets regenerative orthopedic products, biologics, implants, instrumentation and fixation devices for orthopedic and neurological applications. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $19.8 million | $23.1 million | $63.3 million | $65.5 million |
| Gross profit | $11.4 million | $16.0 million | $39.8 million | $44.8 million |
| Gross margin | 57.5% | 69.2% | 62.9% | 68.3% |
| Operating loss | $3.5 million | $1.9 million | $10.8 million | $6.4 million |
| Net loss | $8.5 million | $4.9 million | $24.0 million | $15.0 million |
| Net loss per share | $0.47 | $0.40 | $1.33 | $1.24 |
| Cash used in operating activities | Not separately provided | Not separately provided | $1.2 million | $11.2 million |
Revenue consisted primarily of orthopedic product sales. Approximately 97% of nine-month 2017 revenue came from the United States. At September 30, 2017, cash and equivalents were $2.1 million, net accounts receivable were $13.9 million, and net inventory was $24.8 million, including approximately $12.3 million of consigned inventory.
Total liabilities were $158.7 million, compared with $151.2 million at December 31, 2016. Gross debt was $137.8 million, comprising approximately $65.9 million under the ROS and OrbiMed credit facility, including PIK interest, and $71.9 million of convertible senior notes. Approximately $65.6 million of debt was classified as current. Stockholders’ deficit increased to $30.2 million from $7.1 million at year-end 2016.
Material changes versus the prior comparable period
- Third-quarter revenue declined 14.3%; nine-month revenue declined 3.4%.
- Management reduced or exited unprofitable reseller, high-commission distributor and private-label fixation arrangements. This contributed to lower revenue but was intended to improve pricing and future profitability.
- Cost of sales increased 18.3% in the quarter and 13.1% for the nine-month period. Management attributed the increase to a shift toward lower-margin biologics and higher inventory and surgical-instrument reserves.
- Quarterly gross margin fell to 57.5% from 69.2%; nine-month gross margin fell to 62.9% from 68.3%.
- Operating expenses decreased 16.9% in the quarter, primarily from lower commissions, payroll, travel and other restructuring-related cost reductions. However, nine-month operating expenses decreased only 1.1% because of higher general and administrative, depreciation, and separation-related costs.
- Interest expense increased to $3.8 million in the quarter and $10.5 million for the nine months, reflecting higher debt balances and accumulated interest.
- Separation-related expenses were $0.8 million in the quarter and $1.4 million year to date; no comparable expense was reported in 2016. The company also incurred $2.8 million of restructuring-related other expense year to date.
- Operating cash use improved to $1.2 million from $11.2 million, helped by collections, inventory reduction and restructuring actions. The improvement was accompanied by increased deferred and non-cash interest accruals.
Liquidity, debt, outlook and risks
Management stated that cash, accounts receivable, anticipated operating receipts and limited term-loan capacity may not be sufficient to meet cash requirements through September 30, 2018. The company does not expect to have sufficient funds to service current interest obligations under its senior credit facility and convertible debt. The filing therefore states that the debt terms and accumulated losses raise substantial doubt about the company’s ability to continue as a going concern.
A special board committee and Chief Restructuring Officer were evaluating restructuring alternatives, lender negotiations, additional capital and cost-reduction measures. There is no assurance that these efforts will succeed. The company obtained multiple waivers and amendments relating to deferred interest payments and debt covenants. A lender waiver was obtained for the third-quarter 2017 minimum-revenue covenant, but management did not expect to achieve the $27.5 million fourth-quarter 2017 revenue covenant and could not assure that a future waiver would be obtained.
The credit facility’s minimum liquidity covenant was temporarily reduced to $500,000 through November 30, 2017, after which required liquidity was $5.0 million. Interest payments were repeatedly deferred, including payments due on the senior facility and convertible notes. These deferrals increased accrued interest and may result in additional interest charges.
After quarter-end, the company announced closure of its Dayton, Ohio facility and consolidation of fixation operations in Montana. It anticipated annualized savings exceeding $2 million, with estimated one-time transition costs of $1.5 million through March 31, 2018. Further amendments deferred specified interest payments to November 30, 2017 and extended the temporary $500,000 liquidity threshold.
The company faces competitive, regulatory, reimbursement, product liability, donor-supply, consignment, inventory-control and technological risks. A lawsuit by Axis Spine sought damages exceeding $972,283; the company recorded $1.34 million of reserves for related receivables and consigned assets. The filing also disclosed a material weakness in controls over property and equipment and accumulated depreciation for earlier 2017 quarters. A $618,000 correction was recorded in this filing, and the company planned to restate the affected quarterly reports.
Most important facts for investors to verify
- Whether the company obtained or can obtain waivers for the fourth-quarter revenue covenant and subsequent liquidity and interest-payment obligations.
- Available cash, term-loan capacity, operating cash generation and the timing of deferred interest payments.
- The outcome of restructuring, refinancing or capital-raising efforts and the company’s ability to remain a going concern.
- Whether the Dayton facility consolidation achieves the projected savings and remains within the estimated transition cost.
- The final restatement of the March 31 and June 30, 2017 financial statements and remediation of the related internal-control weakness.
- Changes in gross margin, inventory reserves, consigned inventory and distributor relationships as the company shifts away from lower-margin or unprofitable channels.
- The status and potential financial impact of the Axis Spine litigation and other contingencies.