Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical develops, manufactures and markets orthobiologics, spinal implants and related instrumentation for spinal fusion and other orthopedic procedures. The company operates as one reportable segment, with approximately 98% of revenue generated in the United States. This unaudited report covers the three months ended March 31, 2023, compared with the same period in 2022.
On February 28, 2023, Xtant acquired Surgalign SPV, Inc., including the U.S. Coflex and CoFix product lines, for $17.0 million in cash. The acquisition was funded with cash on hand and approximately $5.0 million of incremental term debt.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $17.943 million | $12.959 million | Up 38% |
| Gross profit | $10.536 million | $7.560 million | Up 39% |
| Gross margin | 58.7% | 58.3% | Up 40 basis points |
| Loss from operations | $(1.576) million | $(1.831) million | Improved $0.255 million |
| Operating margin | (8.8%) | (14.1%) | Improved |
| Net loss | $(2.078) million | $(2.213) million | Improved $0.135 million |
| Net loss per share | $(0.02) | $(0.03) | Improved |
| Cash used in operating activities | $(2.245) million | $(1.004) million | Higher use of cash |
Orthobiologics revenue was $13.551 million, or 76% of total revenue, while spinal implant revenue was $4.391 million, or 24%. U.S. revenue was $17.513 million and revenue outside the United States was $0.430 million.
Sales and marketing expense increased to $7.054 million from $5.209 million, principally because of higher commissions, GPO fees, salaries and wages. General and administrative expense increased to $4.884 million from $3.969 million, including acquisition-related costs. Research and development expense was $0.174 million versus $0.213 million.
Financial Position, Debt and Liquidity
- Cash and cash equivalents were $5.176 million at March 31, 2023, compared with $20.298 million at December 31, 2022. Including restricted cash, total cash was $5.410 million.
- Net working capital declined to $19.311 million from $34.100 million, primarily because of the acquisition and operating cash use.
- Accounts receivable were $11.902 million and inventories were $18.522 million at quarter-end.
- Term loan principal increased to $17.0 million from $12.0 million. The effective term-loan rate was 13.30%.
- The revolving facility had $3.0 million outstanding and $5.0 million of availability; its effective rate was 9.28%.
- The credit facilities mature May 1, 2026. Beginning in June 2023, monthly principal payments of approximately $0.5 million are required on the term facility.
- Management stated that available cash, operating cash flows and facility availability are expected to fund anticipated requirements through at least May 2024, but additional financing may be required earlier.
Material Changes Versus the Prior Comparable Period
- Revenue increased 38%, driven by greater independent-agent sales, opportunistic private-label sales and the contribution from Coflex and CoFix. The prior-year period was negatively affected by COVID-19-related procedure cancellations, elective-procedure restrictions and hospital staffing shortages.
- Gross margin improved modestly because of the Coflex and CoFix contribution, partly offset by higher costs for internally manufactured products.
- Operating and net losses narrowed despite higher operating expenses and interest expense.
- Operating cash use increased by $1.241 million, while investing cash use rose substantially because of the $17.0 million acquisition.
- Cash flow from financing activities was $4.569 million, including approximately $5.0 million of incremental term debt.
- Intangible assets increased to $10.810 million and goodwill increased to $7.639 million, primarily from the acquisition.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance range. It states that the company has begun issuing guidance and cautions that actual results may differ materially.
- Key risks include integrating the Coflex and CoFix business, completing the preliminary purchase-price allocation, achieving expected sales growth and servicing debt while complying with financial covenants.
- Inflation, supply-chain disruption, rising interest rates, labor shortages, reduced elective procedures, bank or credit-market disruptions and recessionary conditions could adversely affect revenue, margins, liquidity and operations.
- The company relies substantially on independent sales agents, distributors, third-party suppliers and manufacturers, and key agents account for a significant portion of revenue.
- Potential litigation includes commercial, product liability, intellectual property and employment matters. Management believes current accruals are adequate and does not expect existing matters to materially affect consolidated financial position, but unfavorable outcomes could exceed accruals.
- The purchase-price allocation for the Surgalign SPV acquisition remains preliminary; changes to acquired intangible-asset values, useful lives or goodwill could affect future amortization or impairment charges.
- The company was in compliance with its credit-facility covenants at March 31, 2023. The facilities are secured by substantially all company and borrower assets.
- OrbiMed-affiliated investors beneficially owned approximately 67% of common stock. A May 2, 2023 amendment reduced certain investor approval rights, subject in part to stockholder approval of a charter amendment.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023. Internal controls were updated to integrate Surgalign SPV.
Important Facts for Investors to Verify
- Whether Coflex and CoFix generate the expected incremental revenue and profitability following the acquisition.
- The final purchase-price allocation, including the valuation and useful lives of acquired intangible assets and goodwill.
- Cash generation and liquidity after the approximately $0.5 million monthly term-loan amortization begins in June 2023.
- Compliance with minimum revenue, adjusted EBITDA and liquidity covenants under the credit agreements.
- The sustainability of the 58.7% gross margin and the effect of rising interest rates on debt service.
- Whether revenue growth continues without disproportionate increases in commissions, GPO fees, inventory and working-capital needs.
- Any changes to management’s undisclosed numerical guidance and the assumptions underlying that guidance.