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 99% of revenue generated in the United States. This unaudited quarterly report covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $15.3 million | $15.0 million | $28.2 million | $27.5 million |
| Gross profit | $8.4 million | $9.5 million | $15.9 million | $17.6 million |
| Gross margin | 54.8% | 63.5% | 56.4% | 64.0% |
| Operating loss | $(1.3) million | $(0.5) million | $(3.1) million | $(0.5) million |
| Net loss | $(1.7) million | $(0.7) million | $(3.9) million | $(0.8) million |
| Net loss per share | $(0.02) | $(0.01) | $(0.04) | $(0.01) |
- Orthobiologics revenue increased to $12.4 million in the second quarter and $22.6 million for the first six months, while spinal implant revenue declined to $2.9 million and $5.7 million, respectively.
- Cash and cash equivalents were $16.5 million at June 30, 2022; cash, cash equivalents and restricted cash totaled $16.8 million.
- Net cash used in operating activities was $1.0 million for the six months ended June 30, 2022, compared with $0.9 million of cash provided in the prior-year period.
- Net cash used in investing activities was $0.6 million, primarily for property and equipment. Financing activities provided $0.1 million.
- Total debt included $12.0 million of term debt, reported at $11.9 million net of issuance costs and other adjustments, and $3.7 million outstanding under the revolving facility.
- The revolving facility had $4.1 million of availability at June 30, 2022. The effective rates were 10.03% for the term facility and 5.57% for the revolving facility.
- Net working capital was $30.5 million, down from $33.3 million at December 31, 2021. Total assets were $52.7 million and stockholders' equity was $28.1 million.
Material changes versus the prior comparable period
- Revenue increased 2% in the second quarter and 3% year to date, primarily due to new products and increased private-label and OEM sales.
- Cost of sales increased 26% in the second quarter and 24% year to date, driven by higher production costs and increased excess and obsolete inventory charges.
- Gross margin declined 870 basis points in the second quarter and 760 basis points year to date. Management attributed the decline to higher product costs, inventory charges and a mix shift toward lower-margin private-label/OEM products and away from higher-margin spinal implants.
- The company incurred a substantially larger operating and net loss, primarily reflecting lower gross profit and higher interest expense. Interest expense increased to $0.4 million for the quarter and $0.8 million year to date, compared with $0.2 million in each 2021 comparison period, following the 2021 refinancing.
- Six-month general and administrative expense increased 8% to $7.8 million, including higher bad-debt expense, licenses and fees, stock-based compensation and ERP upgrade costs. The second-quarter expense declined 9%, partly because the prior-year period included $0.6 million of legal settlement expense.
- Inventories declined to $16.5 million from $17.9 million at year-end, but the company recorded an $0.8 million provision for excess and obsolete inventory in operating cash-flow adjustments.
Outlook, risks, contingencies and unusual items
- The filing does not provide specific revenue or earnings guidance. Management stated that cash and cash equivalents, facility availability and expected operating cash flows should fund anticipated requirements through at least August 2023, but additional financing may be required or sought earlier.
- COVID-19-related hospital staffing shortages and deferred elective procedures negatively affected first-quarter 2022 results; procedure reductions subsided in the second quarter but could recur with further COVID-19 waves.
- Inflation, supply-chain disruption, labor shortages and limited production labor in the Belgrade, Montana area may constrain production, delay product launches, increase costs and pressure margins.
- The company depends substantially on independent sales agents, distributors, GPOs, IDNs, third-party suppliers and manufacturers. Changes in procedure mix toward ambulatory surgical centers could also pressure pricing and margins.
- The March 2022 credit agreement amendment waived the minimum adjusted EBITDA covenant while defined liquidity exceeds $14 million and no other default exists. The company reported compliance with all debt covenants at June 30, 2022. The facilities mature May 1, 2026 and are secured by substantially all company assets.
- Management warned that continued revenue weakness could result in impairment charges to long-lived assets or goodwill and write-downs of excess inventory. No goodwill or long-lived-asset impairments were recorded in the periods presented.
- The company has operating lease commitments with future minimum payments of $1.2 million as of June 30, 2022. Certain facility leases were extended through October 2025 after quarter-end.
- Ordinary-course litigation and potential product, regulatory, intellectual-property and employment claims were disclosed; management does not believe their resolution will materially affect consolidated financial position, results or cash flows.
- OrbiMed-affiliated funds beneficially owned approximately 84% of the common stock, creating significant ownership concentration and related-party governance considerations.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether revenue growth continues while spinal implant revenue and higher-margin sales remain under pressure.
- Whether higher production costs, inventory reserves and private-label/OEM mix continue to reduce gross margin.
- Cash burn, operating cash flow and the company's ability to maintain liquidity above the debt agreement thresholds.
- Revolving-facility availability, interest rates, covenant compliance and the ability to refinance or repay secured debt.
- The effect of COVID-19 resurgences, hospital staffing shortages, supply-chain constraints and local labor availability on procedure volumes and production.
- Potential dilution from outstanding options, restricted stock units and approximately 7.1 million warrants.
- Whether additional equity or debt financing is needed before August 2023 and the resulting dilution, pricing or restrictive covenants.