Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical develops, manufactures and markets orthobiologics and spinal implant systems used in complex spine, deformity and degenerative procedures. The company operates as one reportable segment, with approximately 99% of revenue generated in the United States. This unaudited report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $13.8 million | $14.0 million | $41.3 million | $39.3 million |
| Gross profit | $7.2 million | $9.2 million | $24.8 million | $25.4 million |
| Gross margin | 52.2% | 66.0% | 60.0% | 64.6% |
| Operating income (loss) | $(1.4) million | $0.8 million | $(1.9) million | $(1.0) million |
| Net loss | $(1.8) million | $(1.4) million | $(2.6) million | $(6.3) million |
| Net loss per share | $(0.02) | $(0.10) | $(0.03) | $(0.48) |
| Cash flow from operations | Not separately provided | Not separately provided | $0.02 million | $(1.6) million |
- Q3 revenue consisted of $10.8 million of orthobiologics sales and $2.9 million of spinal implant sales. For the nine-month period, orthobiologics revenue was $31.3 million and spinal implant revenue was $9.9 million.
- Operating expenses were $8.6 million in Q3 and $26.7 million for the nine-month period. Nine-month expenses included $10.3 million of general and administrative expense, $15.7 million of sales and marketing expense, and $0.7 million of research and development expense.
- Cash and cash equivalents were $18.2 million at September 30, 2021, plus $0.4 million of restricted cash. Working capital was $35.2 million, compared with $5.7 million at December 31, 2020.
- Total debt consisted principally of a $12.0 million secured term facility, presented net of $0.3 million of unamortized issuance costs, and $3.5 million outstanding under the revolving line of credit. The facilities mature May 1, 2026.
- Total liabilities were $23.2 million and stockholders’ equity was $32.6 million at September 30, 2021.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 1.7%, while nine-month revenue increased 5.0%. The quarterly decline reflected lower elective procedure volumes associated with the COVID-19 Delta variant, hospital staffing shortages and restrictions on elective surgeries.
- Gross margin fell 13.8 percentage points in Q3 and 4.6 percentage points for the nine-month period. Drivers included under-absorption of labor and overhead, higher excess and obsolete inventory reserves, unfavorable product mix, including increased private-label and OEM sales, and sales of products manufactured at higher prior-period costs.
- Q3 operating results shifted from $0.8 million of operating income to a $1.4 million operating loss. Nine-month operating loss increased from $1.0 million to $1.9 million despite higher revenue.
- Interest expense decreased substantially to $0.3 million in Q3 and $0.5 million for the nine-month period, versus $2.1 million and $5.3 million, respectively, primarily because of the October 2020 debt restructuring.
- Operating cash flow improved to approximately break-even from $1.6 million of cash used in the prior-year nine-month period. Inventory reductions contributed to cash generation, although raw-material inventories increased.
- On February 24, 2021, the company issued 8.9 million common shares at $2.25 per share and warrants to purchase 6.7 million shares, generating approximately $18.4 million of net proceeds. The transaction increased outstanding shares to approximately 86.8 million at September 30, 2021, from 77.6 million at December 31, 2020.
- On May 6, 2021, the company refinanced its prior related-party debt with MidCap facilities. The prior credit agreement was repaid and terminated; the refinancing resulted in a $0.8 million gain recorded in additional paid-in capital due to the related-party relationship.
Outlook, Risks and Unusual Items
- Management reported three new product launches in 2021 and expected to introduce a bone marrow aspirate concentrate product in November 2021. The company added more than 40 sales agents through September and is pursuing expansion into adjacent markets and targeted acquisitions.
- Management expects higher product costs to continue, but expects gross profit to improve as COVID-19-related procedure disruptions diminish. No formal revenue or earnings guidance was provided.
- The Delta-variant surge reduced procedures during Q3, particularly beginning in August. Management stated that reduced elective procedures and staffing shortages continued into early Q4 and could persist into 2022.
- Continued revenue weakness could result in impairment charges for long-lived assets or goodwill and additional excess-inventory write-downs. No long-lived asset or goodwill impairments were recorded through September 30, 2021.
- The company settled a patent dispute in July 2021 for a one-time payment of $550,000, recorded as a special charge in second-quarter general and administrative expense.
- The MidCap facilities are secured by substantially all company assets and include minimum revenue, adjusted EBITDA and liquidity covenants. The company stated that it was in compliance with all covenants at September 30, 2021.
- Management believes cash and available facility capacity will fund anticipated requirements through at least November 2022, but stated that additional financing may be required or sought earlier. Future financing could dilute shareholders or impose additional restrictions.
- Other significant risks include reliance on independent sales agents and third-party suppliers, availability of donor cadavers, reimbursement and regulatory risks, product liability and intellectual-property claims, supply-chain disruption, debt service and covenant compliance, and maintenance of the NYSE American listing.
Important Facts for Investors to Verify
- Whether elective procedure volumes and hospital staffing constraints recover sufficiently to support revenue growth and the company’s gross-margin improvement expectations.
- Available borrowing capacity under the asset-based revolving facility and compliance with the minimum revenue, adjusted EBITDA and liquidity covenants.
- The sustainability of the $18.6 million cash and restricted-cash position given near-break-even operating cash flow and continuing operating losses.
- The impact of inventory-reduction initiatives, excess-inventory reserves and raw-material buildup on future cost of sales and margins.
- Potential dilution from 7.5 million outstanding warrants, 3.2 million outstanding stock options and 3.4 million restricted stock units at September 30, 2021.
- Whether additional capital will be needed before November 2022 and the terms, dilution or restrictions associated with any financing.
- Any further COVID-19-related procedure cancellations, supply-chain disruptions, impairment indicators, inventory write-downs or litigation liabilities.