Xtant Medical Holdings, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Xtant Medical Holdings, Inc. develops, manufactures and markets orthobiologics and spinal implant fixation systems used in complex spine, deformity, degenerative and other orthopedic procedures. The company sells primarily in the United States through independent distributors, stocking agents and direct employees, with additional international distribution.
This filing covers the fiscal year ended December 31, 2020, with comparative fiscal 2019 results. The filing is an annual report rather than a standalone fourth-quarter report, although fourth-quarter information is included where applicable. Xtant is a smaller reporting company and reported one operating segment.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $53.3 million | $64.7 million | Down 17.5% |
| Orthobiologics revenue | $39.3 million | $46.7 million | Down 15.8% |
| Spinal implant revenue | $13.9 million | $17.9 million | Down 22.3% |
| Gross profit | $34.4 million | $42.5 million | Down 19.1% |
| Gross margin | 64.5% | 65.7% | Down 120 bps |
| Operating loss | $0.8 million | $2.3 million | Improved |
| Net loss | $7.0 million | $8.2 million | Improved |
| Basic and diluted loss per share | $0.25 | $0.63 | Improved |
| Net cash used in operating activities | $0.7 million | $0.4 million | Higher use |
International revenue represented approximately 2% of total revenue in 2020, compared with approximately 4% in 2019. The United States generated $52.1 million of 2020 revenue. Xtant ceased selling products in the European Union during the third quarter of 2020; EU revenue for 2020 was approximately $0.2 million.
Cash and cash equivalents declined to $2.3 million at December 31, 2020 from $5.2 million at December 31, 2019. Accounts receivable declined to $6.9 million, while inventories increased to $21.4 million from $16.1 million. The inventory reserve was $11.1 million, and the allowance for credit losses was $0.7 million.
Investing activities used $1.3 million, primarily for $1.5 million of property and equipment purchases. Financing activities used $0.9 million, including debt restructuring costs and debt payments, partially offset by rights-offering proceeds.
Material changes versus the prior comparable period
- Revenue fell $11.3 million, principally because COVID-19 caused hospitals to cancel or defer elective procedures and restricted access for sales representatives and distributors.
- Gross margin declined because lower revenue reduced manufacturing economies of scale, partly offset by lower depreciation expense.
- Operating expenses declined 21.5% to $35.1 million. General and administrative expense decreased 22.1%, sales and marketing expense decreased 20.8%, and research and development expense decreased 29.5%.
- The company completed a major debt restructuring on October 1, 2020. Approximately $61.9 million of principal and paid-in-kind interest was extinguished in exchange for approximately 57.8 million common shares, and approximately $0.9 million of prepayment fees was exchanged for additional shares.
- Remaining principal debt was $15.6 million at year-end, compared with approximately $72.7 million of credit-facility debt at December 31, 2019. Because the debt matures on December 31, 2021, the balance was classified as current; the carrying value of current debt was $16.8 million.
- The restructuring generated a $15.1 million accounting gain, but because the transaction involved related parties, the gain was recorded through additional paid-in capital rather than reported in the statement of operations.
- Common shares outstanding increased to 77.6 million at December 31, 2020 from 13.2 million at December 31, 2019, primarily because of the debt-for-equity exchange and related transactions. OrbiMed-affiliated funds owned approximately 93.9% of outstanding shares at year-end.
Debt, liquidity, outlook and risks
The amended credit facility bears cash interest at 7.00% plus the higher of the applicable LIBO Rate or 1.00%. The lender has sole discretion over the remaining $5.0 million of potential additional term loans. The facility is secured by substantially all company assets and includes operating restrictions, although certain financial covenants were eliminated in the October 2020 amendment.
Management stated that year-end cash, anticipated operating cash flow, anticipated proceeds from a proposed private placement and potential lender-controlled credit availability were expected to fund requirements through at least February 2022, assuming the debt is refinanced or its maturity is extended. The financial statements were prepared on a going-concern basis, but management acknowledged that refinancing or additional financing may be required and may not be available on acceptable terms or at all.
On February 22, 2021, after year-end, Xtant entered into an agreement for a private placement of approximately $20 million of gross proceeds through the issuance of 8.9 million shares at $2.25 per share and warrants for up to 6.7 million shares. Closing was subject to customary conditions, so the filing provides no assurance that the transaction would close as expected. The company intended to use net proceeds for working capital and general corporate purposes.
Management did not provide quantitative revenue or earnings guidance. Its stated priorities included reengaging the distribution network, releasing new products, expanding marketing programs, improving operational efficiency and pursuing growth initiatives. Xtant launched Matriform Si and entered into an agreement with a large GPO during 2020.
Key risks include continued COVID-19-related procedure deferrals, recurring losses, limited liquidity, the December 31, 2021 debt maturity, lender discretion over additional borrowing, variable interest rates and the transition away from LIBOR. Additional risks include dependence on human tissue donors, distributors and suppliers; FDA, HCT/P, quality and reimbursement requirements; product liability and patent litigation; outdated information technology and ERP systems; competition from substantially larger medical-device companies; and OrbiMed’s controlling ownership and related-party influence.
The company settled patent litigation in February 2020. In November 2020, it received a new patent-infringement claim involving several products; the potential loss or range of loss could not be estimated. The filing also discloses pending product-liability litigation, which management believed was covered by insurance but could exceed policy limits.
Investor facts to verify
- Whether the approximately $20 million February 2021 private placement closed, the net proceeds received and the resulting dilution from shares and warrants.
- Progress toward refinancing or extending the $15.6 million principal debt maturity on December 31, 2021, including lender consent and covenant compliance.
- Actual post-pandemic procedure volumes, distributor reengagement and whether revenue can recover toward pre-2020 levels.
- Inventory quality and demand assumptions supporting the $11.1 million reserve against inventory.
- Status and potential financial exposure of the November 2020 patent claim and pending product-liability matters.
- Regulatory and commercial consequences of exiting the European Union and maintaining FDA, AATB and other tissue and device approvals.
- Potential dilution from the private placement, outstanding options, restricted stock units and remaining warrants, as well as OrbiMed’s approximately 93.9% ownership and control rights.