Business Context and Reporting Period
Xtant Medical Holdings, Inc. is a medical technology company developing, manufacturing, and commercializing orthobiologics, spinal implants, and related instrumentation for spinal fusion procedures. The company operates as one reportable segment, with approximately 98% of second-quarter and 97% of year-to-date revenue generated in the United States.
This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $10.5 million vs. $15.3 million | $25.3 million vs. $32.0 million |
| Gross profit | $6.6 million vs. $9.9 million | $16.2 million vs. $20.7 million |
| Gross margin | 62.2% vs. 64.9% | 63.9% vs. 64.8% |
| Loss from operations | $0.4 million vs. $0.6 million | $1.7 million vs. $1.2 million |
| Net loss | $2.5 million vs. $1.9 million | $5.0 million vs. $4.7 million |
| Loss per share | $0.19 vs. $0.15 | $0.38 vs. $0.36 |
| Operating cash flow | Not separately provided | $(1.6) million vs. $1.0 million provided |
Orthobiologics revenue was $7.3 million in the second quarter and $18.1 million year to date. Spinal implant revenue was $3.2 million in the second quarter and $7.2 million year to date.
At June 30, 2020, cash and cash equivalents were $3.0 million, compared with $5.2 million at December 31, 2019. Working capital was $21.9 million, compared with $22.9 million at year-end. Accounts receivable were $7.6 million and inventories were $19.9 million.
Long-term debt, net of issuance costs and including the related premium, was $77.5 million, compared with $76.2 million at December 31, 2019. Total stockholders’ deficit was $46.9 million. The company had $12.2 million of credit-facility availability as of June 30, subject to lender discretion.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined 31.1%, and six-month revenue declined 20.9%, primarily because COVID-19 caused hospitals to cancel or defer elective procedures.
- Gross margin declined 270 basis points in the second quarter and 90 basis points year to date, primarily because lower volume reduced economies of scale.
- Operating expenses decreased 33.7% in the second quarter and 18.4% year to date, driven by lower general and administrative, sales and marketing, and research and development costs.
- Despite lower operating expenses, the year-to-date operating loss increased to $1.7 million from $1.2 million, while net loss increased to $5.0 million from $4.7 million.
- Operating cash flow shifted from $1.0 million provided in the first half of 2019 to $1.6 million used in the first half of 2020, primarily due to a $4.2 million inventory increase and a $0.7 million reduction in accrued liabilities.
- On May 6, 2020, the company amended its credit agreement. Interest was suspended through September 30, 2020, the maturity date was extended to December 31, 2021, and the revenue-base covenant was revised. Cash interest resumes October 1, 2020 at 10.00% plus the greater of the applicable LIBO Rate or 2.3125%.
- As consideration for the credit agreement amendment, the company issued warrants to purchase 2.4 million shares at $0.01 per share, with a 2030 expiration. Total warrants outstanding increased to 5.3 million at June 30, 2020.
- The company adopted the expected-credit-loss standard on January 1, 2020, recording a $47,000 cumulative reduction to retained earnings.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal revenue or earnings guidance. Management stated that COVID-19 will likely continue to adversely affect procedures, revenue, operating results, liquidity, and the company’s stock price.
- During the second quarter, the company terminated or furloughed 42% of its workforce, suspended most hiring, eliminated planned merit increases, reduced employee and executive base pay by 20%, reduced director retainers, suspended future 401(k) matching, and reduced discretionary spending. Full base salaries and wages were reinstated effective July 1, 2020.
- Management believed that available cash and credit-facility availability would fund anticipated cash requirements for at least the next 12 months, but warned that additional financing may be required and may not be available on acceptable terms.
- The company reported compliance with all credit-agreement covenants as of June 30, 2020. However, weaker revenue could affect future covenant compliance and access to additional borrowings.
- The company remained below NYSE American stockholders’ equity listing standards and was operating under a compliance plan through October 4, 2020. Failure to regain compliance could result in delisting proceedings. The stock traded with a “.BC” designation.
- The company settled a patent dispute with RSB Spine in February 2020 through a confidential settlement and patent license agreement. The company paid an undisclosed settlement amount and must pay royalties on future sales of two products through patent expiration.
- Management performed impairment evaluations in light of COVID-19 and recorded no impairment of long-lived assets or goodwill.
- The company’s principal lenders collectively owned approximately 70% of outstanding common stock and, including warrants, approximately 78%, creating significant lender and ownership concentration.
Important Facts for Investors to Verify
- Whether elective-procedure volumes and revenue recover after COVID-19-related disruptions.
- Whether the company can maintain credit-agreement covenant compliance after cash interest resumes and the revenue-base covenant applies.
- The terms, availability, and lender discretion associated with the reported $12.2 million of credit capacity.
- Liquidity needs given $3.0 million of cash, negative year-to-date operating cash flow, and $77.5 million of long-term debt.
- The company’s ability to regain compliance with NYSE American stockholders’ equity requirements and avoid delisting proceedings.
- The potential dilution from 5.3 million outstanding warrants and other equity awards.
- The continuing financial impact of the RSB Spine settlement, future royalties, and other litigation or product-liability contingencies.