Xtant Medical Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The company develops, manufactures and markets orthobiologics, spinal implants and related instrumentation. Results are unaudited and reported in thousands unless otherwise stated.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $17.3 million | $19.8 million | $53.9 million | $63.3 million |
| Gross profit | $11.5 million | $11.4 million | $36.2 million | $39.8 million |
| Gross margin | 66.7% | 57.5% | 67.2% | 62.9% |
| Operating loss | $(1.4) million | $(4.7) million | $(5.4) million | $(13.6) million |
| Operating margin | (8.3)% | (23.7)% | (9.9)% | (21.5)% |
| Net loss | $(3.2) million | $(8.5) million | $(13.4) million | $(24.0) million |
| Basic net loss per share | $(0.24) | $(5.62) | $(1.19) | $(15.94) |
Q3 revenue declined 12.7%, primarily because the company discontinued certain distributor arrangements and experienced channel-management challenges. Nine-month revenue declined 14.8%. Orthopedic product sales were $17.1 million in Q3 and $53.6 million for the first nine months. Approximately 95% of nine-month revenue was generated in the United States.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $5.1 million at September 30, 2018, versus $2.9 million at December 31, 2017.
- Working capital was $27.5 million at September 30, 2018, versus $13.7 million at year-end 2017.
- Cash used in operating activities was $0.8 million for the first nine months, compared with $1.2 million in 2017.
- Cash used in investing activities was $0.1 million, primarily reflecting $0.3 million of capital and intangible-asset purchases and $0.3 million of proceeds from fixed-asset sales.
- Cash provided by financing activities was $3.0 million, including $6.8 million of private-placement proceeds, partly offset by $3.5 million of restructuring-related financing costs.
- Long-term debt, net of issuance costs, was $75.9 million at September 30, 2018, compared with $138.0 million at December 31, 2017. The remaining debt is principally the Credit Facility and accrued PIK interest; gross debt matures July 31, 2020.
- The company reported $2.2 million of available amended credit-facility capacity and stated that cash on hand and availability were expected to cover anticipated cash requirements through December 31, 2019, while acknowledging that additional financing may be required.
Material changes versus the prior comparable period
- Cost of sales fell 31.8% in Q3 and 37.1% for the nine months. Management attributed the improvement to the absence of significant 2017 inventory and surgical-instrument impairment charges and to operating-integration and cost-reduction initiatives.
- Operating expenses declined 19.3% in Q3 and 22.1% for the nine months. Lower commissions, payroll, travel, legal costs and other expenses reflected reduced sales and restructuring actions.
- Interest expense decreased to $1.8 million in Q3 and $8.2 million for the nine months, primarily because of the debt restructuring.
- In the first quarter, approximately $71.9 million of convertible debt was converted or exchanged into 10,590,954 shares. Investors obtained approximately 70% of the outstanding common stock and became the holders of all outstanding long-term debt.
- The company completed a 1-for-12 reverse stock split, issued 945,819 shares in a $6.8 million private placement and issued 1.2 million warrants with a $0.01 exercise price in connection with the amended Credit Facility.
- The Credit Facility was amended to provide interest relief through December 31, 2018, modify PIK-interest terms and increase the repayment or exit fee to 2%. The company stated that it was in compliance with applicable covenants at September 30, 2018.
Outlook, risks and unusual items
- Management did not provide quantitative revenue or earnings guidance. Its outlook depends on rebuilding sales channels, executing cost reductions, improving profitability and maintaining liquidity.
- Key risks include continuing operating losses, declining revenue, dependence on distributors and sales personnel, substantial debt and upcoming 2020 maturity, covenant compliance, access to additional financing, inventory obsolescence, regulatory and reimbursement requirements, product liability and intellectual-property matters.
- The Investors’ approximately 70% ownership gives them significant control. While the applicable ownership threshold is maintained, their approval is required for specified financing, debt, asset, capital-expenditure, budget and senior-management actions.
- Consigned inventory was approximately $9.8 million at September 30, 2018. Total inventory was $22.2 million net of a $7.1 million obsolescence reserve.
- An Axis Spine lawsuit seeks damages exceeding $1.0 million; the court was considering the company’s motions to dismiss and for summary judgment. The filing does not provide a clear estimate of potential loss.
- Michael Mainelli became interim chief executive officer effective October 12, 2018, replacing Carl D. O’Connell. The company anticipated approximately $0.6 million of separation costs.
- The company’s engagement with Aurora Management Partners terminated effective November 8, 2018, with transitional financial support expected during the transition.
- Management concluded that disclosure controls were effective as of September 30, 2018. A new chief financial officer was hired in August 2018.
Investor verification points
- Verify whether revenue-channel changes have stabilized and whether sales growth can resume without restoring unprofitable distributor arrangements.
- Assess liquidity against the $75.9 million of net debt, the July 31, 2020 maturity and the company’s stated possibility of requiring additional financing.
- Review Credit Facility covenants, PIK-interest accumulation, exit fees, warrant dilution and the Investors’ consent rights.
- Monitor inventory levels, the $7.1 million obsolescence reserve and the risk of additional impairment charges.
- Follow the Axis Spine litigation, executive-transition costs and the transition away from Aurora Management Partners.
- Confirm the effect of the reverse split, debt-to-equity restructuring and 1.2 million low-strike warrants on the fully diluted share count.