Xtant Medical Holdings, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Xtant develops, manufactures and markets regenerative orthopedic products, tissue grafts, implants, instrumentation and fixation devices. The filing covers the unaudited quarter ended March 31, 2017, compared with the quarter ended March 31, 2016. The company reported one operating segment and approximately 96% of revenue from the United States.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $22.1 million | $21.0 million | +5.3% |
| Gross profit | $15.5 million | $14.1 million | +10.1% |
| Gross margin | 70.3% | 67.2% | +310 bps |
| Loss from operations | $(1.9) million | $(2.4) million | Improved |
| Operating margin | (8.8)% | (11.3)% | Improved |
| Net loss | $(5.2) million | $(5.6) million | Improved |
| Net loss per share | $(0.29) | $(0.47) | Improved |
| Cash flow from operations | $0.4 million | $1.0 million | Decreased |
Orthopedic product sales increased to $22.0 million from $20.8 million, while other revenue declined to $86,354 from $169,300. Management attributed revenue growth primarily to new products. Cost of sales declined 4.6% to $6.6 million, reflecting product mix and manufacturing efficiencies. Operating expenses increased 6.1% to $17.5 million, including higher general and administrative, sales and marketing, depreciation and separation-related expenses, partly offset by lower research and development and the absence of acquisition and integration expenses.
At March 31, 2017, cash and cash equivalents were $2.5 million, accounts receivable were $16.3 million, and total current assets were $46.8 million. Total assets were $139.7 million, compared with $144.1 million at December 31, 2016. Total liabilities were $151.4 million, and stockholders’ deficit was $11.7 million. The company reported total debt before issuance costs of approximately $123.3 million, including $43.0 million of ROS debt, $8.4 million of PIK interest payable to ROS and $71.9 million of convertible notes. The revolving line of credit balance was $10.3 million.
Material changes versus the prior comparable period
- Revenue increased $1.1 million, led by orthopedic product sales and new products.
- Gross profit increased $1.4 million as cost of sales declined faster than revenue.
- Operating loss narrowed by $413,673, despite higher operating expenses, primarily because of improved gross profit and the absence of 2016 acquisition and integration expenses.
- Interest expense increased $573,215 to $3.4 million because of higher long-term and convertible debt.
- Operating cash flow declined $591,104 to $436,205. Investing cash use declined substantially to $310,078 from $2.7 million, while financing cash use increased to $217,555.
- Shares outstanding increased to 18,092,603 at March 31, 2017 from 11,897,601 at December 31, 2016. Certain interest obligations were settled through issuance of common stock and convertible notes.
- Warrant derivative liability declined to $163,582 from $333,613, generating a non-cash gain of $170,031.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that cash on hand, accounts receivable, expected operating receipts and available credit may not be sufficient to meet cash requirements through March 31, 2018, and that the company did not expect to have sufficient funds to service current interest obligations under its senior credit facility and convertible debt.
The company disclosed substantial doubt about its ability to continue as a going concern. A board special committee was evaluating restructuring alternatives, lender negotiations, capital raising, cost reductions and cash-flow improvements. The filing stated that there could be no assurance these efforts would succeed.
Debt agreements include revenue, liquidity and leverage covenants. Amendments reduced the minimum liquidity requirement to $500,000 through June 30, 2017, with a $5.0 million requirement thereafter, and deferred interest payments. Subsequent to quarter-end, the company entered into a bank forbearance agreement, further deferred interest payments to June 30, 2017, and obtained amendments permitting up to $15.0 million of additional delayed-draw term loans subject to conditions. The company also appointed a chief restructuring officer in May 2017.
Other notable items included $224,372 of separation-related expense, management changes including the appointment of Carl O’Connell as chief executive officer, and continued exposure to competition, reimbursement and regulatory changes, product liability, donor availability, intellectual property matters and the ability to retain qualified personnel.
Important facts for investors to verify
- Whether the company secured sufficient financing or lender waivers to address the disclosed going-concern uncertainty and deferred interest obligations.
- Compliance with minimum revenue, liquidity and leverage covenants after June 30, 2017.
- The availability and terms of any additional delayed-draw loans and the required appointment and oversight of restructuring personnel.
- Cash conversion, accounts receivable collections and inventory levels, including approximately $4.4 million of current inventory reserves.
- The potential dilution from convertible notes, approximately 6.3 million outstanding warrants and stock options.
- Whether improved gross margins and new-product revenue growth can offset high selling, marketing, interest and restructuring costs.
- The effect of subsequent debt amendments, bank forbearance and any future restructuring, refinancing or capital raising on shareholders and creditors.