Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Form 10-Q for the quarter and six months ended June 30, 2018. Xtant develops, manufactures and markets regenerative medicine products, orthobiologics, implants, instrumentation and tissue grafts for orthopedic and neurological applications. The company operates as one segment and generated approximately 95% of first-half revenue in the United States.
During the first quarter, Xtant completed a major restructuring, including conversion or exchange of approximately $71.9 million of convertible debt into 10,590,954 common shares, a $6.8 million private placement, a 1-for-12 reverse stock split and replacement of the board. Investors receiving the converted debt owned approximately 70% of outstanding common stock as of June 30, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $18.7 million | $21.4 million | $36.7 million | $43.5 million |
| Gross profit | $12.5 million | $13.5 million | $24.7 million | $28.4 million |
| Gross margin | 66.6% | 63.2% | 67.4% | 65.4% |
| Operating loss | $(2.3) million | $(6.4) million | $(3.9) million | $(8.9) million |
| Net loss | $(5.0) million | $(9.7) million | $(10.3) million | $(15.5) million |
| Net loss per share | $(0.38) | $(6.43) | $(1.00) | $(10.31) |
| Net cash from operating activities | Not separately provided | Not separately provided | $0.3 million | $(0.8) million |
At June 30, 2018, cash and cash equivalents were $6.0 million, current assets were $39.7 million and current liabilities were $12.4 million, producing working capital of approximately $27.3 million. Total assets were $102.8 million and stockholders’ equity was $10.6 million, compared with a deficit of $58.7 million at December 31, 2017.
Long-term debt, net of issuance costs, was $79.4 million at June 30, 2018, consisting principally of $55.8 million outstanding under the credit facility and $23.9 million of capitalized PIK interest. The debt matures on July 31, 2020. The company reported compliance with applicable credit facility covenants as of June 30, 2018.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 12.6%; first-half revenue decreased 15.7%, primarily due to competitive pressures in fixation products and the elimination or modification of unprofitable sales-channel arrangements.
- Gross margin improved by 3.4 percentage points in the second quarter and 2.0 percentage points for the first half, reflecting more profitable distributor relationships and lower product costs.
- Second-quarter operating expenses declined 25.8%, and first-half operating expenses declined $8.8 million, principally due to lower commissions, personnel reductions, facility consolidation and other cost-containment initiatives.
- Operating and net losses improved materially, although the company remained loss-making.
- Operating cash flow improved to $0.3 million provided in the first half of 2018 from $0.8 million used in the first half of 2017.
- Cash increased by $3.2 million during the first half to $6.0 million, primarily from the private placement and operating cash flow, partially offset by restructuring expenses, capital expenditures and lease payments.
- Accounts receivable declined to $10.4 million from $12.7 million at December 31, 2017, while net current inventory remained broadly unchanged at $22.4 million. Consigned inventory declined to approximately $9.8 million from $12.0 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects cash on hand of $6.0 million and approximately $2.2 million of available credit capacity to meet anticipated cash requirements through September 30, 2019, but states that additional funding may be required and that financing may not be available on acceptable terms.
Management’s strategy emphasizes cost containment, integration of hardware and biologics operations, and improvement of sales-channel profitability. The company intends to hire additional personnel and eventually transition away from Aurora Management Partners, whose personnel support restructuring and finance functions.
- The restructuring eliminated the convertible notes but left the company with $79.4 million of long-term debt, high interest costs and maturity risk in 2020. Interest expense was $6.4 million in the first half.
- The Investors that own approximately 70% of the common stock also hold all outstanding long-term debt and possess significant consent, board nomination and financing-related rights.
- Revenue remains exposed to competition, pricing pressure, distributor performance, reimbursement and regulatory changes, product liability, donor availability and the ability to retain sales personnel.
- The company carries significant inventory, including consigned inventory, creating cash utilization and potential obsolescence risk. Net inventory included a $6.9 million obsolescence reserve.
- An Axis Spine lawsuit seeks damages exceeding $1.0 million; motions to dismiss and for summary judgment were under consideration. The filing also notes routine litigation and product liability disputes.
- Restructuring expense was $1.2 million in the second quarter and $2.0 million in the first half. The company also recorded $41 thousand of first-half non-cash gain from remeasurement of the warrant derivative liability.
- On August 1, 2018, stockholders approved a new equity incentive plan. Subsequent awards included options covering 410,770 shares, 40,000 restricted stock units and a 26,042-share restricted stock award.
- The company adopted revenue standard Topic 606 on January 1, 2018 using the modified retrospective method; management determined the impact was immaterial. Adoption of the new lease standard is expected to create potentially material right-of-use assets and lease liabilities.
Important Facts for Investors to Verify
- Whether revenue stabilizes after reducing unprofitable distribution relationships and whether improved gross margins can offset lower sales volume.
- The company’s ability to sustain positive operating cash flow and fund operations while servicing approximately $79.4 million of debt.
- Compliance with minimum liquidity, leverage and EBITDA covenants, including the company’s ability to meet the July 2020 debt maturity.
- Availability and terms of any additional financing, including required consent from the controlling Investors and potential shareholder dilution.
- Progress in transitioning away from Aurora Management Partners and the effectiveness of internal controls and the reorganized management structure.
- The outcome and potential financial exposure of the Axis Spine litigation and other product liability matters.
- Inventory utilization, reserve adequacy and the risk of further write-downs or cash tied up in consigned products.