Xtant Medical Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical Holdings, Inc. designs, manufactures and commercializes orthobiologics, spinal implants and related instrumentation for complex spine, deformity and degenerative procedures. The filing covers the unaudited quarter ended March 31, 2020, compared with the quarter ended March 31, 2019. The company operates as one reportable segment and generates most revenue in the United States.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $14.8 million | $16.7 million | Down 11.6% |
| Gross profit | $9.6 million | $10.8 million | Down 11.1% |
| Gross margin | 65.1% | 64.6% | Up approximately 0.5 percentage points |
| Operating loss | $(1.4) million | $(0.7) million | Loss increased |
| Net loss | $(2.5) million | $(2.8) million | Loss narrowed |
| Net loss per share | $(0.19) | $(0.21) | Improved |
| Cash used in operating activities | $(1.8) million | $0.5 million provided | Deteriorated by $2.3 million |
- Orthobiologics revenue was $10.8 million, or 73% of total revenue, versus $12.1 million, or 72%, in the prior-year quarter. Spinal implant revenue was $4.0 million, or 27%, versus $4.6 million, or 28%.
- Cost of sales declined 12.6% to $5.2 million, broadly tracking the revenue decline. Sales and marketing expense declined to $6.4 million, but increased to 43.4% of revenue from 40.3%.
- Interest expense declined to $1.1 million from $2.0 million, primarily because of the lower effective interest rate under the 2019 amended credit agreement.
- Cash and cash equivalents were $3.2 million at March 31, 2020, compared with $5.2 million at December 31, 2019. Total current assets were $32.1 million and current liabilities were $10.1 million, producing working capital of $22.1 million.
- Inventories increased to $18.0 million from $16.1 million at year-end 2019, while accounts payable increased to $3.6 million from $2.2 million.
- Long-term debt, net of issuance costs, was $77.3 million at March 31, 2020. Total stockholders’ deficit was $(46.5) million.
- Investing cash usage was $0.2 million, primarily for property and equipment. Financing cash usage was $34 thousand, primarily for financing lease payments.
Material Changes Versus the Prior Comparable Period
- Revenue declined $1.9 million, primarily because COVID-19 caused hospitals to cancel or defer elective procedures beginning in early March 2020.
- Operating loss increased despite lower operating expenses because the revenue decline reduced gross profit. General and administrative expense included approximately $0.7 million of severance-related expense in Q1 2020; Q1 2019 included approximately $0.5 million of legal settlement expense and $0.5 million of additional legal and consulting fees.
- Operating cash flow shifted from $0.5 million provided in Q1 2019 to $1.8 million used in Q1 2020, driven principally by a $2.0 million inventory increase and a $0.7 million decrease in accrued liabilities, partly offset by a $1.4 million increase in accounts payable.
- The company adopted ASU 2016-13, recording a $47 thousand cumulative-effect reduction to retained earnings and accounts receivable for expected credit losses.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management did not provide quantitative revenue or earnings guidance. It stated that COVID-19 is expected to continue materially affecting procedures, sales activity, revenue, suppliers, distributors, customers, operating results and liquidity, but the ultimate impact cannot be predicted.
- COVID-19 cost-saving measures included terminating or furloughing 42% of the workforce, suspending most hiring and merit increases, implementing temporary 20% salary and wage reductions, reducing director retainers by 20%, suspending 401(k) matching, reducing sales and marketing spending, and eliminating most capital expenditures.
- As of March 31, 2020, the company reported $12.2 million of credit-facility availability, subject to lender discretion, and stated that cash plus available borrowings should fund anticipated requirements for at least 12 months. The company also cautioned that additional financing may be needed and may not be available on acceptable terms.
- On May 6, 2020, after quarter-end, the lenders amended the credit agreement. Interest was suspended from March 31 through September 30, 2020; cash interest resumes October 1, 2020 at 10% plus the greater of the LIBO rate or 2.3125%; maturity was extended from March 31, 2021 to December 31, 2021; and the revenue covenant was revised through 2021.
- As consideration for the amendment, the company issued warrants to the lenders for 2.4 million shares at an exercise price of $0.01 per share, expiring May 6, 2030. The lenders collectively owned approximately 70% of outstanding common stock and approximately 75% including the new warrants.
- The company remained subject to NYSE American continued-listing deficiencies related to stockholders’ equity and historical losses. Its compliance plan period ran through October 4, 2020, with potential delisting proceedings if compliance was not regained or adequate progress was not demonstrated.
- The company settled patent litigation with RSB Spine in February 2020 under a confidential agreement involving an undisclosed payment and royalties on future sales of two products. The settlement payment had been accrued at December 31, 2019.
- Management evaluated long-lived assets and goodwill for impairment in response to COVID-19 and recorded no impairment. The company stated that its disclosure controls and procedures were effective as of March 31, 2020.
Important Facts for Investors to Verify
- Whether elective procedure volumes and revenue recover after COVID-19-related cancellations and deferrals.
- Compliance with the revised revenue covenant and the company’s ability to service or refinance approximately $77.3 million of long-term debt.
- Actual lender availability and whether additional draws remain subject to lender discretion and other conditions.
- Cash burn, inventory levels and working-capital requirements as pandemic effects continue.
- The status of the NYSE American listing deficiency and compliance plan before the October 4, 2020 deadline.
- The potential dilution and governance implications of the 2.4 million lender warrants, given the lenders’ existing majority ownership.
- The ultimate financial impact of COVID-19, litigation, product liability, regulatory matters and other contingencies, for which the filing does not provide a complete quantified range of potential losses.