Xtant Medical Holdings, Inc. — Fiscal 2016 Form 10-K Summary
Business Context and Reporting Period
Xtant develops, manufactures and markets regenerative medicine products, orthopedic biologics, spinal implants and surgical instrumentation for orthopedic and neurological surgeons. The filing covers the fiscal year ended December 31, 2016, with comparisons to fiscal 2015. Results include X-spine for the full year in 2016 but only from its July 31, 2015 acquisition date in 2015, limiting direct comparability.
The company operates primarily in the United States, which represented approximately 95% of revenue in both years. Its portfolio includes allograft and demineralized bone products, spinal fixation systems, implants and related instrumentation.
Financial Performance and Liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $90.0 million | $59.3 million | +51.7% |
| Gross profit | $62.3 million | $39.1 million | +59.3% |
| Gross margin | 69.2% | 65.9% | +330 bps |
| Operating loss | $7.5 million | $12.1 million | Improved by $4.5 million |
| Operating margin | (8.4%) | (20.4%) | Improved by 1,200 bps |
| Net loss | $19.5 million | $2.2 million | Worsened by $17.3 million |
| Net loss per share | $1.54 | $0.24 | Worsened |
| Cash used in operations | $14.4 million | $9.1 million | Use increased by $5.3 million |
| Cash used in investing | $5.8 million | $73.6 million | Lower, primarily because 2015 included the X-spine acquisition |
| Cash provided by financing | $16.4 million | $84.6 million | Lower |
Orthopedic product sales increased to $89.4 million from $58.2 million, while other revenue declined to $0.6 million from $1.2 million. Cost of sales increased 36.8%, below revenue growth, reflecting product mix and economies of scale.
Operating expenses were $69.8 million, or 77.6% of revenue, compared with $51.2 million, or 86.2%, in 2015. Sales and marketing expense increased to $44.1 million, and remained the largest operating expense at 48.9% of revenue. Interest expense increased to $12.3 million from $7.7 million due primarily to debt incurred in connection with the X-spine acquisition. The 2016 results included a $0.7 million non-cash gain from the change in the fair value of warrant derivative liabilities.
At December 31, 2016, cash and cash equivalents were $2.6 million, accounts receivable were $19.0 million and total current assets were $49.0 million. Total liabilities were $151.2 million, compared with total assets of $144.1 million, resulting in stockholders’ deficit of $7.1 million versus equity of $8.9 million at December 31, 2015.
Gross debt, before issuance costs, totaled approximately $120.9 million, consisting principally of $70.2 million of 6% convertible senior notes due 2021, $43.0 million owed under the ROS facility and $7.6 million of accrued PIK interest. The company also had $10.4 million outstanding under a Silicon Valley Bank revolving line of credit.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the full-year contribution from X-spine and new products; pro forma 2015 revenue, as disclosed, was $86.5 million.
- Gross margin improved from 65.9% to 69.2%, while the operating loss narrowed despite higher operating expenses.
- Net loss increased substantially because 2015 included a $17.5 million deferred tax benefit related to purchase accounting, while 2016 included only approximately $50,000 of current state and local tax expense.
- Interest expense increased by $4.5 million as acquisition-related and other debt balances grew.
- Operating cash use increased, and year-end cash declined from $6.4 million to $2.6 million.
- The company completed a November 2016 rights offering with approximately $3.8 million of gross proceeds and approximately $2.5 million of net proceeds. The offering issued common shares and five-year warrants exercisable at $0.90 per share.
- Shares outstanding increased from 11.9 million at year-end 2015 to 17.2 million at year-end 2016. Additional dilution could result from convertible debt, warrants and options.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management stated that year-end cash, accounts receivable, expected operating receipts and the line of credit might not be sufficient to meet anticipated cash requirements through December 31, 2017, including interest obligations.
Management disclosed substantial doubt about the company’s ability to continue as a going concern. A board special committee was evaluating restructuring alternatives, lender negotiations, financing options, cost reductions and cash-flow improvement measures. The independent auditor included an explanatory paragraph regarding the going-concern uncertainty.
- The company stated that it did not have cash on hand to satisfy current interest obligations under its senior credit facility and might need additional financing.
- The ROS credit facility included minimum liquidity, revenue and leverage covenants. The December 2016 amendment deferred certain accrued interest to January 14, 2017 and allowed minimum liquidity of $500,000 through March 31, 2017; minimum liquidity thereafter was required to be $5.0 million.
- Subsequent amendments through February 2017 further deferred the relevant interest payment to March 31, 2017. The company also satisfied certain interest obligations through common stock and additional convertible notes.
- The company received an NYSE MKT noncompliance notice in August 2016 related to stockholders’ equity and historical losses. It submitted a compliance plan, with a target date of February 15, 2018, and disclosed potential delisting risk.
- Regulatory risks include FDA clearance and inspection requirements, human tissue and donor regulations, potential recalls, product liability, healthcare fraud and abuse rules, reimbursement changes and international regulatory requirements.
- The business depends on the availability of donor tissue and on key suppliers, including Norwood Medical for certain X-spine products.
- An FDA inspection resulted in four Form 483 observations concerning corrective actions, complaint procedures, nonconforming product controls and purchased-product controls. Management stated that it believed the observations had been corrected, but noted that the FDA could disagree.
- The company reported ordinary routine litigation, including product liability disputes, but the filing does not provide a quantified material litigation reserve.
Most Important Facts for an Investor to Verify
- Whether the company obtained sufficient financing and maintained compliance with the ROS and Silicon Valley Bank credit agreements after March 31, 2017.
- Whether the going-concern uncertainty was resolved, including the company’s ability to fund operations and service cash and PIK interest.
- The status of NYSE MKT listing compliance and any resulting effect on liquidity, financing access and shareholder dilution.
- The current debt balance, accrued interest, conversion terms and potential dilution from convertible notes, warrants and options.
- Whether revenue growth and gross-margin improvement continued after the full-year integration of X-spine.
- The status of FDA Form 483 remediation, AATB accreditation, product clearances and any recalls or regulatory actions.
- The collectability of accounts receivable, inventory obsolescence reserves and the company’s ability to convert its substantial inventory into cash.