Xtant Medical Holdings, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Xtant Medical develops, manufactures and markets orthobiologics, spinal implants and related instrumentation for complex spine, deformity and degenerative procedures. The company operates in one reportable segment and sells primarily through independent commissioned agents, distributors, GPOs and IDNs. This filing covers the three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023.
Key financial metrics
<>| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $27.9 million | $17.9 million | 55% |
| Gross profit | $17.3 million | $10.5 million | 64% |
| Gross margin | 62.1% | 58.7% | +340 basis points |
| Loss from operations | $(3.5) million | $(1.6) million | Higher loss |
| Net loss | $(4.4) million | $(2.1) million | Higher loss |
| Net loss per share | $(0.03) | $(0.02) | |
| Operating cash flow | $(5.8) million | $(2.2) million | Higher use of cash |
| Capital expenditures, net of asset-sale proceeds | $(0.7) million | $(0.4) million |
Orthobiologics revenue increased to $15.4 million from $13.6 million, while spinal implant revenue increased to $12.5 million from $4.4 million. U.S. revenue was $25.1 million and international revenue was $2.7 million.
Operating expenses rose to $20.8 million from $12.1 million, including general and administrative expense of $7.8 million, sales and marketing expense of $12.5 million and research and development expense of $0.5 million. The increase in sales and marketing expense primarily reflected higher independent-agent commissions and headcount-related compensation.
At March 31, 2024, cash and cash equivalents were $4.5 million, or $4.6 million including restricted cash. Accounts receivable were $21.5 million and inventories were $38.7 million. Total current assets were $66.5 million versus current liabilities of $28.4 million, producing reported net working capital of $38.1 million.
Debt included $10.3 million outstanding under the revolving facility and $16.8 million of long-term debt, net of issuance costs. The company reported $6.7 million of availability under the revolving facility and compliance with its debt covenants at quarter-end. The effective rate was 13.59% on the term loan and 9.94% on the revolving facility.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the acquired Surgalign hardware and biologics business, greater independent-agent sales and additional Coflex and CoFix sales.
- Gross margin improved 340 basis points, reflecting scale and improved production efficiency, partially offset by higher production costs.
- Despite revenue growth, operating loss increased because operating expenses grew faster than gross profit. General and administrative expense increased 59%, sales and marketing expense increased 77%, and research and development expense increased from $0.2 million to $0.5 million.
- Operating cash use increased to $5.8 million, primarily reflecting unfavorable changes in inventories, accounts receivable, prepaid assets and accrued liabilities. Inventory increased by $1.8 million from year-end 2023.
- Investing cash use declined substantially because the $17.0 million Surgalign SPV acquisition occurred in Q1 2023 and no comparable acquisition payment occurred in Q1 2024.
- Net financing cash inflow was $5.2 million, primarily reflecting increased net borrowings under the revolving facility.
Guidance, outlook, risks and unusual items
Management stated that $4.6 million of cash and cash equivalents at March 31, 2024, anticipated operating cash flows and available credit, including a subsequent $5.0 million term-loan borrowing, are expected to fund anticipated cash requirements through at least May 2025. Management also stated that additional capital may be required or sought before that date and that financing may not be available on acceptable terms.
On March 7, 2024, the company amended and restated its credit agreements, extending maturities to March 1, 2029, increasing the revolving commitment to $17.0 million, adding a discretionary $10.0 million term-loan tranche and reducing the term-loan margin to 6.50%. On May 14, 2024, the term-loan maximum was increased by $5.0 million to $22.0 million, and the additional amount was fully drawn. Term-loan exit fees increased by 2.50 percentage points to 6.50% of principal borrowed.
Key operating risks include a current stem-cell shortage affecting OsteoVive, manufacturing challenges for biologics, supply-chain and labor disruptions, dependence on independent sales agents and third-party suppliers, reimbursement and regulatory risks, acquisition integration risks, foreign-currency exposure, product liability and litigation, and pressure on pricing and margins from shifts toward ambulatory surgical centers.
The company reported two previously identified material weaknesses in internal control over financial reporting involving the valuation and reserve analysis of acquired inventory and verification of acquired consigned inventory. Disclosure controls and procedures were therefore not effective as of March 31, 2024. Remediation efforts include additional accounting resources and inventory field audits, with management expecting the remediation process to continue through fiscal 2024.
Unusual items include the prior-year acquisitions of Surgalign SPV, Surgalign’s hardware and biologics business and RTI’s nanOss production operations. The Surgalign hardware and biologics transaction generated an $11.7 million bargain-purchase gain in 2023; no comparable gain was reported in Q1 2024. Foreign-currency translation produced a $0.2 million comprehensive-loss adjustment in Q1 2024.
Important facts for investors to verify
- Whether revenue growth from acquired products and independent agents can continue while sales and marketing expenses grow at a slower rate.
- Progress toward operating-cash-flow breakeven and the company’s ability to fund operations without additional financing.
- Actual availability, borrowing-base limitations, interest costs, covenants and exit fees under the amended credit facilities.
- The impact of the $5.0 million term-loan draw after quarter-end on liquidity, leverage and future interest expense.
- Completion and effectiveness of remediation for the two material weaknesses, particularly acquired and consigned inventory controls.
- Inventory utilization, reserves and potential write-downs, given inventory of $38.7 million and the identified control deficiencies.
- Integration and sales performance of the Surgalign, Coflex, CoFix and nanOss businesses, including any contingent payments or additional acquisition-related costs.
- Exposure to the disclosed stem-cell shortage, biologics manufacturing constraints, reimbursement changes, litigation and regulatory actions.