Xtant Medical Holdings, Inc. — 2023 Form 10-K Summary
Business context and reporting period
Xtant Medical Holdings, Inc. develops, manufactures and commercializes orthobiologics, spinal implants, fixation systems and related medical devices used primarily in spinal fusion and other orthopedic procedures. The company sells through independent sales agents, stocking agents, distributors, national accounts and international partners. The filing covers the fiscal year ended December 31, 2023; quarterly data for the fourth quarter is not separately presented in the provided filing text.
During 2023, Xtant expanded substantially through three acquisitions: the Coflex and CoFix product lines for $17.0 million in cash; Surgalign Holdings’ hardware and biologics business for approximately $5.0 million in cash; and RTI Surgical’s nanOss production operations for $2.0 million in cash plus contingent royalty-related consideration.
Financial results and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Revenue | $91.3 million | $58.0 million | +58% |
| Gross profit | $55.5 million | $32.1 million | +73% |
| Gross margin | 60.8% | 55.4% | +540 basis points |
| Operating loss | $10.2 million | $6.8 million | Loss increased |
| Net income (loss) | $0.7 million | $(8.5) million | Improved |
| Net income (loss) per diluted share | $0.01 | $(0.09) | Improved |
| Cash flow from operations | $(9.5) million | $(5.3) million | Use increased |
| Cash flow from investing | $(24.8) million | $(1.6) million | Acquisition-driven |
| Cash flow from financing | $19.7 million | $9.0 million | Increased |
Revenue growth was attributed primarily to the acquired Surgalign businesses, Coflex and CoFix sales, stronger independent-agent sales and private-label opportunities. Orthobiologics revenue was $58.6 million, or 64% of total revenue, while spinal implant revenue was $32.7 million, or 36%. International revenue represented approximately 6% of total revenue, compared with approximately 1% in 2022.
Gross margin improved because of greater scale, improved production efficiency and favorable product mix, partly offset by higher production costs. Operating expenses increased to $65.6 million from $38.9 million, including higher general and administrative costs, acquisition-related professional fees, amortization and compensation, as well as higher sales commissions and travel expenses.
The reported net income was substantially affected by an $11.7 million gain on bargain purchase associated with the Surgalign hardware and biologics acquisition. Excluding this unusual item, the company remained loss-making before taxes and reported a $10.2 million operating loss. The filing does not provide a clear recurring adjusted earnings figure.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $5.7 million at December 31, 2023; cash, cash equivalents and restricted cash totaled $5.9 million.
- Accounts receivable increased to $20.7 million from $10.9 million, and inventories increased to $36.9 million from $17.3 million, reflecting acquisitions and business expansion.
- Total assets were $92.6 million, including $7.3 million of goodwill and $10.1 million of net intangible assets.
- Principal outstanding under the credit agreements was $21.6 million at year-end, comprising $17.0 million under the term facility and approximately $4.6 million under the revolving facility. The balance sheet reported $17.2 million of long-term debt, net of issuance costs and including accrued end-of-term payments.
- The company reported $3.4 million of revolving-facility availability at December 31, 2023 and compliance with its debt covenants.
- On March 7, 2024, after year-end, the credit facilities were amended and restated. Maturity was extended to March 1, 2029, the revolving commitment was increased to $17.0 million, and an additional $10.0 million term tranche was made available at the lenders’ discretion.
Management stated that year-end cash and available credit should fund anticipated cash requirements through at least March 2025, but also cautioned that additional financing may be required before then. The company has an accumulated deficit of $243.0 million and expects that it may continue to incur losses.
Material changes versus the prior comparable period
- Revenue increased 58%, with the acquired businesses materially expanding the product portfolio, distribution network and international footprint.
- Gross margin increased from 55.4% to 60.8%, but operating expenses grew faster than revenue and the operating loss widened.
- Operating cash flow deteriorated to a $9.5 million use, primarily because of the increase in accounts receivable and higher working-capital requirements.
- Financing activity included approximately $14.0 million of net proceeds from a July 2023 private placement of 20.0 million common shares issued at $0.75 per share and approximately $4.7 million of net debt proceeds.
- In the third and fourth quarters, a shortage of stem cells used for the OsteoVive viable bone allograft adversely affected revenue. Management expects the shortage to continue affecting future revenue until additional supply or internal production is developed.
- The company prospectively corrected an immaterial prior-period classification error: GPO fees previously recorded in sales and marketing expense should have reduced revenue. The 2022 impact would have reduced both revenue and sales and marketing expense by approximately $1.0 million.
Guidance, outlook, risks and unusual items
The company intends to pursue four growth initiatives in 2024: new product introductions, distribution expansion, entry into adjacent markets, and technology or strategic acquisitions. Planned or developing products include synthetic bone graft putty, the BMAC System, Cortera and additional fiber-based and growth-factor products. The filing does not provide a clear numerical revenue or earnings forecast.
- Material weaknesses: Management identified two material weaknesses in internal control over financial reporting related to the valuation of acquired inventory and procedures to verify the existence of acquired consigned inventory. Disclosure controls and procedures were deemed ineffective as of December 31, 2023. Remediation is expected to continue through fiscal 2024.
- Supply and manufacturing: Stem-cell shortages, limited donor tissue, labor constraints, manufacturing capacity and dependence on key suppliers may limit sales and margins.
- Acquisition execution: Integration of the Surgalign and RTI assets creates risks related to inventory valuation, systems, controls, employee retention, distributors, goodwill and intangible-asset impairment.
- Liquidity and leverage: The company has negative operating cash flow, variable-rate secured debt, restrictive covenants and potential need for additional capital. Future equity or convertible-debt financing could dilute shareholders.
- Regulatory and reimbursement: Products are subject to FDA, tissue-bank, medical-device and international regulatory requirements. Changes in clearance, reimbursement, healthcare fraud-and-abuse rules or product-specific regulation could increase costs or restrict sales.
- Ownership and governance: OrbiMed-affiliated funds beneficially own approximately 56% of the common stock and can exercise substantial control over corporate actions. The company qualifies as a controlled company under NYSE American rules.
- Legal and operational contingencies: The company is subject to product-liability, intellectual-property, commercial and employment claims. Management considers current matters adequately accrued, but unfavorable outcomes could materially affect cash flows or results.
Most important facts for investors to verify
- Whether stem-cell supply constraints continue to reduce OsteoVive sales and whether internal production or alternative suppliers can mitigate the impact.
- Progress and testing results for remediation of the two material weaknesses, particularly acquired and consigned inventory controls.
- Cash burn, borrowing-base availability, covenant compliance and the timing of any required financing before March 2025.
- Recurring operating performance excluding the $11.7 million bargain-purchase gain, including adjusted EBITDA and cash conversion.
- Revenue retention, margins and integration costs associated with the Surgalign and RTI acquisitions.
- Potential dilution from 12.2 million outstanding warrants, options, restricted stock units and additional equity issuance capacity.
- Renewal or replacement of the Wurmlingen, Germany and nanOss facility leases, which expire in February 2025 and June 2024, respectively.