Xtant Medical Holdings, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
Xtant Medical is a global medical technology company focused on orthobiologics and spinal implant systems used in complex spine, deformity, degenerative and spinal-fusion procedures. The company sells primarily through independent commissioned sales agents, distributors, hospitals, GPOs and IDNs, with operations in one reportable segment.
This quarterly report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The financial statements are unaudited and prepared under U.S. GAAP.
During 2023, Xtant acquired the Coflex and CoFix product lines from Surgalign SPV for $17.0 million and acquired Surgalign Holdings’ hardware and biologics business for approximately $5.0 million plus specified liabilities. On October 23, 2023, after the reporting period, Xtant acquired RTI Surgical’s nanOss production operations for $2.0 million in cash plus contingent payments.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $25.0 million | $14.5 million | Up 73% |
| Gross profit | $15.3 million | $7.9 million | Up 94% |
| Gross margin | 61.3% | 54.6% | Up 670 basis points |
| Operating loss | $(3.4) million | $(1.9) million | Loss increased |
| Net income (loss) | $9.2 million | $(2.4) million | Improved |
| Basic EPS | $0.07 | $(0.03) | Improved |
| Metric | Nine Months 2023 | Nine Months 2022 | Change |
|---|---|---|---|
| Revenue | $63.2 million | $42.7 million | Up 48% |
| Gross profit | $38.3 million | $23.8 million | Up 61% |
| Gross margin | 60.7% | 55.8% | Up 490 basis points |
| Operating loss | $(6.4) million | $(5.0) million | Loss increased |
| Net income (loss) | $5.0 million | $(6.3) million | Improved |
| Basic EPS | $0.04 | $(0.07) | Improved |
Q3 revenue consisted of $15.7 million of orthobiologics revenue and $9.4 million of spinal implant revenue. For the first nine months, orthobiologics contributed $43.5 million and spinal implants contributed $19.7 million. The company attributed growth to higher independent-agent sales, Coflex and CoFix sales, private-label activity and acquired Surgalign products.
Q3 net income included an $11.0 million bargain-purchase gain from the Surgalign Holdings acquisition and a $2.3 million income-tax benefit primarily associated with the release of a deferred-tax valuation allowance. These items materially affected reported earnings and are not indicative of recurring operating profitability.
Operating expenses increased to $18.7 million in Q3 from $9.8 million in the prior-year quarter. General and administrative expense increased to $7.1 million, sales and marketing expense to $11.1 million, and research and development expense to $0.5 million. The increases reflected higher compensation, commissions, acquisition-related legal and professional fees, headcount and amortization.
Cash Flow, Liquidity and Debt
- Cash and restricted cash declined to $8.7 million at September 30, 2023 from $20.5 million at December 31, 2022.
- Net cash used in operating activities was $8.6 million for the first nine months of 2023, compared with $3.1 million in 2022, primarily due to increased accounts receivable.
- Net cash used in investing activities was $22.5 million, including $17.0 million for the Surgalign SPV acquisition, $4.4 million for the Surgalign Holdings business and $1.1 million of capital expenditures.
- Net cash provided by financing activities was $19.4 million, including $14.0 million of net private-placement proceeds and approximately $5.0 million of additional term-loan borrowings.
- Accounts receivable increased to $19.2 million and inventories increased to $34.3 million from $10.9 million and $17.3 million, respectively, at December 31, 2022. Net working capital was $42.2 million.
- Debt included $17.0 million of term-loan principal, $4.0 million outstanding under the revolving facility and $3.3 million of revolving-facility availability at September 30, 2023. The effective rates were 14.43% for the term facility and 9.94% for the revolving facility.
- The credit facilities mature May 1, 2026. The term loan remains interest-only through June 2024, after which monthly principal payments of approximately $0.7 million are required through May 2026.
- Xtant stated that cash, facility availability and expected operating cash flows should meet anticipated cash requirements through at least November 2024, but disclosed that additional financing may be needed before then.
- The company reported compliance with all credit-agreement covenants at September 30, 2023, including minimum revenue, adjusted EBITDA and liquidity requirements.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, with spinal implant revenue growing from $2.4 million to $9.4 million in Q3 and from $8.1 million to $19.7 million for the first nine months.
- Gross margin improved due to product mix, lower excess-and-obsolete-inventory charges, production efficiencies and higher production volumes, partly offset by higher product costs.
- Despite higher gross profit, the operating loss widened because selling, marketing, general and administrative costs grew faster than revenue.
- Reported net income shifted from a loss to a profit primarily because of the $11.0 million bargain-purchase gain and related tax effects, rather than recurring operating earnings.
- The July 2023 private placement issued 20.0 million shares at $0.75 per share and generated $14.0 million of net proceeds. Shares outstanding increased to approximately 129.8 million at September 30, 2023 from approximately 108.9 million at year-end 2022.
- Goodwill increased to $6.5 million and net intangible assets increased to $10.5 million, principally reflecting the acquisitions.
Guidance, Outlook, Risks and Unusual Items
- The filing discusses recently initiated management guidance but does not provide a clear numerical guidance range in the supplied filing text.
- A shortage of stem cells used in the OsteoVive product adversely affected Q3 revenue and is expected to continue until alternative supply or internal production is developed.
- Management identified risks from acquisition integration, acquired-product performance, incomplete purchase-price allocations, supply-chain disruption, inflation, labor shortages, higher interest rates, reliance on third-party suppliers, independent sales agents and distributors, reimbursement and regulatory requirements, and potential product liability or litigation.
- The Surgalign Holdings purchase accounting remains preliminary. Valuations of enterprise value, inventory and equipment, the bargain-purchase gain and related deferred-tax liability may change during the measurement period.
- Coflex-related FDA post-market surveillance requirements and possible future clinical or regulatory requirements could require substantial time and expense.
- Litigation matters arise in the ordinary course. Management believes existing accruals are adequate and does not expect current matters to materially affect consolidated financial position, results or cash flows, but unfavorable outcomes could exceed accruals.
- OrbiMed-affiliated funds beneficially owned approximately 67% of the company’s common stock, creating significant ownership concentration.
- Outstanding warrants covered approximately 12.2 million shares at a weighted-average exercise price of $1.53 per share, in addition to outstanding options and restricted stock units.
Important Facts Investors Should Verify
- Determine how much of revenue growth and future profitability is recurring versus attributable to acquisitions, private-label sales and other opportunistic activity.
- Monitor the stem-cell shortage and its effect on OsteoVive revenue, product availability and gross margin.
- Reconcile reported net income by separating the $11.0 million bargain-purchase gain and tax-related benefits from recurring operating results.
- Assess cash-burn trends, accounts-receivable collections, inventory levels and the company’s ability to maintain minimum liquidity and other debt covenants.
- Review the timing and size of required term-loan amortization beginning in June 2024 and the high effective borrowing rates.
- Track final purchase-price accounting for Surgalign Holdings and any resulting changes to goodwill, intangible assets, taxes or earnings.
- Evaluate dilution from the 20.0 million-share private placement and the company’s outstanding warrants, options and restricted stock units.
- Confirm the financial and operational impact of the October 2023 nanOss production acquisition, for which purchase accounting was not yet complete.