Xtant Medical Holdings, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Xtant Medical develops, manufactures and markets orthobiologics and spinal implant fixation systems for orthopedic and neurological procedures. Products are sold primarily in the United States through more than 300 independent sales and stocking agents, with limited international sales in Canada, Mexico, South America, Australia and certain Pacific-region countries.
The filing covers the fiscal year ended December 31, 2022, with comparative results for fiscal 2021. It is an annual report; the filing does not provide a separately presented fourth-quarter 2022 income statement or cash-flow statement.
Financial performance and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $58.0 million | $55.3 million | +5% |
| Orthobiologics revenue | $47.1 million | $42.3 million | +12% |
| Spinal implant revenue | $10.8 million | $12.9 million | -16% |
| Gross profit | $32.1 million | $32.5 million | -1% |
| Gross margin | 55.4% | 58.8% | -340 bps |
| Operating loss | $6.8 million | $3.9 million | Higher loss |
| Net loss | $8.5 million | $4.8 million | Higher loss |
| Net loss per share | $0.09 | $0.06 | Higher loss per share |
| Cash used in operating activities | $5.3 million | $0.4 million provided | Adverse change |
Cost of sales increased 13% to $25.8 million, driven primarily by approximately $1.0 million of additional excess and obsolete inventory reserves, $0.9 million of higher salaries and wages, and higher sales volume. Operating expenses increased 7% to $38.9 million, including higher general and administrative and sales and marketing costs.
At December 31, 2022, cash and cash equivalents were $20.3 million and restricted cash was $0.2 million, for total cash and restricted cash of $20.5 million. Net working capital was $34.1 million, compared with $33.3 million in 2021. Accounts receivable increased to $10.9 million from $7.2 million, while inventory declined modestly to $17.3 million from $17.9 million.
Capital expenditures resulted in $1.6 million of net cash used in investing activities. Financing activities provided $9.0 million, primarily from the 2022 private placement. The company reported an accumulated deficit of $243.7 million and stated that it expects to continue incurring losses.
Debt and liquidity
- Principal outstanding under the secured credit facilities was $15.4 million at December 31, 2022, consisting of $12.0 million under the term facility and $3.4 million under the revolving facility.
- The revolving facility had approximately $4.6 million of availability at year-end, subject to borrowing-base and other conditions.
- The facilities mature May 1, 2026, and require monthly term-loan principal payments of approximately $0.3 million beginning in June 2023.
- Effective interest rates at year-end were approximately 13.20% for the term facility and 8.74% for the revolving facility. Management expects interest expense to rise with higher reference rates.
- The credit agreements are secured by substantially all company assets and include minimum revenue, adjusted EBITDA and liquidity covenants, as well as restrictions on additional debt, acquisitions, investments, dividends and other corporate actions.
- The company reported compliance with all credit-agreement covenants at December 31, 2022 and believes available cash and credit capacity will fund anticipated requirements through at least March 2024. This assessment includes substantial uncertainty because the company remains loss-making and may require additional financing.
Material changes versus the prior comparable period
- Revenue grew 5%, led by new products, including OsteoVive Plus and OsteoFactor, but spinal implant revenue declined and product mix shifted toward orthobiologics.
- Gross margin fell from 58.8% to 55.4%, primarily because of higher production costs and increased excess and obsolete inventory charges.
- Operating loss more than doubled to $6.8 million, reflecting higher cost of sales, general and administrative expense, and sales and marketing expense.
- Net loss increased to $8.5 million, partly because interest expense rose by $0.7 million following the 2021 debt refinancing and higher interest rates.
- Operating cash flow deteriorated from $0.4 million provided in 2021 to $5.3 million used in 2022, driven largely by the higher net loss and increases in accounts receivable and inventory.
- The company issued approximately 20.3 million common shares and warrants for approximately $9.3 million of net proceeds, increasing year-end shares outstanding to approximately 108.9 million and creating additional dilution potential.
Guidance, outlook, risks and unusual items
The filing provides no formal revenue, earnings or margin guidance. Management intends to pursue four growth initiatives: new products, distribution expansion, adjacent markets, and technology or strategic acquisitions.
On February 28, 2023, after year-end, Xtant acquired the Coflex and CoFix product lines through the purchase of Surgalign SPV for $17.0 million in cash. The transaction was funded with approximately $12.0 million of cash and approximately $5.0 million of new term debt. The acquisition adds FDA-approved products for lumbar spinal stenosis, but purchase-accounting information was not complete when the filing was prepared.
- Labor shortages in Montana limited manufacturing capacity during 2022 and caused the company to forgo certain revenue opportunities.
- Inflation, supply-chain disruptions, material shortages and higher wages may increase costs, delay product launches and pressure margins.
- COVID-19-related hospital staffing shortages and postponed elective procedures negatively affected first-quarter 2022 revenue and could recur.
- The company depends on donor tissue, third-party suppliers, independent distributors and sales agents. One independent sales agent represented approximately 17% of 2022 revenue and has no long-term commitment to continue selling the company’s products.
- The business is subject to extensive FDA, human-tissue, quality-system, reimbursement, healthcare fraud and abuse, product-liability and intellectual-property requirements. Product recalls, loss of accreditation, regulatory action or reimbursement changes could materially affect results.
- OrbiMed-affiliated funds beneficially owned approximately 67% of outstanding common stock and can exert substantial control over board composition, financing, acquisitions and other corporate matters. Xtant relies on controlled-company exemptions from certain NYSE American governance requirements.
- The company is subject to litigation and contingencies, including product-liability, commercial, intellectual-property and employment matters. Management considers current accruals adequate, but unfavorable outcomes could exceed recorded amounts.
- Inventory valuation was the auditor’s critical audit matter because reserves depend on product life-cycle assumptions, sales forecasts and competitive developments. No goodwill impairment was recorded in 2022.
Most important facts for investors to verify
- Whether revenue growth and the Coflex/CoFix acquisition can offset ongoing operating losses and negative operating cash flow.
- Post-acquisition cash, debt balances, covenant compliance and the effect of approximately $12.0 million of cash used and approximately $5.0 million of new borrowing.
- The company’s ability to fund operations through March 2024 and whether additional equity or debt financing will be required.
- Whether gross-margin pressure from production costs, inventory reserves, product mix and private-label activity persists.
- Manufacturing capacity, labor availability, donor-tissue supply and the status of supply-chain constraints.
- Potential dilution from approximately 12.2 million outstanding warrants, 3.3 million stock options and 3.6 million restricted stock units at year-end, in addition to future financing needs.
- The terms and performance requirements of the secured credit facilities, including minimum revenue, liquidity and adjusted EBITDA covenants.
- Regulatory, reimbursement, product-liability and pending-litigation developments that could affect product commercialization or cash requirements.