Xtant Medical Holdings, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Xtant develops, manufactures and markets regenerative orthopedic products, orthobiologics, tissue grafts, spinal implants, fixation devices and surgical instrumentation. The filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Xtant reported one operating segment and approximately 96% of first-half 2017 revenue was generated in the United States.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $21.4 million | $21.5 million | $43.5 million | $42.4 million |
| Gross profit | $13.5 million | $14.7 million | $29.1 million | $28.8 million |
| Approximate gross margin | 63.2% | 68.5% | 66.8% | 67.9% |
| Operating loss | $(4.7) million | $(2.1) million | $(6.7) million | $(4.5) million |
| Net loss | $(9.7) million | $(4.5) million | $(14.9) million | $(10.1) million |
| Basic net loss per share | $(0.54) | $(0.37) | $(0.82) | $(0.84) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(0.8) million | $(7.8) million |
- At June 30, 2017, cash and cash equivalents were $1.7 million; trade accounts receivable were $15.8 million; and total current assets were $43.3 million.
- Total assets were $134.3 million, compared with $144.1 million at December 31, 2016. Stockholders’ deficit increased to $(21.3) million from $(7.1) million.
- Gross long-term debt was $135.5 million, comprising $54.4 million owed under the senior credit facility, $9.2 million of PIK interest, and $71.9 million of convertible notes. Debt, net of issuance costs, totaled $134.0 million.
- Cash flow benefited from working-capital changes and non-cash items, but the company remained dependent on financing. First-half financing cash flow was $0.9 million, including $11.4 million of new long-term debt and repayment of the $10.4 million revolving credit balance.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 0.3% year over year as a 20.5% increase in biologics revenue was offset by an 18.4% decline in fixation revenue. First-half revenue increased 2.5%, primarily from new biologics products.
- Second-quarter cost of sales increased 16.6%, and cost of sales rose to 36.8% of revenue from 31.5%. Management attributed the pressure to product mix, a $304,000 instrumentation wear-and-tear charge, and higher biologic processing-supply costs.
- Operating expenses increased 8.4% in the quarter and 7.3% for the first half. Sales and marketing expense increased due partly to higher distributor commissions, while research and development expense declined because of fewer personnel.
- Quarterly net loss more than doubled year over year, reflecting lower gross profit, higher operating expenses, higher interest expense, and $1.6 million of other expense related primarily to restructuring and other non-recurring items.
- The company recorded $380,548 of separation-related expense in the quarter and $604,920 for the first half, compared with none in the prior-year periods. Management expected additional workforce reductions during 2017.
- Acquisition and integration expenses fell to zero from $450,755 in the quarter and from $752,528 for the first half, reflecting the absence of comparable X-Spine integration costs.
- On May 8, 2017, Xtant retained Aurora Management Partners and appointed a chief restructuring officer and deputy restructuring officer. Carl O’Connell became CEO in February 2017 after serving as interim CEO.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management stated that June 30 cash and accounts receivable of $17.5 million, expected operating receipts and limited term-loan capacity might not be sufficient to meet cash requirements through June 30, 2018. The company did not expect to have sufficient funds to service current interest obligations under its senior credit facility and convertible debt.
- The debt terms and recurring losses raised substantial doubt about Xtant’s ability to continue as a going concern. Management was evaluating restructuring alternatives, lender negotiations, new capital, cost reductions and cash-flow improvements, with no assurance of success.
- The senior credit facility required minimum revenue and liquidity levels and contained leverage covenants. Amendments repeatedly deferred interest payments and modified covenant requirements.
- Subsequent to quarter-end, lenders deferred certain accrued interest payments to September 30, 2017 and permitted minimum liquidity of $500,000 through that date; the required minimum was scheduled to increase to $5.0 million thereafter. Convertible-note holders also deferred July 15 interest payments to August 15, 2017 and waived related defaults. The filing stated that further amendments were being negotiated and that no assurance existed they would be obtained.
- The company paid off its Silicon Valley Bank revolving credit obligations on May 12, 2017 using proceeds from the senior facility. X-Spine was authorized to draw up to $15.0 million of additional term loans, subject to lender conditions and an approved 13-week cash-flow forecast.
- Key operating risks include competitive and rapidly changing markets, product mix and pricing pressure, reimbursement and regulatory changes, product liability or recalls, intellectual-property disputes, donor availability, dependence on qualified personnel, and the ability to maintain required accreditations.
- Warrant derivative liabilities were $177,380 at June 30, 2017, and the company recorded a $156,233 first-half non-cash gain from changes in fair value. There were 6.3 million warrants outstanding at a weighted-average exercise price of $2.23.
Most important facts for investors to verify
- Whether Xtant obtained the required debt amendments, waivers, financing or restructuring relief and met the revised interest-payment and covenant deadlines after August and September 2017.
- Whether liquidity improved sufficiently to meet the $5.0 million post-September 30, 2017 requirement and fund operations through June 30, 2018.
- Whether revenue growth, particularly in biologics, offset declining fixation revenue and restored gross margins.
- Whether additional workforce reductions and restructuring actions reduced the company’s cash burn without impairing sales execution.
- The potential dilution and repayment risk associated with $71.9 million of convertible notes, 6.3 million warrants and other equity-linked instruments.
- The recoverability of receivables, inventories, goodwill and intangible assets given the company’s losses, liquidity constraints and going-concern uncertainty.