Xtant Medical Holdings, Inc. — FY2015 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2015, rather than a standalone fourth quarter. Xtant develops, manufactures and markets regenerative orthopedic biologics, tissue grafts, spinal implants and instrumentation. On July 31, 2015, the Company acquired X-spine Systems, Inc. for approximately $60 million in cash, repayment of approximately $13 million of debt and 4.24 million shares of common stock. X-spine results are included only from the acquisition date.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $59.3 million | $35.3 million | Up 68.3% |
| Gross profit | $39.1 million | $22.3 million | Up 75.3% |
| Gross margin | 65.9% | 63.1% | Up 2.8 percentage points |
| Operating loss | $(12.1) million | $(6.3) million | Loss increased |
| Net loss | $(2.2) million | $(10.5) million | Improved by $8.3 million |
| Net loss per share | $(0.24) | $(1.76) | Improved |
| Cash used in operations | $(9.1) million | $(7.3) million | Use increased |
Revenue growth included approximately 12.2% internal growth attributed to improved sales-force productivity, with the remainder primarily reflecting the X-spine acquisition. Orthopedic product sales represented 98.1% of revenue. United States revenue was $56.8 million, or approximately 95% of total revenue.
Cost of sales increased to $20.3 million but declined to 34.1% of revenue from 36.9%, which management attributed to manufacturing efficiencies, new products and product and customer mix. Operating expenses rose 79.1% to $51.2 million, including $4.9 million of acquisition and integration expenses, $3.8 million of depreciation and amortization, and a $2.3 million gain from debt extinguishment recorded as a reduction of expense.
The $17.5 million deferred tax benefit materially reduced the reported net loss. It resulted primarily from a purchase-accounting valuation allowance reversal related to deferred tax liabilities from acquired intangible assets; it was not an operating cash inflow.
At December 31, 2015, cash and cash equivalents were $6.4 million, accounts receivable were $15.4 million, and total current assets were $45.4 million. Total assets were $143.1 million and stockholders’ equity was $8.9 million, compared with a deficit of $7.8 million at December 31, 2014.
Debt, liquidity and cash flow
Net cash used in operating activities was $9.1 million. Investing cash use was $73.6 million, primarily the $73.0 million cash outlay for X-spine. Financing activities provided $84.6 million, including proceeds from $68.0 million of convertible senior notes and borrowings under the amended ROS credit facility.
Total debt at year-end was $112.7 million, consisting principally of $68.0 million of 6% convertible senior notes due 2021, $42.0 million owed under the ROS facility and $2.7 million of PIK interest. The ROS facility matures in 2020, is secured by substantially all Company assets, carries substantial cash and PIK interest, and includes revenue, liquidity and leverage covenants.
Management stated that cash on hand and accounts receivable of $21.8 million, anticipated operating receipts and proceeds available under the Aspire Capital arrangement were expected to fund requirements through December 31, 2016. Management also warned that failure to meet revenue objectives could require additional equity or debt financing.
Material changes, outlook and unusual items
- The X-spine acquisition substantially expanded revenue, assets, debt, intangible assets and share count. X-spine contributed $288,824 of net profit from the acquisition date through year-end.
- Acquisition and integration expenses totaled $4.9 million, and management expected additional integration costs during the first quarter of 2016.
- The Company discontinued its medical device coatings business and sold the related equipment and intellectual property in 2015. A $285,224 net impairment was recorded on certain intangible assets.
- The Company believes donor tissue availability, sales-force productivity, reimbursement, pricing and regulatory approvals will remain important drivers of future performance. No formal revenue or earnings guidance is provided.
- The Company had a Form FDA-483 inspection with four observations concerning corrective actions, complaints, nonconforming product and purchased-product controls. Management stated it believed the observations had been corrected, but acknowledged that the FDA could disagree.
- A former employee lawsuit seeks damages in excess of $5 million; the Company believes the claims lack merit and has filed counterclaims.
- Stockholders holding approximately 588,000 shares and warrants asserted claims concerning the X-spine acquisition and related financing, but no lawsuit had been filed as of the report. The Company believes the claims are without merit.
- The filing disclosed unresolved SEC staff comments concerning a Form S-1 registration statement that was still under review.
- Robert Di Silvio ceased serving as President effective January 8, 2016, and Darrel Holmes ceased serving as the Company’s Chief Operating Officer effective February 24, 2016, while continuing in a Bacterin operating role.
Principal risks and contingencies
- The Company was not profitable and generated negative operating cash flow. Additional financing may be required and could dilute shareholders or increase debt-service and covenant risks.
- Debt service is significant, and failure to meet ROS facility covenants could trigger default, acceleration and potential loss of pledged assets.
- Growth depends on integrating X-spine, retaining key personnel, maintaining distributors and suppliers, and realizing expected sales and cost synergies.
- The business is subject to extensive FDA, tissue-bank, state and international regulation, including risks of recalls, enforcement actions, delayed clearances and manufacturing restrictions.
- Revenue depends on third-party reimbursement, hospital budgets and pricing conditions, while donor tissue availability and public confidence in allografts affect supply and demand.
- Norwood Medical, a related-party supplier, accounted for approximately 12% of Xtant’s operating-product purchases in 2015. A key X-spine distributor exceeded 10% of X-spine sales in both 2015 and 2014.
- The Company had approximately $55.9 million of federal and state net operating loss carryforwards, but future use may be limited by ownership changes under Section 382.
Investor verification checklist
- Verify the final purchase-price allocation, goodwill and intangible-asset valuations for X-spine, including the effect of future amortization and impairment testing.
- Assess whether operating cash flow and gross-margin improvements are sufficient to support the substantial debt burden and required covenant levels.
- Review the terms, conversion dilution potential and maturity obligations of the $68.0 million convertible notes and the ROS facility’s cash, PIK and exit-fee provisions.
- Confirm the status and financial exposure of the former-employee litigation, shareholder claims and any subsequent legal developments.
- Monitor FDA remediation, future inspections, product clearances, recalls and compliance with tissue-processing requirements.
- Evaluate integration progress, post-acquisition revenue trends, distributor concentration and related-party sourcing arrangements.
- Separate the $17.5 million deferred tax benefit and other non-cash items from recurring operating performance and liquidity.