Xtant Medical Holdings, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The unaudited statements primarily reflect Bacterin’s biologics business; the X-spine acquisition closed after quarter-end and is not included in reported results.
Business Context
The company develops, manufactures and markets human-derived allograft products used in orthopedic, spine, foot and ankle, cranial and joint procedures. The medical-device coatings business was being discontinued. On July 31, 2015, the company acquired X-spine Systems, Inc., a spinal-device business, and changed its name to Xtant Medical Holdings, Inc.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $9.9 million | $8.9 million | $19.4 million | $17.8 million |
| Revenue growth | 11.4% | — | 9.0% | — |
| Gross profit | $6.5 million | $5.6 million | $12.5 million | $11.1 million |
| Gross margin | 65.9% | 62.9% | 64.7% | 62.3% |
| Operating loss | $(1.4) million | $(1.3) million | $(3.1) million | $(2.5) million |
| Net loss | $(2.9) million | $(1.9) million | $(7.1) million | $(6.0) million |
| Basic loss per share | $(0.41) | $(0.35) | $(1.02) | $(1.11) |
- Sales and marketing expense increased 14.3% in the quarter and 15.2% year to date, reflecting higher commissions, sales headcount and manufacturer representatives.
- Six-month operating expenses rose 15.0% to $15.7 million, exceeding gross-profit growth and contributing to the larger operating loss.
- Interest expense was $1.4 million in the quarter and $2.8 million year to date. The company also recorded a $476,289 year-to-date non-cash loss from revaluing its warrant derivative liability.
- Cash and cash equivalents were $2.0 million at June 30, 2015, down from $4.5 million at December 31, 2014. Cash plus trade receivables totaled approximately $7.6 million.
- Net cash used in operating activities was $4.1 million for the first six months, compared with $3.9 million in 2014. Financing activities provided $1.7 million, including equity proceeds from Aspire Capital.
- Current assets were $18.0 million versus current liabilities of $10.3 million. Total liabilities were $38.2 million, compared with total assets of $26.4 million, resulting in stockholders’ deficit of $11.8 million.
- Debt consisted primarily of a $24.0 million ROS loan, a $0.7 million adjustment fee and a $1.3 million Valley Bank loan; carrying-value long-term debt was $21.7 million after debt discounts. Total royalty liabilities were approximately $7.3 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $1.0 million in the second quarter and $1.6 million for the first six months, attributed to improved sales-force productivity.
- Cost of sales grew more slowly than revenue, with the gross margin improving by approximately 3.0 percentage points in the quarter and 2.4 points year to date.
- Despite improved gross margins, higher sales and marketing, general and administrative, research and development and non-cash expenses increased the operating loss.
- Net loss worsened in the second quarter primarily because 2014 included $870,494 of favorable warrant-liability revaluation, while 2015 included a $14,081 loss.
- The company issued 417,000 shares to Aspire Capital for $1.4 million during the second quarter. The agreement permits additional purchases of up to $10.0 million over approximately 24 months, subject to conditions and the company’s election.
- Cash declined by $2.4 million during the first six months, compared with a substantially smaller decline in 2014, despite equity financing proceeds.
Outlook, Subsequent Events, Risks and Unusual Items
- Management stated that June 30 cash and receivables, anticipated operating receipts and Aspire Capital proceeds were expected to fund requirements through June 30, 2016. Management also indicated that additional financing could be required if revenue objectives are not met.
- Management expected 2015 sales and marketing expense of approximately $19 million, compared with approximately $17 million in 2014; these expenses were expected to be funded largely by operating cash flow.
- On July 31, 2015, Xtant acquired X-spine for approximately $60 million in cash, repayment of approximately $13 million of X-spine debt and approximately 4.24 million Xtant shares. Preliminary purchase accounting identified approximately $43.2 million of intangible assets and approximately $22.8 million of goodwill.
- To finance the transaction, the company issued $65.0 million of 6.00% convertible senior unsecured notes due 2021 and borrowed an additional $18 million under an amended ROS credit facility. The notes had an initial conversion price of approximately $3.88 per share. The ROS facility carries cash and payment-in-kind interest, substantial covenants and security over substantially all company assets.
- The company sold its coatings and device business in July 2015 for $350,000, including a contingent $100,000 payment dependent on FDA approval.
- Key risks include continued operating losses and cash burn, substantial debt service, covenant compliance, potential dilution, integration of X-spine, regulatory and FDA compliance, reimbursement and pricing pressure, donor-tissue availability, competition, product liability and litigation.
- A Colorado employment-related lawsuit seeks damages exceeding $5 million; the company disputes the claims and has asserted counterclaims.
- An FDA warning letter concerning the Site 600 facility remained open, and follow-up actions or enforcement outcomes were uncertain as of the filing.
- Management reported effective disclosure controls and internal control over financial reporting as of June 30, 2015.
Investor Verification Items
- Verify the post-quarter-end pro forma leverage, liquidity, debt maturities, interest burden and covenant compliance following the X-spine acquisition and new financing.
- Assess whether the combined company can convert revenue growth and improved gross margins into positive operating cash flow.
- Review the purchase-price allocation, goodwill and intangible-asset amortization for X-spine and the approximately $2.6 million of acquisition-related costs expected to be expensed in the third quarter.
- Monitor dilution from the X-spine share issuance, convertible notes, Aspire Capital facility, options and warrants.
- Follow the open FDA Site 600 matter, regulatory compliance, product recalls and any impact on sales or manufacturing.
- Reconcile the cash-flow amounts presented in the financial statements with the MD&A, which reports somewhat different operating, investing and financing cash-flow totals.
- Track the Taggart litigation, the contingent proceeds from the coatings-business sale and the company’s ability to maintain adequate donor-tissue supply.