Xtant Medical Holdings, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
The filing was submitted by Bacterin International Holdings, Inc., the predecessor name associated with Xtant Medical Holdings, Inc. It covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company develops, manufactures and markets biologic allograft products and bioactive medical-device coatings. Although it operated through biologics and devices divisions, it reported one segment because device revenue was immaterial.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $8.913 million | $8.619 million |
| Gross profit | $5.502 million | $5.498 million |
| Gross margin | 61.7% | 63.8% |
| Loss from operations | $(1.192) million | $(1.233) million |
| Net loss | $(4.140) million | $(1.669) million |
| Basic and diluted loss per share | $(0.08) | $(0.04) |
| Net cash used in operating activities | $(2.189) million | $(2.282) million |
Revenue consisted primarily of tissue sales of $8.751 million, with royalties and other revenue of $162,000. Approximately 98% of revenue came from the United States. Cost of sales was $3.411 million, or 38.2% of revenue, versus 36.2% in the prior-year quarter. Selling and marketing expense was $4.055 million, or 45.5% of revenue.
At March 31, 2014, cash and cash equivalents were $4.769 million, trade receivables were $5.529 million and total current assets were $21.778 million. Total assets were $31.233 million. Total liabilities were $37.799 million, producing stockholders’ deficit of $6.565 million. Total inventory, including non-current inventory, was $12.568 million.
Debt consisted principally of the ROS facility. Gross debt was $26.063 million, including a $24.0 million ROS loan, before a $6.378 million debt discount. Long-term royalty liabilities totaled $6.576 million, with estimated future royalty payments of $12.894 million. The company paid $931,000 of cash interest during the quarter.
Material changes versus the prior comparable period
- Revenue increased 3% to $8.913 million. Management attributed the improvement to greater sales-force productivity after reorganizing the sales function and higher independent-distributor revenue. The company noted that Q1 2013 included an approximately $1.301 million non-recurring stocking order.
- Gross profit was essentially flat, while gross margin declined approximately 210 basis points because of product and customer mix.
- Operating loss improved modestly by $41,000. General and administrative expense declined 11% to $2.289 million, partly because of prior headcount reductions.
- Sales and marketing expense increased 6% to $4.055 million, primarily from higher direct-sales-force and distributor commissions.
- Net loss increased $2.471 million, primarily because of a $1.486 million non-cash loss from remeasurement of the warrant derivative liability, higher interest expense and approximately $187,000 of other expense related to legal settlement costs.
- Operating cash use improved by $93,000. Financing activities generated $3.930 million, primarily from a new $4.0 million ROS borrowing.
- On March 11, 2014, the company issued 1.5 million common shares to an ROS affiliate as consideration for the additional borrowing. Shares outstanding increased to approximately 54.982 million at March 31, 2014, from 53.433 million at December 31, 2013.
Guidance, outlook, risks and unusual items
Management stated that cash on hand and accounts receivable totaling $10.297 million, together with anticipated operating receipts, were expected to fund cash requirements through March 31, 2015. Management expected 2014 sales and marketing expense of approximately $17 million, compared with approximately $16 million in 2013, and anticipated $4 million to $5 million of facility investment over the following five years.
The company was not profitable, had negative equity and continued to consume cash from operations. Management warned that failure to meet revenue objectives could require additional equity or debt financing. Additional financing might be unavailable or could dilute existing shareholders and increase restrictive covenants.
The ROS credit facility carried interest at LIBOR plus 12.13%, subject to a 1.0% LIBOR floor, was secured by substantially all company assets and included minimum liquidity, revenue and other covenants. Prior covenant waivers and amendments, including reduced revenue thresholds, remained important to the company’s financing position.
The company remained subject to NYSE MKT deficiency notices related to negative or insufficient stockholders’ equity and recurring losses. It had an extension until November 13, 2014 to regain compliance; failure to do so could have resulted in delisting.
A former employee sued the company and related parties seeking damages exceeding $5 million for alleged commissions, transaction-related compensation and stock-option vesting. The company disputed the claims and filed counterclaims. Separately, the company paid Lacuna $350,000 in a settlement and expected its directors-and-officers insurer to reimburse 50% of the settlement plus applicable legal fees after the retention.
Other principal risks included the OIG investigation concerning historical physician referral programs, regulatory and reimbursement changes, product liability and recalls, dependence on human tissue donors, competitive pressure, intellectual-property disputes, reliance on key personnel, customer and distributor performance, and potential dilution from future financing.
Most important facts for investors to verify
- Whether the company regained compliance with NYSE MKT listing standards by the November 13, 2014 deadline.
- Current status, maturity, interest burden and covenant compliance of the ROS credit facility, including the effects of prior waivers and amendments.
- Whether recurring revenue growth was sustainable after excluding the approximately $1.301 million Q1 2013 stocking order.
- Progress toward positive operating cash flow and profitability, given the $2.189 million quarterly operating cash outflow.
- Potential dilution from outstanding warrants, options and any future equity financing; the filing reported approximately 18.4 million anti-dilutive options and warrants for Q1 2014.
- Exposure and resolution of the former employee litigation, the Lacuna settlement and the OIG inquiry.
- Inventory realizability, donor-tissue availability, reimbursement trends and the company’s ability to fund planned facility investment.