Xtant Medical Holdings, Inc. — FY2021 Form 10-K Summary
Business context and reporting period
Xtant Medical develops, manufactures and sells orthobiologics and spinal implant fixation systems used in spine, orthopedic and neurological procedures. Products are sold primarily in the United States through independent distributors, stocking agents and direct employees, with limited international sales in Canada, Mexico, South America, Australia and certain Pacific-region countries. The filing covers the fiscal year ended December 31, 2021, with comparative results for 2020. Xtant is a smaller reporting company and operates as one reportable segment.
- 2021 initiatives included four product launches, more than 40 new sales agents, expansion into adjacent markets and increased private-label/OEM activity.
- As of December 31, 2021, Xtant had over 300 independent sales and stocking agents and 118 employees.
- Approximately 99% of 2021 revenue was generated in the United States.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $55.3 million | $53.3 million | Up 3.6% |
| Orthobiologics revenue | $42.3 million | $39.3 million | Up 7.5% |
| Spinal implant revenue | $12.9 million | $13.9 million | Down 7.2% |
| Gross profit | $32.5 million | $34.4 million | Down 5.5% |
| Gross margin | 58.8% | 64.5% | Down 5.7 percentage points |
| Operating loss | $3.9 million | $0.8 million | Loss increased |
| Net loss | $4.8 million | $7.0 million | Loss decreased |
| Net loss per share | $0.06 | $0.25 | Improved |
| Cash flow from operations | $0.4 million provided | $0.7 million used | Improved |
Cost of sales increased 20.2% to $22.8 million. Management attributed the margin decline primarily to $1.0 million of under-absorbed labor and overhead related to inventory-reduction efforts, a less favorable mix including lower-margin private-label/OEM sales, and the sale of products carrying higher historical production costs. Operating expenses were $36.3 million, compared with $35.1 million in 2020. General and administrative expense increased to $14.4 million, driven by higher stock-based compensation, legal settlement expense and wages.
- Cash and cash equivalents were $18.2 million at December 31, 2021; total cash, including $0.1 million of restricted cash, was $18.4 million.
- Accounts receivable was $7.2 million and inventory was $17.9 million, down from $21.4 million in 2020.
- Total assets were $54.7 million and stockholders’ equity was $30.9 million.
- Net cash used in investing activities was $1.9 million, including $2.1 million of property and equipment purchases.
- Net cash provided by financing activities was $17.5 million, primarily from the February 2021 private placement.
- Accumulated deficit was $235.2 million at year-end.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from a $2.4 million increase in private-label and OEM orthobiologics sales, partly offset by a $1.0 million decline in implant sales.
- Orthobiologics increased to 77% of revenue from 74%, while spinal implants declined to 23% from 26%.
- Gross margin contracted materially because of product mix, inventory-reduction activities and higher production costs.
- Interest expense declined to $1.0 million from $6.0 million following the 2020 debt restructuring.
- Inventory decreased by $3.5 million, contributing to positive operating cash flow.
- On February 24, 2021, Xtant issued 8.9 million common shares and warrants to purchase up to 6.7 million shares in a private placement, generating approximately $18.4 million of net proceeds. The placement increased the share count and created potential future dilution.
- On May 6, 2021, Xtant refinanced its prior debt with a $12.0 million secured term facility and an $8.0 million secured revolving facility. The prior related-party facility was repaid and terminated.
Guidance, outlook, risks, contingencies and unusual items
Management did not provide specific revenue or earnings guidance. Management expects to continue focusing on new products, distribution expansion, adjacent markets, private-label/OEM growth and potential strategic acquisitions. It expects gross profit to improve as the effects of COVID-19 on surgical procedures diminish, but expects higher product costs to continue in future periods.
- COVID-19, particularly Delta and Omicron waves, reduced elective procedures, caused hospital staffing shortages and negatively affected third- and fourth-quarter 2021 revenue. These pressures continued into early 2022.
- Management stated that cash and available credit were expected to fund anticipated requirements through at least March 2023, but also disclosed that additional financing may be needed earlier.
- Debt principal outstanding was $15.6 million at year-end, consisting of $12.0 million under the term facility and $3.6 million under the revolving facility. Approximately $3.2 million remained available under the revolving facility. The facilities mature May 1, 2026, bear variable interest based on LIBOR plus applicable margins and are secured by substantially all assets.
- The credit agreements require minimum revenue, adjusted EBITDA and liquidity levels. Xtant was in compliance with all covenants at December 31, 2021. A March 7, 2022 amendment provided conditional relief from the minimum adjusted EBITDA covenant when defined liquidity exceeds $14 million, while increasing exit fees by 25 basis points.
- The company reported a $550,000 special charge for a July 2021 confidential settlement of patent-infringement claims involving certain hardware products.
- Inventory valuation was the auditor’s critical audit matter. The year-end inventory reserve was $10.3 million, and management identified demand forecasts, obsolescence and competition as significant estimation factors.
- Xtant has incurred recurring losses and has an accumulated deficit. The financial statements were prepared on a going-concern basis, with liquidity dependent on future revenue, operating performance and access to credit or additional financing.
- Key risks include supply-chain disruption, inflation, labor shortages, donor-tissue availability, reimbursement pressure, FDA and tissue-bank regulation, product liability and recalls, reliance on independent distributors, cybersecurity and outdated enterprise systems.
- OrbiMed-affiliated funds beneficially owned approximately 83.5% of the common stock as of February 2022, giving them substantial control over board composition, financing, acquisitions and other corporate matters. The company relies on controlled-company exemptions from certain NYSE American governance requirements.
Important facts investors should verify
- Reconcile reported cash of $18.2 million with total cash and restricted cash of $18.4 million and confirm borrowing-base availability under the revolving facility.
- Review the March 2022 credit agreement amendments, covenant thresholds, variable-rate exposure and required consents for future financing or acquisitions.
- Assess whether revenue growth can offset lower margins from private-label/OEM sales, higher production costs and potential inventory charges.
- Monitor COVID-19-related procedure volumes, hospital staffing, supply-chain conditions and any resulting impairment or excess-inventory charges.
- Evaluate dilution from the 6.7 million-share investor warrant, placement-agent warrant, outstanding options and restricted stock units.
- Review the company’s dependence on independent distributors, including one agent responsible for approximately 19% of 2021 revenue.
- Confirm the status and potential exposure of product liability, intellectual-property, regulatory and other contingencies.
- Verify management’s liquidity forecast through March 2023 against actual cash burn, operating cash flow and covenant compliance.