Xtant Medical Holdings, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Xtant Medical is a medical technology company developing, manufacturing and marketing orthobiologics, spinal implants and related instrumentation for complex spine, deformity and degenerative procedures. The company operates as one segment and generates approximately 99% of revenue in the United States. This unaudited filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $20.2 million | $15.3 million | $38.2 million | $28.2 million |
| Revenue growth | 32% | — | 35% | — |
| Gross profit | $12.5 million | $8.4 million | $23.0 million | $15.9 million |
| Gross margin | 61.6% | 54.8% | 60.2% | 56.4% |
| Operating loss | $1.4 million | $1.3 million | $3.0 million | $3.1 million |
| Net loss | $2.2 million | $1.7 million | $4.3 million | $3.9 million |
| Net loss per share | $0.02 | $0.02 | $0.04 | $0.04 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $4.8 million | $1.0 million |
Orthobiologics revenue was $14.3 million in Q2 and $27.9 million for the first six months, while spinal implant revenue was $5.9 million and $10.3 million, respectively. Spinal implant revenue represented 29% of Q2 revenue versus 19% in the prior-year quarter, partly reflecting the Coflex and CoFix acquisition.
At June 30, 2023, cash and cash equivalents were $4.1 million, or $4.4 million including restricted cash. Accounts receivable were $13.7 million and inventories were $20.4 million. Net working capital was $22.6 million, down from $34.1 million at December 31, 2022.
Total liabilities were $34.3 million and stockholders’ equity was $31.0 million at June 30, 2023. Debt included $17.0 million of term-loan principal and $5.0 million outstanding under the revolving facility. Approximately $3.0 million remained available under the revolving facility. The term-loan effective rate was 13.79% and the revolving-facility effective rate was 9.77%.
Material changes versus the prior comparable period
- Revenue increased $5.0 million, or 32%, in Q2 and $9.9 million, or 35%, for the six-month period, driven by higher independent-agent sales, Coflex and CoFix product sales, and opportunistic private-label sales.
- Gross margin improved 680 basis points in Q2 and 380 basis points for the six months. Management attributed the improvement primarily to the Coflex and CoFix product mix and lower excess and obsolete inventory charges, partly offset by higher product costs.
- Sales and marketing expense increased 55% in Q2 and 45% year to date, primarily due to higher commissions and additional headcount. General and administrative expense increased 31% and 27%, respectively, reflecting additional compensation, acquisition-related professional fees and amortization of acquired intangible assets.
- Interest expense increased to $0.8 million in Q2 and $1.4 million for the six months, compared with $0.4 million and $0.8 million, respectively, due to higher reference rates and the additional $5.0 million term-loan borrowing.
- Operating cash use increased to $4.8 million for the first six months, primarily because of higher accounts receivable and inventory. Investing cash use increased to $17.8 million, including the $17.0 million cash acquisition of Surgalign SPV.
- The February 2023 acquisition added the Coflex and CoFix product lines for $17.0 million, funded with cash on hand and approximately $5.0 million of term debt. Preliminary purchase accounting included $11.2 million of intangible assets and $3.3 million of goodwill.
Outlook, transactions, risks and unusual items
- On June 18, 2023, Xtant agreed to acquire specified Surgalign assets and liabilities for $5.0 million in cash through a Chapter 11 bankruptcy-supervised process. Xtant was announced as the successful bidder on July 28, 2023. Closing remained subject to Bankruptcy Court approval and other conditions, with a hearing scheduled for August 8, 2023 and closing expected no later than September 1, 2023.
- On July 6, 2023, the company issued 20.0 million common shares at $0.75 per share in a private placement, generating $15.0 million of gross proceeds before fees. Proceeds are intended for working capital and general corporate purposes.
- Management stated that cash at June 30, 2023, the July private-placement proceeds, available debt capacity and operating cash flows were expected to fund anticipated requirements through at least August 2024, while cautioning that additional capital may be needed earlier.
- The credit facilities mature May 1, 2026. The term facility remains interest-only through June 2024, after which monthly principal payments of approximately $0.7 million are required through May 2026. The company reported compliance with all debt covenants at June 30, 2023.
- Key risks include continued operating losses and cash burn, high interest rates and debt-service requirements, limited liquidity, dependence on independent sales agents and third-party suppliers, inventory and receivable growth, reimbursement and regulatory risks, supply-chain and labor disruptions, and the execution and integration risks of the Surgalign transactions.
- Management identified no long-lived-asset or goodwill impairment for the three or six months ended June 30, 2023. The acquired-business purchase-price allocation remained preliminary and could change during the measurement period.
- Ordinary-course litigation and other contingencies were accrued where considered probable and reasonably estimable; management did not expect currently identified matters to materially affect the company, but noted that unfavorable outcomes could exceed existing accruals.
Most important facts for investors to verify
- Completion, purchase accounting, financing and integration costs associated with the pending Surgalign asset acquisition.
- Whether the July 2023 $15.0 million equity financing and available revolver capacity provide sufficient liquidity as operating cash use continues.
- Ability to meet debt covenants and approximately $0.7 million monthly term-loan principal payments beginning in June 2024.
- Sustainability of the 60%-plus gross margins after acquisition-related mix benefits and the effect of higher product, commission and financing costs.
- Growth and profitability contribution from Coflex, CoFix and the additional Surgalign assets, including the risk of impairment or purchase-price-allocation changes.
- Potential dilution from the 20.0 million shares issued in July, outstanding warrants for 12.2 million shares, and other equity awards.