Xtant Medical (US:XTNT)2024-04-01 11:10PART I Business Overview Xtant Medical is a global medical technology company specializing in orthobiologics and spinal implant systems, expanding through strategic acquisitions - Xtant Medical focuses on orthobiologics and spinal implant fixation systems for spinal fusion procedures16 - Distribution channels include U.S. independent distributors and international partners across multiple regions1739 - Key growth initiatives involve new product introductions, distribution network expansion, adjacent market penetration, and strategic acquisitions18 - In 2023, the company completed three significant acquisitions (Coflex/CoFix for $17.0 million, Surgalign hardware/biologics for $5 million, nanOss operations for $2 million plus royalties), expanding its portfolio and international footprint192022 Risk Factors Risks include supplier dependence, acquisition integration, international operations, regulations, and controlled company status - Dependence on key suppliers, particularly for stem cells used in OsteoVive, poses a significant risk due to current shortages impacting Q3 and Q4 2023 revenues and future projections110111 - Recent 2023 acquisitions (Surgalign SPV, Surgalign Holdings' hardware/biologics, RTI's nanOss operations) introduce risks including management distraction, operational disruption, integration challenges, and potential impairment charges for goodwill and intangible assets113114116 - Growing international operations expose the company to political, economic, social, and currency risks, along with complex regulatory compliance117118119120121 - Two material weaknesses in internal control over financial reporting were identified: inventory fair value completeness/accuracy and acquired consigned inventory confirmation procedures124125 - Extensive governmental regulation, including FDA clearances, healthcare fraud and abuse laws (Anti-Kickback Statute, False Claims Act, Sunshine Act), and international regulations, can lead to substantial penalties, market restrictions, and increased costs if not complied with151152157158159160161162163164167168169170171172173 - OrbiMed funds collectively own approximately 56.2% of outstanding common stock, granting them significant control over corporate decisions and director nominations99108224225227 Unresolved Staff Comments There are no unresolved staff comments from the SEC - No unresolved staff comments were reported257 Cybersecurity Xtant Medical prioritizes cybersecurity, integrating risk management into overall operations with Board oversight - Cybersecurity, data privacy, and data protection are critical to Xtant's business, with processes in place for assessing, identifying, and managing material risks259 - Recent cybersecurity enhancements include a new firewall, a Network and Security Administrator, internal penetration testing, always-on VPN, and hardened cloud computing security259 - Management, led by the Director of Information Technology, is responsible for day-to-day cybersecurity risk management, with oversight from the Audit Committee and Board of Directors262264 - The company engages third-party cybersecurity service providers for assessments, protection, and monitoring of its systems263 - As of the filing date, no cybersecurity threats have materially affected or are reasonably anticipated to have a material effect on the business strategy, results of operations, or financial condition, despite past cyberattacks267 Properties Xtant Medical's headquarters and primary manufacturing facilities are in Belgrade, Montana, with additional leased facilities globally - Headquarters and manufacturing facilities are located in Belgrade, Montana, across three leased buildings (664, 600, and 732 Cruiser Lane), with leases expiring in October 2025268270 - The Belgrade facilities include FDA registered areas with Class 10,000 (ISO 7) and Class 100 (ISO 5) clean rooms, and a Class 1,000 (ISO 6) clean room, used for device design, manufacture, and tissue processing270 - Additional leased facilities include a 2,000 sq ft facility in San Diego, California (expires Dec 2026) for innovation/design, a 13,000 sq ft facility in Wurmlingen, Germany (expires Feb 2025) for international operations, and a 15,000 sq ft nanOss production facility in Greenville, North Carolina (expires June 2024)270271272 Legal Proceedings Legal proceedings are detailed in Note 14 – Commitments and Contingencies within the financial statements - Legal proceedings are discussed in Note 14 – Commitments and Contingencies in the notes to the consolidated financial statements273 Mine Safety Disclosures This item is not applicable to Xtant Medical Holdings, Inc - Mine Safety Disclosures are not applicable274 PART II Market for Common Equity and Stockholder Matters Xtant Medical's common stock is listed on NYSE American, with no cash dividends expected due to credit agreements - Common stock is listed on the NYSE American under the ticker symbol 'XTNT'277 - As of March 25, 2024, there were 166 holders of record and 130,216,541 shares of common stock outstanding5278 - The company has not paid cash dividends and does not expect to in the foreseeable future, as credit agreements preclude such payments279 - No unregistered equity securities were sold, and no equity securities were purchased by the issuer during the Q4 2023280281 Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Xtant Medical achieved significant revenue growth and net income in 2023, driven by acquisitions and managed liquidity - Total revenue for the year ended December 31, 2023, increased by 58% to $91.3 million, up from $58.0 million in 2022, primarily due to additional sales from acquisitions and increased independent agent sales291 - Gross profit as a percentage of revenue increased to 60.8% in 2023 from 55.4% in 2022, driven by greater scale and improved production efficiency (620 basis points) and sales mix (290 basis points), partially offset by higher production costs (340 basis points)293 - Net income for 2023 was $660 thousand, a significant improvement from a net loss of $8.5 million in 2022, primarily due to an $11.7 million gain on bargain purchase from the Surgalign Holdings acquisition298299 - Net cash used in operating activities increased to $9.5 million in 2023 from $5.3 million provided in 2022, mainly due to an increase in accounts receivable301 - Net cash used in investing activities significantly increased to $24.8 million in 2023 from $1.6 million in 2022, primarily due to cash used for the three major acquisitions302 - The company believes its cash and credit facilities will meet anticipated cash requirements through at least March 2025, but may seek additional financing309 Quantitative and Qualitative Disclosures About Market Risk This section is inapplicable to Xtant Medical Holdings, Inc. as it is a smaller reporting company - This item is inapplicable to Xtant as a smaller reporting company322 Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2023 and 2022, prepared in conformity with U.S. GAAP Consolidated Statements of Operations (in thousands) | | Year Ended December 31, 2023 | Year Ended December 31, 2022 | |:---|:---|:---| | Total Revenue | $91,303 | $57,969 | | Cost of Sales | $35,836 | $25,832 | | Gross Profit | $55,467 | $32,137 | | Operating Expenses | $65,625 | $38,892 | | Loss from Operations | $(10,158) | $(6,755) | | Total Other Income (Expense) | $9,121 | $(1,661) | | Net Loss from Operations Before Provision for Income Taxes | $(1,037) | $(8,416) | | Benefit (Provision) for Income Taxes Current and Deferred | $1,697 | $(69) | | Net Income (Loss) | $660 | $(8,485) | Consolidated Balance Sheets (in thousands) | ASSETS | As of December 31, 2023 | As of December 31, 2022 | |:---|:---|:---| | Cash and cash-equivalents | $5,715 | $20,298 | | Restricted cash | $208 | $209 | | Trade accounts receivable, net | $20,731 | $10,853 | | Inventories | $36,885 | $17,285 | | Prepaid and other current assets | $1,330 | $673 | | Total current assets | $64,869 | $49,318 | | Property and equipment, net | $8,692 | $5,785 | | Right of use asset, net | $1,523 | $1,380 | | Goodwill | $7,302 | $3,205 | | Intangible assets, net | $10,085 | $344 | | Other assets | $141 | $197 | | Total Assets | $92,612 | $60,229 | | LIABILITIES & STOCKHOLDERS' EQUITY | | | | Accounts payable | $7,054 | $3,490 | | Accrued liabilities | $10,419 | $5,496 | | Current portion of lease liability | $830 | $458 | | Current portion of finance lease obligations | $65 | $62 | | Line of credit | $4,622 | $3,379 | | Current portion of long-term debt | $— | $2,333 | | Total current liabilities | $22,990 | $15,218 | | Long-term Liabilities: | | | | Lease liability, net | $759 | $972 | | Financing lease obligations, net | $116 | $181 | | Long-term debt, plus premium and less issuance costs | $17,167 | $9,687 | | Accrued earnout liabilities | $210 | $— | | Deferred tax liability | $21 | $— | | Total Liabilities | $41,263 | $26,058 | | Total Stockholders' Equity | $51,349 | $34,171 | | Total Liabilities & Stockholders' Equity | $92,612 | $60,229 | Consolidated Statements of Cash Flows (in thousands) | | Year Ended December 31, 2023 | Year Ended December 31, 2022 | |:---|:---|:---|\n| Net cash used in operating activities | $(9,515) | $(5,341) | | Net cash used in investing activities | $(24,784) | $(1,559) | | Net cash provided by financing activities | $19,691 | $9,020 | | Effect of exchange rate changes on cash and cash equivalents and restricted cash | $24 | $— | | Net change in cash and cash equivalents and restricted cash | $(14,584) | $2,120 | | Cash and cash equivalents and restricted cash at beginning of year | $20,507 | $18,387 | | Cash and cash equivalents and restricted cash at end of year | $5,923 | $20,507 | - The company recognized a $11.7 million gain on bargain purchase in 2023 due to the acquisition of Surgalign Holdings' hardware and biologics business as part of bankruptcy proceedings288400 - Orthobiologics revenue was $58.6 million (64% of total) in 2023, down from 81% in 2022, while spinal implant revenue increased to $32.7 million (36% of total) in 2023 from $10.8 million (19% of total) in 2022, reflecting a shift in product mix380 - The company corrected an immaterial misstatement in prior period financial statements, prospectively reducing revenue and sales and marketing expense by $1.0 million for the year ended December 31, 2022, related to GPO fees457458459 Changes in and Disagreements with Accountants Xtant Medical appointed Grant Thornton LLP as its new auditor in 2023, with no disagreements reported - On August 15, 2023, Grant Thornton LLP was appointed as the independent registered public accounting firm, replacing Plante & Moran, PLLC460 - No disagreements on accounting or financial disclosure matters occurred with either firm during the fiscal years ended December 31, 2022 and 2021, or the subsequent interim period460571 Controls and Procedures Disclosure controls were ineffective due to material weaknesses in inventory valuation and acquired consigned inventory procedures - Disclosure controls and procedures were not effective as of December 31, 2023, due to identified material weaknesses in internal control over financial reporting461469 - Two material weaknesses were identified: (1) insufficient controls over the completeness and accuracy of information for determining the fair value of acquired inventory, and (2) inadequate procedures to verify the existence of acquired consigned inventory463464 - Remediation plans include correcting inputs and assumptions for inventory valuation, adding accounting personnel by end of fiscal 2024, and integrating acquired consigned inventory into ongoing field audits466467 - Management's evaluation of internal control over financial reporting excluded the internal control activities of Surgalign SPV, Inc., Surgalign Holdings' hardware and biologics business, and nanOss production operations due to their recent acquisition in 2023468 Other Information No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers in Q4 2023 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during Q4 2023472 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Xtant Medical Holdings, Inc - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable473 PART III Directors, Executive Officers and Corporate Governance This section outlines Board composition, executive officers, controlled company status, and governance committees Directors and Executive Officers as of March 25, 2024 | Name | Age | Position | Director/Officer Since | |:---|:---|:---|:---|\n| Stavros G. Vizirgianakis | 53 | Chair of the Board and Director | 2022 | | Sean E. Browne | 58 | President and Chief Executive Officer and Director | 2019 | | John K. Bakewell | 62 | Director | 2018 | | Jonn R. Beeson | 55 | Director | 2023 | | Robert E. McNamara | 67 | Director | 2018 | | Lori D. Mitchell-Keller | 57 | Director | 2023 | | Kevin D. Brandt | 58 | Chief Commercial Officer | 2018 | | Scott C. Neils | 40 | Chief Financial Officer | 2022 | | Mark A. Schallenberger | 38 | Chief Operations Officer | 2023 | - Xtant is a 'controlled company' as OrbiMed Advisors LLC affiliates beneficially own approximately 56.2% of its common stock, granting them the right to nominate a majority of directors and approve significant corporate actions487488490 - The Board of Directors has a majority of independent directors (John K. Bakewell, Jonn R. Beeson, Robert E. McNamara, Lori D. Mitchell-Keller, Stavros G. Vizirgianakis) and maintains independent Audit, Compensation, and Nominating and Corporate Governance Committees487491495497 - Stavros G. Vizirgianakis serves as Chair of the Board, while Sean E. Browne is President and CEO, a structure believed to balance strategic direction and day-to-day operations492 Executive Compensation Executive compensation for 2023 included base salary, short-term, and long-term incentives, targeting the 50th percentile of a peer group - Executive compensation targets the 50th percentile of a peer group, with Mercer (US) Inc. engaged as an independent compensation consultant511512514 - The 2023 executive compensation program included base salary, short-term incentives (cash bonuses based on Xtant revenue, Coflex revenue, total revenue, gross margin, and adjusted EBITDA), and long-term incentives (time-vested stock options and restricted stock units)515516 Summary Compensation Table for Named Executive Officers (2023) | Name | Salary | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | All Other Compensation | Total | |:---|:---|:---|:---|:---|:---|:---|\n| Sean E. Browne | $600,000 | $209,059 | $209,266 | $664,560 | $29,273 | $1,712,158 | | Kevin D. Brandt | $415,000 | $144,599 | $144,743 | $229,827 | $13,200 | $947,369 | | Mark A. Schallenberger | $400,000 | $205,144 | $208,263 | $221,520 | $139,696 | $1,174,623 | - Director compensation was revised in 2023 to include annual cash retainers for Board Committee members and a director education reimbursement policy536539541 Director Compensation Table for Fiscal 2023 | Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards | All Other Compensation | Total | |:---|:---|:---|:---|:---|:---|\n| John K. Bakewell | $82,500 | $174,216 | $27,594 | $— | $284,310 | | Jonn R. Beeson | $53,229 | $205,966 | $27,594 | $— | $286,789 | | Michael J. Eggenberg | $16,801 | $— | $— | $— | $16,801 | | Robert E. McNamara | $82,500 | $174,216 | $27,594 | $— | $284,310 | | Lori D. Mitchell-Keller | $43,505 | $205,806 | $27,594 | $— | $276,905 | | Matthew S. Rizzo | $16,801 | $— | $— | $— | $16,801 | | Stavros G. Vizirgianakis | $98,750 | $261,324 | $41,390 | $— | $401,464 | Security Ownership This section details beneficial ownership by significant shareholders and management, including equity compensation plan information Significant Beneficial Owners (>5%) as of March 25, 2024 | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | |:---|:---|:---|\n| OrbiMed Advisors LLC | 73,114,592 | 56.1% | | Altium Capital Management, LP | 14,525,511 | 10.6% | | Stavros G. Vizirgianakis | 7,440,339 | 5.7% | Security Ownership of Management as of March 25, 2024 | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | |:---|:---|:---|\n| John K. Bakewell | 448,546 | * | | Jonn R. Beeson | 1,321,139 | 1.0% | | Sean E. Browne | 2,332,997 | 1.8% | | Robert E. McNamara | 446,809 | * | | Lori D. Mitchell-Keller | — | — | | Stavros G. Vizirgianakis | 7,440,339 | 5.7% | | Kevin D. Brandt | 581,372 | * | | Mark A. Schallenberger | 55,062 | * | | All current executive officers and directors as a group (9 persons) | 12,919,615 | 9.7% | Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2023 | Plan Category | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans | |:---|:---|:---|:---|\n| Equity compensation plans approved by security holders | 8,400,503 | $1.31 | 9,968,016 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 8,400,503 | $1.31 | 9,968,016 | Certain Relationships and Related Transactions, and Director Independence The Audit Committee reviews related party transactions, including the Investor Rights Agreement with OrbiMed affiliates - The Audit Committee is responsible for reviewing and approving all related party transactions556 - The Investor Rights Agreement with OrbiMed affiliates grants them the right to nominate a majority of directors and requires their approval for significant corporate actions, as long as they maintain at least 40% ownership558 - The 2022 Private Placement involved the issuance of common stock and warrants to accredited investors, including Stavros G. Vizirgianakis and his brother, and Jonn R. Beeson, for an aggregate purchase price of approximately $9.75 million560561562 - Associated agreements from the 2022 Private Placement included lock-up agreements (12-month for Stavros G. Vizirgianakis) and a registration rights agreement563565 - The Board has affirmatively determined that John K. Bakewell, Jonn R. Beeson, Robert E. McNamara, Lori D. Mitchell-Keller, and Stavros G. Vizirgianakis are 'independent directors' under NYSE American standards567 Principal Accountant Fees and Services Xtant Medical changed auditors to Grant Thornton LLP in 2023, with increased audit fees and a pre-approval policy - Xtant Medical changed its independent registered public accounting firm from Plante & Moran, PLLC to Grant Thornton LLP on August 15, 2023568 Aggregate Fees Billed by Independent Registered Accounting Firms (in thousands) | Category | 2023 | 2022 | |:---|:---|:---|\n| Audit fees | $840 | $320 | | Audit-related fees | $45 | $7 | | Tax fees | $— | $— | | All other fees | $— | $— | | Total fees | $885 | $327 | - The Audit Committee has a policy to pre-approve all audit, audit-related, tax, and other services, with the Chair delegated authority for pre-approvals up to $25,000576 PART IV Exhibit and Financial Statement Schedules This section lists all financial statements and exhibits filed with the 10-K report, omitting schedules for smaller reporting companies - Consolidated financial statements are included in Part II, Item 8579 - Financial statement schedules are omitted because the company is a smaller reporting company579 - Exhibits include various agreements such as equity purchase, asset purchase, credit, investor rights, and equity incentive plans580582583584585586587 Form 10-K Summary This is an optional disclosure item and is not included in this Annual Report on Form 10-K - Form 10-K Summary is an optional disclosure and is not included in this report588