Xtant Medical (XTNT) - 2022 Q1 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This statement outlines forward-looking statements subject to risks like pandemic impacts, labor shortages, inflation, and supply chain disruptions - Forward-looking statements are subject to various risks and uncertainties, including the impact of the COVID-19 pandemic, labor and staffing shortages, inflation, supply chain disruptions, ability to increase revenue, competition, reliance on third-party suppliers, and personnel retention[10][11][12] PART I. Financial Information ITEM 1. Financial Statements This section presents Q1 2022 unaudited condensed consolidated financial statements, covering balance sheets, operations, equity, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheets | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | Change (in millions) | | :-------------------------------- | :------------- | :---------------- | :----- | | Cash and cash equivalents | $16.8M | $18.2M | $(1.4M) | | Total current assets | $42.8M | $44.3M | $(1.5M) | | Total Assets | $53.2M | $54.7M | $(1.5M) | | Total current liabilities | $11.2M | $11.1M | $0.1M | | Total Liabilities | $23.9M | $23.8M | $0.1M | | Total Stockholders' Equity | $29.3M | $30.9M | $(1.6M) | Condensed Consolidated Statements of Operations | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY, in millions) | | :------------------------------------ | :----- | :----- | :----------- | | Total Revenue | $13.0M | $12.5M | $0.4M | | Cost of sales | $5.4M | $4.5M | $0.9M | | Gross Profit | $7.6M | $8.1M | $(0.5M) | | Total Operating Expenses | $9.4M | $8.1M | $1.3M | | Loss from Operations | $(1.8M) | $(0.0M) | $(1.8M) | | Net Loss | $(2.2M) | $(0.0M) | $(2.2M) | | Net Loss Per Share (Basic & Dilutive) | $(0.03) | $(0.00) | $(0.03) | Condensed Consolidated Statements of Equity | Metric | Balance at Dec 31, 2021 (in millions) | Stock-based compensation (in millions) | Net loss (in millions) | Balance at Mar 31, 2022 (in millions) | | :----------------------- | :---------------------- | :----------------------- | :------- | :---------------------- | | Additional Paid-In Capital | $266.1M | $0.6M | — | $266.7M | | Accumulated Deficit | $(235.2M) | — | $(2.2M) | $(237.4M) | | Total Stockholders' Equity | $30.9M | $0.6M | $(2.2M) | $29.3M | Condensed Consolidated Statements of Cash Flows | Metric | 2022 (in millions) | 2021 (in millions) | Change (YoY, in millions) | | :------------------------------------------ | :------- | :------- | :----------- | | Net cash used in operating activities | $(1.0M) | $(1.3M) | $0.3M | | Net cash used in investing activities | $(0.4M) | $(0.5M) | $0.1M | | Net cash (used in) provided by financing activities | $(0.021M) | $18.1M | $(18.1M) | | Net change in cash and cash equivalents and restricted cash | $(1.4M) | $16.3M | $(17.7M) | | Cash and cash equivalents at end of period | $16.8M | $18.6M | $(1.8M) | Notes to Unaudited Condensed Consolidated Financial Statements (1) Business Description, Basis of Presentation and Summary of Significant Accounting Policies This note describes Xtant's business as a medical technology company and outlines the basis of financial statement presentation and key accounting policies - Xtant is a global medical technology company focused on the design, development, and commercialization of orthobiologics and spinal implant systems for spinal fusion procedures[22] - The COVID-19 pandemic has negatively impacted revenues due to deferred elective procedures, staffing shortages, and supply chain disruptions, with continued uncertainty for 2022[23][66][68] - Diluted net loss per share was the same as basic net loss per share for Q1 2022 and 2021, as shares issuable upon the exercise of stock options and warrants were anti-dilutive due to net losses[32] (2) Revenue This note details the company's revenue recognition policies and provides a breakdown of revenue by product line for 2022 and 2021 - Revenue is primarily generated from independent commissioned sales agents, stocking resellers, and private label resellers, with recognition upon transfer of control[34][36] | Product Line | 2022 Revenue (in millions) | 2022 % of Total | 2021 Revenue (in millions) | 2021 % of Total | | :------------- | :----------- | :-------------- | :----------- | :-------------- | | Orthobiologics | $10.2M | 78% | $9.0M | 72% | | Spinal implant | $2.8M | 22% | $3.5M | 28% | | Other revenue | $0.0M | 0% | $0.0M | 0% | | Total revenue | $13.0M | 100% | $12.5M | 100% | (3) Receivables This note provides a reconciliation of the allowance for current expected credit losses on receivables for the periods presented | Metric | March 31, 2022 (in millions) | March 31, 2021 (in millions) | | :---------------------------------- | :------------- | :------------- | | Balance at January 1 | $0.6M | $0.7M | | Provision for current expected credit losses | $0.2M | $(0.1M) | | Write-offs charged against allowance | $(0.2M) | $(0.0M) | | Balance at March 31 | $0.6M | $0.6M | (4) Inventories This note presents a breakdown of inventory components, including raw materials, work in process, and finished goods, as of March 31, 2022, and December 31, 2021 | Category | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :--------------- | :------------- | :---------------- | | Raw materials | $5.3M | $5.6M | | Work in process | $0.8M | $0.6M | | Finished goods | $11.3M | $11.8M | | Total | $17.3M | $17.9M | (5) Property and Equipment, Net This note details the composition of property and equipment, net of accumulated depreciation, and reports depreciation expense for the period | Category | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :---------------------- | :------------- | :---------------- | | Total cost | $22.8M | $22.4M | | Less: accumulated depreciation | $(17.4M) | $(17.2M) | | Property and equipment, net | $5.4M | $5.2M | - Depreciation expense related to property and equipment was $0.3 million for the first three months of 2022, down from $0.4 million in 2021[40] (6) Intangible Assets This note provides a breakdown of intangible assets, primarily patents, net of accumulated amortization, for the specified periods | Category | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------- | :------------- | :---------------- | | Patents | $0.8M | $0.8M | | Accumulated amortization | $(0.5M) | $(0.4M) | | Intangible assets, net | $0.4M | $0.4M | (7) Accrued Liabilities This note details the components of accrued liabilities, including cash compensation/commissions payable and other accrued amounts | Category | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :-------------------------- | :------------- | :---------------- | | Cash compensation/commissions payable | $3.3M | $3.2M | | Other accrued liabilities | $1.0M | $1.2M | | Accrued liabilities | $4.3M | $4.3M | (8) Debt This note outlines the company's debt structure, including term loans and revolving credit facilities, and details recent amendments and effective interest rates | Category | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :---------------------------------- | :------------- | :---------------- | | Amounts due under term loan | $12.0M | $12.0M | | Accrued end-of-term payments | $0.1M | $0.1M | | Less: unamortized debt issuance costs | $(0.3M) | $(0.3M) | | Long-term debt, less issuance costs | $11.8M | $11.8M | - The term loan and revolving credit agreements were amended on March 7, 2022, to waive minimum adjusted EBITDA requirements if liquidity exceeds $14 million and to reset prepayment fee dates, increasing final payment fees by 25 basis points[43] - As of March 31, 2022, the effective rate of the term loan was 9.96%, and the revolving credit agreement was 5.5%, with $3.5 million available under the revolving facility[44] (9) Stock-Based Compensation This note provides details on stock option and restricted stock unit activity, including shares outstanding, exercise prices, and unrecognized compensation expense | Metric | 2022 Shares | 2022 Avg Exercise Price | 2021 Shares | 2021 Avg Exercise Price | | :---------------------- | :---------- | :---------------------- | :---------- | :---------------------- | | Outstanding at January 1 | 3,201,666 | $1.80 | 2,190,892 | $2.25 | | Granted | 109,164 | $0.65 | — | — | | Cancelled or expired | (301,983) | $2.73 | (125) | $372.00 | | Outstanding at March 31 | 3,008,847 | $1.66 | 2,190,767 | $2.23 | | Metric | 2022 Shares | 2022 Avg Fair Value | 2021 Shares | 2021 Avg Fair Value | | :-------------------- | :---------- | :------------------ | :---------- | :------------------ | | Outstanding at January 1 | 2,970,104 | $1.39 | 2,503,698 | $1.54 | | Granted | 88,983 | $0.65 | — | — | | Vested | (244,721) | $1.45 | (244,716) | $1.45 | | Cancelled | (244,586) | $1.33 | — | — | | Outstanding at March 31 | 2,569,780 | $1.36 | 2,258,982 | $1.54 | - Total unrecognized compensation expense related to unvested stock options was approximately $2.3 million as of March 31, 2022, expected to be recognized over a weighted-average period of 2.9 years[45] (10) Warrants This note discloses the number of outstanding warrants and their weighted average exercise price as of March 31, 2022 - As of March 31, 2022, there were warrants outstanding to purchase 7,111,112 shares of common stock at a weighted average exercise price of $2.29 per share[48] (11) Commitments and Contingencies This note outlines the company's lease liabilities and discusses potential liabilities from government regulations, claims, and legal actions | (in thousands): | March 31, 2022 (in millions) | | :-------------------------- | :------------- | | Right-of-use assets, net | $1.1M | | Current portion of lease liability | $0.5M | | Lease liability, less current portion | $0.7M | | Total lease liability | $1.2M | - The company is subject to potential liabilities under government regulations and various claims and legal actions, but has not incurred any material costs from warranties or indemnification provisions to date[52][53][54] (12) Income Taxes This note explains the company's income tax position, specifically the provision of a valuation allowance against deferred income tax assets - A valuation allowance has been provided against the entire deferred income tax asset balance due to uncertainty regarding future profitability[55] (13) Supplemental Disclosure of Cash Flow Information This note provides additional details on cash flow activities, including cash paid for interest and non-cash investing and financing activities | Metric | 2022 (in millions) | 2021 (in millions) | | :------------------------------------------ | :----- | :----- | | Cash paid during the period for: Interest | $0.3M | $0.0M | | Non-cash activities: Fixed assets acquired under finance lease | $— | $0.2M | | Warrants issued in connection with the Private Placement to placement agents | $— | $0.4M | (14) Related Party Transactions This note describes transactions with OrbiMed, a significant beneficial owner, and confirms review and approval by the Audit Committee - OrbiMed, through its affiliated funds, beneficially owns 84% of the Company's common stock and is party to various agreements, with all related party transactions reviewed and approved by the Audit Committee or disinterested Board members[58][59] (15) Segment and Geographic Information This note clarifies that the company operates in a single reportable segment and provides a breakdown of revenue by geographic area - The company operates in a single reportable segment: the development, manufacture, and marketing of orthopedic medical products and devices[60] | Geographic Area | 2022 Revenue (in millions) | 2021 Revenue (in millions) | | :-------------- | :----------- | :----------- | | United States | $12.7M | $12.3M | | Rest of world | $0.3M | $0.2M | | Total revenue | $13.0M | $12.5M | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for Q1 2022, covering business overview, COVID-19 impact, operating results, liquidity, and critical accounting estimates Business Overview This section describes Xtant Medical's core business of developing, manufacturing, and marketing regenerative medicine products and medical devices for orthopedic and neurological surgeons - Xtant Medical develops, manufactures, and markets regenerative medicine products and medical devices for orthopedic and neurological surgeons, focusing on orthobiologics and spinal implant systems[63] - Key growth initiatives include introducing new products, expanding the distribution network, penetrating adjacent markets, and leveraging technology and strategic acquisitions[65] Impact of the COVID-19 Pandemic This section discusses the continued negative impact of the COVID-19 pandemic on Q1 2022 revenues due to procedure cancellations, staffing shortages, and supply chain disruptions - The COVID-19 pandemic continued to negatively impact Q1 2022 revenues due to cancellations/postponements of elective procedures, hospital staffing shortages, and supply chain disruptions[66][67][68] - The full extent of the pandemic's future impact remains uncertain, depending on new variants, vaccine effectiveness, and healthcare system capacity[69] Results of Operations Revenue This section analyzes the company's total revenue for 2022 and 2021, highlighting the primary drivers of change | Metric | 2022 | 2021 | Change (YoY) | | :----------- | :----- | :----- | :----------- | | Total Revenue | $13.0M | $12.5M | $0.5M (3% increase) | - The increase in revenue is attributed primarily to introductions of new products and greater private label and original equipment manufacturer sales[70] Cost of Sales This section examines the cost of sales, gross profit, and gross profit margin, explaining the factors contributing to their changes | Metric | 2022 | 2021 | Change (YoY) | | :------------ | :----- | :----- | :----------- | | Cost of sales | $5.4M | $4.5M | $0.9M (20% increase) | | Gross profit | $7.6M | $8.1M | $(0.5M) (6.2% decrease) | | Gross profit % | 58.3% | 64.5% | (6.2 percentage points) | - Gross profit margin decreased due to higher production costs (260 bps), sales mix shift to lower-margin private label/OEM products (230 bps), and increased excess/obsolete inventory reserve (130 bps)[71][72] General and Administrative This section analyzes changes in general and administrative expenses, identifying key drivers such as bad debt, licenses, and system upgrades | Metric | 2022 | 2021 | Change (YoY) | | :-------------------------------- | :----- | :----- | :----------- | | General and administrative expenses | $4.0M | $3.0M | $1.0M (31% increase) | - The increase was primarily attributable to additional bad debt expense ($0.3 million), increased licenses and fees ($0.3 million), and costs related to enterprise resource planning system upgrades ($0.2 million)[73] Sales and Marketing This section reviews sales and marketing expenses, detailing increases driven by commissions from higher revenues and additional headcount | Metric | 2022 | 2021 | Change (YoY) | | :---------------------- | :----- | :----- | :----------- | | Sales and marketing expenses | $5.2M | $4.9M | $0.3M (7% increase) | | As % of revenue | 40.2% | 38.7% | 1.5 percentage points | - The increase was primarily due to additional sales commissions ($0.1 million) from greater revenues and increased salaries and wages ($0.1 million) due to additional headcount[75] Research and Development This section reports on research and development expenses, noting their stability between 2021 and 2022 | Metric | 2022 | 2021 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Research and development expenses | $0.2M | $0.2M | $0.0M (Stable) | Interest Expense This section analyzes the significant increase in interest expense, primarily due to debt instruments refinanced in May 2021 | Metric | 2022 | 2021 | Change (YoY) | | :------------- | :----- | :----- | :----------- | | Interest expense | $0.4M | $0.0M | $0.4M (Significant increase) | - Interest expense significantly increased due to debt instruments refinanced in May 2021[77] Liquidity and Capital Resources Working Capital This section analyzes changes in working capital, identifying the primary drivers for the reduction in net working capital | Metric | March 31, 2022 (in millions) | December 31, 2021 (in millions) | Change (in millions) | | :---------------------- | :------------- | :---------------- | :----- | | Cash and cash equivalents | $17.0M | $18.4M | $(1.4M) | | Total current assets | $42.8M | $44.3M | $(1.6M) | | Total current liabilities | $11.2M | $11.1M | $0.2M | | Net working capital | $31.5M | $33.3M | $(1.7M) | - The decrease in cash and cash equivalents was the primary driver for the reduction in net working capital[78] Cash Flows This section summarizes cash flows from operating, investing, and financing activities for 2022 and 2021 | Activity | 2022 | 2021 | | :------------------------------------------ | :----- | :----- | | Net cash used in operating activities | $(1.0M) | $(1.3M) | | Net cash used in investing activities | $(0.4M) | $(0.5M) | | Net cash (used in) provided by financing activities | $(0.021M) | $18.1M | Current and Prior Credit Facilities This section details the company's credit agreements, including new term and revolving facilities, recent amendments, and compliance with covenants - The company entered into new Term ($12.0 million) and Revolving ($8.0 million) Credit Agreements with MidCap Financial Trust on May 6, 2021, maturing May 1, 2026, and secured by substantially all company assets[82][83][84] - The Credit Agreements were amended on March 7, 2022, to waive minimum adjusted EBITDA requirements if liquidity exceeds $14 million and to adjust prepayment fees[87] - As of March 31, 2022, the company was in compliance with all covenants and had $3.5 million available under the Revolving Facility[85][87] Cash Requirements This section assesses the sufficiency of current cash and credit facilities to meet anticipated cash requirements and discusses potential future financing needs - The company believes its cash and cash equivalents ($16.8 million as of March 31, 2022), operating cash flows, and available credit facilities will be sufficient to meet anticipated cash requirements through at least May 2023[89] - Additional financing may be required or sought, potentially through equity or debt, which could dilute current stockholders or impose restrictive covenants[90][91] Critical Accounting Estimates This section confirms that there have been no material changes in critical accounting estimates for the three months ended March 31, 2022 - There have been no changes in critical accounting estimates for the three months ended March 31, 2022, compared to the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[93] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Xtant Medical Holdings, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - As a smaller reporting company, Xtant is exempt from providing quantitative and qualitative disclosures about market risk[95] ITEM 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting Limitations on Effectiveness of Controls and Procedures Management acknowledges that controls and procedures provide only reasonable assurance due to inherent limitations, resource constraints, and judgment - Management acknowledges that any controls and procedures can only provide reasonable assurance due to inherent limitations, resource constraints, and the need for judgment[96] Evaluation of Disclosure Controls and Procedures The company's disclosure controls and procedures were deemed effective as of March 31, 2022, following evaluation by executive and financial officers - The company's disclosure controls and procedures were concluded to be effective as of March 31, 2022, based on an evaluation by the principal executive and financial officers[97] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the three months ended March 31, 2022 - There were no changes in internal control over financial reporting during the three months ended March 31, 2022, that materially affected or are reasonably likely to materially affect these controls[98] PART II. Other Information ITEM 1. Legal Proceedings Legal proceedings are detailed in Note 11 – Commitments and Contingencies within the condensed consolidated financial statements - Legal proceedings information is cross-referenced to Note 11 of the financial statements[100] ITEM 1A. Risk Factors As a smaller reporting company, Xtant Medical Holdings, Inc. is not required to provide risk factor information in this item - Xtant is exempt from providing risk factor disclosures as a smaller reporting company[101] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the company for the current reporting period - This item is not applicable for this reporting period[102] ITEM 3. Defaults Upon Senior Securities This item is not applicable to the company for the current reporting period - This item is not applicable for this reporting period[103] ITEM 4. Mine Safety Disclosures This item is not applicable to the company for the current reporting period - This item is not applicable for this reporting period[104] ITEM 5. Other Information This item is not applicable to the company for the current reporting period - This item is not applicable for this reporting period[105] ITEM 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, credit agreements, and certifications - The exhibits include corporate governance documents, amendments to credit agreements, employment agreements, and certifications[106][107] Signatures This section confirms the signing of the report by the President and CEO, and Interim CFO, on May 5, 2022 - The report was signed by Sean E. Browne, President and Chief Executive Officer, and Scott Neils, Interim Chief Financial Officer, on May 5, 2022[110]