10-K: Xtant Medical Holdings Amends Asset Purchase Agreement with Surgalign, Files 10-K

Xtant Medical Holdings extends the termination deadline for its asset purchase agreement with Surgalign and files its annual 10-K report detailing financial results and strategic initiatives.

Summary

• Xtant Medical Holdings extended the deadline to terminate its asset purchase agreement with Surgalign Holdings to July 24, 2023.
• The extension allows Xtant more time to review Surgalign's disclosure schedules.
• Xtant Medical Holdings filed its annual 10-K report for the fiscal year ended December 31, 2023.
• The report highlights the company's focus on orthobiologics and spinal implant fixation systems.
• Xtant completed several acquisitions in 2023, including Surgalign SPV, certain assets of Surgalign Holdings, and nanOss production operations from RTI Surgical.
• The company's revenue increased by 58% to $91.3 million in 2023, compared to $58.0 million in 2022.
• Xtant reported a net income of $660 thousand for 2023, a significant improvement from a net loss of $8.5 million in 2022.
• The company's gross profit margin increased to 60.8% in 2023 from 55.4% in 2022.
• Xtant's operating expenses increased to $65.6 million in 2023, up from $38.9 million in 2022.
• The company's international revenue accounted for 5% of total revenue in 2023.
• Xtant had 215 employees as of December 31, 2023, with 33 located outside the United States.
• The company identified material weaknesses in its internal control over financial reporting related to recent acquisitions.
• Xtant expects to continue to incur losses and may need additional financing to satisfy future liquidity requirements.
• The company is subject to extensive governmental regulation, including product approvals and healthcare fraud and abuse laws.
• Xtant is dependent on key suppliers for raw materials, including stem cells, which are currently in shortage.
• The company's stock price is extremely volatile.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While there are positive developments such as revenue growth and a return to profitability, there are also significant risks and challenges, including material weaknesses in internal controls, supply chain issues, and the need for additional financing. The sentiment is cautiously optimistic.

Positives

• Xtant Medical Holdings achieved a significant revenue increase of 58% in 2023.
• The company turned profitable in 2023, reporting a net income of $660 thousand.
• Xtant's gross profit margin improved to 60.8% in 2023.
• The company successfully completed several strategic acquisitions in 2023, expanding its product portfolio and distribution network.
• Xtant has a large network of over 650 independent sales agents and stocking agents.
• The company has a growing international presence with distribution partners in multiple countries.

Negatives

• Xtant identified material weaknesses in its internal control over financial reporting related to recent acquisitions.
• The company is experiencing a shortage of stem cells, which is negatively impacting its biologics business.
• Xtant is dependent on a limited number of third-party suppliers for products, components and raw materials.
• The company's stock price is extremely volatile.
• Xtant has incurred significant losses and may need additional financing to satisfy future liquidity requirements.

Risks

• Xtant is dependent on key suppliers of raw materials, including stem cells, which are currently in shortage.
• The company's acquisitions involve risks, including integration challenges and potential impairment charges.
• Xtant operates in some markets outside the United States that are subject to political, economic, and social instability.
• The company has identified material weaknesses in its internal control over financial reporting.
• Prolonged inflation and supply chain disruptions could result in delayed product launches and higher costs.
• Xtant may not be able to compete successfully due to its smaller size and fewer financial resources.
• The company's biologics business is highly dependent on the availability of human donors.
• Xtant is subject to extensive governmental regulation, including product approvals and healthcare fraud and abuse laws.
• The company has significant indebtedness that may limit its ability to conduct and invest in its business.
• Xtant could be required to pay damages or be prevented from selling its products due to intellectual property lawsuits.
• The market price of Xtant's common stock is extremely volatile.

Future Outlook

Xtant expects its revenue from outside the United States to comprise a larger percentage of its total revenue in future years. The company also plans to introduce new products, expand its distribution network, penetrate adjacent markets, and leverage its growth platform with technology and strategic acquisitions.

Management Comments

• The intent of these four key growth initiatives is to increase our future revenues, no assurance can be provided that we will be successful in implementing these growth initiatives or increasing our future revenues.
• Our mission is, honoring the gift of donation, by allowing our patients to live as full, and complete a life as possible.

Industry Context

The orthopedic biomaterials market is highly competitive, with various public and private organizations offering both fixation and orthobiologics. Xtant competes with major players like Medtronic, Johnson & Johnson, and Zimmer Biomet, as well as smaller privately-owned companies and tissue banks. The industry is also subject to increasing consolidation, which could result in stronger competitors.

Comparison to Industry Standards

• Xtant's revenue growth of 58% in 2023 is significant compared to the industry average, which is typically in the single to low double-digit range for established companies.
• The company's gross profit margin of 60.8% is competitive with industry standards for medical device companies, but may be lower than some specialized orthobiologics companies.
• Xtant's return to profitability in 2023 is a positive sign, as many smaller medical device companies struggle to achieve profitability.
• The company's acquisitions in 2023 are a common strategy in the industry to expand product portfolios and market reach, similar to moves by larger competitors like Stryker and Zimmer Biomet.
• The identified material weaknesses in internal control over financial reporting are a concern, as strong internal controls are a key requirement for public companies in the medical device industry, similar to issues faced by other companies in the sector.
• The company's reliance on third-party suppliers and the current stem cell shortage are common challenges in the industry, particularly for smaller companies.
• Xtant's international expansion is in line with industry trends, as many medical device companies seek growth opportunities in global markets.

Related Party Transactions

• The company is party to an Investor Rights Agreement with OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP.
• The company entered into a securities purchase agreement with several accredited investors, including Stavros G. Vizirgianakis and Jonn R. Beeson.

Stakeholder Impact

• Shareholders may benefit from the company's improved financial performance and strategic acquisitions.
• Employees may be affected by the company's efforts to remediate internal control weaknesses and address supply chain issues.
• Customers may benefit from the company's expanded product portfolio and distribution network.
• Suppliers may be affected by the company's efforts to diversify its supply chain and address raw material shortages.
• Creditors may be affected by the company's need for additional financing and its ability to service its debt.

Next Steps

• Xtant plans to continue to pursue its four key growth initiatives: introduce new products, expand its distribution network, penetrate adjacent markets, and leverage its growth platform with technology and strategic acquisitions.
• The company will work to remediate the identified material weaknesses in its internal control over financial reporting.
• Xtant will continue to monitor and address supply chain issues, including the stem cell shortage.

Key Dates

Keywords

orthobiologics, spinal implants, medical devices, acquisitions, revenue, financial results, internal control, stem cells, supply chain, regulatory, indebtedness, intellectual property, market volatility