Xtant Medical Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2025

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed above in “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere in this Form 10-Q.

Business Overview

We develop, manufacture and market regenerative medicine products and medical devices for domestic and international markets. Our products serve the specialized needs of orthopedic and neurological surgeons, including orthobiologics for the promotion of bone healing, implants and instrumentation for the treatment of spinal disease. We promote our products in the United States through independent distributors and stocking agents, supported by direct employees.

We have an extensive sales channel of independent commissioned agents and stocking distributors in the United States representing some or all of our products. We also maintain a national accounts program to enable our agents to gain access to integrated delivery network hospitals (“IDNs”) and through group purchasing organizations (“GPOs”). We have biologics contracts with major GPOs, as well as extensive access to IDNs across the United States for both biologics and spine hardware systems. While our focus is the United States market, we promote and sell our products internationally through direct sales representatives and stocking distribution partners in Europe, Canada, Mexico, South America, Australia, and certain Pacific region countries.

We have focused and intend to continue to focus primarily on four key growth initiatives: (1) introduce new products, including our recently launched premium, next-generation demineralized bone matrix, Trivium™ in addition to our introductions last year: Cortera® Posterior Fixation System, viable bone matrix, OsteoVive® Plus, and amniotic membrane allografts, SimpliGraft™ and SimpliMax™; (2) expand our distribution network; (3) penetrate adjacent markets; and (4) leverage our growth platform with technology and strategic acquisitions. While 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.

Since one of our key growth initiatives is to leverage our growth platform with technology and strategic acquisitions and explore other strategic transactions with respect to our products and our company, including licenses, business collaborations and other business combinations or transactions with other companies, we, as a matter of course, often engage in discussions with third parties regarding such matters.

During the first quarter of 2025, we entered into a manufacture and license agreement with a distributor pursuant to which we agreed to manufacture and supply to the distributor our SimpliGraft® product under the distributor’s name and brand in exchange for a one-time $1.5 million cash payment and minimum SimpliGraft® product purchase obligations of the distributor. During the fourth quarter of 2024, we entered into a license agreement with a distributor granting an exclusive right and license to manufacture and commercialize in the United States our SimpliMax™ product in exchange for a one-time $1.5 million cash payment and minimum quarterly royalty payments based on the volume of product sold by the distributor. The Centers for Medicare and Medicaid Services (“CMS”) issued a Local Coverage Determination implementing significant changes to reimbursement for cellular and tissue-based products, which would impact our SimpliMax™ and SimpliGraft® products and constitute a CMS Policy Change under these license agreements, which changes were initially intended to become effective in February 2025 but were delayed to April 2025 and then again recently delayed to January 1, 2026. These changes limit the amount of revenue to be recognized beyond 2025 and any further changes to CMS policy may reduce the amount of revenue to be recognized during 2025.

With respect to recently enacted or to be effective tariffs announced by the current U.S. Presidential administration, we do not anticipate the effect on our business will be material based on tariffs currently in place.

Results of Operations

Comparison of Three Months Ended March 31, 2025 and March 31, 2024

Revenue

Total revenue for the three months ended March 31, 2025 was $32.9 million, which represents an increase of 18% compared to $27.9 million in the same quarter of the prior year. The increase is attributed primarily additional orthobiologics sales and $3.6 million of licensing revenue during the three months ended March 31, 2025

Cost of Sales

Cost of sales consists primarily of manufacturing costs, product purchase costs, and depreciation of surgical instruments. Cost of sales also includes reserves for estimated excess inventory, inventory on consignment that may be missing and not returned, and reserves for estimated missing and damaged consigned surgical instruments. Cost of sales increased by $2.1 million to $12.7 million for the three months ended March 31, 2025 from $10.6 million for the prior year period. The increase in cost of sales is primarily due to greater revenue in the current year period compared to the prior year period, as described above, and the write-off of approximately $0.6 million of inventory in the prior year period.

Gross profit as a percentage of revenue decreased 60 basis points to 61.5% for the three months ended March 31, 2025 compared to 62.1% for the same period in 2024. Of this decrease, 400 basis points were due to charges for the write-off of inventory and additional excess and obsolete inventory and 260 basis points were due to sales mix. These decreases were partially offset by 570 basis points for reductions to product cost and greater scale.

General and Administrative

General and administrative expenses consist primarily of personnel costs for corporate employees, cash-based and stock-based compensation related costs, amortization, and corporate expenses for legal, accounting and professional fees, as well as occupancy costs. General and administrative expenses decreased 3%, or $0.3 million, to $7.5 million for the three months ended March 31, 2025, compared to $7.8 million for the prior year period. This decrease is primarily attributable to $0.4 million of reduced accounting and consultant fees during the current year period.

Sales and Marketing

Sales and marketing expenses consist primarily of sales commissions, personnel costs for sales and marketing employees, costs for trade shows, sales conventions and meetings, travel expenses, advertising, and other sales and marketing related costs. Sales and marketing expenses decreased 10%, or $1.3 million, to $11.2 million for the three months ended March 31, 2025, compared to $12.5 million for the prior year period. This decrease is primarily due to a decrease in independent agent commissions expense of $0.8 million resulting from sales mix and a $0.7 million decrease in compensation expense related to reduced headcount. These decreases were partially offset by $0.4 million of additional professional fees during the current year period.

Research and Development

Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses were $0.4 million for the three months ended March 31, 2025, compared to $0.5 million for the same period in 2024. This decrease is primarily due to decreased headcount.

Interest Expense

Interest expense is related to interest incurred from our debt instruments and finance leases. Interest expense was $1.0 million for the three months ended March 31, 2025, compared to $0.8 million for the three months ended March 31, 2024. This increase resulted primarily from additional borrowings on our revolving line of credit and the additional borrowing of $5.0 million under our term credit agreement in May 2024. We expect that our annualized interest expense will increase approximately $0.1 million for every 25 basis points of increase to the reference rate associated with our credit agreements.

Provision for Income Taxes Current and Deferred

The decrease in income tax expense for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to a decrease in cash taxes in foreign jurisdictions in 2025.

Liquidity and Capital Resources

Working Capital

Since our inception, we have financed our operations primarily through operating cash flows, private placements of equity securities and convertible debt, debt facilities, common stock rights offerings, and other debt transactions. The following table summarizes our working capital as of March 31, 2025 and December 31, 2024 (in thousands):

Cash Flows

Net cash provided by operating activities for the first three months of 2025 was $1.3 million compared to net cash used in operating activities of $5.8 million for the first three months of 2024. This change relates primarily to net income for the first three months of 2025 compared to a net loss in the comparable prior year period.

Net cash used in investing activities for the first three months of 2025 was $1.1 million compared to $0.7 million for the first three months of 2024. This increase relates primarily to increased purchases of property and equipment in the current year period.

Net cash used in financing activities for the first three months of 2025 was $0.9 million compared to net cash provided by financing activities of $5.2 million for the first three months of 2024. This change relates primarily to $6.5 million of reduced revolver borrowings, net of repayments, during the current year period compared to the prior year period.

Term Loan and Revolving Credit Facilities

The Company, as guarantor, and certain of our subsidiaries, as borrowers (collectively, the “Borrowers”), are parties to a term loan credit agreement (the “Term Credit Agreement”) and revolving loan credit agreement (the “Revolving Credit Agreement” and together with the Term Loan Credit Agreement, the “Loan Agreements”) with MidCap Financial Trust and MidCap Funding IV Trust, each in its respective capacity as agent, and lenders from time to time party thereto. Under the Term Credit Agreement (the “Term Facility”), we have borrowed up to the maximum of $22.0 million as of March 31, 2025.

The Revolving Credit Agreement provides for a secured revolving credit facility (the “Revolving Facility,” and, together with the secured term credit facility under the Term Credit Agreement, the “Facilities”) under which the Borrowers may borrow up to $17.0 million at any one time, the availability of which is determined based on a borrowing base equal to percentages of certain accounts receivable and inventory of the Borrowers in accordance with a formula set forth in the Revolving Credit Agreement. All borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material respects, and the delivery of an updated borrowing base certificate.

The Facilities have a maturity date of March 1, 2029. Each of the Borrowers, and the Company, as guarantor, are jointly and severally liable for all of the obligations under the Facilities on the terms set forth in the Credit Agreements. The Borrowers’ obligations, and the Company’s obligations as a guarantor, under the Credit Agreements are secured by first-priority liens on substantially all of their assets, including, without limitation, all inventory, equipment, accounts, intellectual property and other assets of the Company and the Borrowers. As of March 31, 2025, the Company had $11.3 million outstanding and $5.7 million of availability under the Revolving Credit Facility.

The loans and other obligations pursuant to the Credit Agreements bear interest at a per annum rate equal to the sum of the SOFR Interest Rate, as such term is defined in the Credit Agreements, plus the applicable margin of 6.50% in the case of the Term Credit Agreement, and an applicable margin of 4.50% in the case of the Revolving Credit Agreement, subject in each case to a floor of 2.50%. As of March 31, 2025, the effective rate of the Term Credit Agreement, inclusive of authorization of debt issuance costs and accretion of the final payment, was 13.20%, and the effective rate of the Revolving Credit Agreement was 8.94%.

The Credit Agreements contain affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, undergo a change in control and change the nature of their businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum levels and to maintain a certain minimum liquidity level, in each case as specified in the Credit Agreements. As of March 31, 2024, we were in compliance with all covenants under the Credit Agreements.

Cash Requirements

We believe that our $5.4 million of cash and cash equivalents as of March 31, 2025, together with our anticipated operating cash flows and amounts available under the Facilities, will be sufficient to meet our anticipated cash requirements through at least May 2026. However, we may require or seek additional capital to fund our future operations and business strategy prior to May 2026. Accordingly, there is no assurance that we will not need or seek additional financing prior to such time.

We may elect to raise additional financing even before we need it if market conditions for raising additional capital are favorable. We may seek to raise additional financing through various sources, such as equity and debt financings, debt restructurings or refinancings, or through strategic transactions, dispositions, collaborations and/or license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This is particularly true if economic and market conditions deteriorate or our business, financial performance or prospects deteriorate.

To the extent that we raise additional capital through the sale of equity or convertible debt securities or the restructuring or refinancing of our debt, the interests of our current stockholders may be diluted, and the terms may include discounted equity purchase prices, warrant coverage, liquidation or other preferences or rights that would adversely affect the rights of our current stockholders. If we issue common stock, we may do so at purchase prices that represent a discount to our trading price and/or we may issue warrants to the purchasers, which could further dilute our current stockholders. If we issue preferred stock, it could adversely affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights or preferences granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Prior to raising additional equity or debt financing, we may be required to obtain the consent of MidCap Financial Trust and MidCap Funding IV Trust under our Credit Agreements, which could limit our ability to raise additional financing and the terms thereof. Since we are no longer party to an Investor Rights Agreement with the OrbiMed funds, we no longer need their consent to raise additional financing or take certain other actions.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. There have been no changes in our critical accounting estimates for the three months ended March 31, 2025 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2025. Based upon that evaluation, and as a result of the material weakness in our internal control over financial reporting discussed below, our principal executive officer and principal financial officer concluded that as of March 31, 2025, our disclosure controls and procedures were not effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.