Item
2.02. Results of Operations and Financial Condition.
On
November 7, 2019, Xtant Medical Holdings, Inc. (the “Company”) announced its financial results for the third quarter
ended September 30, 2019. The full text of the press release issued in connection with the announcement is furnished as Exhibit
99.1 to this Current Report on Form 8-K.
The
information in Item 2.02 of this report (including Exhibit 99.1) shall not be deemed “filed” for purposes of Section
18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities
of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended,
or the Exchange Act, except as expressly provided by specific reference in such a filing.
To
supplement its consolidated financial statements prepared in accordance with United States generally accepted accounting principles
(“GAAP”), the Company uses certain non-GAAP financial measures, such as non-GAAP adjusted EBITDA, which are included
in the press release furnished as Exhibit 99.1 to this report. The Company’s non-GAAP adjusted EBITDA is calculated by adding
back to net loss the charges for other expense, depreciation and amortization expense, interest expense and tax expense and further
adjusted by adding back in or excluding, as appropriate, provision for losses on accounts receivable and inventory, non-cash compensation
expense, change in warrant derivative liability, separation-related expenses, field action expenses, litigation reserve, and restructuring
expenses.
The
Company uses adjusted EBITDA and the other non-GAAP measures in making operating decisions because it believes these measures
provide meaningful supplemental information regarding its core operational performance and give the Company a better understanding
of how it should invest in sales and marketing and research and development activities and how it should allocate resources to
both ongoing and prospective business initiatives. The Company also uses these measures to help make budgeting and spending decisions,
for example, among sales and marketing expenses, general and administrative expenses, and research and development expenses. Additionally,
the Company believes its use of non-GAAP adjusted EBITDA and other non-GAAP measures facilitates management’s internal comparisons
to historical operating results by factoring out potential differences caused by charges not related to its regular, ongoing business,
including, without limitation, non-cash charges and certain large and unpredictable charges.
As
described above, the Company excludes the following items from its non-GAAP financial measures for the following reasons:
Non-cash
provision for losses on accounts receivable and inventory. The Company excludes non-cash provision for losses on accounts
receivable and inventory primarily because such item is not reflective of its ongoing operating results and is not used by management
to assess the core profitability of its business operations. The Company further believes that excluding this item from its non-GAAP
results is useful to investors in that it allows for period-over-period comparability.
Non-cash
compensation expense. The Company excludes non-cash compensation expense, which is a non-cash charge related to equity awards
granted by the Company. Although non-cash compensation expense is a recurring charge to the Company’s operations, management
has excluded it because it relies on valuations based on future events, such as the market price of the Company’s common
stock, that are difficult to predict and are affected by market factors that are largely not within the control of the Company.
Thus, management believes that excluding non-cash compensation expense facilitates comparisons of the Company’s operational
performance in different periods, as well as with similarly determined non-GAAP financial measures of comparable companies.
Change
in warrant derivative liability. The Company excludes the change in fair market value of its warrants that are accounted for
as liabilities from non-GAAP adjusted EBITDA primarily because it is a non-cash charge, it is not reflective of the Company’s
ongoing operating results, and it is not used by management to assess the core profitability of the Company’s business operations.
Because it is a non-cash expense, it does not impact the Company’s operational performance, liquidity, or ability to invest
in sales and marketing, research and development, and fund acquisitions and capital expenditures. The Company further believes
that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Separation-related
expenses. The Company excludes separation-related expenses from non-GAAP adjusted EBITDA primarily because such expenses are
not reflective of its ongoing operating results and are not used by management to assess the core profitability of its business
operations. The Company further believes that excluding this item from its non-GAAP results is useful to investors in that it
allows for period-over-period comparability.
Field
action expenses. The Company excludes expenses incurred in connection with the December 2018 recall of the Company’s
Calix Lumbar Spine Implant System because such expenses are not reflective of its ongoing operating results and are not used by
management to assess the core profitability of its business operations. The Company further believes that excluding this item
from its non-GAAP results is useful to investors in that it allows for period-over-period comparability.
Litigation
reserve. The Company excludes litigation reserve from non-GAAP adjusted EBITDA primarily because it is not reflective of its
ongoing operating results and is not used by management to assess the core profitability of its business operations. The Company
further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period
comparability.
Restructuring
expenses. The Company excludes restructuring expenses from non-GAAP adjusted EBITDA primarily because such expenses are not
reflective of its ongoing operating results and are not used by management to assess the core profitability of its business operations.
The Company further believes that excluding this item from its non-GAAP results is useful to investors in that it allows for period-over-period
comparability.
Non-GAAP
adjusted EBITDA is reconciled to net loss, the most directly comparable GAAP measure, in the press release.
Non-GAAP
financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial
measures used by other companies. In addition, non-GAAP financial measures are not based on any comprehensive or standard set
of accounting rules or principles. Accordingly, the calculation of the Company’s non-GAAP financial measures may differ
from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures
for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated
with the Company’s financial results as determined in accordance with GAAP. Non-GAAP financial measures should only be used
to evaluate the Company’s financial results in conjunction with the corresponding GAAP measures. Accordingly, the Company
qualifies its use of non-GAAP financial information in a statement when non-GAAP financial information is presented.