Notes
to Unaudited Condensed Consolidated Financial Statements
(1)
|
Business
Description, Basis of Presentation and Summary of Significant Accounting Policies
|
Business
Description and Basis of Presentation
The
accompanying condensed consolidated financial statements include the accounts of Xtant Medical Holdings, Inc. (“Xtant”),
a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc. (“Xtant Medical”), a Delaware corporation,
Bacterin International, Inc. (“Bacterin”), a Nevada corporation, and X-spine Systems, Inc. (“X-spine”),
an Ohio corporation (Xtant, Xtant Medical, Bacterin, and X-spine are jointly referred to herein as the “Company” or
sometimes “we”, “our,” or “us”). All intercompany balances and transactions have been eliminated
in consolidation.
Xtant
is a global medical technology company focused on the design, development, and commercialization of a comprehensive portfolio
of orthobiologics and spinal implant systems to facilitate spinal fusion in complex spine, deformity, and degenerative procedures.
The
accompanying condensed consolidated financial statements of Xtant for the three and nine months ended September 30, 2019 and 2018
are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America. They
do not include all disclosures required by generally accepted accounting principles for annual consolidated financial statements,
but in the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation.
Certain prior year amounts have been reclassified to conform with current year presentation.
Interim
results are not necessarily indicative of results that may be achieved in the future for the full year ending December 31, 2019.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto, which are included in Xtant’s Annual Report on Form 10-K for the year ended December 31, 2018. The accounting policies
set forth in those annual consolidated financial statements are the same as the accounting policies utilized in the preparation
of these condensed consolidated financial statements, except as modified for appropriate interim consolidated financial statement
presentation.
As
described in more detail below, effective as of February 13, 2018, the Company effected a 1-for-12 reverse split of its common
stock (the “Reverse Stock Split”). The Reverse Stock Split is reflected in the share amounts in all periods presented
in this report.
Corporate
Restructuring
Restructuring
Agreement
On
January 11, 2018, we entered into a Restructuring and Exchange Agreement (the “Restructuring Agreement”) with ROS
Acquisition Offshore LP, OrbiMed Royalty Opportunities II, LP (collectively referred to herein as the “Investors”),
Bruce Fund, Inc., Park West Partners International, Limited (“PWPI”), Park West Investors Master Fund, Limited (“PWIMF”),
and Telemetry Securities, L.L.C., collectively referred to herein as the “Holders.”
Pursuant
to the Restructuring Agreement, and following the execution of the Sixth Amendment to the 2017 Notes, described in the “Debt”
and “Equity” sections below, on January 17, 2018, the Investors converted 6.00% convertible senior unsecured notes
due 2021, plus accrued and unpaid interest, at the $9.11 per share conversion rate originally provided thereunder (the “2017
Notes”), into 189,645 shares of our common stock.
On
February 14, 2018, after giving effect to the Reverse Stock Split (described below), the $70.3 million aggregate principal amount
of our then outstanding 6.00% convertible senior unsecured notes due 2021 held by the Holders (the “Remaining Notes”),
plus accrued and unpaid interest, were exchanged for newly-issued shares of our common stock at an exchange rate of 138.8889 shares
per $1,000 principal amount of the Remaining Notes, for an exchange price of $7.20 per share (the “Notes Exchange”).
This resulted in the issuance of 10,401,309 shares of our common stock to the Holders and the Investors acquiring an approximately
70% controlling interest in our outstanding shares of common stock. Upon the completion of the Notes Exchange, all outstanding
obligations under our convertible senior secured notes were satisfied in full, and the Indentures governing such notes were discharged.
Pursuant
to the terms of the Restructuring Agreement, we commenced a rights offering to allow our stockholders as of a record date of April
27, 2018 to purchase up to an aggregate of 1,137,515 shares of our common stock at a subscription price of $7.20 per share. The
rights offering expired on June 18, 2018. We issued 129 shares of common stock in the rights offering and received $0.9 thousand
gross proceeds.
Amended
and Restated Certificate of Incorporation
On
February 13, 2018, following a special meeting of our stockholders, we filed with the Secretary of State of the State of Delaware
a Certificate of Amendment to our Certificate of Incorporation (the “Certificate Amendment”). The Certificate Amendment
amended and restated our Certificate of Incorporation (the “Charter”) to, among other things:
|
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effect
the Reverse Stock Split;
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●
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after
giving effect to the Reverse Stock Split, decrease the number of authorized shares of common stock available for issuance
from 95,000,000 to 50,000,000 and increase the number of authorized shares of preferred stock available for issuance from
5,000,000 to 10,000,000;
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authorize
the Board of Directors (“Board”) to increase or decrease the number of shares of any series of our capital stock,
provided that such increase or decrease does not exceed the number of authorized shares or represent less than the number
of shares then outstanding;
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●
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authorize
the Board to issue new series of preferred stock without approval of the holders of common stock or other series of preferred
stock, with such powers, preferences, and rights as may be determined by the Board;
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authorize
a majority of the Board to fix the number of our directors;
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indemnify
the members of the Board to the fullest extent permitted by law;
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remove
the classification of the Board to require all directors to be elected annually;
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provide
that special meetings of our stockholders may only be called by the Board, the chairman of the Board, or our chief executive
officer;
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provide
that no stockholder will be permitted cumulative voting at any election of directors;
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elect
not to be governed by Section 203 of the Delaware General Corporation Law (the “DGCL”);
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elect
the Court of Chancery of the State of Delaware to be the exclusive forum for any derivative action or proceeding brought on
our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers, or other employees,
any action under the DGCL, our Charter, or bylaws, or any actions governed by the internal affairs doctrine; and
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require
the vote of at least two-thirds of the voting power of the then outstanding shares of our capital stock to amend or repeal
certain provisions of our Charter.
|
The
Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on February 13, 2018, and our common stock began trading on
a split-adjusted basis when the market opened on February 14, 2018. Upon the effectiveness of the Reverse Stock Split, every 12
shares of our issued and outstanding common stock automatically converted into one share of common stock, without any change in
the par value per share. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares
issuable upon the exercise of all of our outstanding stock options, warrants and convertible securities to purchase shares of
common stock and the number of shares underlying restricted stock awards and reserved for issuance pursuant to our equity incentive
compensation plan. Any fraction of a share of common stock that would otherwise have resulted from the Reverse Stock Split was
rounded down to the nearest whole share. All share and per share amounts have been retroactively restated to reflect the Reverse
Stock Split.
Private
Placement SPA
On
February 14, 2018, we entered into a Securities Purchase Agreement (the “Private Placement SPA”) with the Investors
pursuant to which the Investors purchased from us an aggregate of 945,819 shares of our common stock at a price of $7.20 per share
for aggregate proceeds of $6.8 million.
Investor
Rights Agreement
Effective
February 14, 2018, we entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Holders.
Under the Investor Rights Agreement, the Investors are permitted to nominate a majority of our directors and designate the chairperson
of the Board at subsequent annual meetings, as long as the Investors maintain an ownership threshold in the Company of at least
40% of the then outstanding common stock (the “Ownership Threshold”). If the Investors are unable to maintain the
Ownership Threshold, the Investor Rights Agreement contemplates a reduction of nomination rights commensurate with their ownership
interests.
For
so long as the Ownership Threshold is met, we must obtain the approval of the Investors to proceed with the following actions:
(i) issue new securities; (ii) incur over $0.25 million of debt in a fiscal year; (iii) sell or transfer over $0.25 million of
our assets or businesses or our subsidiaries in a fiscal year; (iv) acquire over $0.25 million of assets or properties in a fiscal
year; (v) make capital expenditures over $0.125 million individually or $1.5 million in the aggregate during a fiscal year; (vi)
approve our annual budget; (vii) hire or terminate our chief executive officer; (viii) appoint or remove the chairperson of the
Board; and (ix) make loans to, make investments in, or purchase, or permit any subsidiary to purchase, any stock or other securities
in another entity in excess of $0.25 million in a fiscal year. As long as the Ownership Threshold is met, we may not increase
the size of the Board beyond seven directors without the approval of a majority of the directors nominated by the Investors.
The
Investor Rights Agreement grants the Holders the right to purchase from us a pro rata amount of any new securities that we may
propose to issue and sell. The Investor Rights Agreement may be terminated (a) upon the mutual written agreement of all the parties,
(b) upon written notice of the Company or an Investor, if such Investor’s ownership percentage of our then outstanding common
stock is less than 10%, or (c) upon written notice by the Investors. PWPI and PWIMF’s right to purchase from us a pro rata
amount of any new securities will also terminate at such time as their aggregate ownership percentage of our then outstanding
common stock is less than 8.5%.
Registration
Rights Agreement
Effective
February 14, 2018, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the
Holders. The Registration Rights Agreement required us to, among other things, file with the U.S. Securities and Exchange Commission
(“SEC”) a shelf registration statement within 90 days of the date of the Registration Rights Agreement covering the
resale, from time to time, of our common stock issued. The registration statement was filed on May 15, 2018 and became effective
on June 4, 2018.
Second
Amended and Restated Bylaws
On
February 14, 2018, we amended and restated our current bylaws by adopting the Second Amended and Restated Bylaws of the Company
(the “Amended Bylaws”). The Amended Bylaws amended our existing bylaws to, among other things:
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provide
for annual and special meetings of stockholders to be held through remote communications;
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provide
for the election of any directors not elected at an annual meeting of stockholders to be elected at a special meeting of stockholders;
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declassify
the Board into one group of directors that will hold office until the subsequent annual meeting of stockholders and until
the election and qualification of such directors’ respective successors;
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provide
for the filling of a new directorship or director vacancy by the affirmative vote of the holders of a majority of the voting
power of our shares of stock;
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allow
for a majority of the Board present to adjourn a Board meeting if a quorum is not met;
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unless
otherwise restricted in the Amended Bylaws or our Charter, provide the Board with the authority to fix the compensation of
directors, including, without limitation, compensation for services as members of Board committees;
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allow
us to enter into an agreement with a stockholder to restrict the transfer of shares held by such stockholder in any manner
not prohibited by the DGCL; and
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allow
the Board to declare dividends on our capital stock, subject to any provisions of our Charter and applicable law.
|
Concentrations
and Credit Risk
The
Company’s accounts receivable are due from a variety of health care organizations and distributors throughout the world.
No single customer accounted for more than 10% of revenue or accounts receivable for the comparable periods. The Company provides
for uncollectible amounts when specific credit issues arise. Management believes that all significant credit risks have been identified
at September 30, 2019.
Use
of Estimates
The
preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Significant estimates
include the carrying amount of property and equipment, goodwill and intangible assets and liabilities, valuation allowances for
trade receivables, inventory and deferred income tax assets and liabilities, current and long-term financing lease obligations
and corresponding right-of-use asset, and estimates for the fair value of long-term debt, stock options and other equity awards
upon which the Company determines stock-based compensation expense. Actual results could differ from those estimates.
Long-Lived
Assets
Long-lived
assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. No impairment expense was recorded during the three and nine months ended September 30, 2019.
Goodwill
Goodwill
represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have indefinite useful lives are not amortized. Instead, they are tested for impairment
at least annually, and whenever events or circumstances indicate, the carrying amount of the asset may not be recoverable. No
impairment expense was recorded during the three and nine months ended September 30, 2019.
Revenue
Recognition
The
Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2014-09, Topic 606, Revenue from Contracts
with Customers, effective January 1, 2018 (“ASC 606”). This new accounting standard outlines a single, comprehensive
model used in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition
requirements and eliminates most industry specific guidance from U.S. generally accepted accounting principles (“GAAP”).
The core principle of the new accounting standard is to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. In addition, the adoption of this new accounting standard resulted in increased disclosure, including qualitative
and quantitative disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers.
Disaggregation
of Revenue
The
Company operates in one reportable segment with our net revenue derived primarily from the sale of orthobiologics and spinal implant
products across North America, Europe, Asia Pacific, and Latin America. Sales are reported net of returns. No rebates, group purchasing
organization fees, or other customer allowances are present and so are not relevant to net revenue determination. The following
table presents revenues from these product lines for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Percentage of
|
|
|
Three Months Ended
|
|
|
Percentage of
|
|
|
|
September 30, 2019
|
|
|
Total Revenue
|
|
|
September 30, 2018
|
|
|
Total Revenue
|
|
Orthobiologics
|
|
$
|
11,342
|
|
|
|
72
|
%
|
|
$
|
11,507
|
|
|
|
67
|
%
|
Spinal implant
|
|
|
4,349
|
|
|
|
28
|
%
|
|
|
5,632
|
|
|
|
33
|
%
|
Other revenue
|
|
|
30
|
|
|
|
0
|
%
|
|
|
127
|
|
|
|
0
|
%
|
Total revenue
|
|
$
|
15,721
|
|
|
|
100
|
%
|
|
$
|
17,266
|
|
|
|
100
|
%
|
|
|
Nine Months Ended
|
|
|
Percentage of
|
|
|
Nine Months Ended
|
|
|
Percentage of
|
|
|
|
September 30, 2019
|
|
|
Total Revenue
|
|
|
September 30, 2018
|
|
|
Total Revenue
|
|
Orthobiologics
|
|
$
|
34,374
|
|
|
|
72
|
%
|
|
$
|
36,419
|
|
|
|
68
|
%
|
Spinal implant
|
|
|
13,200
|
|
|
|
28
|
%
|
|
|
17,203
|
|
|
|
32
|
%
|
Other revenue
|
|
|
144
|
|
|
|
0
|
%
|
|
|
319
|
|
|
|
0
|
%
|
Total revenue
|
|
$
|
47,718
|
|
|
|
100
|
%
|
|
$
|
53,941
|
|
|
|
100
|
%
|
Performance
Obligations
The
Company’s contracts do not include a right of acceptance or a right to cancel. Therefore, our process for recognizing revenue
does not require an evaluation of whether acceptance is received or a right to cancel has expired. Further, the Company does not
incur upfront costs or exclusivity fees in conjunction with entering into a customer contract. The Company’s customer contracts
do not provide for percentage of completion performance measures or contingent consideration.
In
the normal course of business, the Company accepts returns of products that have not been implanted. Product returns are not material
to the Company’s consolidated statements of operations. The Company accounts for shipping and handling activities as a fulfillment
cost rather than a separate performance obligation. The Company’s policy is to record revenue net of any applicable sales,
use, or excise taxes. Payment terms are generally net 30 days from invoice date, and some customers are offered discounts for
early pay.
Contract
Assets and Liabilities
The
Company does not have deferred or unearned revenue arrangements with its customers that would give rise to contract liabilities.
The Company recognizes sales commissions as incurred because the amortization period is less than one year. Additionally, the
Company does not recognize unbilled receivables or progress payments to be billed that would result in a contract asset. All pricing
and agreements are completed based on the contracted individual unit price; no other methods of determining price are allowed
within the Company’s sales agreements. Therefore, no contract assets or contract liabilities are recorded in our condensed
consolidated balance sheets as of September 30, 2019 and December 31, 2018.
Research
and Development
Research
and development costs, which are principally related to internal costs for the development of new products, are expensed as incurred.
Net
Loss Per Share
Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock
outstanding. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period
that they were outstanding. Diluted net income (loss) per share is computed in a manner consistent with that of basic earnings
per share while giving effect to all potentially dilutive shares of common stock outstanding during the period, which include
the assumed exercise of stock options and warrants using the treasury stock method. Diluted net loss per share was the same as
basic net loss per share for the three and nine months ended September 30, 2019 and 2018, as shares issuable upon the exercise
of stock options and warrants were anti-dilutive as a result of the net losses incurred for those periods. Dilutive earnings per
share are not reported, as the effects of including 3,313,953 and 2,156,882 outstanding stock options, restricted stock units
and warrants for the three and nine months ended September 30, 2019 and 2018, respectively, are anti-dilutive.
Fair
Value of Financial Instruments
The
carrying values of financial instruments, including trade accounts receivable, accounts payable, accrued liabilities, and long-term
debt, approximate their fair values based on terms and related interest rates.
The
Company follows a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels
of the fair value hierarchy are described as follows:
Level
1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level
2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level
3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. During the nine months ended September 30, 2019 and 2018, there were no reclassifications in financial
assets or liabilities between Level 1, 2, or 3 categories.
The
following table sets forth by level, within the fair value hierarchy, our liabilities that are measured at fair value on a recurring
basis.
Warrant
derivative liability (in thousands):
|
|
As of
September 30, 2019
|
|
|
As of
December 31, 2018
|
|
Level 1
|
|
|
—
|
|
|
|
—
|
|
Level 2
|
|
|
—
|
|
|
|
—
|
|
Level 3
|
|
$
|
17
|
|
|
$
|
10
|
|
The
valuation technique used to measure fair value of the warrant liability is based on a lattice valuation model and significant
assumptions and inputs determined by us. See Note 9, “Warrants,” below.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments–Credit
Losses: Measurement of Credit Losses on Financial Instruments, which amends certain provisions of ASC 326, Financial Instruments–Credit
Loss. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables,
held to maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking “expected
loss” model that generally will result in the earlier recognition of allowances for losses. In May 2019, the FASB issued
ASU No. 2019-05, Financial Instruments–Credit Losses (Topic 326): Targeted Transition Relief. The amendments in the
update provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized
cost basis. The effective date and transition methodology for the amendment have not changed. The ASU is effective for annual
reporting periods beginning after December 15, 2019, including interim periods within those annual periods, and will be applied
as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance
is effective. We are currently evaluating this update to determine the full impact of its adoption but do not expect the adoption
of these provisions will have a material effect on our consolidated financial position, results of operations, or cash flows.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40),
to simplify the accounting for goodwill impairment. The update removes Step 2 of the goodwill impairment test, which requires
a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods
beginning after December 15, 2019, but early adoption is permitted. We are currently evaluating this update to determine the full
impact of its adoption but do not expect this accounting standards update to have a material impact on our consolidated financial
position, results of operations, or cash flows.
Inventories
consist of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Raw materials
|
|
$
|
3,738
|
|
|
$
|
3,519
|
|
Work in process
|
|
|
1,501
|
|
|
|
949
|
|
Finished goods
|
|
|
23,270
|
|
|
|
25,235
|
|
Gross inventories
|
|
|
28,509
|
|
|
|
29,703
|
|
Reserve for obsolescence
|
|
|
(12,484
|
)
|
|
|
(12,402
|
)
|
Total
|
|
$
|
16,025
|
|
|
$
|
17,301
|
|
(3)
|
Property
and Equipment, Net
|
Property
and equipment, net are as follows (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Equipment
|
|
$
|
4,140
|
|
|
$
|
4,145
|
|
Computer equipment
|
|
|
455
|
|
|
|
481
|
|
Computer software
|
|
|
570
|
|
|
|
570
|
|
Furniture and fixtures
|
|
|
99
|
|
|
|
164
|
|
Leasehold improvements
|
|
|
3,979
|
|
|
|
3,941
|
|
Vehicles
|
|
|
10
|
|
|
|
10
|
|
Surgical instruments
|
|
|
10,872
|
|
|
|
10,772
|
|
Total cost
|
|
|
20,125
|
|
|
|
20,083
|
|
Less: accumulated depreciation
|
|
|
(15,057
|
)
|
|
|
(12,909
|
)
|
Property and equipment, net
|
|
$
|
5,068
|
|
|
$
|
7,174
|
|
Depreciation
expense related to property and equipment, including property under capital lease, for the first nine months of 2019 and 2018
was $2.3 million and $2.4 million, respectively. Depreciation expense not included as part of the depreciation and amortization
line item within the condensed consolidated statements of operations is classified as part of cost of sales.
The
Company leases certain equipment under finance leases. For financial reporting purposes, minimum lease payments relating to the
assets have been capitalized. As of September 30, 2019, the Company has recorded $1.5 million of gross assets in equipment and
$0.9 million of accumulated depreciation.
The
following table sets forth information regarding intangible assets (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Patents
|
|
$
|
847
|
|
|
$
|
847
|
|
Accumulated amortization
|
|
|
(318
|
)
|
|
|
(274
|
)
|
Intangible assets, net
|
|
$
|
529
|
|
|
$
|
573
|
|
The
following is a summary of estimated future amortization expense for intangible assets as of September 30, 2019 (in thousands):
Remainder of 2019
|
|
$
|
14
|
|
2020
|
|
|
56
|
|
2021
|
|
|
55
|
|
2022
|
|
|
54
|
|
2023
|
|
|
52
|
|
Thereafter
|
|
|
298
|
|
Total
|
|
$
|
529
|
|
Accrued
liabilities consist of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Wages/commissions payable
|
|
$
|
3,849
|
|
|
$
|
3,332
|
|
Other accrued liabilities
|
|
|
2,347
|
|
|
|
1,818
|
|
Accrued liabilities
|
|
$
|
6,196
|
|
|
$
|
5,150
|
|
Convertible
Note Indenture
During
the first quarter of 2018 in connection with our Restructuring, all of the outstanding 6.00% convertible senior unsecured notes
due 2021 were converted into shares of our common stock and the Indenture governing such notes was discharged.
Twenty-Second
Amendment to the Amended and Restated Credit Agreement
Effective
January 30, 2018, the Company and the Investors entered into the Twenty-Second Amendment to the Amended and Restated Credit Agreement
dated July 27, 2015, which amended the Amended and Restated Credit Agreement by and between Bacterin and ROS Acquisition Offshore
LP (collectively, the “Prior Credit Agreement” and the facility created under such agreement, the “Credit Facility”).
This amendment further deferred the Company’s accrued interest payment date for the fiscal quarters ended on December 31,
2016, March 31, 2017, June 30, 2017, September 30, 2017, and December 31, 2017, until February 28, 2018.
Twenty-Third
Amendment to the Prior Credit Agreement
Effective
February 14, 2018, the Company and the Investors entered into the Twenty-Third Amendment to the Prior Credit Agreement, which
further amended the Prior Credit Agreement and terms of the Credit Facility. As of this amendment, the interest payable was carried
forward. As modified, the interest rate options within the Credit Facility were as follows: (i) through December 31, 2018, we
had the option at our sole discretion (a) to pay PIK Interest at LIBOR (as defined in the Credit Facility) plus 12% or (b) pay
cash interest at LIBOR plus 10%; (ii) beginning January 1, 2019 through September 30, 2019, we had the option at our sole discretion
to either (a) pay PIK Interest at LIBOR plus 15% or (b) pay cash interest at LIBOR plus 10%; and (iii) beginning July 1, 2019
through the maturity date of the Credit Facility, we will pay cash interest at LIBOR plus 10%. The amendment also reduced the
prepayment or repayment fee under the Credit Facility to 1%.
This
amendment also modified the financial covenants in the Prior Credit Agreement, including removing the minimum revenue covenant
and providing a minimum liquidity covenant, a consolidated leverage ratio covenant, and a minimum consolidated EBITDA covenant,
all as defined in the Prior Credit Agreement.
Twenty-Fourth
Amendment to the Prior Credit Agreement
On
September 17, 2018, the Company and the Investors entered into the Twenty-Fourth Amendment to the Prior Credit Agreement (the
“24th Amendment”), which further amended the Prior Credit Agreement and the terms of the Credit Facility,
effective as of April 1, 2018. Under the terms of the 24th Amendment, no interest was charged on the loans under the
Credit Facility (the “Loans”) from April 1, 2018, until June 30, 2018.
Due
to the interest rate relief provided by the 24th Amendment, the Company performed an assessment of the changes to the
terms of the Credit Facility in accordance with ASC 470, Debt. The Credit Facility was modified based on an evaluation
of the present value of cash flows for the old and new debt instruments. Given the modification, a new effective interest rate
of 13.45% for the modified loan was calculated based on the carrying amount of the debt and the present value of the revised future
cash flows. The modified interest rate is effective through the remaining life of the loan.
Twenty-Fifth
Amendment to the Prior Credit Agreement
Also,
on September 17, 2018, the Company and the Investors entered into the Twenty-Fifth Amendment to the Prior Credit Agreement (the
“25th Amendment”), which further amended the Prior Credit Agreement and terms of the Credit Facility, effective
as of August 1, 2018. Under the terms of the 25th Amendment:
|
●
|
no
interest was charged on the Loans under the Credit Facility from July 1, 2018 until December 31, 2018;
|
|
●
|
the
Optional PIK Interest (as such term is defined in the Prior Credit Agreement) was decreased from 15% plus the LIBO Rate (as
such term is defined in the Amended and Restated Credit Agreement) to 10% plus the LIBO Rate, with a 2.3125% floor;
|
|
●
|
a
LIBO Rate floor of 2.3125% was added; and
|
|
●
|
the
fee due upon payment, prepayment, or repayment of the principal amount of the Loans under the Credit Facility, whether on
the maturity date or otherwise, was increased to 2% from 1% of the aggregate principal amount of such payment, prepayment,
or repayment.
|
The
Company issued warrants to purchase an aggregate of 1.2 million shares of Company common stock to the Investors with an exercise
price of $0.01 per share and an expiration date of August 1, 2028 (collectively, the “2018 Warrants”). The issuance
of the 2018 Warrants occurred on September 17, 2018 and was a condition to the effectiveness of the 25th Amendment.
See Note 9, “Warrants,” below.
Second
Amended and Restated Credit Agreement
On
March 29, 2019, the Company and the Investors entered into a Second Amended and Restated Credit Agreement (the “Second Amended
and Restated Credit Agreement”), which amended and restated the Prior Credit Agreement. Under the Second Amended and Restated
Credit Agreement:
|
●
|
We
may continue to make requests for term loans in amounts equal to the remaining commitment for additional delayed draw loans,
which was approximately $2.2 million as of the date of the Second Amended and Restated Credit Agreement, and may request additional
term loans with the Investors in an aggregate amount of up to $10.0 million, with the amount of each loan draw to be subject
to our production of a thirteen-week cash flow forecast that is approved by the Investors and which shows a projected cash
balance for the following two-week period of less than $1.5 million, as well as the satisfaction (or waiver in writing by
each Investor) of conditions precedent, including closing certificate, delivery of budget, and other satisfactory documents;
|
|
●
|
no
interest will accrue on the Loans under the Second Amended and Restated Credit Agreement from and after January 1, 2019 until
March 31, 2020;
|
|
●
|
beginning
April 1, 2020 through the maturity date of the Second Amended and Restated Credit Agreement, interest payable in cash will
accrue on the Loans under the Credit Agreement at a rate per annum equal to the sum of (a) 10.00% plus (b) the higher of (x)
the LIBO Rate (as such term is defined in the Second Amended and Restated Credit Agreement) and (y) 2.3125%;
|
|
●
|
the
maturity date of the Loans is March 31, 2021;
|
|
●
|
the
Consolidated Senior Leverage Ratio and Consolidated EBITDA (as such terms were defined in the Prior Credit Agreement) financial
covenants were deleted, and a new Revenue Base (as such term is defined in the Second Amended and Restated Credit Agreement)
financial covenant was added; and
|
|
●
|
the
key person event default provision was revised to refer specifically to certain recently-hired executive officers of the Company.
|
Long-term
debt, less issuance costs consists of long-term debt due to the lenders under our Second Amended and Restated Credit Agreement
as of September 30, 2019 and under our Prior Credit Agreement as of December 31, 2018. The execution of the Second Amended and
Restated Credit Agreement during the first quarter of 2019 and the changes to our credit facility reflected therein, including
the interest rate relief and extended maturity, along with the additional availability, were determined to be and accounted for
as a debt extinguishment under GAAP, resulting in the write-off of the original loan and associated issuance costs. The present
value of the new loan was determined to be $72.7 million as of March 31, 2019 with the Company recording an increase to additional
paid-in capital of $7.3 million. Because of the related party affiliation between the Company and our credit facility lenders,
this debt extinguishment resulted in an increase in additional paid-in capital rather than flowing through our condensed consolidated
statements of operations as a gain on extinguishment. As of September 30, 2019, our long-term debt, less issuance costs was $75.0
million. Assuming no debt payments are made, our long-term debt, less issuance costs line item will continue to increase until
the loan’s March 31, 2021 maturity date.
While
our long-term debt, less issuance costs balance was $75.0 million as of September 30, 2019 under GAAP, the Company owes a principal
balance of $55.8 million plus accrued PIK interest of $27.2 million as of September 30, 2019.
Due
to the terms within the Second Amended and Restated Credit Agreement, the Company performed an assessment of the changes to the
terms of the Prior Credit Agreement in accordance with ASC 470. Given there were cumulative changes to the Prior Credit Agreement
within one year of March 29, 2019, the debt terms that existed as of March 29, 2018 were used in the evaluation of the present
value of cash flows for the old and new debt instruments which resulted in the extinguishment of the Prior Credit Agreement and
recognition of the Second Amended and Restated Credit Agreement. A new effective interest rate of 13.19% for the Second Amended
and Restated Credit Agreement was calculated based on the carrying amount of the debt and the present value of the revised future
cash flows. This rate is effective through the remaining life of the loan.
On
April 1, 2019, the Company issued warrants to purchase an aggregate of 1.2 million shares of Company common stock to the Investors,
with an exercise price of $0.01 per share and an expiration date of April 1, 2029 (collectively, the “2019 Warrants”).
The issuance of the 2019 Warrants occurred on April 1, 2019 and was a condition to the effectiveness of the Second Amended and
Restated Credit Agreement.
Long-term
debt consists of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Amounts due under Second Amended and Restated Credit Agreement
|
|
$
|
72,657
|
|
|
$
|
—
|
|
Amounts due under Prior Credit Agreement
|
|
|
—
|
|
|
|
55,787
|
|
PIK interest payable related to Credit Agreements
|
|
|
2,172
|
|
|
|
27,178
|
|
Plus: 2% exit fee on Prior Credit Agreement
|
|
|
266
|
|
|
|
254
|
|
Gross long-term debt
|
|
|
75,095
|
|
|
|
83,219
|
|
Less: discount on Credit Agreements
|
|
|
—
|
|
|
|
(5,114
|
)
|
Less: total debt issuance costs on Credit Agreements
|
|
|
(110
|
)
|
|
|
(166
|
)
|
Long-term debt, less issuance costs
|
|
$
|
74,985
|
|
|
$
|
77,939
|
|
The
following is a summary of maturities due on the long-term debt as of September 30, 2019 (in thousands):
Remainder of 2019
|
|
$
|
—
|
|
2020
|
|
|
—
|
|
2021
|
|
|
75,095
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
75,095
|
|
Charter
Amendment
On
October 30, 2019, the Company’s stockholders, upon recommendation of the Board, approved an amendment to the Company’s
Charter to increase the number of authorized shares of common stock from 50,000,000 to 75,000,000.
Convertible
Note Indenture
During
the first quarter of 2018, in connection with our Restructuring (defined above), all of the outstanding 6.00% convertible senior
unsecured notes due 2021 were converted or exchanged into shares of our common stock, and the Indenture governing such notes was
discharged. On January 17, 2018, the Investors converted a $1.6 million aggregate principal amount of 6.00% convertible senior
unsecured promissory notes due in 2021, which were issued effective January 17, 2017, plus accrued and unpaid interest, into 189,645
shares of our common stock. On February 14, 2018, an additional $70.3 million aggregate principal amount of notes, plus accrued
and unpaid interest, were exchanged for 10,401,309 newly-issued shares of our common stock.
Private
Placement SPA
On
February 14, 2018, we sold to the Investors, pursuant to the Private Placement SPA, 945,819 shares of our common stock at a price
of $7.20 per share for aggregate proceeds of $6.8 million.
Registration
Rights Agreement
On
May 15, 2018, we filed a shelf resale registration statement with the SEC pursuant to our obligations under the Registration Rights
Agreement. This registration statement was declared effective by the SEC on June 4, 2018.
Rights
Offering
On
May 18, 2018, we distributed to holders of our common stock, at no charge, non-transferable subscription rights to purchase up
to an aggregate of 1,137,515 shares of our common stock (the “Rights Offering”). In the Rights Offering, holders received
0.0869816 subscription rights for each share of common stock held on the record date, April 27, 2018. The units were priced at
$7.20 per unit. The Rights Offering expired on June 18, 2018, at which time the rights were no longer exercisable. We issued 129
shares of our common stock in the Rights Offering, resulting in $0.9 thousand in gross proceeds to us.
(8)
|
Stock-Based Compensation
|
Xtant
Medical Holdings, Inc. 2018 Equity Incentive Plan
On
August 1, 2018, our stockholders approved the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan at the 2018 annual meeting
of stockholders of Xtant and at the 2019 annual meeting of stockholders held on October 30, 2019 approved an amendment to increase
the number of shares of common stock available thereunder by 1,500,000 shares (as amended, the “2018 Plan”). The 2018
Plan became effective immediately upon initial approval of the plan by our stockholders on August 1, 2018 and will expire on July
31, 2028, unless terminated earlier. The 2018 Plan replaced the Amended and Restated Xtant Medical Equity Incentive Plan (the
“Prior Plan”) with respect to future grants of equity awards, although the Prior Plan continues to govern equity awards
granted under the Prior Plan. The 2018 Plan permits the Board, or a committee thereof, to grant to eligible employees, non-employee
directors, and consultants of the Company non-statutory and incentive stock options, stock appreciation rights, restricted stock
awards, restricted stock units, deferred stock units, performance awards, non-employee director awards, and other stock-based
awards. The Board may select 2018 Plan participants and determine the nature and amount of awards to be granted. Subject to adjustment
as provided in the 2018 Plan, the number of shares of our common stock available for issuance under the 2018 Plan is 2,807,747
shares, of which 1,742,387 shares remain available as of the date of this report. Under the 2018 Plan, shares of our common
stock related to awards granted under the plan that terminate by expiration, forfeiture, cancellation, or otherwise without the
issuance of the shares become available again for grant under the plan.
The
Board has granted various awards under the 2018 Plan to certain directors, officers and employees. As of September 30, 2019, stock
options to purchase an aggregate of 210,360 shares of our common stock, a restricted stock award for 13,021 shares of common stock,
and restricted stock units covering 129,204 shares were outstanding under the 2018 Plan. During the nine months ended September
30, 2019, options to purchase 420,000 shares of common stock granted under the 2018 Plan were forfeited and cancelled as a result
of the termination of employment of optionees. Effective October 7, 2019, the Company entered into an employment agreement with
Sean Browne as the Company’s President and Chief Executive Officer. In connection with the employment agreement, the Company
granted stock options to purchase 329,044 shares of our common stock and restricted stock units covering 329,044 shares effective
as of October 15, 2019.
The
Board also granted various awards under the Prior Plan. As of September 30, 2019, stock options to purchase an aggregate of 17,772
shares of our common stock and restricted stock awards for 23,438 shares of our common stock were outstanding under the Prior
Plan. During the nine months ended September 30, 2019, options to purchase 3,416 shares of our common stock granted under the
Prior Plan were forfeited and cancelled as a result of the termination of employment of optionees and a restricted stock award
for 10,417 shares of our common stock was forfeited and cancelled as a result of the termination of service of a director.
From
time to time, we have granted options to purchase shares of our common stock outside of any stockholder-approved plan to new hires
(collectively the “Non-Plan Grants”). As of September 30, 2019, no Non-Plan Grants were outstanding. During the nine
months ended September 30, 2019, Non-Plan Grants to purchase 25,000 shares of common stock were forfeited and cancelled as a result
of the termination of employment of the optionee.
Stock
options granted under the 2018 Plan may be either incentive stock options to employees, as defined in Section 422A of the Internal
Revenue Code of 1986, or non-qualified stock options. The exercise price of all stock options granted under the 2018 Plan must
be at least equal to the fair market value of the shares of common stock on the date of the grant. The 2018 Plan is administered
by the Board. Stock options granted under the 2018 Plan are generally not transferable, vest in installments over the requisite
service period, and are exercisable during the stated contractual term of the option only by the optionee.
Stock-based
compensation expense recognized in the consolidated statements of operations for the nine months ended September 30, 2019 and
2018 is based on awards expected to vest and reflects an estimate of awards that will be forfeited. Stock options to purchase
an aggregate of 179,590 shares of common stock were issued during the nine months ended September 30, 2019; options to purchase
an aggregate of 410,770 shares of common stock were issued during the same period in 2018.
Stock
option activity, including options granted under the 2018 Plan, the Prior Plan, and the Non-Plan Grants, was as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Fair Value at Grant Date Per Share
|
|
|
Shares
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Fair Value at Grant Date Per Share
|
|
Outstanding at January 1
|
|
|
496,958
|
|
|
$
|
9.90
|
|
|
$
|
6.62
|
|
|
|
67,465
|
|
|
$
|
71.03
|
|
|
$
|
36.85
|
|
Granted
|
|
|
179,590
|
|
|
$
|
2.47
|
|
|
$
|
2.02
|
|
|
|
410,770
|
|
|
$
|
5.71
|
|
|
$
|
3.91
|
|
Cancelled or expired
|
|
|
(448,416
|
)
|
|
$
|
5.51
|
|
|
$
|
4.21
|
|
|
|
(33,002
|
)
|
|
$
|
53.23
|
|
|
$
|
36.42
|
|
Outstanding at September 30
|
|
|
228,132
|
|
|
$
|
12.51
|
|
|
$
|
7.64
|
|
|
|
445,233
|
|
|
$
|
12.09
|
|
|
$
|
6.49
|
|
Exercisable at September 30
|
|
|
25,464
|
|
|
$
|
89.03
|
|
|
$
|
49.36
|
|
|
|
34,463
|
|
|
$
|
135.23
|
|
|
$
|
67.26
|
|
The
estimated fair value of stock options granted is calculated using the Black-Scholes-Merton method applied to individual grants.
Key assumptions used to estimate the fair value of stock awards are as follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
2.2
|
%
|
|
|
2.9
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term
|
|
|
8.3 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
92
|
%
|
|
|
90
|
%
|
Total
stock-based compensation recognized for employees and directors was $0.3 million and $0.6 million for the nine months ended September
30, 2019 and 2018, respectively, and was recognized as general and administrative expense. The aggregate intrinsic value of options
outstanding as of September 30, 2019 was $66 thousand.
2019
Warrants
On
April 1, 2019, the Company issued warrants to purchase an aggregate of 1.2 million shares of Company common stock to the Investors
with an exercise price of $0.01 per share and an expiration date of April 1, 2029. As a result of the issuance of the warrant
to purchase 1.2 million shares of common stock on April 1, 2019, the total outstanding common stock warrants as of April 1, 2019
was 2,910,609. The issuance of the 2019 Warrants was a condition to the effectiveness of the Second Amended and Restated Credit
Agreement. The fair value of the 2019 Warrants upon issuance was determined to be $9 thousand. The significant decrease in value
of the 2019 Warrants compared to the 2018 Warrants was attributable to the updated forecasts and assumptions used by the Company
during the annual planning process for 2019 that resulted in our decision to conclude that a goodwill and intangible asset impairment
charge was appropriate during the fourth quarter of 2018. The 2019 Warrants meet all the requirements to be classified as equity
awards in accordance with ASC No. 815-40. The number of shares of Company common stock issuable upon exercise of the 2019 Warrants
is subject to standard and customary anti-dilution provisions for stock splits, stock dividends, or similar transactions.
|
|
Common Stock Warrants
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2019
|
|
|
1,710,609
|
|
|
$
|
7.33
|
|
Issued
|
|
|
1,200,000
|
|
|
|
0.01
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2019
|
|
|
2,910,609
|
|
|
$
|
4.31
|
|
The
estimated fair value was derived using a valuation model with the following weighted-average assumptions:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Value of underlying common stock (per share)
|
|
$
|
2.84
|
|
|
$
|
3.85
|
|
Risk free interest rate
|
|
|
1.7
|
%
|
|
|
2.10
|
%
|
Expected term in years
|
|
|
3.0
|
|
|
|
3.9
|
|
Volatility
|
|
|
85
|
%
|
|
|
62
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
following table summarizes our activities related to warrants accounted for as a derivative liability for the nine months ended
September 30, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Balance at January 1,
|
|
|
87,509
|
|
|
|
93,759
|
|
Derivative warrants expired
|
|
|
—
|
|
|
|
(6,250
|
)
|
Balance at September 30,
|
|
|
87,509
|
|
|
|
87,509
|
|
We
utilize a lattice valuation model to determine the fair market value of the warrants accounted for as liabilities. The lattice
valuation model accommodates the probability of exercise price adjustment features, as outlined in the warrant agreements. We
recorded an unrealized loss of $8 thousand resulting from the change in the fair value of the warrant derivative liability for
the nine months ended September 30, 2019. Under the terms of some of our warrant agreements, at any time while the warrant is
outstanding, the exercise price per share can be reduced to the price per share of future subsequent equity sales of our common
stock or a common stock equivalent that is lower than the exercise price per share as stated in the warrant agreement.
(10)
|
Commitments
and Contingencies
|
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use
(“ROU”) asset and lease liability on their balance sheet for all leases with terms beyond 12 months. The new standard
also requires enhanced disclosures intended to provide more transparency and information to financial statement users about lease
portfolios. The distinction between operating and finance leases will continue to exist under the new standard. Additionally,
the recognition and measurement of operating and finance lease expenses and cash flows will not change significantly from current
treatment. For finance leases, lessees will continue to recognize interest expense on the lease liability using the effective
yield method, while the right-of-use asset will be amortized on a straight-line basis. For operating leases, expense will be recognized
on a straight-line basis, consistent with the previous standard.
Operating
Leases
We
lease six office facilities as of September 30, 2019. These leases are under non-cancelable operating lease agreements with expiration
dates between 2019 and 2025. We have the option to extend certain leases to five or ten-year term(s), and we have the right of
first refusal on any sale.
The
Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated
with the lease payments. The Company records its long-term operating leases as right-of-use assets. Upon initial adoption, using
the modified retrospective transition approach, no leases with terms less than 12 months have been capitalized to the balance
sheet consistent with ASC 842. Instead, these leases are recognized in the condensed consolidated statement of operations on a
straight-line expense throughout the lives of the leases. All leases of the Company do not contain common area maintenance or
security agreements. In connection with certain operating leases, the Company has security deposits recorded and maintained as
a prepaid asset totaling $49 thousand as of September 30, 2019.
We
have made certain assumptions and judgments when applying ASC 842, the most significant of which is that we elected the package
of practical expedients available for transition, which allow us to not reassess whether expired or existing contracts contain
leases under the new definition of a lease, lease classification for expired or existing leases, and whether previously capitalized
initial direct costs would qualify for capitalization under ASC 842. Additionally, we did not elect to use hindsight when considering
judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
Present
Value of Long-term Leases
(in thousands):
|
|
September 30, 2019
|
|
Right-of-use assets, net
|
|
$
|
2,198
|
|
|
|
|
|
|
Current portion of lease liability
|
|
|
387
|
|
Lease liability, less current portion
|
|
|
1,827
|
|
Total lease liability
|
|
$
|
2,214
|
|
As
of September 30, 2019, the weighted-average remaining lease term was 5 years. The Company’s lease agreements do not provide
a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, as of September 30, 2019, the
Company estimates the weighted-average discount rate for its operating leases to be 5.2% to present value based on the incremental
borrowing rate.
Future
minimum payments for the next five years and thereafter as of September 30, 2019 under these long-term operating leases are as
follows (in thousands):
Remainder of 2019
|
|
$
|
125
|
|
2020
|
|
|
501
|
|
2021
|
|
|
507
|
|
2022
|
|
|
521
|
|
2023
|
|
|
489
|
|
Thereafter
|
|
|
404
|
|
Total future minimum lease payments
|
|
|
2,547
|
|
Less amount representing interest
|
|
|
(333
|
)
|
Present value of obligations under operating leases
|
|
|
2,214
|
|
Less current portion
|
|
|
(387
|
)
|
Long-term operating lease obligations
|
|
$
|
1,827
|
|
Rent
expense was $0.4 million and $0.9 million for each of the nine months ended September 30, 2019 and 2018, respectively. We have
no contingent rent agreements.
Financing
Leases
Future
minimum payments for the next five years and thereafter as of September 30, 2019 under financing leases for equipment are as follows
(in thousands):
Remainder of 2019
|
|
$
|
53
|
|
2020
|
|
|
205
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total future minimum lease payments
|
|
|
258
|
|
Less amount representing interest
|
|
|
(23
|
)
|
Present value of obligations under financing leases
|
|
|
235
|
|
Less current portion
|
|
|
(229
|
)
|
Long-term financing lease obligations
|
|
$
|
6
|
|
Litigation
On
December 13, 2018, a complaint was filed by RSB Spine, LLC, against Xtant Medical Holdings, Inc., which claims that some of our
products, including the Irix-ATM Lumbar Integrated Fusion System and the Irix-CTM Cervical Integrated Fusion System, infringe
certain of RSB Spine’s patents. The complaint seeks an adjudication of infringement, an injunction against future infringement,
unspecified damages for infringement, a finding that such infringement is willful, and treble damages for such willful infringement.
This action was brought in the United States District Court for the District of Delaware. We filed an answer and affirmative defenses
to the complaint on March 29, 2019, denying the allegations of infringement and seeking dismissal of RSB Spine’s claims
and requested relief. The Court entered a scheduling order on May 9, 2019, scheduling trial for no sooner than June 21, 2021.
We intend to vigorously defend the claims in this action. There can be no assurance that the resolution of this matter will not
have a material adverse effect on our business, financial condition, or results of operations.
In
addition, we are subject to potential liabilities under government regulations and various claims and legal actions that are pending
or may be asserted from time to time. These matters arise in the ordinary course and conduct of our business and may include,
for example, commercial, product liability, intellectual property, and employment matters. We intend to continue to defend the
Company vigorously in such matters and when warranted, take legal action against others. Furthermore, we regularly assess contingencies
to determine the degree of probability and range of possible loss for potential accrual in our financial statements.
An
estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Based on our assessment, we have adequately accrued an amount for contingent liabilities
currently in existence. We do not accrue amounts for liabilities that we do not believe are probable or that we consider immaterial
to our overall financial position. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result,
assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed
the Company’s current accruals, and it is possible that its cash flows or results of operations could be materially affected
in any particular period by the unfavorable resolution of one or more of these contingencies.
Indemnifications
Our
indemnification arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities
if our products or services infringe a third-party’s intellectual property rights. To date, we have not incurred any material
costs as a result of such warranties or indemnification provisions and have not accrued any liabilities related to such obligations
in the accompanying condensed consolidated financial statements.
We
have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines,
and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened
to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out
of that person’s services as our director or officer or that person’s services provided to any other company or enterprise
at our request.
In
evaluating the realizability of the net deferred tax assets, we take into account a number of factors, primarily relating to the
ability to generate taxable income. Where it is determined that it is likely that we will be unable to realize deferred tax assets,
a valuation allowance is established against the portion of the deferred tax asset. Because it cannot be accurately determined
when or if we will become profitable, a valuation allowance was provided against the entire deferred income tax asset balance.
The
Company did not recognize any interest or penalties related to income taxes for the nine months ended September 30, 2019 and 2018.
(12)
|
Supplemental
Disclosure of Cash Flow Information
|
Supplemental
cash flow information is as follows (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
47
|
|
|
$
|
170
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Issuance of capital leases
|
|
$
|
—
|
|
|
$
|
84
|
|
Lease liability from right-of-use assets
|
|
$
|
2,296
|
|
|
$
|
—
|
|
Interest converted into common stock
|
|
$
|
—
|
|
|
$
|
556
|
|
Conversion of convertible debt to equity
|
|
$
|
—
|
|
|
$
|
71,865
|
|
Convertible PIK interest
|
|
$
|
—
|
|
|
$
|
4,764
|
|
Conversion of interest related to the Credit Facility to long-term debt
|
|
$
|
—
|
|
|
$
|
7,977
|
|
Write-off of convertible debt issuance cost
|
|
$
|
—
|
|
|
$
|
1,012
|
|
Transfer of inventory to property and equipment
|
|
$
|
—
|
|
|
$
|
448
|
|
Extinguishment of Prior Credit Agreement (including debt issuance costs)
|
|
$
|
79,624
|
|
|
$
|
—
|
|
Write-off of Prior Credit Agreement debt issuance costs and existing ROS fees
|
|
$
|
307
|
|
|
$
|
—
|
|
Recognition of Second Amended and Restated Credit Agreement
|
|
$
|
72,657
|
|
|
$
|
—
|
|
Recognition of 2019 Warrants
|
|
$
|
9
|
|
|
$
|
—
|
|
Debt discount
|
|
$
|
—
|
|
|
$
|
5,114
|
|
(13)
|
Related
Party Transactions
|
The
Investors, owning approximately 70% of the Company’s outstanding common stock, are the sole holders of our outstanding long-term
debt. In addition, as described in more detail under Note 1, “Business Description and Summary of Significant Accounting
Policies,” we are party to an Investor Rights Agreement and Registration Rights Agreement with the Investors. Transactions
between the Company and the Investors are conducted under the provisions of the Second Amended and Restated Credit Agreement,
the Prior Credit Agreement, the Investor Rights Agreement, and the Registration Rights Agreement, as noted above.
On
April 5, 2019, the Company entered into a Sublease Agreement wherein the Company leases from Cardialen, Inc., a portion of Cardialen’s
office space commencing April 2019 on a month-to-month basis until January 2024, unless terminated earlier upon notice of 60 days.
The rent was $2,100 per month for the months of April through July 2019 and is currently $1,260 per month. Because Jeffrey Peters
is both a member of our Board and the Chief Executive Officer, President, and a Director of Cardialen, this transaction qualifies
as a related party transaction.
All
related party transactions are reviewed and approved by the Audit Committee or the disinterested members of the full Board.
(14)
|
Segment
and Geographic Information
|
The
Company’s management reviews financial results and manages the business on an aggregate basis. Therefore, financial results
are reported in a single operating segment: the development, manufacture, and marketing of orthopedic medical products and devices.
The
Company attributes revenues to geographic areas based on the location of the customer. Approximately 96% and 95% of sales were
in the United States for the nine months ended September 30, 2019 and 2018, respectively. Total revenue by major geographic area
is as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
15,097
|
|
|
$
|
16,496
|
|
Rest of world
|
|
|
624
|
|
|
|
770
|
|
Total revenue
|
|
$
|
15,721
|
|
|
$
|
17,266
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
45,781
|
|
|
$
|
51,288
|
|
Rest of world
|
|
|
1,937
|
|
|
|
2,653
|
|
Total revenue
|
|
$
|
47,718
|
|
|
$
|
53,941
|
|