UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2019
     
    or
     
  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ___________ to ___________

 

Commission File Number: 001-34951

 

XTANT MEDICAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-5313323

(State or other jurisdiction of

 incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

664 Cruiser Lane

Belgrade, Montana

  59714
(Address of principal executive offices)   (Zip Code)

 

(406) 388-0480

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, par value $0.000001 per share   XTNT   NYSE American LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
  Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Number of shares of common stock, $0.000001 par value, of registrant outstanding at November 6, 2019: 13,161,762.

 

 

 

     
 

 

XTANT MEDICAL HOLDINGS, INC.
FORM 10-Q

September 30, 2019

 

TABLE OF CONTENTS

 

    Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS ii
PART I. FINANCIAL INFORMATION 1
ITEM 1. Financial statements 1
  Condensed Consolidated Balance Sheets 1
  Condensed Consolidated Statements of Operations 2
  Condensed Consolidated Statements of Equity 3
  Condensed Consolidated Statements of Cash Flows 4
  Notes to Unaudited Condensed Consolidated Financial Statements 5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28
ITEM 4. Controls and Procedures 28
PART II. OTHER INFORMATION 29
ITEM 1. Legal Proceedings 29
Item 1A. Risk Factors 29
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
ITEM 3. Defaults Upon Senior Securities 29
ITEM 4. Mine Safety Disclosures 29
ITEM 5. Other Information 29
ITEM 6. Exhibits 30

 

 

 

As used in this report, references to “Xtant,” the “Company,” “we,” our,” or “us,” unless the context otherwise requires, refer to Xtant Medical Holdings, Inc., and its wholly owned subsidiaries, Xtant Medical, Inc., Bacterin International, Inc., and X-spine Systems, Inc., all of which are consolidated on Xtant’s condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.

 

  i  
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the applicable securities laws. Our forward-looking statements include, but are not limited to, statements regarding our “expectations,” “hopes,” “beliefs,” “intentions,” or “strategies” regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” and “would,” as well as similar expressions, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward looking. Forward-looking statements in this Form 10-Q may include, for example, statements about:

 

  our ability to comply with the covenants in our second amended and restated credit agreement;
  our ability to maintain sufficient liquidity to fund our operations;
  our ability to obtain financing on reasonable terms;
  our ability to increase or maintain revenue;
  the ability of our sales force to achieve expected results;
  our ability to remain competitive;
  government regulations;
  our ability to innovate and develop new products;
  our ability to retain and recruit independent sales agents and the impact of the termination of an advisory agreement with an entity that provided services to some of our customers;
  our ability to obtain donor cadavers for our products;
  our ability to engage and retain qualified technical personnel and members of our management team;
  the availability of our facilities;
  government and third-party coverage and reimbursement for our products;
  our ability to obtain and maintain regulatory approvals in the United States and abroad;
  our ability to successfully integrate future business combinations or acquisitions;
  our ability to use our net operating loss carry-forwards to offset future taxable income;
  our ability to service our debt;
  product liability claims and other litigation to which we may be subjected;
  product recalls and defects, including the December 2018 recall of our Calix Lumbar Spine Implant System;
  timing and results of clinical studies;
  our ability to obtain and protect our intellectual property and proprietary rights;
  infringement and ownership of intellectual property;
  our ability to remain accredited with the American Association of Tissue Banks; and
  our ability to maintain our stock listing on the NYSE American Exchange.

 

The forward-looking statements contained in this Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control, which may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

 

  ii  
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

XTANT MEDICAL HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except number of shares and par value)

 

    As of
September 30, 2019
    As of
December 31, 2018
 
    (Unaudited)        
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 5,749     $ 6,797  
Trade accounts receivable, net of allowance for doubtful accounts of $1,375 and $2,140, respectively     9,121       9,990  
Inventories     16,025       17,301  
Prepaid and other current assets     714       589  
Total current assets     31,609       34,677  
Property and equipment, net     5,068       7,174  
Right-of-use asset, net     2,198        
Goodwill     3,205       3,205  
Intangible assets, net     529       573  
Other assets     428       793  
Total Assets   $ 43,037     $ 46,422  
                 
LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)                
Current Liabilities:                
Accounts payable   $ 2,249     $ 6,465  
Accrued liabilities     6,196       5,150  
Warrant derivative liability     17       10  
Current portion of lease liability     387        
Current portion of financing lease obligations     229       426  
Total current liabilities     9,078       12,051  
Long-term Liabilities:                
Lease liability, less current portion     1,827        
Financing lease obligation, less current portion     6       204  
Long-term debt, less issuance costs     74,985       77,939  
Total Liabilities     85,896       90,194  
Commitments and Contingencies (note 10)                
Stockholders’ Equity (Deficit):                
Preferred stock, $0.000001 par value; 10,000,000 shares authorized; no shares issued and outstanding            
Common stock, $0.000001 par value; 50,000,000 shares authorized; 13,161,762 shares issued and outstanding as of September 30, 2019 and 13,172,179 shares issued and outstanding as of December 31, 2018            
Additional paid-in capital     178,802       171,273  
Accumulated deficit     (221,661 )     (215,045 )
Total Stockholders’ Equity (Deficit)     (42,859 )     (43,772 )
Total Liabilities & Stockholders’ Equity (Deficit)   $ 43,037     $ 46,422  

 

See notes to unaudited condensed consolidated financial statements.

 

  1  
 

 

XTANT MEDICAL HOLDINGS, INC.

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except number of shares and per share amounts)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
    2019     2018     2019     2018  
Revenue                        
Orthopedic product sales   $ 15,691     $ 17,139     $ 47,574     $ 53,622  
Other revenue     30       127       144       319  
Total Revenue     15,721       17,266       47,718       53,941  
                                 
Cost of sales     5,249       5,743       16,527       17,711  
Gross Profit     10,472       11,523       31,191       36,230  
                                 
Operating Expenses                                
General and administrative     4,155       3,121       12,513       10,006  
Sales and marketing     6,682       7,847       19,496       24,742  
Research and development     203       347       675       1,179  
Depreciation and amortization     137       1,029       442       3,074  
Restructuring expenses           614             2,582  
Total Operating Expenses     11,177       12,958       33,126       41,583  
                                 
Loss from Operations     (705 )     (1,435 )     (1,935 )     (5,353 )
                                 
Other (Expense) Income                                
Interest expense     (1,185 )     (1,790 )     (4,504 )     (8,156 )
Change in warrant derivative liability     4       42       (8 )     83  
Other (expense) income     30       30       (101 )     18  
Total Other (Expense)     (1,151 )     (1,718 )     (4,613 )     (8,055 )
                                 
Net Loss Before Provision for Income Taxes     (1,856 )     (3,153 )     (6,548 )     (13,408 )
                                 
Provision for income taxes     (23 )           (68 )      
Net Loss   $ (1,879 )   $ (3,153 )   $ (6,616 )   $ (13,408 )
                                 
Net loss per share:                                
Basic   $ (0.14 )   $ (0.24 )   $ (0.50 )   $ (1.19 )
Dilutive   $ (0.14 )   $ (0.24 )   $ (0.50 )   $ (1.19 )
                                 
Shares used in the computation:                                
Basic     13,161,762       13,158,326       13,164,694       11,262,642  
Dilutive     13,161,762       13,158,326       13,164,694       11,262,642  

 

See notes to unaudited condensed consolidated financial statements.

 

  2  
 

 

XTANT MEDICAL HOLDINGS, INC.

Condensed Consolidated Statements of Equity

(Unaudited, in thousands, except number of shares)

 

STOCKHOLDERS’ EQUITY – THREE MONTHS ENDED SEPTEMBER 30

 

    Common Stock     Additional
Paid-In-
    Retained     Total
Stockholders’
 
    Shares     Amount     Capital     Deficit     Equity (Deficit)  
Balance at June 30, 2018     13,145,305     $     $ 165,809     $ (155,200 )   $ 10,609  
                                         
Stock-based compensation                 85             85  
Issuance of warrants                 5,114             5,114  
Issuance of common stock     26,042                          
Net loss                  —             (3,153 )     (3,153 )
Balance at September 30, 2018     13,171,347     $     $ 171,008     $ (158,353 )   $ 12,655  
                                         
Balance at June 30, 2019     13,161,762     $     $ 178,707     $ (219,782 )   $ (41,075 )
                                         
Stock-based compensation                 95             95  
Net loss                       (1,879 )                      (1,879 )
Balance at September 30, 2019     13,161,762     $     $ 178,802     $ (221,661 )   $ (42,859 )

 

STOCKHOLDERS’ EQUITY – NINE MONTHS ENDED SEPTEMBER 30

 

    Common Stock     Additional
Paid-In-
    Retained     Total
Stockholders’
 
    Shares     Amount     Capital     Deficit     Equity (Deficit)  
Balance at December 31, 2017     1,514,899     $     $ 86,247     $ (144,945 )   $ (58,698 )
                                         
Stock-based compensation                 448             448  
Issuance of common stock     11,656,448             79,199             79,199  
Issuance of warrants                 5,114             5,114  
Net loss                 —             (13,408 )     (13,408 )
Balance at September 30, 2018     13,171,347     $     $ 171,008     $ (158,353 )   $ 12,655  
                                         
Balance at December 31, 2018     13,172,179     $     $ 171,273     $ (215,045 )   $ (43,772 )
                                         
Stock-based compensation                 256             256  
Forfeiture of restricted stock     (10,417 )                        
Debt extinguishment                 7,264             7,264  
Issuance of warrant                 9             9  
Net loss                       (6,616 )     (6,616 )
Balance at September 30, 2019     13,161,762     $     $ 178,802     $ (221,661 )   $ (42,859 )

 

See notes to unaudited condensed consolidated financial statements.

 

  3  
 

 

XTANT MEDICAL HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

    Nine Months Ended
September 30,
 
    2019     2018  
Operating activities:                
Net loss   $ (6,616 )   $ (13,408 )
Adjustments to reconcile net loss to net cash provided by operating activities:                
Depreciation and amortization     2,338       4,943  
Gain on disposal of fixed assets     (27 )     (15 )
Non-cash interest     4,467       7,853  
Non-cash rent     16       -  
Non-cash stock option expense/change in derivative warrant liability     263       502  
Provision for losses on accounts receivable and inventory     970       298  
                 
Changes in operating assets and liabilities:                
Accounts receivable     417       2,842  
Inventories     760       (508 )
Prepaid and other assets     240       1,138  
Accounts payable     (4,216 )     (3,557 )
Accrued liabilities     1,046       (867 )
Net cash used in operating activities     (342 )     (779 )
                 
Investing activities:                
Purchases of property and equipment and intangible assets     (403 )     (308 )
Proceeds from sale of fixed assets     241       251  
Net cash used in investing activities     (162 )     (57 )
                 
Financing activities:                
Payments on financing leases     (395 )     (260 )
Costs associated with Second Amended and Restated Credit Agreement     (149 )      
Costs associated with private placement and convertible debt conversion/exchange           (3,507 )
Proceeds from equity private placement           6,810  
Proceeds from issuance of stock           1  
Net cash (used in) provided by financing activities     (544 )     3,044  
                 
Net change in cash and cash equivalents     (1,048 )     2,208  
Cash and cash equivalents at beginning of period     6,797       2,856  
Cash and cash equivalents at end of period   $ 5,749     $ 5,064  

 

See notes to unaudited condensed consolidated financial statements.

 

  4  
 

 

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.

 

  5  
 

 

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:

 

  effect the Reverse Stock Split;
  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;
  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;
  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;
  authorize a majority of the Board to fix the number of our directors;
  indemnify the members of the Board to the fullest extent permitted by law;
  remove the classification of the Board to require all directors to be elected annually;
  provide that special meetings of our stockholders may only be called by the Board, the chairman of the Board, or our chief executive officer;
  provide that no stockholder will be permitted cumulative voting at any election of directors;
  elect not to be governed by Section 203 of the Delaware General Corporation Law (the “DGCL”);
  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
  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.

 

  6  
 

 

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:

 

  provide for annual and special meetings of stockholders to be held through remote communications;
  provide for the election of any directors not elected at an annual meeting of stockholders to be elected at a special meeting of stockholders;
  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;
  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;

 

  7  
 

 

  allow for a majority of the Board present to adjourn a Board meeting if a quorum is not met;
  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;
  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
  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.

 

  8  
 

 

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.

 

  9  
 

 

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.

 

  10  
 

 

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.

 

(2) Inventories

 

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  

 

  11  
 

 

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.

 

(4) Intangible Assets

 

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  

 

(5) Accrued Liabilities

 

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  

 

(6) Debt

 

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.

 

  12  
 

 

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.

 

  13  
 

 

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.

 

  14  
 

 

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  

 

(7) Equity

 

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.

 

  15  
 

 

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.

 

  16  
 

 

 

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.

 

  17  
 

 

(9) Warrants

 

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.

 

  18  
 

 

(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  

 

  19  
 

 

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.

 

  20  
 

 

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.

 

(11) Income Taxes

 

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  

 

  21  
 

 

(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  

 

  22  
 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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, 2018, as amended by Form 10-K/A. 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.

 

Executive Summary

 

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 largely through independent distributors and stocking agents, augmented by direct employees.

 

During the first quarter of 2018, we effected a significant restructuring pursuant to which we converted an aggregate of $71.9 million of aggregate principal amount of debt into equity by issuing an aggregate of 10,590,954 shares of our stock, in cancellation thereof, issued an additional 945,819 shares of our common stock in a private placement for an aggregate purchase price of $6.8 million, completed a 1-for-12 reverse split of our common stock after the close of business on February 13, 2018, and replaced our entire Board of Directors. We completed this restructuring during the second quarter of 2018 with a common stock stockholder rights offering, which expired on June 18, 2018, and resulted in the issuance of an additional 129 shares of common stock. Upon completion of this restructuring and as of September 30, 2019, two funds affiliated with OrbiMed, which held a significant portion of our converted indebtedness and continue to hold all of our currently outstanding debt, own approximately 70% of our outstanding common stock. Because of this significant ownership, we are a “controlled company” within the meaning of NYSE American corporate governance standards.

 

During 2018 and continuing through the third quarter of 2019, we experienced reduced revenues compared to prior year periods due primarily to reduced demand for our hardware products in both domestic and international markets. As of September 30, 2019, our cash and cash equivalents were $5.7 million. On March 29, 2019, we entered into a Second Amended and Restated Credit Agreement, which amended and restated our Prior Credit Agreement, revised certain covenants and increased our credit availability by $10.0 million. As of September 30, 2019, we had availability of $12.2 million under our credit facility. We believe that cash and cash equivalents, together with the availability under our Second Amended and Restated Credit Agreement, will be sufficient to meet our anticipated cash requirements for at least 12 months.

 

On April 4, 2019, we received a letter from NYSE Regulation notifying us that we are not in compliance with the NYSE American’s continued listing standards relating to stockholders’ equity. Specifically, we are not in compliance with Section 1003(a)(i) of the NYSE American Company Guide (“Company Guide”) with stockholders’ equity of less than $2.0 million and net losses in two of the three most recent fiscal years, Section 1003(a)(ii) with stockholders’ equity of less than $4.0 million and net losses in three of the four most recent fiscal years, and Section 1003(a)(iii) with stockholders’ equity of less than $6.0 million and net losses in the five most recent fiscal years. Therefore, we became subject to the procedures and requirements of Section 1009 of the Company Guide. On May 3, 2019, we submitted a plan of compliance to NYSE Regulation addressing how we intend to regain compliance with Sections 1003(a)(i), 1003(a)(ii), and 1003(a)(iii) or meet the exemption in Section 1003(a) of the Company Guide by October 4, 2020. On May 23, 2019, we received a letter from NYSE Regulation stating that the Company’s plan of compliance has been accepted and the Company has been granted a plan period through October 4, 2020. We have been advised that we will be subject to delisting proceedings if we do not regain compliance prior to October 4, 2020 or if NYSE Regulation determines that we are not making progress consistent with our plan of compliance. Our common stock will continue to trade on the NYSE American under the symbol “XTNT,” with the added designation of “.BC” to indicate that we are not in compliance with the continued listing standards.

 

  23  
 

 

Results of Operations

 

Comparison of Three and Nine Months Ended September 30, 2019 and September 30, 2018

 

Revenue

 

Total revenue for the three and nine months ended September 30, 2019 was $15.7 million and $47.7 million, respectively, which represents a decrease of 8.9% and 11.5%, respectively, compared to $17.3 million and $53.9 million for the three and nine months ended September 30, 2018, respectively. These declines were primarily due to reduced demand for our hardware products in both domestic and international markets. The reduced demand for our hardware products was due in part to the termination of an advisory agreement with an entity that provided services to some of our customers and the continued transition of certain independent sales agents out of the Company.

 

Cost of Sales

 

Cost of sales consists primarily of manufacturing and product purchase costs as well as depreciation of surgical trays. 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 for the three months ended September 30, 2019 decreased 8.6% to $5.2 million from $5.7 million for the three months ended September 30, 2018. Cost of sales for the nine months ended September 30, 2019 decreased 6.7% to $16.5 million from $17.7 million for the nine months ended September 30, 2018. As a percentage of revenue, cost of sales increased to 33.4% and 34.6% for the three and nine months ended September 30, 2019, respectively, versus 33.3% and 32.8% for the three and nine months ended September 30, 2018, respectively. Gross margin percentages for the three months ended September 30, 2019 were comparable to the prior period. The increase in cost of sales as percentage of sales during the nine months ended September 30, 2019 compared to the prior period reflects a $0.6 million increase the Company’s inventory reserves compared to the prior period.

 

General and Administrative Expenses

 

General and administrative expenses consist principally of personnel costs for corporate employees, cash-based and stock-based compensation related costs, and corporate expenses for legal, accounting, and other professional fees, as well as occupancy costs. General and administrative expenses increased 33.1%, or $1.0 million, to $4.2 million for the three months ended September 30, 2019 compared to the same period of 2018. This increase was primarily due to increased bad debt expense of $0.2 million, executive recruiting fees of $0.2 million and retention of finance and accounting consultants previously utilized in connection with our restructuring for assistance in general and administrative functions. General and administrative expenses increased 25.1%, or $2.5 million, to $12.5 million for the nine months ended September 30, 2019 compared to the same period of 2018. This increase was primarily due to legal settlements of $0.7 million, increased bad debt expense of $0.5 million, executive recruiting fees of $0.5 million and retention of finance and accounting consultants previously utilized in connection with our restructuring for assistance in general and administrative functions.

 

Sales and Marketing Expenses

 

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 14.8% and 21.2% to $6.7 million and $19.5 million for the three and nine months ended September 30, 2019, respectively, compared to $7.8 million and $24.7 million for the three and nine months ended September 30, 2018, respectively. As a percentage of revenue, sales and marketing expenses decreased to 41.5% and 39.8% for the three and nine months ended September 30, 2019, respectively, from 45.5% and 45.9% for the three and nine months ended September 30, 2018, respectively. These decreases were primarily due to lower travel expenses, a reduction in headcount, decreased commissions attributable to decreased revenue, and the favorable impact from changes made to the commission rate structure under certain distribution agreements.

 

  24  
 

 

Research and Development Expenses

 

Research and development expenses consist primarily of internal costs for the development of new technologies and processes. Research and development expenses decreased 41.5% and 42.8% to $0.2 million and $0.7 million for the three and nine months ended September 30, 2019, respectively, from $0.3 million and $1.2 million for the three and nine months ended September 30, 2018, respectively. These decreases were primarily due to a reduction in headcount compared to the prior year periods.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expense consists of depreciation and amortization of long-lived intangible assets, patents, leasehold improvements, and equipment. Depreciation and amortization expense decreased to $0.1 million and $0.4 million for the three and nine months ended September 30, 2019, respectively, from $1.0 million and $3.1 million for the three and nine months ended September 30, 2018, respectively, primarily due to the impairment of the intangible assets in the fourth quarter of 2018.

 

Restructuring Expenses

 

Restructuring expenses were zero for the three and nine months ended September 30, 2019 and $0.6 million and $2.6 million, for the three and nine months ended September 30, 2018, respectively. Restructuring costs for the three and nine months ended September 30, 2018 related to our recapitalization and debt restructuring.

 

Interest Expense

 

Interest expense is related to interest incurred from our debt instruments. Interest expense was $1.2 million and $4.5 million for the three and nine months ended September 30, 2019, respectively, compared to $1.8 million and $8.2 million for the three and nine months ended September 30, 2018, respectively. These decreases were due to amendments to our credit agreement resulting in lower effective interest rates on our outstanding debt during the three and nine months ended September 30, 2019 compared to the prior year periods.

 

Liquidity and Capital Resources

 

Working Capital

 

Since our inception, we have financed our operations through operating cash flows, the private placement of equity securities and convertible debt, an equity credit facility, a debt facility, a common stock rights offering, and other debt transactions.

 

    September 30, 2019     December 31, 2018  
Cash and cash equivalents   $ 5,749     $ 6,797  
Accounts receivable, net     9,121       9,990  
Inventories     16,025       17,301  
Total current assets     31,609       34,677  
Accounts payable     2,249       6,465  
Accrued liabilities     6,196       5,150  
Total current liabilities     9,078       12,051  
Total working capital     22,531       22,626  
Long-term debt, less issuance costs     74,985       77,939  

 

  25  
 

 

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. See Note 6, “Debt” to the condensed consolidated financial statements.

 

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.

 

Cash Flows

 

Net cash used by operating activities for the nine months ended September 30, 2019 was $0.3 million compared to $0.8 million for the nine months ended September 30, 2018. The reduction relates primarily to a decrease in net loss, offset by reductions in depreciation and amortization, non-cash interest and the effects of changes in operating activities.

 

Net cash used in investing activities for the nine months ended September 30, 2019 was $0.2 million compared to $0.1 million for the nine months ended September 30, 2018. The increase reflects primarily increases in purchases of property and equipment and intangible assets.

 

Net cash used in financing activities was $0.5 million during the nine months ended September 30, 2019 compared to net cash provided by financing activities of $3.0 million for the nine months ended September 30, 2018. The net cash provided during the prior year period was due to proceeds from a private placement, partially offset by costs associated therewith and the Company’s debt conversion.

 

Credit Facility

 

On March 29, 2019, we entered into the Second Amended and Restated Credit Agreement with the Investors, which amended and restated the Prior Credit Agreement dated as of July 27, 2015, among the parties thereto, and as subsequently amended through the Twenty-Fifth Amendment to the Prior Credit Agreement.

 

The Second Amended and Restated Credit Agreement amended the Prior Credit Agreement to provide that we may request term loans with the Investors in an amount 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 request additional term loans in an aggregate amount of up to $10.0 million, 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. In addition, the Second Amended and Restated Credit Agreement provides that (i) 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; (ii) 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%; (iii) the maturity date of the Loans is March 31, 2021; (iv) 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 (v) the key person event default provision was revised to refer specifically to certain then recently-hired executive officers of the Company. Under the terms of the Prior Credit Agreement, we were required to comply with a minimum liquidity covenant, a consolidated leverage ratio covenant, and a minimum consolidated EBITDA covenant. We were in compliance with all covenants under the Second Amended and Restated Credit Agreement as of September 30, 2019 and under the Prior Credit Agreement as of December 31, 2018. As of September 30, 2019, there was $12.2 million in unused availability under the Second Amended and Restated Credit Agreement.

 

  26  
 

 

Cash Requirements

 

We believe that our September 30, 2019 cash and cash equivalents of $5.7 million, together with the availability of $12.2 million under our new Second Amended and Restated Credit Agreement, will be sufficient to meet our anticipated cash requirements for at least 12 months. However, we may require additional funds to fund our future operations and business strategy. Accordingly, there is no assurance that we will not need or seek additional funding prior to such time. We may elect to raise additional funds even before we need them if market conditions for raising additional capital are favorable. We may seek to raise additional funds through various sources, such as equity and debt financings, additional debt restructurings or refinancings, or through strategic collaborations and 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.

 

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 liquidation or other preferences that adversely affect the rights of our current stockholders. If we issue preferred stock, it could affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights 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 must obtain the consent of the Investors, and no assurance can be provided that the Investors would provide such consent, which could limit our ability to raise additional financing.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investor in our common stock.

 

Recent Accounting Pronouncements

 

In June 2016, the 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.

 

  27  
 

 

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.

 

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. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.

 

There have been no changes in our critical accounting estimates for the nine months ended September 30, 2019 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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 Exchange Act) as of September 30, 2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2019, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s 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 September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the hiring of additional finance personnel, including a new controller, to perform roles previously performed by consultants.

 

  28  
 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Equity Securities

 

Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

Not applicable.

 

  29  
 

 

ITEM 6. EXHIBITS

 

The following exhibits are being filed or furnished with this Quarterly Report on Form 10-Q:

 

Exhibit No.   Description
3.1   Amended and Restated Certificate of Incorporation of Xtant Medical Holdings, Inc. (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 13, 2018 (SEC File No. 0-34941) and incorporated by reference herein).
     
3.2   Certificate of Amendment to Amended and Restated Certificate of Incorporation of Xtant Medical Holdings, Inc. (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 31, 2019 (SEC File No. 0-34941) and incorporated by reference herein).
     
3.3   Second Amended and Restated Bylaws of Xtant Medical Holding, Inc. (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 16, 2018 (SEC File No. 0-34941) and incorporated by reference herein).
     
10.1   Amended and Restated Employment Agreement effective as of August 8, 2019 between Xtant Medical Holdings, Inc. and Greg Jensen (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (SEC File No. 0-34941) and incorporated by reference herein).
     
10.2   Form of Non-Employee Director Restricted Stock Unit Award Agreement for use with the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan (filed herewith)
     
31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
     
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
     
101   The following materials from Xtant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statements of Equity (Deficit), (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith)

 

  30  
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  XTANT MEDICAL HOLDINGS, INC.
   
Date: November 7, 2019 By: /s/ Sean E. Browne
  Name: Sean E. Browne
  Title:

President and Chief Executive Officer

(Principal Executive Officer)

 

Date: November 7, 2019 By: /s/ Greg Jensen
  Name: Greg Jensen
  Title:

Vice President, Finance and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

  31  
 

 

Xtant Medical (AMEX:XTNT)
Historical Stock Chart
From Oct 2020 to Nov 2020 Click Here for more Xtant Medical Charts.
Xtant Medical (AMEX:XTNT)
Historical Stock Chart
From Nov 2019 to Nov 2020 Click Here for more Xtant Medical Charts.