UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

SCHEDULE 14C

 

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c)

of the Securities Exchange Act of 1934

 

 

 

Check the appropriate box:

 

[X] Preliminary Information Statement
[  ] Confidential, for use of the Commission Only (as permitted by Rule 14c-5(d)(2))
[  ] Definitive Information Statement

 

 

 

XTANT MEDICAL HOLDINGS, INC.

(Name of Registrant as Specified In Its Charter)

 

 

 

Payment of Filing Fee (Check the appropriate box):

 

[X] No fee required.
[  ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
   
  (1) Title of each class of securities to which transaction applies:
   
  (2) Aggregate number of securities to which transaction applies:
   
  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
     
(4) Proposed maximum aggregate value of transaction:
     
(5) Total fee paid:
     
[  ] Fee paid previously with preliminary materials.
[  ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
   
  (1) Amount Previously Paid:
     
  (2) Form, Schedule or Registration Statement No.:
     
  (3) Filing Party:
     
  (4) Date Filed:

 

 

 

 

 

 

PRELIMINARY INFORMATION STATEMENT—SUBJECT TO COMPLETION

 

 

NOTICE OF ACTION BY WRITTEN CONSENT AND INFORMATION STATEMENT

 

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY

 

To Our Stockholders:

 

This Information Statement is furnished to inform holders of shares of common stock of Xtant Medical Holdings, Inc. (the “Company,” “our,” “we” or “us”) that the Board of Directors and the holders of a majority of the voting power of the outstanding shares of common stock of the Company entitled to vote as of the record date of August 7, 2020 (collectively, the “Majority Stockholders”) have approved the following:

 

  1. an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock from 75,000,000 shares to 300,000,000 shares (the “Charter Amendment”); and
     
  2. the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP, as lenders, under the Second Amended and Restated Credit Agreement, dated as of March 29, 2019, by and among the Company, Bacterin International, Inc., Xtant Medical, Inc., X-spine Systems, Inc., and the Lenders, as amended (the “Second A&R Credit Agreement”), as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement) (such loans and PIK Interest, the “Exchanging Loans”), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, resulting in the issuance of approximately 57.8 million shares of our common stock (the “Share Issuance”).

 

Pursuant to Section 228 of the General Corporation Law of the State of Delaware (the “DGCL”) and Section 1.10 of the Company’s Second Amended and Restated Bylaws, stockholder action may be taken by written consent without a meeting of stockholders. By written consent without a meeting on August 7, 2020, the Majority Stockholders approved the Charter Amendment and the Share Issuance. This Information Statement also constitutes notice to you under Section 228 of the DGCL of the actions taken by written consent by the Majority Stockholders without a meeting of stockholders.

 

PLEASE NOTE THAT THE NUMBER OF VOTES RECEIVED FROM THE MAJORITY STOCKHOLDERS BY WRITTEN CONSENT IS SUFFICIENT TO SATISFY THE STOCKHOLDER APPROVAL REQUIREMENT FOR THESE ACTIONS UNDER THE DGCL AND NYSE AMERICAN RULES AND NO ADDITIONAL VOTES WILL CONSEQUENTLY BE NEEDED, OR ARE BEING SOLICITED, TO APPROVE THE CHARTER AMENDMENT AND THE SHARE ISSUANCE.

 

This Information Statement is being furnished to all holders of our common stock pursuant to Section 14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, solely for the purpose of informing stockholders of these corporate actions before they take effect.

 

The record date for determining our stockholders who were entitled to notice of those matters was August 7, 2020, the date that the Board of Directors of the Company took prior action in connection therewith. In accordance with Exchange Act Rule 14c-2, the stockholder consent will become effective no sooner than 20 calendar days following the mailing of this Information Statement. This Information Statement is being mailed on or about                     , 2020 to stockholders of record as of August 7, 2020. Therefore, these actions will be effective on or about                   , 2020.

 

Holders of our common stock do not have appraisal or dissenters’ rights under the DGCL in connection with the matters described in this Information Statement and approved by the Majority Stockholders.

 

You are urged to read this Information Statement carefully in its entirety, including any information incorporated by reference into this Information Statement. However, no action is required on your part in connection with this document.

 

THIS IS NOT A NOTICE OF A SPECIAL MEETING OF STOCKHOLDERS, AND NO STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN. THIS INFORMATION STATEMENT IS BEING FURNISHED TO YOU SOLELY FOR THE PURPOSE OF INFORMING STOCKHOLDERS OF THE MATTERS DESCRIBED HEREIN PURSUANT TO SECTION 14(c) OF THE EXCHANGE ACT AND THE REGULATIONS PROMULGATED THEREUNDER, INCLUDING REGULATION 14C, AND PURSUANT TO SECTION 228 OF THE DGCL.

 

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

We thank you for your continued support.

 

Sincerely,

 

 

Jeffrey Peters

Chairman of the Board

 

Sean E. Browne

President and Chief Executive Officer

 

Belgrade, Montana

                                     , 2020

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
INFORMATION STATEMENT 3
Information Concerning the Action by Written Consent 3
Effective Date of Action by Written Consent 4
Outstanding Shares and Voting Rights as of Record Date 4
No Dissenters’ or Appraisal Rights 4
Expenses 4
QUESTIONS AND ANSWERS ABOUT THIS INFORMATION STATEMENT 5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 6
BACKGROUND OF THE RESTRUCTURING TRANSACTIONS 7
Introduction 7
Background of the Restructuring Transactions 8
DESCRIPTION OF THE RESTRUCTURING AGREEMENT AND RELATED AGREEMENTS 16
Restructuring Agreement 16
Second Amendment to Second Amended and Restated Credit Agreement 21
Registration Rights Agreement 21
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE 22
Opinion of Duff & Phelps, LLC 22
Summary of Financial Analysis by Duff & Phelps 24
Valuation Analysis 25
Discounted Cash Flow Analysis 25
Market Approach 26
Adjusted Enterprise Value 30
Pre-Exchange Transaction Per Share Value Range 30
Post-Exchange Transaction Per Share Value Range 30
Summary Conclusion 32
Other and Miscellaneous 33
CERTAIN COMPANY FORECASTS 33
DILUTION 35
CAPITALIZATION 35
WRITTEN ACTION ONE— APPROVAL OF amendment to AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED shares OF COMMON STOCK 36
Background 36
Text of the Charter Amendment 36
Purpose of the Charter Amendment 36
Interests of Directors, Officers and Affiliates in the Charter Amendment 37
Potential Effects of the Charter Amendment 37
Timing of the Charter Amendment 38
WRITTEN ACTION TWO— APPROVAL OF ISSUANCE OF SHARES OF COMMON STOCK TO LENDERS UPON EXCHANGE OF CERTAIN INDEBTEDNESS FOR COMMON STOCK 39
Background and Reasons for the Share Issuance 39
Reasons for Stockholder Approval of the Share Issuance 39
Interests of Directors, Officers and Affiliates in the Share Issuance 39
No Preemptive Rights of Common Stock 40
Effect of the Share Issuance upon Rights of Existing Stockholders 40
Registration Rights 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 41
Significant Beneficial Owners 41
Security Ownership of Management 42
other matters 43
HOUSEHOLDING information 43
where you can find ADDITIONAL INFORMATION 43

 

  i  

 

 

ANNEXES

 

Annex A – Form of Charter Amendment

Annex B – Restructuring and Exchange Agreement

Annex C – Opinion of Duff & Phelps, LLC

 

  ii  

 

 

PRELIMINARY INFORMATION STATEMENT—SUBJECT TO COMPLETION

 

 

XTANT MEDICAL HOLDINGS, INC.

664 Cruiser Lane

Belgrade, Montana 59714

(406) 388-0480

 

INFORMATION STATEMENT

 

 

 

We are required to deliver this Information Statement to holders of shares of common stock, par value $0.000001 per share (“common stock”), of Xtant Medical Holdings, Inc. (the “Company,” “our,” “we” or “us”) in order to provide notice that certain holders of a majority of the voting power of the outstanding shares of our common stock entitled to vote as of the record date set forth below (collectively, the “Majority Stockholders”), without holding a meeting of stockholders at which holders of our common stock would be entitled to vote, have provided written consent to certain actions that would normally require such a meeting.

 

THE ACCOMPANYING MATERIAL IS BEING PROVIDED TO YOU FOR INFORMATIONAL PURPOSES ONLY. NO VOTE OR OTHER ACTION OF OUR STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE MATTERS DESCRIBED IN THIS INFORMATION STATEMENT.

 

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

Information Concerning the Action by Written Consent

 

This Information Statement is being mailed on or about                   , 2020 to the holders of record at the close of business on August 7, 2020 (the “Record Date”) of our common stock pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and pursuant to Section 228 of the General Corporation Law of the State of Delaware (the “DGCL”) and Section 1.10 of the Company’s Second Amended and Restated Bylaws (“Bylaws”). The purpose of this Information Statement is to inform holders of our common stock that by written consent without a meeting, the Majority Stockholders have approved the following actions:

 

  1. an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Charter”) to increase the number of authorized shares of our common stock from 75,000,000 shares to 300,000,000 shares (the “Charter Amendment”); and
     
  2. the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP, as lenders, under the Second Amended and Restated Credit Agreement, dated as of March 29, 2019, by and among the Company, Bacterin International, Inc., Xtant Medical, Inc., X-spine Systems, Inc., and the Lenders, as amended (the “Second A&R Credit Agreement”), as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement) (such loans and PIK Interest, the “Exchanging Loans”), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, resulting in the issuance of approximately 57.8 million shares of our common stock (the “Share Issuance”).

 

The approval of the Charter Amendment is required under the DGCL, and the approval of the Share Issuance is required by the rules and regulations of the NYSE American, as further described in this Information Statement.

 

     

 

 

The written consent of the Majority Stockholders is sufficient to approve the Charter Amendment and the Share Issuance. Therefore, no proxies or consents were, or are, being solicited in connection with the Charter Amendment and the Share Issuance.

 

THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDER MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED IN THIS INFORMATION STATEMENT.

 

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

Other than the stockholder written consent described above, no other votes are necessary or required to effectuate the Charter Amendment or the Share Issuance or the other transactions described in this Information Statement.

 

Effective Date of Action by Written Consent

 

This Information Statement is being furnished to all holders of our common stock pursuant to Section 14(c) of the Exchange Act and the rules and regulations promulgated thereunder solely for the purpose of informing stockholders of these corporate actions before they take effect. In accordance with Exchange Act Rule 14c-2, the stockholder consent will become effective no sooner than 20 calendar days following the mailing of this Information Statement. After the expiration of the 20-day period required under Rule 14c-2 promulgated under the Exchange Act, and in accordance with the DGCL, the Company intends to file the Charter Amendment with the Secretary of State of the State of Delaware. The Charter Amendment will become effective when it has been accepted for filing by the Secretary of State of the State of Delaware. Immediately after the Charter Amendment has become effective, in accordance with the rules and regulations of the NYSE American and the terms of that certain Restructuring and Exchange Agreement among the Company and the Lenders, as described in more detail later in this Information Statement, the Company intends to issue the 57,837,046 shares of common stock to the Lenders in the Share Issuance.

 

Outstanding Shares and Voting Rights as of Record Date

 

As of the Record Date, our authorized capital stock consisted of 75,000,000 shares of common stock and 10,000,000 shares of preferred stock at a par value of $0.000001 per share (“preferred stock”), of which 13,223,565 shares of common stock and no shares of preferred stock were issued and outstanding, respectively. Each share of our outstanding common stock is entitled to one vote on matters submitted for stockholder approval and to notice of action to be taken pursuant to written consent, such as action taken by the Majority Stockholders.

 

On August 7, 2020, the Majority Stockholders executed and delivered to the Company a written consent by which holders of 9,248,678 shares of our common stock, or approximately 70% of the voting power of the outstanding shares of our common stock entitled to vote on the matter, approved the Charter Amendment and the Share Issuance. Since the Charter Amendment and the Share Issuance have been approved by the Majority Stockholders, no proxies are being solicited with this Information Statement.

 

The DGCL permits the holders of a corporation’s outstanding stock representing a majority of that corporation’s voting power to approve and authorize corporate actions by written consent as if such actions were undertaken at a duly called and held meeting of stockholders. In order to significantly reduce the costs and management time involved in soliciting and obtaining proxies to approve the foregoing matters and in order to timely effectuate such matters, the Board of Directors of the Company elected to utilize, and did in fact obtain, the written consent of the holder of a majority of the voting power of the Company. The Company obtained the written consent of the stockholders who, as of the Record Date, owned approximately 70% of the Company’s voting stock. The written consent satisfies the stockholder approval requirement for the actions taken. Accordingly, under the DGCL, no other Board of Directors or stockholder approval is required in order to effect such actions.

 

No Dissenters’ or Appraisal Rights

 

The DGCL does not provide dissenters’ or appraisal rights to stockholders of the Company in connection with the Charter Amendment or the Share Issuance or any matter described in this Information Statement.

 

Expenses

 

The cost of furnishing this Information Statement will be borne by the Company. We will mail this Information Statement to registered stockholders and certain beneficial stockholders of the Company where requested by brokerage houses, nominees, custodians, fiduciaries and other like parties.

 

  4  

 

 

QUESTIONS AND ANSWERS ABOUT THIS INFORMATION STATEMENT

 

 

 

Q: Why am I receiving these materials?
   
A: We are providing this Information Statement to you for your information to comply with the requirements of the Exchange Act and the DGCL. You are urged to read this Information Statement carefully in its entirety, including any information incorporated by reference into this Information Statement. However, no action is required on your part in connection with this document.
   
  The record date for determining our stockholders who were entitled to notice of those matters was August 7, 2020, the date that the Board of Directors of the Company took prior action in connection therewith. In accordance with Exchange Act Rule 14c-2, the stockholder consent will become effective no sooner than 20 calendar days following the mailing of this Information Statement. This Information Statement is being mailed on or about    , 2020 to stockholders of record as of August 7, 2020. Therefore, these actions will be effective on or about   , 2020.
   
Q: What information is contained in this Information Statement?
   
A: This Information Statement contains information regarding actions approved by the Board of Directors of the Company and holders of our common stock holding an aggregate of 9,248,678 shares of our common stock, representing approximately 70% of our total shares of common stock outstanding as of the Record Date. We refer to these stockholders as the Majority Stockholders in this Information Statement.
   
Q: What actions were taken by written consent of the Majority Stockholders?
   
A: The actions approved by the written consent of the Majority Stockholders are more completely described elsewhere in this Information Statement, but in summary are:
     
  1. an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock from 75,000,000 shares to 300,000,000 shares; and
     
  2. the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by the Lenders under the Second A&R Credit Agreement, as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, resulting in the issuance of approximately 57.8 million shares of our common stock.
   
Q: Why are you not soliciting proxies on these two actions?
   
A: We are not soliciting proxies on these two matters because the Majority Stockholders, who together hold approximately 70% of the Company’s voting power, provided written consent approving each of the two actions, and no other action on the part of our stockholders is necessary or required to effectuate the Charter Amendment or the Share Issuance or the other transactions described in this Information Statement.
   
Q: When do you expect to file the Charter Amendment and effect the Share Issuance?
   
A: In accordance with Exchange Act Rule 14c-2, the stockholder consent will become effective no sooner than 20 calendar days following the mailing of this Information Statement. After the expiration of the 20-day period required under Rule 14c-2 promulgated under the Exchange Act, and in accordance with the DGCL, the Company intends to file the Charter Amendment with the Secretary of State of the State of Delaware. The Charter Amendment will become effective when it has been accepted for filing. Immediately after the Charter Amendment has become effective, in accordance with the rules and regulations of the NYSE American and the terms of that certain Restructuring and Exchange Agreement among the Company and the Lenders, as described in more detail later in this Information Statement, the Company intends to issue the shares of common stock to the Lenders in the Share Issuance.

 

Q: Will the restructuring transactions result in the Company becoming back in compliance with the NYSE American continued listing standards?
   
A: Yes, we expect that upon completion of the Share Issuance, the Company will be back in compliance with the NYSE American continuing listing standards.
   
Q: To whom may I direct any additional questions regarding this Information Statement?
   
A: Any additional questions regarding this Information Statement may be directed to:

 

Xtant Medical Holdings, Inc.

Attention: Investor Relations

664 Cruiser Lane

Belgrade, Montana 59714

(406) 388-0480

 

  5  

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

 

 

The statements contained in this Information Statement 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 Information Statement may include, for example, statements about the following topics and are subject to certain risks and uncertainties, including the following:

 

  our ability to effect the Charter Amendment, the Share Issuance and the other restructuring transactions described in this Information Statement in a timely manner;
  our ability to regain compliance with NYSE American continued listing standards and maintain the listing of our common stock on the NYSE American;
  our ability to service our debt and comply with the covenants in the Second A&R Credit Agreement;
  our ability to maintain sufficient liquidity to fund our operations and obtain financing on reasonable terms when needed;
  our future financial performance, including our ability to increase or maintain revenue;
  the effect of the global novel strain of coronavirus (COVID-19) pandemic on our business, operating results and financial condition, including disruption to our customers, distributors, independent sales representatives, contract manufacturers and suppliers, as well as the global economy and financial and credit markets;
  our ability to remain competitive;
  our ability to innovate and develop new products;
  our ability to obtain donor cadavers for our products from a limited number of third-party suppliers;
  public acceptance of biologics products;
  our ability to engage and retain qualified technical personnel and members of our management team;
  product liability claims and any litigation to which we may be subjected;
  our ability to successfully integrate future business combinations or acquisitions;
  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;
  the ability of our sales force to achieve expected results;
  the impact of worldwide economic conditions, which could adversely affect our revenue, financial condition, or results of operations;
  our ability to use our net operating loss carry-forwards to offset future taxable income;
  the effect of government regulations, our ability to obtain and maintain regulatory approvals in the United States and abroad and government and third-party coverage and reimbursement for our products
  timing and results of clinical studies;
  product recalls and defects;
  our ability to remain accredited with the American Association of Tissue Banks;
  our ability to obtain and protect our intellectual property and proprietary rights and operate without infringing the intellectual property rights of others.

 

The forward-looking statements contained in this Information Statement 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, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020. 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.

 

  6  

 

 

BACKGROUND OF THE RESTRUCTURING TRANSACTIONS

 

 

 

Introduction

 

On August 7, 2020, we entered into a Restructuring and Exchange Agreement with OrbiMed Royalty Opportunities II, LP (“Royalty Opportunities”) and ROS Acquisition Offshore LP (“ROS” and together with Royalty Opportunities, the “Lenders”), pursuant to which the parties thereto agreed, subject to the terms and conditions set forth therein, to take certain actions as set forth therein and as described in more detail below (collectively, the “Restructuring Transactions”) in furtherance of a restructuring of our outstanding indebtedness under the Second A&R Credit Agreement.

 

The Restructuring Transactions include, among others:

 

  an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock from 75 million to 300 million;
     
  the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by the Lenders under the Second A&R Credit Agreement, as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, representing the average closing price of our common stock over the 10 trading days immediately prior to the parties entering into the Restructuring Agreement, and resulting in the issuance of approximately 57.8 million shares of our common stock;
     
  the execution of an amendment to the Second A&R Credit Agreement by the parties thereto to change certain provisions therein, including extinguishing loans in an aggregate principal amount equal to the Exchanging Loans outstanding thereunder together with all accrued and unpaid interest thereon, adding loans in an aggregate principal amount equal to the prepayment fee payable thereunder in respect of the Exchanging Loans, reducing the amount of credit availability thereunder, decreasing the interest rate and eliminating certain financial covenants, as described in more detail below; and
     
  the launch by the Company of a rights offering to allow stockholders of the Company to purchase up to an aggregate of $15 million of our common stock at the same price per share as the $1.07 per share exchange price used to exchange the Exchanging Loans into common stock as part of the Share Issuance (the “Rights Offering”).

 

Immediately after the execution of the Restructuring Agreement by the parties thereto, the Company solicited and obtained the written consent of Royalty Opportunities and ROS, the holders of a majority of the outstanding shares of common stock as of the Record Date, for the approval of the Charter Amendment and the Share Issuance, in accordance with applicable provisions of the DGCL and the Company’s Bylaws. The written consent of the Majority Stockholders was sufficient to approve the Charter Amendment and the Share Issuance. Therefore, no proxies or additional consents will be solicited by the Company in connection with the Charter Amendment and the Share Issuance.

 

Assuming that the Charter Amendment and Share Issuance are consummated on                        , 2020, the Lenders as of such date would own, in the aggregate, approximately 94% of our outstanding common stock. Consequently, all other existing stockholders of the Company, who currently own approximately 30% of our outstanding common stock, would own approximately 6% of our outstanding common stock following the consummation of the Charter Amendment and Share Issuance.

 

The material terms of the Restructuring Transactions are described under “Description of the Restructuring Agreement and Related Agreements” beginning on page 16.

 

Detailed information about these two written consent actions can be found under “Written Action One: Approval of Amendment to Amended and Restated Certificate of Incorporation to Increase Authorized Shares of Common Stock” beginning on page 36 and “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock” beginning on page 39.

 

  7  

 

 

Background of the Restructuring Transactions

 

We have incurred losses and have had negative cash flow since our inception. As a result of our history of losses and negative cash flows, and to maintain the listing of our common stock on the NYSE American stock exchange, during the first quarter of 2018, we effected a significant debt restructuring transaction pursuant to which a portion of our then outstanding indebtedness, amounting to an aggregate of $76.6 million in principal, together with accrued and unpaid interest, was converted into shares of our common stock, and we issued an additional 945,819 shares of common stock to Royalty Opportunities and ROS in a private placement. As part of the 2018 debt restructuring, on February 13, 2018, at a special meeting of our stockholders, we received stockholder approval of certain matters in connection therewith, including the issuance of shares of our common stock for purposes of the continued listing standards of the NYSE American, an amendment to our Charter to effect a 1-for-12 reverse split of our common stock and the election of six new members of the Board of Directors who replaced the then existing members of the Board of Directors, including three directors who were nominated by Royalty Opportunities and ROS and three “independent directors” under the continued listing standards of the NYSE American.

 

As a result of the 2018 debt restructuring, Royalty Opportunities and ROS, which are funds affiliated with OrbiMed Advisors LLC (“OrbiMed”), collectively held approximately $75.6 million of outstanding indebtedness and owned approximately 70% of our outstanding common stock. Because of this significant stock ownership, we became and continue to be a “controlled company” as defined in section 801(a) of the NYSE American Company Guide (“Company Guide”). As a controlled company, we are exempt from certain continued listing standards of the NYSE American requiring the Board of Directors to have a majority of independent members, a compensation committee composed entirely of independent directors and a nominating committee composed entirely of independent directors.

 

As part of the 2018 debt restructuring transaction, effective as of February 14, 2018, we entered into an Investor Rights Agreement with Royalty Opportunities, ROS and certain other stockholders of the Company at that time. Under the terms of the Investor Rights Agreement, Royalty Opportunities and ROS are permitted to nominate a majority of the members of the Board of Directors and designate the chairperson of the Board of Directors at subsequent annual meetings, as long as they maintain an ownership threshold in the Company of at least 40% of our outstanding common stock. If Royalty Opportunities and ROS are unable to maintain the 40% ownership threshold, the Investor Rights Agreement contemplates a reduction of nomination rights commensurate with their ownership interests. In addition, under the terms of the Investor Rights Agreement, for so long as the Ownership Threshold (as defined in the Investor Rights Agreement) is met, we must obtain the approval of Royalty Opportunities and ROS in order to: (i) issue new securities; (ii) incur over $250,000 of debt in the aggregate in a fiscal year; (iii) sell or transfer our assets or our businesses or those of our subsidiaries with a value in excess of $250,000 in the aggregate in a fiscal year; (iv) acquire assets or properties for an amount in excess of $250,000 in a fiscal year; (v) make capital expenditures over $125,000 individually, or $1,500,000 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 of Directors; and (ix) make loans to, investments in, or purchase, or permit any subsidiary to purchase, any stock or other securities in another entity in excess of $250,000 in the aggregate in a fiscal year. In addition, as long as the Ownership Threshold is met, we may not increase the size of the Board of Directors beyond seven directors without the approval of a majority of the directors nominated by Royalty Opportunities and ROS. The Investor Rights Agreement also grants Royalty Opportunities and ROS 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 our written notice or the written notice of Royalty Opportunities or ROS if the ownership percentage of Royalty Opportunities and ROS of our outstanding common stock is less than 10%, or (c) upon written notice of Royalty Opportunities and ROS.

 

Also as part of the 2018 debt restructuring transaction, we entered into amendments to our then credit agreement with the Lenders to extend the maturity date of the credit facility, defer the payment of cash interest on our then outstanding indebtedness, modify the financial covenants and change certain other provisions thereof.

 

Finally as part of the 2018 debt restructuring transaction, we effected certain other actions, including:

 

  certain amendments to our Charter and Bylaws;
     
  a 1-for-12 reverse split of our common stock effective as of February 13, 2018;
     
  the sale of 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 to Royalty Opportunities and ROS in a private placement;

 

  8  

 

 

  a rights offering to allow our stockholders as of the April 27, 2018 record date to purchase shares of our common stock at a subscription price of $7.20 per share, which was the same per share price in the private placement with Royalty Opportunities and ROS; and
     
  the registration of the resale of the shares of our common stock issued to Royalty Opportunities, ROS and certain other third parties pursuant to a registration statement on Form S-1, which was declared effective by the SEC on June 4, 2018.

 

Subsequent to the 2018 debt restructuring transaction, the Board of Directors and management of the Company focused on the Company’s business, including certain operational efficiencies, building a new senior leadership team and improving the Company’s balance sheet.

 

In furtherance of building a senior leadership team, the Board of Directors took the following actions, among other actions:

 

  appointed Kevin D. Brandt as Chief Commercial Officer, effective as of July 9, 2018, and enhanced the Company’s commercial organization under Mr. Brandt’s leadership by hiring five senior sales executives in the beginning of 2019;
     
  appointed Greg Jensen as Vice President, Finance and Interim Chief Financial Officer, effective as of February 11, 2019, and appointed Mr. Jensen as Chief Financial Officer, on a non-interim basis, effective as of August 8, 2019; and
     
  appointed Sean E. Browne as President and Chief Executive Officer, effective as of October 7, 2019.

 

In furtherance of effecting certain operational efficiencies and improving our balance sheet, the Company took the following actions, among other actions:

 

  discontinued several unprofitable distributor arrangements and improved our channel management;
     
  wrote down our goodwill and intangible assets during the fourth quarter of 2018 primarily related to assets acquired in connection with our 2015 acquisition of X-spine Systems, Inc.;
     
  negotiated additional amendments to our credit agreement with the Lenders to provide us additional financial flexibility, as described in more detail below; and
     
  reduced significantly our operating expenses while continuing to invest in certain operational improvements intended to assist the Company in our overall commercial performance, such as expanding marketing programs, reengaging with our distributor network, introducing certain selected new products, and implementing upgrades to our existing Enterprise Resource Planning platform.

 

With respect to the additional amendments to our credit agreement with the Lenders, on September 17, 2018, the Company, its subsidiaries and the Lenders entered into the Twenty-Fourth Amendment (the “24th Amendment”) to the Amended and Restated Credit Agreement by and between Bacterin International, Inc. and ROS (as amended prior to the 24th Amendment, the “Prior Credit Agreement” and the facility created under such agreement, as amended prior to the 24th Amendment, the “Prior Credit Facility”), which further amended the Prior Credit Agreement and terms of the Prior Credit Facility, effective as of April 1, 2018. Under the terms of the 24th Amendment, no interest was charged on the loans under the Prior Credit Facility from April 1, 2018 until June 30, 2018.

 

  9  

 

 

Also, on September 17, 2018, the Company, its subsidiaries and the Lenders 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 Prior Credit Facility, effective as of August 1, 2018. Under the terms of the 25th Amendment:

 

  no interest was charged on the loans outstanding under the Prior Credit Facility from July 1, 2018 until December 31, 2018;
     
  the Optional PIK Interest (as such term was defined in the Prior Credit Agreement) was decreased from 15% plus the LIBO Rate (as such term was defined in the Prior 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 outstanding under the Prior 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.

 

On September 17, 2018, in connection with the 25th Amendment, we issued warrants to purchase an aggregate of 1.2 million shares of our common stock to the Lenders, with an exercise price of $0.01 per share and an expiration date of August 1, 2028. The issuance of these warrants was a condition to the effectiveness of the 25th Amendment.

 

On March 29, 2019, the Company, its subsidiaries and the Lenders entered into the Second A&R Credit Agreement, which amended and restated the Prior Credit Agreement. Under the Second A&R Credit Agreement:

 

  we may continue to make requests for term loans in amounts equal to the remaining commitment for additional delayed draw loans, and may request additional term loans from the Lenders 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 Lenders and which shows a projected cash balance for the following two-week period of no less than $1.5 million, as well as the satisfaction (or waiver in writing by each Lender) of conditions precedent, including closing certificate, delivery of budget, and other satisfactory documents;
     
  no interest accrued on the loans outstanding under the Second A&R Credit Agreement from and after January 1, 2019 until March 31, 2020;
     
  beginning April 1, 2020 through the maturity date of the Second A&R Credit Agreement, interest payable in cash will accrue on the loans outstanding under the Second A&R 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 A&R Credit Agreement) and (y) 2.3125%;
     
  the maturity date of the Loans was changed to 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 A&R Credit Agreement) financial covenant was added; and
     
  the key person event of default provision was revised to refer specifically to certain then recently-hired executive officers of the Company.

 

On April 1, 2019, in connection with the Second A&R Credit Agreement, we issued warrants to purchase an aggregate of 1.2 million shares of our common stock to the Lenders, with an exercise price of $0.01 per share and an expiration date of April 1, 2029. The issuance of these warrants was a condition to the effectiveness of the Second A&R Credit Agreement.

 

Despite progress made in improving the operational efficiency and flexibility of the Company, the market price of our common stock decreased from a high of $11.50 per share during 2018 to a low of $0.55 during 2020, in each case after giving effect to the one-for-12 reverse stock split effected on February 13, 2018.

 

  10  

 

 

In part due to our decreased market capitalization, the significant goodwill and intangible asset charges we incurred during the fourth quarter of 2018 and our continued operating losses, on April 4, 2019, we received a letter from NYSE Regulation notifying us that we are not in compliance with the continued listing standards of the NYSE American relating to stockholders’ equity. Specifically, we were not in compliance with Section 1003(a)(i) of the NYSE American Company Guide with stockholders’ equity of less than $2,000,000 and net losses in two of our three most recent fiscal years, Section 1003(a)(ii) with stockholders’ equity of less than $4,000,000 and net losses in three of our four most recent fiscal years and Section 1003(a)(iii) with stockholders’ equity of less than $6,000,000 and net losses in five of our most recent fiscal years. According to Section 1003(a) of the Company Guide, NYSE Regulation will normally consider providing an exemption for entities not in compliance with Sections 1003(a)(i) through (a)(iii) of the Company Guide if the entity is in compliance with the following standards: (1) total value of market capitalization of at least $50,000,000; or total assets and revenue of $50,000,000 each in its last fiscal year, or in two of its last three fiscal years; and (2) the issuer has at least 1,100,000 shares publicly held, a market value of publicly held shares of at least $15,000,000 and 400 round lot shareholders. This exemption is not currently available to the Company due to the decline of our common stock price and the significant share ownership by Royalty Opportunities and ROS. Therefore, we became subject to the procedures and requirements of Section 1009 of the Company Guide, and pursuant to such procedures, we were required to submit a plan of compliance to NYSE Regulation by no later than May 4, 2019 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 in order to maintain the listing of our common stock on the NYSE American.

 

On May 1, 2019, the Board of Directors held a regular meeting and discussed, among other topics, the Company’s plan to regain compliance with the NYSE American continued listing standards. After receiving input from the representatives of OrbiMed, the Board of Directors decided to pursue a debt restructuring transaction pursuant to which a significant portion of the Company’s outstanding indebtedness under the credit facility with the Lenders would be exchanged for shares of our common stock. Key factors leading to the decision of the Board of Directors to pursue the debt restructuring transaction were the Company’s plan to regain compliance with the continued listing standards of the NYSE American by no later than October 4, 2020, the willingness of the Lenders to exchange a significant portion of our outstanding indebtedness for shares of our common stock, the anticipated terms of the credit facility to be amended in connection with the transaction, and the ability of the transaction, as discussed in this Information Statement, to reform the Company’s capital structure, improve our balance sheet, free up cash flow and provide financial support for our future operations. At the meeting, the Board of Directors approved the Company’s NYSE American compliance plan and authorized management to submit it to NYSE Regulation by the May 4, 2019 deadline.

 

In furtherance of effecting a future debt restructuring transaction, on July 31, 2019, at a regular meeting of the Board of Directors, the Board of Directors created a special Debt Restructuring Committee of the Board of Directors (the “Special Committee”) comprised of the two independent directors, John Bakewell and Robert McNamara. The purpose of the Special Committee was to negotiate and approve the terms of a debt restructuring transaction on behalf of the Company and to report its conclusions and recommendations to the Board of Directors, as appropriate.

 

On August 7, 2019, the Special Committee engaged the law firm of Stoel Rives LLP (“Stoel Rives”) as the Special Committee’s independent counsel in connection with the potential debt restructuring transaction.

 

On August 9, 2019, representatives of Covington & Burling LLP, legal counsel to the Lenders (“Covington”), and representatives of Fox Rothschild LLP, legal counsel to the Company (“Fox Rothschild”), discussed by telephone the timing of a potential debt restructuring transaction. On this call, the representatives of Fox Rothschild informed Covington that a Special Committee had been created by the Board of Directors and had recently engaged Stoel Rives as its independent legal counsel.

 

Subsequent to the creation of the Special Committee and its engagement of Stoel Rives and from time to time throughout the third and fourth quarters of 2019 and the first and second quarters of 2020, the Company, the Board of Directors, the Special Committee and representatives of the Lenders and their respective legal counsel discussed the potential structure and terms of a debt restructuring transaction, including the amount of outstanding indebtedness under the Company’s credit facility that would be exchanged, whether to obtain stockholder approval of the transaction at a special meeting of the Company’s stockholders or by written consent of the Majority Stockholders, whether to require approval of the transaction by a majority of the Company’s minority stockholders, treatment of the prepayment fee, the exchange price, and how the exchange price would relate to the then current market price of the Company’s common stock. On January 14, 2020, Covington distributed a draft Restructuring Agreement to the parties, which contemplated obtaining stockholder approval of the transaction by written consent of the Majority Stockholders and possibly certain other stockholders of the Company. While several discussions among the various parties took place during this time period regarding the draft Restructuring Agreement, no final decisions on the terms of the debt restructuring were agreed upon amongst the parties.

 

Throughout this time period, other business initiatives of the Company continued to consume a significant portion of management’s time and attention and continued to take priority over the debt restructuring transaction. These business initiatives included the hiring of a new Chief Executive Officer, the settlement of outstanding litigation, navigating certain supply chain challenges, negotiating additional amendments to the Company’s credit agreement with the Lenders, and, more recently, responding to the impact of the COVID-19 pandemic on the Company’s business.

 

  11  

 

 

In April 2020, in response to the COVID-19 pandemic, the Company implemented a series of cost-savings actions intended to preserve capital to support operations. These temporary cost-savings actions included, among others, termination or furlough of 42% of our workforce, suspension in hiring most open positions, elimination of planned salary increases, institution of a temporary 20% base salary or wage reduction for all executive officers and employees, a 20% reduction in non-employee director retainers, suspension of future 401(k) plan matching contributions by the Company, reduction in sales and marketing expenses and other discretionary spending, and elimination of most capital expenditures.

 

On May 6, 2020, the Company, its subsidiaries and the Lenders entered into a First Amendment to the Second Amended and Restated Credit Agreement (“First Amendment”), which among other things, provided that, effective as of April 1, 2020:

 

  no interest will accrue on the outstanding loans under the Second A&R Credit Agreement from and after March 31, 2020 until September 30, 2020;
     
  beginning October 1, 2020 through the maturity date of the Second A&R Credit Agreement, interest payable in cash will accrue on the loans outstanding under the Second A&R Credit Agreement at a rate per annum equal to the sum of (i) 10.00% plus (ii) the higher of (x) the LIBO Rate (as such term is defined in the Second A&R Credit Agreement) and (y) 2.3125%;
     
  the maturity date of the loans outstanding under the Second A&R Credit Agreement is extended to December 31, 2021;
     
  the Revenue Base financial covenant was revised through December 31, 2021; and
     
  the key person event of default provision was revised to refer specifically to Sean Browne in lieu of a former executive.

 

On May 6, 2020, in connection with the First Amendment, we issued warrants to purchase an aggregate of 2.4 million shares of our common stock to the Lenders, with an exercise price of $0.01 per share and an expiration date of May 6, 2030. The issuance of these warrants was a condition to the effectiveness of the First Amendment.

 

On July 6, 2020, the Special Committee retained Duff & Phelps, LLC (“Duff & Phelps”) as an independent financial advisor to provide an opinion as to the fairness, from a financial point of view, of the exchange price for the Exchanging Loans, to the stockholders of the Company unaffiliated with the Lenders in connection with the Restructuring Transactions.

 

Throughout the months of May and June 2020, the Company, the Board of Directors, the Special Committee, representatives of the Lenders and their respective legal counsel continued to discuss the potential structure and terms of the debt restructuring transaction, including the amount of outstanding indebtedness under the credit facility to exchange, the remaining availability under the credit facility, whether to obtain stockholder approval of the transaction at a special meeting of the Company’s stockholders or by written consent of the Majority Stockholders, whether to require approval of the transaction by a majority of the Company’s minority stockholders, the exchange price, and how the exchange price related to the then current market price of the Company’s common stock.

 

On May 22, 2020, a revised draft of the Restructuring Agreement incorporating input from management, Fox Rothschild and Stoel Rives was sent to Covington. The revised draft Restructuring Agreement also contemplated obtaining stockholder approval of the transaction by written consent of the Majority Stockholders and possibly certain other stockholders of the Company.

 

Subsequent to sending out the May 22, 2020 draft of the Restructuring Agreement, the parties learned that Park West Investors Master Fund, Limited and Park West Partners International, Limited, which in the aggregate owned 9.5% of our outstanding common stock and were also parties to the Investor Rights Agreement, had sold all of their shares of Xtant common stock.

 

On June 10, 2020, representatives of Covington, Fox Rothschild and Stoel Rives held a telephonic meeting to discuss once again the structure of the debt restructuring transaction and whether to obtain stockholder approval of the transaction at a special meeting of the Company’s stockholders or by written consent of the Majority Stockholders. The parties agreed to continue to structure the transaction in a manner so as to seek stockholder approval of the transaction by written consent of the Majority Stockholders.

 

  12  

 

 

On June 22, 2020, Covington distributed a revised draft Restructuring Agreement to the parties, which contemplated obtaining stockholder approval of the transaction by written consent of the Majority Stockholders, an exchange price based on an average of the closing sale price of the Company’s common stock over the 10 business days prior to the parties entering into the Restructuring Agreement and significant restrictions on the conduct of the Company’s business prior to Closing (as defined below).

 

On June 30, 2020, a revised draft of the Restructuring Agreement incorporating input from management, Fox Rothschild and Stoel Rives was sent to Covington. The revised draft Restructuring Agreement proposed an exchange price based on a premium to the average of the closing sale price of the Company’s common stock over the 10 business days prior to the parties entering into the Restructuring Agreement, certain exceptions to the restrictions on the conduct of the Company’s business prior to Closing and that the terms of the Second Amendment to the Second Amended and Restated Credit Agreement be negotiated at a later date by the members of the Special Committee and representatives of the Lenders.

 

On July 1, 2020, the members of the Special Committee discussed with Michael Eggenberg and Matt Rizzo, two current members of the Board and representatives of the Lenders, material terms of the Restructuring Agreement, including specifically, the exchange price, the Rights Offering, restrictions on the conduct of the Company’s business prior to Closing and certain terms of the Second Amendment to the Second Amended and Restated Credit Agreement, including the amount of unused credit availability, the maturity date, the Revenue Base financial covenant, the deferral of cash interest period and the interest rate.

 

On July 8, 2020, the members of the Special Committee, management and representatives of Fox Rothschild and Stoel Rives discussed open material issues relating to the Restructuring Agreement and the Second Amendment to the Amended and Restated Credit Agreement and process and timing for next steps to negotiate and resolve material open issues and finalize the Restructuring Agreement and the Second Amendment to the Second Amended and Restated Credit Agreement.

 

On July 10, 2020, the Board of Directors held a special telephonic meeting to discuss the status and terms of the Restructuring Agreement. Management and representatives of Fox Rothschild and Stoel Rives were also present.

 

On July 17, 2020, a revised draft of the Restructuring Agreement incorporating input from management, Fox Rothschild and Stoel Rives was sent to Covington. The revised draft Restructuring Agreement contemplated an exchange price based the average of the closing sale price of the Company’s common stock over the 10 trading days prior to the parties entering into the Restructuring Agreement and certain terms of the Second Amendment to the Second Amended and Restated Credit Agreement, including $5 million in unused credit availability, a decreased interest rate commencing October 1, 2020 and elimination of the Revenue Base financial covenant.

 

On July 21, 2020, Covington distributed a revised draft Restructuring Agreement to the parties which accepted the terms proposed in the July 17th draft, but also provided for the ability of the Lenders to terminate the agreement in their discretion in the event of the pendency of a potential material transaction involving the Company and our subsidiaries.

 

From late July until August 7, 2020, the parties and their respective legal counsel finalized the terms of the Restructuring Agreement and the timing of execution thereof, including the ability of the Lenders to terminate the agreement in their discretion in the event of the pendency of a potential transaction involving the Company and our subsidiaries and the $1.07 per share exchange price which was determined after market close on August 6, 2020 based on the average closing sale price over the 10 trading days ended on August 6, 2020.

 

Also during this period, representatives of Fox Rothschild sought guidance from the NYSE American regarding several aspects of the Restructuring Transactions to gauge whether the completion of the Restructuring Transactions would bring the Company back in compliance with the continued listing standards of the NYSE American.

 

On August 7, 2020, the Special Committee held a telephonic meeting to discuss the final terms and conditions of the Restructuring Agreement. Representatives of Stoel Rives discussed with the Special Committee the proposed final terms and conditions of the Restructuring Agreement, and representatives of Fox Rothschild participated in the meeting in their capacity as counsel to the Company. Representatives from Duff & Phelps delivered to the Special Committee a written presentation and an oral opinion, which was subsequently confirmed in writing by delivery of a written opinion dated August 7, 2020, to the Special Committee that, as of the date of such opinion, the exchange price was fair, from a financial point of view, to the stockholders of the Company unaffiliated with the Lenders, without giving effect to any impact of the proposed transaction on any particular stockholder other than in its capacity as a stockholder. See “Opinion of Financial Advisor to the Special Committee” beginning on page 22. Thereafter, the Special Committee unanimously approved the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions, and recommended that the Board of Directors also approve the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions.

 

  13  

 

 

On August 7, 2020, the Board of Directors held a telephonic special meeting to discuss the final terms and conditions of the Restructuring Agreement. Representatives of Fox Rothschild discussed with the Board of Directors the proposed final terms and conditions of the Restructuring Agreement, and representatives of Stoel Rives participated in the meeting in their capacity as counsel to the Special Committee. Representatives from Duff & Phelps delivered a written presentation to the Board and discussed with the Board the oral opinion given to the Special Committee, which was subsequently confirmed in writing by delivery of a written opinion dated August 7, 2020, to the Special Committee that, as of the date of such opinion, the exchange price was fair, from a financial point of view, to the stockholders of the Company unaffiliated with the Lenders, without giving effect to any impact of the proposed transaction on any particular stockholder other than in its capacity as a stockholder. The Special Committee informed the Board of Directors of the actions taken at the meeting of the Special Committee earlier in the day, including its recommendation that the Board of Directors approve the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions. Thereafter, the Board of Directors unanimously approved the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions. More specifically, the Board of Directors, by the unanimous vote of all directors voting:

 

  determined that the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions, are advisable and in the best interests of the Company and its stockholders;
     
  determined that the Restructuring Transactions are fair to the stockholders of the Company;
     
  adopted resolutions approving the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions; and
     
  agreed to solicit the consent of the Majority Stockholders to approve the Charter Amendment and the Share Issuance.

 

In reaching its decision, the Board of Directors evaluated the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions, in consultation with the Company’s management and legal advisors. In addition, the Board of Directors considered the recommendation of the Special Committee and the fairness analysis provided by Duff & Phelps to the Special Committee.

 

The reasons considered by the Board of Directors and the Special Committee in favor of approving the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions, included the following (not necessarily in order of relative importance):

 

  the positive impact that the Restructuring Transactions would have on our balance sheet, liquidity and leverage;
     
  the Company’s ability to pay interest on the indebtedness that would remain outstanding after the Restructuring Transactions with cash generated from operations;
     
  the likelihood that if the Restructuring Transactions are not consummated, our common stock would be delisted from the NYSE American, and it would be difficult for our common stock to be relisted on the NYSE American, which would adversely affect the liquidity and value of our common stock;
     
  the current and historical market prices of our common stock;
     
  the opinion of Duff & Phelps, dated August 7, 2020, to the Special Committee that, as of the date of such opinion and subject to the limitations, qualifications and assumptions set forth therein, the exchange price for the Exchanging Loans was fair, from a financial point of view, to the stockholders of the Company unaffiliated with the Lenders;
     
  the Company’s inability to satisfy its current debt obligations under the Second A&R Credit Agreement, and the likelihood that failure to effect the Restructuring Transactions could lead to an acceleration of its indebtedness owed under the credit facility;

 

  14  

 

 

  the likelihood of the Company’s inability to raise financing or to otherwise realize value for its business operations due to its current capital structure, including in particular its significant outstanding indebtedness;
     
  the likelihood that the Restructuring Agreement and the Restructuring Transactions would be consummated, especially in light of the consent of the Majority Stockholders to the actions described in this Information Statement; and
     
  the elimination of the Revenue Base financial covenant, the reduction of the interest rate and the commitment by the Lenders to provide $5.0 million of availability under the amended credit facility.

 

The Board of Directors and the Special Committee also considered the following negative factors associated with the Restructuring Agreement and the transactions contemplated thereby, including the Restructuring Transactions:

 

  if the Restructuring Transactions are consummated pursuant to the terms and conditions of the Restructuring Agreement, Royalty Opportunities and ROS will own, in the aggregate, approximately 94% of our outstanding common stock, and the other stockholders of the Company, who currently own approximately 30% of the outstanding common stock, will be substantially diluted from an ownership standpoint and will own approximately 6% of our outstanding common stock;
     
  the possibility that the interests of Royalty Opportunities and ROS may not always coincide with the interests of our other stockholders and that they may act in a manner that advances their individual interests and not necessarily those of other stockholders;
     
  the possibility that the Restructuring Agreement may be terminated, including a right by the Lenders to terminate the Restructuring Agreement if a potential transaction involving the Company and our subsidiaries is pending, and that the Restructuring Transactions may not be consummated and thus the benefits thereof may not be realized;
     
  the possibility that the consummation of the Restructuring Transactions may be delayed, resulting in the delisting of our common stock from the NYSE American, and the anticipated resultant adverse effects on the liquidity and value of our common stock;
     
  the fact that the Restructuring Agreement contains significant restrictions on our ability to conduct our business prior to the consummation of the Restructuring Transactions; and
     
  the potential of litigation in connection with the Restructuring Agreement and the Restructuring Transactions.

 

In the judgment of the Board of Directors and the Special Committee, however, these potential risks were favorably offset by the potential benefits of the Restructuring Agreement and the Restructuring Transactions, including those described above.

 

  15  

 

 

DESCRIPTION OF THE RESTRUCTURING AGREEMENT AND RELATED AGREEMENTS

 

 

 

In connection with the proposed Restructuring Transactions, the Company and the Lenders entered into the Restructuring Agreement and intend to enter into a Second Amendment to the Second Amended and Restated Credit Agreement and Registration Rights Agreement.

 

Below is a summary of the material terms of the Restructuring Agreement, Second Amendment to the Second Amended and Restated Credit Agreement and Registration Rights Agreement. The discussion of the Restructuring Agreement is qualified in its entirety by reference to the Restructuring Agreement, which is attached to this Information Statement as Annex A and the discussion of the Registration Rights Agreement is qualified in its entirety by reference to the Registration Rights Agreement, which is attached as an exhibit to the Restructuring Agreement contained in Annex A to this Information Statement (the “Registration Rights Agreement”). This summary does not purport to be complete and may not contain all of the information about the Restructuring Agreement, Second Amendment to the Second Amended and Restated Credit Agreement and Registration Rights Agreement that is important to you.

 

Restructuring Agreement

 

Restructuring Transactions

 

Under the terms of the Restructuring Agreement, the Company and the Lenders agreed, subject to the terms and conditions set forth therein, to take certain actions as set forth therein in furtherance of a restructuring of the Company’s outstanding indebtedness under the Second A&R Credit Agreement. The Restructuring Transactions include the following:

 

  an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of our common stock from 75 million to 300 million;
     
  the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by the Lenders under the Second A&R Credit Agreement, as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, representing the average closing price of our common stock over the 10 trading days immediately prior to the parties entering into the Restructuring Agreement, and resulting in the issuance of approximately 57.8 million shares of our common stock;
     
  the execution of an amendment to the Second A&R Credit Agreement by the parties thereto to change certain provisions therein, including extinguishing loans in an aggregate principal amount equal to the Exchanging Loans outstanding thereunder together with all accrued and unpaid interest thereon, adding loans in an aggregate principal amount equal to the prepayment fee payable thereunder in respect of the Exchanging Loans, reducing the amount of credit availability thereunder, reducing the interest rate and eliminating certain financial covenants, as described in more detail below; and
     
  the launch by the Company of a rights offering to allow stockholders of the Company to purchase up to an aggregate of $15 million of our common stock at the same price per share as the $1.07 per share exchange price used to exchange the Exchanging Loans into common stock as part of the Share Issuance.

 

In furtherance of the completion of the Restructuring Transactions, the Company and the other parties to the Restructuring Agreement agreed to take certain actions prior to the closing of the Restructuring Transactions (the “Closing”), including, among others, the following:

 

  The Company agreed to make certain public disclosures and required filings with the SEC, including, among others, the filing of this Information Statement, on a preliminary and definitive basis, and to mail the definitive version of this Information Statement to all stockholders of the Company as of the Record Date.
     
  The Lenders agreed to make certain required filings with the SEC.
     
  The Company agreed to provide certain required notices to the NYSE American.
     
  The Majority Stockholders agreed to provide their written consent of the Charter Amendment and Share Issuance in accordance with Section 228 of the DGCL and the Company’s Bylaws.
     
  The Company agreed to file with the SEC a registration statement relating to the Rights Offering.

 

  16  

 

 

The Company and the other parties to the Restructuring Agreement agreed to take the following actions at the Closing but only in the event stockholder approval of the Charter Amendment and Share Issuance had been obtained:

 

  The Company agreed to execute and file the Charter Amendment with the Secretary of State of the State of Delaware.
     
  After the filing of the Charter Amendment, the Company agreed to issue the shares of common stock to the Lenders upon exchange of the Exchanging Loans.
     
  The Company and certain of its subsidiaries and the Lenders agreed to enter into the Second Amendment to the Second Amended and Restated Credit Agreement.
     
  The Company and the Lenders agreed to enter into the Registration Rights Agreement.

 

The Company and the other parties to the Restructuring Agreement agreed to take the following actions promptly after the Closing:

 

  The Company agreed to make certain public disclosures and required filings with the SEC.
     
  The Lenders agreed to make certain required filings with the SEC.
     
  The Company agreed to provide certain required notices to the NYSE American.
     
  The Company agreed to use its reasonable best efforts to cause the registration statement filed by the Company in connection with the Rights Offering to become effective as promptly as practicable after the Closing and to commence and close the Rights Offering.

 

Conditions to Closing

 

The obligations of the Company and the Lenders to effect the Restructuring Transactions are subject to the satisfaction or waiver on or prior to the date of Closing (the “Closing Date”) of the following conditions:

 

  all governmental and regulatory approvals and consents necessary to effectuate the Restructuring Transactions and any other transactions described in the Restructuring Agreement under any applicable law shall have been obtained;
     
  no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition which has the effect of preventing the consummation of the Restructuring Transactions and the other transactions contemplated in the Restructuring Agreement or in the Restructuring Documents (as defined in the Restructuring Agreement) shall be in effect; and
     
  all Restructuring Documents shall have been (i) tendered for delivery, (ii) effected or executed and (iii) to the extent required, filed with the applicable governmental authority in accordance with applicable laws; all conditions precedent to the Restructuring Documents shall have been satisfied or waived pursuant to the terms of the Restructuring Documents; and all actions necessary to implement the Restructuring Transactions shall have been taken by the required parties in accordance with applicable laws.

 

  17  

 

 

The obligations of the Company to effect the Restructuring Transactions and the other transactions contemplated in the Restructuring Agreement are further subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions:

 

  the representations and warranties of the Lenders in the Restructuring Agreement that are qualified as to materiality shall be true and correct, and the representations and warranties of the Lenders that are not so qualified shall be true and correct in all material respects, in each case, as of the Closing Date as if made as of such date, except that the accuracy of representations and warranties that by their terms speak as of a specified date will be determined as of such date;
     
  each of the Lenders shall have performed and complied in all material respects with all agreements and covenants contained in the Restructuring Agreement and the Restructuring Documents to be performed by them prior to or at the Closing (or such compliance shall have been waived on terms and conditions reasonably satisfactory to the Company) and after giving effect to the Restructuring Transactions, no default or event of default by any of the Lenders shall have occurred and be continuing under the Restructuring Agreement or any of the Restructuring Documents; and
     
  each of the Lenders shall have, pursuant to the terms of the Investor Rights Agreement, furnished written consent to the Company with respect to all of the transactions contemplated under the Restructuring Agreement.

 

The obligations of the Lenders to effect the Restructuring Transactions are further subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions:

 

  the representations and warranties of the Company in the Restructuring Agreement and the Restructuring Documents that are qualified as to materiality or material adverse effect shall be true and correct, and the representations and warranties of the Company that are not so qualified shall be true and correct in all material respects, in each case, as of the Closing Date as if made as of such date (unless expressly stated to relate to a specific earlier date, in which case such representations and warranties that are qualified as to materiality or material adverse effect shall be true and correct as of such earlier date, and such representations and warranties that are not so qualified shall be true and correct, in all material respects as of such earlier date);
     
  the Company and each of its subsidiaries shall have performed and complied in all material respects with all agreements and covenants contained in the Restructuring Agreement and the Restructuring Documents required to be performed or complied with by the prior to or at the Closing (or such compliance shall have been waived on terms and conditions reasonably satisfactory to each Lender) and after giving effect to the Restructuring Transactions, no default or event of default by the Company or any of such subsidiaries shall have occurred and be continuing under the Restructuring Agreement or any of the Restructuring Documents;
     
  there shall not have been any Material Adverse Effect, which is defined in the Restructuring Agreement as any event, change, effect, circumstance or condition that, individually or in the aggregate with other such events, changes, effects, circumstances or conditions, (i) is, or is reasonably likely to be, materially adverse to the business, operations, results of operations, properties, condition (financial or otherwise), assets, liabilities (actual or contingent) or prospects of the Company and its subsidiaries, taken as a whole or (ii) could reasonably be expected to materially interfere with the consummation of the transactions contemplated by the Restructuring Agreement, excluding a change in the listing status of our common stock from the NYSE American to an over-the-counter market; and
     
  the Company shall have furnished a certificate, addressed to the Lenders, signed by the Chief Executive Officer and the Chief Financial Officer of the Company, to the effect that the closing conditions with respect to the Company set forth in the above three bullets have been satisfied.

 

Representations and Warranties

 

The Restructuring Agreement includes customary representations and warranties of the Company and the Lenders. The representations and warranties of the Company address the following topics:

 

  due organization and corporate power and authority;
  capitalization;
  non-contravention;
  no approvals and consents;
  financial statements and internal controls;
  no undisclosed liabilities;
  no actions or proceedings;
  title to assets and properties;

 

  18  

 

 

  intellectual property;
  taxes;
  labor matters;
  private offering and no integration;
  investment company act;
  insurance;
  compliance with laws and permits;
  material contracts;
  information supplied;
  brokerage fees; and
  fairness opinion.

 

The representations and warranties of the Lenders address the following topics:

 

  ownership, due organization and power and authority;
  investor status;
  no approvals and consents;
  no actions or proceedings; and
  non-contravention.

 

These representations and warranties were made only for purposes of the Restructuring Agreement and as of specific dates, are solely for the benefit of the parties to the Restructuring Agreement, may be subject to limitations agreed upon by the parties (including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Restructuring Agreement instead of establishing these matters as facts), and may be subject to standards of materiality applicable to the parties that differ from those applicable to investors.

 

Investors should not rely on the representations or warranties or any description thereof as characterizations of the actual state of facts or condition of the Company or any of its subsidiaries or affiliates. The representations and warranties made in the Restructuring Agreement by the Company and the Lenders were made solely by the parties to, and for the purposes of, the Restructuring Agreement and as of specific dates and were qualified and subject to important limitations agreed to by the Company and the Lenders in connection with negotiating the terms of the Restructuring Agreement. In particular, in your review of the representations and warranties contained in the Restructuring Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purpose of establishing the circumstances in which a party to the Restructuring Agreement may have the right not to consummate the Restructuring Transactions if the representations and warranties of another party prove to be untrue due to a change in circumstance or otherwise, and allocating risk among the parties to the Restructuring Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the confidential disclosure schedule that the Company provided to the Lenders in connection with the Restructuring Agreement, which disclosures were not reflected in the Restructuring Agreement.

 

Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Restructuring Agreement, which subsequent information may or may not be fully reflected in public disclosures by the Company or its subsidiaries or affiliates. The provisions of the Restructuring Agreement, including the representations and warranties, should not be read alone, but instead should only be read together with all periodic and current reports and statements that the Company files with the SEC.

 

  19  

 

 

Covenants

 

The Restructuring Agreement includes customary covenants of the Company and the Lenders.

 

During the interim period between the execution of the Restructuring Agreement and the Closing, the Company agreed to operate its businesses in the ordinary course based on historic practices and operations contemplated pursuant to the Company’s business plans, but also taking into account the Restructuring Transactions and the other transactions contemplated under the Restructuring Agreement. Without the prior written consent of the Lenders, the Company and any of its subsidiaries may not engage in several specified actions, including, but not limited to the following: issue, sell or pledge additional securities; split, combine, subdivide, reclassify or redeem, or purchase or otherwise acquire any of the Company’s outstanding securities; declare, set aside or pay dividends; purchase, sell or encumber material properties or assets; acquire any business; amend its governing documents; make certain employment compensation or benefit changes; repurchase, prepay, create, incur or assume any indebtedness; purchase, redeem or otherwise acquire any shares of the Company’s capital stock or related interests or other securities; make certain changes in accounting methods; make any changes to tax elections or take certain other actions related to taxes; enter into any real property leases or modify, amend, terminate or fail to renew any lease of real property; enter into any contract that is material or could conflict with the Restructuring Transactions; waive, release or assign any rights or claims under, fail to take a required action under, permit the lapse of or default under, or modify, amend or terminate any material contract; pay, discharge, settle or satisfy any claims, liabilities or obligations; take any action that would conflict with or delay the Restructuring Transactions; adopt or enter into any collective bargaining agreement or terminate the employment of any person that has an employment, severance or similar agreement with the Company or any of its subsidiaries; discharge or satisfy any lien or pay any obligation or liability; fail to maintain insurance coverage at levels consistent with levels existing as of the date of the Restructuring Agreement; commence any bankruptcy, voluntary liquidation, dissolution, winding up, examinership, insolvency or similar proceeding; create additional subsidiaries of the Company; engage in any business or business activity other than the business and business activities the Company currently conducts; or authorize any of, or commit, resolve or agree to take any of the foregoing actions, in each case, subject to certain exceptions.

 

In addition, as part of its covenants, the Company agreed, among other actions, to

 

  use commercially reasonable efforts to preserve intact in all material respects the business organization of the Company;
  make all commercially reasonable efforts consistent with past practices to keep its physical assets in good working condition, to preserve, maintain the value of, renew, extend and keep in full force and effect all intellectual property rights, to keep available the services of its current officers and employees and to preserve the Company’s and each of its subsidiaries’ relationships with lenders, creditors, lessors, lessees, licensors, licensees, officers, employees, contractors, distributors, developers, vendors, clients, customers, suppliers or other persons having a material business relationship with the Company or any of its subsidiaries;
  comply with all applicable laws and orders;
  take such actions as may be necessary or appropriate to effectuate, implement and further evidence the terms and conditions of the Restructuring Agreement and the transactions contemplated thereby;
  pay all reasonable costs and expenses incurred by the Company and certain costs incurred by the Lenders in connection with the Restructuring Agreement and the transactions contemplated thereby;
  promptly give written notice to the Lenders after knowing of any development or event which could, individually or in the aggregate, reasonably be expected to have a material adverse effect;
  make certain SEC filings, including this Information Statement;
  submit written consent of the actions described in this Information Statement to the Majority Stockholders for adoption in order to obtain stockholder approval; and
  cause the shares of common stock to be issued to the Lenders in the Restructuring Transactions to be approved for listing on the NYSE American.

 

In addition, the Company agreed to cause a registration statement relating to the Rights Offering to be filed as promptly as practicable after the date of the Restructuring Agreement and to use its reasonable best efforts to cause such registration statement to become effective as promptly as practicable after the closing of the Restructuring Transactions. The Company also agreed to indemnify certain officers and representatives of the Company and certain affiliates and representatives of the Lenders for all costs, expenses, loss, damage or liability arising from any losses based upon any act or omission, transaction or other occurrence or circumstances arising from or related in any way to the Company, the Restructuring Transactions, the Restructuring Agreement or any related documents.

 

In addition, the Company and the Lenders have agreed to support and use commercially reasonable efforts to facilitate the Restructuring Transactions pursuant to the terms of the Restructuring Agreement.

 

  20  

 

 

Termination

 

The Restructuring Agreement may be terminated, and the Restructuring Transactions and the other transactions contemplated thereunder, may be abandoned, at any time prior to the Closing Date:

 

  by written consent of the Company and the Lenders;
     
  by either of the Lenders, on the one hand, or the Company on the other hand, if the Closing shall not have been consummated by October 4, 2020, for any reason; provided, however, that the right to terminate the Restructuring Agreement shall not be available to any party if the failure of such party to perform any of its obligations under Restructuring Agreement has been a principal cause of or resulted in the failure of the Closing to be consummated on or before such date;
     
  by either of the Lenders, on the one hand, or the Company, on the other hand, if any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition which has the effect of preventing the consummation of the Restructuring Transactions and the other transactions contemplated in the Restructuring Agreement or in the Restructuring Documents shall be in effect and shall have become final and nonappealable;
     
  by the Lenders acting together if the Company shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in the Restructuring Agreement or the Restructuring Documents, which breach or failure to perform (i) would give rise to the failure of a condition to closing of the Lenders, and (ii) has not been or is incapable of being cured by the Company within 10 days after its receipt of written notice thereof from the Lenders;
     
  by the Company, if the Lenders have breached in any material respect any of their respective representations, warranties, covenants or other agreements contained in the Restructuring Agreement, which breach or failure to perform (i) would give rise to the failure of a condition to closing of the Company, and (ii) has not been or is incapable of being cured by the applicable Lender within 10 days after receipt of written notice thereof from the Company; or
     
  by the Lenders acting together and in their sole discretion if a potential transaction involving the Company and its subsidiaries is pending.

 

Second Amendment to Second Amended and Restated Credit Agreement

 

As a condition to the closing of the Restructuring Transactions, the Company and the Lenders are required to enter into a Second Amendment to the Second Amended and Restated Credit Agreement, which will amend the Second A&R Credit Agreement as follows:

 

  extinguishing loans in an aggregate principal amount equal to the Exchanging Loans outstanding under the Second A&R Credit Agreement on the closing date of the Credit Agreement Amendment, immediately prior to the Closing, together with all accrued and unpaid interest thereon;
     
  adding loans in an aggregate principal amount equal to the prepayment fee payable thereunder in respect of the Exchanging Loans;
     
  removing the availability of the Additional Delayed Draw Loans and reducing the Additional Second Delayed Draw Commitment Amount (as such terms are defined in the Second A&R Credit Agreement) to $5.0 million;
     
  providing that beginning on October 1, 2020 through the maturity date of the Second A&R Credit Agreement, interest payable in cash will accrue on the loans thereunder at a rate per annum equal to the sum of (i) 7.00% plus (ii) the higher of (x) the LIBO Rate (as such term is defined in the Second A&R Credit Agreement) and (y) 1.00%; and
     
  eliminating the Revenue Base financial covenant.

 

Registration Rights Agreement

 

As a condition to the closing of the Restructuring Transactions, we are required to enter into a Registration Rights Agreement with the Lenders. The Registration Rights Agreement will require us to, among other things, file with the SEC a shelf registration statement covering the resale, from time to time, of the shares of our common stock issuable upon exchange of the Exchanging Loans no later than the 90th day after the Closing Date and use our best efforts to cause the shelf registration statement to become effective under the Securities Act no later than the 180th day after the Closing Date.

 

  21  

 

 

OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE

 

 

 

Opinion of Duff & Phelps, LLC

 

On July 6, 2020, the Company engaged Duff & Phelps to serve as an independent financial advisor to the Special Committee of the Board of Directors of the Company to provide an opinion as to the fairness, from a financial point of view, of the exchange price for the Exchanging Loans, to the Unaffiliated Stockholders (defined below) of the Company in connection with the Restructuring Transactions.

 

The Company retained Duff & Phelps based on Duff & Phelps’ qualifications, reputation, experience in the valuation of businesses and their securities. Duff & Phelps is a premier global valuation and corporate finance advisor that is regularly engaged to provide financial advisory services, including fairness opinions and valuation advice in connection with mergers and acquisitions, related party transactions and recapitalization transactions.

 

On August 7, 2020, Duff & Phelps delivered to the Special Committee a written presentation and an oral opinion, which was subsequently confirmed in writing by delivery of a written opinion dated August 7, 2020 (the “Duff & Phelps Opinion”), to the Special Committee that, as of the date of such opinion, the exchange price of $1.07 per share, equal to the average closing price of the Company’s common stock over the 10 trading days immediately prior to the date of the Restructuring Agreement (the “Exchange Price”) was fair, from a financial point of view, to the stockholders of the Company unaffiliated with the Lenders (the “Unaffiliated Stockholders”), without giving effect to any impact of the Restructuring Transactions on any particular stockholder other than in its capacity as a stockholder.

 

The full text of the Duff & Phelps Opinion that Duff & Phelps delivered to the Special Committee, which sets forth, among other things, certain assumptions made, certain matters considered, and certain limitations on the review undertaken in connection with the Duff & Phelps Opinion, is attached as Annex C and is incorporated herein by reference. We urge you to read the Duff & Phelps Opinion carefully and in its entirety. The summary of the Duff & Phelps Opinion set forth in this Information Statement is qualified in its entirety by reference to the full text of the Duff & Phelps Opinion.

 

Duff & Phelps provided the Duff & Phelps Opinion for the use and benefit of the Special Committee in connection with its consideration of the Restructuring Transactions. The Duff & Phelps Opinion (i) did not address the merits of the underlying business decision to enter into the Restructuring Transactions versus any alternative strategy or transaction; (ii) did not address any aspect of the Restructuring Transactions other than the Exchange Price for the Exchanging Loans or any transaction related to the Restructuring Transactions; (iii) was not a recommendation as to how the Special Committee, the Board of Directors or any stockholder should vote or act with respect to any matters relating to the Restructuring Transactions, or whether to proceed with the Restructuring Transactions or any related transaction; and (iv) did not indicate that the Exchange Price for the Exchanging Loans was the best price or terms possibly attainable under any circumstances. The decision as to whether to proceed with the Restructuring Transactions or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which the Duff & Phelps Opinion was based.

 

The Duff & Phelps Opinion was only one of many factors taken into consideration by the Special Committee in making its determination with respect to the Restructuring Transactions. The Duff & Phelps Opinion should not be construed as creating any fiduciary duty on the part of Duff & Phelps to any party. Duff & Phelps has not undertaken, and is under no obligation, to update, revise, reaffirm or withdraw the Duff & Phelps Opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of the Duff & Phelps Opinion.

 

In connection with the Duff & Phelps Opinion, Duff & Phelps made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps’ procedures, investigations, and financial analyses with respect to the preparation of the Duff & Phelps Opinion included, but were not limited to, the items summarized below:

 

1. Reviewed the following documents:

 

  a. The Company’s audited financial statements and annual reports on Form 10-K filed with the SEC for the years ended December 31, 2016 through 2019 and the Company’s unaudited interim financial statements for the six months ended June 30, 2020, included in the Company’s quarterly reports on Form 10-Q filed with the SEC;

 

  22  

 

 

  b. Unaudited segment and pro forma financial information for the Company for the fiscal years ended December 31, 2016 through 2019 and the six months ended June 30, 2020, which the Company’s management identified as being the most current financial statements available;
     
  c. Financial projections for the Company, provided to us by management of the Company, for the years ending December 31, 2020 through 2024 (the “Management Projections”);
     
  d. The Company’s Board of Directors meeting presentations dated between January 7, 2020 and June 4, 2020;
     
  e. The Second Amended and Restated Credit Agreement dated as of March 29, 2019 by and among the Company, Bacterin International, Inc., Xtant Medical, Inc. and X-Spine Systems, Inc. and Royalty Opportunities and ROS, and all subsequent amendments;
     
  f. A draft of the Restructuring Agreement dated August 5, 2020 (the “Draft Restructuring Agreement”); and
     
  g. Other internal documents relating to the history, current operations, and probable future outlook of the Company.

 

2. Discussed the information referred to above and the background and other elements of the Restructuring Transactions with management of the Company;
   
3. Reviewed the historical trading price and trading volume of the Company’s common stock and the publicly traded securities of certain other companies that Duff & Phelps deemed relevant;
   
4. Performed certain valuation and comparative analyses using generally accepted valuation and analytical techniques, including a discounted cash flow analysis, an analysis of selected public companies and selected merger and acquisition transactions that Duff & Phelps deemed relevant; and
   
5. Conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.

 

No limits were placed on Duff & Phelps by the Company in terms of the information to which it had access or the matters it could consider.

 

In performing its analyses and rendering the Duff & Phelps Opinion with respect to the Restructuring Transactions, Duff & Phelps, with the Company’s consent:

 

1. Relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including the Company’s management, and did not independently verify such information;
   
2. Relied upon the fact that the Special Committee, the Board of Directors and the Company have been advised by counsel as to all legal matters with respect to the Restructuring Transactions, including whether all procedures required by law to be taken in connection with the Restructuring Transactions have been duly, validly and timely taken;
   
3. Assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing the same, and Duff & Phelps expresses no opinion with respect to such projections or the underlying assumptions;
   
4. Assumed that information supplied and representations made by the Company’s management are substantially accurate regarding the Company and the Restructuring Transactions;
   
5. Assumed that the final, executed Restructuring Agreement and other agreements reviewed by Duff & Phelps in draft form will conform in all material respects to the Draft Restructuring Agreement reviewed by Duff & Phelps;

 

  23  

 

 

6. Assumed that there has been no material change in the assets, liabilities, financial condition, results of operations, business, or prospects of the Company since the date of the most recent financial statements and other information made available to Duff & Phelps, and that there is no information or facts that would make the information reviewed by Duff & Phelps incomplete or misleading;
   
7. Assumed that all of the conditions required to implement the Restructuring Transactions will be satisfied and that the Restructuring Transactions will be completed in accordance with the Restructuring Agreement without any amendments thereto or any waivers of any terms or conditions thereof; and
   
8. Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Restructuring Transactions will be obtained without any adverse effect on the Company.

 

To the extent that any of the foregoing assumptions or any of the facts on which the Duff & Phelps Opinion is based prove to be untrue in any material respect, the Duff & Phelps Opinion cannot and should not be relied upon. Furthermore, in Duff & Phelps’ analysis and in connection with the preparation of the Duff & Phelps Opinion, Duff & Phelps has made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the Restructuring Transactions.

 

The Duff & Phelps Opinion was necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of August 7, 2020, the date of the Duff & Phelps Opinion, and Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting the Duff & Phelps Opinion which may come or be brought to the attention of Duff & Phelps after August 7, 2020. In the event of any such change prior to the completion of the Restructuring Transactions, Duff & Phelps reserves the right to change, modify or withdraw the Duff & Phelps Opinion. The credit, financial and stock markets were experiencing unusual volatility and Duff & Phelps expressed no opinion or view as to any potential effects of such volatility on the Company or the Restructuring Transactions.

 

Duff & Phelps did not evaluate the Company’s solvency or conduct an independent appraisal or physical inspection of any specific assets or liabilities (contingent or otherwise). Duff & Phelps was not requested to, and did not, (i) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the Restructuring Transactions, the assets, businesses or operations of the Company, or any alternatives to the Restructuring Transactions, (ii) structure or negotiate the terms or the effect of the Exchange Price of the Exchanging Loans or any part of the Restructuring Transactions and, therefore, Duff & Phelps assumed that the terms of the Restructuring Transactions, including, without limitation, the Exchange Price for the Exchanging Loans, were the most beneficial terms, from the Company’s perspective, that could, under the circumstances, be negotiated among the parties to the Restructuring Agreement with respect to the Restructuring Transactions, or (iii) advise the Special Committee, the Board of Directors or any other party with respect to alternatives to the Restructuring Transactions or the relative merits of the Restructuring Transactions.

 

Duff & Phelps did not express any opinion as to the market price or value of the Company’s common stock (or anything else) after the announcement or the consummation of the Restructuring Transactions. The Duff & Phelps Opinion should not be construed as a valuation opinion, credit rating, solvency opinion, an analysis of the Company’s credit worthiness, as tax advice, or as accounting advice. Duff & Phelps did not make, and assumed no responsibility to make, any representation, or render any opinion, as to any legal matter.

 

In rendering the Duff & Phelps Opinion, Duff & Phelps did not express any opinion with respect to the amount or nature of any compensation to any of the Company’s officers, directors, or employees, or any class of such persons, relative to the consideration to be received by the public stockholders of the Company in the Restructuring Transactions, or with respect to the fairness of any such compensation.

 

Summary of Financial Analysis by Duff & Phelps

 

Set forth below is a summary of the material financial analyses performed by Duff & Phelps in connection with the preparation of the Duff & Phelps Opinion. The information set forth below summarizes the material financial and comparative analyses performed by Duff & Phelps, but does not purport to be a complete description of the financial analyses performed by Duff & Phelps or the data considered by it in connection with the Duff & Phelps Opinion. The preparation of a financial opinion involves various subjective determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to particular circumstances. In arriving at the Duff & Phelps Opinion, Duff & Phelps considered a number of analytical methodologies. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the strengths and weaknesses of any particular technique. The conclusion reached by Duff & Phelps was based on all analyses and factors taken, as a whole, and also on application of Duff & Phelps’ own experience and judgment. No one method of analysis should be regarded as critical to the overall conclusion. Accordingly, Duff & Phelps believes that its analyses must be considered as a whole, and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying the Duff & Phelps Opinion.

 

  24  

 

 

Although these paragraphs include some information in tabular format, those tables are not intended to stand alone and must be read together with the full text of each summary and the limitations and qualifications in the Duff & Phelps Opinion.

 

Valuation Analysis

 

As part of its analysis, Duff & Phelps performed a valuation to estimate the enterprise value of the Company using generally accepted valuation methodologies.

 

Discounted Cash Flow Analysis

 

Duff & Phelps performed a discounted cash flow (“DCF”) analysis using the Management Projections to derive a range of indications of total enterprise value. A DCF analysis is designed to provide insight into the intrinsic value of a business based on its projected earnings and capital requirements, as well as the net present value of projected debt-free cash flows as provided by the Company’s management in the Management Projections.

 

In the analysis shown in the table below, Duff & Phelps calculated the projected debt-free cash flows of the Company, for the fiscal years 2020 through 2024 based on the Management Projections. For fiscal 2020, debt-free cash flows of the Company used in the DCF analysis only included the interim period from July 1, 2020 through December 31, 2020.

 

After deducting depreciation from earnings before interest, taxes, depreciation and amortization (“EBITDA”), Duff & Phelps deducted estimated taxes utilizing a 25.2% combined federal and state tax rate, to calculate net operating profit after taxes. Duff & Phelps then calculated the projected debt-free cash flows of the Company by subtracting capital expenditures and increases (or adding decreases, as applicable) in projected working capital from the net operating profit after taxes. All of the assumptions and estimates used to calculate the debt-free cash flows of the Company were provided by the Company’s management.

 

Duff & Phelps estimated the value of the Company at the end of 2024, the end of the projection period, by capitalizing the projected revenue in fiscal 2024 by multiples of enterprise value to revenue ranging from 1.50x to 2.00x. These multiples were selected based on an analysis of selected public companies and selected merger and acquisition transactions, as described below. The resulting estimated future value of the Company at the end of 2024 is referred to as the terminal value.

 

Duff & Phelps then discounted the projected debt-free cash flows of the Company for the period from July 1, 2020 through December 31, 2024, as well as the terminal value as of December 31, 2024, by the estimated weighted average cost of capital of the Company ranging from 13.0% to 14.0%.

 

The estimated weighted average cost of capital of the Company was based on the Capital Asset Pricing Model using information derived from the selected public company analysis. The weighted average cost of capital reflected the relative risk associated with the Company’s projected debt-free cash flows, industry observed capital structures and the Company’s pro-forma capital structure, as well as the rates of return that the Company’s security holders could expect to realize on alternative investment opportunities.

 

  25  

 

 

The summary DCF analysis shown below, resulted in an estimated total enterprise value of the Company ranging from $66.9 million to $92.8 million.

 

Discounted Cash Flow Analysis
($ in thousands)
                   
          Management Projections     5-YR  
    LTM (1)     2020P     2021P     2022P     2023P     2024P     CAGR  
                                           
Revenue   $ 57,991     $ 45,162     $ 54,303     $ 65,919     $ 72,500     $ 79,739       4.3 %
Growth     (14.1 )%     (30.2 )%     20.2 %     21.4 %     10.0 %     10.0 %        
                                                         
EBITDA   $ 1,022     ($ 609 )   $ 1,710     $ 4,037     $ 5,035     $ 6,440       21.9 %
Margin     1.8 %     (1.3 )%     3.1 %     6.1 %     6.9 %     8.1 %        

 

    7/20-12/20                          
Earnings Before Interest and Taxes   $ (1,601 )   $ (61 )   $ 2,224     $ 3,423     $ 4,850  
Pro Forma Taxes @ 25.2%     0       0       (560 )     (862 )     (1,221 )
Net Operating Profit After Tax     (1,601 )     (61 )     1,664       2,561       3,629  
                                         
Depreciation     841       1,771       1,813       1,613       1,591  
Capital Expenditures     (600 )     (1,500 )     (2,000 )     (2,000 )     (2,000 )
(Increase) Decrease in Working Capital     377       (2,639 )     (149 )     (921 )     (775 )
Free Cash Flow   $ (983 )   $ (2,430 )   $ 1,328     $ 1,253     $ 2,444  

 

Enterprise Value   Low     Mid     High  
                   
Terminal Revenue Multiple     1.50 x     1.75 x     2.00 x
Weighted Average Cost of Capital     14.00 %     13.50 %     13.00 %
                         
Indicative Enterprise Value Range (Rounded)   $ 66,900     $ 79,600     $ 92,800  

 

Implied Enterprise Value Multiples                        
                         
2022 EBITDA   $ 4,037       16.6 x     19.7 x     23.0 x
LTM Revenue (1)   $ 57,991       1.15 x     1.37 x     1.60 x
2020 Revenue   $ 45,162       1.48 x     1.76 x     2.05 x
2021 Revenue   $ 54,303       1.23 x     1.47 x     1.71 x
2022 Revenue   $ 65,919       1.01 x     1.21 x     1.41 x

 

Implied Terminal Value Multiples                        
Terminal Year (2024) EBITDA   $ 6,440       18.6 x     21.7 x     24.8 x

 

(1) Latest twelve months ended June 30, 2020

 

Market Approach

 

Duff & Phelps analyzed valuation multiples of enterprise value to revenue of the selected public companies and selected merger and acquisition transactions to apply to the Company’s projected 2024 revenue to estimate the terminal value in the DCF analysis. In addition, Duff & Phelps analyzed the implied multiple of terminal enterprise value to 2024 projected EBITDA to assess the reasonableness of the estimated terminal value resulting from the selected revenue multiples of 1.50x to 2.00x. The implied multiple of terminal enterprise value to EBITDA ranged from 18.6x to 24.8x, which falls within the range of enterprise value to EBITDA multiples exhibited by the selected public companies and merger and acquisition transactions.

 

The selected public companies and the selected transactions utilized for comparative purposes in the following analysis were not identical to the Company or the Restructuring Transactions. Duff & Phelps does not have access to non-public information of any of the companies or transactions used for comparative purposes. Accordingly, a complete valuation analysis of the Company, and the Restructuring Transactions cannot rely solely upon a quantitative review of the selected public companies and selected transactions, but involve complex considerations and judgments concerning differences in financial and operating characteristics of such companies and targets and other factors that could affect their value relative to that of the Company and the Restructuring Transactions. Therefore, the selected public companies and selected transactions analysis is subject to these limitations.

 

  26  

 

 

Selected Public Companies Analysis. A selected public companies analysis compares a subject company to a group of public companies that investors may consider to have similar investment characteristics relative to the subject company and applies valuation multiples to the subject company’s financial performance metrics based on the qualitative and quantitative comparison. Comparative factors include, but are not limited to, size, historical and projected growth and profitability and factors that affect the riskiness of future cash flows.

 

Duff & Phelps compared certain financial information of the Company to corresponding data and ratios from the selected publicly traded companies that Duff & Phelps deemed relevant to its analysis. For purposes of its analysis, Duff & Phelps used certain publicly available historical financial data and consensus equity analyst estimates for the selected publicly traded companies. Duff & Phelps included the fourteen companies below in the selected public companies analysis based on their relative similarity, primarily in terms of industry and markets served, to those of the Company.

 

Market Cap <$1B   Market Cap >$1B, <$5B   Market Cap >$5B
Alphatec Holdings, Inc.   Globus Medical, Inc.   Medtronic plc
Medicrea International SA   Integra LifeSciences Holdings Corporation   Smith & Nephew plc
Organogenesis Holdings Inc.   NuVasive, Inc.   Stryker Corporation
Orthofix International N.V.       Zimmer Biomet Holdings, Inc.
Surgalign Holdings, Inc.        
SeaSpine Holdings Corporation        
SI-BONE, Inc.        

 

Duff & Phelps noted that although the Company achieved a modest positive EBITDA in 2018 and 2019, the Company’s profits are generally lower than the profit margins achieved by the selected public companies with market capitalizations above $1 billion.

 

Summary of Market Approach Analysis. In selecting revenue multiples for the terminal value in the DCF analysis, Duff & Phelps reviewed the selected public companies, taken as a group. Duff & Phelps focused primarily on the selected companies with market capitalizations under $1 billion. Duff & Phelps noted that the Company is currently and projected to be at the end of 2024 smaller than most of the companies in the market capitalizations under $1 billion tier, which typically indicates a higher amount of risk and a lower multiple. Conversely, the Company’s EBITDA margin in 2024 is projected to be 8.1%, which is higher than most of the companies in the market capitalization under $1 billion tier but well below companies in the market capitalization above $1 billion tiers.

 

  27  

 

 

Based on a number of factors including, but not limited to, the Company’s size, projected 2024 EBITDA margin and Company management’s growth expectations beyond 2024, Duff & Phelps selected terminal revenue multiples of 1.50x to 2.00x to apply to the Company’s projected 2024 revenue.

 

Selected Public Companies Analysis As of August 6, 2020
(US$ in millions, except per share data)  

 

COMPANY INFORMATION   MARKET DATA     ENTERPRISE VALUE AS MULTIPLE OF  
Company Name   Common Stock Price on 08/06/2020     % of 52-
Week High
    Enterprise
Value
    LTM EBITDA     2020 EBITDA     2021 EBITDA     2022 EBITDA     LTM Revenue     2020 Revenue     2021 Revenue     2022 Revenue  
                                                                   
Market Capitalization < $1B                                                                                        
Alphatec Holdings, Inc.   $ 6.11       77.0 %   $ 450       NM       NM       NM       NM       3.71 x     4.60 x     3.38 x     2.94 x
Medicrea International SA (1)     8.27       98.9       219        NM        NM        NM       30.7 x     5.64       6.14       5.11       4.28  
Organogenesis Holdings Inc.     3.86       46.3       473        NM        NM        NM        NM       1.78       1.92       1.80       1.59  
Orthofix Medical Inc.     33.13       60.3       585       21.5 x     29.2 x     18.8 x     16.0       1.42       1.67       1.31       1.30  
Surgalign Holdings, Inc. (2)     2.89       53.4       150        NM        NM        NM        NA       1.23       1.73       1.20        NA  
SeaSpine Holdings Corporation     14.03       83.6       292        NM        NM        NM        NM       1.97       1.94       1.61       1.43  
SI-BONE, Inc.     19.98       86.5       474        NM        NM        NM        NM       7.08       7.18       5.03       4.07  
                                                                                         
Mean             72.3 %   $ 377       21.5 x     29.2 x     18.8 x     23.4 x     3.26 x     3.60 x     2.78 x     2.60 x
Median             77.0 %   $ 450       21.5 x     29.2 x     18.8 x     23.4 x     1.97 x     1.94 x     1.80 x     2.27 x
                                                                                         
Market Capitalization > $1B < $5B                                                                                        
Globus Medical, Inc.   $ 57.82       96.1 %   $ 5,338       34.0 x     37.6 x     20.4 x     18.3 x     7.14 x     7.93 x     6.24 x     5.75 x
Integra LifeSciences Holdings Corporation     47.81       74.4       5,371       15.0       19.8       15.0       13.3       3.55       4.06       3.55       3.30  
NuVasive, Inc.     52.72       64.4       3,159       17.1       19.0       11.4       10.0       2.97       3.11       2.58       2.41  
                                                                                         
Mean             78.3 %   $ 4,622       22.0 x     25.5 x     15.6 x     13.9 x     4.55 x     5.03 x     4.12 x     3.82 x
Median             74.4 %   $ 5,338       17.1 x     19.8 x     15.0 x     13.3 x     3.55 x     4.06 x     3.55 x     3.30 x
                                                                                         
Market Capitalization > $5B                                                                                        
Medtronic plc   $ 96.73       79.2 %   $ 142,654       18.3 x     20.8 x     14.3 x     12.8 x     4.93 x     5.15 x     4.53 x     4.20 x
Smith & Nephew plc     20.16       75.9       17,791       17.0       16.5       11.9       11.0       3.80       3.81       3.33       3.17  
Stryker Corporation     188.59       83.3       77,962       21.1       23.7       17.4       15.9       5.54       5.58       4.87       4.54  
Zimmer Biomet Holdings, Inc.     132.99       82.5       34,721       18.5       18.7       13.5       12.4       4.94       5.11       4.30       4.11  
                                                                                         
Mean             80.2 %   $ 68,282       18.7 x     19.9 x     14.3 x     13.0 x     4.80 x     4.91 x     4.26 x     4.01 x
Median             80.9 %   $ 56,341       18.4 x     19.8 x     13.9 x     12.6 x     4.94 x     5.13 x     4.41 x     4.16 x
                                                                                         
Aggregate Mean             75.9 %   $ 20,688       20.3 x     23.2 x     15.3 x     15.6 x     3.98 x     4.28 x     3.49 x     3.32 x
Aggregate Median             78.1 %   $ 1,872       18.4 x     20.3 x     14.7 x     13.3 x     3.75 x     4.33 x     3.47 x     3.30 x
                                                                                         
Xtant Medical Holdings, Inc. (3)   $ 1.08       30.9 %   $ 89       NM       NM       NM       22.0 x     1.53 x     1.97 x     1.64 x     1.35 x

 

(1) LTM data as of December 31, 2019

(2) Pro forma for the disposition of the OEM business previously held by Surgalign Holdings Inc., formerly known as RTI Surgical Holdings, Inc.

(3) Projected metrics based on Management Projections

 

LTM = Latest Twelve Months

Enterprise Value = (Market Capitalization + Management Equity + Debt + Preferred Stock + Non-Controlling Interest) - (Cash & Equivalents + Net Non-Operating Assets)

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

Source: S&P Capital IQ, SEC Filings, Annual and Interim Reports

 

Selected Public Companies Analysis

 

 

COMPANY INFORMATION   REVENUE GROWTH     EBITDA GROWTH     EBITDA MARGIN  
Company Name   3-YR
CAGR
    LTM     2020     2021     2022     3-YR
CAGR
    LTM     2020     2021     2022     3-YR
AVG
    LTM     2020     2021     2022  
                                                                                           
Market Capitalization < $1B                                                                                                                        
Alphatec Holdings, Inc.     -1.9 %     21.0 %     -13.8 %     36.0 %     15.0 %     NM       NM       NA       NA       NA       -13.5 %     -26.2 %     -47.1 %     -29.6 %     -8.8 %
Medicrea International SA (1)     3.7       1.4       -8.0       20.1       19.4       NM       NM       NA       NA       136.7 %     -9.9       -5.6       -0.3       7.0       13.9  
Organogenesis Holdings Inc.     23.4       23.5       -5.5       6.5       13.1       NM       NM       NA       NA       NA       -9.0       -8.9       -23.7       -11.5       -6.8  
Orthofix Medical Inc.     3.9       -9.8       -23.9       27.1       1.3       -8.7 %     -38.9 %     -52.4 %     55.5 %     17.5       11.6       6.6       5.7       7.0       8.1  
Surgalign Holdings, Inc. (2)     NA       22.3       -27.2       44.3       NA       NA       NM       NM       NM       NA       NA       NA       NA       -22.9       NA  
SeaSpine Holdings Corporation     7.3       -0.7       -5.6       20.3       12.6       NM       NM       NA       NA       NA       -16.8       -22.2       -23.6       -11.6       -6.4  
SI-BONE, Inc.     16.9       10.9       -1.9       42.6       23.5       NM       NM       NA       NA       NA       -34.0       -54.4       -68.1       -40.7       -21.2  
                                                                                                                         
Mean     8.9 %     9.8 %     -12.3 %     28.2 %     14.1 %     -8.7 %     -38.9 %     -52.4 %     55.5 %     77.1 %     -11.9 %     -18.5 %     -26.2 %     -14.6 %     -3.5 %
Median     5.6 %     10.9 %     -8.0 %     27.1 %     14.0 %     -8.7 %     -38.9 %     -52.4 %     55.5 %     77.1 %     -11.7 %     -15.5 %     -23.6 %     -11.6 %     -6.6 %
                                                                                                                         
Market Capitalization > $1B < $5B                                                                                                                        
Globus Medical, Inc.     11.7 %     0.6 %     -14.3 %     27.2 %     8.4 %     4.4 %     -27.3 %     -38.2 %     84.0 %     11.4 %     30.9 %     21.0 %     21.1 %     30.5 %     31.3 %
Integra LifeSciences Holdings Corporation     15.2       2.5       -12.8       14.2       7.7       16.9       2.6       -26.8       31.7       13.1       23.5       23.7       20.5       23.6       24.8  
NuVasive, Inc.     6.7       -5.5       -12.9       20.3       7.1       8.3       -22.0       -32.3       66.4       14.1       21.2       17.3       16.4       22.7       24.1  
                                                                                                                         
Mean     11.2 %     -0.8 %     -13.3 %     20.6 %     7.7 %     9.9 %     -15.6 %     -32.4 %     60.7 %     12.8 %     25.2 %     20.7 %     19.3 %     25.6 %     26.8 %
Median     11.7 %     0.6 %     -12.9 %     20.3 %     7.7 %     8.3 %     -22.0 %     -32.3 %     66.4 %     13.1 %     23.5 %     21.0 %     20.5 %     23.6 %     24.8 %
                                                                                                                         
Market Capitalization > $5B                                                                                                                        
Medtronic plc     -0.9 %     -5.4 %     -4.3 %     13.8 %     7.7 %     -4.7 %     -17.2 %     -12.2 %     45.4 %     11.6 %     29.5 %     27.0 %     24.8 %     31.6 %     32.7 %
Smith & Nephew plc     3.2       -5.3       -9.1       14.4       5.0       2.0       -24.6       -23.2       38.6       8.0       27.5       22.4       23.2       28.1       28.9  
Stryker Corporation     9.5       -0.9       -6.1       14.6       7.4       10.0       -3.5       -21.0       36.4       9.3       27.2       26.3       23.5       28.0       28.5  
Zimmer Biomet Holdings, Inc.     1.3       -10.7       -14.8       18.8       4.6       -5.6       -20.7       -21.4       38.8       8.3       31.8       26.6       27.3       31.9       33.1  
                                                                                                                         
Mean     3.3 %     -5.6 %     -8.6 %     15.4 %     6.2 %     0.4 %     -16.5 %     -19.5 %     39.8 %     9.3 %     29.0 %     25.6 %     24.7 %     29.9 %     30.8 %
Median     2.3 %     -5.3 %     -7.6 %     14.5 %     6.2 %     -1.4 %     -19.0 %     -21.2 %     38.7 %     8.8 %     28.5 %     26.5 %     24.2 %     29.8 %     30.8 %
                                                                                                                         
Aggregate Mean     7.7 %     3.1 %     -11.4 %     22.9 %     10.2 %     2.8 %     -19.0 %     -28.4 %     49.6 %     25.5 %     9.2 %     4.1 %     0.0 %     6.7 %     14.0 %
Aggregate Median     6.7 %     0.0 %     -11.0 %     20.2 %     7.7 %     3.2 %     -21.4 %     -25.0 %     42.1 %     11.6 %     21.2 %     17.3 %     16.4 %     14.8 %     24.1 %
                                                                                                                         
Xtant Medical Holdings, Inc. (3)     -10.4 %     -14.1 %     -30.2 %     20.2 %     21.4 %     20.6 %     -74.8 %     NM       NM       NM       2.7 %     1.8 %     -1.3 %     3.1 %     6.1 %

 

(1) LTM data as of December 31, 2019

(2) Pro forma for the disposition of the OEM business previously held by Surgalign Holdings Inc., formerly known as RTI Surgical Holdings, Inc.

(3) Projected metrics based on Management Projections

 

LTM = Latest Twelve Months

CAGR = Compounded Annual Growth Rate

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization

Source: S&P Capital IQ, SEC Filings, Annual and Interim Reports

 

  28  

 

 

Selected Transactions Analysis. Duff & Phelps also identified certain precedent merger and acquisition transactions involving target companies that had businesses deemed similar in certain respects to that of the Company, with transaction values under $1.0 billion. Duff & Phelps compared the Company to the target companies involved in the selected transactions listed in the table below. The selection of these transactions was based, among other things, on the target company’s industry, relative size of the applicable transactions compared to the Company and the availability of public information related to the applicable transactions. These multiples of implied enterprise value to revenue and enterprise value to EBITDA were also considered when selecting multiples to apply to the Company’s 2024 revenue for the terminal value in the DCF analysis and the resulting implied terminal EBITDA multiples.

 

 

Analysis of Implied Valuation Multiples. Duff & Phelps compared the trading multiples of enterprise value to revenue and EBITDA of the selected public companies and selected transactions to the range of implied enterprise value to revenue and EBITDA multiples for the Company based on the DCF analysis. Due to the Company’s depressed EBITDA estimates for projected 2020 and projected 2021, the implied EBITDA multiples for these years were not meaningful. Therefore, Duff & Phelps focused on the implied EBITDA multiple for 2022 when the Company was projected to achieve more normalized profitability. Duff & Phelps also analyzed implied multiples of enterprise value to revenue. The implied 2022 EBITDA multiples were in the range of EBITDA multiples of the selected public companies and the implied revenue multiples for the latest twelve months (LTM), projected 2020, projected 2021 and projected 2022 were below the mean and median multiples of the selected public companies. Based on the Company’s risk, growth, and profitability relative to the selected publicly traded companies and selected transactions, the implied multiples were determined to be reasonable.

 

Selected Public Companies / M&A Transactions Analysis Summary

($ in thousands)

 

Enterprise Value Multiples                          
Metric   Public Company
Range
    Public
Company
Median
    Transaction
Median
    Company
Performance
    Enterprise Value Range  
                               
                              Indicative Enterprise Value Range     $ 66,900             $ 92,800  
Implied Enterprise Value Multiples                                                                        
                                                                         
2022 EBITDA     10.0 x     -       30.7 x     13.3 x     NA     $ 4,037       16.6 x     -       23.0 x
                                                                         
LTM Revenue (1)     1.23 x     -       7.14 x     3.75 x     2.00 x   $ 57,991       1.15 x     -       1.60 x
2020 Revenue     1.67 x     -       7.93 x     4.33 x     NA     $ 45,162       1.48 x     -       2.05 x
2021 Revenue     1.20 x     -       6.24 x     3.47 x     NA     $ 54,303       1.23 x     -       1.71 x
2022 Revenue     1.30 x     -       5.75 x     3.30 x     NA     $ 65,919       1.01 x     -       1.41 x

 

(1) Latest twelve months ended June 30, 2020

 

  29  

 

 

Adjusted Enterprise Value

 

The DCF analysis, like any other analytical technique used by Duff & Phelps, has inherent strengths and weaknesses. The range of valuation indications resulting from any particular technique, including the DCF analysis, should not be taken in isolation to be Duff & Phelps’ view of the valuation of the Company. Accordingly, the range of valuation indications derived from the DCF analysis was not necessarily indicative of the Company’s present or future value.

 

Duff & Phelps’ DCF valuation analysis resulted in indications of total enterprise value of the Company ranging from $66.9 million to $92.8 million. Duff & Phelps then made certain adjustments to determine the adjusted enterprise value.

 

Duff & Phelps performed an analysis and held discussions with the Company’s management regarding the utilization of net operating loss carryforwards. As a result of the change of control transaction in 2018, a significant portion of the Company’s net operating loss carryforwards are subject to IRS §382 limitations. The value of the Company’s net operating loss carryforwards was estimated at $4.1 million to $4.6 million.

 

The adjustment for the net operating loss carryforwards resulted in an adjusted enterprise value range of the Company ranging from $71.0 million to $97.4 million.

 

Pre-Exchange Transaction Per Share Value Range

 

To estimate the total equity value of the Company on a pre-transaction basis, Duff & Phelps made adjustments for (i) the addition of cash and equivalents; (ii) the deduction of RSB settlement costs; (iii) the deduction of capital leases and the term loan as of June 30, 2020; and (iv) the inflow of proceeds from the exercise of warrants and the subtraction of estimated value of stock options.

 

These adjustments resulted in an estimated pre-transaction equity value range of approximately $0 million to $22.6 million. Duff & Phelps then calculated the per share value by dividing the equity value range by fully diluted shares outstanding inclusive of in-the-money warrants and outstanding restricted stock units (“RSUs”) as of August 6, 2020, before the Restructuring Transactions, resulting in a per share value range of $0 to $1.19 per share, with a mid-point of $0.48 per share. The Exchange Price of $1.07 per share represents a premium to the mid-point indication of value and is near the high end of the range of indicated values.

 

Post-Exchange Transaction Per Share Value Range

 

To estimate the total equity value of the Company on a post-transaction basis, Duff & Phelps made adjustments for (i) the addition of cash and equivalents; (ii) the deduction of the remaining transaction costs; (iii) the deduction of the RSB settlement costs; (iv) the deduction of capital leases and the term loan after the Restructuring Transactions, reflecting a $1.5 million debt repayment fee; and (v) the inflow of proceeds from the exercise of warrants and the subtraction of estimated value of stock options. The number of fully diluted shares on a post-transaction basis includes the 57.8 million common stock shares and 1,776,515 new RSUs as a result of the Restructuring Transactions.

 

  30  

 

 

These adjustments result in an estimated post-transaction equity value range of the Company ranging from approximately $55.5 million to $81.4 million. Duff & Phelps then calculated the estimated per share value by dividing the equity value range by the estimated fully diluted shares outstanding after the Restructuring Transactions, resulting in a per share value ranging from $0.71 to $1.04 per share. This per share value range after the Restructuring Transactions is included for illustrative purposes only and does not constitute a forecast of the actual price at which the Company’s stock may trade after giving effect to the Restructuring Transactions.

 

 

(1) Based on the 10-day average closing price of Xtant stock on the NYSE American as of August 6, 2020.
(2) Present value of tax savings from the Company’s utilization of net operating loss carryforwards.
(3) Balances are as of June 30, 2020.
(4) Per Company Management.
(5) Balances are as of June 30, 2020; post the proposed Restructuring Transactions pro forma balance includes $15 million of debt that is not converted.
(6) Includes a prepayment fee of $1.538 million to be deemed a loan made as of the closing.
(7) Represents cash proceeds from the exercise of 4.8 million of existing warrants at an exercise price of $0.01.
(8) Estimated value of stock options determined using the Black-Scholes model. Post the proposed Restructuring Transactions include 1,776,515 at-the-money stock options to be issued to the Company’s CEO/President.
(9) Shares outstanding as of August 6, 2020 include (i) 13,223,565 of common shares; (ii) 4,800,000 of warrants; and (iii) 927,548 of restricted stock units.
(10) Based on $61.886 million of outstanding debt at an Exchange Price of $1.07 per share, plus 1,776,515 of RSUs to be issued to the Company’s CEO/President.
(11) Does not constitute a forecast of the actual price at which the Company’s stock may trade subsequent to the proposed Restructuring Transactions.

 

Historical Stock Trading. Because the Company’s common stock is publicly traded, Duff & Phelps considered the per share value ascribed to it by the public markets. Duff & Phelps analyzed the Company’s historical stock prices, trading volumes, levels of institutional ownership and historical valuation multiples. On August 6, 2020, the closing price of the common stock was $1.07 per share. In its valuation analysis of the Company, Duff & Phelps considered the reported price per share of the common stock.

 

  31  

 

 

Summary Conclusion

 

Based on Duff & Phelps’ analysis, as summarized in the table above, the Exchange Price of $1.07 exceeds the estimated pre-transaction per share midpoint value of the Company of $0.48 per share and is at the high end of the range of indicated per-share equity values. The Exchange Price is equal to the 10-day average closing price of the Company’s common stock prior to the date of the Restructuring Agreement, and was deemed to be representative of the trading price of the Company’s common stock.

 

Other and Miscellaneous

 

Fairness Opinion Review Committee. The issuance of Duff & Phelps Opinion was approved by its fairness review committee.

 

Disclosure of Prior Relationships. Duff & Phelps has performed certain cyber security, business intelligence and legal management consulting services for OrbiMed and for these engagements Duff & Phelps received customary fees, expense reimbursement and indemnification. In addition, in January 2018 Duff & Phelps rendered a fairness opinion to the Board of Directors and the Special Strategic Committee of the Board of Directors as to the fairness of the exchange rate of certain notes held by OrbiMed into common stock of the Company, from a financial point of view, to the public holders of common stock of the Company.

 

Fees and Expenses. Pursuant to the Company’s engagement letter with Duff & Phelps, the Company agreed to pay Duff & Phelps a fee of $300,000 for its services, $150,000 of which was payable upon signing the engagement letter and $150,000 became payable upon Duff & Phelps stating to the Special Committee that it was prepared to deliver the Duff & Phelps Opinion. The Company also agreed to reimburse Duff & Phelps for its reasonable out of pocket expenses incurred in connection with its engagement and to indemnify Duff & Phelps, its affiliates, and each of their respective directors, officers, attorneys and other agents, stockholders, employees and controlling persons against certain liabilities, including liabilities under federal securities laws, relating to or arising out of Duff & Phelps’ engagement.

 

  32  

 

 

CERTAIN COMPANY FORECASTS

 

 

 

We do not, as a matter of course, publicly disclose financial forecasts of future financial performance or other results as set forth below and are especially cautious of making financial forecasts due to the unpredictability of the underlying assumptions and estimates. However, in connection with the evaluation of the Restructuring Agreement and the Restructuring Transactions, and in connection with the rendering of Duff & Phelps’ opinion described under “Opinion of Financial Advisor to the Special Committee,” Duff & Phelps and the Board of Directors, including the Special Committee, were provided with certain non-public, unaudited, financial forecasts for the Company (pro forma for the consummation of the Restructuring Transactions), which are described below and which we refer to as the “Company Forecasts.” The Company Forecasts were prepared by management for years ranging from 2020 to 2024 and were provided to Duff & Phelps and presented to the Board in July 2020. The Board of Directors and the Special Committee reviewed the Company Forecasts in their respective evaluations of the Restructuring Transactions, and Duff & Phelps relied, at the direction of the Company, on the Company Forecasts in rendering its fairness opinion.

 

We prepared the Company Forecasts solely for internal use and not with a view toward public disclosure and, accordingly, the Company Forecasts do not necessarily comply with the published guidelines of the SEC regarding projections and the use of measures other than generally accepted accounting principles as applied in the United States (“GAAP”), the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections or forecasts. Neither our independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures regarding the Company Forecasts, nor have they expressed any opinion or any other form of assurance on the information or its achievability, and they assume no responsibility for, and disclaim any association with, the Company Forecasts.

 

The Company Forecasts, while presented with numerical specificity, necessarily were based on numerous variables and assumptions, including, but not limited to, those relating to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to our business, all of which are difficult to predict and many of which are beyond our control. The Company Forecasts are subjective in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. We cannot assure you that the forecasted results under any of the scenarios presented will be realized or that actual results will not be significantly higher or lower than forecasted in any of the scenarios. The Company Forecasts cover multiple years and the information by its nature becomes less predictive with each successive year. The assumptions on which the Company Forecasts were based involve judgments regarding future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. The Company Forecasts also reflect assumptions for certain business decisions that are subject to change. The Company Forecasts cannot, therefore, be considered a guarantee of future operating results, and this information should not be relied on as such. We do not assume any responsibility for the validity, reasonableness, accuracy or completeness of the Company Forecasts.

 

The Company Forecasts are forward-looking statements. For information on factors that may cause our future financial results to materially vary, see “Cautionary Statement Regarding Forward-Looking Statements” on page 6 of this Information Statement.

 

The information from the Company Forecasts should be evaluated, if at all, in conjunction with the historical consolidated financial statements contained in our public filings with the SEC. In light of the foregoing factors and the uncertainties inherent in the Company Forecasts, readers of this Information Statement are cautioned not to place undue, if any, reliance on the Company Forecasts. The Company Forecasts have been prepared on a pro forma basis for the effect of the Restructuring Agreement and the Restructuring Transactions.

 

The Company Forecasts included below are not being included in this Information Statement because we believe they are material or because we believe they are a reliable prediction of actual future results. Instead, the Company Forecasts are being included herein since they were reviewed by the Board of Directors and the Special Committee in connection with the evaluation of the Restructuring Transactions and were relied upon by Duff & Phelps in connection with the rendering of its fairness opinion.

 

  33  

 

 

In light of the foregoing factors and the uncertainties inherent in the Company Forecasts, stockholders are cautioned not to place undue, if any, reliance on such projections.

 

(in thousands)   2020     2021     2022     2023     2024  
Consolidated Statements of Operations                                        
Total revenue   $ 45,162     $ 54,303     $ 65,919     $ 72,500     $ 79,739  
Gross profit     28,798       35,844       43,617       48,158       53,158  
Total operating expenses     32,747       37,412       42,506       45,779       49,046  
(Loss) gain from operations     (3,949 )     (1,567 )     1,111       2,378       4,111  
Total other income/(expense)     (6,097 )     (1,659 )     (1,539 )     (1,307 )     (1,056 )
Net (loss) income   $ (10,136 )   $ (3,317 )   $ (518 )   $ 981     $ 2,966  
                                         
Consolidated Balance Sheet                                        
Assets                                        
Total current assets   $ 31,913     $ 32,623     $ 34,149     $ 36,557     $ 40,811  
Property and equipment     3,994       3,799       4,040       4,480       4,941  
Intangible assets     457       400       354       317       287  
Goodwill     3,205       3,205       3,205       3,205       3,205  
Right of use assets     1,690       1,278       949       685       474  
Other assets     392       311       308       306       304  
Total assets   $ 41,651     $ 41,615     $ 43,004     $ 45,550     $ 50,022  
Liabilities and Stockholders’ Equity                                        
Total current liabilities   $ 12,904     $ 13,034     $ 14,612     $ 15,832     $ 17,320  
Capital lease obligation, less current portion     1,303       877       877       877       877  
Long-term debt, less issuance costs     16,500       16,500       14,786       12,892       10,800  
Total long-term liabilities     17,803       17,377       15,663       13,769       11,677  
Total liabilities     30,708       30,411       30,275       29,601       28,998  
Total stockholders’ equity     10,943       11,204       12,730       15,948       21,024  
Total liabilities and stockholders’ equity   $ 41,651     $ 41,615     $ 43,004     $ 45,550     $ 50,022  

 

We make no representation to any stockholder or any other person regarding our ultimate performance compared to the information included in the above unaudited, projected financial information under any of the Company Forecasts. The inclusion of unaudited, projected financial information in this Information Statement should not be regarded as an indication that the prospective financial information under any of the scenarios will be an accurate prediction of future events, and projected financial information should not be relied on as such. Except to the extent required by federal securities laws, we do not intend to, and disclaim any obligation to, update, revise or correct the above prospective financial information to reflect circumstances existing after the date when made or to reflect the occurrence of future events.

 

  34  

 

 

DILUTION

 

 

 

Based on the number of shares of our common stock outstanding at Closing, if the Lenders fully exchange the Exchanging Loans at the exchange price set forth in the Restructuring Agreement, the Lenders will own approximately 94% of our outstanding common stock. The other stockholders of the Company, who currently own approximately 30% of our outstanding common stock, will be substantially diluted from an ownership standpoint and will own approximately 6% of our outstanding common stock following the consummation of the Restructuring Transactions.

 

CAPITALIZATION

 

 

 

The following table sets forth the capitalization of the Company, taken on a consolidated basis with its subsidiaries, as of June 30, 2020, on an actual basis and on a pro forma basis to give effect to the Restructuring Transactions, assuming that the Restructuring Transactions were consummated on June 30, 2020 (in thousands):

 

    As of June 30, 2020 (Unaudited)  
    Actual     Pro Forma  
Cash, cash equivalents and trade accounts receivable   $ 10,602     $ 9,352  
Long-term debt, plus premium and less issuance costs     77,531       16,538  
Lease liability, less current portion     1,518       1,518  
Total long-term debt     79,049       18,056  
                 
Stockholders’ equity                
Preferred stock, $0.000001 par value per share; 10,000,000 shares authorized, no shares issued and outstanding, actual and pro forma                
Common stock, $0.000001 par value per share; 75,000,000 shares authorized and 13,223,565 shares issued and outstanding, actual and 300,000,000 shares authorized and 71,060,611 shares issued and outstanding, pro forma                
Additional paid-in capital     181,412       242,048  
Accumulated deficit     (228,270 )     (229,163 )
Total stockholders’ (deficit) equity     (46,858 )     12,885  
Total capitalization   $ 32,191     $ 30,941  

 

  35  

 

 

WRITTEN ACTION ONE— APPROVAL OF amendment to AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED shares OF COMMON STOCK

 

 

 

Background

 

Our Amended and Restated Certificate of Incorporation, as amended, currently authorizes the issuance of 75,000,000 shares of common stock, par value $0.000001 per share. On August 7, 2020, the Board of Directors unanimously adopted a resolution approving, and recommending that the Majority Stockholders approve, an amendment to Article IV of our Charter to increase the total number of shares of our common stock that we are authorized to issue to 300,000,000. Immediately subsequent to this Board of Directors approval, the Majority Stockholders approved the Charter Amendment by written consent action pursuant to Section 228 of the DGCL and Section 1.10 of the Company’s Bylaws.

 

The Board of Directors believes that it is advisable and in the best interests of our company and our stockholders to increase the total number of authorized shares of our common stock in order to give us a sufficient number of authorized shares to effect the Share Issuance and greater flexibility in considering and planning for potential future corporate needs, including without limitation potential future debt restructurings; capital-raising or financing transactions; potential strategic transactions, including mergers, acquisitions, and other business combinations; grants and awards under equity compensation plans; and other general corporate purpose transactions.

 

As of August 7, 2020, there were 13,223,565 shares of our common stock outstanding. In addition, 5,261,162 shares of our common stock have been reserved for future issuance under outstanding warrants, 1,409,776 shares of our common stock have been reserved for future issuance under outstanding option and restricted stock unit awards and 1,278,634 shares of our common stock have been reserved for future issuance under our current equity compensation plan. In addition, as described in more detail under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock” beginning on page 39, we intend to issue approximately 57.8 million shares of our common stock under the Restructuring Agreement to the Lenders in the Share Issuance. Accordingly, 53,826,863 of the 75,000,000 shares of our common stock currently authorized remain available for issuance or reserved for issuance.

 

Text of the Charter Amendment

 

The Charter Amendment would amend Section 1 of Article IV of our Charter so that it would state in its entirety as follows:

 

ARTICLE IV: AUTHORIZED STOCK

 

“1. Total Authorized. The total number of shares of all classes of stock which the Corporation shall have authority to issue:

 

COMMON STOCK: Three Hundred Million (300,000,000) with a par value of $0.000001 (USD)
PREFERRED STOCK: Ten Million (10,000,000) with a par value of $0.000001 (USD)”

 

Purpose of the Charter Amendment

 

The Board of Directors believes that additional authorized shares of common stock would provide us with a sufficient number of shares to effect the Share Issuance described under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock” and the necessary flexibility to issue shares in the future for various corporate purposes and enable us to take timely advantage of market conditions and opportunities without the delay and expense associated with convening a special stockholders’ meeting for such purpose, except as otherwise required by law and the rules of the NYSE American. These corporate purposes include, but are not limited to, potential future debt restructurings; capital-raising or financing transactions; potential strategic transactions, including mergers, acquisitions, and other business combinations; grants and awards under equity compensation plans; and other general corporate purpose transactions.

 

In the past, we have used authorized but unissued shares in connection with debt restructurings and equity financings, and for issuance pursuant to equity compensation plans. Other than shares of our common stock to be issued to the Lenders in the Share Issuance described under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock” and other than shares of our common stock subject to outstanding warrants, stock options and restricted stock unit awards and that have been reserved for future issuance under our equity compensation plans, we currently do not have any plans, commitments, arrangements, understandings or agreements to issue any currently authorized and unissued shares of our common stock, or any of the additional shares of common stock that would be authorized by the Charter Amendment.

 

  36  

 

 

All of the additional shares resulting from the increase in our authorized common stock would be of the same class with the same dividend, voting, liquidation and similar rights as the shares of our common stock presently outstanding. The shares would be unreserved and available for issuance. No further authorization for the issuance of our common stock by stockholder vote is required under our existing Charter, and none would be required prior to the issuance of the additional shares of common stock by the Company, subject to applicable law or the rules of any stock exchange on which our common stock is then listed. Other than the contractual rights of Royalty Opportunities and ROS under the Restructuring Agreement and the Investor Rights Agreement, our stockholders have no preemptive rights to acquire any shares issued by the Company under our Charter or otherwise, and stockholders would not acquire any such rights with respect to any additional shares of our common stock to be authorized under the Charter Amendment.

 

Interests of Directors, Officers and Affiliates in the Charter Amendment

 

As described above, one of the purposes of the Charter Amendment is to provide us with a sufficient number of authorized shares of common stock to effect the Share Issuance to the Lenders described under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock”. Pursuant to the Investor Rights Agreement described elsewhere in this Information Statement, for so long as the Ownership Threshold (as defined in the Investor Rights Agreement) is met, Royalty Opportunities and ROS are entitled to nominate such individuals to the Board of Directors constituting a majority of the directors. Michael Eggenberg, Matthew Rizzo and Jeffrey Peters, three current members of the Board of Directors, were nominated to the Board of Directors by Royalty Opportunities and ROS. Because of their affiliation with Royalty Opportunities, ROS and OrbiMed, these three directors, together with Royalty Opportunities, ROS and OrbiMed, have a material interest in the Charter Amendment.

 

Except in their capacity as stockholders (which interest does not differ from that of the other stockholders), none of the other directors or officers of the Company, nor any associate of such person, has any substantial interest by security holding or otherwise in the Charter Amendment.

 

Potential Effects of the Charter Amendment

 

The Board of Directors is required to make any determination to issue shares of our common stock based on its judgment regarding the best interests of the Company and our stockholders. Of the 300,000,000 shares of common stock to be authorized as a result of the Charter Amendment, we intend to issue approximately 57.8 million shares to the Lenders in the Share Issuance described under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock.” The Share Issuance and any future issuances of shares of our common stock or securities convertible into shares of our common stock will have a dilutive effect on our earnings per share, book value per share and the voting interest and power of our current stockholders since holders of our common stock are not entitled to preemptive rights. In addition, although we have not proposed the increase in the total number of authorized shares of common stock with the intent of using the additional shares to prevent or discourage any actual or threatened takeover of the Company, under certain circumstances, such shares could have an anti-takeover effect. The additional shares could be issued to dilute the stock ownership or voting rights of persons seeking to obtain control of the Company or could be issued to persons allied with the Board of Directors or management and thereby having the effect of making it more difficult to remove directors or members of management by diluting the stock ownership or voting rights of persons seeking to effect such a removal. The additional shares also could be issued in private placements and without stockholder approval or further action by our stockholders, subject to applicable law or the rules of any stock exchange on which our common stock is then listed. Accordingly, after the Charter Amendment becomes effective, the additional shares of authorized common stock may render more difficult or discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our common stock, or the replacement or removal of our Board of Directors or management. This is particularly true since Royalty Opportunities and ROS will collectively own 67,085,724 shares of our common stock, representing in the aggregate approximately 94% of our total outstanding shares of common stock, upon completion of the Share Issuance. As described under “Security Ownership of Certain Beneficial Owners and Management,” OrbiMed Advisors LLC, a registered adviser under the Investment Advisors Act of 1940, as amended, is deemed to have voting and investment power with respect to the securities held by Royalty Opportunities and ROS and as a result may be deemed to have beneficial ownership over such securities.

 

  37  

 

 

SEC rules require disclosure of charter and bylaw provisions that could have an anti-takeover effect. The following other provisions of our Charter and Bylaws may have the anti-takeover effect of preventing, discouraging or delaying any change in control of the Company:

 

  Supermajority Voting Provisions. Our Charter provides that any amendment or repeal of certain articles of the Charter, or the adoption of any provision inconsistent with such articles, requires the affirmative vote of the holders of at least two-thirds of the voting power of the then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, voting together as a single class. While other voting thresholds require an affirmative vote of the majority of the voting power of the then outstanding shares, this provision increases this threshold. Therefore, this provision may have the effect of making certain corporate approvals, such as amending our Bylaws or our Charter to allow for cumulative voting or to change the manner in which special meetings of stockholders may be called, more challenging for stockholders.
     
  Blank Check Preferred Stock. Our Charter authorizes unissued shares of preferred stock, also known as “blank check” preferred stock. The existence of authorized but unissued shares of preferred stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal is not in the best interests of the Company, the Board of Directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquiror or insurgent stockholder or stockholder group. In this regard, our Charter grants the Board of Directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance may also adversely affect the rights and powers, including voting rights, of such holders and may have the effect of delaying, deterring or preventing a change in control of the Company.
     
  Stockholder Action. Our Bylaws provide that any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, so long as prompt notice is given to non-consenting stockholders.
     
  Special Meeting of Stockholders. Our Bylaws provide that special meetings of stockholders may only be called by the Board of Directors, the chairman of the Board, or the Chief Executive Officer.
     
  Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our Bylaws provide that stockholders who desire to nominate a person for election to the Board of Directors must comply with specified notice and information provisions. Our Bylaws contain similar advance notice provisions for stockholder proposals for action at annual meetings. These provisions prevent stockholders from making nominations for directors and stockholder proposals from the floor at any stockholder meeting and require any stockholder making a nomination or proposal to submit the name of the nominees for board seats or the stockholder proposal, together with specified information about the nominee or any stockholder proposal, prior to the meeting at which directors are to be elected or action is to be taken. These provisions ensure that stockholders have adequate time to consider nominations and proposals before action is required, and they may also have the effect of delaying stockholder action.

 

As indicated above, the additional authorized shares of common stock would give us a sufficient number of shares of common stock to effect the Share Issuance to the Lenders described under “Written Action Two: Approval of Issuance of Shares of Common Stock to Lenders Upon Exchange of Certain Indebtedness for Common Stock.” In addition, the Board of Directors believes that additional authorized shares of common stock would provide us with the necessary flexibility to issue shares in the future for various corporate purposes and enable us to take timely advantage of market conditions and opportunities without the delay and expense associated with convening a special stockholders’ meeting for such purpose, except as otherwise required by law and the rules of the NYSE American or any stock exchange on which our common stock is then listed. These corporate purposes include, but are not limited to, potential future debt restructurings; capital-raising or financing transactions; potential strategic transactions, including mergers, acquisitions, and other business combinations; grants and awards under equity compensation plans; and other general corporate purpose transactions.

 

Timing of the Charter Amendment

 

The Charter Amendment will become effective immediately upon the filing of a Certificate of Amendment to our Charter with the Secretary of State of the State of Delaware, which we expect to file on or about              , 2020.

 

  38  

 

 

WRITTEN ACTION TWO— APPROVAL OF ISSUANCE OF SHARES OF COMMON STOCK TO LENDERS UPON EXCHANGE OF CERTAIN INDEBTEDNESS FOR COMMON STOCK

 

 

 

Background and Reasons for the Share Issuance

 

As described in more detail under “Background of the Restructuring Transactions” beginning on page 7, on August 7, 2020, we entered into the Restructuring Agreement with Royalty Opportunities and ROS. Under the terms of the Restructuring Agreement, the parties thereto agreed to take certain actions to restructure our outstanding indebtedness, including, among others, the exchange by the Company of shares of our common stock for approximately $40.8 million of the aggregate outstanding principal amount of loans outstanding held by the Lenders under the Second A&R Credit Agreement, as well as, without duplication, approximately $21.1 million of the outstanding amount of PIK Interest (as defined in the Second A&R Credit Agreement), plus all other accrued and unpaid interest on the Exchanging Loans outstanding as of the closing date, at an exchange price of $1.07 per share, representing the average closing price of our common stock over the 10 trading days immediately prior to the parties entering into the Restructuring Agreement, and resulting in the issuance of approximately 57.8 million shares of our common stock.

 

The material terms of the Restructuring Transactions are described under “Description of the Restructuring Agreement and Related Agreements” beginning on page 16.

 

To complete the Restructuring Transactions, we solicited and obtained the written consent from Royalty Opportunities and ROS, the holders of a majority of our outstanding common stock, in accordance with Section 228 of the DGCL and the Company’s Bylaws for approval of the Charter Amendment described under “Written Action One: Approval of Amendment to Amended and Restated Certificate of Incorporation to Increase Authorized Shares of Common Stock” beginning on page 36 and the Share Issuance.

 

Reasons for Stockholder Approval of the Share Issuance

 

Our common stock is listed on the NYSE American. Section 713(a) of the NYSE American rules requires stockholder approval in connection with a transaction involving the sale, issuance or potential issuance by the issuer of common stock (or securities convertible into common stock) equal to 20% or more of presently outstanding shares of common stock at a price less than the greater of book value or market value.

 

Because the approximately 57.8 million shares of our common stock issuable to the Lenders in the Share Issuance represent greater than 20% of our shares of common stock outstanding, the Majority Stockholders approved the issuance of such 57.8 million shares of our common stock for purposes of Section 713(a) of the NYSE American rules.

 

For more information regarding the reasons why the Board of Directors and the Special Committee voted unanimously to approve the Share Issuance, see “Background of the Restructuring Transactions” beginning on page 8.

 

Interests of Directors, Officers and Affiliates in the Share Issuance

 

Pursuant to the Investor Rights Agreement, Royalty Opportunities and ROS, for so long as the Ownership Threshold (as defined in the Investor Rights Agreement) is met, are entitled to nominate such individuals to the Board of Directors constituting a majority of the directors. Michael Eggenberg, Matthew Rizzo and Jeffrey Peters, three current members of the Board of Directors, were nominated to the Board of Directors by Royalty Opportunities and ROS immediately prior to the most recent annual meeting of stockholders of the Company. Because of their affiliation with Royalty Opportunities, ROS and OrbiMed, these three directors, together with Royalty Opportunities, ROS and OrbiMed, have a material interest in the Share Issuance.

 

In addition, under the employment agreement we have entered into with our President and Chief Executive Officer, Sean E. Browne, we agreed to grant Mr. Browne additional equity awards in the form of stock options and restricted stock units upon completion of the Restructuring Transactions such that his total equity in the Company, including his current stock options and restricted stock units, will equal 5% of our outstanding shares of common stock.

 

No other director or officer of the Company, nor any associate of such person, has any substantial interest by security holding or otherwise in the issuance of the shares of our common stock in the Share Issuance.

 

  39  

 

 

No Preemptive Rights of Common Stock

 

Other than the contractual rights of Royalty Opportunities and ROS under the Restructuring Agreement and the Investor Rights Agreement, our stockholders have no preemptive rights to acquire any shares issued by the Company under our Charter or otherwise. In addition, no share of our common stock is convertible, redeemable, assessable or entitled to the benefits of any sinking or repurchase fund.

 

Effect of the Share Issuance upon Rights of Existing Stockholders

 

The principal effect upon the rights of existing stockholders of the Company of the Share Issuance will be a dilution in their current percentage ownership in the Company. Based on the number of shares of our common stock outstanding on the Closing, if the Lenders fully exchange the Exchanging Loans at the exchange price set forth in the Restructuring Agreement, the Lenders will own approximately 94% of our outstanding common stock. The other stockholders of the Company, who currently own approximately 30% of our outstanding common stock, will be substantially diluted from an ownership standpoint and will own approximately 6% of our outstanding common stock following the consummation of the Restructuring Transactions.

 

In addition, the issuance of the approximately 57.8 million shares of our common stock to the Lenders in the Share Issuance could materially and adversely affect the market price of our common stock.

 

Registration Rights

 

The Company has agreed to provide the Lenders registration rights pursuant to a Registration Rights Agreement for the resale of the shares of our common stock issuable in the Share Issuance. The Registration Rights Agreement will require us to, among other things, file with the SEC a shelf registration statement covering the resale, from time to time, of the shares of our common stock issuable upon exchange of the Exchanging Loans no later than the 90th day after the Closing Date and use our best efforts to cause the shelf registration statement to become effective under the Securities Act no later than the 180th day after the Closing Date. Upon such registration, such shares of our common stock will be freely tradable in the public market without restriction (other than restrictions imposed on any affiliates of the Company).

 

  40  

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

 

 

Significant Beneficial Owners

 

The table below sets forth information as to beneficial owners that have reported to the SEC or have otherwise advised us that they are a beneficial owner, as defined by the SEC’s rules and regulations, of more than 5% of our outstanding common stock.

 

Title of Class   Name and Address of Beneficial Owner   Amount and Nature of Beneficial Ownership     Percent of Class(1)  
Common Stock  

OrbiMed Advisors LLC(2)

601 Lexington Avenue, 54th Floor

New York, NY 10022

    14,055,987       78.0 %
                     
Common Stock  

Telemetry Investments, L.L.C.(3)

545 Fifth Avenue, Suite 1108

New York, NY 10017

    752,915       5.7 %

 

 

(1) Percent of class is based on 13,223,565 shares of our common stock outstanding as of August 7, 2020.
   
(2) Based in part on information contained in a Schedule 13D/A filed with the SEC on May 20, 2020. Includes 5,917,609 shares of common stock and 3,071,277 shares of common stock issuable upon exercise of warrants held of record by ROS Acquisition Offshore LP. OrbiMed Advisors LLC, a registered adviser under the Investment Advisors Act of 1940, as amended, is the investment manager of ROS. OrbiMed is also the investment manager of Royalty Opportunities S.àr.l., of which ROS is a wholly-owned subsidiary. By virtue of such relationships, OrbiMed may be deemed to have voting and investment power with respect to the securities held by ROS noted above and as a result may be deemed to have beneficial ownership over such securities. OrbiMed exercises this investment and voting power through a management committee comprised of Carl L. Gordon, Sven H. Borho, and Jonathan T. Silverstein, each of whom disclaims beneficial ownership of the securities held by ROS.
   
  Also includes 3,331,069 shares of common stock and 1,736,032 shares of common stock issuable upon exercise of warrants held of record by OrbiMed Royalty Opportunities II, LP. OrbiMed ROF II LLC (“ROF II”) is the sole general partner of Royalty Opportunities, and OrbiMed is the sole managing member of ROF II. By virtue of such relationships, OrbiMed may be deemed to have voting and investment power with respect to the securities held by Royalty Opportunities noted above and as a result may be deemed to have beneficial ownership over such securities. OrbiMed exercises this investment and voting power through a management committee comprised of Carl L. Gordon, Sven H. Borho, and Jonathan T. Silverstein, each of whom disclaims beneficial ownership of the securities held by Royalty Opportunities.
   
(3) Based solely on information contained in a Schedule 13G/A filed with the SEC on February 13, 2020. Includes 752,915 shares of common stock held by Telemetry Securities, L.L.C. (“Telemetry Securities”). Telemetry Investments, L.L.C. (“Telemetry”) is a registered investment advisor and the investment manager to Telemetry Securities. Andrew J. Schorr and Daniel P. Schorr are each managers of Telemetry. As such, Telemetry, Andrew J. Schorr and Daniel P. Schorr share voting and investment power over the securities held by Telemetry Securities.

 

  41  

 

 

Security Ownership of Management

 

The table below sets forth information relating to the beneficial ownership of our common stock as of the Record Date, August 7, 2020, by:

 

  each of our directors;
     
  each of our named executive officers; and
     
  all directors and executive officers as a group.

 

The number of shares beneficially owned by each person is determined in accordance with the SEC’s rules and regulations, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under the SEC’s rules and regulations, beneficial ownership includes any shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days of August 7, 2020, through the exercise of any stock option, warrants, or other rights or the vesting of any restricted stock awards. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by that person.

 

The percentage of shares beneficially owned is computed on the basis of 13,223,565 shares of our common stock outstanding as of August 7, 2020. Shares of our common stock that a person has the right to acquire within 60 days of August 7, 2020, are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

 

Title of Class   Name of Beneficial Owner   Amount and Nature of Beneficial Ownership     Percent of Class  
Common Stock   John Bakewell     31,597       *