Notes
to Unaudited Condensed Consolidated Financial Statements
(1)
Business Description, Basis of Presentation and Summary of Significant Accounting Policies
Business
Description and Basis of Presentation
The
accompanying condensed consolidated financial statements include the accounts of Xtant Medical Holdings, Inc. (“Xtant”),
a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc. (“Xtant Medical”), a Delaware corporation,
Bacterin International, Inc. (“Bacterin”), a Nevada corporation, and X-spine Systems, Inc. (“X-spine”), an Ohio
corporation (Xtant, Xtant Medical, Bacterin, and X-spine are jointly referred to herein as the “Company” or sometimes “we,”
“our,” or “us”). All intercompany balances and transactions have been eliminated in consolidation.
Xtant
is a global medical technology company focused on the design, development, and commercialization of a comprehensive portfolio of orthobiologics
and spinal implant systems to facilitate spinal fusion in complex spine, deformity, and degenerative procedures.
Since
March 2020, the COVID-19 pandemic has caused business closures, severe travel restrictions and implementation of social distancing measures.
At the onset of the COVID-19 pandemic and more recently as a result of the recent surge in cases and hospitalizations caused by the Delta
variant, hospitals and other medical facilities have cancelled or deferred elective procedures, diverted resources to patients suffering
from infections, and limited access for non-patients, including our direct and indirect sales representatives. Because of these circumstances,
surgeons and their patients have, and may continue to, defer procedures in which our products otherwise would be used. In addition, many
facilities that specialize in procedures in which our products are used have experienced staffing shortages, temporary closures, and/or
reduced operating hours. These circumstances have negatively impacted, and may continue to negatively impact, the number of elective
procedures being conducted and the ability of our employees, independent sales representatives and distributors to effectively market
and sell our products. This is particularly true during the third quarter of 2021, and most acutely starting in August, when spine and
other surgery procedure volumes were negatively impacted in many of our key markets, due to cancellations and/or postponements of procedures
as a result of the increased hospitalizations, restrictions on elective procedures and staffing shortages, which negatively impacted
our third quarter 2021 revenues and may continue to negatively impact our revenues. If our revenues continue to decline in future periods
and do not recover to pre-COVID-19 pandemic levels, we may be required to incur impairment charges to our long-lived assets and goodwill
and write-down excess inventory, which would likely adversely affect our future operating results.
The
accompanying condensed consolidated balance sheet as of December 31, 2020, which has been derived from audited financial statements,
and the unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. They do not include all disclosures required by generally accepted accounting principles for
annual consolidated financial statements, but in the opinion of management include all adjustments, consisting only of normal recurring
items, necessary for a fair presentation.
Interim
results are not necessarily indicative of results that may be achieved in the future for the full year ending December 31, 2021.
These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto,
which are included in Xtant’s Annual Report on Form 10-K for the year ended December 31, 2020. The accounting policies set forth
in those annual consolidated financial statements are the same as the accounting policies utilized in the preparation of these condensed
consolidated financial statements, except as modified for appropriate interim consolidated financial statement presentation.
Reclassifications
Certain
prior year amounts have been reclassified to conform with current year presentation.
Private
Placement
On
February 24, 2021, we issued in a private placement (the “Private Placement”) to a single healthcare-focused institutional
accredited investor (the “Investor”) 8,888,890 shares of our common stock at a purchase price of $2.25 per share, and warrants
to purchase up to 6,666,668 shares of our common stock (the “Investor Warrant”). We received net cash proceeds of approximately
$18.4 million, after deducting fees and other estimated offering expenses, from the Private Placement.
The
Investor Warrant, described in more detail in Note 10, “Warrants”, has an exercise price of $2.25 per share, subject
to customary anti-dilution, but not price protection, adjustments, is immediately exercisable and expires on the five-year anniversary
of the date of issuance.
In
connection with the Private Placement, we entered into a placement agent agreement with a placement agent (the “Placement Agent”)
pursuant to which the Placement Agent served as our exclusive placement agent in connection with the Private Placement (the “Placement
Agent Agreement”). Pursuant to the Placement Agent Agreement, we agreed to pay the Placement Agent a fee equal to a certain percentage
of the aggregate gross proceeds from the Private Placement. In addition to the cash fee, we agreed to issue to the Placement Agent a
warrant to purchase up to 5.0% of the shares sold to the Investor in the Private Placement, or 444,444 shares of our common stock (the
“Placement Agent Warrant”). The Placement Agent Warrant, described in more detail in Note 10, “Warrants”,
has an exercise price of $2.8125 per share, subject to customary anti-dilution, but not price protection, adjustments, is immediately
exercisable and expires on the five-year anniversary of the date of issuance.
Use
of Estimates
The
preparation of the condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenue and expenses during the period. Significant estimates
include the carrying amount of property and equipment, goodwill and intangible assets and liabilities, valuation allowances for trade
receivables, inventory and deferred income tax assets and liabilities, current and long-term lease obligations and corresponding right-of-use
asset and estimates for the fair value of long-term debt, stock options and other equity awards upon which the Company determines stock-based
compensation expense. Actual results could differ from those estimates.
Restricted
Cash
Cash
and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use
under the terms of certain credit agreements. The September 30, 2021 balance included lockbox deposits that are temporarily restricted
due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.
Long-Lived
Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recovered. No impairments of long-lived assets were recorded for the three and nine months ended September 30, 2021
and 2020.
Goodwill
Goodwill
represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase
business combination and determined to have indefinite useful lives are not amortized. Instead, they are tested for impairment at least
annually, and whenever events or circumstances indicate, the carrying amount of the asset may not be recoverable. No impairments of goodwill
were recorded for the three months and nine months ended September 30, 2021 and 2020.
Net
Income (Loss) Per Share
Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding.
Shares issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.
Diluted net income (loss) per share is computed in a manner consistent with that of basic earnings per share while giving effect to all
potentially dilutive shares of common stock outstanding during the period, which include the assumed exercise of stock options and warrants
using the treasury stock method. Diluted net loss per share was the same as basic net loss per share for the three and nine months ended
September 30, 2021 and 2020, as shares issuable upon the exercise of stock options and warrants were anti-dilutive as a result of the
net losses incurred for those periods. Our diluted earnings per share is the same as basic earnings per share, as the effects of including
14,138,224 and 7,083,922 outstanding stock options, restricted stock units and warrants for the three and nine months ended September
30, 2021 and 2020, respectively, are anti-dilutive.
Fair
Value of Financial Instruments
The
carrying values of financial instruments, including trade accounts receivable, accounts payable, accrued liabilities, and long-term debt,
approximate their fair values based on terms and related interest rates as of September 30, 2021 and December 31, 2020.
(2)
Revenue
In
the United States, we generate most of our revenue from independent commissioned sales agents. We consign our orthobiologics products
to hospitals and consign or loan our spinal implant sets to the independent sales agents. The spinal implant sets typically contain the
instruments, disposables, and spinal implants required to complete a surgery. Consigned sets are managed by the sales agent to service
hospitals that are high volume users for multiple procedures.
We
ship replacement inventory to independent sales agents to replace the consigned inventory used in surgeries. Loaned sets are returned
to the Company’s distribution center, replenished, and made available to sales agents for the next surgical procedure.
For
each surgical procedure, the sales agent reports use of the product by the hospital and, as soon as practicable thereafter, ensures that
the hospital provides a purchase order to the Company. Upon receipt of the hospital purchase order, the Company invoices the hospital,
and revenue is recognized in the proper period. Additionally, the Company sells product directly to domestic and international stocking
resellers and private label resellers. Upon receipt and acceptance of a purchase order from a stocking reseller, the Company ships product
and invoices the reseller. The Company recognizes revenue when control of the promised goods is transferred to the customer, in an amount
that reflects the consideration the Company expects to collect in exchange for those goods or services. There is generally no customer
acceptance or other condition that prevents the Company from recognizing revenue in accordance with the delivery terms for these sales
transactions.
The
Company operates in one reportable segment with its net revenue derived primarily from the sale of orthobiologics and spinal implant
products across North America, Europe, Asia Pacific, and Latin America. Sales are reported net of returns. The following table presents
revenues from these product lines for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Summary of Revenues From Product Lines
|
|
Three
Months
Ended
|
|
|
Percentage
|
|
|
Three
Months
Ended
|
|
|
Percentage
|
|
|
|
September
30, 2021
|
|
|
of
Total
Revenue
|
|
|
September
30, 2020
|
|
|
of
Total
Revenue
|
|
Orthobiologics
|
|
$
|
10,795
|
|
|
|
78
|
%
|
|
$
|
10,542
|
|
|
|
75
|
%
|
Spinal implant
|
|
|
2,948
|
|
|
|
22
|
%
|
|
|
3,438
|
|
|
|
25
|
%
|
Other revenue
|
|
|
34
|
|
|
|
0
|
%
|
|
|
36
|
|
|
|
0
|
%
|
Total revenue
|
|
$
|
13,777
|
|
|
|
100
|
%
|
|
$
|
14,016
|
|
|
|
100
|
%
|
|
|
Nine
Months
Ended
|
|
|
Percentage
|
|
|
Nine
Months
Ended
|
|
|
Percentage
|
|
|
|
September
30, 2021
|
|
|
of Total
Revenue
|
|
|
September
30, 2020
|
|
|
of Total
Revenue
|
|
Orthobiologics
|
|
$
|
31,264
|
|
|
|
76
|
%
|
|
$
|
28,613
|
|
|
|
73
|
%
|
Spinal implant
|
|
|
9,929
|
|
|
|
24
|
%
|
|
|
10,594
|
|
|
|
27
|
%
|
Other revenue
|
|
|
100
|
|
|
|
0
|
%
|
|
|
115
|
|
|
|
0
|
%
|
Total revenue
|
|
$
|
41,293
|
|
|
|
100
|
%
|
|
$
|
39,322
|
|
|
|
100
|
%
|
3)
Receivables
The
Company’s provision for current expected credit loss is determined based on historical collection experience adjusted for current
economic conditions affecting collectability. Actual customer collections could differ from estimates. Account balances are charged to
the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions to the
allowance for credit losses are charged to expense. Activity within the allowance for credit losses was as follows for the three months
ended September 30, 2021 and 2020 (in thousands):
Schedule of Allowance for Credit Losses
|
|
September 30, 2021
|
|
|
September 30, 2020
|
|
Balance at January 1
|
|
$
|
653
|
|
|
$
|
547
|
|
Provision for current expected credit losses
|
|
|
(63
|
)
|
|
|
138
|
|
Write-offs charged against allowance
|
|
|
(36
|
)
|
|
|
(17
|
)
|
Balance at March 31
|
|
|
554
|
|
|
|
668
|
|
Provision for current expected credit losses
|
|
|
(81
|
)
|
|
|
66
|
|
Write-offs charged against allowance
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Balance at June 30
|
|
|
470
|
|
|
|
728
|
|
Provision for current expected credit losses
|
|
|
118
|
|
|
|
92
|
|
Write-offs charged against allowance
|
|
|
(12
|
)
|
|
|
(74
|
)
|
Balance at September 30
|
|
$
|
576
|
|
|
$
|
746
|
|
(4)
Inventories
Inventories
consist of the following (in thousands):
Schedule of Inventories
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Raw materials
|
|
$
|
5,927
|
|
|
$
|
3,757
|
|
Work in process
|
|
|
674
|
|
|
|
1,733
|
|
Finished goods
|
|
|
13,107
|
|
|
|
15,918
|
|
Total
|
|
$
|
19,708
|
|
|
$
|
21,408
|
|
(5)
Property and Equipment, Net
Property
and equipment, net are as follows (in thousands):
Schedule of Property and Equipment, Net
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Equipment
|
|
$
|
5,195
|
|
|
$
|
4,950
|
|
Computer equipment
|
|
|
670
|
|
|
|
649
|
|
Computer software
|
|
|
490
|
|
|
|
570
|
|
Leasehold improvements
|
|
|
4,022
|
|
|
|
3,987
|
|
Surgical instruments
|
|
|
11,647
|
|
|
|
11,291
|
|
Total cost
|
|
|
22,024
|
|
|
|
21,447
|
|
Less: accumulated depreciation
|
|
|
(17,053
|
)
|
|
|
(17,100
|
)
|
Property and equipment, net
|
|
$
|
4,971
|
|
|
$
|
4,347
|
|
Depreciation
expense related to property and equipment, including property under finance leases, for the three months ended September 30, 2021 and
2020 was $0.3 million and $0.5 million, respectively, and $1 million and $1.6 million for the nine months ended September 30, 2021 and
2020, respectively.
(6)
Intangible Assets
The
following table sets forth information regarding intangible assets (in thousands):
Schedule of Intangible Assets
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Patents
|
|
$
|
847
|
|
|
$
|
847
|
|
Accumulated amortization
|
|
|
(433
|
)
|
|
|
(390
|
)
|
Intangible assets, net
|
|
$
|
414
|
|
|
$
|
457
|
|
(7)
Accrued Liabilities
Accrued
liabilities consist of the following (in thousands):
Schedule of Accrued Liabilities
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Cash compensation/commissions payable
|
|
$
|
2,991
|
|
|
$
|
4,057
|
|
Other accrued liabilities
|
|
|
1,088
|
|
|
|
1,405
|
|
Accrued liabilities
|
|
$
|
4,079
|
|
|
$
|
5,462
|
|
(8)
Debt
The
Company had a credit facility with OrbiMed Royalty Opportunities II, LP (“Royalty Opportunities”) (the “Prior Credit
Agreement”), which was scheduled to mature on December 31, 2021, but was extinguished prior to maturity and replaced by the credit
agreements with MidCap Financial Trust described below.
On
May 6, 2021, the Company, as guarantor, and its subsidiaries, as borrowers (collectively, the “Borrowers”), entered into
a Credit, Security and Guaranty Agreement (Term Loan) (the “Term Credit Agreement”) and Credit, Security and Guaranty Agreement
(Revolving Loan) (the “Revolving Credit Agreement,” and, together with the Term Credit Agreement, the “Credit Agreements”)
with MidCap Financial Trust, in its capacity as agent (“MidCap”) .
The
Term Credit Agreement provides for a secured term loan facility (the “Term Facility”) in an aggregate principal amount of
$12.0 million (the “Term Loan Commitment”), which was funded to the Borrowers immediately, and an additional $5.0 million
tranche available solely at the discretion of MidCap and the lenders, for the purposes agreed to between the Company, the Borrowers and
the lenders in advance of the making of loans under such additional tranche. The Revolving Credit Agreement provides for a secured revolving
credit facility (the “Revolving Facility,” and, together with the Term Facility, the “Facilities”) under which
the Borrowers may borrow up to $8.0 million (such amount, the “Revolving Loan Commitment”) at any one time, the availability
of which is determined based on a borrowing base equal to percentages of certain accounts receivable and inventory of the Borrowers in
accordance with a formula set forth in the Revolving Credit Agreement. All borrowings under the Revolving Facility are subject to the
satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material
respects and the delivery of an updated borrowing base certificate.
The
Facilities have a maturity date of May 1, 2026. The proceeds of the Term Facility were used to pay transaction fees in connection with
the Facilities and to pay in full all outstanding indebtedness and accrued interest under the Prior Credit Agreement. The proceeds of
the Revolving Facility were used to pay transaction fees in connection with the Facilities, to pay in full all outstanding indebtedness
and accrued interest under the Prior Credit Agreement, and for working capital and general corporate purposes. As a result of the refinancing,
we recorded a gain on extinguishment totalling $0.8 million. The gain represents the difference between the carrying value of our outstanding
loans under the Prior Credit Agreement prior to the extinguishment and $15.6 million, the reacquisition price. Because of the related
party affiliation between the Company and Royalty Opportunities, this debt extinguishment resulted in an increase in additional paid-in
capital rather than flowing through our consolidated statements of operations as a gain on extinguishment.
The
loans and other obligations pursuant to the Credit Agreements bear interest at a per annum rate equal to the sum of the LIBOR rate, as
such term is defined in the Credit Agreements, plus the applicable margin of 7.00% in the case of the Term Credit Agreement, and 4.50%
in the case of the Revolving Credit Agreement, subject in each case to a LIBOR floor of 1.00%. The effective rate of the Term Facility
was 8.83% as of September 30, 2021. In addition to paying interest on the outstanding loans under the Facilities, the Borrowers are also
required to pay an unused line fee equal to 0.50% per annum in respect of unutilized commitments under the Revolving Facility, a fee
for failure to maintain a minimum balance under the Revolving Facility, a collateral management fee under the Revolving Facility equal
to 0.50% of the amount outstanding under the Revolving Facility, an origination fee equal to 0.50% of the Revolving Loan Commitment and
0.50% of the Term Loan Commitment, and if activated, of any additional term loan tranche, and certain other customary fees related to
the Agent’s administration of the Facilities.
The
Credit Agreements contain affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants
that, among other things, limit or restrict the ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness
and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions,
voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their
businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum
levels and to maintain a minimum adjusted EBITDA and a minimum liquidity, in each case at levels specified in the Credit Agreements.
As of September 30, 2021, we were in compliance with all covenants under the Credit Agreements.
Long-term
debt consists of the following (in thousands):
Schedule of Long-term Debt
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
Amounts due under the Term Facility
|
|
$
|
12,000
|
|
|
$
|
—
|
|
Amounts due under the Second Amended and Restated Credit Agreement
|
|
|
—
|
|
|
|
15,556
|
|
Premium related to Second Amendment
|
|
|
—
|
|
|
|
1,241
|
|
Less: unamortized debt issuance costs
|
|
|
(322
|
)
|
|
|
—
|
|
Less: current maturities
|
|
|
—
|
|
|
|
(16,797
|
)
|
Long-term debt
|
|
$
|
11,678
|
|
|
$
|
—
|
|
(9)
Stock-Based Compensation
Stock
option activity, including options granted under the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan, as amended (the “2018
Plan”), and the Amended and Restated Xtant Medical Equity Incentive Plan and options granted to new hires to purchase shares of
our common stock outside of any stockholder-approved plan, was as follows for the nine months ended September 30, 2021 and 2020:
Schedule of Share-based Compensation, Stock Options, Activity
|
|
2021
|
|
|
2020
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price Per Share
|
|
|
Weighted
Average Fair
Value at Grant
Date Per
Share
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
Per Share
|
|
|
Weighted
Average Fair
Value at Grant
Date Per Share
|
|
Outstanding at January 1
|
|
|
2,190,892
|
|
|
$
|
2.25
|
|
|
$
|
1.65
|
|
|
|
602,966
|
|
|
$
|
6.07
|
|
|
$
|
3.99
|
|
Granted
|
|
|
1,012,083
|
|
|
$
|
1.27
|
|
|
$
|
1.07
|
|
|
|
239,884
|
|
|
$
|
1.13
|
|
|
$
|
0.90
|
|
Cancelled or expired
|
|
|
(269
|
)
|
|
$
|
314.19
|
|
|
$
|
153.41
|
|
|
|
(120,738
|
)
|
|
$
|
6.42
|
|
|
$
|
4.05
|
|
Outstanding at September 30
|
|
|
3,202,706
|
|
|
$
|
1.92
|
|
|
$
|
1.45
|
|
|
|
722,112
|
|
|
$
|
4.37
|
|
|
$
|
2.96
|
|
Exercisable at September 30
|
|
|
210,028
|
|
|
$
|
9.02
|
|
|
$
|
5.69
|
|
|
|
49,979
|
|
|
$
|
33.70
|
|
|
$
|
19.67
|
|
Restricted
stock unit activity for awards granted under the 2018 Plan was as follows for the nine months ended September 30, 2021 and 2020:
Schedule of Restricted Stock Activity
|
|
2021
|
|
|
2020
|
|
|
|
Shares
|
|
|
Weighted
Average
Fair
Value at
Grant
Date Per
Share
|
|
|
Shares
|
|
|
Weighted
Average
Fair
Value at
Grant
Date Per
Share
|
|
Outstanding at January 1
|
|
|
2,503,698
|
|
|
$
|
1.54
|
|
|
|
499,914
|
|
|
$
|
2.93
|
|
Granted
|
|
|
1,249,002
|
|
|
$
|
1.27
|
|
|
|
679,803
|
|
|
$
|
1.36
|
|
Vested
|
|
|
(349,572
|
)
|
|
$
|
1.92
|
|
|
|
(79,069
|
)
|
|
$
|
2.37
|
|
Outstanding at September 30
|
|
|
3,403,128
|
|
|
$
|
1.40
|
|
|
|
1,100,648
|
|
|
$
|
2.00
|
|
(10)
Warrants
As
noted in Note 1, “Business Description, Basis of Presentation and Summary of Significant Accounting Policies,” on
February 22, 2021, the Company issued the Investor Warrants and Placement Agent Warrants. The Investor and Placement Agent Warrants meet
all the requirements to be classified as equity awards in accordance with Accounting Standards Codification (“ASC”) No. 815-40.
The number of shares of Company common stock issuable upon exercise of the Investor Warrants and Placement Agent Warrants is subject
to standard and customary anti-dilution provisions for stock splits, stock dividends, or similar transactions. In addition, the Investor
Warrants include a buy-out right whereby the holders of such warrants may put the warrants back to the Company or its successor in the
event of a purchase, tender or exchange offer accepted by 50% or more of the Company’s holders of common stock and not approved
by the Company’s board of directors. The buy-out amount is equal to the Black-Scholes value of the warrants on the date the triggering
transaction is consummated based on certain inputs as defined in the Investor Warrant agreement. The consideration to be paid if the
buy-out provision is triggered shall be in the same type or form of consideration that is being offered and paid to the holders of Company
common stock in connection with the triggering transaction.
While
the Investor Warrants are classified as a component of equity, we were required to allocate the proceeds of the Private Placement between
the shares of common stock and Investor Warrants issued based on their relative fair values. We utilized a lattice valuation model to
determine the fair value of the Investor Warrants. The fair value of the Placement Agent Warrants issued in connection with the Private
Placement was determined using a Black Scholes model. Significant assumptions in both models included contractual term (5 years) and
the estimated volatility factor based on a weighted average of comparable published betas of peer companies (61%).
Our
warrant activity during the nine months ended September 30, 2021 was as follows:
Schedule of Warrant Activity
|
|
Common Stock Warrants
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2021
|
|
|
421,278
|
|
|
$
|
10.80
|
|
Issued
|
|
|
7,111,112
|
|
|
|
2.29
|
|
Outstanding at September 30, 2021
|
|
|
7,532,390
|
|
|
$
|
2.76
|
|
(11)
Commitments and Contingencies
Operating
Leases
We
lease three office facilities as of September 30, 2021 in Belgrade, Montana under non-cancelable operating lease agreements with expiration
dates between 2023 and 2025. We have the option to extend certain leases to five or ten-year term(s), and we have the right of first
refusal on any sale. As of September 30, 2021, the weighted-average remaining lease term was 3.2 years.
Present
Value of Long-term Leases
Schedule of Lease Liability
(in thousands):
|
|
September 30, 2021
|
|
Right-of-use assets, net
|
|
$
|
1,369
|
|
|
|
|
|
|
Current portion of lease liability
|
|
$
|
451
|
|
Lease liability, less current portion
|
|
|
961
|
|
Total lease liability
|
|
$
|
1,412
|
|
Future
minimum payments for the next five years and thereafter as of September 30, 2021 under these long-term operating leases are as follows
(in thousands):
Schedule of Future Minimum Rental Payments for Operating Leases
|
|
|
2021
|
|
Remainder of 2021
|
|
$
|
127
|
|
2022
|
|
|
521
|
|
2023
|
|
|
489
|
|
2024
|
|
|
224
|
|
2025
|
|
|
179
|
|
Total future minimum lease payments
|
|
|
1,540
|
|
Less amount representing interest
|
|
|
(128
|
)
|
Present value of obligations under operating leases
|
|
|
1,412
|
|
Less current portion
|
|
|
(451
|
)
|
Long-term operating lease obligations
|
|
$
|
961
|
|
Rent
expense was $0.1 million for the three months ended September 30, 2021 and 2020 and $0.4 million for the nine months ended September
30, 2021 and 2020. We have no contingent rent agreements.
Litigation
In
November 2020, we received a letter from a third party’s legal counsel alleging that some of our hardware products allegedly infringe
an expired patent and offering to discuss settlement terms. Without admitting any liability, in July 2021, we entered into a confidential
settlement agreement and release that included, among other things, a full release of all asserted patent claims from the third party
and otherwise settled the dispute in exchange for a one-time lump sum payment of $550,000, which was recorded as a special charge in
the second quarter 2021 to general and administrative expense.
In
addition, we are subject to potential liabilities under government regulations and various claims and legal actions that are pending
or may be asserted from time to time.
These
matters arise in the ordinary course and conduct of our business and may include, for example, commercial, product liability, intellectual
property, and employment matters. We intend to continue to defend the Company vigorously in such matters and, when warranted, take legal
action against others. Furthermore, we regularly assess contingencies to determine the degree of probability and range of possible loss
for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable
that a liability has been incurred and the amount of the loss can be reasonably estimated. We do not accrue amounts for liabilities that
we do not believe are probable or that we consider immaterial to our overall financial position. Litigation is inherently unpredictable,
and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future
events. The amount of ultimate loss may exceed the Company’s current accruals, and it is possible that its cash flows or results
of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
Indemnifications
Our
indemnification arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities
if our products or services infringe a third-party’s intellectual property rights. To date, we have not incurred any material costs
as a result of such warranties or indemnification provisions and have not accrued any liabilities related to such obligations in the
accompanying condensed consolidated financial statements.
We
have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines, and
settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to
be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s
services as our director or officer or that person’s services provided to any other company or enterprise at our request.
(12)
Income Taxes
In
evaluating the realizability of the net deferred tax assets, we take into account a number of factors, primarily relating to the ability
to generate taxable income. Where it is determined that it is likely that we will be unable to realize deferred tax assets, a valuation
allowance is established against the applicable portion of the deferred tax asset. Because it cannot be accurately determined when or
if we will become profitable, a valuation allowance was provided against the entire deferred income tax asset balance.
The
Company did not recognize any interest or penalties related to income taxes for the three and nine months ended September 30, 2021 and
2020.
(13)
Supplemental Disclosure of Cash Flow Information
Supplemental
cash flow information is as follows (in thousands):
Schedule of Supplemental Cash Flow Information
|
|
2021
|
|
|
2020
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
485
|
|
|
$
|
13
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Gain on extinguishment of Second A&R Credit Agreement
|
|
$
|
786
|
|
|
$
|
—
|
|
Extinguishment of Second A&R Credit Agreement financed by line of credit
|
|
$
|
3,755
|
|
|
$
|
—
|
|
Prepaid debt issuance costs
|
|
$
|
75
|
|
|
$
|
—
|
|
Fixed assets acquired under finance lease
|
|
$
|
163
|
|
|
$
|
—
|
|
Warrants issued in connection with the Private Placement to placement agents
|
|
$
|
351
|
|
|
$
|
—
|
|
ASU 2016-13 cumulative effect adjustment
|
|
$
|
—
|
|
|
$
|
47
|
|
Recognition or warrants issued in connect with debt modification
|
|
$
|
—
|
|
|
$
|
1,862
|
|
(14)
Related Party Transactions
Royalty
Opportunities, which owns approximately 20%
of the Company’s outstanding common stock, was the sole holder of our outstanding long-term debt and a party to the Second Amended
and Restated Credit Agreement, which was terminated in connection with our debt refinancing described under Note 8, “Debt”.
In addition, as described in more detail under Note
1, “Business Description and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form
10-K for the year ended December 31, 2020, we are party to an Investor Rights Agreement, Registration Rights Agreements and certain other
agreements with Royalty Opportunities and ROS Acquisition Offshore LP, which are funds affiliated with OrbiMed Advisors LLC (“OrbiMed”).
OrbiMed beneficially owns 84%
of the Company’s common stock.
All
related party transactions are reviewed and approved by the Audit Committee or the disinterested members of the full board of directors.
(15)
Segment and Geographic Information
The
Company’s management reviews financial results and manages the business on an aggregate basis. Therefore, financial results are
reported in a single operating segment: the development, manufacture, and marketing of orthopedic medical products and devices.
The
Company attributes revenues to geographic areas based on the location of the customer. Approximately 99% and 98% of sales were in the
United States for the three months ended September 30, 2021 and 2020, respectively, and 99% and 98% for the nine months ended September
30, 2021 and 2020, respectively. Total revenue by major geographic area is as follows (in thousands):
Schedule of Revenues by Geographic Region
|
|
Three
Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$
|
13,629
|
|
|
$
|
13,773
|
|
Rest of world
|
|
|
148
|
|
|
|
243
|
|
Total revenue
|
|
$
|
13,777
|
|
|
$
|
14,016
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$
|
40,813
|
|
|
$
|
38,340
|
|
Rest of world
|
|
|
480
|
|
|
|
982
|
|
Total revenue
|
|
$
|
41,293
|
|
|
$
|
39,322
|
|