Notes
to Unaudited Condensed Consolidated Financial Statements
(1)
Business Description and Summary of Significant Accounting Policies
Business
Description
The
accompanying condensed consolidated financial statements include the accounts of Xtant Medical Holdings, Inc. (“Xtant”),
a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc. (“Xtant Medical”), a Delaware corporation,
Bacterin International, Inc. (“Bacterin”), a Nevada corporation, and X-Spine Systems, Inc. (“X-spine”),
an Ohio corporation (Xtant, Xtant Medical, Bacterin and X-spine are jointly referred to herein as the “Company” or
sometimes “we”, “our” or “us”). All intercompany balances and transactions have been eliminated
in consolidation.
Xtant
is a global medical technology company focused on the design, development, and commercialization of a comprehensive portfolio
of orthobiologics and spinal implant systems to facilitate spinal fusion in complex spine, deformity and degenerative procedures.
The accompanying
interim condensed consolidated financial statements of Xtant for the three and nine months ended September 30, 2018 and 2017 are
unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America. They do
not include all disclosures required by generally accepted accounting principles for annual consolidated financial statements,
but in the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation.
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current
year. For the purpose of providing more concise consolidated statements of operations, restructuring expenses, previously included
in Other expense (income) in the prior year, were reclassified to Operating Expenses.
Interim results are not
necessarily indicative of results which may be achieved in the future for the full year ending December 31, 2018.
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, 2017. The accounting policies set forth in those annual
consolidated financial statements are the same as the accounting policies utilized in the preparation of these condensed consolidated
financial statements, except as modified for appropriate interim consolidated financial statement presentation.
As described in more detail
below, effective as of February 13, 2018, the Company effected a 1-for-12 reverse split of its common stock (the “Reverse
Stock Split”). The Reverse Stock Split is reflected in the share amounts in all periods presented in this report.
Corporate
Restructuring
Restructuring
Agreement
On
January 11, 2018, we entered into a Restructuring and Exchange Agreement (the “Restructuring Agreement”) with ROS
Acquisition Offshore LP, OrbiMed Royalty Opportunities II, LP (collectively referred to herein as the “Investors”),
Bruce Fund, Inc., Park West Partners International, Limited (“PWPI”), Park West Investors Master Fund, Limited (“PWIMF”),
and Telemetry Securities, L.L.C., and with the Investors, are collectively referred to herein as the “Holders”.
Pursuant
to the Restructuring Agreement, and following the execution of the Sixth Amendment to the 2017 Notes, described in the “Debt”
and “Equity” sections below, on January 17, 2018, the Investors converted the 6.00% convertible senior unsecured notes
due 2021, plus accrued and unpaid interest, at the $9.11 per share conversion rate originally provided thereunder (the “2017
Notes”), into 189,645 shares of our common stock.
After
giving effect to the Reverse Stock Split (described below), $70.3 million aggregate principal amount of our then outstanding 6.00%
convertible senior unsecured notes due 2021 held by the Holders (the “Remaining Notes”), plus accrued and unpaid interest,
were exchanged for newly-issued shares of our common stock at an exchange rate of 138.8889 shares per $1,000 principal amount
of the Remaining Notes, for an exchange price of $7.20 per share (the “Notes Exchange”). This resulted in the issuance
of 10,401,309 shares of our common stock to the Holders and the Investors acquiring an approximately 70% controlling interest
in our outstanding shares of common stock. Upon the completion of the Notes Exchange, all outstanding obligations under our convertible
senior secured notes were satisfied in full and the Indentures governing such notes were discharged.
Pursuant
to the terms of the Restructuring Agreement, we commenced a rights offering to allow our stockholders as of April 27, 2018 record
date to purchase up to an aggregate of 1,137,515 shares of our common stock at a subscription price of $7.20 per share. The rights
offering expired on June 18, 2018. We issued 129 shares of common stock in the rights offering and received $0.9 thousand gross
proceeds.
Amended
and Restated Certificate of Incorporation
On February 13, 2018,
following a special meeting of our stockholders, we filed with the Secretary of State of the State of Delaware a Certificate
of Amendment to our Certificate of Incorporation (the “Certificate Amendment”). The Certificate Amendment amended
and restated our Certificate of Incorporation (the “Charter”) to, among other things:
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effect
the Reverse Stock Split;
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after
giving effect to the Reverse Stock Split, decrease the number of authorized shares of common stock available for issuance
from 95,000,000 to 50,000,000 and increase the number of authorized shares of preferred stock available for issuance from
5,000,000 to 10,000,000;
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authorize
the Board of Directors (“Board”) to increase or decrease the number of shares of any series of our capital stock,
provided that such increase or decrease does not exceed the number of authorized shares or be less than the number of shares
then outstanding;
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authorize
the Board to issue new series of preferred stock without approval of the holders of common stock or other series of preferred
stock, with such powers, preferences and rights as may be determined by the Board;
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authorize
a majority of the Board to fix the number of our directors;
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indemnify
the members of the Board to the fullest extent permitted by law;
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remove
the classification of the Board to require all directors to be elected annually;
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provide
that special meetings of our stockholders may only be called by the Board, the chairman of the Board or our chief executive
officer;
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provide
that no stockholder will be permitted cumulative voting at any election of directors;
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elect
not to be governed by Section 203 of the Delaware General Corporation Law (the “DGCL”);
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elect
the Court of Chancery of the State of Delaware to be the exclusive forum for any derivative action or proceeding brought on
our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers or other employees, any
action under the DGCL, our Charter or bylaws or any actions governed by the internal affairs doctrine; and
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require
the vote of at least two-thirds of the voting power of the then outstanding shares of our capital stock to amend or repeal
certain provisions of our Charter.
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The
Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on February 13, 2018, and our common stock began trading on
a split-adjusted basis when the market opened on February 14, 2018. Upon the effectiveness of the Reverse Stock Split, every 12
shares of our issued and outstanding common stock automatically converted into one share of common stock, without any change in
the par value per share. In addition, a proportionate adjustment was made to the per share exercise or conversion price and the
number of shares issuable upon the exercise of all of our outstanding stock options and convertible securities to purchase shares
of common stock and the number of shares underlying restricted stock awards and reserved for issuance pursuant to our equity incentive
compensation plan. Any fraction of a share of common stock that would otherwise have resulted from the Reverse Stock Split was
rounded down to the nearest whole share. All share and per share amounts have been retroactively restated to reflect the Reverse
Stock Split.
Private
Placement SPA
On
February 14, 2018, we entered into a Securities Purchase Agreement (the “Private Placement SPA”) with the Investors
pursuant to which the Investors purchased from us an aggregate of 945,819 shares of our common stock, at a price of $7.20 per
share, for aggregate proceeds of $6.8 million.
Investor
Rights Agreement
Effective
February 14, 2018, we entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Holders.
Under the Investor Rights Agreement, the Investors are permitted to nominate a majority of our directors and designate the chairperson
of the Board at subsequent annual meetings, as long as the Investors maintain an ownership threshold in the Company of at least
40% of our then outstanding common stock (the “Ownership Threshold”). If the Investors are unable to maintain the
Ownership Threshold, the Investor Rights Agreement contemplates a reduction of nomination rights commensurate with their ownership
interests.
For
so long as the Ownership Threshold is met, we must obtain the approval of the Investors to proceed with the following actions:
(i) issue new securities; (ii) incur over $0.25 million of debt in a fiscal year; (iii) sell or transfer over $0.25 million of
our assets or businesses or our subsidiaries in a fiscal year; (iv) acquire over $0.25 million of assets or properties in a fiscal
year; (v) make capital expenditures over $0.125 million individually, or $1.5 million in the aggregate during a fiscal year; (vi)
approve our annual budget; (vii) hire or terminate our chief executive officer; (viii) appoint or remove the chairperson of the
Board; and (ix) make, loans to, investments in, or purchase, or permit any subsidiary to purchase, any stock or other securities
in another entity in excess of $0.25 million in a fiscal year. As long as the Ownership Threshold is met, we may not increase
the size of the Board beyond seven directors without the approval of a majority of the directors nominated by the Investors.
The
Investor Rights Agreement grants the Holders the right to purchase from us a pro rata amount of any new securities that we may
propose to issue and sell. The Investor Rights Agreement may be terminated (a) upon the mutual written agreement of all the parties,
(b) upon written notice of the Company or an Investor, if such Investor’s ownership percentage of our then outstanding common
stock is less than 10%, or (c) upon written notice by the Investors. PWPI and PWIMF’s right to purchase from us a pro rata
amount of any new securities will also terminate at such time as their aggregate ownership percentage of our then outstanding
common stock is less than 8.5%.
Registration
Rights Agreement
Effective
February 14, 2018, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the
Holders. The Registration Rights Agreement requires us to, among other things, file with the U. S. Securities and Exchange Commission
(“SEC”) a shelf registration statement within 90 days of the date of the Registration Rights Agreement covering the
resale, from time to time, of our common stock issued. This registration statement became effective on June 4, 2018.
Second
Amended and Restated Bylaws
On
February 14, 2018, we amended and restated our current bylaws by adopting the Second Amended and Restated Bylaws of the Company
(the “Amended Bylaws”). The Amended Bylaws amended our existing bylaws to, among other things:
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provide
for annual and special meetings of stockholders to be held through remote communications;
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provide
for the election of any directors not elected at an annual meeting of stockholders to be elected at a special meeting of stockholders;
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declassify
the Board into one group of directors that will hold office until the subsequent annual meeting of stockholders and until
the election and qualification of such directors’ respective successors;
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provide
for the filling of a new directorship or director vacancy by the affirmative vote of the holders of a majority of the voting
power of our shares of stock;
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allow
for a majority of the Board present to adjourn a Board meeting if a quorum is not met;
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unless
otherwise restricted in the Amended Bylaws or our Charter, provide the Board with the authority to fix the compensation of
directors, including without limitation, compensation for services as members of Board committees;
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allow
us to enter into an agreement with a stockholder to restrict the transfer of shares held by such stockholder in any manner
not prohibited by the DGCL; and
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allow
the Board to declare dividends on our capital stock, subject to any provisions of our Charter and applicable law.
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Concentrations
and Credit Risk
The
Company’s accounts receivables are due from a variety of health care organizations and distributors throughout the world.
No single customer accounted for more than 10% of revenue or accounts receivable for the comparable periods. The Company provides
for uncollectible amounts when specific credit issues arise. Management’s estimates for uncollectible amounts have been
adequate during prior periods, and management believes that all significant credit risks have been identified at September 30,
2018.
Use
of Estimates
The preparation of the
consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to
the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the period. Significant estimates include the carrying
amount of property and equipment, goodwill, and intangible assets and liabilities; valuation allowances for trade receivables,
inventory, and deferred income tax assets and liabilities; valuation of the warrant derivative liability, debt modification,
inventory, and estimates for the fair value of stock options grants and other equity awards upon which the Company determines
stock-based compensation expense. Actual results could differ from those estimates.
Long-Lived
Assets
Long-lived
assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. Management reviewed assumptions and tested intangible assets as of September 30, 2018 and
determined that no impairment of the carrying value of the long-lived assets existed during the third quarter of 2018.
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. In its
evaluation of goodwill, the Company performs an assessment of qualitative factors to determine if it is more-likely-than-not that
goodwill might be impaired. The results from the assessment and a step 1 analysis allowed the Company to conclude that goodwill
was not impaired as of December 31, 2017. The Company conducts its impairment test on an annual basis.
Revenue
Recognition
The
Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2014-09, Topic 606,
Revenue from Contracts
with Customers
, effective January 1, 2018. Given that our revenue recognition has remained generally the same as in prior
years, the Company has elected the modified retrospective method of adoption. As of December 31, 2017, we finalized our assessment
of the impact of the standard on the consolidated financial statements and determined adoption of Topic 606 was immaterial to
our consolidated financial statements and no adjustment was necessary.
The
Company’s contracts with its customers are generally reviewed and revised on an annual basis. The Company does not incur
upfront costs or exclusivity fees in conjunction with entering into a customer contract. The Company’s customer contracts
do not provide for percentage of completion performance measures or contingent consideration. The Company does not have deferred
or unearned revenue arrangements with its customers that would give rise to contract liabilities. No contract assets or contract
liabilities are recorded in our consolidated balance sheets as of September 30, 2018 or December 31, 2017.
The
Company ships to certain customers under consignment arrangements whereby the Company’s product is stored by the customer.
The customer is required to report usage of the product to the Company and, upon such notice, the Company invoices the customer
and revenue is recognized.
In
the normal course of business, the Company accepts returns of product that have not been implanted. Product returns are not
material to the Company’s consolidated statements of operations. The Company accounts for shipping and handling
activities as a fulfillment cost rather than a separate performance obligation. The Company’s policy is to record
revenue net of any applicable sales, use, or excise taxes. Payment terms are generally net 30 days from invoice date and some
customers are offered discounts for early pay.
Research
and Development
Research
and development costs, which are principally related to internal costs for the development of new devices and biologics are expensed
as incurred.
Net
Loss Per Share
Basic net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Shares
issued during the period and shares reacquired during the period are weighted for the portion of the period that they were outstanding.
Diluted net income (loss) per share is computed in a manner consistent with that of basic earnings per share while giving effect
to all potentially dilutive shares of common stock outstanding during the period, which include the assumed exercise of stock
options and warrants using the treasury stock method. Diluted net loss per share was the same as basic net loss per share for
the three and nine months ended September 30, 2018 and 2017, as shares issuable upon the exercise of stock options and warrants
were anti-dilutive as a result of the net losses incurred for those periods. Dilutive earnings per share are not reported as their
effects of including 2,156,882 and 602,607 outstanding stock options and warrants for the three and nine months ended September
30, 2018 and 2017, respectively, are anti-dilutive.
Fair
Value of Financial Instruments
The
carrying values of financial instruments, including trade accounts receivable, accounts payable, other accrued expenses and long-term
debt, approximate their fair values based on terms and related interest rates.
The
Company follows a framework for measuring fair value. The framework provides a hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the
fair value hierarchy are described below:
Level
1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level
2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
Level
3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. As of September 30, 2018, and December 31, 2017, there were no reclassifications in financial assets
or liabilities between Level 1, 2 or 3 categories.
The
following table sets forth by level, within the fair value hierarchy, our liabilities that are measured at fair value on a recurring
basis:
Warrant
derivative liability
(in thousands):
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As of
September 30,
2018
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As of
December 31,
2017
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Level 1
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-
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-
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Level 2
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-
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-
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Level 3
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$
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48
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$
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131
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The
valuation technique used to measure fair value of the warrant liability is based on a lattice valuation model and significant
assumptions and inputs determined by us (See Note 9, “Warrants” below).
Level
3 Changes
The
following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018:
Warrant
derivative liability
Balance at January 1, 2017
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$
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334
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Gain recognized in earnings
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(203
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)
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Balance at January 1, 2018
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$
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131
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Gain recognized in earnings
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(83
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)
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Balance at September 30, 2018
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$
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48
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During
the nine months ended September 30, 2018, the Company did not change any of the valuation techniques used to measure its liabilities
at fair value.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and
operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated
financial statements, with certain practical expedients available. While we are still evaluating the impact of our pending adoption
of the new standard on our consolidated financial statements, we expect that upon adoption we will recognize ROU assets and lease
liabilities and that the amounts could be material to our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13
Financial Instruments - Credit losses: Measurement of Credit Losses on Financial
Instruments
, which amends certain provisions of ASC 326,
Financial Instruments-Credit Loss
. The ASU changes the impairment
model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities,
loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally
will result in the earlier recognition of allowances for losses. The ASU is effective for annual reporting periods beginning after
December 15, 2019, including interim periods within those annual periods, and will be applied as a cumulative effect adjustment
to retained earnings as of the beginning of the first reporting period for which the guidance is effective. We currently do not
expect that the adoption of these provisions will have a material effect on our consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-07,
Stock Compensation (Topic 718)
which amends the current standard. Specifically,
the new standard expands the scope of Topic 718 to include share-based payment awards to non-employees. Additionally, the ASU
expands and amends the current standard to include and realign consistent with the changes to revenue standard Topic 606. Management
expects that the adoption of this new standard will qualitatively impact the Company’s financial reporting. See further
information in the Stock-Based Compensation of the management disclosure section below.
(2)
Inventories, Net
Inventories
consist of the following
(in thousands):
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September 30,
2018
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December 31,
2017
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Current inventories:
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Raw materials
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$
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3,820
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$
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4,277
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Work in process
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1,087
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1,515
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Finished goods
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24,386
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|
|
|
23,270
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Gross current inventories
|
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29,293
|
|
|
|
29,062
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Reserve for obsolescence
|
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|
(7,106
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)
|
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(6,833
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)
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Current inventories, net
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22,187
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|
|
|
22,229
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Non-current inventories:
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Finished goods
|
|
|
765
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|
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|
1,072
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Reserve for obsolescence
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|
|
(765
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)
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|
(878
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)
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Non-current inventories, net
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-
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|
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|
194
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Total inventories, net
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$
|
22,187
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$
|
22,423
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The
Company provides implants and biologic inventory on consignment through its various sales channels to logistically place the inventory
near the anticipated surgical location. Consigned inventory was approximately $9.8 million and $12.0 million at September 30,
2018 and December 31, 2017, respectively.
(3)
Property and Equipment, Net
Property
and equipment, net are as follows
(in thousands):
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September 30,
2018
|
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December 31,
2017
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Equipment
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|
$
|
4,157
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|
|
$
|
4,471
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Computer equipment
|
|
|
489
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|
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|
489
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Computer software
|
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|
499
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|
|
|
524
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Furniture and fixtures
|
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|
164
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|
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|
215
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Leasehold improvements
|
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4,022
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|
|
|
4,030
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Vehicles
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|
10
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|
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|
10
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Surgical instruments
|
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11,641
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|
|
|
11,462
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Total cost
|
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20,982
|
|
|
|
21,201
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Less: accumulated depreciation
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(12,913
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)
|
|
|
(11,288
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)
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Property and equipment, net
|
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$
|
8,069
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|
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$
|
9,913
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The
Company deploys certain surgical instruments through its various sales channels for use with implant and biologic inventory to
be utilized during surgical procedures. The instruments are classified as non-current assets within property and equipment and
depreciated using the straight-line method over a five-year useful life.
The
net book value of these surgical instruments was approximately $5.1 million and $4.6 million at September 30, 2018 and December
31, 2017, respectively. Instruments are recorded at cost and are carried at net book value (cost less accumulated depreciation).
Depreciation
expense related to property and equipment, including property under capital lease, for the first nine months of 2018 and 2017
was $2.4 million and $3.9 million respectively.
The
Company leases certain equipment under capital leases. For financial reporting purposes, minimum lease payments relating to the
assets have been capitalized. As of September 30, 2018, the Company has recorded $1.6 million gross assets in Equipment and $0.8
million of accumulated depreciation relating to assets under capital leases.
(4)
Intangible Assets
The
following table sets forth information regarding intangible assets (
in thousands):
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September 30,
2018
|
|
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December 31,
2017
|
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Patents
|
|
$
|
847
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|
|
$
|
847
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Acquisition related intangibles:
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|
|
|
|
|
|
|
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Technology
|
|
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13,789
|
|
|
|
13,789
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Customer relationships
|
|
|
9,911
|
|
|
|
9,911
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|
Tradename
|
|
|
1,867
|
|
|
|
1,867
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|
Non-compete
|
|
|
41
|
|
|
|
41
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|
Accumulated amortization
|
|
|
(15,207
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)
|
|
|
(12,629
|
)
|
Intangible assets, net
|
|
$
|
11,248
|
|
|
$
|
13,826
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense:
|
|
$
|
2,578
|
|
|
$
|
4,629
|
|
The
following is a summary of estimated future amortization expense for intangible assets as of September 30, 2018
(in
thousands):
Remainder of 2018
|
|
$
|
859
|
|
2019
|
|
|
3,252
|
|
2020
|
|
|
2,170
|
|
2021
|
|
|
1,409
|
|
2022
|
|
|
1,051
|
|
Thereafter
|
|
|
2,507
|
|
Total
|
|
$
|
11,248
|
|
(5)
Accrued Liabilities
Accrued
liabilities consist of the following
(in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accrued stock compensation
|
|
$
|
156
|
|
|
$
|
120
|
|
Wages/commissions payable
|
|
|
2,745
|
|
|
|
2,831
|
|
Accrued interest payable
|
|
|
-
|
|
|
|
10,835
|
|
Other accrued expenses
|
|
|
1,075
|
|
|
|
2,059
|
|
Accrued liabilities
|
|
$
|
3,976
|
|
|
$
|
15,845
|
|
(6)
Debt
Convertible
Notes
During
the first quarter of 2018 in connection with our Restructuring, all of the outstanding 6.00% convertible senior unsecured notes
due 2021 were converted into shares of our common stock and the Indenture governing such notes was discharged.
Twenty-Second
Amendment to the Amended and Restated Credit Agreement
Effective
January 30, 2018, the Company and Investors entered into the Twenty-Second Amendment to the Amended and Restated Credit Agreement,
which amended the Amended and Restated Credit Agreement dated July 27, 2015 by and between Bacterin and ROS Acquisition Offshore
LP (collectively, the “Amended and Restated Credit Agreement” and the facility created under such agreement, the “Credit
Facility”). This amendment further deferred the Company’s accrued interest payment date for the fiscal quarters ended
on December 31, 2016, March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017 until February 28, 2018.
Twenty-Third
Amendment to the Amended and Restated Credit Agreement
Effective February 14,
2018, the Company and Investors entered into the Twenty-Third Amendment to the Amended and Restated Credit Agreement, which further
amended the Amended and Restated Credit Agreement and terms of the Credit Facility. As of this amendment, the interest payable
has been carried forward and as modified, the interest rate options within the Credit Facility are as follows: (a) through December
31, 2018, we will have the option at our sole discretion (i) to pay PIK Interest at LIBOR (as defined in the Credit Facility)
plus 12% or (ii) pay cash interest at LIBOR plus 10%; (b) beginning January 1, 2019 through June 30, 2019, we will have
the option at our sole discretion to either (i) pay PIK Interest at LIBOR plus 15% or (ii) pay cash interest at LIBOR plus 10%;
and (c) beginning July 1, 2019 through the maturity date of the Credit Facility, we will pay cash interest at LIBOR plus 10%.
The amendment also reduced the prepayment or repayment fee under the Credit Facility to 1%.
This amendment also modified
the financial covenants in the Amended and Restated Credit Agreement, including removing the minimum revenue
covenant, providing a minimum liquidity covenant, a consolidated leverage ratio covenant, and a minimum consolidated EBITDA covenant,
all as defined in the Amended and Restated Credit Agreement. As of September 30, 2018, we were in compliance with all applicable
covenants.
Twenty-Fourth Amendment to the Amended and
Restated Credit Agreement
On September 17,
2018, the Company and Investors entered into the Twenty-Fourth Amendment to the Amended and Restated Credit Agreement (the “24
th
Amendment”), which further amended the Amended and Restated Credit Agreement and terms of the Credit Facility, effective
as of April 1, 2018. Under the terms of the 24
th
Amendment, no interest will be charged on the loans under the Credit
Facility (the “Loans”) from April 1, 2018 until June 30, 2018.
Due to the interest
rate relief provided by the 24
th
Amendment, the Company performed an assessment of the changes to the terms of the
Credit Facility in accordance ASC 470
, Debt.
The Credit Facility was modified based on an evaluation of the present value
of cash flows for the old and new debt instruments. Given the modification, a new effective interest rate for the modified loan
was calculated based on the carrying amount of the debt and the present value of the revised future cash flows. The modified interest
rate is effective through the remaining life of the loan.
Twenty-Fifth
Amendment to the Amended and Restated Credit Agreement
Also,
on September 17, 2018, the Company and the Investors entered into the Twenty-Fifth Amendment to the Amended and Restated Credit
Agreement (the “25
th
Amendment”), which further amended the Amended and Restated Credit Agreement and terms
of the Credit Facility, effective as of August 1, 2018. Under the terms of the 25
th
Amendment:
|
●
|
no
interest will be charged on the Loans under the Credit Facility from July 1, 2018 until December 31, 2018;
|
|
|
|
|
●
|
the
Optional PIK Interest (as such term is defined in the Amended and Restated Credit Agreement) was decreased from 15% plus the
LIBO Rate (as such term is defined in the Amended and Restated Credit Agreement) to 10% plus the LIBO Rate, with a 2.3125%
floor;
|
|
|
|
|
●
|
a
LIBO Rate floor of 2.3125% was added; and
|
|
|
|
|
●
|
the
fee due upon payment, prepayment or repayment of the principal amount of the Loans under the Credit Facility, whether on the
maturity date or otherwise, was increased to 2% from 1% of the aggregate principal amount of such payment, prepayment or repayment.
|
The Company issued warrants
to purchase an aggregate of 1.2 million shares of Company common stock to the Investors, with an exercise price of $0.01 per share
and an expiration date of August 1, 2028 (collectively, the “Warrants”). The issuance of the Warrants occurred on
September 17, 2018 and was a condition to the effectiveness of the 25
th
Amendment. (See Note 9, “Warrants”
below).
The Company is
required to pay a 2% exit fee at the maturity of the Loans on July 31, 2020.
Long-term
debt consists of the following
(in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Amounts due under the Credit Facility
|
|
$
|
50,673
|
|
|
$
|
55,787
|
|
PIK interest payable related to the Credit Facility
|
|
|
25,454
|
|
|
|
11,582
|
|
6% convertible senior unsecured notes due 2021
|
|
|
-
|
|
|
|
71,865
|
|
Gross long-term debt
|
|
|
76,127
|
|
|
|
139,234
|
|
Less: total debt issuance costs
|
|
|
(183
|
)
|
|
|
(1,272
|
)
|
Long-term debt, less issuance costs
|
|
$
|
75,944
|
|
|
$
|
137,962
|
|
All
gross long-term debt will mature July 31, 2020 and become payable at that time.
(7)
Equity
Convertible
Note Indenture
During
the first quarter of 2018, in connection with our Restructuring (defined above), all of the outstanding 6.00% convertible senior
unsecured notes due 2021 were converted or exchanged into shares of our common stock and the Indenture governing such notes was
discharged. On January 17, 2018, the Investors converted $1.6 million aggregate principal amount of 6.00% convertible senior unsecured
promissory notes due in 2021, which were issued effective January 17, 2017, plus accrued and unpaid interest, into 189,645 shares
of our common stock. On February 14, 2018, an additional $70.3 million aggregate principal amount of notes, plus accrued and unpaid
interest, were exchanged for 10,401,309 newly-issued shares of our common stock.
Private
Placement SPA
On
February 14, 2018, we sold to the Investors pursuant to the Private Placement SPA 945,819 shares of our common stock, at a price
of $7.20 per share, for aggregate proceeds of $6.8 million.
Registration
Rights Agreement
On
May 15, 2018, we filed a shelf resale registration statement with the SEC pursuant to our obligations under the Registration Rights
Agreement. This registration statement was declared effective by the SEC on June 4, 2018.
Rights
Offering
On
May 18, 2018, we distributed to holders of our common stock, at no charge, non-transferable subscription rights to purchase up
to an aggregate of 1,137,515 shares of our common stock (the “Rights Offering”). In the Rights Offering, holders received
0.0869816 subscription rights for each share of common stock held on the record date, April 27, 2018. The units were priced at
$7.20 per unit. The Rights Offering expired on June 18, 2018, at which time the rights were no longer exercisable. We issued 129
shares of our common stock in the Rights Offering, resulting in $0.9 thousand in gross proceeds to us.
(8)
Stock-Based Compensation
Xtant
Medical Holdings, Inc. 2018 Equity Incentive Plan
On August 1, 2018, our
stockholders approved the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) at the 2018 annual
meeting of stockholders of Xtant. The 2018 Plan became effective immediately upon approval by our stockholders and will expire
on July 31, 2028, unless terminated earlier. The 2018 Plan replaced the Amended and Restated Xtant Medical Equity Incentive Plan
(the “Prior Plan”) with respect to future grants of equity awards. The Prior Plan will continue to govern equity
awards granted under the Prior Plan. The 2018 Plan permits the Board, or a committee thereof, to grant to eligible employees,
non-employee directors and consultants of the Company non-statutory and incentive stock options, stock appreciation rights, restricted
stock awards, restricted stock units, deferred stock units, performance awards, non-employee director awards, and other stock-based
awards. The Board may select 2018 Plan participants and determine the nature and amount of awards to be granted. Subject to adjustment
as provided in the 2018 Plan, the number of shares of our common stock available for issuance under the 2018 Plan is 1,307,747
shares.
After the approval and
effectiveness of the 2018 Plan, the Board granted various awards thereunder to certain officers and employees, consisting
of stock option grants to purchase an aggregate of 410,770 shares of our common stock and 40,000 shares of restricted stock units.
In addition, a restricted stock award for 26,042 shares was granted to one of our non-employee directors.
As of September 30, 2018,
of the 1,307,747 shares of common stock available for issuance under the 2018 Plan, 476,812 shares were subject to outstanding
awards under the 2018 Plan and 830,935 shares remained available for issuance. Shares of common stock issued under the 2018
Plan may be newly issued shares or reacquired shares. From time to time, we have granted options to purchase shares of our
common stock outside of any stockholder-approved plan to new hires (collectively the “Non-Plan Grants”).
Stock options granted under
the 2018 Plan may be either incentive stock options to employees, as defined in Section 422A of the Internal Revenue Code of 1986,
or non-qualified stock options. The exercise price of all stock options granted under the 2018 Plan must be at least equal to the
fair market value of the shares of common stock on the date of the grant. The 2018 Plan is administered by the Board. Stock options
granted under the 2018 Plan are generally not transferable, vest in installments over the requisite service period and are exercisable
during the stated contractual term of the option only by such optionee.
Stock-based compensation
expense recognized in the condensed consolidated statements of operations for the nine months ended September 30, 2018 and
2017 is based on awards expected to vest and reflects an estimate of awards that will be forfeited. ASC 718 requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. Stock options to purchase an aggregate of 410,770 shares of common stock were issued in the first nine
months of 2018; zero options were issued in the comparable period in 2017.
Stock option activity,
including options granted under the 2018 Plan, the Prior Plan and the Non-Plan Grants, was as follows
(in
thousands, except number of shares and per share amounts):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Average
Exercise
|
|
|
Fair
Value at
|
|
|
|
|
|
Average
Exercise
|
|
|
Fair
Value at
|
|
|
|
Shares
|
|
|
Price Per
Share
|
|
|
Grant Date
Per Share
|
|
|
Shares
|
|
|
Price Per
Share
|
|
|
Grant Date
Per Share
|
|
Outstanding at January 1
|
|
|
67,465
|
|
|
$
|
71.03
|
|
|
$
|
36.85
|
|
|
|
100,492
|
|
|
$
|
62.52
|
|
|
$
|
33.84
|
|
Issued
|
|
|
410,770
|
|
|
|
5.71
|
|
|
|
3.91
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
(33,002
|
)
|
|
|
53.23
|
|
|
|
36.42
|
|
|
|
(1,611
|
)
|
|
|
137.04
|
|
|
|
94.92
|
|
Outstanding at September 30
|
|
|
445,233
|
|
|
$
|
12.09
|
|
|
$
|
6.49
|
|
|
|
98,881
|
|
|
$
|
61.32
|
|
|
$
|
33.60
|
|
Exercisable at September 30
|
|
|
34,463
|
|
|
$
|
135.23
|
|
|
$
|
67.26
|
|
|
|
32,335
|
|
|
$
|
137.04
|
|
|
$
|
68.04
|
|
The aggregate intrinsic
value of options outstanding as of September 30, 2018 was zero because the closing price of the stock at September 30, 2018 was
less than the exercise prices of all options issued under the Prior Plan or the 2018 Plan were fully vested and
expensed due to the change of control as a result of the Corporate Restructuring, noted above.
Total stock-based compensation
expense recognized for employees and directors was $0.6 and $0.4 million for the nine months ended September 30,
2018 and 2017, respectively and was recognized as Non-cash compensation expense as discussed below.
During the nine months
ended September 30, 2018, the Board granted an aggregate of 93,750 shares of restricted stock to our non-employee directors
of the Company. These awards will vest and become non-forfeitable with respect to one-half of the underlying shares on February
14, 2019 and the remaining half on February 14, 2020. The total grant date fair value of these restricted stock awards
amounts to $0.4 million in the aggregate or $4.80 per share and is being recognized ratably over the vesting period. During the
nine months ended September 30, 2018, $0.2 million was expensed as compensation.
On September 15, 2018,
the Company issued 40,000 shares at $6.20 per share of restricted stock to an employee and recognized $5 thousand of expense
in the nine months ended September 30, 2018 associated with this award.
On July 25, 2017, we granted
25,974 shares of restricted stock to certain former non-employee directors of the Company. These awards became fully vested and
non-forfeitable on February 13, 2018 as a result of the Restructuring, which constituted a change of control under the Prior
Plan. The total expense of these restricted stock awards, which amounted to $0.2 million in the aggregate or $9.24 per share,
was being recognized over the vesting period as Non-cash compensation expense. During the three months ended March 31, 2018, the
remaining $0.1 million of expense was recognized as non-cash compensation expense.
Effective October 6, 2016,
the Board granted our former Chief Executive Officer, an option to purchase 25,000 shares of common stock at an exercise price
of $13.32 per share. This option was granted outside the Prior Plan as an inducement option. As a result of the Restructuring,
which constituted a change of control under the option agreement, this option became fully vested on February 13, 2018 and was
fully expensed during the quarter ended March 31, 2018. On August 15, 2018, the Board granted our former Chief Executive Officer
an additional option to purchase 200,000 shares of common stock at an exercise price of $6.20 per share, which was scheduled to
vest and become exercisable in four equal annual installments, commencing on August 15, 2019. The option to purchase 200,000
shares of common stock terminated as a result of the termination of his employment and his vested options to purchase 25,000 shares
of common stock will remain exercisable until January 10, 2019, which is the 90
th
day after his termination date.
(9) Warrants
The Company issued warrants
to purchase an aggregate of 1.2 million shares of Company common stock to the Investors, with an exercise price of $0.01 per share
and an expiration date of August 1, 2028. The issuance of the Warrants occurred on September 17, 2018 and was a condition to the
effectiveness of the 25
th
Amendment. The number of shares of Company common stock issuable upon exercise of the Warrants
are subject to standard and customary anti-dilution provisions for stock splits, stock dividends or similar transactions.
The following table summarizes
our warrant activities for the nine months ended September 30, 2018:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding as of January 1, 2017
|
|
|
524,277
|
|
|
$
|
26.76
|
|
Expired
|
|
|
(4,360
|
)
|
|
|
135.36
|
|
Outstanding at January 1, 2018
|
|
|
519,917
|
|
|
$
|
25.68
|
|
Issued
|
|
|
1,200,000
|
|
|
|
0.01
|
|
Expired
|
|
|
(8,268
|
)
|
|
|
72.56
|
|
Outstanding at September 30, 2018
|
|
|
1,711,649
|
|
|
$
|
7.46
|
|
The
estimated fair value was derived using a valuation model with the following weighted-average assumptions:
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Value of underlying common stock (per share)
|
|
$
|
3.85
|
|
|
$
|
7.92
|
|
Risk-free interest rate
|
|
|
2.10
|
%
|
|
|
1.85
|
%
|
Expected term in years
|
|
|
3.9
|
|
|
|
4.9
|
|
Volatility
|
|
|
62
|
%
|
|
|
98
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
following table summarizes our activities related to warrants accounted for as a derivative liability for the nine months ended
September 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Balance at January 1,
|
|
|
93,759
|
|
|
|
93,759
|
|
Derivative warrants
expired
|
|
|
(6,250
|
)
|
|
|
-
|
|
Balance at September
30,
|
|
|
87,509
|
|
|
|
93,759
|
|
We utilize a lattice valuation
model to determine the fair market value of certain warrants accounted for as liabilities. The lattice valuation model
accommodates the probability of exercise price adjustment features as outlined in the warrant agreements. We recorded an unrealized
gain of $0.1 million resulting from the change in the fair value of the warrant derivative liability for the first nine
months of 2018. Under the terms of some of our warrant agreements, at any time while the warrant is outstanding, the exercise
price per share can be reduced to the price per share of future subsequent equity sales of our common stock or a common stock
equivalent that is lower than the exercise price per share as stated in the warrant agreement.
(10)
Commitments and Contingencies
Operating
Leases
We
lease six office facilities under non-cancelable operating lease agreements with expiration dates between 2019 and 2025. We have
the option to extend the six leases for up to another ten-year term and for one facility, we have the right of first refusal on
any sale.
Future
minimum payments for the next five years and thereafter as of September 30, 2018, under these leases, are as follows
(in
thousands):
Remainder of 2018
|
|
$
|
211
|
|
2019
|
|
|
688
|
|
2020
|
|
|
396
|
|
2021
|
|
|
375
|
|
2022
|
|
|
354
|
|
Thereafter
|
|
|
685
|
|
Total
|
|
$
|
2,709
|
|
Rent
expense was $0.9 million and $0.6 million for the nine months ended September 30, 2018 and 2017, respectively. Rent expense is
determined using the straight-line method of the minimum expected rent paid over the term of the agreement. We have no contingent
rent agreements.
Capital
Leases
Future
minimum payments for the next five years and thereafter as of September 30, 2018, under capital leases for equipment, are as follows
(in thousands):
Remainder of 2018
|
|
$
|
133
|
|
2019
|
|
|
502
|
|
2020
|
|
|
218
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total minimum lease payments
|
|
|
853
|
|
Less amount representing interest
|
|
|
(124
|
)
|
Present value of obligations under capital leases
|
|
|
729
|
|
Less current portion
|
|
|
(478
|
)
|
Long-term capital lease obligations
|
|
$
|
251
|
|
Litigation
On
August 10, 2017, a civil suit complaint was filed against Xtant in the United States District Court, District of Nevada by Axis
Spine NV, LLC (“Axis”), Case No. 2:17-CV-02147-APG-VCF. The complaint alleges breach of contract, breach of the implied
covenant of good faith and fair dealing, and tortious interference with prospective economic advantage with respect to an alleged
medical device distribution relationship between the parties. Axis seeks relief in the form of damages in an amount in excess
of $1.0 million. The Court is considering Xtant’s motions to dismiss and for summary judgment.
In
addition, we are engaged in ordinary routine litigation incidental to our business from time to time, including product liability
disputes.
Indemnification
Arrangements
Our
indemnification arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities
if our products or services infringe a third-party’s intellectual property rights. To date, we have not incurred any material
costs as a result of such warranties or indemnification provisions and have not accrued any liabilities related to such obligations
in the accompanying condensed consolidated financial statements.
We
have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines
and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened
to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out
of that person’s services as our director or officer or that person’s services provided to any other company or enterprise
at our request.
(11)
Income Taxes
In
evaluating the realizability of the net deferred tax assets, we take into account a number of factors, primarily relating to the
ability to generate taxable income. Where it is determined that it is likely that we will be unable to realize deferred tax assets,
a valuation allowance is established against the portion of the deferred tax asset. Because it cannot be accurately determined
when or if we will become profitable, a valuation allowance was provided against the entire deferred income tax asset balance.
The
Company did not recognize any interest or penalties related to income taxes for the nine months ended September 30, 2018 and 2017.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into legislation. At December 31, 2017, the
Company made a reasonable estimate of the effects on the existing deferred tax balances and recorded a provisional amount in the
2017 financial statements.
On
December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP
in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations)
in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company
has provisionally determined that there is no tax deferred tax benefit or expense with respect to the remeasurement of certain
deferred tax assets and liabilities due to the full valuation allowance against net deferred tax assets. The Company is still
analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances
or potentially give rise to new deferred tax amounts. There has been no change to the provisional adjustment recorded in 2017
nor during the first nine months of 2018. Additional analysis of the law and the impact to the Company will be performed and any
impact will be recorded in the respective period in 2018.
(12)
Supplemental Disclosure of Cash Flow Information
Supplemental
cash flow information is as follows
(in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
186
|
|
|
$
|
386
|
|
Non-cash activity:
|
|
|
|
|
|
|
|
|
Issuance of capital leases
|
|
$
|
84
|
|
|
$
|
967
|
|
Interest converted into common stock
|
|
$
|
556
|
|
|
$
|
480
|
|
Conversion of convertible debt to equity
|
|
$
|
71,865
|
|
|
$
|
-
|
|
Convertible PIK interest
|
|
$
|
4,764
|
|
|
$
|
-
|
|
Conversion of interest related to the Credit Facility to long-term debt
|
|
$
|
7,977
|
|
|
$
|
-
|
|
Write-off of convertible debt issuance cost
|
|
$
|
1,012
|
|
|
$
|
-
|
|
Debt discount on long-term credit facility
|
|
$
|
5,114
|
|
|
$
|
-
|
|
RSU vesting
|
|
$
|
120
|
|
|
$
|
-
|
|
Transfer of inventory to property and equipment
|
|
$
|
448
|
|
|
$
|
-
|
|
(13)
Related Party Transactions
The
Investors, which collectively own approximately 70% of our outstanding common stock, are the sole holders of our outstanding long-term
debt. In addition, as described in more detail under Note (1), we are parties to an Investor Rights Agreement and Registration
Rights Agreement with the Investors. Transactions between the Company and the Investors are conducted under the provisions of
Amended and Restated Credit Agreement, the Investor Rights Agreement and the Registration Rights Agreement, as noted above.
(14)
Segment and Geographic Information
The
Company’s management reviews financial results and manages the business on an aggregate basis. Therefore, financial results
are reported in a single operating segment: the development, manufacture and marketing of orthopedic medical products.
The
Company attributes revenues to geographic areas based on the location of the customer. Approximately 95% and 97% of sales were
in the United States, respectively, for the nine months ended September 30, 2018 and 2017. Total revenue by major geographic area
is as follows (in thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
51,288
|
|
|
$
|
61,443
|
|
Rest of world
|
|
|
2,653
|
|
|
|
1,837
|
|
Total revenue
|
|
$
|
53,941
|
|
|
$
|
63,280
|
|
(15)
Subsequent Events
The
Board appointed Michael Mainelli as Interim Chief Executive Officer, replacing Carl D. O’Connell, effective October 12,
2018. In connection with Mr. Mainelli’s appointment as an interim officer of the Company, the Company entered into an interim
executive employment agreement and stock option award agreement with him the details of which were provided in the Company’s
Current Report on Form 8-K filed with the SEC on October 15, 2018.
In
connection with Mr. O’Connell’s departure, the Company intends to enter into a standard and customary separation agreement
and release with Mr. O’Connell the details of which were also provided in the Company’s Current Report Form 8-K filed
with the SEC on October 15, 2018. The Company anticipates separation costs of approximately $0.6 million.