| Business Description, Basis of Presentation and Summary of Significant Accounting Policies | (1) Business
Description, Basis of Presentation and Summary of Significant Accounting Policies Business
Description and Basis of Presentation The
accompanying condensed consolidated financial statements include the accounts of Xtant Medical Holdings, Inc. (“Xtant”),
a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc. (“Xtant Medical”), a Delaware corporation,
Bacterin International, Inc. (“Bacterin”), a Nevada corporation, and X-spine Systems, Inc. (“X-spine”),
an Ohio corporation (Xtant, Xtant Medical, Bacterin, and X-spine are jointly referred to herein as the “Company” or
sometimes “we”, “our,” or “us”). All intercompany balances and transactions have been eliminated
in consolidation. Xtant
is a global medical technology company focused on the design, development, and commercialization of a comprehensive portfolio
of orthobiologics and spinal implant systems to facilitate spinal fusion in complex spine, deformity, and degenerative procedures. The
accompanying condensed consolidated financial statements of Xtant for the three and six months ended June 30, 2019 and 2018 are
unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America. They do
not include all disclosures required by generally accepted accounting principles for annual consolidated financial statements,
but in the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation.
Certain prior year amounts have been reclassified to conform with current year presentation. Interim
results are not necessarily indicative of results that may be achieved in the future for the full year ending December 31, 2019. These
condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes
thereto, which are included in Xtant’s Annual Report on Form 10-K for the year ended December 31, 2018. The accounting policies
set forth in those annual consolidated financial statements are the same as the accounting policies utilized in the preparation
of these condensed consolidated financial statements, except as modified for appropriate interim consolidated financial statement
presentation. As
described in more detail below, effective as of February 13, 2018, the Company effected a 1-for-12 reverse split of its common
stock (the “Reverse Stock Split”). The Reverse Stock Split is reflected in the share amounts in all periods presented
in this report. During
the preparation of this Quarterly Report on Form 10-Q, the Company identified an immaterial misstatement on the condensed consolidated
balance sheet as of June 30, 2018. The Accumulated deficit line item was overstated by $320 thousand and should have been reported
as $155.2 million instead of $155.5 million. The Total stockholders’ equity (deficit) and Total liabilities and stockholders’
equity (deficit) line items in the condensed consolidated balance sheet as of June 30, 2018 were correct. In addition, the Accumulated
deficit line item in subsequent Quarterly Reports on Form 10-Q and in the Annual Report on Form 10-K for the year ended December
31, 2018 were correct. Management evaluated the effect of this misstatement on the prior period and concluded that the prior period
was not materially misstated. Accordingly, the misstatement has been corrected in the second quarter of 2019 and in this Quarterly
Report on Form 10-Q. Specifically, the June 30, 2018 balance under the Retained deficit column in the condensed consolidated statements
of equity for the three and six months ended June 30, 2018 reflects a retained deficit of $155.2 million instead of $155.5 million. Corporate
Restructuring Restructuring
Agreement On
January 11, 2018, we entered into a Restructuring and Exchange Agreement (the “Restructuring Agreement”) with ROS
Acquisition Offshore LP, OrbiMed Royalty Opportunities II, LP (collectively referred to herein as the “Investors”),
Bruce Fund, Inc., Park West Partners International, Limited (“PWPI”), Park West Investors Master Fund, Limited (“PWIMF”),
and Telemetry Securities, L.L.C., collectively referred to herein as the “Holders.” Pursuant
to the Restructuring Agreement, and following the execution of the Sixth Amendment to the 2017 Notes, described in the “Debt”
and “Equity” sections below, on January 17, 2018, the Investors converted 6.00% convertible senior unsecured notes
due 2021, plus accrued and unpaid interest, at the $9.11 per share conversion rate originally provided thereunder (the “2017
Notes”), into 189,645 shares of our common stock. On
February 14, 2018, after giving effect to the Reverse Stock Split (described below), the $70.3 million aggregate principal amount
of our then outstanding 6.00% convertible senior unsecured notes due 2021 held by the Holders (the “Remaining Notes”),
plus accrued and unpaid interest, were exchanged for newly-issued shares of our common stock at an exchange rate of 138.8889 shares
per $1,000 principal amount of the Remaining Notes, for an exchange price of $7.20 per share (the “Notes Exchange”).
This resulted in the issuance of 10,401,309 shares of our common stock to the Holders and the Investors acquiring an approximately
70% controlling interest in our outstanding shares of common stock. Upon the completion of the Notes Exchange, all outstanding
obligations under our convertible senior secured notes were satisfied in full, and the Indentures governing such notes were discharged. Pursuant
to the terms of the Restructuring Agreement, we commenced a rights offering to allow our stockholders as of a record date of April
27, 2018 to purchase up to an aggregate of 1,137,515 shares of our common stock at a subscription price of $7.20 per share. The
rights offering expired on June 18, 2018. We issued 129 shares of common stock in the rights offering and received $0.9 thousand
gross proceeds. Amended
and Restated Certificate of Incorporation On
February 13, 2018, following a special meeting of our stockholders, we filed with the Secretary of State of the State of Delaware
a Certificate of Amendment to our Charter (the “Certificate Amendment”). The Certificate Amendment amended and restated
our Charter (the “Charter”) to, among other things:
● effect
the Reverse Stock Split;
● after
giving effect to the Reverse Stock Split, decrease the number of authorized shares of common stock available for issuance
from 95,000,000 to 50,000,000 and increase the number of authorized shares of preferred stock available for issuance from
5,000,000 to 10,000,000;
● authorize
the Board of Directors (“Board”) to increase or decrease the number of shares of any series of our capital stock,
provided that such increase or decrease does not exceed the number of authorized shares or represent less than the number
of shares then outstanding;
● authorize
the Board to issue new series of preferred stock without approval of the holders of common stock or other series of preferred
stock, with such powers, preferences, and rights as may be determined by the Board;
● authorize
a majority of the Board to fix the number of our directors;
● indemnify
the members of the Board to the fullest extent permitted by law;
● remove
the classification of the Board to require all directors to be elected annually;
● provide
that special meetings of our stockholders may only be called by the Board, the chairman of the Board, or our chief executive
officer;
● provide
that no stockholder will be permitted cumulative voting at any election of directors;
● elect
not to be governed by Section 203 of the Delaware General Corporation Law (the “DGCL”);
● elect
the Court of Chancery of the State of Delaware to be the exclusive forum for any derivative action or proceeding brought on
our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers, or other employees,
any action under the DGCL, our Charter, or bylaws, or any actions governed by the internal affairs doctrine; and
● require
the vote of at least two-thirds of the voting power of the then outstanding shares of our capital stock to amend or repeal
certain provisions of our Charter. The
Reverse Stock Split became effective as of 5:00 p.m. Eastern Time on February 13, 2018, and our common stock began trading on
a split-adjusted basis when the market opened on February 14, 2018. Upon the effectiveness of the Reverse Stock Split, every 12
shares of our issued and outstanding common stock automatically converted into one share of common stock, without any change in
the par value per share. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares
issuable upon the exercise of all of our outstanding stock options and convertible securities to purchase shares of common stock
and the number of shares underlying restricted stock awards and reserved for issuance pursuant to our equity incentive compensation
plan. Any fraction of a share of common stock that would otherwise have resulted from the Reverse Stock Split was rounded down
to the nearest whole share. All share and per share amounts have been retroactively restated to reflect the Reverse Stock Split. Private
Placement SPA On
February 14, 2018, we entered into a Securities Purchase Agreement (the “Private Placement SPA”) with the Investors
pursuant to which the Investors purchased from us an aggregate of 945,819 shares of our common stock at a price of $7.20 per share
for aggregate proceeds of $6.8 million. Investor
Rights Agreement Effective
February 14, 2018, we entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Holders.
Under the Investor Rights Agreement, the Investors are permitted to nominate a majority of our directors and designate the chairperson
of the Board at subsequent annual meetings, as long as the Investors maintain an ownership threshold in the Company of at least
40% of the then outstanding common stock (the “Ownership Threshold”). If the Investors are unable to maintain the
Ownership Threshold, the Investor Rights Agreement contemplates a reduction of nomination rights commensurate with their ownership
interests. For
so long as the Ownership Threshold is met, we must obtain the approval of the Investors to proceed with the following actions:
(i) issue new securities; (ii) incur over $0.25 million of debt in a fiscal year; (iii) sell or transfer over $0.25 million of
our assets or businesses or our subsidiaries in a fiscal year; (iv) acquire over $0.25 million of assets or properties in a fiscal
year; (v) make capital expenditures over $0.125 million individually or $1.5 million in the aggregate during a fiscal year; (vi)
approve our annual budget; (vii) hire or terminate our chief executive officer; (viii) appoint or remove the chairperson of the
Board; and (ix) make loans to, make investments in, or purchase, or permit any subsidiary to purchase, any stock or other securities
in another entity in excess of $0.25 million in a fiscal year. As long as the Ownership Threshold is met, we may not increase
the size of the Board beyond seven directors without the approval of a majority of the directors nominated by the Investors. The
Investor Rights Agreement grants the Holders the right to purchase from us a pro rata amount of any new securities that we may
propose to issue and sell. The Investor Rights Agreement may be terminated (a) upon the mutual written agreement of all the parties,
(b) upon written notice of the Company or an Investor, if such Investor’s ownership percentage of our then outstanding common
stock is less than 10%, or (c) upon written notice by the Investors. PWPI and PWIMF’s right to purchase from us a pro rata
amount of any new securities will also terminate at such time as their aggregate ownership percentage of our then outstanding
common stock is less than 8.5%. Registration
Rights Agreement Effective
February 14, 2018, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the
Holders. The Registration Rights Agreement 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. The 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:
● provide
for annual and special meetings of stockholders to be held through remote communications;
● provide
for the election of any directors not elected at an annual meeting of stockholders to be elected at a special meeting of stockholders;
● declassify
the Board into one group of directors that will hold office until the subsequent annual meeting of stockholders and until
the election and qualification of such directors’ respective successors;
● provide
for the filling of a new directorship or director vacancy by the affirmative vote of the holders of a majority of the voting
power of our shares of stock;
● allow
for a majority of the Board present to adjourn a Board meeting if a quorum is not met;
● unless
otherwise restricted in the Amended Bylaws or our Charter, provide the Board with the authority to fix the compensation of
directors, including, without limitation, compensation for services as members of Board committees;
● allow
us to enter into an agreement with a stockholder to restrict the transfer of shares held by such stockholder in any manner
not prohibited by the DGCL; and
● allow
the Board to declare dividends on our capital stock, subject to any provisions of our Charter and applicable law. Concentrations
and Credit Risk The
Company’s accounts receivable are due from a variety of health care organizations and distributors throughout the world.
No single customer accounted for more than 10% of revenue or accounts receivable for the comparable periods. The Company provides
for uncollectible amounts when specific credit issues arise. Management believes that all significant credit risks have been identified
at June 30, 2019. Use
of Estimates The
preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions
relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and expenses during the period. Significant estimates
include the carrying amount of property and equipment, goodwill and intangible assets and liabilities, valuation allowances for
trade receivables, inventory and deferred income tax assets and liabilities, valuation of the warrant derivative liability, current
and long-term financing lease obligations and corresponding right-of-use asset, and estimates for the fair value of long-term
debt, stock options, 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 the assumptions of intangible assets as of June 30, 2019 and determined
that no impairment of the carrying value of the long-lived assets existed during the second quarter of 2019. Goodwill Goodwill
represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have indefinite useful lives are not amortized. Instead, they are tested for impairment
at least annually, and whenever events or circumstances indicate, the carrying amount of the asset may not be recoverable. The
Company conducts its impairment test on an annual basis and will review the analysis assumptions on a quarterly basis. We test
goodwill for impairment at the reporting unit level, which is an operating segment, or one level below an operating segment, referred
to as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete
financial information is available and segment management regularly reviews the operating results of that component. Revenue
Recognition The
Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2014-09, Topic 606, Revenue from Contracts
with Customers Disaggregation
of Revenue The
Company operates in one reportable segment with our net revenue derived primarily from the sale of orthobiologics and spinal implant
products across North America, Europe, Asia Pacific, and Latin America. Sales are reported net of returns. No rebates, group purchasing
organization fees, or other customer allowances are present and so are not relevant to net revenue determination. The following
table presents revenues from these product lines for the three and six months ended June 30, 2019 and 2018 (in thousands):
Three Months Ended Percentage of Three Months Ended Percentage of
June 30, 2019 Total Revenue June 30, 2018 Total Revenue
Orthobiologics $ 11,020 72 % $ 12,713 68 %
Spinal implant $ 4,177 27 % $ 5,940 32 %
Other revenue $ 74 1 % $ 88 0 %
Total revenue $ 15,271 100 % $ 18,741 100 %
Six Months Ended Percentage of Six Months Ended Percentage of
June 30, 2019 Total Revenue June 30, 2018 Total Revenue
Orthobiologics $ 23,020 72 % $ 24,818 68 %
Spinal implant $ 8,863 27 % $ 11,665 31 %
Other revenue $ 114 1 % $ 191 1 %
Total revenue $ 31,997 100 % $ 36,674 100 % Performance
Obligations The
Company’s contracts do not include a right of acceptance or a right to cancel. Therefore, our process for recognizing revenue
does not require an evaluation of whether acceptance is received or a right to cancel has expired. Further, the Company does not
incur upfront costs or exclusivity fees in conjunction with entering into a customer contract. The Company’s customer contracts
do not provide for percentage of completion performance measures or contingent consideration. In
the normal course of business, the Company accepts returns of products that have not been implanted. Product returns are not material
to the Company’s consolidated statements of operations. The Company accounts for shipping and handling activities as a fulfillment
cost rather than a separate performance obligation. The Company’s policy is to record revenue net of any applicable sales,
use, or excise taxes. Payment terms are generally net 30 days from invoice date, and some customers are offered discounts for
early pay. Contract
Assets and Liabilities The
Company does not have deferred or unearned revenue arrangements with its customers that would give rise to contract liabilities.
The Company recognizes sales commissions as incurred because the amortization period is less than one year. Additionally, the
Company does not recognize unbilled receivables or progress payments to be billed that would result in a contract asset. All pricing
and agreements are completed based on the contracted individual unit price; no other methods of determining price are allowed
within the Company’s sales agreements. Therefore, no contract assets or contract liabilities are recorded in our condensed
consolidated balance sheets as of June 30, 2019 and 2018. Research
and Development Research
and development costs, which are principally related to internal costs for the development of new products, are expensed as incurred. Net
Loss Per Share Basic
net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock
outstanding. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period
that they were outstanding. Diluted net income (loss) per share is computed in a manner consistent with that of basic earnings
per share while giving effect to all potentially dilutive shares of common stock outstanding during the period, which include
the assumed exercise of stock options and warrants using the treasury stock method. Diluted net loss per share was the same as
basic net loss per share for the six months ended June 30, 2019 and 2018, as shares issuable upon the exercise of stock options
and warrants were anti-dilutive as a result of the net losses incurred for those periods. Dilutive earnings per share are not
reported, as the effects of including 3,135,973 and 558,161 outstanding stock options, restricted stock units and warrants for
the six months ended June 30, 2019 and 2018, respectively, are anti-dilutive. Fair
Value of Financial Instruments The
carrying values of financial instruments, including trade accounts receivable, accounts payable, accrued liabilities, and long-term
debt, approximate their fair values based on terms and related interest rates. The
Company follows a framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels
of the fair value hierarchy are described as follows: Level
1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. Level
2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level
3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. A
financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant
to the fair value measurement. During the six months ended June 30, 2019 and 2018, there were no reclassifications in financial
assets or liabilities between Level 1, 2, or 3 categories. The
following table sets forth by level, within the fair value hierarchy, our liabilities that are measured at fair value on a recurring
basis. Warrant
derivative liability (in thousands):
As of June 30, 2019 As of December 31, 2018
Level 1 — —
Level 2 — —
Level 3 $ 21 $ 10 The
valuation technique used to measure fair value of the warrant liability is based on a lattice valuation model and significant
assumptions and inputs determined by us. See Note 9, “ Warrants 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 six months ended June 30, 2019: Warrant
derivative liability (in thousands):
Balance at January 1, 2019 $ 10
Loss recognized in earnings 11
Balance at June 30, 2019 $ 21 During
the six months ended June 30, 2019, the Company did not change any of the valuation techniques used to measure its liabilities
at fair value. Recent
Accounting Pronouncements In
June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments–Credit
losses: Measurement of Credit Losses on Financial Instruments Financial Instruments–Credit
Loss Financial Instruments–Credit Losses (Topic 326): Targeted Transition Relief In
August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40) |
