| Business Description and Summary of Significant Accounting Policies | (1) Business Description and Summary of
Significant Accounting Policies Business Description The accompanying consolidated
financial statements include the accounts of Xtant Medical Holdings, Inc., formerly known as Bacterin International Holdings, Inc.,
a Delaware corporation, and its wholly owned subsidiaries, Xtant Medical, Inc., a Delaware corporation, Bacterin International,
Inc., (“Bacterin”) a Nevada corporation, and X-Spine Systems, Inc. (“X-spine”), an Ohio corporation (Xtant
Medical Inc., Bacterin and X-spine are jointly referred to herein as “Xtant” or the “Company”). The terms
“we,” “us” and “our” also refer to Xtant. All intercompany balances
and transactions have been eliminated in consolidation. Xtant products serve the
combined specialized needs of orthopedic and neurological surgeons, including orthobiologics for the promotion of bone healing,
implants and instrumentation for the treatment of spinal disease, tissue grafts for the treatment of orthopedic disorders to promote
healing following spine, cranial and foot surgeries and the development, manufacturing and sale of medical devices for use in orthopedic
spinal surgeries. 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. At December 31, 2019, the
Company had cash and cash equivalents of $5.2 million, and an accumulated deficit of $223.3 million and has incurred significant
losses in the current and prior periods. Management’s evaluation
of going concern was conducted as part of its discussions with the Xtant Board of Directors’ review of the 2020 Annual Operating
Plan. Management believes that the Company’s cash and cash equivalents of $5.2 million as of December 31, 2019, together
with the availability of $10.0 million under its Second Amended and Restated Credit Agreement, will be sufficient to meet its anticipated
cash requirements and continue as a going concern through at least March 2021. 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 an amendment to the indenture governing our then outstanding 6% convertible senior unsecured
notes due 2021 (the “2017 Notes”), described in the “Debt” and “Equity” sections below, on
January 17, 2018, the Investors converted the 2017 Notes, plus accrued and unpaid interest, at the $9.11 per share conversion rate
originally provided thereunder, into 189,645 shares of our common stock. On February 14, 2018, after
giving effect to the Reverse Stock Split (described below), $70.3 million aggregate principal amount of our then outstanding 2017
Notes 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 the 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 in gross proceeds. Amended and Restated Certificate of Incorporation On February 13, 2018,
following a special meeting of our stockholders, we filed with the Secretary of State of the State of Delaware a Certificate of
Amendment to our Certificate of Incorporation (the “Certificate Amendment”). The Certificate Amendment amended and
restated our Certificate of Incorporation (the “Charter”) to, among other things:
● effect the Reverse Stock Split;
● after giving effect to the Reverse Stock Split, decrease the number of authorized shares of common stock available for issuance from 95,000,000 to 50,000,000 and increase the number of authorized shares of preferred stock available for issuance from 5,000,000 to 10,000,000; and
● authorize the Company’s 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. 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:
● 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
receivables are 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 in the fiscal years 2019 or 2018. The Company provides for uncollectible amounts
when specific credit issues arise. Management believes that all significant credit risks have been identified at December 31, 2019. Use of Estimates The preparation of the
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 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 option grants and other equity awards upon which the Company determines stock-based
compensation expense. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all
highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. Cash equivalents
are recorded at cost, which approximates market value. At times, the Company maintains deposits in financial institutions in excess
of federally insured limits. Trade Accounts Receivable Accounts receivable represents
amounts due from customers for which revenue has been recognized. Normal terms on trade accounts receivable are net 30 days, and
some customers are offered discounts for early pay. The Company performs credit evaluations when considered necessary, but generally
does not require collateral to extend credit. The allowance for doubtful
accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing receivables.
The Company determines the allowance based on factors such as historical collection experience, customers’ current creditworthiness,
customer concentration, age of accounts receivable balance, general economic conditions that may affect a customer’s ability
to pay, and management judgment. 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 doubtful accounts are charged to expense. The Company does not have any off-balance sheet credit exposure related to its customers. Inventories Inventories are stated
at the lower of cost or net realizable value. Cost is determined using the specific identification method and includes materials,
labor and overhead. The Company calculates an inventory reserve for estimated obsolescence and excess inventory based on historical
usage and sales, as well as assumptions about future demand for its products. These estimates for excess and obsolete inventory
are reviewed and updated on a quarterly basis. Increases in the inventory reserves result in a corresponding expense, which is
recorded to cost of sales. Property and Equipment Property and equipment
are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets, generally three to seven years for computers and equipment and five years for surgical instruments. Leasehold
improvements are depreciated over the shorter of their estimated useful life or the remaining term of the lease. Repairs and maintenance
are expensed as incurred. Intangible Assets Intangible assets with
estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed
for impairment whenever events or circumstances indicate their carrying amount may not be recoverable. Intangible assets include
trademarks and patents and include costs to acquire and protect Company patents. Intangible assets are carried at cost less accumulated
amortization. The Company amortizes these assets on a straight-line basis over their estimated useful lives. Other Assets Other assets consist of
the short-term and the long-term portion of prepaid expenses and security deposits. Long-Lived Asset Impairment Long-lived assets, including
property and equipment and 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 undiscounted 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. 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 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 the products are shipped, and the transfer of title and risk of loss occurs. 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.
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. Disaggregation of revenue 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. 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 years ended December 31, 2019 and 2018:
Year Ended December 31, 2019
Percentage of Total Revenue
Year Ended December 31, 2018
Percentage of Total Revenue
Orthobiologics $ 46,663 72 % $ 48,984 68 %
Spinal implant 17,872 28 % 22,830 31 %
Other revenue 147 0 % 389 1 %
Total revenue $ 64,682 100 % $ 72,203 100 % 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 loss per share
is computed by dividing net 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
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 years ended December
31, 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. Diluted net loss per share is not reported as the effects of including 4,011,754 and 2,247,567
outstanding stock options, warrants and restricted stock units for the years ended December 31, 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 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.
During the years ended December 31, 2019 and 2018, there was no reclassification 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 as of December 31, 2019 and 2018 that are measured at fair value
on a recurring basis (in thousands): Warrant derivative liability
As of December 31, 2019
As of December 31, 2018
Level 1 — —
Level 2 — —
Level 3 $ 7 $ 10 The valuation technique
used to measure fair value of the warrant liability is based on a lattice valuation model and significant assumptions and inputs
determined by us (See Note 9, “Warrants” below). Recent Accounting Pronouncements In June 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments
- Credit losses: Measurement of Credit Losses on Financial Instruments Financial Instruments-Credit Loss Reclassification Certain prior year amounts
have been reclassified to conform with current year presentation. |
