Business Combination

12 Months Ended

Dec. 31, 2015

Business Combinations [Abstract]

Business Combination

(2) Business Combination

On July 31, 2015 (the “Acquisition Date”), the Company completed its acquisition of 100% of the outstanding common stock of X-spine, pursuant to a Stock Purchase Agreement (the “Purchase Agreement”). X-spine was engaged in the development, manufacturing and sale of medical devices for use in orthopedic spinal surgeries. The primary reasons for the X-spine acquisition are to combine the Company’s product lines into regenerative orthopedic product lines, leverage customer call points, expand sales and marketing coverage, increase revenue, and drive operating efficiencies.

Under the terms of the Purchase Agreement, the Company paid the former X-spine stockholders consideration of approximately $60 million in cash and approximately 4.24 million shares of Xtant common stock. The Company also repaid approximately $13 million of X-spine debt.

The cash consideration was financed in part using the net proceeds from the Company’s offering of $68 million aggregate principal amount of 6% Convertible Senior Notes due 2021 (See Note 9, “Long-Term Debt” below).

The Company accounted for the acquisition as a business combination and recorded the assets acquired, liabilities assumed, and the estimated future obligations at their respective fair values as of the Acquisition Date. The assets acquired and liabilities assumed were recorded as of the Acquisition Date at their respective fair values and consolidated with those of the Company. The reported consolidated balance sheet of the Company after completion of the acquisition reflects these fair values. The results of X-spine operations from the Acquisition Date contributed $288,824 of net profit to the Company’s consolidated financial statements for the fiscal year ended December 31, 2015.

 

The components of the aggregate preliminary purchase price for the acquisition were as follows:

Cash	$	73,033,018
Fair value of Xtant shares		14,934,146
Total purchase price	$	87,967,164

Net Assets Acquired

The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition Date. The following table summarizes the allocation of assets acquired and liabilities assumed as of the Acquisition Date:

	Allocation of purchase price		Amortization period (in years)
Accounts receivable	$	5,989,904
Inventories		13,132,697
Prepaids and other current assets		208,116
Property and equipment, net		7,409,667
Cash		57,818
Total tangible assets acquired		26,798,202
Less: liabilities assumed		23,559,164
Net tangible assets less liabilities	$	3,239,038
Intangible assets:
Technology		28,698,700		10
Customer relationships		9,911,000		14
Tradename		4,543,300		10
Non-compete agreements		40,500		3
Goodwill		41,534,626
Total purchase price	$	87,967,164

The assets acquired and liabilities assumed were recorded at their estimated fair values as of the Acquisition Date. We determined the fair value of the inventory based on its estimated selling price less cost to sell and normal profit margin.

The fair value of the technology and tradename intangible assets were determined based upon a “relief from royalty” approach. The “relief from royalty” method is based on the premise that a third party would be willing to pay a royalty to use these assets owned by the subject company.  The projected royalties are converted into their present value equivalents through the application of a risk adjusted discount rate. The customer relationships were valued based on an “excess earnings method.” The “excess earnings method” measures the historical customer churn analysis and discussions with management extended until excess earning cash flow approximates zero. The non-compete agreements were valued based on a “with and without” approach. The “with and without” method measures an asset value by estimating the difference in cash flows generated by the business with the asset in-use versus without the asset. The difference in cash flows is attributable to incremental earnings or cost savings associated with the asset. These fair value measurements are based on significant unobservable inputs, based on management’s estimates and assumptions.

The fair value of the identifiable assets, including the intangible assets noted above, may be impacted by the Company’s evaluation of deferred taxes as further discussed below and possibly by future factors that may or may not impact the fair value of the identifiable assets, including the intangible assets noted above.

The Company recorded the excess of the aggregate purchase price over the estimated fair values of the identifiable assets acquired as goodwill, which is not deductible for tax purposes. Goodwill is primarily attributable to the benefits the Company expects to realize by expanding its product offerings and addressable markets, thereby contributing to an expanded revenue base. The Company will also increase the size of its sales organization, while realizing cost synergies associated with eliminating redundant positions, primarily in selling, general and administrative functions.

The assets and liabilities assumed in the acquisition have been included in the Company’s consolidated balance sheet as of December 31, 2015. The results of X-spine operations were included in the Company’s consolidated financial statements from the Acquisition Date.

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 (See Note 17, “Segment and Geographic Information” below).

Acquisition Costs

Acquisition-related expenses were $4.9 million for the year ended December 31, 2015, and primarily included investment banking, accounting, consulting, legal fees and integration expenses. Integration expenses include samples, travel and meetings, severance due to reduction in force, retention bonuses and software. We anticipate additional integration expenses to occur during the first quarter of 2016.

Taxes      

The Company did not acquire X-spine’s net operating loss carryforwards for federal tax purposes because X-spine was an S-corporation tax filer prior to the acquisition and any carryforwards were taken by the former shareholders of X-spine in their federal tax filings. The Company has evaluated the realizability of the net deferred tax assets acquired net of the deferred tax liabilities that arose from the recording of intangible assets as part of the purchase price allocation (See Note 13, “Income Taxes” below).

Given its significant prior accumulated tax losses, the Company does not expect to incur U.S. federal tax expense in the year ended December 31, 2015 or the foreseeable future. The Company does, however, expect to incur state tax expense during 2015.

Unaudited Supplemental Pro Forma Financial Information

The unaudited pro forma results presented below include the combined results of both entities as if the acquisition had been consummated as of January 1, 2014. Certain pro forma adjustments have been made to reflect the impact of the purchase transaction, primarily consisting of amortization of intangible assets with determinable lives and interest expense on long-term debt. In addition, certain historical expenses, such as warrant expense and interest expense associated with debt that was immediately repaid, were eliminated from these pro-forma results. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it indicative of future operating results. The pro forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.

	Year Ended December 31,
	2015		2014
Revenue	$	86,517,599	$	77,651,056
Net loss	$	(5,845,125)	$	(15,565,081)