Commitments and Contingencies

3 Months Ended

Mar. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

(10) Commitments and Contingencies

Operating Leases

We currently lease five office facilities, having terminated the Miamisburg, Ohio, lease on February 28, 2019. These leases are under non-cancelable operating lease agreements with expiration dates between 2019 and 2025. We have the option to extend certain leases to five or ten-year term(s), and we have the right of first refusal on any sale.

The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its long-term operating leases as right-of-use assets. Upon initial adoption, using the modified retrospective transition approach, no leases with terms less than 12-months have been capitalized to the balance sheet consistent with ASC 842. Instead, these leases are recognized in the Condensed Consolidated Statement of Operations on a straight-line expense throughout the lives of the leases. All leases of the Company do not contain common area maintenance or security agreements. In connection with certain operating leases, the Company has security deposits recorded and maintained as a prepaid asset totaling $36 thousand as of March 31, 2019.

We have made certain assumptions and judgments when applying ASC 842, the most significant of which is that we elected the package of practical expedients available for transition which allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. Additionally, we did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.

Present Value of Long-term Leases

(in thousands):	March 31, 2019
Right-of-use assets, net	$	2,568
Current portion of lease liability		374
Lease liability, less current portion		2,194
Total lease liability	$	2,568

As of March 31, 2019, the weighted-average remaining lease term was 5.5 years. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, as of March 31, 2019, the Company estimates the weighted-average discount rate for its operating leases to be 3.0% to present value based on the federal discount rate.

Future minimum payments for the next five years and thereafter as of March 31, 2019 under these long-term operating leases are as follows (in thousands):

Remainder of 2019	$	379
2020		511
2021		516
2022		532
2023		473
Thereafter		225
Total future minimum lease payments		2,636
Less amount representing interest		(68	)
Present value of obligations under operating leases		2,568
Less current portion		(374	)
Long-term operating lease obligations	$	2,194

Rent expense was $0.1 million and $0.2 million for each of the three months ended March 31, 2019 and 2018, respectively. We have no contingent rent agreements.

Financing Leases

Future minimum payments for the next five years and thereafter as of March 31, 2019 under financing leases for equipment are as follows (in thousands):

Remainder of 2019	$	368
2020		218
2021		—
2022		—
2023		—
Thereafter		—
Total future minimum lease payments		586
Less amount representing interest		(60	)
Present value of obligations under financing leases		526
Less current portion		(388	)
Long-term financing lease obligations	$	138

Litigation

On December 13, 2018, a complaint was filed by RSB Spine, LLC, against Xtant Medical Holdings, Inc., which claims that some of our products, including the Irix-ATM Lumbar Integrated Fusion System and the Irix-CTM Cervical Integrated Fusion System, infringe certain of RSB Spine’s patents. The complaint seeks an adjudication of infringement, an injunction against future infringement, unspecified damages for infringement, a finding that such infringement is willful, and treble damages for such willful infringement. This action was brought in the United States District Court for the District of Delaware. We filed an answer and affirmative defenses to the complaint on March 29, 2019, denying the allegations of infringement and seeking dismissal of RSB Spine’s claims and requested relief. The Court entered a scheduling order on May 9, 2019, scheduling trial for no sooner than June 21, 2021. We intend to vigorously defend the claims in this action. Because this matter is in early stages and because of the complexity of the case, we cannot estimate the possible loss or range of loss, if any, associated with its resolution. However, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our business, financial condition, or results of operations.

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. Specifically, Axis alleges that Xtant owes payments to Axis for its medical device distributions. Axis seeks relief in the form of damages in an amount in excess of $1.0 million. On March 6, 2019, the Court granted Xtant’s motion for summary judgment on Axis’s claims for breach of contract and breach of the covenant of good faith and fair dealing but denied Xtant’s motion for summary judgment on Axis’s unjust enrichment claim. Xtant is evaluating its alternatives in light of the court order. Because this matter is in early stages and because of the complexity of the case, we cannot estimate the possible loss or range of loss, if any, associated with its resolution. However, management believes it is unlikely that the ultimate resolution of this matter will result in a material adverse effect on our business, financial condition, or results of operations.

In October 2016, Phoenix Surgical, Inc., a former distributor, sued Xtant for its alleged participation in a scheme orchestrated by a former Phoenix Surgical sales representative to divert sales away from Phoenix Surgical to another entity. On April 26, 2019, the parties entered into a confidential settlement agreement which resolved the dispute and resulted in a settlement payment by Xtant in an undisclosed amount that is not material to Xtant’s financial position and will not have a material effect on its results of operations.

In addition, we are engaged in ordinary routine litigation incidental to our business from time to time, including product liability disputes.

Indemnifications

Our indemnification arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities if our products or services infringe a third-party’s intellectual property rights. To date, we have not incurred any material costs as a result of such warranties or indemnification provisions and have not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request.