UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For
the quarterly period ended | ||
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from ___________ to ___________ |
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | ||
| Smaller
reporting company | |||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Number of shares of common stock, par value $0.000001 per share, of registrant outstanding at May 10, 2024: .
XTANT
MEDICAL HOLDINGS, INC.
FORM 10-Q
March 31, 2024
TABLE OF CONTENTS
| Page | ||
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | ii | |
| PART I. | FINANCIAL INFORMATION | 1 |
| ITEM 1. | FINANCIAL STATEMENTS | 1 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 17 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 21 |
| ITEM 4. | CONTROLS AND PROCEDURES | 22 |
| PART II. | OTHER INFORMATION | 23 |
| ITEM 1. | LEGAL PROCEEDINGS | 23 |
| ITEM 1A. | RISK FACTORS | 23 |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 23 |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 23 |
| ITEM 4. | MINE SAFETY DISCLOSURES | 23 |
| ITEM 5. | OTHER INFORMATION | 23 |
| ITEM 6. | EXHIBITS | 24 |
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Cautionary Statement Regarding Forward-Looking Statements.”
As used in this report, unless the context indicates another meaning, the terms “we,” “us,” “our,” “Xtant,” “Xtant Medical,” and the “Company” mean Xtant Medical Holdings, Inc. and its wholly owned subsidiaries, all of which are consolidated on Xtant’s condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
We own various unregistered trademarks and service marks, including our corporate logo. Solely for convenience, the trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that the owner of such trademarks and trade names will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
We include our website address throughout this report for reference only. The information contained on or connected to our website is not incorporated by reference into this report.
| i |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions, or strategies regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “possible,” “potential,” “predict,” “project,” “should,” and “would,” as well as similar expressions, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward looking. Forward-looking statements in this Form 10-Q may include, for example, statements about the topics below and are subject to risks and uncertainties including without limitation those described below:
| ● | the anticipated adverse impact on our future revenues and financial results of a current shortage in the stem cells used to produce our OsteoVive product; |
| ● | our ability to integrate the products acquired as part of the acquisition of Surgalign SPV, Inc., the acquisition of certain assets and liabilities of Surgalign Holdings, Inc., and the acquisition of certain assets of RTI Surgical, Inc. and achieve future sales of those products as anticipated, and other risks associated with those acquisitions and any future business combinations or acquisitions we may pursue; |
| ● | risks associated with our international operations, including but not limited to the effect of foreign currency exchange rate fluctuations and compliance with foreign legal and regulatory requirements, current and future wars, related sanctions and geopolitical tensions, political risks associated with the potential instability of governments and legal systems in countries in which we or our customers or suppliers conduct business, and other potential conflicts; |
| ● | our ability to operate in international markets and effectively manage our international subsidiaries, which require management attention and financial resources; |
| ● | our ability to navigate manufacturing challenges related to the production of biologics products; |
| ● | our ability to retain and expand our agreements with group purchasing organizations (“GPOs”) and independent delivery networks (“IDNs”) and sell products to members of such GPOs and IDNs; |
| ● | the effect of inflation and supply chain disruptions, which could result in delayed product launches, lost revenue, higher costs, decreased profit margins, and other adverse effects on our business and operating results; |
| ● | the effect of labor and staffing shortages at hospitals and other medical facilities on the number of elective procedures in which our products are used and as a result our revenues, as well as global and local labor shortages and loss of personnel, which have adversely affected and may continue to adversely affect our ability to produce product to meet demand; |
| ● | our ability to remain competitive; |
| ● | our ability to rebrand and integrate acquired products with our existing product line; |
| ● | our ability to innovate, develop, introduce and market new products and technologies and the success of such new products and technologies, including our recently launched amniotic membrane allografts, SimpliGraft™ and SimpliMax™; |
| ● | the effect of our private label and original equipment manufacturer (“OEM”) business on our business and operating results and risks associated therewith, including fluctuations in our operating results and decreased profit margins; |
| ii |
| ● | our ability and success in implementing key growth and process improvement initiatives designed to increase our production capacity, revenue and scale and risks associated with such growth and process improvement initiatives; |
| ● | our dependence on and ability to retain and recruit independent sales agents and distributors and motivate and incentivize them to sell our products, including in particular our dependence on key independent agents for a significant portion of our revenue; |
| ● | the ability of our sales personnel, including our independent sales agents and distributors, to achieve expected results; |
| ● | our reliance on third party suppliers and manufacturers; |
| ● | the effect of product liability claims and other litigation to which we may be subjected and product recalls and defects; |
| ● | the effect of COVID-19 and other infectious diseases on our business, operating results and financial condition; the effect of fluctuations in foreign currency exchange rates on our earnings and our foreign currency translation adjustments; |
| ● | risks associated with and the effect of a shift in procedures using our products from hospitals to ambulatory surgical centers, which would put pressure on the price of our products and margins; |
| ● | our ability to obtain and maintain regulatory approvals in the United States and abroad and the effect of government regulations and our compliance with government regulations; |
| ● | the ability of our clinical trials to demonstrate competent and reliable evidence of the safety and effectiveness of our products; |
| ● | our ability to remain accredited with the American Association of Tissue Banks and continue to obtain a sufficient number of donor cadavers for our products; |
| ● | our ability to obtain and maintain government and third-party coverage and reimbursement for our products; |
| ● | our ability to attract, retain and engage qualified technical, sales and processing personnel and members of our management team, especially in light of a tight labor market and increasing cost of living in and around the Belgrade, Montana area; |
| ● | our ability to maintain sufficient liquidity to fund our operations and obtain financing on reasonable terms when needed and the effect of such additional financing on our business, results of operations, financial condition and stockholders; |
| ● | our ability to service our debt and comply with the covenants in our credit agreements and the effect of our significant indebtedness on our business, results of operations, financial condition and prospects; |
| ● | our expectations regarding operating trends, future financial performance and expense management and our estimates of our future revenue, expenses, ongoing losses, gross margins, operating leverage, capital requirements and our need for, or ability to obtain, additional financing and the availability of our credit facilities; |
| ● | our ability to effectively remediate our outstanding material weaknesses and maintain effective internal control over financial reporting; |
| ● | our ability to obtain and protect our intellectual property and proprietary rights and operate without infringing the intellectual property rights of others; |
| ● | our ability to maintain our stock listing on the NYSE American Exchange; |
| ● | risks inherent in being a controlled company; and |
| ● | the effect of a global economic slowdown, rising interest rates and the prospects for recession, a possible U.S. government shutdown, as well as past and potential future disruptions in access to bank deposits or lending commitments due to bank failures, which could materially and adversely affect our revenue, liquidity, financial condition and results of operations. |
The forward-looking statements contained in this Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control, which may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2023 and this Form 10-Q.
Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.
| iii |
| PART | I. FINANCIAL INFORMATION |
| ITEM 1. | Financial statements |
XTANT MEDICAL HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except number of shares and par value)
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, net of allowance for credit losses and doubtful accounts of $ | ||||||||
| Inventories | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use asset, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current portion of lease liability | ||||||||
| Current portion of finance lease obligations | ||||||||
| Line of credit | ||||||||
| Total current liabilities | ||||||||
| Long-term Liabilities: | ||||||||
| Lease liability, less current portion | ||||||||
| Finance lease obligation, less current portion | ||||||||
| Long-term debt, plus premium and less issuance costs | ||||||||
| Other liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (note 14) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock, $ par value; shares authorized; shares issued and outstanding as of March 31, 2024 and shares issued and outstanding as of December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive (loss) income | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities & Stockholders’ Equity | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
| 1 |
XTANT MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except number of shares and per share amounts)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross Profit | ||||||||
| Operating Expenses | ||||||||
| General and administrative | ||||||||
| Sales and marketing | ||||||||
| Research and development | ||||||||
| Total Operating Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other Expense | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Unrealized foreign currency translation loss | ( | ) | ||||||
| Other income | ||||||||
| Total Other Expense | ( | ) | ( | ) | ||||
| Net Loss from Operations Before Provision for Income Taxes | ( | ) | ( | ) | ||||
| Provision for Income Taxes Current and Deferred | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net Loss Per Share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Dilutive | $ | ( | ) | $ | ( | ) | ||
| Shares used in the computation: | ||||||||
| Basic | ||||||||
| Dilutive | ||||||||
See notes to unaudited condensed consolidated financial statements.
| 2 |
XTANT MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited, in thousands)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Other Comprehensive Loss | ||||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | ||
See notes to unaudited condensed consolidated financial statements.
| 3 |
XTANT MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(Unaudited, in thousands, except number of shares)
| Common Stock | Additional Paid-In- | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common stock issued on vesting of restricted stock units | ||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2023 | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Common stock issued on vesting of restricted stock units | ||||||||||||||||||||||||
| Withholding on common stock upon vesting of restricted stock units | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Foreign currency translation adjustment | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
| 4 |
XTANT MEDICAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on sale of fixed assets | ( | ) | ( | ) | ||||
| Non-cash interest | ||||||||
| Stock-based compensation | ||||||||
| Provision for reserve on accounts receivable | ||||||||
| Provision for excess and obsolete inventory | ||||||||
| Other | ||||||||
| Changes in operating assets and liabilities, net of the effects of the acquisition: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of fixed assets | ||||||||
| Acquisition of Surgalign SPV, Inc. | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Payments on financing leases | ( | ) | ( | ) | ||||
| Borrowings on line of credit | ||||||||
| Repayments on line of credit | ( | ) | ( | ) | ||||
| Proceeds from issuance of long term debt | ||||||||
| Debt issuance costs | ( | ) | ( | ) | ||||
| Payment of taxes from withholding of common stock on vesting of restricted stock units | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ) | ||||||
| Net change in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Reconciliation of cash and cash equivalents and restricted cash reported in the condensed consolidated balance sheets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash reported in condensed consolidated balance sheets | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
| 5 |
Notes to Unaudited Condensed Consolidated Financial Statements
(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, which 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 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 balance sheet as of December 31, 2023, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been 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.
Interim results are not necessarily indicative of results that may be achieved in the future for the full year ending December 31, 2024.
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, 2023. 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.
Liquidity
Since
our inception, we have financed our operations through primarily operating cash flows, private placements of equity securities and convertible
debt, debt facilities, common stock rights offerings, and other debt transactions. For the three months ended March 31, 2024, we incurred
a net loss of $
| 6 |
Use of Estimates
The preparation of the condensed 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 condensed 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, intangible assets and liabilities; valuation allowances for trade receivables, inventory, deferred income tax assets and liabilities; current and long-term lease obligations and corresponding right-of-use asset; estimates for the fair value of assets acquired as part of business combinations; and estimates for the fair value of long-term debt, stock options and other equity awards upon which the Company determines stock-based compensation expense. Actual results could differ from those estimates.
Restricted Cash
Cash and cash equivalents classified as restricted cash on the Company’s condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The March 31, 2024 and December 31, 2023 balances included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against the Company’s line of credit the next business day.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash balances primarily with two financial institutions. These balances generally exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in cash and cash equivalents.
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recovered.
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.
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. Our diluted earnings per share is the same as basic earnings per share, as the effects of including and outstanding stock options, restricted stock units and warrants for the three months ended March 31, 2024 and 2023, respectively, are anti-dilutive.
Foreign Currency
The Company generates revenues outside the United States in multiple foreign currencies including euros, Swiss francs, British pounds and in U.S. dollar-denominated transactions conducted with customers who generate revenue in currencies other than the U.S. dollar. The Company also incurs operating expenses in euros, Swiss francs and British pounds. All assets and liabilities of foreign subsidiaries which have a functional currency other than the U.S. dollar are translated at the rate of exchange at period-end, while elements of the income statement are translated at the average exchange rates in effect during the period. The net effect of these translation adjustments is shown as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are reported in other income, net.
| 7 |
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 as of March 31, 2024 and December 31, 2023.
(2) Acquisition of Coflex and CoFix Product Lines
On
February 28, 2023, the Company entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with Surgalign
SPV, Inc. (“Surgalign SPV”), a wholly owned subsidiary of Surgalign Spine Technologies, Inc., (“Seller”), Seller
and Surgalign Holdings, Inc., pursuant to which the Company purchased all of the issued and outstanding shares of common stock of Surgalign
SPV, which shares constituted all of the outstanding equity of Surgalign SPV, for an aggregate purchase price of $
Immediately prior to the Closing, Seller and its affiliates transferred and assigned to Surgalign SPV, a newly formed entity wholly owned by Seller, certain intellectual property, contractual rights and other assets related to the design, manufacture, sale and distribution of Seller’s Coflex and CoFix products in the United States (the “Coflex Business”). The Coflex and CoFix products have been approved by the U.S. Food and Drug Administration for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression and provide minimally invasive, motion preserving stabilization.
In conjunction with the Equity Purchase Agreement, on February 28, 2023, the Company entered into a Transition Services Agreement with Surgalign SVP and Seller, whereby Seller agreed to provide, or cause to be provided, to the Company on and after the effective date of the Equity Purchase Agreement, after giving effect to the Closing, certain transitional services related to the transition of the Coflex Business.
The
Company funded the Purchase Price with cash on hand and approximately $
The Company recorded the purchase of this acquisition using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. The table below represents the allocation of the total consideration for Surgalign SPV’s assets and liabilities based on management’s estimates of their respective fair values as of February 28, 2023 (in thousands):
| Inventories | $ | |||
| Equipment | ||||
| Intangible assets | ||||
| Net assets acquired | ||||
| Goodwill | ||||
| Total purchase consideration | $ |
The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists.
The
acquisition strengthened the Company’s spine portfolio with the addition of the Coflex Business. Coflex is a differentiated and
minimally invasive motion preserving stabilization implant that is premarket approved by the U.S. Food and Drug Administration for the
treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression. This potential benefit resulted in the Company
paying a premium for the acquisition resulting in the recognition of $
| 8 |
(3) Acquisition of Surgalign Holdings, Inc.’s Hardware and Biologics Business
On August 10, 2023, the Company completed the acquisition (the “Transaction”) of the assets of Surgalign Holdings, Inc. (“Surgalign Holdings”), and its subsidiaries used in Surgalign Holdings’ hardware and biologics business. The acquired assets included specified inventory, intellectual property and intellectual property rights, contracts, equipment and other personal property, records, the outstanding equity securities of Surgalign Holdings’ international subsidiaries, and intangibles that were related to Surgalign Holdings’ hardware and biologics business (collectively, the “Assets”). As part of the Transaction, the Company assumed and certain specified liabilities of Surgalign Holdings (collectively, the “Liabilities”), all pursuant to the Asset Purchase Agreement, dated June 18, 2023, between Surgalign Holdings and us (as amended, the “Asset Purchase Agreement”).
The
Transaction was conducted through a process supervised by the United States Bankruptcy Court for the Southern District of Texas, Houston
Division (the “Bankruptcy Court”) in connection with Surgalign Holdings’ bankruptcy proceedings; and therefore, the
Company acquired the Assets with limited representations and warranties. The Bankruptcy Court issued a Sale Order on August 9, 2023 approving
and authorizing the Transaction. The Company funded the purchase price of $
The Company recorded the purchase of the Transaction using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. The table below represents the preliminary allocation of the total consideration for Surgalign Holdings’ assets and liabilities based on management’s estimates of their respective fair values as of August 10, 2023 (in thousands):
| Cash | $ | |||
| Accounts receivable | ||||
| Inventories | ||||
| Prepaids and other current assets | ||||
| Equipment | ||||
| Right-of-use asset | ||||
| Accounts payable | ( | ) | ||
| Accrued liabilities | ( | ) | ||
| Current portion of lease liability | ( | ) | ||
| Lease liability, less current portion | ( | ) | ||
| Net assets acquired | ||||
| Bargain purchase gain | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| Total purchase consideration | $ |
The Transaction was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. These values changed from those previously reported in our Form 10-Q for the three and nine months ended September 30, 2023 for adjustments to the valuation related to assumed future cash flows and inventory utilization which ultimately affected values associated with inventories and equipment.
Accounting
Standards Codification (“ASC”) 805, Business Combinations, requires that any excess of purchase price over the fair
value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill and any excess of fair
value of acquired net assets, including identifiable intangible assets over the acquisition consideration, results in a gain from bargain
purchase. Prior to recording a gain, the acquiring entity must reassess whether all assets acquired and assumed liabilities have been
identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed
have been properly valued. The Transaction resulted in a gain on bargain purchase due to the estimated fair value of the identifiable
net assets acquired exceeding the purchase consideration transferred by $
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The Company believes that the Transaction will strengthen our growing orthobiologics and spinal fusion device portfolio, while expanding the Company’s commercial footprint with new contracts and distributors.
(4) Acquisition of NanOss Production Operations
On
October 23, 2023, the Company acquired the nanOss production operations from RTI Surgical, Inc. (“RTI”) pursuant to an Asset
Purchase Agreement dated October 23, 2023 between the Company and RTI (the “Asset Purchase Agreement”). Under the terms of
the Asset Purchase Agreement, the Company acquired certain assets, including equipment and inventory, used in RTI’s synthetic bone
graft business and assumed from RTI the lease for the nanOss production facility located in Greenville, North Carolina. The purchase
price for the assets was $
The Company recorded the purchase of this acquisition using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. The table below represents the allocation of the total consideration for certain RTI assets based on management’s estimates of their respective fair values as of October 23, 2023 (in thousands):
| Inventories | $ | |||
| Fixed assets | ||||
| Intangible assets | ||||
| Net assets acquired | ||||
| Goodwill | ||||
| Total preliminary purchase consideration |
The following unaudited pro forma combined financial information summarizes the results of operations for the periods indicated as if the acquisition of the assets of Surgalign Holdings, Inc., the acquisition of Surgalign SPV, Inc. and the acquisition of nanOss production operations from RTI Surgical, Inc. had been completed as of January 1, 2023 (in thousands):
| Three Months Ended | ||||
| March 31, 2023 | ||||
| Revenues | $ | |||
| Net loss | ( | ) | ||
Pro forma information reflects adjustments that are expected to have a continuing impact on the Company’s results of operations and are directly attributable to the acquisition of the assets of Surgalign Holdings, Inc., the acquisition of Surgalign SPV, Inc. and the acquisition of nanOss production operations from RTI Surgical, Inc. The unaudited pro forma results include adjustments to reflect the amortization of the inventory step-up and the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset. The pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the transactions had occurred as of January 1, 2023 or that may be obtained in the future, and do not reflect future synergies, integration costs, or other such costs or savings.
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(5) Revenue
In the United States, the Company generates most of its revenue from independent commissioned sales agents. The Company consigns its orthobiologics products to hospitals and consign or loans its spinal implant sets to 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.
The Company ships 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. Revenue is recognized upon utilization of product.
Additionally, the Company sells product directly to domestic and international stocking resellers, original equipment manufacturer 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 control is transferred upon shipment or upon delivery, based on the customer contract terms and legal requirements, 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. The consideration for goods or services reflects any fixed amount stated per the contract and estimates for any variable consideration, such as returns, discounts or rebates, to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. For certain sales transactions, we incur GPO fees that are based on a contractual percentage of applicable sales and are treated as consideration payable to a customer and recorded as a reduction of revenue.
The
Company operates in
| Three Months Ended | Percentage of | Three Months Ended | Percentage of | |||||||||||||
| March 31, 2024 | Total Revenue | March 31, 2023 | Total Revenue | |||||||||||||
| Orthobiologics | $ | % | $ | % | ||||||||||||
| Spinal implant | % | % | ||||||||||||||
| Total revenue | $ | % | $ | % | ||||||||||||
(6) Receivables
The Company’s provision for current expected credit loss is determined based on historical collection experience adjusted for current economic conditions affecting collectability. 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 credit losses are charged to expense.
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(7) Inventories
Inventories consist of the following (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
(8) Property and Equipment, Net
Property and equipment, net are as follows (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||
| Equipment | $ | $ | ||||||
| Computer equipment | ||||||||
| Computer software | ||||||||
| Leasehold improvements | ||||||||
| Surgical instruments | ||||||||
| Assets not yet in service | ||||||||
| Total cost | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense related to property and equipment, including property under finance leases, for the first three months of 2024 and 2023 was $
(9) Intangible Assets
The following table sets forth information regarding intangible assets (in thousands):
| March 31, 2024: | Weighted Average Life | Cost | Accumulated Amortization | Net | ||||||||||
| Patents | $ | $ | ( | ) | $ | |||||||||
| Customer List | ( | ) | ||||||||||||
| Tradenames | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
| December 31, 2023: | Weighted Average Life | Cost | Accumulated Amortization | Net | ||||||||||
| Patents | $ | $ | ( | ) | $ | |||||||||
| Customer List | ( | ) | ||||||||||||
| Tradenames | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
Amortization
expense was $
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(10) Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||
| Cash compensation/commissions payable | $ | $ | ||||||
| Other accrued liabilities | ||||||||
| Accrued liabilities | $ | $ | ||||||
(11) Debt
Long-term debt consists of the following (in thousands):
March 31, 2024 | December 31, 2023 | |||||||
| Amounts due under term loan | $ | $ | ||||||
| Accrued end-of-term payments | ||||||||
| Less: unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Long-term debt, less issuance costs | $ | $ | ||||||
On
March 7, 2024, the Company’s term credit agreement was amended and restated to, among other things, extend the maturity date to
The
effective rate of the term loan, inclusive of amortization of debt issuance costs and accretion of the final payment, was
On
May 14, 2024, the term credit agreement was amended to increase the amount of term loans that may be borrowed by $
On July 26, 2023, our stockholders approved and adopted the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (the “2023 Plan”), which replaced the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) with respect to future grants of equity awards, although the 2018 Plan continues to govern equity awards granted under the 2018 Plan. The 2023 Plan permits the Board of Directors, 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 of Directors may select 2023 Plan participants and determine the nature and amount of awards to be granted.
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| 2024 | 2023 | |||||||||||||||||||||||
| Shares | Weighted Average Price | Weighted Average Contract (years) | Shares | Weighted Average Price | Weighted Average Contract (years) | |||||||||||||||||||
| Outstanding at January 1 | ||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||
| Cancelled or expired | ( | ) | ||||||||||||||||||||||
| Outstanding at March 31 | ||||||||||||||||||||||||
| Exercisable at March 31 | ||||||||||||||||||||||||
As of March 31, 2024, there was approximately $ million of total unrecognized compensation expense related to unvested stock options. These costs are expected to be recognized over a weighted-average period of years.
Restricted stock unit activity for awards granted under the 2023 Plan and 2018 Plan was as follows for the three months ended March 31, 2024 and 2023:
2024 | 2023 | |||||||||||||||
| Shares | Weighted Average Fair Value at Grant Date Per Share | Shares | Weighted Average Fair Value at Grant Date Per Share | |||||||||||||
| Outstanding at January 1 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Vested | ( | ) | ( | ) | ||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding at March 31 | $ | $ | ||||||||||||||
Total compensation expense related to unvested restricted stock units not yet recognized was $ million as of March 31, 2024, which is expected to be allocated to expenses over a weighted-average period of years.
(13) Warrants
As
of March 31, 2024 and December 31, 2023, there were outstanding and exercisable warrants to purchase shares of our common
stock at a weighted average exercise price of $
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(14) Commitments and Contingencies
Litigation
We are subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted from time to time. These matters arise in the ordinary course and conduct of our business and may include, for example, commercial, product liability, intellectual property, and employment matters. We intend to continue to defend the Company vigorously in such matters and, when warranted, take legal action against others. Furthermore, we regularly assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on our assessment, we have adequately accrued an amount for contingent liabilities currently in existence. We do not accrue amounts for liabilities that we do not believe are probable or that we consider immaterial to our overall financial position. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. While we do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations or cash flows, it is possible that the amount of ultimate loss may exceed our current accruals and that our cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.
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.
(15) Income Taxes
Information on the Company’s income taxes for the periods reported is as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Income tax expense from continuing operations | $ | $ | ||||||
| Income from continuing operations before income taxes | $ | ( | ) | $ | ( | ) | ||
| Effective income tax rate | - | % | - | % | ||||
Our effective tax rate for the first quarter of 2024 differs from the statutory rate due to a valuation allowance against deferred tax assets, offset by the impact of cash state and foreign taxes.
Our effective tax rate for the first quarter of 2023 differs from the statutory rate due to a valuation allowance against deferred tax assets, offset by the impact of cash state and foreign taxes.
As of March 31, 2024, the Company is not currently under examination by tax authorities.
(16) Supplemental Disclosure of Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
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(17) Related Party Transactions
As
described in more detail under Note 1, “Business Description and Summary of Significant Accounting Policies,” and
Note 19, “Related Party Transactions,” in the Company’s Annual Report on Form 10-K for the year ended December
31, 2023, we are party to an Investor Rights Agreement, as amended, Registration Rights Agreements and certain other agreements with
OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP, which are funds affiliated with OrbiMed Advisors LLC (“OrbiMed”).
OrbiMed beneficially owns
All related party transactions are reviewed and approved by the Audit Committee or the disinterested members of the full Board of Directors.
(18) Segment and Geographic Information
The
Company operates in
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| United States | $ | $ | ||||||
| Rest of world | ||||||||
| Total revenue | $ | $ | ||||||
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| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed above in “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere in this Form 10-Q.
Business Overview
We develop, manufacture and market regenerative medicine products and medical devices for domestic and international markets. Our products serve the specialized needs of orthopedic and neurological surgeons, including orthobiologics for the promotion of bone healing, implants and instrumentation for the treatment of spinal disease. We promote our products in the United States through independent distributors and stocking agents, supported by direct employees.
We have an extensive sales channel of independent commissioned agents and stocking distributors in the United States representing some or all of our products. We also maintain a national accounts program to enable our agents to gain access to integrated delivery network hospitals (“IDNs”) and through group purchasing organizations (“GPOs”). We have biologics contracts with major GPOs, as well as extensive access to IDNs across the United States for both biologics and spine hardware systems. While our focus is the United States market, we promote and sell our products internationally through direct sales representatives and stocking distribution partners in Canada, Mexico, South America, Australia, and certain Pacific region countries.
We have focused and intend to continue to focus primarily on four key growth initiatives: (1) introduce new products; (2) expand our distribution network; (3) penetrate adjacent markets; and (4) leverage our growth platform with technology and strategic acquisitions. In furtherance of our growth initiatives, and as described elsewhere in this report, we made the following three acquisitions last year:
| ● | On February 28, 2023, we acquired all of the issued and outstanding capital stock of Surgalign SPV, Inc. (“Surgalign SPV”), a then indirect wholly owned subsidiary of Surgalign Holdings, Inc. (“Surgalign Holdings”), which held certain intellectual property, contractual rights and other assets related to the design, manufacture, sale and distribution of the Coflex and CoFix products in the United States, for a purchase price of $17.0 million in cash. |
| ● | On August 10, 2023, we acquired out of a bankruptcy proceeding certain additional assets of Surgalign Holdings and its subsidiaries, including specified inventory, intellectual property and intellectual property rights, contracts, equipment and other personal property, records, all outstanding equity securities of Surgalign Holdings’ international subsidiaries, and intangibles related to the business of designing, developing and manufacturing hardware medical technology and distributing biologics medical technology, and assume certain related liabilities, for a purchase price of $5 million in cash. |
| ● | On October 23, 2023, we acquired the nanOss production operations from RTI Surgical, Inc. (“RTI”) including certain equipment and inventory used in RTI’s synthetic bone graft business and assumed from RTI the lease for the nanOss production facility located in Greenville, North Carolina. The purchase price for the assets was $2 million in cash plus a low single digit royalty on sales prior to October 23, 2028 of next generation nanOss products. |
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While the intent of these four key growth initiatives is to increase our future revenues, no assurance can be provided that we will be successful in implementing these growth initiatives or increasing our future revenues.
Results of Operations
Comparison of Three Months Ended March 31, 2024 and March 31, 2023
Revenue
Total revenue for the three months ended March 31, 2024 was $27.9 million, which represents an increase of 55% compared to $17.9 million in the same quarter of the prior year. The increase is attributed primarily to the contribution of additional sales resulting from the acquisition of the Surgalign Holdings’ hardware and biologics business, greater independent agent sales and additional Coflex and CoFix product sales.
Cost of Sales
Cost of sales consists primarily of manufacturing cost, product purchase costs and depreciation of surgical instruments. Cost of sales also includes reserves for estimated excess inventory, inventory on consignment that may be missing and not returned, and reserves for estimated missing and damaged consigned surgical instruments. Cost of sales increased by $3.2 million to $10.6 million for the three months ended March 31, 2024 from $7.4 million for the three months ended March 31, 2023. The increase in cost of sales is primarily due to greater revenue in the first quarter of 2024 compared to the first quarter of 2023, as mentioned above.
Gross profit as a percentage of revenue increased 340 basis points to 62.1% for the three months ended March 31, 2024 compared to 58.7% for the same period in 2023. Of this increase, 660 basis points were due to greater scale and improved production efficiency, partially offset by 140 basis points due to higher production costs.
General and Administrative
General and administrative expenses consist primarily of personnel costs for corporate employees, cash-based and stock-based compensation related costs, amortization, and corporate expenses for legal, accounting and professional fees, as well as occupancy costs. General and administrative expenses increased 59%, or $2.9 million, to $7.8 million for the three months ended March 31, 2024, compared to $4.9 million for the prior year period. This increase is primarily attributable to additional employee compensation expense of $1.2 million, $0.4 million of additional legal and accounting fees and $0.3 million of amortization of intangible assets associated with the acquisition of Surgalign SPV.
Sales and Marketing
Sales and marketing expenses consist primarily of sales commissions, personnel costs for sales and marketing employees, costs for trade shows, sales conventions and meetings, travel expenses, advertising, and other sales and marketing related costs. Sales and marketing expenses increased 77%, or $5.4 million, to $12.5 million for the three months ended March 31, 2024, compared to $7.1 million for the prior year period. This increase is primarily due to additional independent agent commissions expense of $3.2 million resulting from higher sales, $1.6 million of additional compensation expense related to additional headcount and $0.5 million of additional consulting expenses.
Research and Development
Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses were $0.5 million for the three months ended March 31, 2024, compared to $0.2 million for the same period in 2023. This increase is primarily due to increased headcount.
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Interest Expense
Interest expense is related to interest incurred from our debt instruments and finance leases. Interest expense was $0.8 million for the three months ended March 31, 2024, compared to $0.6 million for the three months ended March 31, 2023. This increase resulted primarily from increases to the base interest rate applied to our debt instruments and the additional borrowing of $5.0 million under our term credit agreement in February 2023 in connection with our acquisition of Surgalign SPV and the Coflex and CoFix product lines. We expect that our annualized interest expense will increase approximately $0.1 million for every 50 basis points of increase to the reference rate associated with our credit agreements.
Provision for Income Taxes Current and Deferred
The increase in income tax expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to an increase in cash taxes in the domestic and foreign jurisdictions in 2024.
Liquidity and Capital Resources
Working Capital
Since our inception, we have financed our operations through primarily operating cash flows, private placements of equity securities and convertible debt, debt facilities, common stock rights offerings, and other debt transactions. The following table summarizes our working capital as of March 31, 2024 and December 31, 2023 (in thousands):
| March 31, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalents | $ | 4,624 | $ | 5,923 | ||||
| Accounts receivable, net | 21,484 | 20,731 | ||||||
| Inventories | 38,724 | 36,885 | ||||||
| Total current assets | 66,541 | 64,899 | ||||||
| Accounts payable | 7,378 | 7,054 | ||||||
| Accrued liabilities | 9,875 | 10,419 | ||||||
| Line of credit | 10,270 | 4,622 | ||||||
| Total current liabilities | 28,442 | 22,990 | ||||||
| Net working capital | 38,099 | 41,879 | ||||||
Cash Flows
Net cash used in operating activities for the first three months of 2024 was $5.8 million compared to $2.2 million for the first three months of 2023. This increase in net cash used in operating activities relates primarily to changes in operating assets and liabilities.
Net cash used in investing activities for the first three months of 2024 was $0.7 million compared to $17.4 million for the first three months of 2023. This decrease relates primarily to the use of $17.0 in cash for the acquisition of Surgalign SPV, Inc. during the first three months of 2023.
Net cash provided by financing activities for the first three months of 2024 was $5.2 million compared to $4.6 million for the first three months of 2023. This increase relates primarily to $6.0 million of additional revolver borrowings, net of repayments, partially offset by $5.0 million of additional term loan borrowings during the first three months of 2023.
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Current and Prior Credit Facilities
On March 7, 2024, the Company, as guarantor, and certain of our subsidiaries, as borrowers (collectively, the “Borrowers”), entered into an Amended and Restated Credit, Security and Guaranty Agreement (Term Loan) (the “Term Credit Agreement”) and an Amended and Restated Credit, Security and Guaranty Agreement (Revolving Loan) (the “Revolving Credit Agreement” and, together with the Term Credit Agreement, the “Credit Agreements”) with MidCap Financial Trust and MidCap Funding IV Trust, each in its respective capacity as agent, and lenders from time to time party thereto. These Credit Agreements amend and restate the Credit, Security and Guaranty Agreement, dated as of May 6, 2021 (Term Loan), as amended (the “Prior Term Credit Agreement”), and the Credit, Security and Guaranty Agreement, dated as of May 6, 2021 (Revolving Loan), as amended (the “Prior Revolving Credit Agreement” and, together with the Prior Term Credit Agreement, the “Prior Credit Agreements”), in each case, by and among the Borrowers, the Company and MidCap Financial Trust and MidCap Funding IV Trust, as respective agents, and the lenders from time to time party thereto.
The Term Credit Agreement provides for a secured term loan facility (the “Term Facility”) in an aggregate principal amount of $17.0 million (the “Term Loan Commitment”), which was previously funded under the Prior Term Credit Agreement, and an additional $10.0 million tranche available solely at the discretion of MidCap Financial Trust and the lenders, for the purposes agreed to between the Company, the Borrowers and the lenders in advance of the making of loans under such additional tranche. The Revolving Credit Agreement provides for a secured revolving credit facility (the “Revolving Facility,” and, together with the Term Facility, the “Facilities”) under which the Borrowers may borrow up to $17.0 million (such amount, the “Revolving Loan Commitment”) at any one time, the availability of which is determined based on a borrowing base equal to percentages of certain accounts receivable and inventory of the Borrowers in accordance with a formula set forth in the Revolving Credit Agreement. All borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material respects and the delivery of an updated borrowing base certificate.
The Facilities have a maturity date of March 1, 2029 (the “Maturity Date”). Each of the Borrowers, and the Company, as guarantor, are jointly and severally liable for all of the obligations under the Facilities on the terms set forth in the Credit Agreements. The Borrowers’ obligations, and the Company’s obligations as a guarantor, under the Credit Agreements are secured by first-priority liens on substantially all of their assets, including, without limitation, all inventory, equipment, accounts, intellectual property and other assets of the Company and the Borrowers. As of March 31, 2024, the Company had $10.3 million outstanding and $6.7 million of availability under the Revolving Facility.
The loans and other obligations pursuant to the Credit Agreements will bear interest at a per annum rate equal to the sum of the SOFR Interest Rate, as such term is defined in the Credit Agreements, plus the applicable margin of 6.50% in the case of the Term Credit Agreement, and an applicable margin of 4.50% in the case of the Revolving Credit Agreement, subject in each case to a floor of 2.50%. As of December 31, 2023, the effective rate of the Prior Term Credit Agreement, inclusive of authorization of debt issuance costs and accretion of the final payment, was 14.42%, and the effective rate of the Prior Revolving Credit Agreement was 9.94%.
The Credit Agreements contain affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum levels and to maintain a certain minimum liquidity level, in each case as specified in the Credit Agreements. As of March 31, 2023, we were in compliance with all covenants under the Credit Agreements.
On May 14, 2024, we entered into Amendment No. 1 to Amended and Restated Credit, Security and Guarantee Agreement (Term Loan) (“Term Amendment No. 1”), which amends the Term Credit Agreement, and Amendment No. 1 to Amended and Restated Credit, Security and Guarantee Agreement (Revolving Loan) (“Revolving Amendment No. 1” and, together with Term Amendment No. 1, the “Amendments No. 1”), which amends the Revolving Credit Agreement. The Term Amendment No. 1 increases the amount of term loans that may be borrowed by $5.0 million to a maximum of $22.0 million, which are fully drawn as of May 14, 2024. In addition, the Amendments No. 1 re-set the date certain fees payable in connection with optional prepayments are determined to May 14, 2024 and consequently extend such fees’ original expiration. The exit fees were increased by 2.50% to 6.50% of the principal amount borrowed pursuant to the Term Credit Agreement. The terms of borrowing under the Credit Agreements otherwise remain materially unchanged.
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Cash Requirements
We believe that our $4.6 million of cash and cash equivalents as of March 31, 2024, together with our anticipated operating cash flows and amounts available under the Facilities, including additional term loan borrowings of $5.0 million on May 14, 2024, will be sufficient to meet our anticipated cash requirements through at least May 2025. However, we may require or seek additional capital to fund our future operations and business strategy prior to May 2025. Accordingly, there is no assurance that we will not need or seek additional financing prior to such time.
We may elect to raise additional financing even before we need it if market conditions for raising additional capital are favorable. We may seek to raise additional financing through various sources, such as equity and debt financings, additional debt restructurings or refinancings, or through strategic collaborations and license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This is particularly true if economic and market conditions deteriorate or our business, financial performance or prospects deteriorate.
To the extent that we raise additional capital through the sale of equity or convertible debt securities or the restructuring or refinancing of our debt, the interests of our current stockholders may be diluted, and the terms may include discounted equity purchase prices, warrant coverage, liquidation or other preferences or rights that would adversely affect the rights of our current stockholders. If we issue common stock, we may do so at purchase prices that represent a discount to our trading price and/or we may issue warrants to the purchasers, which could further dilute our current stockholders. If we issue preferred stock, it could adversely affect the rights of our stockholders or reduce the value of our common stock. In particular, specific rights or preferences granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Prior to raising additional equity or debt financing, we may be required to obtain the consent of MidCap Financial Trust and MidCap Funding IV Trust under our Credit Agreements and/or ROS and Royalty Opportunities under our Investor Rights Agreement with them, and no assurance can be provided that they would provide such consent, which could limit our ability to raise additional financing and the terms thereof.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
There have been no changes in our critical accounting estimates for the three months ended March 31, 2024 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
As a smaller reporting company, we are not required to provide the information required by this Item.
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| ITEM 4. | Controls and Procedures |
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2024. Based upon that evaluation, and as a result of the material weakness in our internal control over financial reporting discussed below, our principal executive officer and principal financial officer concluded that as of March 31, 2024, our disclosure controls and procedures were not effective.
Previously Reported Material Weakness in Internal Control over Financial Reporting
As previously described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, in connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2023, we identified certain control deficiencies in the design and implementation of our internal control over financial reporting, which constituted two material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
More specifically, our controls surrounding the completeness and accuracy of information utilized in determining the open balance sheet fair value of inventory, which includes the establishment of inventory reserves, related to the acquisition of the hardware and biologics business of Surgalign Holdings. were insufficient and did not operate at an appropriate level of precision. Our review of certain data and assumptions utilized in our valuation of opening balance sheet inventory failed to identify inconsistent assumptions related to inventory utilization and inventory costing. This constituted a material weakness. In addition to the foregoing material weakness, due to insufficient time and resources, we did not appropriately design, implement and execute sufficient controls and procedures to verify the existence of inventory on consignment that was acquired in connection with our acquisitions of Surgalign SPV. and the hardware and biologics business of Surgalign Holdings during the year ended December 31, 2023, resulting in a second material weakness.
The material weaknesses described above, if not remediated, could result in a material misstatement of one or more disclosures in our annual or interim consolidated financial statements that would not be prevented or detected in a timely manner.
Our management, under the oversight of the Audit Committee of the Board of Directors, is continuing to implement measures designed to improve our internal control over financial reporting to remediate the identified material weaknesses. The remediation actions we are taking, and expect to take, include the following:
| ● | Precision of Controls Related to Completeness and Accuracy of Information Utilized in Determining the Opening Balance Sheet Fair Value of Inventory. To prevent similar occurrences in the future, we plan to add additional accounting personnel to allow for more robust review of nonrecurring, complex transactions. We expect to have additional headcount in place by end of fiscal 2024. Additionally, if necessary, we may utilize external accounting resources to review future valuations of acquired inventory. | |
| ● | Insufficient Procedures to Confirm the Existence of Acquired Consigned Inventory. Beginning in the first quarter of 2024, we began subjecting our acquired consigned inventory to our ongoing inventory field audits, with the goal of verifying all consigned inventory acquired during the year ended December 31, 2024. We expect this process to be completed by the end of fiscal 2024. |
As management continues to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the material weaknesses. However, we cannot provide assurance that the measures we have taken to date, or that we may take in the future, will be sufficient to remediate the material weaknesses or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
Other than the remediation steps described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| PART II. | OTHER INFORMATION |
| ITEM 1. | Legal Proceedings |
Our legal proceedings are discussed in Note 14, “Commitments and Contingencies,” in the notes to our condensed consolidated financial statements in this Form 10-Q.
| Item 1A. | Risk Factors |
As a smaller reporting company, we are not required to provide the information required by this Item.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
| ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
| ITEM 4. | Mine Safety Disclosures |
Not applicable.
| ITEM 5. | Other Information |
Entry into a Material Definitive Agreement
On May 14, 2024, we entered into Amendment No. 1 to Amended and Restated Credit, Security and Guarantee Agreement (Term Loan) (“Term Amendment No. 1”), which amends the Amended and Restated Credit, Security and Guarantee Agreement (Term Loan) by and among the Company, as guarantor, and certain of our subsidiaries, as borrowers, MidCap Financial Trust, as agent, and lenders from time to time party thereto (as amended, the “Term Credit Agreement”), and Amendment No. 1 to Amended and Restated Credit, Security and Guarantee Agreement (Revolving Loan) (“Revolving Amendment No. 1” and, together with Term Amendment No. 1, the “Amendments No. 1”), which amends the Amended and Restated Credit, Security and Guarantee Agreement (Revolving Loan) by and among the Company, as guarantor, and certain of our subsidiaries, as borrowers, MidCap Funding IV Trust, as agent, and lenders from time to time party thereto (as amended, the “Revolving Credit Agreement” and, together with the Term Credit Agreement, the “Credit Agreements”).
The Term Amendment No. 1 increases the amount of term loans that may be borrowed by $5.0 million to a maximum of $22.0 million, which are fully drawn as of May 14, 2024. In addition, the Amendments No. 1 re-set the date certain fees payable in connection with optional prepayments are determined to May 14, 2024 and consequently extend such fees’ original expiration. The exit fees were increased by 2.50% to 6.50% of the principal amount borrowed pursuant to the Term Credit Agreement. The terms of borrowing under the Credit Agreements otherwise remain materially unchanged.
The foregoing summary of the Amendments No. 1 is not complete and is qualified in its entirety by reference to the full text of the Amendments No. 1, which are filed as exhibits to this Quarterly Report on Form 10-Q.
Rule 10b5-1 Plan and Non-Rule 10b5-1 Trading Arrangement Adoptions, Terminations, and Modifications
During
the three months ended March 31, 2024, none of our directors or “officers” (as defined in Rule 16a-1(f) under the Exchange
Act)
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| ITEM 6. | Exhibits |
The following exhibits are being filed or furnished with this Quarterly Report on Form 10-Q:
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† All exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will furnish the omitted exhibits and schedules to the SEC upon request by the SEC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| XTANT MEDICAL HOLDINGS, INC. | ||
| Date: May 15, 2024 | By: | /s/ Sean E. Browne |
| Name: | Sean E. Browne | |
| Title: | President and Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: May 15, 2024 | By: | /s/ Scott C. Neils |
| Name: | Scott C. Neils | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) |
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