XTANT MEDICAL HOLDINGS, INC. 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
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
We have an extensive sales channel of independent commissioned agents and
stocking distributors in
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. 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.
Recent Acquisition of Coflex and CoFix Product Lines
On
Immediately prior to the Closing, Seller and its affiliates transferred and
assigned to Surgalign SPV, a privately held, newly formed entity, certain
intellectual property, contractual rights and other assets related to the
design, manufacture, sale and distribution of its Coflex and CoFix products in
For additional information regarding the acquisition of Surgalign SPV, refer to Note 2 - Acquisition of Coflex and CoFix Product Lines in the condensed consolidated financial statements in this Form 10-Q.
14 Results of Operations
Comparison of Three Months Ended
Revenue
Total revenue for the three months ended
Cost of Sales
Cost of sales consists primarily of manufacturing and product purchase costs as
well as depreciation of surgical trays. 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
Gross profit as a percentage of revenue increased 40 basis points to 58.7% for
the three months ended
General and Administrative
General and administrative expenses consist principally of personnel costs for
corporate employees, cash-based and stock-based compensation related costs, and
corporate expenses for legal, accounting and professional fees, and occupancy
costs. General and administrative expenses increased 20%, or
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 35%, or
Research and Development
Research and development expenses consist primarily of internal costs for the
development of new technologies and processes. Research and development expenses
were
15 Interest Expense
Interest expense is related to interest incurred from our debt instruments and
finance leases. Interest expense was
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, 2023 December 31, 2022
Cash and cash equivalents $ 5,410 $ 20,507
Accounts receivable, net 11,902 10,853
Inventories 18,522 17,285
Total current assets 36,587 49,318
Accounts payable 3,421 3,490
Accrued liabilities 5,595 5,496
Line of credit 3,002 3,379
Current portion of long-term debt 4,722 2,333
Total current liabilities 17,276 15,218
Net working capital 19,311 34,100
Our decrease in cash and cash equivalents is due primarily to the use of cash
for our acquisition of
Cash Flows
Net cash used in operating activities for the first three months of 2023 was
Net cash used in investing activities for the first three months of 2023 was
Net cash provided by financing activities for the first three months of 2023 was
Credit Facilities
On
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The Term Credit Agreement provides for a secured term loan facility (the "Term
Facility") in an aggregate principal amount of
On
On
The Facilities have a maturity date of
As of
The loans and other obligations pursuant to the Credit Agreements bear interest
at a per annum rate equal to the sum of the SOFR rate, as such term is defined
in the Credit Agreements, plus 0.11%, plus the applicable margin of 7.00% in the
case of the Term Credit Agreement, and 4.50% in the case of the Revolving Credit
Agreement, subject in each case to a floor of 2.50%. As of
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 minimum adjusted EBITDA and a minimum liquidity, in
each case at levels specified in the Credit Agreements. As of
17 Cash Requirements
We believe that our
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.
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 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 the Agent under our Credit Agreements
and/or
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
There have been no changes in our critical accounting estimates for the three
months ended
Business Combinations
When applicable, we account for the acquisition of a business in accordance with
the accounting standards codification guidance for business combinations,
whereby the total consideration transferred is allocated to the assets acquired
and liabilities assumed, including amounts attributable to non-controlling
interests, when applicable, based on their respective estimated fair values as
of the date of acquisition.
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Assigning estimated fair values to the net assets acquired requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. While the ultimate responsibility for determining estimated fair values of the acquired net assets resides with management, for material acquisitions, we may retain the services of certified valuation specialists to assist with assigning estimated fair values to certain acquired assets and assumed liabilities, including intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. Estimated fair values of acquired intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment are generally based on available historical information, future expectations, available market data, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, technological obsolescence, the useful life of the acquired assets, and other factors. These significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach, or the cost approach; estimating future cash flows based on projected revenues and/or margins that we expect to generate subsequent to the acquisition; applying an appropriate discount rate to estimate the present value of those projected cash flows we expect to generate; selecting an appropriate terminal growth rate and/or royalty rate or estimating a customer attrition or technological obsolescence factor where necessary and appropriate given the nature of the respective asset; assigning an appropriate contributory asset charge where needed; determining an appropriate useful life and the related depreciation or amortization method for the respective asset; and assessing the accuracy and completeness of other historical financial metrics of the acquiree used as standalone inputs or as the basis for determining estimated projected inputs such as margins, customer attrition, and costs to hold and sell product.
In determining the estimated fair value of intangible assets that are separately identifiable from goodwill, we typically utilize the income approach, which discounts the projected future cash flows using a discount rate that appropriately reflects the risks associated with the projected cash flows. Generally, we estimate the fair value of acquired customer relationships using the relief from royalty method under the income approach, which is based on the hypothetical royalty stream that would be received if we were to license the acquired trade name. For most other acquired intangible assets, we estimate fair value using the excess earnings method under the income approach, which is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group that includes the particular asset. In certain instances, particularly in relation to developed technology or patents, we may utilize the cost approach depending on the nature of the respective intangible asset and the recency of the development or procurement of such technology. The useful lives and amortization methods for the acquired intangible assets that are separately identifiable from goodwill are generally determined based on the period of expected cash flows used to measure the fair value of the acquired intangible assets and the nature of the use of the respective acquired intangible asset, adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors such as customer attrition rates and product or order lifecycles that may limit the useful life of the respective acquired intangible asset. In determining the estimated fair value of acquired inventory, we typically utilize the cost approach for raw materials and the sales comparison approach for work in process, finished goods, and service parts. In determining the estimated fair value of acquired property, plant, and equipment, we typically utilize the sales comparison approach or the cost approach depending on the nature of the respective asset and the recency of the construction or procurement of such asset.
We may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known as of the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to an acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill will affect any measurement of goodwill impairment taken during the measurement period, if applicable. If necessary, purchase price allocation revisions that occur outside of the measurement period are recorded within cost of sales, selling expenses or general and administrative expenses within our consolidated condensed statements of operations depending on the nature of the adjustment.
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