Xtant Medical (XTNT) - 2023 Q2 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This statement warns that forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements that are subject to various risks and uncertainties, potentially causing actual results to differ materially from projections[9][11] - Key risks include potential delays or failure in completing the Surgalign acquisition, challenges in integrating acquired businesses, the impact of inflation and supply chain disruptions, global economic slowdown, rising interest rates, labor shortages, and the ability to service debt and maintain liquidity[10][12] Part I. Financial Information This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section provides the unaudited condensed consolidated financial statements and comprehensive notes for the periods ended June 30, 2023 and 2022 Condensed Consolidated Balance Sheets This statement presents the company's financial position, including assets, liabilities, and equity, as of June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (In thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,138 | $20,298 | | Restricted cash | $310 | $209 | | Trade accounts receivable, net | $13,744 | $10,853 | | Inventories | $20,364 | $17,285 | | Total current assets | $39,571 | $49,318 | | Total Assets | $65,218 | $60,229 | | Total current liabilities | $16,989 | $15,218 | | Long-term debt, plus premium and less issuance costs | $16,401 | $9,687 | | Total Liabilities | $34,259 | $26,058 | | Total Stockholders' Equity | $30,959 | $34,171 | Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss for the three and six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Operations (In thousands, except per share amounts) | | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $20,232 | $15,277 | $38,176 | $28,236 | | Gross Profit | $12,459 | $8,374 | $22,995 | $15,934 | | Loss from Operations | $(1,391) | $(1,300) | $(2,967) | $(3,131) | | Net Loss | $(2,190) | $(1,710) | $(4,268) | $(3,923) | | Net Loss Per Share: Basic | $(0.02) | $(0.02) | $(0.04) | $(0.04) | | Net Loss Per Share: Dilutive | $(0.02) | $(0.02) | $(0.04) | $(0.04) | Condensed Consolidated Statements of Equity This statement outlines changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Equity (In thousands) | | Balance at Dec 31, 2022 | Stock-based Compensation | Net Loss | Balance at June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Common Stock Shares | 108,874,803 | — | — | 108,897,048 | | Additional Paid-In Capital | $277,841 | $1,056 | — | $278,897 | | Accumulated Deficit | $(243,670) | — | $(4,268) | $(247,938) | | Total Stockholders' Equity | $34,171 | $1,056 | $(4,268) | $30,959 | Condensed Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (In thousands) | | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,766) | $(989) | | Net cash used in investing activities | $(17,815) | $(645) | | Net cash provided by financing activities | $6,522 | $94 | | Net change in cash and cash equivalents and restricted cash | $(16,059) | $(1,540) | | Cash and cash equivalents and restricted cash at end of period | $4,448 | $16,847 | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed information supporting the financial statements, covering business, accounting policies, acquisitions, and revenue recognition (1) Business Description, Basis of Presentation and Summary of Significant Accounting Policies This note describes Xtant's business, the basis of financial statement presentation, and significant accounting policies and estimates - Xtant is a global medical technology company specializing in orthobiologics and spinal implant systems for spinal fusion procedures[24] - The financial statements are prepared using GAAP, with significant estimates made for assets, liabilities, revenue, and expenses, including goodwill, intangible assets, and valuation allowances[25][28] - Restricted cash includes lockbox deposits temporarily restricted due to timing, applied against the line of credit the next business day[29] (2) Acquisition of Coflex and CoFix Product Lines This note details the February 2023 acquisition of Surgalign SPV, Inc. for $17.0 million, adding Coflex and CoFix product lines and recognizing goodwill - Xtant acquired Surgalign SPV, Inc. on February 28, 2023, for $17.0 million in cash, adding the Coflex and CoFix product lines[35][38] - The Coflex and CoFix products are FDA PMA-approved for treating moderate to severe lumbar spinal stenosis, enhancing Xtant's spine portfolio with minimally invasive, motion-preserving stabilization[36][42] Preliminary Purchase Price Allocation (in thousands) | Acquired Assets | Amount | | :--- | :--- | | Inventories | $1,589 | | Equipment | $947 | | Intangible assets | $11,155 | | Net assets acquired | $13,691 | | Goodwill | $3,309 | | Total purchase consideration | $17,000 | Unaudited Pro Forma Combined Financial Information (Six Months Ended June 30, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Revenues | $40,000 | $31,828 | | Net loss | $(3,745) | $(2,543) | (3) Asset Purchase Agreement This note describes the June 2023 agreement to acquire Surgalign Holdings' assets for $5 million, pending Bankruptcy Court approval and expected to close by September 1, 2023 - On June 18, 2023, Xtant agreed to acquire specified assets and assume certain liabilities of Surgalign Holdings, Inc. for $5 million in cash[44] - The transaction is being conducted through a Bankruptcy Court-supervised process, with Xtant designated as the successful bidder in an auction on July 28, 2023[45] - Closing of the transaction is expected after the Bankruptcy Court sale hearing on August 8, 2023, but no later than September 1, 2023[45] (4) Revenue This note details revenue recognition policies for orthopedic product sales, primarily in the U.S., and presents revenue by product line - Revenue is primarily generated from independent commissioned sales agents in the U.S. and recognized upon product utilization by hospitals or transfer of control to stocking/private label resellers[46][48] Revenue by Product Line (in thousands) | Product Line | Q2 2023 Revenue | Q2 2023 % of Total | Q2 2022 Revenue | Q2 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | Orthobiologics | $14,315 | 71% | $12,402 | 81% | | Spinal implant | $5,917 | 29% | $2,875 | 19% | | Other revenue | $— | 0% | $— | 0% | | Total revenue | $20,232 | 100% | $15,277 | 100% | | Product Line | H1 2023 Revenue | H1 2023 % of Total | H1 2022 Revenue | H1 2022 % of Total | | :--- | :--- | :--- | :--- | :--- | | Orthobiologics | $27,866 | 73% | $22,568 | 80% | | Spinal implant | $10,309 | 27% | $5,659 | 20% | | Other revenue | $1 | 0% | $9 | 0% | | Total revenue | $38,176 | 100% | $28,236 | 100% | (5) Receivables This note outlines the company's policy for the allowance for credit losses, based on historical experience and current economic conditions Allowance for Credit Losses Activity (in thousands) | | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Balance at January 1 | $515 | $552 | | Provision for expected credit losses (Q1) | $106 | $191 | | Write-offs charged against allowance (Q1) | $— | $(173) | | Balance at March 31 | $621 | $570 | | Provision for expected credit losses (Q2) | $119 | $(49) | | Write-offs charged against allowance (Q2) | $— | $(11) | | Balance at June 30 | $740 | $510 | (6) Inventories This note provides a breakdown of the company's inventories, including raw materials, work in process, and finished goods Inventories (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Raw materials | $6,359 | $5,628 | | Work in process | $1,406 | $798 | | Finished goods | $12,599 | $10,859 | | Total | $20,364 | $17,285 | (7) Property and Equipment, Net This note details the composition of property and equipment, net, including depreciation expense, for the periods presented Property and Equipment, Net (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Equipment | $5,597 | $5,598 | | Computer equipment | $1,158 | $1,043 | | Computer software | $230 | $230 | | Leasehold improvements | $4,105 | $4,105 | | Surgical instruments | $12,209 | $11,266 | | Assets not yet in service | $2,079 | $1,507 | | Total cost | $25,378 | $23,749 | | Less: accumulated depreciation | $(18,503) | $(17,964) | | Property and equipment, net | $6,875 | $5,785 | - Depreciation expense for property and equipment was $0.4 million for Q2 2023 (vs $0.3 million in Q2 2022) and $0.7 million for H1 2023 (vs $0.6 million in H1 2022)[52] (8) Intangible Assets This note details the company's intangible assets, including patents, customer relationships, and trade names, and their amortization Intangible Assets (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Patents | $2,617 | $807 | | Customer relationships | $8,100 | $— | | Trade names | $1,245 | $— | | Total cost | $11,962 | $807 | | Less: accumulated amortization | $(1,042) | $(463) | | Intangible assets, net | $10,920 | $344 | (9) Accrued Liabilities This note provides a breakdown of accrued liabilities, primarily cash compensation/commissions payable and other accrued items Accrued Liabilities (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash compensation/commissions payable | $5,455 | $4,464 | | Other accrued liabilities | $800 | $1,032 | | Accrued liabilities | $6,255 | $5,496 | (10) Debt This note details the company's long-term debt, including term loan amendments, increased borrowings, and effective interest rates as of June 30, 2023 Long-Term Debt (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Amounts due under the term loan | $17,000 | $12,000 | | Accrued end-of-term payments | $337 | $216 | | Less: unamortized debt issuance costs | $(228) | $(196) | | Less: current maturities | $(708) | $(2,333) | | Long-term debt, less issuance costs | $16,401 | $9,687 | - The term loan agreement was amended on February 28, 2023, to provide an additional $5.0 million in funding and increase the minimum interest rate from 1% to 2.5%[55] - The interest-only period on the term loan was extended until June 2024, after which monthly principal payments of approximately $0.7 million will be required[56] - As of June 30, 2023, the effective rate of the term loan was 13.79%, and the revolving credit agreement was 9.77%; the company had $3.0 million available under the revolving credit agreement[57] (11) Stock-Based Compensation This note details stock option and restricted stock unit activity, unrecognized compensation expense, and the new 2023 Equity Incentive Plan Stock Option Activity (Six Months Ended June 30) | | 2023 Shares | 2023 Avg. Exercise Price | 2022 Shares | 2022 Avg. Exercise Price | | :--- | :--- | :--- | :--- | :--- | | Outstanding at January 1 | 3,360,664 | $1.51 | 3,201,666 | $1.80 | | Granted | 130,000 | $0.74 | 109,164 | $0.65 | | Cancelled or expired | (75,460) | $18.61 | (443,125) | $2.39 | | Outstanding at June 30 | 3,415,204 | $1.49 | 2,867,705 | $1.66 | | Exercisable at June 30 | 1,438,894 | $1.93 | 599,063 | $2.71 | Restricted Stock Unit Activity (Six Months Ended June 30) | | 2023 Shares | 2023 Avg. Fair Value | 2022 Shares | 2022 Avg. Fair Value | | :--- | :--- | :--- | :--- | :--- | | Outstanding at January 1 | 3,612,433 | $0.88 | 2,970,104 | $1.39 | | Granted | 186,831 | $0.71 | 88,983 | $0.65 | | Vested | (22,245) | $0.65 | (244,721) | $1.45 | | Cancelled | (494,121) | $0.54 | (318,807) | $1.32 | | Outstanding at June 30 | 3,282,898 | $0.92 | 2,495,559 | $1.36 | - As of June 30, 2023, total unrecognized compensation expense related to unvested stock options was approximately $1.5 million, and for restricted stock units, it was $2.0 million, both expected to be recognized over a weighted-average period of 2.0 years[58][61] - The 2023 Equity Incentive Plan was approved on July 26, 2023, replacing the 2018 Plan for future grants and making available up to 5,500,000 new shares, plus remaining and forfeited shares from the 2018 Plan[62] (12) Warrants This note provides information on the company's outstanding and exercisable warrants, including exercise price and remaining term - As of June 30, 2023, there were 12,187,470 outstanding and exercisable warrants to purchase common stock[63] - The warrants have a weighted average exercise price of $1.53 per share and a weighted average remaining contractual term of 3.3 years[63] (13) Commitments and Contingencies This note details operating lease obligations, rent expense, and the company's assessment of potential liabilities from legal proceedings Future Minimum Operating Lease Payments (in thousands) | Period | Amount | | :--- | :--- | | Remainder of 2023 | $271 | | 2024 | $559 | | 2025 | $470 | | Total future minimum lease payments | $1,300 | | Less amount representing interest | $(92) | | Present value of obligations under operating leases | $1,208 | | Less current portion | $(488) | | Long-term operating lease obligations | $720 | - Rent expense was $0.1 million for the three months ended June 30, 2023 and 2022, and $0.3 million for the six months ended June 30, 2023 and 2022[65] - The company assesses potential liabilities from legal actions and accrues estimated losses when probable and reasonably estimable, believing current accruals are adequate[66] (14) Income Taxes This note explains the company's deferred tax assets and the establishment of a valuation allowance due to uncertainty of future profitability - A valuation allowance has been established against the entire deferred income tax asset balance due to uncertainty about the company's ability to generate future taxable income[69] - No interest or penalties related to income taxes were recognized for the three and six months ended June 30, 2023 and 2022[70] (15) Supplemental Disclosure of Cash Flow Information This note provides supplemental cash flow information, including cash paid for interest and non-cash investing activities Supplemental Cash Flow Information (Six Months Ended June 30, in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Cash paid during the period for: Interest | $1,171 | $667 | | Non-cash activities: Fixed assets acquired under finance lease | $— | $159 | (16) Related Party Transactions This note discloses related party transactions with OrbiMed-affiliated funds and the approval process by the Audit Committee - OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP, funds affiliated with OrbiMed Advisors LLC, beneficially own 67% of the Company's common stock[72] - All related party transactions are reviewed and approved by the Audit Committee or disinterested members of the Board of Directors[73] (17) Segment and Geographic Information This note confirms the company operates in a single segment, with revenue primarily generated in the United States - The company operates in a single operating segment: the development, manufacture, and marketing of orthopedic medical products and devices[74] Revenue by Major Geographic Area (in thousands) | Geographic Area | Q2 2023 Revenue | Q2 2022 Revenue | H1 2023 Revenue | H1 2022 Revenue | | :--- | :--- | :--- | :--- | :--- | | United States | $19,987 | $15,025 | $37,501 | $27,719 | | Rest of world | $245 | $252 | $675 | $517 | | Total revenue | $20,232 | $15,277 | $38,176 | $28,236 | - Approximately 99% of sales for both the three and six months ended June 30, 2023 and 2022, were in the United States[75] (18) Subsequent Event This note details a July 2023 private placement of 20 million common shares, raising $15.0 million for working capital - On July 3, 2023, Xtant entered into a securities purchase agreement for a private placement, issuing 20,000,000 shares of common stock at $0.75 per share[77] - The private placement closed on July 6, 2023, generating gross proceeds of $15.0 million, which are expected to be used for working capital and general corporate purposes[77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operational results, business overview, acquisitions, liquidity, and critical accounting estimates Business Overview Xtant develops and markets regenerative and stabilization medicine products for orthopedic and neurological surgeons, focusing on the U.S. market with key growth initiatives - Xtant develops, manufactures, and markets regenerative and stabilization medicine products and medical devices for orthopedic and neurological surgeons, including orthobiologics and spinal implant systems[79] - The company promotes products in the U.S. through independent distributors and stocking agents, with a national accounts program for IDNs and GPOs, and also sells internationally[80] - Key growth initiatives include introducing new products, expanding the distribution network, penetrating adjacent markets, and leveraging growth platforms with technology and strategic acquisitions[81] Acquisition of Coflex and CoFix Product Lines This section reiterates the February 2023 acquisition of Surgalign SPV, Inc. for $17.0 million, adding FDA-approved Coflex and CoFix products - On February 28, 2023, Xtant acquired Surgalign SPV, Inc. for $17.0 million, gaining the Coflex and CoFix product lines[82] - The Coflex and CoFix products are FDA-approved for treating moderate to severe lumbar spinal stenosis, providing minimally invasive, motion-preserving stabilization[83] Recent Development: Asset Purchase Agreement This section details the June 2023 Asset Purchase Agreement to acquire Surgalign Holdings' assets for $5 million, pending bankruptcy court approval - On June 18, 2023, Xtant agreed to acquire specific assets and assume liabilities from Surgalign Holdings, Inc. for $5 million[85] - The acquisition is part of a Chapter 11 bankruptcy process, with Xtant designated as the successful bidder in an auction on July 28, 2023[87] - The closing of the transaction is anticipated after the Bankruptcy Court sale hearing on August 8, 2023, and no later than September 1, 2023[87] Recent Development: July 2023 Private Placement This section describes the July 2023 private placement of 20 million common shares, raising $15.0 million for working capital - On July 3, 2023, Xtant issued 20,000,000 shares of common stock in a private placement at $0.75 per share[88] - The private placement generated $15.0 million in gross proceeds, intended for working capital and general corporate purposes[88] Results of Operations This section analyzes the company's financial performance, detailing changes in revenue, cost of sales, gross profit, and operating expenses Revenue This subsection analyzes the company's revenue performance for the three and six months ended June 30, 2023, compared to the prior year - Total revenue for the three months ended June 30, 2023, increased by 32% to $20.2 million (from $15.3 million in 2022)[89] - Total revenue for the six months ended June 30, 2023, increased by 35% to $38.2 million (from $28.2 million in 2022)[89] - These increases are primarily attributed to greater independent agent sales, the contribution of Coflex and CoFix product sales, and opportunistic private label sales[89] Cost of Sales and Gross Profit This subsection analyzes changes in cost of sales and gross profit, including factors impacting gross profit percentage - Cost of sales increased by 12% to $7.7 million for the three months ended June 30, 2023, and by 23% to $15.1 million for the six months ended June 30, 2023, primarily due to higher sales volumes[90] - Gross profit as a percentage of revenue increased to 61.6% for Q2 2023 (from 54.8% in Q2 2022) and to 60.2% for H1 2023 (from 56.4% in H1 2022)[91] - The increase in gross profit percentage was driven by the impact of Coflex and CoFix products (580 basis points for Q2, 550 for H1) and decreased charges for excess and obsolete inventory, partially offset by higher product costs[91] General and Administrative This subsection analyzes changes in general and administrative expenses, including contributing factors like amortization and compensation - General and administrative expenses increased by 31% to $5.0 million for Q2 2023 (from $3.8 million in Q2 2022) and by 27% to $9.8 million for H1 2023 (from $7.8 million in H1 2022)[93] - The increase was primarily due to amortization of intangible assets from Coflex/CoFix ($0.4 million for Q2, $0.6 million for H1), additional compensation expense related to headcount ($0.4 million for Q2, $0.8 million for H1), and acquisition-related professional fees ($0.2 million for Q2, $0.3 million for H1)[93] Sales and Marketing This subsection analyzes changes in sales and marketing expenses, driven by commission and compensation increases - Sales and marketing expenses increased by 55% to $8.7 million for Q2 2023 (from $5.6 million in Q2 2022) and by 45% to $15.8 million for H1 2023 (from $10.8 million in H1 2022)[94] - The increase was primarily driven by additional commission expense due to revenue growth ($1.7 million for Q2, $2.9 million for H1) and additional compensation expense related to headcount ($0.8 million for Q2, $1.1 million for H1)[94] Research and Development This subsection analyzes changes in research and development expenses for the periods presented - Research and development expenses remained stable at $0.2 million for the three months ended June 30, 2023 and 2022[95] - For the six months ended June 30, 2023, R&D expense was $0.4 million, a decrease from $0.5 million in the same period of 2022[95] Interest Expense This subsection analyzes changes in interest expense, primarily due to higher rates and increased term loan borrowings - Interest expense increased to $0.8 million for Q2 2023 (from $0.4 million in Q2 2022) and to $1.4 million for H1 2023 (from $0.8 million in H1 2022)[96] - The increase was primarily due to higher base interest rates on debt instruments and an additional $5.0 million borrowing under the term loan in February 2023[96] - Annualized interest expense is expected to increase by approximately $0.1 million for every 50 basis points increase in the reference rate[96] Liquidity and Capital Resources This section discusses the company's working capital, cash flow activities, credit facilities, and future cash requirements, including the impact of acquisitions and financing Working Capital This subsection analyzes the company's working capital position, highlighting changes in cash, receivables, and inventory Working Capital (in thousands) | | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,448 | $20,507 | | Accounts receivable, net | $13,744 | $10,853 | | Inventories | $20,364 | $17,285 | | Total current assets | $39,571 | $49,318 | | Total current liabilities | $16,989 | $15,218 | | Net working capital | $22,582 | $34,100 | - The decrease in cash and cash equivalents is primarily due to the acquisition of Surgalign SPV, Inc. and the net loss incurred during the first six months of 2023, along with increases in accounts receivable and inventory[98] - A private placement in July 2023 generated $15.0 million in gross proceeds, expected to be used for working capital and general corporate purposes[99] Cash Flows This subsection analyzes the company's cash flows from operating, investing, and financing activities for the periods presented - Net cash used in operating activities increased to $4.8 million for H1 2023 (from $1.0 million in H1 2022), mainly due to increases in accounts receivable and inventory[100] - Net cash used in investing activities significantly increased to $17.8 million for H1 2023 (from $0.6 million in H1 2022), primarily due to the $17.0 million acquisition of Surgalign SPV, Inc[101] - Net cash provided by financing activities was $6.5 million for H1 2023 (from $94 thousand in H1 2022), mainly from $5.0 million in additional term loan borrowings[102] Current and Prior Credit Facilities This subsection details the company's term loan and revolving credit facilities, including amendments and compliance with covenants - The company has a Term Credit Agreement for $12.0 million (plus an additional $5.0 million tranche) and a Revolving Credit Agreement for up to $8.0 million, both maturing on May 1, 2026[104][107] - Amendments in February 2023 provided $5.0 million for the Surgalign SPV acquisition, reset prepayment fee dates, and increased the minimum interest rate from 1% to 2.5% for both facilities[106] - As of June 30, 2023, the company had $5.0 million outstanding and $3.0 million available under the Revolving Facility, and was in compliance with all credit agreement covenants[108][110] Cash Requirements This subsection discusses the company's projected liquidity, sufficiency of funds, and potential need for additional financing - The company believes its cash and cash equivalents ($4.1 million as of June 30, 2023), along with proceeds from the July 2023 private placement, available credit, and operating cash flows, will be sufficient through at least August 2024[111] - There is no assurance that additional financing will not be needed or that it will be available on acceptable terms, especially if market conditions deteriorate[112] - Raising additional capital through equity or convertible debt could dilute current stockholders, and debt financing may impose restrictive covenants[113] Critical Accounting Estimates This section discusses critical accounting estimates, particularly those related to business combinations and the valuation of acquired assets and liabilities Business Combinations This subsection details the accounting for business combinations, emphasizing the significant estimates and judgments in fair value allocation - Business acquisitions are accounted for by allocating total consideration to acquired assets and assumed liabilities based on their estimated fair values, with goodwill representing the excess consideration[116] - Assigning fair values to acquired net assets, especially intangible assets, inventory, and property/equipment, requires significant estimates and judgments, often involving third-party valuation specialists and various valuation methods (income, market, cost approaches)[117][118] - Estimates can be refined within one year of acquisition, and these judgments materially impact net earnings through depreciation, amortization, and potential impairment charges[119] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Xtant Medical Holdings, Inc. is exempt from providing market risk disclosures - As a smaller reporting company, Xtant Medical Holdings, Inc. is exempt from providing quantitative and qualitative disclosures about market risk[120] Item 4. Controls and Procedures This section details management's evaluation of disclosure controls and procedures, concluding their effectiveness and noting integration changes Limitations on Effectiveness of Controls and Procedures This subsection acknowledges the inherent limitations of any control system, providing only reasonable assurance of achieving objectives - Management acknowledges that any controls and procedures, regardless of design, can only provide reasonable assurance of achieving desired control objectives due to inherent limitations and resource constraints[121] Evaluation of Disclosure Controls and Procedures This subsection states management's conclusion on the effectiveness of disclosure controls and procedures as of June 30, 2023 - As of June 30, 2023, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[122] Changes in Internal Control over Financial Reporting This subsection reports on material changes in internal control over financial reporting, including those from the Surgalign SPV Inc. integration - There were no material changes in internal control over financial reporting during the three months ended June 30, 2023, other than those implemented to integrate the internal controls of Surgalign SPV Inc[123] Part II. Other Information This part provides additional information, including legal proceedings, risk factors, and exhibits, not covered in the financial statements Item 1. Legal Proceedings This section refers to Note 13 for details on the company's legal proceedings and potential liabilities - Information regarding legal proceedings is discussed in Note 13 – Commitments and Contingencies in the notes to the condensed consolidated financial statements[125] Item 1A. Risk Factors This section outlines new and revised risk factors, focusing on acquisition risks and the adverse effects of economic conditions on financial performance - Acquisitions and business combinations, including the pending Surgalign Holdings acquisition and completed Surgalign SPV acquisition, are inherently risky and may harm business, operating results, and financial condition due to integration difficulties, loss of key personnel, and unanticipated liabilities[126][128] - Worldwide economic and market conditions, including global slowdown, inflation, rising interest rates, bank failures, and supply chain disruptions, could materially and adversely affect the company's revenue, liquidity, financial condition, and results of operations[130] - The company's operating results may differ significantly from its guidance, which is speculative and subject to uncertainties, potentially causing the market price of common stock to decline[131][134][135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the registrant - This item is not applicable to the registrant[136] Item 3. Defaults Upon Senior Securities This item is not applicable to the registrant - This item is not applicable to the registrant[137] Item 4. Mine Safety Disclosures This item is not applicable to the registrant - This item is not applicable to the registrant[138] Item 5. Other Information This item is not applicable to the registrant - This item is not applicable to the registrant[139] Item 6. Exhibits This section lists all exhibits filed or furnished with the Quarterly Report on Form 10-Q, including agreements and certifications Selected Exhibits Filed with Form 10-Q | Exhibit No. | Description | | :--- | :--- | | 2.1 | Equity Purchase Agreement, dated February 28, 2023 | | 2.2 | Asset Purchase Agreement, dated June 18, 2023 | | 3.1-3.6 | Amended and Restated Certificate of Incorporation and Amendments | | 3.7 | Third Amended and Restated Bylaws | | 10.1 | Amendment No. 1 to Investor Rights Agreement | | 10.2 | Form of Indemnification Agreement for Directors and Officers | | 31.1-31.2 | Certification of Chief Executive Officer and Chief Financial Officer (Section 302) | | 32.1-32.2 | Certification of Chief Executive Officer and Chief Financial Officer (Section 906) | | 101 | Cover Page Interactive Data File (Inline XBRL) | Signatures This section contains the duly authorized signatures of the registrant's President, CEO, and CFO, affirming the report filing - The report is signed by Sean E. Browne, President and Chief Executive Officer, and Scott Neils, Chief Financial Officer, on August 1, 2023[145]