Xtant Medical Holdings Inc

Previous wording

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.

Current wording

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 Europe, Canada, Mexico, South America, Australia, and certain Pacific region countries.

Previous wording

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:

Current wording

We have focused and intend to continue to focus primarily on four key growth initiatives: (1) introduce new products, including our Cortera®Posterior Fixation System, viable bone matrix, OsteoVive® Plus, and amniotic membrane allografts, SimpliGraft™ and SimpliMax™; (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:

Previous wording

Comparison of Three and Six Months Ended June 30, 2024 and June 30, 2023

Current wording

Comparison of Three and Nine Months Ended September 30, 2024 and September 30, 2023

Previous wording

Total revenue for the three and six months ended June 30, 2024 was $29.9 million and $57.8 million, respectively, which represents an increase of 48% and 51%, respectively, compared to $20.2 million and $38.2 million for the three and six months ended June 30, 2023, respectively. These increases are attributed primarily to the contribution of additional sales resulting from the acquisition of the Surgalign Holdings’ hardware and biologics business.

Current wording

Total revenue for the three and nine months ended September 30, 2024 was $27.9 million and $85.8 million, respectively, which represents an increase of 12% and 36%, respectively, compared to $25.0 million and $63.2 million for the three and nine months ended September 30, 2023, respectively. These increases are attributed primarily to the contribution of additional sales resulting from the acquisition of the Surgalign Holdings’ hardware and biologics business, partially offset by reduced surgical procedures using our products in the current year periods as compared to the respective prior year periods.

Previous wording

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 46%, or $3.6 million, to $11.4 million for the three months ended June 30, 2024 from $7.8 million for the three months ended June 30, 2023. Cost of sales increased by 44%, or $6.8 million, to $21.9 million for the six months ended June 30, 2024 from $15.2 million for the six months ended June 30, 2023. These increases are primarily due to greater revenue in the 2024 periods compared to the comparable 2023 periods, as mentioned above.

Current wording

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 20%, or $1.9 million, to $11.6 million for the three months ended September 30, 2024 from $9.7 million for the three months ended September 30, 2023. Cost of sales increased by 35%, or $8.7 million, to $33.6 million for the nine months ended September 30, 2024 from $24.9 million for the nine months ended September 30, 2023. These increases are primarily due to greater revenue in the 2024 periods compared to the comparable 2023 periods, as mentioned above.

Previous wording

Gross profit as a percentage of revenue increased to 62.1% for the three months ended June 30, 2024 compared to 61.6% for the same period in 2023 and increased to 62.1% for the six months ended June 30, 2024 compared to 60.2% for the same period in 2023. Of the increase for the three-month comparison, 550 basis points were due to greater scale and improved production efficiency, partially offset by 260 basis points related to increased charges for excess and obsolete inventory and non-absorbed costs and 110 basis points related to sales mix. Of the increase for the six-month comparison, 570 basis points were due to greater scale and improved production efficiency, partially offset by 200 basis points related to increased charges for excess and obsolete inventory and non-absorbed costs and 100 basis points related to higher product cost.

Current wording

Gross profit as a percentage of revenue decreased to 58.4% for the three months ended September 30, 2024 compared to 61.3% for the same period in 2023 and increased to 60.9% for the nine months ended September 30, 2024 compared to 60.7% for the same period in 2023. Of the decrease for the three-month comparison, 350 basis points were due to reduced production throughput, partially offset by 100 basis points related to additional scale. Of the increase for the nine-month comparison, 250 basis points were due to greater scale, partially offset by 150 basis points related to reduced production throughput.

Previous wording

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 56%, or $2.8 million, to $7.7 million for the three months ended June 30, 2024, compared to $5.0 million for the same period in 2023. General and administrative expenses increased 58%, or $5.7 million, to $15.5 million for the six months ended June 30, 2024, compared to $9.8 million for the same period in 2023. The increase for the three-month comparison is primarily attributable to $0.7 million of additional compensation expense related to additional headcount, $0.8 million additional stock-based compensation, $0.3 million additional professional service fees and $0.2 million of additional hardware and software expense. The increase for the six-month comparison is primarily attributable to $1.7 million of additional compensation expense related to additional headcount, $1.1 million of additional stock-based compensation expense, $0.7 million of additional professional service fees, $0.5 million of additional consultant fees and $0.4 million of additional hardware and software expense.

Current wording

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 5%, or $0.4 million, to $7.5 million for the three months ended September 30, 2024, compared to $7.1 million for the same period in 2023. General and administrative expenses increased 35%, or $6.0 million, to $23.0 million for the nine months ended September 30, 2024, compared to $17.0 million for the same period in 2023. The increase for the three-month comparison is primarily attributable to $0.5 million of severance expense and $0.4 million of additional stock-based compensation. These increases were partially offset by reduced expense of $0.2 million related to various compensation plans. The increase for the nine-month comparison is primarily attributable to $1.4 million of additional expense related to various compensation plans, $1.5 million of additional stock-based compensation expense, $0.9 million of additional professional service fees, $0.5 million of additional hardware and software expense and $0.5 million of severance expense.

Previous wording

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 increased 51%, or $4.5 million, to $13.2 million for the three months ended June 30, 2024, compared to $8.7 million for the same period in 2023. Sales and marketing expenses increased 63%, or $9.9 million, to $25.6 million for the six months ended June 30, 2024, compared to $15.8 million for the same period in 2023. The increase for the three-month comparison is primarily due to additional commission expense of $2.8 million resulting from revenue growth and $1.2 million of additional compensation expense related to additional headcount. The increase for the six-month comparison is primarily due to additional commission expense of $5.7 million resulting from revenue growth, $2.8 million of additional compensation expense related to additional headcount and $0.6 million of additional consulting fees.

Current wording

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 increased 7%, or $0.8 million, to $11.9 million for the three months ended September 30, 2024, compared to $11.1 million for the same period in 2023. Sales and marketing expenses increased 40%, or $10.7 million, to $37.5 million for the nine months ended September 30, 2024, compared to $26.9 million for the same period in 2023. The increase for the three-month comparison is primarily due to additional commission expense of $0.6 million resulting from revenue growth. The increase for the nine-month comparison is primarily due to additional commission expense of $6.3 million resulting from revenue growth and $3.0 million of additional compensation expense related to additional headcount.

Previous wording

Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses were $0.6 million for the three months ended June 30, 2024, compared to $0.2 million for the same period in 2023. Research and development expenses were $1.2 million for the six months ended June 30, 2024, compared to $0.4 million for the same period in 2023. The increases for the three- and six-month comparisons are primarily due to $0.2 million and $0.4 million, respectively, of compensation expense related to additional headcount.

Current wording

Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses were $0.7 million for the three months ended September 30, 2024, compared to $0.5 million for the same period in 2023. Research and development expenses were $1.9 million for the nine months ended September 30, 2024, compared to $0.8 million for the same period in 2023. The increases for the three- and nine-month comparisons are primarily due to $0.1 million and $0.5 million, respectively, of compensation expense related to additional headcount.

Previous wording

Interest expense consists of interest incurred from our debt instruments and finance leases. Interest expense was $1.0 million and $1.8 million for the three and six months ended June 30, 2024, respectively, compared to $0.8 million and $1.4 million for the three and six months ended June 30, 2023. The increase in interest expense during the three- and six-month comparisons resulted primarily from additional borrowings on our revolving line of credit and the additional borrowing of $5.0 million under our term credit agreement in May 2024.

Current wording

Interest expense consists of interest incurred from our debt instruments and finance leases. Interest expense was $1.2 million and $3.0 million for the three and nine months ended September 30, 2024, respectively, compared to $0.8 million and $2.1 million for the three and nine months ended September 30, 2023. The increases in interest expense during the three- and nine-month comparisons resulted primarily from additional borrowings on our revolving line of credit and the additional borrowing of $5.0 million under our term credit agreement in May 2024.

Previous wording

Net cash used in operating activities for the first six months of 2024 was $10.8 million compared to $4.8 million for the first six months of 2023. This increase in net cash used in operating activities relates primarily to the combination of the increase in net losses during the first six months of 2024 compared to the prior year period and the effects of changes in operating assets and liabilities.

Current wording

Net cash used in operating activities for the first nine months of 2024 was $12.6 million compared to $8.6 million for the first nine months of 2023. This increase in net cash used in operating activities relates primarily to the combination of the increase in net loss during the first nine months of 2024 compared to the prior year period and the effects of changes in operating assets and liabilities.

Previous wording

Net cash used in investing activities for the first six months of 2024 was $1.2 million compared to $17.8 million for the first six 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 six months of 2023.

Current wording

Net cash used in investing activities for the first nine months of 2024 was $3.2 million compared to $22.5 million for the first nine months of 2023. This decrease relates primarily to the use of $21.4 million in cash for the acquisitions of Surgalign SPV, Inc. and Surgalign Holdings, Inc.’s hardware and biologics business during the first nine months of 2023.

Previous wording

Net cash provided by financing activities for the first six months of 2024 was $11.6 million compared to $6.5 million for the first six months of 2023. This increase relates primarily to $5.6 million of additional borrowings under the Revolving Facility, as defined below, net of repayments.

Current wording

Net cash provided by financing activities for the first nine months of 2024 was $16.9 million compared to $19.4 million for the first nine months of 2023. This decrease relates primarily to $9.6 million of greater proceeds from private placements during the first nine months of 2023, partially offset by greater borrowings during the first nine months of 2024 under the Revolving Facility, as defined below, net of repayments.

Previous wording

The Revolving Credit Agreement provides for a secured revolving credit facility (the “Revolving Facility,” and, together with the secured term credit facility under the Term Credit Agreement, 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.

Current wording

The Revolving Credit Agreement provides for a secured revolving credit facility (the “Revolving Facility,” and, together with the secured term credit facility under the Term Credit Agreement, the “Facilities”) under which the Borrowers may borrow up to $17.0 million 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.

Previous wording

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 June 30, 2024, the Company had $11.9 million outstanding and $5.1 million of availability under the Revolving Facility.

Current wording

The Facilities have a maturity date of March 1, 2029. 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 September 30, 2024, the Company had $12.9 million outstanding and $3.8 million of availability under the Revolving Facility.

Previous wording

We believe that our $5.5 million of cash and cash equivalents as of June 30, 2024, together with the net proceeds to our recent $5.0 million private placement, our anticipated operating cash flows and amounts available under the Facilities, will be sufficient to meet our anticipated cash requirements through at least August 2025. However, we may require or seek additional capital to fund our future operations and business strategy prior to August 2025. Accordingly, there is no assurance that we will not need or seek additional financing prior to such time.

Current wording

We believe that our $7.1 million of cash and cash equivalents as of September 30, 2024, together with our anticipated operating cash flows, including fees associated with licensing agreements, and amounts available under the Facilities, will be sufficient to meet our anticipated cash requirements through at least November 2025. However, we may require or seek additional capital to fund our future operations and business strategy prior to November 2025. Accordingly, there is no assurance that we will not need or seek additional financing prior to such time.

Previous wording

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.

Current wording

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, or additional debt restructurings or refinancings. 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.