ITEM
1. | FINANCIAL
STATEMENTS |
XTANT
MEDICAL HOLDINGS, INC.
Condensed
Consolidated Balance Sheets
(In
thousands, except number of shares and par value)
See
notes to unaudited condensed consolidated financial statements.
XTANT
MEDICAL HOLDINGS, INC.
Condensed
Consolidated Statements of Operations
(Unaudited,
in thousands, except number of shares and per share amounts)
See
notes to unaudited condensed consolidated financial statements.
XTANT
MEDICAL HOLDINGS, INC.
Condensed
Consolidated Statements of Equity
(Unaudited,
in thousands, except number of shares)
| |
Common Stock | | |
Additional Paid-In- | | |
Accumulated | | |
Total Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
Balance at December 31, 2020 | |
| 77,573,680 | | |
$ | — | | |
$ | 244,850 | | |
$ | (230,336 | ) | |
$ | 14,514 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Private placement of common stock, net of issuance costs of $1,926 | |
| 8,888,890 | | |
| — | | |
| 12,831 | | |
| — | | |
| 12,831 | |
Warrants issued in connection with the private placement | |
| — | | |
| — | | |
| 5,243 | | |
| — | | |
| 5,243 | |
Warrants issued in connection with the private placement to placement agents | |
| — | | |
| — | | |
| 351 | | |
| — | | |
| 351 | |
Common stock issued on vesting of restricted stock units | |
| 244,716 | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock-based compensation | |
| — | | |
| — | | |
| 456 | | |
| — | | |
| 456 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (29 | ) | |
| (29 | ) |
Balance at March 31, 2021 | |
| 86,707,286 | | |
| — | | |
| 263,731 | | |
| (230,365 | ) | |
| 33,366 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation | |
| — | | |
| — | | |
| 465 | | |
| — | | |
| 465 | |
Gain on debt extinguishment | |
| — | | |
| — | | |
| 786 | | |
| — | | |
| 786 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (733 | ) | |
| (733 | ) |
Balance at June 30, 2021 | |
| 86,707,286 | | |
| — | | |
| 264,982 | | |
| (231,098 | ) | |
| 33,884 | |
Beginning balance | |
| 86,707,286 | | |
| — | | |
| 264,982 | | |
$ | (231,098 | ) | |
| 33,884 | |
Common stock issued on vesting of restricted stock units | |
| 104,856 | | |
| — | | |
| — | | |
| — | | |
| — | |
Withholding of common stock upon vesting of restricted stock units | |
| (15,967 | ) | |
| — | | |
| (23 | ) | |
| — | | |
| (23 | ) |
Stock-based compensation | |
| — | | |
| — | | |
| 580 | | |
| — | | |
| 580 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (1,804 | ) | |
| (1,804 | ) |
Balance at September 30, 2021 | |
| 86,796,175 | | |
$ | — | | |
$ | 265,539 | | |
$ | (232,902 | ) | |
$ | 32,637 | |
Ending balance | |
| 86,796,175 | | |
$ | — | | |
$ | 265,539 | | |
$ | (232,902 | ) | |
$ | 32,637 | |
See
notes to unaudited condensed consolidated financial statements.
XTANT
MEDICAL HOLDINGS, INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited,
in thousands)
See
notes to unaudited condensed consolidated financial statements.
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, Xtant Medical, Inc. (“Xtant Medical”), a Delaware corporation,
Bacterin International, Inc. (“Bacterin”), a Nevada corporation, and X-spine Systems, Inc. (“X-spine”), an Ohio
corporation (Xtant, Xtant Medical, Bacterin, and X-spine are jointly referred to herein as the “Company” or sometimes “we,”
“our,” or “us”). 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.
At
the onset of, and at various times during, the COVID-19 pandemic, hospitals and other medical facilities cancelled or deferred elective
procedures, diverted resources to patients suffering from infections and limited access for non-patients, including our direct and indirect
sales representatives. Especially during waves of increased cases and hospitalizations, surgeons and their patients have been required
or chosen to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in
which our products otherwise would be used have experienced temporary closures or reduced operating hours. These circumstances have negatively
impacted, and may continue to negatively impact, the ability of our employees, independent sales representatives and distributors to
effectively market and sell our products, which has had and may continue to have a material adverse effect on our revenues.
The
accompanying condensed consolidated balance sheet as of December 31, 2021, 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, 2022.
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, 2021. 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.
Private
Placement
On
August 25, 2022, the Company closed the first tranche of a private placement (the “First Closing”) with several accredited
investors (the “Private Placement”). At the First Closing, the Company sold approximately 14.1 million shares of common stock
of the Company (collectively, the “Shares”) and warrants to purchase approximately 3.5 million shares of common stock (collectively,
the “Warrants”) for an aggregate purchase price of approximately $6.75 million. We
received net cash proceeds of approximately $6.3 million, after deducting fees and other estimated offering expenses, from the First
Closing.
The
closing of the second tranche of the Private Placement (the “Second Closing”) occurred on October 7, 2022. At the Second
Closing, the Company sold an additional approximately 6.2 million shares of common stock of the Company and warrants to purchase approximately
1.6 million shares of common stock for an aggregate purchase price of approximately $3.0 million.
The
Warrants, described in more detail in Note 10, “Warrants”, have an exercise price of $0.48 per share, are subject
to customary anti-dilution, but not price protection, adjustments, are immediately exercisable and expire on the five-year anniversary
of the First Closing.
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 and intangible assets and liabilities, valuation allowances for trade
receivables, inventory and deferred income tax assets and liabilities, current and long-term lease obligations and corresponding right-of-use
asset 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 our condensed consolidated balance sheets are restricted as to withdrawal or use
under the terms of certain credit agreements. The September 30, 2022 balance included lockbox deposits that are temporarily restricted
due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.
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. No impairments of long-lived assets were recorded for the three and nine months ended September 30, 2022
and 2021.
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. No impairments of goodwill
were recorded for the three and nine months ended September 30, 2022 and 2021.
Net
Loss Per Share
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 17,192,048 and 14,138,224
outstanding stock options, restricted stock units and warrants for the three and nine months ended September 30, 2022 and 2021, respectively,
are anti-dilutive.
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 September 30, 2022 and December 31, 2021.
(2) Revenue
In
the United States, we generate most of our revenue from independent commissioned sales agents. We consign our orthobiologics products
to hospitals and consign or loan our spinal implant sets to the 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.
We
ship 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. Upon receipt of the hospital purchase order, the Company invoices the hospital,
and revenue is recognized in the proper period. Additionally, the Company sells product directly to domestic and international stocking
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 control of the promised goods is transferred to the customer, in an amount
that reflects the consideration the Company expects to collect in exchange for those goods or services. 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.
The
Company operates in one reportable segment with its net revenue derived primarily from the sale of orthopaedic medical products and devices
across North America, Europe, Asia Pacific, and Latin America. Sales are reported net of returns. The following table presents revenues
from these product lines for the three and nine months ended September 30, 2022 and 2021 (in thousands):
Summary
of Revenues from Product Lines
| |
Three Months Ended September
30, 2022 | | |
Percentage of Total Revenue | | |
Three Months Ended September 30, 2021 | | |
Percentage of Total Revenue | |
Orthobiologics | |
$ | 12,046 | | |
| 83 | % | |
$ | 10,795 | | |
| 78 | % |
Spinal implant | |
| 2,416 | | |
| 17 | % | |
| 2,948 | | |
| 22 | % |
Other revenue | |
| — | | |
| 0 | % | |
| 34 | | |
| 0 | % |
Total revenue | |
$ | 14,462 | | |
| 100 | % | |
$ | 13,777 | | |
| 100 | % |
| |
Nine Months Ended September 30, 2022 | | |
Percentage of Total Revenue | | |
Nine Months Ended September 30, 2021 | | |
Percentage of Total Revenue | |
Orthobiologics | |
$ | 34,614 | | |
| 81 | % | |
$ | 31,264 | | |
| 76 | % |
Spinal implant | |
| 8,075 | | |
| 19 | % | |
| 9,929 | | |
| 24 | % |
Other revenue | |
| 10 | | |
| 0 | % | |
| 100 | | |
| 0 | % |
Total revenue | |
$ | 42,699 | | |
| 100 | % | |
$ | 41,293 | | |
| 100 | % |
(3) 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. Activity within the allowance for credit losses was as follows for the three and
nine months ended September 30, 2022 and 2021 (in thousands):
Schedule
of Allowance for Credit Losses
| |
September 30,
2022 | | |
September 30,
2021 | |
Balance at January 1 | |
$ | 552 | | |
$ | 653 | |
Provision for current expected credit losses | |
| 191 | | |
| (63 | ) |
Write-offs charged against allowance | |
| (173 | ) | |
| (36 | ) |
Balance at March 31 | |
| 570 | | |
| 554 | |
Provision for current expected credit losses | |
| (49 | ) | |
| (81 | ) |
Write-offs charged against allowance | |
| (11 | ) | |
| (3 | ) |
Balance at June 30 | |
| 510 | | |
| 470 | |
Provision for current expected credit losses | |
| 54 | | |
| 118 | |
Write-offs charged against allowance | |
| (15 | ) | |
| (12 | ) |
Balance at September 30 | |
$ | 549 | | |
$ | 576 | |
(4) Inventories
Inventories
consist of the following (in thousands):
Schedule
of Inventories
| |
September 30,
2022 | | |
December 31,
2021 | |
Raw materials | |
$ | 5,121 | | |
$ | 5,613 | |
Work in process | |
| 957 | | |
| 571 | |
Finished goods | |
| 10,915 | | |
| 11,761 | |
Total | |
$ | 16,993 | | |
$ | 17,945 | |
(5) Property
and Equipment, Net
Property
and equipment, net are as follows (in thousands):
Schedule
of Property and Equipment, Net
| |
September 30,
2022 | | |
December 31,
2021 | |
Equipment | |
$ | 6,302 | | |
$ | 5,541 | |
Computer equipment | |
| 1,090 | | |
| 828 | |
Computer software | |
| 490 | | |
| 490 | |
Furniture and fixtures | |
| 104 | | |
| 94 | |
Leasehold improvements | |
| 4,333 | | |
| 3,994 | |
Other | |
| 10 | | |
| 10 | |
Surgical instruments | |
| 11,307 | | |
| 11,424 | |
Total cost | |
| 23,636 | | |
| 22,381 | |
Less: accumulated depreciation | |
| (17,967 | ) | |
| (17,169 | ) |
Property and equipment, net | |
$ | 5,669 | | |
$ | 5,212 | |
Depreciation
expense related to property and equipment, including property under finance leases, for the three months ended September 30, 2022 and
2021 was $0.4 million and $0.3 million, respectively, and $1 million for both the nine months ended September 30, 2022 and 2021.
(6) Intangible
Assets
The
following table sets forth information regarding intangible assets (in thousands):
Schedule
of Intangible Assets
| |
September 30,
2022 | | |
December 31,
2021 | |
Patents | |
$ | 807 | | |
$ | 847 | |
Accumulated amortization | |
| (449 | ) | |
| (447 | ) |
Intangible assets, net | |
$ | 358 | | |
$ | 400 | |
(7) Accrued
Liabilities
Accrued
liabilities consist of the following (in thousands):
Schedule
of Accrued Liabilities
| |
September 30,
2022 | | |
December 31,
2021 | |
Cash compensation/commissions payable | |
$ | 3,844 | | |
$ | 3,184 | |
Other accrued liabilities | |
| 1,177 | | |
| 1,165 | |
Accrued liabilities | |
$ | 5,021 | | |
$ | 4,349 | |
(8) Debt
Long-term
debt consists of the following (in thousands):
Schedule
of Long-term Debt
| |
September 30, 2022 | | |
December 31, 2021 | |
Amounts due under the Term Facility | |
$ | 12,000 | | |
$ | 12,000 | |
Accrued end-of-term payments | |
| 182 | | |
| 83 | |
Less: unamortized debt issuance costs | |
| (221 | ) | |
| (296 | ) |
Less: current maturities | |
| (1,335 | ) | |
| — | |
Long-term debt | |
$ | 10,626 | | |
$ | 11,787 | |
On
March 7, 2022, the Company’s term loan agreement and revolving credit agreement were amended to, among other things, (i) provide
for a waiver of compliance with respect to the Company’s minimum adjusted EBITDA requirement if and so long as the Company’s
liquidity (as specifically defined in the term loan agreement and revolving credit agreement) is in excess of $14 million and there is
not otherwise an event of default under the term loan agreement and revolving credit agreement, commencing March 31, 2022, and (ii) re-set
the date certain fees payable in connection with optional prepayments are determined to the date the amendment was executed and consequently
extend such fees’ original expiration. In addition, the final payment fees associated with the term loan were increased by 25 basis
points.
The
effective rate of the term loan, inclusive of amortization of debt issuance costs and accretion of the final payment, was 11.53% as of
September 30, 2022. The effective rate of the revolving credit agreement was 7.07% as of September 30, 2022. As of September 30, 2022,
the Company had $7.3 million available under the revolving credit agreement.
On
October 27, 2022, the Company’s term loan and revolving credit agreements were amended to transition the reference rate from LIBOR
to term SOFR. The term SOFR reference rate will apply to amounts outstanding and draws that place on or after November 1, 2022.
(9) Stock-Based
Compensation
Stock
option activity, including options granted under the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan, as amended (the “2018
Plan”), and the Amended and Restated Xtant Medical Equity Incentive Plan and options granted to new hires to purchase shares of
our common stock outside of any stockholder-approved plan, was as follows for the nine months ended September 30, 2022 and 2021:
Schedule of Share-based
Compensation, Stock Options, Activity
| |
2022 | | |
2021 | |
| |
Shares | | |
Weighted
Average
Exercise
Price
Per
Share | | |
Weighted
Average
Remaining
Contract
Term
(years) | | |
Shares | | |
Weighted
Average
Exercise
Price
Per
Share | | |
Weighted Average Remaining Contract Term (years) | |
Outstanding at January 1 | |
| 3,201,666 | | |
$ | 1.80 | | |
| | | |
| 2,190,892 | | |
$ | 2.25 | | |
| | |
Granted | |
| 109,164 | | |
$ | 0.65 | | |
| | | |
| 1,012,083 | | |
$ | 1.27 | | |
| | |
Cancelled or expired | |
| (443,125 | ) | |
$ | 2.39 | | |
| | | |
| (269 | ) | |
$ | 314.19 | | |
| | |
Outstanding at September 30 | |
| 2,867,705 | | |
$ | 1.66 | | |
| 8.1 | | |
| 3,202,706 | | |
$ | 1.92 | | |
| 9.1 | |
Exercisable at September 30 | |
| 828,978 | | |
$ | 2.37 | | |
| 7.8 | | |
| 210,028 | | |
$ | 9.02 | | |
| 7.4 | |
Restricted
stock unit activity for awards granted under the 2018 Plan was as follows for the nine months ended September 30, 2022 and 2021:
Schedule of Restricted
Stock Activity
| |
2022 | | |
2021 | |
| |
Shares | | |
Weighted Average Fair Value at Grant Date Per Share | | |
Shares | | |
Weighted Average Fair Value at Grant Date Per Share | |
Outstanding at January 1 | |
| 2,970,104 | | |
$ | 1.39 | | |
| 2,503,698 | | |
$ | 1.54 | |
Granted | |
| 1,898,808 | | |
$ | 0.53 | | |
| 1,249,002 | | |
$ | 1.27 | |
Vested | |
| (851,955 | ) | |
$ | 1.33 | | |
| (349,572 | ) | |
$ | 1.92 | |
Cancelled | |
| (318,805 | ) | |
$ | 1.38 | | |
| — | | |
$ | — | |
Outstanding at September 30 | |
| 3,698,152 | | |
$ | 0.96 | | |
| 3,403,128 | | |
$ | 1.40 | |
At
the 2022 annual meeting of stockholders held on October 26, 2022, our shareholders approved an amendment to the 2018 Plan to increase
the number of shares of common stock available thereunder by 8,500,000 shares.
(10) Warrants
As
noted in Note 1, “Business Description, Basis of Presentation and Summary of Significant Accounting Policies,” on
August 25, 2022, the Company issued the Warrants. The Warrants meet all the requirements to be classified as equity awards in accordance
with Accounting Standards Codification (“ASC”) No. 815-40. The number of shares of Company common stock issuable upon exercise
of the Warrants is subject to standard and customary anti-dilution provisions for stock splits, stock dividends, or similar transactions.
In addition, the Warrants include a buy-out right whereby the holders of such warrants may put the warrants back to the Company or its
successor in the event of a purchase, tender or exchange offer accepted by 50% or more of the Company’s holders of common stock
and not approved by the Company’s board of directors. The buy-out amount is equal to the Black-Scholes value of the warrants on
the date the triggering transaction is consummated based on certain inputs as defined in the Warrant agreement. The consideration to
be paid if the buy-out provision is triggered shall be in the same type or form of consideration that is being offered and paid to the
holders of Company common stock in connection with the triggering transaction.
While
the Warrants are classified as a component of equity, we were required to allocate the proceeds of the Private Placement between the
shares of common stock and the Warrants issued based on their relative fair values. The fair value of the Warrants, $0.40 per warrant,
issued in connection with the Private Placement was determined using a Black Scholes model. Significant assumptions in the model included
contractual term (5 years) and the estimated volatility factor of the Company’s stock (107%).
Our
warrant activity during the nine months ended September 30, 2022 was as follows:
Schedule of Warrant Activity
| |
Common Stock
Warrants | | |
Weighted Average
Exercise Price | |
Outstanding at January 1, 2022 | |
| 7,111,112 | | |
$ | 2.29 | |
Issued | |
| 3,515,079 | | |
| 0.48 | |
Outstanding at September 30, 2022 | |
| 10,626,191 | | |
$ | 1.69 | |
(11) Commitments
and Contingencies
Operating
Leases
We
lease three office facilities as of September 30, 2022 in Belgrade, Montana under non-cancelable operating lease agreements. On
July 14, 2022, the Company’s lease agreement for facilities at 600 Cruiser Lane in Belgrade, Montana was amended to, among other
things, extend the lease term through October 2025 to align the lease term with the Company’s lease agreement for facilities at
664 Cruisier Lane in Belgrade, Montana. In addition, the Company’s lease agreement for facilities at 732 Cruiser Lane in Belgrade,
Montana was amended on July 29, 2022 to extend the lease term through October 2025. We have the option to extend certain leases
to five or ten-year term(s), and we have the right of first refusal on any sale. As of September 30, 2022, the weighted-average remaining
lease term was 3.1 years.
Present
Value of Long-term Leases
Schedule of Lease Liability
(in thousands): | |
September 30,
2022 | |
Right-of-use assets, net | |
$ | 1,490 | |
| |
| | |
Current portion of lease liability | |
$ | 443 | |
Lease liability, less current portion | |
| 1,094 | |
Total lease liability | |
$ | 1,537 | |
Future
minimum payments for the next five years and thereafter as of September 30, 2022 under these long-term operating leases are as follows
(in thousands):
Schedule of Future Minimum
Rental Payments for Operating Leases
| |
| | |
Remainder of 2022 | |
| 131 | |
2023 | |
| 534 | |
2024 | |
| 559 | |
2025 | |
| 470 | |
Total future minimum lease payments | |
| 1,694 | |
Less amount representing interest | |
| (157 | ) |
Present value of obligations under operating leases | |
| 1,537 | |
Less current portion | |
| (443 | ) |
Long-term operating lease obligations | |
$ | 1,094 | |
Rent
expense was $0.1 million for both the three months ended September 30, 2022 and 2021 and $0.4 million for both the nine months ended
September 30, 2022 and 2021. We have no contingent rent agreements.
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. When
we believe that a loss is probable and reasonably estimable, we record a charge on our condensed consolidated statements of operations
for our estimated loss. We do not believe that the ultimate resolution of any such potential liabilities, claims or legal actions will
have a material adverse effect upon our consolidated financial position, results of operations, or cash flows.
Indemnifications
Our
indemnification arrangements generally include limited warranties and certain provisions for indemnifying customers against liabilities
if our products or services infringe a third-party’s intellectual property rights. To date, we have not incurred any material costs
as a result of such warranties or indemnification provisions and have not accrued any liabilities related to such obligations in the
accompanying condensed consolidated financial statements.
We
have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines, and
settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to
be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s
services as our director or officer or that person’s services provided to any other company or enterprise at our request.
(12) Income
Taxes
In
evaluating the realizability of the net deferred tax assets, we take into account a number of factors, primarily relating to the ability
to generate taxable income. Where it is determined that it is likely that we will be unable to realize deferred tax assets, a valuation
allowance is established against the applicable portion of the deferred tax asset. Because it cannot be accurately determined when or
if we will become profitable, a valuation allowance was provided against the entire deferred income tax asset balance.
The
Company did not recognize any interest or penalties related to income taxes for the three and nine months ended September 30, 2022 and
2021.
(13) Supplemental
Disclosure of Cash Flow Information
Supplemental
cash flow information is as follows (in thousands):
Schedule of Supplemental
Cash Flow Information
| |
2022 | | |
2021 | |
| |
Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Supplemental disclosure of cash flow information | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 1,022 | | |
$ | 485 | |
Non-cash activities: | |
| | | |
| | |
Fixed assets acquired under finance lease | |
$ | 159 | | |
$ | 163 | |
Revaluation of lease liability and right of use asset | |
$ | 234 | | |
$ | — | |
Gain on extinguishment of Second A&R Credit Agreement | |
$ | — | | |
$ | 786 | |
Extinguishment of Second A&R Credit Agreement financed by line of credit | |
$ | — | | |
$ | 3,755 | |
Prepaid debt issuance costs | |
$ | — | | |
$ | 75 | |
Warrants issued in connection with the Private Placement to placement agents | |
$ | — | | |
$ | 351 | |
(14) Related
Party Transactions
As
described in more detail under Note 1, “Business Description and Summary of Significant Accounting Policies” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2021, we are party to an Investor Rights Agreement, Registration
Rights Agreements and certain other agreements with OrbiMed Royalty Opportunities II, LP (“Royalty Opportunities”) and ROS
Acquisition Offshore LP (“ROS”), which are funds affiliated with OrbiMed Advisors LLC (“OrbiMed”). OrbiMed beneficially
owns 72% of the Company’s common stock.
All
related party transactions are reviewed and approved by the Audit Committee or the disinterested members of the full Board of Directors.
(15) Segment
and Geographic Information
The
Company’s management reviews financial results and manages the business on an aggregate basis. Therefore, financial results are
reported in a single operating segment: the development, manufacture, and marketing of orthopedic medical products and devices.
The
Company attributes revenues to geographic areas based on the location of the customer. Approximately 99% of sales were in the United
States for the three months ended September 30, 2022 and 2021, and 99% for the nine months ended September 30, 2022 and 2021. Total revenue
by major geographic area is as follows (in thousands):
Schedule of Revenues by
Geographic Region
| |
Three Months Ended September 30, | |
| |
2022 | | |
2021 | |
United States | |
$ | 14,370 | | |
$ | 13,629 | |
Rest of world | |
| 92 | | |
| 148 | |
Total revenue | |
$ | 14,462 | | |
$ | 13,777 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
United States | |
$ | 42,089 | | |
$ | 40,813 | |
Rest of world | |
| 610 | | |
| 480 | |
Total revenue | |
$ | 42,699 | | |
$ | 41,293 | |
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, 2021. 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 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. Xtant has continued
to experience growth from the two new products introduced in 2021, and we will continue to focus on growing those lines. Concurrently,
our penetration into certain adjacent markets has slowed due to recently limited availability of production labor in our local area.
Initiatives are underway to improve our recruitment, training capabilities and production levels in order to better penetrate new market
opportunities. 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
Private Placement
On
August 25, 2022, we issued in the first tranche of a private placement with several accredited investors approximately 14.1 million shares
of our common stock at a purchase price of $0.48 per share and warrants to purchase approximately 3.5 million shares of our common stock.
The warrants have an exercise price of $0.48 per share,
are subject to customary anti-dilution, but not price protection, adjustments, are immediately exercisable and expire on the five-year
anniversary of the date of issuance. We received net cash proceeds of approximately $6.3 million, after deducting fees and other estimated
offering expenses, from the private placement. The closing of the second tranche of the private placement occurred on October 7, 2022,
at which we sold an additional approximately 6.2 million shares of our common stock and warrants to purchase approximately 1.6 million
shares of common stock for an aggregate purchase price of approximately $3.0 million. The warrants issued at the second closing are identical
to the warrants issued at the first closing and also expire on the five-year anniversary of the first closing. We
expect to use these net proceeds for working capital and other general corporate purposes.
Impact
of the COVID-19 Pandemic
At
the onset of, and at various times during, the COVID-19 pandemic, hospitals and other medical facilities have cancelled or deferred elective
procedures, diverted resources to patients suffering from infections, and limited access for non-patients, including our direct and indirect
sales representatives. Because of these circumstances, surgeons and their patients have deferred, and may continue to defer, procedures
in which our products otherwise would be used. In addition, many facilities that specialize in procedures in which our products are used
have experienced, and may continue to experience, staffing shortages, temporary closures, and/or reduced operating hours. These circumstances
have negatively impacted, and may continue to negatively impact, the number of elective procedures being conducted and the ability of
our employees, independent sales representatives and distributors to effectively market and sell our products, which has had and may
continue to have a material adverse effect on our revenues.
During
the first quarter of 2022, spine and other surgery procedure volumes were negatively impacted in many of our key markets, due to cancellations
and/or postponements of procedures as a result of hospitalizations of COVID-19 patients, restrictions on elective procedures and staffing
shortages in our key markets, which negatively impacted our first quarter 2022 revenues. This reduction in elective procedures and staffing
shortages subsided during the second quarter of 2022, but could reoccur if there is another wave or sustained resurgence of COVID-19
cases and hospitalizations.
The
COVID-19 pandemic also has caused and may continue to cause adverse effects on general commercial activity and the global economy and
supply chain, disrupting our ability to obtain raw materials, components and products. The pandemic has also adversely affected, and
may continue to adversely affect, our distributors, independent sales representatives, customers, contract manufacturers and suppliers
and their respective businesses, which in turn, have adversely affected, and may continue to adversely affect, our business and operations.
Although
we continue to monitor the impact of the COVID-19 pandemic on our business, operations and financial results, the full extent to which
the COVID-19 pandemic will continue to impact our business during the remainder of 2022 will depend on future developments that are highly
uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 variants, actions taken to
contain or treat the impact of COVID-19, the availability, acceptance and effectiveness of vaccines, future resurgences of the virus
and its variants, the level of any government restrictions, patient capacity at hospitals and healthcare systems, and the willingness
and ability of patients to seek care and treatment due to safety concerns or financial hardship. If our revenues continue to decline
and do not recover to pre-COVID-19 pandemic levels, we may be required to incur impairment charges to our long-lived assets and goodwill
and write-off excess inventory, which would likely adversely affect our future operating results.
Results
of Operations
Comparison
of Three and Nine Months Ended September 30, 2022 and September 30, 2021
Revenue
Total
revenue for the three and nine months ended September 30, 2022 was $14.5 million and $42.7 million, respectively, which represents increases
of 5% and 3%, respectively, compared to $13.8 million and $41.3 million for the three and nine months ended September 30, 2021, respectively.
These revenue increases are attributed primarily to introductions of new products, specifically
OsteoVive® Plus and OsteoFactor™.
Cost
of Sales and Gross Profit
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 of $6.6 million for the three months ended September 30, 2022 was comparable
to the same prior year period. Cost of sales increased by 14%, or $2.4 million, to $18.9 million for the nine months ended September
30, 2022 from $16.5 million for the nine months ended September 30, 2021. The increase in cost of sales for the nine month comparison
is primarily due to additional expense of $1.0 million related to increased reserve expense for excess and obsolete inventory and additional
salaries and wages expense of $0.6 million with the remaining increase relating primarily to higher sales levels.
Gross
profit as a percentage of revenue increased to 54.6% for the three months ended September 30, 2022 compared to 52.2% for the same period
in 2021 and decreased to 55.8% for the nine months ended September 30, 2022 compared to 60.0% for the same period in 2021. Of the increase
for the three-month comparison, 200 basis points resulted from sales mix including greater higher margin independent agent sales and
400 basis points resulted from additional absorption of labor and overhead, partially offset by 280 basis points resulting from additional
reserve expense for excess and obsolete inventory. Of the decrease for the nine-month comparison, 220 basis points resulted from higher
product costs and 240 basis points results from additional reserve expense for excess and obsolete inventory. We
expect higher product costs to continue to adversely affect our gross profit as a percentage of revenue in future periods.
General
and Administrative
General
and administrative expenses consist principally of personnel costs for corporate employees, cash-based and stock-based compensation related
costs, legal, accounting and professional fees, and occupancy costs. General and administrative expenses increased 20%, or $0.6 million,
to $3.7 million for the three months ended September 30, 2022, compared to $3.1 million for the same period in 2021. General and administrative
expenses were $11.5 million for the nine months ended September 30, 2022, an increase of 12%, or $1.2 million, compared to the same period
in 2021. The increase for the three-month comparison is primarily attributable to additional expense of $0.3 million related to product
registrations and additional expense of $0.3 million related to various employee compensation plans. The increase for the nine-month
comparison includes additional bad debt expense of $0.3 million, additional expense of $0.3 million related to product registrations,
additional stock-based compensation of $0.3 million and costs related to ERP system upgrades of $0.5 million, partially
offset by legal settlement expenses of $0.6 million during the prior year period.
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 11%, or $0.6 million, to $5.9 million for the three months ended September 30, 2022, compared to $5.3 million for the same
period of 2021. Sales and marketing expenses increased 6%, or $1.0 million, to $16.7 million for the nine months ended September 30,
2022, compared to $15.7 million for the same period of 2021. The increase for the three-month comparison is primarily due to additional
independent agent sales commissions and incentives of $0.6 million due to higher revenues versus the comparable period in 2021. The increase
for the nine-month comparison is primarily due to additional salaries and wages related to higher headcount and additional independent
agent sales commissions and incentives of $0.6 million due to higher revenues versus the comparable period in 2021.
Research
and Development
Research
and development expenses consist primarily of internal costs for the development of new technologies and processes. Research and development
expenses decreased 13% or $0.1 million, to $0.2 million for the three months ended September 30, 2022, compared to $0.3 million for the
three months ended September 30, 2021. Research and development expenses of $0.7 million for the nine months ended September 30, 2022
was comparable to the prior year period. The decrease for the three-month comparison is primarily due to reduced equipment purchases
versus the comparable period in 2021.
Interest
Expense
Interest
expense consists of interest incurred from our debt instruments. Interest expense was $0.4 million for the three months ended September
30, 2022 compared to $0.3 million for the three months ended September 30, 2021. Interest expense was $1.2 million for the nine months
ended September 30, 2022 and $0.5 million for the nine months ended September 30, 2021. The increase in interest expense during the three
months ended September 30, 2022 compared to the comparable period in the prior year resulted primarily from increases to the base interest
rate applied to our debt instruments. The increase in interest expense during the nine months ended September 30, 2022 compared to the
comparable period in the prior year resulted from our debt refinancing in May 2021, prior to which
no interest expense related to our debt instruments was incurred during 2021. We expect interest expense to increase in future periods
compared to the comparable prior year periods in light of current rising interest rates. We expect that our annualized interest expense
will increase approximately $0.1 million for every 75 basis points of increase to the reference rate associated with our credit agreements.
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 September 30, 2022 and December 31, 2021 (in thousands):
| |
September 30,
2022 | | |
December 31,
2021 | |
Cash and cash equivalents | |
$ | 17,603 | | |
$ | 18,387 | |
Accounts receivable, net | |
| 9,839 | | |
| 7,154 | |
Inventories | |
| 16,993 | | |
| 17,945 | |
Total current assets | |
| 45,108 | | |
| 44,330 | |
Accounts payable | |
| 3,779 | | |
| 2,615 | |
Accrued liabilities | |
| 5,021 | | |
| 4,349 | |
Line of credit | |
| 720 | | |
| 3,620 | |
Current portion of long-term debt | |
| 1,335 | | |
| — | |
Total current liabilities | |
| 11,359 | | |
| 11,077 | |
Net working capital | |
| 33,749 | | |
| 33,253 | |
Our
decrease in cash and cash equivalents was due primarily to net cash used in operations and reduced borrowing on our revolving line of
credit, partially offset by the net proceeds from the closing of the first tranche of our August 2022 private placement of common stock
and warrants. On August 25, 2022, we issued in the first tranche of a private placement with several
accredited investors approximately 14.1 million shares of our common stock at a purchase price of $0.48 per share and warrants to purchase
approximately 3.5 million shares of our common stock. The warrants have an exercise price of $0.48 per share, subject to customary
anti-dilution, but not price protection, adjustments, are immediately exercisable and expire on the five-year anniversary of the date
of issuance. We received net cash proceeds of approximately $6.3 million, after deducting fees and other estimated offering expenses,
from the first tranche of this private placement. The closing of the second tranche of the private placement occurred on October 7, 2022,
at which we sold an additional approximately 6.2 million shares of our common stock and warrants to purchase approximately 1.6 million
shares of common stock for an aggregate purchase price of $3.0. The warrants issued at the second closing are identical to the warrants
issued at the first closing and also expire on the five-year anniversary of the first closing. We
expect to use the net proceeds from this private placement for working capital and other general corporate purposes.
Cash
Flows
Net
cash used in operating activities for the first nine months of 2022 was $3.1 million. For the comparable period of 2021, net cash provided
by operating activities was $16 thousand. This increase in net cash used in operating activities
relates primarily to the increase in net loss, partially offset by the effects of changes in operating assets and liabilities.
Net
cash used in investing activities for the first nine months of 2022 and 2021 was $1.1 million and $1.3 million, respectively, primarily
representing purchases of property and equipment.
Net
cash provided by financing activities was $3.4 million for the first nine months of 2022, which was primarily attributable to $6.3 million
of proceeds from the first tranche of our August 2022 private placement, net of issuance costs, partially offset by net repayments on
our line of credit. Net cash provided financing activities was $17.6 million for the comparable period of 2021, which was primarily attributable
to $18.4 million of proceeds from our February 2021 private placement, net of issuance costs.
Current
and Prior Credit Facilities
On
May 6, 2021, the Company, as guarantor, and our subsidiaries, as borrowers (collectively, the “Borrowers”), entered into
a Credit, Security and Guaranty Agreement (Term Loan) (the “Term Credit Agreement”) and 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, in its capacity as agent (“MidCap”).
The
Term Credit Agreement provides for a secured term loan facility (the “Term Facility”) in an aggregate principal amount of
$12.0 million (the “Term Loan Commitment”), which was funded to the Borrowers immediately, and an additional $5.0 million
tranche available solely at the discretion of MidCap 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 $8.0 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 May 1, 2026 (the “Maturity Date). Beginning in June 2023, the Company is required to make monthly
principal payments of approximately $0.3 million on the Term Facility through 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.
The
proceeds of the Term Facility and Revolving Facility were used to pay transaction fees in connection with the Facilities and to pay in
full all outstanding indebtedness and accrued interest under the Company’s prior credit facility, which is described below. As
of September 30, 2022, the Company had $0.7 million outstanding and $7.3 million of availability under the Revolving Facility. On October
27, 2022, the Credit Agreements were amended to transition the reference rate from LIBOR to term SOFR. The term SOFR reference rate will
apply to amounts outstanding and draws that take place on or after the November 1, 2022.
The
loans and other obligations pursuant to the Credit Agreements bear interest at a per annum rate equal to the sum of the LIBOR rate, as
such term is defined in the Credit Agreements, 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 LIBOR floor of 1.00%. As of September 30, 2022, the effective
rate of the Term Facility, inclusive of amortization of debt issuance costs and accretion of the final payment, was 11.53%, and the effective
rate of the Revolving Facility was 7.07%.
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.
On March 7, 2022, the Credit Agreements were amended to, among other things, (i) provide for a waiver of compliance with respect to the
Company’s minimum adjusted EBITDA requirement if and so long as the Company’s liquidity (as specifically defined in the Credit
Agreements) is in excess of $14 million and there is not otherwise an event of default under the Credit Agreements, commencing with the
next delivery of the compliance certificate required under the Credit Agreements, and (ii) re-set the date certain fees payable in connection
with optional prepayments are determined to the date the amendment was executed and consequently extend such fees’ original expiration.
In addition, the exit fees were increased by 25 basis points. As of September 30, 2022, we were in compliance with all covenants under
the Credit Agreements.
On
May 6, 2021, contemporaneously with the execution and delivery of the Credit Agreements, that certain Second Amended and Restated Credit
Agreement, dated March 29, 2019, among the Company, the Borrowers, Royalty Opportunities and ROS, as subsequently amended, which was
scheduled to mature on December 31, 2021, was terminated in accordance with the terms thereof and all outstanding amounts were repaid
by the Borrowers to OrbiMed Royalty Opportunities II, LP in its role as sole lender thereunder.
Cash
Requirements
We
believe that our $17.4 million of cash and cash equivalents as of September 30, 2022, together with the net proceeds from the closing
of the second tranche of our private placement on October 7, 2022 and amounts available under the Facilities and cash provided by operating
activities, will be sufficient to meet our anticipated cash requirements through at least November 2023. However, we may require or seek
additional capital to fund our future operations and business strategy prior to November 2023. 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.
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 the Agent 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. In addition,
the investors in our recent private placement have certain participation rights with respect to certain future equity offerings for capital
raising purposes.
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 and nine months ended September 30, 2022 as compared to the critical
accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.