Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock, ~~$0.000001~~ par value $0.000001 per share, of registrant outstanding at November ~~1, 2022:~~13, 2023: ~~108,659,388~~130,110,250.

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Cautionary Statement Regarding Forward-Looking Statements.”

As used in this report, unless the context indicates another meaning, the terms “we,” “us,” “our,” “Xtant,” “Xtant Medical,” and the “Company” mean Xtant Medical Holdings, Inc. and its wholly owned subsidiaries, ~~Xtant Medical, Inc., Bacterin International, Inc., and X-spine Systems, Inc.,~~ all of which are consolidated on Xtant’s condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.

We own various unregistered trademarks and service marks, including our corporate logo. Solely for convenience, the trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that the owner of such trademarks and trade names will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

We include our website address throughout this report for reference only. The information contained on or connected to our website is not incorporated by reference into this report.

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements include, but are not limited to, statements regarding our ~~“expectations,” “hopes,” “beliefs,” “intentions,”~~expectations, hopes, beliefs, intentions, or ~~“strategies”~~strategies regarding the future. In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,~~” “might,” “plan,~~” “possible,” “potential,” “predict,” “project,” “should,” and “would,” as well as similar expressions, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward looking. Forward-looking statements in this Form 10-Q may include, for example, statements about the topics below and are subject to risks and uncertainties including without limitation those described below:

●our ability to service our debt and comply with the covenants in our credit agreements;●our ability to maintain sufficient liquidity to fund our operations and obtain financing on reasonable terms when needed;

The forward-looking statements contained in this Form 10-Q are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties, or assumptions, many of which are beyond our control, which may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 and this Form 10-Q.

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws.

	As of September 30, 2022			As of December 31, 2021			As of September 30, 2023			As of December 31, 2022
	(Unaudited)						(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	17,363		$	18,243		$	8,664		$	20,298
Restricted cash		240			144			85			209
Trade accounts receivable, net of allowance for credit losses and doubtful accounts of $549 and $552, respectively		9,839			7,154
Trade accounts receivable, net of allowance for credit losses and doubtful accounts of $820 and $515, respectively								19,150			10,853
Inventories		16,993			17,945			34,334			17,285
Prepaid and other current assets		673			844			1,874			673
Total current assets		45,108			44,330			64,107			49,318
Property and equipment, net		5,669			5,212			9,097			5,785
Right-of-use asset, net		1,490			1,258			1,594			1,380
Goodwill		3,205			3,205			6,514			3,205
Intangible assets, net		358			400			10,492			344
Other assets		219			287			199			197
Total Assets	$	56,049		$	54,692		$	92,003		$	60,229

LIABILITIES & STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	3,779		$	2,615		$	5,358		$	3,490
Accrued liabilities		5,021			4,349			8,934			5,496
Current portion of lease liability		443			462			733			458
Current portion of finance lease obligations		61			31			64			62
Line of credit		720			3,620			3,999			3,379
Current portion of long-term debt		1,335			—			2,833			2,333
Total current liabilities		11,359			11,077			21,921			15,218
Long-term Liabilities:
Lease liability, less current portion		1,094			842			916			972
Finance lease obligation, less current portion		197			103			133			181
Long-term debt, plus premium and less issuance costs		10,626			11,787			14,352			9,687
Total Liabilities		23,276			23,809			37,322			26,058
Commitments and Contingencies (Note 11)		-
Commitments and Contingencies (note 13)								-			-
Stockholders’ Equity:
Preferred stock, $0.000001 par value; 10,000,000 shares authorized; no shares issued and outstanding		—			—			—			—
Common stock, $0.000001 par value; 300,000,000 shares authorized; 101,981,250 shares issued and outstanding as of September 30, 2022 and 87,068,980 shares issued and outstanding as of December 31, 2021		—			—
Common stock, $0.000001 par value; 300,000,000 shares authorized; 129,788,947 shares issued and outstanding as of September 30, 2023 and 108,874,803 shares issued and outstanding as of December 31, 2022								—			—
Additional paid-in capital		274,234			266,068			293,534			277,841
Accumulated other comprehensive loss								(146	)		—
Accumulated deficit		(241,461	)		(235,185	)		(238,707	)		(243,670	)
Total Stockholders’ Equity		32,773			30,883			54,681			34,171
Total Liabilities & Stockholders’ Equity	$	56,049		$	54,692		$	92,003		$	60,229

	2022			2021			2022			2021			2023			2022			2023			2022
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021			2023			2022			2023			2022
Revenue
Orthopedic product sales	$	14,462		$	13,743		$	42,689		$	41,193
Other revenue		—			34			10			100
Total Revenue		14,462			13,777			42,699			41,293		$	25,019		$	14,462		$	63,195		$	42,699

Cost of sales		6,566			6,586			18,868			16,498
Cost of Sales														9,685			6,566			24,865			18,868
Gross Profit		7,896			7,191			23,831			24,795			15,334			7,896			38,330			23,831

Operating Expenses
General and administrative		3,729			3,107			11,496			10,307			7,144			3,729			16,983			11,496
Sales and marketing		5,838			5,267			16,683			15,712			11,085			5,838			26,855			16,683
Research and development		229			262			683			719			490			229			844			683
Total Operating Expenses		9,796			8,636			28,862			26,738			18,719			9,796			44,682			28,862

Loss from Operations		(1,900	)		(1,445	)		(5,031	)		(1,943	)		(3,385	)		(1,900	)		(6,352	)		(5,031	)

Other Expense
Other Income (Expense)
Interest expense		(440	)		(329	)		(1,197	)		(529	)		(760	)		(440	)		(2,120	)		(1,197	)
Total Other Expense		(440	)		(329	)		(1,197	)		(529	)
Interest income														48			—			133			—
Bargain purchase gain														11,028			—			11,028			—
Total Other Income (Expense)														10,316			(440	)		9,041			(1,197	)

Net Loss Before Provision for Income Taxes		(2,340	)		(1,774	)		(6,228	)		(2,472	)
Net Income (Loss) from Operations Before Provision for Income Taxes														6,931			(2,340	)		2,689			(6,228	)

Provision for Income Taxes Current and Deferred		(13	)		(30	)		(48	)		(94	)		2,300			(13	)		2,274			(48	)
Net Loss	$	(2,353	)	$	(1,804	)	$	(6,276	)	$	(2,566	)
Net Income (Loss)													$	9,231		$	(2,353	)	$	4,963		$	(6,276	)

Net loss per share:
Net Income (Loss) Per Share:
Basic	$	(0.03	)	$	(0.02	)	$	(0.07	)	$	(0.03	)	$	0.07		$	(0.03	)	$	0.04		$	(0.07	)
Dilutive	$	(0.03	)	$	(0.02	)	$	(0.07	)	$	(0.03	)	$	0.07		$	(0.03	)	$	0.04		$	(0.07	)

Shares used in the computation:
Basic		93,278,610			86,763,210			89,236,832			84,926,656			128,140,238			93,278,610			115,380,792			89,236,832
Dilutive		93,278,610			86,763,210			89,236,832			84,926,656			135,663,274			93,278,610			123,832,401			89,236,832

	Shares		Amount		Capital		Deficit			Equity			Shares			Amount		Capital			Loss			Deficit			Equity
	Common Stock				Additional Paid-In-		Accumulated			Total Stockholders’			Common Stock					Additional Paid-In-			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Capital		Deficit			Equity			Shares			Amount		Capital			Loss			Deficit			Equity
Balance at December 31, 2021		87,068,980	$	—	$	266,068	$	(235,185	)	$	30,883
Balance at December 31, 2022														108,874,803		$	—	$	277,841		$	—		$	(243,670	)	$	34,171

Warrants issued in connection with the private placement to placement agents
Gain on debt extinguishment
Common stock issued on vesting of restricted stock units		244,721		—		—		—			—			22,245			—		—			—			—			—
Withholding of common stock upon vesting of restricted stock units
Withholding of common stock upon vesting of restricted stock units, shares
Stock-based compensation		—		—		613		—			613			—			—		617			—			—			617
Net loss		—		—		—		(2,213	)		(2,213	)		—			—		—			—			(2,078	)		(2,078	)
Balance at March 31, 2022		87,313,701		—		266,681		(237,398	)		29,283
Balance at March 31, 2023														108,897,048			—		278,458			—			(245,748	)		32,710

Stock-based compensation		—		—		571		—			571			—			—		439			—			—			439
Net loss		—		—		—		(1,710	)		(1,710	)		—			—		—			—			(2,190	)		(2,190	)
Balance at June 30, 2022		87,313,701				267,252		(239,108	)		28,144
Balance at June 30, 2023														108,897,048		$	—	$	278,897		$	—		$	(247,938	)	$	30,959

Private placement of common stock, net of issuance costs of $409		14,060,315		—		5,225		—			5,225
Warrants issued in connection with the private placement		—		—		1,116		—			1,116
Private placement of common stock, net of issuance costs of $175														20,000,000			—		14,011			—			—			14,011
Common stock issued on vesting of restricted stock units		607,234		—		—		—			—			992,287			—		—			—			—			—
Withholding of common stock upon vesting of restricted stock units														(100,388	)		—		(119	)		—			—			(119	)
Stock-based compensation		—		—		641		—			641			—			—		745			—			—			745
Net loss		—		—		—		(2,353	)		(2,353	)
Balance at September 30, 2022		101,981,250	$	—	$	274,234	$	(241,461	)	$	32,773
Foreign currency translation adjustment														—			—		—			(146	)		—			(146	)
Net income														—			—		—			—			9,231			9,231
Balance at September 30, 2023														129,788,947			—		293,534			(146	)		(238,707	)		54,681

	2022			2021			2023			2022
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2023			2022
Operating activities:
Net loss	$	(6,276	)	$	(2,566	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Net income (loss)							$	4,963		$	(6,276	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		971			1,041			2,157			971
Gain on disposal of fixed assets		(91	)		(164	)		(104	)		(91	)
Non-cash interest		175			38			266			175
Non-cash rent		2			8			5			2
Stock-based compensation		1,825			1,501			1,801			1,825
Provision for reserve (recovery) on accounts receivable		277			(25	)
Provision for expected credit losses								316			277
Provision for excess and obsolete inventory		1,568			572			398			1,568
Release of valuation allowance								(2,394	)		—
Gain on bargain purchase								(11,028	)		—

Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of acquisition effects:
Accounts receivable		(2,962	)		584			(7,047	)		(2,962	)
Inventories		(616	)		1,128			(1,669	)		(616	)
Prepaid and other assets		239			(126	)		69			239
Accounts payable		1,164			(592	)		1,298			1,164
Accrued liabilities		671			(1,383	)		2,369			671
Net cash (used in) provided by operating activities		(3,053	)		16
Net cash used in operating activities								(8,600	)		(3,053	)

Investing activities:
Purchases of property and equipment and intangible assets		(1,321	)		(1,489	)
Purchases of property and equipment								(1,093	)		(1,321	)
Proceeds from sale of fixed assets		184			194			70			184
Acquisition of Surgalign SPV, Inc.								(17,000	)		—
Acquisition of Surgalign Holdings, Inc.’s hardware and biologics business, net of cash acquired								(4,448	)		—
Net cash used in investing activities		(1,137	)		(1,295	)		(22,471	)		(1,137	)

Financing activities:
Payment of taxes from withholding of common stock on vesting of restricted stock units		—			(23	)
Payments on financing leases		(35	)		(42	)		(46	)		(35	)
Costs associated with refinancing		—			(136	)
Payments on long-term debt		—			(411	)
Borrowings on line of credit		36,680			22,767			55,345			36,680
Repayments of line of credit		(39,580	)		(23,029	)
Repayments on line of credit								(54,724	)		(39,580	)
Proceeds from private placement, net of cash issuance costs		6,341			18,426			14,011			6,341
Net proceeds from issuance of long-term debt, net of issuance costs								4,899			—
Payments of taxes from withholding of common stock on vesting of restricted stock units								(119	)		—
Net cash provided by financing activities		3,406			17,552			19,366			3,406

Effect of exchange rate changes on cash and cash equivalents and restricted cash								(53	)		—

Net change in cash and cash equivalents and restricted cash		(784	)		16,273			(11,758	)		(784	)
Cash and cash equivalents and restricted cash at beginning of period		18,387			2,341			20,507			18,387
Cash and cash equivalents and restricted cash at end of period	$	17,603		$	18,614		$	8,749		$	17,603

Reconciliation of cash and restricted cash reported in the condensed consolidated balance sheets
Reconciliation of cash and cash equivalents and restricted cash reported in the condensed consolidated balance sheets
Cash and cash equivalents	$	17,363		$	18,175		$	8,664		$	17,363
Restricted cash		240			439			85			240
Total cash and restricted cash reported in the condensed consolidated balance sheets	$	17,603		$	18,614
Total cash and restricted cash reported in condensed consolidated balance sheets							$	8,749		$	17,603

(1) Business Description, Basis of Presentation and Summary of Significant Accounting Policies

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 “Xtant” or the “Company” ~~or sometimes~~. The terms “we,” ~~“our,” or~~ “us”). and “our” also refer to Xtant.

All intercompany balances and transactions have been eliminated in consolidation.

Xtant is a global medical technology company focused on the design, development, and commercialization of a comprehensive portfolio of orthobiologics and spinal implant systems to facilitate spinal fusion in complex spine, deformity, and degenerative procedures.

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,~~2022, 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.~~2023.

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.~~2022. 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.

On ~~August 25, 2022, the Company closed the first tranche~~July 3, 2023, we entered into a securities purchase agreement pursuant to which we issued an aggregate of ~~a private placement (the “First Closing”) with several accredited investors (the “Private Placement”). At the First Closing, the Company sold approximately~~ ~~14.1~~20,000,000 ~~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~~accredited investors in a private placement at a per share purchase price of ~~approximately~~ $~~6.75~~0.75 ~~million.~~ ~~We received net cash~~at a closing held on July 6, 2023. The gross proceeds ~~of approximately~~to us from the private placement were $~~6.3~~15.0 million, ~~after~~before deducting estimated offering fees and ~~other estimated offering~~ expenses payable by us. We expect to use the net proceeds from the ~~First Closing.~~private placement for working capital and other general corporate purposes.

~~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.~~

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,~~equipment; goodwill, ~~and~~ intangible assets and ~~liabilities,~~liabilities; valuation allowances for trade receivables, inventory, ~~and~~ deferred income tax assets and ~~liabilities,~~liabilities; current and long-term lease obligations and corresponding right-of-use ~~asset~~asset; estimates for the fair value of assets acquired as part of business combinations; and estimates for the fair value of long-term debt, stock options and other equity awards upon which the Company determines stock-based compensation expense. Actual results could differ from those estimates.

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~~contractual agreements. The September 30, 2023 and December 31, 2022 ~~balance~~balances 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.

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash balances primarily with two financial institutions. These balances generally exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in cash and cash equivalents.

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~~2023 and ~~2021.~~2022.

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~~2023 and ~~2021.~~2022.

~~Basic net loss per share is computed by dividing net loss by~~The Company generates revenues outside the ~~weighted~~United States in multiple foreign currencies including euros, Swiss francs, British pounds and in U.S. dollar-denominated transactions conducted with customers who generate revenue in currencies other than the U.S. dollar. The Company also incurs operating expenses in euros, Swiss francs and British pounds. All assets and liabilities of foreign subsidiaries which have a functional currency other than the U.S. dollar are translated at the rate of exchange at period-end, while elements of the income statement are translated at the average ~~number of shares of common stock outstanding. Shares issued~~exchange rates in effect during the ~~period~~period. The net effect of these translation adjustments is shown as a component of accumulated other comprehensive income. Foreign currency transaction gains and ~~shares reacquired during the period~~losses are ~~weighted for the portion of the period that they were outstanding. Diluted net loss per share is computed~~reported 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.~~other income, net.

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~~2023 and December 31, ~~2021.~~2022.

~~(2)~~ On February 28, 2023, we entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with Surgalign SPV, Inc. (“Surgalign SPV”), a wholly owned subsidiary of Surgalign Spine Technologies, Inc., (“Seller”), Seller and Surgalign Holdings, Inc. , pursuant to which we purchased all of the issued and outstanding shares of common stock of Surgalign SPV, which shares constituted all of the outstanding equity of Surgalign SPV, for an aggregate purchase price of $~~Revenue~~17.0 million in cash (the “Purchase Price”). The closing contemplated by the Equity Purchase Agreement occurred on February 28, 2023 (the “Closing”).

Immediately prior to the Closing, Seller and its affiliates transferred and assigned to Surgalign SPV, a newly formed entity wholly owned by Seller, certain intellectual property, contractual rights and other assets related to the design, manufacture, sale and distribution of Seller’s Coflex and CoFix products in the United States (the “Coflex Business”). The Coflex and CoFix products have been approved by the U.S. Food and Drug Administration for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression and provide minimally invasive, motion preserving stabilization.

In conjunction with the Equity Purchase Agreement, on February 28, 2023, we entered into a Transition Services Agreement with Surgalign SVP and Seller, whereby Seller agreed to provide, or cause to be provided, to us on and after the effective date of the Equity Purchase Agreement, after giving effect to the Closing, certain transitional services related to the transition of the Coflex Business.

We funded the Purchase Price with cash on hand and approximately $5.0 million of indebtedness incurred under our term loan, refer to Note 10 – Debt for additional information.

We recorded the purchase of this acquisition using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. The table below represents the allocation of the total consideration for Surgalign SPV’s assets and liabilities based on management’s estimates of their respective fair values as of February 28, 2023 (in thousands):

The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists.

The acquisition strengthened the Company’s spine portfolio with the addition of the Coflex Business. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression. This potential benefit resulted in the Company paying a premium for the acquisition resulting in the recognition of $3.3 million in goodwill. For tax purposes, goodwill is deductible.

(3) Acquisition of Surgalign Holdings, Inc.’s Hardware and Biologics Business

On August 10, 2023, we completed the acquisition (the “Transaction”) of the assets of Surgalign Holdings, Inc. ( “Surgalign Holdings”), and its subsidiaries used in Surgalign Holding’s hardware and biologics business. The acquired assets included specified inventory, intellectual property and intellectual property rights, contracts, equipment and other personal property, records, the outstanding equity securities of Surgalign Holdings’s international subsidiaries, and intangibles that were related to Surgalign Holding’s hardware and biologics business (collectively, the “Assets”) As part of the Transaction, we assumed and certain specified liabilities of Surgalign Holdings (collectively, the “Liabilities”), all pursuant to the Asset Purchase Agreement, dated June 18, 2023, between Surgalign Holdings and us (as amended, the “Asset Purchase Agreement”).

The Transaction was conducted through a process supervised by the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) in connection with Surgalign Holdings’ bankruptcy proceedings; and therefore, we acquired the Assets with limited representations and warranties. The Bankruptcy Court issued a Sale Order on August 9, 2023 approving and authorizing the Transaction. We funded the purchase price of $5 million, plus Liabilities, with cash on hand.

We recorded the purchase of the Transaction using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. Due to the proximity of the acquisition date to the balance sheet date of September 30, 2023, the initial accounting and the third-party valuation is incomplete. The primary areas of purchase price allocation that are not yet finalized are the determination of overall enterprise value and the value of its inventory and equipment. In addition, depending on the value associated with these areas, the gain on bargain purchase as well as the deferred tax liability for the difference between book and tax bases are also subject to change. The table below represents the preliminary allocation of the total consideration for Surgalign Holdings’ assets and liabilities based on management’s preliminary estimate of their respective fair values as of August 10, 2023 (in thousands):

The Transaction was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. Managements estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as we finalize our valuations of assets acquired and liabilities assumed in connection with the Transaction.

Accounting Standards Codification (“ASC”) 805, Business Combinations, requires that any excess of purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill and any excess of fair value of acquired net assets, including identifiable intangible assets over the acquisition consideration, results in a gain from bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all assets acquired and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued. The Transaction resulted in a gain on bargain purchase due to the estimated fair value of the identifiable net assets acquired exceeding the purchase consideration transferred by $11.0 million and is shown as a gain on bargain purchase on our condensed consolidated statement of operations. Upon completion of our assessment, we concluded that recording a gain on bargain purchase was appropriate and required under ASC 805. The bargain purchase was primarily attributable to the Transaction occurring as part of bankruptcy proceedings.

We believe that the Transaction will strengthen our growing orthobiologics and spinal fusion device portfolio, while expanding our commercial footprint with new contracts and distributors.

The following unaudited pro forma combined financial information summarizes the results of operations for the periods indicated as if the Transaction, and the acquisition of Surgalign SPV, Inc., had been completed as of January 1, 2022 (in thousands):

Pro forma information reflects adjustments that are expected to have a continuing impact on our results of operations and are directly attributable to the Transaction, and the acquisition of Surgalign SPV, Inc. The unaudited pro forma results include adjustments to reflect the amortization of the inventory step-up and the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset. The pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the Transaction had occurred as of January 1, 2022 or that may be obtained in the future, and do not reflect future synergies, integration costs, or other such costs or savings.

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,~~centers, 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~~Revenue is recognized ~~in the proper period.~~ upon utilization of product. 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~~our net revenue derived primarily from the sale of ~~orthopaedic medical~~orthobiologics and spinal implant 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~~2023 and ~~2021~~2022 (in thousands):

											Three Months Ended					Three Months Ended
	Nine Months Ended September 30, 2022		Percentage of Total Revenue			Nine Months Ended September 30, 2021		Percentage of Total Revenue			September 30, 2023		Percentage of Total Revenue			September 30, 2022		Percentage of Total Revenue
Orthobiologics	$	34,614		81	%	$	31,264		76	%	$	15,665		63	%	$	12,046		83	%
Spinal implant		8,075		19	%		9,929		24	%		9,354		37	%		2,416		17	%
Other revenue		10		0	%		100		0	%
Total revenue	$	42,699		100	%	$	41,293		100	%	$	25,019		100	%	$	14,462		100	%

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):~~

	September 30, 2022		December 31, 2021		September 30, 2023		December 31, 2022
Raw materials	$	5,121	$	5,613	$	6,439	$	5,628
Work in process		957		571		1,547		798
Finished goods		10,915		11,761		26,348		10,859
Total	$	16,993	$	17,945	$	34,334	$	17,285

	September 30, 2022			December 31, 2021			September 30, 2023			December 31, 2022
Equipment	$	6,302		$	5,541		$	6,469		$	5,598
Computer equipment		1,090			828			1,258			1,043
Computer software		490			490			230			230
Furniture and fixtures		104			94
Leasehold improvements		4,333			3,994			4,325			4,105
Other		10			10
Surgical instruments		11,307			11,424			14,750			11,266
Assets not yet in service								1,080			1,507
Total cost		23,636			22,381			28,112			23,749
Property and equipment, gross								28,112			23,749
Less: accumulated depreciation		(17,967	)		(17,169	)		(19,015	)		(17,964	)
Property and equipment, net	$	5,669		$	5,212		$	9,097		$	5,785

Depreciation expense related to property and equipment, including property under finance leases, for the three months ended September 30, ~~2022~~2023 and ~~2021~~2022 was $~~0.4~~0.5 million and $~~0.3~~0.4 million, respectively, and $1.2 million and $1 million for ~~both~~ the nine months ended September 30, 2023 and 2022, ~~and 2021.~~respectively.

The following table sets forth information regarding intangible assets (in thousands):

	September 30, 2022			December 31, 2021			September 30, 2023			December 31, 2022
Amounts due under the Term Facility	$	12,000		$	12,000
Amounts due under the term loan							$	17,000		$	12,000
Accrued end-of-term payments		182			83			399			216
Less: unamortized debt issuance costs		(221	)		(296	)		(214	)		(196	)
Less: current maturities		(1,335	)		—			(2,833	)		(2,333	)
Long-term debt	$	10,626		$	11,787
Long-term debt, less issuance costs							$	14,352		$	9,687

On ~~March 7, 2022,~~February 28, 2023, the Company’s term loan agreement was amended to provide an additional $5.0 million of funding. Additionally, the Company’s term loan agreement and revolving credit ~~agreement~~facility were amended on February 28, 2023 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,~~expiration and (ii) increase the ~~final payment fees associated with~~minimum amount of interest payable under the term loan and the revolving credit facility from 1% to 2.5%.

In May 2023, the Company extended its interest only period on the term loan until June 2024 when the Company is required to make monthly principal payments of approximately $0.7 million on the term loan through the May 2026.

On August 10, 2023, the Company’s term loan agreement and revolving credit facility were ~~increased by 25 basis points.~~amended to permit the Transaction and provide the Company with additional flexibility with respect to holding foreign subsidiaries. The amendment contains standard covenants regarding holding foreign subsidiaries. The terms of the borrowing under these agreements otherwise remain unchanged.

The effective rate of the term loan, inclusive of amortization of debt issuance costs and accretion of the final payment, was ~~11.53~~14.43% as of September 30, ~~2022.~~2023. The effective rate of the revolving credit agreement was ~~7.07~~9.94% as of September 30, ~~2022.~~2023. As of September 30, ~~2022,~~2023, the Company had $~~7.3~~3.3 million available under the revolving credit agreement.

~~On October 27, 2022,~~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 ~~Company’s term loan~~ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness and ~~revolving credit agreements~~additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum levels and to maintain a minimum adjusted EBITDA and a minimum liquidity, in each case at levels specified in the Credit Agreements. As of September 30, 2023, we were ~~amended to transition~~in compliance with all covenants under 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.~~Credit Agreements.

On July 26, 2023, our stockholders approved and adopted the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (the “2023 Plan”), which replaced the Xtant Medical Holdings, Inc. 2018 Equity Incentive Plan (the “2018 Plan”) with respect to future grants of equity awards, although the 2018 Plan continues to govern equity awards granted under the 2018 Plan. The 2023 Plan permits the Board of Directors, or a committee thereof, to grant to eligible employees, non-employee directors, and consultants of the Company non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, deferred stock units, performance awards, non-employee director awards, and other stock-based awards. The Board of Directors may select 2023 Plan participants and determine the nature and amount of awards to be granted. The maximum number of shares of our common stock available for issuance under the 2023 Plan, subject to adjustment pursuant to the terms of the 2023 Plan, is (i) 5,500,000 shares of common stock; (ii) 7,695,812 shares of common stock remaining available for issuance under the 2018 Plan but not subject to outstanding awards under the 2018 Plan as of July 26, 2023; and (iii) up to 6,686,090 shares of common stock subject to awards outstanding under the 2018 Plan as of July 26, 2023 but only to the extent such awards are subsequently forfeited, cancelled, expire, or otherwise terminate without the issuance of such shares of common stock after such date.

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~~2023 Plan and ~~options granted to new hires to purchase shares of our common stock outside of any stockholder-approved plan,~~2018 Plan was as follows for the nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:

	2022							2021							2023							2022
	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)		Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (years)		Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (years)
Outstanding at January 1		3,201,666		$	1.80				2,190,892		$	2.25				3,360,664		$	1.51				3,201,666		$	1.80
Granted		109,164		$	0.65				1,012,083		$	1.27				1,602,013			1.16				109,164			0.65
Cancelled or expired		(443,125	)	$	2.39				(269	)	$	314.19				(86,849	)	$	6.58				(443,125	)	$	2.39
Outstanding at September 30		2,867,705		$	1.66		8.1		3,202,706		$	1.92		9.1		4,875,828		$	1.31		8.2		2,867,705		$	1.66		8.1
Exercisable at September 30		828,978		$	2.37		7.8		210,028		$	9.02		7.4		1,519,973		$	1.59		7.1		828,978		$	2.37		7.8

As of September 30, 2023, there was approximately $2.6 million of total unrecognized compensation expense related to unvested stock options. These costs are expected to be recognized over a weighted-average period of 2.9years. The weighted average grant date fair value of options granted during the three months ended September 30, 2023 was $1.20.

Restricted stock unit activity for awards granted under the 2023 Plan and 2018 Plan was as follows for the nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:

~~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.~~

~~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~~Total compensation expense related to ~~be classified as equity awards in accordance with Accounting Standards Codification (“ASC”) No. 815-40. The number of shares of Company common~~unvested restricted 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 andunits 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,yet recognized was $~~0.40~~3.6 ~~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:~~

~~We lease three office facilities~~million as of September 30, ~~2022 in Belgrade, Montana under non-cancelable operating lease agreements.~~2023, which is expected to be allocated to expenses over a weighted-average period of 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 2025.2.3 ~~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.~~ years.

As of September 30, 2023 and December 31, 2022, ~~the weighted-average~~there were outstanding and exercisable warrants to purchase 12,187,470 shares of our common stock at a weighted average exercise price of $1.53 per share with a weighted average remaining ~~lease~~contractual term ~~was~~of ~~3.1~~3 years.

~~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):~~

~~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.~~

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 intend to continue to defend the Company vigorously in such matters and, when warranted, take legal action against others. Furthermore, we ~~believe~~regularly assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss ~~is probable and~~can be reasonably ~~estimable, we record a charge~~estimated. Based on our ~~condensed consolidated statements of operations~~assessment, we have adequately accrued an amount for contingent liabilities currently in existence. We do not accrue amounts for liabilities that we do not believe are probable or that we consider immaterial to our ~~estimated loss. We~~overall financial position. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. While we do not believe that the ultimate resolution of any ~~such potential liabilities,~~ claims ~~or legal actions~~and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations or cash ~~flows.~~flows, it is possible that the amount of ultimate loss may exceed our current accruals and that our cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

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.

Our effective tax rates for the three and nine months ended September 30, 2023 were (33.2%) and (84.7%), respectively, and differ from the statutory rate primarily due to the tax benefit associated with release of valuation allowance resulting from recognition of deferred tax liabilities in purchase accounting, and cash state taxes. Our effective tax rates for the three and nine months ended September 30, 2022 were (0.6%) and (0.8%), respectively, and differ from the statutory rate due to the valuation allowance against all deferred tax assets, and cash state taxes. Purchase accounting for the Transaction is recorded on a preliminary basis and includes the deferred tax liability recorded. Accordingly, the benefit associated with the release of the valuation allowance from the recognition of the deferred tax liability is subject to change, refer to Note 3 – Acquisition of Surgalign Holdings, Inc.’s Hardware and Biologics Business for additional information.

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~~2023 and ~~2021.~~2022.

Basic net income (loss) per share is computed by dividing net income (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 income (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. Diluted net income (loss) per share was the same as basic net income (loss) per share for the three and nine months ended September 30, 2022, as shares issuable upon the exercise of stock options and warrants were anti-dilutive as a result of the net losses incurred for those periods.

The table below sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

For the three months ended September 30, 2023 and 2022, 13,856,656 and 17,192,048 stock options, restricted stock units and warrants were excluded for the diluted earnings per share calculation as they were anti-dilutive. For the nine months ended September 30, 2023 and 2022, 12,658,083 and 17,192,048 stock options, restricted stock units and warrants were excluded for the diluted earnings per share calculation as they were anti-dilutive.

	2022		2021		2023		2022
	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2023		2022
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	1,022	$	485	$	1,854	$	1,022
Non-cash activities:
Fixed assets acquired under finance lease	$	159	$	163	$	—	$	159
Revaluation of lease liability and right of use asset	$	234	$	—	$	—	$	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

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,~~2022 and Item 5 of Part II of this Quarterly Report on Form 10-Q, 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%~~67% 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.

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~~operates in one segment based upon the Company’s organizational structure, the way in which the operations and investments are managed and evaluated by the chief operating decision maker (“CODM”). The Company shares common, centralized support functions which report directly to ~~geographic areas based~~the CODM and decision-making regarding the Company’s overall operating performance and allocation of Company resources is assessed 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~~a consolidated basis. Net revenue by ~~major~~ geographic ~~area is~~region are as ~~follows (in thousands):~~follows:

					2023		2022
	Three Months Ended September 30,				Three Months Ended September 30,
	2022		2021		2023		2022
United States	$	14,370	$	13,629	$	23,433	$	14,370
Rest of world		92		148		1,586		92
Total revenue	$	14,462	$	13,777	$	25,019	$	14,462

					2023		2022
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2023		2022
United States	$	42,089	$	40,813	$	60,932	$	42,089
Rest of world		610		480		2,263		610
Total revenue	$	42,699	$	41,293	$	63,195	$	42,699

On October 23, 2023, the Company acquired the nanOss production operations from RTI Surgical, Inc. (“RTI”) pursuant to an Asset Purchase Agreement dated October 23, 2023 between the Company and RTI (the “Asset Purchase Agreement”). Under the terms of the Asset Purchase Agreement, the Company acquired certain assets, including equipment and inventory, used in RTI’s synthetic bone graft business and assumed from RTI the lease for the nanOss production facility located in Greenville, North Carolina. The purchase price for the assets was $2 million in cash plus contingent payments based on future sales of next generation nanOss products. The Company previously acquired nanOss distribution rights and nanOss intellectual property with the acquisition of assets related to the biologics and spinal fixation business of Surgalign Holdings, Inc. in August 2023.

We recorded the purchase of this acquisition using the acquisition method of accounting and, accordingly, recognized the assets acquired at their fair values as of the date of acquisition. No liabilities were assumed in connection with the acquisition. Because the closing occurred on October 23, 2023, information necessary to complete the purchase accounting is not yet available.

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.~~2022. 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.

We develop, manufacture and market regenerative and stabilization 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.

On ~~August 25, 2022,~~February 28, 2023, we ~~issued in the first tranche~~entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with Surgalign SPV, Inc. (“Surgalign SPV”), a wholly owned subsidiary 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~~Surgalign Spine Technologies, Inc. (“Seller”), Seller and ~~warrants~~Surgalign Holdings, Inc., pursuant 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 anniversarywhich we purchased all of the ~~date of issuance. We received net cash proceeds of approximately $6.3 million, after deducting fees~~issued 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 millionoutstanding shares of common stock of Surgalign SPV, which shares constitute all of the outstanding equity of Surgalign SPV, for an aggregate purchase price of ~~approximately $3.0 million.~~$17.0 million in cash. The ~~warrants issued at~~closing contemplated by the ~~second closing are identical to the warrants issued at the first closing and also expire~~Equity Purchase Agreement occurred on ~~the five-year anniversary of the first closing.~~ ~~We expect to use these net proceeds for working capital and other general corporate purposes.~~February 28, 2023 (the “Closing”).

~~Impact~~Immediately prior to the Closing, Seller and its affiliates transferred and assigned to Surgalign SPV, a newly formed entity wholly owned by Seller, certain intellectual property, contractual rights and other assets related to the design, manufacture, sale and distribution of Seller’s Coflex and CoFix products in the ~~COVID-19 Pandemic~~United States (the “Coflex Business”). The Coflex and CoFix products have been approved by the U.S. Food and Drug Administration for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression and provide minimally invasive, motion preserving stabilization.

AtFor additional information regarding the ~~onset~~acquisition of Surgalign SPV, refer to Note 2 – Acquisition of Coflex and ~~at various times during,~~CoFix Product Lines in 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, procedurescondensed consolidated financial statements 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.this Form 10-Q.

On August 10, 2023, we completed the ~~first quarter~~acquisition (the “Transaction”) of ~~2022, spine~~certain assets of Surgalign Holdings, Inc., a Delaware corporation (the “Surgalign Holdings”), and its subsidiaries on an as-is, where-is basis, including specified inventory, intellectual property and intellectual property rights, contracts, equipment and other ~~surgery procedure volumes were negatively impacted in many~~personal property, records, all outstanding equity securities of ~~our key markets, due~~Surgalign Holdings’ international subsidiaries, and intangibles related to ~~cancellations and/or postponements~~the business of ~~procedures~~designing, developing and manufacturing hardware medical technology and distributing biologics medical technology, as ~~a result~~conducted by Surgalign Holdings and its subsidiaries (collectively, the “Assets”), and certain specified liabilities of ~~hospitalizations of COVID-19 patients, restrictions on elective procedures~~Surgalign Holdings and ~~staffing shortages in our key markets, which negatively impacted our first quarter 2022 revenues. This reduction in elective procedures~~its subsidiaries (collectively, the “Liabilities”) pursuant to the Asset Purchase Agreement, dated June 18, 2023, between Surgalign Holdings and ~~staffing shortages subsided during~~us (as amended, the ~~second quarter of 2022, but could reoccur if there is another wave or sustained resurgence of COVID-19 cases and hospitalizations.~~“Asset Purchase Agreement”).

The ~~COVID-19 pandemic also has caused~~Transaction was conducted through a process supervised by the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the “Bankruptcy Court”) in connection with Surgalign Holdings’ bankruptcy proceedings. The Bankruptcy Court issued a Sale Order on August 9, 2023 approving and ~~may continue to cause adverse effects~~authorizing the Transaction. We funded the purchase price of $5 million, plus Liabilities, with cash 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.hand.

~~Although we continue~~For additional information regarding the Transaction, refer to ~~monitor~~Note 3 – Acquisition of Surgalign Holdings, Inc.’s Hardware and Biologics Business in the ~~impact of the COVID-19 pandemic on our business, operations and~~condensed consolidated 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.

On October 23, 2023, we acquired the nanOss production operations from RTI Surgical, Inc. (“RTI”) pursuant to an Asset Purchase Agreement dated October 23, 2023 between the Company and RTI (the “Asset Purchase Agreement”). Under the terms of the Asset Purchase Agreement, we acquired certain assets, including equipment and inventory, used in RTI’s synthetic bone graft business and assumed from RTI the lease for the nanOss production facility located in Greenville, North Carolina. The purchase price for the assets was $2 million in cash plus contingent payments based on future sales of next generation nanOss products. We previously acquired the nanOss distribution rights and nanOss intellectual property with the acquisition of assets related to the biologics and spinal fixation business of Surgalign Holdings, as described above.

For additional information regarding the acquisition of the nanOss production operations, refer to Note 19 – Subsequent Event in the condensed consolidated financial statements in this Form 10-Q.

Comparison of Three and Nine Months Ended September 30, ~~2022~~2023 and September 30, ~~2021~~2022

Total revenue for the three and nine months ended September 30, ~~2022~~2023 was $25.0 million and $63.2 million, respectively, which represents an increase of 73% and 48%, respectively, compared to $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,~~2022, respectively. These revenue increases are attributed primarily to ~~introductions~~greater independent agent sales, the effect of ~~new~~the contribution of Coflex and CoFix product sales, opportunistic private label sales and the effect of the contribution of additional product sales resulting from the acquisition of Surgalign Holdings, Inc. hardware and biologics business. The increase for the three-month comparison was partially offset by the effect of a shortage of stem cells used in our Osteo Vive Plus products ~~specifically OsteoVive® Plus and OsteoFactor™~~, which we expect to continue. until such time as we can find additional supply of stem cells or develop internal production of stem cells.

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 ofincreased by 48%, or $3.1 million, to $9.7 million for the three months ended September 30, 2023 from $6.6 million for the three months ended September 30, ~~2022 was comparable to the same prior year period.~~2022. Cost of sales increased by ~~14%~~32%, or ~~$2.4~~$6.0 million, to $24.9 million for the nine months ended September 30, 2023 from $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~~2022. These increases in cost of sales ~~for the nine month comparison is~~are 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.~~volumes.

Gross profit as a percentage of revenue increased to ~~54.6%~~61.3% for the three months ended September 30, ~~2022~~2023 compared to ~~52.2%~~54.6% for the same period in ~~2021~~2022 and ~~decreased~~increased to ~~55.8%~~60.7% for the nine months ended September 30, ~~2022~~2023 compared to ~~60.0%~~55.8% for the same period in ~~2021.~~2022. Of the increase for the three-month comparison, ~~200~~410 basis points resulted from ~~sales mix including greater higher margin independent agent sales~~decreased charges for excess and obsolete inventory, 400 basis points resulted from ~~additional absorption of labor~~greater production and ~~overhead,~~production efficiencies and 480 basis points resulted from product mix, partially offset by ~~280~~310 basis points ~~resulting~~related to higher product costs. Of the increase for the nine-month comparison, 510 basis points resulted from ~~additional reserve expense~~product mix, 270 basis points resulted from decreased charges for excess and obsolete ~~inventory. Of the decrease for the nine-month comparison, 220~~inventory and 150 basis points resulted from greater production and production efficiencies, partially offset by 360 basis points related to 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.~~costs.

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%~~92%, or ~~$0.6~~$3.4 million, to ~~$3.7~~$7.1 million for the three months ended September 30, ~~2022,~~2023, compared to ~~$3.1~~$3.7 million for the same period in ~~2021.~~2022. General and administrative expenses ~~were $11.5~~increased 48%, or $5.5 million, to $17.0 million for the nine months ended September 30, ~~2022, an increase of 12%, or $1.2~~2023, compared to $11.5 million ~~compared to~~for the same period in ~~2021.~~2022. The increase for the three-month comparison is primarily attributable to $1.3 million of additional compensation expense related to performance metrics and additional headcount, $0.7 million of additional legal expense resulting primarily from acquisition related activities, $0.4 million of amortization of intangible assets associated with the Coflex and CoFix product lines and $0.3 million ~~related to product registrations and additional expense~~ of ~~$0.3 million related to various employee compensation plans.~~consulting fees. The increase for the nine-month comparison ~~includes~~is primarily attributable to $2.2 million of additional ~~bad debt~~compensation expense related to performance metrics and additional headcount, $1.6 million of additional legal and other professional fees resulting primarily from acquisition related activities, $1.0 million of additional amortization of intangible assets associated with the Coflex and CoFix product lines and $0.3 million ~~additional expense~~ of ~~$0.3 million~~consulting fees resulting primarily from acquisition 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~~.activities.

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%~~90%, or ~~$0.6~~$5.2 million, to ~~$5.9~~$11.1 million for the three months ended September 30, ~~2022,~~2023, compared to ~~$5.3~~$5.8 million for the same period ~~of 2021.~~in 2022. Sales and marketing expenses increased 6%61%, or ~~$1.0~~$10.2 million, to ~~$16.7~~$26.9 million for the nine months ended September 30, ~~2022,~~2023, compared to ~~$15.7~~$16.7 million for the same period ~~of 2021.~~in 2022. The increase for the three-month comparison is primarily due to additional ~~independent agent sales commissions~~commission expense of $2.9 million resulting from revenue growth and ~~incentives~~$1.7 million of ~~$0.6~~additional compensation expense related to additional headcount resulting from our recent acquisitions and revenue growth and $0.3 million ~~due to higher revenues versus the comparable period in 2021.~~of additional professional service fees. The increase for the nine-month comparison is primarily due to additional ~~salaries and wages~~commission expense of $6.1 million resulting from revenue growth, $2.9 million of additional compensation expense related to ~~higher~~additional headcount resulting from our recent acquisitions and revenue growth, $0.5 million of additional ~~independent agent sales commissions~~profession service fees and ~~incentives~~$0.4 million of ~~$0.6 million due to higher revenues versus the comparable period in 2021.~~additional expense for travel and tradeshows.

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~~were $0.5 million for the three months ended September 30, ~~2022,~~2023 compared to ~~$0.3~~$0.2 million for the ~~three months ended September 30, 2021.~~same period in 2022. Research and development ~~expenses of $0.7~~expense was $0.8 million for the nine months ended September 30, ~~2022 was~~2023, compared to $0.7 million for the same period in 2022. The increase in research and development expense during the three and nine months ended September 30, 2023 compared to the comparable toperiods in the prior year ~~period. The decrease for the three-month comparison is~~resulted primarily ~~due to reduced equipment purchases versus the comparable period in 2021.~~from increased headcount.

Interest expense consists of interest incurred from our debt instruments. Interest expense was ~~$0.4~~$0.8 million and $2.1 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~~and nine months ended September 30, ~~2022~~2023, respectively, compared to $0.4 million and ~~$0.5~~$1.2 million for the three and nine months ended September 30, ~~2021.~~ 2022. The increase in interest expense during the three and nine months ended September 30, ~~2022~~2023 compared to the comparable ~~period~~periods in the prior year resulted primarily from increases to the base interest rate applied to our debt ~~instruments. The increase~~instruments and the additional borrowing of $5.0 million under our term loan agreement 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.February 2023. We expect that our annualized interest expense will increase approximately $0.1 million for every 7550 basis points of increase to the reference rate associated with our credit agreements.

Income tax benefit for the three months ended September 30, 2023 was $2.3 million compared to income tax expense of $13 thousand for the same period in 2022. The change resulted primarily from the tax benefit associated with release of valuation allowance resulting from recognition of deferred tax liabilities in purchase accounting. Income tax benefit for the nine months ended September 30, 2023 was $2.3 million compared to income tax expense of $48 thousand for the same period in 2022. The change resulted primarily from the tax benefit associated with release of valuation allowance resulting from recognition of deferred tax liabilities in purchase accounting.

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~~2023 and December 31, ~~2021~~2022 (in thousands):

	September 30, 2022		December 31, 2021		September 30, 2023		December 31, 2022
Cash and cash equivalents	$	17,603	$	18,387	$	8,749	$	20,507
Accounts receivable, net		9,839		7,154		19,150		10,853
Inventories		16,993		17,945		34,334		17,285
Total current assets		45,108		44,330		64,107		49,318
Accounts payable		3,779		2,615		5,358		3,490
Accrued liabilities		5,021		4,349		8,934		5,496
Line of credit		720		3,620		3,999		3,379
Current portion of long-term debt		1,335		—		2,833		2,333
Total current liabilities		11,359		11,077		21,921		15,218
Net working capital		33,749		33,253		42,186		34,100

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~~2023 was $8.6 million compared to $3.1 ~~million. For~~million for the ~~comparable period~~first nine months of ~~2021, net cash provided by operating activities was $16 thousand.~~ 2022. This increase ~~in net cash used in operating activities~~ relates primarily to ~~the increase~~increases in ~~net loss, partially offset by the effects of changes in operating assets and liabilities.~~accounts receivable balances.

Net cash used in investing activities for the first nine months of ~~2022 and 2021~~2023 was $22.5 million compared to $1.1 million for the first nine months of 2022. This increase relates primarily to the use of $17.0 million of cash for the acquisition of Surgalign SPV and ~~$1.3~~$4.4 million ~~respectively, primarily representing purchases~~ of ~~property~~cash for the acquisition of Surgalign Holdings’s hardware and ~~equipment.~~biologics business during the first nine months of 2023.

Net cash provided by financing activities for the first nine months of 2023 was $19.4 million, consisting primarily of $5.0 million of additional borrowings under our term loan and $14.0 million of net proceeds resulting from our July 2023 private placement, compared to $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.~~2022.

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.~~tranche (the “Discretionary 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.

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.

On February 28, 2023, in connection with the acquisition of Surgalign SPV, the Term Credit Agreement was amended pursuant to an Amendment No. 3 to Credit, Security and Guarantee Agreement (Term Loan) (“Term Amendment No. 3”) to provide approximately $5.0 of funding for such acquisition, which replaced the Discretionary Tranche. In addition to the Term Amendment No. 3., we entered into an Amendment No. 3 to Credit, Security and Guarantee Agreement (Revolving Loan) (together with the Term Amendment No. 3, the “Amendments No. 3”), which amends the Revolving Credit Agreement. Additionally, the Amendments No. 3 (i) re-set the date certain fees payable in connection with optional prepayments under the Term Credit Agreement and the Revolving Credit Agreement are determined to the date the amendments were executed and consequently extended such fees’ original expiration and (ii) increased the minimum amount of interest payable under the Term Credit Agreement and the Revolving Credit Agreement from 1% to 2.5%.

On August 10, 2023, in connection with the acquisition certain assets and liabilities of Surgalign Holdings, Inc. that were related to Surgalign Holding, Inc.’s hardware and biologics business, the Company entered into a Limited Consent and Amendment No. 4 to Credit, Security and Guarantee Agreement (Term Loan) (“Term Amendment No. 4”), which amends the Credit, Security and Guarantee Agreement (Term Loan) by and among the Company, as guarantor, and its U.S. subsidiaries, as borrowers, MidCap Financial Trust, as agent, and the financial institutions party thereto (as amended, the “Term Credit Agreement”), and a Limited Consent and Amendment No. 4 to Credit, Security and Guarantee Agreement (Revolving Loan) (“Revolving Amendment No. 4” and, together with Term Amendment No. 4, the “Amendments No. 4”), which amends the Credit, Security and Guarantee Agreement (Revolving Loan) by and among the Company, as guarantor, and its U.S. subsidiaries, as borrowers, MidCap Funding IV Trust, as agent, and the financial institutions party thereto (as amended, the “Revolving Credit Agreement” and, together with the Term Credit Agreement, the “Credit Agreements”).

The Amendments No. 4 permit the acquisition of certain assets and liabilities of Surgalign Holdings, Inc., as described above, and provide the Company with additional flexibility with respect to holding foreign subsidiaries. The Amendments No. 4 contain standard covenants regarding holding foreign subsidiaries. The terms of borrowing under the Credit Agreements otherwise remain unchanged.

The Facilities have a maturity date of May 1, 2026 (the “Maturity ~~Date)~~Date”). ~~Beginning in~~In May 2023, the Company extended its interest only period on the Term Facility until June ~~2023,~~2024 when the Company is required to make monthly principal payments of approximately ~~$0.3~~$0.7 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,~~2023, the Company had ~~$0.7~~$4.0 million outstanding and ~~$7.3~~$3.3 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~~SOFR rate, as such term is defined in the Credit Agreements, plus 0.11%, plus the applicable margin of 7.00% in the case of the Term Credit Agreement, and 4.50% in the case of the Revolving Credit Agreement, subject in each case to a ~~LIBOR~~ floor of ~~1.00%~~2.50%. As of September 30, ~~2022,~~2023, the effective rate of the Term Facility, inclusive of amortization of debt issuance costs and accretion of the final payment, was ~~11.53%~~14.43%, and the effective rate of the Revolving Facility was ~~7.07%~~9.94%.

The Credit Agreements contain affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Borrowers, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments, and change the nature of their businesses. In addition, the Credit Agreements require the Borrowers and the Company to maintain net product revenue at or above minimum levels and to maintain a 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,~~2023, 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.

We believe that our ~~$17.4~~$8.7 million of cash and cash equivalents as of September 30, ~~2022,~~2023, 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.~~2024. However, we may require or seek additional capital to fund our future operations and business strategy prior to November ~~2023.~~2024. 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~~OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP 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~~2022 private placement have certain participation rights with respect to certain future equity offerings for capital raising purposes.

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~~during the ~~three and~~ nine months ended September 30, ~~2022~~2023, as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022, other than with respect to the fair value of assets acquired as part of the Coflex, CoFix product lines, and the acquisition of Surgalign Holdings, Inc.’s hardware and biologics business and the new critical accounting estimates below in light of such acquisition.

When applicable, we account for the acquisition of a business in accordance with the accounting standards codification guidance for business combinations, whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.

Assigning estimated fair values to the net assets acquired requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of domestic and international assets and liabilities, including intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. While the ultimate responsibility for determining estimated fair values of the acquired net assets resides with management, for material acquisitions, we may retain the services of certified valuation specialists to assist with assigning estimated fair values to certain acquired assets and assumed liabilities, including intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. Estimated fair values of acquired intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment are generally based on available historical information, future expectations, available market data, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, technological obsolescence, the useful life of the acquired assets, and other factors. These significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach, or the cost approach; estimating future cash flows based on projected revenues and/or margins that we expect to generate subsequent to the acquisition; applying an appropriate discount rate to estimate the present value of those projected cash flows we expect to generate; selecting an appropriate terminal growth rate and/or royalty rate or estimating a customer attrition or technological obsolescence factor where necessary and appropriate given the nature of the respective asset; assigning an appropriate contributory asset charge where needed; determining an appropriate useful life and the related depreciation or amortization method for the respective asset; and assessing the accuracy and completeness of other historical financial metrics of the acquiree used as standalone inputs or as the basis for determining estimated projected inputs such as margins, customer attrition, and costs to hold and sell product.

In determining the estimated fair value of intangible assets that are separately identifiable from goodwill, we typically utilize the income approach, which discounts the projected future cash flows using a discount rate that appropriately reflects the risks associated with the projected cash flows. Generally, we estimate the fair value of acquired customer relationships using the relief from royalty method under the income approach, which is based on the hypothetical royalty stream that would be received if we were to license the acquired trade name. For most other acquired intangible assets, we estimate fair value using the excess earnings method under the income approach, which is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group that includes the particular asset. In certain instances, particularly in relation to developed technology or patents, we may utilize the cost approach depending on the nature of the respective intangible asset and the recency of the development or procurement of such technology. The useful lives and amortization methods for the acquired intangible assets that are separately identifiable from goodwill are generally determined based on the period of expected cash flows used to measure the fair value of the acquired intangible assets and the nature of the use of the respective acquired intangible asset, adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors such as customer attrition rates and product or order lifecycles that may limit the useful life of the respective acquired intangible asset. In determining the estimated fair value of acquired inventory, we typically utilize the cost approach for raw materials and the sales comparison approach for work in process, finished goods, and service parts. In determining the estimated fair value of acquired property, plant, and equipment, we typically utilize the sales comparison approach or the cost approach depending on the nature of the respective asset and the recency of the construction or procurement of such asset.

We may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known as of the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to an acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill will affect any measurement of goodwill impairment taken during the measurement period, if applicable. If necessary, purchase price allocation revisions that occur outside of the measurement period are recorded within cost of sales, selling expenses or general and administrative expenses within our consolidated condensed statements of operations depending on the nature of the adjustment.

As a smaller reporting company, we are not required to provide the information required by this Item.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as ~~amended)~~amended (the “Exchange Act”)) as of September 30, ~~2022.~~2023. Based upon that evaluation, our principal executive officer and principal financial officer concluded that as of September 30, ~~2022,~~2023, our disclosure controls and procedures were effective.

~~During the three months ended September 30, 2022, the Company implemented a new enterprise resource planning system.~~ There were no ~~other~~ changes in ~~the Company’s~~our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the ~~Securities~~ Exchange ~~Act of 1934, as amended)~~Act) during the three months ended September 30, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting.~~reporting, other than changes implemented to integrate the internal controls of Surgalign SPV and Surgalign Holdings’s hardware and biologics business with our internal controls.

Our legal proceedings are discussed in Note 13 – Commitments and Contingencies in the notes to our condensed consolidated financial statements in this Form 10-Q.

Although this Item is inapplicable to us as a smaller reporting company, we hereby disclose the following revised and new risk factors from those described in our annual report on Form 10-K for the fiscal year ended December 31, 2022:

Our dependence on key suppliers of raw materials puts us at risk of interruptions in the availability of our products, which could reduce our sales and adversely affect our operating results and harm our reputation. In particular, because of a current stem cell shortage, we expect our revenues in future periods to be adversely affected by this shortage until such time as we can find additional supply of stem cells or develop internal production of stem cells.

We rely on key suppliers for certain raw materials used in our products. Among the key suppliers we do business with are the producers of stem cells used in our OsteoVive viable cell allograft. Our dependence on third-party suppliers involves several risks, including limited control over availability and pricing. Suppliers of such raw materials may decide, or be required, for reasons beyond our control, to cease supplying such raw materials and components to us or to raise their prices. Shortages of raw materials, quality control problems, production capacity constraints, or delays by suppliers have in the past and in the future could negatively affect our ability to meet our production goals. For example, in the third quarter of fiscal 2023, stem cells used to produce our OsteoVive viable cell allograft became unavailable and may remain unavailable for the foreseeable future. Elutia Inc. (formerly Aziyo Biologics, Inc.), one of our key suppliers of stem cells, recently voluntarily recalled its viable bone matrix products and suspended shipments of all viable bone matrix products from all donor lots. This recall has led to the American Association of Tissue Banks imposing additional regulations and has also constrained the overall supply of stem cells, with other stem cell suppliers now favoring larger customers during this shortage. As a smaller customer, we have encountered difficulties in receiving any supply of stem cells. Stem cells may continue to be unavailable to us or may be available only at elevated prices. Our revenues during the third quarter of fiscal 2023 were adversely affected as a result of the stem cell shortage and we expect our revenues in future periods to continue to be adversely affected by the stem cell shortage until such time as we can find additional supply of stem cells or develop internal production of stem cells. In addition, our sales of other products could be adversely affected by other similar shortages in the future. Such shortages and constraints adversely affect our revenues and other operating results and may also adversely affect our reputation.

Our actual operating results may differ significantly from our guidance, which could cause the market price of our common stock to decline.

We recently initiated the issuance of guidance regarding our future performance, such as our anticipated annual revenue, that represents our management’s estimates as of the date of release. This guidance, which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other information contained or referred to in the release. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute of Certified Public Accountants, and neither any independent registered public accounting firm nor any other independent expert or outside party compiles, examines or reviews the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.

Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, is inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results could not fall outside of these ranges. The principal reason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such persons.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecasted financial data will diminish the farther in the future that the data are forecast. In light of the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this Quarterly Report on Form 10-Q could result in the actual operating results being different than our guidance, and such differences may be adverse and material. The failure to achieve such guidance could disappoint investors and analysts and cause the market price of our common stock to decline.

We have completed acquisitions and business combinations in the past, including our recent acquisition of certain assets of RTI Holdings, Inc., our recent acquisition of certain assets and liabilities of Surgalign Holdings, Inc. and our acquisition of Surgalign SPV, and our current business strategy includes targeted strategic acquisitions in the future. Acquisitions and business combinations are risky and may harm our business, reputation, operating results and financial condition.

One of our key growth initiatives is to add depth to our product offerings through targeted strategic acquisitions. In furtherance of this strategy, we acquired Surgalign SPV during the first quarter of 2023, certain assets and liabilities of Surgalign Holdings during third quarter of 2023 and certain assets and liabilities of RTI Holdings, Inc. during fourth quarter of 2023. We may complete acquisitions and business combinations in the future. Our ability to complete acquisitions and business combinations will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions; our ability to compete effectively for acquisition candidates; and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Any acquisition or business combination could impair our business, reputation, operating results and financial condition. The benefits of an acquisition or business combination may take more time than expected to develop or integrate into our operations, and we cannot guarantee that previous or future acquisitions or business combinations will, in fact, produce any benefits. Acquisitions and business combinations may involve a number of risks, the occurrence of which could adversely affect our business, reputation, operating results and financial condition, including:

~~As a smaller reporting company, we~~In addition, effective internal controls are ~~not required~~necessary for us to provide reliable and accurate financial reports and to effectively prevent fraud. The integration of acquired businesses may result in our systems and controls becoming increasingly complex and more difficult to manage. We devote significant resources and time to comply with the ~~information required by this Item.~~internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we design, implement, and maintain adequate control over our financial processes and reporting in the future, especially in the context of acquisitions of other businesses, regardless of whether such acquired business was previously privately or publicly held. Any difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Also, some acquisitions, such as our acquisition of Surgalign SPV, our acquisition of certain assets and liabilities of Surgalign Holdings, Inc., and our acquisition of certain assets of RTI Holdings, Inc., may require the consent of the lenders under our credit agreements with MidCap and/or the consent of OrbiMed Royalty Opportunities II, LP and ROS Acquisition Offshore LP, which are funds affiliated with OrbiMed Advisors LLC, under our Investor Rights Agreement. We cannot predict whether such approvals would be forthcoming or the terms on which the lenders or these investors would approve future acquisitions. These risks, among others, could be heightened if we complete a large acquisition or other business combination or multiple transactions within a relatively short period of time.

Our clinical trials involve risk and expense and may fail to demonstrate competent and reliable evidence of the safety and effectiveness of our products, which in the case of product in development would prevent or delay their commercialization.

As a result of our acquisition of the Coflex product line, we are required by the U.S. Food and Drug Administration (“FDA”) to conduct a post-market surveillance study. In addition, we may be required to conduct other clinical studies that demonstrate competent and reliable evidence that our products are safe and effective before we can commercialize our products. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. We cannot be certain that our planned clinical trials or any other future clinical trials will be successful. In addition, even if such clinical trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our products for approval. To the extent that the results of the trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, we may be required to expend significant resources, which may not be available to us, to conduct additional trials in support of potential approval of our products. Even if regulatory approval is secured for any of our products, the terms of such approval may limit the scope and use of our products, which may also limit their commercial potential. The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a pre-market approval (“PMA”) application, for numerous reasons, including, but not limited to, the following:

Worldwide economic and market conditions, including with respect to financial institutions, and social instability could adversely affect our revenue, liquidity, financial condition, or results of operations.

The health of the global economy, and the credit markets and the financial services industry in particular, as well as the stability of the social fabric of our society, affects our business and operating results. The global economic slowdown, inflation, rising interest rates and the prospects for recession, as well as past and potential future disruptions in access to bank deposits or lending commitments due to bank failures, could materially and adversely affect our revenue, liquidity, financial condition and results of operations. For example, the 2023 closures of Silicon Valley Bank, Signature Bank and First Republic Bank and their placement into receivership with the Federal Deposit Insurance Corporation (“FDIC”) created bank-specific and broader financial institution liquidity risk and concerns. Although depositors at these institutions will continue to have access to their funds, future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages. The failure of any bank with which we deposit our funds or otherwise do business could reduce the amount of cash we have available for our operations or delay our ability to access such funds. Any such failure may increase the possibility of a sustained deterioration of financial market liquidity, or illiquidity at clearing, cash management and/or custodial financial institutions. In the event we have a commercial relationship with a bank that fails or is otherwise distressed, we may experience delays or other issues in meeting our financial obligations. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. Additionally, the credit and financial markets may be adversely affected by the war between Russia and Ukraine and measures taken in response thereto, as well as the conflict between Israel and Hamas. If the credit markets are not favorable, we may be unable to raise additional financing when needed or on favorable terms. Our customers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability to purchase our products or to pay for our products on a timely basis, if at all. In addition, adverse economic conditions, such as the lingering economic impacts of COVID-19, continuing supply chain disruptions, labor shortages and persistent inflation, and measures taken in response thereto, including recent interest rate increases, could also adversely impact our suppliers’ ability to provide us with materials and components, which may negatively impact our business. As with our customers and vendors, these economic conditions make it more difficult for us to accurately forecast and plan our future business activities.

We did not sell any unregistered equity securities of our Company during the quarter ended September 30, ~~2022,~~2023, other than the issuance of shares of our common stock ~~and warrants~~ in connection with our private placement, as reported in a Current Report on Form 8-K as filed with the SEC on ~~August 24, 2022.~~July 3, 2023.

On October 27, 2022, the Company’s term loan and revolving credit agreements with MidCap Financial Trust, as agent, 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.item 5.OTHER INFORMATION

The foregoing description of the amendments to the Company’s term loan and revolving credit agreements does not purport to be complete and is qualified in its entirety by reference to the full text of the amendments, which are filed as Exhibits 10.4 and 10.5, respectively, to this ~~Quarterly Report on Form 10-Q~~ ~~and incorporated herein by reference.~~

The following exhibits are being filed or furnished with this Quarterly Report on Form 10-Q:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Delaware		20-5313323
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

664 Cruiser Lane Belgrade, Montana		59714
(Address of principal executive offices)		(Zip Code)

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, par value $0.000001 per share		XTNT		NYSE American LLC

	Large accelerated filer ☐		Accelerated filer ☐
	Non-accelerated filer ☒		Smaller reporting company ☒
			Emerging growth company ☐

		Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS		ii
PART I.	FINANCIAL INFORMATION	1
ITEM 1.	FINANCIAL STATEMENTS	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1415
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	2021
ITEM 4.	CONTROLS AND PROCEDURES	2021
PART II.	OTHER INFORMATION	2022
ITEM 1.	LEGAL PROCEEDINGS	2022
ITEM 1A.	RISK FACTORS	2022
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	2025
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	2325
ITEM 4.	MINE SAFETY DISCLOSURES	2325
ITEM 5.	OTHER INFORMATION	2325
ITEM 6.	EXHIBITS	2326


Cash	$	1,142
Accounts receivable		1,627
Inventories		14,300
Prepaids and other current assets		1,252
Equipment		2,391
Right-of-use asset		554
Accounts payable		(530	)
Accrued liabilities		(1,170	)
Current portion of lease liability		(229	)
Lease liability, less current portion		(325	)
Net assets acquired		19,012
Bargain purchase gain		(11,028	)
Deferred tax liability		(2,394	)

Total purchase consideration	$	5,590

	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, ~~2022~~2023

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ___________ to ___________

	●	our ability to integrate the products acquired as part of the acquisition of Surgalign SPV, Inc., the acquisition of certain assets and liabilities of Surgalign Holdings, Inc., and the acquisition of certain assets of RTI Holdings, Inc. and achieve future sales of those products as anticipated, and other risks associated with those acquisitions;

	●	the anticipated adverse impact on our future revenues and financial results of a current shortage in the stem cells used to produce our OsteoVive product;

	●	the effect of inflation and supply chain disruptions, which could result in delayed product launches, lost revenue, higher costs, decreased profit margins, and other adverse effects on our business and operating results;

	●	the effect of a global economic slowdown, rising interest rates and the prospects for recession, a possible U.S. government shutdown, as well as past and potential future disruptions in access to bank deposits or lending commitments due to bank failures, which could materially and adversely affect our revenue, liquidity, financial condition and results of operations;

	●	the effect of labor and staffing shortages at hospitals and other medical facilities on the number of elective procedures in which our products are used ~~which have adversely affected~~ and ~~may continue to adversely affect~~as a result our revenues, as well as global and local labor shortages and loss of personnel, which have adversely affected and may continue to adversely affect our ability to produce product to meet demand;


Balance at January 1, 2023	$	3,205
Goodwill resulting from acquisition of Surgalign SPV, Inc.		3,309
Balance at September 30, 2023	$	6,514


Inventories	$	1,589
Equipment		947
Intangible assets		11,155
Net assets acquired		13,691

Goodwill		3,309

Total purchase consideration	$	17,000

	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					Nine Months Ended
	September 30, 2023		Percentage of Total Revenue			September 30, 2022		Percentage of Total Revenue
Orthobiologics	$	43,531		69	%	$	34,624		81	%
Spinal implant		19,664		31	%		8,075		19	%
Total revenue	$	63,195		100	%	$	42,699		100	%

	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

	September 30, 2022			December 31, 2021
Patents	$	807		$	847
Accumulated amortization		(449	)		(447	)
Intangible assets, net	$	358		$	400

	September 30, 2023					December 31, 2022
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Patents	$	2,617	$	(609	)	$	807	$	(463	)
Customer relationships		8,100		(788	)		—		—
Trade names		1,245		(73	)		—		—
Total cost	$	11,962	$	(1,470	)	$	807	$	(463	)


ITEM 1.	FINANCIAL STATEMENTS

	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

	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

(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


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

~~ITEM 1A.~~	~~RISK FACTORS~~●	diversion of management’s attention;
	●	disruption to our existing operations and plans;
	●	inability to effectively manage our expanded operations;
	●	difficulties or delays in integrating and assimilating information and financial systems, operations, manufacturing processes and products of an acquired business or other business venture or in realizing projected efficiencies, growth prospects, cost savings, and synergies;
	●	inability to successfully integrate or develop a distribution channel for acquired product lines;
	●	potential loss of key employees, customers, distributors, or sales representatives of the acquired businesses or adverse effects on existing business relationships with suppliers, customers, distributors, and sales representatives;
	●	adverse impact on overall profitability if our expanded operations do not achieve the financial results projected in our valuation models;
	●	reallocation of amounts of capital from other operating initiatives and/or an increase in our leverage and debt service requirements to pay acquisition purchase prices or other business venture investment costs, which could in turn restrict our ability to access additional capital when needed or pursue other important elements of our business strategy;
	●	infringement by acquired businesses or other business ventures of intellectual property rights of others;
	●	violation of confidentiality, intellectual property and non-compete obligations or agreements by employees of an acquired business or lack of or inadequate formal intellectual property protection mechanisms in place at an acquired business;
	●	inaccurate assessment of additional post-acquisition investments, undisclosed, contingent, tax or other liabilities or problems, unanticipated costs associated with an acquisition, and an inability to recover or manage such liabilities and costs;
	●	incorrect estimates made in the accounting for acquisitions and incurrence of non-recurring charges; and
	●	write-off of significant amounts of goodwill or other assets as a result of deterioration in the performance of an acquired business or product line, adverse market conditions, changes in the competitive landscape, changes in laws or regulations that restrict activities of an acquired business or product line, or as a result of a variety of other circumstances.

	●	The FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
	●	Patients do not enroll in clinical trials at the rate expected;
	●	Patients do not comply with trial protocols;
	●	Patient follow-up is not at the rate expected;
	●	Patients experience adverse events;
	●	Patients die during a clinical trial, even though their death may not be related to the products that are part of the trial;
	●	Device malfunctions occur with unexpected frequency or potential adverse consequences;
	●	Side effects or device malfunctions of similar products already in the market that change the FDA’s view toward approval of new or similar PMAs or result in the imposition of new requirements or testing;
	●	Institutional review boards and third-party clinical investigators may delay or reject the trial protocol;
	●	Third-party clinical investigators decline to participate in a trial or do not perform a trial on the anticipated schedule or consistent with the clinical trial protocol, investigator agreement, investigational plan, good clinical practices, the IDE regulations, or other FDA or institutional review board requirements;
	●	Third-party investigators are disqualified by the FDA;
	●	We or third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the clinical trial protocol or investigational or statistical plans, or otherwise fail to comply with the investigational device exemption regulations governing responsibilities, records, and reports of sponsors of clinical investigations;
	●	Third-party clinical investigators have significant financial interests related to us or our study such that the FDA deems the study results unreliable, or the company or investigators fail to disclose such interests;
	●	Regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials;
	●	Changes in government regulations or administrative actions;
	●	The interim or final results of the clinical trial are inconclusive or unfavorable as to safety or effectiveness; or
	●	The FDA concludes that our trial design is unreliable or inadequate to demonstrate safety and effectiveness.

Exhibit No.		Description
2.1		Equity Purchase Agreement, dated February 28, 2023, by and among Xtant Medical Holdings, Inc, Surgalign SPV, Inc., Surgalign Spine Technologies, Inc., and Surgalign Holdings, Inc. (filed as Exhibit 2.1 to Xtant’s Current Report on Form 8-K filed with the SEC on March 1, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

2.2		Asset Purchase Agreement, dated June 18, 2023, by and between Surgalign Holdings, Inc. and Xtant Medical Holdings, Inc. (filed as Exhibit 2.1 to Xtant’s Current Report on Form 8-K filed with the SEC on June 20, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

2.3		First Amendment to Asset Purchase Agreement, dated as of July 10, 2023, by and between Xtant Medical Holdings, Inc. and Surgalign Holdings, Inc. (filed as Exhibit 2.1 to Xtant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 11, 2023 (SEC File No. 001-34591) and incorporated by reference herein).

3.1		~~Amended and~~ Restated Certificate of Incorporation of Xtant Medical Holdings, Inc. (filed herewith).

3.2		Third Amended and Restated Bylaws of Xtant Medical Holdings, Inc. (Effective as of June 1, 2023) (filed as Exhibit 3.1 to ~~the Registrant’s~~Xtant’s Current Report on Form 8-K filed with the SEC on ~~February 13, 2018~~May 19, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

~~3.2~~10.1		~~Certificate~~Securities Purchase Agreement, dated as of ~~Amendment of the Amended~~July 3, 2023, by and ~~Restated Certificate of Incorporation of~~among Xtant Medical Holdings, Inc. and the investors party thereto (filed as Exhibit ~~3.1~~10.1 to ~~the Registrant’s~~Xtant’s Current Report on Form 8-K filed with the SEC on ~~October 31, 2019 (SEC File No. 001-34951) and incorporated by reference herein).~~

~~3.3~~		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Xtant Medical Holdings, Inc., as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 1, 2020 (SEC File No. 001-34951) and incorporated by reference herein).

~~3.4~~		~~Second Amended and Restated Bylaws of Xtant Medical Holdings, Inc. (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 16, 2018~~July 3, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

~~4.1~~		Form of Warrant Issued to Investors in August 2022 Private Placement (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K as filed with the SEC on August 24, 2022 (SEC File No. 0001-34951) and incorporated by reference herein).
10.2
~~10.1~~		~~Securities Purchase~~Registration Rights Agreement, dated as of ~~August 23, 2022,~~July 6, 2023, by and among Xtant Medical Holdings, Inc. and the investors party thereto (filed as Exhibit ~~10.1~~4.9 to ~~the Registrant’s Current Report~~Xtant’s Registration Statement on Form ~~8-K as~~S-3 filed with the SEC on ~~August 24, 2022~~July 7, 2023 (SEC File No. ~~0001-34951)~~333-273169) and incorporated by reference herein).

~~10.2~~		Registration Rights Agreement by and among Xtant Medical Holdings, Inc. and the investors party thereto (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the SEC on August 31, 2022 (SEC File No. 0001-34951) and incorporated by reference herein).

10.3		~~Letter Agreement by and between~~ Xtant Medical Holdings, Inc. ~~and Stavros Vizirgianakis~~2023 Equity Incentive Plan (filed as Exhibit ~~10.3~~10.1 to ~~the Registrant’s~~Xtant’s Current Report on Form 8-K as filed with the SEC on ~~August 31, 2022~~July 28, 2023 (SEC File No. ~~0001-34951)~~001-34951) and incorporated by reference herein).

10.4		Form of Employee Stock Option Award Agreement for use with the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (filed as Exhibit 10.2 to Xtant’s Current Report on Form 8-K filed with the SEC on July 28, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

10.5		Form of Employee Restricted Stock Unit Award Agreement for use with the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (filed as Exhibit 10.3 to Xtant’s Current Report on Form 8-K filed with the SEC on July 28, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

10.6		Form of Non-Employee Director Restricted Stock Unit Award Agreement for use with the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (filed as Exhibit 10.4 to Xtant’s Current Report on Form 8-K filed with the SEC on July 28, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

10.7		Form of Non-Employee Director Deferred Stock Unit Award Agreement for use with the Xtant Medical Holdings, Inc. 2023 Equity Incentive Plan (filed as Exhibit 10.5 to Xtant’s Current Report on Form 8-K filed with the SEC on July 28, 2023 (SEC File No. 001-34951) and incorporated by reference herein).

10.8		Limited Consent and Amendment No. 24 to Credit, Security and Guaranty Agreement (Term Loan), dated as of ~~October 27, 2022,~~August 10, 2023, by and among Xtant Medical, Inc., Bacterin International, Inc., X-spine Systems, Inc., Surgalign SPV, Inc., and any additional borrower that hereafter becomes party thereto, Xtant Medical Holdings, Inc., and any additional guarantor that hereafter becomes party thereto, and MidCap Financial Trust, as agent, and the lenders from time to time party thereto (filed herewith).

~~10.5~~10.9		Limited Consent Amendment No. 24 to Credit, Security and Guaranty Agreement (Revolving Loan), dated as of ~~October 27, 2022,~~August 10, 2023, by and among Xtant Medical, Inc., Bacterin International, Inc., X-spine Systems, Inc., Surgalign SPV, Inc., and any additional borrower that hereafter becomes party thereto, Xtant Medical Holdings, Inc., and any additional guarantor that hereafter becomes party thereto, and MidCap Financial Trust, as agent, and the lenders from time to time party thereto (filed herewith).

31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101		The following materials from Xtant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, ~~2022,~~2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the unaudited Condensed Consolidated Balance Sheets, (ii) the unaudited Condensed Consolidated Statements of Operations, (iii) the unaudited Condensed Consolidated Statements of Equity, (iv) the unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith).

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

	XTANT MEDICAL HOLDINGS, INC.

Date: November ~~3, 2022~~14, 2023	By:	/s/ Sean E. Browne
	Name:	Sean E. Browne
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

Date: November ~~3, 2022~~14, 2023	By:	/s/ Scott Neils
	Name:	Scott Neils
	Title:	Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)