Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

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, 2025. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed above in "Cautionary Statement Regarding Forward-Looking Statements" and elsewhere in this Form 10-Q.

Business Overview

We develop, manufacture and market regenerative medicine products and medical devices for domestic and international markets. Our products serve the specialized needs of orthopedic and neurological surgeons, as well as trauma, foot and ankle, sports medicine, and wound care surgeons including orthobiologics for the promotion of bone healing, amniotic tissue and collagen for both surgical repair and chronic wound care, and implants and instrumentation for the treatment of spinal disease. We promote our products primarily in the United States through a direct sales force, independent distributors and stocking agents.

We have an extensive sales channel of direct and 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 and through group purchasing organizations. 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 Europe, Canada, Mexico, South America, and certain Pacific region countries. We have recently made and intend to continue to make measured investments in the expansion of our commercial team to support our new products and maximize the reach of our broad portfolio of orthobiologics solutions. In April 2026, we hired approximately 20 sales personnel in connection with our exclusive distribution arrangement with Dilon Technologies, Inc. ("Dilon").

As previously disclosed, on December 1, 2025, we completed the sale of certain non-core assets relating to our Coflex and CoFix products and our international hardware business to Companion Spine, LLC ("Companion Spine") for an aggregate purchase price of $21.4 million (the "Coflex/CoFix and Paradigm Divestitures"). Of the $10.7 million of proceeds received (including $0.3 million of interest accrued on the note receivable balance) during the first quarter of 2026, $2.8 million was used to repay a portion of our term debt. To assist in the transition of this business to Companion Spine, we agreed to provide certain transition services to Companion Spine for a limited period of time. In 2025, we recognized $20.3 million in revenue from sales of our Coflex and CoFix products and international hardware products prior to the Coflex/CoFix and Paradigm Divestitures. As anticipated, the loss of this revenue has adversely affected and will continue to adversely affect our 2026 revenue.

In addition, as previously disclosed, we recognized $18.7 million in license revenue in 2025 that we indicated likely will not repeat in 2026 due primarily to changes in the reimbursement environment for our SimpliMax™ product effective January 1, 2026. As previously disclosed, this loss in license revenue has also adversely affected and will continue to adversely affect a portion of our product revenue in 2026. Specifically, we experienced $5.0 million and $8.6 million decreases in license revenue during the three and six months ended June 30, 2026, respectively, and $2.9 million and $4.9 million decreases in product revenue related primarily to skin substitute products during the three and six months ended June 30, 2026, respectively, in each case as compared to the respective prior year period. The loss of this license and product revenue will continue to adversely impact our revenues and other operating results, including our gross margins, during the remainder of 2026 as compared to 2025.

Recent Developments

On April 13, 2026, we announced that we entered into a Distribution Agreement (the "Distribution Agreement") with Dilon Technologies, Inc. pursuant to which we obtained the exclusive rights to import, market, distribute and sell the HEMOBLAST^® Bellows product in the United States. The HEMOBLAST^® Bellows product is an FDA-approved powder-based, topical, surgical hemostatic agent used to control bleeding during surgical procedures. In connection with the agreement, we hired approximately 20 Dilon sales personnel to assist in selling product in the United States. Under the Distribution Agreement, Dilon will continue to manufacture the HEMOBLAST^® Bellows product at its facility in France and supply it to us at a specified transfer price, which price is subject to adjustment in certain circumstances. The Distribution Agreement does not contain any minimum purchase requirements. We rely on Dilon, as the sole manufacturer, to produce the product for us and in sufficient quantities and at an appropriate transfer price. There are no other suppliers of the HEMOBLAST® Bellows product. Accordingly, this arrangement involves risk since we do not control the manufacturing process and Dilon is responsible for all manufacturing decisions, as well as compliance with all applicable rules and regulations in connection therewith. We believe we will have a sufficient supply of the HEMOBLAST® Bellows product to support our anticipated sales through the end of third quarter 2026. We are uncertain that supply will be available to us thereafter. If Dilon is unable to manufacture and supply us the HEMOBLAST® Bellows product in sufficient quantities or at all, then we will be unable to sell the product and recognize revenue in connection therewith, as discussed later in this report under the heading "Part II. Other Information - Item 1A. Risk Factors."

Under the Distribution Agreement, we paid Dilon a $5.0 million exclusivity fee upon execution of the agreement. The fee is fully refundable to us in certain circumstances. Given the refundable nature of the payment, we initially recognized the $5.0 million as a deposit asset on our consolidated balance sheet. However, based on an assessment of facts and circumstances, including the uncertainty surrounding recovery of the payment and management's expectation that repayment was not probable despite contractual repayment provisions, we recognized a $5.0 million charge to operating expenses during the second quarter of 2026, which adversely affected our operating results for the second quarter of 2026.

Results of Operations

Comparison of Three and Six Months Ended June 30, 2026 and 2025

Revenue

Total revenue for the three and six months ended June 30, 2026 was $23.0 million and $43.9 million, respectively, which represent decreases of 35% and 36%, respectively, compared to $35.4 million and $68.3 million for the three and six months ended June 30, 2025, respectively. These decreases are attributed primarily to: (i) $5.6 million and $11.0 million of revenues associated with the Coflex/CoFix and Paradigm Divestitures recognized during the three and six months ended June 30, 2025, respectively; (ii) $5.0 million and $8.6 million of licensing revenue recognized during the three and six months ended June 30, 2025, respectively; and (iii) decreases in orthobiologics sales during the current year periods compared to the prior year periods.

Cost of Sales

Cost of sales consists primarily of manufacturing cost, product purchase costs, and depreciation of surgical instruments. Cost of sales also includes reserves for estimated excess inventory and inventory on consignment that may be missing and not returned. Cost of sales decreased by $1.4 million to $9.7 million for the three months ended June 30, 2026 from $11.1 million for the three months ended June 30, 2025. Cost of sales decreased by $5.2 million to $18.6 million for the six months ended June 30, 2026 from $23.8 million for the six months ended June 30, 2025. The decrease associated with the three-month comparison was due primarily to the non-recurrence of costs of sales in the current year period associated with the Coflex/CoFix and Paradigm Divestitures in the prior year period. The decrease associated with the six-month comparison was due primarily to the non-recurrence of costs of sales in the current year period associated with the Coflex/CoFix and Paradigm Divestitures and decreases in orthobiologics sales during the current year period.

Gross Profit

Gross profit as a percentage of revenue, decreased to 57.9% for the three months ended June 30, 2026 compared to 68.6% for the same period in 2025 and decreased to 57.6% for the six months ended June 30, 2026 compared to 65.2% for the same period in 2025. Of the decrease for the three-month comparison, 450 basis points related to the reduction in license revenue and 390 basis points resulted from reduced production efficiencies and increased charges for excess and obsolete inventory. Of the decrease for the six-month comparison, 450 basis points related to the reduction in license revenue and 230 basis points resulted from reduced production efficiencies.

General and Administrative

General and administrative expenses consist primarily of personnel costs for corporate employees, cash-based and stock-based compensation related costs, amortization, and corporate expenses for legal, accounting and other professional fees, as well as occupancy costs. General and administrative expenses decreased 14%, or $1.0 million, to $6.4 million for the three months ended June 30, 2026, compared to $7.5 million for the same period in 2025. General and administrative expenses decreased 15%, or $2.3 million, to $12.7 million for the six months ended June 30, 2026, compared to $15.0 million for the same period in 2025. Of these decreases, $1.4 million and $3.0 million for the three-month and six-month periods are due to the Coflex/CoFix and Paradigm Divestitures. The decrease for the three-month comparison was partially offset by $0.1 million in additional stock-based compensation expense incurred in the current year period. The decrease for the six-month comparison was partially offset by $0.2 million of additional computer and software costs and $0.2 million in additional accounting and consulting fees incurred in the current year period.

Sales and Marketing

Sales and marketing expenses consist primarily of sales commissions; personnel costs for sales and marketing employees; costs for trade shows, sales conventions and meetings; travel expenses; advertising; and other sales and marketing related costs. Sales and marketing expenses decreased 11%, or $1.2 million, to $10.4 million for the three months ended June 30, 2026, compared to $11.6 million for the same period in 2025. Sales and marketing expenses decreased 19%, or $4.2 million, to $18.6 million for the six months ended June 30, 2026, compared to $22.8 million for the same period in 2025. Of these decreases, $2.4 million and $4.9 million for the three-month and six-month periods are due to the Coflex/CoFix and Paradigm Divestitures. The remaining increase for the three-month comparison is primarily due to increased compensation expenses of $1.2 million related to increased headcount; an increase in independent agent commission expense of $0.3 million resulting from revenue mix; and a $0.3 million increase in travel-related expenses, partially offset by a $0.9 million reduction in consulting fees. The remaining increase for the six-month comparison is primarily due to increased compensation expenses of $1.4 million related to increased sales personnel headcount and $0.4 million increase in travel-related expenses, partially offset by a $1.5 million reduction in consulting fees.

Research and Development

Research and development expenses consist primarily of internal costs for the development of new technologies. Research and development expenses increased 23%, or $0.1 million, to $0.7 million for the three months ended June 30, 2026, compared to $0.6 million for the same period in 2025. Research and development expenses increased 12%, or $0.1 million, to $1.1 million for the six months ended June 30, 2026, compared to $1.0 million for the same period in 2025.

Write-off of Distribution Agreement Deposit

The three and six months ended June 30, 2026 include expense of $5.0 million for the exclusivity fee we paid Dilon upon execution of the Distribution Agreement, which although refundable in certain circumstances, we do not expect to collect.

Interest Expense

Interest expense decreased 46%, or $0.5 million, to $0.5 million for the three months ended June 30, 2026, compared to $1.0 million for the same period in 2025. Interest expense decreased 44%, or $0.9 million, to $1.1 million for the six months ended June 30, 2026, compared to $2.0 million for the same period in 2025. These decreases resulted primarily from reduced borrowings under our revolving line of credit and repayments totaling $0.9 million and $3.8 million on our term loan during the three and six months ended June 30, 2026, respectively.

Other Income (Expense)

We recognized $0.3 million and $0.6 million, respectively, of other income for the three and six months ended June 30, 2026 primarily related to certain transition services provided to Companion Spine. We expect such other income to continue for approximately one month through the remaining term of the transition services agreement with Companion Spine.

Provision for Income Taxes - Current and Deferred

The decrease in income tax expense for the three and six months ended June 30, 2026 compared to the three and six months ended June 30, 2025 was primarily due to a decrease in cash state taxes attributable to tax year 2026 as compared to 2025.

Liquidity and Capital Resources

Working Capital

Since our inception, we have financed our operations primarily through 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 June 30, 2026 and December 31, 2025 (in thousands):

		June 30, 2026				December 31, 2025
Cash, cash equivalents and restricted cash		$	10,217			$	17,328
Accounts receivable, net			19,416				17,803
Inventories			33,287				30,263
Note receivable			-				10,462
Total current assets			64,777				78,245
Accounts payable			6,154				3,844
Accrued liabilities			7,481				10,626
Current portion of long-term debt			3,720				3,500
Line of credit			11,985				10,857
Total current liabilities			29,963				29,484
Net working capital			34,814				48,761

While our working capital decreased by $13.9 million as of June 30, 2026 as compared to December 31, 2025, we used cash received from the Coflex/CoFix and Paradigm Divestitures and the repayment by Companion Spine of the note receivable that existed as of December 31, 2025 in connection therewith to repay some of our long-term debt, resulting in our long-term debt, less the current portion and plus premium and less issuance costs, being $7.3 million as of June 30, 2026, compared to $11.0 million as of December 31, 2025.

During the second quarter of 2026, we used $5.0 million of cash to pay the exclusivity fee to Dilon under the Distribution Agreement. While this fee is subject to repayment by Dilon under certain circumstances, including upon termination of the Distribution Agreement for any reason, we recorded a $5.0 million charge to operating expenses during the second quarter of 2026. This charge is based on an assessment of facts and circumstances, including the uncertainty surrounding recovery of the payment and management's expectation that repayment was not probable despite the contractual repayment provisions.

Cash Flows

Net cash used in operating activities for the first six months of 2026 was $9.4 million compared to net cash provided by operating activities of $2.6 million for the first six months of 2025. This change relates primarily to the net loss in the first six months of 2026 compared to net income in the comparable prior year period, exclusive of the $5.0 million Dilon distribution expense associated with the Distribution Agreement.

Net cash provided by investing activities for the first six months of 2026 was $5.0 million compared to net cash used in investing activities of $1.5 million for the first six months of 2025. This change relates primarily to $10.4 million of cash received from Companion Spine in connection with the Coflex/Cofix and Paradigm Divestitures in the current year period, partially offset by $5.0 million paid to Dilon in connection with the Distribution Agreement in the current year period.

Net cash used in financing activities for the first six months of 2026 was $2.7 million compared to $0.3 million for the first six months of 2025. This increase relates primarily to $3.8 million of increased repayments on the term loan during the current year period compared to the prior year period, partially offset by $1.2 million of reduced borrowings under our revolving credit facility, net of repayments.

Term Loan and Revolving Credit Facilities

Xtant, as guarantor, and certain of our subsidiaries, as borrowers (collectively, the "Borrowers"), are parties to a term loan credit agreement (the "Term Credit Agreement") and revolving loan credit agreement (the "Revolving Credit Agreement" and together with the Term Loan Credit Agreement, the "Loan Agreements") with MidCap Financial Trust and MidCap Funding IV Trust, respectively and each in its respective capacity as agent, and lenders from time to time party thereto. As of June 30, 2026, $10.2 million was outstanding under the term loan facility under the Term Credit Agreement (the "Term Facility"), reduced from $14.0 million as of December 31, 2025. This reduction was due to the final purchase price payment of $2.8 million by Companion Spine to us during the current year period in connection with the sale of certain assets relating to our Coflex and CoFix products and international hardware business to Companion Spine and $0.9 million of principal repayments under the Term Loan Credit Agreement.

The Revolving Credit Agreement provides for a secured revolving credit facility (the "Revolving Facility," and, together with the secured term credit facility under the Term Credit Agreement, the "Facilities") under which the Borrowers may borrow up to $17.0 million at any one time, the availability of which is determined based on a borrowing base equal to percentages of certain accounts receivable and inventory of the Borrowers in accordance with a formula set forth in the Revolving Credit Agreement. All borrowings under the Revolving Facility are subject to the satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material respects, and the delivery of an updated borrowing base certificate.

The Facilities have a maturity date of March 1, 2029. Each of the Borrowers, and Xtant, 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 Xtant'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 Xtant and the Borrowers. As of June 30, 2026, we had $12.0 million outstanding and $0.7 million of availability under the Revolving Credit Facility.

The loans and other obligations pursuant to the Credit Agreements bear interest at a per annum rate equal to the sum of the SOFR Interest Rate, as such term is defined in the Credit Agreements, plus the applicable margin of 6.50% in the case of the Term Credit Agreement, and an applicable margin of 4.50% in the case of the Revolving Credit Agreement, subject in each case to a floor of 2.50%. As of June 30, 2026, the effective rate of the Term Credit Agreement, inclusive of amortization of debt issuance costs and accretion of the final payment, was 14.74%, and the effective rate of the Revolving Credit Agreement was 8.23%.

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, undergo a change in control and change the nature of their businesses. In addition, the Credit Agreements require us to maintain net product revenue at or above certain minimum levels and to maintain a certain minimum liquidity level, in each case as specified in the Credit Agreements.

On August 10, 2026, we entered into Amendment No. 5 to Amended and Restated Credit, Security and Guaranty Agreement (Term Loan) with MidCap Financial Trust and Amendment No. 5 to Amended and Restated Credit, Security and Guaranty Agreement (Revolving Loan) with MidCap Funding IV Trust pursuant to which we eliminated the requirement to comply with the minimum net revenue covenant for second quarter of 2026, adjusted the amortization of the term loan to increase quarterly principal payments by $0.15 million in the fourth quarter of 2026 and increase quarterly principal payments by $0.3 million thereafter until the outstanding principal balance of the term loan has been paid in full, and revised the minimum net revenue covenant to minimum net revenue amounts. As of June 30, 2026, our credit agreements included a minimum net revenue covenant, however, pursuant to the Amendment No. 5s executed in August 2026, we were not required to comply with the minimum net revenue covenant for the quarter ended June 30, 2026. Under the covenant terms in effect prior to the Amendment No. 5s, we would not have been in compliance with the minimum net revenue requirement for that quarter.

Cash Requirements

We believe that our $10.2 million of cash and cash equivalents as of June 30, 2026, together with our anticipated operating cash flows and amounts available under the Facilities, will be sufficient to meet our anticipated cash requirements through at least August 2027. However, we may require or seek additional capital to fund our future operations and business strategy prior to August 2027. 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, debt restructurings or refinancings or through strategic transactions, dispositions, collaborations or license agreements. We can give no assurances that we will be able to secure additional sources of funds to support our operations, or if such funds are available to us, that such additional financing will be sufficient to meet our needs or on terms acceptable to us. This is particularly true if economic and market conditions deteriorate or our business, financial performance or prospects deteriorate.

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 MidCap Financial Trust and MidCap Funding IV Trust under our Credit Agreements, 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.

Critical Accounting Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. There have been no changes in our critical accounting estimates for the six months ended June 30, 2026 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2025.