NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share and per share data)
1.
|
Operations and Organization
|
The company is a leader in the use of natural tissues, metals and synthetics to produce orthopedic and other surgical
implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. The Company processes donated human musculoskeletal tissue and procured bovine and porcine animal tissue in producing allograft
and xenograft implants utilizing its proprietary BIOCLEANSE
®
and TUTOPLAST
®
sterilization processes, for distribution to hospitals and
surgeons. The Company processes natural tissue at two facilities in Alachua, Florida and one facility in Neunkirchen, Germany and manufactures metal and synthetic products in Marquette, Michigan and Greenville, North Carolina. The Company
distributes its implants and products in all 50 states and in over 45 countries worldwide.
The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, comprehensive income (loss) and cash flows in conformity with
accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2013.
The condensed consolidated financial statements include the accounts of RTI Surgical, Inc. and its wholly owned subsidiaries,
Pioneer Surgical Technology, Inc. (Pioneer), Tutogen Medical, Inc. (TMI), RTI Surgical, Inc. Cardiovascular (inactive), Biological Recovery Group, Inc. (inactive) and RTI Services, Inc. (inactive). The condensed
consolidated financial statements also include the accounts of RTI Donor Services, Inc. (RTIDS), which is a controlled entity.
3.
|
Summary of Significant Accounting Policies
|
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605,
Revenue Recognition
. This ASU is
based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain
or fulfill a contract. The effective date will be annual reporting periods beginning after December 15, 2016 using one of two retrospective application methods. The Company has not yet determined the potential effects, if any, on its unaudited
condensed consolidated financial statements.
4.
|
Merger with Pioneer Surgical Technology, Inc.
|
On July 16, 2013, the Company completed its acquisition of Pioneer. Under the terms of the merger agreement dated
June 12, 2013, the Company acquired Pioneer for $126,307 in cash. The transaction was funded through a combination of cash on hand, a new credit facility and a concurrent private placement of convertible preferred equity. The Company obtained
from Toronto-Dominion Bank, N.A., TD Securities USA LLC (TD Bank) and Regions Bank, a 5 year, $80,000 senior secured facility, which includes a $60,000 term loan and a $20,000 revolving credit facility, that matures on
July 16, 2018 with a variable interest rate between 100 and 300 basis points in excess of the one month London Interbank Offered Rate (LIBOR). The $20,000 revolving credit facility replaced the Companys previous $15,000 U.S.
credit facility.
5
Additionally, the Company received $50,000 in gross proceeds from a private placement of
convertible preferred equity to WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, a leading healthcare-focused private equity firm (Water Street). The convertible preferred stock is convertible into shares
of the Companys common stock. The convertible preferred stock accrues dividends at a rate of 6% per year. In 2013, the Company capitalized $1,989 in financing costs associated with the preferred stock issuance and the debt issuance. The
capitalized financing costs are being amortized over the respective lives of the preferred stock issuance and debt issuance agreements.
The Company has accounted for the acquisition of Pioneer under Accounting Standards Codification (ASC) 805,
Business
Combinations
. Pioneers results of operations are included in the consolidated financial statements for periods ending after July 16, 2013, the acquisition date.
The purchase price was financed as follows:
|
|
|
|
|
Cash proceeds from term loan
|
|
$
|
60,000
|
|
Net cash proceeds from preferred share issuance
|
|
|
48,710
|
|
Cash from RTI Surgical
|
|
|
17,597
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
126,307
|
|
|
|
|
|
|
The table below represents an allocation of the total consideration to Pioneers tangible and intangible
assets and liabilities based on managements estimate of their respective fair values as of July 16, 2013.
|
|
|
|
|
Inventories
|
|
$
|
35,972
|
|
Accounts receivable
|
|
|
10,567
|
|
Other current assets
|
|
|
6,059
|
|
Property, plant and equipment
|
|
|
15,258
|
|
Other assets
|
|
|
13,260
|
|
Current liabilities
|
|
|
(10,893
|
)
|
Other long-term liabilities
|
|
|
(19,841
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
50,382
|
|
Other intangible assets
|
|
|
23,100
|
|
Goodwill
|
|
|
52,825
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
126,307
|
|
|
|
|
|
|
Total net assets acquired as of July 16, 2013 are all part of the Companys only operating segment.
Fair values are based on managements estimates and assumptions including variations of the income approach, the cost approach and the market approach.
The Company believes that the acquisition of Pioneer offers the potential for substantial strategic and financial benefits. The transaction
will enhance the Companys existing core competency in biologics processing with the addition of Pioneers core competency in metals and synthetics. The Company believes the acquisition will enhance stockholder value through, among other
things, enabling the Company to capitalize on the following strategic advantages and opportunities:
|
|
|
Diversification of its implant portfolio.
|
|
|
|
Expansion of its direct distribution and marketing organizations.
|
6
|
|
|
Enhancement of its current international business.
|
|
|
|
Improvement of its margin profile and additional revenue opportunities.
|
These potential
benefits resulted in the Company paying a premium for Pioneer resulting in the recognition of goodwill. The $52,825 of goodwill was assigned to the Companys only operating segment.
The fair value of receivables acquired is $10,567, with the gross contractual amount being $11,712, of which $1,145 was not expected to be
collected.
The following unaudited pro forma information shows the results of the Companys operations as though the acquisition had
occurred as of the beginning of the respective periods (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
|
|
|
For the Six
Months Ended
|
|
|
|
June 30, 2013
|
|
|
June 30, 2013
|
|
Revenues
|
|
$
|
62,394
|
|
|
$
|
124,844
|
|
Net loss
|
|
|
(4,665
|
)
|
|
|
(4,188
|
)
|
Basic net loss per share
|
|
|
(0.08
|
)
|
|
|
(0.07
|
)
|
Diluted net loss per share
|
|
|
(0.08
|
)
|
|
|
(0.07
|
)
|
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of
the actual results of operations had the merger taken place as of the beginning of the periods presented, or the results that may occur in the future.
These amounts have been calculated to reflect the additional depreciation, amortization and interest expense that would have been incurred
assuming the fair value of adjustments and borrowings occurred on January 1, 2013, together with the consequential tax effects. In addition, these amounts exclude costs incurred which are directly attributable to the acquisition, and which do
not have a continuing impact on the combined companies operating results.
The Company completed its analysis of the purchase price
allocation in the second quarter of 2014 with no significant changes from managements estimate of their respective fair values as of July 16, 2013.
5.
|
Stock-Based Compensation
|
The Company has five stock-based compensation plans under which employees, consultants and outside directors have received
stock options and restricted stock awards. The Companys policy is to grant stock options at an exercise price equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Companys stock options
generally have ten-year contractual terms and vest over a one to five year period from the date of grant. The Companys policy is to grant restricted stock awards at a fair value equal to 100% of the market value of a share of common stock at
closing on the date of the grant. The Companys restricted stock awards generally vest over one to three year periods.
1998
Stock Option Plan, 2004 Equity Incentive Plan and 2010 Equity Incentive Plan
The Company adopted equity incentive plans in 1998 (the 1998 Plan), 2004 (the 2004 Plan) and 2010 (the 2010 Plan), which
provide for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company and consultants and advisors. The 2004 Plan and 2010 Plan allow for up to 2,000,000 and
5,000,000 shares, respectively, of common stock to be issued with respect to awards granted. New stock options may no longer be awarded under the 1998 Plan.
TMI 1996 Stock Option Plan and TMI 2006 Incentive and Non-Statutory Stock Option Plan
In connection with the merger with
TMI in 2008, the Company assumed the TMI 1996 Stock Option Plan and the TMI 2006 Incentive and Non-Statutory Stock Option Plan. The TMI 2006 Incentive and Non-Statutory Stock Option Plan allows for 1,830,000 shares of common stock which may be
issued with respect to stock options granted to former TMI employees or employees of the Company hired subsequent to the TMI acquisition. New stock options may no longer be awarded under the TMI 1996 Stock Option Plan.
7
Stock Options
As of June 30, 2014, there was $2,868 of total unrecognized stock-based compensation related to nonvested stock options. That expense is
expected to be recognized over a weighted-average period of 3.50 years.
Stock options outstanding, exercisable and available for grant at
June 30, 2014 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
|
|
|
|
Outstanding at January 1, 2014
|
|
|
5,518,604
|
|
|
$
|
4.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
933,500
|
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(161,000
|
)
|
|
|
3.31
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(642,700
|
)
|
|
|
5.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
5,648,404
|
|
|
$
|
4.38
|
|
|
|
6.09
|
|
|
$
|
3,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
4,961,214
|
|
|
$
|
4.47
|
|
|
|
5.69
|
|
|
$
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
3,329,404
|
|
|
$
|
4.86
|
|
|
|
4.47
|
|
|
$
|
1,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at June 30, 2014
|
|
|
1,915,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information concerning stock options are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Weighted average fair value of stock options granted
|
|
$
|
1.85
|
|
|
$
|
1.72
|
|
Aggregate intrinsic value of stock options exercised
|
|
|
142
|
|
|
|
90
|
|
The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value of stock
options for which the fair market value of the underlying common stock exceeds, or exceeded the respective stock option exercise price.
Restricted
Stock Awards
During the first quarter of 2014, the Company granted 145,000 shares of restricted stock with a weighted-average
grant date fair value of $3.78 which vest over a three year period. During the second quarter of 2014, the Company granted 120,731 shares of restricted stock with a weighted-average grant date fair value of $4.10 per share which vest over a one year
period. As of June 30, 2014, there was $1,031 of total unrecognized stock-based compensation related to time-based, nonvested restricted stock. That expense is expected to be recognized on a straight-line basis over a weighted-average
period of 1.55 years.
8
For the three and six months ended June 30, 2014 and 2013, the Company recognized
stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of processing and distribution
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
66
|
|
|
$
|
66
|
|
Marketing, general and administrative
|
|
|
485
|
|
|
|
536
|
|
|
|
927
|
|
|
|
973
|
|
Research and development
|
|
|
15
|
|
|
|
15
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
533
|
|
|
$
|
584
|
|
|
$
|
1,023
|
|
|
$
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Net Income (Loss) Per Common Share
|
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income (loss) per
common share is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic shares
|
|
|
56,714,512
|
|
|
|
56,272,327
|
|
|
|
56,584,579
|
|
|
|
56,146,608
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
363,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
57,077,552
|
|
|
|
56,272,327
|
|
|
|
56,584,579
|
|
|
|
56,146,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2014 and 2013, approximately 4,418,272 and 4,170,035, respectively,
and for the six months ended June 30, 2014 and 2013, approximately 4,297,143 and 3,987,828, respectively, of issued stock options were not included in the computation of diluted net income or loss per common share because they were
anti-dilutive since their exercise price exceeded the market price. For the six months ended June 30, 2014 and 2013, and for the three months ended June 30, 2013, options to purchase 333,852, 283,578 and 298,381 shares respectively of
common stock were not included in the computation of diluted loss per share because dilutive shares are not factored into the calculation of earnings per share when a net loss is reported.
For the three and six months ended June 30, 2014, 50,000 shares of convertible preferred stock were anti-dilutive on an as if-converted
basis and were not included in the computation of diluted net loss per common share.
Inventories by stage of completion are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Unprocessed tissue and raw materials
|
|
$
|
30,933
|
|
|
$
|
31,468
|
|
Tissue and work in process
|
|
|
41,460
|
|
|
|
39,417
|
|
Implantable tissue and finished goods
|
|
|
33,505
|
|
|
|
33,102
|
|
Supplies
|
|
|
2,213
|
|
|
|
2,139
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,111
|
|
|
$
|
106,126
|
|
|
|
|
|
|
|
|
|
|
9
For the three months ended June 30, 2014 and 2013, the Company had inventory write-downs of
$597 and $589, respectively, and for the six months ended June 30, 2014 and 2013, the Company had inventory write-downs of $1,911 and $1,346, respectively, relating primarily to product obsolescence.
8.
|
Property, Plant and Equipment
|
Property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Land
|
|
$
|
2,608
|
|
|
$
|
2,618
|
|
Buildings and improvements
|
|
|
49,696
|
|
|
|
50,106
|
|
Processing equipment
|
|
|
45,636
|
|
|
|
43,309
|
|
Surgical instruments
|
|
|
7,043
|
|
|
|
5,012
|
|
Computer equipment and software
|
|
|
6,703
|
|
|
|
6,152
|
|
Construction in process
|
|
|
18,679
|
|
|
|
16,156
|
|
Equipment under capital leases:
|
|
|
|
|
|
|
|
|
Processing equipment
|
|
|
396
|
|
|
|
396
|
|
Computer equipment
|
|
|
744
|
|
|
|
744
|
|
Office equipment
|
|
|
152
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,729
|
|
|
|
128,639
|
|
Less accumulated depreciation
|
|
|
(58,956
|
)
|
|
|
(53,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,773
|
|
|
$
|
74,738
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense of property, plant and equipment was $2,738 and $1,568 for the three months ended
June 30, 2014 and 2013, respectively, and $5,274 and $3,071 for the six months ended June 30, 2014 and 2013, respectively.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Balance at January 1
|
|
$
|
54,887
|
|
|
$
|
2,062
|
|
Goodwill acquired during the period
|
|
|
|
|
|
|
52,825
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,887
|
|
|
$
|
54,887
|
|
|
|
|
|
|
|
|
|
|
10
10.
|
Other Intangible Assets
|
Other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
|
|
|
Patents
|
|
$
|
11,063
|
|
|
$
|
2,303
|
|
|
$
|
10,637
|
|
|
$
|
1,935
|
|
Acquired exclusivity rights
|
|
|
|
|
|
|
|
|
|
|
2,941
|
|
|
|
2,787
|
|
Acquired licensing rights
|
|
|
10,850
|
|
|
|
5,932
|
|
|
|
10,850
|
|
|
|
5,326
|
|
Marketing and procurement intangible assets
|
|
|
21,418
|
|
|
|
3,091
|
|
|
|
22,098
|
|
|
|
2,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,331
|
|
|
$
|
11,326
|
|
|
$
|
46,526
|
|
|
$
|
12,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and procurement intangible assets include the following: procurement contracts, trademarks, selling
and marketing relationships, customer lists and non-compete agreements.
Amortization expense of other intangible assets for the three
months ended June 30, 2014 and 2013 was $1,125 and $527, respectively, and for the six months ended June 30, 2014 and 2013 was $2,253 and $1,052, respectively. At June 30, 2014, managements estimates of future amortization
expense for the next five years are as follows:
|
|
|
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
|
2014
|
|
$
|
2,200
|
|
2015
|
|
|
4,000
|
|
2016
|
|
|
3,400
|
|
2017
|
|
|
3,300
|
|
2018
|
|
|
3,300
|
|
|
|
|
|
|
|
|
$
|
16,200
|
|
|
|
|
|
|
Other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Indemnification asset
|
|
$
|
12,275
|
|
|
$
|
13,000
|
|
Other
|
|
|
1,349
|
|
|
|
1,332
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,624
|
|
|
$
|
14,332
|
|
|
|
|
|
|
|
|
|
|
Under the acquisition agreement, Pioneer deposited $13,000 in an escrow account and indemnified the Company
for up to $13,000 for various outstanding legal issues. At acquisition, the Company recorded a $13,000 indemnification asset and a corresponding $13,000 indemnification liability. At June 30, 2014, other assets include $12,275 of remaining
long-term indemnification assets. Under the acquisition agreement, the Company may submit claims against the escrow account during an initial escrow period of 15 months commencing on the closing date. Under certain provisions of the agreement, the
claims period for certain claims may be extended to 30 months after the closing date.
Interest expense associated with the amortization
of debt issuance costs for the three months ended June 30, 2014 and 2013 was $36 and $4, respectively, and for the six months ended June 30, 2014 and 2013 was $71 and $7, respectively. The remaining unamortized debt issuance costs are
included in Other in the table above.
11
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Accrued compensation
|
|
$
|
5,288
|
|
|
$
|
3,817
|
|
Accrued donor recovery fees
|
|
|
1,921
|
|
|
|
5,771
|
|
Accrued restructuring charges
|
|
|
673
|
|
|
|
2,609
|
|
Accrued distributor commissions
|
|
|
1,927
|
|
|
|
2,059
|
|
Accrued taxes
|
|
|
92
|
|
|
|
200
|
|
Contingent consideration
|
|
|
|
|
|
|
39
|
|
Other
|
|
|
7,574
|
|
|
|
7,983
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,475
|
|
|
$
|
22,478
|
|
|
|
|
|
|
|
|
|
|
The Company accrues for the estimated donor recovery fees due to third party recovery agencies as tissue is
received.
13.
|
Short and Long-Term Obligations
|
Short and long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Term loan
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Credit facilities
|
|
|
15,207
|
|
|
|
8,911
|
|
Capital leases
|
|
|
107
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
75,314
|
|
|
|
69,050
|
|
Less current portion
|
|
|
(5,632
|
)
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
69,682
|
|
|
$
|
67,706
|
|
|
|
|
|
|
|
|
|
|
On July 16, 2013, the Company obtained from TD Bank and Regions Bank, a 5-year, $80,000 senior secured
facility, which includes a $60,000 term loan and a $20,000 revolving credit facility, that matures on July 16, 2018 with a variable interest rate between 100 and 300 basis points in excess of the one month LIBOR rate. At June 30, 2014, the
interest rate for the term loan and revolving credit facility is 2.41%. The facility is secured by substantially all the assets of the Company and its subsidiaries and guaranteed by the Companys domestic subsidiaries, other than RTIDS. The
$20,000 revolving credit facility replaced the Companys previous $15,000 U.S. credit facility. As of June 30, 2014, there was $13,250 outstanding on the revolving credit facility. The term loan facility includes an interest only period of
September 30, 2013 through December 31, 2014 with a final balloon principal payment at the end of the loan agreement. The new credit agreement also contains various restrictive covenants which limit, among other things, indebtedness and
liens, as well as payment of dividends, while requiring a minimum cash balance on hand of $10,000 and certain financial covenant ratios.
In addition to the credit facility with TD Bank and Regions Bank, the Company has three credit facilities with German banks as of
June 30, 2014. Under the terms of the revolving credit facilities with three German banks, the Company may borrow up to 1,700 Euro, or approximately $2,320, for working capital needs. The 1,000 Euro revolving credit facility is secured by a
mortgage on the Companys German facility. The 500 Euro revolving credit facility is secured by accounts receivable of the Companys German subsidiary. The 200 Euro revolving credit facility is unsecured. The current interest rates for
these lines of credit vary from 3.30% to 4.43%. As of June 30, 2014, there was $1,957 outstanding on revolving credit facilities with German banks.
12
The total available credit on the Companys four revolving credit facilities at
June 30, 2014 was $7,113. The Company was in compliance with all covenants related to its revolving credit facilities as of June 30, 2014.
The Company has capital leases with interest rates ranging from 1.49% to 8.46% and maturity dates through 2017. The $107 representing future
maturities of capital leases includes interest in the amount of $2 at June 30, 2014. The present value of minimum lease payments as of June 30, 2014 was $105.
As of June 30, 2014, contractual maturities of long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
|
Credit
Facilities
|
|
|
Capital
Leases
|
|
|
Total
|
|
|
|
|
|
|
2014
|
|
$
|
625
|
|
|
$
|
1,957
|
|
|
$
|
26
|
|
|
$
|
2,608
|
|
2015
|
|
|
5,250
|
|
|
|
|
|
|
|
45
|
|
|
|
5,295
|
|
2016
|
|
|
4,500
|
|
|
|
|
|
|
|
32
|
|
|
|
4,532
|
|
2017
|
|
|
5,250
|
|
|
|
|
|
|
|
4
|
|
|
|
5,254
|
|
2018
|
|
|
44,375
|
|
|
|
13,250
|
|
|
|
|
|
|
|
57,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,000
|
|
|
$
|
15,207
|
|
|
$
|
107
|
|
|
$
|
75,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Other Long-Term Liabilities
|
Other long-term liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Indemnification liability
|
|
$
|
12,275
|
|
|
$
|
13,000
|
|
Other
|
|
|
403
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,678
|
|
|
$
|
13,446
|
|
|
|
|
|
|
|
|
|
|
As described in Note 11, the Company recorded a $13,000 indemnification liability on the date of the
acquisition of Pioneer.
The Company expects its deferred tax assets of $29,772, net of the valuation allowance at June 30, 2014 of $469, to be
realized through the generation of future taxable income and the reversal of existing taxable temporary differences.
Valuation allowances
are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. As such, valuation allowances of $469 have been established at both June 30, 2014 and December 31, 2013, against a
portion of the Companys deferred tax assets relating to certain state net operating loss carryforwards.
U.S. income taxes have not
been provided on the undistributed earnings of the Companys foreign subsidiaries. It is not practicable to estimate the amount of tax that might be payable. The Companys intention is to permanently reinvest earnings in its foreign
subsidiaries.
As of June 30, 2014, the Companys deferred tax assets were primarily attributable to U.S. federal net operating
loss and credit carryforwards. The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable
income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and
negative evidence factors. It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company utilizes a rolling three years
of actual results as the primary measure of cumulative losses in recent years.
13
When evaluating whether the Company has overcome the significant negative evidence that resulted
from cumulative losses in recent years, the Company adjusted its historical loss for items that the Company determined were not indicative of its ability to generate taxable income in future years. The Company is in a cumulative income position
after adjusting for the items that were not indicative of its ability to generate taxable income in future years. The Company considers this objectively verifiable evidence that its current operations existing on June 30, 2014 have consistently
demonstrated the ability to operate at a profit. The Company believes that this evidence is sufficient to overcome the unadjusted cumulative losses in recent years. The Company has a history of utilizing 100 percent of its deferred tax assets before
they expire and the forecasts of taxable earnings project a complete realization of all federal deferred tax assets before they expire, including under various stressed scenarios.
Upon considering all of the available positive and negative evidence, and the extent to which that evidence was objectively verifiable, the
Company determined that the positive evidence outweighed the negative evidence and the deferred tax assets are more-likely-than-not realizable, as of June 30, 2014. The Company will continue to regularly assess the realizability of its deferred
tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause the Company to adjust its valuation allowance, which would impact the Companys income tax expense in the period the Company
determines that these factors have changed.
The Company completed an examination during the three months ended March 31, 2014 by the
Internal Revenue Service (IRS). The IRS examination covered the 2010 tax year and resulted in no material adjustments. In addition, one of the Companys foreign subsidiaries is undergoing an examination by the German tax
authorities. The foreign examination covers the foreign subsidiarys 2006 through 2009 tax years.
On June 12, 2013, the Company and Water Street entered into an investment agreement. Pursuant to the terms of the
investment agreement, the Company issued $50,000 of convertible preferred equity to Water Street in a private placement which closed on July 16, 2013.
Preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
Preferred shares issuance
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Preferred shares issuance costs
|
|
|
(1,290
|
)
|
|
|
(1,290
|
)
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
|
48,710
|
|
|
|
48,710
|
|
Amortization of preferred shares issuance costs
|
|
|
169
|
|
|
|
77
|
|
Accrued dividend payable
|
|
|
2,284
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
51,163
|
|
|
$
|
49,537
|
|
|
|
|
|
|
|
|
|
|
14
17.
|
Restructuring Charges
|
The Company instituted a restructuring plan primarily related to termination of employees and a location closure as a result
of the integration activities following the acquisition of Pioneer, which resulted in $2,881 of expenses for the year ended December 31, 2013. The total estimated restructuring charges are expected to be paid in full prior to February 28,
2015. Severance payments are made to terminated employees over periods ranging from one month to twelve months and will not have a material impact on cash flows of the Company in any quarterly period. The following table includes a rollforward of
restructuring charges included in accrued expenses, see Note 12.
|
|
|
|
|
Accrued restructuring charges at January 1, 2014
|
|
$
|
2,609
|
|
Cash payments
|
|
|
(1,936
|
)
|
|
|
|
|
|
Accrued restructuring charges at June 30, 2014
|
|
$
|
673
|
|
|
|
|
|
|
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary
course of business. The Company believes that none of these claims that were outstanding as of June 30, 2014 will have a material adverse impact on its financial position or results of operations.
Biomedical Tissue Service, Ltd.(BTS)
The Company was named as a party, along with a number of other recovery
and processor defendants, in lawsuits relating to the tissue recovery practices of BTS, an unaffiliated recovery agency. The Company settled a majority of the BTS cases in 2012. The remaining cases were settled in 2013 for a payment of $2,700 with a
contingent interest in any recovery in the Companys litigation with its insurer, in the amount of $300. Accordingly, the Company recorded a litigation settlement charge of $3,000 in the second quarter of 2013.
Lanx, Inc.(Lanx)
Lanx, a subsidiary of Biomet, Inc. filed suit in the second quarter of 2013 against
Pioneer in the U.S. District Court, District of Colorado, alleging that one of the Companys medical devices infringed certain of Lanxs U.S. intellectual property rights, and sought monetary damages and threatened injunctive relief. In
the second quarter of 2014, the parties resolved the claim with no material financial impact to the Company or its operations. As part of the resolution of the claim, a settlement payment of $325 was made to Lanx from the indemnification escrow
account, see Note 11 Other Assets.
Coloplast
The Company is presently named as co-defendant along with other companies
in a small number of the transvaginal surgical mesh (TSM) mass tort claims being brought in various state and federal courts. The TSM litigation has as its catalyst various Public Health Notifications issued by the U.S. Food and Drug
Administration (FDA) with respect to the placement of certain TSM implants that were the subject of 510k regulatory clearance prior to their distribution. The Company does not process or otherwise manufacture for distribution in the U.S.
any implants that were the subject of these FDA Public Health Notifications. The Company denies any allegations against it and intends to vigorously defend itself.
In addition to claims made directly against the Company, Coloplast, a distributor of TSMs and certain allografts processed and private
labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts. Coloplast has requested that the Company indemnify or defend Coloplast in those claims which allege
injuries caused by the Companys allograft implants, which the Company is currently considering. If the Company determines such indemnification and defense to be required by the Company, it is anticipated that such defense and indemnification
will be afforded coverage under the Companys insurance policy subject to a reservation of rights by the insurer.
Based on the
current information available to the Company, it is not possible to evaluate and estimate with reasonable certainty the impact that current or any future TSM litigation may have on the Company.
The Companys accounting policy is to accrue for legal costs as they are incurred.
15
The Company distributes natural tissues, metals and synthetic implants through various distribution channels. The Company
operates in one reportable segment comprised of six lines of business. The Companys six lines of business are comprised of: spine, sports medicine, bone graft substitutes (BGS) and general orthopedic, ortho fixation, surgical
specialties and dental. Discrete financial information is not available for these six lines of business. The following table presents revenues from these six categories and other revenues for the three and six months ended June 30, 2014 and
2013, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
21,346
|
|
|
$
|
11,221
|
|
|
$
|
40,409
|
|
|
$
|
21,320
|
|
Sports medicine
|
|
|
11,459
|
|
|
|
11,657
|
|
|
|
22,819
|
|
|
|
22,168
|
|
BGS and general orthopedic
|
|
|
9,088
|
|
|
|
6,050
|
|
|
|
17,235
|
|
|
|
11,401
|
|
Ortho fixation
|
|
|
8,866
|
|
|
|
|
|
|
|
16,361
|
|
|
|
|
|
Surgical specialties
|
|
|
7,182
|
|
|
|
6,875
|
|
|
|
14,460
|
|
|
|
13,829
|
|
Dental
|
|
|
5,140
|
|
|
|
5,006
|
|
|
|
9,786
|
|
|
|
9,179
|
|
Other revenues
|
|
|
2,948
|
|
|
|
1,500
|
|
|
|
5,704
|
|
|
|
4,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
66,029
|
|
|
$
|
42,309
|
|
|
$
|
126,774
|
|
|
$
|
82,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenues
|
|
|
59,006
|
|
|
|
37,413
|
|
|
|
113,821
|
|
|
|
73,527
|
|
International revenues
|
|
|
7,023
|
|
|
|
4,896
|
|
|
|
12,953
|
|
|
|
9,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
66,029
|
|
|
$
|
42,309
|
|
|
$
|
126,774
|
|
|
$
|
82,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents percentage of total revenues derived from the Companys largest distributors
and international distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Percent of revenues derived from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zimmer, Inc.
|
|
|
16%
|
|
|
|
15%
|
|
|
|
16%
|
|
|
|
14%
|
|
Medtronic, Inc.
|
|
|
12%
|
|
|
|
18%
|
|
|
|
13%
|
|
|
|
19%
|
|
Davol, Inc.
|
|
|
5%
|
|
|
|
10%
|
|
|
|
6%
|
|
|
|
11%
|
|
International
|
|
|
11%
|
|
|
|
12%
|
|
|
|
10%
|
|
|
|
11%
|
|
The following table presents property, plant and equipmentnet by significant geographic location:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Property, plant and equipmentnet:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
61,395
|
|
|
$
|
58,458
|
|
International
|
|
|
15,378
|
|
|
|
16,280
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,773
|
|
|
$
|
74,738
|
|
|
|
|
|
|
|
|
|
|
The Company evaluated subsequent events as of the issuance date of the condensed consolidated financial statements as
defined by FASB ASC 855
Subsequent Events
, and identified no subsequent events that require adjustment to, or disclosure of, in these condensed consolidated financial statements.
16