NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue, and bovine and porcine animal tissue in producing allograft and xenograft implants utilizing
proprietary BIOCLEANSE
®
, TUTOPLAST
®
and CANCELLE
®
SP sterilization processes,
and manufactures metal and synthetic implants for distribution to hospitals and surgeons. The Company processes tissue at two operating facilities in Alachua, Florida and one operating facility in Neunkirchen, Germany, and manufactures metal and
synthetic implants in Marquette, Michigan and Greenville, North Carolina. The Company distributes its implants and services in all 50 states and in over 45 countries worldwide.
2. Basis of Presentation
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 Rule
10-01
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 (loss) income 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, 2016.
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. Recently Issued Accounting Standards
CompensationStock Compensation
In May 2017, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU)
2017-09,
CompensationStock Compensation
(Topic 718): Scope of Modification Accounting. The requirement provides guidance on determining
which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. For public business entities, this ASU should be effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2017. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.
Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets
In February 2017, the FASB issued ASU
2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic
610-20):
Clarifying the Scope of Asset Derecognition Guidance
and Accounting for Partial Sales of Nonfinancial Assets. This ASU requires all entities to derecognize a business or nonprofit activity in accordance with Topic 810, and also requires all entities derecognize an equity method investment in
accordance with Topic 860. The amendments in this ASU eliminate the scope exceptions, and simplifies GAAP. This ASU is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting
period. Public entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of adopting
this new accounting guidance on its condensed consolidated financial statements.
Simplifying the Test for Goodwill
Impairment
In January 2017, the FASB issued ASU
No. 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic 350) (ASU
No. 2017-04).
The amendments in ASU
No. 2017-04
are intended to reduce the cost and complexity of the goodwill impairment test by eliminating Step 2 from
the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds
its fair value. Under the amendments in ASU
No. 2017-04,
an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount.
An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting
7
units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in ASU
No. 2017-04
are effective for the Companys annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU
No. 2017-04
on January 1, 2017, and it did not have a material impact on the Companys
results of operations, financial position and disclosures.
Compensation Stock Compensation
In March 2016, the
FASB issued ASU
No. 2016-09,
Compensation Stock Compensation
(Topic 718) (ASU
2016-09).
ASU
2016-09
identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted ASU
2016-09
on January 1, 2017.
ASU
2016-09
requires
recognition through opening retained earnings of any
pre-adoption
date net operating loss carryforwards from
share-based
payments, as well as recognition of all income
tax effects from share
based-payments
in income tax expense.
In addition, under ASU
2016-09
excess tax benefits no longer represent financing activities, but instead represent operating activities in the statement of cash flow. ASU
2016-09
allows companies to
recognize excess tax benefits as an operating activity on a prospective or retrospective basis. The Company has decided to recognize this requirement on a prospective basis and has not adjusted prior periods. For the six months ended June 30, 2017,
there was no material impact on the Companys condensed consolidated financial statements.
Simplifying the Measurement of
Inventory
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. Update
No. 2015-11
more closely aligns the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by requiring companies using the
first-in,
first-out
and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated distribution
prices of the inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Update
No. 2015-11
is effective for annual reporting periods
beginning after December 15, 2016 and interim periods within those fiscal years. Update
No. 2015-11
should be applied prospectively with earlier application permitted as of the beginning of an
interim or annual reporting period. The Company adopted ASU
2015-11
effective January 1, 2017. Adoption of ASU
2015-11
had no material impact on the Companys
condensed consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU
2014-09),
which supersedes the revenue recognition requirements in
Accounting Standards Codification (ASC) Topic 605,
Revenue Recognition
. ASU
2014-09
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. ASU
2014-09
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. As updated in
August 2015, the effective date of ASU
2014-09
will be annual reporting periods beginning after December 15, 2017, using one of two retrospective application methods.
In March and April 2016, the FASB issued two updates to the revenue recognition guidance: ASU
2016-08
Principal Versus Agent Considerations
(Topic 606) (Reporting Revenue Gross Versus Net), and ASU
2016-10,
Identifying Performance Obligations and Licensing
(Topic 606).
In May 2016, the FASB issued ASU Update
No. 2016-12
(ASU
2016-12)
which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition.
The Company has not determined the impact ASU
2014-09,
ASU
2016-08,
ASU
2016-10
and ASU
2016-12
will have on its condensed consolidated financial statements and footnote disclosures.
However, an implementation project team has been identified, and has developed a plan to adopt the ASUs and assess the impact on the Companys condensed consolidated financial statements and footnote disclosures. Currently, the Company has
analyzed its global revenue and categorized its revenue contracts based on distribution channel. Based on this analysis, the Company has identified revenue contracts that it will individually assess. The Company has begun assessing the selected
revenue contracts.
8
4. Stock-Based Compensation
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.
2015 Incentive Compensation Plan
On April 14, 2015, the Companys stockholders approved and adopted the 2015
Incentive Compensation Plan, (the 2015 Plan). The 2015 Plan provides 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 2015 Plan allows for up to 4,656,587 shares of common stock to be issued with respect to awards granted.
Stock Options
As of June 30, 2017, there was $2,140 of total unrecognized stock-based compensation related to nonvested stock options. The expense
related to these stock options is expected to be recognized over a weighted-average period of 3.39 years.
Stock options outstanding,
exercisable and available for grant at June 30, 2017, are summarized as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding at January 1, 2017
|
|
|
5,764,607
|
|
|
$
|
4.28
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
456,038
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(426,639
|
)
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(647,661
|
)
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
5,146,345
|
|
|
$
|
4.13
|
|
|
|
5.63
|
|
|
$
|
9,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at June 30, 2017
|
|
|
4,891,474
|
|
|
$
|
4.12
|
|
|
|
5.47
|
|
|
$
|
8,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
3,771,493
|
|
|
$
|
4.07
|
|
|
|
4.63
|
|
|
$
|
7,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at June 30, 2017
|
|
|
5,281,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 exceeded the respective stock option exercise price.
Other information concerning stock options are as follows:
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|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average fair value of stock options granted
|
|
$
|
2.24
|
|
|
$
|
1.55
|
|
Aggregate intrinsic value of stock options exercised
|
|
|
533
|
|
|
|
6
|
|
The aggregate intrinsic value of stock options exercised in a period represents the
pre-tax
cumulative difference, for the stock options exercised during the period, between the fair market value of the underlying common stock and the stock option exercise prices.
Restricted Stock Awards
During
the first quarter of 2017, the Company granted 62,500 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $3.15 per share and the Company granted 6,331 shares of time-based
restricted stock with a weighted-average grant date fair value of $3.70 per share which vest over a
one-year
period. During the second quarter of 2017, the Company granted 218,000 shares of time-based
restricted stock, which vest over a
9
three-year period, with a weighted-average grant date fair value of $4.60 per share and the Company granted 148,356 shares of time-based restricted stock with a weighted-average grant date fair
value of $4.55 per share which vest over a
one-year
period. As of June 30, 2017, there was $1,876 of total unrecognized stock-based compensation related to time-based and performance-based, nonvested
restricted stock. The expense related to these restricted stock awards is expected to be recognized on a straight-line basis over a weighted-average period of 1.52 years.
For the three and six months ended June 30, 2017 and 2016, the Company recognized stock-based compensation as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of processing and distribution
|
|
$
|
22
|
|
|
$
|
33
|
|
|
$
|
45
|
|
|
$
|
66
|
|
Marketing, general and administrative
|
|
|
942
|
|
|
|
552
|
|
|
|
1,744
|
|
|
|
1,004
|
|
Research and development
|
|
|
10
|
|
|
|
15
|
|
|
|
19
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
974
|
|
|
$
|
600
|
|
|
$
|
1,808
|
|
|
$
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inducement Grant
On January 26, 2017, the Company issued an inducement grant to its President and Chief Executive Officer, Mr. Camille Farhat. This
grant was in the form of: (1) a restricted stock award agreement (the Restricted Stock Agreement #1); (2) another restricted stock award agreement (the Restricted Stock Agreement #2); and (3) a stock option
agreement (the Option Agreement).
Under the Restricted Stock Agreement #1, the Company granted Mr. Farhat 850,000 shares
of restricted common stock. On the first anniversary of the Grant Date, 170,000 shares will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 42,500 shares per calendar quarter commencing after the first
anniversary of the Grant Date and continuing for four years after. Vesting of these shares may accelerate upon the occurrence of either of two performance conditions.
Under the Restricted Stock Agreement #2, the Company granted Mr. Farhat 150,000 shares of restricted common stock. These 150,000
restricted shares will become fully vested on the latest date (the Purchase Date) on which the fair market value of the cumulative amount of shares that Mr. Farhat purchases on the open market equals $500,000, so long as the
Purchase Date is on or before March 15, 2018. After vesting, the shares will be
non-transferable
for a period of one year following the Purchase Date. During the second quarter of 2017, Mr. Farhat
purchased $572,313 worth of the Companys shares on the open market. Accordingly, the 150,000 restricted shares of common stock granted to Mr. Farhat pursuant to the Restricted Stock Award #2 became fully vested, effective May 18,
2017.
Under the Option Agreement, the Company granted Mr. Farhat the option to purchase 1,950,000 shares of common stock (the
Stock Options). The exercise price for the Stock Options is $3.20. The Stock Options will expire on January 26, 2022. The Stock Options will vest based on the Companys attainment of three average stock price benchmarks. The
first 650,000 shares will vest if the Companys average publicly traded stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Companys average publicly traded stock price is over
$7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Companys average publicly traded stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the Stock Options is
cumulative.
5. Net Income Per Common Share
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented
below:
10
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|
|
|
|
|
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|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic shares
|
|
|
58,935,786
|
|
|
|
58,215,477
|
|
|
|
58,715,791
|
|
|
|
58,065,185
|
|
Effect of dilutive securities:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
58,935,786
|
|
|
|
58,215,477
|
|
|
|
58,715,791
|
|
|
|
58,065,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2017 and 2016, approximately 1,350,051 and 4,073,600, respectively,
and for the six months ended June 30, 2017 and 2016, approximately 2,422,661 and 4,144,433, respectively, of issued stock options were not included in the computation of diluted net income per common share because they were anti-dilutive
because their exercise price exceeded the market price. For the three months ended June 30, 2017 and 2016, options to purchase 1,005,138 and 417,311, respectively, and for the six months ended June 30, 2017 and 2016, options to purchase
687,268 and 347,038, respectively, of common stock were not included in the computation of diluted loss per share because dilutive shares are not factored into this calculation when a net loss is reported.
For the three and six months ended June 30, 2017 and 2016, 50,000 shares of convertible preferred stock and accrued but unpaid dividends
were anti-dilutive on an as
if-converted
basis and were not included in the computation of diluted net loss per common share.
6. Inventories
Inventories by stage of
completion are as follows:
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|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Unprocessed tissue, raw materials and supplies
|
|
$
|
24,959
|
|
|
$
|
31,745
|
|
Tissue and work in process
|
|
|
42,420
|
|
|
|
38,552
|
|
Implantable tissue and finished goods
|
|
|
49,394
|
|
|
|
49,446
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,773
|
|
|
$
|
119,743
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2017 and 2016, the Company had inventory write-downs of $1,964 and
$1,425, respectively, and for the six months ended June 30, 2017 and 2016, the Company had inventory write-downs of $3,753 and $2,370, respectively, relating primarily to product obsolescence.
7. Property, Plant and Equipment
Property, plant and equipment are as follows:
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|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
2,378
|
|
|
$
|
2,324
|
|
Buildings and improvements
|
|
|
57,092
|
|
|
|
59,187
|
|
Processing equipment
|
|
|
41,843
|
|
|
|
38,387
|
|
Surgical instruments
|
|
|
21,573
|
|
|
|
18,394
|
|
Office equipment, furniture and fixtures
|
|
|
1,704
|
|
|
|
1,701
|
|
Computer equipment and software
|
|
|
18,931
|
|
|
|
11,852
|
|
Construction in process
|
|
|
11,124
|
|
|
|
17,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,645
|
|
|
|
149,399
|
|
Less accumulated depreciation
|
|
|
(70,266
|
)
|
|
|
(66,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,379
|
|
|
$
|
83,298
|
|
|
|
|
|
|
|
|
|
|
11
For the three months ended June 30, 2017 and 2016, the Company had depreciation expense in
connection with property, plant and equipment of $2,652 and $3,454, respectively, and for the six months ended June 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $5,324 and $6,836,
respectively.
Owned property previously used for administrative, distribution and marketing functions with a cost basis of $1,750 are to
be disposed of as a result of improving operational efficiencies were included in Assets held for sale on the Condensed Consolidated Balance Sheet as of June 30, 2017, are not included in the table above. On July 21, 2017, the
Company entered into a sale agreement with a third party for the owned property. The transaction is expected to close in the fourth quarter 2017.
8.
Other Intangible Assets
Other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Patents
|
|
$
|
11,727
|
|
|
$
|
4,565
|
|
|
$
|
11,559
|
|
|
$
|
4,159
|
|
Acquired licensing rights
|
|
|
13,685
|
|
|
|
8,646
|
|
|
|
12,204
|
|
|
|
8,302
|
|
Marketing and procurement intangible assets
|
|
|
20,837
|
|
|
|
9,043
|
|
|
|
20,694
|
|
|
|
8,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,249
|
|
|
$
|
22,254
|
|
|
$
|
44,457
|
|
|
$
|
20,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and procurement intangible assets include the following: procurement contracts, trademarks, selling
and marketing relationships, customer lists and
non-compete
agreements.
For the three months
ended June 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $909 and $930, respectively, and for the six months ended June 30, 2017 and 2016, the Company had amortization expense of other intangible
assets of $1,805 and $1,858, respectively. At June 30, 2017, managements estimates of future amortization expense for the next five years are as follows:
|
|
|
|
|
|
|
Amortization
Expense
|
|
2017
|
|
$
|
1,700
|
|
2018
|
|
|
3,400
|
|
2019
|
|
|
3,400
|
|
2020
|
|
|
3,400
|
|
2021
|
|
|
3,400
|
|
2022
|
|
|
3,300
|
|
|
|
|
|
|
|
|
$
|
18,600
|
|
|
|
|
|
|
9. Accrued Expenses
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Accrued compensation
|
|
$
|
4,271
|
|
|
$
|
4,904
|
|
Accrued severance charges
|
|
|
4,494
|
|
|
|
410
|
|
Accrued restructuring charges
|
|
|
|
|
|
|
95
|
|
Accrued CEO retirement and transition costs
|
|
|
1,096
|
|
|
|
2,406
|
|
Accrued distributor commissions
|
|
|
4,366
|
|
|
|
4,422
|
|
Accrued donor recovery fees
|
|
|
3,376
|
|
|
|
6,350
|
|
Other
|
|
|
3,347
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,950
|
|
|
$
|
22,030
|
|
|
|
|
|
|
|
|
|
|
The Company accrues for the estimated donor recovery fees due to third party recovery agencies as tissue is
received.
12
10. Short and Long-Term Obligations
Short and long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Term loan
|
|
$
|
47,139
|
|
|
$
|
50,347
|
|
Credit facility
|
|
|
33,000
|
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80,139
|
|
|
|
83,347
|
|
Less current portion
|
|
|
(5,779
|
)
|
|
|
(6,080
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
74,360
|
|
|
$
|
77,267
|
|
|
|
|
|
|
|
|
|
|
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 275 basis points in excess of the one month LIBOR rate. On
October 15, 2014, the Company entered into a Second Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which amended the loan agreement to remove certain financial covenants. On June 29, 2015,
the Company entered into a Third Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased the maximum revolving credit amount from $20,000 to $30,000. On June 29, 2016, the Company entered
into a Fourth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased the maximum revolving credit amount from $30,000 to $45,000. On November 7, 2016, the Company entered into a Fifth
Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which provided for: (i) a decrease in the maximum revolving credit amount from $45,000 to $42,500; (ii) an increase in the Companys leverage
to EBITDA ratio from 2.50 to 1.00 to (A) 3.25 to 1.00 through March 31, 2017 and (B) 3.00 to 1.00 after March 31, 2017 and (iii) certain corresponding amendments. On February 28, 2017, the Company entered into a Sixth Amendment
to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased to 300 basis points the LIBOR Spread applicable when the Companys financial performance under its Leverage Ratio is greater than 3.0x. At
June 30, 2017, the interest rate for the term loan and revolving credit facility is 4.05%. 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. As of June 30, 2017, there was $33,000 outstanding on the revolving credit facility. The term loan facility requires aggregate principal payments of $6,000 from September 30, 2017 through June 30, 2018, with a final
balloon principal payment of $41,375 on July 2, 2018. The 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.
The total available credit on the Companys revolving credit
facility at June 30, 2017 was $9,500. The Companys ability to access its revolving credit facility is subject to and can be limited by the Companys compliance with the Companys financial and other covenants. The Company was in
compliance with the financial covenants related to its revolving credit facility as of June 30, 2017.
For the three months ended
June 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs was $150 and $39, respectively, and for the six months ended June 30, 2017 and 2016, interest expense associated with the amortization of debt
issuance costs was $262 and $78, respectively.
As of June 30, 2017, contractual maturities of long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
Credit Facility
|
|
|
Total
|
|
2017
|
|
$
|
2,873
|
|
|
$
|
|
|
|
$
|
2,873
|
|
2018
|
|
|
44,266
|
|
|
|
33,000
|
|
|
|
77,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,139
|
|
|
$
|
33,000
|
|
|
$
|
80,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Income Taxes
The Company expects its deferred tax assets of $24,868, net of the valuation allowance at June 30, 2017 of $5,899, to be realized through
the generation of future taxable income and the reversal of existing taxable temporary differences.
13
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 $5,899 and $4,916 have been established at June 30, 2017 and December 31, 2016, respectively, against a portion of the deferred tax assets.
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 indefinitely reinvest earnings of its foreign subsidiaries outside of the U.S.
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. 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.
On a rolling three years, the Companys U.S. operations are in a
cumulative income position. The Company considers this objectively verifiable evidence that its current U.S. operations existing on June 30, 2017, have consistently demonstrated the ability to operate at a profit. The Company has a history of
utilizing 100 percent of its U.S. deferred taxes assets before they expire and the forecasts of taxable earnings project a complete realization of all U.S. deferred tax assets before they expire, including under stressed scenarios.
The Companys German and French operations are in three year cumulative loss positions. As a result, the Company has recorded a full
valuation allowance on its German and French subsidiaries deferred tax assets.
The Company will continue to regularly assess the
realizability of our 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 is undergoing an examination by the Internal
Revenue Service (IRS). The IRS examination covers the 2015 tax year.
12. Preferred Stock
On June 12, 2013, the Company and WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, a leading
healthcare-focused private equity firm (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, with preferred stock issuance costs of $1,290. The preferred stock accrues dividends at a rate of 6% per annum. To the extent dividends are not paid in cash in any quarter, the dividends which have
accrued on each outstanding share of preferred stock during such three-month period will accumulate until paid in cash or converted to common stock. Our credit agreement with TD Bank and Regions Bank contains various covenants of financial
conditions which, if not met, would restrict the Company from paying dividends.
Preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
Liquidation Value
|
|
|
Preferred Stock
Issuance Costs
|
|
|
Net Total
|
|
Balance at January 1, 2017
|
|
$
|
60,676
|
|
|
$
|
(660
|
)
|
|
$
|
60,016
|
|
Accrued dividend payable
|
|
|
1,834
|
|
|
|
|
|
|
|
1,834
|
|
Amortization of preferred stock issuance costs
|
|
|
|
|
|
|
91
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
62,510
|
|
|
$
|
(569
|
)
|
|
$
|
61,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Severance Charges
The Company recorded severance charges to reduce headcount and improve operational efficiencies, which resulted in $7,803 of expenses for the
six months ended June 30, 2017. The total severance charges are expected to be paid in full by the first quarter of 2018. Severance payments are made to terminated employees over periods ranging from one month to twelve months
and are not expected to have a material impact on cash flows of the Company in any quarterly period. The following table includes a rollforward of severance
charges included in accrued expenses, see Note 9.
14
|
|
|
|
|
Accrued severance charges at January 1, 2017
|
|
$
|
410
|
|
Employee separation expenses accrued in 2017
|
|
|
7,803
|
|
|
|
|
|
|
Subtotal severance charges
|
|
|
8,213
|
|
Severance cash payments
|
|
|
(3,386
|
)
|
Stock based compensation
|
|
|
(333
|
)
|
|
|
|
|
|
Accrued severance charges at June 30, 2017
|
|
$
|
4,494
|
|
|
|
|
|
|
14. CEO Retirement and Transition Costs
The Company recorded Chief Executive Officer retirement and transition costs related to the retirement of our former Chief Executive Officer
pursuant to the Executive Transition Agreement dated August 29, 2012 (as amended and extended to date), which resulted in $4,404 of expenses for the year ended December 31, 2016. The total Chief Executive Officer retirement and transition
costs are expected to be paid in full prior to the first quarter of 2019. The following table includes a rollforward of CEO retirement and transition costs included in accrued expenses, see Note 9.
|
|
|
|
|
Accrued CEO retirement and transition costs at January 1, 2017
|
|
$
|
2,406
|
|
Cash payments
|
|
|
(727
|
)
|
Other long-term liabilities portion
|
|
|
(583
|
)
|
|
|
|
|
|
Accrued restructuring charges at June 30, 2017
|
|
$
|
1,096
|
|
|
|
|
|
|
15. Legal Actions
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, 2017, will have a material adverse impact on its financial position or results of operations.
Coloplast
The Company is presently named as
co-defendant
along with other
companies in a small percentage 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 continue 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 requested that the Company indemnify or defend Coloplast in those claims which allege
injuries caused by the Companys allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast
entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the Company Parties) resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the
defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is
identified) (Tissue Only Claims), and (2) tissue plus
non-Coloplast
synthetic mesh
(Tissue-Non-Coloplast
Claims) (the Tissue Only Claims and the
Tissue-Non-Coloplast
Claims being collectively referred to as Indemnified Claims). As of June 30, 2017,
there are a cumulative total of 1,250 Indemnified Claims for which the Company Parties are providing defense and indemnification. The defense and indemnification of these cases are covered 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
16. Regulatory Actions
On September 30, 2014, the Company received a letter from the FDA regarding our
map3
®
cellular allogeneic bone graft. The letter addresses some technical aspects of the processing of the map3
®
allograft, as well as
language included on the Companys website. The Company has ongoing dialogue with the FDA where comprehensive packages of data have been provided to address the FDAs comments and clarifying information has been provided regarding the
technical components of the implant processing. The Company believes that in both the developing and processing of map3
®
, the Company has properly considered the relevant regulatory
requirements. Additionally, the Company has removed certain information from the Companys website. The Company is committed to resolving the concerns raised by the FDA. However, it is not possible to predict the specific outcome or timing of a
resolution at this time.
17. Segment Data
The Company distributes human tissue, bovine and porcine animal tissue, metal and synthetic implants through various distribution channels. The
Company operates in one reportable segment composed of six lines of business. The reporting of the Companys lines of business is composed primarily of six categories: spine; sports medicine and orthopedics; surgical specialties;
cardiothoracic; international; and global commercial. 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, 2017 and 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
19,419
|
|
|
$
|
17,645
|
|
|
$
|
39,757
|
|
|
$
|
34,739
|
|
Sports medicine and orthopedics
|
|
|
12,997
|
|
|
|
12,562
|
|
|
|
25,893
|
|
|
|
25,082
|
|
Surgical specialties
|
|
|
1,456
|
|
|
|
802
|
|
|
|
3,236
|
|
|
|
1,817
|
|
Cardiothoracic
|
|
|
3,673
|
|
|
|
2,905
|
|
|
|
6,824
|
|
|
|
5,439
|
|
International
|
|
|
6,005
|
|
|
|
5,663
|
|
|
|
11,662
|
|
|
|
11,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal direct
|
|
|
43,550
|
|
|
|
39,577
|
|
|
|
87,372
|
|
|
|
78,257
|
|
Global commercial
|
|
|
25,837
|
|
|
|
24,769
|
|
|
|
49,418
|
|
|
|
50,099
|
|
Other revenues
|
|
|
2,733
|
|
|
|
3,274
|
|
|
|
5,269
|
|
|
|
6,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
72,120
|
|
|
$
|
67,620
|
|
|
$
|
142,059
|
|
|
$
|
134,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenues
|
|
|
65,528
|
|
|
|
61,049
|
|
|
|
128,835
|
|
|
|
122,233
|
|
International revenues
|
|
|
6,592
|
|
|
|
6,571
|
|
|
|
13,224
|
|
|
|
12,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
72,120
|
|
|
$
|
67,620
|
|
|
$
|
142,059
|
|
|
$
|
134,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents percentage of total revenues derived from the Companys largest distributors
and international distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Percent of revenues derived from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zimmer Biomet Holdings, Inc.
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
Medtronic, PLC
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
10
|
%
|
International
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
The following table presents property, plant and equipment - net by significant geographic location:
16
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Property, plant and equipmentnet:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
78,256
|
|
|
$
|
77,596
|
|
International
|
|
|
6,123
|
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,379
|
|
|
$
|
83,298
|
|
|
|
|
|
|
|
|
|
|
18. Subsequent Events
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, except for on August 3, 2017:
1. The Company completed the sale of substantially all of the assets related to its Cardiothoracic closure business (the CT
Business) to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (A&E). The sale was completed pursuant to an Asset Purchase Agreement between the Company and A&E, dated August 3, 2017 (the
Asset Purchase Agreement). As a part of the transaction, the Company also entered into a multi-year Contract Manufacturing Agreement with A&E (the Contract Manufacturing Agreement). Under the Contract Manufacturing
Agreement, the Company agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The total consideration received by the Company under the
Asset Purchase Agreement was composed of $54,000 in cash consideration, $3,000 of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any, plus an additional $6,000 in contingent cash
consideration (the Contingent Consideration). Payment of the Contingent Consideration is subject to two conditions: (1) if the Company obtains certain FDA regulatory clearance, then it will be paid $1,000 of the Contingent Consideration;
and (2) if A&E reaches certain revenue milestones, then the Company will be paid $5,000 of the Contingent Consideration.
2.
Concurrent with the divestiture, the Company entered into a Third Amended and Restated Loan Agreement, dated as of August 3, 2017 (the 2017 Loan Agreement), among the Company, TD Bank, N.A. and First Tennessee Bank National Association,
as Lenders (together with the various financial institutions as in the future may become parties thereto, the Lenders), and TD Bank, N.A., as administrative agent for the Lenders. The 2017 Loan Agreement represents a restructuring of the
Companys former loan agreement with TD Bank, N.A. and another lender under the Second Amended and Restated Loan Agreement dated July 16, 2013 between the Company, TD Bank, N.A. and Regions Bank (as amended, the 2013 Loan
Agreement).
The 2017 Loan Agreement provides for a revolving credit facility (the Revolving Credit Facility), in the
aggregate principal amount of $42,500. A total of $35,000 currently is outstanding on the Revolving Credit Facility. The 2017 Loan Agreement also contains a term loan facility in the aggregate principal amount of $25,375 (the Term Loan
Facility and, together with the Revolving Credit Facility the Facility). The Company used $22,000 of the proceeds from the sale of the CT Business to partially pay down amounts owed under the 2013 Loan Agreement. The Facility is
secured by substantially all the assets of the Company and its domestic subsidiaries and is guaranteed by the Companys domestic subsidiaries, as well as 65% of the stock of the Companys foreign subsidiaries.
Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to
3.50%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1,125, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019. The Company may make
optional prepayments on the Facility without penalty at the end of any LIBOR interest period.
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