Quarterly Report (10-q)

Date : 08/08/2019 @ 10:10AM
Source : Edgar (US Regulatory)
Stock : Wright Medical Group NV (WMGI)
Quote : 29.45  -0.06 (-0.20%) @ 9:14PM
After Hours
Last Trade
Last $ 29.45 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission file number: 001-35065
WRIGHT MEDICAL GROUP N.V.
(Exact name of registrant as specified in its charter)
The Netherlands
 
98-0509600
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Prins Bernhardplein 200
 
None
1097 JB
Amsterdam,
The Netherlands
 
(Zip Code)
(Address of principal executive offices)
 
 
(+31) 20 521 4777
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act :
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Ordinary shares, par value €0.03 per share
 
WMGI
 
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑     Accelerated filer
Non-accelerated filer ☐     Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of August 2, 2019 , there were 126,678,118 ordinary shares outstanding.
 



WRIGHT MEDICAL GROUP N.V.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document may contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and that are subject to the safe harbor created by those sections. These statements reflect management’s current knowledge, assumptions, beliefs, estimates, and expectations and express management’s current view of future performance, results, and trends. Forward looking statements may be identified by their use of terms such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will, and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those described in the forward-looking statements. The reader should not place undue reliance on forward-looking statements. Such statements are made as of the date of this report, and we undertake no obligation to update such statements after this date. Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements are discussed in our filings with the U.S. Securities and Exchange Commission (SEC) (including our most recent Annual Report on Form 10-K, which was filed with the SEC on February 27, 2019 ). By way of example and without implied limitation, such risks and uncertainties include:
inability to achieve or sustain profitability;
failure to achieve our financial guidance or projected goals and objectives, including long-term financial targets, in the time periods that we anticipate or announce publicly;
failure to realize the anticipated benefits from previous acquisitions and dispositions, including our recent acquisition of Cartiva, Inc. (Cartiva);
failure to obtain anticipated commercial sales of our AUGMENT ® Bone Graft and AUGMENT ® Injectable Bone Graft products;
liability for product liability claims on hip/knee (OrthoRecon) products sold by Wright Medical Technology, Inc. (WMT) prior to the divestiture of the OrthoRecon business;
risks and uncertainties associated with our metal-on-metal master settlement agreements and the settlement agreements with certain of our insurance companies, including without limitation, the resolution of the remaining unresolved claims, the effect of the broad release of certain insurance coverage for present and future claims, and the resolution of WMT’s dispute with the remaining carrier;
adverse outcomes in existing product liability litigation;
copycat claims against modular hip systems resulting from a competitor’s recall of its modular hip product;
the ability of a creditor of any one particular entity within our corporate structure to reach the assets of the other entities within our corporate structure not liable for the underlying claims of the one particular entity, despite our corporate structure which is intended to ring-fence liabilities;
new product liability claims;
pending and future other litigation, which could have an adverse effect on our business, financial condition, or operating results;
challenges to our intellectual property rights or inability to defend our products against the intellectual property rights of others;
the possibility of private securities litigation or shareholder derivative suits;
inadequate insurance coverage;
inability to generate sufficient cash flow to satisfy our capital requirements, including future milestone payments, and existing debt, including the conversion features of our convertible senior notes, or refinance our existing debt as it matures;
risks associated with our credit, security and guaranty agreement for our senior secured asset-based line of credit and term loan facility;
inability to raise additional financing when needed and on favorable terms;
the loss of key suppliers, which may result in our inability to meet customer orders for our products in a timely manner or within our budget;
the incurrence of significant expenditures of resources to maintain relatively high levels of inventory, which could reduce our cash flows and increase the risk of inventory obsolescence, which could harm our operating results;
our inability to timely manufacture products or instrument sets to meet demand;
our private label manufacturers failing to provide us with sufficient supply of their products, or failing to meet appropriate quality requirements;
our plans to bring the manufacturing of certain of our products in-house and possible disruptions we may experience in connection with such transition;
our plans to increase our gross margins by taking certain actions designed to do so;
inventory reductions or fluctuations in buying patterns by wholesalers or distributors;
not successfully competing against our existing or potential competitors and the effect of significant recent consolidations amongst our competitors;
not successfully developing and marketing new products and technologies and implementing our business strategy;
insufficient demand for and market acceptance of our new and existing products;

3


the reliance of our business plan on certain market assumptions;
lack of suitable business development opportunities;
inability to capitalize on business development opportunities;
future actions of the SEC, the United States Attorney’s office, the U.S. Food and Drug Administration (FDA), the Department of Health and Human Services, or other U.S. or foreign government authorities, including those resulting from increased scrutiny under the U.S. Foreign Corrupt Practices Act and similar laws, that could delay, limit, or suspend our development, manufacturing, commercialization, and sale of products, or result in seizures, injunctions, monetary sanctions, or criminal or civil liabilities;
failure or delay in obtaining FDA or other regulatory clearance for our products;
the compliance of our products and activities with the laws and regulations of the countries in which they are marketed, which compliance may be costly and time-consuming;
the use, misuse or off-label use of our products that may harm our image in the marketplace or result in injuries that may lead to product liability suits, which could be costly to our business or result in governmental sanctions;
changes in healthcare laws, which could generate downward pressure on our product pricing;
ability of healthcare providers to obtain reimbursement for our products or a reduction in the current levels of reimbursement, which could result in reduced use of our products and a decline in sales;
the potentially negative effect of our ongoing compliance efforts on our relationships with customers and on our ability to deliver timely and effective medical education, clinical studies, and new products;
failures of, interruptions to, or unauthorized tampering with, our information technology systems;
our inability to maintain effective internal controls;
product quality or patient safety issues;
geographic and product mix impact on our sales;
deriving a significant portion of our revenues from operations in certain geographic markets that are subject to political, economic, and social instability, including in particular France, and risks and uncertainties involved in launching our products in certain new geographic markets;
the negative impact of the commercial and credit environment on us, our customers, and our suppliers;
inability to retain key sales representatives, independent distributors, and other personnel or to attract new talent;
consolidation in the healthcare industry that could lead to demands for price concessions or the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, financial condition, or operating results;
our clinical trials and their results and our reliance on third parties to conduct them;
potentially burdensome tax measures; and
fluctuations in foreign currency exchange rates.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see “ Part I. Item 1A. Risk Factors ” of our most recent Annual Report on Form 10-K and “ Part II. Item 1A. Risk Factors ” of this report. The risks and uncertainties described above and in “Part I. Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K and “ Part II. Item 1A. Risk Factors ” of this report are not exclusive and further information concerning us and our business, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update, amend, or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K we file with or furnish to the SEC.

4


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited).
Wright Medical Group N.V.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(unaudited)
 
June 30, 2019
 
December 30, 2018
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
150,574

 
$
191,351

Accounts receivable, net
139,680

 
141,019

Inventories
194,720

 
180,690

Prepaid expenses
14,225

 
11,823

Other current assets 1
280,343

 
78,349

Total current assets
779,542

 
603,232

 
 
 
 
Property, plant and equipment, net
239,734

 
224,929

Goodwill
1,263,958

 
1,268,954

Intangible assets, net
273,532

 
282,332

Deferred income taxes
948

 
942

Other assets 1
204,970

 
314,012

Total assets
$
2,762,684

 
$
2,694,401

Liabilities and Shareholders’ Equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
43,949

 
$
48,359

Accrued expenses and other current liabilities 1
395,106

 
217,081

Current portion of long-term obligations 1
417,911

 
201,686

Total current liabilities
856,966

 
467,126

 
 
 
 
Long-term debt and finance lease obligations 1
727,348

 
913,441

Deferred income taxes
11,729

 
13,146

Other liabilities 1
260,611

 
368,229

Total liabilities
1,856,654

 
1,761,942

Commitments and contingencies ( Note 13 )

 

Shareholders’ equity:
 
 
 
Ordinary shares, €0.03 par value, authorized: 320,000,000 shares; issued and outstanding: 126,580,952 shares at June 30, 2019 and 125,555,751 shares at December 30, 2018
4,623

 
4,589

Additional paid-in capital
2,553,442

 
2,514,295

Accumulated other comprehensive loss
(19,509
)
 
(8,083
)
Accumulated deficit
(1,632,526
)
 
(1,578,342
)
Total shareholders’ equity
906,030

 
932,459

Total liabilities and shareholders’ equity
$
2,762,684

 
$
2,694,401


___________________________
1  
As of June 30, 2019 , the closing price of our ordinary shares was greater than 130% of the 2021 Notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end; and, therefore, the holders of the 2021 Notes may convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the

5


notes during this period, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivative were classified as current liabilities, and the fair value of the 2021 Notes Hedges were classified as current assets as of June 30, 2019 . The respective balances were classified as long-term as of December 30, 2018. See Note 6 and Note 10 .
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Wright Medical Group N.V.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
 
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Net sales
$
229,734

 
$
205,400

 
$
459,861

 
$
403,937

Cost of sales 1
48,338

 
45,558

 
94,655

 
86,697

Gross profit
181,396

 
159,842

 
365,206

 
317,240

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative 1
152,112

 
140,826

 
305,418

 
278,074

Research and development 1
18,756

 
14,665

 
35,728

 
28,564

Amortization of intangible assets
7,862

 
6,009

 
15,449

 
13,150

Total operating expenses
178,730

 
161,500

 
356,595

 
319,788

Operating income (loss)
2,666

 
(1,658
)
 
8,611

 
(2,548
)
Interest expense, net
19,995

 
20,678

 
39,690

 
40,490

Other (income) expense, net
(1,831
)
 
72,747

 
11,064

 
71,747

Loss from continuing operations before income taxes
(15,498
)
 
(95,083
)
 
(42,143
)
 
(114,785
)
Provision (benefit) for income taxes
3,434

 
(4,462
)
 
7,045

 
(4,257
)
Net loss from continuing operations
(18,932
)
 
(90,621
)
 
(49,188
)
 
(110,528
)
Income (loss) from discontinued operations, net of tax
1,120

 
22,923

 
(5,225
)
 
17,316

Net loss
$
(17,812
)
 
$
(67,698
)
 
$
(54,413
)
 
$
(93,212
)
 
 
 
 
 
 
 
 
Net loss from continuing operations per share - basic and diluted ( Note 12 ):
$
(0.15
)
 
$
(0.85
)
 
$
(0.39
)
 
$
(1.04
)
Net income (loss) from discontinued operations per share - basic and diluted ( Note 12 ):
$
0.01

 
$
0.21

 
$
(0.04
)
 
$
0.16

Net loss per share - basic and diluted ( Note 12 ):
$
(0.14
)
 
$
(0.64
)
 
$
(0.43
)
 
$
(0.88
)
 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - basic and diluted:
126,267

 
106,095

 
126,040

 
106,000

___________________________
1  
These line items include the following amounts of non-cash, share-based compensation expense for the periods indicated:
 
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Cost of sales
$
137

 
$
146

 
$
257

 
$
311

Selling, general and administrative
6,835

 
5,437

 
13,822

 
9,959

Research and development
651

 
478

 
1,165

 
809


The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Wright Medical Group N.V.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(unaudited)
 
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Net loss
$
(17,812
)
 
$
(67,698
)
 
$
(54,413
)
 
$
(93,212
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Changes in foreign currency translation
(123
)
 
(29,327
)
 
(11,426
)
 
(16,869
)
Other comprehensive loss
(123
)
 
(29,327
)
 
(11,426
)
 
(16,869
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(17,935
)
 
$
(97,025
)
 
$
(65,839
)
 
$
(110,081
)
The accompanying notes are an integral part of these condensed consolidated financial statements.


8


Wright Medical Group N.V.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
 
Six months ended
 
June 30, 2019
 
July 1, 2018
Operating activities:
 
 
 
Net loss
$
(54,413
)
 
$
(93,212
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation
31,673

 
28,382

Share-based compensation expense
15,244

 
11,079

Amortization of intangible assets
15,449

 
13,150

Amortization of deferred financing costs and debt discount
26,948

 
26,986

Deferred income taxes
(1,238
)
 
(1,531
)
Provision for excess and obsolete inventory
6,016

 
11,025

Amortization of inventory step-up adjustment
704

 

Non-cash adjustment to derivative fair values
(1,812
)
 
34,573

Net loss on exchange or extinguishment of debt
14,274

 
39,935

Mark-to-market adjustment for CVRs ( Note 6 )
(420
)
 
(6,447
)
Other
(4,127
)
 
792

Changes in assets and liabilities:
 
 
 
Accounts receivable
1,689

 
3,869

Inventories
(21,921
)
 
(17,531
)
Prepaid expenses and other current assets
(10,596
)
 
29,667

Accounts payable
(4,205
)
 
821

Accrued expenses and other liabilities
2,834

 
(30,300
)
Metal-on-metal product liabilities ( Note 13 )
(13,998
)
 
(56,423
)
Net cash provided by (used in) operating activities
2,101

 
(5,165
)
Investing activities:
 
 
 
Capital expenditures
(48,007
)
 
(29,732
)
Purchase of intangible assets
(3,614
)
 
(605
)
Acquisition of business
722

 

Other investing
3,766

 
(500
)
Net cash used in investing activities
(47,133
)
 
(30,837
)
Financing activities:
 
 
 
Issuance of ordinary shares
14,014

 
5,713

Issuance of stock warrants
21,210

 
102,137

Payment of notes premium

 
(55,643
)
Payment of notes hedge options
(30,144
)
 
(141,278
)
Repurchase of stock warrants
(11,026
)
 

Payment of equity issuance costs
(350
)
 

Proceeds from notes hedge options
16,849

 

Proceeds from exchangeable senior notes

 
675,000

Proceeds from other debt
3,551

 
23,434

Payments of debt
(2,631
)
 
(22,272
)
Redemption of convertible senior notes

 
(400,911
)
Payment of financing costs
(3,154
)
 
(919
)


9


Wright Medical Group N.V.
Consolidated Statements of Cash Flows (Continued)
(In thousands)

 
Six months ended
 
June 30, 2019
 
July 1, 2018
Payment of contingent consideration
$

 
$
(919
)
Payments of finance lease obligations
(3,904
)
 
(2,559
)
Net cash provided by financing activities
4,415

 
181,783

Effect of exchange rates on cash and cash equivalents
(160
)
 
(307
)
Net (decrease) increase in cash and cash equivalents
(40,777
)
 
145,474

Cash and cash equivalents, beginning of period
191,351

 
167,740

Cash and cash equivalents, end of period
$
150,574

 
$
313,214


The accompanying notes are an integral part of these condensed consolidated financial statements.

10


Wright Medical Group N.V.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
(unaudited)
 
Three months ended June 30, 2019
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at March 31, 2019
126,105,530

 
$
4,608

 
$
2,542,747

 
$
(19,386
)
 
$
(1,614,714
)
 
$
913,255

2019 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(17,812
)
 
(17,812
)
Foreign currency translation

 

 

 
(123
)
 

 
(123
)
Issuances of ordinary shares
137,025

 
4

 
3,009

 

 

 
3,013

Vesting of restricted stock units
338,397

 
11

 
(11
)
 

 

 

Share-based compensation

 

 
7,697

 

 

 
7,697

Balance at June 30, 2019
126,580,952

 
$
4,623

 
$
2,553,442

 
$
(19,509
)
 
$
(1,632,526
)
 
$
906,030

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 1, 2018
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at April 1, 2018
105,949,645

 
$
3,901

 
$
1,978,877

 
$
34,748

 
$
(1,434,351
)
 
$
583,175

2018 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(67,698
)
 
(67,698
)
Foreign currency translation

 

 

 
(29,327
)
 

 
(29,327
)
Issuances of ordinary shares
162,630

 
6

 
3,068

 

 

 
3,074

Vesting of restricted stock units
331,005

 
12

 
(12
)
 

 

 

Share-based compensation

 

 
6,060

 

 

 
6,060

Issuance of stock warrants, net of repurchases and equity issuance costs

 

 
72,956

 

 

 
72,956

Balance at July 1, 2018
106,443,280

 
$
3,919

 
$
2,060,949

 
$
5,421

 
$
(1,502,049
)
 
$
568,240

 
Six months ended June 30, 2019
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at December 30, 2018
125,555,751

 
$
4,589

 
$
2,514,295

 
$
(8,083
)
 
$
(1,578,342
)
 
$
932,459

2019 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(54,413
)
 
(54,413
)
Cumulative impact of lease accounting adoption

 

 

 

 
229

 
229

Foreign currency translation

 

 

 
(11,426
)
 

 
(11,426
)
Issuances of ordinary shares
683,585

 
23

 
13,991

 

 

 
14,014

Vesting of restricted stock units
341,616

 
11

 
(11
)
 

 

 

Share-based compensation

 

 
15,333

 

 

 
15,333

Issuance of stock warrants, net of repurchases and equity issuance costs

 

 
9,834

 

 

 
9,834

Balance at June 30, 2019
126,580,952

 
$
4,623

 
$
2,553,442

 
$
(19,509
)
 
$
(1,632,526
)
 
$
906,030

 
 
 
 
 
 
 
 
 
 
 
 


11


 
Six months ended July 1, 2018
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive income (loss)
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at December 31, 2017
105,807,424

 
$
3,896

 
$
1,971,347

 
$
22,290

 
$
(1,408,837
)
 
$
588,696

2018 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(93,212
)
 
(93,212
)
Foreign currency translation

 

 

 
(16,869
)
 

 
(16,869
)
Issuances of ordinary shares
304,196

 
11

 
5,702

 

 

 
5,713

Vesting of restricted stock units
331,660

 
12

 
(12
)
 

 

 

Share-based compensation

 

 
10,956

 

 

 
10,956

Issuance of stock warrants, net of repurchases and equity issuance costs

 

 
72,956

 

 

 
72,956

Balance at July 1, 2018
106,443,280

 
$
3,919

 
$
2,060,949

 
$
5,421

 
$
(1,502,049
)
 
$
568,240


The accompanying notes are an integral part of these condensed consolidated financial statements.

12

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Organization and Description of Business
Wright Medical Group N.V. (Wright or we) is a global medical device company focused on extremities and biologics products. We are committed to delivering innovative, value-added solutions improving quality of life for patients worldwide and are a recognized leader of surgical solutions for the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and ankle) and biologics markets, three of the fastest growing segments in orthopaedics. We market our products in approximately 50 countries worldwide.
Our global corporate headquarters are located in Amsterdam, the Netherlands. We also have significant operations located in Memphis, Tennessee (U.S. headquarters, research and development, sales and marketing administration, and administrative activities); Bloomington, Minnesota (upper extremities sales and marketing and warehousing operations); Arlington, Tennessee (manufacturing and warehousing operations); Franklin, Tennessee (manufacturing and warehousing operations); Columbia City, Indiana (research and development); Alpharetta, Georgia (manufacturing and warehousing operations); Montbonnot, France (manufacturing and warehousing operations); Plouzané, France (research and development); and Macroom, Ireland (manufacturing). In addition, we have local sales and distribution offices in Canada, Australia, Asia, Latin America, and throughout Europe. For purposes of this report, references to “international” or “foreign” relate to non-U.S. matters while references to “domestic” relate to U.S. matters.
Our fiscal year-end is generally determined on a 52-week basis and runs from the Monday nearest to the 31st of December of a year and ends on the Sunday nearest to the 31st of December of the following year. Every few years, it is necessary to add an extra week to the year making it a 53-week period.
The condensed consolidated financial statements and accompanying notes present our consolidated results for each of the three and six months ended June 30, 2019 and July 1, 2018 . The three and six months ended June 30, 2019 and July 1, 2018 each consisted of thirteen and twenty-six weeks, respectively.
All amounts are presented in U.S. dollars ($), except where expressly stated as being in other currencies, e.g., Euros (€).
References in these notes to the condensed consolidated financial statements to “we,” “our” and “us” refer to Wright Medical Group N.V. and its subsidiaries after the merger with Tornier N.V. (legacy Tornier) (Wright/Tornier merger) and Wright Medical Group, Inc. (WMG or legacy Wright) and its subsidiaries before the Wright/Tornier merger.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation.  The unaudited condensed consolidated interim financial statements of Wright Medical Group N.V. have been prepared in accordance with U.S. generally accepted accounting principles (US GAAP) for interim financial statements and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to these rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended  December 30, 2018 , as filed with the SEC on February 27, 2019 .
In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments necessary for a fair presentation of our interim financial results. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not indicative of results for the full fiscal year. The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.
Revenue recognition. Our revenues are primarily generated through two types of customers, hospitals and surgery centers and stocking distributors, with the majority of our revenue derived from sales to hospitals and surgery centers. Our products are sold through a network of employee and independent sales representatives in the United States and by a combination of employee sales representatives, independent sales representatives, and stocking distributors outside the United States. We record revenues from sales to hospitals and surgery centers upon transfer of control of promised products in an amount that reflects the consideration we expect to receive in exchange for those products, which is generally when the product is surgically implanted in a patient.
We record revenues from sales to our stocking distributors at a point in time upon transfer of control of promised products to the distributor. Our stocking distributors, who sell the products to their customers, take control of the products and assume all risks

13

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

of ownership upon transfer. Our stocking distributors are obligated to pay us within specified terms regardless of when, if ever, they sell the products. In general, our stocking distributors do not have any rights of return or exchange; however, in limited situations, we have repurchase agreements with certain stocking distributors. Those certain agreements require us to repurchase a specified percentage of the inventory purchased by the distributor within a specified period of time prior to the expiration of the contract. During those specified periods, we defer the applicable percentage of the sales. An insignificant amount of sales related to these types of agreements was deferred and not yet recognized as revenue as of June 30, 2019 and July 1, 2018.
We must make estimates of potential future product returns related to current period product sales. We base our estimate for sales returns on historical sales and product return information, including historical experience and trend information. Our reserve for sales returns has historically been immaterial. We incur shipping and handling costs associated with the shipment of goods to customers, independent distributors, and our subsidiaries. Amounts billed to customers for shipping and handling of products are included in net sales. Costs incurred related to shipping and handling of products to customers are included in selling, general and administrative expenses. We also record depreciation on surgical instruments used by our hospital and surgery center customers within selling, general and administrative expense as these costs are considered to be similar to shipping and handling costs, necessary to deliver the implant products to the end customer.
Discontinued Operations. On January 9, 2014, pursuant to an Asset Purchase Agreement, dated as of June 18, 2013 (the MicroPort Agreement), by and among us and MicroPort Scientific Corporation (MicroPort), we completed the divestiture and sale of our business operations operating under our prior OrthoRecon operating segment to MicroPort.
All historical operating results for the OrthoRecon business are reflected within discontinued operations in the condensed consolidated financial statements. See Note 4 for further discussion of discontinued operations. Other than Note 4 , unless otherwise stated, all discussion of assets and liabilities in these Notes to the condensed consolidated financial statements reflects the assets and liabilities held and used in our continuing operations, and all discussion of revenues and expenses reflects those associated with our continuing operations.
Recent Accounting Pronouncements. On February 25, 2016, the FASB issued ASU 2016-02, Leases , and has subsequently issued several supplemental and/or clarifying ASUs (collectively ASC 842). ASC 842 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in FASB ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). We adopted ASC 842 during the quarter ended March 31, 2019 using the hindsight practical expedient, the practical expedient for short-term leases, and the practical expedient package which primarily limited the need for reassessing lease classification on existing leases and allowed us to issue our financial statements showing comparative lease disclosures under previous GAAP. See additional details related to the impact of this adoption in Note 9 .
On June 16, 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments and has subsequently issued several supplemental and/or clarifying ASUs. The new standard adds an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU will be effective for us beginning in fiscal year 2020. We do not believe this guidance will have a significant impact on our consolidated financial statements.
On August 29, 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) to provide guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40, Internal Use Software , to determine which implementation costs should be capitalized in such a CCA. The ASU will be effective for us beginning in fiscal year 2020. We are in the initial phases of our adoption plans and, accordingly, we are unable to estimate any effect this may have on our consolidated financial statements.
3. Acquisitions
Cartiva, Inc.
On October 10, 2018, we completed the acquisition of Cartiva, Inc. (Cartiva), an orthopaedic medical device company focused on treatment of osteoarthritis of the great toe. Under the terms of the agreement with Cartiva, we acquired 100% of the outstanding equity on a fully diluted basis of Cartiva for a total price of $435 million in cash, subject to certain adjustments which totaled $1.1 million , as set forth in the purchase agreement, $0.7 million of which was refunded in 2019. We funded the acquisition with the proceeds from a registered underwritten public offering of 18.2 million ordinary shares which had net proceeds of $423.0 million . This acquisition adds a differentiated premarket approval (PMA) approved technology for a high-volume foot and ankle procedure

14

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

and further accelerates growth opportunities in our global extremities business. The results of operations of Cartiva are included in our condensed consolidated financial statements for all periods after completion of the acquisition.
The acquired business contributed net sales of $7.9 million and operating income of $1.7 million to our consolidated results of operations for the three months ended June 30, 2019 , which included $0.4 million of inventory step-up amortization, $0.6 million of transition expenses, and $2.1 million of intangible asset amortization. The acquired business contributed net sales of $17.1 million and operating income of $5.1 million to our consolidated results of operations for the six months ended June 30, 2019 , which included $0.7 million of inventory step-up amortization, $1.0 million of transition expenses, and $3.9 million of intangible asset amortization.
Purchase Consideration and Net Assets Acquired
The following presents the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed on October 10, 2018 (in thousands):
Cash and cash equivalents
$
309

Accounts receivable
4,352

Inventories
2,686

Other current assets
486

Property, plant and equipment
1,446

Intangible assets
81,000

Total assets acquired
90,279

Current liabilities
(4,226
)
Deferred income taxes
(3,622
)
Total liabilities assumed
(7,848
)
Net assets acquired
$
82,431

 
 
Goodwill
351,445

 
 
Total preliminary purchase consideration
$
433,876


The acquisition was recorded by allocating the costs of the net assets acquired based on their estimated fair values at the acquisition date. The fair values were based on management’s analysis, including work performed by third-party valuation specialists. Wright’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date) as we finalize our valuations of assets acquired and liabilities assumed in connection with the acquisition. The primary areas of the purchase price allocation that are not yet finalized relate to identifiable intangible assets.
Trade receivables and payables, as well as certain other current assets and property, plant and equipment, were valued at the existing carrying values as they approximated the fair value of those items at the acquisition date, based on management’s judgments and estimates. Trade receivables included gross contractual amounts of $5.8 million and our best estimate of $1.4 million which represented contractual cash flows not expected to be collected at the acquisition date. Inventory was recorded at estimated selling price less costs of disposal and a reasonable selling profit. The resulting inventory step-up adjustment is being recognized in cost of sales as the related inventory is sold.
In determining the fair value of intangibles, we used an income method which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), technology life cycles, customer attrition rates, and the discount rate applied to the cash flows.
Of the $81.0 million of acquired intangible assets, $52.0 million was assigned to customer relationships ( 15 year life), $28.0 million was assigned to developed technology ( 7 year life), and $1.0 million was assigned to in-process research and development.
The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The goodwill is primarily attributable to strategic opportunities that arose from the acquisition of Cartiva. The goodwill is not expected to be deductible for tax purposes.

15

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Pro Forma Condensed Combined Financial Information (Unaudited)
The following unaudited pro forma combined financial information summarizes the results of operations for the periods indicated as if the Cartiva acquisition had been completed as of January 1, 2018.
Pro forma information reflects adjustments that are expected to have a continuing impact on our results of operations and are directly attributable to the acquisition. The unaudited pro forma results include adjustments to reflect the amortization of the inventory step-up and the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset. The pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition had occurred as of January 1, 2018 or that may be obtained in the future, and do not reflect future synergies, integration costs, or other such costs or savings.
(in thousands)
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Net sales
$
229,734

 
$
213,403

 
$
459,861

 
$
420,847

Net loss from continuing operations
(18,580
)
 
(91,801
)
 
(48,484
)
 
(111,954
)

4. Discontinued Operations
For the three and six months ended June 30, 2019 , our income (loss) from discontinued operations, net of tax, totaled $1.1 million and $(5.2) million , respectively. For the three and six months ended July 1, 2018 , our income from discontinued operations, net of tax, totaled $22.9 million and $17.3 million , respectively. Cash used in discontinued operations totaled $32.1 million and $21.1 million for the six months ended June 30, 2019 and July 1, 2018 , respectively. Our operating results from discontinued operations and cash used in discontinued operations during 2019 and 2018 were attributable primarily to expenses, net of insurance recoveries, associated with legacy Wright’s former OrthoRecon business as described in Note 13 .
OrthoRecon Business
On January 9, 2014, legacy Wright completed the divestiture and sale of its OrthoRecon business to MicroPort Scientific Corporation. Certain liabilities associated with the OrthoRecon business, including product liability claims associated with hip and knee products sold by legacy Wright prior to the closing, were not assumed by MicroPort. Charges associated with these product liability claims, including legal defense, settlements and judgments, income associated with product liability insurance recoveries, and changes to any contingent liabilities associated with the OrthoRecon business have been reflected within results of discontinued operations, and we will continue to reflect these within results of discontinued operations in future periods.
All current and historical operating results for the OrthoRecon business are reflected within discontinued operations in the condensed consolidated financial statements. The following table summarizes the results of discontinued operations for the OrthoRecon business (in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
Net sales
$

 
$

 
$

 
$

Selling, general and administrative
(1,120
)
 
(29,299
)
 
5,225

 
(23,862
)
Income (loss) from discontinued operations before income taxes
1,120

 
29,299

 
(5,225
)
 
23,862

Provision for income taxes

 
6,183

 

 
6,183

Total income (loss) from discontinued operations, net of tax
$
1,120

 
$
23,116

 
$
(5,225
)
 
$
17,679


Our income from discontinued operations for the quarter ended June 30, 2019 and July 1, 2018 was primarily attributable to a $15.5 million insurance recovery recognized in 2019 and a $30.75 million insurance recovery recognized in 2018. See Note 13 for further discussion regarding our retained contingent liabilities associated with the OrthoRecon business.
We will incur continuing cash outflows associated with legal defense costs and the ultimate resolution of these contingent liabilities, net of insurance proceeds, until these liabilities are resolved.

16

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

5. Inventories
Inventories consist of the following (in thousands):
 
June 30, 2019
 
December 30, 2018
Raw materials
$
12,882

 
$
9,612

Work-in-process
27,115

 
26,839

Finished goods
154,723

 
144,239

 
$
194,720

 
$
180,690


6. Fair Value of Financial Instruments and Derivatives
We account for derivatives in accordance with FASB ASC 815, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivatives’ fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.
FASB ASC Section 820, Fair Value Measurement requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1:
Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2:
Financial instruments determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3:
Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.
As of June 30, 2019 , we have convertible notes outstanding that are due in 2020, 2021, and 2023. See Note 10 of the condensed consolidated financial statements for additional information about the convertible notes. These notes are cash settled upon conversion for the principal amount of the notes plus a conversion premium (valued at the amount our ordinary share price exceeds the respective conversion price of the notes). The conversion premium is a conversion derivative feature that requires bifurcation from the notes in accordance with ASC Topic 815 and is accounted for as a derivative liability (Notes Conversion Derivative).
At the time of issuance of the notes, we entered into hedges with certain option counterparties to reduce our exposure to potential cash payments required for these conversion premiums (Notes Hedges). Upon conversion of the notes, the option counterparties would settle these hedges with us in cash, valued in the same manner as the conversion premiums. The Notes Hedges are accounted for as a derivative asset in accordance with ASC Topic 815. In connection with certain events, our option counterparties have the discretion to make certain adjustments to the Note Hedges, which may reduce the effectiveness of the Note Hedges. See Note 10 .
Pursuant to ASC 815, the Notes Conversion Derivatives and Notes Hedges are recorded at fair value in our consolidated balance sheet. Changes in the fair value of the Notes Conversion Derivatives and the Notes Hedges are reflected within our results of operations as other income/expense.

17

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

The following table summarizes the fair values and the presentation in our condensed consolidated balance sheets (in thousands) of our Notes Hedges and our Notes Conversion Derivatives:
 
June 30, 2019
 
December 30, 2018
 
Location on condensed consolidated balance sheet
 
Amount
 
Location on condensed consolidated balance sheet
 
Amount
2023 Notes Hedges
Other assets
 
$
164,500

 
Other assets
 
$
115,923

2023 Notes Conversion Derivative
Other liabilities
 
$
164,027

 
Other liabilities
 
$
116,833

2021 Notes Hedges
Other current assets
 
$
212,864

 
Other assets
 
$
188,301

2021 Notes Conversion Derivative
Accrued expenses and other current liabilities
 
$
210,756

 
Other liabilities
 
$
187,539

2020 Notes Hedges
Other current assets
 
$
6,015

 
Other current assets
 
$
17,822

2020 Notes Conversion Derivative
Accrued expenses and other current liabilities
 
$
5,799

 
Accrued expenses and other current liabilities
 
$
17,386


As of June 30, 2019 , the 2021 Notes are convertible at any time during the quarterly period ended September 30, 2019 . See Note 10 . Due to the ability of the holders of the 2021 Notes to convert the notes during this period, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivative were classified as current liabilities, and the fair value of the 2021 Notes Hedges were classified as current assets as of June 30, 2019 . The respective balances were classified as long-term as of December 30, 2018 . We currently do not expect significant conversions because the 2021 Notes currently trade at a premium to the as-converted value, and a converting holder would forego future interest payments. However, any conversions would reduce our cash resources. We believe that, in the event that holders elect to exercise the conversion option, our cash resources and access to additional borrowings would provide the necessary liquidity.
As described in Note 10 , because the holders of the 2020 Notes can convert their notes within the next year, the carrying value of the 2020 Notes and the fair value of the 2020 Notes Conversion Derivatives were classified as current liabilities and the fair value of the 2020 Notes Hedges was classified as current assets as of June 30, 2019 and December 30, 2018 .
Neither the Notes Conversion Derivatives nor the Notes Hedges qualify for hedge accounting; thus, any changes in the fair value of the derivatives are recognized immediately in our condensed consolidated statements of operations. The following table summarizes the net gain (loss) on changes in fair value (in thousands) related to the Notes Hedges and Notes Conversion Derivatives:
 
Three months ended
 
Six months ended
 
June 30, 2019
 
July 1, 2018
 
June 30, 2019
 
July 1, 2018
2023 Notes Hedges
$
(36,757
)
 
$
(16,305
)
 
$
18,433

 
$
(16,305
)
2023 Notes Conversion Derivative
37,404

 
(1,238
)
 
(18,319
)
 
(1,238
)
2021 Notes Hedges
(37,358
)
 
60,959

 
24,563

 
49,265

2021 Notes Conversion Derivative
37,543

 
(60,214
)
 
(23,217
)
 
(49,493
)
2020 Notes Hedges
(3,208
)
 
16,630

 
5,042

 
13,530

2020 Warrants Derivative

 
(250
)
 

 
(250
)
2020 Notes Conversion Derivative
3,192

 
(32,461
)
 
(4,690
)
 
(30,082
)
Net gain (loss) on changes in fair value
$
816

 
$
(32,879
)
 
$
1,812

 
$
(34,573
)

In addition to the above gain (loss) on changes in fair value, we also recognized a $28.9 million loss on the 2023 Notes Conversion Derivative and a $16.3 million gain on the 2020 Notes Conversion Derivative during the quarter ended March 31, 2019 as part of the additional 2023 Notes exchange as described in Note 10 .
The Notes Hedges and the Notes Conversion Derivative are measured at fair value using Level 3 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable and unobservable market data for inputs.
To determine the fair value of the embedded conversion option in the 2020, 2021, and 2023 Notes Conversion Derivatives, a trinomial lattice model was used. A trinomial stock price lattice generates three possible outcomes of stock price - one up, one down, and one stable. This lattice generates a distribution of stock prices at the maturity date and throughout the life of the 2020, 2021, and 2023 Notes. Using this stock price lattice, a convertible note lattice was created where the value of the embedded

18

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

conversion option was estimated by comparing the value produced in a convertible note lattice with the option to convert against the value without the ability to convert. In each case, the convertible note lattice first calculates the possible convertible note values at the maturity date, using the distribution of stock prices, which equals to the maximum of (x) the remaining bond cash flows and (y) stock price times the conversion price. The values of the 2020, 2021, and 2023 Notes Conversion Derivatives at the valuation date were estimated using the values at the maturity date and moving back in time on the lattices (both for the lattice with the conversion option and without the conversion option). Specifically, at each node, if the 2020, 2021, or 2023 Notes are eligible for early conversion, the value at this node is the maximum of (i) converting to stock, which is the stock price times the conversion price, and (ii) holding onto the 2020, 2021, and 2023 Notes, which is the discounted and probability-weighted value from the three possible outcomes at the future nodes plus any accrued but unpaid coupons that are not considered at the future nodes. If the 2020, 2021, or 2023 Notes are not eligible for early conversion, the value of the conversion option at this node equals to (ii). In the lattice, a credit adjustment was applied to the discount for each cash flow in the model as the embedded conversion option, as well as the coupon and notional payments, is settled with cash instead of shares.
To estimate the fair value of the 2020, 2021 and 2023 Notes Hedges, we used the Black-Scholes formula combined with credit adjustments, as the option counterparties have credit risk and the call options are cash settled. We assumed that the call options will be exercised at maturity since our ordinary shares do not pay any dividends and management does not expect to declare dividends in the near term.
The following assumptions were used in the fair market valuations as of June 30, 2019 :
 
2020 Notes Conversion Derivative
2020 Notes
Hedge
2021 Notes Conversion Derivative
2021 Notes
Hedge
2023 Notes Conversion Derivative
2023 Notes
Hedge
Black Stock Volatility (1)
32.58%
32.58%
38.09%
38.09%
31.43%
31.43%
Credit Spread for Wright (2)
3.49%
N/A
2.92%
N/A
2.58%
N/A
Credit Spread for Deutsche Bank AG (3)
N/A
0.33%
N/A
N/A
N/A
0.66%
Credit Spread for Wells Fargo Securities, LLC (3)
N/A
0.12%
N/A
N/A
N/A
N/A
Credit Spread for JPMorgan Chase Bank (3)
N/A
0.12%
N/A
0.20%
N/A
0.31%
Credit Spread for Bank of America (3)
N/A
N/A
N/A
0.24%
N/A
0.36%
(1)
Volatility selected based on historical and implied volatility of ordinary shares of Wright Medical Group N.V.
(2)
Credit spread implied from traded price.
(3)
Credit spread of each bank is estimated using CDS curves. Source: Bloomberg.
Derivatives not Designated as Hedging Instruments
As a result of the acquired business of IMASCAP in 2017, we have recorded the estimated fair value of future contingent consideration of approximately €18.5 million , or approximately $20.9 million , related to the achievement of certain technical milestones and sales earnouts as of June 30, 2019 . The estimated fair value of contingent consideration related to technical milestones totaled $14.2 million and $12.7 million as of June 30, 2019 and December 30, 2018, respectively, and is contingent upon the development and approval of a next generation reverse shoulder implant system and new software modules. The estimated fair value of contingent consideration related to sales earnouts totaled $6.7 million and $6.5 million as of June 30, 2019 and December 30, 2018, respectively, and is contingent upon the sale of certain guides and the next generation reverse shoulder implant system.
The fair values of the sales earn out contingent consideration as of June 30, 2019 and December 30, 2018 were determined using a discounted cash flow model and probability adjusted estimates of the future earnings and are classified in Level 3. The discount rate is 12% for the sales earnout contingent consideration.
The contingent consideration from the IMASCAP acquisition related to technical milestones is based on meeting certain developmental milestones for new software modules and for the FDA and CE approval for the next generation reverse shoulder implant system. The fair value of this contingent consideration as of June 30, 2019 and December 30, 2018 was determined using probability adjusted estimates of the future payments and is classified in Level 3. The discount rate is approximately 6% for the

19

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

contingent consideration related to technical milestones. A change in the discount rate would have limited impact on our profits or the fair value of this contingent consideration.
On March 1, 2013, as part of our acquisition of BioMimetic Therapeutics, Inc. (BioMimetic), we issued Contingent Value Rights (CVRs) as part of the merger consideration. Each CVR entitled its holder to receive additional cash payments of up to $6.50 per share, which were payable upon receipt of FDA approval of AUGMENT ® Bone Graft and upon achieving certain revenue milestones. On September 1, 2015, AUGMENT ® Bone Graft received FDA approval and the first of the milestone payments associated with the CVRs was paid out at $3.50 per share, which totaled $98.1 million . The CVR agreement also provided for a revenue milestone payment equal to $1.50 per share, or $42 million , to be paid if, prior to March 1, 2019, sales of AUGMENT ®  Bone Graft reached $40 million over 12 consecutive months. Sales for AUGMENT ®  Bone Graft reached $40 million for the 12 months ended October 28, 2018, and this milestone payment was paid during the fourth quarter of 2018. The CVR agreement also provided for a second revenue milestone equal to $1.50 per share, or $42 million , if, prior to March 1, 2019, sales of AUGMENT ® Bone Graft reach $70 million over 12 consecutive months. This milestone was not met before the termination of the CVRs. There were no CVRs outstanding as of June 30, 2019 , as the agreement terminated on March 1, 2019. The fair value of the CVRs outstanding at December 30, 2018 was $0.4 million and was determined using the closing price of the security in the active market (Level 1), and is reflected within “Accrued expenses and other current liabilities” on our condensed consolidated balance sheet. For the three months ended July 1, 2018 , the change in the fair value of the CVRs resulted in a gain of $2.5 million . For the six months ended June 30, 2019 and July 1, 2018 , the change in the fair value of the CVRs resulted in a gain of $0.4 million and $6.4 million , respectively.
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates the fair value of these financial instruments at June 30, 2019 and December 30, 2018 due to their short maturities and variable rates.
The following tables summarize the valuation of our financial instruments (in thousands):
 
Total
Quoted prices
in active
markets
(Level 1)
Prices with
other
observable
inputs
(Level 2)
Prices with
unobservable
inputs
(Level 3)
At June 30, 2019
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
150,574

$
150,574

$

$

2020 Notes Hedges
6,015



6,015

2021 Notes Hedges
212,864



212,864

2023 Notes Hedges
164,500



164,500

Total
$
533,953

$
150,574

$

$
383,379

 
 
 
 
 
Liabilities
 
 
 
 
2020 Notes Conversion Derivative
$
5,799

$

$

$
5,799

2021 Notes Conversion Derivative
210,756



210,756

2023 Notes Conversion Derivative
164,027



164,027

Contingent consideration
20,947



20,947

Total
$
401,529

$

$

$
401,529


20

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

 
Total
Quoted prices
in active
markets
(Level 1)
Prices with
other
observable
inputs
(Level 2)
Prices with
unobservable
inputs
(Level 3)
At December 30, 2018
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
191,351

$
191,351

$

$

2020 Notes Hedges
17,822



17,822

2021 Notes Hedges
188,301



188,301

2023 Notes Hedges
115,923



115,923

Total
$
513,397

$
191,351

$

$
322,046

 
 
 
 
 
Liabilities
 

 

 

 

2020 Notes Conversion Derivative
$
17,386

$

$

$
17,386

2021 Notes Conversion Derivative
187,539



187,539

2023 Notes Conversion Derivative
116,833



116,833

Contingent consideration
19,248



19,248

Contingent consideration (CVRs)
420

420



Total
$
341,426

$
420

$

$
341,006

The following is a roll forward of our assets and liabilities measured at fair value on a recurring basis using unobservable inputs (Level 3) (in thousands):
 
Balance at December 30, 2018
Additions
Transfers into Level 3
Gain/(loss) on fair value adjustments included in earnings
Gain/(loss) on issuance/settlement
included in earnings
Settlements
Currency
Balance at June 30, 2019
2020 Notes Hedges
$
17,822

$

$

$
5,042

$

$
(16,849
)
$

$
6,015

2020 Notes Conversion Derivative
$
(17,386
)


(4,690
)
16,277



$
(5,799
)
2021 Notes Hedges
$
188,301



24,563




$
212,864

2021 Notes Conversion Derivative
$
(187,539
)


(23,217
)



$
(210,756
)
2023 Notes Hedges
$
115,923

30,144


18,433




$
164,500

2023 Notes Conversion Derivative
$
(116,833
)


(18,319
)
(28,875
)


$
(164,027
)
Contingent consideration
$
(19,248
)


(1,747
)


48

$
(20,947
)

7. Property, Plant and Equipment
Property, plant and equipment, net consists of the following (in thousands):
 
June 30, 2019
 
December 30, 2018
Property, plant and equipment, at cost
$
591,360

 
$
534,366

Less: Accumulated depreciation
(351,626
)
 
(309,437
)
 
$
239,734

 
$
224,929



21

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the six months ended June 30, 2019 and July 1, 2018 are as follows (in thousands):
 
U.S. Lower Extremities
& Biologics
 
U.S. Upper Extremities
 
International Extremities
& Biologics
 
Total
Goodwill at December 30, 2018
$
569,970

 
$
627,850

 
$
71,134

 
$
1,268,954

Foreign currency translation

 
(1,191
)
 
(3,805
)
 
(4,996
)
Goodwill at June 30, 2019
$
569,970

 
$
626,659

 
$
67,329

 
$
1,263,958

 
 
 
 
 
 
 
 
Goodwill at December 31, 2017
$
218,525

 
$
630,650

 
$
84,487

 
$
933,662

Foreign currency translation

 
(780
)
 
(8,929
)
 
(9,709
)
Goodwill at July 1, 2018
$
218,525

 
$
629,870

 
$
75,558

 
$
923,953


Goodwill is recognized for the excess of the purchase price over the fair value of net assets of businesses acquired. Goodwill is required to be tested for impairment at least annually. Unless circumstances otherwise dictate, the annual impairment test is performed in the fourth quarter annually.
Following the December 2017 IMASCAP acquisition, foreign currency translation has been reported within the U.S. Upper Extremities segment. While the IMASCAP offices are located in France and the majority of their operations have a functional currency of the Euro, the results of the IMASCAP business are managed by the U.S. Upper Extremities segment.
The components of our identifiable intangible assets, net, are as follows (in thousands):
 
June 30, 2019
 
December 30, 2018
 
Cost
 
Accumulated
amortization
 
Cost
 
Accumulated
amortization
Indefinite life intangibles:
 
 
 
 
 
 
 
In-process research and development (IPRD) technology
$
6,509

 
$

 
$
6,262

 
$

 
 
 
 
 
 
 
 
Finite life intangibles:
 
 
 
 
 
 
 
 Completed technology
173,045

 
63,573

 
174,596

 
55,114

 Licenses
9,247

 
2,276

 
6,547

 
1,851

 Customer relationships
181,435

 
36,109

 
179,605

 
30,935

 Trademarks
13,989

 
11,675

 
14,048

 
11,564

 Non-compete agreements
5,753

 
2,813

 
3,252

 
2,514

 Other
760

 
760

 
764

 
764

Total finite life intangibles
384,229

 
$
117,206

 
378,812

 
$
102,742

 
 
 
 
 
 
 
 
Total intangibles
390,738

 
 
 
385,074

 
 
Less: Accumulated amortization
(117,206
)
 
 
 
(102,742
)
 
 
Intangible assets, net
$
273,532

 
 
 
$
282,332

 
 

Based on the total finite life intangible assets held at June 30, 2019 , we expect amortization expense of approximately $32 million in 2019 , $31 million in 2020 , $30 million in 2021 , $30 million in 2022 , and $30 million in 2023 .
9. Leases
We lease various manufacturing, warehousing and distribution facilities, administrative and sales offices as well as equipment under operating leases. We evaluate our contracts to identify leases, which are generally deemed to exist if there is an identified asset over which we have the right to direct its use and from which we obtain substantially all of the economic benefit from its use. Certain of our lease agreements contain rent escalation clauses, rent holidays, and other lease concessions. We recognize our

22

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

minimum rental expense on a straight-line basis over the term of the lease beginning with the date of initial control of the asset. With the adoption of ASC 842, we recognized all operating leases with terms greater than twelve months in duration on our condensed consolidated balance sheet as of December 31, 2018 as right-of-use assets and lease liabilities which totaled approximately  $30 million . Additionally, we recorded a cumulative adjustment of $0.2 million to our accumulated deficit upon adoption. We adopted the standard using the prospective approach and did not retrospectively apply it to prior periods.
We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
We elected the package of practical expedients available for transition which allows us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We elected to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
The determination of the discount rate used in a lease is our incremental borrowing rate which is based on what we would normally pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term.
Our net ROU assets under operating leases are included within Other Assets on our condensed consolidated balance sheet and include the following (in thousands):
 
June 30, 2019
Buildings
$
24,972

Machinery and equipment
2,388

Furniture, fixtures and office equipment
918

 
$
28,278


At June 30, 2019 , future minimum lease payments under operating lease obligations, together with the present value of the net minimum lease payments, are included within Accrued expenses and other current liabilities and Other liabilities as follows (in thousands):
2019
$
4,789

2020
7,935

2021
6,175

2022
4,465

2023
2,925

Thereafter
8,374

Total minimum payments
34,663

Less amount representing interest
(6,176
)
Present value of minimum lease payments
28,487

Current portion
(7,773
)
Long-term portion
$
20,714



23

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Prior to the adoption of ASC 842, operating leases were expensed ratably over the lease period and were not reflected within our balance sheet as of December 30, 2018. Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining lease terms of one year or more, were as follows at December 30, 2018 (in thousands):
2019
$
9,606

2020
7,498

2021
6,019

2022
4,433

2023
2,678

Thereafter
10,998

Total minimum payments
$
41,232


The components of property, plant and equipment recorded under finance leases consist of the following (in thousands):
 
June 30, 2019
 
December 30, 2018
Buildings
$
12,017

 
$
12,017

Machinery and equipment
31,365

 
24,331

Furniture, fixtures and office equipment
538

 
559

 
43,920

 
36,907

Less: Accumulated depreciation
(14,618
)
 
(11,906
)
 
$
29,302

 
$
25,001


Future minimum lease payments under finance lease obligations, together with the present value of the net minimum lease payments, are as follows (in thousands):
 
June 30, 2019
 
December 30, 2018
2019
$
4,473

 
$
7,369

2020
7,734

 
6,106

2021
6,009

 
4,545

2022
5,034

 
3,553

2023
3,195

 
2,430

Thereafter
4,885

 
4,682

Total minimum payments
31,330

 
28,685

Less amount representing interest
(3,037
)
 
(3,146
)
Present value of minimum lease payments
28,293

 
25,539

Current portion
(7,484
)
 
(6,384
)
Long-term portion
$
20,809

 
$
19,155



24

WRIGHT MEDICAL GROUP N.V.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

Amounts recorded within our condensed consolidated statement of operations for the three and six months ended June 30, 2019 related to leased assets are as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2019
 
June 30, 2019
 
 
 
 
Lease cost