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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 28, 2020
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 July 24, 2020, there were 129,271,023 ordinary shares outstanding.
 



WRIGHT MEDICAL GROUP N.V.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 28, 2020

TABLE OF CONTENTS
 
Page
 
 
 
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 28, 2020 and June 30, 2019
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended June 28, 2020 and June 30, 2019
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 28, 2020 and June 30, 2019
 
 
 
 
 
 
 




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 24, 2020). By way of example and without implied limitation, such risks and uncertainties include:
the occurrence of any event, change or other circumstance that could give rise to the termination of the definitive agreement that we entered into with Stryker Corporation (Stryker) and its wholly-owned acquisition subsidiary on November 4, 2019, pursuant to which we expect to become a wholly-owned subsidiary of Stryker;
the failure to satisfy required closing conditions under the agreement with Stryker, including, but not limited to, the tender of a minimum number of our outstanding ordinary shares in the related tender offer, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), and the receipt of required regulatory approvals, or the failure to complete the acquisition in a timely manner;
risks related to disruption of management’s attention from our ongoing business operations due to the pendency of the transaction with Stryker;
the effect of the announcement of the transaction with Stryker on our operating results and business generally, including, but not limited to, our ability to retain and hire key personnel and maintain our relationships with customers, strategic partners and suppliers;
the impact of the pending transaction with Stryker on our strategic plans and operations and our ability to respond effectively to competitive pressures, industry developments and future opportunities;
the outcome of any legal proceedings that have been or in the future may be instituted against us and others relating to the proposed transaction with Stryker;
the effect of the global novel strain of coronavirus (COVID-19);
inability to achieve or sustain profitability;
failure to realize the anticipated benefits from previous acquisitions and dispositions, including our October 2018 acquisition of Cartiva, Inc. (Cartiva);
failure to obtain anticipated commercial sales of our AUGMENT® Bone Graft and AUGMENT® Injectable 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 effect of the broad release of certain insurance coverage for present and future claims;
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;

3


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;
the reliance of our business plan on certain market assumptions;
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 28, 2020
 
December 29, 2019
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
133,651

 
$
166,856

Accounts receivable, net
107,701

 
147,400

Inventories
238,783

 
198,374

Prepaid expenses
14,847

 
16,031

Other current assets 1
212,121

 
214,997

Total current assets
707,103

 
743,658

 
 
 
 
Property, plant and equipment, net
259,313

 
251,922

Goodwill
1,262,296

 
1,260,967

Intangible assets, net
243,589

 
257,382

Deferred income taxes
991

 
1,012

Other assets
90,235

 
70,699

Total assets
$
2,563,527

 
$
2,585,640

 
 
 
 
Liabilities and Shareholders’ Equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36,162

 
$
32,121

Accrued expenses and other current liabilities 1
370,716

 
387,025

Current portion of long-term obligations 1
454,337

 
430,862

Total current liabilities
861,215

 
850,008

 
 
 
 
Long-term debt and finance lease obligations
756,829

 
737,167

Deferred income taxes
9,914

 
10,384

Other liabilities
94,646

 
96,288

Total liabilities
1,722,604

 
1,693,847

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Ordinary shares, €0.03 par value, authorized: 320,000,000 shares; issued and outstanding: 129,059,876 shares at June 28, 2020 and 128,614,026 shares at December 29, 2019
4,706

 
4,691

Additional paid-in capital
2,630,194

 
2,608,939

Accumulated other comprehensive loss
(27,340
)
 
(29,499
)
Accumulated deficit
(1,766,637
)
 
(1,692,338
)
Total shareholders’ equity
840,923

 
891,793

Total liabilities and shareholders’ equity
$
2,563,527

 
$
2,585,640


___________________________
1 
At June 28, 2020 and December 29, 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

5


the 2021 Notes are able to convert the notes during the succeeding quarterly period. Due to the ability of the holders of the 2021 Notes to convert the notes, 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 28, 2020 and December 29, 2019. See Note 5 and Note 8.
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 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Net sales
$
129,955

 
$
229,734

 
$
348,495

 
$
459,861

Cost of sales 1
28,723

 
48,338

 
67,638

 
94,655

Gross profit
101,232

 
181,396

 
280,857

 
365,206

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative 1
118,241

 
152,112

 
272,830

 
305,418

Research and development 1
14,178

 
18,756

 
33,778

 
35,728

Amortization of intangible assets
8,091

 
7,862

 
16,215

 
15,449

Total operating expenses
140,510

 
178,730

 
322,823

 
356,595

Operating (loss) income
(39,278
)
 
2,666

 
(41,966
)
 
8,611

Interest expense, net
21,176

 
19,995

 
41,646

 
39,690

Other (income) expense, net
(7,462
)
 
(1,831
)
 
(21,169
)
 
11,064

Loss from continuing operations before income taxes
(52,992
)
 
(15,498
)
 
(62,443
)
 
(42,143
)
(Benefit) provision for income taxes
(11
)
 
3,434

 
2,127

 
7,045

Net loss from continuing operations
(52,981
)
 
(18,932
)
 
(64,570
)
 
(49,188
)
(Loss) income from discontinued operations, net of tax
(6,412
)
 
1,120

 
(9,729
)
 
(5,225
)
Net loss
$
(59,393
)
 
$
(17,812
)
 
$
(74,299
)
 
$
(54,413
)
 
 
 
 
 
 
 
 
Net loss from continuing operations per share - basic and diluted (Note 10):
$
(0.41
)
 
$
(0.15
)
 
$
(0.50
)
 
$
(0.39
)
Net (loss) income from discontinued operations per share - basic and diluted (Note 10):
$
(0.05
)
 
$
0.01

 
$
(0.08
)
 
$
(0.04
)
Net loss per share - basic and diluted (Note 10):
$
(0.46
)
 
$
(0.14
)
 
$
(0.58
)
 
$
(0.43
)
 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - basic and diluted:
128,922

 
126,267

 
128,833

 
126,040

___________________________
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 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Cost of sales
$
253

 
$
137

 
$
477

 
$
257

Selling, general and administrative
6,649

 
6,835

 
13,124

 
13,822

Research and development
669

 
651

 
1,300

 
1,165


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 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Net loss
$
(59,393
)
 
$
(17,812
)
 
$
(74,299
)
 
$
(54,413
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in foreign currency translation
11,271

 
(123
)
 
2,159

 
(11,426
)
Other comprehensive income (loss)
11,271

 
(123
)
 
2,159

 
(11,426
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(48,122
)
 
$
(17,935
)
 
$
(72,140
)
 
$
(65,839
)
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 28, 2020
 
June 30, 2019
Operating activities:
 
 
 
Net loss
$
(74,299
)
 
$
(54,413
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation
31,232

 
31,673

Share-based compensation expense
14,901

 
15,244

Amortization of intangible assets
16,215

 
15,449

Amortization of deferred financing costs and debt discount
27,178

 
26,948

Deferred income taxes
(509
)
 
(1,238
)
Provision for excess and obsolete inventory
6,732

 
6,016

Amortization of inventory step-up adjustment

 
704

Non-cash adjustment to derivative fair values
(25,762
)
 
(1,812
)
Net loss on exchange of cash convertible notes

 
14,274

Mark-to-market adjustment for CVRs

 
(420
)
Other
1,859

 
(4,127
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
36,884

 
1,689

Inventories
(47,992
)
 
(21,921
)
Prepaid expenses and other current assets
7,322

 
(10,596
)
Accounts payable
3,904

 
(4,205
)
Accrued expenses and other liabilities
(5,568
)
 
2,834

Metal-on-metal product liabilities (Note 11)
(3,039
)
 
(13,998
)
Net cash (used in) provided by operating activities
(10,942
)
 
2,101

Investing activities:
 
 
 
Capital expenditures
(39,179
)
 
(48,007
)
Purchase of intangible assets
(3,733
)
 
(3,614
)
Acquisition of business

 
722

Other investing

 
3,766

Net cash used in investing activities
(42,912
)
 
(47,133
)
Financing activities:
 
 
 
Issuance of ordinary shares
6,353

 
14,014

Issuance of stock warrants

 
21,210

Payment of notes premium
(146
)
 

Payment of notes hedge options

 
(30,144
)
Repurchase of stock warrants

 
(11,026
)
Payment of equity issuance costs

 
(350
)
Proceeds from notes hedge options
351

 
16,849

Proceeds from debt
77,010

 
3,551

Payments of debt
(58,782
)
 
(2,631
)
Payment of financing costs

 
(3,154
)
Payment of contingent consideration
(320
)
 

Payments of finance lease obligations
(3,754
)
 
(3,904
)


9


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

 
Six months ended
 
June 28, 2020
 
June 30, 2019
Net cash provided by financing activities
$
20,712

 
$
4,415

Effect of exchange rates on cash and cash equivalents
(63
)
 
(160
)
Net decrease in cash and cash equivalents
(33,205
)
 
(40,777
)
Cash and cash equivalents, beginning of period
166,856

 
191,351

Cash and cash equivalents, end of period
$
133,651

 
$
150,574


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, except share data)
(unaudited)
 
Three months ended June 28, 2020
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at March 29, 2020
128,817,336

 
$
4,697

 
$
2,620,516

 
$
(38,611
)
 
$
(1,707,244
)
 
$
879,358

2020 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(59,393
)
 
(59,393
)
Foreign currency translation

 

 

 
11,271

 

 
11,271

Issuances of ordinary shares
110,236

 
4

 
2,115

 

 

 
2,119

Vesting of restricted stock units
132,304

 
5

 
(5
)
 

 

 

Share-based compensation

 

 
7,568

 

 

 
7,568

Balance at June 28, 2020
129,059,876

 
$
4,706

 
$
2,630,194

 
$
(27,340
)
 
$
(1,766,637
)
 
$
840,923

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
Six months ended June 28, 2020
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive loss
 
Accumulated deficit
 
Total shareholders’ equity
 
Number of shares
 
Amount
Balance at December 29, 2019
128,614,026

 
$
4,691

 
$
2,608,939

 
$
(29,499
)
 
$
(1,692,338
)
 
$
891,793

2019 Activity:
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 
(74,299
)
 
(74,299
)
Foreign currency translation

 

 

 
2,159

 

 
2,159

Issuances of ordinary shares
298,951

 
10

 
6,343

 

 

 
6,353

Vesting of restricted stock units
146,899

 
5

 
(5
)
 

 

 

Share-based compensation

 

 
14,917

 

 

 
14,917

Balance at June 28, 2020
129,059,876

 
$
4,706

 
$
2,630,194

 
$
(27,340
)
 
$
(1,766,637
)
 
$
840,923

 
 
 
 
 
 
 
 
 
 
 
 


11


 
Six months ended June 30, 2019
 
Ordinary shares
 
Additional paid-in capital
 
Accumulated other comprehensive income (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


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.
On November 4, 2019, we entered into a definitive agreement with Stryker and its subsidiary, Stryker B.V. Under the terms of the purchase agreement, and upon the terms and subject to the conditions thereof, Stryker B.V. has commenced a tender offer to purchase all of the outstanding ordinary shares of Wright for $30.75 per share, without interest and less applicable withholding taxes, in cash (the Offer). The Offer is currently scheduled to expire at 5:00 p.m., Eastern Time, on August 31, 2020, but may be extended in accordance with the terms of the purchase agreement between Stryker and Wright. The closing of the transaction is subject to receipt of applicable regulatory approvals, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), completion of the Offer, and other customary closing conditions.
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 ordinary shares are traded on the Nasdaq Global Select Market under the symbol “WMGI.”
Impact of Global COVID-19 Pandemic. The global COVID-19 pandemic has led to the temporary closure of businesses, travel restrictions and the implementation of social distancing measures. Hospitals, ambulatory surgery centers and other medical facilities have deferred elective procedures, diverted resources to patients suffering from infections and limited access for non-patients, including our sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in which our products otherwise would be used have temporarily closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees, independent sales representatives and distributors to effectively market and sell our products.
In response to the COVID-19 pandemic, we set our corporate priorities and actions as follows. First, we are focused on the health and safety of our employees. Second, we are focused on continuity of product supply and service for our customers and their patients. Third, we are focused on minimizing the spread of the virus to reduce the impact on our communities and hospital systems. Finally, we are focused on maintaining the sustainability of our Company by diligently and thoughtfully conserving and allocating resources, and pausing non-critical spending and non-critical hiring. In furtherance of this objective, we implemented temporary reductions in base salaries for our executive officers and certain other employees, including a 50% reduction for our Chief Executive Officer, 25% reductions for other officers and 15% reductions for certain other employees, as well as a temporary 50% reduction in cash retainers for our Board of Directors. These temporary reductions ended in July 2020 for our executive officers and in June 2020 for our other employees. Our other sustainability measures remain in place.
Because of the anticipated temporary decline in our net sales, on May 7, 2020, we agreed with MidCap to amend the Credit Agreement to, among other things, suspend the quarterly-tested minimum net revenue and minimum adjusted EBITDA financial covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. See Note 8 to the condensed consolidated financial statements for a description of this amendment.
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 28, 2020 and June 30, 2019. The three and six months ended June 28, 2020 and June 30, 2019 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 (€).

13

WRIGHT MEDICAL GROUP N.V.

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

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 29, 2019, as filed with the SEC on February 24, 2020.
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 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 28, 2020 and June 30, 2019.
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.
Inventories. Our inventories are valued at the lower of cost or market on a first in, first out (FIFO) basis. Inventory costs include material, labor costs, and manufacturing overhead. We regularly review inventory quantities on hand for excess and obsolete inventory, and, when circumstances indicate, we incur charges to write down inventories to their net realizable value. Historically, our excess and obsolete inventory reserve was based on both the current age of kit inventory as compared to its estimated life cycle and our forecasted product demand and production requirements for other inventory items for the next 36 months. During the quarter ended September 29, 2019, we changed our estimate of excess and obsolete inventory reserves to better reflect the future usage for inventory in excess of estimated three-year demand. The impact of this change in estimate was approximately $26 million. We reduce our inventory reserve and recognize an offset to cost of sales as the related inventory is sold based on an estimated inventory turnover period of 2.5 years.
Total charges incurred to write down excess and obsolete inventory to net realizable value included in “Cost of sales” were approximately $5.2 million and $2.5 million for the three months ended June 28, 2020 and June 30, 2019, respectively. Total charges incurred to write down excess and obsolete inventory to net realizable value included in “Cost of sales” were approximately $6.7 million and $6.0 million for the six months ended June 28, 2020 and June 30, 2019, respectively. During the three and six

14

WRIGHT MEDICAL GROUP N.V.

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

months ended June 28, 2020, our cost of sales included a favorable adjustment of $2.6 million and $5.2 million, respectively, as a result of our change in accounting estimate of reserves for excess and obsolete inventory, as such inventory was sold.
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 3 for further discussion of discontinued operations. Other than Note 3, 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases, and has subsequently issued several supplemental and/or clarifying ASUs (collectively ASC 842). ASC 842 introduced 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 Accounting Standards Codification (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. During 2019, 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 right-of-use assets and lease liabilities which totaled approximately $20 million. Additionally, we recorded a cumulative adjustment of $0.2 million to our accumulated deficit upon adoption during the quarter ended March 31, 2019. We adopted the standard using the prospective approach and did not retrospectively apply it to prior periods.
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. We adopted this ASU in fiscal year 2020, however, this guidance did not have a significant impact on our condensed 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. We adopted this ASU in fiscal year 2020; however, this guidance did not have a significant impact on our condensed consolidated financial statements.
On December 18, 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which adds new guidance to simplify the accounting for income taxes and changes the accounting for certain income tax transactions. The new standard is effective for fiscal years beginning after December 15, 2020, and early adoption is permitted. We do not expect this standard to have a material impact on our consolidated financial statements.  
3. Discontinued Operations
On January 9, 2014, we completed the divestiture and sale of our 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 us 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.
For the three and six months ended June 28, 2020, our loss from discontinued operations, net of tax, totaled $6.4 million and $9.7 million, respectively. 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. Our operating results from discontinued operations and cash used in discontinued operations during 2020 and 2019 were attributable primarily to expenses, net of insurance recoveries, associated with our former OrthoRecon business as described in Note 11. Cash used in discontinued operations totaled $11.3 million and $32.1 million for the six months ended June 28, 2020 and June 30, 2019, respectively. We will incur continuing cash outflows associated

15

WRIGHT MEDICAL GROUP N.V.

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

with legal defense costs and the ultimate resolution of these contingent liabilities, net of insurance proceeds, until these liabilities are resolved.
All current and historical operating results for the OrthoRecon business are reflected within discontinued operations in the condensed consolidated financial statements.
4. Inventories
Inventories consist of the following (in thousands):
 
June 28, 2020
 
December 29, 2019
Raw materials
$
14,814

 
$
12,681

Work-in-process
29,613

 
27,528

Finished goods
194,356

 
158,165

 
$
238,783

 
$
198,374


5. 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 28, 2020, we had 2.25% cash convertible senior notes due 2021 (2021 Notes) and 1.625% cash convertible senior notes due 2023 (2023 Notes) outstanding. The 2.00% cash convertible senior notes due 2020 (2020 Notes) matured and were repaid on February 15, 2020.
See Note 8 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, including in connection with the Offer as further described in Note 8, our option counterparties have the discretion to make certain adjustments to the Note Hedges, which may reduce the effectiveness of the Note Hedges.

16

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 28, 2020
 
December 29, 2019
 
Location on condensed consolidated balance sheet
 
Amount
 
Location on condensed consolidated balance sheet
 
Amount
2023 Notes Hedges
Other assets
 
$
62,307

 
Other assets
 
$
39,240

2023 Notes Conversion Derivative
Other liabilities
 
$
38,981

 
Other liabilities
 
$
31,555

2021 Notes Hedges
Other current assets
 
$
182,436

 
Other current assets
 
$
183,437

2021 Notes Conversion Derivative
Accrued expenses and other current liabilities
 
$
168,258

 
Accrued expenses and other current liabilities
 
$
179,478

2020 Notes Hedges
Other current assets
 
$

 
Other current assets
 
$
1,969

2020 Notes Conversion Derivative
Accrued expenses and other current liabilities
 
$

 
Accrued expenses and other current liabilities
 
$
1,666


As of June 28, 2020 and December 29, 2019, the sale price condition (as defined in Note 8) for the 2021 Notes was satisfied and, therefore, the 2021 Notes are convertible at any time during the succeeding calendar quarterly period. Due to the ability of the holders of the 2021 Notes to convert the notes, the carrying value of the 2021 Notes and the fair value of the 2021 Notes Conversion Derivative are classified as current liabilities, and the fair value of the 2021 Notes Hedges are classified as current assets as of June 28, 2020 and December 29, 2019. There were no significant conversions through July 28, 2020.
The 2020 Note Hedge and 2020 Conversion Derivative were settled during the first quarter of 2020 and resulted in net proceeds of approximately $0.2 million.
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 on changes in fair value (in thousands) related to the Notes Hedges and Notes Conversion Derivatives:
 
Three months ended
 
Six months ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
2023 Notes Hedges
$
21,894

 
$
(36,757
)
 
$
23,067

 
$
18,433

2023 Notes Conversion Derivative
(21,501
)
 
37,404

 
(7,426
)
 
(18,319
)
2021 Notes Hedges
25,242

 
(37,358
)
 
(1,001
)
 
24,563

2021 Notes Conversion Derivative
(15,570
)
 
37,543

 
11,220

 
(23,217
)
2020 Notes Hedges

 
(3,208
)
 
(1,618
)
 
5,042

2020 Notes Conversion Derivative

 
3,192

 
1,520

 
(4,690
)
Net gain on changes in fair value
$
10,065

 
$
816

 
$
25,762

 
$
1,812


In addition to the above net gain on changes in fair value, we also recognized a $12.6 million net loss on the Notes Conversion Derivatives during the quarter ended March 31, 2019 as part of the additional 2023 Notes exchange as described in Note 8.
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 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 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

17

WRIGHT MEDICAL GROUP N.V.

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

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 28, 2020:
 
2021 Notes Conversion Derivative
2021 Notes
Hedge
2023 Notes Conversion Derivative
2023 Notes
Hedge
Black Stock Volatility (1)
42.3%
42.3%
19.88%
19.88%
Credit Spread for Wright (2)
0.55%
N/A
0.30%
N/A
Credit Spread for Deutsche Bank AG (3)
N/A
N/A
N/A
0.83%
Credit Spread for Wells Fargo Securities, LLC (3)
N/A
N/A
N/A
N/A
Credit Spread for JPMorgan Chase Bank (3)
N/A
0.39%
N/A
0.48%
Credit Spread for Bank of America (3)
N/A
0.39%
N/A
0.49%
(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 €28.0 million, or approximately $31.5 million, related to the achievement of certain technical milestones and sales earnouts as of June 28, 2020. The estimated fair value of contingent consideration related to technical milestones totaled $24.1 million and $20.8 million as of June 28, 2020 and December 29, 2019, 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 $7.4 million and $7.2 million as of June 28, 2020 and December 29, 2019, 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 28, 2020 and December 29, 2019 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 28, 2020 and December 29, 2019 was determined using probability adjusted estimates of the future payments and is classified in Level 3. The discount rate is approximately 6% for the 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.
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates the fair value of these financial instruments at June 28, 2020 and December 29, 2019 due to their short maturities and variable rates.

18

WRIGHT MEDICAL GROUP N.V.

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

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)
June 28, 2020
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
133,651

$
133,651

$

$

2021 Notes Hedges
182,436



182,436

2023 Notes Hedges
62,307



62,307

Total
$
378,394

$
133,651

$

$
244,743

 
 
 
 
 
Liabilities
 
 
 
 
2021 Notes Conversion Derivative
$
168,258

$

$

$
168,258

2023 Notes Conversion Derivative
38,981



38,981

Contingent consideration
31,456



31,456

Total
$
238,695

$

$

$
238,695

 
Total
Quoted prices
in active
markets
(Level 1)
Prices with
other
observable
inputs
(Level 2)
Prices with
unobservable
inputs
(Level 3)
December 29, 2019
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
166,856

$
166,856

$

$

2020 Notes Hedges
1,969



1,969

2021 Notes Hedges
183,437



183,437

2023 Notes Hedges
39,240



39,240

Total
$
391,502

$
166,856

$

$
224,646

 
 
 
 
 
Liabilities
 

 

 

 

2020 Notes Conversion Derivative
$
1,666

$

$

$
1,666

2021 Notes Conversion Derivative
179,478



179,478

2023 Notes Conversion Derivative
31,555



31,555

Contingent consideration
28,077



28,077

Total
$
240,776

$

$

$
240,776


19

WRIGHT MEDICAL GROUP N.V.

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

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 29, 2019
Additions
Transfers into Level 3
Gain/(loss) on fair value adjustments included in earnings
Settlements
Currency
Balance at June 28, 2020
2020 Notes Hedges
$
1,969



(1,618
)
(351
)

$

2020 Notes Conversion Derivative
$
(1,666
)


1,520

146


$

2021 Notes Hedges
$
183,437



(1,001
)


$
182,436

2021 Notes Conversion Derivative
$
(179,478
)


11,220



$
(168,258
)
2023 Notes Hedges
$
39,240



23,067



$
62,307

2023 Notes Conversion Derivative
$
(31,555
)


(7,426
)


$
(38,981
)
Contingent consideration
$
(28,077
)


(3,509
)
(320
)
450

$
(31,456
)

6. Property, Plant and Equipment
Property, plant and equipment, net consists of the following (in thousands):
 
June 28, 2020
 
December 29, 2019
Property, plant and equipment, at cost
$
695,387

 
$
648,318

Less: Accumulated depreciation
(436,074
)
 
(396,396
)
 
$
259,313

 
$
251,922


7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill occurring during the six months ended June 28, 2020 and June 30, 2019 are as follows (in thousands):
 
U.S. Lower Extremities
& Biologics
 
U.S. Upper Extremities
 
International Extremities
& Biologics
 
Total
Balance at December 29, 2019
$
569,970

 
$
625,926

 
$
65,071

 
$
1,260,967

Foreign currency translation

 
426

 
903

 
1,329

Balance at June 28, 2020
$
569,970

 
$
626,352

 
$
65,974

 
$
1,262,296

 
 
 
 
 
 
 
 
Balance at December 30, 2018
$
569,970

 
$
627,850

 
$
71,134

 
$
1,268,954

Foreign currency translation

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

 
$
626,659

 
$
67,329

 
$
1,263,958


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.

20

WRIGHT MEDICAL GROUP N.V.

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

The components of our identifiable intangible assets, net, are as follows (in thousands):
 
June 28, 2020
 
December 29, 2019
 
Cost
 
Accumulated
amortization
 
Cost
 
Accumulated
amortization
Indefinite life intangibles:
 
 
 
 
 
 
 
In-process research and development (IPRD) technology
$
7,860

 
$

 
$
6,238

 
$

Total indefinite life intangibles
7,860

 
 
 
6,238

 
 
 
 
 
 
 
 
 
 
Finite life intangibles:
 
 
 
 
 
 
 
 Completed technology
172,632

 
81,204

 
172,111

 
72,140

 Licenses
9,247

 
3,395

 
9,247

 
2,835

 Customer relationships
181,184

 
46,779

 
181,094

 
41,389

 Trademarks
13,916

 
11,987

 
14,002

 
11,834

 Non-compete agreements
3,439

 
2,490

 
5,713

 
4,090

 Other
1,523

 
357

 
2,022

 
757

Total finite life intangibles
381,941

 
$
146,212

 
384,189

 
$
133,045

 
 
 
 
 
 
 
 
Total intangibles
389,801

 
 
 
390,427

 
 
Less: Accumulated amortization
(146,212
)
 
 
 
(133,045
)
 
 
Intangible assets, net
$
243,589

 
 
 
$
257,382

 
 

Based on the total finite life intangible assets held at June 28, 2020, we expect amortization expense of approximately $31 million in 2020, $30 million in 2021, $30 million in 2022, $30 million in 2023, and $27 million in 2024.
8. Debt and Finance Lease Obligations
Debt and finance lease obligations consist of the following (in thousands):
 
Maturity by Fiscal Year
 
June 28, 2020
 
December 29, 2019
Finance lease obligations
2020-2026
 
$
23,029

 
$
25,086

Convertible Notes
 
 
 
 
 
         1.625% Notes
2023
 
709,421

 
695,748

         2.25% Notes 1
2021
 
357,184

 
344,635

         2.0% Notes
2020
 

 
55,997

Term loan facility
2021
 
54,463


19,296

Asset-based line of credit 2
2021
 
61,709

 
20,652

Other debt
2020-2024
 
5,360

 
6,615

 
 
 
1,211,166

 
1,168,029

Less: Current portion 1,2
 
 
(454,337
)
 
(430,862
)
Long-term debt and finance lease obligations
 
 
$
756,829

 
$
737,167


_______________________
1 
As of June 28, 2020 and December 29, 2019, the sale price condition (as defined below) for the 2021 Notes was satisfied and, therefore, the 2021 Notes are convertible at any time during the succeeding calendar quarterly period. As a result, the carrying value of the 2021 Notes was classified as a current liability as of June 28, 2020 and December 29, 2019.
2 
We have reflected this debt as a current liability as of June 28, 2020 and December 29, 2019, as required by US GAAP due to the weekly lockbox repayment/re-borrowing arrangement underlying the agreement, as well as the ability for the lenders to accelerate the repayment of the debt under certain circumstances as described below.

21

WRIGHT MEDICAL GROUP N.V.

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

Convertible Notes
The components of our Convertible Notes were as follows (in thousands):
 
June 28, 2020
 
December 29, 2019
Principal amount of 2023 Notes
$
814,556

 
$
814,556

Unamortized debt discount
(95,495
)
 
(107,916
)
Unamortized debt issuance costs
(9,640
)
 
(10,892
)
Net carrying amount of 2023 Notes
$
709,421

 
$
695,748

 
 
 
 
Principal amount of 2021 Notes
$
395,000

 
$
395,000

Unamortized debt discount
(35,593
)
 
(47,405
)
Unamortized debt issuance costs
(2,223
)
 
(2,960
)
Net carrying amount of 2021 Notes
$
357,184

 
$
344,635

 
 
 
 
Principal amount of 2020 Notes
$

 
$
56,455

Unamortized debt discount

 
(408
)
Unamortized debt issuance costs

 
(50
)
Net carrying amount of 2020 Notes
$

 
$
55,997


The 2021 Notes were issued by us and the 2020 Notes and the 2023 Notes were issued by Wright Medical Group, Inc. (WMG) and are fully and unconditionally guaranteed by Wright Medical Group N.V. The 2020 Notes matured and were repaid on February 15, 2020.
The holders of the Convertible Notes may convert their notes solely into cash at their option at any time prior to the Early Conversion date (as defined below) only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of our ordinary shares for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day (the sale price condition); (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our ordinary shares and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events, including in connection with the Offer as further described below and within Note 1. The Certain terms of conversion are set forth below:
 
2021 Notes
 
2023 Notes
Conversion rate
46.8165

 
29.9679

Conversion price
$
21.36

 
$
33.37

Early Conversion date
May 15, 2021

 
December 15, 2022

Maturity date
November 15, 2021

 
June 15, 2023


On or after the Early Conversion date until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes solely into cash, regardless of the foregoing circumstances. Upon conversion, a holder will receive an amount in cash, per $1,000 principal amount of the Convertible Notes, equal to the settlement amount as calculated under the Notes Indenture. If a fundamental change, as defined in the applicable Notes Indenture, occurs, subject to certain conditions, holders of the applicable series of Convertible Notes will have the option to require us to repurchase for cash all or a portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date, as defined in the applicable Notes Indenture. In addition, if a make-whole fundamental change, as defined in the applicable Notes Indenture, occurs prior to the maturity date, we are required to increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

22

WRIGHT MEDICAL GROUP N.V.

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

On November 4, 2019, we entered into a definitive agreement with Stryker and its subsidiary, Stryker B.V. Under the terms of the agreement, and upon the terms and subject to the conditions thereof, Stryker B.V. commenced the Offer to purchase all of the outstanding ordinary shares of Wright for $30.75 per share, without interest and less applicable withholding taxes, in cash. The obligation of Stryker and Stryker B.V. to consummate the Offer is subject to the tender of a minimum number of our outstanding shares in the related tender offer, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright’s shareholders (which condition has been met), receipt of applicable regulatory approvals and other customary conditions. If these conditions are satisfied and the Offer closes, Stryker may acquire any remaining shares through a post-offer reorganization. Wright expects that a fundamental change and a make-whole fundamental change will occur at the time Stryker B.V. accepts for purchase and pays for all shares validly tendered pursuant to the Offer. Wright also expects that the Offer will trigger certain conversion rights under each of the Notes Indentures prior to the closing of the proposed acquisition by Stryker.
As described above, the 2021 Notes were convertible during the first and second quarters of 2020 and are convertible for the third quarter of 2020. There were no significant conversions through July 28, 2020.
The 2021 Notes and our guarantee of the 2023 Notes are senior unsecured obligations that rank: (i) senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the guarantee; (ii) equal in right of payment to any of our unsecured indebtedness that is not so subordinated; (iii) effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all indebtedness and other liabilities (including trade payables) of our subsidiaries. Because the 2023 Notes were issued by WMG, they are structurally senior to all indebtedness and other liabilities of Wright Medical Group N.V.
The estimated fair value of the 2021 and 2023 Notes was approximately $553.0 million and $840.5 million, respectively, at June 28, 2020, based on a quoted price in an active market (Level 1).
The Notes Conversion Derivatives require bifurcation from the Convertible Notes in accordance with ASC Topic 815, Derivatives and Hedging, and are accounted for as a derivative liability. See Note 5 for additional information regarding the Notes Conversion Derivative.
In connection with the issuance of each series of Convertible Notes, we and WMG entered into the Note Hedges, which are generally intended to reduce exposure to potential cash payments that we or WMG, as applicable, would be required to make if holders elect to convert the Convertible Notes at a time when our ordinary share price exceeds the conversion price. We also entered into warrant transactions (the Warrants) in connection with the issuance of each series of Convertible Notes in which we sold warrants that are initially exercisable in the same number of shares as are issuable upon conversion of the applicable series of Convertible Notes at the initial conversion rate. The strike price of the Note Hedge for each series of Convertible Notes is equal to the conversion price of the applicable series of Convertible Notes and the exercise prices for the Warrants issued with the 2021 and 2023 Notes are $30.00 and $40.86, respectively. The strike prices of the Notes Hedges and exercise prices of the Warrants are subject to adjustment upon the occurrence of certain events including in connection with the Offer as further described above and within Note 1. See Note 5 for additional information regarding the Notes Hedges. The 2020 Note Hedge and 2020 Conversion Derivative were settled during the first quarter of 2020 and resulted in net proceeds of approximately $0.2 million. The warrants associated with the 2020 Notes have an exercise price of $38.80 and are expected to be net-share settled and exercisable over a certain trading period as detailed below.
However, in connection with certain events, including, among others, (i) a merger or other make-whole fundamental change, including in connection with the Offer as further described above and within Note 1; (ii) certain hedging disruption events, which may include changes in tax laws, an increase in the cost of borrowing our ordinary shares in the market or other material increases in the cost to the option counterparties of hedging the Note Hedges; (iii) our failure to perform certain obligations under the Notes Indenture or under the Notes Hedges; (iv) certain defaults on our, or any of our other subsidiary’s indebtedness in excess of $25 million; (v) if we, or any of our significant subsidiaries become insolvent or otherwise become subject to bankruptcy proceedings or (vi) if we repurchase Convertible Notes in the open market, through a tender or exchange offer or in individually negotiated transactions, the option counterparties have the discretion to terminate the Notes Hedges, which may reduce the effectiveness of the Notes Hedges. In addition, the option counterparties have broad discretion to make certain adjustments to the Notes Hedges and Warrants upon the occurrence of certain other events, including, among others, (i) upon the announcement of certain significant corporate events, including events that may give rise to a termination event as described above, such as the announcement of a third-party tender offer, including in connection with the Offer as further described above and within Note 1; or (ii) solely with respect to the Notes Hedges, any adjustment to the conversion rate of the Notes. Any such adjustment may also reduce the effectiveness of the Note Hedges and further the dilutive effect of the Warrants.
Aside from the initial premiums paid to the option counterparties and subject to the right of the option counterparties to terminate the Notes Hedges and Warrants in certain circumstances, we do not generally expect to be required to make any cash payments

23

WRIGHT MEDICAL GROUP N.V.

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

to the option counterparties under the Notes Hedges and Warrants and expect to be entitled to receive from the option counterparties cash, generally equal to the amount by which the market price per ordinary share exceeds the strike price of the applicable Note Hedge during the relevant valuation period.
The Warrants are expected to be net-share settled and exercisable over a certain trading period after the Convertible Notes mature as detailed below:
 
2020 Notes
 
2021 Notes
 
2023 Notes
Exercisable period
200 trading day period beginning on May 15, 2020
 
100 trading day period beginning on February 15, 2022
 
120 trading day period beginning on September 15, 2023
If the market value per ordinary share exceeds the strike price on any settlement date under the applicable Warrant, we will generally be obligated to issue to the Warrant holders in the aggregate, a number of shares equal in value to the amount by which the then-current market value of one ordinary share exceeds the then-effective strike price of each Warrant, multiplied by the number of Warrants exercised. As a result, the Warrants will have a dilutive effect on our ordinary shares to the extent that the market value per ordinary share during such period exceeds the applicable strike price of the Warrants.
As of June 28, 2020 and December 29, 2019, we had warrants outstanding related to the 2020 Notes, 2021 Notes and 2023 Notes which were exercisable for 1.9 million ordinary shares, 18.5 million ordinary shares, and 24.4 million ordinary shares, respectively.
As of June 28, 2020, our effective interest rates for the 2020, 2021, and 2023 Notes were 8.54%, 9.72%, and 5.76%, respectively. For the three and six months ended June 28, 2020 and June 30, 2019, we recorded the following interest expense related to the amortization of the debt discount (in thousands):
 
Three months ended
 
Six months ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
2023 Notes
$
6,256

 
$
5,937

 
$
12,422

 
$
11,461

2021 Notes
5,977

 
5,426

 
11,812

 
10,723

2020 Notes

 
770

 
408

 
2,215


On February 7, 2019, WMG issued an additional $139.6 million aggregate principal amount of 2023 Notes in exchange for $130.1 million aggregate principal amount of 2020 Notes. For each $1,000 principal amount of 2020 Notes validly submitted for exchange, we delivered $1,072.40 principal amount of 2023 Notes to the exchanging investor (subject, in each case, to rounding to the nearest $1,000 aggregate principal amount for each such exchanging investor). As this was a debt modification, a pro rata share of the 2020 Notes discount and deferred financing costs which totaled $7.4 million and $0.9 million, respectively, was transferred to the 2023 Notes discount and deferred financing costs. Additionally, the 2023 Notes discount was adjusted in order for net debt to remain the same subsequent to the exchange. The discount and deferred financing costs will be amortized over the remaining term of the 2023 Notes using the effective interest method.
The fair value of the 2023 Notes Conversion Derivative associated with the additional $139.6 million of 2023 Notes was $28.9 million at the time of issuance, and the pro rata share of the 2020 Notes Conversion Derivative that was settled as part of the additional 2023 Notes exchange had a fair value of $16.3 million immediately prior to issuance of the additional 2023 Notes. As the exchange was accounted for as a debt modification, the net amount of $12.6 million was recognized as a loss on settlement during the quarter ended March 31, 2019.
On January 30, 2019 and January 31, 2019, we entered into additional Note Hedge and Warrant transactions with the same strike and exercise prices as set forth above for the 2023 Notes. We paid approximately $30.1 million in the aggregate to the option counterparties for the additional Note Hedge, and received approximately $21.2 million in the aggregate from the option counterparties for the Warrants, resulting in a net cost to us of approximately $8.9 million. In addition, we settled a pro rata share of the 2020 Notes Hedges corresponding to the amount of the 2020 Notes exchanged pursuant to the above-described exchange. We received proceeds of approximately $16.8 million related to the 2020 Notes Hedges and paid $11.0 million related to the 2020 Warrants, generating net proceeds of $5.8 million.
For more information relating to our Convertible Notes, please refer to our Annual Report on Form 10-K for the year ended December 29, 2019.

24

WRIGHT MEDICAL GROUP N.V.

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

Credit Agreement
On December 23, 2016, we, together with WMG and certain of our other wholly-owned U.S. subsidiaries (collectively, Borrowers), entered into a Credit, Security and Guaranty Agreement with MidCap Financial Trust, as administrative agent (Agent) and a lender and the additional lenders from time to time party thereto, which agreement was subsequently amended and restated in May 2018 and subsequently amended thereafter on several occasions, including the May 7, 2020 amendment described herein, which, among other things, suspended certain financial covenants through the end of 2020 (as amended, the Credit Agreement).
The Credit Agreement provides for a $175 million senior secured asset-based line of credit, subject to the satisfaction of a borrowing base requirement (ABL Facility) and a $55 million term loan facility (Term Loan Facility). The ABL Facility may be increased by up to $75 million upon the Borrowers’ request, subject to the consent of the Agent and each of the other lenders providing such increase. All borrowings under the ABL Facility are subject to the satisfaction of customary conditions, including the absence of default, the accuracy of representations and warranties in all material respects and the delivery of an updated borrowing base certificate. The initial $20 million term loan tranche was funded at closing in May 2018 and the second $35 million term loan tranche was funded in May 2020. All borrowings under the Term Loan Facility are subject to the satisfaction of customary conditions, including the absence of default and the accuracy of representations and warranties in all material respects.
As of June 28, 2020, we had $61.7 million in borrowings outstanding under the ABL Facility and $113.3 million in unused availability under the ABL Facility. We borrowed $40 million under the ABL Facility during the second quarter of 2020. As of December 29, 2019, we had $20.7 million in borrowings outstanding under the ABL Facility and $154.3 million in unused availability under the ABL Facility.
The interest rate margin applicable to borrowings under the ABL Facility is, at the option of the Borrowers, equal to either (a) 3.25% for base rate loans or (b) 4.25% for LIBOR rate loans, subject to a 0.75% LIBOR floor. In addition to paying interest on the outstanding loans under the ABL Facility, the Borrowers also are required to pay a customary unused line fee equal to 0.50% per annum in respect of unutilized commitments and certain other customary fees related to Agent’s administration of the ABL Facility. Beginning January 1, 2017, the Borrowers are required to maintain a minimum drawn balance on the ABL Facility equal to 20% of the average borrowing base for each month. To the extent the actual drawn balance is less than 20%, the Borrowers must pay a fee equal to the amount the lenders under the ABL Facility would have earned had the Borrowers maintained a minimum drawn balance equal to 20% of the average borrowing base for such month.
The Credit Agreement requires that the Borrowers calculate the borrowing base for the ABL Facility on at least a monthly basis and each time the Borrowers make a draw on the ABL Facility in accordance with the formula set forth in the Credit Agreement. The borrowing base is subject to adjustment and the implementation of reserves by the Agent in its permitted discretion, as further described in the Credit Agreement. If at any time the outstanding drawn balance under the ABL Facility exceeds the borrowing base as in effect at such time, Borrowers will be required to prepay loans under the ABL Facility in an amount equal to such excess. Certain accounts receivables and proceeds of collateral of the Borrowers will be applied to reduce the outstanding principal amount of the ABL Facility on a periodic basis.
There is no scheduled amortization under the ABL Facility and (subject to borrowing base requirements and applicable conditions to borrowing) the available revolving commitment may be borrowed, repaid, and reborrowed without restriction. All outstanding loans under the ABL Facility will be due and payable in full on the date that is the earliest to occur of December 23, 2021 or the date that is 91 days prior to the maturity date of the 2021 Notes; provided if we refinance, extend, renew or replace at least 85% of the 2021 Notes, as applicable, outstanding as of the closing date of the ABL Facility pursuant to the terms of the Credit Agreement, the maturity date will be deemed extended.
Any voluntary or mandatory permanent reduction or termination of the revolving commitments under the ABL Facility is subject to a prepayment premium equal to 0.75% of such reduced or terminated amount.
The interest rate applicable to borrowings under the Term Loan Facility is equal to one-month LIBOR plus 7.85%, subject to a 1.00% LIBOR floor. The Credit Agreement previously provided that amortization payments under the Term Loan Facility were due in equal monthly installments beginning on May 1, 2019 unless we meet certain adjusted EBITDA targets; in which case, the amortization payments would not commence until May 1, 2021. We had previously met all such targets. As a result of the May 7, 2020 amendment to the Credit Agreement, the monthly straight line amortization payments of the Term Loan Facility will now commence on January 1, 2021. In addition to paying interest on the outstanding loans under the Term Loan Facility, the Borrowers are also required to pay certain other customary fees related to Agent’s administration of the Term Loan Facility.
The Term Loan Facility requires mandatory prepayments, subject to the right of reinvestment and certain other exceptions, in amounts equal to 100% of the net cash proceeds from certain asset sales and casualty and condemnation events in excess of $10 million in any fiscal year. Any voluntary or mandatory prepayment under the Term Loan Facility, subject to certain exceptions,

25

WRIGHT MEDICAL GROUP N.V.

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

was previously subject to a 1.00% prepayment premium, but as a result of the May 7, 2020 amendment to the Credit Agreement, the prepayment premium under the Term Loan Facility is now 1.25%. The advances under the Term Loan Facility are due and payable in full at the same time as the outstanding loans under the ABL Facility.
All of the obligations under the ABL Facility and the Term Loan Facility are guaranteed jointly and severally by us and each of the Borrowers and are secured by a senior first priority security interest in substantially all existing and after-acquired assets of us and each Borrower on the terms set forth in the Credit Agreement.
The Credit Agreement contains certain negative covenants that restrict our ability to take certain actions as specified in the ABL Credit Agreement and an affirmative covenant that we maintain net revenue at or above minimum levels and maintain liquidity in the United States at a level specified in the Credit Agreement, subject to certain exceptions. In addition to financial and liquidity covenants consistent with those in the Credit Agreement, while the Term Loan Facility is outstanding, the Company is required to maintain a minimum adjusted EBITDA, as described in the Credit Agreement. On May 7, 2020, we agreed with MidCap to amend the Credit Agreement to suspend the quarterly-tested minimum net revenue and minimum adjusted EBITDA financial covenants through the end of 2020 and add a minimum liquidity covenant that will apply from the date of the amendment through May 15, 2021. The Credit Agreement will not affect our ability to meet our existing contractual obligations, except in circumstances where an event of default (subject to certain exceptions) has occurred and is continuing. The Credit Agreement also contains negative covenants, representations and warranties, affirmative covenants and events of default, in each case subject to grace periods, thresholds, and materiality qualifiers consistent with the Credit Agreement.
Our exposure to interest rate risk arises principally from variable interest rates applicable to borrowings under our Credit Agreement and the interest rates associated with our invested cash balances.
Borrowings under our Credit Agreement, including our ABL Facility and Term Loan Facility, bear interest at variable rates. The interest rate margin applicable to borrowings under the ABL Facility is, at the option of the Borrowers, equal to either (a) 3.25% for base rate loans or (b) 4.25% for LIBOR rate loans, subject to a 0.75% LIBOR floor. The interest rate applicable to borrowings under the Term Loan Facility is equal to one-month LIBOR plus 7.85%, subject to a 1.00% LIBOR floor. Based upon our debt level and the LIBOR floor on our interest rate, a 100 basis point increase in the annual interest rate on such borrowings would have an immaterial impact on our interest expense on an annual basis.
Other Debt
Other debt primarily includes government loans, mortgages, and miscellaneous international bank loans.
9. Accumulated Other Comprehensive Income (AOCI)
Other comprehensive income (OCI) includes certain gains and losses that under US GAAP are included in comprehensive loss but are excluded from net loss as these amounts are initially recorded as an adjustment to shareholders’ equity. Amounts in OCI may be reclassified to net loss upon the occurrence of certain events.
For the three and six months ended June 28, 2020 and June 30, 2019, OCI was comprised solely of foreign currency translation adjustments.
Changes in AOCI for the three and six months ended June 28, 2020 and June 30, 2019 were as follows (in thousands):
 
Three months ended June 28, 2020
 
Currency translation adjustment
Balance at March 29, 2020
$
(38,611
)
Other comprehensive income
11,271

Balance at June 28, 2020
$
(27,340
)
 
Three months ended June 30, 2019
 
Currency translation adjustment
Balance at March 31, 2019
$
(19,386
)
Other comprehensive loss
(123
)
Balance at June 30, 2019
$
(19,509
)


26

WRIGHT MEDICAL GROUP N.V.

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

 
Six months ended June 28, 2020
 
Currency translation adjustment
Balance at December 29, 2019
$
(29,499
)
Other comprehensive income
2,159

Balance at June 28, 2020
$
(27,340
)
 
Six months ended June 30, 2019
 
Currency translation adjustment
Balance at December 30, 2018
$
(8,083
)
Other comprehensive loss
(11,426
)
Balance at June 30, 2019
$
(19,509
)

10. Capital Stock and Earnings Per Share
Our articles of association provide an authorized capital of €9.6 million divided into 320 million ordinary shares, each with a par value of three Euro cents (€0.03). At our 2019 annual general meeting of shareholders, our shareholders authorized our board of directors until June 28, 2021 to issue, or grant rights to purchase or subscribe for, our unissued ordinary shares up to 20% of our issued and outstanding shares at the time of issue, which is further divided into 10% for general corporate purposes (including potential mergers and acquisitions) and an additional 10% only for potential mergers and acquisitions. We had 129.1 million and 128.6 million ordinary shares issued and outstanding as of June 28, 2020 and December 29, 2019, respectively.
FASB ASC Topic 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share. Basic earnings per share is calculated based on the weighted-average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated to include any dilutive effect of our ordinary share equivalents. For the three and six months ended June 28, 2020 and June 30, 2019, our ordinary share equivalents consisted of stock options, restricted stock units, performance share units, and warrants. The dilutive effect of the stock options, restricted stock units, performance share units, and warrants is calculated using the treasury-stock method.
We had outstanding options to purchase 8.6 million ordinary shares, 1.1 million restricted stock units, and 0.8 million performance share units, assuming maximum performance, at June 28, 2020 and outstanding options to purchase 9.2 million ordinary shares, 1.0 million restricted stock units, and 0.2 million performance share units, assuming maximum performance, at June 30, 2019.
We had outstanding net-share settled warrants on the 2020 Notes, 2021 Notes and 2023 Notes of 1.9 million ordinary shares, 18.5 million ordinary shares, and 24.4 million ordinary shares, respectively, at June 28, 2020 and June 30, 2019. See Note 8 of the condensed consolidated financial statements for additional information about the convertible notes and the related warrants.
None of the options, restricted stock units, performance share units, or warrants were included in the calculation of diluted net loss from continuing operations per share, diluted loss from discontinued operations per share, and diluted net loss per share for the three and six months ended June 28, 2020 or June 30, 2019, because we recorded a net loss from continuing operations for all periods. Including these instruments would be anti-dilutive as the net loss from continuing operations is the control number in determining whether those potential common shares are dilutive or anti-dilutive.
The weighted-average number of ordinary shares outstanding for basic and diluted earnings per share purposes is as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 28, 2020
 
June 30, 2019
 
June 28, 2020
 
June 30, 2019
Weighted-average number of ordinary shares outstanding-basic and diluted
128,922

 
126,267

 
128,833

 
126,040


11. Commitments and Contingencies
Legal Contingencies
The legal contingencies described in this footnote relate primarily to WMT, an indirect subsidiary of Wright Medical Group N.V., and are not necessarily applicable to Wright Medical Group N.V. or other affiliated entities. Maintaining separate legal entities within our corporate structure is intended to ring-fence liabilities. We believe our ring-fenced structure should preclude corporate veil-piercing efforts against entities whose assets are not associated with particular claims.

27

WRIGHT MEDICAL GROUP N.V.

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

As described below, our business is subject to various contingencies, including patent and other litigation and product liability claims. These contingencies could result in losses, including damages, fines, or penalties, any of which could be substantial. Although such matters are inherently unpredictable, and negative outcomes or verdicts can occur, we believe we have significant defenses in all of them and are vigorously defending all of them. However, we could incur judgments, pay settlements, or revise our expectations regarding the outcome of any matter. Such developments, if any, could have a material adverse effect on our results of operations in the period in which applicable amounts are accrued, or on our cash flows in the period in which amounts are paid, however, unless otherwise indicated, we do not believe any of them will have a material adverse effect on our financial position.
Our legal contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss or the measurement of a loss can be complex. We have accrued for losses that are both probable and reasonably estimable. Unless otherwise indicated, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate. Unanticipated events and circumstances may occur that could cause us to change our estimates and assumptions.
Patent Litigation
On March 23, 2018, WMT filed suit against Paragon 28, Inc. (Paragon 28) in the United States District Court for the District of Colorado, alleging infringement of ten patents concerning orthopaedic plates, plating systems and instruments, and related methods of use. Our complaint seeks damages, injunctive relief and attorneys’ fees. On June 4, 2018, Paragon 28 filed an amended answer and counterclaim seeking declaratory judgment of non-infringement and invalidity of the patent-in-suit, and attorneys’ fees. On September 28, 2018, WMT filed an amended complaint adding claims against Paragon 28 for misappropriation of trade secrets and related wrongdoing. Paragon 28 filed a motion to dismiss those trade secret-related claims, which WMT opposed. On September 30, 2019, the Court issued an order granting in part and denying in part the motion to dismiss, leaving intact the majority of the trade secret-related claims. A motion for clarification of the order remains pending. In March 2019, Paragon 28 filed four petitions with the Patent Trial and Appeal Board seeking Inter Partes Reviews of the patents in question, which WMT opposed. On September 25, 2019 and October 4, 2019, the Patent Trial and Appeal Board granted Paragon 28’s petitions. Oral arguments were heard on June 18, 2020, and we expect the Patent Trial and Appeal Board to render a substantive decision on the merits of the petitions in October 2020.
On April 24, 2020, ConforMIS, Inc. filed suit against WMT and Tornier, Inc. in the United States District Court for the District of Delaware alleging that the patient specific instrumentation (PSI) Wright makes available for use in certain shoulder arthroplasty procedures infringes its asserted patents. The suit alleges that shoulder implants and related products, when used together with PSI, also infringe the asserted patents. The suit seeks, among other things, a permanent injunction, statutory damages and treble damages for willful infringement. We dispute these allegations and intend to defend the suit vigorously.
Product Liability
We have received claims for personal injury against us associated with fractures of the PROFEMUR® titanium modular neck product (PROFEMUR® Claims). As of June 28, 2020, there were approximately 32 unresolved pending U.S. lawsuits and approximately five unresolved pending non-U.S. lawsuits alleging such claims. The overall fracture rate for the product is low and the fractures appear, at least in part, to relate to patient demographics. In 2009, we began offering a cobalt-chrome version of the PROFEMUR® modular neck, which has greater strength characteristics than the alternative titanium version. However, during the fiscal quarter ended September 30, 2011, as a result of an increase in the number and monetary amount of these claims, management estimated our liability to patients in the United States and Canada who have previously required a revision following a fracture of a PROFEMUR® titanium modular neck, or who may require a revision in the future. As of June 28, 2020, our accrual for PROFEMUR® Claims totaled $11.8 million, of which $6.4 million is included in our condensed consolidated balance sheet within “Accrued expenses and other current liabilities” and $5.4 million is included within “Other liabilities.” As of December 29, 2019, our accrual for PROFEMUR® Claims totaled $12.1 million, of which $8.8 million is included in our consolidated balance sheet within “Accrued expenses and other current liabilities” and $3.3 million is included within “Other liabilities.” We expect to pay the majority of these claims within the next two years. Any claims associated with this product outside of the United States and Canada, or for any other products, will be managed as part of our standard product liability accrual methodology on a case-by-case basis.
We are aware that MicroPort has recalled a certain size of its cobalt chrome modular neck product as a result of alleged fractures. As of June 28, 2020, there were eleven pending U.S. lawsuits and five pending non-U.S. lawsuits against us alleging personal injury resulting from the fracture of a cobalt chrome modular neck. These claims will be managed as part of our standard product liability accrual methodology on a case-by-case basis.

28

WRIGHT MEDICAL GROUP N.V.

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

On May 18, 2020, certain plaintiffs’ counsel filed a motion to coordinate (Motion to Transfer) pre-trial management of 42 cases involving both titanium and cobalt chrome PROFEMUR® modular necks in a multi-district litigation.  Plaintiffs request that the cases be coordinated before a judge in the United States District Court for the Eastern District of Arkansas. We have opposed the Motion to Transfer and a hearing on the Motion to Transfer is scheduled for July 30, 2020.
Claims for personal injury have also been made against us associated with metal-on-metal hip products (primarily the CONSERVE® product line). The pre-trial management of certain of these claims was consolidated in the federal court system, in the United States District Court for the Northern District of Georgia under multi-district litigation (MDL) and certain other claims by the Judicial Counsel Coordinated Proceedings in state court in Los Angeles County, California (JCCP and, together with the MDL, the Consolidated Metal-on-Metal Claims). Pursuant to previously disclosed settlement agreements with the Court-appointed attorneys representing plaintiffs in the MDL and JCCP described below (the MoM Settlement Agreements), the MDL and JCCP were closed to new cases effective October 18, 2017 and October 31, 2017, respectively.
Excluding claims resolved in the MoM Settlement Agreements, as of June 28, 2020, there were approximately 235 unresolved metal-on-metal hip cases pending in the U.S. This number includes cases ineligible for settlement under the MoM Settlement Agreements, cases which opted out of such settlements, post-settlement cases, tolled cases, and existing state court cases that were not part of the MDL or JCCP. As of June 28, 2020, we estimate there also were pending approximately 28 unresolved non-U.S. metal-on metal hip cases, 59<