Notes to Condensed Consolidated Financial Statements
For the
Three and Nine
Ended
September 30,
2017
and
2016
(Unaudited)
(In Thousands, Except Share and Per Share Data)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “K2M,” “the Company,” “we,” “us” and “our,” refer to K2M Group Holdings, Inc. together with its consolidated subsidiaries.
We are a global medical device provider of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance
TM
. Since our inception, we have designed, developed and commercialized innovative complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most complicated spinal pathologies. K2M has leveraged these core competencies into Balance ACS™, a platform of products, services and research to help surgeons achieve three-dimensional spinal balance across the axial, coronal and sagittal planes, with the goal of supporting the full continuum of care to facilitate quality patient outcomes. The Balance ACS platform, in combination with our technologies, techniques and leadership in the 3D-printing of spinal devices, enable us to compete favorably in the global spinal surgery market.
Unaudited Interim Results
The accompanying condensed consolidated balance sheets as of
September 30, 2017
and
December 31, 2016
, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss for the
three and nine
months ended
September 30,
2017
and
2016
, the condensed consolidated statement of changes in stockholders’ equity for the
nine
months ended
September 30, 2017
, and the condensed consolidated statements of cash flows for the
nine
months ended
September 30, 2017
and
2016
are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis of accounting as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows for the periods presented. The results for the
three and nine
months ended
September 30, 2017
are not necessarily indicative of future results. All information as of
September 30, 2017
and for the
three and nine
month periods ending
September 30, 2017
and
2016
within these notes to the condensed consolidated financial statements is unaudited.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net Loss per Share
Basic net loss per common share is determined by dividing the net loss allocable to common stockholders by the weighted average number of common shares outstanding during the periods presented, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of our stock option grants. The if-converted method is used to determine the dilutive effect of the convertible senior notes due 2036 (the “Notes”). The weighted average shares used to calculate both basic and diluted loss per share are the same because common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive. Although included in our outstanding shares total as of
September 30, 2017
, shares of restricted stock are contingently issuable until their restrictions lapse and have been excluded from the weighted average shares outstanding.
Foreign Currency Translation and Other Comprehensive Loss
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our reporting currency is the U.S. dollar, which is also the functional currency of our domestic entities, while the functional currency of our foreign subsidiaries are the British Pound, Euro and Swiss Franc. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Net gains and losses resulting from the translation of foreign financial statements are recorded in other comprehensive income (loss). Net foreign currency gains or losses resulting from transactions in currencies other than the functional currencies are included in other expense, net on the consolidated statements of operations.
Recent Accounting Pronouncements
We are currently an EGC pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012. Based on the market value of our common stock held by non-affiliates as of the last business day of our second fiscal quarter ended June 30, 2017, we will lose our status as an EGC as of December 31, 2017. Once we cease to be an EGC, we will no longer be able to take advantage of certain exemptions and relief from various reporting requirements that were allowed when we were an EGC.
Accounting Pronouncements that we will adopt as of December 31, 2017:
In March 2016, the FASB issued ASU No. 2016-09,
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to improve employee share-based payment accounting for companies that issue share-based awards to their employees. This guidance simplifies the accounting for share-based payment transactions, including consequences of income tax award, classification as either equity or liability, treatment of forfeitures, and classification on statement of cash flows. The recognition, measurement and reporting for share-based payments will be affected by this new guidance. For public entities, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently evaluating the impact of this guidance.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of modification accounting:
provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, inputs to the valuation technique used to value the award does not change, the vesting conditions do not change, and the classification as an equity or liability instrument do not change. This guidance should be applied prospectively to an award modified on or after date of the adoption. For public entities, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations or cash flows.
Accounting Pronouncements we will adopt in 2018 and later periods:
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments in this guidance will be applied prospectively. We will adopt the new standard effective January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our financial condition, results of operations or cash flows.
Revenue Recognition
Between
May 2014 and March 2017, the Financial Accounting Standards Board, or FASB issued several updates related to Topic 606 - Revenue Recognition for which we are still evaluating the impact:
In May 2014, ASU 2014-09,
Revenue from Contracts with Customers
was first to amend the existing accounting standards for revenue recognition. It provides a single comprehensive model for accounting for revenue from contracts with customers and will supersede most existing revenue recognition guidance. The amendment is based on the principle that revenue should be recognized to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This new guidance requires disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers.
In March 2016, ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
was issued to address principal versus agent considerations, reporting revenue gross versus net in the new revenue recognition standard. The guidance clarifies how an entity should evaluate the unit of accounting to determine whether it is a specified good or service and how it should apply the control principle to certain types of arrangements.
In April 2016, ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, was issued and included final amendments to clarify the guidance on identifying performance obligations and accounting for licenses of intellectual property (“IP”). The amendment allows entities to disregard goods or services that are immaterial in the context of a contract, assess whether the performance obligation is separately identifiable and whether the shipping and handling activities are a promised service in a contract. This guidance also clarifies how an entity should evaluate the nature of its promise in granting an IP license and when a promised good or service is distinct within the context of a contract.
In May 2016, ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients,
was issued and clarifies that for a contract to be considered completed the entity should evaluate the collectability threshold or probability of collecting revenue. It provides that the fair value of noncash consideration such as equity should be measured at contract inception when determining the transaction price and any subsequent changes must be recorded as a gain or loss, not as revenue. In addition, the entity has the option to make an accounting policy election to exclude from the transaction price certain types of taxes such as sales tax, value-added tax and excise tax in lieu of evaluating such taxes they collect in all jurisdictions to determine whether a tax is levied to the entity or the customer.
In December 2016, ASU 2016-20,
Revenue from Contracts with Customers: Technical Corrections and Improvements
, was issued to make minor corrections or minor improvements to the codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. It affects narrow aspects of the revenue from contracts with customers’ guidance, including its scope, disclosure of remaining and prior-period performance obligation, contract modifications, contract asset vs receivables, refund liability and advertising costs.
For public companies, the guidance included in these updates will be effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for reporting periods beginning after December 15, 2016. The guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of the initial application.
We will adopt the new standard effective January 1, 2018. We continue to evaluate the impact of the standard and have not yet determined the method of our adoption. Presently we and our advisors are reviewing a representative sample of existing revenue contracts with customers in relation to the requirements of this guidance. Other than the inclusion of incremental disclosures, we do not expect the new revenue guidance to have a material impact on our consolidated financial condition, results of operations and cash flows based on our assessment to date.
Other Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Public companies will be required to comply with the guidance in 2019, and interim periods within that year. Early adoption is permitted for all entities. We are presently evaluating the impact of this guidance.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investors and beneficial interests obtained in a financial asset securitization. It also provides clarifications related to separately identifiable cash-flows and application of the predominance principle based on evaluating the source and nature of the underlying cash flows when determining whether it is a financing, investing, operating or a combination of cash flow classifications. For public entities the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently assessing the impact of this guidance.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash,
which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. These amounts should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This amendment does not provide a definition of restricted cash or restricted cash equivalents. For public entities the guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted in any annual or interim period for which financial statements have not been issued or made available for issuance, but all of the guidance must be adopted in the same period. We are currently assessing the impact of this guidance.
In January 2017, the Financial Accounting Standards Board, or FASB issued ASU 2017-04,
Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment,
which no longer requires an entity to measure a goodwill impairment loss by comparing the implied fair value to the carrying value of a reporting unit’s goodwill. Instead, any goodwill impairment charge will be recognized as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. In addition, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendment does not affect the optional qualitative assessment of goodwill impairment. For public entities, the guidance will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The amendments in this guidance should be applied prospectively with earlier application permitted for goodwill impairment tests with measurement dates after January 1, 2017. We are currently assessing the impact of this guidance.
2. ACCOUNTS RECEIVABLE
The following table summarizes accounts receivable, net of allowances:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Accounts receivable
|
|
$
|
47,528
|
|
|
$
|
48,664
|
|
Allowances
|
|
(2,496
|
)
|
|
(2,234
|
)
|
Accounts receivable, net
|
|
$
|
45,032
|
|
|
$
|
46,430
|
|
3. INVENTORY
The following table summarizes inventory, net of allowances:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Finished goods
|
|
$
|
109,785
|
|
|
$
|
96,619
|
|
Inventory allowances
|
|
(37,396
|
)
|
|
(34,722
|
)
|
Inventory, net
|
|
$
|
72,389
|
|
|
$
|
61,897
|
|
Inventory includes surgical instruments available for sale with a carrying value of $
9,018
and $
9,874
at
September 30, 2017
and
December 31, 2016
, respectively.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes prepaid expenses and other current assets:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Restricted cash
|
|
$
|
—
|
|
|
$
|
61
|
|
Prepaid expenses
|
|
3,772
|
|
|
2,666
|
|
Other
|
|
3,744
|
|
|
3,420
|
|
Total
|
|
$
|
7,516
|
|
|
$
|
6,147
|
|
5. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
September 30,
2017
|
|
December 31,
2016
|
Buildings under capital lease
|
16 years
|
|
$
|
26,469
|
|
|
$
|
26,469
|
|
Leasehold improvements, including property under capital lease
|
15 years
|
|
20,229
|
|
|
20,051
|
|
Equipment
|
3-5 years
|
|
4,181
|
|
|
3,817
|
|
Software
|
3 years
|
|
7,326
|
|
|
4,989
|
|
Computer equipment
|
3 years
|
|
1,173
|
|
|
1,070
|
|
Furniture and office equipment
|
5-7 years
|
|
3,811
|
|
|
3,696
|
|
Vehicles and other
|
3 years
|
|
847
|
|
|
832
|
|
Total
|
|
|
64,036
|
|
|
60,924
|
|
Less accumulated depreciation and amortization
|
|
|
(14,109
|
)
|
|
(10,210
|
)
|
Property, plant and equipment, net
|
|
|
$
|
49,927
|
|
|
$
|
50,714
|
|
Depreciation and amortization expense for property, plant and equipment was $
1,522
and $
1,374
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
4,327
and $
3,526
for the
nine
months ended
September 30, 2017
and
2016
, respectively. Included in this total is amortization expense for buildings and leasehold improvements under capital lease of $
416
for each of the
three
months ended
September 30, 2017
and
2016
and $
1,247
for each of the
nine
months ended
September 30, 2017
and
2016
. Interest expense on the capital lease obligation was $
572
and $
554
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
1,728
and $
1,700
for the
nine
months ended
September 30,
2017
and
2016
, respectively.
6. INTANGIBLE ASSETS
Intangible assets, net comprise the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
Estimated
Useful Lives
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
—
|
|
$
|
12,900
|
|
|
$
|
—
|
|
|
$
|
12,900
|
|
In-process research and development
|
|
—
|
|
900
|
|
|
—
|
|
|
900
|
|
Other
|
|
—
|
|
240
|
|
|
—
|
|
|
240
|
|
Subtotal
|
|
|
|
14,040
|
|
|
—
|
|
|
14,040
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
Developed technology
|
|
4 - 6 years
|
|
62,000
|
|
|
(61,689
|
)
|
|
311
|
|
Licensed technology
|
|
4 - 6 years
|
|
52,600
|
|
|
(52,575
|
)
|
|
25
|
|
Customer relationships
|
|
4 - 7 years
|
|
29,700
|
|
|
(29,700
|
)
|
|
—
|
|
Patents and other
|
|
2 - 17 years
|
|
4,352
|
|
|
(1,481
|
)
|
|
2,871
|
|
Subtotal
|
|
|
|
148,652
|
|
|
(145,445
|
)
|
|
3,207
|
|
Intangible assets, net
|
|
|
|
$
|
162,692
|
|
|
$
|
(145,445
|
)
|
|
$
|
17,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Estimated
Useful Lives
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
—
|
|
$
|
12,900
|
|
|
$
|
—
|
|
|
$
|
12,900
|
|
In-process research and development
|
|
—
|
|
900
|
|
|
—
|
|
|
900
|
|
Other
|
|
—
|
|
220
|
|
|
—
|
|
|
220
|
|
Subtotal
|
|
|
|
14,020
|
|
|
—
|
|
|
14,020
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
Developed technology
|
|
4 - 6 years
|
|
62,000
|
|
|
(58,026
|
)
|
|
3,974
|
|
Licensed technology
|
|
4 - 6 years
|
|
52,600
|
|
|
(52,475
|
)
|
|
125
|
|
Customer relationships
|
|
4 - 7 years
|
|
29,700
|
|
|
(27,048
|
)
|
|
2,652
|
|
Patents and other
|
|
2 - 17 years
|
|
3,302
|
|
|
(1,315
|
)
|
|
1,987
|
|
Subtotal
|
|
|
|
147,602
|
|
|
(138,864
|
)
|
|
8,738
|
|
Intangible assets, net
|
|
|
|
$
|
161,622
|
|
|
$
|
(138,864
|
)
|
|
$
|
22,758
|
|
Amortization expense of intangible assets was $
1,836
and $
2,594
for the
three
months ended
September 30,
2017
and
2016
, respectively, and $
6,581
and $
7,781
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
As of
September 30, 2017
, the expected amortization expense for the remainder of
2017
and the following four years and thereafter is as follows:
|
|
|
|
|
|
|
|
September 30, 2017
|
2017
|
|
$
|
210
|
|
2018
|
|
346
|
|
2019
|
|
328
|
|
2020
|
|
302
|
|
2021
|
|
244
|
|
Thereafter
|
|
1,777
|
|
Total
|
|
$
|
3,207
|
|
7. OTHER ASSETS
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Surgical instruments, net
|
|
$
|
26,485
|
|
|
$
|
24,810
|
|
Restricted cash
|
|
3,016
|
|
|
2,262
|
|
Other
|
|
1,228
|
|
|
1,182
|
|
Total
|
|
$
|
30,729
|
|
|
$
|
28,254
|
|
Surgical instruments are stated net of accumulated amortization and allowances of $
41,790
and $
34,191
at
September 30, 2017
and
December 31, 2016
, respectively. Amortization expense was $
2,502
and $
2,517
for the three months ended
September 30,
2017
and
2016
, respectively, and $
7,670
and $
7,431
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
Restricted cash balances represent deposits made on pending bids or contracts with customers.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Accrued commissions
|
|
$
|
7,447
|
|
|
$
|
6,607
|
|
Accrued royalties
|
|
3,062
|
|
|
3,495
|
|
Other
|
|
7,996
|
|
|
5,571
|
|
Total
|
|
$
|
18,505
|
|
|
$
|
15,673
|
|
9. DEBT
Convertible Senior Notes
On August 11, 2016, we issued $
50,000
aggregate principal amount of the Notes. The Notes pay interest at an annual rate of
4.125%
, payable semi-annually in arrears on February 15 and August 15 of each year beginning on February 15, 2017 and mature on August 15, 2036, unless earlier converted, redeemed or repurchased by us. We received net proceeds from the sale of the Notes of $
47,091
, after deducting underwriting discounts and commissions and offering expenses of $
2,909
. The Notes are governed by an indenture between the Company and the Bank of New York Mellon.
The Notes are senior, unsecured obligations and are equal in right of payment with our existing and future senior, unsecured indebtedness, senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes, and effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
Interest expense related to the Notes was $
1,096
and $
558
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
3,237
and $
558
for the
nine
months ended
September 30, 2017
and
2016
, respectively. These amounts included accretion expense of the debt discounts of $
580
and $
277
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
1,689
and $
277
for the
nine
months ended
September 30, 2017
and
2016
, respectively. The Notes have been classified as long-term debt on our condensed consolidated balance sheet. As of
September 30, 2017
, the fair value of the Notes was $
44,692
.
Revolving Credit Facility
We maintain a senior secured credit facilities credit agreement (as amended from time to time) with Silicon Valley Bank and Comerica Bank as Lenders, which is secured primarily by the assets of our operating subsidiaries in the United States and United Kingdom. On October 6, 2017, we entered into an amendment to the credit agreement, which extended its maturity date from April 26, 2018 to April 26, 2019, among other changes. As amended, the credit facility consists of revolving credit facility of $
55,000
, with a sub-facility for letters of credit in the aggregate availability amount of $
10,000
and a swingline sub-facility in the aggregate availability amount of $
5,000
. As of
September 30, 2017
, we had
no
outstanding borrowings on the revolving credit facility.
The revolving credit facility contains various financial covenants and negative covenants with which we must maintain compliance, including a consolidated adjusted quick ratio for K2M, Inc., K2M UK Limited and select subsidiaries of not less than
1.20
:
1.00
as of the last day of any month, restrictive covenants which limits our ability to pay dividends on common stock and make certain investments, and the provision of certain financial reporting and company information as required. We were in compliance with all the financial and other covenants of the credit facility at
September 30, 2017
.
Interest expense related to the credit agreement was $
31
and $
194
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
92
and $
406
for the
nine
months ended
September 30, 2017
and
2016
, respectively, which included amortization expense of loan issuance fees of $
31
and $
51
for the
three
months ended
September 30, 2017
and
2016
, respectively, and $
92
and $
143
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
As of
September 30, 2017
, we had $
47,932
of unused borrowing capacity under the revolving credit facility which is net of an issued but undrawn letter of credit for $
6,000
, representing a security deposit on the corporate headquarters and operations facilities lease.
10. STOCK-BASED COMPENSATION
As of
September 30, 2017
, there was a total of
1,411,718
shares of common stock available for future grants under our stock purchase and equity award or incentive plans. The following table summarizes the stock-based compensation expense by financial statement line item, employees and non-employees and type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of revenue
|
|
$
|
29
|
|
|
$
|
44
|
|
|
$
|
108
|
|
|
$
|
124
|
|
Research and development
|
|
35
|
|
|
85
|
|
|
224
|
|
|
396
|
|
Sales and marketing
|
|
240
|
|
|
341
|
|
|
942
|
|
|
1,283
|
|
General and administrative
|
|
1,137
|
|
|
1,057
|
|
|
3,048
|
|
|
3,578
|
|
Total
|
|
$
|
1,441
|
|
|
$
|
1,527
|
|
|
$
|
4,322
|
|
|
$
|
5,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
|
$
|
684
|
|
|
$
|
819
|
|
|
$
|
2,157
|
|
|
$
|
2,135
|
|
Restricted stock
|
|
594
|
|
|
346
|
|
|
1,353
|
|
|
692
|
|
Restricted stock units (“RSUs”)
|
|
81
|
|
|
262
|
|
|
487
|
|
|
2,261
|
|
Employee Stock Purchase Plan
|
|
82
|
|
|
100
|
|
|
325
|
|
|
293
|
|
Total
|
|
$
|
1,441
|
|
|
$
|
1,527
|
|
|
$
|
4,322
|
|
|
$
|
5,381
|
|
The following table summarizes stock option plans activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(1)
|
Outstanding at December 31, 2016
(2)
|
|
3,685,125
|
|
|
$
|
12.45
|
|
|
6.05
|
|
$
|
29,142
|
|
Granted
|
|
407,823
|
|
|
22.73
|
|
|
|
|
|
Exercised
|
|
(824,165
|
)
|
|
10.23
|
|
|
|
|
|
Expired
|
|
(4,904
|
)
|
|
8.03
|
|
|
|
|
|
Forfeited
|
|
(66,302
|
)
|
|
18.02
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
3,197,577
|
|
|
$
|
14.23
|
|
|
6.12
|
|
$
|
23,677
|
|
Vested:
|
|
|
|
|
|
|
|
|
At September 30, 2017
|
|
2,334,856
|
|
|
$
|
12.29
|
|
|
5.09
|
|
$
|
20,244
|
|
Vested or expected to vest:
|
|
|
|
|
|
|
|
|
At September 30, 2017
(3)
|
|
3,123,585
|
|
|
$
|
14.30
|
|
|
6.17
|
|
$
|
22,890
|
|
(1) Calculated using the fair market value per-share of our common stock as of
September 30, 2017
and
December 31, 2016
of $
21.21
and $
20.04
, respectively.
(2) The total includes
980,671
performance-based options at
December 31, 2016
which had not vested based on their performance criteria.
(3) Outstanding options, net of expected forfeitures.
A summary of restricted stock and RSU activity during the
nine
months ended
September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average
Remaining
Term (years)
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average
Remaining
Term (years)
|
Non-vested at December 31, 2016
|
|
218,505
|
|
|
$
|
16.59
|
|
|
2.35
|
|
79,457
|
|
|
$
|
15.22
|
|
|
0.81
|
Vested
(1)
|
|
(80,384
|
)
|
|
17.39
|
|
|
|
|
(68,001
|
)
|
|
15.06
|
|
|
|
Granted
|
|
131,562
|
|
|
22.81
|
|
|
|
|
32,636
|
|
|
21.83
|
|
|
|
Forfeited
|
|
(3,999
|
)
|
|
14.38
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Non-vested at September 30, 2017
|
|
265,684
|
|
|
$
|
19.46
|
|
|
2.24
|
|
44,092
|
|
|
$
|
17.37
|
|
|
2.49
|
Vested:
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017
|
|
—
|
|
|
$
|
—
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
Vested or expected to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2017
|
|
265,684
|
|
|
$
|
19.46
|
|
|
2.24
|
|
44,092
|
|
|
$
|
17.37
|
|
|
2.49
|
(1) Vested shares include
7,354
shares of restricted stock returned to us in lieu of withholding taxes and are reflected as Treasury Stock.
11. COMMITMENTS AND CONTINGENCIES
Intellectual Property
In the normal course of business, we enter into agreements to obtain the rights to certain intellectual property. These agreements may require up-front payments, milestone payments and/or royalties, if applicable. Typically, we have certain rights to cancel these agreements, with notice, without additional payments due other than the amount due at the time of cancellation. As of
September 30, 2017
, the aggregate amount of these future payments, assuming achievement of applicable milestones and non-cancellation, as determinable was $
895
over a period not less than
five
years. Royalties ranging from
2%
to
10%
of net sales may be due on the sale of related products. Some of the agreements contain minimum annual royalty amounts.
As of
September 30, 2017
, we have purchased or licensed certain proprietary technology under which agreements could require us to make additional aggregate payments of up to $
15,565
should certain milestones be met, including milestones related to regulatory applications and approvals. In addition, milestone payments of $
500
, $
2,000
and $
4,000
are due upon the achievement of net sales of related products of $
10,000
, $
25,000
and $
50,000
, respectively.
Legal Contingencies
The medical device industry is characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices or other contingencies in the ordinary course of our business. We are not aware of any pending or threatened legal proceeding against us that are expected to have a material adverse effect on our business, operating results or financial condition. However, we are a party in multiple legal actions involving claimants seeking various remedies, including monetary damages, and none of the outcomes are certain or entirely within our control.
12. RELATED PARTIES
On January 30, 2017, pursuant to an underwritten public offering, Welsh, Carson, Anderson & Stowe XI, L.P., and certain of its affiliates completed the sale of an additional
4,000,000
shares of our common stock. We incurred transaction fees of approximately $
225
which are reflected as general and administrative expenses for the
nine
months ended
September 30, 2017
. We did not receive any proceeds from the sale of these shares.
13. INCOME TAXES
The provision for income taxes includes both domestic and foreign minimum income taxes and changes in the valuation allowance. For the three months ended
September 30,
2017
and
2016
, the income tax expense (benefit) was $
40
and $
(53)
, respectively, resulting in an effective tax rate of
(0.5)%
and
0.7%
, respectively. For the
nine
months ended
September 30, 2017
and
2016
, income tax expense was $
128
and $
21
, respectively, resulting in an effective tax rate of
(0.4)%
and
(0.1)%
, respectively. The effective tax rate differs from the statutory rate due to minimum income taxes, permanent differences and changes in valuation allowances.
14. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,465
|
)
|
|
$
|
(7,910
|
)
|
|
$
|
(28,397
|
)
|
|
$
|
(29,193
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares
outstanding
|
|
43,009,015
|
|
|
41,940,370
|
|
|
42,627,985
|
|
|
41,639,609
|
|
Basic and diluted loss per common share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
(0.70
|
)
|
The following outstanding securities, using the treasury stock method, were excluded from the above computations of net loss per share because their impact would be antidilutive due to the net losses during the
nine
months ended
September 30,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock options
|
|
3,197,577
|
|
|
3,741,779
|
|
|
3,197,577
|
|
|
3,741,779
|
|
Restricted stock
|
|
265,684
|
|
|
78,073
|
|
|
265,684
|
|
|
78,073
|
|
RSUs
|
|
44,092
|
|
|
218,505
|
|
|
44,092
|
|
|
218,505
|
|
As discussed in Note 9, in August 2016, we issued $
50,000
aggregate principal amount of Notes. The Notes may be settled, at our election, in cash, shares of our common stock or combination of cash and shares of our common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of Notes is excluded from the calculation of diluted loss per share because the net loss for the
three and nine
months ended
September 30,
2017
causes such securities to be antidilutive.
The potential dilutive effect of these securities is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Conversion of Notes
|
|
2,707,852
|
|
|
2,917,165
|
|
|
2,707,852
|
|
|
2,917,165
|
|
15. SEGMENT AND GEOGRAPHICAL CONCENTRATION
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We manage the business globally within
one
reporting segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Products are sold principally in the United States. International revenue represented
22.6%
and
23.5%
of total revenue for the
three and nine
months ended
September 30, 2017
; however, revenue earned in any individual foreign country was below
10%
of our consolidated revenue.
The following table represents total revenue by geographic area, based on the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
|
$
|
48,474
|
|
|
$
|
45,978
|
|
|
$
|
145,456
|
|
|
$
|
133,409
|
|
International
|
|
14,179
|
|
|
13,332
|
|
|
44,774
|
|
|
41,434
|
|
Total
|
|
$
|
62,653
|
|
|
$
|
59,310
|
|
|
$
|
190,230
|
|
|
$
|
174,843
|
|
We classify sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among the three product categories. These sales transactions are settled when we ship the product to the distributor.
The following table represents domestic revenue by current procedure category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Complex spine
|
|
$
|
20,047
|
|
|
$
|
19,516
|
|
|
$
|
57,525
|
|
|
$
|
53,981
|
|
Minimally invasive
|
|
7,694
|
|
|
6,767
|
|
|
24,351
|
|
|
20,653
|
|
Degenerative and other
|
|
20,733
|
|
|
19,695
|
|
|
63,580
|
|
|
58,775
|
|
|
|
48,474
|
|
|
45,978
|
|
|
145,456
|
|
|
133,409
|
|
International
|
|
14,179
|
|
|
13,332
|
|
|
44,774
|
|
|
41,434
|
|
Total
|
|
$
|
62,653
|
|
|
$
|
59,310
|
|
|
$
|
190,230
|
|
|
$
|
174,843
|
|
ITEM 2.