NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. Operations and Organization
The
Company is a leader in the use of natural tissues, metals and synthetics to produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. The Company
processes donated human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue, and bovine and porcine animal tissue in producing allograft and xenograft implants utilizing
proprietary BIOCLEANSE
®
, TUTOPLAST
®
and CANCELLE
®
SP sterilization processes,
and manufactures metal and synthetic implants for distribution to hospitals and surgeons. The Company processes tissue at two operating facilities in Alachua, Florida and one operating facility in Neunkirchen, Germany, and manufactures metal and
synthetic implants in Marquette, Michigan and Greenville, North Carolina. The Company distributes its implants and services in all 50 states and in over 40 countries worldwide.
2. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown.
The condensed consolidated financial statements have been prepared in accordance with the instructions to Form
10-Q
and Rule
10-01
of Regulation
S-X,
and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, comprehensive income (loss) and cash flows in conformity
with accounting principles generally accepted in the United States of America (GAAP). All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily
indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form
10-K
for the year ended December 31, 2016.
The condensed consolidated financial statements include the accounts of RTI Surgical, Inc. and
its wholly owned subsidiaries, Pioneer Surgical Technology, Inc. (Pioneer), Tutogen Medical, Inc. (TMI), RTI Surgical, Inc. Cardiovascular (inactive), Biological Recovery Group, Inc. (inactive) and RTI Services, Inc.
(inactive). The condensed consolidated financial statements also include the accounts of RTI Donor Services, Inc. (RTIDS), which is a controlled entity.
3. Recently Issued Accounting Standards
CompensationStock Compensation
In May 2017, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU)
2017-09,
CompensationStock Compensation
(Topic 718): Scope of Modification Accounting. The requirement provides guidance on determining
which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. For public business entities, this ASU should be effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2017. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.
Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets
In February 2017, the FASB issued ASU
2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic
610-20):
Clarifying the Scope of Asset Derecognition Guidance
and Accounting for Partial Sales of Nonfinancial Assets. This ASU requires all entities to derecognize a business or nonprofit activity in accordance with Topic 810, and also requires that all entities derecognize an equity method investment in
accordance with Topic 860. The amendments in this ASU eliminate the scope exceptions, and simplifies GAAP. This ASU is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting
period. Public entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of adopting
this new accounting guidance on its condensed consolidated financial statements.
Simplifying the Test for Goodwill
Impairment
In January 2017, the FASB issued ASU
No. 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic 350) (ASU
No. 2017-04).
The amendments in ASU
No. 2017-04
are intended to reduce the cost and complexity of the goodwill impairment test by eliminating Step 2 from
the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds
its fair value. Under the amendments in ASU
No. 2017-04,
an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount.
An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting
7
units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in ASU
No. 2017-04
are effective for the Companys annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU
No. 2017-04
on January 1, 2017, and it did not have a material impact on the Companys
results of operations, financial position and disclosures.
Compensation Stock Compensation
In March 2016, the
FASB issued ASU
No. 2016-09,
Compensation Stock Compensation
(Topic 718) (ASU
2016-09).
ASU
2016-09
identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.
ASU
2016-09
requires recognition through opening retained earnings of any
pre-adoption
date net operating loss carryforwards from
share-based
payments, as well as recognition of all income tax effects from share
based-payments
in income tax expense. In addition, under ASU
2016-09
excess tax benefits no longer represent financing activities, but instead represent operating
activities in the statement of cash flow. ASU
2016-09
allows companies to recognize excess tax benefits as an operating activity on a prospective or retrospective basis. The Company adopted ASU
2016-09
on January 1, 2017. The Company has decided to recognize this requirement on a prospective basis and has not adjusted prior periods. For the nine months ended September 30, 2017, there was no
material impact on the Companys condensed consolidated financial statements, apart from income tax expense of $451 recorded relating to tax deficiencies from share-based payment transactions.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU
No. 2015-11,
Inventory Simplifying the Measurement of Inventory
(Topic 330). Update
No. 2015-11
more closely aligns the measurement of
inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by requiring companies using the
first-in,
first-out
and average
costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated distribution prices of the inventory in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. Update
No. 2015-11
is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Update
No. 2015-11
should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company adopted ASU
2015-11
effective January 1, 2017. Adoption of ASU
2015-11
had no material impact on the Companys condensed consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU
2014-09),
which supersedes the revenue recognition requirements
in Accounting Standards Codification (ASC) Topic 605,
Revenue Recognition
. ASU
2014-09
is based on the principle that revenue is recognized to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU
2014-09
also requires additional disclosure about the
nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. As updated in
August 2015, the effective date of ASU
2014-09
will be annual reporting periods beginning after December 15, 2017, using one of two retrospective application methods.
In March and April 2016, the FASB issued two updates to the revenue recognition guidance: ASU
2016-08
Principal Versus Agent Considerations
(Topic 606) (Reporting Revenue Gross Versus Net), and ASU
2016-10,
Identifying Performance Obligations and Licensing
(Topic 606).
In May 2016, the FASB issued ASU Update
No. 2016-12
(ASU
2016-12)
which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition.
The Company has not determined the impact ASU
2014-09,
ASU
2016-08,
ASU
2016-10
and ASU
2016-12
will have on its condensed consolidated financial statements and footnote disclosures.
However, an implementation project team has been identified, and has developed a plan to adopt the ASUs and assess the impact on the Companys condensed consolidated financial statements and footnote disclosures. Currently, the Company has
analyzed its global revenue and categorized its revenue contracts based on distribution channel. Based on this analysis, the Company has identified revenue contracts that it will individually assess. The Company has begun assessing the selected
revenue contracts.
8
4. Cardiothoracic Closure Business Divestiture
The Company completed the sale of substantially all of the assets related to its Cardiothoracic closure business (the CT Business)
to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (A&E) pursuant to an Asset Purchase Agreement between the Company and A&E, dated August 3, 2017 (the Asset Purchase
Agreement). The total consideration received by the Company under the Asset Purchase Agreement was composed of $54,000 in cash consideration, $3,000 of which is being held in escrow for up to twelve months to satisfy possible indemnification
obligations, if any (the Escrow Amount), plus an additional $5,000 in contingent cash consideration if A&E reaches certain revenue milestones (the Contingent Consideration). The Company is also entitled to an additional
$1,000 in consideration if the Company successfully obtains a certain FDA regulatory clearance. As a part of the transaction, the Company also entered into a multi-year Contract Manufacturing Agreement with A&E (the Contract Manufacturing
Agreement). Under the Contract Manufacturing Agreement, the Company agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The
Company elected to account for the Contingent Consideration arrangement including the Escrow Amount, as a gain contingency in accordance with ASC 450 Contingencies. As such, the Contingent Consideration and Escrow Amount were excluded in measuring
the fair value of the consideration to be received in connection with the transaction.
The calculation of the gain on the CT Business
divestiture is as follows:
|
|
|
|
|
Proceeds from cardiothoracic closure business divestiture
|
|
$
|
51,000
|
|
Inventoriesnet
|
|
|
(2,893
|
)
|
Property, plant and equipmentnet
|
|
|
(1,299
|
)
|
Goodwill
|
|
|
(8,645
|
)
|
Other intangible assetsnet
|
|
|
(280
|
)
|
Cardiothoracic closure business divestiture expenses
|
|
|
(3,793
|
)
|
|
|
|
|
|
Gain on cardiothoracic closure business divestiture
|
|
$
|
34,090
|
|
|
|
|
|
|
5. Stock-Based Compensation
The Companys policy is to grant stock options at an exercise price equal to 100% of the market value of a share of common stock at
closing on the date of the grant. The Companys stock options generally have five to
ten-year
contractual terms and vest over a one to five-year period from the date of grant. The Companys policy is
to grant restricted stock awards at a fair value equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Companys restricted stock awards generally vest over one to three-year periods.
2015 Incentive Compensation Plan
On April 14, 2015, the Companys stockholders approved and adopted the 2015
Incentive Compensation Plan, (the 2015 Plan). The 2015 Plan provides for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company and consultants and
advisors. The 2015 Plan allows for up to 4,656,587 shares of common stock to be issued with respect to awards granted.
Stock Options
As of September 30, 2017, there was $3,532 of total unrecognized stock-based compensation related to nonvested stock options. The expense
related to these stock options is expected to be recognized over a weighted-average period of 2.25 years.
9
Stock options outstanding, exercisable and available for grant at September 30, 2017, are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
5,764,607
|
|
|
$
|
4.28
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,506,038
|
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(504,312
|
)
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(789,847
|
)
|
|
|
5.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
6,976,486
|
|
|
$
|
3.86
|
|
|
|
5.55
|
|
|
$
|
6,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
6,495,458
|
|
|
$
|
3.88
|
|
|
|
5.40
|
|
|
$
|
5,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
3,726,630
|
|
|
$
|
4.06
|
|
|
|
4.33
|
|
|
$
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at September 30, 2017
|
|
|
2,427,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the tables above represents the total
pre-tax
intrinsic value of stock options for which the fair market value of the underlying common stock exceeded the respective stock option exercise price.
Other information concerning stock options are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average fair value of stock options granted
|
|
$
|
1.54
|
|
|
$
|
1.55
|
|
Aggregate intrinsic value of stock options exercised
|
|
|
641
|
|
|
|
6
|
|
The aggregate intrinsic value of stock options exercised in a period represents the
pre-tax
cumulative difference, for the stock options exercised during the period, between the fair market value of the underlying common stock and the stock option exercise prices.
Restricted Stock Awards
During
the first quarter of 2017, the Company granted 187,500 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $3.15 per share and the Company granted 6,331 shares of time-based
restricted stock with a weighted-average grant date fair value of $3.70 per share which vest over a
one-year
period. During the second quarter of 2017, the Company granted 218,000 shares of time-based
restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $4.60 per share and the Company granted 148,356 shares of time-based restricted stock with a weighted-average grant date fair value of $4.55 per
share which vest over a
one-year
period. During the third quarter of 2017, the Company granted 50,000 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant
date fair value of $5.65 per share. As of September 30, 2017, there was $3,973 of total unrecognized stock-based compensation related to time-based and performance-based, nonvested restricted stock. The expense related to these restricted stock
awards is expected to be recognized on a straight-line basis over a weighted-average period of 3.30 years.
10
For the three and nine months ended September 30, 2017 and 2016, the Company recognized
stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of processing and distribution
|
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
78
|
|
|
$
|
99
|
|
Marketing, general and administrative
|
|
|
2,257
|
|
|
|
1,927
|
|
|
|
4,001
|
|
|
|
2,931
|
|
Research and development
|
|
|
15
|
|
|
|
15
|
|
|
|
34
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,305
|
|
|
$
|
1,975
|
|
|
$
|
4,113
|
|
|
$
|
3,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inducement Grant
On January 26, 2017 (the Grant Date), the Company issued an inducement grant to its President and Chief Executive Officer,
Mr. Camille Farhat. This grant was in the form of: (1) a restricted stock award agreement (the Restricted Stock Agreement #1); (2) another restricted stock award agreement (the Restricted Stock Agreement #2); and
(3) a stock option agreement (the Option Agreement).
Under the Restricted Stock Agreement #1, the Company granted
Mr. Farhat 850,000 shares of restricted common stock. On the first anniversary of the Grant Date, 170,000 shares will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 42,500 shares per calendar quarter
commencing after the first anniversary of the Grant Date and continuing for four years after. Vesting of these shares may accelerate upon the occurrence of either of two performance conditions.
Under the Restricted Stock Agreement #2, the Company granted Mr. Farhat 150,000 shares of restricted common stock. These 150,000
restricted shares will become fully vested on the latest date (the Purchase Date) on which the fair market value of the cumulative amount of shares that Mr. Farhat purchases on the open market equals $500,000, so long as the
Purchase Date is on or before March 15, 2018. After vesting, the shares will be
non-transferable
for a period of one year following the Purchase Date. During the second quarter of 2017, Mr. Farhat
purchased $572,313 worth of the Companys shares on the open market. Accordingly, the 150,000 restricted shares of common stock granted to Mr. Farhat pursuant to the Restricted Stock Award #2 became fully vested, effective May 18,
2017.
Under the Option Agreement, the Company granted Mr. Farhat the option to purchase 1,950,000 shares of common stock (the
Stock Options). The exercise price for the Stock Options is $3.20. The Stock Options will expire on January 26, 2022. The Stock Options will vest based on the Companys attainment of three average stock price benchmarks. The
first 650,000 shares will vest if the Companys average publicly traded stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Companys average publicly traded stock price is over
$7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Companys average publicly traded stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the Stock Options is
cumulative.
6. Net Income Per Common Share
A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic shares
|
|
|
59,704,533
|
|
|
|
58,353,110
|
|
|
|
59,045,372
|
|
|
|
58,173,580
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
1,244,082
|
|
|
|
|
|
|
|
909,592
|
|
|
|
|
|
Preferred stock Series A
|
|
|
14,239,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
75,188,161
|
|
|
|
58,353,110
|
|
|
|
59,954,964
|
|
|
|
58,173,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017 and 2016, approximately 1,418,182 and 4,854,771,
respectively, and for the nine months ended September 30, 2017 and 2016, approximately 1,474,461 and 4,787,572, respectively, of issued stock options were not included in the computation of diluted net income per common share because they were
anti-dilutive because
11
their exercise price exceeded the market price. For the three months ended September 30, 2016, options to purchase 278,766 and for the nine months ended September 30, 2016, options to
purchase 306,527 of common stock were not included in the computation of diluted loss per share because dilutive shares are not factored into this calculation when a net loss is reported.
For the three months ended September 30, 2017, 50,000 shares of convertible preferred stock or 14,239,546 of converted common stock and
accrued but unpaid dividends were dilutive on an as
if-converted
basis and were included in the computation of diluted net income per common share.
7. Inventories
Inventories by stage of
completion are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Unprocessed tissue, raw materials and supplies
|
|
$
|
23,026
|
|
|
$
|
31,745
|
|
Tissue and work in process
|
|
|
42,014
|
|
|
|
38,552
|
|
Implantable tissue and finished goods
|
|
|
49,528
|
|
|
|
49,446
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,568
|
|
|
$
|
119,743
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017 and 2016, the Company had inventory write-downs of $735 and
$2,052, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had inventory write-downs of $4,488 and $4,422, respectively, relating primarily to product obsolescence.
8. Property, Plant and Equipment
Property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
2,374
|
|
|
$
|
2,324
|
|
Buildings and improvements
|
|
|
57,350
|
|
|
|
59,187
|
|
Processing equipment
|
|
|
41,906
|
|
|
|
38,387
|
|
Surgical instruments
|
|
|
20,602
|
|
|
|
18,394
|
|
Office equipment, furniture and fixtures
|
|
|
1,561
|
|
|
|
1,701
|
|
Computer equipment and software
|
|
|
18,836
|
|
|
|
11,852
|
|
Construction in process
|
|
|
11,677
|
|
|
|
17,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,306
|
|
|
|
149,399
|
|
Less accumulated depreciation
|
|
|
(71,512
|
)
|
|
|
(66,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,794
|
|
|
$
|
83,298
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017 and 2016, the Company had depreciation expense in
connection with property, plant and equipment of $2,623 and $3,459, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $7,947 and
$10,295, respectively.
Owned property previously used for administrative, distribution and marketing functions with a cost basis of
$1,750, to be disposed of, as of September 30, 2017, as a result of improving operational efficiencies were included in Assets held for sale on the Condensed Consolidated Balance Sheet as of September 30, 2017, are not included
in the table above. On July 21, 2017, the Company entered into a sale agreement with a third party for the owned property. The transaction closed on October 20, 2017 for $1,818 net of selling costs.
12
9. Goodwill
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Balance at January 1
|
|
$
|
54,887
|
|
|
$
|
54,887
|
|
Goodwill disposed of related to sale of CT business
|
|
|
8,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,242
|
|
|
$
|
54,887
|
|
|
|
|
|
|
|
|
|
|
10. Other Intangible Assets
Other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Patents
|
|
$
|
11,938
|
|
|
$
|
4,811
|
|
|
$
|
11,559
|
|
|
$
|
4,159
|
|
Acquired licensing rights
|
|
|
14,497
|
|
|
|
8,841
|
|
|
|
12,204
|
|
|
|
8,302
|
|
Marketing and procurement intangible assets
|
|
|
20,181
|
|
|
|
9,158
|
|
|
|
20,694
|
|
|
|
8,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,616
|
|
|
$
|
22,810
|
|
|
$
|
44,457
|
|
|
$
|
20,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and procurement intangible assets include the following: procurement contracts, trademarks, selling
and marketing relationships, customer lists and
non-compete
agreements.
For the three months
ended September 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $952 and $934, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had amortization expense of other
intangible assets of $2,757 and $2,792, respectively. At September 30, 2017, managements estimates of future amortization expense for the next five years are as follows:
|
|
|
|
|
|
|
Amortization
Expense
|
|
2017
|
|
$
|
925
|
|
2018
|
|
|
3,800
|
|
2019
|
|
|
3,800
|
|
2020
|
|
|
3,700
|
|
2021
|
|
|
3,700
|
|
2022
|
|
|
3,500
|
|
|
|
|
|
|
|
|
$
|
19,425
|
|
|
|
|
|
|
11. Accrued Expenses
Accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accrued compensation
|
|
$
|
5,689
|
|
|
$
|
4,904
|
|
Accrued severance charges
|
|
|
3,634
|
|
|
|
410
|
|
Accrued restructuring charges
|
|
|
|
|
|
|
95
|
|
Accrued CEO retirement and transition costs
|
|
|
822
|
|
|
|
2,406
|
|
Accrued distributor commissions
|
|
|
3,364
|
|
|
|
4,422
|
|
Accrued donor recovery fees
|
|
|
2,499
|
|
|
|
6,350
|
|
Other
|
|
|
4,474
|
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,482
|
|
|
$
|
22,030
|
|
|
|
|
|
|
|
|
|
|
The Company accrues for the estimated donor recovery fees due to third party recovery agencies as tissue is
received.
13
12. Short and Long-Term Obligations
Short and long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Term loan
|
|
$
|
24,911
|
|
|
$
|
50,347
|
|
Credit facility
|
|
|
25,000
|
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
49,911
|
|
|
|
83,347
|
|
Less current portion
|
|
|
(4,268
|
)
|
|
|
(6,080
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
45,643
|
|
|
$
|
77,267
|
|
|
|
|
|
|
|
|
|
|
The Company entered into a Third Amended and Restated Loan Agreement, dated as of August 3, 2017 (the
2017 Loan Agreement), among the Company, TD Bank, N.A. and First Tennessee Bank National Association, as Lenders (together with the various financial institutions as in the future may become parties thereto, the Lenders), and
TD Bank, N.A., as administrative agent for the Lenders. The 2017 Loan Agreement represents a modification of the Second Amended and Restated Loan Agreement dated July 16, 2013 between the Company, TD Bank, N.A. and Regions Bank (as amended, the
2013 Loan Agreement).
The 2017 Loan Agreement provides for a revolving credit facility (the Revolving Credit
Facility), in the aggregate principal amount of $42,500 which is unchanged from the final Amendment to the 2013 Loan Agreement. The Company used $22,000 of the proceeds from the sale of the CT Business to partially pay down amounts owed under
the 2013 Loan Agreement, and $10,000 to pay down amounts owed under the Revolving Credit Facility. Subsequent to the pay down, the outstanding principal balance on the 2013 Loan Agreement Term Loan amounted to $25,375 which became the principal
amount of the 2017 Loan Agreement (the Term Loan Facility and, together with the Revolving Credit Facility the Facility). The Facility is secured by substantially all the assets of the Company and its domestic subsidiaries
and is guaranteed by the Companys domestic subsidiaries, as well as 65% of the stock of the Companys foreign subsidiaries.
Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to
3.50%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1,125, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019, which represents an
extension from the 2013 Loan Agreement maturity date of July 16, 2018. The Company may make optional prepayments on the Facility without penalty at the end of any LIBOR interest period.
At September 30, 2017, the interest rate for the Term Loan and Revolving Credit Facility is 4.74%. As of September 30, 2017, there
was $25,000 outstanding on the revolving credit facility. The term loan facility requires aggregate principal payments of $7,875 from September 30, 2017 through June 30, 2019, with a final balloon principal payment of $17,500 on
September 15, 2019. The credit agreement also contains various restrictive covenants which limit, among other things, indebtedness and liens, as well as payment of dividends, while requiring a minimum cash balance on hand of $10,000 and certain
financial covenant ratios.
The total available credit on the Companys revolving credit facility at September 30, 2017 was
$17,500. The Companys ability to access its revolving credit facility is subject to and can be limited by the Companys compliance with the Companys financial and other covenants. The Company was in compliance with the financial
covenants related to its revolving credit facility as of September 30, 2017.
For the three months ended September 30, 2017 and
2016, interest expense associated with the amortization of debt issuance costs was $88 and $46, respectively, and for the nine months ended September 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs
was $350 and $85, respectively.
14
As of September 30, 2017, contractual maturities of long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
|
Credit Facility
|
|
|
Total
|
|
2017
|
|
$
|
1,068
|
|
|
$
|
|
|
|
$
|
1,068
|
|
2018
|
|
|
4,272
|
|
|
|
|
|
|
|
4,272
|
|
2019
|
|
|
19,571
|
|
|
|
25,000
|
|
|
|
44,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,911
|
|
|
$
|
25,000
|
|
|
$
|
49,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Income Taxes
The Company expects its deferred tax assets of $18,543, net of the valuation allowance at September 30, 2017 of $6,501, to be realized
through the generation of future taxable income and the reversal of existing taxable temporary differences.
The Company evaluates the
need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided
for in the tax law for each applicable tax jurisdiction. It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company
utilizes a rolling three years of actual results as the primary measure of cumulative losses in recent years.
On a rolling three years,
the Companys consolidated U.S. operations are in a cumulative income position. However, one U.S. entity (Entity) is in a three year cumulative loss position. Future taxable income exclusive of reversing temporary differences and
carryforwards is one source of taxable income available that can be used to realize tax benefits. During 2017, the Company has undertaken various cost reduction activities to reduce complexity and increase operational excellence within the
organization. The Entity anticipates generating significant cost savings from the various cost reduction activities. After adjusting the Entitys cumulative losses to include the projected costs savings, the Entitys operations project
future profits sufficient to utilize the Entitys separate state deferred tax assets before expiration. The Company considers this objectively verifiable evidence that all its U.S. deferred tax assets are more likely than not realizable.
The Companys German and French operations are in three year cumulative loss positions. As a result, the Company has recorded a full
valuation allowance on its German and French subsidiaries deferred tax assets.
As such, valuation allowances of $6,501 and $4,916
have been established at September 30, 2017 and December 31, 2016, respectively, against a portion of the deferred tax assets.
The Company will continue to regularly assess the realizability of our deferred tax assets. Changes in historical earnings performance and
future earnings projections, among other factors, may cause the Company to adjust its valuation allowance, which would impact the Companys income tax expense in the period the Company determines that these factors have changed.
The Companys 2015 U.S. federal income tax return is under examination by the Internal Revenue Service (IRS). Currently,
there are no proposed adjustments by the IRS.
14. Preferred Stock
On June 12, 2013, the Company and WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, a leading
healthcare-focused private equity firm (Water Street), entered into an investment agreement. Pursuant to the terms of the investment agreement, the Company issued $50,000 of convertible preferred equity to Water Street in a private
placement which closed on July 16, 2013, with preferred stock issuance costs of $1,290. The preferred stock accrues dividends at a rate of 6% per annum. To the extent dividends are not paid in cash in any quarter, the dividends which have
accrued on each outstanding share of preferred stock during such three-month period will accumulate until paid in cash or converted to common stock. Our credit agreement with TD Bank and First Tennessee Bank contains various covenants of financial
conditions which, if not met, would restrict the Company from paying dividends.
15
Preferred stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
Liquidation Value
|
|
|
Preferred Stock
Issuance Costs
|
|
|
Net
Total
|
|
Balance at January 1, 2017
|
|
$
|
60,676
|
|
|
$
|
(660
|
)
|
|
$
|
60,016
|
|
Accrued dividend payable
|
|
|
2,772
|
|
|
|
|
|
|
|
2,772
|
|
Amortization of preferred stock issuance costs
|
|
|
|
|
|
|
137
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
63,448
|
|
|
$
|
(523
|
)
|
|
$
|
62,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Severance Charges
The Company recorded severance charges to reduce headcount and improve operational efficiencies, which resulted in $2,820 and $10,623 of
expenses for the three and nine months ended September 30, 2017, respectively. The total severance charges are expected to be paid in full by the fourth quarter of 2018. Severance payments are made to terminated employees over periods ranging
from one month to twelve months and are not expected to have a material impact on cash flows of the Company in any quarterly period. The following table includes a rollforward of severance charges included in accrued expenses, see Note 11.
|
|
|
|
|
Accrued severance charges at January 1, 2017
|
|
$
|
410
|
|
Employee separation expenses accrued in 2017
|
|
|
10,623
|
|
|
|
|
|
|
Subtotal severance charges
|
|
|
11,033
|
|
Severance cash payments
|
|
|
(6,246
|
)
|
Stock based compensation
|
|
|
(1,153
|
)
|
|
|
|
|
|
Accrued severance charges at September 30, 2017
|
|
$
|
3,634
|
|
|
|
|
|
|
16. CEO Retirement and Transition Costs
In the third quarter of 2016, the Company recorded Chief Executive Officer retirement and transition costs related to the retirement of our
former Chief Executive Officer pursuant to the Executive Transition Agreement dated August 29, 2012 (as amended and extended to date), which resulted in $4,404 of expenses for the year ended December 31, 2016. The total Chief Executive
Officer retirement and transition costs are expected to be paid in full prior to the first quarter of 2019. The following table includes a rollforward of CEO retirement and transition costs included in accrued expenses, see Note 11.
|
|
|
|
|
Accrued CEO retirement and transition costs at January 1, 2017
|
|
$
|
2,406
|
|
Cash payments
|
|
|
(1,001
|
)
|
Other long-term liabilities portion
|
|
|
(583
|
)
|
|
|
|
|
|
Accrued CEO retirement and transition costs at September 30, 2017
|
|
$
|
822
|
|
|
|
|
|
|
17. Legal Actions
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business.
The Company believes that none of these claims that were outstanding as of September 30, 2017, will have a material adverse impact on its financial position or results of operations.
Coloplast
The Company is presently named as
co-defendant
along with other
companies in a small percentage of the transvaginal surgical mesh (TSM) mass tort claims being brought in various state and federal courts. The TSM litigation has as its catalyst various Public Health Notifications issued by the U.S.
Food and Drug Administration (FDA) with respect to the placement of certain TSM implants that were the subject of 510k regulatory clearance prior to their distribution. The Company does not process or otherwise manufacture for
distribution in the U.S. any implants that were the subject of these FDA Public Health Notifications. The Company denies any allegations against it and intends to continue to vigorously defend itself.
In addition to claims made directly against the Company, Coloplast, a distributor of TSMs and certain allografts processed and private
labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts. Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege
injuries caused by the Companys allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast
entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the Company Parties)
16
resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future
claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (Tissue Only Claims), and (2) tissue plus
non-Coloplast
synthetic mesh
(Tissue-Non-Coloplast
Claims) (the Tissue Only Claims and the
Tissue-Non-Coloplast
Claims being collectively referred to as Indemnified Claims). As of September 30, 2017, there are a cumulative total of 1,257
Indemnified Claims for which the Company Parties are providing defense and indemnification. The defense and indemnification of these cases are covered under the Companys insurance policy subject to a reservation of rights by the insurer.
Based on the current information available to the Company, it is not possible to evaluate and estimate with reasonable certainty the impact
that current or any future TSM litigation may have on the Company.
The Companys accounting policy is to accrue for legal costs as
they are incurred.
18. Regulatory Actions
On September 30, 2014, the Company received a letter from the FDA regarding our
map3
®
cellular allogeneic bone graft. The letter addresses some technical aspects of the processing of the map3
®
allograft, as well as
language included on the Companys website. The Company has ongoing dialogue with the FDA where comprehensive packages of data have been provided to address the FDAs comments and clarifying information has been provided regarding the
technical components of the implant processing. The Company believes that in both the developing and processing of map3
®
, the Company has properly considered the relevant regulatory
requirements. Additionally, the Company has removed certain information from the Companys website. The Company is committed to resolving the concerns raised by the FDA. However, it is not possible to predict the specific outcome or timing of a
resolution at this time.
19. Segment Data
The Company distributes human tissue, bovine and porcine animal tissue, metal and synthetic implants through various distribution channels. The
Company operates in one reportable segment composed of six lines of business. The reporting of the Companys lines of business is composed primarily of six categories: spine; sports medicine and orthopedics; surgical specialties;
cardiothoracic; international; and global commercial. Discrete financial information is not available for these six lines of business. The following table presents revenues from these six categories and other revenues for the three and nine months
ended September 30, 2017 and 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(In Thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
18,131
|
|
|
$
|
17,775
|
|
|
$
|
57,888
|
|
|
$
|
52,514
|
|
Sports medicine and orthopedics
|
|
|
11,286
|
|
|
|
11,874
|
|
|
|
37,179
|
|
|
|
36,956
|
|
Surgical specialties
|
|
|
1,437
|
|
|
|
1,168
|
|
|
|
4,673
|
|
|
|
2,985
|
|
Cardiothoracic
|
|
|
1,340
|
|
|
|
2,893
|
|
|
|
8,164
|
|
|
|
8,332
|
|
International
|
|
|
5,077
|
|
|
|
4,352
|
|
|
|
16,739
|
|
|
|
15,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal direct
|
|
|
37,271
|
|
|
|
38,062
|
|
|
|
124,643
|
|
|
|
116,319
|
|
Global commercial
|
|
|
26,807
|
|
|
|
25,297
|
|
|
|
76,225
|
|
|
|
75,396
|
|
Other revenues
|
|
|
2,610
|
|
|
|
3,188
|
|
|
|
7,879
|
|
|
|
9,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
66,688
|
|
|
$
|
66,547
|
|
|
$
|
208,747
|
|
|
$
|
201,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenues
|
|
|
60,973
|
|
|
|
60,959
|
|
|
|
189,808
|
|
|
|
183,192
|
|
International revenues
|
|
|
5,715
|
|
|
|
5,588
|
|
|
|
18,939
|
|
|
|
18,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
66,688
|
|
|
$
|
66,547
|
|
|
$
|
208,747
|
|
|
$
|
201,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
The following table presents percentage of total revenues derived from the Companys largest
distributors and international distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Percent of revenues derived from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zimmer Biomet Holdings, Inc.
|
|
|
15
|
%
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
Medtronic, PLC
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
International
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
The following table presents property, plant and equipmentnet by significant geographic location:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Property, plant and equipmentnet:
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
76,516
|
|
|
$
|
77,596
|
|
International
|
|
|
6,278
|
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,794
|
|
|
$
|
83,298
|
|
|
|
|
|
|
|
|
|
|
20. Subsequent Events
The Company evaluated subsequent events as of the issuance date of the condensed consolidated financial statements as defined by FASB ASC 855
Subsequent Events, and identified no subsequent events that require adjustment to, or disclosure of, in these condensed consolidated financial statements, except for:
1. Effective October 2, 2017, the Company appointed Jonathon Singer, a previous member of the Companys board of directors, as Chief
Financial and Administrative Officer. On September 18, 2017, the Company entered into an employment agreement, restricted stock award agreement and stock option agreement with Mr. Singer in which the Company agreed to an inducement payment
award and equity. The aforementioned agreements are filed as exhibits with this quarterly report.
2. On
October 20, 2017, the Company sold an owned property previously used for administrative, distribution and marketing functions for $1,818 net of selling costs.
18