SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
|
1.
|
Operations and Organization
|
Surgalign Holdings Inc. and Subsidiaries. (formerly known as RTI Surgical Holdings, Inc. and Subsidiaries (“RTI”) (“Surgalign” or the “Company”) is a global medical technology company advancing the science of spine care, focused on delivering innovative solutions that drive superior clinical and economic outcomes. The company is building off a legacy of high quality and differentiated products, and continues to invest in clinically validated innovation to deliver better surgical outcomes and improve patient’s lives. Surgalign markets products throughout the United States and in more than 50 countries worldwide through an expanding network of top independent distributors. Surgalign, a member of AdvaMed (“Advanced Medical Technology Association”) , is headquartered in Deerfield, Illinois, and as of the date of filing of this Form 10-Q, has commercial, innovation and design centers in San Diego, California, and Wurmlingen, Germany.
On July 20, 2020, RTI completed the disposition of the original equipment manufacturer (“OEM”) business, refere to subsequent event for further discussion in FN 25, and was renamed to Surgalign Holdings, Inc. References in this Form 10-Q to Surgalign or the Company refer to the Company as of June 30, 2020, prior to the disposition of the OEM business, unless otherwise noted or obvious from the context. “Legacy RTI” refers to the Company prior to the acquisition of Paradigm Spine on March 8, 2019. In conjunction with the sale of the OEM business the Company repaid and terminated all outstanding debt held on the books as of June 30, 2020.
COVID-19
The coronavirus (COVID-19) pandemic, as well as the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the economy continues to evolve and the full extent of the impact is uncertain as of the date of this filing. The outbreak has already brought a significant disruption to the operations of the Company.
Many hospitals and other medical facilities have canceled elective surgeries, reduced and diverted staffing and diverted other resources to patients suffering from the infectious disease and limited hospital access for non-patients, including our direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products would be used, and many facilities that specialize in the procedures in which our products would be used have closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees and distributors to effectively market and sell our products. In addition, even after the pandemic has subsided and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to coronavirus or for other reasons.
The COVID-19 pandemic has also caused adverse effects on general commercial activity and the global economy, which has led to an economic slowdown or recession, and which has adversely affected our business, operating results or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using our products, and could cause one or more of our distributors, customers, and suppliers to experience financial distress, cancel, postpone or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business. This could impact our ability to provide products and otherwise operate our business, as well as increase our costs and expenses.
The COVID-19 pandemic has also led to and could continue to lead to severe disruption and volatility in the global capital markets, which could increase our cost of future capital and adversely affect our ability to access the capital markets in the future.
The above and other continued disruptions to our business as a result of COVID-19 has resulted in a material adverse effect on our business, operating results and financial condition. The full extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.
In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, beginning April 6, 2020, the Company furloughed or reduced the hours of over 500 of its U.S.-based employees. While many of those employees have returned to work, the Company cannot predict when it will be able to fully resume normal operations and will continue to carefully monitor the situation and the needs of the business. In addition, most current employees have taken base salary reductions until business conditions improve.
5
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 condensed consolidated financial position, results of operations, comprehensive 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2019. As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, certain June 30, 2019 balances have been restated. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, advisor fee expenses, within the Transaction and integration expense line on the condensed consolidated comprehensive loss.
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Surgalign, Inc., Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Tutogen Medical, Inc. (“TMI”), and Zyga Technology, Inc. (“Zyga”). Prior to the completion of the acquisition of Paradigm, the financial statements were that of RTI Surgical, Inc. and subsidiaries (“Legacy RTI”). Subsequent to the acquisition of Paradigm, Surgalign Holdings, Inc. and Subsidiaries is the successor reporting company.
Significant Accounting Policies
Derivative Instruments – The Company reviews debt agreements for embedded features. If these features are not clearly and closely related to the debt host, they meet the definition of a derivative and require bifurcation from the host contract. All derivative instruments, including embedded derivatives are recorded on the balance sheet at their respective fair values. The Company will adjust the carrying value of the derivative liability to fair value at each subsequent reporting date. The changes in the fair value of the derivatives are recorded in the period they occur.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of June 30, 2020, we had cash of $2.2 million, a working capital deficiency of $101.7 million and an accumulated deficit of $507.6 million. We had a loss from operations of $41.1 million and a net loss of $56.4 million for the six months ended June 30, 2020. We have suffered losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019. Management is projecting that it will continue to generate losses from operations into the future.
As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time.
On July 20, 2020, RTI completed the disposition of its OEM business. Upon the close of the transaction, the Company fully repaid all of its outstanding indebtedness, including its revolving line of credit with JP Morgan Chase Bank and both its term loan and incremental term loan commitment with Ares Capital Corporation. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock. Management believes that after payment of taxes related to the transaction that it will have approximately $53 million of available cash.
As discussed in Note 24, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing. The Company continues to cooperate with the SEC in relation to its investigation. Additionally, as disclosed in Note 23, there is currently ongoing shareholder litigation. Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.
Although there is uncertainty relate to the matters noted above, based on current information available, management believes it will have sufficient cash and liquidity, such that it is not probable the Company will be unable to meet its obligations during the next year.
6
|
3.
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Recently Issued Accounting Standards
|
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) and other interbank offered rates. This guidance is effective beginning on March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 and it did not have an impact on its condensed consolidated financial statements.
In May 2019, the FASB issued ASU No. 2019-05 Financial Instruments — Credit Losses (Topic 326) which provides relief to certain entities adopting ASU 2016-13 (discussed below). The amendments accomplish those objectives by providing entities with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic 326-20, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. ASU 2019-05 has the same transition as ASU 2016-13 and is effective for periods beginning after December 15, 2019, with adoption permitted after this update. The Company adopted ASU 2019-05 and it did not have an impact on the condensed consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which provides updates and clarifications to three previously-issued ASUs: 2016-01 Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, described further above and which the Company has not yet adopted; and 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which the Company early adopted effective January 1, 2018. The updates related to ASU 2016-13 have the same transition as ASU 2016-13 and are effective for periods beginning after December 15, 2019, with adoption permitted after the issuance of ASU 2019-04. The updates related to ASU 2017-12 are effective for the Company on January 1, 2020. The updates related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-12 and it did not have an impact on the condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models previously used under U.S. generally accepted accounting principles, which generally require that a loss be incurred before it is recognized. The new standard also applies to financial assets arising from revenue transactions such as contract assets and accounts receivables. On January 1, 2020, the Company adopted ASU 2016-13. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.
Credit losses for trade receivables is determined based on historical information, current information and reasonable and supportable forecasts. The Company has concluded that the adoption of the standard was not material as the composition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages. Further, the risk characteristics of the Company’s customer and composition of the portfolio have not changed significantly over time.
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for the Company beginning after December 31, 2019. Certain disclosures in ASU 2018-13 are required to be applied on a retrospective basis and others on a prospective basis. The Company adopted ASU 2018-13 and it did not have an impact on the condensed consolidated financial statements.
7
The Company’s leases are classified as operating leases and includes office space, automobiles, and copiers. The Company does not have any finance leases and the Company’s operating leases do not have any residual value guarantees, restrictions or covenants. The Company does not have any leases that have not yet commenced as of June 30, 2020. The Company’s leases have remaining lease terms of 1 to 9 years, some of which include options to extend or terminate the leases. The option to extend is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease ROU assets are presented within other assets-net on the condensed consolidated balance sheet. The current portion of operating lease liabilities are presented within accrued expenses, and the non-current portion of operating lease liabilities are presented within other long-term liabilities on the condensed consolidated balance sheet.
A subset of the Company’s automobile and copier leases contain variable payments. The variable lease payments for such automobile leases are based on actual mileage incurred at the standard contractual rate. The variable lease payments for such copier leases are based on actual copies incurred at the standard contractual rate. The variable lease costs for all leases are immaterial.
The components of operating lease expense were as follows:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Operating lease cost
|
|
$
|
362
|
|
|
$
|
440
|
|
|
$
|
738
|
|
|
$
|
784
|
|
|
Short-term operating lease cost
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
|
|
36
|
|
|
Total operating lease cost
|
|
$
|
362
|
|
|
$
|
440
|
|
|
$
|
738
|
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to operating leases was as follows:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
374
|
|
|
$
|
397
|
|
|
$
|
733
|
|
|
$
|
691
|
|
|
ROU assets obtained in exchange for lease obligations
|
|
|
—
|
|
|
|
-
|
|
|
|
—
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
Balance at
|
|
|
Balance at
|
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
Other assets - net
|
|
$
|
1,883
|
|
|
$
|
2,155
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
Accrued expenses
|
|
$
|
1,001
|
|
|
$
|
1,159
|
|
|
Noncurrent
|
|
Other long-term liabilities
|
|
|
1,440
|
|
|
|
1,547
|
|
|
Total operating lease liabilities
|
|
|
|
$
|
2,441
|
|
|
$
|
2,706
|
|
As of June 30, 2020, the weighted-average remaining lease term was 4.7 years. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value. The weighted-average discount rate of the Company’s operating leases was 4.8%, as of June 30, 2020.
8
As of June 30, 2020, maturities of operating lease liabilities were as follows:
|
|
|
Balance at
|
|
|
Maturity of Operating Lease Liabilities
|
|
June 30, 2020
|
|
|
2020 (remaining)
|
|
$
|
666
|
|
|
2021
|
|
|
778
|
|
|
2022
|
|
|
298
|
|
|
2023
|
|
|
160
|
|
|
2024
|
|
|
159
|
|
|
2025 and beyond
|
|
|
716
|
|
|
Total future minimum lease payments
|
|
|
2,777
|
|
|
Less imputed interest
|
|
|
(336
|
)
|
|
Total
|
|
$
|
2,441
|
|
The Company has determined its operating segments in accordance with FASB issued Accounting Standards Codification (“ASC 280”) - Segment Reporting. Prior to the consummation of the Transaction, the overall strategy of the Company is to manage our business in two operating segments, Global Spine (“Spine”) and Global OEM (“OEM”). The Spine segment focuses on sales, distribution and conducting research and development activities focused on the global spine market and the OEM segment focuses on the design, development and manufacturing of biologics and hardware medical technology. The value drivers of the Spine segment include growth through innovation and acquisition while the value drivers of the OEM segment focus on predetermined and relatively predictable execution. The Company is now organized into two distinct groupings, Spine and OEM, which are also our operating and reportable segments. As the adoption of the new structure was done in the fourth quarter of 2019, the comparative periods for the three and six months ended June 30, 2019 has been restated to conform to the new segment presentation.
The Spine and OEM reportable segments reflect the way the Company was managed prior to the Transaction, and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s Chief Executive Officer is the CODM.
9
The segment revenues and segment net income (loss) for the three and six months ended June 30, 2020 and 2019 are included in the table below. All revenues are earned from external customers. The Company does not disclose total assets by Spine and OEM as the CODM does not receive or review with regularity assets on a Spine or OEM basis. Additionally, the Company does not disclose long-lived assets by geographic location as no country outside of the United States holds 10 percent or more of our consolidated Property, Plant and Equipment.
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
20,519
|
|
|
$
|
32,747
|
|
|
$
|
47,628
|
|
|
$
|
57,124
|
|
|
OEM
|
|
|
33,706
|
|
|
|
48,807
|
|
|
|
80,323
|
|
|
|
94,451
|
|
|
Total
|
|
$
|
54,225
|
|
|
$
|
81,554
|
|
|
$
|
127,951
|
|
|
$
|
151,575
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
194
|
|
|
$
|
2,979
|
|
|
$
|
285
|
|
|
$
|
5,379
|
|
|
OEM
|
|
|
2,254
|
|
|
|
2,929
|
|
|
|
4,402
|
|
|
|
4,929
|
|
|
Total
|
|
$
|
2,448
|
|
|
$
|
5,908
|
|
|
$
|
4,687
|
|
|
$
|
10,308
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine
|
|
$
|
(5,265
|
)
|
|
$
|
(6,296
|
)
|
|
$
|
(15,673
|
)
|
|
$
|
(10,790
|
)
|
|
OEM
|
|
|
(4,729
|
)
|
|
|
7,444
|
|
|
|
2,633
|
|
|
|
13,373
|
|
|
Unallocated corporate costs
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Asset impairment and abandonments
|
|
|
882
|
|
|
|
-
|
|
|
|
2,761
|
|
|
|
15
|
|
|
Gain on acquisition contingency
|
|
|
(130
|
)
|
|
|
(1,590
|
)
|
|
|
(130
|
)
|
|
|
(1,590
|
)
|
|
Restatement and related costs
|
|
|
7,818
|
|
|
|
-
|
|
|
|
11,254
|
|
|
|
-
|
|
|
Transaction and integration expenses
|
|
|
4,923
|
|
|
|
1,953
|
|
|
|
14,203
|
|
|
|
10,910
|
|
|
Total unallocated corporate costs
|
|
|
13,493
|
|
|
|
363
|
|
|
|
28,088
|
|
|
|
9,335
|
|
|
Operating (loss) income
|
|
$
|
(23,487
|
)
|
|
$
|
785
|
|
|
$
|
(41,128
|
)
|
|
$
|
(6,752
|
)
|
|
Interest expense
|
|
|
(5,972
|
)
|
|
|
(3,635
|
)
|
|
|
(9,537
|
)
|
|
|
(5,239
|
)
|
|
Interest income
|
|
|
21
|
|
|
|
26
|
|
|
|
71
|
|
|
|
157
|
|
|
Derivative loss
|
|
|
(12,641
|
)
|
|
|
-
|
|
|
|
(12,641
|
)
|
|
|
-
|
|
|
Foreign exchange loss
|
|
|
217
|
|
|
|
(19
|
)
|
|
|
(29
|
)
|
|
|
(50
|
)
|
|
Loss before income tax benefit (expense)
|
|
$
|
(41,862
|
)
|
|
$
|
(2,843
|
)
|
|
$
|
(63,264
|
)
|
|
$
|
(11,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents revenues by geographic location:
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
North America
|
|
$
|
49,077
|
|
|
$
|
72,426
|
|
|
$
|
115,890
|
|
|
$
|
135,480
|
|
|
EMEA
|
|
|
4,118
|
|
|
|
7,414
|
|
|
|
9,853
|
|
|
|
12,997
|
|
|
Asia Pacific
|
|
|
880
|
|
|
|
866
|
|
|
|
1,799
|
|
|
|
1,348
|
|
|
Latin America
|
|
|
150
|
|
|
|
848
|
|
|
|
409
|
|
|
|
1,750
|
|
|
Total revenues
|
|
$
|
54,225
|
|
|
$
|
81,554
|
|
|
$
|
127,951
|
|
|
$
|
151,575
|
|
10
The following table presents percentage of total revenues derived from the Company’s largest distributors all of which are OEM customers:
|
|
|
For the Three Month Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Percent of revenues derived from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zimmer Biomet Holdings, Inc.
|
|
|
15
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
19
|
%
|
|
Medtronic, PLC
|
|
|
6
|
%
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
|
DePuy Synthes
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
Certain corporate costs have been allocated solely to the Spine reportable segment, including certain executive compensation costs and certain corporate costs including board of directors fees and board of directors stock-based compensation, public company expenses, legal fees, corporate compliance and communications costs, and business development expenses. These costs were not allocated to the OEM reportable segment because the basis for the changes to the internal organization of the Company was in contemplation of the pending sale of the OEM business, and these costs are expected to remain with the Spine reportable segment. Such presentation appropriately reflects that manner in which the CODM evaluates the ongoing performance and allocates resources of the Company.
|
6.
|
Revenue from Contracts with Customers
|
The Company is organized into two business lines, which are also our operating and reportable segments: Spine and OEM. The following table presents revenues from these two segments for the three and six months ended June 30, 2020 and 2019:
|
|
For the Three Month Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spine Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
16,951
|
|
|
$
|
26,351
|
|
|
$
|
39,228
|
|
|
$
|
46,570
|
|
|
International
|
|
3,567
|
|
|
|
6,396
|
|
|
|
8,400
|
|
|
|
10,554
|
|
|
OEM Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM
|
|
18,765
|
|
|
|
32,120
|
|
|
|
46,084
|
|
|
|
61,119
|
|
|
Sports
|
|
13,248
|
|
|
|
13,955
|
|
|
|
30,350
|
|
|
|
27,791
|
|
|
International
|
|
1,694
|
|
|
|
2,732
|
|
|
|
3,889
|
|
|
|
5,541
|
|
|
Total revenues from contracts with customers
|
$
|
54,225
|
|
|
$
|
81,554
|
|
|
$
|
127,951
|
|
|
$
|
151,575
|
|
The following table presents revenues recognized at a point in time and over time for the three and six months ended June 30, 2020 and 2019:
|
|
For the Three Month Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenue recognized at a point in time
|
$
|
41,463
|
|
|
$
|
64,412
|
|
|
$
|
96,572
|
|
|
$
|
118,509
|
|
|
Revenue recognized over time
|
|
12,762
|
|
|
|
17,142
|
|
|
|
31,379
|
|
|
|
33,066
|
|
|
Total revenues from contracts with customers
|
$
|
54,225
|
|
|
$
|
81,554
|
|
|
$
|
127,951
|
|
|
$
|
151,575
|
|
The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. Some of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Such warranties do not represent a separate performance obligation and are not material to the condensed consolidated financial statements.
11
The opening and closing balances of the Company’s accounts receivable, contract asset and current and long-term contract liability for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
Contract
|
|
|
Liability
|
|
|
|
Accounts
|
|
|
Liability
|
|
|
(Long-
|
|
|
|
Receivable
|
|
|
(Current)
|
|
|
Term)
|
|
|
Opening Balance, January 1, 2020
|
$
|
59,288
|
|
|
$
|
3,378
|
|
|
$
|
-
|
|
|
Closing Balance, June 30, 2020
|
|
46,865
|
|
|
|
3,721
|
|
|
|
-
|
|
|
Increase/(decrease)
|
|
(12,423
|
)
|
|
|
343
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
Contract
|
|
|
Liability
|
|
|
|
Accounts
|
|
|
Liability
|
|
|
(Long-
|
|
|
|
Receivable
|
|
|
(Current)
|
|
|
Term)
|
|
|
Opening Balance, January 1, 2019
|
$
|
48,096
|
|
|
$
|
5,425
|
|
|
$
|
744
|
|
|
Closing Balance, June 30, 2019
|
|
55,540
|
|
|
|
5,537
|
|
|
|
325
|
|
|
Increase/(decrease)
|
|
7,444
|
|
|
|
112
|
|
|
|
(419
|
)
|
As of June 30, 2020 and December 31, 2019, $6,060 and $10,633 of unbilled receivables in connection with our exclusively built inventory contracts are included in accounts receivable.
|
7.
|
Acquisition of Paradigm Spine, LLC
|
On March 8, 2019, pursuant to the Master Transaction Agreement (the “Master Transaction Agreement”), dated as of November 1, 2018, by and among Legacy RTI, PS Spine Holdco, LLC, a Delaware limited liability company (“PS Spine”), the Company, and Bears Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Merger Sub”), the Company acquired all of the outstanding equity interests of Paradigm, through a transaction in which: (i) PS Spine contributed all of the issued and outstanding equity interests in Paradigm to the Company (the “Contribution”); (ii) Merger Sub merged with and into Legacy RTI (the “Merger”), with Legacy RTI surviving as a wholly owned direct subsidiary of the Company; and (iii) the Company was renamed “RTI Surgical Holdings, Inc.” (collectively, the “Paradigm Transaction”). Legacy RTI retained its existing name “RTI Surgical, Inc.”
Pursuant to the Master Transaction Agreement: (i) each share of common stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one fully paid and non-assessable share of Company common stock , par value $0.001 per share; (ii) each share of Series A convertible preferred stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one fully paid and non-assessable share of Series A convertible preferred stock, par value $0.001 per share, of the Company; and (iii) each stock option and restricted stock award granted by Legacy RTI was converted into a stock option or restricted stock award, as applicable, of the Company with respect to an equivalent number of shares of the Company common stock on the same terms and conditions as were applicable prior to the closing.
The consideration for the Contribution was $100,000 (the “Cash Consideration Amount”) in cash and 10,729,614 shares of Company common stock (the “Stock Consideration Amount”). The Cash Consideration Amount was adjusted lower by Paradigm’s working capital of $7,000.
In addition to the Cash Consideration Amount and the Stock Consideration Amount, the Company may be required to make further cash payments or issue additional shares of Company common stock to PS Spine in an amount up to $50,000 of shares of Company common stock to be valued based upon the Legacy RTI Price and an additional $100,000 of cash and/or Company common stock to be valued at the time of issuance, in each case, if certain revenue targets are achieved between closing, March 8, 2019, and December 31, 2022. The Company originally estimated the fair value of the contingent liability related to the revenue-based earnout of $72,177 utilizing a Monte-Carlo simulation model as of March 8, 2019. A Monte-Carlo simulation is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes. Accounted for as a liability to be revalued at each reporting period, the fair value of the contingent liability was measured using Level 3 inputs, which includes weighted average cost of capital and projected revenues and costs. Acquisition and integration related costs, specific to Paradigm, were approximately $15,537, (which includes business development expenses of $462 and severance expense of $896).
12
The Company has accounted for the acquisition of Paradigm under FASB (“ASC”) 805, Business Combinations. Paradigm’s results of operations are included in the condensed consolidated financial statements beginning after March 8, 2019, the acquisition date.
The purchase price was financed as follows:
|
|
|
(In thousands)
|
|
|
Cash proceeds from second lien credit agreement
|
|
$
|
100,000
|
|
|
Fair market value of securities issued
|
|
|
60,730
|
|
|
Fair market value of contingent earnout
|
|
|
72,177
|
|
|
Total purchase price
|
|
$
|
232,907
|
|
In the first quarter of 2019, the Company completed its valuations and purchase price allocations. The table below represents the final allocation of the total purchase price to Paradigm’s tangible and intangible assets and liabilities fair values as of March 8, 2019.
|
|
|
Balance at
|
|
|
|
|
March 8, 2019
|
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
307
|
|
|
Accounts receivable
|
|
|
5,220
|
|
|
Inventories
|
|
|
17,647
|
|
|
Other current assets
|
|
|
934
|
|
|
Property, plant and equipment
|
|
|
379
|
|
|
Other non-current assets
|
|
|
1,079
|
|
|
Current liabilities
|
|
|
(6,169
|
)
|
|
Lease liabilities
|
|
|
(1,079
|
)
|
|
Net tangible assets acquired
|
|
|
18,318
|
|
|
Other intangible assets
|
|
|
79,000
|
|
|
Goodwill
|
|
|
135,589
|
|
|
Total net assets acquired
|
|
$
|
232,907
|
|
As of March 8, 2019, the inventory fair value was composed of current inventory of $7,122 and non-current inventory of $10,525.
Total net assets acquired as of March 8, 2019, were all part of the Company’s only operating segment at that time. Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.
The Company believes that the acquisition of Paradigm, a spine focused business, offers the potential for substantial strategic and financial benefits. The transaction further advances the Company’s strategic transformation focused on reducing complexity, driving operational excellence and accelerating growth. The Company believes the acquisition will enhance stockholder value through, among other things, enabling the Company to capitalize on the following strategic advantages and opportunities:
|
|
•
|
Paradigm will strengthen the Company’s spine portfolio with the addition of the coflex® Interlaminar Stabilization® device. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression.
|
|
|
•
|
Coflex allows the Company to provide surgeons who treat patients with moderate to severe LSS with a PMA-approved device supported by more than 12 years of clinical data.
|
These potential benefits resulted in the Company paying a premium for Paradigm resulting in the recognition of $135,589 of goodwill assigned to the Company’s only operating segment and reporting unit at the time of the Paradigm acquisition.
13
The following unaudited pro forma information shows the results of the Paradigm’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2019, (in thousands):
|
|
For the Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
Revenues
|
$
|
18,900
|
|
|
Net loss applicable to common shares
|
|
(14,397
|
)
|
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the periods presented, or the results that may occur in the future.
|
8.
|
Stock-Based Compensation
|
The Company’s policy is to generally 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 Company’s 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 Company’s general 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 Company’s restricted stock awards generally vest over one to three-year periods.
2018 Incentive Compensation Plan – On April 30, 2018, the Company’s stockholders approved and adopted the 2018 Incentive Compensation Plan (the “2018 Plan”). The 2018 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 2018 Plan allows for up to 5,726,035 shares of common stock to be issued with respect to awards granted.
Stock Options
As of June 30, 2020, there was $2,252 of total unrecognized stock-based compensation related to unvested stock options. The expense related to these stock options is expected to be recognized over a weighted-average period of 3.34 years.
The following tables summarizes information about stock options outstanding, exercisable and available for grant as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2020
|
|
4,536,461
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
755,866
|
|
|
|
4.21
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(5,000
|
)
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(599,630
|
)
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
4,687,697
|
|
|
$
|
3.75
|
|
|
|
4.77
|
|
|
$
|
229
|
|
|
Vested or expected to vest at June 30, 2020
|
|
4,369,996
|
|
|
$
|
3.73
|
|
|
|
4.45
|
|
|
$
|
192
|
|
|
Exercisable at June 30, 2020
|
|
1,135,490
|
|
|
$
|
3.63
|
|
|
|
3.03
|
|
|
$
|
25
|
|
|
Available for grant at June 30, 2020
|
|
2,738,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table 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. Estimated forfeitures are based on the Company’s historical forfeiture activity. Compensation expense recognized for all option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods.
14
Other information concerning stock options are as follows:
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
Weighted average fair value of stock options granted
|
$
|
3.00
|
|
|
$
|
1.99
|
|
|
Aggregate intrinsic value of stock options exercised
|
|
3
|
|
|
|
161
|
|
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
As of June 30, 2020, there was $3,857 of total unrecognized stock-based compensation related to unvested restricted stock awards. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1.62 years. The following table summarizes information about unvested restricted stock awards as of June 30, 2020:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2020
|
|
1,227,858
|
|
|
$
|
4.34
|
|
|
Granted
|
|
944,289
|
|
|
|
4.19
|
|
|
Vested
|
|
(429,667
|
)
|
|
|
4.63
|
|
|
Forfeited
|
|
(193,686
|
)
|
|
|
4.41
|
|
|
Unvested at June 30, 2020
|
|
1,548,794
|
|
|
$
|
4.16
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
As of June 30, 2020, there was $583 of total unrecognized stock-based compensation related to unvested restricted stock units. That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1.5 years. The following table summarizes information about unvested restricted stock units as of June 30, 2020:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2020
|
|
184,582
|
|
|
$
|
7.41
|
|
|
Granted
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
(9,144
|
)
|
|
|
7.41
|
|
|
Unvested at June 30, 2020
|
|
175,438
|
|
|
$
|
7.41
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2020 and 2019, the Company recognized stock-based compensation as follows:
|
|
For the Three Month Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of processing and distribution
|
$
|
36
|
|
|
$
|
36
|
|
|
$
|
72
|
|
|
$
|
72
|
|
|
Marketing, general and administrative
|
|
983
|
|
|
|
1,216
|
|
|
|
2,242
|
|
|
|
2,328
|
|
|
Research and development
|
|
15
|
|
|
|
15
|
|
|
|
30
|
|
|
|
30
|
|
|
Total
|
$
|
1,034
|
|
|
$
|
1,267
|
|
|
$
|
2,344
|
|
|
$
|
2,430
|
|
15
|
9.
|
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 Month Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Basic shares
|
|
|
75,814,668
|
|
|
|
75,144,488
|
|
|
|
75,995,324
|
|
|
|
70,409,839
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
823,707
|
|
|
|
—
|
|
|
|
—
|
|
|
Preferred stock Series A
|
|
|
—
|
|
|
|
15,152,761
|
|
|
|
—
|
|
|
|
—
|
|
|
Diluted shares
|
|
|
75,814,668
|
|
|
|
91,120,956
|
|
|
|
75,995,324
|
|
|
|
70,409,839
|
|
For the three months ended June 30, 2020 approximately 4,819,238 and for the six months ended June 30, 2020 and 2019, approximately 4,838,639 and 1,429,442, respectively, of issued stock options were not included in the computation of diluted net loss per common share because they were anti-dilutive because their exercise price exceeded the market price. For the three months ended June 30, 2019, options to purchase 823,707 shares of common stock were included in the computation of diluted loss per share because dilutive shares are factored into this calculation when net income is reported.
For the three months ended June 30, 2020 and six months ended June 30, 2020 and 2019, 50,000 shares of convertible preferred stock or 15,152,761of converted common stock and accrued but unpaid dividends were anti-dilutive on an as if-converted basis and were not included in the computation of diluted net loss per common share. For the three months ended June 30, 2019, 50,000 shares of convertible preferred stock or 15,152,761of 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.
Inventories by stage of completion are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Unprocessed tissue, raw materials and supplies
|
$
|
29,252
|
|
|
$
|
29,552
|
|
|
Tissue and work in process
|
|
35,989
|
|
|
|
35,740
|
|
|
Implantable tissue and finished goods
|
|
62,549
|
|
|
|
65,494
|
|
|
Total
|
|
127,790
|
|
|
|
130,786
|
|
|
Less current portion
|
|
122,596
|
|
|
|
124,149
|
|
|
Long-term portion
|
$
|
5,194
|
|
|
$
|
6,637
|
|
For the three months ended June 30, 2020 and 2019, the Company had inventory write-downs of $1,430 and $1,744, respectively, and for the six months ended June 30, 2020 and 2019 the Company had inventory write-downs of $1,947 and $3,274, respectively relating primarily to product obsolescence. As of June 30, 2020, the long-term portion of inventory relates to finished goods.
|
11.
|
Prepaid and Other Current Assets
|
Prepaid and Other Current Assets are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Income tax receivable
|
$
|
3,963
|
|
|
$
|
2,803
|
|
|
Prepaid expenses
|
|
4,642
|
|
|
|
1,865
|
|
|
Other
|
|
888
|
|
|
|
2,101
|
|
|
|
$
|
9,493
|
|
|
$
|
6,769
|
|
16
|
12.
|
Property, Plant and Equipment
|
Property, plant and equipment are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Land
|
$
|
2,092
|
|
|
$
|
2,005
|
|
|
Buildings and improvements
|
|
57,236
|
|
|
|
58,208
|
|
|
Processing equipment
|
|
46,304
|
|
|
|
45,762
|
|
|
Surgical instruments
|
|
848
|
|
|
|
541
|
|
|
Office equipment, furniture and fixtures
|
|
2,265
|
|
|
|
1,730
|
|
|
Computer equipment and software
|
|
20,820
|
|
|
|
20,521
|
|
|
Construction in process
|
|
14,749
|
|
|
|
11,717
|
|
|
|
|
144,314
|
|
|
|
140,484
|
|
|
Less accumulated depreciation
|
|
(74,183
|
)
|
|
|
(70,594
|
)
|
|
|
$
|
70,131
|
|
|
$
|
69,890
|
|
For the three months ended June 30, 2020 and 2019, the Company had depreciation expense in connection with property, plant and equipment of $1,880 and $2,800, respectively and for the six months ended months ended June 30, 2020 and 2019, the Company had depreciation expense in connection with property, plant and equipment of $3,646 and $5,539, respectively. For the three and six months ended June 30, 2020, the Company recorded asset impairment and abandonment charges of $882 and $2,761, respectively related to property, plant and equipment in the Spine segment. The Spine asset group could not support the newly capitalized carrying amount of the property, plant and equipment, because the Spine asset group has projected negative cash flows over the useful life of the long-lived assets in the asset group. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.
The change in the carrying amount of goodwill for the six months ended June 30, 2020, is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Balance at January 1
|
$
|
55,384
|
|
|
$
|
59,798
|
|
|
Goodwill acquired related to Paradigm acquisition
|
|
—
|
|
|
|
135,589
|
|
|
Goodwill impairment
|
|
—
|
|
|
|
(140,003
|
)
|
|
Balance at end of period
|
$
|
55,384
|
|
|
$
|
55,384
|
|
On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232,907 and recorded goodwill of approximately $135,589. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit. For the impairment test performed in 2019, it was concluded the fair value of goodwill is substantially in excess of our carrying value. For the Spine reporting unit test for the year ended December 31, 2019, it was concluded the carrying value was in excess of the fair value of goodwill and we recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140,003.
|
14.
|
Other Intangible Assets
|
Other intangible assets are as follows:
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Patents
|
|
$
|
5,128
|
|
|
$
|
2,983
|
|
|
$
|
2,145
|
|
|
$
|
5,095
|
|
|
$
|
2,768
|
|
|
$
|
2,327
|
|
|
Acquired licensing rights
|
|
|
2,522
|
|
|
|
157
|
|
|
|
2,365
|
|
|
|
1,413
|
|
|
|
64
|
|
|
|
1,349
|
|
|
Marketing and procurement and other intangible assets
|
|
|
16,509
|
|
|
|
10,405
|
|
|
|
6,104
|
|
|
|
16,488
|
|
|
|
9,672
|
|
|
|
6,816
|
|
|
Total
|
|
$
|
24,159
|
|
|
$
|
13,545
|
|
|
$
|
10,614
|
|
|
$
|
22,996
|
|
|
$
|
12,504
|
|
|
$
|
10,492
|
|
17
For the three months ended June 30, 2020 and 2019, the Company had amortization expense of other intangible assets of $568 and $995, respectively and for the six months ended June 30, 2020 and 2019, the Company had amortization expense of other intangible assets of $1,041 and $1,952, respectively.
At June 30, 2020, management’s estimates of future amortization expense for the next five years are as follows:
|
|
|
Amortization
|
|
|
|
|
Expense
|
|
|
2020 (remaining)
|
|
|
1,150
|
|
|
2021
|
|
|
2,300
|
|
|
2022
|
|
|
2,300
|
|
|
2023
|
|
|
700
|
|
|
2024
|
|
|
700
|
|
|
2025
|
|
|
700
|
|
|
15.
|
Fair Value Information
|
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Embedded derivatives identified within the Ares incremental term loan entered into, assessed and adjusted to their estimated fair value during the second quarter of 2020. Fair value is measured as of the debt issuance date using Level 3 inputs. For the issuance, the derivative level 3 fair value was measured based on a probability-weighted discounted cash flow approach. Unobservable inputs included the probability of a shareholder approval (unobservable), a recovery scenario should shareholder approval not occur (unobservable), and an estimated discount rate based on market data of comparable debt (observable).
Long-lived assets, including property and equipment subject to amortization were impaired and written down to their estimated fair values during the first quarter of 2020. Fair value is measured as of the impairment date using Level 3 inputs. For the 2020 impairments, the long-lived asset level 3 fair value was measured base on orderly liquidation value for the Property, plant and equipment. Unobservable inputs for the orderly liquidation value included replacement costs (unobservable), physical deterioration estimates (unobservable) and market sales data for comparable assets and unobservable inputs for the income approach included forecasted cash flows generated from use of the intangible assets (unobservable).
The following table summarizes impairments of long-lived assets and the related post impairment fair values of the corresponding assets for the three and six months ended June 30, 2020.
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
Property, plant and equipment - net
|
|
|
882
|
|
|
|
803
|
|
|
|
2,761
|
|
|
|
803
|
|
|
|
|
$
|
882
|
|
|
$
|
803
|
|
|
$
|
2,761
|
|
|
$
|
803
|
|
18
Accrued expenses are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Accrued compensation
|
|
$
|
5,283
|
|
|
$
|
5,435
|
|
|
Accrued severance and restructuring costs
|
|
|
604
|
|
|
|
136
|
|
|
Accrued distributor commissions
|
|
|
4,274
|
|
|
|
4,569
|
|
|
Accrued donor recovery fees
|
|
|
4,191
|
|
|
|
8,921
|
|
|
Accrued leases
|
|
|
1,001
|
|
|
|
1,159
|
|
|
Accrued transactions and integration expenses
|
|
|
4,934
|
|
|
|
2,555
|
|
|
Other
|
|
|
9,633
|
|
|
|
10,562
|
|
|
|
|
$
|
29,920
|
|
|
$
|
33,337
|
|
|
17.
|
Short and Long-Term Obligations
|
Short and long-term obligations are as follows:
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Ares Term loan
|
|
$
|
127,710
|
|
|
$
|
104,406
|
|
|
JPM Facility
|
|
|
64,096
|
|
|
|
71,000
|
|
|
Derivative Liability
|
|
|
23,020
|
|
|
|
-
|
|
|
Less unamortized debt issuance costs
|
|
|
(2,686
|
)
|
|
|
(1,229
|
)
|
|
Total
|
|
|
212,140
|
|
|
|
174,177
|
|
|
Less current portion
|
|
|
212,140
|
|
|
|
174,177
|
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On June 5, 2018, the Company, along with its wholly-owned subsidiary, Pioneer Surgical, entered into that certain Credit Agreement (the “2018 Credit Agreement”), as borrowers, with JPMorgan Chase Bank, N.A. (“JPM”), as lender (together with the various financial institutions as in the future may become parties thereto, the “JPM Lenders”) and as administrative agent for the JPM Lenders. The 2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100,000 (the “JPM Facility”) (subsequently reduced to $75,000, and later increased to $80,000, in each case, as described below). The Company and Pioneer Surgical will be able to, at their option, request an increase to the JPM Facility in an amount not to exceed $50,000, subject to customary conditions and the approval of JPM and the JPM Lenders providing such increased amount.
The JPM Facility is guaranteed by the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of the Company and Pioneer Surgical; (ii) substantially all of the assets of each of the Company’s domestic subsidiaries; and (iii) 65% of the stock of the Company’s foreign subsidiaries.
The Company may elect to apply either the CBFR or Eurodollar rate to any borrowing. The CBFR loans will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate plus the Adjusted LIBO Rate. The Company may elect to convert the interest rate for the Eurodollars Loans to a rate per annum equal to the adjusted LIBOR Rate plus the JPM Eurodollar Rate. The applicable margin was subject to adjustment after the end of each fiscal quarter, based upon the Company’s average quarterly availability (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The maturity date of the JPM Facility is June 5, 2023 (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The Company may make optional prepayments on the JPM Facility without penalty. The Company paid certain customary closing costs and bank fees upon entering into the 2018 Credit Agreement.
19
The Company is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting the Company’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. The Company is required to maintain a minimum fixed charge coverage ratio of at least 1.00:1.00 (the “JPM Required Minimum Fixed Charge Coverage Ratio”) on each JPM Calculation Date (as defined below) during either of the following periods (each, a “JPM Covenant Testing Period”): (i) a period beginning on a date that a default has occurred and is continuing under the loan documents entered into by the Company in conjunction with the 2018 Credit Agreement through the first date on which no default has occurred and is continuing; or (ii) a period beginning on a date that availability under the JPM Facility is less than the specified covenant testing threshold and continuing until availability under the JPM Facility is greater than or equal to the specified covenant testing threshold for thirty (30) consecutive days. The JPM Required Minimum Fixed Charge Coverage Ratio is measured on the last day of each calendar month during the JPM Covenant Testing Period (each a “JPM Calculation Date”), and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each JPM Calculation Date. The amounts owed under the 2018 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.
First Amendment to Credit Agreement and Joinder Agreement
On March 8, 2019, the Company entered into a First Amendment to Credit Agreement and Joinder Agreement dated as of March 8, 2019 (the “2019 First Amendment”), among the Company, Legacy RTI, as a borrower, Pioneer Surgical, as a borrower, the other loan parties thereto as guarantors, JP Morgan Chase Bank, N.A., as lender (together with the various financial institutions as in the future may become parties thereto) and as administrative agent for the JPM Lenders. The 2019 First Amendment amended the 2018 Credit Agreement by: (i) reducing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $100,000 to $75,000; (ii) joining the Company and Paradigm, and its domestic subsidiaries as guarantors as loan parties to the 2018 Credit Agreement; (iii) permitting the Ares Term Loan (as defined below); and (iv) making certain other changes to the 2018 Credit Agreement consistent with the foregoing including pro rata reductions to certain thresholds that were based on the aggregate commitments under the 2018 Credit Agreement.
Second Amendment to Credit Agreement
The Company entered into a Second Amendment to Credit Agreement dated as of December 9, 2019 (the “2019 Second Amendment”). The 2019 Second Amendment amended the 2018 Credit Agreement by increasing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $75,000 to $80,000.
Third Amendment to Credit Agreement and Joinder Agreement
On April 9, 2020, Legacy RTI entered into a Consent and Third Amendment to Credit Agreement and Joinder Agreement (the “Third Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties and the JPM Lenders. The Third Amendment to the 2018 Credit Agreement amended the 2018 Credit Agreement by: (i) extending the deadline for delivery of certain annual audited financial statements of the Company from March 30, 2020 to April 30, 2020, (ii) modifying certain interest rates contained therein to contain a 1.00% floor, (iii) requiring the Company and each other Loan Party to close all of its deposit accounts and securities accounts at Wells Fargo Bank, N.A. or any affiliates thereof on or before June 19, 2020, and (iv) making certain other changes to the 2018 Credit Agreement consistent with the foregoing.
Fourth Amendment to Credit Agreement and Joinder Agreement
On April 27, 2020, Legacy RTI entered into a Fourth Amendment to Credit Agreement (the “Fourth Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties, JPM and the JPM Lenders. The Fourth Amendment to the 2018 Credit Agreement amends the 2018 Agreement to: (i) provide for a $8,000 block on availability under the 2018 Credit Agreement until the earlier of: (a) the date upon which at least $25,000 of the Second Amendment Incremental Term Loan Commitments (as defined below) have been funded to Legacy RTI in accordance with the 2019 Credit Agreement and evidence of such funding, in form and substance satisfactory to JPM, shall have been received by JPM.; and (b) the date upon which (1) no default or event of default exists under the 2018 Credit Agreement; and (2) Ares notifies Legacy RTI that, for any reason, Second Amendment Incremental Term Loan Commitments have been terminated in accordance with the terms of the 2019 Credit Agreement and evidence of such termination, in form and substance satisfactory to JPMorgan Chase Bank, N.A., shall have been delivered to JPM; (ii) amend the applicable rate with respect to any loan to 2.75% per annum; and (iii) amend the maturity date to the earlier to occur of: (a) June 5, 2023, or any earlier date on which the commitments are reduced to zero or otherwise terminated pursuant to the terms of the 2018 Credit Agreement; and (b) the date that is 30 days prior to the maturity date of the Second Amendment Incremental Term Loan Commitments (as defined below), as the same may be extended from time to time pursuant to the terms of the 2019 Credit Agreement and such extension is agreed to by the JPM Lenders.
At June 30, 2020, the interest rate applicable to CBFR loans and Eurodollars under the JPM Facility was 3.75%. As of June 30, 2020, there was $64,096 outstanding on the JPM Facility and total remaining available credit on the JPM Facility was $7,404. The Company’s ability to access the JPM Facility is subject to and can be limited by the Company’s compliance with the Company’s financial and other covenants.
20
Second Lien Credit Agreement and Term Loan
On March 8, 2019, Legacy RTI entered into a Second Lien Credit Agreement dated as of March 8, 2019 (the “2019 Credit Agreement”), among Legacy RTI, as a borrower, the other loan parties thereto as guarantors (together with Legacy RTI, the “Ares Loan Parties”), Ares Capital Corporation (“Ares”), as lender (together with the various financial institutions as in the future may become parties thereto, the “Ares Lenders”) and as administrative agent for the Ares Lenders. The 2019 Credit Agreement provides for a term loan in the principal amount of up to $100,000 (the “Ares Term Loan”) (subsequently increased to $130,000 as described below). The Ares Term Loan was advanced in a single borrowing on March 8, 2019 (other than any increase thereto as described below).
The Ares Term Loan is guaranteed by the Company and each of the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of Legacy RTI; (ii) substantially all of the assets of the Company; (iii) substantially all of the assets of the Company’s domestic subsidiaries; and (iv) 65% of the stock of the Company’s foreign subsidiaries.
First Amendment to Second Lien Credit Agreement
On March 3, 2020, the Company entered into a First Amendment to Second Lien Credit Agreement, dated March 3, 2020 (the “2020 First Amendment”), by and among the Ares Loan Parties and the Ares Lenders. The 2020 First Amendment amended the 2019 Credit Agreement: (a) amending the definition of “EBITDA” contained therein; (b) modifying the Leverage Ratio covenant contained therein; and (c) making certain other changes to the 2019 Credit Agreement consistent with the foregoing. These amendments will allow the Company to, among other things, support the investment being made to separate the OEM and Spine businesses in anticipation of the sale of the Company’s OEM business.
Second Amendment to Second Lien Credit Agreement
On April 27, 2020, the Company entered into a Second Amendment to Second Lien Credit Agreement (the “Second Amendment to the 2019 Credit Agreement”), by and among the Ares Loan Parties and the Ares Lenders. The Second Amendment to the 2019 Credit Agreement amended the 2019 Credit Agreement to: (i) establish an incremental term loan commitment; (ii) provide for certain incremental term loans in an aggregate principal amount not to exceed $30,000 (the “Second Amendment Incremental Loan Commitments”); (iii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13,500 be available on a delayed-draw basis at any time after the effective date of the Ares Amendment and on or prior to August 31, 2020, subject to certain conditions; iv) increase the Base Rate applicable margin with respect to all Term Loans (other than the Second Amendment Incremental Term Loans) to 12.5% effective on September 1, 2020; and (v)make certain other changes to the 2019 Credit Agreement consistent with the foregoing. Pursuant to the terms of the Second Amendment to the 2019 Credit Agreement, Legacy RTI agreed pay to Ares, for the ratable benefit of each incremental term lender, a fee in an amount equal to 5.0% of the principal amount of the incremental term loan commitments provided by such lender on the effective date of the Ares Amendment. The maturity of the loans advanced under the Second Amendment Incremental Term Commitments (the “Second Amendment Incremental Term Loans”) have a maturity date of April 27, 2021. The Second Amendment Incremental Term Loans must be repaid in their entirety, at which time a takeout fee ranging from $11,250 to $25,500 shall be due and payable (the “Takeout Fee”). The Takeout Fee is inclusive of all interest accruing due and payable with respect to the Second Amendment Incremental Term Loans. The interest rate on the Second Amendment Incremental Term Loans is 12.50% and, commencing on September 1, 2020 and on the first day of each of the next four calendar months thereafter, the interest in respect of the Second Amendment Incremental Term Loans shall increase on each such date, on a cumulative basis, by an additional 1.00% per annum (such that, after the fifth such increase, the Base Rate with respect to the Second Amendment Incremental Term Loans shall equal 17.50% per annum).
The Ares Term Loan will bear interest at a rate per annum equal to, at the option of Legacy RTI: (i) the monthly Base Rate plus an adjustable margin of up to 7.50% (the “Base Rate”); or (ii) the LIBOR plus an adjustable margin of up to 8.50% (the “Ares Eurodollar Rate”) (as the Base Rate and the Ares Eurodollar Rate were subsequently modified as described below). Subject to customary notices, Legacy RTI may elect to convert the Ares Term Loan from Base Rate to Ares Eurodollar Rate or from Ares Eurodollar Rate to Base Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon the Ares Loan Parties’ Leverage Ratio (as subsequently modified as described below). At any time during the period commencing on March 8, 2019 and ending on March 8, 2021, if the Ares Loan Parties’ Leverage Ratio is greater than 4.50:1.00, Legacy RTI shall have the option (the “PIK Option”) to elect to pay 50% of the interest that will accrue in the subsequent quarterly period in kind by capitalizing it and adding such amount to the principal balance of the Ares Term Loan. If Legacy RTI exercises the PIK Option, the adjustable margin applicable to the Ares Term Loan shall be increased by 0.75%.
The maturity date of the Ares Term Loan is December 5, 2023. Legacy RTI may make optional prepayments on the Ares Term Loan, provided that any such optional prepayments made on or prior to March 8, 2022, shall be subject to a make whole premium or a prepayment price, as the case may be. Legacy RTI is required to make mandatory prepayments of the Ares Term Loan based on excess cash flow and the Ares Loan Parties’ Leverage Ratio, upon the incurrence of certain indebtedness not otherwise permitted under the 2019 Credit Agreement, upon consummation of certain dispositions, and upon the receipt of certain proceeds of casualty events. Legacy RTI was required to pay certain customary closing costs and bank fees upon entering into the 2019 Credit Agreement.
21
Legacy RTI is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting Legacy RTI’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. During any JPM Covenant Testing Period Legacy RTI is required to maintain a minimum fixed charge coverage ratio of at least 0.91:1.00 (the “Ares Required Minimum Fixed Charge Coverage Ratio”). The Ares Required Minimum Fixed Charge Coverage Ratio is measured on each JPM Calculation Date, and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each JPM Calculation Date. The Ares Loan Parties are required to maintain an initial Leverage Ratio of 9.00:1.00, which ratio steps down each fiscal quarter of Legacy RTI resulting in a requirement that the Ares Loan Parties maintain a total net leverage ratio of 3.50:1.00 for the fiscal quarter ending June 30, 2021 (as subsequently modified as described below), and each fiscal quarter ending thereafter.
The amounts owed under the 2019 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.
At June 30, 2020, the interest rate for the Ares Term Loan was 9.75%.
For the six months ended June 30, 2020 and 2019, interest expense associated with the amortization of debt issuance costs was $283 and $361, respectively. Included in the six months ended June 30, 2019, was $219 of accelerated amortization of debt issuance costs associated with the modification of the 2018 Credit Agreement. For the six months ended June 30, 2019, the Company incurred total debt issuance cost of $826.
As of June 30, 2020, the Company had approximately $2,229 of cash and cash equivalents and $7,404 of availability under the 2018 Credit Agreement.
The 2019 Credit Agreement contains a debt to EBITDA covenant, which requires the Company to maintain a 5.75:1 Leverage Ratio for each quarter ending in 2020, including the fiscal quarter ended March 31, 2020. The 2019 Credit Agreement provides that the Leverage Ratio reduces to 5.25:1 for the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50:1 for each quarter ending thereafter. Our Leverage Ratio as of March 31, 2020 is approximately 5.98:1.
On April 9, 2020 and on May 8, 2020, the Company received waivers and consent agreements with respect to certain financial statement delivery requirements extending the due dates for delivering the required financial statements under the credit facilities. Further, Pursuant to two Consent Agreements, dated June 1, 2020, one with respect to the JPM Credit Facility and one for the Ares Term Loan, each of JPM, the JPM Lenders, Ares and the Ares Lenders, respectively, agreed to extend the deadline for the delivery of the fiscal year end 2019 financial statements to June 8, 2020. Further, each of JPM, the JPM Lenders, Ares and the Ares Lenders also agreed to waive the requirement with respect to the going concern qualification.
In connection with any repayment or prepayment of principal of the Second Amendment Incremental Loan Commitments (whether voluntary, mandatory, at maturity, by acceleration or otherwise), the Company is obligated to pay the Takeout Fee to the lender. The maximum potential Takeout Fee of $25.5 million will be recorded as initial debt discount and accrued over the expected life of the Second Amendment Incremental Loan Commitments until maturity using the effective interest method.
The Second Amendment Incremental Loan Commitments also contain a provision that allows the lender to accelerate the maturity of the debt upon the receipt of any proceeds from the incurrence of certain indebtedness, disposition of assets in excess of $2,500,000, or a casualty event. The Company will treat this provision as an embedded derivative feature that requires bifurcation and separate accounting from the debt host pursuant to ASC 815. The initial fair value of the embedded derivative of $10.4 million was recorded as a derivative liability that is presented as additional discount on the Second Amendment Incremental Loan Commitments being amortized over the term of the Second Amendment Incremental Loan Commitments using the effective interest method. The derivative liability will be marked to fair value over the term of the Second Amendment Incremental Loan Commitments at each reporting period. As of June 30, 2020, the value of the derivative liability had increased from $10.4 million to $23 million. The Company recorded the increase in fair value of $12.6 million through Other (expense) income in the Statement of Comprehensive Loss.
22
|
18.
|
Other long-term liabilities
|
Other long-term liabilities are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Acquisition contingencies
|
$
|
|
|
|
$
|
1,130
|
|
|
Lease obligations
|
|
1,440
|
|
|
|
1,547
|
|
|
Other
|
|
876
|
|
|
|
470
|
|
|
|
$
|
2,316
|
|
|
$
|
3,147
|
|
Acquisition contingencies represent the Company’s fair value estimate of the Zyga acquisition clinical and revenue milestones of $1,130 at December 31, 2019. As of June 30, 2020, there was a $130 reduction in the contingent liability estimate of the Zyga acquisition revenue earnout, as the probability weighted model has been updated based on the current updated forecast for the performance of the Zyga product portfolio. The clinical milestone of $1,000 has been reclassified to current as it will be paid in Q2 2021.
The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company has evaluated all evidence, both positive and negative, and determined that its domestic deferred tax assets are not more likely than not to be realized. Accordingly, the Company has recorded valuation allowances in the amount of $62,975 and $51,508 at June 30, 2020 and December 31, 2019, respectively. In making this determination, numerous factors were considered including the cumulative recent loss position in the US.
The Company considers the removal of the going concern evaluation and the Company’s foreign operations three-year cumulative income position to be objectively verifiable evidence which supports the Company’s ability to utilize its foreign deferred tax assets. As a result, the valuation allowances against its foreign subsidiaries’ deferred tax assets has been released, resulting in a tax benefit of approximately $3.4M. The Company expects its foreign deferred tax assets of $3,300, net of the valuation allowance at June 30, 2020 of $ 62,975, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and resulted in the Company recognizing a benefit of approximately $3.5 million of related to a tax receivable. Our effective tax rate was 7.9 percent and 10.8 percent for the quarter and six months ended June 30, 2020, respectively.
The effective tax rate is impacted both for quarter and year-to-date by valuation allowances in the U.S., which reduce the tax benefit associated with pretax losses. The impact of the U.S valuation allowances is offset in part by the CARES Act and foreign valuation allowance release benefits referenced above. The June 30, 2019 effective tax rate was primarily a result of pretax earnings at statutory rates.
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 accrued 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.
On August 1, 2018, the Company and Water Street, a related party, entered into an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of RTI Surgical, Inc. (the “Amended and Restated Certificate of Designation”). Pursuant to the Amended and Restated Certificate of Designation: (1) dividends on the Series A Preferred Stock will not accrue after July 16, 2018 (in the event of a default by the Company, dividends will begin accruing and will continue to accrue until the default is cured); (2) the Company may not force a redemption of the Series A Preferred Stock prior to July 16, 2020; and (3) the holders of the Series A Preferred Stock may not convert the Series A Preferred Stock into common stock prior to July 16, 2021 (with certain exceptions). The Company evaluated and concluded on a qualitative basis the amendment qualifies as modification accounting to the preferred shares, which did not result in a change in the valuation of the shares.
23
Preferred stock is as follows:
|
|
|
Preferred
Stock
Liquidation
|
|
|
Preferred
Stock
Issuance
|
|
|
Net
|
|
|
|
|
Value
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at January 1, 2020
|
|
$
|
66,519
|
|
|
$
|
(109
|
)
|
|
$
|
66,410
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
Balance at March 31, 2020
|
|
|
66,519
|
|
|
|
(63
|
)
|
|
|
66,456
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
Balance at June 30, 2020
|
|
$
|
66,519
|
|
|
$
|
(17
|
)
|
|
$
|
66,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
Liquidation
|
|
|
Preferred
Stock
Issuance
|
|
|
Net
|
|
|
|
|
Value
|
|
|
Costs
|
|
|
Total
|
|
|
Balance at January 1, 2019
|
|
$
|
66,519
|
|
|
$
|
(293
|
)
|
|
$
|
66,226
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
Balance at March 31, 2019
|
|
|
66,519
|
|
|
|
(247
|
)
|
|
|
66,272
|
|
|
Amortization of preferred stock issuance costs
|
|
|
—
|
|
|
|
46
|
|
|
|
46
|
|
|
Balance at June 30, 2019
|
|
$
|
66,519
|
|
|
$
|
(201
|
)
|
|
$
|
66,318
|
|
|
21.
|
Severance and Restructuring Costs
|
As part of the acquisition of Paradigm in 2019, management implemented a plan for which remaining outstanding balances at December 31, 2019 were fully paid out during the first quarter of 2020. During the second quarter of 2020, management implemented a plan as part of the sale of OEM which resulted in $604 of severance and restructuring expense for the six months ended June 30, 2020 included in severance and restructuring costs within the Condensed Consolidated Statements of Comprehensive Gain (Loss). The severance plan is the transition of certain executives as a result of the sale of the OEM business and is composed of payroll expense all within the Spine segment, which cumulatively the plan will be $604. The total severance and restructuring costs are expected to be paid in full by the fourth quarter of 2020. Severance and restructuring payments are made over periods ranging from one month to six 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 roll-forward of severance and restructuring costs included in accrued expenses, see Note 16.
|
Accrued severance and restructuring costs at January 1, 2020
|
$
|
136
|
|
|
Severance and restructuring costs accrued in 2020
|
|
604
|
|
|
Subtotal severance and restructuring costs
|
|
740
|
|
|
Severance and restructuring related cash payments
|
|
(136
|
)
|
|
Accrued severance and restructuring charges at June 30, 2020
|
$
|
604
|
|
|
22.
|
Commitments and Contingencies
|
Sale of OEM Business – On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments primarily relating to working capital delivered at closing. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.
24
Agreement to Acquire Paradigm – On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300,000, consisting of $150,000 on March 8, 2019, plus potential future milestone payments. Established in 2005, Paradigm’s primary product is the coflex® Interlaminar Stabilization® device, a differentiated and minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.
Under the terms of the agreement, the Company paid $100,000 in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50,000 of value. In addition, the Company may be required to pay up to an additional $150,000 in a combination of cash and Company common stock based on a revenue earnout consideration. Based on a probability weighted model, the Company estimates a contingent liability related to the revenue based earnout of zero.
Acquisition of Zyga– On January 4, 2018, the Company acquired Zyga, a leading spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21,000 in consideration paid at closing (consisting of borrowings of $18,000 on its revolving credit facility and $3,000 cash on hand), $1,000 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35,000. Based on a probability weighted model, the Company estimates a contingent liability related to the clinical milestone of $1,000, which is within the Accrued expenses line of the Condensed Consolidated Balance Sheets.
Distribution Agreement with Medtronic – On October 12, 2013, the Company entered into a replacement distribution agreement with Medtronic, plc. (“Medtronic”), pursuant to which Medtronic will distribute certain allograft implants for use in spinal, general orthopedic and trauma surgery. Under the terms of this distribution agreement, Medtronic will be a non-exclusive distributor except for certain specified implants for which Medtronic will be the exclusive distributor. Medtronic will maintain its exclusivity with respect to these specified implants unless the cumulative fees received by us from Medtronic for these specified implants decline by a certain amount during any trailing 12-month period. The initial term of this distribution agreement was to have been through December 31, 2017. The term automatically renews for successive five-year periods, unless either party provides written notice of its intent not to renew at least one year prior to the expiration of the initial term or the applicable renewal period. Neither party provided notice of non-renewal on or before December 31, 2016, thereby triggering the five-year automatic renewal period upon the expiration of the initial term. The distribution agreement will therefore continue at least through December 31, 2022.
Distribution Agreement with Zimmer Dental Inc. - On September 3, 2010, the Company entered into an exclusive distribution agreement with Zimmer Dental, Inc. (“Zimmer Dental”), a subsidiary of Zimmer, with an effective date of September 30, 2010, as amended from time to time. The Agreement was assigned to Biomet 3i, LLC (“Biomet”), an affiliate of Zimmer Dental, on January 1, 2016. The Agreement has an initial term of ten years. Under the terms of this distribution agreement, the Company agreed to supply sterilized allograft and xenograft implants at an agreed upon transfer price, and Biomet agreed to be the exclusive distributor of the implants for dental and oral applications worldwide (except Ukraine), subject to certain Company obligations under an existing distribution agreement with a third party with respect to certain implants for the dental market. In consideration for Biomet’s exclusive distribution rights, Biomet agreed to the following: 1) payment to the Company of $13,000 within ten days of the effective date (the “Upfront Payment”); 2) annual exclusivity fees (“Annual Exclusivity Fees”) paid annually as long as Biomet maintains exclusivity for the term of the contract to be paid at the beginning of each calendar year; and 3) annual purchase minimums to maintain exclusivity. Upon occurrence of an event that materially and adversely affects Biomet’s ability to distribute the implants, Biomet may be entitled to certain refund rights with respect to the then current Annual Exclusivity Fee, where such refund would be in an amount limited by a formula specified in this agreement that is based substantially on the occurrence’s effect on Biomet’s revenues. The Upfront Payment, the Annual Exclusivity Fees and the fees associated with distributions of processed tissue are considered to be a single performance obligation. Accordingly, the Upfront Payment and the Annual Exclusivity Fees are deferred as received and are being recognized as other revenues over the term of this distribution agreement based on the expected contractual annual purchase minimums relative to the total contractual minimum purchase requirements in this distribution agreement. Additionally, the Company considered the potential impact of this distribution agreement’s contractual refund provisions and does not expect these provisions to impact future expected revenue related to this distribution agreement.
The Company’s aforementioned revenue recognition methods related to the Zimmer distribution agreements do not result in the deferral of revenue less than amounts that would be refundable in the event the agreements were to be terminated in future periods. Additionally, the Company evaluates the appropriateness of the aforementioned revenue recognition methods on an ongoing basis.
The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. Based on the information currently available to the Company, including the availability of coverage under its insurance policies, the Company does not believe that any of these claims that were outstanding as of June 30, 2020 will have a material adverse impact on its financial position or results of operations. The Company’s accounting policy is to accrue for legal costs as they are incurred.
25
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 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 TSM’s 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 Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”) resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), and (2) tissue plus non-Coloplast synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”). As of June 30, 2020, there are a cumulative total of 1,137 Indemnified Claims for which the Company Parties are providing defense and indemnification. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.
Based on the current information available to the Company, the impact that current or any future TSM litigation may have on the Company cannot be reasonably estimated.
LifeNet — On June 27, 2018, LifeNet Health, Inc. (“LifeNet”) filed a patent infringement lawsuit in the United States District Court for the Middle District of Florida (since moved to the Northern District of Florida) claiming infringement of five of its patents by the Company. The suit requests damages, enhanced damages, reimbursement of costs and expenses, reasonable attorney fees, and an injunction. The asserted patents are now expired. On April 7, 2019, the Court granted the Company’s request to stay the lawsuit pending the U.S. Patent Trial and Appeal Board’s (PTAB) decision whether to institute review of the patentability of LifeNet’s patents. On August 12, 2019 the PTAB instituted review of three LifeNet patents, and on September 3 the PTAB instituted review of the remaining two. Final decisions with respect to the patentability of LifeNet’s patents (which may be appealed by either party) is expected to take place in the second half of 2020. The Company continues to believe the suit is without merit and will vigorously defend its position. Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.
Securities Class Action—There is currently ongoing stockholder litigation related to the Company’s Investigation (as defined below). A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain current and former officers of the Company, in the United States District Court for the Northern District of Illinois on March 23, 2020 asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (“Lowry Action”). The court appointed a shareholder as Lead Plaintiff and set August 16, 2020 as the deadline for the filing of any amended complaint. Counsel for Lead Plaintiff has filed a motion seeking to extend the deadline for the filing an amended complaint until August 31, 2020. . Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.
Derivative Lawsuits—Three derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial. On June 5, 2020, David Summers filed a shareholder derivative lawsuit (“Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste. Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant). The three derivative lawsuits have been consolidated into the first-filed Summers Action. No response to any complaint is due until after the Court rules on a leadership structure for plaintiffs’ counsel and either a consolidated amended complaint is filed or the operative complaint is identified. Based on the current information available to the Company the financial or other impact of the Investigation cannot be reasonably determined.
In the future, we may become subject to additional litigation or governmental proceedings or investigations that could result in additional unanticipated legal costs regardless of the outcome of the litigation. If we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs. Based on the current information available to the Company, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.
The Company’s accounting policy is to accrue for legal costs as they are incurred.
26
SEC Investigation— As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2020, and the Form 10-K filed with the SEC on June 8,2020, the Audit Committee of the Board of Directors, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts. As a result of the Investigation, the Audit Committee concluded that the Company would restate its previously issued audited financial statements for fiscal years 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year. The Investigation was precipitated by an investigation by the U.S. Securities and Exchange Commission initially related to the periods 2014 through 2016. The SEC investigation is ongoing and the Company is cooperating with the SEC in its investigation. Based on the current information available to the Company the financial or other impact of the Investigation cannot be reasonably determined.
Environmental Protection Agency—On January 28, 2020, RTI received an Opportunity to Show Cause letter from the United States Environmental Protection Agency (“EPA”). The letter alleged potential violations of hazardous waste regulations at the Company’s Alachua, Florida facilities based on a November 20, 2019 inspection conducted by EPA, and offered the Company the opportunity to meet with EPA to explain why EPA should not take any formal enforcement action. The Company held a virtual meeting with EPA on May 19, 2020 to discuss the corrective actions it had taken in response to EPA’s letter. During subsequent discussions, EPA has indicated that it intends to impose a penalty on the Company related to the allegations in the letter. The Company has recorded a liability for the amount the EPA has communicated they intend to impose on the Company related to the allegations in the letter which is included in accrued expenses in the condensed consolidated balance sheet. The Company is in negotiations with EPA.
The Company evaluated subsequent events as of the issuance date of the consolidated financial statements as defined by FASB ASC 855, Subsequent Events.
Sale of OEM Business
On July 15, 2020, RTI Surgical Holdings, Inc. (the “Company”) the Company announced that it received all of the necessary approvals for the transactions contemplated by the previously disclosed Equity Purchase Agreement, dated as of January 13, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement (the “Contemplated Transactions”), the Company’s plans to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” and the ticker symbol of the Company from “RTIX” to “SRGA” shortly after consummation of the Contemplated Transactions and the Company’s leadership transitions.
On July 20, 2020, the Company announced the consummation of the Transactions, the Company’s payment of its outstanding indebtedness, the Company’s planned redemption of all of the outstanding shares of its Series A Convertible Preferred Stock, the Name Change, the Symbol Change and the Company’s previously announced leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as a director and the President and Chief Executive of the Company and Jonathon M. Singer as the Chief Financial and Operating Officer of the Company.
On July 20, 2020, the Company filed: (i) a Certificate of Amendment of the Certificate of Incorporation with the Secretary of Delaware (the “Certificate of Incorporation Amendment”); and (ii) an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock (the “A&R Certificate of Designation”) to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” (the “Name Change”). In connection with the Name Change, the Company’s common stock began trading under the new ticker symbol “SRGA;” trading under the new ticker symbol is expected to begin on Thursday, July 23, 2020 (the “Symbol Change”). The new CUSIP number of the Company’s common stock is 86882C 105.
The Name Change and Symbol Change do not affect the rights of the Company’s security holders. The Company’s common stock will continue to be quoted on Nasdaq. Following the Name Change, the stock certificates, which reflect the former name of the Company, will continue to be valid. Any certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.
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Discontinued Operations
On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments. After consideration of initial working capital adjustments, we currently expect to record a pre-tax gain on disposition of the OEM business in the range of $245 million to $260 million during the third quarter of fiscal 2020. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.
Debt Retirement
Effective on July 20, 2020, Surgalign Holdings, Inc. (i) paid in full its $80.0 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018, by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as a borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender and as administrative agent for the JPM Lenders, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100.0 million term loan and $30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of March 8, 2019, by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation, as administrative agent for the other lenders party thereto, as amended and (iv) terminated the 2019 Credit Agreement.
Retirement of Series A Convertible Preferred Stock and Related Events
On July 17, 2020, the Company received a notification from WSHP Biologics Holdings, LLC (“WSHP”) seeking redemption on or before September 14, 2020 of all of the outstanding shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), all of which are held by WSHP. On July 24, 2020 the Company redeemed the Series A Preferred Stock for approximately $67 million, a Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock, and the WSHP representatives on the Company’s Board of Directors, Curtis M. Selquist and Chris Sweeney resigned from the Board of Directors.
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