☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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RTI Surgical
Delaware | 83-2540607 | |||||||
(State or Other Jurisdiction of
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(877)343-6832
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common stock, $0.001 par value | SRGA | Nasdaq Global Select Market |
Large accelerated filer | ¨ | Accelerated filer | ||||||||||||
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Emerging Growth Company | ¨ |
Explanatory Note
DOCUMENTS INCORPORATED BY REFERENCE
On April 7, 2020, the Audit Committee of the Board concluded that the Company will restate its unaudited financial statementsregistrant’s definitive proxy statement for the quarterly periods within the 2019 fiscal year (the “Relevant Periods”). Such restated quartersregistrant’s 2021 Annual Meeting of Stockholders are includedincorporated by reference in this Form10-K.
Restatement Background
Based on the results of the Investigation, the Company has concluded that revenue for certain invoices should have been recognized at a later date than when originally recognized. In response to binding purchase orders from certain OEM customers, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances, the OEM customers requested or approved the early shipments, but the Company has determined that on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in revenues being pulled from a future quarter into an earlier quarter. In addition, the Company has concluded that in July 2017 an adjustment was improperly made to a product return provision in the Direct Division. The revenue for those shipments is being restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company has concluded that in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual and reserve accounts, including an adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company has restated its financial statements to correct these errors. Furthermore, other errors that were unrelated to the SEC investigation were identified that were corrected in the restated financial statements. Additional errors were made in connection with the recording of the acquisition of Paradigm Spine, LLC in 2019.
Accordingly, as discussed further in Note 30 of the “Notes to the Consolidated Financial Statements” contained in Item 8Part III of this Annual Report on Form10-K, we restated previously issued unaudited financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019, to correct these errors.
RTI SURGICAL
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In 2019, we continuedAI to implement a focused strategyautonomously and accurately identify and segment neural structures in medical images and integrate specific reference information regarding possible pathological states to expand our spine and Original Equipment Manufacturer (“OEM”) operations and create long-term, profitable growthphysicians caring for patients. As consideration for the company. The core components42% ownership we paid total consideration of $19.9 million which consisted of $5.0 million in cash, issued to the Sellers 6,820,792 shares of our strategy were:
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common stock with a fair value of $4.9 million and issued of unsecured promissory notes to the Sellers in an aggregate principal amount of $10.6 million with a fair value of $10.0 million. As part of the transaction, subject to certain contingencies, the Company must purchase up to 100% of the equity of INN if the three additional clinical, regulatory, and revenue milestones are met. With the achievement off each milestone and the satisfaction of the related contingencies, the Company will acquire an additional 19.3% equity interest in INN for $19.3 million.
The Contemplated Transactions are subject to customary closing conditions, including, among other things, the approval of the Contemplated Transactions by the Company’s stockholders. The parties currently expect to close the Contemplated Transactions in the third quarter of 2020. Following the OEM Closing, RTI will focus exclusively on the design, development and distribution of spinal implants to the global market.
Segments
As noted below in Item 8, Note 5, in the fourth quarter of 2019, we reorganized into two business lines, which are also our operating and reportable segments: Spine and OEM. We distribute human tissue, bovine and porcine animal tissue, metal and synthetic implants through various distribution channels: Spine (Direct Domestic and Direct International) and OEM (OEM Domestic, Direct Sports and OEM International).
For the Year Ended December 31, | Percent Change | |||||||||||||||||||
2019 | 2018 | 2017 | 2019/2018 | 2018/2017 | ||||||||||||||||
Spine | $ | 118,987 | $ | 94,436 | $ | 92,712 | 26.0 | % | 1.9 | % | ||||||||||
OEM | 189,397 | 185,926 | 187,637 | 1.9 | % | (0.9 | )% | |||||||||||||
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Total Revenues | $ | 308,384 | $ | 280,362 | $ | 280,349 | 10.0 | % | 0.0 | % | ||||||||||
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For additional financial information concerning our operating performance, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K and our Consolidated Financial Statements in Part II,IV, Item 815, “Exhibits and Financial Statement Schedules” of this Form 10-K.
We were incorporatedExhibit for additional information. Unless otherwise indicated, the following information relates to continuing operations.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, RTI Surgical, Inc. (defined as “Legacy RTI” for matters occurring after March 8, 2019, and as the “Company” for matters occurring before March 8, 2019), Paradigm, Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Tutogen Medical, Inc. (“TMI”), and Zyga. The consolidated financial statements also include the accounts of RTI Donor Services, Inc. (“RTIDS”), which is a controlled entity. Prior to the completion of the acquisition of Paradigm, the financial statements were that of RTI Surgical, Inc. and subsidiaries. Subsequently, RTI Surgical Holdings, Inc. and Subsidiaries is the successor reporting company. See Note 7 for further discussion.
COVID-19
As discussed in more detail throughout this Form10-K, 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 global economy continuescontinue to evolve, and the full extent of the impact is uncertain aswith the existence of variant strains of COVID-19. The variant strains have and will continue to lead to a rise in infections resulting in the datereinstatement of this filing. The outbreak has already broughtcertain restrictions previously in place on a significant disruption to the operationsglobal scale which includes closure of the Company.
Hospitalshospitals.
COVID-19.
Defects
metals and synthetics;
“xenograft” tissue from an animal source;
“autograft” tissue$2.15625 per share. We received net proceeds of $45.8 million from the patient;offering after deducting investor fees of $4.2 million.
“allograft” tissue sold a total 28,700,000 shares of our common stock at a price of $1.50 per share, less the underwriter discounts and commissions. We received net proceeds of $40.5 million from another human donor.
Depending
Metalssatisfy the Company’s on-going cash requirements through 2022, the Company will be required to scale back operations, reduce research and Synthetics
The medical community has used metaldevelopment expenses, and synthetic materials for implant procedures for many years. Metal and synthetic technologies are used to create both surgical implantspostpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Xenograft Tissue
Xenograft tissue-based implantsenabling technologies. These technologies are common in many areas of medicine including cardiac and vascular procedures, soft tissue repair and wound care. Xenograft based implants are also used in the repair of bone defects in orthopedic surgery as carriers for demineralized bone matrix and bone morphogenic protein products. The production of xenograft implants involves recovering animal tissue, typically from cattle (bovine) or pigs (porcine), processing and sterilization, and then transplanting the xenograft implant into a human patient.
Autograft and Allograft Tissue
Manydesigned to aid surgeons use autograft and allograft tissue in their surgical procedures to take advantage of their natural characteristics. Autograft procedures involve a surgeon harvesting tissue from one part of a patient’s body for transplant to another part of the body. Allograft tissues are recovered from cadaveric donors, processed for certain intended uses and then transplanted by a surgeon into the patient’s body to make the needed repair.
Autograft and allograft bone implants are not only “osteoconductive,” meaning they provide a scaffold for new bone to attach itself to, but can be “osteoinductive” as well, meaning they stimulate the growth of new tissue.
We market and distribute our implants through direct distribution channels and a combination of both exclusive andnon-exclusive OEM distributors depending upon the product category. Our implants are used in the following markets: spine, sports medicine, orthobiologics, trauma, dental, plastic surgery and other surgical specialties. Our implants range from metals, synthetics, allografts and xenografts that are precision machined for specific surgical applications, to grafts conventionally processed for general surgical uses.
Direct Channels
Spine
The human spine consists of four regions: cervical (neck region), thoracic (back region attached to the ribs), lumbar (lower back), and sacral (tail bone). We design, manufacture, and distribute surgical implants, instruments, and biologics used in the treatment of spinal conditions affectingby providing information and tools to enhance treatment planning and execution. Major categories within this segment include surgical navigation systems, robotic targeting devices and pre-surgical planning software.
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Sports
Many repetitive use and sports-related injuries can be addressed with allograft implants. The most prevalent surgeriessurgically applied via traditional open surgery or via minimally invasive surgery. We provide devices in both segments of the knee include repairs to the anterior cruciate ligament, articular cartilage repair, and meniscus transplantation. The most prevalent surgeries in the shoulder include rotator cuff repair and articular cartilage repair. Our principal sports medicine allografts are tendons for ligament reconstruction, fresh osteochondral grafts for cartilage repair, and our meniscal allografts for advanced meniscus injuries. Many of our sports medicine tendon allografts utilize our patentedpre-shaped technology, which greatly reduces preparation time in the operating room and are generally easier tospine implant than nonpre-shaped allografts. We also distribute Matrix HD human dermis implants for wound repair and soft tissue augmentation. We also market and distribute implants for abdominal wall repair,via both surgical methodologies.
OEM Channels
We also market and distribute our implants through relationships with OEM distributors.
bone.
Our allograft paste implants are marketed and distributed under Puros® DBM by Zimmer and BIO DBMTM by Stryker.
Our surgical specialty implants are marketed and distributed through distributors including: Integra for dural repair applications; Davol, Inc., a subsidiary of C. R. Bard, Inc. (“Davol”) for hernia repair and breast reconstruction; Katena Products Inc. for ophthalmology and Coloplast A/S of Denmark (“Coloplast”) for urology.
Our allograft dental implants including cancellous and cortical bone and human and bovine membranes primarily for dental procedures related to augmenting ridge restoration are distributed exclusively by Zimmer.
Our trauma implants are distributed through Zimmer and DePuy Synthes (“Synthes”), a Johnson & Johnson Inc. subsidiary. Zimmer across all implants represents approximately 18% of our total revenues.
Our cardiothoracic hardware implants are distributed through A&E.
International
InternationallyOn January 14, 2022 we market and distribute our implants through a direct distribution organization and a network of independent distributors.
The BIOCLEANSE® Tissue Sterilization Process
We have developed and utilized in the United States the patented BIOCLEANSE® tissue sterilization process, which is an automated, pharmaceutical grade chemical sterilization process for musculoskeletal bone and certain soft tissue. This process is fully validated to kill or inactivate all classes of conventional pathogens, viruses, microbes, bacteria and fungi. Our BIOCLEANSE® process is able to remove greater than 99% of the blood, fats, lipids and other unwanted materials from the tissue we process. An important element of the BIOCLEANSE® process is that while it removes unwanted materials embedded within the tissue, it maintains the tissue’s structural integrity and compression strength. Studies have shown that bone tissue sterilized with the BIOCLEANSE® process maintains the same compression strength as untreated tissue.
The BIOCLEANSE® process has been reviewed by thereceived U.S. Food and Drug Administration (“FDA”("FDA") which concluded that BIOCLEANSE® was a validated tissue sterilization process demonstrated to prevent contaminationclearance on HOLO Portal™, our AI-driven AR surgical navigation system for spine. This is the first of tissue grafts. To our knowledge, no other tissue sterilization processmany FDA submission related to human tissue in our industry has been reviewed or approved by the FDA. It should be noted that the FDA does notdigital health platform and strategy to improve patient outcomes. We have a formal approval processbroad portfolio of spine implants, including solutions for fusion procedures in placethe lumbar, thoracic, and cervical spine, motion preservation solutions for tissue related processing techniques.
Two typesthe lumbar spine, and a minimally invasive surgical implant system for fusion of preserved allografts are processed using the BIOCLEANSE® process: soft tissue, consistingsacroiliac joint. We also have a broad portfolio of tendonsbiomaterial products.
The TUTOPLAST® Tissue Sterilization Process
The TUTOPLAST® tissue sterilization process utilizes solvent dehydrationprinciples, to create the appropriate environment to fuse the joint.
Two types of preserved allografts are processed using the TUTOPLAST® process: soft tissue, consisting of fascia lata, pericardium, dermis, sclera and cornea; and bone tissue, consisting of various configurations of cancellous and cortical bone material. Processed pericardium, fascia lata and dermis are collagenous tissue used to repair, replace or line native connective tissue primarily in dental, ophthalmology, urology, plastic and reconstructive surgeries. Dermis is also used in hernia repair and pelvic floor reconstruction. Sclera and cornea are used in ophthalmology procedures such as anterior and posterior segment patch grafting applications for glaucoma, retina and trauma surgery and oculoplastics,disability scores, as well as contour wrappingthe possibility of faster recovery times.
The CANCELLE® SP DBM Sterilization Process
DBM-based pastes and putties are sterilizedWurmlingen, Germany. We have new capabilities in Poland, acquired through the CANCELLE® SP process,Holo Surgical and INN transactions, that bring us expertise in AR, machine learning, and software development which is designed to preserve protein activity. In their final form, the DBM implants serve as bone void fillers in many applications, including spinal, general orthopedic, joint reconstruction and dental surgeries.
CANCELLE® SP is a proprietary process that sterilizes DBM pastes and putties while simultaneously allowing them to maintain their osteoinductive (“OI”) potential, which is verified by 100% lot testing after sterilization. The determination of OI potential is made by lot release animal studies or testing for certain protein markers. These tests are not necessarily predictive of human clinical results. Through a combination of oxidative treatments and acid or alcohol washes, debris is removed and pathogens are inactivated. Cleansing rinses remove residual chemicals, maintaining biocompatibility and preserving the utility of the graft. The CANCELLE® SP irradiation dose is delivered terminally for most pastes and putties to achieve device-level sterility (“SAL 10-6”).
Tissue recovery is the actual removal of tissue from a donor after legal authorization has been obtained. Authorization is obtained by the tissue recovery group.will help us expand on our digital health strategy. We contracthave also maintained our strategic partnership with independent FDA registered tissue recovery groups that specialize in this activity. Tissue recovery personnel aseptically recover tissue within 24 hours following a donor’s death, using surgical instruments and sterile techniques similar to those used in hospitals for routine surgery. Recovered tissue is placed on wet or dry ice, then transported by the donor recovery agencyRTI Surgical, subsequent to the tissue processor or possibly a research institution.
Under U.S. law, human tissue cannot be boughtdisposition of our OEM Businesses, to support our spine implants and sold. However, the law permits the recoverybiomaterials businesses.
Donor recovery groups recovercommitted to leading in digital health and expanding our scope outside the operating room and in additional clinical specialties. Our priorities include refinement and expansion of indications of our HOLO Portal™ system, and the development of a varietycloud platform to allow use of tissue types from donors including the fibula, femur, tibia, humerus, ilium, pericardium, fascia lata, dermis, costal cartilage, sclera, tendonsHOLO™ AI technology in preoperative and ligaments.postoperative settings. This will enable us to leverage HOLO™ AI technology to automate certain use cases in diagnostics, preoperative planning, patient specific implants, and postoperative assessment, with an ultimate goal of predictive patient outcomes.
We have relationships with tissue donor recovery agencies across the United States. We also have relationships outside the United States. We believe additional recovery group relationships would be available if needed and consequently that the loss of any one of our sources of donor tissue would not have a material impact on our operating results.
We continue to develop new xenograft tissue implants. Implants processed from xenograft tissue are regulated by the FDA as devices and require approval or licenses from the FDA prior to marketing in the United States. The sources of our bovine animal tissues are regulated closed herds. We believe that our established relationships with our sources of xenograft animal tissues are sufficient to meet our demands for our ongoing operations. We believe the continued development of our xenograft implantsdoing so will help us meet unmet demand for certain allografts and also allow us to develop new biological implants that cannot currently be made due to structural limitations of human tissue.
Our strategy has been to develop new implants, technologies and surgical techniques within our current markets, and to develop additional technologies for other markets to address unmet clinical needs.better compete at the procedural level. We have done this by building on our core technology platforms: TETRAfuse® 3-D, BIOCLEANSE®, TUTOPLAST®, CANCELLE® SP, precision machining, assembled grafts, tissue-mediated osteoinduction and our metal and synthetics design and production expertise. We have worked andwill also continue to work on developing differentiated technologies and investing in generating the necessary clinical data to drive demand and support appropriate reimbursement. We operate a dedicated research team working on advanced technologies, and have embedded development/technical teams who work with the business/marketing teams focused on expanding the scope and scale of existing competencies such as tissue machining and sterilization, and metal and synthetics manufacturing to meet specific surgical needs.
In 2019, we launched 6 new implants and product enhancements in spine, sports, and general orthopedics developed by our research and development teams. January 2018 marked the first clinical use of theFortilink-TS andFortilink-L product systems, which were followed by the full commercial launch of theFortilink-TS system in May 2018. The Fortilink systems are the second and third in a family of devices to incorporate our TETRAfuse 3D Technology. Additionally, 2018 began the manufacture and initial commercial use of the Thorecon sternal closure system in association with our partner A&E. Enhancements were made to Streamline OCT system, continuing the history of continuously improved features and options; performance improvements were made to our synthetic biologic line with the release of nanOss 3D Plus.
As part of the Holo Surgical Acquisition, we acquired intellectual property and technologies that relate to digital surgery. As of December 31, 2021, the intellectual property of the Holo Surgical business included, among other things, two issued U.S. patents, one granted European patent, fifteen U.S. pending patent applications, and ten pending European patent applications. We do not know whether our current patent applications, or any future patent applications that we may file, will result in a patent being issued with the scope of the claims we seek, or at all, or whether any patents we may receive will be challenged or invalidated. The term of individual patents depends on the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a nonprovisional patent application in the applicable country. The expected years of expiration for these patents and any patents that issue from such pending applications range from 2037 to 2042. The HOLO™ platform is an autonomous anatomical mapping technology designed to assist surgeons and physicians to diagnose, treat, and manage patients with neurosurgical and orthopedic conditions. The HOLO™ platform is capable of advanced, real-time analytics, autonomous presurgical planning, and autonomous intraoperative guidance, potentially enhancing surgical performance with the goal of facilitating improved patient outcomes.
For more information regarding the risks related to intellectual property, please see the section titled “Risk Factors—Risks Related to Intellectual Property.”
Our principal competitors in the conventional allograft market include the Musculoskeletal Transplant Foundation (“MTF”), AlloSource Inc., Community Tissue Services (“CTS”), LifeLink Tissue Bank (“LifeLink”), JRF Ortho (“JRF”), LifeCell, Inc., a subsidiary of Allergan PLC and LifeNet Health, Inc. (“LifeNet”). Among our competitors in precision machined allograft are MTF, LifeNet and AlloSource. Other companies who process and distribute allograft pastes include Medtronic, AlloSource, Integra, Wright Medical Inc. and MTF. Companies who process and distribute xenograft tissue include Baxter, Inc., LifeCell, Cook Surgical, Becton Dickenson, Integra MTF, and Medtronic.
In the United States, most of our
In Germany, allografts are classified as drugs and the German government regulates such implants in accordance with German Drug Law. On April 7, 2004, the European Commission issued a human tissue, directivewhich are processed by third-party suppliers who are responsible for satisfying local regulatory requirements and who ship the implants directly to regulate allografts within the European Union (“EU”). Our Neunkirchen facility is presently licensed by the German Health Authorities and in compliance with applicable international laws and regulations, allowing us to market our human and animal tissue implants globally.
The FDA and international regulatory bodies conduct periodic compliance inspections of both our U.S. and our German processing facilities. All operations are registered with the FDA Center for Devices and Radiological Health (the “CDRH”) for device manufacturing locations and the Center for Biologics Evaluation and Research (the “CBER”) for human tissue recovery, processing and distribution locations and are certified to ISO 13485:2003 and transitioning to ISO 13485:2016. The Alachua facility is also accredited by the AATB and is licensed in the states of Florida, New York, California, Maryland, Delaware and Illinois. The Neunkirchen facility is registered with the German Health Authority as a pharmaceutical and medical device manufacturer and is subject to German Drug Law.customers. We believe that worldwide regulation of allografts and xenografts is likely to intensify as the international regulatory community focuses on the growing demand for these implants and the attendant safety and efficacy issues of citizen recipients.
We currently market and distribute allografts that are subject to the FDA’s “Human Tissue Intended for Transplantation” and “Human Cells, Tissues, and Cellular and Tissue-Based Products” regulations. Under these regulations, we are required to perform donor screening and infectious disease testing and to document this screening and testing for each donor from whom we process tissue, and to process tissues in compliance with cGTP. The FDA has authority under the rules to inspect human tissue processing facilities, and to detain, recall, or destroy tissues for which appropriate documentation and evidence of compliance is not available. We are not required to obtainpre-market approval or clearance from the FDA for allografts that meet the regulation’s definition of “human tissue.”
The FDA may regulate certain allografts as medical devices, drugs, or biologics, which would require that we obtain approval or product licensure from the FDA. This would occur in those cases where the allograft is deemed to have been “more than minimally manipulated or indicated fornon-homologous use.” In general, “homologous use” occurs when tissue is used for the same basic function that it fulfilled in the donor. The definitional criteria for making these determinations appear in the FDA’s rules. If the FDA decides that certain of our current or future allografts are more than minimally manipulated or indicated fornon-homologous use, it would require licensure, approval or clearances of those allografts. Allografts requiring suchpre-market review are subject to pervasive and continuing regulation by the FDA. We would be required to list these allografts as a drug, as a medical device, or as a biologic, and to manufacture them in specifically registered or licensed facilities in accordance with cGMPs. We would also be subject to post-marketing surveillance and reporting requirements. In addition, our manufacturing facilities and processes would be subject to periodic inspection to assess compliance with cGMPs. Our labeling and promotional activities would be subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The export of drugs, devices, and biologics is also subject to more intensive regulation than is the case for human tissue implants.
Our research, development, and clinical programs, as well as our manufacturingmarketing and marketingcommercial operations, are subject to extensive regulation in the United States and other countries. Most notably, all of our implants distributed in the United States are subject to the federal Food, Drug, and Cosmetic Act and the Public Health Services Act as implemented and enforced by the FDA. The regulations that cover our implants and facilities vary widely based on implant type and classification both in the United States, and from country to country. The amount of time required to obtain approvals or clearances from regulatory authorities also differs from country to country.
process.
We have one FDA PMA approved device: The Coflex
® Interlaminar Stabilization device. The Coflex® device is currently the only FDA PMA-approved implant for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA to determine our compliance with FDA’s QSR and other regulations. If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, the agency could institute a wide variety of enforcement actions, ranging from a public Warning Letter to more severe sanctions, such as: fines and civil penalties against us, our officers, our employees or our suppliers; unanticipated expenditures to address or defend such actions; delays in clearing or approving, or refusal to clear or approve, our products; withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies; product recall or seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. Moreover, governmental authorities outside the United States have become increasingly stringent in their regulation of medical devices, and our products may become subject to more rigorous regulation bynon-U.S. governmental authorities in the future. U.S. ornon-U.S. government regulations may be imposed in the future that may have a material adverse effect on our business and operations. The EU has nationally transposed regulations based on the European Commission (“EC”) Medical Device Directives (“MDD”) for the control of medical devices with which manufacturers must comply. New medical device regulationMedical Device Regulations (“MDR”) replacedwere slated to replace the medical device directives effective May 26, 2020. The2020, in the EU. However, due to delays, implementation of the EU MDR manufacturing plantsbegan on May 26, 2021. Manufacturers must have received Conformitè Europèene (“CE”) certification from a “notified body” in order to be able to sell products within the member states of the EU. Certification allows manufacturers to stamp the products of certified plants with a CE mark. Products covered by the EC directives that do not bear the CE mark cannot be sold or distributed within the EU. We have received certification for all currently existing manufacturing facilities andAll products that we distribute in the EU.
Effective May 26, 2020, the EU’s new MDR (“EU MDR”) replaced the current medical device directives. have received CE certification.
During the third quarter of 2018, we decided to stop procurement, manufacturingU.S. and distributing the map3® implants. This activity was completed in the fourth quarter of 2018. The map3® product is now off the market.
international jurisdictions.
•Organizational oversight by senior-level personnel responsible for the compliance functions within our company;
•Written standards and procedures, including a Code of Conduct;
•Methods for communicating compliance concerns, including anonymous reporting mechanisms;
•Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action;
•Compliance education and training for employees and contracted business associates such as distributors;
•Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness;
•Oversight of interactions with healthcare professionals to ensure compliance with healthcare fraud &and abuse laws, including mandated reporting of transfers of value to healthcare professionals under the Affordable Care Act;
•Oversight of corporate handling of personal data to ensure compliance with data protection legislation;
•Disciplinary guidelines to enforce compliance and address violations;
•Screening of employees and relevant contracted business associates; and
•Risk assessments to identify areas of regulatory compliance risk.
Our allografts and xenografts, as well as the chemicals used in processing natural tissues and also in the manufacturing of metal and synthetic implants, are handled and disposed of in accordance with country-specific, federal, provincial, regional, state and/or local regulations, as applicable. We contract with independent third parties to perform all gamma irradiation of our surgical implants. In view of the engagement of a third party to perform irradiation services, the requirements for compliance with radiation hazardous waste do not apply, and therefore we do not anticipate that having any material adverse effect upon our capital expenditures, results of operations or financial condition. However, we are responsible for assuring that the service is being performed in accordance with applicable regulations.
2019,2021, we had a total of 935231 employees of which 19070 were employed outside of the United States. Management believes its relations with itsNone of our employees are represented by a labor union, and we consider our employee relations to be good. We believe a strong employee culture and a commitment to improving patient lives by advancing the standard of spine care and our digital health initiatives will help foster a shared sense of engagement and purpose among our employees and provide us with a competitive advantage. Our culture and employees are driven by our five values: being relentless, gritty and tenacious; acting with speed; being customer-focused and patient-minded; leading with integrity; and being bold and acting courageously. We intend to attract and retain the best talent in the industry by offering competitive pay, annual incentive
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Many of our employees have been furloughed and although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely.
Ifon our essential employees who are unablebusiness, financial condition, results of operations and prospects.
generally require significant upfront capital expenditures. As a medical device manufacturer,of December 31, 2021, we fall generally within a “critical essential infrastructure” sector,had capital resources consisting of cash and we are considered exempt under most stay at home/shelter in place orders. Accordingly, our employees maycash equivalents of $51.3 million. We will continue to work because ofexpend substantial cash resources for the importanceforeseeable future, for, among other things, the development of our operations to thedigital health and well-being of citizens in the states in which we operate. Consistent with these stay at home/shelter in place orders, we have implemented telework policies wherever possible for appropriate categories of “nonessential” employees. “Essential” employees that are unable to telework continue to work at our facilities, and we have implemented appropriate safety measures,solutions platform, including social distancing, face covering, temperature checking and increased sanitation standards. We are following guidance from the Center for Disease Control and the Occupational Safety and Health Administration regarding suspension of nonessential travel, self-isolation recommendations for employees returning from certain geographic areas, confirmed reports of any COVID-19 diagnosis among our employees, and the return of such employees to our workplace. Pursuant to updated guidance from the Equal Employment Opportunity Commission, we are engaging in limited and appropriate inquiries of employees regarding potential COVID-19 exposure,applications based on the direct threat that such exposure may presentHOLOTM AI technology, inventory, the investments in our product pipeline, and other operating expenses. These expenditures will include costs associated with marketing and selling our products, obtaining certain regulatory approvals, and expanding our technology pipeline. In connection with prior acquisitions, we are required to our workforce. We continue to address other unique situations that arise among its workforce duemake contingent consideration earnout payments to the COVID-19 pandemic on a case-by-case basis. Whilesellers if certain metrics relating to the acquired businesses have been achieved. As of December 31, 2021, we believehad accrued $51.9 million in contingent consideration as liabilities that we owe in connection with our prior acquisitions. In addition we have taken appropriate measures$10.0 million related to ensureforward contracts that we may owe if certain milestones are met based on the healthINN acquisition. There is no assurance that we will have sufficient cash on hand or available capital to finance our capital expenditures and wellbeing of our “essential” employees, there can be no assurances that our measures will be sufficientother working capital needs or fund contingent consideration payments when they become due, and failure to protect our employeesdo so may result in our workplace or that they may otherwise be exposed to COVID-19 outside of our workplace. If a number of our essential employees become ill, incapacitated or are otherwise unable to continue working during the current or any future epidemic, our operations may be adversely impacted.
We are involved in an ongoing government investigation by the SEC, the results of which may have a material adverse effect on our business, operations, and financial condition.
prospects will be materially adversely affected.
performance.
As discussed in Note 1 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements
The SEC InvestigationFurther, we are projecting that we will continue to generate significant negative operating cash flows over the next 12 months and beyond. In consideration of these projected negative cash flows, as well as, (i) contingent consideration amounts payable in cash in connection with the Holo Surgical and INN acquisitions; (ii) additional payment obligations we may owe to our suppliers in respect of minimum purchase requirements under our supply contracts; (iii) uncertainties related to potential settlements from ongoing litigation and regulatory investigations; (iv) the unsecured promissory notes in an aggregate principal amount of approximately $10.6 million issued to the sellers in connection with the INN acquisition; and (v) uncertainties related to COVID-19, we have forecasted the need to raise additional capital in order to continue as a going concern. Our operating plan for the next 12-month period also includes continued investments in our product pipeline that will necessitate additional debt and/or equity financing in addition to the funding of future operations through 2022 and beyond. Our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the restatementrecent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Further, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all, and no assurance can be given that future financing will be available or, if available, that it will be on terms that are satisfactory. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our previously issued financial statements,stockholders, in the errorscase of equity financing. If cash resources are insufficient to satisfy our ongoing cash requirements through 2022, we may be required to scale back operations, reduce research and development expenses, and postpone, as well as suspend, capital expenditures, in order to preserve liquidity, or be forced to liquidate the Company, in which case it is likely that resultedinvestors will lose all or a part of their investment.
In connectionour Board of Directors (“Board”), with the filingassistance of RTI’s Form 10-K/A for fiscal year end December 31, 2018, we corrected certain historical errors relatedindependent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the timing of our revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and
In connection with this restatement of our prior consolidated financial statements, we have also identified material weaknesses in our internal control over financial reporting, and management has concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2018. For further discussionpotential settlement of the material weaknesses, please see “Item 9A. Controls and Procedures”. Remediation efforts place aSEC Investigation. It is uncertain at this time whether any settlement will be reached or the terms of any such settlement, which could include the payment of significant burden on management and add increased pressure to our financial resources and processes.
monetary amounts. If we are unable to successfully remediate our existingreach a settlement with the SEC, or any future material weaknesses or other deficiencies in our internal control over financial reporting or disclosure controls and procedures, investors may lose confidence in our financial reporting andif the accuracy and timingterms of our financial reporting and disclosures andsuch settlement involve significant monetary payments, our business, reputation,financial condition, results of operations financial condition, market value ofand prospects, along with our debt securities,reputation with customers and ability to access the capital markets through debt issuancesbusiness partners, could be significantly adversely affected.
We depend heavily upon sources
The supplythe outcome of human tissue has at times limited our growth, and may not be sufficient to meet our future needs. In addition, due to seasonal changes in mortality rates, some scarce tissues that we currently use for allografts are at times in particularly short supply. Other factors, some of which are unpredictable, such as negative publicity and regulatory actions in the industry in which we operate (and which may not involve us) also could unexpectedly reduce the available supply of tissue.
We rely on donor recovery groups for their human tissue supplies and we have relationships with tissue donor recovery groups across the country. We also have relationships outside the United States. Donor recovery groups are part of relatively complex relationships. They provide support to donor families, are regulated by the FDA and applicable foreign equivalents, and are often affiliated with hospitals, universities or organ procurement organizations. Our relationships with donor recovery groups, which are critical to our supply of tissue, could be affected by relationships recovery groups have with other organizations. Any negative impact arising from potential regulatory and disease transmission issues facing the industry, as well as the negative publicity that these issues could create, could adversely affect our ability to negotiate contracts with recovery groups.
We cannot be sure that the supply of human tissue will continue to be available at current levels or will be sufficient to meet our needs.litigation. If we are not able to obtain tissue from current sources sufficient to meet our needs,successful in any such litigation, we may not be ablerequired to locate additional replacement sourcespay substantial damages or settlement costs. While we maintain insurance coverages that are intended to address certain aspects of tissue on commercially reasonable terms, if at all. Any interruption of our business caused by the need to locate additional sources of tissue could significantly impact our revenues. We expectsuch proceedings and any litigation that our revenues from allografts would decline in proportion to any decline in tissue supply.
We depend on various third-party suppliers and, in some cases, a single third-party supplier for key raw materials and component parts, apart from human tissue, used in our tissue processing and manufacturing processes, and the loss of any of these third-party suppliers, or their inability to supply us with adequate raw materials, could harm our business.
We use a number of raw materials in addition to human tissue, including titanium, titanium alloys, stainless steel, PEEK, PEKK, and animal tissue. We rely from time to time on a number of suppliers and, in some cases, on a single source vendor. Our dependence on single third-party suppliers, or even a limited number of third-party suppliers in certain instances, creates several risks, including limited control over pricing, availability, quality and delivery schedules. In addition, any supply interruption or cancellation in a limited or sole sourced component or raw material could materially harm our ability to manufacture our products until a new source of supply, if any, could be found. Wemay arise, such insurance may be unableinsufficient to find a sufficient alternative supply channel in a reasonable time periodcover all losses or on commercially reasonable terms, if at all which would have an adverse effect on our business, financial condition and resultstypes of operations. In addition, a change in manufactures will require qualification of the new supplier to ensure they comply with our quality standards. Delays in qualifying a new supplier orre-qualifying an existing supplier could have an adverse effect on our business, financial condition and results of operations.
claims that may arise.
operations and prospects.
Our health insurance and prescription drug coverage, along Additionally, a change in parties who manufacture our products will require qualification of the new party to ensure they comply with our self-insurance reserves,quality standards. Delays in qualifying a new party could have an adverse effect on our business, financial condition, results of operations and prospects.
We currently self-insure Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon acceptance of our implants or to expand our business.
For policies underincreasing revenues.
results of operations, and financial condition.
The FDA and several states have statutory authority to regulate allograft processing, including our BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP processes, and allograft-based materials. We must register our facilities, whether located in the United States potential penalties from, and/or elsewhere,agreements with, the FDA as well as regulators outside the United States,federal government.
Since 2009, the FDA has significantly increased its oversight of companies’ subject to its regulations, including medical device companies, by hiring new investigators and stepping up inspections of manufacturing facilities. In recent years, the FDA has also significantly increased the number of warning and untitled letters issued to companies. If the FDA were to concludefind that we are not in complianceor certain of our suppliers have failed to comply with applicable lawsregulations, the agency could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions such as: fines and civil penalties against us, our officers, our employees or regulations,our suppliers; unanticipated expenditures to address or that anydefend such actions; delays in clearing or approving, or refusal to clear or approve, our products; withdrawal or suspension of approval of our implants are ineffectiveproducts or pose an unreasonable health risk,those of our third-party suppliers by the FDA could ban such implants, detainor
If any of our allografts fall under the FDA’s definitions of “more than minimally manipulated or indicated fornon-homologous use,” we would be required to obtain medical device approval or clearance or biologics licenses, which could require clinical testing and could result in disapproval of our license applications and restricted distribution of any of our allografts whichproducts may become subject topre-market approval. The more rigorous regulation by non-U.S. governmental authorities in the future. U.S. or non-U.S. government regulations may be imposed in the future that may have a material adverse effect on our business, financial condition, and results of operations.
cGTP covers all stages of allograft processing, from procurement of tissue toFDA permits commercial distribution of final allografts. In addition, these regulationsmost new medical devices only after the devices have received clearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act (“510(k)”) or are the subject of an approved premarket approval application (“PMA”). The process of obtaining FDA clearance and approvals to develop and market a significant effect upon recovery agencies which supply us with tissuemedical device can be costly, time-consuming, and have increased the cost of recovery activities. These increases have translated into increased costs for us, because we are expected to reimburse the recovery agencies based on their cost of recovery.
In additionsubject to the FDA, several state agencies regulate tissue banking. Regulations issued by Florida, New York, California and Maryland are particularly relevant to our business. Most states dorisk that such clearances or approvals will not currently have tissue banking regulations, but it is possible that others may make allegations against us or against donor recovery groups or tissue banks, including those with which we have relationships, aboutnon-compliance with applicable FDA regulations or other relevant statutes and regulations. Allegations like these could cause regulators or other authorities to take investigative or other action, or could cause negative publicity for our business and the industry in which we operate.
be granted on a timely basis, if at all.
We are also subject
Effective May 26, 2020, the MDR replaced the current medical device directives. All medical devices currently distributed in the EU under the medical device directives are likely impacted. The MDR may also include products, such as human tissue, not traditionally considered medical devices in the EU. Additionally, the MDR, among other things, increases regulatory requirements for several medical device groupings applicable to the Company’s implants distributed in the EU, including strengthening notified body oversight for Class I reusable surgical instruments, andup-classifying spinal devices in contact with the spinal column. Additionalpre-clinical testing or clinical studies may be required to meet new MDR requirements. As notified bodies are preparing for certification under the MDR, a trend has been observed among industry participants that the notified bodies are becoming more rigorous and conservative in their interpretation and application of currently existing directives, resulting in observations requiring corrective actions, particularly with respect to clinical evaluation reports, that cause industry members, including the Company, to incur additional costs. Further, with the implementation of the MDR the demand for notified body services is anticipated to increase while the number of eligible entities qualified as notified bodies is anticipated to decrease, thereby creating for the foreseeable future an imbalance in supply and demand that is anticipated to increase the cost of notified body services. Meeting the requirements of the MDR will likely cause us to incur additional costs and/or require us to discontinue distributing certain products in the EU and other countries outside the EU that rely on the CE mark for distribution into such countries. If we are unable to timely meet the requirements of the new MDR we may be prohibited from distributingsubject to greater regulatory and product liability risks. With the passage of the American Recovery and Reinvestment Act of 2009, funds have been appropriated for the U.S. Department of Health and Human Services’ Healthcare Research and Quality to conduct comparative effectiveness research to determine the effectiveness of different drugs, medical devices, and procedures in treating certain conditions and diseases. Some of our affected products inor procedures performed with our products could become the EUsubject of such research. It is unknown what effect, if any, this research may have on our business. Further, future research or experience may indicate that treatment with our products does not improve patient outcomes or improves patient outcomes less than we initially expected. Such results would reduce demand for our products, and other countries that rely on the CE mark, whichthis could cause us to lose revenue. Further, notified bodies arewithdraw our products from the market. Moreover, if future research or experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, we could be subject to new certification. If the Company’s notified body is notre-certified, or if they are certified forsignificant legal liability, significant negative publicity, damage to our reputation and a narrower rangedramatic reduction in sales of product types, the Company mayour products, all of which would have to engage a new or additional notified body which could cause a delay in meeting the new MDR requirements. Individually or cumulatively, these changes associated with the MDR could cause us to incur costs or require us to changematerial adverse effect on our business, practices in a manner adverse to our business. Asfinancial condition, results of April 23, 2020, implementation of the EU MDR has been delayed until May 26, 2021.
operations and prospects.
operations, and financial condition.
In addition, the ECEuropean Commission in July 2016 and the Swiss Government in January 2017 approved theEU-U.S. and theSwiss-U.S. Privacy Shield frameworks, respectively, which are designed to allow U.S. companies that self-certify to the U.S. Department of Commerce and publicly commit to comply with the Privacy Shield requirements to freely import personal data from the EU and Switzerland. However, these frameworks face a number of legal challenges, and their validity remains subject to legal, regulatory and political developments in both the EU and the United States. For example, on July 16, 2020, the Court of Justice of the EU invalidated the EU-US Privacy Shield Framework. This has resulted in some uncertainty, and compliance obligations could cause us to incur costs or require us to change our business practices in a manner adverse to our business.
A majority of all of our allograft processing facilities are currently conducted in locations that may be at risk of damage from hurricanes, fire, or other natural disasters. If a natural disaster strikes our administrative headquarters or any of our other processing or manufacturing facilities, our operations may be interrupted and we may be unable to process or manufacture certain products for a substantial amount of time.
A majority of all of our allograft processing facilitiesare located in Alachua, Florida, in an area with historical occurrences of hurricane damage and wild fires. We have taken precautions to safeguard our facilities, including obtaining property, casualty and business interruption insurance. We have also developed an information technology disaster recovery plan. However, any future natural disaster at this or our other locations could cause substantial delays in our operations, damage or destroy our facilities, equipment or inventory, and cause us to incur additional expenses. A disaster could seriously harm our business, financial condition and results of operations. Our facilities would be difficult to replace and would require substantial lead time to repair or replace. The insurance we maintain may not be adequate to cover our losses in any particular case and may not continue to be available to us on acceptable terms, or at all.
If we fail to maintain existing strategic relationships or are unable to identify distributors of our implants, revenues may decrease.
We currently derive a significant amount of our revenues through distributors such as Zimmer, Medtronic and Synthes. In addition, our spine distributors provide nearly all of the instrumentation, surgeon training, distribution assistance and marketing materials for the lines of spinal implants that we produce and they distribute.
Variations in the timing and volume of orders by our distributors, particularly those who distribute a significant amount of our implants, may have a material effect upon our revenues. If our relationships with our distributors are terminated or reduced for any reason and we are unable to replace these relationships with other means of distribution, we could suffer a material decrease in revenues.
We may need, or decide it is otherwise advantageous to us, to obtain the assistance of additional distributors to market and distribute our new implants and technologies, as well as to market and distribute our existing implants and technologies, to new markets or geographical areas. We may not be able to find additional distributors who will agree to and are able to successfully market and distribute our implants and technologies on commercially reasonable terms, if at all. If we are unable to establish additional distribution relationships on favorable terms, our revenues may decline.
Also, our financial results are dependent upon the service efforts of our distributors. If our distributors are unsuccessful in adequately servicing our products, our sales could significantly decrease.
If we fail to maintain the high processing standards that implants require or if we are unable to develop processing capacity as required, our commercial opportunity will be reduced or eliminated.
Implants require careful calibration and precise, high-quality processing and/or manufacturing. Achieving precision and quality control requires skill and diligence by our personnel. If we fail to achieve and maintain these high standards, including avoiding processing and manufacturing errors, and, depending on the nature of the complaint, design defects or component failures; we could be forced to recall, withdraw or suspend distribution of our implants; our implants and technologies could fail quality assurance and performance tests; production and deliveries of our implants could be delayed or cancelled and our processing and/or manufacturing costs could increase.
Further, to be successful, we will need to manage our human tissue processing capacity related to tissue recovery and demand for our allografts. It may be difficult for us to match our processing capacity to demand due to problems related to the amount of suitable tissue, quality control and assurance, tissue availability, adequacy of control policies and procedures and lack of skilled personnel. If we are unable to process and produce our implants on a timely basis, at acceptable quality and costs, and in sufficient quantities, or if we experience unanticipated technological problems or delays in processing, it may reduce revenues, increase our cost per allograft processed or both.
The allograft industry is subject to additional local, state, federal and international government regulations and any increased regulations of our activities could significantly increase the cost of doing business, thereby reducing profitability.
Some aspects of our business are subject to additional local, state, federal or international regulation. Changes in the laws or new interpretations of existing laws could negatively affect our business, revenues or prospects, and increase the costs associated with conducting our business. In particular, the procurement and transplantation of allograft tissue is subject to federal regulation under the National Organ Transplant Act (“NOTA”), a criminal statute that prohibits the purchase and sale of human organs, including bone and other tissue. NOTA permits the payment of reasonable fees associated with the transportation, processing, preservation, quality control and storage of human tissue. If NOTA were amended or interpreted in a way that made us unable to include some of these costs in the amounts we charge our customers, it could reduce our revenues and therefore negatively impact our business. It is possible that more restrictive interpretations or expansions of NOTA could be adopted which could require us to change one or more aspects of our business, at a substantial cost, in order to continue to comply with this statute.
A variety of additional local, state, federal and international government laws and regulations govern our business, including those relating to the storage, handling, generation, manufacture and disposal of medical wastes from the processing of tissue and collaborations with health care professionals. If we fail to conduct our business in compliance with these laws and regulations, we could be subject to significant liabilities for which our insurance may not be adequate. Moreover, such insurance may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity.
Our success depends on the continued acceptance of our surgical implants and technologies by the medical community.
New allograft, xenograft, metal or synthetic implants, technologies or enhancements to our existing implants may never achieve broad market acceptance, which can be affected by numerous factors, including lack of clinical acceptance of implants and technologies; introduction of competitive treatment options which render implants and technologies too expensive or obsolete; lack of availability of third-party reimbursement; and difficulty training surgeons in the use of tissue implants and technologies.
Market acceptance will also depend on our ability to demonstrate that our existing and new implants and technologies are an attractive alternative to existing treatment options. Our ability to do so will depend on surgeons’ evaluations of the clinical safety, efficacy, ease of use, reliability and cost-effectiveness of these treatment options and technologies. For example, we believe that some in the medical community have lingering concerns over the risk of disease transmission through the use of allografts.
Furthermore, we believe that even if the medical community generally accepts our implants and technologies, acceptance and recommendations by influential surgeons will be important to the broad commercial success of our implants and technologies. If our implants and technologies are not broadly accepted in the marketplace, we may not remain competitive in the market.
Rapid technological changes could result in reduced demand for our implants and products.
Technologies change rapidly in the industry in which we operate. For example, steady improvements have been made in synthetic human tissue substitutes which compete with our tissue implants. Unlike allografts, synthetic tissue technologies are not dependent on the availability of tissue. If one of our competitors successfully introduces synthetic technologies using recombinant technologies, which stimulate the growth of tissue surrounding an implant, it could result in a decline in demand for tissue implants. We may not be able to respond effectively to technological changes and emerging industry standards, or to successfully identify, develop or support new technologies or enhancements to existing implants in a timely and cost-effective manner, if at all. If we are unable to achieve the improvements in our implants necessary for their successful commercialization, the demand for our implants will suffer.
We face intense competition, which could result in reduced acceptance and demand for our implants and technologies.
The medical technology/biotechnology industry is intensely competitive. We compete with companies in the United States and internationally that engage in the development and production of medical technologies and processes including biotechnology, orthopedic, pharmaceutical, biomaterial and other companies; academic and scientific institutions; and public and private research organizations.
Many of our competitors have much greater financial, technical, research, marketing, distribution, service and other resources than we do. Moreover, our competitors may offer a broader array of tissue repair treatment products, medical devices, surgical instruments and technologies or may have greater name recognition in the marketplace. We compete with a number of companies with significantly greater resources and brand recognition than ours. Our competitors, including several development stage companies, may develop or market technologies that are more effective or commercially attractive than our technologies, or that may render our technologies obsolete. For example, the development of a synthetic tissue implant that permits remodeling of bones could reduce the demand for allograft and xenograft-based implants and technologies.
If we do not manage the medical release of donor tissue into processing in an effective and efficient manner, it could adversely affect profitability.
Many factors affect the level and timing of donor medical releases, including the effectiveness of donor screening performed by donor recovery groups, the timely receipt, recording and review of required medical documentation, and employee loss and turnover in our medical records department. We can provide no assurance that releases will occur at levels which maximize our processing efficiency and minimize our cost per allograft processed.
Negative publicity concerning methods of human tissue recovery and screening of donor tissue in the industry in which we operate may reduce demand for our allografts and impact the supply of available donor tissue.
Media reports or other negative publicity concerning both methods of tissue recovery from donors and actual or potential disease transmission from donated tissue may limit widespread acceptance of our allografts, whether directed to allografts generally or our allografts specifically. Unfavorable reports of improper or illegal tissue recovery practices by any participant in the industry, both in the United States and internationally, as well as incidents of improperly processed tissue leading to transmission of disease, may broadly affect the rate of future tissue donation and market acceptance of allograft technologies.
Potential patients may not be able to distinguish our allografts, technologies and the tissue recovery and the processing procedures from those of our competitors or others engaged in tissue recovery. In addition, families of potential donors may become reluctant to agree to donate tissue tofor-profit tissue processors.
If our patents and the other means we use to protect our intellectual property prove to be inadequate, our competitors could exploit our intellectual property to compete more effectively against us.
The law of patents and trade secrets is constantly evolving and often involves complex legal and factual questions. The U.S. government may deny or significantly reduce the coverage we seek for our patent applications before or after a patent is issued. We cannot be sure that any particular patent for which we apply will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from competing technologies, that interference, derivation, reexamination, post-grant review or inter parties review proceedings regarding any of our patent applications will not be filed, or that we will achieve any other competitive advantage from a patent. In addition, it is possible that one or more of our patents will be held invalid or reduced in scope of claims if challenged or that others will claim rights in or ownership of our patents and other proprietary rights. If any of these events occur, our competitors may be able to use our intellectual property to compete more effectively against us.
Because patent applications remain secret until published (typically 18 months after first filing) and the publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that our patent application was the first application filed disclosing or potentially covering a particular invention. If another party’s rights to an invention are superior to ours, we may not be able to obtain a license to use that party’s invention on commercially reasonable terms, if at all. In addition, our competitors, many of which have greater resources than ours, could obtain patents that will prevent, limit or interfere with our ability to make use of our inventions either in the United States or in international markets. Further, the laws of some foreign countries do not always protect our intellectual property rights to the same extent as the laws of the United States. Litigation or regulatory proceedings in the United States or foreign countries also may be necessary to enforce our patent or other intellectual property rights or to determine the scope and validity of the proprietary rights of our competitors. These proceedings may prove unsuccessful and may also be costly, result in development delays, and divert the attention of our management.
We rely upon unpatented proprietary techniques and processes in tissue recovery, research and development, tissue processing, manufacturing and quality assurance. It is possible that others will independently develop technology similar to our technology or otherwise gain access to or disclose our proprietary technologies. We may not be able to meaningfully protect our rights in these proprietary technologies, which would reduce our ability to compete.
Our success depends in part on our ability to operate without infringing on or misappropriating the proprietary rights of others, and if we are unable to do so we may be liable for damages.
We cannot be certain that U.S. or foreign patents or patent applications of other companies do not exist or will not be issued that would prevent us from commercializing our allografts, xenografts, medical devices, surgical instruments and other technologies. Third parties may sue us for infringing or misappropriating their patent or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in litigation, in addition to any damages we might have to pay, we could be required to cease the infringing activity or obtain a license requiring us to make royalty payments. It is possible that a required license may not be available to us on commercially acceptable terms, if at all. In addition, a required license may benon-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around another company’s patent, we may be unable to make use of some of the affected technologies or distribute the affected allografts, xenografts or surgical implants, which would reduce our revenues.
The defense costs and settlements for patent infringement lawsuits are not covered by insurance. Patent infringement lawsuits can take years to settle. If we are not successful in our defenses or are not successful in obtaining dismissals of any such lawsuit, legal fees or settlement costs could have a material adverse effect on our results of operations and financial position.
We or our competitors may be exposed to product or professional liability claims which could cause us to be liable for damages or cause investors to think we will be liable for similar claims in the future.
The development, manufacture, and distribution of implants, medical devices, surgical instruments, and other technologies for surgical and medical treatment entails an inherent risk of product or professional liability claims, and substantial product or professional liability claims may be asserted against us. We are party to a number of legal proceedings relating to professional liability. The prevailing view among the states throughout the United States is that providing allografts is a service and not the sale of a product. As such, allografts are not typically subject to product liability causes of action. However, the law of a particular state could change in response to legislative changes or by judicial interpretation in a state where such issue has either not been previously addressed or prior precedent is overturned or subject to different interpretations by a court of higher precedential authority. In addition, due to the international scope of our activities we are subject to the laws of foreign jurisdictions which may treat allografts as products in those jurisdictions.
The implantation of donated human tissue implants creates the potential for transmission of communicable diseases. Although we comply with federal, state and foreign regulations and guidelines intended to prevent communicable disease transmission, and our tissue suppliers are also required to comply with such regulations, there can be no assurances that: (i) our tissue suppliers will comply with such regulations intended to prevent communicable disease transmissions; (ii) even if such compliance is achieved, that our implants have not been or will not be associated with transmission of disease; or (iii) a patient otherwise infected with disease would not erroneously assert a claim that the use of our implants resulted in disease transmission.
Our business of designing, manufacturing and marketing metal, synthetic, and xenograft medical devices and surgical instruments exposes us to potential product liability risks that are inherent in such activities. In the ordinary course of business, we are the subject of product liability lawsuits alleging that component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to patients.
We currently have $30 million of product and professional liability insurance to cover claims. This amount of insurance may not be adequate for potential claims if we are not successful in our defenses. Moreover, insurance covering our business may not always be available in the future on commercially reasonable terms, if at all. If our insurance proves to be inadequate to pay a damage award, we may not have sufficient funds to do so, which would harm our financial condition and liquidity. In addition, successful product liability claims made against one of our competitors could cause claims to be made against us or expose us to a perception that we are vulnerable to similar claims. Claims against us, regardless of their merit or potential outcome, may also hurt our ability to obtain surgeon acceptance of our implants or to expand our business.
We are subject to federal, state, and foreign laws and regulations, including fraud and abuse laws, as well as anti-bribery laws, and could face substantial penalties if we fail to fully comply with such regulations and laws.
If we are not successful in expanding our distribution activities into international markets, we will not be able to pursue one of our strategies for increasing revenues.
Our international distribution strategies vary by market, as well as within each country in which we operate. For example, we distribute only a portion of our line of allograft and xenograft implants within each foreign country where we operate. Our international operations will be subject to a number of risks which may vary from the risks we face in the United States, including the need to obtain regulatory approvals in additional foreign countries before we can offer our implants and technologies for use; the potential burdens of complying with a variety of foreign laws; longerdistribution-to-collection cycles, as well as difficulty in collecting accounts receivable; dependence on local distributors; limited protection of intellectual property rights; fluctuations in the values of foreign currencies; and political and economic instability.
Security breaches, loss of data and other disruptions could compromise sensitive information related to our business, prevent us from accessing critical information or expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect and store sensitive data, including patient health information, personally identifiable information about our employees, intellectual property, and proprietary business information. We manage and maintain our applications and data utilizingon-site andoff-site systems. These applications and data encompass a wide variety of business-critical information including research and development information, commercial information and business and financial information.
The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers, viruses, breaches or interruptions due to employee error or malfeasance, terrorist attacks, hurricanes, fire, flood, other natural disasters, power loss, computer systems failure, data network failure, internet failure, or lapses in compliance with privacy and security mandates. Any such virus, breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. We have measures in place that are designed to detect and respond to such security incidents and breaches of privacy and security mandates. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, government enforcement actions and regulatory penalties. Unauthorized access, loss or dissemination could also interrupt our operations, including our ability to receive and ship orders from customers, bill our customers, provide customer support services, conduct research and development activities, process and prepare company financial information, manage various general and administrative aspects of our business and damage our reputation, any of which could adversely affect our business.
Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
We are currently involved in stockholder litigation and have in the past and may in the future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and various other legal proceedings by stockholders, customers, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.
We may be subject to suit under a state or federal whistleblower statute.
Our business
Respondingcommercialize products and technologies similar or identical to actions by activist stockholders can be costlyours and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would likely require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our Board of Directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
The tax treatment of corporations could be subject to potential legislative, administrative or judicial changes or interpretations.
The present federal income tax treatment of corporationssuccessfully commercialize any products may be modified by legislative, administrative or judicial changes or interpretations at any time. For example, on December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”) was enacted. The Tax Legislation significantly revises the U.S. corporate income tax code.
We are unable to predict whether future modifications will be made to the U.S. corporate income tax code. Any such future changes could materially adversely affect us.
We are dependent on our key management and technical personnel for continued success.
affected.
Competition for qualified leadership and scientific personnel in our industry is intense, and we compete for leadership and scientific personnel with other companies that have greater financial and other resources than we do. Our future success will depend in large part on our ability to attract, retain,obtain and motivate highly qualified leadershipmaintain patent and scientific personnel,other intellectual property with respect to our products. The law of patents and there cantrade secrets is constantly evolving and often involves complex legal and factual questions. The U.S. government or applicable bodies in other jurisdictions may deny or significantly reduce the coverage we seek for our patent applications before or after a patent is issued. We cannot be no assurancesure that any particular patent for which we apply will be issued, that the scope of the patent protection will be comprehensive enough to provide adequate protection from competing technologies, that interference, derivation, reexamination, post-grant review, inter parties review or other proceedings regarding any of our patent applications will not be filed, or that we arewill achieve any other competitive advantage from a patent. In addition, it is possible that one or more of our patents will be held invalid or reduced in scope of claims if challenged or that others will claim rights in or ownership of our patents and other proprietary rights. If any of these events occur, our competitors and other parties may be able to use our intellectual property to compete more effectively against us.
Additionally,position.
Water Street may exercise significant influence over us, including through its ability to elect up to two membersprotect trade secrets. If any of our Board of Directors.
We issued 50,000 shares of Series A convertible preferred stock (“Preferred Stock”)trade secrets were to WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners (“WSHP”),be lawfully obtained or independently developed by a leading healthcare-focused private equity firm (“Water Street”), in connection with the closing of the Pioneer acquisition. As holders of this Preferred Stock, Water Street is entitled to vote on anas-converted basis, up to a maximum number ofas-converted shares, upon all matters upon which holders of our common stock have the right to vote. The shares of Preferred Stock owned by Water Street currently represent approximately 18% of the voting rights in respect of our share capital on anas-converted basis; accordingly, Water Street has the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders (also, Water Street is not prohibited from buying shares of our common stock). In addition, the dividends which have accrued on each outstanding share of Preferred Stock are added to the liquidation value with respect to such share of Preferred Stock. On August 1, 2018,competitor or other third party, we amended and restated the Certificate of Designation of Series A Convertible Preferred Stock (the “Amended and Restated Certificate of Designation”). Pursuant to the terms of the Amended and Restated Certificate of Designation, dividends on our Preferred Stock ceased accruing as of July 16, 2018. We did not pay dividends on the Preferred Stock from the fourth quarter of 2013 through June 16, 2018. Consequently, we have accrued $16.5 million in preferred dividends payable as of December 31, 2019.
In connection with the Paradigm transaction, on March 8, 2019, the Company adopted a certificate of designation (the “Certificate of Designation”) containing provisions identical to the Amended and Restated Certificate of Designation in effect immediately prior to the transaction except with respect to the name of the Company, which was changed to “RTI Surgical Holdings, Inc.”, pursuant to the Company’s Amended and Restated Certificate of Incorporation.
Water Street may have interests that diverge from, or even conflict with, those of our other stockholders. In addition, our Amended and Restated Certificate of Incorporation and Investor Rights Agreement with Water Street provide that Water Street’s consent is required before we may take certain actions for so long as Water Street and its permitted transferees beneficially own in the aggregate at least 10% of our issued share capital.
In addition, our Amended and Restated Certificate of Incorporation and our Investor Rights Agreement with Water Street provide that Water Street has the right to designate and nominate, respectively, directors to our Board such that the percentage of the members of our Board so designated or nominated is approximately equal to Water Street’s percentage equity ownership interest in the Company. The maximum number of directors that Water Street is able to designate or nominate is two, with at least one of such directors to serve on each of our Board committees. If Water Street’s ownership of our share capital on anas-converted basis falls below 5% (calculated on a fully diluted basis, assuming conversion of the Preferred Stock at the then-existing conversion price), Water Street would have no further director designationright to prevent them from using that technology or nomination rights under our Amended and Restated Certificate of Incorporation or the Investor Rights Agreement.
In addition, the ownership position and the governance rights of Water Street could discourage a third party from proposing a change of control or other strategic transactioninformation to compete with us.
Our ability to pay dividends and to make distributions may be limited or prohibited by the terms of our indebtedness or Preferred Stock.
We are, and may in the future become, party to agreements and instruments that restrict or prevent the payment of dividends on our capital stock. In June 2018, we entered into a Credit Agreement dated as of June 5, 2018 (the “2018 Credit Agreement”), among Legacy RTI, as a borrower, Pioneer, our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors (together, with Legacy RTI and Pioneer, the “JPM Loan Parties”), 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. Under the terms Any of the 2018 Credit Agreement, we are restricted from paying dividends on our common stock without the prior written consent of the administrative agent. We are also restricted from paying dividends or making distributions on our common stock without the prior written consent of the holders of a majority of the Preferred Stock pursuant to the terms of the Certificate of Designation, so long as any shares of the Preferred Stock remain outstanding. In addition, under the terms of the 2018 Credit Agreement, distributions to holders of our Preferred Stock are permitted only to the extent that we can satisfy certain financial covenant tests (based on the ratio of our total indebtedness to consolidated EBITDA) and meet other requirements.
The 2018 Credit Agreement and the 2019 Credit Agreement contain financial and operating restrictions that may limit our access to credit. If we fail to comply with financial or other covenants in the 2018 Credit Agreement and the 2019 Credit Agreement, we may be required to repay indebtedness to our existing lenders, which may harm our liquidity.
Provisions in the 2018 Credit Agreement and the 2019 Credit Agreement (defined below) impose restrictions on our ability to, among other things:
merge or consolidate;
make strategic acquisitions;
make dispositions of property;
create liens;
enter into transactions with affiliates;
become a guarantor;
pay dividends and make distributions;
incur more debt; and
make investments.
The 2018 Credit Agreement and the 2019 Credit Agreement also contain financial covenants that require us to maintain compliance with specified financial ratios and maintain a specified amount of cash on hand.
We may not be able to comply with the financial covenants in the future. In the absence of a waiver from our lenders, any failure by us to comply with these covenants in the future may result in the declaration of an event of default, which could prevent us from borrowing under the 2018 Credit Agreement and the 2019 Credit Agreement. In addition to preventing additional borrowings under the 2018 Credit Agreement and the 2019 Credit Agreement, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding, if any, under the agreement, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we then may not have sufficient funds available for repayment or the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.
We have incurred a significant amount of secured debt, and expect to incur a significant amount of additional debt in the future.
The 2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100 million (the “2018 Facility”). We and Pioneer will be able to, at our option, and subject to customary conditions and JPM Lender approval, request an increase to the 2018 Facility by up to $50 million. A total of $50 million currently is outstanding on the 2018 Facility due to the Company’s pay off of its previous Third Amended and Restated Loan Agreement, dated as of August 3, 2017, with TD Bank, N.A. and First Tennessee Bank National Association.
The 2018 Facility is guaranteed by our domestic subsidiaries and is secured by: (i) substantially all of our assets and the assets of Pioneer; (ii) substantially all of the assets of each of our domestic subsidiaries; and (iii) 65% of the stock of our foreign subsidiaries. Borrowings made under the 2018 Credit Agreement will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate (“CBFR Loans”) plus an adjustable margin of up to 2.00% (the “CBFR Rate”). We may elect to convert the interest rate for the initial borrowings to a rate per annum equal to the adjusted London Interbank Offered Rate (“LIBOR”) (“Eurodollar Loans”) plus an adjustable margin of up to 2.00% (the “Eurodollar Rate”). For all subsequent borrowings, we may elect to apply either the CBFR Rate or Eurodollar Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon our average quarterly availability. The maturity date of the 2018 Facility is June 5, 2023. The Company may make optional prepayments on the 2018 Facility without penalty.
Refer to Item 8, Note 18 for additional information regarding amendments to our credit agreements.
Our level of indebtedness may limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations under the agreements relating to our indebtedness.
Any acquisitions, strategic investments, divestures, mergers or joint ventures we make may require the issuance of a significant amount of equity or debt securities and may not be scientifically or commercially successful.
As part of our business strategy, we intend to make certain acquisitions to obtain additional businesses, product and/or process technologies, capabilities and personnel. If we make one or more significant acquisitions in which the consideration includes securities, we may be required to issue a substantial amount of equity, debt, warrants, convertible instruments or other similar securities. Such an issuance could dilute your investment in our common stock or increase our interest expense and other expenses.
Our long-term strategy may include identifying and acquiring, investing in or merging with suitable candidates on acceptable terms, divesting of certain business lines or activities or entering into joint ventures. In particular, over time, we may acquire, make investments in, or merge with providers of product offerings that complement our business or may terminate such activities. Mergers, acquisitions and divestitures include a number of risks and present financial, managerial and operational challenges, including but not limited to:
Further, acquisitions involve a number of operational risks, such as:
difficulty and expense of assimilating the operations, technology and personnel of the acquired business;
our inability to retain the management, key personnel and other employees of the acquired business;
our inability to maintain the acquired company’s relationship with customers and key third parties, such as alliance partners;
exposure to legal claims for activities of the acquired business prior to the acquisition;
the potential need to implement financial and other systems and add management resources;
the potential for internal control deficiencies in the internal controls of the acquired operations;
potential inexperience in a business area that is either new to us or more significant to us than prior to the acquisition;
the diversion of our management’s attention from our core business;
the potential impairment of goodwill andwrite-off ofin-process research and development costs, adversely affecting our reported results of operations; and
increased costs to integrate or, in the case of a divestiture or joint venture, separate the technology, personnel, customer base and business practices of the acquired or divested business or assets.
Any one of these risks could prevent an acquisition, strategic investment, divesture, merger or joint venture from being scientifically or commercially successful, whichforegoing could have a material impactadverse effect on our results of operations and financial condition.
The pendencyposition.
Uncertainty about the effect of the Contemplated Transactions on employees, customers, suppliers, third-party distributorshearings, motions, or other interim proceedings or developments, and other parties, mayif securities analysts or investors perceive these results to be negative, it could have an adverse effect on each of the business, financial condition and results of operations of RTI, regardless of whether the Contemplated Transactions are completed, and may have ana substantial adverse effect on the business, financial condition and resultsprice of operationsour common stock. If we are not successful in our defenses or are not successful in obtaining dismissals of RTI if the Contemplated Transactions are completed. These risks include the following, all of whichany such lawsuit, we could be exacerbated by a delay in the completionrequired to pay substantial legal fees or settlement costs. Any of the Contemplated Transactions:
the impairment of RTI’s ability to attract, retain and motivate current and prospective employees, including key personnel;
the diversion of significant time and resources of RTI’s management;
difficulties maintaining relationships with RTI’s customers, suppliers, third-party distributors and other business partners;
delays or deferments of certain business decisions by RTI’s customers, suppliers, third-party distributors and other business partners;
RTI’s inability to pursue alternative business opportunities or make appropriate changes to the Business because of requirements in the OEM Purchase Agreement that it conduct the Business in all material respects in the ordinary course of business consistent with past practice and not engage in certain activities prior to the completion of the Contemplated Transactions;
any litigation concerning the Contemplated Transactions and related costs; and
the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Contemplated Transactions.
A disruption in the relationship with the OEM Business after the OEM Closingforegoing could have a material adverse impacteffect on RTI’s businessour results of operations and operating results.
Followingfinancial position.
Failure to consummate the Contemplated Transactions within the expected timeframe or at all could have a material adverse impact on the business, financial condition andour results of operations and financial position.
Therethe Nasdaq Stock Market, which could result in our Common Stock being delisted from the Nasdaq Stock Market.
the accuracyvalue and liquidity of the representationsour Common Stock, Warrants and warrantiesPre-Funded Warrants would likely be significantly adversely
the receipt of RTI stockholder approval;
the absence of any law or order in effect that prevents, makes unlawful or prohibits the consummation of the Contemplated Transactions; and
the absence of any material adverse effect on the OEM Group Companies, taken as a whole, or the OEM Business, in each case subject to certain exceptions, since December 31, 2018.
We cannot provide any assurances that these conditions will be satisfied in a timely manner or at all or that the Contemplated Transactions will occur. In addition, the OEM Purchase Agreement contains certain termination rights.
The OEM Purchase Agreement limitsour Common Stock from Nasdaq could also adversely affect our ability to pursue alternativesobtain financing for our operations and/or result in a loss of confidence by investors, employees and/or business partners.
The OEM Purchase Agreement contains provisions that make it more difficult for usseek approval from our stockholders to sell our assets or engage in another type of acquisition transaction withaffect a party other than the buyer. These provisions include anon-solicitation provision, which generally prohibits our solicitation of third-party proposals relating to the acquisition of more than 20% of the consolidated assets of the Company or 20% of any classreverse stock split of the issued and outstanding equity securitiesshares of our Common Stock in order to regain compliance with the Nasdaq Minimum Bid Requirement. However, there can be no assurance that the reverse stock split would be approved by our stockholders. Further, there can be no assurance that the market price per new share of our Common Stock after the reverse stock split will remain unchanged or increase in proportion to the reduction in the number of old shares of our Common Stock outstanding before the reverse stock split. The liquidity of the Company (an “Acquisition Proposal”) (providedshares of our Common Stock, Warrants, Pre-Funded Warrants and Underwriter Warrants may be affected adversely by any reverse stock split given the reduced number of shares of our Common Stock that any third-party inquiries, offers or proposals relating solely towill be outstanding following the reverse stock split, especially if the market price of our spine business shallCommon Stock does not be considered an Acquisition Proposal) and restricts our ability to furnishnon-public information to, or participate in any discussions or negotiations with, any third party with respect to any Acquisition Proposal, subject to certain limited exceptions. In addition, the buyer has an opportunity to modify the termsincrease as a result of the Contemplated Transactions in response toreverse stock split.
The amountOur amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could discourage, delay, or prevent a change of control of our company or changes in management that our stockholders might deem advantageous, including transactions in which stockholders might otherwise receive a premium for their shares. As a result of these provisions, the price investors may be willing to pay for shares of our common stock may be limited. Moreover, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
Pursuantapproved in a prescribed manner.
Our stockholders may not receive any of the proceeds of the Contemplated Transactions.
The proceeds from the Contemplated Transactions will be paid directly to RTI and not our stockholders. Our Board of Directors will evaluate different alternatives for the use of the proceeds from the Contemplated Transactions. RTI intends to use substantiallypay some or all of the proceeds to repay indebtedness and capitalize RTI for continued investment in its global spine portfolio. The Board doesmilestone payments thereunder that remain unpaid — whether or not currently expect to declare a special dividend of any such proceeds to our stockholders, but such a dividend may be paid inwe have achieved the future. If the Contemplated Transactions are consummated, the purchase price for the OEM Business will be paid directly to RTI. Our management will have discretion in the application of the net proceeds from the Contemplated Transactions. Although our Board will evaluate various alternatives regarding the use of the proceeds from the Contemplated Transactions, it has made no decision with respect to the specific use of proceeds other than as described above and has not committed to making any such decision by a particular date.
WSHP is the record owner of 50,000 shares of RTI’s preferred stock, which is 100% of the issued and outstanding preferred stock. Pursuant to the terms of the Certificate of Designation, WSHP is entitled to certain liquidation, redemption and conversion rightsmilestones — upon a change in control of RTI. The Sale may constituteour company prior to December 31, 2022. In addition, under the sale of substantially all of the assets of RTI, which would resultHolo Surgical Purchase Agreement, any surviving entity or acquiror in a change of control pursuant to the Certificate of Designation. As a result, there is a risk that the Sale will trigger such liquidation, redemption and conversion rights and WSHP may exercise these rights. WSHP has not informed RTI whether it would exercise any of these liquidation, redemption or conversion rights, if they are triggered as a result of the Contemplated Transactions. If WSHP were to opt to exercise its liquidation, redemption or conversion rights, and the Company determines that they have been triggered, then approximately $67 million of the proceeds from the Contemplated Transactions would be utilized for that purpose.
We have incurred and will continue to incur significant expenses in connection with the Contemplated Transactions, regardless of whether the Contemplated Transactions are completed.
We have incurred and will continue to incur significant expenses related to the Contemplated Transactions. These expenses include, but are not limited to, financial advisory and opinion fees and expenses, legal fees, accounting fees and expenses, certain employee expenses, consulting fees, filing fees, printing expenses and other related fees and expenses. Many of these expensestransaction involving our company will be payable by us regardless of whether the Contemplated Transactions are completed.
Failurerequired to complete the Contemplated Transactionsassume any outstanding milestone obligations thereunder. These milestone payments and obligations could cause RTI’s stock price to decline.
The failure to complete the Contemplated Transactions may create doubt as to the value of the OEM Business and about RTI’s ability to effectively implement its current business strategies and/likewise discourage or a strategic transaction, which may result in a decline in RTI’s stock price.
The Sale may trigger the liquidation, redemption and conversion rights of WSHP, an affiliate of Water Street, and WSHP may exercise those rights.
WSHP is the record owner of 50,000 shares of Preferred Stock, which is 100% of the issued and outstanding Preferred Stock. WSHP has agreed to vote “FOR” the approval of the Contemplated Transactions. Pursuant to the terms of the Certificate of Designation, WSHP is entitled to the following liquidation, redemption and conversion rights upon a change in control of RTI:
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The Sale may constitute the sale of substantially all of the assets of RTI, which would result indisincentivize a change of control pursuant toof our company that our stockholders might deem advantageous.
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None.
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United States
Our U.S. natural tissue processing facilities are located in Alachua, Florida, near metropolitan Gainesville, including four buildings on approximately 21 acres of property that we own.
Processing, Manufacturing and Laboratory Facilities
In Alachua, Florida, we own a 65,500 square foot processing facility and lease an 8,000 square foot facility for the processing of natural tissues utilizing our BioCleanse®, TUTOPLAST® and CANCELLE® SP sterilization processes. In addition, we also own a 42,000 square foot logistics and technology center. These facilities are pledged under the 2018 Credit Agreement.
In Marquette, Michigan, we own a 106,000 square foot facility for manufacturing metal and synthetic implants and instruments that also houses laboratory facilities. This facility is primarily used for our OEM business and is pledged under the 2018 Credit Agreement.
In Greenville, North Carolina, we lease a 15,500 square foot facility for manufacturing synthetic implants. This facility is primarily used for our OEM business.
Our processing and manufacturing facilities meet the cGMPs requirements and allows us to meet the requirements of anFDA-approved medical device manufacturer.
Administrative, Distributionour current and Marketing Offices
foreseeable future needs.
In Minnetonka, Minnesota,San Diego, California we lease 11,419two locations totaling 18,256 square feet for generalour innovation and administrativedesign functions and other corporate functions. This facility is primarily used for our Spine business.
In Neunkirchen, Germany we own six buildings totaling approximately 60,000 square feet on approximately two acres of land, including 11,000 square feet of area for processing natural tissues utilizing the TUTOPLAST sterilization process. This facility is primarily used for our OEM business.
The Netherlands
On January 1, 2020, the Company exited theresearch and development, product development and general and administrative functions. In Poznan, Poland we lease of the sales300 square feet for product development, test, research, and distribution office in Houten consisting of approximately 10,000 square feet.
We believe that we have sufficient space and facilities to meet our current and foreseeable future needs.
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development functions.
As described in the Explanatory Note to this Form10-K,information regarding certain legal proceedings.
the second quarter of 2020. On April 7, 2020, the Audit Committee of the Board concluded that the Company willwould restate its previously issued audited financial statements for thefiscal years ended December 31, 2018, 2017 and 2016, and selected financial data for thefiscal years ended December 31, 2015 and 2014, and the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016.
2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year. The Company filed the restated financial statements on June 8, 2020.
There is currently ongoingThe Company’s Investigation resulted in stockholder litigation related to the Company’s Investigation.litigation. 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. Atrial (“Lowry Action”). The court appointed a different shareholder as Lead Plaintiff, and she filed an amended complaint on August 31, 2020. On October 15, 2020, the Company and the other-named defendants moved to dismiss the amended complaint and those motions are now ripe for review.
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mediation session, after which negotiations among the parties continued into July. On July 27, 2021, a binding term sheet settling the Lowry Action was entered into whereby the defendants agreed to pay $10.5 million (inclusive of attorneys’ fees and administrative costs) in exchange for the dismissal with prejudice of all claims against the defendants in connection with the Lowry Action. In September 2021, the Court separately granted preliminary approval of the proposed settlements (the “Settlements”) of the Lowry Action and the Summers Action. On January 24, 2022, the Court granted final approval of the settlement of the Summers Action. On January 26, 2022, the Court granted final approval of the settlement of the Lowry Action. As part of the Settlements, the Court awarded attorney’s fees and expenses to plaintiffs’ counsel in the Summers Action, which was paid by the Company’s insurers. These matters are now fully resolved.
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Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2019 to January 31, 2019 | 9,192 | $ | 4.10 | — | — | |||||||||||
February 1, 2019 to February 28, 2019 | 2,571 | $ | 4.98 | — | — | |||||||||||
March 1, 2019 to March 31, 2019 | 17,258 | $ | 4.98 | — | — | |||||||||||
April 1, 2019 to April 30, 2019 | 847 | $ | 4.98 | — | — | |||||||||||
May 1, 2019 to May 31, 2019 | 6,901 | $ | 4.90 | — | — | |||||||||||
June 1, 2019 to June 30, 2019 | — | — | — | — | ||||||||||||
July 1, 2019 to July 31, 2019 | 5,737 | $ | 4.05 | — | — | |||||||||||
August 1, 2019 to August 31, 2019 | 2,075 | $ | 4.18 | — | — | |||||||||||
September 1, 2019 to September 30, 2019 | — | — | — | — | ||||||||||||
October 1, 2019 to October 31, 2019 | 7,325 | $ | 2.78 | — | — | |||||||||||
November 1, 2019 to November 30, 2019 | 2,215 | $ | 1.90 | — | — | |||||||||||
December 1, 2019 to December 31, 2019 | 9,923 | $ | 4.52 | — | — | |||||||||||
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Total | 64,044 | $ | 4.31 | — | — | |||||||||||
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2021.
Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
January 1, 2021 to January 31, 2021 | 7,294 | $ | 2.19 | — | — | |||||||||||||||||||||
February 1, 2021 to February 28, 2021 | 39,589 | $ | 2.51 | — | — | |||||||||||||||||||||
March 1, 2021 to March 31, 2021 | — | $ | — | — | — | |||||||||||||||||||||
April 1, 2021 to April 30, 2021 | 9,796 | $ | 2.05 | — | — | |||||||||||||||||||||
May 1, 2021 to May 31, 2021 | — | $ | — | — | — | |||||||||||||||||||||
June 1, 2021 to June 30, 2021 | 717 | $ | 1.39 | — | — | |||||||||||||||||||||
July 1, 2021 to July 31, 2021 | 6,528 | $ | 1.27 | — | — | |||||||||||||||||||||
August 1, 2021 to August 31, 2021 | 923 | $ | 1.09 | — | — | |||||||||||||||||||||
September 1, 2021 to September 30, 2021 | 11,143 | $ | 1.43 | — | — | |||||||||||||||||||||
October 1, 2021 to October 31, 2021 | 23,763 | $ | 1.03 | — | — | |||||||||||||||||||||
November 1, 2021 to November 30, 2021 | 788 | $ | 1.11 | — | — | |||||||||||||||||||||
December 1, 2021 to December 31, 2021 | 8,477 | $ | 0.72 | — | — | |||||||||||||||||||||
Total | 109,018 | $ | 1.91 | — | — |
Total Return Analysis | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
RTI Surgical, Inc. | $ | 100.00 | $ | 76.35 | $ | 62.50 | $ | 78.85 | $ | 71.15 | $ | 52.69 | ||||||||||||
NASDAQ Composite | 100.00 | 106.96 | 116.45 | 150.96 | 146.67 | 200.49 | ||||||||||||||||||
S&P 500 Health Care Equipment Index | 100.00 | 105.97 | 112.85 | 147.71 | 171.70 | 222.04 |
The statement of operations data set forth below for the years ended December 31, 2019, 2018 and 2017, and selected balance sheet data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements and accompanying notes. The consolidated financial statements as of December 31, 2019 and 2018 and for the three years ended December 31, 2019, 2018 and 2017 are included elsewhere in this Form10-K. The selected consolidated financial data set forth below should be read along with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes accounting changes and business combinations, and our consolidated financial statements and accompanying notes included elsewhere in this Form 10-K.
The statement of operations data set forth below for the year ended December 31, 2016 , and the balance sheet data set forth as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements and accompanying notes which are not included elsewhere in this Form10-K.
The selected financial data as of and for the years ended December 31, 2019 and 2018 reflect our adoption of Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,Revenue from Contracts with Customers (Topic 606). The selected financial data as of and for the year ended December 31, 2019 also reflects our adoption of the FASB issued ASU 2016-02,Leases (Topic 842). We have not adjusted the selected financial data for any other period or as of any other date presented. See Note 4, Leases, and Note 6, Revenue from Contracts with Customers.
Year Ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||
Revenues | $ | 308,384 | $ | 280,362 | $ | 280,349 | $ | 275,984 | $ | 283,131 | ||||||||||
Costs of processing and distribution | 137,259 | 140,719 | 137,277 | 142,657 | 133,460 | |||||||||||||||
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Gross profit | 171,125 | 139,643 | 143,072 | 133,327 | 149,671 | |||||||||||||||
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Expenses: | ||||||||||||||||||||
Marketing, general and administrative | 157,675 | 119,724 | 115,009 | 116,666 | 107,550 | |||||||||||||||
Research and development | 16,836 | 14,410 | 13,315 | 16,297 | 15,065 | |||||||||||||||
Severance and restructuring costs | — | 2,808 | 12,016 | 1,039 | 995 | |||||||||||||||
Gain on acquisition contingency | (76,033 | ) | — | — | — | — | ||||||||||||||
Strategic review costs | — | — | — | 1,150 | — | |||||||||||||||
Executive transition costs | — | — | 2,818 | 4,404 | — | |||||||||||||||
Contested proxy expenses | — | — | — | 2,680 | — | |||||||||||||||
Asset impairment and abandonments | 97,341 | 5,070 | 4,034 | 5,241 | 814 | |||||||||||||||
Litigation settlement and settlement charges | — | — | — | — | 804 | |||||||||||||||
Goodwill impairment | 140,003 | — | — | 1,107 | — | |||||||||||||||
Acquisition and integration expenses | 17,159 | 4,943 | 630 | — | — | |||||||||||||||
Cardiothoracic closure business divestiture contingency consideration | — | (3,000 | ) | — | — | — | ||||||||||||||
Gain on cardiothoracic closure business divestiture | — | — | (34,090 | ) | — | — | ||||||||||||||
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Total operating expenses | 352,981 | 143,955 | 113,732 | 148,584 | 125,228 | |||||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Operating (loss) income | (181,856 | ) | (4,312 | ) | 29,340 | (15,257 | ) | 24,443 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Other (expense) income: | ||||||||||||||||||||
Interest expense | (12,571 | ) | (2,771 | ) | (3,180 | ) | (1,655 | ) | (1,492 | ) | ||||||||||
Interest income | 161 | 35 | 8 | 8 | 3 | |||||||||||||||
Loss on extinguishment of debt | — | (309 | ) | — | — | — | ||||||||||||||
Foreign exchange (loss) gain | (139 | ) | (34 | ) | 87 | (129 | ) | 78 | ||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Total other expense - net | (12,549 | ) | (3,079 | ) | (3,085 | ) | (1,776 | ) | (1,411 | ) | ||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
(Loss) income before income tax (provision) benefit | (194,405 | ) | (7,391 | ) | 26,255 | (17,033 | ) | 23,032 | ||||||||||||
Income tax benefit (provision) | (17,237 | ) | 4,268 | (19,349 | ) | 3,228 | (8,499 | ) | ||||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Net (loss) income | (211,642 | ) | (3,123 | ) | 6,906 | (13,805 | ) | 14,533 | ||||||||||||
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|
|
|
|
|
| |||||||||||
Convertible preferred dividend | 0 | (2,120 | ) | (3,723 | ) | (3,508 | ) | (3,305 | ) | |||||||||||
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| |||||||||||
Net (loss) income applicable to common shares | $ | (211,642 | ) | $ | (5,243 | ) | $ | 3,183 | $ | (17,313 | ) | $ | 11,228 | |||||||
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| |||||||||||
Net (loss) income per common share - basic | $ | (2.91 | ) | $ | (0.08 | ) | $ | 0.05 | $ | (0.30 | ) | $ | 0.19 | |||||||
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| |||||||||||
Net (loss) income per common share - diluted | $ | (2.91 | ) | $ | (0.08 | ) | $ | 0.05 | $ | (0.30 | ) | $ | 0.19 | |||||||
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Weighted average shares outstanding - basic | 72,824,308 | 63,521,703 | 59,684,289 | 58,236,745 | 57,611,231 | |||||||||||||||
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|
|
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|
| |||||||||||
Weighted average shares outstanding - diluted | 72,824,308 | 63,521,703 | 60,599,952 | 58,236,745 | 58,590,494 | |||||||||||||||
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As of December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,608 | $ | 10,949 | $ | 22,381 | $ | 13,849 | $ | 12,614 | ||||||||||
Working capital | (44,574 | ) | 118,120 | 133,071 | 120,615 | 130,353 | ||||||||||||||
Total assets | 344,509 | 360,185 | 345,764 | 367,955 | 379,844 | |||||||||||||||
Long-term obligations - less current portion | — | 49,073 | 42,076 | 77,267 | 73,631 | |||||||||||||||
Redeemable preferred stock | 66,410 | 66,226 | 63,923 | 60,016 | 56,323 | |||||||||||||||
Total stockholders’ equity | 34,564 | 181,530 | 181,516 | 164,060 | 179,908 |
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You should read the following discussion of our financial condition and results of operations together with those financial statements and the notes to those statements included elsewhere in this filing. This discussion contains forward lookingforward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. Our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
RTI
Domestic distributions and services accounted for 90%regional product specialists who oversee a network of total revenues in 2019. Most of our implants are distributed directly to healthcare providers, hospitals and other healthcare facilities through a direct distribution force and through various OEM relationships.
International distributions and services accounted for 10% of total revenues in 2019. Our implants are distributed in over 50 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the United States.
In 2019, we continued to implement a focused strategy to expand ourindependent spine and OEM operationsorthobiologics distributors who receive commissions for sales that they generate. Our international sales organization is composed of a sales management team that oversees a network of direct sales representatives, independent spine and create long-term, profitable growth for the Company. The core components of our strategy were:
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In line with our strategy, on March 8, 2019, we acquired Paradigm, a leader in motion preservationorthobiologics distributors, andnon-fusion spinal implant technology. Paradigm’s primary product is the coflex® Interlaminar Stabilization® device. Under the terms of the master transaction agreement dated March 8, 2019, we acquired Paradigm for $150.0 million in consideration paid at closing consisting of new debt financing of $100.0 million stocking distributors.
We believe this is a significant step toward focusing our business and advancing our efforts to generate predictable and sustainable operating results through disciplined execution and building scale to extend distribution of our products in those areas that offer the greatest opportunities to benefit our patients and stockholders.
We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft, xenograft, metal and synthetic implants as well as focused clinical efforts to support their acceptance in the marketplace. In addition, we consider strategic acquisitions from time to time for new implants and technologies intended to augment our existing implant offerings, as well as strategic dispositions from time to time in response to market trends or industry developments.
On January 13, 2020, we entered into the OEM Purchase Agreement with Ardi Bidco, an affiliate of Montagu, in connection with the proposed sale of the OEM Business, for a purchase price of $440.0 million, subject to certain adjustments. More specifically, pursuant to the terms of the OEM Purchase Agreement, we will sell all of the issued and outstanding shares of the OEM Group Companies.
The OEM Purchase Agreement contemplates that, prior to the OEM Closing, we will undergo the Reorganization.
The Contemplated Transactions are subject to customary closing conditions, including, among other things: the approval of the Contemplated Transactions by the Company’s stockholders. The parties currently expect to close the Contemplated Transactions in the third quarter of 2020.
Following consummation of the Contemplated Transactions, RTI will focus exclusively on the design, development and distribution of spinal implants to the global market.
Restatement and Revision of Previously Issued Financials
As previously discussed in the Explanatory Note of this Form10-K and as further discussed in Note 30 of the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data,” we have restated previously issued unaudited financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019, to correct certain errors.
year(s) ended December 31, 2021.
Due to the COVID-19 pandemic, there has been uncertainty(8) Non-controlling interest.
Tissue Inventory Valuation.GAAP requiresnear expiration by analyzing historical expiration trends to project inventory that will expire prior to being sold. Our demand-based consumption model assumes that inventory will be stated atsold on a first-in-first-out basis. Our metal inventory does not expire and can be re-sterilized and sold; however, we assess quantities on hand, historical sales, projected sales, projected consumption, the lowernumber of cost or market value. Dueforecasted years, safety stock and those products we have determined to various reasons, some tissue within our inventory will never become available for distribution. Therefore, we must make estimates of future distribution from existing inventory in order towrite-off inventory which will not be distributed and which therefore has reduced or no market value.
Our management reviews available information regarding processing costs, inventory distribution rates, industry supply and demand, medical releases and processed tissue rejections, in order to determine write-offs of cost above market value. For a variety of reasons, we may from time to time be required to adjust our assumptions as processes change and as we gain better information. Although we continue to refinesunset when calculating the information on which we base our estimates, we cannot be sure that our estimates are accurate indicators of future events. Accordingly, future adjustments may result from refining these estimates. Such adjustments may be significant.
estimate.
future expectations. Write-off activity and recoveries for the years were not material.
During the fourth quarter of 2019, we incurred an asset impairment of $11.9 million consisting of $11.7 million related toincluding property plant and equipment and $0.2 million of right-of-use lease assets. The property, plant and equipment was measured utilizing an orderly liquidation value of each of the underlying assets. The right-of-use lease assets were measured utilizing a version of the income approach that considers the present value of the market-based rent payments for the applicable properties. The impairment resulted from a change made to the internal organization of the Company in the fourth quarter of 2019 as discussed in Item 8, Note 5. The organizational change resulted in the creation of a new Spine asset group. Prior to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it had interdependencies among the utilization of the assets within the group, and therefore, there were no discrete cash flows. The newly formed Spine asset group could not support the carrying amount of the property, plant and equipment and the right of use asset, because the Spine asset group no longer has the benefit of shared resources and cashflows generated by the former asset group that it was previously included in.
During the second quarter of 2018, we incurred an asset impairment of $4.5 million related to the abandonment of our map3® implants as a result of us phasing out and ceasing distributions effective October 31, 2018. During the fourth quarter of 2017, we ceased certain long-term projects resulting in asset abandonments of long-term assets at our U.S. facility of $3.5 million.
Intangible assets generally consist of finite-lived intangible assets including patents, tradenames, procurement contracts, customer lists, distribution agreementssubject to amortization were impaired and acquired exclusivity rights. Patents are amortized on the straight-line method over the shorterwritten down to their estimated fair values in 2021 and 2020.
Intangible Assets and Goodwill. Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 350,Goodwill and Other Intangible Assets, requires companies to test goodwill for impairment on an annual basis at the reporting unit level (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). The annual impairment test is performed at each year-end unless indicators of impairment are present and require more frequent testing. In December 2019, we changed our reporting structure, as we adopted new segment reporting, which we concluded resulted in two reporting units, Global Spine (“Spine”) and Global OEM (“OEM”). Refer to Item 8, Note 5 for further discussion regarding segment changes in 2019. With the change in reporting units we performed an impairment test prior to the change, on our previous one reporting unit, and then performed an impairment test immediately after the change on the two reporting units which also coincides with our annual impairment test date of December 31, 2019.
Goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Prior to 2019, in concluding as to fair value of the reporting unit for purposes of testing goodwill, an income approach and a market approach were utilized. The conclusion from these two approaches were weighted equally and then adjusted to incorporate a control premium or acquisition premium that reflects the additional amount a buyer is willingconsideration it expects to payreceive in exchange for elements of control and for a premium that reflects the buyer’s perception of its ability to add value through synergies. In 2019, since the cash flows were negative over the forecast period for the Spine reporting unit, a cost approach was used to determine the fair value of the Spine reporting unit. For the OEM reporting unit, we weighted the income approach 75% and the market approach 25%. We have chosen the weightings because the income approach more fully captures the company specific factors that would not be directly captured in the market approach, as there are no pure publicly traded comparable companies.
The income approach employs a discounted cash flow model that considers: (1) assumptions that marketplace participants would use in their estimates of fair value, including the cash flow period, terminal values based on a terminal growth rate and the discount rate; (2) current period actual results; and (3) projected results for future periods that have been prepared and approved by our senior management.
The market approach employs market multiples from guideline public companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for size and performance metrics relative to peer companies. A control premium was included in determining the fair value under this approach.
The cost approach considers the replacement cost adjusted for certain factors. Certain balance sheet items were adjusted to fair value before being utilized in estimating the value of the reporting units under the cost approach, including inventory, property, plant and equipment, right of use assets, and other intangible assets.
All three approaches used in the analysis have a degree of uncertainty. Potential events or changes in circumstances which could impact the key assumptions used in our goodwill impairment evaluation are as follows:
Change in peer group or performance of peer group companies;
Change in the company’s markets and estimates of future operating performance;
Change in the company’s estimated market cost of capital; and
Change in implied control premiums related to acquisitions in the medical device industry.
The valuation of goodwill requires management to use significant judgments and estimates including, but not limited to, projected future revenue and cash flows, along with risk-adjusted weighted average cost of capital. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232.9 million and recorded goodwill of approximately $135.6 million. Paradigm was initially included in the Company’s single reporting unit. With the change in reporting units, we performed a relative fair value valuation calculation to allocate the Company’s historical goodwill (existing prior to the Paradigm acquisition) between the two reporting units. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit.those products. The Company concluded specific allocation was most appropriate since Paradigm was recently acquired and the benefits of the acquired goodwill were never realized by the rest of the reporting unit as Paradigm was not integrated. Based on this change in reporting units, we conducted an impairment test before and after the change, and it was concluded that the fair value of our reporting unit exceeded the carrying value under the previous reporting unit structure. On the impairment test performed immediately subsequent to the change in reporting units, on the OEM reporting unit test, it was concluded the fair value of goodwill is substantially in excess of its carrying value; on the Spine reporting unit test, it was concluded the carrying value was in excess of the fair value of goodwill. Based on several factors, we weighted the income approach at 75% and the market approach at 25% in determining the fair value of our OEM reporting unit and utilized the cost approach for the Spine reporting unit for the purpose of the impairment test. The test resulted in the fair value of the OEM reporting unit exceeding the carrying value by approximately 54%, and the fair value of the Spine reporting unit could not support the allocated goodwill. As a result, for the year ended December 31, 2019, we recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140.0 million.
Revenue Recognition. We recognize revenue upon shipping, or receipt by our customers of our products and implants, depending on our distribution agreements with our customers or distributors. Our performance obligations consist mainly of transferring control of implants identified in our contracts. We typically transfertransfers control at a point in time upon shipment or delivery of the implants for direct sales, or upon implantation for sales of consigned inventory. OurThe customer is able to direct the use of, and obtain substantially all of the benefits from, the implant at the time the implant is shipped, delivered, or implanted, respectively based on the terms of the contract. For
We permit returns of tissueconsolidated financial statements.
Stock-Based Compensation Plans. We account for our stock-based compensation plansderivative in accordance with FASB ASC 718, Accounting for Stock Compensation (“FASB ASC 718”). FASB ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Under the provisions of FASB ASC 718, stock-based compensation cost is815, these warrants were measured at the grant date, based on the calculated fair value ofat inception and will be remeasured at each reporting date in accordance with ASC 820, “Fair Value Measurement,” with changes in fair value recognized in earnings in the award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award (generally the vesting period of the award). We value restricted stock awards using the intrinsic value method, which is based on the fair market value price on the grant date. We use a Monte Carlo simulation model to estimatechange. The Company determined the fair value of restricted stock awards that contain a market condition.
its warrants based on the Black Scholes Option Pricing Model.
Regulatory Approvals in 2019
Americas
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US 510(k) clearance of Streamline MIS Spinal Fixation System
US 510(k) clearances of Fortilink® Interbody Fusion Device (IBF) with TETRAfuse® 3D Technology
US Puros Customized Block Allograft Market Extension
Canada Puros Customized Block Allograft Market Extension
El Salvador Puros Allograft Registration (Bone)
Peru Puros Allograft Registration (Dermis & Pericardium)
Europe, Middle East, Africa
Israel Puros Allograft Registration
Greece CopiOs Particulate and Membrane registration
Spain Puros Allograft Market Extension (Dowel & Blocks)
France Puros Allograft Registration
Europe Tutobone CE line extension
Asia-Pacific
Singapore Licenses for various allograft products
Malaysia Coflex registration
TaiwanCoflex-F+ registration
Results of Operations
Year Ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||
Revenues | $ | 308,384 | 100.0 | % | $ | 280,362 | 100.0 | % | $ | 280,349 | 100.0 | % | ||||||||||||
Costs of processing and distribution | 137,259 | 44.5 | 140,719 | 50.2 | 137,277 | 49.0 | ||||||||||||||||||
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Gross profit | 171,125 | 55.5 | 139,643 | 49.8 | 143,072 | 51.0 | ||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||
Marketing, general and administrative | 157,675 | 51.1 | 119,724 | 42.7 | 115,009 | 41.0 | ||||||||||||||||||
Research and development | 16,836 | 5.5 | 14,410 | 5.1 | 13,315 | 4.7 | ||||||||||||||||||
Severance and restructuring costs | — | — | 2,808 | 1.0 | 12,016 | 4.3 | ||||||||||||||||||
Gain on acquisition contingency | (76,033 | ) | (24.7 | ) | — | — | — | — | ||||||||||||||||
Executive transition costs | — | — | — | — | 2,818 | 1.0 | ||||||||||||||||||
Asset impairment and abandonments | 97,341 | 31.6 | 5,070 | 1.8 | 4,034 | 1.4 | ||||||||||||||||||
Goodwill impairment | 140,003 | 45.4 | — | — | — | — | ||||||||||||||||||
Acquisition and integration expenses | 17,159 | 5.6 | 4,943 | 1.8 | 630 | 0.2 | ||||||||||||||||||
Cardiothoracic closure business divestiture contingency consideration | — | — | (3,000 | ) | (1.1 | ) | — | — | ||||||||||||||||
Gain on cardiothoracic closure business divestiture | — | — | — | — | (34,090 | ) | (12.2 | ) | ||||||||||||||||
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Total operating expenses | 352,981 | 114.5 | 143,955 | 51.3 | 113,732 | 40.6 | ||||||||||||||||||
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Operating (loss) income | (181,856 | ) | (59.0 | ) | (4,312 | ) | (1.5 | ) | 29,340 | 10.4 | ||||||||||||||
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Other (expense) income: | ||||||||||||||||||||||||
Interest expense | (12,571 | ) | (4.1 | ) | (2,771 | ) | (1.0 | ) | (3,180 | ) | (1.1 | ) | ||||||||||||
Interest income | 161 | 0.1 | 35 | 0.0 | 8 | 0.0 | ||||||||||||||||||
Loss on extinguishment of debt | — | — | (309 | ) | (0.1 | ) | — | — | ||||||||||||||||
Foreign exchange (loss) gain | (139 | ) | (0.0 | ) | (34 | ) | (0.0 | ) | 87 | 0.0 | ||||||||||||||
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Total other expense - net | (12,549 | ) | (4.0 | ) | (3,079 | ) | (1.1 | ) | (3,085 | ) | (1.1 | ) | ||||||||||||
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(Loss) income before income tax (provision) benefit | (194,405 | ) | (63.0 | ) | (7,391 | ) | (2.6 | ) | 26,255 | 9.4 | ||||||||||||||
Income tax benefit (provision) | (17,237 | ) | (5.6 | ) | 4,268 | 1.5 | (19,349 | ) | (6.9 | ) | ||||||||||||||
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Net (loss) income | (211,642 | ) | (68.6 | ) | (3,123 | ) | (1.1 | ) | 6,906 | 2.5 | ||||||||||||||
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Convertible preferred dividend | — | — | (2,120 | ) | (0.8 | ) | (3,723 | ) | (1.3 | ) | ||||||||||||||
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Net (loss) income applicable to common shares | $ | (211,642 | ) | (68.6 | %) | $ | (5,243 | ) | (1.9 | %) | $ | 3,183 | 1.2 | % | ||||||||||
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For the Year Ended December 31, | Percent Change | |||||||||||||||||||
2019 | 2018 | 2017 | 2019/2018 | 2018/2017 | ||||||||||||||||
Spine | $ | 118,987 | $ | 94,436 | $ | 92,712 | 26.0 | % | 1.9 | % | ||||||||||
OEM | 189,397 | 185,926 | 187,637 | 1.9 | % | (0.9 | )% | |||||||||||||
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Total Revenues | $ | 308,384 | $ | 280,362 | $ | 280,349 | 10.0 | % | 0.0 | % | ||||||||||
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2019
Year Ended December 31, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||||||||||||||||||
Revenues | $ | 90,500 | 100.0 | % | $ | 101,749 | 100.0 | % | $ | 117,423 | 100.0 | % | |||||||||||||||||||||||
Costs of goods sold | 29,775 | 32.9 | 44,002 | 43.2 | 32,777 | 27.9 | |||||||||||||||||||||||||||||
Gross profit | 60,725 | 67.1 | 57,747 | 56.8 | 84,646 | 72.1 | |||||||||||||||||||||||||||||
Operating Expenses: | |||||||||||||||||||||||||||||||||||
General and administrative | 104,668 | 115.7 | 124,424 | 122.3 | 135,396 | 115.3 | |||||||||||||||||||||||||||||
Research and development | 13,888 | 15.3 | 11,947 | 11.7 | 16,836 | 14.3 | |||||||||||||||||||||||||||||
Loss (Gain) on acquisition contingency | (4,587) | (5.1) | 4,753 | 4.7 | (76,033) | (64.8) | |||||||||||||||||||||||||||||
Asset acquisition expenses | 72,087 | 79.7 | 94,999 | 93.4 | — | — | |||||||||||||||||||||||||||||
Asset impairment and abandonments | 12,195 | 13.5 | 14,773 | 14.5 | 97,341 | 82.9 | |||||||||||||||||||||||||||||
Goodwill impairment | — | — | — | — | 140,003 | 119.2 | |||||||||||||||||||||||||||||
Transaction and integration expenses | 3,689 | 4.1 | 4,872 | 4.8 | 13,999 | 11.9 | |||||||||||||||||||||||||||||
Total operating expenses | 201,940 | 223.1 | 255,768 | 251.4 | 327,542 | 278.8 | |||||||||||||||||||||||||||||
Other operating income, net | (3,932) | (4.3) | — | — | — | — | |||||||||||||||||||||||||||||
Operating loss | (137,283) | (151.7) | (198,021) | (194.6) | (242,896) | (206.7) | |||||||||||||||||||||||||||||
Other (income) expense - net: | |||||||||||||||||||||||||||||||||||
Other (income) expense - net | (202) | (0.2) | (61) | 0.1 | (161) | 0.1 | |||||||||||||||||||||||||||||
Foreign exchange loss (gain) | 1,447 | 1.6 | (279) | 0.3 | 122 | (0.1) | |||||||||||||||||||||||||||||
Change in fair value of warrant liability | (14,736) | (16.3) | — | — | — | — | |||||||||||||||||||||||||||||
Total other (income) expense - net | (13,491) | (14.9) | (340) | 0.4 | (39) | — | |||||||||||||||||||||||||||||
Loss before income tax (benefit) provision | (123,792) | (136.8) | (197,681) | (194.3) | (242,857) | (206.8) | |||||||||||||||||||||||||||||
Income tax (benefit) provision | (886) | (1.0) | (3,486) | 3.4 | 5,921 | (5.0) | |||||||||||||||||||||||||||||
Net loss from continuing operations | (122,906) | (135.8) | (194,195) | (190.9) | (248,778) | (211.9) | |||||||||||||||||||||||||||||
Discontinued operations | |||||||||||||||||||||||||||||||||||
Income from operations of discontinued operations | (6,316) | (7.0) | 179,934 | 176.8 | 48,452 | 41.3 | |||||||||||||||||||||||||||||
Income tax provision (benefit) provision | (2,674) | (3.0) | 19,522 | (19.2) | 11,316 | (9.6) | |||||||||||||||||||||||||||||
Net income from discontinued operations | (3,642) | (4.0) | 160,412 | 157.6 | 37,136 | 31.7 | |||||||||||||||||||||||||||||
Net loss | (126,548) | (139.8) | (33,783) | (33.3) | (211,642) | (180.2) | |||||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | 41,897 | 46.3 | — | — | — | — | |||||||||||||||||||||||||||||
Net (loss) income applicable to Surgalign Holdings, Inc. | $ | (84,651) | (93.5) | $ | (33,783) | (33.3) | $ | (211,642) | (180.2) |
For the Year Ended December 31, | Percent Change | ||||||||||||||||||||||||||||
2021 | 2020 | 2019 | 2021/2020 | 2020/2019 | |||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||
Domestic | $ | 77,927 | $ | 85,612 | $ | 97,703 | (9.0) | % | (12.4) | % | |||||||||||||||||||
International | 12,573 | 16,137 | 19,720 | (22.1) | % | (18.2) | % | ||||||||||||||||||||||
Total revenues | $ | 90,500 | $ | 101,749 | $ | 117,423 | (11.1) | % | (13.3) | % |
Total 2020
Spine Segment.Revenues from spinal implants increased $24.6 million, or 26.0%, to $119.0 million for the year ended December 31, 2019, compared to $94.4 million for the year ended December 31, 2018. Spine revenues increased primarily as a result of increased distributions of our coflex® Interlaminar Stabilization® implants, partially offset by the abandonment of the map3® implant. Excluding our coflex® Interlaminar Stabilization® implants, our spine implants decreased $5.7 million, or 6.0%, to $88.7 million for the year ended December 31, 2019 compared to $94.4 million for the year ended December 31, 2018.
OEM Segment.Revenues from OEM which includes sports allografts increased $3.5 million, or 1.9%, to $189.4 million for the year ended December 31, 2019, compared to $185.9 million for the year ended December 31, 2018. OEM revenues increased primarily due to increased demand from certain OEM distributors, primarily in our acellular dermal matrix implants and as a result of higher distributions of our Cortiva® implant.
Costs of Processing and Distribution. Costs of processing and distribution decreased $3.4 million, or 2.4%, to $137.3 million for the year ended December 31, 2019, from $140.7 million for the year ended December 31, 2018. Adjusted for the impact of purchase accountingstep-up of $3.2 million and $0.6 million for the years ended December 31, 2019 and 2018, respectively, and an inventorywrite-off of $6.6 million related to the abandonment of our map3® implant and $1.0 million as a result ofwriting-off certain obsolete quantities primarily of bone graft substitute inventory due to the rationalization of our international distribution infrastructure for the year ended December 31, 2018, cost of processing and distribution increased $1.6 million, or 1.2%, to $134.1 million, or 43.5% of revenue, for the year ended December 31, 2019, compared to $132.5 million, or 47.3% of revenue, for the year ended December 30, 2018. The decrease in costs of processing and distribution was primarily due to the reduction in cost from our strategic initiative to optimize material cost and drive operational efficiency.
Marketing, General and Administrative Expenses. Marketing, general and administrative expenses increased $37.9 million, or 31.7%, to $157.7 million for the year ended December 31, 2019, compared to $119.7 million for the year ended December 31, 2018. Marketing, general and administrative expenses increased as a percentage of revenues from 42.7% for the year ended December 31, 2018 to 51.1% for the year ended December 31, 2019. The increase was primarily due to the Paradigm acquisition resulting in incremental headcount and marketing and administrative related expenses and increased legal cost related to patent litigation, all totaling $36.2 million.
Research and Development Expenses.Research and development expenses increased $2.4 million, or 16.7%, to $16.8 million for the year ended December 31, 2019, compared to $14.4 million for the year ended December 31, 2018. Research and development expenses increased as a percentage of revenues from 5.1% for the year ended December 31, 2018, to 5.5% for the year ended December 31, 2019. The increase in researchcosts of goods was primarily due to product mix, specifically hardware products.
Gain on Acquisition Contingency.Gain on acquisition contingency was $76.0$124.4 million for the year ended December 31, 2020, compared to $135.4 million for the year ended December 31, 2019. The decrease in general and administrative expenses is primarily the result of $8.3 million of reduced spending on commission and distribution related to the decline in revenue.
Asset Impairment2020, was primarily the result of the impairment of the property and Abandonments.equipment.
Acquisition2020.
2019.
foreign exchange gain and loss.
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(in thousands) | ||||||||||||
Net (loss) income applicable to common shares, as reported | $ | (211,642 | ) | $ | (5,243 | ) | $ | 3,183 | ||||
Severance and restructuring costs | — | 2,808 | 12,016 | |||||||||
Executive transition costs | — | — | 2,818 | |||||||||
Gain on acquisition contingency | (76,033 | ) | — | — | ||||||||
Asset impairment and abandonments | 97,341 | 5,070 | 4,034 | |||||||||
Goodwill impairment | 140,003 | — | — | |||||||||
Inventory purchase price adjustment | 3,225 | 594 | — | |||||||||
Loss on extinguishment of debt | — | 309 | — | |||||||||
Inventory write-off | 361 | 7,582 | — | |||||||||
Acquisition and integration expenses | 17,159 | 4,943 | 630 | |||||||||
Cardiothoracic closure business divestiture contingency consideration | — | (3,000 | ) | — | ||||||||
Gain on cardiothoracic closure business divestiture | — | — | (34,090 | ) | ||||||||
Net change in valuation allowance | 48,415 | (1,620 | ) | — | ||||||||
Tax effect on new tax legislation | — | (650 | ) | 2,187 | ||||||||
Tax effect on other adjustments | (30,204 | ) | (4,180 | ) | 13,117 | |||||||
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Non-GAAP net (loss) income applicable to common shares, adjusted | $ | (11,375 | ) | $ | 6,613 | $ | 3,895 | |||||
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For the Year Ended December 31, | For the Year Ended December 31, | ||||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||
Gross profit, as reported | $ | 171,125 | $ | 139,643 | $ | 143,072 | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Net loss from continuing operations, as reported | Net loss from continuing operations, as reported | $ | (122,906) | $ | (194,195) | $ | (248,778) | ||||||||||||||||||||||
Change in fair value of warrant liability | Change in fair value of warrant liability | (14,736) | — | — | |||||||||||||||||||||||||
Bargain purchase gain | Bargain purchase gain | (90) | — | — | |||||||||||||||||||||||||
Other operating income | Other operating income | (3,932) | — | — | |||||||||||||||||||||||||
Supplier prepayment write-off | Supplier prepayment write-off | 3,000 | — | — | |||||||||||||||||||||||||
Severance and restructuring costs | Severance and restructuring costs | 208 | 34 | — | |||||||||||||||||||||||||
Loss (gain) on acquisition contingency | Loss (gain) on acquisition contingency | (4,587) | 4,753 | (76,033) | |||||||||||||||||||||||||
Asset acquisition expenses | Asset acquisition expenses | 72,087 | 94,999 | — | |||||||||||||||||||||||||
Asset impairment and abandonments | Asset impairment and abandonments | 12,195 | 14,773 | 97,341 | |||||||||||||||||||||||||
Goodwill impairment | Goodwill impairment | — | — | 140,003 | |||||||||||||||||||||||||
Inventory purchase price adjustment | Inventory purchase price adjustment | 2,036 | 3,409 | 3,225 | |||||||||||||||||||||||||
Inventory write-off | 361 | 7,582 | — | Inventory write-off | — | 9,367 | 361 | ||||||||||||||||||||||
Inventory purchase price adjustment | 3,225 | 594 | — | ||||||||||||||||||||||||||
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Non-GAAP gross profit, adjusted | $ | 174,711 | $ | 147,819 | $ | 143,072 | |||||||||||||||||||||||
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Transaction and integration expenses | Transaction and integration expenses | 3,689 | 4,872 | 13,999 | |||||||||||||||||||||||||
Restatement and investigation related costs | Restatement and investigation related costs | — | 13,152 | — | |||||||||||||||||||||||||
Tax effect on new tax legislation | Tax effect on new tax legislation | — | (3,464) | — | |||||||||||||||||||||||||
Tax effect on other adjustments | Tax effect on other adjustments | (28) | (11,519) | (27,017) | |||||||||||||||||||||||||
Non-GAAP net loss applicable to common shares, adjusted | Non-GAAP net loss applicable to common shares, adjusted | $ | (53,064) | $ | (63,819) | $ | (96,899) |
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
(In thousands) | |||||||||||||||||
Revenues | $ | 90,500 | $ | 101,749 | $ | 117,423 | |||||||||||
Costs of goods sold | 29,775 | 44,002 | 32,777 | ||||||||||||||
Gross profit, as reported | 60,725 | 57,747 | 84,646 | ||||||||||||||
Inventory write-off | — | 9,367 | 361 | ||||||||||||||
Supplier prepayment write-off | 3,000 | — | — | ||||||||||||||
Inventory purchase price adjustment | 2,036 | 3,409 | 3,225 | ||||||||||||||
Non-GAAP gross profit, adjusted | $ | 65,761 | $ | 70,523 | $ | 88,232 |
2018
2017 Executive transition costs – This adjustment represents charges relating to hiring a new Chief Executive Officer
2019 GainLoss /(Gain) on acquisition contingency – The 2021 gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical Acquisition. The loss on acquisition contingency for 2020 relates to an adjustment to our estimate of the obligation for future milestone payments on the Holo Surgical Acquisition; while the gain on acquisition contingency in 2019 relates to an adjustment to our estimate of the obligation for future milestone payments of the Paradigm and Zyga acquisition.
2019, 2018
2019
2018 Loss on extinguishment of debt – These costs relate to refinancing our debt.
2018 Inventorywrite-off – These costs relate to an inventorywrite-off due to transition from an integrated manufacturing company to a distribution model and Cervalign
map3 implant in 2019.
2018 Cardiothoracic closure business divestiture contingency considerationinvestigation related costs – This adjustment represents the remaining cash contingency consideration received from the sale of substantially allThese costs relate to consulting and legal fees and settlement expenses incurred as a result of the assets of our CT Business to A&E.
2017 Gain on cardiothoracic closure business divestiture – This adjustment represents the gain relating to the sale of substantially all of the assets of our CT Business to A&E.
2019restatement, regulatory, and 2018 Net changerelated activities in valuation allowance – This adjustment represents a net change in valuation allowance relating to foreign and certain state deferred tax assets.
2018 and 20172020.
On April 27, 2020, we entered into an amendmentachieved. Further, pursuant to the 2019 Credit Agreement. The amendment amended the 2019 CreditMaster Transaction Agreement, to: (i) establish an incremental term loan commitment in an aggregate principal amount notwe will be obligated to exceed $30 million (the “Second Amendment Incremental Loan Commitments”); and (ii) provide for a portionpay some or all of the Second Amendment Incremental Loan Commitments upmilestone payments thereunder that remain unpaid – whether or not we have achieved the milestones – upon a change in control of our company prior to $13.5 million be availableDecember 31, 2022. Based on a delayed-draw basis at any time after the effective date of the amendment and on or prior to August 31, 2020, subject to certain conditions as set forth in the amendment and the 2019 Credit Agreement. The maturity of the loans advanced under Second Amendment Incremental Loan Commitments have a maturity date of April 27, 2021. These term loans must be repaid in their entirety, at which time a takeout fee ranging from $11.25 million to $25.5 million shall be due and payable.
Absent the closing of the Contemplated Transactions, which is contingent upon a number of factors and expected to close in the third quarter of 2020,probability weighted model, the Company has limited financial resources available to support its ongoing operations and pay its obligations as they become due. These factors raise substantial doubt concerning the Company’s ability to continue asestimates a going concern. The consolidated financial statements do not include any adjustments relatingcontingent liability related to the recoverability and classificationrevenue based earnout of asset carrying amounts or the amount and classificationzero.
Should the Pending Transaction not be consummated, the Company will continue to attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s liquidity needs. If cash resources are insufficient to satisfy the Company’son-going cash requirements, the Company will be required to scale back or discontinue its operations entirely. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing. We note also that there is significant uncertainty of the effect that the novel coronavirus may have on the availability, cost and type of financing. If the Pending Transaction is not consummated, there will be an elevated risk that the Company will not comply with its loan covenants. Current forecasted results project violation of covenant ratios within the next year. Failure to comply with these loan covenants may result in a default on the Company’s debtoperating lease obligations and a possible acceleration of these obligations.
Asother significant obligations as of December 31, 2019,2021.
Contractual Obligations Due by Period | |||||||||||||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Operating lease obligations (1) | 66,718 | 1,406 | 8,986 | 11,205 | 45,121 | ||||||||||||||||||||||||
Purchase obligations (2) | 62,729 | 32,208 | 29,473 | 1,048 | — | ||||||||||||||||||||||||
Milestone payments (3) | 62,180 | 25,585 | 36,595 | — | — | ||||||||||||||||||||||||
Total | $ | 191,627 | $ | 59,199 | $ | 75,054 | $ | 12,253 | $ | 45,121 |
As of May 29, 2020, the Company was in compliance with its loan covenants; however, based on current financial trends relating to FY 2020 the Company does not expect to meet its covenant requirements as of the next measurement period, June 30, 2020. If these trends continue, the Company intends to seek a waiver with the issuers. The table below shows the covenant calculations for the Company’s credit instruments as of the balance sheet dateHolo Surgical acquisition and the most recent measurement period, March 31, 2020.
Credit Facility | Balance as of 12/31/2019 (000s) | Financial Covenant | Measurement | Financial | Financial Covenant Metric as of 12/31/2019 | Financial Covenant Metric as of 3/31/2020 | ||||||||||||
JPM Revolver | $ | 71,000 | Fixed Charge Coverage Ratio | Quarterly | >1.00:1.00 | 1.88:1.00 | 1.37:1.00 | |||||||||||
Ares Term Loan | $ | 104,406 | Fixed Charge Coverage Ratio | Quarterly | >0.91:1.00 | 1.88:1.00 | 1.37:1.00 | |||||||||||
Ares Term Loan | $ | 104,406 | Total Net Leverage Ratio* | Quarterly | <5.00:1.00 | 4.96:1.00 | 5.51:1.00 |
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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 respectforward contracts related to the JPM Credit Facility and one for the Ares Credit Facility, each of JPM and Ares, 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 and Ares also agreed to waive the requirement with respect to the going concern qualification.
In view of the matters described above, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date the financial statements are issued and our independent registered public accounting firm have included in their report relating to our 2019 financial statements a “going concern” explanatory paragraph as to substantial doubt of our ability to continue as a going concern.
Going Concern
In connection with the preparation of the consolidated financial statements for the year ended December 31, 2019, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the Company’s ability to continue as a going concern within one year after the date of the issuance, or the date of availability of the financial statements to be issued, noting that there did appear to be evidence of substantial doubt of the Company’s ability to continue as a going concern as further discussed in Note 1 to the consolidated financial statements.
2019Working capital comparison 2021 Compared to 2018
2020
continued growth within the digital surgery strategy.
prior period.
Our short and long-term obligations at December 31, 2019, increased $125.1 million to $174.2 million from $49.1 million at December 31, 2018. The increase in short and long-term obligations was primarily due to increased borrowing to finance
On March 8, 2019, we acquired Paradigm,Credit Agreement dated as discussed above under “Management Overview.”
Onof June 5, 2018, Legacyby and among Surgalign Spine Technologies, Inc. (formerly known as RTI along with itsSurgical, Inc.), as a borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, Pioneer Surgical, entered intoas a borrower, the 2018 Credit Agreement, as borrowers, with JPM, as lender (together with the various financial institutions as in the future may becomeother loan parties thereto the “JPM Lenders”)as guarantors, JPMorgan Chase Bank, N.A., as lender and as administrative agent for the JPM Lenders. The 2018Lenders, as amended (the “2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100.0 million (the “JPM Facility”Agreement”) (subsequently reduced to $75.0 million, as described below). Legacy RTI and Pioneer Surgical will be able to, at their option, and subject to customary conditions and JPM Lender approval, request an increase to the JPM Facility in an amount not to exceed $50.0 million.
The JPM Facility is guaranteed by the Legacy RTI’s domestic subsidiaries and is secured by: (i) substantially all of the assets of Legacy RTI and Pioneer Surgical;; (ii) substantially all of the assets of each of Legacy RTI’s domestic subsidiaries; and (iii) 65% of the stock of the Company’s foreign subsidiaries.
The CBFR Loans will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate plus the CBFR 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. For all subsequent borrowings, Legacy RTI may elect to apply either the CBFR Rate or JPM Eurodollar Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon Legacy RTI’s average quarterly availability. The maturity date of the JPM Facility is June 5, 2023. Legacy RTI may make optional prepayments on the JPM Facility without penalty. Legacy RTI paid certain customary closing costs and bank fees upon entering into the 2018 Credit Agreement.
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. Legacy RTI 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”) 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 withterminated the 2018 Credit Agreement, through the first date on which no default has occurred(iii) paid in full its $100 million term loan and is continuing; or (ii) a period beginning on a date$30 million incremental term loan commitment under 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 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 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, Legacy RTI entered into a First Amendment to the 2018 Credit Agreement and Joinder Agreement (the “2019 First Amendment”), which, among other things: (i) reduced the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $100.0 million to $75.0 million; (ii) joined the Company and Paradigm, and its domestic subsidiaries as guarantors and loan parties to the 2018 Credit Agreement; (iii) permitted the Ares Term Loan (as defined below); and (iv) made 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 and Joinder Agreement
On December 9, 2019, Legacy RTI entered into a Second Amendment to Credit Agreement and Joinder Agreement (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 $75.0 million to $80.0 million.
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; 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 and the JPM Lenders. The Fourth Amendment to the 2018 Credit Agreement amends the 2018 Agreement to: (i) provide for a $8,000,000 block on availability under the 2018 Credit Agreement until the earlier of: (a) the date upon which at least $25,000,000 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 JPM, 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 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 December 31, 2019, the interest rate for the JPM Facility was 3.69%. As of December 31, 2019, there was $71.0 million outstanding on the JPM Facility and total remaining available credit on the JPM Facility was $9.0 million. 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. The Company was in compliance with the financial covenants related to the JPM Facility as of December 31, 2019.
Second Lien Credit Agreement and Term Loan
On March 8, 2019, Legacy RTI entered a Second Lien Credit Agreement, dated as of March 8, 2019, (the “2019 Credit Agreement”)by and among Surgalign Spine Technologies, Inc., among Legacy RTI, as a borrower, the other loan partieslenders party thereto as guarantors (together with Legacy RTI, the “Ares Loan Parties”),from time to time and Ares as lender (together with the various financial institutions as in the future may become parties thereto, the “2019 Lenders”) andCapital Corporation, as administrative agent for the 2019 Lenders. Theother lenders party thereto, as amended (the “2019 Credit Agreement”); and (iv) terminated the 2019 Credit Agreement provides for a term loan in the principal amount of up to $100.0 million (the “Ares Term Loan”). The Ares Term Loan was advanced in a single borrowing on March 8, 2019.
The Ares Term Loan is guaranteed byAgreement. Additionally, the Company and each of the Company’s domestic subsidiaries and is secured by: (i) substantiallyredeemed all of the assetsoutstanding shares of Legacy RTI; (ii) substantially all ofSeries A Convertible Preferred Stock.
The Ares Term Loan will bear interest at a rate per annum equalSEC in relation 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”). 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’ total net leverage ratio. At any time during the period commencingits investigation. Based on March 8, 2019 and ending on March 8, 2021, if the Ares Loan Parties’ total net leverage ratio is greater than 5.75:1.00, 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 amountcurrent information available to the principal balance ofCompany, the Ares Term Loan. If Legacy RTI exercises the PIK Option, the adjustable margin applicableimpact associated with SEC investigation cannot be reasonably estimated. Refer 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 prepaymentsNote 24 for further discussion 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’ total net 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.
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 period beginning on a date that either: (i) a default has occurred and is continuing under the loan documents entered into by Legacy RTI in conjunction with the Credit Agreement (the “Ares Loan Documents”); or (ii) availability under the Ares Term Loan is less than the specified covenant testing threshold, and continuing until either (a) no default has occurred and is continuing under the Ares Loan Documents or (b) availability under the Ares Term Loan is greater than or equal to the specified covenant testing threshold for thirty consecutive days, respectively, (the “Ares 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 the last day of each calendar month during the Ares Covenant Testing Period (each a “Ares Calculation Date”), and is calculated using the minimum fixed charge coverage ratio for the twelve consecutive months ending on each Ares Calculation Date. The Ares Loan Parties are required to maintain an initial total net 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, 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.
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 total net 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 Agreement”), by and among the Ares Loan Parties and the Ares Lenders. The Second Amendment to the 2019 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 $30,000,000 (the “Second Amendment Incremental Loan Commitments”); (iii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13,500,000 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 Ares Amendment, 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 $11,250,000 to $25,500,000 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).
At December 31, 2019, the interest rate for the Ares Term Loan was 10.49%. The Company was in compliance with the financial covenantssettlement related to the Ares Term LoanLowry Action.
For2021, the years ended December 31, 2019, 2018 and 2017, interest expense associated with the amortizationCompany had cash of debt issuance costs was $0.5 million, $0.5$51.3 million and $0.4 million, respectively. Included in the year ended December 31, 2019, was $0.2 millionan accumulated deficit of accelerated amortization of debt issuance costs associated with the modification of the 2018 Credit Agreement.$569.6 million. For the year ended December 31, 2019, the Company incurred total debt issuance cost of $0.8 million.
As of December 31, 2019,2021, the Company had approximately $5.6a loss from continuing operations of $122.9 million and a net loss applicable to Surgalign Holdings, Inc. of cash and cash equivalents and $9.0 million of availability under its revolver agreement.
$84.7 million. The Company’s debt agreements contain a leverage to EBITDA covenant, which as of December 31, 2019, required the Company to maintain a 5.0:1 leverage to trailing twelve-month adjusted EBITDA ratio. The debt agreement provides for an increasehas incurred losses from operations in the covenant ratio to 5.75:1 for each quarter end during 2020, then reduces to 5.25:1 for the quarters ending March 31, 2021previous two fiscal years and June 30, 2021, with a final reduction to 3.50 for each quarter ending thereafter. The Company’s leverage ratio as of December 31, 2019 is approximately 5.51:1. If the Company is unable to execute on its acquisition integration plans or achieve its projected growth anddid not generate positive cash flow targets, its available liquidity could be further limited, and its operations may lead to defaults under the borrowing agreements.
To maintain an adequate amount of available liquidity and execute on our current business plan, we intend to utilize cash flowflows from operations in fiscal year 2021 nor in 2020.
Certain Commitments
On January 13, 2020, we entered into the OEM Purchase Agreement with Ardi Bidco, an affiliate of Montagu,also in connection with the proposed saleoffering, issued placement agent warrants to purchase an aggregate of up 2,608,696 shares of common stock at a strike price of $0.575 per share. We received net proceeds of $17.8 million from the OEM Business. More specifically, pursuant to the termsoffering after deducting investor and other filing fees of the OEM Purchase Agreement, RTI and its subsidiaries will sell to an affiliate of Montagu all of the$2.2 million.
The OEM Purchase Agreement contemplates that, prior to the OEM Closing, we will undergo the Reorganization.
The Contemplated Transactions are subject to customary closing conditions, including, among other things, the approval of the Contemplated Transactions by the Company’s stockholders. The parties currently expect to close the Contemplated Transactions in the third quarter of 2020.
On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300.0 million, consisting of $150.0 million 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 $100.0 million in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Companyour common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days priorand investor warrants to the date of execution of the definitive agreement, representing $50.0 million of value. In addition, the Company may be required to paypurchase up to an additional $150.0aggregate of 29.0 million inshares at a combinationstrike price of cash and$1.725. The 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.
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 $21.0 million in consideration paid at closing (consisting of borrowings of $18.0 million on its revolving credit facility and $3.0 million cash on hand), $1.1 million contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35.0 million. Based on a probability weighted model, the Company estimates a contingent liability related to the clinical and revenue milestones of $1.1 million.
On August 3, 2017, we completed the sale of substantially all of the assets related to our CT Business to A&E pursuant to the Asset Purchase Agreement between us and A&E. The total cash consideration received by us under the Asset Purchase Agreement was composed of $54.0 million, $3.0 million of which was held in escrow (the “Escrow Amount”) to satisfy possible indemnification obligations, of which there were none. As such, we earned and received the $3.0 million cash consideration in the third quarter of 2018. An additional $5.0 million in contingent cash consideration is earned if A&E reaches certain revenue milestones (the “Contingent Consideration”). We also earned and received an additional $1.0 million in consideration for successfully obtaining certain FDA regulatory clearance. As a part of the transaction, we also entered into a multi-year Contract Manufacturing Agreement with A&E (the “Contract Manufacturing Agreement”). Under the Contract Manufacturing Agreement, we agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. We elected to account for the Contingent Consideration arrangement including the Escrow Amount, as a gain contingency in accordance with FASB ASC 450, Contingencies. As such, the Contingent Consideration and Escrow Amount were excluded in measuring the fair value of the consideration to be received in connection with the transaction.
direct offering, issued placement agent warrants to purchase an aggregate of up to 1.7 million shares of our common stock at a strike price of $2.15625 per share. We received net proceeds of $45.8 million from the offering after deducting investor fees of $4.2 million.
Our debt obligations and availability of credit as of December 31, 2019 are as follows:
Outstanding Balance | Available Credit | |||||||
(In thousands) | ||||||||
Ares Term loan | $ | 104,406 | ||||||
JPM facility | 71,000 | $ | 9,000 | |||||
Less unamortized debt issuance costs | (1,229 | ) | ||||||
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Total | $ | 174,177 | ||||||
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The following table provides a summary of our debt obligations, operating lease obligations and other significant obligations as of December 31, 2019.
Contractual Obligations Due by Period | ||||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Debt obligations | $ | 174,177 | $ | 174,177 | $ | — | $ | — | $ | — | ||||||||||
Operating lease obligations | 3,083 | 1,261 | 788 | 318 | 716 | |||||||||||||||
Purchase obligations (1) | 13,445 | 13,445 | — | — | — | |||||||||||||||
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Total | $ | 190,705 | $ | 188,883 | $ | 788 | $ | 318 | $ | 716 | ||||||||||
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existence.
We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities.
rate.
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On April 7, 2020, the Audit Committee of the Board concluded that the Company would restate its previously issued audited financial statements for the years ended December 31, 2018, 2017 and 2016, and selected financial data for the years ended December 31, 2015 and 2014, and the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016.
Based on the results of the Investigation, the Company has concluded that revenue for certain invoices should have been recognized at a later date than when originally recognized. In response to binding purchase orders from certain OEM customers, goods were shipped and received by the customers before requested delivery dates and agreed-upon delivery windows. In many instances the OEM customers requested or approved the early shipments, but the Company has determined that on other occasions the goods were delivered early without obtaining the customers’ affirmative approval. Some of those unapproved shipments were shipped by employees in order to generate additional revenue and resulted in revenues being pulled from a future quarter into an earlier quarter. In addition, the Company has concluded that in July 2017 an adjustment was improperly made to a product return provision in the Direct Division. The revenue for those shipments is being restated, as well as for other orders that shipped earlier than the purchase order due date in the system for which the Company could not locate evidence that the OEM customers had requested or approved the shipments. In addition, the Company has concluded that in the periods from 2015 through the fourth quarter of 2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual and reserve accounts, including an adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company has restated its financial statements to correct these errors.
Furthermore, other errors that were unrelated to the SEC investigation were identified that were corrected in the restated financial statements. Additional errors were made in connection with the recording of the acquisition of Paradigm Spine, LLC in 2019.
deficiencies. The remedial measures undertaken, or to be undertaken by our management team and theirour advisors, and the conclusions that our management team reached in its evaluationson the design and operating effectiveness of the effectiveness of our disclosure controls and procedures andcontrol environment as it related to internal control over financial reporting as of December 31, 2019,2021, are described below in detail.
In connection with the preparation of this Amendment, under
2021.
accounting principles generally accepted in the United States (“U.S. GAAP”).
Management,
December 31, 2021.
Management has excluded Paradigm Spine, LLC from its assessment of
Control Environment
We did not maintain an effective control environment based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the control environment of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines, and authority and responsibilities in pursuit of objectives; (ii)that report. During 2021, our commitment to attract, develop, and retain competent individuals; and (iii) holding individuals accountable for their internal control related responsibilities. As disclosed in the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”, these material weaknesses contributed to accounting errors.
We did not maintain an effective control environment to enable the identification and mitigation of risks of accounting errors based on the contributing factors to material weaknesses in the control environment, including:
The tone from executive management was insufficient to create the proper environment for effective internal control over financial reporting and to ensure that: (i) there were adequate processes for oversight; (ii) there was accountability for the performance of internal control over financial reporting responsibilities; (iii) personnel with key positions had the appropriate training to carry out their responsibilities; and (iv) corrective activities were appropriately applied, prioritized, and implemented in a timely manner.
The Company did not maintain a sufficient complement of management, accounting, financial reporting, sales, and operations personnel who had appropriate levels of knowledge, experience, and training in accounting and internal control matters commensurate with the nature, growth and complexity of our business. The lack of sufficient appropriately skilled and trained personnel contributed to our failure to: (i) adequately identify potential risks; (ii) include in the scope of our internal controls framework certain systems relevant to financial reporting and the preparation of our consolidated financial statements; (iii) design and implement certain risk-mitigating internal controls; and (iv) consistently operate certain of our internal controls.
Our oversight processes and procedures that guide individuals in applying internal control over financial reporting were not adequate in preventing or detecting material accounting errors, or omissions due to inadequate information and, in certain instances, management override of internal controls, including recording improper accounting entries, recording accounting entries that were inconsistent with information known by management at the time, and not communicating relevant information within our organization.
The control environment material weaknesses contributed to other material weaknesses within our system of internal controls over financial reporting in the following COSO Components.
Risk Assessment
We did not design and implement an effective risk assessment based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the risk assessment component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives; (ii) identifying and analyzing risks to achieve these objectives; (iii) considering the potential for fraud in assessing risks; and (iv) identifying and assessing changes in the business that could impact our system of internal controls.
The Company’s formal SOX compliance program did not have sufficient scope and focus on the key financial reporting risks, which was a contributing factor to material weaknesses in the risk assessment.
Control Activities
We did not design and implement effective control activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
The following were contributing factors to the material weaknesses in control activities:
Lack of consistently established controls to segregate the function of recording and approving journal entries, as well as preparation and review of reconciliations with appropriate supporting documentation.
Inconsistent documentation and retention of support for the review and approval of manual journal entries.
Inconsistent documentation and application of accounting policies and/or practice for the sales returns reserve and certain accrual accounts.
Insufficient resources within the accounting and financial reporting department to review the accounting fornon-recurring complex purchase accounting, contingent payment and segment reporting transactions.
Insufficient design and operation of certain control activities to respond to potential risk of material misstatements in the area of revenue recognition. In particular: (i) no controls requiring customer approval for early shipments outside of agreed upon shipping terms; (ii) no controls requiring centralized retention of proof of customer approval or request related to shipping outside of agreed terms; (iii) no formal process for offering or approving discounts to customers for early shipments; and (iv) no formal controls to ensure appropriatecut-off of direct revenue to customers at period ends in line with shipping terms.
Deficiencies in control activities contributed to material accounting errors identified and corrected through 2019 and prior years. These design deficiencies in control activities contributed to the potential for there to have been material accounting errors in substantially all financial statement account balances and disclosures.
Information and Communication
We did not consistently generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the function of internal control; and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.
The following were contributing factors to the material weaknesses in information and communication:
We did not have an effective process in place to identify and maintain the information required to support the functioning of internal controls over financial reporting.
We did not obtain and retain consistent and relevant quality documentation or analysis to provide underlying support and calculations related to reserve and accrual adjustments when recorded.
We did not have a process in place to communicate required information to enable personnel to understand internal control responsibilities.
Monitoring Activities
We did not design and implement effective monitoring activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning; and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.
The following were contributing factors to the material weaknesses in monitoring activities:
Management did not properly evaluate the function and operating effectiveness of certain internal control activities, limiting its ability to detect and communicate deficiencies.
Internal audit activities were insufficient to keep pace with the size and complexity of our business structure and organization, which limited our ability to effectively monitor internal controls.
The Company did not have sufficient talent and resources with sufficient expertise to evaluate the risks and controls.
The Company did not have sufficient oversight and supervision of the internal control evaluation process.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019. Deloitte & Touche LLP’s opinion appears in Item 8 of this Form10-K.
Remediation Plan and Status
Our management isteam committed to remediating identified control deficiencies, (including both those that rise to the level of a material weakness and those that do not), fostering continuous improvement in our internal controls, and enhancing our overall internal controls environment. Our management believesWe believe that these remediation actions along with additional actions, when fully implemented, will remediatehave remediated the material weaknesses we have identifiedweaknesses. The controls that were implemented and strengthen our internal control over financial reporting. Our remediation efforts are ongoing and additional remediation initiatives may be necessary. We will continue our initiatives to implement and document the strengthening of existing, and development of new policies, procedures, and internal controls.
Remediation of the identified material weaknesses and strengthening our internal control environment will require a substantial effort throughout 2020 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controlsenhanced in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls2021 have operated for a sufficient period of time, and management has concluded, through testing, that these controls are designed and operating effectively.
While we believe We have highlighted the steps taken to date and those planned for implementation will remediate the effectiveness of our internal control over financial reporting, we have notactivities that were completed all remediation efforts identified herein. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reportingduring 2021 that assisted in the areas affected byremediating the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary, to ensure that our consolidated financial statements are fairly stated in all material respects. The following remediation activities highlight our commitment to remediating our identified material weaknesses:
weakness.
Our management has
•A comprehensive disciplinary plan is in the process of beingwas implemented for all employees found to have engaged in misconduct, including termination, removal of the individuals from certain accounting and finance functions, written warnings, and appropriate training depending on the severity of the misconduct;
•The Company engaged an experienced compliance professional and increased its compliance staffingefforts to upgrade and enhance the Company’s compliance program in accordance with the Federal Sentencing Guidelines;
•The Company hasengaged a third party to assist with the redesign of the Sarbanes-Oxley program inclusive of Entity Level Controls.
•The Company conducted Ethics training with the Executive management team and finance personnel and will continue doing so annually.
We have separated the functional leadership of the•Business functions such as Financial Planning and& Analysis (FP&A) function from the accounting function.
To date, we have realigned("FP&A"), financial reporting, team members and removed certain members from accounting, and finance functions. We are inhave been restructured and realigned. Through this realignment, the process of evaluating current staffing levelsCompany has hired key finance and the competence of our personnel given their assigned responsibilities. We are also in the process of evaluating the type of training that our personnel require,accounting leadership positions, as well as other supporting accounting staff, seniors, and have also approved resources to have a third-party facilitate required training. We havemanagers, and engaged external resources with significant experience to provide additional capacity, functional capabilities, and cross-training. Management will continue
control environment was remediated.
We have begun implementing
Internal Audit conducted the 2021 SOX program assessment in 2021. The Internal Audit function is outsourced to a third party, which reports to the Audit Committee and administratively to management.
We will hire additional resources and/or augment our resources with third-party advisors within theaccounting oversight competency by hiring key leadership positions as well as accounting and finance personnel to provide additional capacity, functional capabilities, and cross-training. Where applicable, subject matter resources are engaged to assist with transactions and to provide guidance.
OEM Businesses and where control deficiencies existed. We planimplemented new internal controls to implement newaddress the control deficiencies prior to the sale of OEM and strengthen currenthave strengthened existing internal controls over revenue recognition including: (i) controls requiring customer approval for earlythe remaining business, including formalizing a control to conduct a month end review of items billed but not shipped to ensure appropriate cut-off for revenue recognition for direct sales shipments outside of agreed upon shipping terms; (ii) retention of proof of customer approval or requestand enhanced Delivery Order validation procedures for consignment sales related to shipping outside of agreed terms; (iii) a formal process for offering or approving discountssurgical procedures.
We are also enhancing our review and approval process to incorporate segregation of duties to reduce risk of manual overrides.
control activities was remediated.
Creating an effectivehave created a process to identify and maintain the information required to support the functioning of internal controls over financial reporting.
Instituting policiesreporting and processes relating to the maintenanceestablished and continued reinforcement of sufficient capture, use and storage of the information used to evaluate financial reporting controls.
Establishing and reinforcing communications protocols including required information and expectations to enable personnel to perform internal control.
Monitoring Activities
In addition
We will increaseincreased internal audit, finance, and accounting staffingstaff levels and expertise. In 20182020 and 2021, we outsourced our internal audit function. We will increasefunction to assist in improving the scope of theSOX 404 program. The Internal Audit engagement includes assessment of key risks to assist with the ongoing evaluation of our Enterprise Risk Management process, detailorganization and processes, detailed testing of newly implemented controls, and other activities related to monitoring our overall remediation efforts.
Internal Control status is communicated to process and control owners including identification of deficiencies and recommendations for corrective actions. Process and control owners are responsible for remediation of deficiencies identified. .
We are also developingEntity level controls were enhanced related to the above activities, and documentation was retained and tested as part of the SOX 404 program to support their effective communication plans relating to, among other things, identification of deficienciesdesign and recommendations for corrective actions. These plans will apply to all parties responsible for remediation.
Changes in Internal Controls
Over Financial Reporting
Except for
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Not applicable
PART III
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Composition of the Board
Our Board currently consists of nine directors. Pursuant14) is incorporated by reference to the terms of our Preferred Stock, two directors have been appointed by Water Street Healthcare Partners (“Water Street”), our largest stockholder. The remaining seven directors are elected by holders of our common stock and preferred stock voting together as a single class.
Director Qualifications and Biographical Information
Set forth below is a brief description of the background and business experience of each of our current directors for the past five years and the new member, who joined the Board on June 1, 2020.
Director | Age | Year First Became Director | Business Experience | |||
Camille I. Farhat
| 51 | 2017 | Mr. Farhat joined RTI as President and Chief Executive Officer in March 2017. Mr. Farhat’s experience is built from extensive work across multiple companies in ten countries and nine industries, including experience in the healthcare industry globally spanning pharmaceuticals, implantable devices, capital equipment, consumables and services. During 2016 and until he became our President and Chief Executive Officer in March 2017, Mr. Farhat provided certain consulting services and fulfilled his board obligations. Prior to that, Mr. Farhat was President and Chief Executive Officer of American Medical Systems (“AMS”) from 2012 to 2015. Prior to AMS, Mr. Farhat advanced several business segments for Baxter International, serving as Global General Manager of Baxter Pharmaceuticals & Technologies from 2008 to 2011 and Global General Manager of Global Infusion Systems from 2006 to 2008. Prior to Baxter Pharmaceuticals & Technologies, Mr. Farhat was Vice President of Business Development at Medtronic, and previously Global General Manager of Medtronic’s gastroenterology and urology divisions from 2003 to 2006. Earlier in his career, Mr. Farhat gained executive and leadership experience during his thirteen years at General Electric. Mr. Farhat earned a Master of Business Administration from Harvard University, a degree in European Union Studies from Institut National d’Etudes Politiques de Paris and graduated summa cum laude from Northeastern University with a bachelor’s degree in international finance and accounting. Mr. Farhat serves on the Board of ADVAMED (the Advanced Medical Technology Association), the Board of CMR Surgical and Northwestern University’s Cerebrovascular Neurosurgery Advisory Council. Mr. Farhat brings to the Board significant experience revitalizing and profitably growing global businesses within the health care industry. It is also customary for the Chief Executive Officer to be a member of the Board of Directors. |
Director | Age | Year First Became Director | Business Experience | |||
Jeffrey C. Lightcap
| 61 | 2019 | Mr. Lightcap joined the Board on March 8, 2019. Sincemid-2006, Mr. Lightcap has served as a Senior Managing Director at HealthCor Partners Management, LP, a growth equity investor focused on late stage venture and early commercial stage healthcare companies in the diagnostic, therapeutic and med tech, sectors. From 1997 tomid-2006, Mr. Lightcap served as a Senior Managing Director at JLL Partners, a leading middle-market private equity firm. Prior to JLL Partners, from 1993 to 1997, Mr. Lightcap served as a Managing Director at Merrill Lynch & Co., Inc. Prior to joining Merrill Lynch, Mr. Lightcap was a Senior Vice President in the mergers and acquisitions group at Kidder, Peabody & Co. and briefly at Salomon Brothers. Mr. Lightcap received a B.E. in Mechanical Engineering from the State University of New York at Stony Brook in 1981 and in 1985 received an MBA from the University of Chicago. Mr. Lightcap previously served as Chairman of the Board at Corindus Vascular Robotics, Inc. (NYSE: CVRS), a precision vascular robotics company prior to the company being acquired by Siemens Healthineers and serves as a director of the following companies: Heartflow Inc., a medical technology company redefining the way heart disease is diagnosed and treated; CareView Communications, Inc. (OTCQB: CRVW), a healthcare technology company; KellBenx, Inc., a prenatal diagnostic technology company and Paige.AI, a machine learning driven pathology diagnostic company. Mr. Lightcap’s experience navigating the reimbursement landscape and advancing access to medical devices with substantial clinical data and high-growth potential and his leadership skills exhibited throughout his career make him well-qualified to serve as one of the Company’s directors. | |||
Thomas A. McEachin
| 67 | 2015 | Mr. McEachin joined the Board in December 2015. He has been retired since 2012. Prior to his retirement, he served in executive capacities with Covidien Surgical Solutions, a division of Covidien plc, from 2008 to 2012, first as Vice President, Finance from 2008 to 2011, and then as Vice President and Group Chief Financial Officer from 2011 to 2012. From 1997 to 2008, Mr. McEachin served United Technologies and its subsidiaries in various finance capacities. Prior to joining United Technologies, Mr. McEachin served in various executive capacities with Digital Equipment Corporation from 1986 to 1997 and Xerox Corporation from 1975 to 1986. Mr. McEachin holds a B.S. from New York University and an MBA from Stanford University. Mr. McEachin’s finance and executive management experience provides our Board with valuable financial reporting, compliance, accounting and controls, and corporate governance experience. Mr. McEachin also qualifies as an “Audit Committee Financial Expert.” | |||
Stuart F. Simpson
| 53 | 2020 | Mr. Simpson joined our Board on June 1, 2020, filling a newly created directorship. Based on the recommendation of the Nominating and Governance Committee of the Company, Mr. Simpson is one of the Board’s nominees for election by at the 2020 annual meeting of our stockholders. Mr. Simpson most recently served as the President of the Joint Replacement Division of Stryker Corporation, a medical technology company that provides products and services in orthopedics, medical and surgical, and neurotechnology and spine (“Stryker”), from 2017 until his departure from Stryker in 2019. Mr. Simpson held various roles at Stryker from 1997 until 2019, including VP & General Manager of the Commercial Division from 2015 until 2017 and VP & General Manager of the Global Knee & Mako BUs Division from 2014 until 2015. During his tenure at Stryker, Mr. Simpson led transformative, industry-leading strategy to establish robotics as a standard of care for orthopedics industry, led efforts in new product development, provided both strategic counsel and financial discipline to the organization, and helped improve HR leadership, organizational capabilities and customer satisfaction within the organization. Mr. Simpson also helped Stryker complete three significant business development deals, including one with a publicly traded company. Prior to joining Stryker, Mr. Simpson gained diverse experience in sales and marketing in the pharmaceutical and medical technology industry, such as Howmedica International (acquired by Stryker in 1998), Knoll AG and Gold Cross Limited. Mr. Simpson received a Bachelor of Science in Technology and Business Studies from the University of Strathclyde in Glasgow, United Kingdom. He also received a CIM Diploma in Marketing from the Central College of Commerce in Glasgow, United Kingdom. Mr. Simpson is a director of Breg, Inc., a provider of orthopedic and sports medicine products and services. Our Board believes Mr. Simpson’s extensive background in the sports medicine, spine, orthopedic, and surgical device industry, particularly as a President of the Joint Replacement Division of Stryker, complements our Board with valuable industry expertise especially in digital surgery, an area that the Company believes will be important to its ongoing strategy in addition to his experience in new product development and acquisitions. |
Director | Age | Year First Became Director | Business Experience | |||
Mark D. Stolper
| 48 | 2017 | Mr. Stolper joined the Board in March 2017. He has served as Executive Vice President and Chief Financial Officer of RadNet, Inc., the largest owner and operator of freestanding medical diagnostic imaging centers, since July 2004, and he previously served as a member of the Board of RadNet, Inc. from March 2004 to July 2004. He has had diverse experiences in investment banking, private equity, venture capital investing and operations as follows: from 1993 to 1995, Mr. Stolper was a member of the corporate finance group at Dillon, Read & Co., Inc.; from 1995 to 1997, Mr. Stolper was a member of Archon Capital Partners; from 1997 to 1999, Mr. Stolper worked in business development for Eastman Kodak; and in 1999, Mr. Stolperco-founded Broadstream Capital Partners. Mr. Stolper has served on the Board, Compensation Committee and Audit Committee of Rotech Healthcare since February 2016. Mr. Stolper has also served on the Board, Audit Committee, Transaction Committee and Compliance Committee of 21st Century Oncology Holdings, Inc. since January 2018. Previously, Mr. Stolper served as a member of the Board of the following companies: On Track Innovations, Ltd. from 2012 until 2016; Surgical Solutions LLC from 2015 to February 2017; Alco Stores, Inc. from 2014 to 2015; Compumed, Inc. from 2008 to 2014; and Physiotherapy Associates from 2013 to 2016. Mr. Stolper graduated with a liberal arts degree from the University of Pennsylvania and a finance degree from the Wharton School. Additionally, Mr. Stolper earned a postgraduate Award in Accounting from the University of California, Los Angeles. Mr. Stolper’s financial background in life sciences (particularly as a sitting Chief Financial Officer of a publicly-traded company), extensive experience in serving on boards of directors of both public and private companies, and broad mergers and acquisitions experience qualify him to serve on our Board. | |||
Paul G. Thomas
| 64 | 2016 | Mr. Thomas joined the Board in June 2016. He has served as the Founder and Chief Executive Officer of Prominex, apoint-of-care molecular diagnostic company focused on infectious diseases since January 2018. Prior to Prominex, he served as Founder, Chief Executive Officer and President of Roka Bioscience, a molecular diagnostics company focused on food safety applications, from September 2009 until January 2017. Mr. Thomas previously served as Chairman, Chief Executive Officer and President of LifeCell Corporation, a publicly traded regenerative medicine company, from 1998 until it was acquired by KCI in 2008 in a transaction valued at $1.8 billion. Mr. Thomas previously held various senior positions, including President of the Pharmaceutical Products Division, during his tenure of 15 years with Ohmeda, a world leader in inhalation anesthetics and acute care pharmaceuticals. Mr. Thomas currently serves on the Board of Abiomed. Mr. Thomas formerly served on the Board of Roka Bioscience and Aegerion Pharmaceuticals. Mr. Thomas received his M.B.A. degree from Columbia University Graduate School of Business and completed his postgraduate studies in Chemistry at the University of Georgia Graduate School of Arts and Science. He received his B.S. degree in Chemistry from St. Michael’s College in Vermont. Mr. Thomas’s extensive leadership experience with companies in the life science industry qualifies him to serve as a member of our Board. In addition, we regard Mr. Thomas’s experience as a Chief Executive Officer to be of great importance to the Company in providing a broad perspective of the industry, as well as management issues. |
Director | Age | Year First Became Director | Business Experience | |||
Nicholas J. Valeriani
| 63 | 2016 | Mr. Valeriani joined the Board in June 2016. He retired as the Chief Executive Officer of West Health, The Gary and Mary West Health Institute, an independent nonprofit medical research organization that works to create new and more effective ways of delivering healthcare at lower costs, a position he held until 2015. Previously, Mr. Valeriani served 34 years in key positions at Johnson & Johnson, including Company Group Chairman of Johnson & Johnson Ortho-Clinical Diagnostics from 2009 to 2012; Vice President, Office of Strategy and Growth from 2007 to 2009; Worldwide Chairman, Medical Devices and Diagnostics from 2005 to 2007; and Corporate Vice President, Human Resources from 2003 to 2005. Mr. Valeriani also served on the Executive Committee of Johnston & Johnson during his tenure. Mr. Valeriani currently serves on the Board of Edwards Lifesciences Corp., SPR Therapeutics, Inc, and AgNovos Healthcare, LLC. Mr. Valeriani received a Bachelor’s Degree in Industrial Engineering and a Master of Business Administration from Rutgers University. Mr. Valeriani’s experience in the global medical device industry and his leadership in the areas of strategy, growth and human resources qualifies him to serve on our Board. | |||
Shirley A. Weis
| 66 | 2014 | Ms. Weis joined the Board in October 2014. She is president of Weis Associates, LLC, a consulting firm focused on healthcare management, strategic planning and leadership development, and emerita Vice President and Chief Administrative Officer of Mayo Clinic. Ms. Weis worked at Mayo Clinic in many different capacities since 1995, but, most recently, she was charged with overseeing the operations of 87 corporations that make up the Mayo Clinic system, including a 57,000-member staff. Ms. Weis was a member of the Mayo Clinic Board of Trustees and served as the secretary for the Mayo Clinic Board of Governors. Ms. Weis held a position until April 2019 on the Board of Sentry Insurance Company where she was a member of the Audit, Finance and Compensation Committees. She is a member of the board of The Medical Memory, LLC (now called Obex) and serves on the Compensation Committee. Ms. Weis is Professor of Practice in the W.P. Carey School of Business and the College of Nursing and Health Innovation at Arizona State University. Ms. Weis graduated with a master’s degree in management from Aquinas College and received an honorary doctor of science degree from Michigan State University. Ms. Weis’s background at the Mayo Clinic provides our Board with valuable healthcare and business strategy from the perspective of a purchaser of medical products. In addition, she has significant consulting and management experience, which has enabled her to provide valuable insight to our Board. |
Director | Age | Year First Became Director | Business Experience | |||||||
PREFERRED DIRECTORS (APPOINTED BY HOLDERS OF PREFERRED STOCK) | ||||||||||
Curtis M. Selquist
| 75 | 2013 | Mr. Selquist joined the Board pursuant to the Investment Agreement by and between the Company and WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, in July 2013 (the “Investment Agreement”). He has served as the Chairman of the Board since February 2016. Mr. Selquist has been an Operating Partner at Water Street, a strategic investor focused exclusively on the healthcare industry, since April 2007. Mr. Selquist has led and grown a number of global healthcare businesses during a distinguished35-year career at Johnson & Johnson. Prior to joining Water Street, he was the Company Group Chairman of Johnson & Johnson Medical and Johnson & Johnson Healthcare Systems. Mr. Selquist also served as President of Johnson & Johnson Latin America. He was subsequently appointed Worldwide President of Johnson & Johnson, Merck Consumer Pharmaceuticals and Company Group Chairman, responsible for Johnson & Johnson Medical. Mr. Selquist was the founding Chairman of the Global Healthcare Exchange. He also served as Chairman of the National Alliance for Health Information Technology, and as a board member of the National Quality Forum. Mr. Selquist also chaired the National Quality Forum Leadership Network. Mr. Selquist serves as the Lead Director of Breg, Inc. (a manufacturer of medical braces and splints). He is also a Director of Temp Time, Inc. (a cold chain temperature monitoring business) where he serves as Chair of the Board, Chair of the Compensation Committee and a member of the Audit Committee. He was a Director of Health Fitness Corporation (a provider of health management and corporate fitness solutions) from 2007-2010, where he served on the Compensation Committee and Strategy Committee as Chair. He received a bachelor’s degree in Finance and Management from Bradley University. We believe that Mr. Selquist’s experience in the healthcare industry and numerous leadership positions qualifies him to be the Chairman of our company. | |||||||
Christopher R. Sweeney
| 45 | 2015 | Mr. Sweeney joined the Board in October 2015 pursuant to the Investment Agreement. Mr. Sweeney has been employed by Water Street, a strategic investor focused exclusively on the healthcare industry, since 2005, serving initially as a principal and, since 2010, as a partner. Prior to joining Water Street, Mr. Sweeney was employed in various capacities with Cleary & Oxford, a middle market healthcare investment firm, from 1997-2005, ultimately serving as a principal. Mr. Sweeney holds a degree from Williams College. We believe that his investment banking experience as an investor in healthcare companies qualifies him to provide valuable insight to our Board. |
Committees of the Board
Our Board has an Audit Committee, which assists our Boarddisclosure in discharging its responsibilities. The current members of Audit Committee are identified below:
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Our Audit Committee is charged with, among other things, the appointment of our independent registered public accounting firm, as well as discussing and reviewing with the independent registered public accounting firm the scope and the results of the annual audit,pre-approving the engagement of the independent registered public accounting firm for all audit-related services and permissiblenon-audit related services, and reviewing and approving all related-party transactions. Our Audit Committee also reviews interim financial statements included in our quarterly reports and reviews financial statements and related documents filed with the SEC. The Board has determined that each member of the Audit Committee is independent within the meaning of the director independence standards of the Nasdaq Listing Rules as well as the heightened director independence standards of the SEC for Audit Committee members, including Rule10A-3(b)(1) under the Exchange Act. The Board has also determined that each of the members of the Audit Committee is financially literateand is able to read and understand consolidated financial statements and that Mr. McEachin qualifies as an “Audit Committee Financial Expert” as defined in the Exchange Act. During 2019, our Audit Committee met eight times. The charter of the Audit Committee is available on our website athttp://www.rtix.com/en_us/investors/corporate-governance.
AND CORPORATE GOVERNANCE.
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Code of Ethics for Senior Financial Professionals
and Code of Conduct
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Compensation Discussion and Analysis
The Company’s named executive officers for 2019 (in some instances, referred to as the “NEOs”), are:
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Executive Summary
The primary objective of our executive compensation program is to align executive pay with key business and strategic objectives, Company performance and long-term stockholder value creation. With respect to 2019 compensation opportunities and plan design decisions, the Compensation Committee reviewed the performance of the Company in 2018, the performance of each NEO in 2018, relevant external market benchmark data provided by the Compensation Committee’s independent consultant, and relevant internal factors such as the Company’s transformation strategy and outlook for 2019 and the strength and continuity of the executive leadership team. The Compensation Committee also took the core components of the Company’s current transformation strategy (reducing complexity, driving operational excellence, and accelerating growth) and stockholder outreach feedback into account when determining executive compensation levels for 2019 and designed executive compensation to correspond with those goals.
Based on these and other relevant considerations, the Compensation Committee approved the following decisions related to executive compensation levels and plan designs for 2019:
Base salary increases for Mr. Farhat, 3%, Mr. Singer, 4%, Mr. Varela, 3% and Mr. Visa, 6% (Mr. DeRienzis, who began working for the Company in April 2019 did not receive an increase).
Target short-term incentive opportunities, expressed as percentage of base salary, remained unchanged from prior year levels at 110% of salary for Mr. Farhat, 65% of salary for Mr. Singer, and 50% of salary for Mr. Varela, and increased from 40% of salary to 50% of salary for Mr. Visa to improve pay competitiveness and align more closely with other senior executives. Upon joining the Company in April 2019, the target award opportunity for Mr. DeRienzis was set at 45% of salary.
Maintained the design of the Annual Incentive Plan to include the following metrics: 1) Total Corporate Revenues; 2) Adjusted EBITDA; 3) Adjusted Free Cash Flow; 4) Business Unit Revenue; and 5)Non-GAAP Business Unit Contribution Margin. Maximum award funding levels for superior performance results were increased from 125% of target to 150% of target. No annual incentives were earned in 2019 due to below-threshold performance results.
Annual equity grants to NEOs other than Mr. Farhat, who previously received front-loaded inducement grants in 2017, with an approximate equal value weighting between performance-based restricted stock units and time-based restricted stock.
Financial Metrics Used in Compensation Programs
Financial metrics are commonly referenced in defining Company performance for executive officer compensation. The Compensation Committee bases its compensation decisions on the Company’s performance related to certain objectives. The Compensation Committee does not rely solely on predetermined formulas or a limited set of criteria when it evaluates the performance of the executive officers. The Compensation Committee retains discretion to take other factors into account in determining annual incentives and to award no annual incentives even if performance criteria are met. These metrics are defined here, and their use in incentive compensation programs is described below.
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Total Corporate Revenues means total consolidated revenues. The use of Total Corporate Revenues as a metric aligns with the Company’s transformation strategy in 2019 of accelerating growth through: (i) leveraging the Company’s core competency in the spine market; (ii) utilizing core technologies to expand OEM relationships and drive organic growth; and (iii) and building relevant scale in our spinal portfolio to improve our importance to the consolidating healthcare market driven increasingly by integrated delivery networks and group purchasing organizations. A portion of Mr. Visa’s annual incentive award opportunity is also tied to business unit revenues to further reinforce Mr. Visa’s performance incentives.
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Adjusted EBITDA is anon-GAAP measure and, in management’s opinion, an indication of operational effectiveness and profitability as well as providing better alignment with valuation measures used by many stockholders. The use of Adjusted EBITDA as a metric helps to align the Company’s executive compensation metrics with its transformation strategy in 2019 of: (i) reducing complexity in the Company through the divestiture ofnon-core assets and investment in core competencies; and (ii) driving operational excellence through an increase in operational efficiency and reduction in costs. Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization less certain reconciling items. The calculation of Adjusted EBITDA, and its reconciliation to the applicable GAAP figure, is set forth in Annex A to this Annual Report on Form10-K.
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Adjusted Free Cash Flow is anon-GAAP measure and an indication of liquidity. Adjusted Free Cash Flow meansnon-GAAP net cash provided by operating activities less purchases of property, plant and equipment andnon-recurring charges, in an effort to support our ongoing strategic transformation through efforts to simplify our business. We believe that Adjusted Free Cash Flow is useful because it is intended to be a consistent measure of the underlying results of our business and efforts to improve liquidity. Furthermore, management uses it internally as a measure of liquidity and of the performance of our operations. The calculation of Adjusted Free Cash Flow, and its reconciliation to the applicable GAAP figure, is set forth in Annex A to this Annual Report on Form10-K.
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Business Unit Contribution Margin is anon-GAAP measure which measures the ability of a company to cover variable costs with revenue. We use Business Unit Contribution Margin as an incentive metric because we believe that such growth is a reflection of our ability to leverage our fixed costs.
The 2019 operating goals focused on successfully growing all of our businesses with an emphasis on long-term growth. The Company’s operating goals for 2019 included:
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Goals established for 2019 were set at levels above the 2018 actual achievement for Total Corporate Revenues and Adjusted EBITDA. Actual performance for 2019 Total Corporate Revenue, Adjusted EBITDA and Adjusted Free Cash Flow failed to meet the threshold level of achievement set by the Board and the 2019 goals. The 2019 goal for Adjusted Free Cash Flow was set lower than 2018 actual achievement to align with the 2019 operating plan and planned capital expenditures.
Actual payouts under the Annual Incentive Plan are based upon a comparison of actual performance to performance goals approved by the Compensation Committee at the beginning of the year. These performance goals contain thresholds and if performance is below such thresholds, as was the case for Fiscal 2019, no amount is earned for such goal. As such, none of the NEOs received a payout for the Annual Incentive Plan. See the discussion below under Short-Term Incentive Compensation which addresses the 2019 results.
The closing price of our common stock as of December 31, 2019 was $2.74 per share, resulting in the following:
the performance-based stock options granted as inducement awards to Messrs. Farhat and Singer upon hire in 2017 remaining unvested, because the related stock price appreciation hurdles were not met;
the value of our executives’ actual stock holdings in RTI decreased commensurate with the decrease in stockholder value during the year; and
Total Shareholder Return (“TSR”) for 2019 of (25.9)%, which represents the change in the Company’s share price from the beginning of 2019 to the end of 2019.
While financial goals were below threshold, NEOs and other employees made progress on a number of strategic objectives in 2019, leading to the previously announced agreement to sell the OEM Business to Montagu, a private equity firm, in 2020. This transaction is expected to strengthen the financial position of the stand-alone spine business and to further enhance long-term stockholder value creation, as evidenced by the significant increase in stock price, compared with the December 31, 2019 closing value, immediately following the deal announcement.
In light of the uncertainty created by the effects of theCOVID-19 novel coronavirus pandemic, for an indefinite period of time, Camille I. Farhat, the Company’s President and Chief Executive Officer, agreed to forgo 50% of his base salary and each of our executive officers has agreed to forgo 30% of their respective base salaries. This reduction will be effective until such time as the Company determines in its discretion that business conditions related to, among other things, theCOVID-19 novel coronavirus have improved.
The remainder of this Compensation Discussion and Analysis provides the more detailed philosophy, process, considerations, and analysis involved in the determination of executive compensation, particularly in regard to our NEOs.
Oversight of Executive Compensation Program
General
The Compensation Committee of our Board (the “Compensation Committee”), presently chaired by Ms. Weis and consisting of Mr. Stolper, Mr. Thomas, Mr. Valeriani and Ms. Weis, is responsible for the planning, review and administration of our executive compensation programs. A copy of the Compensation Committee charter is available on our website athttp://www.rtix.com/en_us/investors/corporate-governance.
One of our primary corporate objectives is to provide a superior return to stockholders. To support this objective, we believe we must attract, retain and motivate top quality executive talent. We believe that the executive compensation program we adopt is a critical tool in this process. The executive compensation program is designed to link executive compensation to our performance throughat-risk compensation opportunities, providing significant reward to executives based on our success. The executive compensation program consists of base salary, annual cash incentive opportunities and long-term incentives in the form of performance shares and restricted stock in fiscal year 2019. To further encourage long-term stockholder value creation, stock options granted to Messrs. Farhat and Singer at the time of hire in 2017 include challenging stock price appreciation hurdles that must be met in order to vest. For annual equity grants to NEOs and other senior executives in fiscal year 2019, 50% of the target award opportunity is provided in the form of performance shares tied to our3-year total stockholder return relative to industry peers.
Our compensation programs are designed specifically for: (1) our NEOs; (2) other officers of the Company; and (3) other Company employees. The Compensation Committee is charged with the review and approval of all annual compensation decisions relating to executive officers and our annual compensation guidelines for all other Company officers and employees.
Compensation Consultant
The Compensation Committee retains an independent compensation consultant to assist with the review of our executive andnon-employee director compensation programs. The Compensation Committee has engaged Pearl Meyer as its independent consultant since 2011. Pearl Meyer reports to and is directed by the Compensation Committee and provides no other services to the Company. The compensation consultant assists the Compensation Committee by providing comparative market data on compensation practices and programs based on an analysis of the companies in our peer group identified below, provides guidance on incentive plan designs and industry best practices, and participates in Compensation Committee meetings as requested.
Peer Group and Compensation Targets
With the assistance of Pearl Meyer, during 2018, the Compensation Committee selected a peer group of public companies and prepared an analysis of compensation paid to our executive officers, against the executive officers at the peer companies, which we refer to as “compensation benchmarking data.” The peer group consisted of the following sixteen publicly-traded medical device related companies which we believe had executives in positions that were of similar scope to the Company’s executives:
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At the time of the market pay analysis conducted in 2018, RTI’s net sales and employee headcount were positioned between the 50th and 75th percentile levels of this peer group.
With the assistance of Pearl Meyer, the Compensation Committee also assesses pay competitiveness for certain other executive officers, based on market data for comparable positions withinsimilarly-sized organizations as reported in published executive compensation surveys. For the most recent study completed in 2018, sources included the Radford Global Technology Survey and the Culpepper Executive Compensation Survey. Pearl Meyer did not conduct a similar study in 2019.
The compensation benchmarking data provides information to compare the compensation levels of executives against comparable organizations but is not the main determinant of compensation. In general, the Committee considers the executive’s compensation against the median (or 50th percentile) of the compensation benchmarking data, and then considers additional factors such as Company performance, individual executive performance, qualifications and responsibilities, internal pay equity among colleagues, and retention risks.
Based on market benchmarking conducted by Pearl Meyer, target total direct compensation (sum of base salaries plus target short-term cash incentives plus target long-term incentives) was within a competitive range (defined as +/- 15%) of 50th percentile market values for each of our NEOs other than Messrs. Varela and Visa (whose target pay was below the range) and Mr. DeRienzis (who was not employed by the Company in 2018) and equal to 99% of the 50th percentile in the aggregate.
Overview of Compensation Philosophy and Program
In order to recruit and retain the most qualified and competent individuals as executive officers, we strive to maintain a compensation program that is competitive in the global labor market. Our compensation program is intended to reward exceptional organizational and individual performance.
The following compensation objectives are considered in setting the compensation programs for our executive officers:
Drive and reward performance in support of the Company’s strategy, primary objectives and values;
Reflect competitive market practices and enhance our ability to attract, retain, reward and recognize top talent;
Provide a meaningful percentage of total compensation that isat-risk, or variable, based on predetermined performance criteria; and
Reward both short and long-term performance aligning executive incentives to stockholder returns and value creation.
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Compensation Elements and Rationale for Pay Mix Decisions
To reward both short and long-term performance in the compensation program and in furtherance of our compensation philosophy noted above, our executive compensation program includes the following:
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Review of Executive Officer Performance
The Compensation Committee reviews, on an annual basis, all pay components for each of our executive officers. The Compensation Committee takes into account the scope of responsibilities and experience of each incumbent and balances these against competitive compensation levels.
In addition, each year, the President and Chief Executive Officer presents to the Compensation Committee his evaluation of each executive officer, other than himself, which includes a review of contribution and performance over the past year, strengths, weaknesses, development plans and succession potential. The Chairman of the Board and the Chairman of the Compensation Committee, in consultation with the full Board, also evaluate the President and Chief Executive Officer’s performance in light of corporate goals and objectives and other factors as deemed appropriate. Following the reviews of performance and a comparison to the compensation benchmarking data, the Compensation Committee makes its own assessments and recommends to the Board compensation for the executive officers, including the President and Chief ExecutiveAccounting Officer. The Board evaluates the contribution and performance of the executive officers, including the President and Chief Executive Officer, and approves their compensation after considering the recommendation of the Compensation Committee.
The Company’s 2018 results, management’s execution against the transformation strategy and the Compensation Committee’s deliberations were reflected in our final 2019 executive compensation decisions. We believe the performance and pay results demonstrate a strong alignment between executive compensation, Company performance, and stockholder value creation.
2019 Compensation Highlights
NEO | Base Salary Increase (1) | 2019 Annualized Base Salary (2) | Short-Term Incentive Target as a % of Salary (3) | Long-Term Incentive Target as a % of Salary (4) | ||||||||||||
Camille I. Farhat | 3 | % | $ | 673,672 | 110 | % | (5 | ) | ||||||||
Jonathon M. Singer | 4 | % | $ | 468,000 | 65 | % | 110 | % | ||||||||
John N. Varela | 3 | % | $ | 354,502 | 50 | % | 50 | % | ||||||||
Olivier M. Visa | 6 | % | $ | 318,000 | 50 | % | 75 | % | ||||||||
Joshua H. DeRienzis | N/A | $ | 325,000 | 45 | % | 45 | % |
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Short-Term Incentive Compensation
The 2019 incentive criteria for Messrs. Farhat, Singer, Varela and DeRienzis were:
Metric | Total Corporate Revenues | Adjusted EBITDA (1) | Adjusted Free Cash Flow (2) | |||||||||
Weighting | 40 | % | 30 | % | 30 | % |
The 2019 incentive criteria for Mr. Visa were split between the Company-wide goals described above with a 70% weighting and business unit specific metrics with a 30% weighting:
Business Unit Metric | Revenue | Contribution Margin (3) | ||||||
Weighting | 60 | % | 40 | % |
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The specific 2019 performance goals established by the Compensation Committee and actual performance results for each metric are set forth in the following tables:
Corporate Performance Category | 2019 Goal | 2019 Actual Performance | Percentage Achievement | % of Target STI Opportunity Earned | ||||||||||||
Total Corporate Revenues | $ | 332.6 million | $ | 307.6 million | 92.5 | % | 0.0 | % | ||||||||
Adjusted EBITDA | $ | 41.2 million | $ | 26.8 million | 65.1 | % | 0.0 | % | ||||||||
Adjusted Free Cash Flow | $ | 0.3 million | $ | (4.7) million | 0.0 | % | 0.0 | % | ||||||||
Total Award Earned as a Percentage of Target Opportunity |
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Business Unit Performance Category | Percentage Achievement | % of Target STI Opportunity Earned | ||||||
Revenue | 102.4 | % | 75.0 | % | ||||
Contribution Margin | 105.1 | % | 48.3 | % | ||||
Total Award Earned as a Percentage of Target Opportunity |
| 123.3 | % |
Actual payouts under the Annual Incentive Plan are based upon a comparison of actual performance to performance goals approved by the Board at the beginning of the year. In addition, these performance goals contain thresholds and if performance is below such thresholds, no amount is earned for such goals. Goals established for 2019 were set at levels above the 2018 actual achievement for Total Corporate Revenues and Adjusted EBITDA. The 2019 goal for Adjusted Free Cash Flow was set lower than 2018 actual achievement to align with the 2019 operating plan and planned capital expenditures. Goals established for the Business Unit Revenue and Contribution Margin were aligned with the 2019 operating plan. For 2019, actual payouts, relative to target awards, could range from 0% (for below threshold results) to 150% (for superior performance), with award funding for each metric separately calculated.
For 2019, the actual performance for Total Corporate Revenues, Adjusted EBITDA and Adjusted Free Cash Flow were not earned. Based on the metric weightings and performance results, calculated award funding was equal to 0.0% of the total target award opportunity for each eligible NEO. Though the Business Unit objectives were achieved above target, no payout was made to Mr. Visa as a result of the Total Corporate objectives not meeting threshold levels. Payouts under the Annual Incentive Plan are subject to the discretion of the Compensation Committee and annual incentive payouts under the plan may reflect adjustments (downward or upward) for extraordinary or unusual accounting events. The Compensation Committee did not adjust the calculated payouts of the 2019 short-term incentives for each of the eligible NEOs.
Recognition Bonuses
On November 4, 2019, the Compensation Committee approved special recognition bonuses related to the Contemplated Transactions taking into account extraordinary services performed by certain executives. These special recognition bonuses were approved for Mr. Varela, equal to 50% of his base salary as in effect when the bonus is paid and for each of Mr. Visa and Mr. DeRienzis equal to 75% of such executive’s base salary as in effect when the bonus is paid. The special recognition bonuses will be paid to the executives on the earlier of April 30, 2020 or the consummation of the Contemplated Transactions.
Additionally, on January 10, 2020, the Compensation Committee approved the award of a transaction bonus to Mr. Singer, which includes: (a) $225,000 in cash; and (b) the number of Restricted Shares, pursuant to the Plan, equal to (x) $225,000 divided by (y) Average Stock Price,one-half of which shall vest on the first anniversary of the grant date andone-half of which shall vest quarterly commencing on the fifteenth month following the grant date and ending on the second anniversary of the grant date. The transaction bonus will be issued to Mr. Singer upon the consummation of the Contemplated Transactions.
Long-Term Incentive Compensation
Long-term incentives comprise a significant portion of an executive officer’s total compensation package. The Compensation Committee’s objective is to provide executive officers with long-term incentive award opportunities that will align pay with stockholder value creation, encourage teamwork and collaboration in accomplishing long-term goals, facilitate stock ownership among executives, create retention incentives, and generally reflect competitive market practices. In recent years, we have provided executive officers with grants of stock options and restricted stock awards.
Each year the Company budgets a certain level of equity compensation expense and the Compensation Committee and Board approve awards within budget guidelines. The executive officers are granted restricted stock awards and performance shares as part of the overall allocation of equity compensation to managerial employees of the Company. The compensation benchmarking data is looked at as a point of reference as to whether executive officers are receiving stock awards commensurate with responsibilities and similar to executive officers in the peer companies.
The long-term incentive information related to the 2019 NEOs is included in the Summary Compensation Table under the columns Stock Awards and Option Awards. Additional information on long-term incentive awards is shown in the Grants of Plan-Based Awards Table and the Outstanding Equity Awards at FiscalYear-End Table.
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To further encourage long-term stockholder value creation, the Company granted stock options to Mr. Farhat at the time of hire in 2017. All of the outstanding stock options granted to Mr. Farhat are performance-based and are intended to cover long-term incentive award opportunities through 2019. As a result, Mr. Farhat did not receive any additional grants in 2018 and 2019.
Consistent with our commitment to apay-for-performance philosophy and our use of challenging performance hurdles, 50% of the annual equity grants to NEOs in 2019 were provided in the form of performance-based restricted stock tied to3-year relative TSR vs. industry peers in 2019. TSR is based on30-day average closing prices leading up to start and end of cycle (i.e. January 1, 2019 to December 31, 2021) with straight-line interpolation used for results in between designated performance levels.
Stock Ownership Guidelines and Insider Trading Policy
Our Board has adopted Stock Ownership Guidelines, which require our chief executive officer to hold qualifying shares in an amount equal to six times base salary, our other NEOs to hold an amount equal to three times base salary and ournon-employee directors to hold an amount equal to five times the annual cash retainer plus all shares initially granted upon election to the Board, if applicable. Our chief executive officer, other NEOs andnon-employee directors are given five years from the date of first becoming subject to these Stock Ownership Guidelines, to achieve the threshold ownership. Once the threshold is reached, an executive officer ornon-employee director is permitted to sell netafter-tax shares received from equity grants, provided that the threshold ownership requirement is maintained. NEOs andnon-employee directors may, from time to time, sell shares of the Company’s common stock to cover taxes associated with the vesting of restricted stock awards. When an executive officer ornon-employee director leaves our Company or the Board, the executive officer ornon-employee director may sell any vested shares he or she possesses, subject to compliance with applicable law. Each of our NEOs andnon-employee directors is in compliance with the Stock Ownership Guidelines or is within the five-year accumulation period. Our Chief Executive Officer has made open market purchases of our common stock totaling 173,394 shares since the execution of his employment agreement. The Stock Ownership Guidelines are available on our website at http://www.rtix.com/en_us/investors/governance.
Our Board has also adopted an Insider Trading Policy, which includes anti-hedging provisions that restrict our employees, officers and directors from purchasing financial instruments or otherwise engaging in transactions that are designeda Code of Conduct applicable to or have the effect of hedging or offsetting any decrease in the market value of our stock.
Tax Implications of Executive Compensation
Compensation paid to certain executive officers in excess of $1,000,000 is generallynon-deductible, whether or not it is performance-based. Although the Compensation Committee has generally attempted to structure executive compensation so as to preserve deductibility, it also believes that there are circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it might result in thenon-deductibility of certain compensation under the Code.
Retirement, Health and Welfare Benefits
We offer a variety of health and welfare benefits, life insurance, short and long-term disability and retirement benefits to all eligible employees. The NEOs generally are eligible for these benefit programs on the same basis as other employees but also participate in perquisite programs related to these benefits as described below.
Perquisites and Perquisite Allowance Payments
Executive officers are provided with the following benefits as a supplement to their other compensation:
Health and Welfare Coverage: We pay 100% of the premium for health, dental and vision insurance for executive officers. In addition, at our expense, each executive officer is allowed to have a complete and professional personal physical exam on an annual basis. Executive officers are responsible for deductibles andco-payments under the health benefit plans.
Life Insurance & Accidental Death & Dismemberment Coverage: We pay 100% of the premium for both term life insurance and accidental death and dismemberment coverage, equal to $50,000 for the executive officers of the Company.
Severance Plan
As of December 31, 2019, we did not have in effect any general severance plan that provides forchange-in-control or other payments to our executive officers, although Messrs. Farhat and Singer’s employment agreements and Mr. DeRienzis’s offer letter provides forchange-in-control provisions as described below.
On January 13, 2020, RTI entered into involuntary termination agreements with Messrs. Varela and Visa. Pursuant to the terms of these agreements, if the executive’s employment is terminated without cause or he resigns for good reason (both terms as defined in the involuntary termination agreements) during the period beginning on and ending six months following the Contemplated Transactions, the executive is entitled to a severance payment equal to twelve times the executive’s monthly base salary. Each executive’s severance payment is conditioned upon execution of a general release agreement provided by RTI. All of the executive’s outstanding and unvested equity awards will be accelerated upon RTI’s successful completion of the Contemplated Transactions. After RTI’s successful completion of the Contemplated Transactions, it is currently contemplated that Messrs. Varela and Visa will transition to OEM.
RTI also entered into an involuntary termination agreement with Mr. Louw on January 13, 2020, however, as previously announced, on March 17, 2020, the Company and Mr. Louw agreed that Mr. Louw’s employment with Legacy RTI would end no later than April 8, 2020. Upon termination of his employment on April 8, 2020, the involuntary termination agreement with Mr. Louw became void. In connection with his departure, on April 24, 2020, Legacy RTI entered into a Separation Agreement and Release of Claims and a Consultant Agreement with Mr. Louw.
Employment Agreements
Employment Agreement – Mr. Farhat
On January 26, 2017, the Company entered into an employment agreement with our Chief Executive Officer, Camille Farhat (the “Farhat Employment Agreement”). The Farhat Employment Agreement had an initial term of two years, which expired on January 26, 2019. The Farhat Employment Agreement automatically renewed, however, for an additionalone-year term beginning on January 26, 2019, and will automatically renew forone-year terms on each anniversary of the expiration of the initial term until terminated. Pursuant to the Farhat Employment Agreement, the Company will pay Mr. Farhat a base salary of at least $635,000 annually (subject to annual review by the Board (or a Board committee). Mr. Farhat will be eligible to receive an annual discretionary incentive payment under the Company’s annual incentive plan based on a target of at least 110% of his base salary, based on the attainment of one or morepre-established performance goals to be determined by the Board or the Compensation Committee in its sole discretion. In addition, the Farhat Employment Agreement contains customary covenants on confidentiality,non-competition,non-solicitation, andnon-interference, as well as provisions on the termination of the Farhat Employment Agreement and the consequences thereof.
As a material condition to entering into the Farhat Employment Agreement, on January 26, 2017 (the “Grant Date”), the Company and Mr. Farhat entered into: (1) a restricted stock award agreement (the “Restricted Stock Agreement #1”); (2) another restricted stock award agreement (the “Restricted Stock Agreement #2”); and (3) a stock option agreement (the “Option Agreement”).
Under the original Restricted Stock Agreement #1, as amended, the Company granted Mr. Farhat 850,000 shares of restricted common stock, all of which have fully vested. Under the Restricted Stock Agreement #2, the Company granted Mr. Farhat 150,000 shares of restricted common stock, all of which have fully vested.
Under the Option Agreement, the Company granted Mr. Farhat the option to purchase 1,950,000 shares of common stock (the “Stock Options”). The exercise price for the Stock Options is $3.20. The Stock Options will expire on January 26, 2022. The Stock Options will vest based on the Company’s attainment of three average stock price benchmarks. The first 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the Stock Options is cumulative.
Employment Agreement – Mr. Singer
The Company entered into an Employment Agreement with Mr. Singer, dated September 18, 2017 (the “Singer Employment Agreement”), which sets forth the terms of Mr. Singer’s service as the Company’s Chief Financial and Administrative Officer. The Singer Employment Agreement has an initial term of three years, which automatically renews annually at the expiration of the initial term. Pursuant to the Singer Employment Agreement, the Company will pay Mr. Singer a base salary of at least $450,000 annually (subject to annual review by the Company’s Chief Executive Officer and the Board (or a committee thereof)). Mr. Singer will be eligible to receive an annual discretionary incentive award opportunity under the Company’s annual incentive plan based on a target of at least 65% of his base salary, based on the attainment of one or morepre-established performance goals to be determined by the Board or the Company’s compensation committee in its sole discretion. Mr. Singer will also be eligible to participate in the Company’s long-term incentive plan based upon a target long term incentive opportunity of at least 110% of his salary. The Singer Employment Agreement also provided for aone-time payment of $168,750 no later than March 15, 2018, and aone-time payment of $1,000,000 to Mr. Singer in September of 2018 as an inducement to Mr. Singer’s entry into the Singer Employment Agreement, both of which have been paid to Mr. Singer. If Mr. Singer’s employment with the Company is terminated by the Company for cause or by Mr. Singer without good reason before October 2, 2020, then Mr. Singer will have to repay theone-time payment of $168,750 and theafter-tax portion of the $1,000,000one-time payment, respectively, and forfeit any unvested shares of the Company’s common stock, granted to Mr. Singer pursuant to the Restricted Stock Agreement and the Option Agreement (as defined below). In addition, the Singer Employment Agreement contains customary covenants regarding confidentiality,non-competition,non-solicitation, andnon-interference, as well as provisions regarding the termination of the Singer Employment Agreement and the consequences thereof.
As a material condition to entering into the Singer Employment Agreement, on September 18, 2017 (the “Grant Date”), the Company issued an inducement grant to Mr. Singer. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement (the “Option Agreement”). This inducement grant was made under the RTI Surgical, Inc. 2015 Incentive Compensation Plan.
Under the Restricted Stock Agreement, the Company granted Mr. Singer 109,890 shares of restricted common stock, of which 73,760 shares have fully vested. On the third anniversary of the Grant Date, the final 36,630 shares will vest.
Under the Option Agreement, the Company granted Mr. Singer the option to purchase 306,900 shares of Common Stock (the “Stock Options”), as of the Grant Date. The exercise price for the Stock Options is $4.55 per share. The Stock Options will expire on September 18, 2027. The Stock Options will vest based the Company’s attainment of three average stock price benchmarks. The first 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $7.00 per share for a sixty-consecutive calendar day period. The next 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $8.00 per share for a sixty-consecutive calendar day period. The final 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $9.00 per share for a sixty-consecutive calendar day period. The vesting of the Stock Options is cumulative.
Offer Letter – Mr. DeRienzis
On April 4, 2019, Mr. DeRienzis accepted the terms of an offer letter (the “Offer Letter”) summarizing the terms of his employment and compensation. The Offer Letter provides for a severance payout in the event of a change in control and involuntary termination without cause or voluntary termination with good reason, which consists of: (i) 12 months’ base salary; (ii) a prorated target bonus based on the number of full months completed in the performance year of the termination event; and (iii) 12 months of premium reimbursement for medical, dental and vision coverage under COBRA. Under the terms of the Offer Letter, the Company also granted Mr. DeRienzis aone-time award of 69,188 shares of time-based restricted stock, which vests 33.3% per year over a three-year period from the date of grant.
Potential Payments upon Termination of Employment
If the Company terminates Mr. Farhat or Mr. Singer for cause or Mr. Farhat or Mr. Singer resign without good reason, such individual would be owed any unpaid base salary through the date of termination, reimbursement for any unreimbursed business expenses incurred through the date of termination, any accrued but unused vacation time in accordance with Company policy, and all other payments, benefits or fringe benefits under the Company’s applicable benefits plan or program (the “Accrued Benefits”). In 2019, our other NEOs did not have employment or Change in Control agreements providing for severance benefits upon certain qualifying termination of employment scenarios. On January 13, 2020, the Company entered into Involuntary Termination Agreements providing for certain severance benefits upon certain qualifying termination of employment scenarios. For a more detailed discussion of the Involuntary Termination Agreements, see the section of this Annual Report on Form10-K entitled “Severance Plan”.
The following table discloses the estimated payments and benefits, in addition to the Accrued Benefits, that would have been provided to our NEOs upon a termination without cause or resignation with good reason upon a Change in Control (as that term is defined in any employment agreement or equity award agreement) or without a Change in Control, applying the assumptions that their last day of employment was December 31, 2019, and assuming continued compliance with certainnon-competition,non-solicitation, confidentiality restrictions contained in their respective employment agreements.
Potential Payouts upon Involuntary Termination by Company without Cause or by Executive for Good Reason | Potential Payouts upon Involuntary Termination by Company without Cause or by Executive for Good Reason after a Change in Control | |||||||||||||||||||||||||||||||||||||||||||||||
Name | Cash Payment | Unvested Equity Awards | Outplacement Services | Cash Payment | Unvested Equity Awards | Outplacement Services | ||||||||||||||||||||||||||||||||||||||||||
Camille I. Farhat | $ | 673,672 | (1 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Jonathon M. Singer | $ | 468,000 | (2 | ) | $ | 507,434 | (3 | ) | $ | 30,000 | (4 | ) | $ | 994,500 | (5 | ) | $ | 507,434 | (6 | ) | $ | 30,000 | (7 | ) | ||||||||||||||||||||||||
John N. Varela | — | — | — | — | $ | 161,743 | (8 | ) | — | |||||||||||||||||||||||||||||||||||||||
Olivier M. Visa | — | — | — | — | $ | 255,148 | (9 | ) | — | |||||||||||||||||||||||||||||||||||||||
Joshua H. DeRienzis | — | — | — | $ | 434,688 | $ | 227,491 | (10 | ) | — |
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Clawbacks
Pursuant to certain of the Company’s equity incentive plans, the Board may, in appropriate circumstances, require reimbursement of any incentive payment under any award to an employee where: (1) there is an accounting restatement of Company financial statements or results; and (2) such restatement results from a noncompliance by the Company with any requirements under or related to the federal securities laws.
Risk Assessment
Public companies are required to conduct a risk assessment to determine if there are any compensation programs, policies, or practices that are “reasonably likely” to have a material adverse effect on the Company.
The Compensation Committee conducted a risk assessment of the Company’s compensation policies and practices for the fiscal year 2019. This risk assessment consisted of a review of cash and equity compensation provided to senior executives and incentive compensation plans and commission plans which provide variable compensation based upon Company and individual performance. The Compensation Committee concluded that our compensation programs are designed with the appropriate balance of risk and reward in relation to the Company’s overall business and do not create risk that is reasonably likely to have a material adverse effect on the Company. The following characteristics of our compensation programs support this finding:
our use of different types of compensation vehicles that provide a balance of long- and short-term incentives with fixed and variable components;
our use of multiple performance measures and capped incentive award opportunities in the short-term incentive program;
the ability of the Compensation Committee and/or the Board to reduce incentive payouts if deemed appropriate;
stock awards have multi-year vesting ranging from three to five years;
performance shares only vest if market-based and/or financial goals are achieved and are capped at 200% of target levels;
Stock Ownership Guidelines are in place with respect to minimum levels of stock ownership;
our Insider Trading Policy contains a prohibition of hedging and using derivative securities or short selling as it relates to Company stock; and
our practice of looking beyond specificresults-oriented performance and assessing the overall contributions of a particular executive.
Compensation Committee Interlocks and Insider Participation
During 2019, Ms. Weis, Mr. Stolper, Mr. Thomas, and Mr. Valeriani served as members of our Compensation Committee. No member of our Compensation Committee was an officer or employee of ours during 2019 or had any other relationship with us requiring disclosure. None of our executive officers serves as a member of the Board or the Compensation Committee of any other entity that has one or more executive officers serving as a member of our Board or our Compensation Committee.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning all cash andnon-cash compensation awarded to, earned by or paid to our 2019 NEOs for the years indicated.
Name and Principal Position | Year | Salary ($) | Bonus ($) (1) | Stock Awards ($) (2) | Option Awards ($) (2) | Non-Equity Incentive Plan Compensation ($) (3) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||
Camille I. Farhat | 2019 | 664,148 | — | — | — | — | 26,036 | (4) | 690,184 | |||||||||||||||||||||||
President and Chief Executive Officer | 2018 | 651,119 | — | — | — | 550,383 | 18,127 | (5) | 1,219,629 | |||||||||||||||||||||||
2017 | 483,577 | — | 3,200,000 | 2,615,600 | 530,860 | 2,862 | (6) | 6,832,898 | ||||||||||||||||||||||||
Jonathon M. Singer | 2019 | 460,347 | — | 514,798 | — | — | 28,507 | (7) | 1,003,652 | |||||||||||||||||||||||
Chief Financial and Administrative | 2018 | 450,000 | 1,000,000 | 247,350 | 247,487 | 223,763 | 19,711 | (8) | 2,188,311 | |||||||||||||||||||||||
Officer | 2017 | 95,192 | 168,750 | 500,000 | 764,181 | 55,423 | — | 1,583,546 | ||||||||||||||||||||||||
John N. Varela | 2019 | 351,739 | — | 177,249 | — | — | 26,123 | (9) | 555,111 | |||||||||||||||||||||||
Executive Vice President Global | 2018 | 343,138 | — | 84,575 | 84,494 | 131,648 | 25,509 | (10) | 669,364 | |||||||||||||||||||||||
Operations | 2017 | 335,009 | — | 110,000 | 110,077 | 128,223 | 23,862 | (11) | 707,171 | |||||||||||||||||||||||
Olivier M. Visa | 2019 | 305,734 | — | 238,496 | — | — | 33,197 | (12) | 577,427 | |||||||||||||||||||||||
President, Global OEM | 2018 | 300,000 | — | 112,150 | 111,105 | 108,648 | 23,563 | (13) | 655,466 | |||||||||||||||||||||||
2017 | 63,462 | — | 348,750 | — | 22,738 | — | 434,950 | |||||||||||||||||||||||||
Joshua H. DeRienzis | 2019 | 224,492 | — | 450,000 | — | — | 146,003 | (14) | 820,495 | |||||||||||||||||||||||
Vice President, General Counsel | 2018 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
and Corporate Secretary | 2017 | — | — | — | — | — | — | — |
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GRANTS OF PLAN-BASED AWARDS
This table discloses the actual numbers of restricted stock awards and stock options granted during 2019 and the grant date fair value of these awards. It also captures potential payouts under the Company’snon-equity incentive plans.
All Other Stock Awards: | Exercise or Base | Grant Date | ||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under Non- Equity Incentive Plan Awards (1) | Estimated Future Payouts Under Equity Incentive Plan Awards (2) | Number of Shares of | Price of Option | Fair Value of Stock and | ||||||||||||||||||||||||||||||||||||||
Name | Grant Date | Grant Type | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | Stock or Units (#) (2) | Awards ($/Sh) | Option Awards ($) | |||||||||||||||||||||||||||||||
Camille I. Farhat | Non-Equity Incentive Plan | 370,520 | 741,039 | 926,299 | — | — | — | |||||||||||||||||||||||||||||||||||
Stock Award | — | — | — | |||||||||||||||||||||||||||||||||||||||
Jonathon M. Singer | Non-Equity Incentive Plan | 152,100 | 304,200 | 380,250 | — | — | — | |||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Award | 54,883 | 4.69 | 257,401 | ||||||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Unit | 27,441 | 54,882 | 109,764 | — | 4.69 | 257,397 | |||||||||||||||||||||||||||||||||||
John N. Varela | Non-Equity Incentive Plan | 88,626 | 177,251 | 221,564 | — | — | — | |||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Award | 18,897 | 4.69 | 88,627 | ||||||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Unit | 9,448 | 18,896 | 37,792 | — | 4.69 | 88,622 | |||||||||||||||||||||||||||||||||||
Olivier M. Visa | Non-Equity Incentive Plan | 79,500 | 159,000 | 198,750 | — | — | — | |||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Award | 25,426 | 4.69 | 119,248 | ||||||||||||||||||||||||||||||||||||||
2/26/2019 | Restricted Stock Unit | 12,713 | 25,426 | 50,852 | — | 4.69 | 119,248 | |||||||||||||||||||||||||||||||||||
Joshua H. DeRienzis (3) | Non-Equity Incentive Plan | 73,125 | 146,250 | 182,813 | — | — | — | |||||||||||||||||||||||||||||||||||
4/8/2019 | Restricted Stock Award | 69,188 | 5.42 | 375,000 | ||||||||||||||||||||||||||||||||||||||
4/8/2019 | Restricted Stock Unit | 6,919 | 13,838 | 27,676 | — | 5.42 | 75,000 |
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OUTSTANDING EQUITY AWARDS AT FISCALYEAR-END
The following table shows outstanding stock option awards classified as exercisable and unexercisable as of December 31, 2019, for NEOs.
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||
Name | Grant Date | Grant Type | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | ||||||||||||||||||||||||||||
Camille I. Farhat (1) | 1/26/2017 | Stock Options | — | 1,950,000 | 3.20 | 1/26/2022 | — | — | — | — | ||||||||||||||||||||||||||||
1/26/2017 | RSA | — | — | — | — | |||||||||||||||||||||||||||||||||
Jonathon M. Singer (2) | 9/18/2017 | Stock Options | — | 306,900 | 4.55 | 9/18/2022 | — | — | — | — | ||||||||||||||||||||||||||||
2/28/2018 | Stock Options | 25,600 | 102,400 | 4.25 | 2/28/2028 | — | — | — | — | |||||||||||||||||||||||||||||
9/18/2017 | RSA | 36,630 | 100,366 | — | — | |||||||||||||||||||||||||||||||||
2/28/2018 | RSA | 38,800 | 106,312 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSA | 54,883 | 150,379 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSU | 54,882 | 150,377 | — | — | |||||||||||||||||||||||||||||||||
John N. Varela (3) | 7/14/2014 | Stock Options | 20,000 | — | 4.26 | 7/14/2024 | — | — | — | — | ||||||||||||||||||||||||||||
2/17/2015 | Stock Options | 24,000 | 6,000 | 5.23 | 2/17/2025 | — | — | — | — | |||||||||||||||||||||||||||||
2/24/2016 | Stock Options | 23,226 | 15,484 | 3.31 | 2/24/2026 | — | — | — | — | |||||||||||||||||||||||||||||
5/3/2017 | Stock Options | 19,384 | 29,074 | 4.60 | 5/3/2027 | — | — | — | — | |||||||||||||||||||||||||||||
2/28/2018 | Stock Options | 8,740 | 34,960 | 4.25 | 2/28/2028 | — | — | — | — | |||||||||||||||||||||||||||||
5/3/2017 | RSA | 7,971 | 21,841 | — | — | |||||||||||||||||||||||||||||||||
2/28/2018 | RSA | 13,266 | 36,349 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSA | 18,897 | 51,778 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSU | 18,896 | 51,775 | — | — | |||||||||||||||||||||||||||||||||
Olivier M. Visa (4) | 2/28/2018 | Stock Options | 7,760 | 31,040 | 4.25 | 2/28/2028 | — | — | — | — | ||||||||||||||||||||||||||||
5/1/2018 | Stock Options | 3,380 | 13,520 | 4.50 | 5/1/2028 | — | — | — | — | |||||||||||||||||||||||||||||
10/2/2017 | RSA | 25,000 | 68,500 | — | — | |||||||||||||||||||||||||||||||||
2/28/2018 | RSA | 11,734 | 32,151 | — | — | |||||||||||||||||||||||||||||||||
5/1/2018 | RSA | 5,534 | 15,163 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSA | 25,426 | 69,667 | — | — | |||||||||||||||||||||||||||||||||
2/26/2019 | RSU | 25,426 | 69,667 | — | — | |||||||||||||||||||||||||||||||||
Joshua H. DeRienzis (5) | 4/8/2019 | RSA | 69,188 | 189,575 | — | — | ||||||||||||||||||||||||||||||||
4/8/2019 | RSU | 13,838 | 37,916 | — | — |
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- 1,950,000 stock options granted on January 26, 2017. The first 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Company’s average publicly traded closing stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the Stock Options is cumulative.
- 1,000,000 restricted stock awards granted January 26, 2017. 150,000, 425,000, 170,000, 42,500, 42,500, 42,500 and 42,500 restricted stock awards vested on May 18, 2017, December 4, 2017, January 26, 2018, March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018, March 31, 2019 and June 30, 2019, respectively.
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- 306,900 stock options granted on September 18, 2017. The first 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $7.00 per share for a sixty-consecutive calendar day period. The next 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $8.00 per share for a sixty-consecutive calendar day period. The final 102,300 shares will vest if the Company’s average publicly traded closing stock price is over $9.00 per share for a sixty-consecutive calendar day period. The vesting of the Stock Options is cumulative.
- 128,000 stock options granted on February 28, 2018. 25,600 stock options have vested, or will vest, on each of February 28, 2019, 2020, 2021, 2022 and 2023.
- 109,890 restricted stock awards granted September 18, 2017. 36,630 restricted stock awards have vested, or will vest, on each of September 18, 2018, 2019 and 2020.
- 58,200 restricted stock awards granted February 28, 2018. 19,400 restricted stock awards have vested, or will vest, on each of February 28, 2019, 2020 and 2021.
- 54,883 restricted stock awards granted February 26, 2019. 18,294 restricted stock awards have vested, or will vest, on each of February 26, 2020, 2021 and 2022.
- 54,882 performance-based restricted stock units granted February 26, 2019. 54,882 performance-based restricted stock units may vest on February 26, 2022, subject to a three-year performance-period based on achieving certain financial performance targets.
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- 43,700 stock options granted on February 28, 2018. 8,740 stock options have vested, or will vest, on each of February 28, 2019, 2020, 2021, 2022 and 2023.
- 48,458 stock options granted on May 3, 2017. 9,691 stock options have vested, or will vest, on each of May 3, 2018 and 2019. 9,692 stock options have vested, or will vest, on each of May 3, 2020, 2021 and 2022.
- 38,710 stock options granted on February 24, 2016. 7,742 stock options have vested, or will vest, on each of February 24, 2017, 2018, 2019, 2020 and 2021.
- 30,000 stock options granted on February 17, 2015. 6,000 stock options have vested, or will vest, on each of February 17, 2016, 2017, 2018, 2019 and 2020.
- 20,000 stock options granted on July 14, 2014. 4,000 stock options have vested, or will vest, on each of July 14, 2015, 2016, 2017, 2018 and 2019.
- 19,900 restricted stock awards granted February 28, 2018. 6,633 restricted stock awards have vested, or will vest, on each of February 28, 2019 and 2020. 6,634 restricted stock awards will vest on February 28, 2021.
- 23,913 restricted stock awards granted May 3, 2017. 7,971 restricted stock awards have vested, or will vest, on each of May 3, 2018, 2019 and 2020.
- 18,897 restricted stock awards granted February 26, 2019. 6,299 restricted stock awards have vested, or will vest, on each of February 26, 2020, 2021 and 2022.
- 18,896 performance-based restricted stock units granted February 26, 2019. 18,896 performance-based restricted stock units may vest on February 26, 2022, subject to a three-year performance-period based on achieving certain financial performance targets.
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- 16,900 stock options granted on May 1, 2018. 3,380 stock options will vest on each of May 1, 2019, 2020, 2021, 2022 and 2023.
- 38,800 stock options granted on February 28, 2018. 7,760 stock options have vested, or will vest, on each of February 28, 2019, 2020, 2021, 2022 and 2023.
- 8,300 restricted stock awards granted May 1, 2018. 2,766 restricted stock awards vested on February 28, 2019. 2,767 restricted stock awards will vest on each of May 1, 2020 and 2021.
- 17,600 restricted stock awards granted February 28, 2018. 5,866 restricted stock awards vested on February 28, 2019. 5,867 restricted stock awards will vest on each of February 28, 2020 and 2021.
- 75,000 restricted stock awards granted October 2, 2017. 25,000 restricted stock awards have vested, or will vest, on each of October 2, 2018, 2019 and 2020.
- 25,426 restricted stock awards granted February 26, 2019. 8,475 restricted stock awards have vested, or will vest, on each of February 26, 2020, 2021 and 2022.
- 25,426 performance-based restricted stock units granted February 26, 2019. 25,426 performance-based restricted stock units may vest on February 26, 2022, subject to a three-year performance-period based on achieving certain financial performance targets.
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- 69,188 restricted stock awards granted April 8, 2019. 23,063 restricted stock awards have vested, or will vest, on each of April 8, 2020, 2021 and 2022.
- 13,838 performance-based restricted stock units granted April 8, 2019. 13,838 performance-based restricted stock units may vest on April 8, 2022, subject to a three-year performance-period based on achieving certain financial performance targets.
OPTION EXERCISES AND STOCK VESTED
The following table sets forth information with respect to restricted stock awards held by the persons named in the Summary Compensation Table that vested in 2019.
Option Awards | Stock Awards | |||||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
Camille I. Farhat | — | — | 85,000 | $ | 439,450 | |||||||||||
Jonathon M. Singer | — | — | 56,030 | 212,363 | ||||||||||||
John N. Varela | — | — | 18,633 | 96,371 | ||||||||||||
Olivier M. Visa | — | — | 33,634 | 113,521 | ||||||||||||
Joshua H. DeRienzis | — | — | — | — |
NONQUALIFIED DEFERRED COMPENSATION
The Company has an Executive Nonqualified Excess Plan (“Excess Plan”) that permits eligible U.S. employees to defer base pay in excess of the amount taken into account under the Company’s qualified 401(k) Plan. As of December 31, 2019, there were no contributions, earnings, withdrawals, distributions and balances for any of the named executive officers under the Excess Plan.
At the time participation is elected and on an annual basis thereafter, employees must specify the amount of base pay and/or the percentage of incentives to be deferred, as well as the time and form of payment. If termination of employment occurs before retirement (defined as at least age 55 with 10 years of service), distribution is made in the form of a lump sum payment, annual installments or a combination of both at the time of termination, subject to any delay required under Section 409A of the Code. At retirement, benefits are paid according to the distribution election made by the participant at the time of the deferral election and are subject to any delay required under Section 409A of the Code. No withdrawals are permitted during employment or prior to the previously elected distribution date, other than “hardship” withdrawals as permitted by applicable law.
Amounts deferred or credited under the Excess Plan are credited with an investment return determined as if the account were invested in one or more investment funds made available by the Company. Accounts maintained for participants under the Excess Plan are not held in trust, and all such accounts are subject to the claims of general creditors of nonqualified deferred compensation plans. No accounts are credited with above-market earnings.
DIRECTOR COMPENSATION
Board compensation is reviewed annually, and changes are recommended by the Compensation Committee and approved by the Board.
Our directors who are also our employees or officers did not receive any compensation specifically related to their activities as directors, other than reimbursement for expenses incurred relating to their attendance at meetings. In 2019, ournon-employee directors received an annual Board cash retainer of $40,000, paid in quarterly installments. Also, in 2019, the Chairman of the Board received an additional annual cash retainer of $50,000.Non-employee directors received annual chair and member retainers based on committee service as follows:
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In light of the uncertainty created by the effects of theCOVID-19 novel coronavirus pandemic, on April 21, 2020, at a Board meeting, each of our directors, elected to defer, for an indefinite period of time, 100% of their director fees for 2020. This deferral will be effective until at least the date of the Annual Meeting.
At the discretion of our Board or Compensation Committee, our directors are also eligible to receive stock awards under our 2018 Incentive Compensation Plan, with a target grant date value in 2019 of $100,000. On February 26, 2019, each of our independent directors, except for Mr. Lightcap, received a grant of 21,322 restricted stock awards at a stock price of $4.69 per share. On March 8, 2019, Mr. Lightcap, received a grant of 17,668 restricted stock awards at a stock price of $5.66 per share. These restricted stock awards were subject to a restricted stock award agreement withone-year vesting.Non-employee directors are subject to stock ownership guidelines equal to five times the value of the annual Board cash retainer.Non-employee directors have up to five years from the time they join the Board to achieve stock ownership requirements.
officers and employees.
Director Compensation
Name (1) | Fees Earned or Paid in Cash ($) (2) | Stock Awards ($) (3) | Total ($) | |||||||||
Peter F. Gearen (6) | 35,179 | — | 35,179 | |||||||||
Jeffrey C. Lightcap (7) | 33,333 | 100,000 | (4) | 133,333 | ||||||||
Thomas A. McEachin | 67,500 | 100,000 | (5) | 167,500 | ||||||||
Curt M. Selquist | 107,500 | 100,000 | (5) | 207,500 | ||||||||
Mark D. Stolper | 65,000 | 100,000 | (5) | 165,000 | ||||||||
Christopher R. Sweeney | 47,500 | 100,000 | (5) | 147,500 | ||||||||
Paul G. Thomas | 62,898 | 100,000 | (5) | 162,898 | ||||||||
Nicholas J. Valeriani | 60,000 | 100,000 | (5) | 160,000 | ||||||||
Shirley A. Weis | 68,297 | 100,000 | (5) | 168,297 |
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COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewedexecutive officers and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriatecorporate governance is incorporated by the Compensation Committee, the Compensation Committee recommendedreference to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form10-K.
Shirley A. Weis (Committee Chair)
Mark D. Stolper
Paul G. Thomas
Nicholas J. Valeriani
President and Chief Executive Officer Pay Ratio
Mr. Farhat’s total reported compensation in 2019 was $690,184 as reflected in the Summary Compensation Table included in this Annual Report on Form10-K. Mr. Farhat’s 2019 total annual compensation was approximately 11.8 times the median employee’s annual total compensation of $58,452. There was a material change in our employee population during 2019 resulting in the calculation of a new median employee. The median employee pay value represents compensation received from January 1, 2019 through December 31, 2019. The methodology used to identify the median employee uses the same pay components, as well as the same calculation methods and assumptions, disclosed in the Summary Compensation Table (including salary, bonus, stock awards, option awards,non-equity incentive plan compensation, deferred compensation earnings and other compensation). Compensation levels for permanent employees only working a partial year were annualized. All active employees were used in determining the median employee. Given the different methodologies that various public companies will use to determine an estimate of their pay ratio, the estimated ratio reported above should not be used as a basis for comparison between companies.
Item 12. SECURITY |
Equity Compensation Plan Information
The following table sets forth, as of the end of the last fiscal year, the number of equity securities authorized for issuance under the Company’s equity compensation plans.
Plan Category | Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
Equity compensation plans approved by security holders | 4,295,744 | $ | 3.76 | 3,872,655 | ||||||||
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Equity compensation plans not approved by security holders | 2,950,000 | $ | 3.20 | — | ||||||||
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Equity compensation plans not approved by security holders | 313,995 | $ | 1.99 | — | ||||||||
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Total | 7,559,739 | $ | 3.47 | 3,872,655 | ||||||||
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Please see the above summary on page 73 under “Employment Agreement – Mr. Farhat” of the equity grants awarded to Mr. Farhat. Such equity grants were made as inducement grants and were not made under an equity compensation plan approved by RTI’s stockholders.
BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERSCERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
Amount and Nature of Beneficial Ownership (1) | ||||||||
Name and Address of Beneficial Owner | Number | Percent | ||||||
Camille I. Farhat | 1,110,619 | 1.5 | ||||||
Jonathon M. Singer (2) | 620,827 | * | ||||||
John N. Varela (3) | 204,959 | * | ||||||
Olivier M. Visa (4) | 157,361 | * | ||||||
Joshua H. DeRienzis (5) | 64,350 | * | ||||||
Jeffrey C. Lightcap (6) | 42,360 | * | ||||||
Thomas A. McEachin | 110,438 | * | ||||||
Stuart F. Simpson | 0 | * | ||||||
Curt M. Selquist | 140,064 | * | ||||||
Mark D. Stolper | 91,476 | * | ||||||
Christopher R. Sweeney | 100,415 | * | ||||||
Paul G. Thomas | 100,415 | * | ||||||
Nicholas J. Valeriani | 111,415 | * | ||||||
Shirley A. Weis | 121,531 | * | ||||||
WSHP Biologics Holdings, LLC (7) 444 West Lake Street, Suite 1800 Chicago, Illinois 60606 | 15,152,761 | 16.9 | ||||||
Hayfin Capital Holdings Limited (8) c/o Hayfin Capital Management LLP One Eagle Place London, SW1Y 6AF, United Kingdom | 5,631,026 | 7.6 | ||||||
Kopp Family Office, LLC (9) Building One, 6300 Bee Cave Road Austin, TX 78746 | 3,709,829 | 5.0 | ||||||
Paradigm Capital Management Inc. (10) Nine Elk Street Albany, New York 12207 | 6,024,070 | 8.1 | ||||||
BlackRock Inc. (11) 55 East 52nd Street New York, New York 10022 | 5,416,349 | 7.3 | ||||||
Glen Capital Partners LLC (12) 800 South Street, Suite 160 Waltham, Massachusetts 02453 | 5,117,616 | 6.9 | ||||||
Dimensional Fund Advisors, LP (13) Building One, 6300 Bee Cave Road Austin, Texas 78746 | 4,756,346 | 6.5 | ||||||
Krensavage Asset Management, LLC (14) 130 E. 59th Street, 11th Floor New York, New York 10022 | 3,852,567 | 5.2 |
Wellington Trust Company, National Association Multiple Common Trust Funds Trust, Micro Cap Equity Portfolio (15) c/o Wellington Trust Company 280 Congress Street Boston, Massachusetts 02210 | 3,714,924 | 5.0 | ||||||
All current executive officers and directors (16 persons) (16) | 3,243,043 | 4.4 |
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The Board of the Company has adopted a related party transaction policy. The policy requires that all “interested transactions” (as defined below) between the Company and any “related party” (as defined below) are subject to approval or ratificationcorporate governance is incorporated by the Audit Committee. In determining whether to approve or ratify such transactions, the Audit Committee will take into account, among other factors it deems appropriate, whether the interested transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. Also, the Board has delegatedreference to the Chair of the Audit Committee the authorityProxy Statement.
Under the policy, an “interested transaction”
the aggregate amount involved will or may be expected to exceed $100,000 in any fiscal year;
the Company is a participant; and
any related party has or will have a direct or indirect interest (other than solely as a result of being a director or a less than ten percent beneficial owner of another entity).
A “related party” is defined as any:
person who is or was (since the beginning of the last fiscal year for which the Company has filed a Form10-K and proxy statement, even if he or she does not presently serve in that role) an executive officer, director or nominee for election as a director;
greater than five percent beneficial owner of the Company’s common stock; or
immediate family member of any of the foregoing.
There were no related party transactions in 2019.
Our current Board of Directors currently consists of nine members: Camille I. Farhat, Jeffrey C. Lightcap, Thomas A. McEachin, Curtis M. Selquist, Mark D. Stolper, Christopher R. Sweeney, Paul G. Thomas, Nicholas J. Valeriani and Shirley A. Weis. Our Board has determined that each of our current directors and each of our nominees, except for Mr. Farhat, is an “independent director” as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing Rules.
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Fees Paid to Independent Registered Public Accounting Firm
The following table sets forth fees billed for professional audit services and other services renderedincorporated by reference to the Company by Deloitte & Touche LLP and its affiliates for the fiscal years ended December 31, 2019 and 2018.
Fiscal 2019 | Fiscal 2018 | |||||||
Audit Fees | $ | 11,450,000 | $ | 1,270,000 | ||||
Audit-Related Fees | — | — | ||||||
Tax Fees | — | — | ||||||
All Other Fees | — | — | ||||||
Total | $ | 11,450,000 | $ | 1,270,000 |
Audit Fees
The aggregate fees billed by Deloitte & Touche LLP and their respective affiliates for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2019 and 2018, for the Sarbanes-Oxley Section 404 audit of our internal control structure, and for the reviews of the financial statements included in our Quarterly Reports on Form10-Q for those years were $1,290,000 and $1,270,000, respectively. The fiscal 2019 fees include time and expenses related to the 2018 10-K/A restatements.
Audit-Related Fees
Deloitte & Touche LLP rendered no professional services for audit-related services for the years ended December 31, 2019 or 2018.
Tax Fees
Deloitte & Touche LLP rendered no professional services for tax fees for the years ended December 31, 2019 or 2018.
All Other Fees
Deloitte & Touche LLP rendered no professional services for all other fees for the years ended December 31, 2019 and 2018.
Policy on Audit CommitteePre-Approval of Audit and PermissibleNon-Audit Services of Independent Auditors
The Audit Committeepre-approves all audit andnon-audit services provided by our independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such services. All “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees” set forth above werepre-approved by the Audit Committee in accordance with itspre-approval policy.
l Exhibit No. | Incorporated by Reference | |||||||||||||||||||||||||
Description |
| Form |
| File No. | Date Filed | |||||||||||||||||||||
2.1 | ||||||||||||||||||||||||||
8-K12B | 001-38832 | 3/11/2019 | ||||||||||||||||||||||||
2.2† | ||||||||||||||||||||||||||
8-K | 001-38832 | 1/15/2020 | ||||||||||||||||||||||||
2.3† | ||||||||||||||||||||||||||
8-K | 001-38832 | 3/9/2020 | ||||||||||||||||||||||||
2.4† | ||||||||||||||||||||||||||
8-K | 001-38832 | 4/29/2020 | ||||||||||||||||||||||||
2.5† | 8-K | 001-38832 | 7/9/2020 | |||||||||||||||||||||||
8-K | 001-38832 | 9/29/2020 | ||||||||||||||||||||||||
2.7† | 8-K | 001-38832 | 10/23/2020 | |||||||||||||||||||||||
2.8† | 8-K | 001-38832 | 1/18/2022 | |||||||||||||||||||||||
2.9† | 8-K | 001-38832 | 1/5/2022 | |||||||||||||||||||||||
3.1 | 8-K12B | 001-38832 | 3/11/2019 | |||||||||||||||||||||||
3.2 | ||||||||||||||||||||||||||
8-K | 001-38832 | |||||||||||||||||||||||||
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l Exhibit No. | Incorporated by Reference | |||||||||||||||||||||||||||||||
Description | Form | File No. | Date Filed | |||||||||||||||||||||||||||||
3.3 | 10-Q | 001-38832 | 5/4/2021 | |||||||||||||||||||||||||||||
3.4 | 8-K |
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3.5 | 8-K | 001-38832 | 7/24/2020 | |||||||||||||||||||||||||||||
3.6 | 10-Q | 001-38832 | 11/16/2020 | |||||||||||||||||||||||||||||
4.1 | S-1/A | 333-228694 | 1/18/2019 | |||||||||||||||||||||||||||||
4.2 | 8-K | 001-38832 | 6/11/2021 | |||||||||||||||||||||||||||||
4.3 | 8-K | 001-38832 | 6/11/2021 | |||||||||||||||||||||||||||||
4.4 | 8-K | 001-38832 | 2/15/2022 | |||||||||||||||||||||||||||||
4.5 | 8-K | 001-38832 | 2/15/2022 | |||||||||||||||||||||||||||||
4.6 | 8-K | 001-38832 | 2/15/2022 | |||||||||||||||||||||||||||||
4.7* | ||||||||||||||||||||||||||||||||
10.1‡ | DEF 14A | 000-31271 | 7/19/2013 | |||||||||||||||||||||||||||||
10.2‡ | S-8 | 333-203861 | 5/5/2015 | |||||||||||||||||||||||||||||
10.3‡ | (under 2015 Plan). | S-8 | 333-203861 | 5/5/2015 | ||||||||||||||||||||||||||||
10.4‡ | (under 2015 Plan) | S-8 | 333-203861 | 5/5/2015 | ||||||||||||||||||||||||||||
10.5‡ | S-8 | 333-203861 | 5/5/2015 | |||||||||||||||||||||||||||||
10.6‡ | 10-Q | 000-31271 | 5/4/2018 | |||||||||||||||||||||||||||||
10.7‡ | 10-Q | 000-31271 | 5/4/2018 | |||||||||||||||||||||||||||||
10.8‡ | 10-Q | 000-31271 | 5/4/2018 | |||||||||||||||||||||||||||||
10.9‡ | 10-Q | 000-31271 | 5/4/2018 | |||||||||||||||||||||||||||||
10.10‡ | S-8 | 333-255852 | 5/7/2021 | |||||||||||||||||||||||||||||
10.11‡ | S-8 | 333-255852 | 5/7/2021 | |||||||||||||||||||||||||||||
10.12‡ | S-8 | 333-255853 | 5/7/2021 | |||||||||||||||||||||||||||||
10.13‡ | 10-Q | 001-38832 | 8/6/2021 | |||||||||||||||||||||||||||||
10.14‡ | 10-Q | 001-38832 | 8/6/2021 | |||||||||||||||||||||||||||||
10.15‡ | 10-Q | 000-38832 | ||||||||||||||||||||||||||||||
10.16‡ | 10-Q | 000-38832 | 8/12/2020 | |||||||||||||||||||||||||||||
10.17‡ | 10-Q (Q1 2017) | 000-31271 | 5/3/2017 | |||||||||||||||||||||||||||||
10.18‡ | 10-Q | 000-38832 | 8/12/2020 | |||||||||||||||||||||||||||||
10.19‡ | 10-Q | 000-38832 | 8/12/2020 | |||||||||||||||||||||||||||||
10.20‡ | 10-Q | 000-38832 | 8/12/2020 |
l Exhibit No. | Incorporated by | Reference | ||||||||||||||||||||||||||||||||||||
Description | Form | File No. | Date Filed | |||||||||||||||||||||||||||||||||||
10.21‡ | 10-K | 000-38832 | 3/16/2021 | |||||||||||||||||||||||||||||||||||
10.22‡ | 10-K | 000-38832 | 3/16/2021 | |||||||||||||||||||||||||||||||||||
10.23‡* | ||||||||||||||||||||||||||||||||||||||
10.24‡* | ||||||||||||||||||||||||||||||||||||||
10.25‡* | ||||||||||||||||||||||||||||||||||||||
10.26‡* | ||||||||||||||||||||||||||||||||||||||
10.27‡* | ||||||||||||||||||||||||||||||||||||||
10.28‡ | 8-K | 001-38832 | 1/5/2022 | |||||||||||||||||||||||||||||||||||
21.1* | ||||||||||||||||||||||||||||||||||||||
23.1* | ||||||||||||||||||||||||||||||||||||||
31.1* | ||||||||||||||||||||||||||||||||||||||
31.2* | ||||||||||||||||||||||||||||||||||||||
32.1* | ||||||||||||||||||||||||||||||||||||||
32.2* | ||||||||||||||||||||||||||||||||||||||
Inline XBRL Instance Document | – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||||||||
Inline XBRL Taxonomy Extension Schema Document | ||||||||||||||||||||||||||||||||||||||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||||||||||||||||||||||||||||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||||||||||||||||||||||||||||
Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||||||||||||||||||||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||||||||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
† | Certain information in this exhibit identified by brackets has been omitted pursuant to Item 601(b)(10) of RegulationS-K because it (i) is not material and (ii) would cause competitive harm to |
‡ | Indicates a management contract or any compensatory plan, contract, or arrangement. | ||||
* | Filed herewith. |
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Consolidated Financial Statements of | ||||||||
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) | ||||||||
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 23) | ||||||||
67-103 | ||||||||
To the
RTI SurgicalShareholders
Deerfield, Illinois
financial statements
Changes in Accounting Principles
As discussed in Note 3 to the financial statements, effective January 1, 2018, the Company adopted Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers, using the modified retrospective method and effective January 1, 2019, the Company adopted ASC 842, Leases, using the optional transition method.
unqualified opinion.
concern
opinion
Tampa, Florida
June 8, 2020
To the
RTI SurgicalShareholders
Deerfield, Illinois
financial reporting
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Paradigm Spine, LLC, which was acquired on March 8, 2019, and whose financial statements constitute 4% and 10% of total assets and revenues, respectively. of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at Paradigm Spine, LLC.
statements.
opinion
financial reporting
Material Weaknesses
A
The Company did not maintain an effective control environment based on the criteria establisheddisclosures in the COSO frameworkfinancial statements. Our audits also included evaluating the accounting principles used and identified deficiencies insignificant estimates made by management, as well as evaluating the principles associated with the control environment of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines, and authority and responsibilities in pursuit of objectives, (ii) the Company’s commitment to attract, develop, and retain competent individuals, and (iii) holding individuals accountable for their internal control related responsibilities.
The Company did not design and implement an effective risk assessment based on the criteria established in the COSO framework, and identified deficiencies in the principles associated with the risk assessment component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives, (ii) identifying and analyzing risks to achieve these objectives, (iii) considering the potential for fraud in assessing risks, and (iv) identifying and assessing changes in the business that could impact the Company’s system of internal controls.
The Company did not design and implement effective control activities based on the criteria established in the COSO framework, and identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
The Company did not consistently generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework, and identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the function of internal control, and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.
The Company did not design and implement effective monitoring activities based on the criteria established in the COSO framework, and identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, control deficiencies constituted material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning, and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our auditoverall presentation of the financial statements of the Company, and this report does not affectstatements. We believe that our report on such financial statements.
audits provide a reasonable basis for our opinion.
June 8, 2020
RTI SURGICAL
December 31, | ||||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 5,608 | $ | 10,949 | ||||
Accounts receivable - less allowances of $5,098 at December 31, 2019 and $2,660 at December 31, 2018 | 59,288 | 48,096 | ||||||
Inventories - net | 124,149 | 107,655 | ||||||
Prepaid and other current assets | 6,769 | 8,413 | ||||||
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Total current assets | 195,814 | 175,113 | ||||||
Non-current inventories - net | 6,637 | — | ||||||
Property, plant and equipment - net | 69,890 | 77,954 | ||||||
Deferred tax assets - net | — | 17,760 | ||||||
Goodwill | 55,384 | 59,798 | ||||||
Other intangible assets - net | 10,492 | 25,557 | ||||||
Other assets - net | 6,292 | 4,003 | ||||||
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Total assets | $ | 344,509 | $ | 360,185 | ||||
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Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 30,126 | $ | 26,219 | ||||
Accrued expenses | 33,337 | 25,865 | ||||||
Current portion of deferred revenue | 2,748 | 4,908 | ||||||
Current portion of short and long-term obligations | 174,177 | — | ||||||
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Total current liabilities | 240,388 | 56,992 | ||||||
Long-term obligations - less current portion | — | 49,073 | ||||||
Acquisition contingencies | 1,130 | 4,986 | ||||||
Other long-term liabilities | 2,017 | 633 | ||||||
Deferred revenue | — | 744 | ||||||
|
|
|
| |||||
Total liabilities | 243,535 | 112,428 | ||||||
Commitments and contingencies (Note 22) | ||||||||
Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares issued and outstanding | 66,410 | 66,226 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $.001 par value: 150,000,000 shares authorized; 75,213,515 and 63,469,185 shares issued and outstanding, respectively | 75 | 64 | ||||||
Additionalpaid-in capital | 498,438 | 433,143 | ||||||
Accumulated other comprehensive loss | (7,629 | ) | (7,270 | ) | ||||
Accumulated deficit | (451,179 | ) | (239,537 | ) | ||||
Less treasury stock, 1,285,224 and 1,221,180 shares, respectively, at cost | (5,141 | ) | (4,869 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 34,564 | 181,531 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 344,509 | $ | 360,185 | ||||
|
|
|
|
December 31, | |||||||||||
2021 | 2020 | ||||||||||
Assets | |||||||||||
Current Assets: | |||||||||||
Cash and cash equivalents | $ | 51,287 | $ | 43,962 | |||||||
Accounts receivable - less allowances of $9,272 at December 31, 2021 and $8,203 at December 31, 2020 | 19,197 | 27,095 | |||||||||
Inventories - current | 26,204 | 22,841 | |||||||||
Prepaid and other current assets | 8,984 | 10,284 | |||||||||
Total current assets | $ | 105,672 | $ | 104,182 | |||||||
Non-current inventories | 10,212 | 7,856 | |||||||||
Property and equipment - net | 945 | 521 | |||||||||
Other assets - net | 6,970 | 10,145 | |||||||||
Total assets | $ | 123,799 | $ | 122,704 | |||||||
Liabilities, Mezzanine Equity and Stockholders' Equity | |||||||||||
Current Liabilities: | |||||||||||
Accounts payable | $ | 10,204 | $ | 13,418 | |||||||
Current portion of accrued acquisition contingency - Holo | 25,585 | 8,996 | |||||||||
Accrued expenses | 17,769 | 12,648 | |||||||||
Accrued income taxes | 484 | 11,761 | |||||||||
Total current liabilities | 54,042 | 46,823 | |||||||||
Acquisition contingencies - Holo | 26,343 | 47,519 | |||||||||
Warrant liability | 12,013 | — | |||||||||
Notes payable - related party | 9,982 | — | |||||||||
Other long-term liabilities | 3,176 | 4,192 | |||||||||
Total liabilities | 105,556 | 98,534 | |||||||||
Commitments and contingencies (Note 23) | 0 | 0 | |||||||||
Mezzanine equity | 10,006 | — | |||||||||
Stockholders' equity: | |||||||||||
Common stock, $.001 par value: 300,000,000 shares authorized; 146,640,069 and 81,678,179 shares issued and outstanding, as of December 31, 2021 and 2020, respectively | 147 | 81 | |||||||||
Additional paid-in capital | 585,375 | 517,123 | |||||||||
Accumulated other comprehensive loss | (1,820) | (2,416) | |||||||||
Accumulated deficit | (569,613) | (484,962) | |||||||||
Less treasury stock, 1,543,446 and 1,444,578 shares, as of December 31, 2021 and 2020, respectively, at cost | (5,852) | (5,656) | |||||||||
Total stockholders' equity | 8,237 | 24,170 | |||||||||
Total liabilities, mezzanine equity and stockholders' equity | $ | 123,799 | $ | 122,704 |
RTI SURGICAL
Loss
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues | $ | 308,384 | $ | 280,362 | $ | 280,349 | ||||||
Costs of processing and distribution | 137,259 | 140,719 | 137,277 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 171,125 | 139,643 | 143,072 | |||||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
Marketing, general and administrative | 157,675 | 119,724 | 115,009 | |||||||||
Research and development | 16,836 | 14,410 | 13,315 | |||||||||
Severance and restructuring costs | — | 2,808 | 12,016 | |||||||||
Gain on acquisition contingency | (76,033 | ) | — | — | ||||||||
Executive transition costs | — | — | 2,818 | |||||||||
Asset impairment and abandonments | 97,341 | 5,070 | 4,034 | |||||||||
Goodwill impairment | 140,003 | — | — | |||||||||
Acquisition and integration expenses | 17,159 | 4,943 | 630 | |||||||||
Cardiothoracic closure business divestiture contingency consideration | — | (3,000 | ) | — | ||||||||
Gain on cardiothoracic closure business divestiture | (34,090 | ) | ||||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 352,981 | 143,955 | 113,732 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) income | (181,856 | ) | (4,312 | ) | 29,340 | |||||||
|
|
|
|
|
| |||||||
Other (expense) income: | ||||||||||||
Interest expense | (12,571 | ) | (2,771 | ) | (3,180 | ) | ||||||
Interest income | 161 | 35 | 8 | |||||||||
Loss on extinguishment of debt | — | (309 | ) | — | ||||||||
Foreign exchange (loss) gain | (139 | ) | (34 | ) | 87 | |||||||
|
|
|
|
|
| |||||||
Total other expense - net | (12,549 | ) | (3,079 | ) | (3,085 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) income before income tax (provision) benefit | (194,405 | ) | (7,391 | ) | 26,255 | |||||||
|
|
|
|
|
| |||||||
Income tax (provision) benefit | (17,237 | ) | 4,268 | (19,349 | ) | |||||||
|
|
|
|
|
| |||||||
Net (loss) income | (211,642 | ) | (3,123 | ) | 6,906 | |||||||
|
|
|
|
|
| |||||||
Convertible preferred dividend | — | (2,120 | ) | (3,723 | ) | |||||||
|
|
|
|
|
| |||||||
Net (loss) income applicable to common shares | $ | (211,642 | ) | $ | (5,243 | ) | $ | 3,183 | ||||
|
|
|
|
|
| |||||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized foreign currency translation loss | (351 | ) | (941 | ) | 1,987 | |||||||
|
|
|
|
|
| |||||||
Comprehensive (loss) income | $ | (211,993 | ) | $ | (6,184 | ) | $ | 5,170 | ||||
|
|
|
|
|
| |||||||
Net (loss) income per common share - basic | $ | (2.91 | ) | $ | (0.08 | ) | $ | 0.05 | ||||
|
|
|
|
|
| |||||||
Net (loss) income per common share - diluted | $ | (2.91 | ) | $ | (0.08 | ) | $ | 0.05 | ||||
|
|
|
|
|
| |||||||
Weighted average shares outstanding - basic | 72,824,308 | 63,521,703 | 59,684,289 | |||||||||
|
|
|
|
|
| |||||||
Weighted average shares outstanding - diluted | 72,824,308 | 63,521,703 | 60,599,952 | |||||||||
|
|
|
|
|
|
Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Revenues | $ | 90,500 | $ | 101,749 | $ | 117,423 | |||||||||||
Costs of goods sold | 29,775 | 44,002 | 32,777 | ||||||||||||||
Gross profit | 60,725 | 57,747 | 84,646 | ||||||||||||||
Operating Expenses: | |||||||||||||||||
General and administrative | 104,668 | 124,424 | 135,396 | ||||||||||||||
Research and development | 13,888 | 11,947 | 16,836 | ||||||||||||||
Loss (gain) on acquisition contingency | (4,587) | 4,753 | (76,033) | ||||||||||||||
Asset acquisition expenses | 72,087 | 94,999 | — | ||||||||||||||
Asset impairment and abandonments | 12,195 | 14,773 | 97,341 | ||||||||||||||
Goodwill impairment | — | — | 140,003 | ||||||||||||||
Transaction and integration expenses | 3,689 | 4,872 | 13,999 | ||||||||||||||
Total operating expenses | 201,940 | 255,768 | 327,542 | ||||||||||||||
Other operating income, net | (3,932) | — | — | ||||||||||||||
Operating loss | (137,283) | (198,021) | (242,896) | ||||||||||||||
Other (income) expense - net | |||||||||||||||||
Other (income) expense - net | (202) | (61) | (161) | ||||||||||||||
Foreign exchange loss (gain) | 1,447 | (279) | 122 | ||||||||||||||
Change in fair value of warrant liability | (14,736) | — | — | ||||||||||||||
Total other (income) expense - net | (13,491) | (340) | (39) | ||||||||||||||
Loss before income tax (benefit) provision | (123,792) | (197,681) | (242,857) | ||||||||||||||
Income tax (benefit) provision | (886) | (3,486) | 5,921 | ||||||||||||||
Net loss from continuing operations | (122,906) | (194,195) | (248,778) | ||||||||||||||
Discontinued operations (Note 5) | |||||||||||||||||
(Loss) Income from operations of discontinued operations | (6,316) | 179,934 | 48,452 | ||||||||||||||
Income tax (benefit) provision | (2,674) | 19,522 | 11,316 | ||||||||||||||
Net (loss) income from discontinued operations | (3,642) | 160,412 | 37,136 | ||||||||||||||
Net loss | (126,548) | (33,783) | (211,642) | ||||||||||||||
Net loss applicable to noncontrolling interests | $ | 41,897 | — | — | |||||||||||||
Net (loss) applicable to Surgalign Holdings, Inc. | $ | (84,651) | $ | (33,783) | $ | (211,642) | |||||||||||
Other comprehensive (loss) income: | |||||||||||||||||
Unrealized foreign currency translation loss (gain) | (596) | (23) | 351 | ||||||||||||||
Total other comprehensive loss | $ | (84,055) | $ | (33,760) | $ | (211,993) | |||||||||||
Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - basic | $ | (1.00) | $ | (2.61) | $ | (3.55) | |||||||||||
Net income from discontinued operations per share applicable to Surgalign Holdings, Inc. - basic | (0.03) | 2.16 | 0.53 | ||||||||||||||
Net loss per share applicable to Surgalign Holdings, Inc.- basic | (0.69) | (0.45) | (3.02) | ||||||||||||||
Net loss from continuing operations per share applicable to Surgalign Holdings, Inc. - diluted | $ | (1.00) | $ | (2.61) | $ | (3.55) | |||||||||||
Net income from discontinued operations per share applicable to Surgalign Holdings, Inc. - diluted | (0.03) | 2.16 | 0.53 | ||||||||||||||
Net loss per share applicable to Surgalign Holdings, Inc. - diluted | (0.69) | (0.45) | (3.02) | ||||||||||||||
Weighted average shares outstanding - basic | 122,592,569 | 74,403,155 | 70,150,492 | ||||||||||||||
Weighted average shares outstanding - diluted | 122,592,569 | 74,403,155 | 70,150,492 |
RTI SURGICAL
Common Stock | Additional Paid- In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||
Balance, January 1, 2017 | $ | 58 | $ | 417,428 | $ | (8,316 | ) | $ | (244,192 | ) | $ | (916 | ) | $ | 164,062 | |||||||||
Net income | — | — | — | 6,906 | — | 6,906 | ||||||||||||||||||
Foreign currency translation adjustment | — | — | 1,987 | — | — | 1,987 | ||||||||||||||||||
Exercise of common stock options | 5 | 9,176 | — | — | — | 9,181 | ||||||||||||||||||
Stock-based compensation | — | 6,762 | — | — | — | 6,762 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (3,474 | ) | (3,474 | ) | ||||||||||||||||
Amortization of preferred stock | ||||||||||||||||||||||||
Series A issuance costs | — | (184 | ) | — | — | — | (184 | ) | ||||||||||||||||
Preferred stock Series A dividend | — | (3,723 | ) | — | — | — | (3,723 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2017 | $ | 63 | $ | 429,459 | $ | (6,329 | ) | $ | (237,286 | ) | $ | (4,390 | ) | $ | 181,517 | |||||||||
Accumulated effect of adoption of the revenue recognition standard | — | — | — | 872 | — | 872 | ||||||||||||||||||
Net (loss) | — | — | — | (3,123 | ) | — | (3,123 | ) | ||||||||||||||||
Foreign currency translation adjustment | — | — | (941 | ) | — | — | (941 | ) | ||||||||||||||||
Exercise of common stock options | 1 | 1,242 | — | — | — | 1,243 | ||||||||||||||||||
Stock-based compensation | — | 4,745 | — | — | — | 4,745 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (479 | ) | (479 | ) | ||||||||||||||||
Amortization of preferred stock | ||||||||||||||||||||||||
Series A issuance costs | — | (183 | ) | — | — | — | (183 | ) | ||||||||||||||||
Preferred stock Series A dividend | — | (2,120 | ) | — | — | — | (2,120 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2018 | $ | 64 | $ | 433,143 | $ | (7,270 | ) | $ | (239,537 | ) | $ | (4,869 | ) | $ | 181,531 | |||||||||
Net (loss) | — | — | — | (211,642 | ) | — | (211,642 | ) | ||||||||||||||||
Foreign currency translation adjustment | — | — | (359 | ) | — | — | (359 | ) | ||||||||||||||||
Exercise of common stock options | — | 395 | — | — | — | 395 | ||||||||||||||||||
Equity instruments issued in connection with Paradigm Spine acquisition - net of fees | 11 | 60,719 | — | — | — | 60,730 | ||||||||||||||||||
Stock-based compensation | — | 4,367 | — | — | — | 4,367 | ||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (272 | ) | (272 | ) | ||||||||||||||||
Amortization of preferred stock | ||||||||||||||||||||||||
Series A issuance costs | — | (186 | ) | — | — | — | (186 | ) | ||||||||||||||||
Preferred stock Series A dividend | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Balance, December 31, 2019 | $ | 75 | $ | 498,438 | $ | (7,629 | ) | $ | (451,179 | ) | $ | (5,141 | ) | $ | 34,564 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
thousands, except share data)
Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Treasury Stock | Total Stockholders' Equity | Mezzanine Equity | |||||||||||||||||||||||||||||||||||
Balance, January 1, 2019 | $ | 64 | $ | 433,143 | $ | (7,270) | $ | (239,537) | $ | (4,869) | $ | 181,531 | $ | — | |||||||||||||||||||||||||||
Net loss | — | — | — | (211,642) | — | (211,642) | — | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | (359) | — | — | (359) | — | ||||||||||||||||||||||||||||||||||
Exercise of common stock options | — | 395 | — | — | — | 395 | — | ||||||||||||||||||||||||||||||||||
Equity instruments issued in connection with Paradigm Spine acquisition - net of fees | 11 | 60,719 | — | — | — | 60,730 | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | 4,367 | — | — | — | 4,367 | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (272) | (272) | — | ||||||||||||||||||||||||||||||||||
Amortization of preferred stock | — | (186) | — | — | — | (186) | — | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | 75 | 498,438 | (7,629) | (451,179) | (5,141) | 34,564 | — | ||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (33,783) | — | (33,783) | — | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | 23 | — | — | 23 | — | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment related to the impact of discontinued operations | — | — | 5,190 | — | — | 5,190 | — | ||||||||||||||||||||||||||||||||||
Vesting of Restricted Stock Awards | — | 22 | — | — | — | 22 | — | ||||||||||||||||||||||||||||||||||
Equity instruments issued in connection with the Holo acquisition | 6 | 12,244 | — | — | — | 12,250 | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | 6,528 | — | — | — | 6,528 | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (515) | (515) | — | ||||||||||||||||||||||||||||||||||
Amortization of preferred stock | — | (109) | — | — | — | (109) | — | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | 81 | 517,123 | (2,416) | (484,962) | (5,656) | 24,170 | — | ||||||||||||||||||||||||||||||||||
Net (loss) income | — | — | — | (84,651) | — | (84,651) | (41,897) | ||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | 596 | — | — | 596 | — | ||||||||||||||||||||||||||||||||||
Exercise of common stock options | — | 23 | — | — | — | 23 | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | 5,212 | — | — | — | 5,212 | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | (196) | (196) | — | ||||||||||||||||||||||||||||||||||
Share offering | 58 | 82,268 | — | — | — | 82,326 | — | ||||||||||||||||||||||||||||||||||
Warrant issuance costs | — | (24,798) | — | — | — | (24,798) | — | ||||||||||||||||||||||||||||||||||
Equity instruments issued in connection with Prompt Prototypes, LLC | — | 221 | — | — | — | 221 | — | ||||||||||||||||||||||||||||||||||
Equity instruments issued in connection with the INN acquisition | 7 | 4,920 | — | — | — | 4,927 | — | ||||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest | — | — | — | — | — | — | 51,903 | ||||||||||||||||||||||||||||||||||
Purchases of stock in the ESPP plan | 1 | 406 | — | — | — | 407 | — | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2021 | $ | 147 | $ | 585,375 | $ | (1,820) | $ | (569,613) | $ | (5,852) | $ | 8,237 | $ | 10,006 |
Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net loss | $ | (126,548) | $ | (33,783) | $ | (211,642) | |||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||||
Depreciation and amortization expense | 2,479 | 6,581 | 22,675 | ||||||||||||||
Provision for bad debts and product returns | 2,064 | 4,286 | 2,937 | ||||||||||||||
Change in fair value of warrant liability | (14,736) | — | — | ||||||||||||||
Provision for inventory write-downs | 9,096 | 17,691 | 8,493 | ||||||||||||||
Investor Fee | 2,119 | — | — | ||||||||||||||
Revenue recognized due to change in deferred revenue | — | (2,618) | (4,906) | ||||||||||||||
Deferred income tax provision | (171) | (1,807) | 17,066 | ||||||||||||||
Stock-based compensation | 5,212 | 6,528 | 4,367 | ||||||||||||||
Asset impairment and abandonments | 12,195 | 14,773 | 97,341 | ||||||||||||||
Goodwill impairment | — | — | 140,003 | ||||||||||||||
Asset acquisition expenses | 72,087 | 94,999 | — | ||||||||||||||
Loss (Gain) on acquisition contingency | (4,587) | 4,753 | (76,033) | ||||||||||||||
Paid in kind interest expense | — | — | 4,408 | ||||||||||||||
Loss on extinguishment of debt | — | 2,686 | — | ||||||||||||||
Bargain purchase gain | (90) | — | — | ||||||||||||||
Amortization of debt issuance costs | — | 283 | — | ||||||||||||||
Amortization of debt discount | — | 2,479 | — | ||||||||||||||
Derivative loss | — | 12,641 | — | ||||||||||||||
Loss (gain) on sale of OEM business (discontinued operations) | 6,316 | (209,800) | — | ||||||||||||||
Other | 24 | 279 | 1,673 | ||||||||||||||
Change in assets and liabilities: | |||||||||||||||||
Accounts receivable | 5,701 | 4,444 | (9,013) | ||||||||||||||
Inventories | (15,480) | (12,607) | (14,219) | ||||||||||||||
Accounts payable | (3,112) | 5,306 | (974) | ||||||||||||||
Accrued expenses and income taxes payable | 10,542 | 3,731 | 4,489 | ||||||||||||||
Right-of-use asset and lease liability | (2,542) | — | — | ||||||||||||||
Contract liability | — | 2,956 | 2,000 | ||||||||||||||
Other operating assets and liabilities | (12,361) | (11,839) | 1,879 | ||||||||||||||
Net cash used in operating activities | (51,792) | (88,038) | (9,456) | ||||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Payments for OEM working capital adjustment | (5,430) | — | — | ||||||||||||||
Purchases of property and equipment | (13,423) | (10,115) | (14,426) | ||||||||||||||
Acquisition of INN | (5,000) | — | — | ||||||||||||||
Patent and acquired intangible asset costs | (649) | (3,923) | (2,007) | ||||||||||||||
Proceeds from sale of OEM business | — | 437,097 | — | ||||||||||||||
Acquisition of Prompt Prototype, net of cash acquired | (330) | — | — | ||||||||||||||
Acquisition of Paradigm Spine | — | — | (99,692) | ||||||||||||||
Acquisition of Holo Surgical | — | (32,117) | — | ||||||||||||||
Net cash provided by (used in) investing activities | (24,832) | 390,942 | (116,125) | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||
Share offering proceeds, net | 82,326 | — | — | ||||||||||||||
Proceeds from exercise of common stock options | 23 | 22 | 395 | ||||||||||||||
Proceeds from Employee Stock Purchase Program (ESPP) | 407 | — | — | ||||||||||||||
Repayment of short-term obligations | — | (76,912) | — | ||||||||||||||
Proceeds from long-term obligations | — | 89,892 | 121,500 | ||||||||||||||
Payments of debt issuance costs | — | (1,740) | (826) | ||||||||||||||
Payments on long-term obligations | — | (207,266) | (500) | ||||||||||||||
Payments for treasury stock | (196) | (515) | (273) | ||||||||||||||
Redemption of preferred stock | — | (66,519) | — | ||||||||||||||
Net cash provided by (used in) financing activities | 82,560 | (263,038) | 120,296 | ||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 1,389 | (1,512) | (56) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 7,325 | 38,354 | (5,341) | ||||||||||||||
Cash and cash equivalents, beginning of period | 43,962 | 5,608 | 10,949 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 51,287 | $ | 43,962 | $ | 5,608 | |||||||||||
Supplemental cash flow disclosure: | |||||||||||||||||
Cash paid for interest | $ | — | $ | 14,964 | $ | 7,121 | |||||||||||
Cash paid for income taxes, net of refunds | 7,990 | 7,103 | (1,994) | ||||||||||||||
Non-cash acquisition of property and equipment | 195 | 750 | 1,468 | ||||||||||||||
Non-cash common stock issuance - Prompt | 221 | — | — | ||||||||||||||
Non-cash acquisition of INN | 14,909 | — | — |
RTI SURGICAL
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | (211,642 | ) | $ | (3,123 | ) | $ | 6,906 | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization expense | 22,675 | 14,579 | 14,233 | |||||||||
Provision for bad debts and product returns | 2,937 | 1,721 | 946 | |||||||||
Provision for inventory write-downs | 8,493 | 15,122 | 5,066 | |||||||||
Amortization of deferred revenue | (4,906 | ) | (4,958 | ) | (4,744 | ) | ||||||
Deferred income tax provision | 17,066 | (4,692 | ) | 13,573 | ||||||||
Stock-based compensation | 4,367 | 4,745 | 6,660 | |||||||||
Asset impairment and abandonments | 97,341 | 5,070 | 4,034 | |||||||||
Cardiothoracic closure business divestiture contingency consideration | — | (3,000 | ) | (34,090 | ) | |||||||
Goodwill impairment | 140,003 | — | — | |||||||||
Gain on acquisition contingency | (76,033 | ) | — | — | ||||||||
Paid in kind interest expense | 4,408 | — | — | |||||||||
Other | 1,673 | 1,330 | 2,392 | |||||||||
Change in assets and liabilities: | ||||||||||||
Accounts receivable | (9,013 | ) | (10,829 | ) | 5,116 | |||||||
Inventories | (14,219 | ) | (11,957 | ) | 1,610 | |||||||
Accounts payable | (974 | ) | 8,035 | (12,936 | ) | |||||||
Accrued expenses | 4,489 | (827 | ) | 5,667 | ||||||||
Deferred revenue | 2,000 | 2,000 | 2,000 | |||||||||
Other operating assets and liabilities | 1,879 | 4,036 | (10,645 | ) | ||||||||
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Net cash provided by operating activities | (9,456 | ) | 17,252 | 5,788 | ||||||||
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Cash flows from investing activities: | ||||||||||||
Purchases of property, plant and equipment | (14,426 | ) | (11,042 | ) | (12,301 | ) | ||||||
Patent and acquired intangible asset costs | (2,007 | ) | (3,695 | ) | (2,266 | ) | ||||||
Proceeds from sale of building | — | — | 1,818 | |||||||||
Acquisition of Zyga Technology | — | (21,000 | ) | — | ||||||||
Acquisition of Paradigm Spine | (99,692 | ) | — | — | ||||||||
Cardiothoracic closure business divestiture | — | 3,000 | 51,000 | |||||||||
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Net cash (used in) provided by investing activities | (116,125 | ) | (32,737 | ) | 38,251 | |||||||
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Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of common stock options | 395 | 2,356 | 5,060 | |||||||||
Proceeds from long-term obligations | 121,500 | 74,425 | 6,000 | |||||||||
Payments of debt issuance costs | (826 | ) | — | — | ||||||||
Payments on long-term obligations | (500 | ) | (71,171 | ) | (43,000 | ) | ||||||
Payments for treasury stock | (273 | ) | (478 | ) | (3,474 | ) | ||||||
Other financing activities | — | (1,039 | ) | (317 | ) | |||||||
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Net cash provided by (used in) financing activities | 120,296 | 4,093 | (35,731 | ) | ||||||||
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Effect of exchange rate changes on cash and cash equivalents | (56 | ) | (40 | ) | 224 | |||||||
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Net increase (decrease) in cash and cash equivalents | (5,341 | ) | (11,432 | ) | 8,532 | |||||||
Cash and cash equivalents, beginning of period | 10,949 | 22,381 | 13,849 | |||||||||
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Cash and cash equivalents, end of period | $ | 5,608 | $ | 10,949 | $ | 22,381 | ||||||
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Supplemental cash flow disclosure: | ||||||||||||
Cash paid for interest | $ | 7,121 | $ | 3,047 | $ | 3,023 | ||||||
Cash paid for income taxes, net of refunds | (1,994 | ) | (6,403 | ) | 12,142 | |||||||
Non-cash acquisition of property, plant and equipment | 1,468 | 1,217 | 593 | |||||||||
Receivable for executive stock option exercise | — | — | 1,234 | |||||||||
Stock-based compensation related to sale of CT business | — | — | 102 | |||||||||
Increase in accrual for dividend payable | — | 2,120 | 3,723 |
See notes to consolidated financial statements.
2019
data or otherwise noted)
RTI Surgical
identify neural structures in medical images. We believe HOLO™ AI, our portfolio of neural network technologies, is one of the most advanced artificial intelligence technologies being applied to surgery.
2021 nor in 2020.
Should the sale of the OEM Business, as discussed in Note 29, Subsequent Events, not be consummated,efforts the Company will continue to attempt to raise additional debt and/or equity financingneed continued capital and cash flows to fund the future operations through 2022 and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs.beyond. The Company’s ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.worldwide. If cash resources are insufficient to satisfy the Company’s on-going cash requirements through 2022, the Company will be required to scale back or discontinue its operations, entirely.reduce research and development expenses, and postpone, as well as suspend capital expenditures, in order to preserve liquidity. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
RTIDS is a taxablenot-for-profit entity organized and controlled by the Company. RTIDS is the corporate entity that is responsible for procuring tissue for the Company. Expenses incurred by RTIDS
Use of Estimates—The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions relating to inventories, receivables, long-lived assets, contingent considerations, and litigation are made at the end of each financial reporting period by management. Actual results could differ from those estimates.
loss.
future expectations. Write-off activity and recoveries for the years were not material.
comprehensive loss.
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Processing equipment | 7 to 10 years | |||||||
Office equipment, furniture and fixtures | 5 to 7 years | |||||||
Computer | 3 to 7 years | |||||||
Surgical instruments | 1 year |
Long-Lived Assets—The Company reviews its property, plant and equipmentlong-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset. An impairment loss would be recorded for the excess of net carrying value over the fair value of the asset impaired. The fair value is estimated based on expected discounted future cash flows. The results of impairment tests are subject to management’s estimates and assumptions of projected cash flows and operating results. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
Goodwill—Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350,Goodwill Because the Company’s forecasted cash flow is negative, Long-lived assets, including property and equipment and intangible assets subject to amortization were impaired and written down to their estimated fair values in 2021 and 2020.
Goodwill is tested for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. Prior to 2019, in concluding as to fair value of the reporting unit for purposes of testing goodwill, an income approach and a market approach were utilized. The conclusion from these two approaches were weighted equally and then adjusted to incorporate a control premium or acquisition premium that reflects the additional amount a buyer is willing to pay for elements of control and for a premium that reflects the buyer’s perception of its ability to add value through synergies. In 2019, since the cash flows were negative over the forecast period for the Spine reporting unit, a cost approach was used to determine the fair value of the Spine reporting unit. For the OEM reporting unit, we weighted the income approach 75% and the market approach 25%. We have chosen the weightings because the income approach more fully captures the company specific factors that would not be directly captured in the market approach, as there are no pure publicly traded comparable companies.
The income approach employs a discounted cash flow model that considers: 1) assumptions that marketplace participants would use in their estimates of fair value, including the cash flow period, terminal values based on a terminal growth rate and the discount rate; 2) current period actual results; and 3) projected results for future periods that have been prepared and approved by senior management of the Company.
The market approach employs market multiples from guideline public companies operating in our industry. Estimates of fair value are derived by applying multiples based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for size and performance metrics relative to peer companies.
The cost approach considers the replacement cost adjusted for certain factors. Certain balance sheet items were adjusted to fair value before being utilized in estimating the value of the reporting unit under the cost approach, including inventory, property, plant and equipment, right of use assets, and other intangible assets.
All three approaches used in the analysis have a degree of uncertainty. Potential events or changes in circumstances which could impact the key assumptions used in our goodwill impairment evaluation are as follows:
Change in peer group or performance of peer group companies
Change in the Company’s markets and estimates of future operating performance
Change in the Company’s estimated market cost of capital
Change in implied control premiums related to acquisitions in the medical device industry
Other Intangible Assets — Intangibleconstitutes finite lives assets, generally consist of finite-lived intangible assets, including patents, tradenames, procurement contracts, customer lists,acquired exclusivity rights, licensing rights, distribution agreements, and acquired exclusivity rights.procurement contracts. Patents are amortized on the straight-line method over the shorter of the remaining protection period or estimated useful lives of between 8 and 16 years. Tradenames,Trade names, procurement contracts, customer lists, acquired exclusivity rights, and distribution agreements are amortized over estimated useful lives of between 5 to 25 years.
As of December 31, 2019, For the Company concluded, through the ASC 360 valuation testing, that factors existed indicating that finite-lived intangible assets in the Spine asset group were impaired. The factors included a change made to the internal organization of the Company in the fourth quarter of 2019. The organizational change resulted in the creation of a new Spine asset group. Prior to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it had interdependencies among the utilization of the assets within the group, and therefore, there were no discrete cash flows. The asset group representing the Spine asset group could not support the carrying amount of the finite-lived intangible assets, because the Spine asset group no longer has the benefit of shared resources and cashflows generated by the former asset group that it was previously included in. Thus, we tested the $85,096 carrying amount of intangible assets in the Spine asset group for impairment on December 31, 2019. As a result, for the yearyears ended December 31, 2021, 2020 and 2019, we recorded an impairment charge for all of the finite-lived intangible assets within Spine asset group, totaling $85,096.
amortization expense is $0.0 million, $0.9 million and $10.7 million , respectively.
The Company permits returns of implants in accordance with the terms of contractual agreements with customers if the implant is returned in a timely manner, in unopened packaging, and from the normal channels of distribution. Allowances for returns are provided based upon analysis of the Company’s historical patterns of returns matched against the revenues from which they originated.
The Company records estimated implant returns, discounts, rebates and other distribution incentives as a reduction of revenue in the same period revenue is recognized. Estimates of implant returns are recorded for anticipated implant returns based on historical distributions and returns information. Estimates of discounts, rebates and other distribution incentives are recorded based on contractual terms, historical experience and trend analysis.
Other revenues consist of service processing, tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees which is included in revenues.
Stock-Based Compensation Plans—The Company accounts for its stock-based compensation plans in accordance with FASB ASC 718,Accounting for Stock Compensation (“FASB ASC 718”). FASB ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and restricted stock. Under the provisions of FASB ASC 718, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the requisite service period of the entire award (generally the vesting period of the award). The Company uses the Black-Scholes model to value its stock option grants under FASB ASC 718 and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk free interest rate. The term assumption is primarily based on the contractual vesting term of the option and historic data related to exercise and post-vesting cancellation history experienced by the Company. The Company uses the simplified method for estimating the expected term used to determine the fair value of options under FASB ASC 718. The expected term is determined separately for options issued to the Company’s directors and to employees. The Company’s anticipated volatility level is primarily based on the historic volatility of the Company’s common stock. The Company’s model includes a zero dividend yield assumption, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The risk free interest rate approximates recent U.S. Treasury note auction results with a similar life to that of the option. The Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined based on the valuation of the options, and at that time an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate ofpre-vesting forfeitures is primarily based on the recent historical experience of the Company, and is adjusted to reflect actual forfeitures as the options vest. The Company uses a Monte Carlo simulation model to estimate the fair value of restricted stock awards that contain a market condition.
Research and Development Costs—Research and development costs, including the cost of research and development conducted for others and the cost of contracted research and development, are expensed as incurred.
Income Taxes—The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the tax consequences on future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at eachyear-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized.
Treasury Stock— The Company may periodically repurchase shares of its common stock from employees for the satisfaction of their individual payroll tax withholding upon vesting of restricted stock awards in connection with the Company’s incentive plans. The Company’s repurchases of common stock are recorded at the stock price on the vesting date of the common stock. The Company repurchased 64,044, 107,109, and 745,122 shares of its common stock for $272, $479, and $3,474 for the years ended December 31, 2019, 2018, and 2017, respectively.
Earnings Per Share—Basic earnings per share (“EPS”) is computed by dividing earnings attributable to common stockholders by the weighted-average number of common shares outstanding for the periods. Diluted EPS reflects the potential dilution of securities that could share in the earnings. A reconciliation of the number of common shares used in the calculation of basic and diluted EPS is presented below:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Weighted average basic shares | 72,824,308 | 63,521,703 | 59,684,289 | |||||||||
Effect of dilutive securities: | ||||||||||||
Stock options | — | — | 915,663 | |||||||||
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Weighted average diluted shares | 72,824,308 | 63,521,703 | 60,599,952 | |||||||||
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Options to purchase 4,536,461 shares of common stock at prices ranging from $2.09 to $5.23 per share which were outstanding as of December 31, 2019, were not included in the computation of diluted EPS because dilutive shares are not factored into the calculation of EPS when a loss applicable to common shares is reported as they would be anti-dilutive.
Options to purchase 4,275,744 shares of common stock at prices ranging from $2.69 to $5.23 per share which were outstanding as of December 31, 2018, were not included in the computation of diluted EPS because dilutive shares are not factored into the calculation of EPS when a loss applicable to common shares is reported as they would be anti-dilutive.
Options to purchase 4,662,037 shares of common stock at prices ranging from $2.69 to $8.20 per share which were outstanding as of December 31, 2017, were included in the computation of diluted EPS because dilutive shares are factored into the calculation of EPS when income applicable to common shares is reported.
For the years ended December 31, 2019, and 2018, 50,000 shares of convertible preferred stock or 15,152,761 of 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) income per common share.
3. Recently Issued and Adopted Accounting Standards.
Financial Instruments— In May 2019, the FASB issued Accounting Standards Codification (“ASU”)No. 2019-05Financial Instruments — Credit Losses (Topic 326) which provides relief to certain entities adopting ASU2016-13 (discussed below). The amendments accomplish those objectives by providing entities with an option to irrevocably elect the fair value option in Subtopic825-10, applied on aninstrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic326-20, upon adoption of Topic 326. The fair value option election does not apply toheld-to-maturity debt securities. ASU2019-05 has the same transition as ASU2016-13 and is effective for periods beginning after December 15, 2019, with adoption permitted after this update. The Company does not expect the impact of adoption to have an impact on the consolidated financial statements.
In April 2019, the FASB issued ASUNo. 2019-04Codification 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:2016-01Financial Instruments — Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities;2016-13Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, described further above and which the Company has not yet adopted; and2017-12Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which the Company early adopted effective January 1, 2018. The updates related to ASU2016-13 have the same transition as ASU2016-13 and are effective for periods beginning after December 15, 2019, with adoption permitted after the issuance of ASU2019-04. The updates related to ASU2017-12 are effective for the Company on January 1, 2020. The updates related to ASU2016-01 are effective for fiscal years beginning after December 15, 2019. The Company does not expect the impact of adoption to have an impact on the consolidated financial statements.
In June 2016, the FASB issued ASUNo. 2016-13,Financial Instruments — Credit Losses. ASU2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable,held-to-maturity debt securities, and net investments in direct financing leases, amongst other financial instruments. ASU2016-13 also modifies the impairment model foravailable-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU2016-13 is effective for periods beginning after December 15, 2019. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company does not expect the adoption to have a material impact on the consolidated financial statements.
Fair Value Measurement— In August 2018, the FASB issuedASU 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. ASU2018-13 is effective for the Company beginning after December 31, 2019. Certain disclosures in ASU2018-13 are required to be applied on a retrospective basis and others on a prospective basis. The Company does not expect the impact of adoption to have an impact on the consolidated financial statements.
Leases— In February 2016, the FASB issued ASU2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840).” ASU2016-02 establishes aright-of-use (“ROU”) model that requires operating leases be recorded on the balance sheet through recognition of a liability for the discounted present value of future lease payments and a corresponding ROU asset. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. The Company has adopted a policy for which leases with an initial term of 12 months or less and do not have an option to purchase the underlying asset that is deemed reasonably certain to exercise are not recorded on the balance sheet; rather, rent expense for these leases is recognized on a straight-line basis over the lease term. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
Effective January 1, 2019, the Company adopted Topic 842 using the optional transition method which allowed us to continue to apply Topic 840 in the comparative periods presented. In addition, the Company elected the package of practical expedients, which allowed us to not reassess whether any existing contracts contain a lease, to not reassess historical lease classification as operating or finance leases, and to not reassess initial direct costs. The Company has not elected the practical expedient to use hindsight to determine the lease term for its leases at transition. The Company has also elected the practical expedient allowing us to not separate the lease andnon-lease components for all classes of underlying assets. Adoption of Topic 842 resulted in the recording of operating lease ROU assets and corresponding operating lease liabilities of $3,164 and $3,155, respectively, as of January 1, 2019 with no impact on accumulated deficit. Financial position for reporting periods beginning on or after January 1, 2019, are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 840.
Revenue from Contracts with Customers— On January 1, 2018, the Company adopted a new accounting standard issued by the FASB on revenue recognition using the modified retrospective method. This new accounting standard outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. This standard supersedes existing revenue recognition requirements and eliminates most industry-specific guidance from GAAP. The core principle of the new accounting standard is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the adoption of this new accounting standard resulted in increased disclosure, including qualitative and quantitative disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new accounting standard was applied to all contracts, apart from contracts for which all or substantially all revenue was recognized before January 1, 2018. Additionally, the Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation.
4. Leases
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 December 31, 2019. The majority of our leases have remaining lease terms of 1 to 14 years, some of which include options to extend or terminate the leases. The option to extend or terminate is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease ROU assets are presented within otherassets-net on the consolidated balance sheet. The current portion of operating lease liabilities are presented within accrued expenses, and thenon-current portion of operating lease liabilities are presented within other long-term liabilities on the 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 Year Ended | ||||
December 31, 2019 | ||||
Operating lease cost | $ | 1,659 | ||
Short-term operating lease cost | 36 | |||
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Total operating lease cost | $ | 1,695 | ||
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Supplemental cash flow information related to operating leases was as follows:
For the Year Ended | ||||
December 31, 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 1,558 | ||
ROU assets obtained in exchange for lease obligations | 103 |
Supplemental balance sheet information related to operating leases was as follows:
Balance Sheet Classification | Balance at December 31, 2019 | |||||||
Assets: | ||||||||
Right-of-use assets | Other assets - net | $ | 2,155 | |||||
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Liabilities: | ||||||||
Current | Accrued expenses | $ | 1,159 | |||||
Noncurrent | Other long-term liabilities | 1,547 | ||||||
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Total operating lease liabilities | $ | 2,706 | ||||||
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As of December 31, 2019, the weighted-average remaining lease term was 5.0 years. The rate implicit on the Company’s leases are not readily determinable nor is it available to the Company from its lessors. Thus, 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 4.7%, as of December 31, 2019. Based on the income approach, including consideration of present value of market-based rent payments for the applicable properties of the Spine segment leases, the Company recorded a write down of $201 related to a right of use assets.
Maturities of operating lease liabilities were as follows:
Maturity of Operating Lease Liabilities | Balance at December 31, 2019 | |||
2020 | $ | 1,261 | ||
2021 | 562 | |||
2022 | 226 | |||
2023 | 159 | |||
2024 | 159 | |||
2025 and beyond | 716 | |||
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Total future minimum lease payments | 3,083 | |||
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Less imputed interest | (377 | ) | ||
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Total operating lease liabilities | $ | 2,706 | ||
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As previously disclosed in our 2018 Annual Report on Form10-K/A, which followed the lease accounting under Topic 840, future commitments relating to operating leases for the five years and period thereafter as of December 31, 2018 were as follows:
Maturity of Operating Lease Liabilities | Balance at December 31, 2018 | |||
2019 | $ | 1,374 | ||
2020 | 806 | |||
2021 | 276 | |||
2022 | 162 | |||
2023 | 166 | |||
2024 and beyond | 882 | |||
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Total future minimum lease payments | $ | 3,666 | ||
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5. Segment Reporting
The Company has determined its operating segments in accordance with ASC 280 - Segment Reporting. Prior to the fourth quarter of 2019, the Company operated in one operating and reportable segment composed of four franchises: spine; sports; original equipment manufacturer (“OEM”) and international.
During the fourth quarter of 2019, changes were made to the internal organization of the Company which resulted in a change in the Company’s operating segments. 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. Changes were made to align our internal reporting and management structure to focus on the value drivers of each segment. 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. Due to the reassessment of the business lines and our internal reorganization, the Company is now organized into two distinct groupings, Spine and OEM, which are also our operating and reportable segments. Additionally, the 2018 and 2017 revenue franchise data has been recast below to reflect the presentation of the new segment structure.
The Spine and OEM reportable segments reflect the way the Company is managed, 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.
The segment revenues and segment net income (loss) for the years ended December 31, 2019, 2018, and 2017 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% or more of our consolidated Property, Plant and Equipment.
The Company’s segment data is as follows:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues: | ||||||||||||
Spine | $ | 118,987 | $ | 94,436 | $ | 92,712 | ||||||
OEM | 189,397 | 185,926 | 187,637 | |||||||||
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Total | $ | 308,384 | $ | 280,362 | $ | 280,349 | ||||||
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Depreciation and amortization: | ||||||||||||
Spine | $ | 12,779 | $ | 4,692 | $ | 3,469 | ||||||
OEM | 9,896 | 9,887 | 10,764 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 22,675 | $ | 14,579 | $ | 14,233 | ||||||
|
|
|
|
|
| |||||||
Operating income (loss): | ||||||||||||
Spine | $ | (30,538 | ) | $ | (20,603 | ) | $ | (9,497 | ) | |||
OEM | 27,152 | 26,112 | 24,245 | |||||||||
One-time charges | ||||||||||||
Severance and restructuring costs | — | 2,808 | 12,016 | |||||||||
Executive transition costs | — | — | 2,818 | |||||||||
Gain on acquisition contingency | (76,033 | ) | — | — | ||||||||
Asset impairment and abandonments | 97,341 | 5,070 | 4,034 | |||||||||
Goodwill impairment | 140,003 | — | — | |||||||||
Acquisition and integration expenses | 17,159 | 4,943 | 630 | |||||||||
Gain on cardiothoracic closure business divestiture | — | (3,000 | ) | (34,090 | ) | |||||||
|
|
|
|
|
| |||||||
Total one-time charges | 178,470 | 9,821 | (14,592 | ) | ||||||||
|
|
|
|
|
| |||||||
Operating income (loss) | $ | (181,856 | ) | $ | (4,312 | ) | $ | 29,340 | ||||
Interest expense | (12,571 | ) | (2,771 | ) | (3,180 | ) | ||||||
Interest income | 161 | 35 | 8 | |||||||||
Loss on extinguishment of debt | — | (309 | ) | — | ||||||||
Foreign exchange (loss) gain | (139 | ) | (34 | ) | 87 | |||||||
|
|
|
|
|
| |||||||
Income (loss) before income tax benefit (provision) | $ | (194,405 | ) | $ | (7,391 | ) | $ | 26,255 | ||||
|
|
|
|
|
|
Revenues are attributed to countries based on the location of customer. The following table presents revenues by geographic location:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Revenues: | ||||||||||||
North America | $ | 277,152 | $ | 254,409 | $ | 254,385 | ||||||
EMEA | 24,252 | 21,258 | 19,303 | |||||||||
Asia Pacific | 4,027 | 2,996 | 5,488 | |||||||||
Latin America | 2,953 | 1,699 | 1,173 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 308,384 | $ | 280,362 | $ | 280,349 | ||||||
|
|
|
|
|
|
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. The costs that were allocated solely to the Spine reportable segment total $7,855, $11,212, and $9,148 in 2019, 2018, and 2017, respectively. 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:
Year Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Revenues: | ||||||||
Spine Segment | ||||||||
Domestic | $ | 97,629 | $ | 79,812 | ||||
International | 21,358 | 14,625 | ||||||
OEM Segment | ||||||||
OEM | 124,184 | 120,037 | ||||||
Sports | 55,339 | 54,560 | ||||||
International | 9,874 | 11,328 | ||||||
|
|
|
| |||||
Total revenues from contracts with customers | $ | 308,384 | $ | 280,362 | ||||
|
|
|
|
The following table presents revenues recognized at a point in time and over time for the years ended December 31, 2019 and 2018:
Year Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Revenue recognized at a point in time | $ | 240,469 | $ | 239,619 | ||||
Revenue recognized over time | 67,915 | 40,743 | ||||||
|
|
|
| |||||
Total revenues from contracts with customers | $ | 308,384 | $ | 280,362 | ||||
|
|
|
|
The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. The Company’s transaction price is generally fixed. Any discounts or rebates are estimated at the inception of the contract and recognized as a reduction of the revenue. We generally do not bill customers for shipping and handling of our
Accounts Receivable | Contract Liability (Current) | Contract Liability (Long- Term) | ||||||||||
Opening - January 1, 2019 | $ | 48,096 | $ | 5,425 | $ | 744 | ||||||
Closing - December 31, 2019 | 59,288 | 3,378 | — | |||||||||
|
|
|
|
|
| |||||||
Increase/(decrease) | 11,192 | (2,047 | ) | (744 | ) | |||||||
|
|
|
|
|
|
Accounts Receivable | Contract Liability (Current) | Contract Liability (Long- Term) | ||||||||||
Opening - January 1, 2018 | $ | 38,441 | $ | 5,978 | $ | 3,741 | ||||||
Closing - December 31, 2018 | 48,096 | 5,425 | 744 | |||||||||
|
|
|
|
|
| |||||||
Increase/(decrease) | 9,655 | (553 | ) | (2,997 | ) | |||||||
|
|
|
|
|
|
a.If all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the contingent stock agreement, if later).
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | For the Year Ended December 31, 2019 | |||||||||||||||
Operating lease cost | $ | 706 | $ | 1,179 | $ | 1,108 | |||||||||||
Short-term operating lease cost | 335 | — | 36 | ||||||||||||||
Total operating lease cost | $ | 1,041 | $ | 1,179 | $ | 1,144 |
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | ||||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 1,237 | $ | 1,313 | |||||||
ROU assets obtained in exchange for lease obligations | 57 | 242 |
Balance Sheet Classification | Balance at December 31, 2021 | Balance at December 31, 2020 | |||||||||||||||
Assets: | |||||||||||||||||
Right-of-use assets | Other assets - net | $ | 876 | $ | 1,425 | ||||||||||||
Liabilities: | |||||||||||||||||
Current | Accrued expenses | $ | 294 | $ | 650 | ||||||||||||
Noncurrent | Other long-term liabilities | 947 | 1,200 | ||||||||||||||
Total operating lease liabilities | $ | 1,241 | $ | 1,850 |
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | ||||||||||
Weighted-average remaining lease term (years) | 6.3 | 5.5 | |||||||||
Weighted-average discount rate | 5.09 | % | 4.92 | % |
Maturity of Operating Lease Liabilities | Balance at December 31, 2021 | |||||||
2022 | $ | 374 | ||||||
2023 | 217 | |||||||
2024 | 173 | |||||||
2025 | 161 | |||||||
2026 | 159 | |||||||
2027 and beyond | 398 | |||||||
Total future minimum lease payments | 1,482 | |||||||
Less imputed interest | (241) | |||||||
Total | $ | 1,241 |
the discontinued operations.
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Major classes of line items constituting net income from discontinued operations: | |||||||||||||||||
Revenues | $ | — | $ | 87,192 | $ | 190,961 | |||||||||||
Costs of goods sold | — | 49,678 | 104,482 | ||||||||||||||
Gross profit | — | 37,514 | 86,479 | ||||||||||||||
Expenses: | |||||||||||||||||
General and administrative | — | 12,889 | 22,279 | ||||||||||||||
Severance and restructuring costs | — | 604 | — | ||||||||||||||
Transaction and integration expenses | — | 23,598 | 3,160 | ||||||||||||||
Total operating expenses | — | 37,091 | 25,439 | ||||||||||||||
Operating income | — | 423 | 61,040 | ||||||||||||||
Other expense (income): | |||||||||||||||||
OEM working capital adjustment | 6,316 | — | — | ||||||||||||||
Interest expense | — | 14,965 | 12,571 | ||||||||||||||
Loss on extinguishment of debt | — | 2,686 | — | ||||||||||||||
Derivative loss | — | 12,641 | — | ||||||||||||||
Foreign exchange (gain) loss | — | (3) | 17 | ||||||||||||||
Total other expense - net | 6,316 | 30,289 | 12,588 | ||||||||||||||
(Loss) income from discontinued operations | (6,316) | (29,866) | 48,452 | ||||||||||||||
Gain on sale of net assets of discontinued operations | — | 209,800 | — | ||||||||||||||
(Loss) Income from discontinued operations before income tax provision | (6,316) | 179,934 | 48,452 | ||||||||||||||
Income tax (benefit) provision | (2,674) | 19,522 | 11,316 | ||||||||||||||
Net (loss) income on discontinued operations | $ | (3,642) | $ | 160,412 | $ | 37,136 |
Year Ended December 31, | Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Significant operating non-cash reconciliation items: | |||||||||||||||||
Depreciation and amortization | $ | — | $ | 2,125 | $ | 4,466 | |||||||||||
Provision for bad debts and product returns | $ | — | $ | 456 | $ | 101 | |||||||||||
Provision for inventory write-downs | $ | — | $ | — | $ | 6,340 | |||||||||||
Revenue recognized due to change in deferred revenue | $ | — | $ | (2,618) | $ | (4,906) | |||||||||||
Deferred income tax (benefit) provision | $ | — | $ | (1,609) | $ | (3,989) | |||||||||||
Stock-based compensation | $ | — | $ | 792 | $ | 540 | |||||||||||
Gain on sale of discontinued assets, net | $ | — | $ | (209,800) | $ | — | |||||||||||
Paid in kind interest expense | $ | — | $ | — | $ | 4,408 | |||||||||||
Loss on extinguishment of debt | $ | — | $ | 2,686 | $ | — | |||||||||||
Amortizations of debt issuance costs | $ | — | $ | 283 | $ | — | |||||||||||
Amortizations of debt discount | $ | — | $ | 2,479 | $ | — | |||||||||||
Significant investing items: | |||||||||||||||||
Payments for OEM working capital adjustment | $ | (5,430) | $ | — | $ | — | |||||||||||
Purchases of property and equipment | $ | — | $ | (1,867) | $ | (6,866) | |||||||||||
Patent and acquired intangible asset costs | $ | — | $ | (419) | $ | (578) | |||||||||||
Proceeds from sale of OEM Businesses | $ | — | $ | 437,097 | $ | — |
Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | |||||||||||||||
Revenues: | |||||||||||||||||
Domestic | $ | 77,927 | $ | 85,612 | $ | 97,703 | |||||||||||
International | 12,573 | 16,137 | 19,720 | ||||||||||||||
Total revenues from contracts with customers | $ | 90,500 | $ | 101,749 | $ | 117,423 |
Balance at | |||||
April 30, | |||||
2021 | |||||
Inventories | $ | 140 | |||
Right-of-use assets | 78 | ||||
Property and equipment | 528 | ||||
Operating lease liabilities | (78) | ||||
Deferred tax liability | (28) | ||||
Net assets acquired | $ | 640 | |||
Bargain purchase gain | (90) | ||||
Total purchase price | $ | 550 |
Acquisition
$7.0 million.
$0.0 million.
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 | ||
|
|
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 |
Balance at | ||||
March 8, 2019 | ||||
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 | ||
|
|
Balance at | |||||
March 8, 2019 | |||||
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 |
$10.5 million.
|
|
goodwill, which was subsequently impaired in 2019.
For the Year Ended December 31, | ||||||||
2019 | 2018 | |||||||
Revenues | $ | 37,374 | $ | 40,810 | ||||
Net loss | (16,547 | ) | (42,550 | ) |
For the Year Ended December 31, | |||||
2019 | |||||
Revenues | $ | 37,374 | |||
Net loss applicable to common shares | (16,547) |
On January 4, 2018, the Company acquired Zyga Technology, Inc. (“Zyga”), a 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 the Company’s revolving credit facility and $3,000 cash on hand), $1,100 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to $35,000. Based on a probability weighted model, the Company estimates a contingent liability related to the clinical milestone and revenue based earnout of $4,986. Acquisition related costs were approximately $1,430, of which approximately $630 was incurred in 2017 and $800 was incurred for the three months ended March 31, 2018 and is reflected separately in the accompanying Consolidated Statements of Comprehensive (Loss) Gain. As of December 31, 2019, there was a $3,856 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.
Stock-Based Compensation
The purchase price was financed as follows:
Cash proceeds from revolving credit facility | $ | 18,000 | ||
Cash from RTI Surgical | 3,000 | |||
|
| |||
Total purchase price | $ | 21,000 | ||
|
|
In the fourth quarter of 2018, the Company completed its valuation of the purchase price allocation. The table below represents the final allocation of the total consideration to Zyga’s tangible and intangible assets and liabilities fair values as of January 4, 2018. Including acquisition contingencies, the total consideration for the Zyga acquisition was $25,986.
Inventories | $ | 1,099 | ||
Accounts receivable | 573 | |||
Other current assets | 53 | |||
Property, plant and equipment | 151 | |||
Other assets | 26 | |||
Deferred tax assets | 4,715 | |||
Current liabilities | (947 | ) | ||
Acquisition contingencies | (4,986 | ) | ||
|
| |||
Net tangible assets acquired | 684 | |||
Other intangible assets | 6,760 | |||
Goodwill | 13,556 | |||
|
| |||
Total net assets acquired | $ | 21,000 | ||
|
|
Total net assets acquired as of January 4, 2018, are all part of the Company’s only operating segment and reporting unit. Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach2021 Employee Stock Purchase Plan ("ESPP"), and the market approach. Other intangible assets include patents of $6,500 with a useful life of 13 years, trademarks of $80 with a useful life of 1 year and selling and marketing relationships of $180 with a useful life of 7 years.
2018 Incentive Compensation Plan. The Company believes that the acquisition of Zyga has offered and continues to offer the potentialaccounts for substantial strategic and financial benefits. The transaction further advances our 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:
Zyga’s innovative minimally invasive treatment should accentuate our spine portfolio and opens significant opportunities to accelerate our Spine-focused expansion strategy.
Zyga should leverage the core competencies of our Spine franchise by pursuing niche differentiated products, to gain scale and customer retention and support portfolio pull-through.
These potential benefits resulted in the Company paying a premium for Zyga resulting in the recognition of $13,556 of goodwill assigned to the Company’s only operating segment and reporting unit. For tax purposes, none of the goodwill is deductible.
The following unaudited pro forma information shows the results of the Zyga’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2018.
For the Year Ended December 31, | ||||
2018 | ||||
Revenues | $ | 4,809 | ||
Net loss | (2,640 | ) |
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.
9. Cardiothoracic Closure Business Divestiture
The Company completed the sale of substantially all of the assets related to its Cardiothoracic closure business (the “CT Business”) to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (“A&E”) pursuant to an Asset Purchase Agreement between the Company and A&E, dated August 3, 2017 (the “Asset Purchase Agreement”). The total cash consideration received by the Company under the Asset Purchase Agreement was composed of $54,000, $3,000 of which was held in escrow (the “Escrow Amount”) to satisfy possible indemnification obligations, of which there were none. As such, the Company earned and received the $3,000 cash consideration in the third quarter of 2018. An additional $5,000 in contingent cash consideration is earned if A&E reaches certain revenue milestones (the “Contingent Consideration”). The Company also earned and received an additional $1,000 in consideration for successfully obtaining certain U.S. Food and Drug Administration (“FDA”) regulatory clearance. As a part of the transaction, the Company also entered into a multi-year Contract Manufacturing Agreement with A&E (the “Contract Manufacturing Agreement”). Under the Contract Manufacturing Agreement, the Company agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The Company elected to account for the Contingent Consideration arrangement including the Escrow Amount, as a gain contingencystock-based compensation plans in accordance with ASC 450 Contingencies. As718. The Company grants stock-based awards to its employees, including officers and directors, comprised of restricted stock, restricted stock units, stock options and ESPP purchase rights.
The calculation of the gainour common stock on the CT Business divestiture isoffering date or the purchase date. ESPP purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. During 2021, 667,399 shares were
Proceeds from cardiothoracic closure business divestiture | $ | 51,000 | ||
Inventories - net | (2,893 | ) | ||
Property, plant and equipment - net | (1,299 | ) | ||
Goodwill | (8,645 | ) | ||
Other intangible assets - net | (280 | ) | ||
Cardiothoracic closure business divestiture expenses | (3,793 | ) | ||
|
| |||
Gain on cardiothoracic closure business divestiture | $ | 34,090 | ||
|
|
10. Stock-Based Compensation
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Stock-based compensation: | |||||||||||||||||
Costs of goods sold | $ | 21 | $ | 169 | $ | 144 | |||||||||||
General and administrative | 4,839 | 3,980 | 3,623 | ||||||||||||||
Research and development | 352 | 72 | 60 | ||||||||||||||
Transaction and integration expenses | — | 1,515 | — | ||||||||||||||
Total | $ | 5,212 | $ | 5,736 | $ | 3,827 |
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
(in thousands, except for share and per share information) | |||||||||||||||||||||||
Outstanding at January 1, 2021 | 4,979,180 | $ | 3.28 | 5.30 | $ | 142 | |||||||||||||||||
Granted | 776,564 | 1.82 | |||||||||||||||||||||
Exercised | (1,007) | 2.69 | |||||||||||||||||||||
Forfeited or expired | (423,517) | 3.29 | |||||||||||||||||||||
Outstanding at December 31, 2021 | 5,331,220 | $ | 3.08 | 4.43 | $ | — | |||||||||||||||||
Vested or expected to vest at | |||||||||||||||||||||||
December 31, 2021 | 5,331,220 | $ | 3.08 | 4.43 | $ | — | |||||||||||||||||
Exercisable at December 31, 2021 | 3,487,657 | $ | 3.37 | 2.15 | $ | — | |||||||||||||||||
Available for grant at December 31, 2021 | 5,777,619 |
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
(in thousands, except for per share information) | |||||||||||||||||
Weighted average fair value of stock options granted | $ | 0.93 | $ | 1.21 | $ | 1.56 | |||||||||||
Aggregate intrinsic value of stock options exercised | $ | — | $ | 3.20 | $ | 161.00 |
Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Expected term (years) | 6.35 | 6.50 | 6.50 | ||||||||||||||
Risk free interest rate | 0.72 | % | 0.62 | % | 2.54 | % | |||||||||||
Volatility factor | 49.97 | % | 41.62 | % | 37.73 | % | |||||||||||
Dividend yield | — | — | — |
Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Expected term (years) | 0.50 | 0.00 | 0.00 | ||||||||||||||
Risk free interest rate | 0.05 | % | — | — | |||||||||||||
Volatility factor | 84.32 | % | — | — | |||||||||||||
Dividend yield | — | % | — | — |
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, restricted stock, and restricted stock units to key employees, including officers and directors of the Company. 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 December 31, 2019, there was $1,627 of total unrecognized stock-based compensation expense related to nonvested stock options. That expense is expected to be recognized over a weighted-average period of 3.00 years.
Stock options outstanding, exercisable and available for grant at December 31, 2019, are summarized as follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Options | Price | Life (Years) | Value | |||||||||||||
Outstanding at January 1, 2019 | 4,275,744 | $ | 3.76 | |||||||||||||
Granted | 584,297 | 3.85 | ||||||||||||||
Exercised | (118,500 | ) | 3.34 | |||||||||||||
Forfeited or expired | (205,080 | ) | 4.46 | |||||||||||||
|
|
|
| |||||||||||||
Outstanding at December 31, 2019 | 4,536,461 | $ | 3.75 | 4.01 | $ | 124 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Vested or expected to vest at | ||||||||||||||||
December 31, 2019 | 4,301,432 | $ | 3.73 | 3.81 | $ | 97 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at December 31, 2019 | 1,085,814 | $ | 4.10 | 2.68 | $ | 3 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Available for grant at December 31, 2019 | 4,186,650 | |||||||||||||||
|
|
The aggregate intrinsic value in the table above represents the totalpre-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. Stock-based compensation expense recognized for all stock option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods.
Other information concerning stock options are as follows:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Weighted average fair value of stock options granted | $ | 1.56 | $ | 2.05 | $ | 1.66 | ||||||
Aggregate intrinsic value of stock options exercised | 161 | 349 | 2,786 |
The aggregate intrinsic value of stock options exercised in a period represents thepre-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.
The following weighted-average assumptions were used to determine the fair value of stock options under FASB ASC 718:
Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Expected term (years) | 6.50 | 6.50 | 6.50 | |||||||||
Risk free interest rate | 2.54 | % | 2.75 | % | 2.26 | % | ||||||
Volatility factor | 37.73 | % | 43.74 | % | 47.39 | % | ||||||
Dividend yield | — | — | — |
Restricted Stock Awards
The value of restricted stock awards that do not have market conditions is determined by the market value of the Company’s common stock at the date of grant. In 2019,2021, restricted stock awards in the amount of 625,881147,719 shares and 166,9220 shares of restricted stock were granted to employees andnon-employee directors, respectively. As of December 31, 2019,2021, there was $2,676$1.4 million of total unrecognized stock-based compensation expense related to unvested restricted stock awards. That
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested at January 1, 2019 | 1,032,715 | $ | 4.32 | |||||
Granted | 792,803 | 4.38 | ||||||
Vested | (516,491 | ) | 4.27 | |||||
Forfeited | (81,169 | ) | 4.86 | |||||
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Unvested at December 31, 2019 | 1,227,858 | $ | 4.34 | |||||
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2021:
Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
Unvested at January 1, 2021 | 1,897,196 | $ | 3.47 | ||||||||
Granted | 147,719 | 2.06 | |||||||||
Vested | (1,037,528) | 3.68 | |||||||||
Forfeited | (353,133) | 3.35 | |||||||||
Unvested at December 31, 2021 | 654,254 | $ | 2.89 |
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Unvested at January 1, 2019 | — | $ | — | |||||
Granted | 226,352 | 7.41 | ||||||
Vested | — | — | ||||||
Forfeited | (41,770 | ) | 7.41 | |||||
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Unvested at December 31, 2019 | 184,582 | $ | 7.41 | |||||
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For2021:
Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
Unvested at January 1, 2021 | 89,935 | $ | 7.41 | ||||||||
Granted | 5,541,313 | 1.64 | |||||||||
Vested | (30,783) | 1.73 | |||||||||
Forfeited | (800,102) | 2.18 | |||||||||
Unvested at December 31, 2021 | 4,800,363 | $ | 1.66 |
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Stock-based compensation: | ||||||||||||
Costs of processing and distribution | $ | 144 | $ | 132 | $ | 132 | ||||||
Marketing, general and administrative | 4,163 | 4,553 | 6,586 | |||||||||
Research and development | 60 | 60 | 44 | |||||||||
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Total | $ | 4,367 | $ | 4,745 | $ | 6,762 | ||||||
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Inducement Grant
of the grant date. The exercise price for the stock options is $4.55 per share. The stock options will expire on September 18, 2027. The stock options will vest based on the Company’s attainment of 3 average stock price benchmarks. The first 102,300 shares will vest if the Company’s average publicly traded stock price is over $7.00 per share for a 60-consecutive calendar day period. The next 102,300 shares will vest if the Company’s average publicly traded stock price is over $8.00 per share for a 60-consecutive calendar day period. The final 102,300 shares will vest if the Company’s average publicly traded stock price is over $9.00 per share for a 60-consecutive calendar day period. The vesting of the stock options is cumulative.
Officer
Chief Financial and Administrative Officer
On September 18, 2017, the Company issued an inducement grant to its Chief Financial and Administrative Officer, Mr. Jonathon Singer. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement. This inducement grant was made under the RTI Surgical, Inc. 2015 Incentive Compensation Plan, which was filed with the SEC on May 5, 2015.
Under the Restricted Stock Agreement, the Company granted Mr. Singer 109,890 shares of restricted stock. All of the shares granted to Mr. Singer under the Restricted Stock Agreement have fully vested.
Under the Option Agreement, the Company granted Mr. Singer the option to purchase 306,900 shares of common stock,inventory balances as of December 31, 2021 and 2020, consist entirely of finished goods. The Company values its inventories at the grant date. The exercise price for the stock options is $4.55 per share. The stock options will expire on September 18, 2027. The stock options will vest based the Company’s attainmentlower of three average stock price benchmarks. The first 102,300 shares will vest if the Company’s average publicly traded stock price is over $7.00 per share for a sixty-consecutive calendar day period. The next 102,300 shares will vest if the Company’s average publicly traded stock price is over $8.00 per share for a sixty-consecutive calendar day period. The final 102,300 shares will vest if the Company’s average publicly traded stock price is over $9.00 per share for a sixty-consecutive calendar day period. The vesting of the stock options is cumulative.
President, Global Spine
On November 29, 2019, the Company issued an inducement grant to its President of Global Spine, Mr. Terry Rich. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement”); and (2) a stock option agreement. This inducement grant was made under the RTI Surgical Holdings, Inc., Terry Rich Reserve Compensation Plan.
Under the Restricted Stock Agreement, the Company granted Mr. Rich 125,598 shares of restricted stock. On the first anniversary of the grant date, 41,866 shares will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 10,467 shares per calendar quarter commencing on the fifteenth month following the grant date and continuing for two years year after. Vesting of these shares may accelerate upon the occurrence of certain conditions.
Under the Option Agreement, the Company granted Mr. Rich the option to purchase 188,397 shares of common stock (the “Stock Options”), as of the grant date. The exercise price for the Stock Options is $2.09. On the first anniversary of the grant date, 62,799 will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 15,700 shares per calendar quarter commencing on the fifteenth month following the grant date and continuing for two years after. The vesting of the Stock Options is cumulative.
11. Inventories
Inventories by stage of completion are as follows:
December 31, | ||||||||
2019 | 2018 | |||||||
Unprocessed tissue, raw materials and supplies | $ | 29,552 | $ | 24,211 | ||||
Tissue and work in process | 35,740 | 31,796 | ||||||
Implantable tissue and finished goods | 65,494 | 51,648 | ||||||
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Total | 130,786 | 107,655 | ||||||
Less current portion | 124,149 | 107,655 | ||||||
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Long-term portion | $ | 6,637 | $ | — | ||||
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net realizable value or cost using first-in, first-out (FIFO).
12.
December 31, | ||||||||
2019 | 2018 | |||||||
Income tax receivable | $ | 2,803 | $ | 3,920 | ||||
Prepaid expenses | 1,865 | 2,013 | ||||||
Other | 2,101 | 2,480 | ||||||
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$ | 6,769 | $ | 8,413 | |||||
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13.
For the Year Ended December 31, | |||||||||||
2021 | 2020 | ||||||||||
Insurance Recovery Receivable | $ | 1,500 | $ | — | |||||||
Income tax receivable | 4,116 | 4,836 | |||||||||
Prepaid expenses | 2,553 | 1,543 | |||||||||
Other Receivable | 815 | 3,905 | |||||||||
Total Prepaid and Other Current Assets | $ | 8,984 | $ | 10,284 |
equipment
December 31, | ||||||||
2019 | 2018 | |||||||
Land | $ | 2,005 | $ | 2,020 | ||||
Buildings and improvements | 58,208 | 58,093 | ||||||
Processing equipment | 45,762 | 42,599 | ||||||
Surgical instruments | 541 | 24,070 | ||||||
Office equipment, furniture and fixtures | 1,730 | 1,877 | ||||||
Computer equipment and software | 20,521 | 18,873 | ||||||
Construction in process | 11,717 | 8,934 | ||||||
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140,484 | 156,466 | |||||||
Less accumulated depreciation | (70,594 | ) | (78,512 | ) | ||||
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$ | 69,890 | $ | 77,954 | |||||
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For the Year Ended December 31, | |||||||||||
2021 | 2020 | ||||||||||
Processing equipment | $ | 346 | $ | 35 | |||||||
Surgical instruments | 489 | 440 | |||||||||
Office equipment, furniture and fixtures | 15 | 34 | |||||||||
Computer equipment and software | 44 | 12 | |||||||||
Construction in process | $ | 51 | — | ||||||||
Total Property and equipment | $ | 945 | $ | 521 |
For the year ended December 31, 2019, the Company recorded asset impairment and abandonment charges of $11,856 consisting of $11,655 related to property, plant and equipment and $201 of right-of-use lease assets in the Spine segment. The organizationaldate upon which a change in 2019 resultedcontrol occurs. Interest is paid in kind and capitalized into the creation of a new Spine asset group. Prior to the fourth quarter of 2019, the Spine asset group did not exist as the related assets were included in another asset group as it had interdependencies among the utilization of the assets within the group, and therefore, there were no discrete cash flows. The newly formed Spine asset group could not support the carryingprincipal amount of the property, plantSeller Notes on each anniversary of the issuance date at a rate of 6.8% per year. In the event of default, as defined in the agreement, any and equipmentall of the indebtedness may be immediately declared due and payable, and the rightinterest would accrue at a 4.0% higher
Carrying Value | |||||||||||
(In thousands) | |||||||||||
Seller Notes-P. Lewicki | $ | 5,306 | |||||||||
Seller Notes-K. Siemionow | 5,306 | ||||||||||
Less: fair value adjustment | (630) | ||||||||||
Total Seller Notes - related party | 9,982 | ||||||||||
Current portion of seller notes | — | ||||||||||
Total long-term seller note, excluding current portion | $ | 9,982 |
2022 | $ | — | ||||||
2023 | — | |||||||
2024 | 10,612 | |||||||
2025 | — | |||||||
2026 | — | |||||||
Thereafter | — | |||||||
Total | $ | 10,612 |
14. Goodwill
The changecommon stock used in the carrying amountcalculation of goodwill for the year ended December 31, 2019,basic and diluted net loss per common share is as follows:
December 31, | ||||||||
2019 | 2018 | |||||||
Balance at January 1 | $ | 59,798 | $ | 46,242 | ||||
Goodwill acquired related to Zyga acquisition | — | 13,556 | ||||||
Goodwill acquired related to Paradigm acquisition | 135,589 | — | ||||||
Goodwill impairment | (140,003 | ) | — | |||||
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Balance at December 31 | $ | 55,384 | $ | 59,798 | ||||
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Goodwill acquired during the year ended December 31, 2019 and 2018, includes the excess of the Paradigm and Zyga, respectively, purchase price over the sum of the amounts assigned to assets acquired less liabilities assumed.
The Company considered the abandonment of our map3® implant to be a triggering event for long-lived asset impairment testing. As a result, the Company performed a goodwill impairment analysis on its sole reporting unit during the quarter ended June 30, 2018, and based on the analysis, the Company concluded its goodwill was not impaired.
The valuation of goodwill requires management to use significant judgments and estimates including, but not limited to, projected future revenue and cash flows, along with risk-adjusted weighted average cost of capital. Changes in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
On March 8, 2019, we acquired Paradigm for a purchase price of approximately $232,907 and recorded goodwill of approximately $135,589. Paradigm was initially included in the Company’s single reporting unit. As noted above in Note 5, the Company reorganized its segments in the fourth quarter of 2019, which resulted in the Company dividing its single reporting unit into a Spine and OEM reporting unit. With the change in reporting units, we performed a relative fair value valuation calculation to allocate the Company’s historical goodwill (existing prior to the Paradigm acquisition) between the two reporting units. The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit. The Company concluded specific allocation of the Paradigm goodwill to the Spine reporting unit was most appropriate since Paradigm was recently acquired and the benefits of the acquired goodwill were never realized by the single reporting unit as Paradigm was not integrated. Based on this change in reporting units, we conducted an impairment test before and after the change, and it was concluded that the fair value of our single reporting unit exceeded the carrying value under the previous reporting unit structure. For the impairment test performed immediately subsequent to the change in reporting units on the OEM reporting unit, it was concluded the fair value of goodwill is substantially in excess of its carrying value. For the Spine reporting unit test, it was concluded the carrying value was in excess of the fair value of goodwill. Based on several factors, we weighted the income approach at 75% and the market approach at 25% in determining the fair value of our OEM reporting unit and utilized the cost approach for the Spine reporting unit for the purpose of the impairment test. The test resulted in the fair value of the OEM reporting unit exceeding the carrying value by approximately 54%, and the fair value of the Spine reporting unit could not support the allocated goodwill. As a result, for the year ended December 31, 2019, we recorded an impairment charge of all the goodwill in the Spine reporting unit totaling $140,003.
15. Other Intangible Assets
Other intangible assets are as follows:
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
Patents | $ | 5,095 | $ | 2,768 | $ | 2,327 | $ | 15,469 | $ | 4,191 | $ | 11,278 | ||||||||||||
Acquired licensing rights | 1,413 | 64 | 1,349 | 11,671 | 6,468 | 5,203 | ||||||||||||||||||
Marketing and procurement and other intangible assets | 16,488 | 9,672 | 6,816 | 20,355 | 11,279 | 9,076 | ||||||||||||||||||
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Total | $ | 22,996 | $ | 12,504 | $ | 10,492 | $ | 47,495 | $ | 21,938 | $ | 25,557 | ||||||||||||
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presented below:
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Weighted average basic and dilutive shares | 122,592,569 | 74,403,155 | 70,150,492 |
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Stock Option (1) | — | 271,351 | 345,154 | ||||||||||||||
RSU and RSA | 3,202,888 | 1,099,018 | 821,888 | ||||||||||||||
Convertible Series A Preferred Stock | — | 8,400,512 | 15,152,761 | ||||||||||||||
Total | 3,202,888 | 9,770,881 | 16,319,803 |
AsDecember 31, 2020 the company excluded 5,306,938 and 265,282 respectively, of issued stock options in the computation of diluted net loss per common share because their exercise price exceeded the average market price during the respective periods. The Company’s outstanding warrants were also excluded from the computation of diluted net loss per common share as they were considered “out-of-the-money” as of December 31, 2019, the Company concluded, through the ASC 360 valuation testing, that factors existed indicating that long-lived assets in the Spine segment were impaired. Thus, we tested the carrying amount in the Spine intangibles for impairment on December 31, 2019. The method used to determine the fair value of the Spine asset group was based on a net asset value approach (i.e. a cost approach). As a result, for the year ended December 31, 2019, we recorded an impairment charge for all of the other intangible assets within the Spine segment, totaling $85,096. Included within these impairment charges are $71,958 of other intangible assets, net of amortization, acquired as part of Paradigm. For the year ended December 31, 2018, the Company recorded asset impairment and abandonment charges of $2,718 relating to the abandonment of our map3® implant.
At December 31, 2019, management’s estimates of future amortization expense for the next five years are as follows:
Amortization Expense | ||||
2020 | $ | 2,300 | ||
2021 | 2,300 | |||
2022 | 2,300 | |||
2023 | 700 | |||
2024 | 700 |
16.
Fair Value at December 31, 2021 | Valuation Technique | Unobservable Inputs | Ranges | ||||||||
$51,928 | Earn-Out Valuation | Probability of success factor | 0% - 90% | ||||||||
Discount rates | 0.06% - 11.60% |
Fair Value at December 31, 2020 | Valuation Technique | Unobservable Inputs | Ranges | ||||||||
$56,515 | Earn-Out Valuation | Probability of success factor | 60% - 90% | ||||||||
Discount rates | 0.11% - 16.86% |
loss for the year ended December 31. 2019. There are no amounts recorded as contingent consideration as of December 31, 2021 or 2020.
2021 | 2020 | |||||||||||||
Beginning balance as of January 1 | $ | 56,515 | $ | 1,130 | ||||||||||
Contingent consideration – Holo Milestone Payments | — | 50,632 | ||||||||||||
(Gain) loss - Holo & Zyga | (4,587) | 4,883 | ||||||||||||
Other | — | (130) | ||||||||||||
Ending balance as of December 31 | $ | 51,928 | $ | 56,515 |
Long-lived assets, includingDecember 31, 2021 and 2020, respectively, property and equipment with a carrying amount of $12.0 million and $12.2 million were written down to their estimated fair value of $0.9 million and $0.5 million using Level 3 inputs. The Level 3 fair value was measured based on orderly liquidation value and is evaluated on a quarterly basis. Unobservable inputs for the orderly liquidation value included replacement costs, physical deterioration estimates and market sales data for comparable assets.
The following table summarizes impairments of long-lived assets and the related post impairment fair values of the corresponding assets subject to fair value measured using Level 3 inputs for the years ended December 31, 2021 and 2020, and the corresponding impairment charge during the respective year:
For the Year Ended December 31, 2021 | |||||||||||
Impairment | Fair Value | ||||||||||
Property and equipment - net | $ | 11,018 | $ | 945 | |||||||
Definite-lived intangible assets - net | 782 | — | |||||||||
Other assets - net | 395 | 6,970 | |||||||||
Total | $ | 12,195 | $ | 7,915 |
For the Year Ended December 31, 2020 | |||||||||||
Impairment | Fair Value | ||||||||||
Property and equipment - net | $ | 11,707 | $ | 521 | |||||||
Definite-lived intangible assets - net | 2,621 | — | |||||||||
Other assets - net | 445 | 10,145 | |||||||||
Total | $ | 14,773 | $ | 10,666 |
For the Year Ended December 31, 2019 | ||||||||
Impairment | Fair Value | |||||||
Property, plant and equipment - net | $ | 11,655 | $ | — | ||||
Other intangible assets - net | 85,096 | — | ||||||
Other assets - net | 201 | |||||||
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| |||||
$ | 96,952 | $ | — | |||||
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For the Year Ended December 31, 2018 | ||||||||
Impairment | Fair Value | |||||||
Property, plant and equipment - net | $ | 1,797 | $ | — | ||||
Other intangible assets - net | 2,718 | — | ||||||
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| |||||
$ | 4,515 | $ | — | |||||
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No impairments onthe Company concluded, through its ASC 360 impairment testing of long-lived assets classified as held and used, that factors existed indicating that finite-lived intangible assets were impaired. The factors considered by management include a history of net losses and negative cash flows in each of those periods to be able to support the assets. The Company tested the carrying amounts of the property and equipment, definite lived intangible assets, and other assets for impairment. As a result, we recorded an impairment charge of $12.2 million, $14.8 million, and $97.3 million for the years ended December 31, 2017.
17. Accrued Expenses
Accrued expenses2021, 2020, and 2019 recorded within the Asset impairment and abandonments line item on the consolidated statement of comprehensive loss.
December 31, | ||||||||
2019 | 2018 | |||||||
Accrued compensation | $ | 5,435 | $ | 8,308 | ||||
Accrued severance and restructuring costs | 136 | 1,302 | ||||||
Accrued distributor commissions | 4,569 | 3,907 | ||||||
Accrued donor recovery fees | 8,921 | 3,018 | ||||||
Accrued leases | 1,159 | — | ||||||
Accrued acquisition and integration expenses | 2,555 | — | ||||||
Other | 10,562 | 9,330 | ||||||
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| |||||
$ | 33,337 | $ | 25,865 | |||||
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18. Shortliabilities in accordance with ASC 815-40 and Long-Term Obligations
Short and long-term obligations are as follows:
December 31, | ||||||||
2019 | 2018 | |||||||
Ares Term loan | $ | 104,406 | $ | — | ||||
JPM facility | 71,000 | 50,000 | ||||||
Less unamortized debt issuance costs | (1,229 | ) | (927 | ) | ||||
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Total | 174,177 | 49,073 | ||||||
Less current portion | 174,177 | — | ||||||
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Long-term portion | $ | — | $ | 49,073 | ||||
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On June 5, 2018, the Company terminated its 2017 loan agreement with TD Bank, N.A. and First Tennessee Bank National Association. The 2017 loan agreement provided for a revolving credit facilitypresented within "Warrant liability" in the aggregate principal amountCompany’s consolidated balance sheets. The warrant liability is revalued each reporting period with the change in fair value recorded in the "Change in fair value of $42,500. Borrowings underwarrant liability" line item in the 2017 loan agreement had an interest rate per annum equal to monthly LIBOR plus a marginconsolidated statements of up to 3.50%. comprehensive income/(loss) until the warrants are exercised or expire.
On June 5, 2018,warrant liability is estimated using the Company, along with its wholly-owned subsidiary, Pioneer Surgical, entered intoBlack-Scholes Option Pricing Model using the 2018 Credit Agreement, as borrowers, with JP Morgan Chase Bank, N.A., as lender (together with the various financial institutions asfollowing valuation inputs:
December 31, 2021 | December 31, 2020 | |||||||
Stock price | $ | 0.72 | $ | — | ||||
Risk-free interest rate | 0.84 | % | — | % | ||||
Dividend yield | — | % | — | % | ||||
Volatility | 130 | % | — | % |
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 eachfair value of the Company’s domestic subsidiaries; and (iii) 65% of the stock of the Company’s foreign subsidiaries.
The CBFR Loans will bear interest at a rate per annum equal to the monthly REVLIBOR30 Rate plus the CBFR Rate. The Company may elect to convert the interest rateLevel 3 valuation for the Eurodollars Loans to a rate per annum equal to the adjusted LIBOR Rate plus the JPM Eurodollar Rate. For all subsequent borrowings, the Company may elect to apply either the CBFR Rate or JPM Eurodollar Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon the Company’s average quarterly availability. The maturity date of the JPM Facility is June 5, 2023. 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.
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”) 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 thresholdwarrant liability 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 and 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 and Joinder Agreement
The Company entered into a Second Amendment to Credit Agreement and Joinder 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.
At December 31, 2019, the interest rate for the JPM Facility was 3.69%. As of December 31, 2019, there was $71,000 outstanding on the JPM Facility and total remaining available credit on the JPM Facility was $9,000. 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. The Company was in compliance with the financial covenants related to the JPM Facility as of December 31, 2019.
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, 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”). The Ares Term Loan was advanced in a single borrowing on March 8, 2019.
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.
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”). 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’ total net leverage ratio. At any time during the period commencing on March 8, 2019 and ending on March 8, 2021, if the Ares Loan Parties’ total net leverage ratio is greater than 5.75:1.00, 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’ total net 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.
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 period beginning on a date that either: (i) a default has occurred and is continuing under the loan documents entered into by Legacy RTI in conjunction with the Credit Agreement (the “Ares Loan Documents”); or (ii) availability under the Ares Term Loan is less than the specified covenant testing threshold, and continuing until either (a) no default has occurred and is continuing under the Ares Loan Documents or (b) availability under the Ares Term Loan is greater than or equal to the specified covenant testing threshold for thirty (30) consecutive days, respectively, (the “Ares 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 the last day of each calendar month during the Ares Covenant Testing Period (each a “Ares Calculation Date”), and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each Ares Calculation Date. The Ares Loan Parties are required to maintain an initial total net 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, 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 December 31, 2019, the interest rate for the Ares Term Loan was 10.49%. The Company was in compliance with the financial covenants related to the Ares Term Loan as of December 31, 2019.
For the years ended December 31, 2019, 2018 and 2017, interest expense associated with the amortization of debt issuance costs was $524, $528 and $409, respectively. Included in the year ended December 31, 2019, was $2192021:
Warrant Liability | |||||
Balance - January 1, 2021 | $ | — | |||
Fair value of warrants on date of issuance | 26,749 | ||||
Change in fair value | (14,736) | ||||
Balance - December 31, 2021 | $ | 12,013 |
during such time as the placement agent warrants are outstanding.
The Company’s Ares Term Loan and JPM Facility agreements both contain a leverage to EBITDA covenant, which as of December 31, 2019, required the Company to maintain a 5.0:1 leverage to trailing twelve-month adjusted EBITDA ratio. The debt agreement provides for an increasewill be remeasured at each reporting date with changes in fair value recognized in the covenant ratio to 5.75:1 for each quarter end during 2020, then reduces to 5.25:1 forconsolidated statements of comprehensive loss in the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50 for each quarter ending thereafter. The Company’s leverage ratio asperiod of December 31, 2019 is approximately 4.96:1. If the Company is unable to execute on its acquisition integration plans or achieve its projected growth and cash flow targets, its available liquidity could be further limited, and its operations may lead to defaults under the borrowing agreements.change. See Note 1.
On April 9, 2020 and on May 8, 2020,14 for information about 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 Credit Facility, each of JPM and Ares, respectively, agreed to extend the deadline for the deliveryfair value measurement of the fiscal year end 2019 financial statements to June 8, 2020. Further, each of JPMwarrants liability and Ares also agreed to waiveLevel 3 inputs used in the requirement with respect to the going concern qualification.
19.
For the Year Ended December 31, | |||||||||||
2021 | 2020 | ||||||||||
Accrued compensation | $ | 5,258 | $ | 2,268 | |||||||
Accrued securities class action settlement | 1,500 | — | |||||||||
Accrued distributor commissions | 2,957 | 4,113 | |||||||||
Other | 8,054 | 6,267�� | |||||||||
Total accrued expenses | $ | 17,769 | $ | 12,648 |
For the Year Ended December 31, | ||||||||
2021 | 2020 | |||||||
Acquisition contingencies | $ | 26,343 | $ | 47,519 | ||||
Warrant Liability | 12,013 | — | ||||||
Lease obligations | 947 | 1,200 | ||||||
Other | 2,229 | 2,992 | ||||||
Total other long-term liabilities | $ | 41,532 | $ | 51,711 |
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Pre-tax income: | ||||||||||||
Domestic (U.S., state and local) | $ | (196,426 | ) | $ | (9,052 | ) | $ | 30,121 | ||||
Foreign | 2,021 | 1,661 | (3,866 | ) | ||||||||
|
|
|
|
|
| |||||||
Total pre-tax income | (194,405 | ) | (7,391 | ) | 26,255 | |||||||
|
|
|
|
|
|
Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Pre-tax loss: | |||||||||||||||||
Domestic (U.S., state and local) | $ | (114,731) | $ | (191,455) | $ | (242,896) | |||||||||||
Foreign (loss) income | (9,061) | (6,226) | 39 | ||||||||||||||
Total pre-tax loss | (123,792) | (197,681) | (242,857) |
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Current: | ||||||||||||
Federal | $ | 503 | $ | 967 | $ | (2,910 | ) | |||||
State | (147 | ) | (205 | ) | (833 | ) | ||||||
International | 79 | (376 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Total current | 435 | 386 | (3,743 | ) | ||||||||
|
|
|
|
|
| |||||||
Deferred: | ||||||||||||
Federal | (12,680 | ) | 2,356 | (14,554 | ) | |||||||
State | (1,091 | ) | (2,446 | ) | (1,052 | ) | ||||||
International | (3,901 | ) | 3,972 | — | ||||||||
|
|
|
|
|
| |||||||
Total deferred | (17,672 | ) | 3,882 | (15,606 | ) | |||||||
|
|
|
|
|
| |||||||
Total income tax (provision) benefit | $ | (17,237 | ) | $ | 4,268 | $ | (19,349 | ) | ||||
|
|
|
|
|
|
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Current: | |||||||||||||||||
Federal | $ | 426 | $ | (3,671) | $ | (312) | |||||||||||
State | (1,325) | — | 89 | ||||||||||||||
International | 184 | (13) | 138 | ||||||||||||||
Total current | (715) | (3,684) | (85) | ||||||||||||||
Deferred: | |||||||||||||||||
Federal | (25) | (99) | 2,456 | ||||||||||||||
State | (4) | — | 169 | ||||||||||||||
International | (142) | 297 | 3,381 | ||||||||||||||
Total deferred | (171) | 198 | 6,006 | ||||||||||||||
Total income tax (benefit) provision | $ | (886) | $ | (3,486) | $ | 5,921 |
December 31, 2019 | December 31, 2018 | |||||||||||||||
Deferred Income Tax | Deferred Income Tax | |||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Accounts receivable | $ | 1,184 | $ | — | $ | 513 | $ | — | ||||||||
Accrued liabilities | 3,481 | — | 2,358 | — | ||||||||||||
Deferred compensation | 1,526 | — | 1,372 | — | ||||||||||||
Fixed assets and intangibles | 15,898 | — | — | (5,862 | ) | |||||||||||
Inventory | 9,817 | — | 7,631 | — | ||||||||||||
Net operating losses | 13,242 | — | 8,198 | — | ||||||||||||
Revenue | — | (59 | ) | 650 | — | |||||||||||
Tax credits | 6,372 | — | 5,993 | — | ||||||||||||
Lease Liability | 708 | — | ||||||||||||||
Right of Use Asset (Leases) | — | (558 | ) | |||||||||||||
Other | — | (103 | ) | — | — | |||||||||||
Valuation allowance | (51,508 | ) | — | (3,093 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 720 | $ | (720 | ) | $ | 23,622 | $ | (5,862 | ) | ||||||
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|
|
|
|
|
|
|
For the Year Ended December 31, 2021 | For the Year Ended December 31, 2020 | ||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
Accounts receivable | $ | 2,376 | $ | — | $ | 1,993 | — | ||||||||||||||||
Accrued liabilities | 990 | — | 1,326 | — | |||||||||||||||||||
Deferred compensation | 1,876 | — | 1,281 | — | |||||||||||||||||||
Fixed assets and intangibles | 22,096 | — | 22,235 | — | |||||||||||||||||||
Inventory | 7,066 | — | 8,475 | — | |||||||||||||||||||
Net operating losses | 29,917 | — | 9,891 | — | |||||||||||||||||||
Revenue | — | — | — | (129) | |||||||||||||||||||
Tax credits | 265 | — | — | — | |||||||||||||||||||
Lease Liability | 318 | — | 446 | — | |||||||||||||||||||
Right of Use Asset | — | (224) | — | (344) | |||||||||||||||||||
Other | 408 | — | — | (48) | |||||||||||||||||||
Valuation allowance | (65,007) | — | (45,126) | — | |||||||||||||||||||
Total | $ | 305 | $ | (224) | $ | 521 | $ | (521) |
Reduction was enacted. As a result of the U.S. federal corporate tax rate from 35% to 21%
Requiring a transition tax on certain unrepatriated earnings of foreign subsidiaries
Bonus depreciation that will allow for full expensing of qualified property
Eliminationenactment of the corporate alternative minimum tax
The repeal of the domestic production activity deduction
Limitations on the deductibility of certain executive compensation
Limitations onCARES Act, net operating losses generated after December 31, 2017
In addition, beginning in 2018, the Tax Legislation includes a global intangiblelow-taxed income (“GILTI”) provision, which requires a tax on foreign earnings in excess of a deemed return on tangible assets of foreign subsidiaries. The Company has elected an accounting policy to account for GILTI as a period cost if incurred, rather than recognizing deferred taxes for temporary basis differences expected to reverse as a result of GILTI.
In 2018,July 20, 2020, the Company completed the disposition of its accounting forOEM Businesses. The Company was able to partially offset the tax effectsgain on the OEM sale with the utilization of tax attributes and year-to-date losses. The benefit for 2020 year-to-date U.S. losses from continuing operations is reported in discontinued operations pursuant to the Company’s adoption of ASU 2019-12. (See Note 5 “Discontinued Operations” for additional information).
Valuation allowances are established when necessaryAcquisitions" for additional information).
expense. (See Note 7 "Business Combinations and Acquisitions" for additional information).
As of December 31, 2019,2021, the Company has U.S. research taxand development credit carryforwards of $7,111 thatapproximately $0.3 million which will expire in years 2029 through 2038.
the year 2041.
As of December 31, 2019, the Company has $1,088 of unrecognized tax benefits, which was recorded net against$65.0 million on deferred tax assets in the accompanying consolidated balance sheet.
The Company’s unrecognized tax benefits are summarized as follows:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Opening balance | $ | 1,088 | $ | 1,591 | $ | 1,591 | ||||||
Reductions based on tax positions related to the current year | — | — | — | |||||||||
Additions for tax positions of prior years | — | — | — | |||||||||
Reductions for tax positions of prior years | — | (415 | ) | — | ||||||||
Reductions for expiration of statute of limitations | — | (88 | ) | — | ||||||||
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|
|
| |||||||
$ | 1,088 | $ | 1,088 | $ | 1,591 | |||||||
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|
|
For the Year Ended December 31, | |||||||||||||||||
2021 | 2020 | 2019 | |||||||||||||||
Opening balance | $ | 2,991 | $ | 1,088 | $ | 1,088 | |||||||||||
Additions based on tax positions related to the current year | — | 1,903 | — | ||||||||||||||
Additions for tax positions of prior years | 542 | — | — | ||||||||||||||
Reductions for tax positions of prior years | (1,451) | — | — | ||||||||||||||
Reductions for expiration of statute of limitations | — | — | — | ||||||||||||||
$ | 2,082 | $ | 2,991 | $ | 1,088 |
It is reasonably possible that the unrecognized tax benefits will not significantly increase or decrease during the next twelve months. The unrecognized tax benefits of $2.1 million as of December 31, 2021 are presented with other long-term liabilities on the consolidated balance sheets.
During the year ended
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Statutory federal rate | 21.00 | % | 21.00 | % | 35.00 | % | ||||||
State income taxes—net of federal tax benefit | (1.31 | %) | (4.58 | %) | 2.37 | % | ||||||
Foreign rate differential | — | 14.36 | % | 2.54 | % | |||||||
Acquisition expenses | — | (7.26 | %) | — | ||||||||
Gain on acquisition contingency | 8.23 | % | — | — | ||||||||
Goodwill impairment and disposal | (14.86 | %) | — | 11.52 | % | |||||||
Life insurance | — | (0.98 | %) | (1.38 | %) | |||||||
Officer compensation | — | (7.88 | %) | 4.18 | % | |||||||
Stock-based compensation | — | (3.90 | %) | 6.06 | % | |||||||
Tax credits | 0.07 | % | 8.65 | % | (4.53 | %) | ||||||
Tax legislation | — | 9.23 | % | 8.33 | % | |||||||
Valuation allowances | (21.25 | %) | 21.93 | % | 6.08 | % | ||||||
Uncertain tax positions | — | 6.86 | % | — | ||||||||
Other reconciling items, net | (0.75 | %) | 0.32 | % | 3.52 | % | ||||||
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|
|
|
|
| |||||||
Effective tax rate | (8.87 | %) | 57.75 | % | 73.69 | % | ||||||
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|
|
|
|
|
20.For the Year Ended December 31, 2021 2020 2019 Statutory federal rate 21.00 % 21.00 % 21.00 % State income taxes—net of federal tax benefit 0.00 % (0.07) % (0.56) % Foreign rate differential 1.33 % 0.90 % 0.00 % Acquisition expenses (5.21) % (9.87) % 0.00 % Loss (Gain) on acquisition contingency 0.78 % (0.50) % 6.58 % Goodwill impairment and disposal 0.00 % 0.00 % (11.88) % Change in fair value of the warrant liability 2.50 % 0.00 % 0.00 % Noncontrolling interest (7.11 %) 0.00 % 0.00 % Tax attributes (0.22) % 0.28 % 0.04 % Tax legislation 0.19 % 0.95 % 0.00 % Valuation allowances (12.61) % (10.57) % (16.98) % Uncertain tax positions 0.95 % 0.00 % 0.00 % Other reconciling items, net (0.89) % (0.36) % (0.63) % Effective tax rate 0.71 % 1.76 % (2.43) %
Preferred Stock Liquidation Value | Preferred Stock Issuance Costs | Net Total | ||||||||||
Balance at January 1, 2017 | $ | 60,676 | $ | (660 | ) | $ | 60,016 | |||||
Accrued dividend | 3,723 | — | 3,723 | |||||||||
Amortization of preferred stock issuance costs | — | 184 | 184 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, 2017 | 64,399 | (476 | ) | 63,923 | ||||||||
Accrued dividend | 2,120 | — | 2,120 | |||||||||
Amortization of preferred stock issuance costs | — | 183 | 183 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, 2018 | 66,519 | (293 | ) | 66,226 | ||||||||
Accrued dividend | — | — | — | |||||||||
Amortization of preferred stock issuance costs | — | 184 | 184 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, 2019 | $ | 66,519 | $ | (109 | ) | $ | 66,410 | |||||
|
|
|
|
|
|
Preferred Stock Liquidation Value | Preferred Stock Issuance Costs | Net Total | |||||||||||||||
Balance at January 1, 2019 | $ | 66,519 | $ | (293) | $ | 66,226 | |||||||||||
Amortization of preferred stock issuance costs | — | 184 | 184 | ||||||||||||||
Balance at December 31, 2019 | 66,519 | (109) | 66,410 | ||||||||||||||
Amortization of preferred stock issuance costs | — | 109 | 109 | ||||||||||||||
Redemption of preferred stock | (66,519) | — | (66,519) | ||||||||||||||
Balance at December 31, 2020 | — | — | — | ||||||||||||||
Amortization of preferred stock issuance costs | — | — | — | ||||||||||||||
Redemption of preferred stock | — | — | — | ||||||||||||||
Balance at December 31, 2021 | $ | — | $ | — | $ | — |
The preferred stock will be convertible at
The Company may, upon 30 days’ notice, redeem the preferred stock, in whole or in part, five years after its issuance at the initial liquidation preference of $1,000 per share of the preferred stock plus an amount per share equal to accrued but unpaid dividends (collectively, the “Liquidation Value”). The holders of the preferred stock may require the Company to redeem their preferred stock, in whole or in part, at the Liquidation Value seven years after its issuance or upon the occurrence of a change of control.
On August 1, 2018, the Company and WSHP Biologics Holdings, LLC, a related party, entered into an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock (“Series A Preferred Stock”), all of RTI Surgical, Inc. (the “Amended and Restated Certificate of Designation”). Pursuant towhich are held by WSHP. On July 24, 2020, the Amended and Restated Certificate of Designation: (1) dividends onCompany redeemed the Series A Preferred Stock will not accrue after July 16, 2018 (infor approximately
21. Stockholders’ Equity
Preferred Stock
As discussed in Note 19, the Company issued 50,000 shares of Series A Preferred Stock in 2013 and, subsequently, all shares outstanding were redeemed on July 24, 2020. As of December 31, 2021, the Company did not have any Preferred Stock outstanding.
22. Executive Transition Costs
The Company recorded Chief Executive Officer retirement and transition costs related to the retirement of our former Chief Executive Officer pursuant to the Executive Transition Agreement dated August 29, 2012 (as amended and extended to date), which resulted in $4,404 of expenses for the year ended December 31, 2016. The total Chief Executive Officer retirement and transition costs were paid in full in 2019. In addition, the Company recorded executive transition costs of $2,818 as a result of hiring a new Chief Executive Officer and Chief Financial and Administrative Officer for the year ended December 31, 2017, separately disclosed on the Consolidated Statements of Comprehensive (Loss) Income. The total executive transition costs of $1,169 which is cash basis was paid in full in 2018. The following table includes a rollforward of executive transition costs included in accrued expenses, see Note 16.
Accrued executive transition costs at January 1, 2017 | $ | 2,406 | ||
Executive transition costs accrued in 2017 | 2,818 | |||
Stock-based compensation | (1,612 | ) | ||
Cash payments | (1,275 | ) | ||
|
| |||
Accrued executive transition costs at December 31, 2017 | 2,337 | |||
|
| |||
Executive transition costs accrued in 2018 | — | |||
Cash payments | (2,294 | ) | ||
|
| |||
Accrued executive transition costs at December 31, 2018 | 43 | |||
|
| |||
Executive transition costs accrued in 2019 | — | |||
Cash payments | (43 | ) | ||
|
| |||
Accrued executive transition costs at December 31, 2019 | $ | — | ||
|
|
23.
The Company recorded
The Company recorded severance and restructuring costs related to the reduction of our organizational structure which resulted in $2,808 of expenses for the year ended December 31, 2018. The total severance and restructuring costs were paid in full in 2019. Severance and restructuring payments were made over periods ranging from one month to twelve months and did not have a material impact on cash flows of the Company in any quarterly period.
As part of the acquisition of Paradigm, management implemented a plan which resulted in $896 of severance expenses for the year ended December 31, 2019. Paradigm severance expenses were offset by previous severance accrual activity and are included in the acquisition and integration expenses within the Consolidated Statements of Comprehensive (Loss) Gain, totaling $626 for the year ended December 31, 2019. The total severance and restructuring costs were paid in full in of 2019. Severance and restructuring payments were made over periods ranging from one month to twelve months and did not have a material impact on cash flows of the Company in any quarterly period.
The following table includes a rollforward of severance and restructuring costs included in accrued expenses on the consolidated balance sheets, see Note 16.
Accrued severance and restructuring charges at January 1, 2017 | $ | 505 | ||
Severance and restructuring expenses accrued in 2017 | 12,016 | |||
Severance and restructuring cash payments | (8,246 | ) | ||
Stock based compensation | (1,153 | ) | ||
|
| |||
Accrued severance and restructuring charges at December 31, 2017 | 3,122 | |||
|
| |||
Severance and restructuring expenses accrued in 2018 | 2,808 | |||
Severance and restructuring cash payments | (4,628 | ) | ||
|
| |||
Accrued severance and restructuring charges at December 31, 2018 | 1,302 | |||
|
| |||
Severance and restructuring expenses accrued in 2019 | 626 | |||
Severance and restructuring cash payments | (1,792 | ) | ||
|
| |||
Accrued severance and restructuring charges at December 31, 2019 | $ | 136 | ||
|
|
24.
Accrued severance and restructuring charges at January 1, 2019 | $ | 908 | |||
Severance and restructuring expenses accrued in 2019 | 626 | ||||
Severance and restructuring cash payments | (1,398) | ||||
Accrued severance and restructuring charges at December 31, 2019 | 136 | ||||
Severance and restructuring expenses accrued in 2020 | — | ||||
Severance and restructuring cash payments | (136) | ||||
Accrued severance and restructuring charges at December 31, 2020 | — | ||||
Severance and restructuring expenses accrued in 2021 | 208 | ||||
Severance and restructuring cash payments | (208) | ||||
Accrued severance and restructuring charges at December 31, 2021 | $ | — |
25. Concentrations of Risk
Distribution—The Company’s principal concentration of risk is related to its limited distribution channels. The Company’s revenues include the distribution efforts of fourteen independent companies with significant revenues coming from three of the distribution companies, Zimmer Biomet Holdings Inc. (“Zimmer”), Medtronic, PLC (“Medtronic”) and DePuy Synthes (“Synthes”), a Johnson & Johnson Inc. subsidiary. The following table presents percentage of total revenues derived from the Company’s largest distributors:
For the Year Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Percent of revenues derived from: | ||||||||||||
Distributor | ||||||||||||
Zimmer | 18 | % | 21 | % | 17 | % | ||||||
Medtronic | 7 | % | 8 | % | 9 | % | ||||||
Synthes | 4 | % | 5 | % | 4 | % |
The Company’s distribution agreements are subject to termination by either party for a variety of causes. No assurance can be given that such distribution agreements will be renewed beyond their expiration dates, continue in their current form or at similar rate structures. Any termination or interruption in the distribution of the Company’s implants through one of its major distributors could have a material adverse effect on the Company’s operations.
Tissue Supply—The Company’s operations are dependent on the availability of tissue from human donors. For all of the tissue recoveries, the Company relies on the efforts of independent procurement agencies to educate the public and increase the willingness to donate bone tissue. These procurement agencies may not be able to obtain sufficient tissue to meet present or future demands. Any interruption in the supply of tissue from these procurement agencies could have a material adverse effect on the Company’s operations.
26.
Under the terms of the agreement, the Company paid $100,000$100.0 million 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$50.0 million of value. In addition, under the terms of the agreement, the Company may be required to pay up to an additional $150,000$150.0 million in a combination of cash and Company common stock based on acertain revenue earnout consideration. Basedconsideration which have achievement dates of December 31, 2020, 2021 and 2022. The first and second revenue milestones were not achieved as of December 31, 2021, and the Company has no further liability with respect thereto. The third revenue earnout milestone has an achievement date of December 31, 2022. The Company bases the potential payment on a probability weighted model, the Company estimates a contingent liability related to the third revenue based earnout of zero.
zero utilizing a Monte-Carlo simulation model. Within the Master Transaction Agreement, there is a clause that upon a change in control of the organization, the Company would owe any outstanding milestone payments to Paradigm, regardless if the milestone was probable of achievement.
Distribution Agreement with A&EDecember 31, 2021.
Distribution Agreement with Medtronic –gain on acquisition contingency line of the consolidated statements of comprehensive loss. On OctoberJanuary 12, 2013,2022, the Company entered into a replacement distribution agreementSecond Amendment to the Stock Purchase Agreement with Medtronic, plc. (“Medtronic”),the sellers of Holo Surgical to amendment one of the regulatory milestones beyond December 31, 2021. This regulatory milestone was subsequently achieved on January 14, 2022, when the Company received 510(k) clearance for Holo. Upon achievement of this milestone the Company issued 8,650,000 shares in common stock at a value of $5.9 million and also paid the sellers $4.1 million in cash, for a total payment for achieving the milestone of $10.0 million 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 exceptthe agreement. These payments were made in 2022. See Note 7 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 expirationfurther information of the initial term orHolo Surgical Acquisition.
Distribution Agreement with Zimmer Dental Inc.—On September 3, 2010,OEM Transaction, on July 20, 2020 the Company entered into an exclusive3 manufacturing and distribution agreementagreements with Zimmer Dental,affiliates of Montague Private Equity: (i) a Manufacture and Distribution Agreement (the “Hardware MDA”) with Pioneer Surgical Technology, Inc. (“Zimmer Dental”Pioneer”), pursuant to which Pioneer will manufacture certain hardware implants for the Company; (ii) a subsidiary of Zimmer,Processing and Distribution Agreement with an effective date of September 30, 2010, as amended from time to time. The Agreement was assigned to Biomet 3i, LLCRTI Surgical, Inc. (“Biomet”RTI”), 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,Pioneer, pursuant to which RTI would process certain biologic implants for the Company agreed(the “PDA”); and (ii) a Manufacture and Distribution Agreement ("NanOss") pursuant to supply sterilized allograftwhich Pioneer would manufacture certain synthetic implants for the Company (the “NanOss MDA”), and xenograft implants at an agreed upon transfer price,together with the Hardware MDA and Biomet agreed to be the exclusive distributorPDA, (the “OEM Distribution Agreements”). The OEM Distribution Agreements contain aggregate minimum purchase obligations for each of the implantsfirst three years of the agreements as follows:
The Company’s aforementioned revenue recognition methods related to the Zimmer distribution agreements do not resultLandlord a payment in the deferralamount of revenue less than amounts that would be refundable$2.5 million which is recorded within "Other assets – net" 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.
27.
SEC Investigation — As previously disclosed in the RTI’s Current Report on Form 8-K filed with the SEC on March 16, 2020, the Audit Committee of the Board of Directors of RTI, 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 was precipitated by an investigation by the SEC 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 financialimpact that current or other impact ofany future litigation may have on the InvestigationCompany cannot be reasonably determined.
28. Quarterly Results of Operations (Unaudited)
estimated.
Year Ended December 31, 2019 | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||||||
Revenues | $ | 70,021 | $ | 81,554 | $ | 76,741 | $ | 80,068 | ||||||||
Gross profit | 37,886 | 46,124 | 43,223 | 43,891 | ||||||||||||
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Net (loss) income | (9,352 | ) | 188 | (5,138 | ) | (197,340 | ) | |||||||||
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Net (loss) income per common share - basic | $ | (0.14 | ) | $ | 0.00 | $ | (0.07 | ) | $ | (2.63 | ) | |||||
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Net (loss) income per common share - diluted | $ | (0.14 | ) | $ | 0.00 | $ | (0.07 | ) | $ | (2.63 | ) | |||||
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Year Ended December 31, 2018 | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Revenues | $ | 69,141 | $ | 70,385 | $ | 70,450 | $ | 70,386 | ||||||||
Gross profit | 33,503 | 29,899 | 38,228 | 38,013 | ||||||||||||
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Net (loss) income | (1,117 | ) | (5,802 | ) | 2,997 | 799 | ||||||||||
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Net (loss) income per common share - basic | $ | (0.03 | ) | $ | (0.11 | ) | $ | 0.04 | $ | 0.01 | ||||||
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Net (loss) income per common share - diluted | $ | (0.03 | ) | $ | (0.11 | ) | $ | 0.04 | $ | 0.01 | ||||||
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29. Subsequent Events
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 January 13, 2020, we entered into an Equity Purchase Agreement, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, and that certain Second Amendment to Equity Purchase Agreement dated as of April 27, 2020 (as amended, the “OEM Purchase Agreement”), with Ardi Bidco Ltd., a Delaware corporation and an entity affiliated with Montagu Private Equity LLP (“Montagu”), for the sale (the “Sale”) of the RTI’s business of: (a) providing original equipment manufacturing (“OEM”), including the design, development and manufacture, of private label and custom biological-, metal- and polymer-based implants and instruments that are used in spine, sport medicine, plastic and reconstructive, urology, gynecology and trauma surgical procedures, and (b)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 (i) as represented by RTI’s “Sports” line of business and (ii) as otherwise described in RTI Surgical, Inc.’s Annual Report on Form10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019, in each case for clauses (a) and (b), as currently produced at RTI’s facilities in Alachua, Florida; Marquette, Michigan; Greenville, North Carolina; and Tutogen Medical GmbH’s facility in Neunkirchen, Germany (together, the “OEM Business”; provided that the “OEM Business” shall not be deemed to include the marketing, sale or direct distribution of surgical implants, instruments, or biologics used in the treatment of conditions affecting the spine (x) as represented by RTI’s “Spine” or “International” lines of business and (y) as otherwise described in RTI Surgical, Inc.’s Annual Report on Form10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019), for a purchase price of $440,000, subject to certain adjustments. More specifically, pursuant to the terms of the OEM Purchase Agreement, the Company will sell all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Sale, is required to convert to a corporation and change its name to “RTI Surgical, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH (the “OEM Companies” and, together with a wholly-owned subsidiary, RTI Donor Services, Inc., the “OEM Group Companies”).
The OEM Purchase Agreement contemplates that, prior to the closing (the “OEM Closing”) of the Sale and each of the agreements ancillary to the OEM Purchase Agreement, (the “Contemplated Transactions”), we will undergo an internal reorganization, pursuant to which, in addition to certain inter-company transfers and mergers, the Company and its subsidiaries will transfer to the OEM Group Companies the assets primarily used in the operation of the OEM Business and the OEM Group Companies will assume certain liabilities that are related to the OEM Business (collectively, the “Reorganization”). In addition to the Reorganization, RTI is required to use reasonable best efforts to separate the assets and liabilities of the U.S. “metals” business and the U.S. “biologics” business into two separate companies prior to the OEM Closing. As part of such separation, another subsidiary of RTI, established to hold the assets and liabilities of the U.S. “metals” business, will constitute an OEM Company and be sold as part of the Contemplated Transactions to an affiliate of the Buyer. The affiliate of the Buyer established for this purpose would be an additional “Buyer” under the OEM Purchase Agreement.
The Contemplated Transactions are subject to customary closing conditions, including, among other things, the approval of the Contemplated Transactions by the Company’s stockholders. The parties currently expect to close the Contemplated Transactions in the third quarter of 2020. Following the OEM Closing, the Company will focus exclusively on the design, development and distribution of spinal implants to the global market.
Financing
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, 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 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 CommitmentsInvestigation (as defined below) have been funded to Legacy RTIresulted 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 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.
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 total net 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 Agreement”), by and among the Ares Loan Parties and the Ares Lenders. The Second Amendment to the 2019 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 Ares Amendment, 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).
COVID-19
The COVID-19 pandemic has directly and indirectly adversely impacted the Company’s business, financial condition and operating results. The extent to which these adverse impacts will continue will depend on numerous evolving factors that are highly uncertain, rapidly changing and cannot be predicted with precision or certainty at this time. The spread of COVID-19 has caused many hospitals and other healthcare providers to refocus their care on the surge of the COVID-19 cases and to postpone elective and non-emergent procedures, restrict access to these facilities, and in some cases re-allocate scarce resources to their critically ill patients.
These efforts have impacted and could continue to impact our business activities, including our product sales, as many of our products are used in connection with elective surgeries. Many of our employees have been furloughed and although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely. Additionally, these measures are hindering our ability to recruit, vet and hire personnel for key positions. It is unknown how long these disruptions could continue. Due to the challenges created by the furloughs and remote working conditions, on May 11, 2020, we filed a Current Report on Form 8-K to avail ourselves to an extension to file our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, originally due on May 11, 2020, relying on an order issued by the Securities and Exchange Commission on March 25, 2020 pursuant to Section 36 of the Securities Exchange Act of 1934, as amended (Release No. 34-88465), regarding exemptions granted to certain public companies.
As noted above, our product sales have been materially reduced as a result of COVID-19. While we are continuing to monitor and evaluate the impact on our business of COVID-19, we have not at this point identified any material impairments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on our financial statements specifically due to the COVID-19 pandemic. However, 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.
Stockholder Litigation
There is currently ongoing stockholder litigation related to the Investigation.litigation. 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 (the “Court”) 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. Atrial (the “Lowry Action”). The court appointed a different shareholder as Lead Plaintiff and she filed an amended complaint on August 31, 2020. On October 15, 2020, the Company and the other named defendants
30. Restatement of Prior Period Quarterly Financial Statements (Unaudited)
Furthermore, certain errors were identified, separately from the Investigation, primarily related to accounting for our 2019 Acquisition of Paradigm Spine, LLC for the first three quarters of 2019.
The Company determined towould 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 condensed consolidated financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019. The following tables summarize the impacts of the results on our previously reported unaudited condensed consolidated statements of operations and balances sheets included in our Quarterly Reports on Form10-Q for each respective period. Certain line items in the quarterly financial data below were excluded because they were not impacted by the Restatement.
The following errors in the Company’s quarterly financial statements were identified and corrected as a result of the Investigation:
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The following errors in the Company’s quarterly financial statements were identified and corrected apart from the Investigation and related to accounting for our 2019 acquisition of Paradigm Spine, LLC for the first three quarters of 2019. ASC 805Business Combinations states that if the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer shall report in its financial statements the provisional amounts for the items for which the accounting is incomplete. The acquisition occurred on March 8, 2019, before the end ofperiods within these years commencing with the first quarter of 2019. Accordingly, based2016, as well as the unaudited condensed consolidated financial statements for the quarterly periods within the 2019 fiscal year. The Investigation was precipitated by an investigation by the SEC initially related to the periods 2014 through 2016 (the “SEC Investigation”). The SEC Investigation is ongoing, and the Company is cooperating with the SEC. The Company is in discussions with the SEC regarding a potential settlement. We have determined a reasonable estimate of this liability and have recorded that estimate in Accrued Expenses on the information known or knowableconsolidated balance sheets as of December 31, 2021. In addition, on April 30, 2021, the Company and one of its executive officers each received a subpoena from the SEC requesting documents in an investigation relating to trading in the first quarter ofCompany’s securities in late 2019 and early 2020. On October 18, 2021, the Company should have performedand the executive officer each received a preliminary allocationtermination letter from the SEC advising them that the SEC had concluded its investigation as to them and that the Staff did not intend to recommend any enforcement action by the SEC.
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In addition to the correction of the errors discussed above,which the Company has voluntarily madefiled a Form 10-K and proxy statement, even if he or she does not presently serve in that role) an executive officer, director or nominee for election as a director; ii) greater than 5 percent beneficial owner of the Company’s common stock; or iii) immediate family member of any of the foregoing. The following are the Company's related party transactions:
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30. Restatementoccurring up to the sixth (6th) anniversary of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2019 | June 30, 2019 | September 30, 2019 | ||||||||||
(as restated) | (as restated) | (as restated) | ||||||||||
Assets | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 6,043 | $ | 4,518 | $ | 2,950 | ||||||
Accounts receivable | 55,709 | 55,540 | 56,545 | |||||||||
Inventories - net | 115,486 | 115,454 | 118,336 | |||||||||
Prepaid and other current assets | 9,399 | 8,258 | 8,156 | |||||||||
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Total current assets | 186,637 | 183,770 | 185,987 | |||||||||
Non-current inventories - net | 10,261 | 9,225 | 8,374 | |||||||||
Property, plant and equipment - net | 79,500 | 79,956 | 81,471 | |||||||||
Deferred tax assets - net | 17,114 | 20,230 | 21,576 | |||||||||
Goodwill | 194,797 | 195,067 | 194,838 | |||||||||
Other intangible assets - net | 103,006 | 100,651 | 97,614 | |||||||||
Other assets - net | 7,653 | 7,277 | 7,006 | |||||||||
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Total assets | $ | 598,968 | $ | 596,176 | $ | 596,866 | ||||||
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Liabilities and Stockholders’ Equity | ||||||||||||
Current Liabilities: | ||||||||||||
Accounts payable | $ | 23,149 | $ | 20,600 | $ | 17,634 | ||||||
Accrued expenses | 25,557 | 25,312 | 31,714 | |||||||||
Current portion of deferred revenue | 4,825 | 4,744 | 2,748 | |||||||||
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Total current liabilities | 53,531 | 50,656 | 52,096 | |||||||||
Long-term obligations - less current portion | 163,615 | 165,081 | 169,137 | |||||||||
Acquisition contingencies | 77,163 | 75,573 | 75,573 | |||||||||
Other long-term liabilities | 3,065 | 2,562 | 2,271 | |||||||||
Deferred revenue | 1,535 | 325 | 1,134 | |||||||||
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Total liabilities | 298,909 | 294,197 | 300,211 | |||||||||
Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares issued and outstanding | 66,272 | 66,318 | 66,364 | |||||||||
Stockholders’ equity: | ||||||||||||
Common stock, $.001 par value: 150,000,000 shares authorized; 75,055,225, 75,159,262, and 75,087,917 shares issued and outstanding, respectively | 75 | 75 | 75 | |||||||||
Additionalpaid-in capital | 495,263 | 496,596 | 497,518 | |||||||||
Accumulated other comprehensive loss | (7,663 | ) | (7,268 | ) | (8,390 | ) | ||||||
Accumulated deficit | (248,889 | ) | (248,701 | ) | (253,839 | ) | ||||||
Less treasury stock, 1,250,201, 1,257,949 and 1,265,761 shares, respectively, at cost | (4,999 | ) | (5,041 | ) | (5,073 | ) | ||||||
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Total stockholders’ equity | 233,787 | 235,661 | 230,291 | |||||||||
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Total liabilities and stockholders’ equity | $ | 598,968 | $ | 596,176 | $ | 596,866 | ||||||
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30. Restatementthe Closing Date. On January 12, 2022 the Company entered into a Second Amendment to the Stock Purchase Agreement with the sellers of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated StatementsHolo Surgical to amend one of Income (Unaudited)
Three Months Ended March 31, 2019 | ||||
(as restated) | ||||
Revenues | $ | 70,021 | ||
Costs of processing and distribution | 32,134 | |||
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Gross profit | 37,887 | |||
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Expenses: | ||||
Marketing, general and administrative | 32,116 | |||
Research and development | 4,336 | |||
Asset impairment and abandonments | 15 | |||
Acquisition and integration expenses | 8,957 | |||
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Total operating expenses | 45,424 | |||
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Operating (loss) | (7,537 | ) | ||
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Other (expense) income: | ||||
Interest expense | (1,604 | ) | ||
Interest income | 131 | |||
Foreign exchange (loss) | (31 | ) | ||
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Total other expense - net | (1,504 | ) | ||
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(Loss) before income tax (provision) | (9,041 | ) | ||
Income tax (provision) | (310 | ) | ||
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Net (loss) | (9,351 | ) | ||
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Convertible preferred dividend | ||||
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Net (loss) applicable to common shares | $ | (9,351 | ) | |
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Other comprehensive (loss): | ||||
Unrealized foreign currency translation loss | (393 | ) | ||
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Comprehensive (loss) | $ | (9,744 | ) | |
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Net (loss) per common share - basic | $ | (0.14 | ) | |
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Net (loss) per common share - diluted | $ | (0.14 | ) | |
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30. Restatementthe regulatory milestones beyond December 31, 2021. This regulatory milestone was subsequently achieved on January 14, 2022, when the Company received 510(k) clearance for Holo. Upon achievement of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementsthis milestone the Company issued 8,650,000 in common stock at a value of Income (Unaudited)
Six Months Ended June 30, 2019 | ||||
(as restated) | ||||
Revenues | $ | 151,575 | ||
Costs of processing and distribution | 67,564 | |||
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Gross profit | 84,011 | |||
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Expenses: | ||||
Marketing, general and administrative | 73,224 | |||
Research and development | 8,204 | |||
Gain on acquisition contingency | (1,590 | ) | ||
Asset impairment and abandonments | 15 | |||
Acquisition and integration expenses | 10,910 | |||
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Total operating expenses | 90,763 | |||
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Operating (loss) | (6,752 | ) | ||
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Other (expense) income: | ||||
Interest expense | (5,239 | ) | ||
Interest income | 157 | |||
Foreign exchange (loss) | (50 | ) | ||
Total other expense - net | (5,132 | ) | ||
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(Loss) before income tax benefit | (11,884 | ) | ||
Income tax benefit | 2,721 | |||
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Net (loss) applicable to common shares | (9,163 | ) | ||
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Convertible preferred dividend | — | |||
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Net (loss) applicable to common shares | $ | (9,163 | ) | |
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Other comprehensive (loss): | ||||
Unrealized foreign currency translation loss | 2 | |||
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Comprehensive (loss) | $ | (9,161 | ) | |
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Net (loss) per common share - basic | $ | (0.13 | ) | |
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Net (loss) per common share - diluted | $ | (0.13 | ) | |
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30. Restatement$5.9 million and also paid the sellers $4.1 million in cash for a total payment for achieving the milestone of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statements$10.0 million pursuant to the terms of Income (Unaudited)
Nine Months Ended September 30, 2019 | ||||
(as restated) | ||||
Revenues | $ | 228,316 | ||
Costs of processing and distribution | 101,081 | |||
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Gross profit | 127,235 | |||
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Expenses: | ||||
Marketing, general and administrative | 112,447 | |||
Research and development | 12,475 | |||
Gain on acquisition contingency | (1,590 | ) | ||
Asset impairment and abandonments | 15 | |||
Acquisition and integration expenses | 14,119 | |||
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Total operating expenses | 137,466 | |||
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Operating (loss) | (10,231 | ) | ||
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Other (expense) income: | ||||
Interest expense | (8,957 | ) | ||
Interest income | 161 | |||
Foreign exchange (loss) | (128 | ) | ||
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Total other expense - net | (8,924 | ) | ||
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(Loss) before income tax benefit | (19,155 | ) | ||
Income tax benefit | 4,854 | |||
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Net (loss) | (14,301 | ) | ||
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Convertible preferred dividend | — | |||
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Net (loss) applicable to common shares | $ | (14,301 | ) | |
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Other comprehensive (loss): | ||||
Unrealized foreign currency translation loss | (1,120 | ) | ||
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Comprehensive (loss) | $ | (15,421 | ) | |
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Net (loss) per common share - basic | $ | (0.20 | ) | |
|
| |||
Net (loss) per common share - diluted | $ | (0.20 | ) | |
|
|
30. Restatementthe agreement. Dr. Pawel Lewicki, a member of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementsthe Company’s board of Income (Unaudited)
Three Months Ended June 30, 2019 | ||||
(as restated) | ||||
Revenues | $ | 81,554 | ||
Costs of processing and distribution | 35,430 | |||
|
| |||
Gross profit | 46,124 | |||
|
| |||
Expenses: | ||||
Marketing, general and administrative | 41,108 | |||
Research and development | 3,868 | |||
Gain on acquisition contingency | (1,590 | ) | ||
Acquisition and integration expenses | 1,953 | |||
|
| |||
Total operating expenses | 45,339 | |||
|
| |||
Operating income | 785 | |||
|
| |||
Other (expense) income: | ||||
Interest expense | (3,635 | ) | ||
Interest income | 26 | |||
Foreign exchange (loss) | (19 | ) | ||
|
| |||
Total other expense - net | (3,628 | ) | ||
|
| |||
(Loss) before income tax benefit | (2,843 | ) | ||
Income tax benefit | 3,031 | |||
|
| |||
Net income | 188 | |||
|
| |||
Convertible preferred dividend | — | |||
|
| |||
Net income applicable to common shares | $ | 188 | ||
|
| |||
Other comprehensive income: | ||||
Unrealized foreign currency translation loss | 395 | |||
|
| |||
Comprehensive income | $ | 583 | ||
|
| |||
Net income per common share - basic | $ | 0.00 | ||
|
| |||
Net income per common share - diluted | $ | 0.00 | ||
|
|
30. Restatementdirectors, indirectly owns approximately 57.5% of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementsthe outstanding ownership interests in the Seller. Dr. Lewicki was appointed to the Company’s board of Income (Unaudited)
Three Months Ended September 30, 2019 | ||||
(as restated) | ||||
Revenues | $ | 76,741 | ||
Costs of processing and distribution | 33,517 | |||
|
| |||
Gross profit | 43,224 | |||
|
| |||
Expenses: | ||||
Marketing, general and administrative | 39,223 | |||
Research and development | 4,271 | |||
Acquisition and integration expenses | 3,209 | |||
|
| |||
Total operating expenses | 46,703 | |||
|
| |||
Operating (loss) | (3,479 | ) | ||
|
| |||
Other (expense) income: | ||||
Interest expense | (3,718 | ) | ||
Interest income | 4 | |||
Foreign exchange (loss) | (78 | ) | ||
|
| |||
Total other expense - net | (3,792 | ) | ||
|
| |||
(Loss) before income tax benefit | (7,271 | ) | ||
Income tax benefit | 2,133 | |||
|
| |||
Net (loss) applicable to common shares | (5,138 | ) | ||
|
| |||
Convertible preferred dividend | — | |||
|
| |||
Net (loss) applicable to common shares | $ | (5,138 | ) | |
|
| |||
Other comprehensive (loss): | ||||
Unrealized foreign currency translation loss | (1,122 | ) | ||
|
| |||
Comprehensive (loss) | $ | (6,260 | ) | |
|
| |||
Net (loss) per common share - basic | $ | (0.07 | ) | |
|
| |||
Net (loss) per common share - diluted | $ | (0.07 | ) | |
|
|
30. RestatementSimpson Consulting Agreement
Restated Condensed Consolidated Statementthe Board, effective immediately upon consummation of Cash Flows (Unaudited)
For the Three Months Ended March 31, | ||||
2019 | ||||
(as restated) | ||||
Cash flows from operating activities: | ||||
Net (loss) | $ | (9,351 | ) | |
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||
Depreciation and amortization expense | 4,400 | |||
Provision for bad debts and product returns | 233 | |||
Provision for inventory write-downs | 1,530 | |||
Amortization of deferred revenue | (1,292 | ) | ||
Deferred income tax provision | 384 | |||
Stock-based compensation | 1,163 | |||
Other | 197 | |||
Change in assets and liabilities: | ||||
Accounts receivable | (2,717 | ) | ||
Inventories | (2,190 | ) | ||
Accounts payable | (7,329 | ) | ||
Accrued expenses | (2,074 | ) | ||
Deferred revenue | 2,000 | |||
Other operating assets and liabilities | (511 | ) | ||
|
| |||
Net cash (used in) operating activities | (15,557 | ) | ||
|
| |||
Cash flows from investing activities: | ||||
Purchases of property, plant and equipment | (3,477 | ) | ||
Patent and acquired intangible asset costs | (328 | ) | ||
Cardiothoracic closure business divestiture | (99,921 | ) | ||
|
| |||
Net cash (used in) investing activities | (103,726 | ) | ||
|
| |||
Cash flows from financing activities: | ||||
Proceeds from exercise of common stock options | 284 | |||
Proceeds from long-term obligations | 115,000 | |||
Net (payments) on short-term obligations | (729 | ) | ||
Payments for treasury stock | (128 | ) | ||
Net cash provided by financing activities | 114,427 | |||
|
| |||
Effect of exchange rate changes on cash and cash equivalents | (50 | ) | ||
|
| |||
Net decrease in cash and cash equivalents | (4,906 | ) | ||
Cash and cash equivalents, beginning of period | 10,949 | |||
|
| |||
Cash and cash equivalents, end of period | $ | 6,043 | ||
|
| |||
Supplemental cash flow disclosure: | ||||
Cash paid for interest | $ | 557 | ||
Cash paid for income taxes, net of refunds | (635 | ) | ||
Non-cash acquisition of property, plant and equipment | 502 | |||
Non-cash acquisition of Paradigm | 60,730 | |||
Non-cash common stock issuance | 60,730 |
30. Restatementthe transactions contemplated by the Holo Surgical Purchase Agreement. On July 20, 2020, Mr. Simpson entered into a consulting agreement (the “Consulting Agreement”) with the Company, pursuant to which he will provide consulting services to the Company. The Consulting Agreement has an initial term of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementthree years, but may be extended with the mutual agreement of Cash Flows (Unaudited)
For the Six Months Ended June 30, | ||||
2019 | ||||
(as restated) | ||||
Cash flows from operating activities: | ||||
Net (loss) | $ | (9,163 | ) | |
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||
Depreciation and amortization expense | 10,308 | |||
Provision for bad debts and product returns | 899 | |||
Provision for inventory write-downs | 3,274 | |||
Amortization of deferred revenue | (2,585 | ) | ||
Deferred income tax benefit | (2,969 | ) | ||
Stock-based compensation | 2,430 | |||
Gain on acquisition contingency | (1,590 | ) | ||
Paid in kind interest expense | 1,473 | |||
Other | 877 | |||
Change in assets and liabilities: | — | |||
Accounts receivable | (3,141 | ) | ||
Inventories | (2,658 | ) | ||
Accounts payable | (9,751 | ) | ||
Accrued expenses | (2,583 | ) | ||
Deferred revenue | 2,000 | |||
Other operating assets and liabilities | 240 | |||
|
| |||
Net cash (used in) operating activities | (12,939 | ) | ||
|
| |||
Cash flows from investing activities: | ||||
Purchases of property, plant and equipment | (6,912 | ) | ||
Patent and acquired intangible asset costs | (1,126 | ) | ||
Acquisition of Zyga Technology | — | |||
Cardiothoracic closure business divestiture | (99,921 | ) | ||
|
| |||
Net cash (used in) investing activities | (107,959 | ) | ||
|
| |||
Cash flows from financing activities: | ||||
Proceeds from exercise of common stock options | 395 | |||
Proceeds from long-term obligations | 115,000 | |||
Net (payments) on short-term obligations | (729 | ) | ||
Payments for treasury stock | (172 | ) | ||
Net cash provided by financing activities | 114,494 | |||
|
| |||
Effect of exchange rate changes on cash and cash equivalents | (27 | ) | ||
|
| |||
Net decrease in cash and cash equivalents | (6,431 | ) | ||
Cash and cash equivalents, beginning of period | 10,949 | |||
|
| |||
Cash and cash equivalents, end of period | $ | 4,518 | ||
|
| |||
Supplemental cash flow disclosure: | ||||
Cash paid for interest | $ | 2,732 | ||
Cash paid for income taxes, net of refunds | 1,982 | |||
Non-cash acquisition of property, plant and equipment | 456 | |||
Non-cash acquisition of Paradigm | 60,730 | |||
Non-cash common stock issuance | 60,730 |
30. Restatementthe parties. On September 10, 2021, Mr. Simpson resigned as Chairman of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementthe Board and as a member of Cash Flows (Unaudited)
For the Nine Months Ended September 30, | ||||
2019 | ||||
(as restated) | ||||
Cash flows from operating activities: | ||||
Net (loss) | $ | (14,301 | ) | |
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||
Depreciation and amortization expense | 16,342 | |||
Provision for bad debts and product returns | 1,050 | |||
Provision for inventory write-downs | 5,482 | |||
Amortization of deferred revenue | (3,772 | ) | ||
Deferred income tax benefit | (4,588 | ) | ||
Stock-based compensation | 3,399 | |||
Gain on acquisition contingency | (1,590 | ) | ||
Paid in kind interest expense | 2,948 | |||
Other | 1,069 | |||
Change in assets and liabilities: | — | |||
Accounts receivable | (4,522 | ) | ||
Inventories | (7,609 | ) | ||
Accounts payable | (12,684 | ) | ||
Accrued expenses | 3,998 | |||
Deferred revenue | 2,000 | |||
Other operating assets and liabilities | 273 | |||
|
| |||
Net cash (used in) operating activities | (12,505 | ) | ||
|
| |||
Cash flows from investing activities: | ||||
Purchases of property, plant and equipment | (10,882 | ) | ||
Patent and acquired intangible asset costs | (1,786 | ) | ||
Cardiothoracic closure business divestiture | (99,692 | ) | ||
|
| |||
Net cash (used in) investing activities | (112,360 | ) | ||
|
| |||
Cash flows from financing activities: | ||||
Proceeds from exercise of common stock options | 395 | |||
Proceeds from long-term obligations | 118,000 | |||
Net (payments) on short-term obligations | (729 | ) | ||
Payments on long-term obligations | (500 | ) | ||
Payments for treasury stock | (204 | ) | ||
Net cash provided by financing activities | 116,962 | |||
|
| |||
Effect of exchange rate changes on cash and cash equivalents | (96 | ) | ||
|
| |||
Net decrease in cash and cash equivalents | (7,999 | ) | ||
Cash and cash equivalents, beginning of period | 10,949 | |||
|
| |||
Cash and cash equivalents, end of period | $ | 2,950 | ||
|
| |||
Supplemental cash flow disclosure: | ||||
Cash paid for interest | $ | 4,941 | ||
Cash paid for income taxes, net of refunds | 1,982 | |||
Non-cash acquisition of property, plant and equipment | 817 | |||
Non-cash acquisition of Paradigm | 60,730 | |||
Non-cash common stock issuance | 60,730 |
30. Restatementthe Board of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Balance Sheet Amounts (Unaudited)
As of March 31, 2019 | ||||||||||||
As Previously | ||||||||||||
Reported | Adjustments | As Restated | ||||||||||
Accounts receivable | $ | 55,670 | $ | 39 | $ | 55,709 | ||||||
Inventories - net | 114,365 | 1,121 | 115,486 | |||||||||
Prepaid and other current assets | 9,860 | (461 | ) | 9,399 | ||||||||
|
|
|
|
|
| |||||||
Total current assets | 185,938 | 699 | 186,637 | |||||||||
Non-current inventories - net | — | 10,261 | 10,261 | |||||||||
Property, plant and equipment - net | 79,235 | 265 | 79,500 | |||||||||
Deferred tax assets - net | 16,778 | 336 | 17,114 | |||||||||
Goodwill | 308,345 | (113,548 | ) | 194,797 | ||||||||
Other intangible assets - net | 25,512 | 77,494 | 103,006 | |||||||||
Other assets - net | 7,918 | (265 | ) | 7,653 | ||||||||
|
|
|
|
|
| |||||||
Total assets | $ | 623,726 | $ | (24,758 | ) | $ | 598,968 | |||||
|
|
|
|
|
| |||||||
Accounts payable | $ | 23,315 | $ | (166 | ) | $ | 23,149 | |||||
Accrued expenses | 24,992 | 565 | 25,557 | |||||||||
|
|
|
|
|
| |||||||
Total current liabilities | 53,132 | 399 | 53,531 | |||||||||
Acquisition contingencies | 99,962 | (22,799 | ) | 77,163 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities | 321,309 | (22,400 | ) | 298,909 | ||||||||
Accumulated deficit | (246,531 | ) | (2,358 | ) | (248,889 | ) | ||||||
|
|
|
|
|
| |||||||
Total stockholders’ equity | 236,145 | (2,358 | ) | 233,787 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities and stockholders’ equity | $ | 623,726 | $ | (24,758 | ) | $ | 598,968 | |||||
|
|
|
|
|
|
As of June 30, 2019 | ||||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Accounts receivable | 56,163 | (623 | ) | 55,540 | ||||||||
Inventories - net | 127,906 | (12,452 | ) | 115,454 | ||||||||
Prepaid and other current assets | 8,733 | (475 | ) | 8,258 | ||||||||
|
|
|
|
|
| |||||||
Total current assets | 197,320 | (13,550 | ) | 183,770 | ||||||||
Non-current inventories - net | 20,445 | (11,220 | ) | 9,225 | ||||||||
Property, plant and equipment - net | 79,691 | 265 | 79,956 | |||||||||
Deferred tax assets - net | 19,715 | 515 | 20,230 | |||||||||
Goodwill | 271,429 | (76,362 | ) | 195,067 | ||||||||
Other intangible assets - net | 25,269 | 75,382 | 100,651 | |||||||||
Other assets - net | 7,542 | (265 | ) | 7,277 | ||||||||
|
|
|
|
|
| |||||||
Total assets | $ | 621,411 | $ | (25,235 | ) | $ | 596,176 | |||||
|
|
|
|
|
| |||||||
Accounts payable | $ | 20,766 | $ | (166 | ) | $ | 20,600 | |||||
Accrued expenses | 24,668 | 644 | 25,312 | |||||||||
|
|
|
|
|
| |||||||
Total current liabilities | 50,178 | 478 | 50,656 | |||||||||
Acquisition contingencies | 98,372 | (22,799 | ) | 75,573 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities | 316,518 | (22,321 | ) | 294,197 | ||||||||
Accumulated deficit | (245,787 | ) | (2,914 | ) | (248,701 | ) | ||||||
|
|
|
|
|
| |||||||
Total stockholders’ equity | 238,575 | (2,914 | ) | 235,661 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities and stockholders’ equity | $ | 621,411 | $ | (25,235 | ) | $ | 596,176 | |||||
|
|
|
|
|
|
30. RestatementDirectors of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Balance Sheet Amounts (Unaudited)
As of September 30, 2019 | ||||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Accounts receivable | $ | 56,556 | $ | (11 | ) | $ | 56,545 | |||||
Inventories - net | 130,913 | (12,577 | ) | 118,336 | ||||||||
Prepaid and other current assets | 8,631 | (475 | ) | 8,156 | ||||||||
|
|
|
|
|
| |||||||
Total current assets | 199,050 | (13,063 | ) | 185,987 | ||||||||
Non-current inventories - net | 18,345 | (9,971 | ) | 8,374 | ||||||||
Property, plant and equipment - net | 81,206 | 265 | 81,471 | |||||||||
Deferred tax assets - net | 20,967 | 609 | 21,576 | |||||||||
Goodwill | 236,547 | (41,709 | ) | 194,838 | ||||||||
Other intangible assets - net | 24,345 | 73,269 | 97,614 | |||||||||
Other assets - net | 7,271 | (265 | ) | 7,006 | ||||||||
|
|
|
|
|
| |||||||
Total assets | $ | 587,731 | $ | 9,135 | $ | 596,866 | ||||||
|
|
|
|
|
| |||||||
Accounts payable | $ | 17,800 | $ | (166 | ) | $ | 17,634 | |||||
Accrued expenses | 31,067 | 647 | 31,714 | |||||||||
|
|
|
|
|
| |||||||
Total current liabilities | 51,615 | 481 | 52,096 | |||||||||
Acquisition contingencies | 63,719 | 11,854 | 75,573 | |||||||||
|
|
|
|
|
| |||||||
Total liabilities | 287,876 | 12,335 | 300,211 | |||||||||
Accumulated deficit | (250,639 | ) | (3,200 | ) | (253,839 | ) | ||||||
|
|
|
|
|
| |||||||
Total stockholders’ equity | 233,491 | (3,200 | ) | 230,291 | ||||||||
|
|
|
|
|
| |||||||
Total liabilities and stockholders’ equity | $ | 587,731 | $ | 9,135 | $ | 596,866 | ||||||
|
|
|
|
|
|
Restated Condensed Consolidated Statementsthe Company. Due to his resignation, Mr. Simpson's Consulting agreement with the Company was terminated. Total cash compensation paid to Mr. Simpson for his services for the years ended December 31, 2021 and December 31, 2020 were approximately $0.3 million and $0.1 million respectively. No amounts were payable to Mr. Simpson as of Income Amounts (Unaudited)
Three Months Ended March 31, 2019 | ||||||||||||
(as reported) | (adjustments) | (as restated) | ||||||||||
Revenues | $ | 69,741 | $ | 280 | $ | 70,021 | ||||||
Costs of processing and distribution | 31,737 | 397 | 32,134 | |||||||||
|
|
|
|
|
| |||||||
Gross profit | 38,004 | (117 | ) | 37,887 | ||||||||
|
|
|
|
|
| |||||||
Marketing, general and administrative | 31,883 | 233 | 32,116 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 45,191 | 233 | 45,424 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) | (7,187 | ) | (350 | ) | (7,537 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) before income tax (provision) | (8,691 | ) | (350 | ) | (9,041 | ) | ||||||
Income tax (provision) | (396 | ) | 86 | (310 | ) | |||||||
|
|
|
|
|
| |||||||
Net (loss) | (9,087 | ) | (264 | ) | (9,351 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive (loss) | $ | (9,480 | ) | $ | (264 | ) | $ | (9,744 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - basic | $ | (0.14 | ) | $ | (0.00 | ) | $ | (0.14 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - diluted | $ | (0.14 | ) | $ | (0.00 | ) | $ | (0.14 | ) | |||
|
|
|
|
|
|
30. RestatementINN Acquisition
Restated Condensed Consolidated StatementsINN evenly. See Note 1, Note 7 and Note 12 for further discussion on amounts outstanding to them.
Six Months Ended June 30, 2019 | ||||||||||||
(as reported) | (adjustments) | (as restated) | ||||||||||
Revenues | $ | 152,048 | $ | (473 | ) | $ | 151,575 | |||||
Costs of processing and distribution | 69,299 | (1,735 | ) | 67,564 | ||||||||
|
|
|
|
|
| |||||||
Gross profit | 82,749 | 1,262 | 84,011 | |||||||||
|
|
|
|
|
| |||||||
Marketing, general and administrative | 70,876 | 2,348 | 73,224 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 88,415 | 2,348 | 90,763 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) | (5,666 | ) | (1,086 | ) | (6,752 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) before income tax (provision) | (10,798 | ) | (1,086 | ) | (11,884 | ) | ||||||
Income tax benefit | 2,455 | 266 | 2,721 | |||||||||
|
|
|
|
|
| |||||||
Net (loss) | (8,343 | ) | (820 | ) | (9,163 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive (loss) | $ | (8,341 | ) | $ | (820 | ) | $ | (9,161 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - basic | $ | (0.12 | ) | $ | (0.01 | ) | $ | (0.13 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - diluted | $ | (0.12 | ) | $ | (0.01 | ) | $ | (0.13 | ) | |||
|
|
|
|
|
|
Nine Months Ended September 30, 2019 | ||||||||||||
(as reported) | (adjustments) | (as restated) | ||||||||||
Revenues | $ | 228,177 | $ | 139 | $ | 228,316 | ||||||
Costs of processing and distribution | 103,941 | (2,860 | ) | 101,081 | ||||||||
|
|
|
|
|
| |||||||
Gross profit | 124,236 | 2,999 | 127,235 | |||||||||
|
|
|
|
|
| |||||||
Marketing, general and administrative | 107,983 | 4,464 | 112,447 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 133,002 | 4,464 | 137,466 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) | (8,766 | ) | (1,465 | ) | (10,231 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) before income tax benefit | (17,690 | ) | (1,465 | ) | (19,155 | ) | ||||||
Income tax benefit | 4,495 | 359 | 4,854 | |||||||||
|
|
|
|
|
| |||||||
Net (loss) | (13,195 | ) | (1,106 | ) | (14,301 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive (loss) | $ | (14,315 | ) | $ | (1,106 | ) | $ | (15,421 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - basic | $ | (0.18 | ) | $ | (0.02 | ) | $ | (0.20 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - diluted | $ | (0.18 | ) | $ | (0.02 | ) | $ | (0.20 | ) | |||
|
|
|
|
|
|
30. Restatementthe issuance date of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statementsthe consolidated financial statements as defined by FASB ASC 855, Subsequent Events.
Three Months Ended June 30, 2019 | ||||||||||||
(as reported) | (adjustments) | (as restated) | ||||||||||
Revenues | $ | 82,307 | $ | (753 | ) | $ | 81,554 | |||||
Costs of processing and distribution | 37,562 | (2,132 | ) | 35,430 | ||||||||
|
|
|
|
|
| |||||||
Gross profit | 44,745 | 1,379 | 46,124 | |||||||||
|
|
|
|
|
| |||||||
Marketing, general and administrative | 38,993 | 2,115 | 41,108 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 43,224 | 2,115 | 45,339 | |||||||||
|
|
|
|
|
| |||||||
Operating income | 1,521 | (736 | ) | 785 | ||||||||
|
|
|
|
|
| |||||||
(Loss) before income tax benefit | (2,107 | ) | (736 | ) | (2,843 | ) | ||||||
Income tax benefit | 2,851 | 180 | 3,031 | |||||||||
|
|
|
|
|
| |||||||
Net income | 744 | (556 | ) | 188 | ||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 1,139 | $ | (556 | ) | $ | 583 | |||||
|
|
|
|
|
| |||||||
Net income per common share - basic | $ | 0.01 | $ | (0.01 | ) | $ | 0.00 | |||||
|
|
|
|
|
| |||||||
Net income per common share - diluted | $ | 0.01 | $ | (0.01 | ) | $ | 0.00 | |||||
|
|
|
|
|
|
Three Months Ended September 30, 2019 | ||||||||||||
(as reported) | (adjustments) | (as restated) | ||||||||||
Revenues | $ | 76,129 | $ | 612 | $ | 76,741 | ||||||
Costs of processing and distribution | 34,642 | (1,125 | ) | 33,517 | ||||||||
|
|
|
|
|
| |||||||
Gross profit | 41,487 | 1,737 | 43,224 | |||||||||
|
|
|
|
|
| |||||||
Marketing, general and administrative | 37,107 | 2,116 | 39,223 | |||||||||
|
|
|
|
|
| |||||||
Total operating expenses | 44,587 | 2,116 | 46,703 | |||||||||
|
|
|
|
|
| |||||||
Operating (loss) | (3,100 | ) | (379 | ) | (3,479 | ) | ||||||
|
|
|
|
|
| |||||||
(Loss) before income tax benefit | (6,892 | ) | (379 | ) | (7,271 | ) | ||||||
Income tax benefit | 2,040 | 93 | 2,133 | |||||||||
|
|
|
|
|
| |||||||
Net (loss) | (4,852 | ) | (286 | ) | (5,138 | ) | ||||||
|
|
|
|
|
| |||||||
Comprehensive (loss) | $ | (5,974 | ) | $ | (286 | ) | $ | (6,260 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - basic | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
|
|
|
|
|
| |||||||
Net (loss) per common share - diluted | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.07 | ) | |||
|
|
|
|
|
|
30. Restatementits common stock (or pre-funded warrants to purchase common stock in lieu thereof) and warrants to purchase up to an aggregate of Prior Period Quarterly Financial Statements (Unaudited) (Continued)
Restated Condensed Consolidated Statement32,608,698 shares of Cash Flows Amounts (Unaudited)
For the Three Months Ended March 31, 2019 | ||||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) | $ | (9,087 | ) | $ | (264 | ) | $ | (9,351 | ) | |||
Depreciation and amortization expense | 3,696 | 704 | 4,400 | |||||||||
Deferred income tax provision | 470 | (86 | ) | 384 | ||||||||
Accounts receivable | (2,422 | ) | (295 | ) | (2,717 | ) | ||||||
Inventories | (2,742 | ) | 552 | (2,190 | ) | |||||||
Accounts payable | (7,253 | ) | (76 | ) | (7,329 | ) | ||||||
Accrued expenses | (1,585 | ) | (489 | ) | (2,074 | ) | ||||||
Other operating assets and liabilities | (593 | ) | 82 | (511 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash (used in) operating activities | (15,685 | ) | 128 | (15,557 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Payments for treasury stock | — | (128 | ) | (128 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used by financing activities | 114,555 | (128 | ) | 114,427 |
For the Six Months Ended June 30, 2019 | ||||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) | $ | (8,343 | ) | $ | (820 | ) | $ | (9,163 | ) | |||
Depreciation and amortization expense | 7,491 | 2,817 | 10,308 | |||||||||
Deferred income tax (benefit) | (2,703 | ) | (266 | ) | (2,969 | ) | ||||||
Accounts receivable | (3,509 | ) | 368 | (3,141 | ) | |||||||
Inventories | (1,078 | ) | (1,580 | ) | (2,658 | ) | ||||||
Accounts payable | (9,675 | ) | (76 | ) | (9,751 | ) | ||||||
Accrued expenses | (2,217 | ) | (366 | ) | (2,583 | ) | ||||||
Other operating assets and liabilities | 145 | 95 | 240 | |||||||||
|
|
|
|
|
| |||||||
Net cash (used in) operating activities | (13,111 | ) | 172 | (12,939 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Payments for treasury stock | — | (172 | ) | (172 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used by financing activities | 114,666 | (172 | ) | 114,494 | ||||||||
For the Nine Months Ended September 30, 2019 | ||||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) | $ | (13,195 | ) | $ | (1,106 | ) | $ | (14,301 | ) | |||
Depreciation and amortization expense | 11,413 | 4,929 | 16,342 | |||||||||
Deferred income tax (benefit) | (4,229 | ) | (359 | ) | (4,588 | ) | ||||||
Accounts receivable | (4,278 | ) | (244 | ) | (4,522 | ) | ||||||
Inventories | (4,904 | ) | (2,705 | ) | (7,609 | ) | ||||||
Accounts payable | (12,608 | ) | (76 | ) | (12,684 | ) | ||||||
Accrued expenses | 4,329 | (331 | ) | 3,998 | ||||||||
Other operating assets and liabilities | 177 | 96 | 273 | |||||||||
|
|
|
|
|
| |||||||
Net cash (used in) operating activities | (12,709 | ) | 204 | (12,505 | ) | |||||||
|
|
|
|
|
| |||||||
Cash flows from financing activities | ||||||||||||
Payments for treasury stock | — | (204 | ) | (204 | ) | |||||||
|
|
|
|
|
| |||||||
Net cash used by financing activities | 117,166 | (204 | ) | 116,962 |
RTI SURGICAL
2019
Description | Balance at Beginning of Period | Charged to Costs and Expenses | Deductions- Write-offs, Payments | Balance at End of Period | ||||||||||||
For the year ended December 31, 2019: | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,660 | $ | 2,582 | $ | 144 | $ | 5,098 | ||||||||
Allowance for product returns | 708 | 60 | 138 | 630 | ||||||||||||
Allowance for excess and obsolescence | 15,353 | 8,558 | 8,601 | 15,310 | ||||||||||||
Deferred tax asset valuation allowance | 3,093 | 48,415 | 0 | 51,508 | ||||||||||||
For the year ended December 31, 2018: | ||||||||||||||||
Allowance for doubtful accounts | 1,731 | 1,105 | 176 | 2,660 | ||||||||||||
Allowance for product returns | 795 | 616 | 703 | 708 | ||||||||||||
Allowance for excess and obsolescence | 8,102 | 15,122 | 7,871 | 15,353 | ||||||||||||
Deferred tax asset valuation allowance | 7,258 | 2,368 | 6,533 | 3,093 | ||||||||||||
For the year ended December 31, 2017: | ||||||||||||||||
Allowance for doubtful accounts | 1,870 | 536 | 675 | 1,731 | ||||||||||||
Allowance for product returns | 582 | 410 | 197 | 795 | ||||||||||||
Allowance for excess and obsolescence | 14,798 | 5,066 | 11,762 | 8,102 | ||||||||||||
Deferred tax asset valuation allowance | 4,916 | 1,668 | (674 | ) | 7,258 |
Description Balance at
Beginning of
PeriodCharged to
Costs and
ExpensesDeductions,
Write-offs, or
PaymentsBalance at
End of
PeriodFor the year ended December 31, 2021: Allowance for doubtful accounts $ 8,203 $ 1,722 $ 653 $ 9,272 Allowance for product returns 105 — — 105 Deferred tax asset valuation allowance 45,126 20,459 578 65,007 For the year ended December 31, 2020: Allowance for doubtful accounts 4,803 3,584 $ 184 $ 8,203 Allowance for product returns 106 246 247 105 Deferred tax asset valuation allowance 48,115 (2,638) 351 45,126 For the year ended December 31, 2019: Allowance for doubtful accounts 1,865 2,541 (397) 4,803 Allowance for product returns 478 — 372 106 Deferred tax asset valuation allowance 3,093 45,022 — 48,115
| ||||||||||||||||
By: | ||||||||||||||||
Terry M. Rich | ||||||||||||||||
President and Chief Executive Officer |
Signature | Title | Date | ||||||||||||
|
President and Chief Executive Officer (Principal Executive Officer) |
| ||||||||||||
Terry M. Rich | ||||||||||||||
|
| |||||||||||||
/s/
| ||||||||||||||
Christopher Thunander | ||||||||||||||
| Vice President and Chief Accounting Officer (Principal Financial Officer) | |||||||||||||
Christopher Thunander | ||||||||||||||
| ||||||||||||||
| ||||||||||||||
| ||||||||||||||
| ||||||||||||||
/s/
| ||||||||||||||
Sheryl L. Conley | ||||||||||||||
| Director | |||||||||||||
Thomas A. McEachin | ||||||||||||||
| Director | |||||||||||||
Mark D. Stolper | ||||||||||||||
| Director | |||||||||||||
Paul G. Thomas | ||||||||||||||
| Director | |||||||||||||
Nicholas J. Valeriani | ||||||||||||||