UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20192020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to  

Commission file number 001-38832

 

RTI Surgical Holdings, Inc.SURGALIGN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

83-2540607

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

520 Lake Cook Road, Suite 315,

Deerfield, Illinois

 

60015

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (877) 343-6832(224) 303-4651

RTI Surgical Holdings, Inc., 11621 Research Circle, Alachua, Florida, 32615

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of exchange on which registered

common stock, $0.001 par value

RTIX

SRGA

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit such files.) Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes      No  

Shares of common stock, $0.001 par value, outstanding on July 26, 2019:  73,897,96529, 2020:  75,954,373

 

 

 


RTI SURGICALSURGALIGN HOLDINGS, INC.

FORM 10-Q For the Quarter Ended June 30, 20192020

Index

 

 

 

 

Page #

 

 

 

 

 

Part I    Financial Information

 

 

 

 

 

 

 

Item 1

 

Unaudited Condensed Consolidated Financial Statements

 

31 - 2428

 

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2529 - 3038

 

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

3139

 

 

 

 

 

Item 4

 

Controls and Procedures

 

3139

 

 

 

 

 

Part II    Other Information

 

 

 

 

 

 

 

Item 1  

 

Legal Proceedings

 

3240

 

 

 

 

 

Item 1A

 

Risk Factors

 

3241

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

3241

 

 

 

 

 

Item 3

 

Defaults Upon Senior Securities

 

3241

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

 

3241

 

 

 

 

 

Item 5

 

Other Information

 

3241

 

 

 

 

 

Item 6

 

Exhibits

 

3342

 

 

 

 

 

Signatures

 

3443

 

 

 

 


Part I

Financial Information

Item 1.

Unaudited Condensed Consolidated Financial Statements

Part IFinancial Information

Item 1.Unaudited Condensed Consolidated Financial Statements

RTI SURGICALSURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share data)

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

4,518

 

 

$

10,949

 

 

$

2,229

 

 

$

5,608

 

Accounts receivable - less allowances of $3,103 at June 30, 2019

 

 

 

 

 

 

 

and $2,380 at December 31, 2018

 

56,163

 

 

 

48,351

 

Accounts receivable - less allowances of $5,717 at June 30, 2020 and $5,098 at December 31, 2019

 

 

46,865

 

 

 

59,288

 

Inventories - net

 

127,906

 

 

 

107,471

 

 

 

122,596

 

 

 

124,149

 

Prepaid and other current assets

 

8,733

 

 

 

8,791

 

 

 

9,493

 

 

 

6,769

 

Total current assets

 

197,320

 

 

 

175,562

 

 

 

181,183

 

 

 

195,814

 

Non-current inventories - net

 

20,445

 

 

 

-

 

 

 

5,194

 

 

 

6,637

 

Property, plant and equipment - net

 

79,691

 

 

 

77,954

 

 

 

70,131

 

 

 

69,890

 

Deferred tax assets - net

 

19,715

 

 

 

17,510

 

 

 

3,300

 

 

 

-

 

Goodwill

 

271,429

 

 

 

59,798

 

 

 

55,384

 

 

 

55,384

 

Other intangible assets - net

 

25,269

 

 

 

26,359

 

 

 

10,614

 

 

 

10,492

 

Other assets - net

 

7,542

 

 

 

4,003

 

 

 

6,007

 

 

 

6,292

 

Total assets

$

621,411

 

 

$

361,186

 

 

$

331,813

 

 

$

344,509

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

$

20,766

 

 

$

26,309

 

 

$

37,490

 

 

$

30,126

 

Accrued expenses

 

24,668

 

 

 

24,683

 

 

 

29,920

 

 

 

33,337

 

Derivative liability

 

 

23,020

 

 

 

-

 

Current portion of deferred revenue

 

4,744

 

 

 

4,908

 

 

 

3,328

 

 

 

2,748

 

Current portion of long-term obligations

 

 

189,121

 

 

 

174,177

 

Total current liabilities

 

50,178

 

 

 

55,900

 

 

 

282,879

 

 

 

240,388

 

Long-term obligations

 

165,081

 

 

 

49,073

 

Acquisition contingencies

 

98,372

 

 

 

4,986

 

Other long-term liabilities

 

2,562

 

 

 

633

 

 

 

2,316

 

 

 

3,147

 

Deferred revenue

 

325

 

 

 

744

 

Total liabilities

 

316,518

 

 

 

111,336

 

 

 

285,195

 

 

 

243,535

 

Commitments and contingencies (Note 22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares

issued and outstanding

 

66,318

 

 

 

66,226

 

 

 

66,502

 

 

 

66,410

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.001 par value: 150,000,000 shares authorized; 75,159,262 and

63,469,185 shares issued and outstanding, respectively

 

75

 

 

 

64

 

Common stock, $.001 par value: 150,000,000 shares authorized; 75,954,373 and 75,213,515 shares issued and outstanding, respectively

 

 

75

 

 

 

75

 

Additional paid-in capital

 

496,596

 

 

 

433,143

 

 

 

500,701

 

 

 

498,438

 

Accumulated other comprehensive loss

 

(7,268

)

 

 

(7,270

)

 

 

(7,701

)

 

 

(7,629

)

Accumulated deficit

 

(245,787

)

 

 

(237,444

)

 

 

(507,606

)

 

 

(451,179

)

Less treasury stock, 1,257,949 and 1,221,180 shares, respectively, at cost

 

(5,041

)

 

 

(4,869

)

Less treasury stock, 1,353,026 and 1,285,224 shares, respectively, at cost

 

 

(5,353

)

 

 

(5,141

)

Total stockholders' equity

 

238,575

 

 

 

183,624

 

 

 

(19,884

)

 

 

34,564

 

Total liabilities and stockholders' equity

$

621,411

 

 

$

361,186

 

 

$

331,813

 

 

$

344,509

 

 

See notes to unaudited condensed consolidated financial statement.

31


RTI SURGICALSURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Gain (Loss)Loss

(Unaudited, in thousands, except share and per share data)

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

Costs of processing and distribution

 

37,562

 

 

 

40,645

 

 

 

69,299

 

 

 

76,853

 

 

31,093

 

 

 

35,430

 

 

 

64,366

 

 

 

67,564

 

Gross profit

 

44,745

 

 

 

30,040

 

 

 

82,749

 

 

 

63,722

 

 

23,132

 

 

 

46,124

 

 

 

63,585

 

 

 

84,011

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing, general and administrative

 

38,993

 

 

 

29,266

 

 

 

70,876

 

 

 

57,655

 

 

37,066

 

 

 

41,108

 

 

 

79,719

 

 

 

73,224

 

Research and development

 

3,868

 

 

 

3,270

 

 

 

8,204

 

 

 

6,691

 

 

3,274

 

 

 

3,868

 

 

 

7,556

 

 

 

8,204

 

Severance and restructuring costs

 

 

 

 

 

 

 

 

 

 

884

 

 

604

 

 

 

 

 

 

604

 

 

 

 

Gain on acquisition contingency

 

(1,590

)

 

 

 

 

 

(1,590

)

 

 

 

 

(130

)

 

 

(1,590

)

 

 

(130

)

 

 

(1,590

)

Asset impairment and abandonments

 

 

 

 

4,515

 

 

 

15

 

 

 

4,644

 

 

882

 

 

 

 

 

 

2,761

 

 

 

15

 

Acquisition and integration expenses

 

1,953

 

 

 

 

 

 

10,910

 

 

 

800

 

Transaction and integration expenses

 

4,923

 

 

 

1,953

 

 

 

14,203

 

 

 

10,910

 

Total operating expenses

 

43,224

 

 

 

37,051

 

 

 

88,415

 

 

 

70,674

 

 

46,619

 

 

 

45,339

 

 

 

104,713

 

 

 

90,763

 

Operating income (loss)

 

1,521

 

 

 

(7,011

)

 

 

(5,666

)

 

 

(6,952

)

 

(23,487

)

 

 

785

 

 

 

(41,128

)

 

 

(6,752

)

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(3,635

)

 

 

(777

)

 

 

(5,239

)

 

 

(1,612

)

 

(5,972

)

 

 

(3,635

)

 

 

(9,537

)

 

 

(5,239

)

Interest income

 

26

 

 

 

6

 

 

 

157

 

 

 

17

 

 

21

 

 

 

26

 

 

 

71

 

 

 

157

 

Loss on extinguishment of debt

 

 

 

 

(309

)

 

 

 

 

 

(309

)

Derivative loss

 

(12,641

)

 

 

 

 

 

(12,641

)

 

 

 

Foreign exchange loss

 

(19

)

 

 

(71

)

 

 

(50

)

 

 

(22

)

 

217

 

 

 

(19

)

 

 

(29

)

 

 

(50

)

Total other expense - net

 

(3,628

)

 

 

(1,151

)

 

 

(5,132

)

 

 

(1,926

)

 

(18,375

)

 

 

(3,628

)

 

 

(22,136

)

 

 

(5,132

)

Income (loss) before income tax benefit

 

(2,107

)

 

 

(8,162

)

 

 

(10,798

)

 

 

(8,878

)

Income tax benefit

 

2,851

 

 

 

2,702

 

 

 

2,455

 

 

 

2,453

 

Net income (loss)

 

744

 

 

 

(5,460

)

 

 

(8,343

)

 

 

(6,425

)

Convertible preferred dividend

 

 

 

 

(981

)

 

 

 

 

 

(1,947

)

Loss before income tax benefit (expense)

 

(41,862

)

 

 

(2,843

)

 

 

(63,264

)

 

 

(11,884

)

Income tax benefit (expense)

 

3,298

 

 

 

3,031

 

 

 

6,837

 

 

 

2,721

 

Net loss

 

(38,564

)

 

 

188

 

 

 

(56,427

)

 

 

(9,163

)

Net income (loss) applicable to common shares

 

744

 

 

 

(6,441

)

 

 

(8,343

)

 

 

(8,372

)

 

(38,564

)

 

 

188

 

 

 

(56,427

)

 

 

(9,163

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation gain (loss)

 

395

 

 

 

(914

)

 

 

2

 

 

 

(521

)

Comprehensive gain (loss)

$

1,139

 

 

$

(7,355

)

 

$

(8,341

)

 

$

(8,893

)

Net income (loss) per common share - basic

$

0.01

 

 

$

(0.10

)

 

$

(0.12

)

 

$

(0.13

)

Net income (loss) per common share - diluted

$

0.01

 

 

$

(0.10

)

 

$

(0.12

)

 

$

(0.13

)

Other comprehensive (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign currency translation loss

 

298

 

 

 

395

 

 

 

(72

)

 

 

2

 

Comprehensive loss

$

(38,266

)

 

$

583

 

 

$

(56,499

)

 

$

(9,161

)

Net loss per common share - basic

$

(0.51

)

 

$

-

 

 

$

(0.74

)

 

$

(0.13

)

Net loss per common share - diluted

$

(0.51

)

 

$

-

 

 

$

(0.74

)

 

$

(0.13

)

Weighted average shares outstanding - basic

 

75,144,488

 

 

 

63,405,708

 

 

 

70,409,839

 

 

 

63,400,737

 

 

75,814,668

 

 

 

75,144,488

 

 

 

75,995,324

 

 

 

70,409,839

 

Weighted average shares outstanding - diluted

 

91,120,956

 

 

 

63,405,708

 

 

 

70,409,839

 

 

 

63,400,737

 

 

75,814,668

 

 

 

91,120,956

 

 

 

75,995,324

 

 

 

70,409,839

 

See notes to unaudited condensed consolidated financial statements.

2


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited, in thousands)

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

 

Balance, January 1, 2020

$

75

 

 

$

498,438

 

 

$

(7,629

)

 

$

(451,179

)

 

$

(5,141

)

 

$

34,564

 

Net loss

 

 

 

 

 

 

 

 

 

 

(17,863

)

 

 

 

 

 

(17,863

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(370

)

 

 

 

 

 

 

 

 

(370

)

Exercise of common stock options

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Stock-based compensation

 

 

 

 

1,310

 

 

 

 

 

 

 

 

 

 

 

 

1,310

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

(193

)

Amortization of preferred stock series A issuance costs

 

 

 

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

(44

)

Balance, March 31, 2020

$

75

 

 

$

499,724

 

 

$

(7,999

)

 

$

(469,042

)

 

$

(5,334

)

 

$

17,424

 

Net loss

 

 

 

 

 

 

 

 

 

 

(38,564

)

 

 

 

 

 

(38,564

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

298

 

 

 

 

 

 

 

 

 

298

 

Exercise of common stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

1,023

 

 

 

 

 

 

 

 

 

 

 

 

1,023

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(19

)

 

 

(19

)

Amortization of preferred stock series A issuance costs

 

 

 

 

(46

)

 

 

 

 

 

 

 

 

 

 

 

(46

)

Balance, June 30, 2020

$

75

 

 

$

500,701

 

 

$

(7,701

)

 

$

(507,606

)

 

$

(5,353

)

 

$

(19,884

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

 

Balance, January 1, 2019

$

64

 

 

$

433,143

 

 

$

(7,270

)

 

$

(239,537

)

 

$

(4,869

)

 

$

181,531

 

Net loss

 

 

 

 

 

 

 

 

 

 

(9,351

)

 

 

 

 

 

(9,351

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(393

)

 

 

 

 

 

 

 

 

(393

)

Exercise of common stock options

 

 

 

 

284

 

 

 

 

 

 

 

 

 

 

 

 

284

 

Equity instruments issued in connection with Paradigm Spine acquisition - net of fees

 

11

 

 

 

60,719

 

 

 

 

 

 

 

 

 

 

 

 

60,730

 

Stock-based compensation

 

 

 

 

1,163

 

 

 

 

 

 

 

 

 

 

 

 

1,163

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(130

)

 

 

(130

)

Amortization of preferred stock series A issuance costs

 

 

 

 

(46

)

 

 

 

 

 

 

 

 

 

 

 

(46

)

Balance, March 31, 2019

$

75

 

 

$

495,263

 

 

$

(7,663

)

 

$

(248,888

)

 

$

(4,999

)

 

$

233,788

 

Net income

 

 

 

 

 

 

 

 

 

 

188

 

 

 

 

 

 

188

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

395

 

 

 

 

 

 

 

 

 

395

 

Exercise of common stock options

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

111

 

Stock-based compensation

 

 

 

 

1,267

 

 

 

 

 

 

 

 

 

 

 

 

1,267

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

(42

)

Amortization of preferred stock series A issuance costs

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Balance, June 30, 2019

$

75

 

 

$

496,596

 

 

$

(7,268

)

 

$

(248,700

)

 

$

(5,041

)

 

$

235,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

For the Six Months Ended

 

 

June 30,

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(56,427

)

 

$

(9,163

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

4,687

 

 

 

10,308

 

Provision for bad debts and product returns

 

1,436

 

 

 

899

 

Provision for inventory write-downs

 

1,947

 

 

 

3,274

 

Amortization of deferred revenue

 

(2,375

)

 

 

(2,585

)

Deferred income tax benefit

 

(3,614

)

 

 

(2,969

)

Stock-based compensation

 

2,344

 

 

 

2,430

 

Asset impairment and abandonments

 

2,761

 

 

 

 

Gain on acquisition contingency

 

(130

)

 

 

(1,590

)

Paid in kind interest expense

 

3,434

 

 

 

1,473

 

Amortization of debt issuance costs

 

283

 

 

 

361

 

Amortization of debt discount

 

2,479

 

 

 

 

Derivative loss

 

12,641

 

 

 

 

Other

 

131

 

 

 

516

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

10,950

 

 

 

(3,141

)

Inventories

 

1,062

 

 

 

(2,658

)

Accounts payable

 

7,459

 

 

 

(9,751

)

Accrued expenses

 

(4,420

)

 

 

(2,583

)

Deferred revenue

 

2,955

 

 

 

2,000

 

Other operating assets and liabilities

 

(2,192

)

 

 

240

 

Net cash used in operating activities

 

(14,589

)

 

 

(12,939

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,315

)

 

 

(6,912

)

Patent and acquired intangible asset costs

 

(419

)

 

 

(1,126

)

Acquisition of Paradigm Spine

 

 

 

 

(99,921

)

Net cash used in investing activities

 

(7,734

)

 

 

(107,959

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

20

 

 

 

395

 

Proceeds from long-term obligations

 

72,829

 

 

 

115,000

 

Payments of debt issuance costs

 

(1,740

)

 

 

(729

)

Payments on long-term obligations

 

(51,962

)

 

 

 

Payments for treasury stock

 

(212

)

 

 

(172

)

Net cash provided by financing activities

 

18,935

 

 

 

114,494

 

Effect of exchange rate changes on cash and cash equivalents

 

9

 

 

 

(27

)

Net decrease in cash and cash equivalents

 

(3,379

)

 

 

(6,431

)

Cash and cash equivalents, beginning of period

 

5,608

 

 

 

10,949

 

Cash and cash equivalents, end of period

$

2,229

 

 

$

4,518

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

Cash paid for interest

$

4,082

 

 

$

2,732

 

Income tax refunds, net of payments

 

(1,962

)

 

 

1,982

 

Non-cash acquisition of property, plant and equipment

 

342

 

 

 

456

 

Non-cash embedded derivative associated with Ares

 

10,379

 

 

 

-

 

Non-cash acquisition of Paradigm Spine

 

 

 

 

60,730

 

Non-cash common stock issuance

 

 

 

 

60,730

 

 

See notes to unaudited condensed consolidated financial statements.

4


RTI SURGICALSURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited, in thousands)

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

 

Balance, January 1, 2019

$

64

 

 

$

433,143

 

 

$

(7,270

)

 

$

(237,444

)

 

$

(4,869

)

 

$

183,624

 

     Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,087

)

 

 

-

 

 

 

(9,087

)

     Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

(393

)

 

 

-

 

 

 

-

 

 

 

(393

)

     Exercise of common stock options

 

-

 

 

 

284

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

284

 

     Equity instruments issued in connection

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       with Paradigm Spine acquistion - net of fees

 

11

 

 

 

60,719

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

60,730

 

     Stock-based compensation

 

-

 

 

 

1,163

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,163

 

     Purchase of treasury stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(130

)

 

 

(130

)

     Amortization of preferred stock series A issuance costs

 

-

 

 

 

(46

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(46

)

Balance, March 31, 2019

 

75

 

 

 

495,263

 

 

 

(7,663

)

 

 

(246,531

)

 

 

(4,999

)

 

 

236,145

 

Net income

 

 

 

 

 

 

 

 

 

 

744

 

 

 

 

 

 

744

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

395

 

 

 

 

 

 

 

 

 

395

 

Exercise of common stock options

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

111

 

Stock-based compensation

 

 

 

 

1,267

 

 

 

 

 

 

 

 

 

 

 

 

1,267

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(42

)

 

 

(42

)

     Amortization of preferred stock series A issuance costs

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Balance, June 30, 2019

$

75

 

 

$

496,596

 

 

$

(7,268

)

 

$

(245,787

)

 

$

(5,041

)

 

$

238,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Treasury

Stock

 

 

Total

 

Balance, January 1, 2018

$

63

 

 

$

429,459

 

 

$

(6,329

)

 

$

(237,066

)

 

$

(4,390

)

 

$

181,737

 

     Accumulated effect of adoption of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        the revenue recognition standard

 

-

 

 

 

-

 

 

 

-

 

 

 

872

 

 

 

-

 

 

 

872

 

     Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

(965

)

 

 

-

 

 

 

(965

)

     Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

393

 

 

 

-

 

 

 

-

 

 

 

393

 

     Exercise of common stock options

 

-

 

 

 

287

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

287

 

     Stock-based compensation

 

-

 

 

 

1,280

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,280

 

     Purchase of treasury stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(363

)

 

 

(363

)

     Amortization of preferred stock series A issuance costs

 

-

 

 

 

(46

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(46

)

     Preferred stock Series A dividend

 

-

 

 

 

(966

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(966

)

Balance, March 31, 2018

 

63

 

 

 

430,014

 

 

 

(5,936

)

 

 

(237,159

)

 

 

(4,753

)

 

 

182,229

 

     Net loss

 

 

 

 

 

 

 

 

 

 

(5,460

)

 

 

 

 

 

(5,460

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

(914

)

 

 

 

 

 

 

 

 

(914

)

Exercise of common stock options

 

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

33

 

Stock-based compensation

 

 

 

 

1,290

 

 

 

 

 

 

 

 

 

 

 

 

1,290

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(77

)

 

 

(77

)

Amortization of preferred stock series A issuance costs

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Preferred stock Series A dividend

 

 

 

 

(981

)

 

 

 

 

 

 

 

 

 

 

 

(981

)

Balance, June 30, 2018

$

63

 

 

$

430,311

 

 

$

(6,850

)

 

$

(242,619

)

 

$

(4,830

)

 

$

176,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

5


RTI SURGICAL HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

For the Six Months Ended

 

 

June 30,

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(8,343

)

 

$

(6,425

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

7,491

 

 

 

7,068

 

Provision for bad debts and product returns

 

899

 

 

 

494

 

Provision for inventory write-downs

 

3,274

 

 

 

10,865

 

Amortization of deferred revenue

 

(2,585

)

 

 

(2,435

)

Deferred income tax benefit

 

(2,703

)

 

 

(2,671

)

Stock-based compensation

 

2,430

 

 

 

2,570

 

Asset impairment and abandonments

 

 

 

 

4,644

 

Gain on acquisition contingency

 

(1,590

)

 

 

 

Paid in kind interest expense

 

1,473

 

 

 

 

Other

 

877

 

 

 

610

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(3,509

)

 

 

(7,640

)

Inventories

 

(1,078

)

 

 

(411

)

Accounts payable

 

(9,675

)

 

 

(3,803

)

Accrued expenses

 

(2,217

)

 

 

(2,592

)

Deferred revenue

 

2,000

 

 

 

2,000

 

Other operating assets and liabilities

 

145

 

 

 

7,104

 

Net cash (used in) provided by operating activities

 

(13,111

)

 

 

9,378

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(6,912

)

 

 

(3,856

)

Patent and acquired intangible asset costs

 

(1,126

)

 

 

(728

)

Acquisition of Zyga Technology

 

 

 

 

(21,000

)

Acquisition of Paradigm Spine

 

(99,921

)

 

 

 

Net cash used in investing activities

 

(107,959

)

 

 

(25,584

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

395

 

 

 

1,429

 

Proceeds from long-term obligations

 

115,000

 

 

 

74,425

 

Payments of debt issuance costs

 

(729

)

 

 

 

Payments on long-term obligations

 

 

 

 

(66,750

)

Other financing activities

 

 

 

 

(1,026

)

Net cash provided by financing activities

 

114,666

 

 

 

8,078

 

Effect of exchange rate changes on cash and cash equivalents

 

(27

)

 

 

(7

)

Net decrease in cash and cash equivalents

 

(6,431

)

 

 

(8,135

)

Cash and cash equivalents, beginning of period

 

10,949

 

 

 

22,381

 

Cash and cash equivalents, end of period

$

4,518

 

 

$

14,246

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

Cash paid for interest

$

2,732

 

 

$

1,974

 

Income tax refunds, net of payments

 

1,982

 

 

 

6,698

 

Non-cash acquisition of property, plant and equipment

 

456

 

 

 

676

 

Increase in accrual for dividend payable

 

 

 

 

1,947

 

Non-cash acquisition of Paradigm

 

60,730

 

 

 

 

Non-cash common stock issuance

 

60,730

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

6


RTI SURGICAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1.

Operations and Organization

Surgalign Holdings Inc. and Subsidiaries. (formerly known as RTI Surgical Holdings, Inc. and Subsidiaries (defined as(“RTI”) (“Surgalign” or the “Company” for matters occurring after March 8, 2019)) is a global medical technology company advancing the science of spine care, focused on delivering innovative solutions that drive superior clinical and economic outcomes. The company is building off a legacy of high quality and differentiated products, and continues to invest in clinically validated innovation to deliver better surgical implant company that designs, develops, manufactures and distributes biologic, metal and synthetic implants. The Company’s implants are used in orthopedic, spine, sports medicine, plastic surgery, trauma and other surgical procedures to repair and promote the natural healing of human bone and other human tissuesoutcomes and improve surgical outcomes. The Company manufactures metalpatient’s lives. Surgalign markets products throughout the United States and synthetic implants and processes donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using its proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes. The Company processes tissue at its facilities in Alachua, Florida and Neunkirchen, Germany and manufactures metal and synthetic implants in Marquette, Michigan and Greenville, North Carolina, respectively, and has a distribution and research center in Wurmlingen, Germany. The Company is accredited in the U.S. by the American Associationmore than 50 countries worldwide through an expanding network of Tissue Banks and the Company istop independent distributors. Surgalign, a member of AdvaMed. The Company’s implants are distributed directlyAdvaMed (“Advanced Medical Technology Association”) , is headquartered in Deerfield, Illinois, and as of the date of filing of this Form 10-Q, has commercial, innovation and design centers in San Diego, California, and Wurmlingen, Germany.

On July 20, 2020, RTI completed the disposition of the original equipment manufacturer (“OEM”) business, refere to hospitalssubsequent event for further discussion in FN 25, and free-standing surgery centers throughoutwas renamed to Surgalign Holdings, Inc.  References in this Form 10-Q to Surgalign or the U.S. and in over 50 countries worldwideCompany refer to the Company as of June 30, 2020, prior to the disposition of the OEM business, unless otherwise noted or obvious from the context.  “Legacy RTI” refers to the Company prior to the acquisition of Paradigm Spine on March 8, 2019. In conjunction with the supportsale of both itsthe OEM business the Company repaid and third-party representativesterminated all outstanding debt held on the books as of June 30, 2020.

COVID-19

The coronavirus (COVID-19) pandemic, as well as through larger purchasing companies.the corresponding governmental response and the Company’s management of the crisis has had a significant impact on the Company’s business. The consequences of the outbreak and impact on the economy continues to evolve and the full extent of the impact is uncertain as of the date of this filing. The outbreak has already brought a significant disruption to the operations of the Company.

Many hospitals and other medical facilities have canceled elective surgeries, reduced and diverted staffing and diverted other resources to patients suffering from the infectious disease and limited hospital access for non-patients, including our direct and indirect sales representatives. Because of the COVID-19 pandemic, surgeons and their patients are required, or are choosing, to defer procedures in which our products would be used, and many facilities that specialize in the procedures in which our products would be used have closed or reduced operating hours. These circumstances have negatively impacted the ability of our employees and distributors to effectively market and sell our products. In addition, even after the pandemic has subsided and/or governmental orders no longer prohibit or recommend against performing such procedures, patients may continue to defer such procedures out of concern of being exposed to coronavirus or for other reasons.

The COVID-19 pandemic has also caused adverse effects on general commercial activity and the global economy, which has led to an economic slowdown or recession, and which has adversely affected our business, operating results or financial condition. The adverse effect of the pandemic on the broader economy has also negatively affected demand for procedures using our products, and could cause one or more of our distributors, customers, and suppliers to experience financial distress, cancel, postpone or delay orders, be unable to perform under a contract, file for bankruptcy protection, go out of business, or suffer disruptions in their business. This could impact our ability to provide products and otherwise operate our business, as well as increase our costs and expenses.

The COVID-19 pandemic has also led to and could continue to lead to severe disruption and volatility in the global capital markets, which could increase our cost of future capital and adversely affect our ability to access the capital markets in the future.

The above and other continued disruptions to our business as a result of COVID-19 has resulted in a material adverse effect on our business, operating results and financial condition. The full extent to which the COVID-19 pandemic will impact our business will depend on future developments that are highly uncertain and cannot be accurately predicted, including the possibility that new adverse information may emerge concerning COVID-19 and additional actions to contain it or treat its impact may be required.

In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, beginning April 6, 2020, the Company furloughed or reduced the hours of over 500 of its U.S.-based employees. While many of those employees have returned to work, the Company cannot predict when it will be able to fully resume normal operations and will continue to carefully monitor the situation and the needs of the business.  In addition, most current employees have taken base salary reductions until business conditions improve.

5


2.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown.  The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of condensed consolidated financial position, results of operations, comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, certain June 30, 2019 balances have been restated. The Company includes acquisition, disposal, integration and separation related costs, which are predominantly composed of legal, consulting, advisor fee expenses, within the Transaction and integration expense line on the condensed consolidated comprehensive loss.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, RTI Surgical,Surgalign, Inc. (defined as “Legacy RTI” for matters occurring after March 8, 2019, and as the “Company” for matters occurring before March 8, 2019), Paradigm Spine, LLC (“Paradigm”), Pioneer Surgical Technology, Inc. (“Pioneer Surgical”), Tutogen Medical, Inc. (“TMI”), and Zyga Technology, Inc. (“Zyga”).  The condensed 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 Surgicalsubsidiaries (“Legacy RTI”). Subsequent to the acquisition of Paradigm, Surgalign Holdings, Inc. and Subsidiaries is the successor reporting company. See

Significant Accounting Policies

Derivative Instruments – The Company reviews debt agreements for embedded features. If these features are not clearly and closely related to the debt host, they meet the definition of a derivative and require bifurcation from the host contract. All derivative instruments, including embedded derivatives are recorded on the balance sheet at their respective fair values. The Company will adjust the carrying value of the derivative liability to fair value at each subsequent reporting date. The changes in the fair value of the derivatives are recorded in the period they occur.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these financial statements are issued, and we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. As of June 30, 2020, we had cash of $2.2 million, a working capital deficiency of $101.7 million and an accumulated deficit of $507.6 million. We had a loss from operations of $41.1 million and a net loss of $56.4 million for the six months ended June 30, 2020. We have suffered losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019.  Management is projecting that it will continue to generate losses from operations into the future.  

As the global outbreak of COVID-19 continues to rapidly evolve, it could continue to materially and adversely affect our revenues, financial condition, profitability, and cash flows for an indeterminate period of time.

On July 20, 2020, RTI completed the disposition of its OEM business.  Upon the close of the transaction, the Company fully repaid all of its outstanding indebtedness, including its revolving line of credit with JP Morgan Chase Bank and both its term loan and incremental term loan commitment with Ares Capital Corporation. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock.  Management believes that after payment of taxes related to the transaction that it will have approximately $53 million of available cash. 

As discussed in Note 24, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing.  The Company continues to cooperate with the SEC in relation to its investigation. Additionally, as disclosed in Note 23, there is currently ongoing shareholder litigation.  Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.

Although there is uncertainty relate to the matters noted above, based on current information available, management  believes it will have sufficient cash and liquidity, such that it is not probable the Company will be unable to meet its obligations during the next year.

6 for further discussion.


3.

Recently Issued and Adopted Accounting Standards

In February 2016,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification Standard Update (“ASU”) 2016-02, LeasesNo. 2020-04, Reference Rate Reform (Topic 842)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which supersedes existing guidance on accountingprovides optional expedients and exceptions for leases in “Leases (Topic 840).” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires operating leases be recorded onapplying U.S. GAAP to contracts, hedging relationships and other transactions affected by 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 commencementdiscontinuation of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. Leases with an initial term ofLondon Interbank Offered Rate (LIBOR) and other interbank offered rates. This guidance is effective beginning on March 12, months or less2020 through December 31, 2022. The Company adopted ASU 2020-04 and doit did not have an impact on its condensed consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019-05 Financial Instruments — Credit Losses (Topic 326) which provides relief to certain entities adopting ASU 2016-13 (discussed below). The amendments accomplish those objectives by providing entities with an option to purchaseirrevocably elect the underlying assetfair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, that are within the scope of Subtopic 326-20, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. ASU 2019-05 has the same transition as ASU 2016-13 and is effective for periods beginning after December 15, 2019, with adoption permitted after this update. The Company adopted ASU 2019-05 and it did not have an impact on the condensed consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which provides updates and clarifications to three previously-issued ASUs: 2016-01 Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities; 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, described further above and which the Company has not yet adopted; and 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which the Company early adopted effective January 1, 2018. The updates related to ASU 2016-13 have the same transition as ASU 2016-13 and are effective for periods beginning after December 15, 2019, with adoption permitted after the issuance of ASU 2019-04. The updates related to ASU 2017-12 are effective for the Company on January 1, 2020. The updates related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2017-12 and it did not have an impact on the condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which replaces the incurred loss methodology with an expected loss methodology that is deemed reasonably certainreferred to exerciseas the current expected credit loss (CECL) methodology.  The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are not recorded onadjusted each period for changes in expected lifetime credit losses. This model replaces the balance sheet; rather, rent expense for these leasesmultiple existing impairment models previously used under U.S. generally accepted accounting principles, which generally require that a loss be incurred before it is recognized on a straight-line basis over the lease term. Leases are classifiedrecognized. The new standard also applies to financial assets arising from revenue transactions such as finance or operating, with classification affecting the patterncontract assets and classification of expense recognition in the income statement.

Effectiveaccounts receivables. On January 1, 2019,2020, the Company adopted ASU 2016-13.  The adoption did not have a material impact on the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time 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 reassessCompany’s condensed consolidated financial statements.

Credit losses for trade receivables is determined based on historical lease classification as operating or finance leases,information, current information and to not reassess initial direct costs.reasonable and supportable forecasts.  The Company has concluded that the adoption of the standard was not electedmaterial as the practical expedientcomposition of the trade receivables at the reporting date is consistent with that used in developing the historical credit-loss percentages.  Further, the risk characteristics of the Company’s customer and composition of the portfolio have not changed significantly over time.

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to use hindsightthe Disclosure Requirements for Fair Value Measurement.” This ASU modifies the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for the Company beginning after December 31, 2019. Certain disclosures in ASU 2018-13 are required to determine the lease term for its leases at transition.be applied on a retrospective basis and others on a prospective basis. The Company has also elected the practical expedient allowing us toadopted ASU 2018-13 and it did not separate the lease and non-lease components for all classes of underlying assets. Adoption of this standard 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 nohave an impact on accumulated deficit.  Financial position for reporting periods beginning on or after January 1, 2019, are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance. Note disclosures required in Topic 842 are reported in Note 4, Leases.condensed consolidated financial statements.

7


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 June 30, 2019.2020. The majority of ourCompany’s leases have remaining lease terms of 1 to 149 years, some of which include options to extend or terminate the leases.  The option to extend is only included in the lease term if the Company is reasonably certain of exercising that option. Operating lease ROU assets are presented within other assets-net on the Condensed Consolidated Balance Sheet.condensed consolidated balance sheet.  The current portion of operating lease liabilities are presented within accrued expenses, and the non-current portion of operating lease liabilities are presented within other long-term liabilities on the Condensed Consolidated Balance Sheet.condensed consolidated balance sheet.

A subset of the Company’s automobile and copier leases contain variable payments.  The variable lease payments for such automobile leases are based on actual mileage incurred at the standard contractual rate. The variable lease payments for such copier leases are based on actual copies incurred at the standard contractual rate. The variable lease costs for all leases are immaterial.

The components of operating lease expense were as follows:

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three

Months Ended

 

 

For the Six

Months Ended

 

 

June 30,

 

 

June 30,

 

June 30, 2019

 

 

June 30, 2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease cost

$

440

 

 

$

784

 

 

$

362

 

 

$

440

 

 

$

738

 

 

$

784

 

Short-term operating lease cost

 

 

 

 

36

 

 

 

 

 

 

-

 

 

 

 

 

 

36

 

Total operating lease cost

$

440

 

 

$

820

 

 

$

362

 

 

$

440

 

 

$

738

 

 

$

820

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company does not have any variable lease costs.

 

Supplemental cash flow information related to operating leases was as follows:

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three

Months Ended

 

 

For the Six

Months Ended

 

 

June 30,

 

 

June 30,

 

June 30, 2019

 

 

June 30, 2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement

of lease liabilities

$

397

 

 

$

691

 

 

$

374

 

 

$

397

 

 

$

733

 

 

$

691

 

ROU assets obtained in exchange for lease obligations

 

 

 

 

34

 

 

 

 

 

 

-

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental balance sheet information related to operating leases was as follows:

 

 

 

 

Balance at

 

 

Balance at

 

 

Balance Sheet Classification

 

June 30, 2019

 

 

Balance Sheet Classification

 

June 30, 2020

 

 

December 31, 2019

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets

 

Other assets - net

 

$

3,546

 

 

Other assets - net

 

$

1,883

 

 

$

2,155

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

Accrued expenses

 

$

1,505

 

 

Accrued expenses

 

$

1,001

 

 

$

1,159

 

Noncurrent

 

Other long-term liabilities

 

 

2,117

 

 

Other long-term liabilities

 

 

1,440

 

 

 

1,547

 

Total operating lease liabilities

 

 

 

$

3,622

 

 

 

 

$

2,441

 

 

$

2,706

 

 

 

 

 

 

 

 

As of June 30, 2019,2020, the weighted-average remaining lease term was 4.64.7 years. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates its incremental borrowing rate based on information available at lease commencement in order to discount lease payments to present value. The weighted-average discount rate of the Company’s operating leases was 4.7%4.8%, as of June 30, 2019.2020.

8


As of June 30, 2019,2020, maturities of operating lease liabilities were as follows:

 

 

Balance at

 

Maturity of Operating Lease Liabilities

 

June 30, 2019

 

 

June 30, 2020

 

2019 (remaining)

 

$

879

 

2020

 

 

1,368

 

2020 (remaining)

 

$

666

 

2021

 

 

565

 

 

 

778

 

2022

 

 

224

 

 

 

298

 

2023

 

 

160

 

 

 

160

 

2024 and beyond

 

 

875

 

2024

 

 

159

 

2025 and beyond

 

 

716

 

Total future minimum lease payments

 

 

4,071

 

 

 

2,777

 

Less imputed interest

 

 

(449

)

 

 

(336

)

Total

 

$

3,622

 

 

$

2,441

 

 

 

 

 

 

As previously disclosed in our 2018 Annual Report on Form 10-K, which followed the lease accounting prior to adoption of ASC 842, 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

 

December 31,

2018

 

2019

 

$

1,374

 

2020

 

 

806

 

2021

 

 

276

 

2022

 

 

162

 

2023

 

 

166

 

2024 and beyond

 

 

882

 

Total future minimum lease payments

 

$

3,666

 

5.

Segment Reporting

5.Revenue from Contracts with Customers

The Company operateshas determined its operating segments in one reportable segment composed of four lines of business. The reportingaccordance with FASB issued Accounting Standards Codification (“ASC 280”) - Segment Reporting.  Prior to the consummation of the Company’s linesTransaction, the overall strategy of the Company is to manage our business are composed primarily of four franchises: spine; sports; original equipment manufacturerin two operating segments, Global Spine (“Spine”) and Global OEM (“OEM”). The Spine segment focuses on sales, distribution and international.conducting research and development activities focused on the global spine market and the OEM segment focuses on the design, development and manufacturing of biologics and hardware medical technology. The following table presents revenues from these four categoriesvalue drivers of the Spine segment include growth through innovation and acquisition while the value drivers of the OEM segment focus on predetermined and relatively predictable execution. The Company is now organized into two distinct groupings, Spine and OEM, which are also our operating and reportable segments. As the adoption of the new structure was done in the fourth quarter of 2019, the comparative periods for the three and six months ended June 30, 2019 has been restated to conform to the new segment presentation.

The Spine and 2018:OEM reportable segments reflect the way the Company was managed prior to the Transaction, and for which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s Chief Executive Officer is the CODM.

9


The segment revenues and segment net income (loss) for the three and six months ended June 30, 2020 and 2019 are included in the table below. All revenues are earned from external customers. The Company does not disclose total assets by Spine and OEM as the CODM does not receive or review with regularity assets on a Spine or OEM basis. Additionally, the Company does not disclose long-lived assets by geographic location as no country outside of the United States holds 10 percent or more of our consolidated Property, Plant and Equipment.

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spine

$

26,671

 

 

$

18,934

 

 

$

46,676

 

 

$

38,197

 

 

$

20,519

 

 

$

32,747

 

 

$

47,628

 

 

$

57,124

 

Sports

 

14,024

 

 

 

14,190

 

 

 

27,803

 

 

 

27,625

 

OEM

 

32,483

 

 

 

31,170

 

 

 

61,474

 

 

 

61,290

 

 

 

33,706

 

 

 

48,807

 

 

 

80,323

 

 

 

94,451

 

International

 

9,129

 

 

 

6,391

 

 

 

16,095

 

 

 

13,463

 

Total revenues from contracts with customers

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

Total

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spine

 

$

194

 

 

$

2,979

 

 

$

285

 

 

$

5,379

 

OEM

 

 

2,254

 

 

 

2,929

 

 

 

4,402

 

 

 

4,929

 

Total

 

$

2,448

 

 

$

5,908

 

 

$

4,687

 

 

$

10,308

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spine

 

$

(5,265

)

 

$

(6,296

)

 

$

(15,673

)

 

$

(10,790

)

OEM

 

 

(4,729

)

 

 

7,444

 

 

 

2,633

 

 

 

13,373

 

Unallocated corporate costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment and abandonments

 

 

882

 

 

 

-

 

 

 

2,761

 

 

 

15

 

Gain on acquisition contingency

 

 

(130

)

 

 

(1,590

)

 

 

(130

)

 

 

(1,590

)

Restatement and related costs

 

 

7,818

 

 

 

-

 

 

 

11,254

 

 

 

-

 

Transaction and integration expenses

 

 

4,923

 

 

 

1,953

 

 

 

14,203

 

 

 

10,910

 

Total unallocated corporate costs

 

 

13,493

 

 

 

363

 

 

 

28,088

 

 

 

9,335

 

Operating (loss) income

 

$

(23,487

)

 

$

785

 

 

$

(41,128

)

 

$

(6,752

)

Interest expense

 

 

(5,972

)

 

 

(3,635

)

 

 

(9,537

)

 

 

(5,239

)

Interest income

 

 

21

 

 

 

26

 

 

 

71

 

 

 

157

 

Derivative loss

 

 

(12,641

)

 

 

-

 

 

 

(12,641

)

 

 

-

 

Foreign exchange loss

 

 

217

 

 

 

(19

)

 

 

(29

)

 

 

(50

)

Loss before income tax benefit (expense)

 

$

(41,862

)

 

$

(2,843

)

 

$

(63,264

)

 

$

(11,884

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents revenues by geographic location:

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(In thousands)

 

Revenues:

 

 

 

North America

 

$

49,077

 

 

$

72,426

 

 

$

115,890

 

 

$

135,480

 

EMEA

 

 

4,118

 

 

 

7,414

 

 

 

9,853

 

 

 

12,997

 

Asia Pacific

 

 

880

 

 

 

866

 

 

 

1,799

 

 

 

1,348

 

Latin America

 

 

150

 

 

 

848

 

 

 

409

 

 

 

1,750

 

Total revenues

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

10


The following table presents percentage of total revenues derived from the Company’s largest distributors all of which are OEM customers:

 

 

For the Three Month Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Percent of revenues derived from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc.

 

 

15

%

 

 

17

%

 

 

16

%

 

 

19

%

Medtronic, PLC

 

 

6

%

 

 

8

%

 

 

6

%

 

 

8

%

DePuy Synthes

 

 

5

%

 

 

4

%

 

 

5

%

 

 

4

%

Certain corporate costs have been allocated solely to the Spine reportable segment, including certain executive compensation costs and certain corporate costs including board of directors fees and board of directors stock-based compensation, public company expenses, legal fees, corporate compliance and communications costs, and business development expenses.     These costs were not allocated to the OEM reportable segment because the basis for the changes to the internal organization of the Company was in contemplation of the pending sale of the OEM business, and these costs are expected to remain with the Spine reportable segment. Such presentation appropriately reflects that manner in which the CODM evaluates the ongoing performance and allocates resources of the Company.  

6.

Revenue from Contracts with Customers

The Company is organized into 2 business lines, which are also our operating and reportable segments: Spine and OEM. The following table presents revenues from these 2 segments for the three and six months ended June 30, 2020 and 2019:

 

For the Three Month Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spine Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

$

16,951

 

 

$

26,351

 

 

$

39,228

 

 

$

46,570

 

International

 

3,567

 

 

 

6,396

 

 

 

8,400

 

 

 

10,554

 

OEM Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OEM

 

18,765

 

 

 

32,120

 

 

 

46,084

 

 

 

61,119

 

Sports

 

13,248

 

 

 

13,955

 

 

 

30,350

 

 

 

27,791

 

International

 

1,694

 

 

 

2,732

 

 

 

3,889

 

 

 

5,541

 

Total revenues from contracts with customers

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

 

The following table presents revenues recognized at a point in time and over time for the three and six months ended June 30, 20192020 and 2018:2019:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three Month Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue recognized at a point in time

$

66,469

 

 

$

61,534

 

 

$

119,070

 

 

$

121,697

 

$

41,463

 

 

$

64,412

 

 

$

96,572

 

 

$

118,509

 

Revenue recognized over time

 

15,838

 

 

 

9,151

 

 

 

32,978

 

 

 

18,878

 

 

12,762

 

 

 

17,142

 

 

 

31,379

 

 

 

33,066

 

Total revenues from contracts with customers

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s performance obligations consist mainly of transferring control of implants identified in the contracts. Some of the Company’s contracts offer assurance-type warranties in connection with the sale of a product to a customer. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended because it complies with

9


agreed-upon specifications. Such warranties do not represent a separate performance obligation and are not material to the condensed consolidated financial statements.

11


The opening and closing balances of the Company’s accounts receivable, contract asset and current and long-term contract liability for the three and six months ended June 30, 20192020 and 20182019 are as follows:

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

Contract

 

 

Liability

 

 

Accounts

 

 

Liability

 

 

(Long-

 

 

Receivable

 

 

(Current)

 

 

Term)

 

Opening 1/1/2019

$

48,351

 

 

$

5,425

 

 

$

744

 

Closing 6/30/2019

 

56,163

 

 

 

5,292

 

 

 

325

 

Increase/(decrease)

 

7,812

 

 

 

(133

)

 

 

(419

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

Contract

 

 

Liability

 

 

Accounts

 

 

Liability

 

 

(Long-

 

 

Receivable

 

 

(Current)

 

 

Term)

 

Opening 1/1/2018

$

39,095

 

 

$

5,978

 

 

$

3,741

 

Closing 6/30/2018

 

45,576

 

 

 

6,210

 

 

 

3,155

 

Increase/(decrease)

 

6,481

 

 

 

232

 

 

 

(586

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

Contract

 

 

Liability

 

 

Accounts

 

 

Liability

 

 

(Long-

 

 

Receivable

 

 

(Current)

 

 

Term)

 

Opening Balance, January 1, 2020

$

59,288

 

 

$

3,378

 

 

$

-

 

Closing Balance, June 30, 2020

 

46,865

 

 

 

3,721

 

 

 

-

 

Increase/(decrease)

 

(12,423

)

 

 

343

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract

 

 

 

 

 

 

Contract

 

 

Liability

 

 

Accounts

 

 

Liability

 

 

(Long-

 

 

Receivable

 

 

(Current)

 

 

Term)

 

Opening Balance, January 1, 2019

$

48,096

 

 

$

5,425

 

 

$

744

 

Closing Balance, June 30, 2019

 

55,540

 

 

 

5,537

 

 

 

325

 

Increase/(decrease)

 

7,444

 

 

 

112

 

 

 

(419

)

Contract liabilities consist primarily

As of the return allowance described above, and of deferred revenue arising from upfront and annual exclusivity fees. The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the Company’s performance of the Company’s contractual obligations over time. The Company recognizes sales commissions as incurred because the amortization period is less than one year. The Company does not incur other incremental costs relating to obtaining a contract with a customer, and therefore, does not have contract assets, or impairment losses associated therewith. Revenue recognized for the six months ended June 30, 2020 and December 31, 2019, $6,060 and 2018, from amounts$10,633 of unbilled receivables in connection with our exclusively built inventory contracts are included in contract liabilities at the beginning of the period were $2,584 and $2,434, respectively.accounts receivable.

6.7.

Acquisition of Paradigm Spine, LLC

On March 8, 2019, pursuant to the Master Transaction Agreement (the “Master Transaction Agreement”), dated as of November 1, 2018, by and among Legacy RTI, PS Spine Holdco, LLC, a Delaware limited liability company (“PS Spine”), the Company, and Bears Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of the Company (“Merger Sub”), the Company acquired all of the outstanding equity interests of Paradigm, through a transaction in which: (i) PS Spine contributed all of the issued and outstanding equity interests in Paradigm to the Company (the “Contribution”); (ii) Merger Sub merged with and into Legacy RTI (the “Merger”), with Legacy RTI surviving as a wholly owned direct subsidiary of the Company; and (iii) the Company was renamed “RTI Surgical Holdings, Inc.” (collectively, the “Transaction”“Paradigm Transaction”). Legacy RTI retained its existing name “RTI Surgical, Inc.”

Pursuant to the Master Transaction Agreement: (i) each share of common stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one fully paid and non-assessable share of Company common stock , par value $0.001 per share; (ii) each share of Series A convertible preferred stock, par value $0.001 per share, of Legacy RTI issued and outstanding immediately prior to the Paradigm Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the Paradigm Transaction, which were automatically cancelled and ceased to exist) was converted automatically into one fully paid and non-assessable share of Series A convertible preferred stock, par value $0.001 per share, of the Company; and (iii) each stock option and restricted stock award granted by Legacy RTI was converted into a stock option or restricted stock award, as applicable, of the Company with respect to an equivalent number of shares of the Company common stock on the same terms and conditions as were applicable prior to the closing.

The consideration for the Contribution was $100,000 (the “Cash Consideration Amount”) in cash subject to adjustment as described below, and 10,729,614 shares of Company common stock (the “Stock Consideration Amount”). The Stock Consideration Amount was determined by dividing $50,000 by the volume weighted average closing price of Legacy RTI’s common stock for the five business days prior to November 1, 2018 (the “Legacy RTI Price”). The Cash Consideration Amount was adjusted lower by a: (i) positive dollar for dollar adjustment based on the amount of Paradigm’s cash and cash equivalents at closing; (ii) negative dollar for dollar adjustment based on the amount of outstanding indebtedness and unpaid transaction expenses of Paradigm at closing; and (iii) negative dollar for dollar adjustment to the extent that Paradigm’s working capital (excluding indebtedness and transaction expenses) at closing did not exceed the working capital target of $7,000.

10


In addition to the Cash Consideration Amount and the Stock Consideration Amount, the Company may be required to make further cash payments or issue additional shares of Company common stock to PS Spine in an amount up to $50,000 of shares of Company common stock to be valued based upon the Legacy RTI Price and an additional $100,000 of cash and/or Company common stock to be valued at the time of issuance, in each case, if certain revenue targets are achieved between closing, March 8, 2019, and December 31, 2022.  The Company estimates aoriginally estimated the fair value of the contingent liability related to the revenue basedrevenue-based earnout of $94,976$72,177 utilizing a Monte-Carlo simulation model.model as of March 8, 2019. A Monte-Carlo simulation is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes. Accounted for as a liability to be revalued at each reporting period, the preliminary fair value of the contingent liability was measured using Level 3 inputs, which includes weighted average cost of capital and projected revenues and costs. Acquisition and integration related costs, specific to Paradigm, were approximately $15,053, of which approximately $4,143 was incurred during 2018, $10,910$15,537, (which includes business development expenses of $462 and severance expense of $896) was incurred for the six months ended June 30, 2019 and is reflected separately in the accompanying condensed consolidated statements of comprehensive income (loss).

12


The Company has accounted for the acquisition of Paradigm under Accounting Standards CodificationFASB (“ASC”) 805, Business Combinations.  Paradigm’s results of operations are included in the condensed consolidated financial statements beginning after March 8, 2019, the acquisition date.

The purchase price was financed as follows:

 

(In thousands)

 

 

(In thousands)

 

Cash proceeds from second lien credit agreement

$

100,000

 

 

$

100,000

 

Fair market value of securities issued

 

60,730

 

 

 

60,730

 

Fair market value of contingent earnout

 

94,976

 

 

 

72,177

 

Total purchase price

$

255,706

 

 

$

232,907

 

 

 

 

 

The preliminary valuationIn the first quarter of the acquired assets and liabilities is not yet complete, and as such,2019, the Company has not yet finalizedcompleted its allocation of thevaluations and purchase price for the acquisition.allocations. The table below represents the preliminaryfinal allocation of the total considerationpurchase price to Paradigm’s tangible and intangible assets and liabilities based on management’s preliminary estimate of their respective fair values as of March 8, 2019.

 

During the three months ended June 30, 2019, the Company made the following changes to the fair values of acquired assets and liabilities as follows:

Balance at

 

 

 

 

 

 

Balance at

 

June 30, 2019

 

 

March 31, 2019

 

 

Change

 

 

March 8, 2019

 

(In thousands)

 

 

(In thousands)

 

Cash

$

79

 

 

$

79

 

 

$

-

 

 

$

307

 

Accounts receivable

 

5,220

 

 

 

5,220

 

 

 

-

 

 

 

5,220

 

Inventories

 

43,084

 

 

 

5,898

 

 

 

37,186

 

 

 

17,647

 

Other current assets

 

1,693

 

 

 

1,752

 

 

 

(59

)

 

 

934

 

Property, plant and equipment

 

379

 

 

 

379

 

 

 

-

 

 

 

379

 

Other non-current assets

 

 

1,079

 

Current liabilities

 

(6,380

)

 

 

(6,169

)

 

 

(211

)

 

 

(6,169

)

Lease liabilities

 

 

(1,079

)

Net tangible assets acquired

 

44,075

 

 

 

7,159

 

 

 

36,916

 

 

 

18,318

 

Other intangible assets

 

 

79,000

 

Goodwill

 

211,631

 

 

 

248,547

 

 

 

(36,916

)

 

 

135,589

 

Total net assets acquired

$

255,706

 

 

$

255,706

 

 

$

-

 

 

$

232,907

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 8, 2019, the inventory fair value was composed of current inventory of $19,703$7,122 and non-current inventory of $23,381. As a result of the inventory purchase price adjustment to fair value Paradigm inventory, the Company recorded $2,936 to costs of processing and distribution for the six months ended June 30, 2019, which includes $477 for the inventory sold over the three months ended March 31, 2019.$10,525.   

 

Total net assets acquired as of March 8, 2019, arewere all part of the Company’s only operating segment.segment at that time.  Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach.

11


The Company believes that the acquisition of Paradigm, a spine focused business, offers the potential for substantial strategic and financial benefits. The transaction further advances the Company’s strategic transformation focused on reducing complexity, driving operational excellence and accelerating growth.  The Company believes the acquisition will enhance stockholder value through, among other things, enabling the Company to capitalize on the following strategic advantages and opportunities:

Paradigm will strengthen the Company’s spine portfolio with the addition of the coflex® Interlaminar Stabilization® device. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression.

Paradigm will strengthen the Company’s spine portfolio with the addition of the coflex® Interlaminar Stabilization® device. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression.

Coflex allows the Company to provide surgeons who treat patients with moderate to severe LSS with a PMA-approved device supported by more than 12 years of clinical data and with expanding coverage from payors.

Coflex allows the Company to provide surgeons who treat patients with moderate to severe LSS with a PMA-approved device supported by more than 12 years of clinical data.

These potential benefits resulted in the Company paying a premium for Paradigm resulting in the preliminary recognition of $211,631$135,589 of goodwill assigned to the Company’s only operating segment and reporting unit.unit at the time of the Paradigm acquisition.

The amount of Paradigm’s revenues and net income since the March 8, 2019, acquisition date, included in the Company’s Condensed Consolidated Statement of Comprehensive Loss for the six months ended June 30, 2019, excluding acquisition and integration related costs of approximately $10,910, are $12,096 and $490, respectively.

13


The following unaudited pro forma information shows the results of the Company’sParadigm’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2018,2019, (in thousands, except per share data)thousands):

 

For the Six Months Ended

 

For the Six

Months Ended

 

June 30,

 

June 30,

 

2019

 

 

2018

 

2019

 

Revenues

$

19,074

 

 

$

21,252

 

$

18,900

 

Net loss applicable to common shares

 

(10,406

)

 

 

(19,169

)

 

(14,397

)

Net loss applicable to common shares excluding acquistion and integration costs

 

(1,219

)

 

 

(19,169

)

 

 

 

 

 

 

 

 

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.  The pro forma net loss was adjusted to exclude $10,910 of acquisition and integration related costs net of tax of $1,723 incurred during the six months ended June 30, 2019.

7.

Acquisition of Zyga Technology, Inc.

On January 4, 2018, the Company acquired Zyga Technology, Inc. (“Zyga”), a leading spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21,000 in consideration paid at closing (consisting of borrowings of $18,000 on the Company’s revolving credit facility and $3,000 cash on hand), $1,000 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to $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) Income.

The Company has accounted for the acquisition of Zyga under ASC 805, Business Combinations.  Zyga’s results of operations are included in the consolidated financial statements beginning after January 4, 2018, the acquisition date.

The purchase price was financed as follows:

 

(In thousands)

 

Cash proceeds from revolving credit facility

$

18,000

 

Cash from RTI Surgical

 

3,000

 

Total purchase price

$

21,000

 

12


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.

 

(In thousands)

 

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.  Fair values are based on management’s estimates and assumptions including variations of the income approach, the cost approach 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.

The Company believes that the acquisition of Zyga has offered and continues to offer the potential 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 Company’s operations as though the acquisition had occurred as of the beginning of the prior comparable period, January 1, 2017, (in thousands, except per share data):

 

For the Six Months Ended

 

 

June 30,

 

 

2018

 

 

2017

 

Revenues

$

2,439

 

 

$

2,364

 

Net loss applicable to common shares

 

(1,053

)

 

 

(2,192

)

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. These amounts exclude costs incurred which are directly attributable to the acquisition, and which do not have a continuing impact on the combined companies’ operating results.

8.

Stock-Based Compensation

The Company’s policy is to generally grant stock options at an exercise price equal to 100% of the market value of a share of common stock at closing on the date of the grant.  The Company’s stock options generally have five to ten-year contractual terms and vest over a one to five-year period from the date of grant.  The Company’s general policy is to grant restricted stock awards at a fair value equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Company’s restricted stock awards generally vest over one to three-year periods.

2018 Incentive Compensation Plan – On April 30, 2018, the Company’s stockholders approved and adopted the 2018 Incentive Compensation Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive and nonqualified stock options and restricted stock

13


to key employees, including officers and directors of the Company and consultants and advisors. The 2018 Plan allows for up to 5,726,035 shares of common stock to be issued with respect to awards granted.

Stock Options

As of June 30, 2019,2020, there was $1,792$2,252 of total unrecognized stock-based compensation related to nonvestedunvested stock options. The expense related to these stock options is expected to be recognized over a weighted-average period of 2.253.34 years.

The following tabletables summarizes information about stock options outstanding, exercisable and available for grant as of June 30, 2019:2020:

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Price

 

 

Life (Years)

 

 

Value

 

Outstanding at January 1, 2019

 

4,295,744

 

 

$

3.76

 

 

 

 

 

 

 

 

 

Granted

 

374,224

 

 

 

4.71

 

 

 

 

 

 

 

 

 

Exercised

 

(118,500

)

 

 

3.34

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

(65,304

)

 

 

4.08

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2019

 

4,486,164

 

 

$

3.84

 

 

 

5.73

 

 

$

2,467

 

Vested or expected to vest at June 30, 2019

 

4,192,575

 

 

$

3.80

 

 

 

5.50

 

 

$

2,442

 

Exercisable at June 30, 2019

 

2,499,185

 

 

$

3.65

 

 

 

3.65

 

 

$

1,738

 

Available for grant at June 30, 2019

 

4,234,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

Shares

 

 

Price

 

 

Life (Years)

 

 

Value

 

Outstanding at January 1, 2020

 

4,536,461

 

 

$

3.75

 

 

 

 

 

 

 

 

 

Granted

 

755,866

 

 

 

4.21

 

 

 

 

 

 

 

 

 

Exercised

 

(5,000

)

 

 

4.02

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

(599,630

)

 

 

4.31

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

4,687,697

 

 

$

3.75

 

 

 

4.77

 

 

$

229

 

Vested or expected to vest at June 30, 2020

 

4,369,996

 

 

$

3.73

 

 

 

4.45

 

 

$

192

 

Exercisable at June 30, 2020

 

1,135,490

 

 

$

3.63

 

 

 

3.03

 

 

$

25

 

Available for grant at June 30, 2020

 

2,738,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value of stock options for which the fair market value of the underlying common stock exceeded the respective stock option exercise price. Estimated forfeitures are based on the Company’s historical forfeiture activity. Compensation expense recognized for all option grants is net of estimated forfeitures and is recognized over the awards’ respective requisite service periods.

14


Other information concerning stock options are as follows:

 

For the Six Months Ended

 

For the Six Months Ended

 

June 30,

 

June 30,

 

2019

 

 

2018

 

2020

 

 

2019

 

Weighted average fair value of stock options granted

$

1.99

 

 

$

2.02

 

$

3.00

 

 

$

1.99

 

Aggregate intrinsic value of stock options exercised

 

161

 

 

 

98

 

 

3

 

 

 

161

 

 

The aggregate intrinsic value of stock options exercised in a period represents the pre-tax cumulative difference, for the stock options exercised during the period, between the fair market value of the underlying common stock and the stock option exercise prices.

Restricted Stock Awards

As of June 30, 2019,2020, there was $3,561$3,857 of total unrecognized stock-based compensation related to unvested restricted stock awards.  That expense is expected to be recognized on a straight-line basis over a weighted-average period of 1.871.62 years. The following table summarizes information about unvested restricted stock awards as of June 30, 2019:2020:

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Average

 

Number of

 

 

Grant Date

 

Number of

 

 

Grant Date

 

Shares

 

 

Fair Value

 

Shares

 

 

Fair Value

 

Unvested at January 1, 2019

 

1,075,215

 

 

$

4.29

 

Unvested at January 1, 2020

 

1,227,858

 

 

$

4.34

 

Granted

 

625,476

 

 

 

4.85

 

 

944,289

 

 

 

4.19

 

Vested

 

(385,185

)

 

 

4.17

 

 

(429,667

)

 

 

4.63

 

Forfeited

 

(9,865

)

 

 

4.43

 

 

(193,686

)

 

 

4.41

 

Unvested at June 30, 2019

 

1,305,641

 

 

$

4.61

 

Unvested at June 30, 2020

 

1,548,794

 

 

$

4.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


Restricted Stock Units

As of June 30, 2019,2020, there was $1,198$583 of total unrecognized stock-based compensation related to unvested restricted stock units.  That expense is expected to be recognized on a straight-line basis over a weighted-average period of 2.501.5 years. The following table summarizes information about unvested restricted stock units as of June 30, 2019:2020:

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Average

 

Number of

 

 

Grant Date

 

Number of

 

 

Grant Date

 

Shares

 

 

Fair Value

 

Shares

 

 

Fair Value

 

Unvested at January 1, 2019

 

 

 

$

 

Unvested at January 1, 2020

 

184,582

 

 

$

7.41

 

Granted

 

226,352

 

 

 

7.41

 

 

 

 

 

 

Vested

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

(9,144

)

 

 

7.41

 

Unvested at June 30, 2019

 

226,352

 

 

$

7.41

 

Unvested at June 30, 2020

 

175,438

 

 

$

7.41

 

 

 

 

 

 

 

 

 

For the three and six months ended June 30, 20192020 and 2018,2019, the Company recognized stock-based compensation as follows:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three Month Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Stock-based compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of processing and distribution

$

36

 

 

$

33

 

 

$

72

 

 

$

66

 

$

36

 

 

$

36

 

 

$

72

 

 

$

72

 

Marketing, general and administrative

 

1,216

 

 

 

1,242

 

 

 

2,328

 

 

 

2,474

 

 

983

 

 

 

1,216

 

 

 

2,242

 

 

 

2,328

 

Research and development

 

15

 

 

 

15

 

 

 

30

 

 

 

30

 

 

15

 

 

 

15

 

 

 

30

 

 

 

30

 

Total

$

1,267

 

 

$

1,290

 

 

$

2,430

 

 

$

2,570

 

$

1,034

 

 

$

1,267

 

 

$

2,344

 

 

$

2,430

 

 

15


9.

Net Income Per Common Share

A reconciliation of the number of shares of common stock used in the calculation of basic and diluted net income per common share is presented below:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Month Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic shares

 

75,144,488

 

 

 

63,405,708

 

 

 

70,409,839

 

 

 

63,400,737

 

 

 

75,814,668

 

 

 

75,144,488

 

 

 

75,995,324

 

 

 

70,409,839

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

823,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

823,707

 

 

 

 

 

 

 

Preferred stock Series A

 

15,152,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,152,761

 

 

 

 

 

 

 

Diluted shares

 

91,120,956

 

 

 

63,405,708

 

 

 

70,409,839

 

 

 

63,400,737

 

 

 

75,814,668

 

 

 

91,120,956

 

 

 

75,995,324

 

 

 

70,409,839

 

 

For the three months ended June 30, 2019 and 2018,2020   approximately 1,537,678 and 1,590,662, respectively,4,819,238 and for the six months ended June 30, 2020 and 2019, approximately 4,838,639 and 2018, approximately 1,429,442, and 1,447,911, respectively, of issued stock options were not included in the computation of diluted net loss per common share because they were anti-dilutive because their exercise price exceeded the market price. For the three months ended June 30, 2019, options to purchase 823,707  shares of common stock were included in the computation of diluted incomeloss per share because dilutive shares are factored into this calculation when net income is reported.

For the three months ended June 30 2018, options to purchase 659,785, , 2020 and for the six months ended June 30, 2020 and 2019 and 2018, options to purchase 808,904 and 618,776, respectively,, 50,000 shares of convertible preferred stock or 15,152,761of converted common stock and accrued but unpaid dividends were anti-dilutive on an as if-converted basis and were not included in the computation of diluted net loss per share because dilutive shares are not factored into this calculation when a net loss is reported.

common share.  For the three months ended June 30, 2019,, 50,000 shares of convertible preferred stock or 15,152,761of converted common stock and accrued but unpaid dividends were dilutive on an as if-converted basis and were included in the computation of diluted net income per common share. For the three months ended June 30, 2018 and for the six months ended June 30, 2019 and 2018, respectively, 50,000 shares of convertible preferred stock and accrued but unpaid dividends were anti-dilutive on an as if-converted basis and were not included in the computation of diluted net loss per common share.

15


10.

Inventories

Inventories by stage of completion are as follows:

 

June 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

2020

 

 

2019

 

Unprocessed tissue, raw materials and supplies

$

25,014

 

 

$

24,211

 

$

29,252

 

 

$

29,552

 

Tissue and work in process

 

30,502

 

 

 

31,796

 

 

35,989

 

 

 

35,740

 

Implantable tissue and finished goods

 

58,585

 

 

 

51,464

 

 

62,549

 

 

 

65,494

 

Purchase price adjustment for finished goods

 

34,250

 

 

 

-

 

Total

 

148,351

 

 

 

107,471

 

 

127,790

 

 

 

130,786

 

Less current portion

 

127,906

 

 

 

107,471

 

 

122,596

 

 

 

124,149

 

Long-term portion

$

20,445

 

 

$

-

 

$

5,194

 

 

$

6,637

 

 

 

 

 

 

 

 

 

For the three months ended June 30, 20192020 and 2018,2019, the Company had inventory write-downs of $1,744$1,430 and $8,224,$1,744, respectively, and for the six months ended June 30, 20192020 and 2018,2019 the Company had inventory write-downs of $3,274$1,947 and $10,865,$3,274, respectively relating primarily to product obsolescence. As of June 30, 2019,2020, the long-term portion of inventory relates to acquired Paradigm inventory which comprises of finished goods and purchase price adjustment of $1,608 and $18,837, respectively, see Note 6.

Included in the three months ended March 31, 2018, are $1,023 of product obsolescence which was due to the rationalization of our international distribution infrastructure.  Included in the three months ended June 30, 2018, was $6,559 of inventory write-off which was due to the suspension of the map3® implant.goods.  

11.

Prepaid and Other Current Assets

Prepaid and Other Current Assets are as follows:

 

June 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

2020

 

 

2019

 

Income tax receivable

$

2,685

 

 

$

3,920

 

$

3,963

 

 

$

2,803

 

Prepaid expenses

 

5,275

 

 

 

4,127

 

 

4,642

 

 

 

1,865

 

Other

 

773

 

 

 

744

 

 

888

 

 

 

2,101

 

$

8,733

 

 

$

8,791

 

$

9,493

 

 

$

6,769

 

 

16


12.

Property, Plant and Equipment

Property, plant and equipment are as follows:

 

June 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

2020

 

 

2019

 

Land

$

2,020

 

 

$

2,020

 

$

2,092

 

 

$

2,005

 

Buildings and improvements

 

58,093

 

 

 

58,093

 

 

57,236

 

 

 

58,208

 

Processing equipment

 

44,624

 

 

 

42,599

 

 

46,304

 

 

 

45,762

 

Surgical instruments

 

25,829

 

 

 

24,070

 

 

848

 

 

 

541

 

Office equipment, furniture and fixtures

 

1,973

 

 

 

1,877

 

 

2,265

 

 

 

1,730

 

Computer equipment and software

 

19,102

 

 

 

18,873

 

 

20,820

 

 

 

20,521

 

Construction in process

 

11,593

 

 

 

8,934

 

 

14,749

 

 

 

11,717

 

 

163,234

 

 

 

156,466

 

 

144,314

 

 

 

140,484

 

Less accumulated depreciation

 

(83,543

)

 

 

(78,512

)

 

(74,183

)

 

 

(70,594

)

$

79,691

 

 

$

77,954

 

$

70,131

 

 

$

69,890

 

 

For the three months ended June 30, 20192020 and 2018,2019, the Company had depreciation expense in connection with property, plant and equipment of $2,800$1,880 and $2,524,$2,800, respectively and for the six months ended months ended June 30, 20192020 and 2018,2019, the Company had depreciation expense in connection with property, plant and equipment of $5,539$3,646 and $5,147,$5,539, respectively. For the three and six months ended June 30, 2018,2020, the Company had $1,797 ofrecorded asset impairment and abandonment charges relatingof $882 and $2,761, respectively related to property, plant and equipment in the suspensionSpine segment. The Spine asset group could not support the newly capitalized carrying amount of the map3® implant.property, plant and equipment, because the Spine asset group has projected negative cash flows over the useful life of the long-lived assets in the asset group. The fair value of property and equipment was measured utilizing an orderly liquidation value of each of the underlying assets.

16


13.

Goodwill

Goodwill acquired duringThe change in the carrying amount of goodwill for the six months ended June 30, 2020, is as follows:

 

June 30,

 

 

December 31,

 

 

2020

 

 

2019

 

Balance at January 1

$

55,384

 

 

$

59,798

 

Goodwill acquired related to Paradigm acquisition

 

 

 

 

135,589

 

Goodwill impairment

 

 

 

 

(140,003

)

Balance at end of period

$

55,384

 

 

$

55,384

 

On March 8, 2019, includeswe acquired Paradigm for a purchase price of approximately $232,907 and recorded goodwill of approximately $135,589.  The goodwill arising from the Paradigm acquisition was specifically allocated to the Spine reporting unit. For the impairment test performed in 2019, it was concluded the fair value of goodwill is substantially in excess of our carrying value. For the Spine reporting unit test for the year ended December 31, 2019, it was concluded the carrying value was in excess of the Paradigm purchase price overfair value of goodwill and we recorded an impairment charge of all the sum ofgoodwill in the amounts assigned to assets acquired less liabilities assumed.Spine reporting unit totaling $140,003.

 

June 30,

 

 

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

 

211,631

 

 

 

 

Balance at end of period

$

271,429

 

 

$

59,798

 

 

14.

Other Intangible Assets

Other intangible assets are as follows:

 

June 30, 2019

 

 

December 31, 2018

 

 

June 30, 2020

 

 

December 31, 2019

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Patents

$

16,256

 

 

$

4,727

 

 

$

11,529

 

 

$

16,092

 

 

$

4,194

 

 

$

11,898

 

 

$

5,128

 

 

$

2,983

 

 

$

2,145

 

 

$

5,095

 

 

$

2,768

 

 

$

2,327

 

Acquired licensing rights

 

7,528

 

 

 

1,902

 

 

 

5,626

 

 

 

11,852

 

 

 

6,468

 

 

 

5,384

 

 

 

2,522

 

 

 

157

 

 

 

2,365

 

 

 

1,413

 

 

 

64

 

 

 

1,349

 

Marketing and procurement and other intangible assets

 

20,205

 

 

 

12,091

 

 

 

8,114

 

 

 

20,356

 

 

 

11,279

 

 

 

9,077

 

 

 

16,509

 

 

 

10,405

 

 

 

6,104

 

 

 

16,488

 

 

 

9,672

 

 

 

6,816

 

Total

$

43,989

 

 

$

18,720

 

 

$

25,269

 

 

$

48,300

 

 

$

21,941

 

 

$

26,359

 

 

$

24,159

 

 

$

13,545

 

 

$

10,614

 

 

$

22,996

 

 

$

12,504

 

 

$

10,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


For the three months ended June 30, 20192020 and 2018,2019, the Company had amortization expense of other intangible assets of $568 and $995, and $960, respectively, and for the six months ended June 30, 20192020 and 2018,2019, the Company had amortization expense of other intangible assets of $1,041 and $1,952, and $1,921, respectively.  For the three months ended June 30, 2018, the Company had $2,718 of asset impairment and abandonment charges related to the suspension of the map3® implant.respectively.

At June 30, 2019,2020, management’s estimates of future amortization expense for the next five years are as follows:

 

Amortization

 

 

Amortization

 

Expense

 

 

Expense

 

2019 (remaining)

$

2,100

 

2020

 

4,100

 

2020 (remaining)

 

 

1,150

 

2021

 

4,100

 

 

 

2,300

 

2022

 

4,100

 

 

 

2,300

 

2023

 

1,800

 

 

 

700

 

2024

 

1,800

 

 

 

700

 

2025

 

 

700

 

 

15.

Fair Value Information

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for classification and disclosure of fair value measurements as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Embedded derivatives identified within the Ares incremental term loan entered into, assessed and adjusted to their estimated fair value during the second quarter of 2020. Fair value is measured as of the debt issuance date using Level 3 inputs. For the issuance, the derivative level 3 fair value was measured based on a probability-weighted discounted cash flow approach. Unobservable inputs included the probability of a shareholder approval (unobservable), a recovery scenario should shareholder approval not occur (unobservable), and an estimated discount rate based on market data of comparable debt (observable).

Long-lived assets, including property and equipment subject to amortization were impaired and written down to their estimated fair values during the first quarter of 2020. Fair value is measured as of the impairment date using Level 3 inputs. For the 2020 impairments, the long-lived asset level 3 fair value was measured base on orderly liquidation value for the Property, plant and equipment. Unobservable inputs for the orderly liquidation value included replacement costs (unobservable), physical deterioration estimates (unobservable) and market sales data for comparable assets and unobservable inputs for the income approach included forecasted cash flows generated from use of the intangible assets (unobservable).

The following table summarizes impairments of long-lived assets and the related post impairment fair values of the corresponding assets for the three and six months ended June 30, 2020.

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2020

 

 

 

Impairment

 

 

Fair Value

 

 

Impairment

 

 

Fair Value

 

Property, plant and equipment - net

 

 

882

 

 

 

803

 

 

 

2,761

 

 

 

803

 

 

 

$

882

 

 

$

803

 

 

$

2,761

 

 

$

803

 

18


16.

Accrued Expenses

Accrued expenses are as follows:

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Accrued compensation

$

6,175

 

 

$

8,678

 

 

$

5,283

 

 

$

5,435

 

Accrued severance and restructuring costs

 

758

 

 

 

931

 

 

 

604

 

 

 

136

 

Accrued executive transition costs

 

 

 

 

43

 

Accrued distributor commissions

 

3,825

 

 

 

3,907

 

 

 

4,274

 

 

 

4,569

 

Accrued donor recovery fees

 

4,692

 

 

 

4,088

 

 

 

4,191

 

 

 

8,921

 

Accrued leases

 

 

1,001

 

 

 

1,159

 

Accrued transactions and integration expenses

 

 

4,934

 

 

 

2,555

 

Other

 

9,218

 

 

 

7,036

 

 

 

9,633

 

 

 

10,562

 

$

24,668

 

 

$

24,683

 

 

$

29,920

 

 

$

33,337

 

 

17


16.17.

Short and Long-Term Obligations

Short and long-term obligations are as follows:

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

 

2020

 

 

2019

 

Ares Term loan

$

101,473

 

 

$

 

 

$

127,710

 

 

$

104,406

 

JPM facility

 

65,000

 

 

 

50,000

 

JPM Facility

 

 

64,096

 

 

 

71,000

 

Derivative Liability

 

 

23,020

 

 

 

-

 

Less unamortized debt issuance costs

 

(1,392

)

 

 

(927

)

 

 

(2,686

)

 

 

(1,229

)

Total

 

165,081

 

 

 

49,073

 

 

 

212,140

 

 

 

174,177

 

Less current portion

 

 

 

 

 

 

 

212,140

 

 

 

174,177

 

Long-term portion

$

165,081

 

 

$

49,073

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

  

On June 5, 2018, the Company, along with its wholly-owned subsidiary, Pioneer Surgical, entered into athat certain Credit Agreement (the “2018 Credit Agreement”), as borrowers, with JP MorganJPMorgan Chase Bank, N.A. (“JPM”), as lender (together with the various financial institutions as in the future may become parties thereto, the “JPM LendersLenders”) and as administrative agent for the JPM Lenders. The 2018 Credit Agreement provides for a revolving credit facility in the aggregate principal amount of up to $100,000 (the “JPM Facility”) (subsequently reduced to $75,000, and later increased to $80,000, in each case, as described below). The Company and Pioneer Surgical will be able to, at their option, and subject to customary conditions and JPM Lender approval, request an increase to the JPM Facility in an amount not to exceed $50,000.$50,000, subject to customary conditions and the approval of JPM and the JPM Lenders providing such increased amount.

The JPM Facility is guaranteed by the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of the Company and Pioneer Surgical; (ii) substantially all of the assets of each of the Company’s domestic subsidiaries; and (iii) 65% of the stock of the Company’s foreign subsidiaries.

The initial borrowings made underCompany may elect to apply either the 2018 Credit AgreementCBFR or Eurodollar rate to any borrowing.  The CBFR loans 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”).the Adjusted LIBO Rate. The Company may elect to convert the interest rate for the initial borrowingsEurodollars Loans to a rate per annum equal to the adjusted LIBOLIBOR Rate (“Eurodollar Loans”) plus an adjustable margin of up to 2.00% (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 iswas subject to adjustment after the end of each fiscal quarter, based upon the Company’s average quarterly availability.availability (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The maturity date of the JPM Facility is June 5, 2023.2023 (subsequently modified by the Fourth Amendment to the 2018 Credit Agreement (as defined below)). The Company may make optional prepayments on the JPM Facility without penalty. The Company paid certain customary closing costs and bank fees upon entering into the 2018 Credit Agreement.

19


The Company is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting the Company’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. The Company is required to maintain a minimum fixed charge coverage ratio of at least 1.00:1.00 (the “JPM Required Minimum Fixed Charge Coverage Ratio”) on each JPM Calculation Date (as defined below) during either of the following periods (each, a “JPM Covenant Testing Period”): (i) a period beginning on a date that a default has occurred and is continuing under the loan documents entered into by the Company in conjunction with the 2018 Credit Agreement through the first date on which no default has occurred and is continuing; or (ii) a period beginning on a date that availability under the JPM Facility is less than the specified covenant testing threshold and continuing until availability under the JPM Facility is greater than or equal to the specified covenant testing threshold for thirty (30) consecutive days. The JPM Required Minimum Fixed Charge Coverage Ratio is measured on the last day of each calendar month during the JPM Covenant Testing Period (each a “JPM Calculation Date”), and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each JPM Calculation Date. The amounts owed under the 2018 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.

First Amendment to Credit Agreement and Joinder Agreement

On March 8, 2019, the Company entered into a First Amendment to Credit Agreement and Joinder Agreement dated as of March 8, 2019 (the “2019 First Amendment”), among the Company, Legacy RTI, as a borrower, Pioneer Surgical, as a borrower, the other loan parties thereto as guarantors, JP Morgan Chase Bank, N.A., as lender (together with the various financial institutions as in the future may become parties thereto) and as administrative agent for the JPM Lenders. The 2019 First Amendment amended the 2018 Credit Agreement by: (i) reducing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $100,000 to $75,000; (ii) joining the Company and Paradigm, and its domestic subsidiaries as guarantors andas 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.

18


Second Amendment to Credit Agreement

The Company entered into a Second Amendment to Credit Agreement dated as of December 9, 2019 (the “2019 Second Amendment”). The 2019 Second Amendment amended the 2018 Credit Agreement by increasing the aggregate revolving commitments available to Legacy RTI and Pioneer Surgical from $75,000 to $80,000.

Third Amendment to Credit Agreement and Joinder Agreement

On April 9, 2020, Legacy RTI entered into a Consent and Third Amendment to Credit Agreement and Joinder Agreement (the “Third Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties and the JPM Lenders.  The Third Amendment to the 2018 Credit Agreement amended the 2018 Credit Agreement by: (i) extending the deadline for delivery of certain annual audited financial statements of the Company from March 30, 2020 to April 30, 2020, (ii) modifying certain interest rates contained therein to contain a 1.00% floor, (iii) requiring the Company and each other Loan Party to close all of its deposit accounts and securities accounts at Wells Fargo Bank, N.A. or any affiliates thereof on or before June 19, 2020, and (iv) making certain other changes to the 2018 Credit Agreement consistent with the foregoing.

Fourth Amendment to Credit Agreement and Joinder Agreement

On April 27, 2020, Legacy RTI entered into a Fourth Amendment to Credit Agreement (the “Fourth Amendment to the 2018 Credit Agreement”), by and among the JPM Loan Parties, JPM and the JPM Lenders.  The Fourth Amendment to the 2018 Credit Agreement amends the 2018 Agreement to: (i) provide for a $8,000 block on availability under the 2018 Credit Agreement until the earlier of: (a) the date upon which at least $25,000 of the Second Amendment Incremental Term Loan Commitments (as defined below) have been funded to Legacy RTI in accordance with the 2019 Credit Agreement and evidence of such funding, in form and substance satisfactory to JPM, shall have been received by JPM.; and (b) the date upon which (1) no default or event of default exists under the 2018 Credit Agreement; and (2) Ares notifies Legacy RTI that, for any reason, Second Amendment Incremental Term Loan Commitments have been terminated in accordance with the terms of the 2019 Credit Agreement and evidence of such termination, in form and substance satisfactory to JPMorgan Chase Bank, N.A., shall have been delivered to JPM; (ii) amend the applicable rate with respect to any loan to 2.75% per annum; and (iii) amend the maturity date to the earlier to occur of: (a) June 5, 2023, or any earlier date on which the commitments are reduced to zero or otherwise terminated pursuant to the terms of the 2018 Credit Agreement; and (b) the date that is 30 days prior to the maturity date of the Second Amendment Incremental Term Loan Commitments (as defined below), as the same may be extended from time to time pursuant to the terms of the 2019 Credit Agreement and such extension is agreed to by the JPM Lenders.

At June 30, 2019,2020, the interest rate forapplicable to CBFR loans and Eurodollars under the JPM Facility was 4.19%3.75%. As of June 30, 2019,2020, there was $65,000$64,096 outstanding on the JPM Facility and total remaining available credit on the JPM Facility was $10,000.$7,404. The Company’s ability to access the JPM Facility is subject to and can be limited by the Company’s compliance with the Company’s financial and other covenants. The Company was in compliance with the financial covenants related to the JPM Facility as of June 30, 2019.

20


Second Lien Credit Agreement and Term Loan

On March 8, 2019, Legacy RTI entered into a Second Lien Credit Agreement dated as of March 8, 2019 (the “2019 Credit Agreement”), among Legacy RTI, as a borrower, the other loan parties thereto as guarantors (together with Legacy RTI, the “Ares Loan Parties”), Ares Capital Corporation (“Ares”), as lender (together with the various financial institutions as in the future may become parties thereto, the “Ares Lenders”) and as administrative agent for the Ares Lenders. The 2019 Credit Agreement provides for a term loan in the principal amount of up to $100,000 (the “Ares Term Loan”) (subsequently increased to $130,000 as described below). The Ares Term Loan was advanced in a single borrowing on March 8, 2019.2019 (other than any increase thereto as described below).

The Ares Term Loan is guaranteed by the Company and each of the Company’s domestic subsidiaries and is secured by: (i) substantially all of the assets of Legacy RTI; (ii) substantially all of the assets of the Company; (iii) substantially all of the assets of the Company’s domestic subsidiaries; and (iv) 65% of the stock of the Company’s foreign subsidiaries.

First Amendment to Second Lien Credit Agreement

On March 3, 2020, the Company entered into a First Amendment to Second Lien Credit Agreement, dated March 3, 2020 (the “2020 First Amendment”), by and among the Ares Loan Parties and the Ares Lenders.  The 2020 First Amendment amended the 2019 Credit Agreement: (a) amending the definition of “EBITDA” contained therein; (b) modifying the Leverage Ratio covenant contained therein; and (c) making certain other changes to the 2019 Credit Agreement consistent with the foregoing.  These amendments will allow the Company to, among other things, support the investment being made to separate the OEM and Spine businesses in anticipation of the sale of the Company’s OEM business.

Second Amendment to Second Lien Credit Agreement

On April 27, 2020, the Company entered into a Second Amendment to Second Lien Credit Agreement (the “Second Amendment to the 2019 Credit Agreement”), by and among the Ares Loan Parties and the Ares Lenders.  The Second Amendment to the 2019 Credit Agreement amended the 2019 Credit Agreement to: (i) establish an incremental term loan commitment; (ii) provide for certain incremental term loans in an aggregate principal amount not to exceed $30,000 (the “Second Amendment Incremental Loan Commitments”); (iii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13,500 be available on a delayed-draw basis at any time after the effective date of the Ares Amendment and on or prior to August 31, 2020, subject to certain conditions; iv) increase the Base Rate applicable margin with respect to all Term Loans (other than the Second Amendment Incremental Term Loans) to 12.5% effective on September 1, 2020; and (v)make certain other changes to the 2019 Credit Agreement consistent with the foregoing.  Pursuant to the terms of the Second Amendment to the 2019 Credit Agreement, Legacy RTI agreed pay to Ares, for the ratable benefit of each incremental term lender, a fee in an amount equal to 5.0% of the principal amount of the incremental term loan commitments provided by such lender on the effective date of the Ares Amendment.  The maturity of the loans advanced under the Second Amendment Incremental Term Commitments (the “Second Amendment Incremental Term Loans”) have a maturity date of April 27, 2021.  The Second Amendment Incremental Term Loans must be repaid in their entirety, at which time a takeout fee ranging from $11,250 to $25,500 shall be due and payable (the “Takeout Fee”).  The Takeout Fee is inclusive of all interest accruing due and payable with respect to the Second Amendment Incremental Term Loans.  The interest rate on the Second Amendment Incremental Term Loans is 12.50% and, commencing on September 1, 2020 and on the first day of each of the next four calendar months thereafter, the interest in respect of the Second Amendment Incremental Term Loans shall increase on each such date, on a cumulative basis, by an additional 1.00% per annum (such that, after the fifth such increase, the Base Rate with respect to the Second Amendment Incremental Term Loans shall equal 17.50% per annum).

The Ares Term Loan will bear interest at a rate per annum equal to, at the option of Legacy RTI: (i) the monthly Base Rate plus an adjustable margin of up to 7.50% (the “Base Rate”); or (ii) the LIBOR plus an adjustable margin of up to 8.50% (the “Ares Eurodollar Rate”) (as the Base Rate and the Ares Eurodollar Rate were subsequently modified as described below). Subject to customary notices, Legacy RTI may elect to convert the Ares Term Loan from Base Rate to Ares Eurodollar Rate or from Ares Eurodollar Rate to Base Rate. The applicable margin is subject to adjustment after the end of each fiscal quarter, based upon the Ares Loan Parties’ total net leverage ratio.Leverage Ratio (as subsequently modified as described below). At any time during the period commencing on March 8, 2019 and ending on March 8, 2021, if the Ares Loan Parties’ total net leverage ratioLeverage Ratio is greater than 4.50:1.00, Legacy RTI shall have the option (the “PIK Option”) to elect to pay 50% of the interest that will accrue in the subsequent quarterly period in kind by capitalizing it and adding such amount to the principal balance of the Ares Term Loan. If Legacy RTI exercises the PIK Option, the adjustable margin applicable to the Ares Term Loan shall be increased by 0.75%.

The maturity date of the Ares Term Loan is December 5, 2023. Legacy RTI may make optional prepayments on the Ares Term Loan, provided that any such optional prepayments made on or prior to March 8, 2022, shall be subject to a make whole premium or a prepayment price, as the case may be. Legacy RTI is required to make mandatory prepayments of the Ares Term Loan based on excess cash flow and the Ares Loan Parties’ total net leverage ratio,Leverage Ratio, upon the incurrence of certain indebtedness not otherwise permitted under the 2019 Credit Agreement, upon consummation of certain dispositions, and upon the receipt of certain proceeds of casualty events. Legacy RTI was required to pay certain customary closing costs and bank fees upon entering into the 2019 Credit Agreement.

21


Legacy RTI is subject to certain affirmative and negative covenants, including (but not limited to), covenants limiting Legacy RTI’s ability to: incur certain additional indebtedness; create certain liens; enter into sale and leaseback transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to another person. During any 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 “AresJPM Covenant Testing Period”)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 “AresJPM Calculation Date”),Date, and is calculated using the minimum fixed charge coverage ratio for the twelve (12) consecutive months ending on each AresJPM Calculation Date. The Ares Loan Parties are required to maintain an initial total net leverage ratioLeverage Ratio of 9.00:1.00, which ratio steps down each fiscal quarter of Legacy RTI resulting in a requirement that the Ares Loan Parties maintain a total net leverage ratio of 3.50:1.00 for the fiscal quarter ending June 30, 2021 (as subsequently modified as described below), and each fiscal quarter ending thereafter.

The amounts owed under the 2019 Credit Agreement may be accelerated upon the occurrence of certain events of default customary for facilities for similarly rated borrowers.

At June 30, 2019,2020, the interest rate for the Ares Term Loan was 11.16%9.75%. The Company was in compliance with the financial covenants related to the Ares Term Loan as of June 30, 2019.

For the six months ended June 30, 2020 and 2019, and 2018, interest expense associated with the amortization of debt issuance costs was $361283 and $423,$361, respectively. Included in the six months ended June 30, 2019, was $219 of accelerated amortization of debt issuance costs associated with the modification of the 2018 Credit Agreement.  For the six months ended June 30, 2019, the Company incurred total debt issuance cost of $826.

19As of June 30, 2020, the Company had approximately $2,229 of cash and cash equivalents and $7,404 of availability under the 2018 Credit Agreement. 

The 2019 Credit Agreement contains a debt to EBITDA covenant, which requires the Company to maintain a 5.75:1 Leverage Ratio for each quarter ending in 2020, including the fiscal quarter ended March 31, 2020. The 2019 Credit Agreement provides that the Leverage Ratio reduces to 5.25:1 for the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50:1 for each quarter ending thereafter.  Our Leverage Ratio as of March 31, 2020 is approximately 5.98:1.

On April 9, 2020 and on May 8, 2020, the Company received waivers and consent agreements with respect to certain financial statement delivery requirements extending the due dates for delivering the required financial statements under the credit facilities. Further, Pursuant to two Consent Agreements, dated June 1, 2020, one with respect to the JPM Credit Facility and one for the Ares Term Loan, each of JPM, the JPM Lenders, Ares and the Ares Lenders, respectively, agreed to extend the deadline for the delivery of the fiscal year end 2019 financial statements to June 8, 2020. Further, each of JPM, the JPM Lenders, Ares and the Ares Lenders also agreed to waive the requirement with respect to the going concern qualification.

In connection with any repayment or prepayment of principal of the Second Amendment Incremental Loan Commitments (whether voluntary, mandatory, at maturity, by acceleration or otherwise), the Company is obligated to pay the Takeout Fee to the lender. The maximum potential Takeout Fee of $25.5 million will be recorded as initial debt discount and accrued over the expected life of the Second Amendment Incremental Loan Commitments until maturity using the effective interest method.

The Second Amendment Incremental Loan Commitments also contain a provision that allows the lender to accelerate the maturity of the debt upon the receipt of any proceeds from the incurrence of certain indebtedness, disposition of assets in excess of $2,500,000, or a casualty event. The Company will treat this provision as an embedded derivative feature that requires bifurcation and separate accounting from the debt host pursuant to ASC 815. The initial fair value of the embedded derivative of $10.4 million was recorded as a derivative liability that is presented as additional discount on the Second Amendment Incremental Loan Commitments being amortized over the term of the Second Amendment Incremental Loan Commitments using the effective interest method. The derivative liability will be marked to fair value over the term of the Second Amendment Incremental Loan Commitments at each reporting period. As of June 30, 2020, the value of the derivative liability had increased from $10.4 million to $23 million. The Company recorded the increase in fair value of $12.6 million through Other (expense) income in the Statement of Comprehensive Loss.        

22


17.18.

Other long-term liabilities

Other long-term liabilities are as follows:

 

June 30,

 

 

December 31,

 

June 30,

 

 

December 31,

 

2019

 

 

2018

 

2020

 

 

2019

 

Acquisition contingencies

$

98,372

 

 

$

4,986

 

$

 

 

 

$

1,130

 

Lease obligations

 

1,440

 

 

 

1,547

 

Other

 

2,562

 

 

 

633

 

 

876

 

 

 

470

 

$

100,934

 

 

$

5,619

 

$

2,316

 

 

$

3,147

 

 

Acquisition contingencies represent the Company’s fair value estimate of the Zyga acquisition clinical and revenue milestones of $3,396 and the Company’s preliminary fair value estimate of the Paradigm acquisition revenue earnout contingency of $94,976.$1,130 at December 31, 2019. As of June 30, 2019,2020, there was a $1,590$130 reduction in the contingent liability estimate of the Zyga acquisition revenue earnout, as the probability weighted model has been updated based on the current updated forecast for the performance of the Zyga product portfolioportfolio. The clinical milestone of $1,000 has been reclassified to current as it will be paid in Q2 2021.

18.19.

Income Taxes

The Company expects its deferred tax assets of $19,715, net of the valuation allowance at June 30, 2019 of $3,076, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.

The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction.

The assessment regarding whether a valuation allowance is required or should be adjusted also considersCompany has evaluated all availableevidence, both positive and negative, evidence.  It is difficultand determined that its domestic deferred tax assets are not more likely than not to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company utilizes a rolling three-years of actual results asbe realized. Accordingly, the primary measure of cumulative losses in recent years.

On a rolling three-years, the Company’s consolidated U.S. operations are in a cumulative income position.  However, one U.S. entity is in a three-year cumulative loss position. The Company has established arecorded valuation allowance on its separate state deferred tax assets.allowances in the amount of $62,975 and $51,508 at June 30, 2020 and December 31, 2019, respectively. In making this determination, numerous factors were considered including the cumulative recent loss position in the US.

The Company’s foreign operations are in a three-year cumulative loss position.  Future taxable income exclusive of reversing temporary differences and carryforwards is one source of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards.  Beginning in 2017, the Company began a restructuring plan, which was finalized in 2018. The efforts under this plan have led the Company to achieve operational improvements and a reduction in complexities which has contributed to current year and projected future earnings within its foreign subsidiary.  The Company considers the current yearremoval of the going concern evaluation and projected future earningsthe Company’s foreign operations three-year cumulative income position to be objectively verifiable evidence which will allowsupports the CompanyCompany’s ability to fully utilize its foreign deferred tax assets.  The Company believes this positive evidence outweighs the negative evidence of its foreign subsidiaries’ cumulative three-year loss position. As a result, nothe valuation allowances have been established against its foreign subsidiaries’ deferred tax assets.  assets has been released, resulting in a tax benefit of approximately $3.4M.  The Company expects its foreign deferred tax assets of $3,300, net of the valuation allowance at June 30, 2020 of $ 62,975, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted by the United States Congress. As a result of the enactment of the CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and resulted in the Company recognizing a benefit of approximately $3.5 million of related to a tax receivable. Our effective tax rate was 7.9 percent and 10.8 percent for the quarter and six months ended June 30, 2020, respectively.

The Company will continue to regularly assesseffective tax rate is impacted both for quarter and year-to-date by valuation allowances in the realizabilityU.S., which reduce the tax benefit associated with pretax losses.  The impact of our deferred tax assets. Changesthe U.S valuation allowances is offset in historical earnings performancepart by the CARES Act and future earnings projections, among other factors, may cause the Company to adjust itsforeign valuation allowance which would impact the Company’s incomerelease benefits referenced above.  The June 30, 2019 effective tax expense in the period the Company determines that these factors have changed.rate was primarily a result of pretax earnings at statutory rates.

19.20.

Preferred Stock

On June 12, 2013, the Company and WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, a leading healthcare-focused private equity firm (“Water Street”), entered into an investment agreement. Pursuant to the terms of the investment agreement, the Company issued $50,000 of convertible preferred equity to Water Street in a private placement which closed on July 16, 2013, with preferred stock issuance costs of $1,290. Before July 16, 2018, theThe preferred stock accrued dividends at a rate of 6% per annum. Dividends that wereTo the extent dividends are not paid in cash in any quarter, the dividends which have accrued on each outstanding share of preferred stock during such three-month period and accumulated.will accumulate until paid in cash or converted to common stock.

On August 1, 2018, the Company and Water Street, a related party, entered into an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of RTI Surgical, Inc. (the “Amended and Restated Certificate of Designation”).  Pursuant to the Amended and Restated Certificate of Designation: (1) dividends on the Series A Preferred Stock will not accrue after July 16, 2018 (in the event of a default by the Company, dividends will begin accruing and will continue to accrue until the default is cured); (2) the Company may not force a redemption of the Series A Preferred Stock prior to July 16, 2020; and (3) the holders of the Series A

20


Preferred Stock may not convert the Series A Preferred Stock into common stock prior to July 16, 2021 (with certain exceptions).  The Company evaluated and concluded on a qualitative basis the amendment qualifies as modification accounting to the preferred shares, which did not result in a change in the valuation of the shares.

23


Preferred stock is as follows:

 

 

Preferred

Stock

Liquidation

 

 

Preferred

Stock

Issuance

 

 

Net

 

 

Value

 

 

Costs

 

 

Total

 

Balance at January 1, 2020

 

$

66,519

 

 

$

(109

)

 

$

66,410

 

Amortization of preferred stock issuance costs

 

 

 

 

 

46

 

 

 

46

 

Balance at March 31, 2020

 

 

66,519

 

 

 

(63

)

 

 

66,456

 

Amortization of preferred stock issuance costs

 

 

 

 

 

46

 

 

 

46

 

Balance at June 30, 2020

 

$

66,519

 

 

$

(17

)

 

$

66,502

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

Stock

Liquidation

 

 

Preferred

Stock

Issuance

 

 

Net

 

 

Preferred

Stock

Liquidation

 

 

Preferred

Stock

Issuance

 

 

Net

 

Value

 

 

Costs

 

 

Total

 

 

Value

 

 

Costs

 

 

Total

 

Balance at January 1, 2019

$

66,519

 

 

$

(293

)

 

$

66,226

 

 

$

66,519

 

 

$

(293

)

 

$

66,226

 

Accrued dividend payable

 

 

 

 

 

 

 

 

Amortization of preferred stock issuance costs

 

 

 

 

 

46

 

 

 

46

 

Balance at March 31, 2019

 

 

66,519

 

 

 

(247

)

 

 

66,272

 

Amortization of preferred stock issuance costs

 

 

 

 

92

 

 

 

92

 

 

 

 

 

 

46

 

 

 

46

 

Balance at June 30, 2019

$

66,519

 

 

$

(201

)

 

$

66,318

 

 

$

66,519

 

 

$

(201

)

 

$

66,318

 

 

20.21.

Severance and Restructuring Costs

The Company recorded severance and restructuring costs related to the reduction of our organizational structure which resulted in $2,280 of expenses for the year ended December 31, 2018. As part of the acquisition of Paradigm in 2019, management implemented a plan for which remaining outstanding balances at December 31, 2019 were fully paid out during the first quarter of 2020. During the second quarter of 2020, management implemented a plan as part of the sale of OEM which resulted in $896$604 of severance expensesand restructuring expense for the six months ended June 30, 20192020 included in acquisitionseverance and integration expensesrestructuring costs within the Condensed Consolidated Statements of Comprehensive Gain (Loss).  The severance plan is the transition of certain executives as a result of the sale of the OEM business and is composed of payroll expense all within the Spine segment, which cumulatively the plan will be $604. The total severance and restructuring costs are expected to be paid in full by the fourth quarter of 2019.2020.  Severance and restructuring payments are made over periods ranging from one month to twelvesix months and are not expected to have a material impact on cash flows of the Company in any quarterly period.    The following table includes a roll-forward of severance and restructuring costs included in accrued expenses, see Note 15.16.

 

Accrued severance and restructuring costs at January 1, 2019

$

931

 

Severance and restructuring costs accrued in 2019

 

896

 

  Subtotal severance and restructuring costs

 

1,827

 

Severance and restructuring related cash payments

 

(1,069

)

Accrued severance and restructuring charges at June 30, 2019

$

758

 

 

 

 

 

Accrued severance and restructuring costs at January 1, 2020

$

136

 

Severance and restructuring costs accrued in 2020

 

604

 

Subtotal severance and restructuring costs

 

740

 

Severance and restructuring related cash payments

 

(136

)

Accrued severance and restructuring charges at June 30, 2020

$

604

 

 

21.

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 the first quarter of 2019. The following table includes a roll-forward of executive transition costs included in accrued expenses, see Note 15.

Accrued executive transition costs at January 1, 2019

$

43

 

Cash payments

 

(43

)

Accrued executive transition costs at June 30, 2019

$

-

 

 

 

 

 

22.

Commitments and Contingencies

Sale of OEM Business –On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments primarily relating to working capital delivered at closing. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.

24


Agreement to Acquire Paradigm– On March 8, 2019, pursuant to the Master Transaction Agreement, the Company acquired Paradigm in a cash and stock transaction valued at up to $300,000, consisting of $150,000 on March 8, 2019, plus potential future milestone payments. Established in 2005, Paradigm’s primary product is the coflex® Interlaminar Stabilization® device, a differentiated and minimally invasive motion preserving stabilization implant that is FDA premarket approved for the treatment of moderate to severe lumbar spinal stenosis in conjunction with decompression.

Under the terms of the agreement, the Company paid $100,000 in cash and issued 10,729,614 shares of the Company’s common stock. The shares of Company common stock issued on March 8, 2019, were valued based on the volume weighted average closing trading price for the five trading days prior to the date of execution of the definitive agreement, representing $50,000 of value.  In addition, the Company may be required to pay up to an additional $150,000 in a combination of cash and Company common stock based on a revenue earnout consideration.  Based on a probability weighted model, the Company estimates a preliminary contingent liability related to the revenue based earnout of $94,976.  The Company has not completed its preliminary purchase price allocation.0.

21


Acquisition of Zyga– On January 4, 2018, the Company acquired Zyga, a leading spine-focused medical device company that develops and produces innovative minimally invasive devices to treat underserved conditions of the lumbar spine. Zyga’s primary product is the SImmetry® Sacroiliac Joint Fusion System. Under the terms of the merger agreement dated January 4, 2018, the Company acquired Zyga for $21,000 in consideration paid at closing (consisting of borrowings of $18,000 on its revolving credit facility and $3,000 cash on hand), $1,000 contingent upon the successful achievement of a clinical milestone, and a revenue based earnout consideration of up to an additional $35,000.  Based on a probability weighted model, the Company estimates a contingent liability related to the clinical and revenue milestonesmilestone of $3,396, see Note 17.$1,000, which is within the Accrued expenses line of the Condensed Consolidated Balance Sheets.

Distribution Agreement with Medtronic – On October 12, 2013, the Company entered into a replacement distribution agreement with Medtronic, plc. (“Medtronic”), as amended January 1, 2019, 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 iswill be a non-exclusive distributor except for certain specified implants for which Medtronic iswill be the exclusive distributor.  Medtronic will maintain its exclusivity with respect to these specified implants unless the cumulative fees received by the Companyus from Medtronic for these specified implants decline by a certain amount during any trailing 12-month period.  The initial term of this distribution agreement was to have been through December 31, 2017.  The term automatically renews for successive five-year periods, unless either party provides written notice of its intent not to renew at least one year prior to the expiration of the initial term or the applicable renewal period. Neither party provided notice of non-renewal on or before December 31, 2016, thereby triggering the five-year automatic renewal period upon the expiration of the initial term. The distribution agreement will therefore continue at least through December 31, 2022.

Distribution Agreement with Zimmer Dental Inc. - On September 3, 2010, the Company entered into an exclusive distribution agreement with Zimmer Dental, Inc. (“Zimmer Dental”), a subsidiary of Zimmer, with an effective date of September 30, 2010, as amended from time to time.  The Agreement was assigned to Biomet 3i, LLC (“Biomet”), an affiliate of Zimmer Dental, on January 1, 2016.  The Agreement has an initial term of ten years.  Under the terms of this distribution agreement, the Company agreed to supply sterilized allograft and xenograft implants at an agreed upon transfer price, and Biomet agreed to be the exclusive distributor of the implants for dental and oral applications worldwide (except Ukraine), subject to certain Company obligations under an existing distribution agreement with a third party with respect to certain implants for the dental market.  In consideration for Biomet’s exclusive distribution rights, Biomet agreed to the following: 1) payment to the Company of $13,000 within ten days of the effective date (the “Upfront Payment”); 2) annual exclusivity fees (“Annual Exclusivity Fees”) paid annually as long as Biomet maintains exclusivity for the term of the contract to be paid at the beginning of each calendar year; and 3) annual purchase minimums to maintain exclusivity.  Upon occurrence of an event that materially and adversely affects Biomet’s ability to distribute the implants, Biomet may be entitled to certain refund rights with respect to the then current Annual Exclusivity Fee, where such refund would be in an amount limited by a formula specified in this agreement that is based substantially on the occurrence’s effect on Biomet’s revenues. The Upfront Payment, the Annual Exclusivity Fees and the fees associated with distributions of processed tissue are considered to be a single performance obligation. Accordingly, the Upfront Payment and the Annual Exclusivity Fees are deferred as received and are being recognized as other revenues over the term of this distribution agreement based on the expected contractual annual purchase minimums relative to the total contractual minimum purchase requirements in this distribution agreement.  Additionally, the Company considered the potential impact of this distribution agreement’s contractual refund provisions and does not expect these provisions to impact future expected revenue related to this distribution agreement.

The Company’s aforementioned revenue recognition methods related to the Zimmer distribution agreements do not result in the deferral of revenue less than amounts that would be refundable in the event the agreements were to be terminated in future periods. Additionally, the Company evaluates the appropriateness of the aforementioned revenue recognition methods on an ongoing basis.

23.

Legal Actions

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. TheBased on the information currently available to the Company, believesincluding the availability of coverage under its insurance policies, the Company does not believe that noneany of these claims that were outstanding as of June 30, 2019,2020 will have a material adverse impact on its financial position or results of operations. The Company’s accounting policy is to accrue for legal costs as they are incurred.

25


Coloplast — The Company is presently named as co-defendant along with other companies in a small percentage of the transvaginal surgical mesh (“TSM”) mass tort claims being brought in various state and federal courts. The TSM litigation has as its catalyst various Public Health Notifications issued by the FDA with respect to the placement of certain TSM implants that were the subject of 510k regulatory clearance prior to their distribution. The Company does not process or otherwise manufacture for distribution in the U.S. any implants that were the subject of these FDA Public Health Notifications. The Company denies any allegations against it and intends to continue to vigorously defend itself.

In addition to claims made directly against the Company, Coloplast, a distributor of TSM’s and certain allografts processed and private labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts.  Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege injuries caused by the Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract.  On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”) resulting in dismissal of the case.  Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims:  (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), and (2) tissue plus non-Coloplast

22


synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”).  As of June 30, 2019,2020, there are a cumulative total of 1,1171,137 Indemnified Claims for which the Company Parties are providing defense and indemnification.  The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.

Based on the current information available to the Company, the impact that current or any future TSM litigation may have on the Company cannot be reasonably estimated.

LifeNet — On June 27, 2018, LifeNet Health, Inc. (“LifeNet”) filed a patent infringement lawsuit in the United States District Court for the Middle District of Florida (since moved to the Northern District of Florida) claiming infringement of five of its patents by the Company. The suit requests damages, enhanced damages, reimbursement of costs and expenses, reasonable attorney fees, and an injunction. The asserted patents are now expired. On April 7, 2019, the Court granted the Company’s request to stay the lawsuit pending the U.S. Patent Trial and Appeal Board’s (PTAB) decision expected in the third quarter of 2019, whether to institute review of the patentability of LifeNet’s patents.  On August 12, 2019 the PTAB instituted review of three LifeNet patents, and on September 3 the PTAB instituted review of the remaining two.  Final decisions with respect to the patentability of LifeNet’s patents (which may be appealed by either party) is expected to take place in the second half of 2020.  The Company believescontinues to believe the suit is without merit and will vigorously defend its position. Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.

Securities Class Action—There is currently ongoing stockholder litigation related to the Company’s Investigation (as defined below).  A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain current and former officers of the Company, in the United States District Court for the Northern District of Illinois on March 23, 2020 asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (“Lowry Action”).  The court appointed a shareholder as Lead Plaintiff and set August 16, 2020 as the deadline for the filing of any amended complaint.  Counsel for Lead Plaintiff has filed a motion seeking to extend the deadline for the  filing an amended complaint until August 31, 2020. . Based on the current information available to the Company, the impact that current or any future litigation may have on the Company cannot be reasonably estimated.

Derivative Lawsuits—NaN derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial.  On June 5, 2020, David Summers filed a shareholder derivative lawsuit (“Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste.  Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant).  The 3 derivative lawsuits have been consolidated into the first-filed Summers Action.  No response to any complaint is due until after the Court rules on a leadership structure for plaintiffs’ counsel and either a consolidated amended complaint is filed or the operative complaint is identified. Based on the current information available to the Company the financial or other impact of the Investigation cannot be reasonably determined.

In the future, we may become subject to additional litigation or governmental proceedings or investigations that could result in additional unanticipated legal costs regardless of the outcome of the litigation. If we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs.  Based on the current information available to the Company, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.

The Company’s accounting policy is to accrue for legal costs as they are incurred.

26


24.

Regulatory Actions

DuringSEC Investigation— As previously disclosed in the thirdCompany’s Current Report on Form 8-K filed with the SEC on March 16, 2020, and the Form 10-K filed with the SEC on June 8,2020, the Audit Committee of the Board of Directors, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts.  As a result of the Investigation, the Audit Committee concluded that the Company would restate its previously issued audited financial statements for fiscal years 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2018,2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year.  The Investigation was precipitated by an investigation by the U.S. Securities and Exchange Commission initially related to the periods 2014 through 2016. The SEC investigation is ongoing and the Company decidedis cooperating with the SEC in its investigation. Based on the current information available to stop procurement, manufacturing and distributing its map3® implants effective October 31, 2018. The map3® product has been either sold or destroyed and is off the market. In April 2019, the Company the financial or other impact of the Investigation cannot be reasonably determined.

Environmental Protection Agency—On January 28, 2020, RTI received aan Opportunity to Show Cause letter from the FDA indicating that no furtherUnited States Environmental Protection Agency (“EPA”). The letter alleged potential violations of hazardous waste regulations at the Company’s Alachua, Florida facilities based on a November 20, 2019 inspection conducted by EPA, and offered the Company the opportunity to meet with EPA to explain why EPA should not take any formal enforcement action.  The Company held a virtual meeting with EPA on May 19, 2020 to discuss the corrective actions are necessaryit had taken in response to EPA’s letter.  During subsequent discussions, EPA has indicated that it intends to impose a penalty on the Company related to the allegations in the letter. The Company has recorded a liability for the amount the EPA has communicated they intend to impose on the Company related to the allegations in the letter which is included in accrued expenses in the condensed consolidated balance sheet.  The Company is in negotiations with respect to its previously issued Warning Letter in connection with the map3® product.EPA.

25.

Segment Data

The Company distributes human tissue, bovine and porcine animal tissue, metal and synthetic implants through various distribution channels. The Company operates in one reportable segment composed of four franchises: spine; sports; OEM and international. Discrete financial information is not available for these four franchises. The following table presents revenues from these four franchises for the three and six months ended June 30, 2019 and 2018:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

(In thousands)

 

Revenues:

 

 

Spine

$

26,671

 

 

$

18,934

 

 

$

46,676

 

 

$

38,197

 

Sports

 

14,024

 

 

 

14,190

 

 

 

27,803

 

 

 

27,625

 

OEM

 

32,483

 

 

 

31,170

 

 

 

61,474

 

 

 

61,290

 

International

 

9,129

 

 

 

6,391

 

 

 

16,095

 

 

 

13,463

 

Total revenues

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

The following table presents percentage of total revenues derived from the Company’s largest distributors:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Percent of revenues derived from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zimmer Biomet Holdings, Inc.

 

17

%

 

 

20

%

 

 

19

%

 

 

21

%

Medtronic, PLC

 

7

%

 

 

8

%

 

 

8

%

 

 

8

%

DePuy Synthes

 

3

%

 

 

6

%

 

 

4

%

 

 

5

%

The following table presents property, plant and equipment - net by significant geographic location:

 

June 30,

 

 

December 31,

 

 

2019

 

 

2018

 

Property, plant and equipment - net:

 

 

 

 

 

 

 

Domestic

$

73,580

 

 

$

72,501

 

International

 

6,111

 

 

 

5,453

 

Total

$

79,691

 

 

$

77,954

 


26.

Subsequent Events

The Company evaluated subsequent events as of the issuance date of the condensed consolidated financial statements as defined by FASB ASC 855, Subsequent Events.

Sale of OEM Business

On July 15, 2020, RTI Surgical Holdings, Inc. (the “Company”) the Company announced that it received all of the necessary approvals for the transactions contemplated by the previously disclosed Equity Purchase Agreement, dated as of January 13, 2020 (as amended, the “Purchase Agreement”), by and identified no subsequent eventsbetween the Company and Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement (the “Contemplated Transactions”), the Company’s plans to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” and the ticker symbol of the Company from “RTIX” to “SRGA” shortly after consummation of the Contemplated Transactions and the Company’s leadership transitions.

On July 20, 2020, the Company announced the consummation of the Transactions, the Company’s payment of its outstanding indebtedness, the Company’s planned redemption of all of the outstanding shares of its Series A Convertible Preferred Stock, the Name Change, the Symbol Change and the Company’s previously announced leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as a director and the President and Chief Executive of the Company and Jonathon M. Singer as the Chief Financial and Operating Officer of the Company. 

On July 20, 2020, the Company filed: (i) a Certificate of Amendment of the Certificate of Incorporation with the Secretary of Delaware (the “Certificate of Incorporation Amendment”); and (ii) an Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock (the “A&R Certificate of Designation”) to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” (the “Name Change”). In connection with the Name Change, the Company’s common stock began trading under the new ticker symbol “SRGA;” trading under the new ticker symbol is expected to begin on Thursday, July 23, 2020 (the “Symbol Change”). The new CUSIP number of the Company’s common stock is 86882C 105.

The Name Change and Symbol Change do not affect the rights of the Company’s security holders. The Company’s common stock will continue to be quoted on Nasdaq. Following the Name Change, the stock certificates, which reflect the former name of the Company, will continue to be valid. Any certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.

27


Discontinued Operations

On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that require adjustmentcertain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments. After consideration of initial working capital adjustments, we currently expect to record a pre-tax gain on disposition of the OEM business in the range of $245 million to $260 million during the third quarter of fiscal 2020. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.

Debt Retirement

Effective on July 20, 2020, Surgalign Holdings, Inc. (i) paid in full its $80.0 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018, by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as a borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender and as administrative agent for the JPM Lenders, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100.0 million term loan and $30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of March 8, 2019, by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation, as administrative agent for the other lenders party thereto, as amended and (iv) terminated the 2019 Credit Agreement.

Retirement of Series A Convertible Preferred Stock and Related Events

On July 17, 2020, the Company received a notification from WSHP Biologics Holdings, LLC (“WSHP”) seeking redemption on or disclosurebefore September 14, 2020 of in these condensed consolidated financial statements.all of the outstanding shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Stock”), all of which are held by WSHP. On July 24, 2020 the Company redeemed the Series A Preferred Stock for approximately $67 million, a Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock, and the WSHP representatives on the Company’s Board of Directors, Curtis M. Selquist and Chris Sweeney resigned from the Board of Directors.

24

28


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Relating to Forward Looking Statements

Information contained in this filing contains “forward-looking statements” which can be identified by the use of forward-looking terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “requires,” “hopes,” “assumes” or comparable terminology, or by discussions of strategy. There can be no assurance that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, or in subsequent Quarterly Reports on Form 10-Q (including this one), constitute cautionary statements which identify some of the factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Management Overview

On July 20, 2020, RTI Surgicalcompleted the disposition of the OEM business, and was renamed Surgalign Holdings, Inc.  References in this Form 10-Q to Surgalign or the Company refer to the Company as of June 30, 2020, prior to the disposition of the OEM business, unless otherwise noted or obvious from the context.   In conjunction with the sale of the OEM business the Company repaid and Subsidiaries (definedterminated all outstanding debt held on the books as the “Company” for matters occurring after March 8, 2019)of June 30, 2020.

Surgalign Holdings, Inc. is a global medical technology company advancing the science of spine care, focused on delivering innovative solutions that drive superior clinical and economic outcomes. The company is building off a legacy of high quality and differentiated products, and continues to invest in clinically validated innovation to deliver better surgical implant company that designs, develops, manufactures and distributes biologic, metal and synthetic implants. Our implants are used in orthopedic, spine, sports medicine, general surgery, trauma and other surgical procedures to repair and promote the natural healing of human bone and other human tissuesoutcomes and improve surgical outcomes. We manufacture metal and synthetic implants and process donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using our proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes. We process tissue at our facilities in Alachua, Florida and Neunkirchen, Germany and manufacture metal and synthetic implants in Marquette, Michigan and Greenville, North Carolina, and we have a distribution and research center in Wurmlingen, Germany. We are accredited in the U.S. by the American Association of Tissue Banks and we are a member of AdvaMed. Our implants are distributed directly to hospitalspatient’s lives. Surgalign markets products throughout the U.S.United States and in more than 4050 countries worldwide through an expanding network of top independent distributors. Surgalign, a member of AdvaMed, is headquartered in Deerfield, Illinois, with commercial, innovation and, as of the supportdate of both employeethis filing, has design centers in San Diego, California, and third-party representatives as well as through larger purchasing companies.Wurmlingen, Germany. We were founded in 1997 and are headquartered in Deerfield, Illinois.1997.

Domestic distributions and services accounted for 89%91% of total revenues in the first six months of 2019.2020. Most of our implants are distributed directly to healthcare providers, hospitals and other healthcare facilities and various original equipment manufacturer (“OEM”) relationships.

International distributions and services accounted for 11%9% of total revenues in the first six months of 2019.2020. Our implants are distributed in over 4050 countries through a direct sales force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

We continue to implement a focused strategy to expand our spine and OEM operations and create long-term, profitable growth for the Company. The core components of our strategy are:

Reduce Complexity. We are working to reduce complexity in our organization by divesting non-core assets and investing in core competencies.

Reduce Complexity. We are working to reduce complexity in our organization by divesting non-core assets and investing in core competencies.

Drive Operational Excellence. We are working to optimize material cost and drive operational efficiency to reduce other direct costs by pursuing world class manufacturing.

Drive Operational Excellence. We are working to optimize material cost and drive operational efficiency to reduce other direct costs by pursuing world class manufacturing.

Accelerate Growth. We are investing in innovative, niche high growth product categories leveraging core competency in the spine market; utilizing core technologies to expand OEM relationships and drive organic growth; and building relevant scale in our spinal portfolio to improve importance to the consolidating healthcare market driven by integrated delivery networks and group purchasing organizations.

Accelerate Growth. We are investing in innovative, niche high growth product categories leveraging core competency in the spine market; utilizing core technologies to expand OEM relationships and drive organic growth; and building relevant scale in our spinal portfolio to improve importance to the consolidating healthcare market driven by integrated delivery networks and group purchasing organizations.

In line with our strategy, on March 8, 2019, we acquired Paradigm Spine, LLC (“Paradigm”), a leader in motion preservation and non-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 and $50.0 million of issued securities. In addition to the cash consideration amount and the stock consideration amount, we may be required to make further cash payments or issue additional shares of our common stock to Paradigm in an amount up to $50.0 million of shares of our common stock and an additional $100.0 million of cash and/or our common stock, in each case, if certain revenue targets are achieved between closing and December 31, 2022.

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 shareholders.  

2529


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.

Critical Accounting Policies

ThereSale of OEM Business and Retirement of Debt

On July 15, 2020, RTI Surgical Holdings, Inc. (the “Company”) announced that the Company has received all of the necessary approvals for the transactions contemplated by the previously disclosed Equity Purchase Agreement, dated as of January 13, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd., an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement (the “Contemplated Transactions”), the Company’s plans to change the name of the Company from “RTI Surgical Holdings, Inc.” to “Surgalign Holdings, Inc.” and the ticker symbol of the Company from “RTIX” to “SRGA” shortly after consummation of the Contemplated Transactions and the Company’s leadership transitions.

On July 20, 2020, the Company announced the consummation of the Transactions, the Company’s payment of its outstanding indebtedness, the Company’s planned redemption of all of the outstanding shares of its Series A Convertible Preferred Stock, the Name Change, the Symbol Change and the Company’s previously announced leadership transitions, including, without limitation, the appointment of Stuart F. Simpson as the Chairman of the Board, Terry M. Rich as the President and Chief Executive of the Company and Jonathon M. Singer as the Chief Operating Officer of the Company. 

On July 20, 2020, pursuant to the previously announced Equity Purchase Agreement, dated as of January 13, 2020, as amended by that certain First Amendment to Equity Purchase Agreement dated as of March 6, 2020, that certain Second Amendment to Equity Purchase Agreement, dated as of April 27, 2020 and that certain Third Amendment to Equity Purchase Agreement, dated as of July 8, 2020 (as amended, the “Purchase Agreement”), by and between the Company and Ardi Bidco Ltd. (the “Buyer”), an entity owned and controlled by Montagu Private Equity LLP, and each of the agreements ancillary to the Purchase Agreement, the transactions contemplated by the Purchase Agreement (the “Transactions”) were consummated. As a result of the Transactions, among other things, the Company’s original equipment manufacturing business and the Company’s business related to processing donated human musculoskeletal and other tissue and bovine and porcine animal tissue in producing allograft and xenograft implants using BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes were sold to the Buyer and its affiliates for a purchase price of $440 million of cash, subject to certain adjustments. More specifically, pursuant to the terms of the Purchase Agreement, the Company and its subsidiaries sold to the Buyer and its affiliates all of the issued and outstanding shares of RTI OEM, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “RTI Surgical, Inc.”), RTI Surgical, LLC (which, prior to the Transactions, was converted to a corporation and changed its name to “Pioneer Surgical Technology, Inc.”), Tutogen Medical (United States), Inc. and Tutogen Medical GmbH. The Transactions were previously described in the Proxy Statement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on June 18, 2020.

Effective on July 20, 2020, Surgalign Holdings, Inc. (formerly known as RTI Surgical Holdings, Inc.) (“Surgalign” or the “Company”) (i) paid in full its $80.0 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018 (the “2018 Credit Agreement”), by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as a borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender (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, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid in full its $100.0 million term loan and $30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of March 8, 2019 (the “2019 Credit Agreement”), by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation, as administrative agent for the other lenders party thereto, as amended and (iv) terminated the 2019 Credit Agreement.

On July 17, 2020, the Company received a notification from WSHP seeking redemption on or before September 14, 2020 of all of the outstanding shares of the Series A Preferred Stock,  all of which are held by WSHP. On July 24, 2020 the Company redeemed the Series A Preferred Stock for approximately $67 million, a Certificate of Retirement was filed with the Delaware Secretary of State retiring the Series A Preferred Stock, and the WSHP representatives on the Company’s Board of Directors, Curtis M. Selquist and Chris Sweeney resigned from the Board of Directors.

30


COVID-19

The COVID-19 pandemic has directly and indirectly materially and 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 been no significantimpacted and could continue to impact our business activities, including our product sales, as many of our products are used in connection with elective surgeries. Further, disruptions in the manufacture and/or distribution of our products or in our supply chain may occur as a result of the pandemic or pandemic-related events that result in staffing shortages, production slowdowns, stoppages, or disruptions in delivery systems, any of which could materially and adversely affect our ability to manufacture and/or distribute our products, or to obtain the raw materials and supplies necessary to manufacture and/or distribute our products, in a timely manner, or at all.

In response to the COVID-19 novel coronavirus pandemic and the resulting federal and local guidelines, Surgalign furloughed or reduced the hours of over 500 of its U.S.-based employees, beginning on April 6, 2020. Although our operations are beginning to increase towards normal levels, we continue to have many employees working remotely. Surgalign cannot predict when it will be able to resume normal operations and will continue to carefully monitor the situation. COVID-19 has had an adverse effect on the overall productivity of our workforce, and we may be required to continue to take extraordinary measures to ensure the safety of our employees and those of our business partners. In addition, our employees may be required to take time off for extended periods of time due to illness or as a result of government-imposed changes to daily routines, including school closures. Additionally, these measures are hindering our critical accounting policiesability to recruit, vet and hire personnel for key positions. It is unknown how long these disruptions could continue.

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. We are unable to accurately predict the full impact that the ongoing COVID-19 pandemic will have due to numerous factors that are not within our control, including the duration and severity of the pandemic. Stay-at-home/ shelter-in-place orders, business closures, travel restrictions, supply chain disruptions, employee illness or quarantines, and other extended periods of interruption to our business have resulted and could continue to result in disruptions to our operations, which have had and could continue to have adverse impacts on the growth of our business, have and could continue to cause us to cease or delay operations, and could prevent our customers from those disclosedreceiving shipments or processing payments. Some experts expect a second, more severe phase of the pandemic in our 2018 Annual Report on Form 10-K.the Fall of 2020 and Winter of 2021. Such a severe second phase would result in additional material adverse impacts upon the Company.

31


Results of Operations

Consolidated Financial Results

The following table set forth, in both dollars and as a percentage of revenues, the results of our operations for the three and six months ended June 30, 2020 and 2019, respectively.

 

For the Three Months Ended June 30,

 

 

For the Six Months June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

$

54,225

 

 

 

100.0

%

 

$

81,554

 

 

 

100.0

%

 

$

127,951

 

 

 

100.0

%

 

$

151,575

 

 

 

100.0

%

Costs of processing and distribution

 

31,093

 

 

 

57.3

%

 

 

35,430

 

 

 

43.4

%

 

 

64,366

 

 

 

50.3

%

 

 

67,564

 

 

 

44.6

%

Gross profit

 

23,132

 

 

 

42.7

%

 

 

46,124

 

 

 

56.6

%

 

 

63,585

 

 

 

49.7

%

 

 

84,011

 

 

 

55.4

%

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing, general and administrative

 

37,066

 

 

 

68.4

%

 

 

41,108

 

 

 

50.4

%

 

 

79,719

 

 

 

62.3

%

 

 

73,224

 

 

 

48.3

%

Research and development

 

3,274

 

 

 

6.0

%

 

 

3,868

 

 

 

4.7

%

 

 

7,556

 

 

 

5.9

%

 

 

8,204

 

 

 

5.4

%

Severance and restructuring costs

 

604

 

 

 

1.1

%

 

 

-

 

 

 

0.0

%

 

 

604

 

 

 

0.5

%

 

 

-

 

 

 

0.0

%

Gain on acquisition contingency

 

(130

)

 

 

-0.2

%

 

 

(1,590

)

 

 

-1.9

%

 

 

(130

)

 

 

-0.1

%

 

 

(1,590

)

 

 

-1.0

%

Asset impairment and abandonments

 

882

 

 

 

1.6

%

 

 

-

 

 

 

0.0

%

 

 

2,761

 

 

 

2.2

%

 

 

15

 

 

 

0.0

%

Goodwill impairment

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

Transaction and integration expenses

 

4,923

 

 

 

9.1

%

 

 

1,953

 

 

 

2.4

%

 

 

14,203

 

 

 

11.1

%

 

 

10,910

 

 

 

7.2

%

Total operating expenses

 

46,619

 

 

 

86.0

%

 

 

45,339

 

 

 

55.6

%

 

 

104,713

 

 

 

81.8

%

 

 

90,763

 

 

 

59.9

%

Operating income (loss)

 

(23,487

)

 

 

-43.3

%

 

 

785

 

 

 

1.0

%

 

 

(41,128

)

 

 

-32.1

%

 

 

(6,752

)

 

 

-4.5

%

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,972

)

 

 

-11.0

%

 

 

(3,635

)

 

 

-4.5

%

 

 

(9,537

)

 

 

-7.5

%

 

 

(5,239

)

 

 

-3.5

%

Interest income

 

21

 

 

 

0.0

%

 

 

26

 

 

 

0.0

%

 

 

71

 

 

 

0.1

%

 

 

157

 

 

 

0.1

%

Derivative loss

 

(12,641

)

 

 

-23.3

%

 

 

-

 

 

 

0.0

%

 

 

(12,641

)

 

 

-9.9

%

 

 

-

 

 

 

0.0

%

Foreign exchange loss

 

217

 

 

 

0.4

%

 

 

(19

)

 

 

0.0

%

 

 

(29

)

 

 

0.0

%

 

 

(50

)

 

 

0.0

%

Total other expense - net

 

(18,375

)

 

 

-33.9

%

 

 

(3,628

)

 

 

-4.4

%

 

 

(22,136

)

 

 

-17.3

%

 

 

(5,132

)

 

 

-3.4

%

Loss before income tax benefit (expense)

 

(41,862

)

 

 

-77.2

%

 

 

(2,843

)

 

 

-3.5

%

 

 

(63,264

)

 

 

-49.4

%

 

 

(11,884

)

 

 

-7.8

%

Income tax benefit (expense)

 

3,298

 

 

 

6.1

%

 

 

3,031

 

 

 

3.7

%

 

 

6,837

 

 

 

5.3

%

 

 

2,721

 

 

 

1.8

%

Net loss

 

(38,564

)

 

 

-71.1

%

 

 

188

 

 

 

0.2

%

 

 

(56,427

)

 

 

-44.1

%

 

 

(9,163

)

 

 

-6.0

%

Convertible preferred dividend

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

 

 

-

 

 

 

0.0

%

Net income (loss) applicable to common shares

$

(38,564

)

 

 

-71.1

%

 

$

188

 

 

 

0.2

%

 

$

(56,427

)

 

 

-44.1

%

 

$

(9,163

)

 

 

-6.0

%

The following table reflects revenues for the three and six months ended June 30, 20192020 and 2018,2019, respectively.

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

(In thousands)

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

Spine

$

26,671

 

 

$

18,934

 

 

$

46,676

 

 

$

38,197

 

 

$

20,518

 

 

$

32,747

 

 

$

47,627

 

 

$

57,124

 

Sports

 

14,024

 

 

 

14,190

 

 

 

27,803

 

 

 

27,625

 

OEM

 

32,483

 

 

 

31,170

 

 

 

61,474

 

 

 

61,290

 

 

 

33,707

 

 

 

48,807

 

 

 

80,324

 

 

 

94,451

 

International

 

9,129

 

 

 

6,391

 

 

 

16,095

 

 

 

13,463

 

Total revenues

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

 

32


Three Months Ended June 30, 2019,2020, Compared With Three Months Ended June 30, 20182019

Total Revenues – Our total revenues increased $11.6decreased $27.3 million, or 16.4%33.5%, to $82.3$54.2 million for the three months ended June 30, 2020, compared to $81.6 million for the three months ended June 30, 2019, compareddue to $70.7decreased demand as a result in the reduction of elective surgical procedures related to COVID-19 impacting both our Spine and OEM businesses.

Spine – Revenues from spine implants decreased $12.2 million, or 37.0%, to $20.5 million for the three months ended June 30, 2018, due2020, compared to increased demand from certain OEM distributors, primarily in our dermis based implants and our coflex® Interlaminar Stabilization® implants, acquired through$32.7 million for the acquisition of Paradigm, partially offset by the suspensionthree months ended June 30, 2019. Spine revenues decreased as a result of the map3® implant.impact of COVID-19.

Spine –OEM - Revenues from spine implants increased $7.7OEM decreased $15.1 million, or 40.9%31.2%, to $26.7$33.7 million for the three months ended June 30, 2020, compared to $48.9 million for the three months ended June 30, 2019. OEM revenues decreases entirely as a result of the impact of COVID-19.

Costs of Processing and Distribution – Costs of processing and distribution decreased $4.3 million, or 12.1%, to $31.1 million for the three months ended June 30, 2020, compared to $35.4 million for the three months ended June 30, 2019 compared to $18.9 million for the three months ended June 30, 2018. Spine revenues increased primarily as a result of increased distributions of our legacy spine hardware implants and our coflex® Interlaminar Stabilization® implants, partially offset by the suspension of the map3® implant.

Sports – Revenues from sports allografts decreased $166,000, or 1.2%, to $14.0 million for the three months ended June 30, 2019, compared to $14.2 million for the three months ended June 30, 2018. Sports revenues decreased primarily as a result of lower distributions of our sports tendons and cartilage implants, partially offset by increased distributions of our Cortiva® implant.

OEM - Revenues from OEM increased $1.3 million, or 4.2%, to $32.5 million for the three months ended June 30, 2019, compared to $31.2 million for the three months ended June 30, 2018.  OEM revenues increased primarily due to increased demand from certain OEM distributors, primarily in our dermis based implants.

International – Revenues from international include distributions from our foreign affiliates as well as domestic export revenues.  International revenues increased $2.7 million, or 42.8%, to $9.1 million for the three months ended June 30, 2019, compared to $6.4 million for the three months ended June 30, 2018.  International revenues increased due to the introduction of our coflex® Interlaminar Stabilization® implants.

Costs of Processing and Distribution – Costs of processing and distribution decreased $3.1 million, or 7.6%, to $37.6 million for the three months ended June 30, 2019, compared to $40.6 million for the three months ended June 30, 2018. For the three months ended June 30, 2019 cost of processing and distribution included a $2.9 million charge related to the purchase accounting step-up of Paradigm inventory. For the three months ended June 30, 2018, costs of processing and distribution included an inventory charge of $6.6 million related to the suspension of the map3® implant and a $250,000 charge related to the purchase accounting step-up of Zyga inventory. Adjusted for the impact of purchase accounting step-up, and other inventory charges, cost of processing and distribution increased $0.8decreased $3.3 million or 2.3%9.4%, to $34.6$31.7 million, or 42.1%58.5% of revenue, for the three months ended June 30, 2019,2020, compared to $33.8$35.0 million, or 47.9%42.9% of revenue, for the three months ended June 30, 2018.2019. The increasedecrease in costs of processing and distribution

26


corresponds was primarily due to the increasedecreased revenue distributions and impact of unabsorbed overhead due to reduction of activity in revenue, partially offset by reductionour plants in cost from our strategic initiativeresponse to optimize material cost and drive operational efficiency.COVID-19.

Marketing, General and Administrative Expenses – Marketing, general and administrative expenses increased $9.7decreased $4.0 million, or 33.2%9.7%, to $39.0$37.1 million for the three months ended June 30, 2019, from $29.32020, compared to $41.1 million for the three months ended June 30, 2018. The increase was primarily due to the Paradigm acquisition resulting in incremental headcount and marketing and administrative related expenses.2019. Marketing, general and administrative expenses increased as a percentage of revenues from 41.4%50.4% for the three months ended June 30, 2018,2019, to 47.4%68.4% for the three months ended June 30, 2019.2020. The decrease in marketing, general and administrative costs is driven by a reduction in distribution, marketing and commissions correlating to the reduction in revenue and the furlough of the majority of our sales resources offset by restatement and related costs of $7.8 million for the three months ended June 30, 2020..

Research and Development Expenses – Research and development expenses increased $598,000,decreased $0.6 million or 18.3%15.4%, to $3.3 million from $3.9 million for the three months ended June 30, 2019. Research and development expenses decreased as a percentage of revenues from 4.7% for the three months ended June 30, 2019, from $3.3to 6.0% for the three months ended June 30, 2020.  The decrease in Research and development expenses is due to the furlough of a portion of our research and development team during the current quarter.

Severance and restructuring costs – Severance and restructuring costs were $0.6 million for the three months ended June 30, 2018. The increase2020, which is the result of employee transition in researchrelation to the OEM transaction. There were no severance and development was in support of our strategic initiative to accelerate growth resulting in increased investment in new product development and clinical studies. Research and development expenses increased as a percentage of revenues from 4.6%restructuring costs for the three months ended June 30, 2018, to 4.7%2019.

Gain on acquisition contingency – Gain on acquisition Contingency was $0.1 million for the three months ended June 30, 2019.

Gain on acquisition contingency – Gain on acquisition contingency was2020 compared to $1.6 million for the three months ended June 30, 2019.  The gain on acquisition contingency was the result of an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition. There was no gain on acquisition contingencyfor both periods.

Asset Impairment and Abandonments– Asset impairment and abandonments expenses were $0.9 million for the three months ended June 30, 2018.

Asset impairment2020, which was primarily the result of Spine asset group Property, Plant and abandonments –equipment being impaired. There were no asset impairment and abandonments for the three months ended June 30, 2019, as compared2019.

Transaction and Integration Expenses – Transaction and integration expenses related to $4.5the sale and separation of the OEM business were $4.9 million for the three months ended June 30, 2018 related2020, compared to the suspension$2.0 million of the map3® implant.

Acquisition and Integration Expenses – Acquisition and integration expenses were $2.0 millionParadigm acquisition costs for the three months ended June 30, 2019.  Included in acquisition and integration expenses are business development expenses of $462,000 and severance expense of $500,000. There were no acquisition and integration expenses for the three months ended June 30, 2018.

Total Net Other Expense – Total net other expense, which includes interest expense, amortization of debt discount, interest income, and foreign exchange loss, increased $2.5$14.8 million or 215.2%, to $18.4 million as a result of amortization of debt discount of $12.6 million associated with the Ares incremental term loan and increased borrowings for the three months ended June 30, 2020, from $3.6 million for the three months ended June 30, 2019, from $1.2 million for the three months ended June 30, 2018. The increase in total net other expense is primarily due to higher interest expense as a result of new debt financing due to the purchase of Paradigm.2019.

Income Tax Benefit – Income tax benefit for the three months ended June 30, 2019,2020, was $2.9$3.3 million compared to $2.7$3.0 million for the three months ended June 30, 2018.2019. Our effective tax rate for the three months ended June 30, 2019,2020, was 135.3%6.1% compared to 33.1%106.6% for the three months ended June 30, 2018. Our effective tax rate for2019. For the three months ended June 30, 2019, was primarily impacted by2020, the gain recognized on acquisition contingency andCompany has provided a full valuation allowance against all of the charge related tonet domestic deferred tax assets in the purchase accounting step-upamount of Paradigm inventory.$63 million.

33


Six Months Ended June 30, 2019,2020, Compared With Six Months Ended June 30, 20182019

Total Revenues – Our total revenues increased $11.5decreased $23.6 million, or 8.2%15.6%, to $152.0$128.0 million for the six months ended June 30, 2020, compared to $151.6 million for the six months ended June 30, 2019, compareddue to $140.6decreased demand as a result in the reduction of elective surgical procedures related to COVID-19 impacting both our Spine and OEM businesses.

Spine – Revenues from spine implants decreased $9.5 million, or 16.3%, to $47.6 million for the six months ended June 30, 2018, due2020, compared to increased demand from certain OEM distributors,$57.1 million for the six months ended June 30, 2019. Spine revenues decreased primarily in our dermis based implants and our coflex® Interlaminar Stabilization® implants, acquired through the acquisitionas a result of Paradigm, partially offset by the suspensionas a result of the map3® implant.impact of COVID-19.

Spine –OEM - Revenues from spine implants increased $8.5OEM decreased $14.2 million, or 22.2%15.1%, to $46.7$80.3 million for the six months ended June 30, 2020, compared to $94.5 million for the six months ended June 30, 2019. OEM revenues decreased primarily as a result of the impact of COVID-19.

Costs of Processing and Distribution – Costs of processing and distribution decreased $3.2 million, or 4.6%, to $64.4 million for the six months ended June 30, 2020, compared to $67.6 million for the six months ended June 30, 2019 compared to $38.2 million for the six months ended June 30, 2018. Spine revenues increased primarily as a result of increased distributions of our legacy spine hardware implants and our coflex® Interlaminar Stabilization® implants, partially offset by the suspension of the map3® implant.

Sports – Revenues from sports allografts of $27.8 million for the six months ended June 30, 2019, were comparable to the six months ended June 30, 2018.

OEM - Revenues from OEM of $61.5 million for the six months ended June 30, 2019, were comparable to the six months ended June 30, 2018.  

International – Revenues from international include distributions from our foreign affiliates as well as domestic export revenues.  International revenues increased $2.6 million, or 19.5%, to $16.1 million for the six months ended June 30, 2019, compared to $13.5 million for the six months ended June 30, 2018.  International revenues increased due to the introduction of our coflex® Interlaminar Stabilization® implants.

Costs of Processing and Distribution – Costs of processing and distribution decreased $7.6 million, or 9.8%, to $69.3 million for the six months ended June 30, 2019, compared to $76.9 million for the six months ended June 30, 2018. For the six months ended

27


June 30, 2019 cost of processing and distribution included a $2.9 million charge related to the purchase accounting step-up of Paradigm inventory. For the six months ended June 30, 2018, costs of processing and distribution included an inventory write-off of $6.6 million related to the suspension of the map3® implant; an inventory charge of $1.0 million from the write-off of inventory related to our international restructuring and a $456,000 charge related to the purchase accounting step-up of Zyga inventory. Adjusted for the impact of purchase accounting step-up, and other inventory charges, cost of processing and distribution decreased $2.5$3.6 million or 3.6%5.4%, to $66.4$63.0 million, or 43.6%49.2% of revenue, for the six months ended June 30, 2019,2020, compared to $68.8$66.6 million, or 49.0%43.9% of revenue, for the six months ended June 30, 2018.2019. The decrease in costs of processing and distribution iswas primarily due to thedecreased revenue distributions and impact of unabsorbed overhead due to reduction of activity in cost from our strategic initiativeplants in response to optimize material cost and drive operational efficiency.COVID-19.

Marketing, General and Administrative Expenses – Marketing, general and administrative expenses increased $13.2$6.5 million, or 22.9%8.9%, to $70.9$79.7 million for the six months ended June 30, 2019, from $57.72020, compared to $73.2 million for the six months ended June 30, 2018. The increase was primarily due to increased legal cost related to patent litigation and the Paradigm acquisition resulting in incremental headcount and marketing and administrative related expenses.2019. Marketing, general and administrative expenses increased as a percentage of revenues from 41.0%48.3% for the six months ended June 30, 2018,2019, to 46.6%62.3% for the six months ended June 30, 2019.2020. The increase in marketing, general and administrative costs is primarily due  to restatement and related costs of $11.3 million for the six months ended June 30, 2020 offset by a reduction in distribution, marketing and commissions correlating to the reduction in revenue and the furlough of a majority of our sales resources during the second quarter of 2020.

Research and Development Expenses – Research and development expenses increased $1.5decreased $0.6 million or 22.6%7.9%, to $7.6 million from $8.2 million for the six months ended June 30, 2019, from $6.7 million for the six months ended June 30, 2018. The increase in research and development was in support of our strategic initiative to accelerate growth resulting in increased investment in new product development and clinical studies.2019. Research and development expenses increased as a percentage of revenues from 4.8% for the six months ended June 30, 2018, to 5.4% for the six months ended June 30, 2019.2019, to 5.9% for the six months ended June 30, 2020.  The decrease in Research and development expenses is due to the furlough of a portion of our research and development team during the second quarter of 2020.

Severance and Restructuring Costsrestructuring costs Severance and restructuring costs were $0.6 million for the six months ended June 30, 2020, which is the result of employee transition in relation to the OEM transaction. There were no severance and restructuring costs for the six months ended June 30, 2019, as compared to $884,000 of expenses2019.

Gain on acquisition contingency – Gain on acquisition Contingency was $0.1 million for the six months ended June 30, 2018.

Gain on acquisition contingency – Gain on acquisition contingency was2020 compared to $1.6 million for the six months ended June 30, 2019.  The gain on acquisition contingency was the result of an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition. There was no gain on acquisition contingencyfor both periods.

Asset Impairment and Abandonments– Asset impairment and abandonments expenses were $2.8 million for the six months ended June 30, 2018.

Asset impairment2020, which was primarily the result of Spine asset group Property, Plant and abandonments –equipment being impaired. There were no asset impairment and abandonments for the six months ended June 30, 2019, as compared2019.

Transaction and Integration Expenses – Transaction and integration expenses related to $4.6the sale and separation of the OEM business were $14.2 million for the six months ended June 30, 2018 related2020, compared to the suspension$10.9 million of the map3® implant.

Acquisition and Integration Expenses – Acquisition and integration expenses were $10.9 millionParadigm acquisition costs for the six months ended June 30, 2019. Included in acquisition and integration expenses are business development expenses of $462,000 and severance expense of $896,000. Acquisition and integration expenses for the six months ended June 30, 2018, were $800,000 relating to the purchase of Zyga.

Total Net Other Expense – Total net other expense, which includes interest expense, amortization of debt discount, interest income, and foreign exchange gain,loss, increased $3.2$17.0 million or 166.5%, to $22.1 million as a result of amortization of debt discount of $12.6 million associated with the Ares incremental term loan and increased borrowings for the six months ended June 30, 2020, from $5.1 million for the six months ended June 30, 2019, from $1.9 million for the six months ended June 30, 2018. The increase in total net other expense is primarily due to higher interest expense as a result of new debt financing due to the purchase of Paradigm.2019.

Income Tax Benefit – Income tax benefit for the six months ended June 30, 2019,2020, was $2.5$6.8 million compared to $2.5$2.7 million for the six months ended June 30, 2018.2019. Our effective tax rate for the six months ended June 30, 2019,2020, was 22.7%5.3% compared to 27.6%22.9% for the six months ended June 30, 2018. Our effective tax rate for2019. For the six months ended June 30, 2019,2020, the Company has provided a full valuation allowance against all of the net domestic deferred tax assets in the amount of $63 million. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was primarily impactedenacted by the gain recognized on acquisition contingency, charge related toUnited States Congress. As a result of the purchase accounting step-upenactment of Paradigm inventorythe CARES Act, net operating losses (“NOL’s”) can now be carried back for five years and non-deductible acquisition expenses relating toresulted in the purchaseCompany recognizing approximately $3.5 million of Paradigm.a tax receivable.

34


Non-GAAP Financial Measures

We utilize certain financial measures that are not calculated based on Generally Accepted Accounting Principles (“GAAP”). Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC. We believe that non-GAAP financial measures provide an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors.

28


To supplement our condensed consolidated financial statements presented on a GAAP basis, we disclose non-GAAP net income applicable to common shares and non-GAAP gross profit adjusted for certain amounts.  The calculation of the tax effect on the adjustments between GAAP net loss applicable to common shares and non-GAAP net income applicable to common shares is based upon our estimated annual GAAP tax rate, adjusted to account for items excluded from GAAP net loss applicable to common shares in calculating non-GAAP net income applicable to common shares.  Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures are included in the reconciliations below:

 

Non-GAAP Net Income Applicable to Common Shares, Adjusted:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

2020

 

 

2019

 

 

2020

 

 

2019

 

(In thousands)

 

(In thousands)

 

Net loss applicable to common shares, as reported

$

744

 

 

$

(6,441

)

 

$

(8,343

)

 

$

(8,372

)

$

(38,564

)

 

$

188

 

 

$

(56,427

)

 

$

(9,163

)

Severance and restructuring costs

 

 

 

 

 

 

 

 

 

 

884

 

$

604

 

 

$

-

 

 

$

604

 

 

$

-

 

Gain on acquisition contingency

 

(1,590

)

 

 

 

 

 

(1,590

)

 

 

 

 

(130

)

 

 

(1,590

)

 

 

(130

)

 

 

(1,590

)

Asset impairment and abandonments

 

 

 

 

4,515

 

 

 

 

 

 

4,515

 

 

882

 

 

 

 

 

 

2,761

 

 

 

15

 

Acquisition and integration expenses

 

1,953

 

 

 

 

 

 

10,910

 

 

 

800

 

Transaction and integration expenses

 

4,923

 

 

 

1,953

 

 

 

14,203

 

 

 

10,910

 

Restatement and related expenses

 

7,818

 

 

 

 

 

 

11,254

 

 

 

 

Inventory purchase price adjustment

 

563

 

 

 

1,036

 

 

 

1,441

 

 

 

1,036

 

Inventory write-off

 

 

 

 

6,559

 

 

 

 

 

 

7,582

 

 

 

 

 

 

 

 

48

 

 

 

 

Inventory purchase price adjustment

 

2,936

 

 

 

250

 

 

 

2,936

 

 

 

456

 

Loss on extinguishment of debt

 

 

 

 

309

 

 

 

 

 

 

309

 

Tax effect on adjustments

 

(3,313

)

 

 

(3,161

)

 

 

(2,696

)

 

 

(3,654

)

 

 

 

 

(3,313

)

 

 

 

 

 

(2,696

)

Non-GAAP net income applicable to common

shares, adjusted

$

730

 

 

$

2,031

 

 

$

1,217

 

 

$

2,520

 

Non-GAAP net (loss) income applicable to common shares, adjusted

$

(23,904

)

 

$

(1,726

)

 

$

(26,246

)

 

$

(1,488

)

 

Non-GAAP Gross Profit, Adjusted:

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

(In thousands)

 

 

(In thousands)

 

Revenues

$

82,307

 

 

$

70,685

 

 

$

152,048

 

 

$

140,575

 

 

$

54,225

 

 

$

81,554

 

 

$

127,951

 

 

$

151,575

 

Costs of processing and distribution

 

37,562

 

 

 

40,645

 

 

 

69,299

 

 

 

76,853

 

 

 

31,093

 

 

 

35,430

 

 

 

64,366

 

 

 

67,564

 

Gross profit, as reported

 

44,745

 

 

 

30,040

 

 

 

82,749

 

 

 

63,722

 

 

 

23,132

 

 

 

46,124

 

 

 

63,585

 

 

 

84,011

 

Inventory write-off

 

 

 

 

6,559

 

 

 

 

 

 

7,582

 

 

 

 

 

 

 

 

 

48

 

 

 

 

Inventory purchase price adjustment

 

2,936

 

 

 

250

 

 

 

2,936

 

 

 

456

 

 

 

563

 

 

 

1,036

 

 

 

1,441

 

 

 

1,036

 

Non-GAAP gross profit, adjusted

$

47,681

 

 

$

36,849

 

 

$

85,685

 

 

$

71,760

 

 

$

23,695

 

 

$

47,160

 

 

$

65,074

 

 

$

85,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following are explanations of the adjustments that management excluded as part of the non-GAAP measures for the three and six months ended June 30, 20192020 and 2018.2019. Management removes the amount of these costs including the tax effect on the adjustments from our operating results to supplement a comparison to our past operating performance.

Severance35


2020 Asset impairment and restructuring costsabandonments – These costs relate to asset impairment and abandonments of certain long-term assets within the reductionSpine asset group.

2020 Restatement and related expenses – These costs relate to consulting and legal fees and settlement expenses incurred as a result of our organizational structure, primarily driven by simplification of our international operating infrastructure, specifically our distribution model.the restatement, regulatory and related activities in 2020.

2020 Gain on acquisition contingency – The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition.

Asset impairment2020 Transaction and abandonmentsintegration expensesThisThese costs relate to professional fees associated with the on-going SEC investigation and other matters.

2020 Restatement and related expenses – These costs relate to transaction and separation expenses due the Sale of OEM in 2020.

2020 Inventory purchase price adjustment represents an asset impairment and abandonments related– These costs relate to the suspensionpurchase price effects of acquired Paradigm inventory that was sold during the map3® implant.three and six months ended June 30, 2020.

Acquisition2019 Gain on acquisition contingency – The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Zyga acquisition.

2019 Transaction and integration expenses – These costs relate to acquisition and integration expenses due to the purchase of Paradigm in 2019.

Liquidity and Zyga in 2019 and 2018, respectively.Capital Resources

Inventory write-off – These costs relate to

On April 27, 2020, we entered into an inventory write-off dueamendment to the rationalization2019 Credit Agreement. The amendment amended the 2019 Credit Agreement to: (i) establish an incremental term loan commitment in an aggregate principal amount not to exceed $30 million (the “Second Amendment Incremental Loan Commitments”); and (ii) provide for a portion of the Second Amendment Incremental Loan Commitments up to $13.5 million be available 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.

The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that we will continue in operation one year after the date these financial statements are issued, and we will be able to realize our international distribution infrastructure.

Inventory purchase price adjustment – These costs relate toassets and discharge our liabilities and commitments in the purchase price effectsnormal course of acquired Paradigmbusiness. As of June 30, 2020, we had cash of $2.2 million, a working capital deficiency of $101.7 million and Zyga, respectively, inventory that was sold duringan accumulated deficit of $507.6 million. We had a loss from operations of $41.1 million and a net loss of $56.4 million for the six months ended June 30, 20192020. We have suffered losses from operations in the previous two fiscal years and 2018, respectively.did not generate positive cash flows from operations in fiscal year 2019.  Management is projecting that it will continue to generate losses from operations into the future.  As of July 31, 2020, our cash balance was approximately $123.7 million.

29


Loss on extinguishmentAs the global outbreak of debt – This adjustment represents costs relatingCOVID-19 continues to refinancingrapidly evolve, it could continue to materially and adversely affect our debt.revenues, financial condition, profitability, and cash flows for an indeterminate period of time.

Liquidity and Capital Resources

Our working capital at June 30, 2019, excluding the purchase accounting step-up of Paradigm inventory, increased $12.1 million to $131.7 million from $119.7 million at December 31, 2018, primarily asAs a result of the purchaseCompany not filing its 2019 10-K timely with the Securities and Exchange Commission (“SEC”), the Company is unable to issue securities until they have filed in a timely manner for at least 12 months.  While management does not believe there is any need to raise capital over the near term, the Company is currently exploring strategic alternatives in relation to raising capital under an offering under Rule 144A.

On July 20, 2020, RTI completed the disposition of Paradigm.its OEM business.  Upon the close of the transaction, the Company fully repaid all of its outstanding indebtedness, including its revolving line of credit with JP Morgan Chase Bank and both its term loan and incremental term loan commitment with Ares Capital Corporation. Additionally, the Company redeemed all of the outstanding shares of Series A Convertible Preferred Stock.  Management believes that after payment of taxes related to the transaction that it will have approximately $53 million of available cash. 

36


As discussed in Note 24, the Securities and Exchange Commission (“SEC”) has an active investigation that remains ongoing.  The Company continues to cooperate with the SEC in relation to its investigation. Additionally, as disclosed in Note 23, there is currently ongoing shareholder litigation.  Based on current information available to the Company, the impact associated with SEC investigation and shareholder litigation may have on the Company cannot be reasonably estimated.

Although there is uncertainty relate to the matters noted above, based on current information available, management believes it will have sufficient cash and liquidity, such that it is not probable the Company will be unable to meet its obligations during the next year. As of June 30, 2020, we had cash of $2.2 million, working capital deficiency of $101.7 million and an accumulated deficit of $507.6 million. We acquired Paradigmhad a loss from operations of $41.1 million and a net loss of $56.4 million for $100.0the six months ended June 30, 2020. We have suffered losses from operations in the previous two fiscal years and did not generate positive cash flows from operations in fiscal year 2019.

Effective on July 20, 2020, the Company (i) paid in full its outstanding balance of $76.9 million on the $80.0 million revolving credit facility under that certain Credit Agreement dated as of June 5, 2018 (the “2018 Credit Agreement”), by and among Surgalign Spine Technologies, Inc. (formerly known as RTI Surgical, Inc.), as a borrower, Pioneer Surgical Technology, Inc., our wholly-owned subsidiary, as a borrower, the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender (together with the various financial institutions as in cash considerationthe future may become parties thereto, the “JPM Lenders”) and as administrative agent for the JPM Lenders, as amended, (ii) terminated the 2018 Credit Agreement, (iii) paid at closing consistingin full its outstanding balance of new debt financing$155.3 million on the $100.0 million term loan and $30.0 million incremental term loan commitment under that certain Second Lien Credit Agreement, dated as of $100.0 million.March 8, 2019 (the “2019 Credit Agreement”), by and among Surgalign Spine Technologies, Inc., as borrower, the lenders party thereto from time to time and Ares Capital Corporation, as administrative agent for the other lenders party thereto, as amended and (iv) terminated the 2019 Credit Agreement.

At June 30, 2019,2020, we had 7060 days of revenues outstanding in trade accounts receivable, an increasea decrease of 76 days compared to December 31, 2018.2019. The increasedecrease is primarily driven by the longer period receivables remain outstanding for contracts with customers where inventory is exclusively built with no alternative use to us, and where revenue is recognized over time under FASB ASC 606. While we previously recorded revenue and receivables at the time of shipment, they are now recorded over time. The customer, however, is only billed at the time of shipment.

At June 30, 2019,2020, excluding the purchase accounting step-up of Paradigm inventory, we had 32033 days of inventory on hand, an increasea decrease of 4110 days compared to December 31, 2018.2019. The increasedecrease in inventory days is primarily due to the acquisition of Paradigm. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months.

We had $4.5 million of cash and cash equivalents at

At June 30, 2019. At June 30, 2019,2020, our foreign subsidiaries held $1.9$2.5 million in cash. We intend to indefinitely reinvest the earnings of our foreign subsidiaries. If we were to repatriate indefinitely reinvested foreign funds, we would not be subject to additional U.S. federal income tax, however, we would be required to accrue and pay any applicable withholding tax and U.S. state income tax liabilities. We do not believe that this policy of indefinitely reinvesting the earnings of our foreign subsidiaries will have a material adverse effect on the business as a whole.

Our short and long-term obligations at June 30, 2019, increased $116.02020, increased $37.9 million to $165.1$212.1 million from $49.1$174.2 million at December 31, 2018.2019. The increase2018 Credit Agreement and the 2019 Credit Agreement contain customary covenants, including, in the case of the 2019 Credit Agreement, a debt to trailing twelve month EBITDA ratio (the “Leverage Ratio”) which, assuming our short and long-term obligations was primarily dueremain constant, progressively requires the Company to increased borrowingachieve higher earnings before interest, depreciation, taxes, and amortization to financeoutstanding debt ratio.  

The 2019 Credit Agreement contains a debt to EBITDA covenant, which requires the Paradigm acquisition.Company to maintain a 5.75:1 Leverage Ratio for each quarter ending in 2020, including the fiscal quarter ended March 31, 2020. The 2019 Credit Agreement provides that the Leverage Ratio reduces to 5.25:1 for the quarters ending March 31, 2021 and June 30, 2021, with a final reduction to 3.50:1 for each quarter ending thereafter. With the termination of both credit agreements the financial covenant s for June 30, 2020 were no longer required.

On March 8, 2019,

To maintain an adequate amount of available liquidity and execute on our current business plan, we acquired Paradigm, as discussed above under “Management Overview.”intend to utilize cash flow from the sale if the OEM business to fund operations and business expenses

As of June 30 2019, we believe that our working capital, together with our borrowing ability under the JPM Facility, will be adequate to fund our ongoing operations for the next twelve months.

As of June 30, 20192020, we have no material off-balance sheet arrangements.  

37


Certain Commitments.

Our long-term debt obligations and availability of credit as of June 30, 20192020 are as follows:

 

Outstanding

 

 

Available

 

 

Outstanding

 

 

Available

 

Balance

 

 

Credit

 

 

Balance

 

 

Credit

 

(In thousands)

 

 

(In thousands)

 

Ares Term loan

$

101,473

 

 

 

 

 

 

$

127,710

 

 

 

 

 

JPM facility

 

65,000

 

 

$

10,000

 

 

 

64,096

 

 

$

7,404

 

Derivative Liability

 

 

23,020

 

 

 

 

 

Less unamortized debt issuance costs

 

(1,392

)

 

 

 

 

 

 

(2,686

)

 

 

 

 

Total

$

165,081

 

 

 

 

 

 

$

212,140

 

 

 

 

 

 

The following table provides a summary of our long-term debt obligations, operating lease obligations and other significant obligations as of June 30, 2019.2020.

 

Contractual Obligations Due by Period

 

Contractual Obligations Due by Period

 

Total

 

 

Less than 1 Year

 

 

1-3 Years

 

 

4-5 Years

 

 

More than 5 Years

 

Total

 

 

Less than 1

Year

 

 

1-3 Years

 

 

4-5 Years

 

 

More than 5

Years

 

(In thousands)

 

(In thousands)

 

Long-term debt obligations

$

165,081

 

 

$

 

 

$

 

 

$

165,081

 

 

$

 

$

212,140

 

 

$

212,140

 

 

$

 

 

$

-

 

 

$

 

Operating lease obligations

 

4,071

 

 

 

879

 

 

 

1,933

 

 

 

384

 

 

 

875

 

 

2,777

 

 

 

666

 

 

 

1,076

 

 

 

319

 

 

 

716

 

Purchase obligations (1)

 

17,998

 

 

 

17,998

 

 

 

 

 

 

 

 

 

 

 

15,874

 

 

 

15,874

 

 

 

 

 

 

 

 

 

 

Total

$

187,150

 

 

$

18,877

 

 

$

1,933

 

 

$

165,465

 

 

$

875

 

$

230,791

 

 

$

228,680

 

 

$

1,076

 

 

$

319

 

 

$

716

 

 

(1)

These amounts consist of contractual obligations for capital expenditures and open purchase orders.

3038


Item 3.

Quantitative and QualitativeQualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities.  We are exposed to interest rate risk in the United States and Germany. Changes in interest rates affect interest income earned on cash and cash equivalents and interest expense on revolving credit arrangements. We have not entered into derivative transactions related to cash and cash equivalents or debt. Our borrowings under our the Ares Term Loan and JPM Facility expose us to market risk related to changes in interest rates. As of June 30, 2019,2020, our outstanding floating rate indebtedness totaled $165.1$175.7 million. The primary base interest rate is LIBOR. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis100-basis point increase in the interest rate would decrease net income and cash flow by approximately $1.3$1.4 million. Other outstanding debt consists of fixed rate instruments. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2019.2020. However, we can give no assurance that interest rates will not significantly change in the future.

The value of the U.S. dollar compared to the Euro affects our financial results. Changes in exchange rates may positively or negatively affect revenues, gross margins, operating expenses and net income. Our international operations currently transact business primarily in the Euro. Assets and liabilities of foreign subsidiaries are translated at the period end exchange rate while revenues and expenses are translated at the average exchange rate for the period. Intercompany transactions are translated from the Euro to the U.S. dollar. Based on June 30, 20192020 outstanding intercompany balances, a 1% change in currency rates would have had a de-minimis impact on our results of operations. We do not expect changes in exchange rates to have a material adverse effect on our income or our cash flows in 2019.2020. However, we can give no assurance that exchange rates will not significantly change in the future.

Item 4.

Controls and Procedures

As

Evaluation of the end of the period covered by this report, an evaluation was performed on the effectiveness of the designDisclosure Controls and operation of our disclosure controls and procedures under the supervision andProcedures

Our management, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, pursuant to Rules 13a-15(b) or 15d-15(b)has evaluated the effectiveness of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosureour disclosure controls and procedures include(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2020, due to the existence of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and other procedures were not effective to provide reasonable assurance that are designed to ensure thatthe information required to be disclosed by the Company in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief

Material Weaknesses in Internal Control Over Financial Officer concluded that the design and operationReporting

A material weakness is a deficiency, or combination of our disclosure controls and procedures were effective as of the end of the period covered by this report.

We implemented ASU 2016-02 as of January 1, 2019. As a result, we made the following significant modifications todeficiencies, in internal control over financial reporting, including changes to accounting policies and procedures and documentation practices:

Updatedsuch that there is a reasonable possibility that a material misstatement of our policies and procedures related to accounting for lease assets and liabilities and related income and expense

Modified our contract review controls

Added controls for reevaluating our significant assumptions and judgmentsannual or interim financial statements will not be prevented or detected on a quarterlytimely basis.

Added

As previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, we identified material weaknesses in the control environment, risk assessment, control activities, monitoring activities, information and communication components of internal control as we did not appropriately design controls in response to address required disclosures regarding leases, includingthe risk of misstatement due to changes in our significant assumptions and judgments usedbusiness environment. The material weaknesses resulted in applying ASC 842.

Other thanmisstatements that were corrected in the items described above, thererestatement included in our Annual Report on Form 10-K for the year ended December 31, 2019. The material weaknesses have not been anyremediated as of June 30, 2020.

Additionally, the material weaknesses described above could result in a misstatement of the aforementioned account balances or disclosures that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Efforts to Address Material Weakness

Our management, with oversight from our Audit Committee, continues to take action on the remediation plan more fully described under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  This plan includes enhancing the overall internal control environment, the addition of experienced internal resources and/or third-party advisors and the implementation of additional controls and procedures to strengthen our internal controls over financial reporting.  While the remediation plan has been developed, and action has been taken on resolution of required activities within it, there are still a significant number of steps to be taken to enable management to complete the remediation.  Accordingly, we concluded that the material weaknesses had not yet been remediated as of June 30, 2020.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the threesix months ended June 30, 2019,2020, that have materially affected, or that we believe are reasonably likely to materially affect, our internal control over financial reporting.

We are in the process of integrating Paradigm into our overall internal control over financial reporting processes.

3139


PART II. OTHEROTHER INFORMATION

Item 1.

SEC and related Audit Committee Investigation

As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2020, the Audit Committee of the Board, with the assistance of independent legal and forensic accounting advisors, conducted an internal investigation of matters relating to the Company’s revenue recognition practices for certain contractual arrangements, primarily with OEM customers, including the accounting treatment, financial reporting and internal controls related to such arrangements (the “Investigation”). The Investigation also examined transactions to understand the practices related to manual journal entries for accrual and reserve accounts. 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.

The Audit Committee completed its Investigation in the second quarter of 2020.  On April 7, 2020, the Audit Committee of the Board concluded that the Company would restate its previously issued audited financial statements for fiscal years 2018, 2017 and 2016, selected financial data for fiscal years 2015 and 2014, the unaudited financial statements for the quarterly periods within these years commencing with the first quarter of 2016, as well as the unaudited financial statements for the quarterly periods within the 2019 fiscal year. The Company is,filed the restated financial statements on June 8, 2020.

Based on the results of the Investigation, the Company 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 timecertain 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 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 time, involvedgenerate additional revenue and resulted in litigation relatingshipments being pulled from a future quarter into an earlier quarter. In addition, the Company concluded that in July 2017 an adjustment was improperly made to claims arising out of its operationsa product return provision in the ordinary courseDirect Division. The revenue for those shipments was 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 concluded that in the periods from 2015 through the fourth quarter of business. The2018, certain adjustments were incorrectly or erroneously made via manual journal entries to accrual/reserve accounts, including a July 2017 adjustment to a product return provision in the Direct Division, among others. Accordingly, the Company believes that none of these claims that were outstanding as of June 30, 2019, will have a material adverse impact onrestated its financial positionstatements to correct these adjustments.

There is currently ongoing stockholder litigation related to the Company’s Investigation.  A class action complaint was filed by Patricia Lowry, a purported shareholder of the Company, against the Company, and certain current and former officers of the Company, in the United States District Court for the Northern District of Illinois on March 23, 2020 asserting claims under Sections 10(b) and 20(a) the Securities Exchange Act of 1934 (the “Exchange Act”) and demanding a jury trial (“Lowry Action”).  In the Lowry Action, another purported shareholder of the Company has filed a motion seeking to be appointed as Lead Plaintiff and for the court to appoint her counsel as Lead Counsel.  The court has not yet ruled on that motion.

In the future, we may become subject to additional litigation or resultsgovernmental proceedings or investigations that could result in additional unanticipated legal costs regardless of operations.the outcome of the litigation. If we are not successful in any such litigation, we may be required to pay substantial damages or settlement costs.  Based on the current information available to the Company, the impact that current or any future stockholder litigation may have on the Company cannot be reasonably estimated.

Three derivative lawsuits have also been filed on behalf of the Company, naming it as a nominal defendant, and demanding a jury trial.  On June 5, 2020, David Summers filed a shareholder derivative lawsuit (“Summers Action”) against certain current and former directors and officers of the Company (as well as the Company as a nominal defendant), in the United States District Court for the Northern District of Illinois asserting statutory claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as common law claims for breach of fiduciary duty, unjust enrichment and corporate waste.  Thereafter, two similar shareholder derivative lawsuits asserting many of the same claims were filed in the same court against the same current and former directors and officers of the Company (as well as the Company as a nominal defendant).  The three derivative lawsuits have been consolidated into the first-filed Summers Action.  No response to any complaint is due until after the parties file a Joint Status Report and Plaintiffs’ counsel advise how they intend to proceed with the prosecution of the consolidated derivative action.

For a further description, we refer you to Part I, Item 1, Note 23 entitled “Legal Actions” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of material legal proceedings.

40


Item 1A.

Risk Factors

There has been no material change in our risk factors as previously disclosed in Part I, Item 1.A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission on March 5, 2019, although certain risk factors with respect to the ability to close the Paradigm acquisition are no longer applicable.June 8, 2020.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to our repurchases of our common stock during the six months ended June 30, 2019.2020.

 

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

 

 

-

 

 

$

-

 

 

 

 

 

 

 

Total

 

 

36,769

 

 

$

4.63

 

 

 

 

 

 

 

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, 2020 to January 31, 2020

 

 

7,215

 

 

$

2.69

 

 

 

 

 

 

 

February 1, 2020 to February 28, 2020

 

 

3,208

 

 

$

4.05

 

 

 

 

 

 

 

March 1, 2020 to March 31, 2020

 

 

38,950

 

 

$

3.89

 

 

 

 

 

 

 

April 1, 2020 to April 30, 2020

 

 

8,125

 

 

$

1.86

 

 

 

 

 

 

 

May 1, 2020 to May 31, 2020

 

 

7,513

 

 

$

2.67

 

 

 

 

 

 

 

June 1, 2020 to June 30, 2020

 

 

2,791

 

 

$

3.89

 

 

 

 

 

 

 

Total

 

 

67,802

 

 

$

3.39

 

 

 

 

 

 

 

 

(1)

The purchases include amounts that are attributable to shares surrendered to us by employees to satisfy, in connection with the vesting of restricted stock awards, their tax withholdings obligations.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.In connection with the closing of the sale of the OEM business, Olivier Visa and John Varela resigned from the Company effective July 20, 2020.  Their resignation was not as a result of any disagreement with the Company regarding any operations, policies or practice.  

3241


Item 6.

Exhibits

 

2.1(1)  2.1*

 

Master TransactionSecond Amendment to Equity Purchase Agreement, dated as of November 1, 2018,April 27, 2020, by and among RTI Surgical, Inc., PS Spine Holdco, LLC, Bears Holding Sub, Inc.,between the Company and Bears Merger Sub, Inc.Ardi Bidco Ltd.(1)

 

 

 

3.1(1)  2.2*

 

Third Amendment to Equity Purchase Agreement, dated July  8, 2020, by and between the Company and Ardi Bidco Ltd.(2)

  3.1

Amended and Restated Certificate of Incorporation of the Company, effective as of March 8, 2019. (3)

 

 

 

3.2(1)  3.2

 

Certificate of Amendment to Certificate of Incorporation of the Company, effective as of July 20, 2020. (4)

  3.3

Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of the Company, effective as of March 8, 2019.July 20, 2020. (4)

 

 

 

3.3(1)  3.4

 

Certificate of Retirement of Series A Convertible Preferred Stock of the Company, effective as of July 24, 2020.(5)

  3.5

Amended and Restated Bylaws of the Company, effective as of March 8, 2019.July 20, 2020. (4)

10.1

Second Amendment to Equity Commitment Letter, dated as of April  27, 2020, by and among Montagu V LP, Montagu V (Non-US) LP, Montagu V (US) LP, Montagu V (D) LP, Ardi Bidco Ltd. and the Company.(1)

10.2

Second Amendment to Second Lien Credit Agreement, dated April  27, 2020, by and among RTI Surgical, Inc., the other loan parties thereto as guarantors, Ares Capital Corporation, as lender (together with the various financial institutions from time to time party thereto as lenders, the “Lenders”) and as administrative agent for the Lenders. (1)

10.3

Fourth Amendment to Credit Agreement, dated April  27, 2020, by and among RTI Surgical, Inc., the other loan parties thereto as guarantors, JPMorgan Chase Bank, N.A., as lender (together with the various financial institutions from time to time party thereto as lenders, the “Lenders”) and as administrative agent for the Lenders. (1)

10.4

Consultant Agreement, dated July 20, 2020, by and between the Company and Stuart F. Simpson.

10.5

Separation Agreement and General Release, dated July 17, 2020, by and between the Company and Camille Farhat.

10.6

Amended and Restated Employment Agreement, dated June 15, 2020, by and between the Company and Terry M. Rich.

10.7

Stand Alone Restricted Stock Agreement for Terry M. Rich, dated November 29, 2019, by and between the Company and Terry M. Rich.

10.8

Stand Alone Nonqualified Stock Option Agreement for Terry M. Rich, dated November 29, 2019, by and between the Company and Terry M. Rich.

 

 

 

31.1

 

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

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.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

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 schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to furnish supplementally a copy of such omitted schedule to the Securities and Exchange Commission upon request.

(1)

Incorporated by reference to Registrant’s Current Report on Form 8-K filed by the Registrant on April 29, 2020.

(2)

Incorporated by reference to Registrant’s Current Report on Form 8-K filed by the Registrant on July 9, 2020.

(3)

Incorporated by reference to Registrant’s Current Report on Form 8-K12B filed by the Registrant on March 11, 2019.

(4)

Incorporated by reference to Registrant’s Current Report on Form 8-K filed by the Registrant on July 20, 2020.

(5)

Incorporated by reference to Registrant’s Current Report on Form 8-K filed by the Registrant on July 24, 2020.

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SIGNATURESSIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

RTI SURGICALSURGALIGN HOLDINGS, INC. (Registrant)

 

 

 

By:

 

/s/ Camille I. FarhatTerry M. Rich

 

 

Camille I. Farhat

Terry M. Rich

President and Chief Executive Officer

 

 

 

By:

 

/s/ Jonathon M. Singer

 

 

Jonathon M. Singer

Chief Financial and AdministrativeOperating Officer

 

 

 

 

Date: August 5, 201912, 2020

3443