Acquisition | 6. 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”). 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 Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the 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 Transaction (other than shares held by Legacy RTI as treasury shares or by the Company or Merger Sub immediately prior to the 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 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. 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 a contingent liability related to the revenue based earnout of $94,976 utilizing a Monte-Carlo simulation model. 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 f The Company has accounted for the acquisition of Paradigm under Accounting Standards Codification (“ASC”) 805, Business Combinations The purchase price was financed as follows: (In thousands) Cash proceeds from second lien credit agreement $ 100,000 Fair market value of securities issued 60,730 Fair market value of contingent earnout 94,976 Total purchase price $ 255,706 The preliminary valuation of the acquired assets and liabilities is not yet complete, and as such, the Company has not yet finalized its allocation of the purchase price for the acquisition. The table below represents the preliminary allocation of the total consideration to Paradigm’s tangible 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 June 30, 2019 March 31, 2019 Change (In thousands) Cash $ 79 $ 79 $ - Accounts receivable 5,220 5,220 - Inventories 43,084 5,898 37,186 Other current assets 1,693 1,752 (59 ) Property, plant and equipment 379 379 - Current liabilities (6,380 ) (6,169 ) (211 ) Net tangible assets acquired 44,075 7,159 36,916 Goodwill 211,631 248,547 (36,916 ) Total net assets acquired $ 255,706 $ 255,706 $ - As of March 8, 2019, the inventory fair value was composed of current inventory of $19,703 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. Total net assets acquired as of March 8, 2019, 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. The Company believes that the acquisition of Paradigm, a spine focused business, offers the potential for substantial strategic and financial benefits. The transaction further advances the Company’s strategic transformation focused on reducing complexity, driving operational excellence and accelerating growth. The Company believes the acquisition will enhance stockholder value through, among other things, enabling the Company to capitalize on the following strategic advantages and opportunities: • Paradigm will strengthen the Company’s spine portfolio with the addition of the coflex® Interlaminar Stabilization® device. Coflex is a differentiated and minimally invasive motion preserving stabilization implant that is FDA PMA-approved for the treatment of moderate to severe lumbar spinal stenosis (“LSS”) in conjunction with decompression. • Coflex allows the Company to provide surgeons who treat patients with moderate to severe LSS with a PMA-approved device supported by more than 12 years of clinical data and with expanding coverage from payors. These potential benefits resulted in the Company paying a premium for Paradigm resulting in the preliminary recognition of $211,631 of goodwill assigned to the Company’s only operating segment and reporting unit. 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. 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, 2018, (in thousands, except per share data): For the Six Months Ended June 30, 2019 2018 Revenues $ 19,074 $ 21,252 Net loss applicable to common shares (10,406 ) (19,169 ) 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. |