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Table of Contents

 

 

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, 2017

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 0-31271

 

 

RTI Surgical, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   59-3466543

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

11621 Research Circle

Alachua, Florida

  32615
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (386) 418-8888

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

 

 

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 and posted on its corporate Web site, if any, 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 and post 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   ☐  (Do not check if a smaller reporting company)    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 August 4, 2017: 59,509,094

 

 

 


Table of Contents

RTI SURGICAL, INC.

FORM 10-Q For the Quarter Ended June 30, 2017

Index

 

         Page #  

Part I Financial Information

  

Item 1

 

Unaudited Condensed Consolidated Financial Statements

     1–17  

Item 2

 

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

     18–24  

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     25  

Item 4

 

Controls and Procedures

     25  

Part II Other Information

  

Item 1

 

Legal Proceedings

     26  

Item 1A

 

Risk Factors

     26  

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

     26  

Item 3

 

Defaults Upon Senior Securities

     26  

Item 4

 

Mine Safety Disclosures

     26  

Item 5

 

Other Information

     26  

Item 6

 

Exhibits

     26  

Signatures

     28  

EXHIBIT INDEX

     29  


Table of Contents

Part I Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share data)

 

     June 30,
2017
    December 31,
2016
 
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 13,675     $ 13,849  

Accounts receivable - less allowances of $1,787 at June 30, 2017 and $1,728 at December 31, 2016

     39,099       41,488  

Inventories - net

     116,773       119,743  

Prepaid and other current assets

     6,177       5,213  

Assets held for sale

     1,750       —    
  

 

 

   

 

 

 

Total current assets

     177,474       180,293  

Property, plant and equipment - net

     84,379       83,298  

Deferred tax assets - net

     24,868       24,968  

Goodwill

     54,887       54,887  

Other intangible assets - net

     23,995       23,994  

Other assets - net

     991       591  
  

 

 

   

 

 

 

Total assets

   $ 366,594     $ 368,031  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current Liabilities:

    

Accounts payable

   $ 27,745     $ 26,112  

Accrued expenses

     20,950       22,030  

Current portion of deferred revenue

     4,718       4,742  

Current portion of short and long-term obligations

     5,779       6,080  
  

 

 

   

 

 

 

Total current liabilities

     59,192       58,964  

Long-term obligations—less current portion

     74,360       77,267  

Other long-term liabilities

     841       256  

Deferred revenue

     6,176       6,612  
  

 

 

   

 

 

 

Total liabilities

     140,569       143,099  

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

     61,941       60,016  

Stockholders’ equity:

    

Common stock, $.001 par value: 150,000,000 shares authorized; 59,445,223 and 58,433,397 shares issued and outstanding, respectively

     59       58  

Additional paid-in capital

     418,884       417,428  

Accumulated other comprehensive loss

     (6,903     (8,316

Accumulated deficit

     (246,899     (243,338

Less treasury stock, 410,396 and 368,949 shares, respectively, at cost

     (1,057     (916
  

 

 

   

 

 

 

Total stockholders’ equity

     164,084       164,916  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 366,594     $ 368,031  
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss

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

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2017     2016     2017     2016  

Revenues

   $ 72,120     $ 67,620     $ 142,059     $ 134,971  

Costs of processing and distribution

     35,157       33,671       69,317       64,997  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36,963       33,949       72,742       69,974  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Marketing, general and administrative

     29,496       28,402       59,167       55,954  

Research and development

     3,740       4,084       7,428       8,245  

Severance charges

     3,400       711       7,803       711  

Restructuring charges

     —         1,107       —         1,107  

Contested proxy expenses

     —         2,372       —         2,680  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,636       36,676       74,398       68,697  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     327       (2,727     (1,656     1,277  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

        

Interest expense

     (915     (392     (1,734     (753

Interest income

     —         6       —         7  

Foreign exchange (loss) gain

     (75     (38     (55     8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense - net

     (990     (424     (1,789     (738
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax (provision) benefit

     (663     (3,151     (3,445     539  

Income tax (provision) benefit

     (1,026     859       (116     (430
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (1,689     (2,292     (3,561     109  
  

 

 

   

 

 

   

 

 

   

 

 

 

Convertible preferred dividend

     (924     (870     (1,834     (1,728
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common shares

     (2,613     (3,162     (5,395     (1,619
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss:

        

Unrealized foreign currency translation gain (loss)

     1,093       (556     1,413       (94
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (1,520   $ (3,718   $ (3,982   $ (1,713
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share - basic

   $ (0.04   $ (0.05   $ (0.09   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share - diluted

   $ (0.04   $ (0.05   $ (0.09   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - basic

     58,935,786       58,215,477       58,715,791       58,065,185  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - diluted

     58,935,786       58,215,477       58,715,791       58,065,185  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For the Six Months Ended June 30, 2017

(Unaudited, in thousands)

 

     Common
Stock
     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Loss
    Accumulated
Deficit
    Treasury
Stock
    Total  

Balance, December 31, 2016

   $ 58      $ 417,428     $ (8,316   $ (243,338   $ (916   $ 164,916  

Net loss

     —          —         —         (3,561     —         (3,561

Foreign currency translation adjustment

     —          —         1,413       —         —         1,413  

Exercise of common stock options

     1        1,574       —         —         —         1,575  

Stock-based compensation

     —          1,808       —         —         —         1,808  

Purchase of treasury stock

     —          —         —         —         (141     (141

Amortization of preferred stock Series A issuance costs

     —          (92     —         —         —         (92

Preferred stock Series A dividend

     —          (1,834     —         —         —         (1,834
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2017

   $ 59      $ 418,884     $ (6,903   $ (246,899   $ (1,057   $ 164,084  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2017     2016     2017     2016  

Cash flows from operating activities:

        

Net (loss) income

   $ (1,689   $ (2,292   $ (3,561   $ 109  

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

        

Depreciation and amortization expense

     3,561       4,384       7,129       8,694  

Provision for bad debts and product returns

     216       191       560       495  

Provision for inventory write-downs

     1,964       1,425       3,753       2,370  

Amortization of deferred revenue

     (1,186     (1,217     (2,460     (2,434

Deferred income tax provision (benefit)

     524       (532     (561     (119

Stock-based compensation

     974       600       1,808       1,100  

Other

     759       96       873       264  

Change in assets and liabilities:

        

Accounts receivable

     (2,777     4,467       2,128       9,540  

Inventories

     (567     (241     167       (4,572

Accounts payable

     890       1,731       998       4,495  

Accrued expenses

     (1,963     (1,242     (1,384     (8,318

Deferred revenue

     —         —         2,000       2,000  

Other operating assets and liabilities

     330       (584     (837     (415
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,036       6,786       10,613       13,209  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

        

Purchases of property, plant and equipment

     (3,877     (4,766     (7,160     (9,403

Patent and acquired intangible asset costs

     (1,526     (195     (1,845     (1,391
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (5,403     (4,961     (9,005     (10,794
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

        

Proceeds from exercise of common stock options

     1,467       14       1,575       14  

Proceeds from long-term obligations

     2,000       4,000       4,000       7,000  

Net payments from short-term obligations

     —         (600     —         (849

Payments on long-term obligations

     (3,125     (4,166     (7,375     (8,299

Other financing activities

     —         —         (142     (108
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     342       (752     (1,942     (2,242
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     102       (47     160       (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (3,923     1,026       (174     140  

Cash and cash equivalents, beginning of period

     17,598       11,728       13,849       12,614  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 13,675     $ 12,754     $ 13,675     $ 12,754  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental cash flow disclosure:

        

Cash paid for interest

   $ 845     $ 396     $ 2,303     $ 789  

Cash paid for income taxes, net of refunds

     32       138       32       176  

Non-cash acquisition of property, plant and equipment

     566       1,128       879       1,257  

Increase in accrual for dividend payable

     924       870       1,834       1,728  

See notes to unaudited condensed consolidated financial statements.

 

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RTI SURGICAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. Operations and Organization

The Company is a leader in the use of natural tissues, metals and synthetics to produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. The Company processes donated human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue, and bovine and porcine animal tissue in producing allograft and xenograft implants utilizing proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes, and manufactures metal and synthetic implants for distribution to hospitals and surgeons. The Company processes tissue at two operating facilities in Alachua, Florida and one operating facility in Neunkirchen, Germany, and manufactures metal and synthetic implants in Marquette, Michigan and Greenville, North Carolina. The Company distributes its implants and services in all 50 states and in over 45 countries worldwide.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, comprehensive (loss) income 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, 2016.

The condensed consolidated financial statements include the accounts of RTI Surgical, Inc. and its wholly owned subsidiaries, Pioneer Surgical Technology, Inc. (“Pioneer”), Tutogen Medical, Inc. (“TMI”), RTI Surgical, Inc. – Cardiovascular (inactive), Biological Recovery Group, Inc. (inactive) and RTI Services, Inc. (inactive). The condensed consolidated financial statements also include the accounts of RTI Donor Services, Inc. (“RTIDS”), which is a controlled entity.    

3. Recently Issued Accounting Standards

Compensation—Stock Compensation — In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation—Stock Compensation” (Topic 718): Scope of Modification Accounting. The requirement provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. For public business entities, this ASU should be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets — In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets” (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU requires all entities to derecognize a business or nonprofit activity in accordance with Topic 810, and also requires all entities derecognize an equity method investment in accordance with Topic 860. The amendments in this ASU eliminate the scope exceptions, and simplifies GAAP. This ASU is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities may apply the guidance earlier but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

Simplifying the Test for Goodwill Impairment — In January 2017, the FASB issued ASU No. 2017-04,Simplifying the Test for Goodwill Impairment” (Topic 350) (“ASU No. 2017-04”). The amendments in ASU No. 2017-04 are intended to reduce the cost and complexity of the goodwill impairment test by eliminating Step 2 from the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Under the amendments in ASU No. 2017-04, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting

 

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unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in ASU No. 2017-04 are effective for the Company’s annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted ASU No. 2017-04 on January 1, 2017, and it did not have a material impact on the Company’s results of operations, financial position and disclosures.

Compensation – Stock Compensation — In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (Topic 718) (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017.

ASU 2016-09 requires recognition through opening retained earnings of any pre-adoption date net operating loss carryforwards from share-based payments, as well as recognition of all income tax effects from share based-payments in income tax expense.

In addition, under ASU 2016-09 excess tax benefits no longer represent financing activities, but instead represent operating activities in the statement of cash flow. ASU 2016-09 allows companies to recognize excess tax benefits as an operating activity on a prospective or retrospective basis. The Company has decided to recognize this requirement on a prospective basis and has not adjusted prior periods. For the six months ended June 30, 2017, there was no material impact on the Company’s condensed consolidated financial statements.

Simplifying the Measurement of Inventory — In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. Update No. 2015-11 more closely aligns the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by requiring companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated distribution prices of the inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Update No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Update No. 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company adopted ASU 2015-11 effective January 1, 2017. Adoption of ASU 2015-11 had no material impact on the Company’s condensed consolidated financial statements.

Revenue from Contracts with Customers — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. As updated in August 2015, the effective date of ASU 2014-09 will be annual reporting periods beginning after December 15, 2017, using one of two retrospective application methods.

In March and April 2016, the FASB issued two updates to the revenue recognition guidance: ASU 2016-08 “Principal Versus Agent Considerations” (Topic 606) (Reporting Revenue Gross Versus Net), and ASU 2016-10, “Identifying Performance Obligations and Licensing” (Topic 606).

In May 2016, the FASB issued ASU Update No. 2016-12 (“ASU 2016-12”) which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition.

The Company has not determined the impact ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 will have on its condensed consolidated financial statements and footnote disclosures. However, an implementation project team has been identified, and has developed a plan to adopt the ASUs and assess the impact on the Company’s condensed consolidated financial statements and footnote disclosures. Currently, the Company has analyzed its global revenue and categorized its revenue contracts based on distribution channel. Based on this analysis, the Company has identified revenue contracts that it will individually assess. The Company has begun assessing the selected revenue contracts.

 

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4. Stock-Based Compensation

The Company’s policy is to grant stock options at an exercise price equal to 100% of the market value of a share of common stock at closing on the date of the grant. The Company’s stock options generally have ten-year contractual terms and vest

over a one to five-year period from the date of grant. The Company’s 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.

2015 Incentive Compensation Plan – On April 14, 2015, the Company’s stockholders approved and adopted the 2015 Incentive Compensation Plan, (the “2015 Plan”). The 2015 Plan provides for the grant of incentive and nonqualified stock options and restricted stock to key employees, including officers and directors of the Company and consultants and advisors. The 2015 Plan allows for up to 4,656,587 shares of common stock to be issued with respect to awards granted.

Stock Options

As of June 30, 2017, there was $2,140 of total unrecognized stock-based compensation related to nonvested stock options. The expense related to these stock options is expected to be recognized over a weighted-average period of 3.39 years.

Stock options outstanding, exercisable and available for grant at June 30, 2017, are summarized as follows:

 

                   Weighted         
            Weighted      Average         
            Average      Remaining      Aggregate  
     Number of      Exercise      Contractual      Intrinsic  
     Shares      Price      Life (Years)      Value  

Outstanding at January 1, 2017

     5,764,607      $ 4.28        

Granted

     456,038        4.53        

Exercised

     (426,639      3.69        

Forfeited or expired

     (647,661      5.98        
  

 

 

    

 

 

       

Outstanding at June 30, 2017

     5,146,345      $ 4.13        5.63      $ 9,383  
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested or expected to vest at June 30, 2017

     4,891,474      $ 4.12        5.47      $ 8,992  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2017

     3,771,493      $ 4.07        4.63      $ 7,235  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available for grant at June 30, 2017

     5,281,115           
  

 

 

          

The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value of stock options for which the fair market value of the underlying common stock exceeded the respective stock option exercise price.

Other information concerning stock options are as follows:

 

     For the Six Months Ended  
     June 30,  
     2017      2016  

Weighted average fair value of stock options granted

   $ 2.24      $ 1.55  

Aggregate intrinsic value of stock options exercised

     533        6  

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

Restricted Stock Awards

During the first quarter of 2017, the Company granted 62,500 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $3.15 per share and the Company granted 6,331 shares of time-based restricted stock with a weighted-average grant date fair value of $3.70 per share which vest over a one-year period. During the second quarter of 2017, the Company granted 218,000 shares of time-based restricted stock, which vest over a

 

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three-year period, with a weighted-average grant date fair value of $4.60 per share and the Company granted 148,356 shares of time-based restricted stock with a weighted-average grant date fair value of $4.55 per share which vest over a one-year period. As of June 30, 2017, there was $1,876 of total unrecognized stock-based compensation related to time-based and performance-based, nonvested restricted stock. The expense related to these restricted stock awards is expected to be recognized on a straight-line basis over a weighted-average period of 1.52 years.

For the three and six months ended June 30, 2017 and 2016, the Company recognized stock-based compensation as follows:

 

     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  

Stock-based compensation:

           

Costs of processing and distribution

   $ 22      $ 33      $ 45      $ 66  

Marketing, general and administrative

     942        552        1,744        1,004  

Research and development

     10        15        19        30  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 974      $ 600      $ 1,808      $ 1,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Inducement Grant

On January 26, 2017, the Company issued an inducement grant to its President and Chief Executive Officer, Mr. Camille Farhat. This grant was in the form of: (1) a restricted stock award agreement (the “Restricted Stock Agreement #1”); (2) another restricted stock award agreement (the “Restricted Stock Agreement #2”); and (3) a stock option agreement (the “Option Agreement”).

Under the Restricted Stock Agreement #1, the Company granted Mr. Farhat 850,000 shares of restricted common stock. On the first anniversary of the Grant Date, 170,000 shares will vest. The remaining shares will vest on the last day of each calendar quarter at a rate of 42,500 shares per calendar quarter commencing after the first anniversary of the Grant Date and continuing for four years after. Vesting of these shares may accelerate upon the occurrence of either of two performance conditions.

Under the Restricted Stock Agreement #2, the Company granted Mr. Farhat 150,000 shares of restricted common stock. These 150,000 restricted shares will become fully vested on the latest date (the “Purchase Date”) on which the fair market value of the cumulative amount of shares that Mr. Farhat purchases on the open market equals $500,000, so long as the Purchase Date is on or before March 15, 2018. After vesting, the shares will be non-transferable for a period of one year following the Purchase Date. During the second quarter of 2017, Mr. Farhat purchased $572,313 worth of the Company’s shares on the open market. Accordingly, the 150,000 restricted shares of common stock granted to Mr. Farhat pursuant to the Restricted Stock Award #2 became fully vested, effective May 18, 2017.

Under the Option Agreement, the Company granted Mr. Farhat the option to purchase 1,950,000 shares of common stock (the “Stock Options”). The exercise price for the Stock Options is $3.20. The Stock Options will expire on January 26, 2022. The Stock Options will vest based on the Company’s attainment of three average stock price benchmarks. The first 650,000 shares will vest if the Company’s average publicly traded stock price is over $6.00 for a sixty-consecutive calendar day period. The next 650,000 shares will vest if the Company’s average publicly traded stock price is over $7.00 for a sixty-consecutive calendar day period. The final 650,000 shares will vest if the Company’s average publicly traded stock price is over $8.00 for a sixty-consecutive calendar day period. The vesting of the Stock Options is cumulative.

5. 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:

 

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     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  

Basic shares

     58,935,786        58,215,477        58,715,791        58,065,185  

Effect of dilutive securities:

           

Stock options

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares

     58,935,786        58,215,477        58,715,791        58,065,185  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2017 and 2016, approximately 1,350,051 and 4,073,600, respectively, and for the six months ended June 30, 2017 and 2016, approximately 2,422,661 and 4,144,433, respectively, of issued stock options were not included in the computation of diluted net income per common share because they were anti-dilutive because their exercise price exceeded the market price. For the three months ended June 30, 2017 and 2016, options to purchase 1,005,138 and 417,311, respectively, and for the six months ended June 30, 2017 and 2016, options to purchase 687,268 and 347,038, respectively, of common stock were not included in the computation of diluted loss per share because dilutive shares are not factored into this calculation when a net loss is reported.

For the three and six months ended June 30, 2017 and 2016, 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.

6. Inventories

Inventories by stage of completion are as follows:

 

     June 30,
2017
     December 31,
2016
 

Unprocessed tissue, raw materials and supplies

   $ 24,959      $ 31,745  

Tissue and work in process

     42,420        38,552  

Implantable tissue and finished goods

     49,394        49,446  
  

 

 

    

 

 

 
   $ 116,773      $ 119,743  
  

 

 

    

 

 

 

For the three months ended June 30, 2017 and 2016, the Company had inventory write-downs of $1,964 and $1,425, respectively, and for the six months ended June 30, 2017 and 2016, the Company had inventory write-downs of $3,753 and $2,370, respectively, relating primarily to product obsolescence.

7. Property, Plant and Equipment

Property, plant and equipment are as follows:

 

     June 30,
2017
     December 31,
2016
 

Land

   $ 2,378      $ 2,324  

Buildings and improvements

     57,092        59,187  

Processing equipment

     41,843        38,387  

Surgical instruments

     21,573        18,394  

Office equipment, furniture and fixtures

     1,704        1,701  

Computer equipment and software

     18,931        11,852  

Construction in process

     11,124        17,554  
  

 

 

    

 

 

 
     154,645        149,399  

Less accumulated depreciation

     (70,266      (66,101
  

 

 

    

 

 

 
   $ 84,379      $ 83,298  
  

 

 

    

 

 

 

 

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For the three months ended June 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $2,652 and $3,454, respectively, and for the six months ended June 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $5,324 and $6,836, respectively.

Owned property previously used for administrative, distribution and marketing functions with a cost basis of $1,750 are to be disposed of as a result of improving operational efficiencies were included in “Assets held for sale” on the Condensed Consolidated Balance Sheet as of June 30, 2017, are not included in the table above. On July 21, 2017, the Company entered into a sale agreement with a third party for the owned property. The transaction is expected to close in the fourth quarter 2017.

8. Other Intangible Assets

Other intangible assets are as follows:

 

     June 30, 2017      December 31, 2016  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Patents

   $ 11,727      $ 4,565      $ 11,559      $ 4,159  

Acquired licensing rights

     13,685        8,646        12,204        8,302  

Marketing and procurement intangible assets

     20,837        9,043        20,694        8,002  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,249      $ 22,254      $ 44,457      $ 20,463  
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketing and procurement intangible assets include the following: procurement contracts, trademarks, selling and marketing relationships, customer lists and non-compete agreements.

For the three months ended June 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $909 and $930, respectively, and for the six months ended June 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $1,805 and $1,858, respectively. At June 30, 2017, management’s estimates of future amortization expense for the next five years are as follows:

 

     Amortization
Expense
 

2017

   $ 1,700  

2018

     3,400  

2019

     3,400  

2020

     3,400  

2021

     3,400  

2022

     3,300  
  

 

 

 
   $ 18,600  
  

 

 

 

9. Accrued Expenses

Accrued expenses are as follows:

 

     June 30,
2017
     December 31,
2016
 

Accrued compensation

   $ 4,271      $ 4,904  

Accrued severance charges

     4,494        410  

Accrued restructuring charges

     —          95  

Accrued CEO retirement and transition costs

     1,096        2,406  

Accrued distributor commissions

     4,366        4,422  

Accrued donor recovery fees

     3,376        6,350  

Other

     3,347        3,443  
  

 

 

    

 

 

 
   $ 20,950      $ 22,030  
  

 

 

    

 

 

 

The Company accrues for the estimated donor recovery fees due to third party recovery agencies as tissue is received.

 

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10. Short and Long-Term Obligations

Short and long-term obligations are as follows:

 

     June 30,
2017
     December 31,
2016
 

Term loan

   $ 47,139      $ 50,347  

Credit facility

     33,000        33,000  
  

 

 

    

 

 

 

Total

     80,139        83,347  

Less current portion

     (5,779      (6,080
  

 

 

    

 

 

 

Long-term portion

   $ 74,360      $ 77,267  
  

 

 

    

 

 

 

The Company obtained from TD Bank and Regions Bank, a 5-year, $80,000 senior secured facility, which includes a $60,000 term loan and a $20,000 revolving credit facility that matures on July 16, 2018, with a variable interest rate between 100 and 275 basis points in excess of the one month LIBOR rate. On October 15, 2014, the Company entered into a Second Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which amended the loan agreement to remove certain financial covenants. On June 29, 2015, the Company entered into a Third Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased the maximum revolving credit amount from $20,000 to $30,000. On June 29, 2016, the Company entered into a Fourth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased the maximum revolving credit amount from $30,000 to $45,000. On November 7, 2016, the Company entered into a Fifth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which provided for: (i) a decrease in the maximum revolving credit amount from $45,000 to $42,500; (ii) an increase in the Company’s leverage to EBITDA ratio from 2.50 to 1.00 to (A) 3.25 to 1.00 through March 31, 2017 and (B) 3.00 to 1.00 after March 31, 2017 and (iii) certain corresponding amendments. On February 28, 2017, the Company entered into a Sixth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased to 300 basis points the LIBOR Spread applicable when the Company’s financial performance under its Leverage Ratio is greater than 3.0x. At June 30, 2017, the interest rate for the term loan and revolving credit facility is 4.05%. The facility is secured by substantially all the assets of the Company and its subsidiaries and guaranteed by the Company’s domestic subsidiaries, other than RTIDS. As of June 30, 2017, there was $33,000 outstanding on the revolving credit facility. The term loan facility requires aggregate principal payments of $6,000 from September 30, 2017 through June 30, 2018, with a final balloon principal payment of $41,375 on July 2, 2018. The credit agreement also contains various restrictive covenants which limit, among other things, indebtedness and liens, as well as payment of dividends, while requiring a minimum cash balance on hand of $10,000 and certain financial covenant ratios.

The total available credit on the Company’s revolving credit facility at June 30, 2017 was $9,500. The Company’s ability to access its revolving credit 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 its revolving credit facility as of June 30, 2017.

For the three months ended June 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs was $150 and $39, respectively, and for the six months ended June 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs was $262 and $78, respectively.

As of June 30, 2017, contractual maturities of long-term obligations are as follows:

 

     Term Loan      Credit Facility      Total  

2017

   $ 2,873      $ —        $ 2,873  

2018

     44,266        33,000        77,266  
  

 

 

    

 

 

    

 

 

 
   $ 47,139      $ 33,000      $ 80,139  
  

 

 

    

 

 

    

 

 

 

11. Income Taxes

The Company expects its deferred tax assets of $24,868, net of the valuation allowance at June 30, 2017 of $5,899, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.

 

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Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. As such, valuation allowances of $5,899 and $4,916 have been established at June 30, 2017 and December 31, 2016, respectively, against a portion of the deferred tax assets.

U.S. income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries. It is not practicable to estimate the amount of tax that might be payable. The Company’s intention is to indefinitely reinvest earnings of its foreign subsidiaries outside of the U.S.

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 considers all available positive and negative evidence. It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company utilizes a rolling three years of actual results as the primary measure of cumulative losses in recent years.

On a rolling three years, the Company’s U.S. operations are in a cumulative income position. The Company considers this objectively verifiable evidence that its current U.S. operations existing on June 30, 2017, have consistently demonstrated the ability to operate at a profit. The Company has a history of utilizing 100 percent of its U.S. deferred taxes assets before they expire and the forecasts of taxable earnings project a complete realization of all U.S. deferred tax assets before they expire, including under stressed scenarios.

The Company’s German and French operations are in three year cumulative loss positions. As a result, the Company has recorded a full valuation allowance on its German and French subsidiaries’ deferred tax assets.

The Company will continue to regularly assess the realizability of our deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause the Company to adjust its valuation allowance, which would impact the Company’s income tax expense in the period the Company determines that these factors have changed.

The Company is undergoing an examination by the Internal Revenue Service (“IRS”). The IRS examination covers the 2015 tax year.    

12. Preferred Stock

On June 12, 2013, the Company and WSHP Biologics Holdings, LLC, an affiliate of Water Street Healthcare Partners, a leading healthcare-focused private equity firm (“Water Street”), entered into an investment agreement. Pursuant to the terms of the investment agreement, the Company issued $50,000 of convertible preferred equity to Water Street in a private placement which closed on July 16, 2013, with preferred stock issuance costs of $1,290. The preferred stock accrues dividends at a rate of 6% per annum. To the extent dividends are not paid in cash in any quarter, the dividends which have accrued on each outstanding share of preferred stock during such three-month period will accumulate until paid in cash or converted to common stock. Our credit agreement with TD Bank and Regions Bank contains various covenants of financial conditions which, if not met, would restrict the Company from paying dividends.

Preferred stock is as follows:

 

     Preferred Stock
Liquidation Value
     Preferred Stock
Issuance Costs
     Net Total  

Balance at January 1, 2017

   $ 60,676      $ (660    $ 60,016  

Accrued dividend payable

     1,834        —          1,834  

Amortization of preferred stock issuance costs

     —          91        91  
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ 62,510      $ (569    $ 61,941  
  

 

 

    

 

 

    

 

 

 

13. Severance Charges

The Company recorded severance charges to reduce headcount and improve operational efficiencies, which resulted in $7,803 of expenses for the six months ended June 30, 2017. The total severance charges are expected to be paid in full by the first quarter of 2018. Severance payments are made to terminated employees over periods ranging from one month to twelve months

and are not expected to have a material impact on cash flows of the Company in any quarterly period. The following table includes a rollforward of severance charges included in accrued expenses, see Note 9.

 

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Accrued severance charges at January 1, 2017

   $ 410  

Employee separation expenses accrued in 2017

     7,803  
  

 

 

 

Subtotal severance charges

     8,213  

Severance cash payments

     (3,386

Stock based compensation

     (333
  

 

 

 

Accrued severance charges at June 30, 2017

   $ 4,494  
  

 

 

 

14. CEO Retirement and 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 are expected to be paid in full prior to the first quarter of 2019. The following table includes a rollforward of CEO retirement and transition costs included in accrued expenses, see Note 9.

 

Accrued CEO retirement and transition costs at January 1, 2017

   $ 2,406  

Cash payments

     (727

Other long-term liabilities portion

     (583
  

 

 

 

Accrued restructuring charges at June 30, 2017

   $ 1,096  
  

 

 

 

15. Legal Actions

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of these claims that were outstanding as of June 30, 2017, will have a material adverse impact on its financial position or results of operations.

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

In addition to claims made directly against the Company, Coloplast, a distributor of TSM’s and certain allografts processed and private labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts. Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege injuries caused by the Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”) resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), and (2) tissue plus non-Coloplast synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”). As of June 30, 2017, there are a cumulative total of 1,250 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, it is not possible to evaluate and estimate with reasonable certainty the impact that current or any future TSM litigation may have on the Company.

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

 

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16. Regulatory Actions

On September 30, 2014, the Company received a letter from the FDA regarding our map3® cellular allogeneic bone graft. The letter addresses some technical aspects of the processing of the map3® allograft, as well as language included on the Company’s website. The Company has ongoing dialogue with the FDA where comprehensive packages of data have been provided to address the FDA’s comments and clarifying information has been provided regarding the technical components of the implant processing. The Company believes that in both the developing and processing of map3®, the Company has properly considered the relevant regulatory requirements. Additionally, the Company has removed certain information from the Company’s website. The Company is committed to resolving the concerns raised by the FDA. However, it is not possible to predict the specific outcome or timing of a resolution at this time.

17. Segment Data

The Company distributes human tissue, bovine and porcine animal tissue, metal and synthetic implants through various distribution channels. The Company operates in one reportable segment composed of six lines of business. The reporting of the Company’s lines of business is composed primarily of six categories: spine; sports medicine and orthopedics; surgical specialties; cardiothoracic; international; and global commercial. Discrete financial information is not available for these six lines of business. The following table presents revenues from these six categories and other revenues for the three and six months ended June 30, 2017 and 2016, respectively:

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (In Thousands)  

Revenues:

           

Spine

   $ 19,419      $ 17,645      $ 39,757      $ 34,739  

Sports medicine and orthopedics

     12,997        12,562        25,893        25,082  

Surgical specialties

     1,456        802        3,236        1,817  

Cardiothoracic

     3,673        2,905        6,824        5,439  

International

     6,005        5,663        11,662        11,180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal direct

     43,550        39,577        87,372        78,257  

Global commercial

     25,837        24,769        49,418        50,099  

Other revenues

     2,733        3,274        5,269        6,615  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 72,120      $ 67,620      $ 142,059      $ 134,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic revenues

     65,528        61,049        128,835        122,233  

International revenues

     6,592        6,571        13,224        12,738  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 72,120      $ 67,620      $ 142,059      $ 134,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
     2017     2016     2017     2016  

Percent of revenues derived from:

        

Distributor

        

Zimmer Biomet Holdings, Inc.

     14     14     15     15

Medtronic, PLC

     8     7     9     10

International

     9     10     9     9

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

 

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     June 30,
2017
     December 31,
2016
 

Property, plant and equipment—net:

     

Domestic

   $ 78,256      $ 77,596  

International

     6,123        5,702  
  

 

 

    

 

 

 

Total

   $ 84,379      $ 83,298  
  

 

 

    

 

 

 

18. Subsequent Events

The Company evaluated subsequent events as of the issuance date of the condensed consolidated financial statements as defined by FASB ASC 855 Subsequent Events, and identified no subsequent events that require adjustment to, or disclosure of, in these condensed consolidated financial statements, except for on August 3, 2017:

1. The Company completed the sale of substantially all of the assets related to its Cardiothoracic closure business (the “CT Business”) to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (“A&E”). The sale was completed pursuant to an Asset Purchase Agreement between the Company and A&E, dated August 3, 2017 (the “Asset Purchase Agreement”). As a part of the transaction, the Company also entered into a multi-year Contract Manufacturing Agreement with A&E (the “Contract Manufacturing Agreement”). Under the Contract Manufacturing Agreement, the Company agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The total consideration received by the Company under the Asset Purchase Agreement was composed of $54,000 in cash consideration, $3,000 of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any, plus an additional $6,000 in contingent cash consideration (the “Contingent Consideration”). Payment of the Contingent Consideration is subject to two conditions: (1) if the Company obtains certain FDA regulatory clearance, then it will be paid $1,000 of the Contingent Consideration; and (2) if A&E reaches certain revenue milestones, then the Company will be paid $5,000 of the Contingent Consideration.

2. Concurrent with the divestiture, the Company entered into a Third Amended and Restated Loan Agreement, dated as of August 3, 2017 (the “2017 Loan Agreement”), among the Company, TD Bank, N.A. and First Tennessee Bank National Association, as Lenders (together with the various financial institutions as in the future may become parties thereto, the “Lenders”), and TD Bank, N.A., as administrative agent for the Lenders. The 2017 Loan Agreement represents a restructuring of the Company’s former loan agreement with TD Bank, N.A. and another lender under the Second Amended and Restated Loan Agreement dated July 16, 2013 between the Company, TD Bank, N.A. and Regions Bank (as amended, the “2013 Loan Agreement”).

The 2017 Loan Agreement provides for a revolving credit facility (the “Revolving Credit Facility”), in the aggregate principal amount of $42,500. A total of $35,000 currently is outstanding on the Revolving Credit Facility. The 2017 Loan Agreement also contains a term loan facility in the aggregate principal amount of $25,375 (the “Term Loan Facility” and, together with the Revolving Credit Facility the “Facility”). The Company used $22,000 of the proceeds from the sale of the CT Business to partially pay down amounts owed under the 2013 Loan Agreement. The Facility is secured by substantially all the assets of the Company and its domestic subsidiaries and is guaranteed by the Company’s domestic subsidiaries, as well as 65% of the stock of the Company’s foreign subsidiaries.

Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to 3.50%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1,125, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019. The Company may make optional prepayments on the Facility without penalty at the end of any LIBOR interest period.

 

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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, 2016 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

RTI Surgical, Inc. together with its subsidiaries, designs, develops, manufactures and distributes surgical implants for use in a variety of surgical procedures. We are a leader in providing tissue implants as well as metal and synthetic implants for the benefit of surgeons and patients worldwide. We process donated human musculoskeletal and other tissues including bone, cartilage, tendons, ligaments, fascia lata, pericardium, sclera, cornea and dermal tissues, as well as bovine and porcine animal tissues to produce allograft and xenograft implants. We process the majority of our tissue implants using our proprietary BIOCLEANSE®, TUTOPLAST® and CANCELLE® SP sterilization processes. In addition, we manufacture, market and distribute metal and synthetic implants for treatment of spinal and other orthopedic disorders. Our implants are used in the fields of spine, ortho fixation, sports medicine, bone graft substitutes and general orthopedic, surgical specialties, cardiothoracic and dental. We distribute our implants to hospitals and surgeons in the United States and internationally through a direct distribution organization, as well as through a network of independent distributors. We were founded in 1997 and are headquartered in Alachua, Florida.

Domestic distributions and services accounted for 91% of total revenues in the first six months of 2017. Most of our implants are distributed directly to healthcare providers, hospitals and other healthcare facilities through a direct distribution force and through various strategic relationships.

International distributions and services accounted for 9% of total revenues in the first six months of 2017. Our implants are distributed in over 45 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

Our business is generally not seasonal in nature; however, the number of orthopedic implant surgeries and elective procedures generally declines during the summer months.

Our principal goals are as follows: 1) provide safe, high quality, surgical implants to surgeons for the benefit of their patients, 2) invest in areas that provide the best opportunities for profitable growth and cash flow, 3) generate predictable and sustainable operating results for the benefit of shareholders.

In line with our principal goals, on August 3, 2017, we completed the sale of substantially all of the assets of our Cardiothoracic closure business to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (“A&E”). The sale was completed pursuant to an Asset Purchase Agreement with A&E entered into that same date. In this transaction, A&E agreed to pay total consideration of up to $60 million in cash. Of the total consideration, $3 million is being held in escrow for up to twelve months to satisfy indemnification obligations, if any, and $6 million is contingent upon achievement of a certain FDA regulatory clearance and a revenue milestone. In addition, we have entered into a multi-year Contract Manufacturing Agreement with A&E whereby we will continue to support the Cardiothoracic closure business under A&E’s ownership through the manufacturing of existing products. 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 high-quality products in those areas that offer the greatest opportunities to benefit our patients and shareholders.

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.

 

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Results of Operations

Consolidated Financial Results

The following table reflects revenues for the three and six months ended June 30, 2017 and 2016, respectively.

 

     For the Three Months Ended      For the Six Months Ended  
     June 30,      June 30,  
     2017      2016      2017      2016  
     (In Thousands)  

Revenues:

           

Spine

   $ 19,419      $ 17,645      $ 39,757      $ 34,739  

Sports medicine and orthopedics

     12,997        12,562        25,893        25,082  

Surgical specialties

     1,456        802        3,236        1,817  

Cardiothoracic

     3,673        2,905        6,824        5,439  

International

     6,005        5,663        11,662        11,180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal direct

     43,550        39,577        87,372        78,257  

Global commercial

     25,837        24,769        49,418        50,099  

Other revenues

     2,733        3,274        5,269        6,615  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 72,120      $ 67,620      $ 142,059      $ 134,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic revenues

     65,528        61,049        128,835        122,233  

International revenues

     6,592        6,571        13,224        12,738  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 72,120      $ 67,620      $ 142,059      $ 134,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2017 Compared With Three Months Ended June 30, 2016

Total Revenues. Our total revenues of $72.1 million for the three months ended June 30, 2017, increased $4.5 million, or 6.7%, compared to $67.6 million for the three months ended June 30, 2016. Our direct revenues increased by $4.0 million, or 10.0%, to $43.6 million, and our global commercial revenues increased by $1.1 million, or 4.3%, to $25.8 million. Our global commercial revenue comparisons are impacted due to a significant amount of our revenue being derived from large global commercial stocking distributors, whose timing of orders can vary from quarter to quarter. These ordering patterns can result in significant unit volume variations, which can result in significant variation in quarter over quarter comparisons. In addition, global commercial revenues increased primarily as a result of higher orders from certain commercial distributors, primarily in the dental and trauma markets.

Direct Revenues

Spine - Revenues from spinal implants increased $1.8 million, or 10.1%, to $19.4 million for the three months ended June 30, 2017, compared to $17.6 million for the three months ended June 30, 2016. Spine revenues increased primarily as a result of new surgeon customers and increased distributions of our map3® and nanOss® implants.

Sports Medicine and Orthopedics—Revenues from sports medicine and orthopedics allografts increased $435,000, or 3.5%, to $13.0 million for the three months ended June 30, 2017, compared to $12.6 million for the three months ended June 30, 2016. Sports medicine and orthopedics revenues increased primarily as a result of increased distributions of our cartilage and bone growth substitutes.

Surgical Specialties - Revenues from surgical specialty allografts increased $654,000, or 81.5%, to $1.5 million for the three months ended June 30, 2017, compared to $802,000 for the three months ended June 30, 2016. Surgical specialties revenues increased primarily as a result of new customers and increased distributions of our CortivaTM implants.

Cardiothoracic - Revenues from cardiothoracic implants increased $768,000, or 26.4%, to $3.7 million for the three months ended June 30, 2017, compared to $2.9 million for the three months ended June 30, 2016. Cardiothoracic revenues increased primarily as a result of increased distributions of sternal cables and sternal closure plates.

International Revenues - International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $342,000, or 6.0%, to $6.0 million for the three months ended June 30, 2017, compared to $5.7 million for the three months ended June 30, 2016. International revenues increased primarily as a result of higher distributions in Asia Pacific and Latin America due to expanded distribution channels.

 

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Global Commercial

Revenues from global commercial increased $1.1 million, or 4.3%, to $25.8 million for the three months ended June 30, 2017, compared to $24.8 million for the three months ended June 30, 2016. Global commercial revenues increased primarily as a result of higher orders from certain commercial distributors, primarily in the dental and trauma markets.

Other Revenues

Revenues from other sources consisting of service processing, tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased $541,000, or 16.5%, to $2.7 million for the three months ended June 30, 2017, compared to $3.3 million for the three months ended June 30, 2016. Other revenues decreased primarily as a result of lower service processing fees.

Costs of Processing and Distribution

Costs of processing and distribution increased $1.5 million, or 4.4%, to $35.2 million for the three months ended June 30, 2017, compared to $33.7 million for the three months ended June 30, 2016. Costs of processing and distribution decreased as a percentage of revenues from 49.8% for the three months ended June 30, 2016 to 48.7% for the three months ended June 30, 2017. The decrease was primarily due to changes in distribution mix.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses increased $1.1 million, or 3.9%, to $29.5 million for the three months ended June 30, 2017, from $28.4 million for the three months ended June 30, 2016. The increase was primarily due to higher variable compensation and distributor commission expenses on direct revenue distributions. Marketing, general and administrative expenses decreased as a percentage of revenues from 42.0% for the three months ended June 30, 2016 to 40.9% for the three months ended June 30, 2017, for the same reasons as described in the previous sentence.

Research and Development Expenses

Research and development expenses decreased $344,000, or 8.4%, to $3.7 million for the three months ended June 30, 2017, from $4.1 million for the three months ended June 30, 2016. The decrease was primarily due to lower research study related expenses. Research and development expenses decreased as a percentage of revenues from 6.0% for the three months ended June 30, 2016, to 5.2% for the three months ended June 30, 2017.

Severance Charges

Severance charges related to a reduction in headcount and improvement in operational efficiencies resulted in $3.4 million of expenses for the three months ended June 30, 2017, as compared to $711,000 of expenses for the three months ended June 30, 2016.

Net Other Expense

Net other expense, which includes interest expense, interest income and foreign exchange loss increased $566,000, or 133.5%, to $990,000 for the three months ended June 30, 2017 from $424,000 for the three months ended June 30, 2016. The increase in net other expense is primarily attributable to higher interest expense of $915,000, as a result of higher interest rate and higher amortization of debt issuance costs as compared to $392,000 for the three months ended June 30, 2016.

Income Tax (Provision) Benefit

Income tax provision for the three months ended June 30, 2017, was $1.0 million compared to income tax benefit of $859,000 for the three months ended June 30, 2016. Our effective tax rate for the three months ended June 30, 2017, was 154.8% compared to 27.3% for the three months ended June 30, 2016. Our effective tax rate increased as a result of recording a full valuation allowance on losses associated with our German subsidiary. No comparable tax expense was recorded for the three months ended June 30, 2016.

Six Months Ended June 30, 2017 Compared With Six Months Ended June 30, 2016

Total Revenues. Our total revenues of $142.1 million for the six months ended June 30, 2017, increased $7.1 million, or 5.3%, compared to $135.0 million for the six months ended June 30, 2016. Our direct revenues increased by $9.1 million, or 11.6%, to $87.4 million, and our global commercial revenues decreased by $681,000, or 1.4%, to $49.4 million. Our global commercial revenue comparisons are impacted due to a significant amount of our revenue being derived from large global commercial stocking distributors, whose timing of orders can vary from quarter to quarter. These ordering patterns can result in significant unit volume variations, which can result in significant variation in quarter over quarter comparisons. In addition,

global commercial revenues decreased primarily as a result of lower orders from certain commercial distributors, primarily in the orthopedics and trauma markets.

 

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Direct Revenues

Spine - Revenues from spinal implants increased $5.0 million, or 14.4%, to $39.8 million for the six months ended June 30, 2017, compared to $34.7 million for the six months ended June 30, 2016. Spine revenues increased primarily as a result of new surgeon customers and increased distributions of our map3® implants and our spine hardware.

Sports Medicine and Orthopedics—Revenues from sports medicine and orthopedics allografts increased $811,000, or 3.2%, to $25.9 million for the six months ended June 30, 2017, compared to $25.1 million for the six months ended June 30, 2016. Sports medicine and orthopedics revenues increased primarily as a result of increased distributions of our map3® implants.

Surgical Specialties - Revenues from surgical specialty allografts increased $1.4 million, or 78.1%, to $3.2 million for the six months ended June 30, 2017, compared to $1.8 million for the six months ended June 30, 2016. Surgical specialties revenues increased primarily as a result of new customers and increased distributions of our CortivaTM implants.

Cardiothoracic - Revenues from cardiothoracic implants increased $1.4 million, or 25.5%, to $6.8 million for the six months ended June 30, 2017, compared to $5.4 million for the six months ended June 30, 2016. Cardiothoracic revenues increased primarily as a result of increased distributions of sternal cables and sternal closure plates resulting from expanded investment in distribution channels.

International Revenues - International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $482,000, or 4.3%, to $11.7 million for the six months ended June 30, 2017, compared to $11.2 million for the six months ended June 30, 2016. International revenues increased primarily as a result of higher distributions in Asia Pacific and Latin America due to expanded distribution channels.

Global Commercial

Revenues from global commercial decreased $681,000, or 1.4%, to $49.4 million for the six months ended June 30, 2017, compared to $50.1 million for the six months ended June 30, 2016. Global commercial revenues decreased primarily as a result of lower orders from certain commercial distributors, primarily in the orthopedics and trauma markets.

Other Revenues

Revenues from other sources consisting of service processing, tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased $1.3 million, or 20.3%, to $5.3 million for the six months ended June 30, 2017, compared to $6.6 million for the six months ended June 30, 2016. Other revenues decreased primarily as a result of lower service processing fees.

Costs of Processing and Distribution

Costs of processing and distribution increased $4.3 million, or 6.6%, to $69.3 million for the six months ended June 30, 2017, compared to $65.0 million for the six months ended June 30, 2016. Costs of processing and distribution increased as a percentage of revenues from 48.2% for the six months ended June 30, 2016, to 48.8% for the six months ended June 30, 2017. The increase was primarily due to higher production levels and changes in distribution mix.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses increased $3.2 million, or 5.7%, to $59.2 million for the six months ended June 30, 2017, from $56.0 million for the six months ended June 30, 2016. The increase was primarily due to higher variable compensation and distributor commission expenses on direct revenue distributions. Marketing, general and administrative expenses increased as a percentage of revenues from 41.5% for the six months ended June 30, 2016 to 41.6% for the six months ended June 30, 2017 for the same reasons as described in the previous sentence.

Research and Development Expenses

Research and development expenses decreased $817,000, or 9.9%, to $7.4 million for the six months ended June 30, 2017, from $8.2 million for the six months ended June 30, 2016. The decrease was primarily due to lower research study related expenses. Research and development expenses decreased as a percentage of revenues from 6.1% for the six months ended June 30, 2016 to 5.2% for the six months ended June 30, 2017.

 

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Severance Charges

Severance charges related to a reduction in headcount and improvement in operational efficiencies resulted in $7.8 million of expenses for the six months ended June 30, 2017 as compared to $711,000 of expenses for the six months ended June 30, 2016.

Net Other Expense

Net other expense, which includes interest expense, interest income and foreign exchange loss increased $1.1 million, or 142.4%, to $1.8 million for the six months ended June 30, 2017 from $738,000 for the six months ended June 30, 2016. The increase in net other expense is primarily attributable to higher interest expense of $1.7 million as a result of higher interest rate and higher amortization of debt issuance costs as compared to $753,000 for the six months ended June 30, 2016.

Income Tax (Provision) Benefit

Income tax provision for the six months ended June 30, 2017, was $116,000 compared to $430,000 for the six months ended June 30, 2016. Our effective tax rate for the six months ended June 30, 2017, was 3.4% compared to 79.8% for the six months ended June 30, 2016. Our effective tax rate decreased as a result of recording a full valuation allowance on losses associated with our German subsidiary. No comparable tax expense was recorded for the six months ended June 30, 2016.

Non-GAAP Financial Measures

We utilize certain financial measures that are not calculated based on 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 U.S. Securities and Exchange Commission (“SEC”). We believe that non-GAAP financial measures reflect 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.

To supplement our unaudited condensed consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures that exclude certain amounts, including non-GAAP net income (loss) applicable to common shares, adjusted. The calculation of the tax effect on the adjustments between GAAP net loss applicable to common shares and non-GAAP net income (loss) 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 (loss) applicable to common shares. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures are included in the reconciliation below:

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2017      2016      2017      2016  
     (In thousands)  

Net loss applicable to common shares, as reported

   $ (2,613    $ (3,162    $ (5,395    $ (1,619

Severance charges

     3,400        711        7,803        711  

Restructuring charges

     —          1,107        —          1,107  

Contested proxy expenses

     —          2,372        —          2,680  

Tax effect on adjustments

     178        (1,237      (1,304      (1,355
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 965      $ (209    $ 1,104      $ 1,524  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is an explanation of the adjustment that management excluded as part of the non-GAAP measures for the three and six months ended June 30, 2017 and 2016 as well as the reasons for excluding the individual items:

Severance charges – This adjustment represents charges relating to the termination of former employees. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Restructuring charges – This adjustment represents the closure of our French distribution and tissue procurement office. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

 

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Contested proxy expenses – This adjustment represents charges relating to contested proxy expenses. Management removes the amount of these costs from our operating results to supplement a comparison to our past operating performance.

Liquidity and Capital Resources

Our working capital at June 30, 2017, decreased $3.0 million to $118.3 million from $121.3 million at December 31, 2016, primarily as a result of higher cash receipts from customers than shipments and corresponding billings to customers and lower inventory from planned inventory reductions, offset by classifying certain long-term assets held for sale.

At June 30, 2017, we had 51 days of revenues outstanding in trade accounts receivable, a decrease of 4 days compared to December 31, 2016. The decrease was due to higher cash receipts from customers than shipments and corresponding billings to customers during the six months ended June 30, 2017.

At June 30, 2017, we had 294 days of inventory on hand, a decrease of 17 days compared to December 31, 2016. The decrease in inventory days is primarily due to higher distributions during the six months ended June 30, 2017. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months.

We had $13.7 million of cash and cash equivalents at June 30, 2017. At June 30, 2017, our foreign subsidiaries held $1.6 million in cash which is not available for use in the U.S. without incurring U.S. taxes. U.S. income taxes have not been paid or accrued for on the undistributed earnings of our foreign subsidiaries. We intend to indefinitely reinvest the earnings of our foreign subsidiaries. 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, 2017, decreased $3.2 million to $80.1 million from $83.3 million at December 31, 2016. The decrease in short and long-term obligations was primarily due to principal payments on long-term obligations.

In June 2016, we entered into a Fourth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which increased the maximum revolving credit amount from $30.0 million to $45.0 million. In November 2016, we entered into a Fifth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which provided for: (i) a decrease in the maximum revolving credit amount from $45.0 million to $42.5 million; (ii) an increase in our leverage to EBITDA ratio from 2.50 to 1.00 to (A) 3.25 to 1.00 through March 31, 2017 and (B) 3.00 to 1.00 after March 31, 2017 and (iii) certain corresponding amendments. At June 30, 2017, we have $9.5 million of borrowing capacity available under our revolving credit facilities. In February 2017, we entered into a Sixth Amendment to the Second Amended and Restated Loan Agreement with TD Bank, N.A. and Regions Bank, which modified the definition of “Extraordinary Expenses” and to increase to 300 basis points the LIBOR Spread, applicable when our financial performance under its Leverage Ratio is greater than 3.0x.

On August 3, 2017, we completed the sale of substantially all of the assets related to the CT Business to A&E. The sale was completed pursuant to an Asset Purchase Agreement. As a part of the transaction, we also entered into the Contract Manufacturing Agreement. Under the Contract Manufacturing Agreement, we agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The total consideration we received under the Asset Purchase Agreement was composed of $54 million in cash consideration, $3 million of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any, plus an additional $6 million in Contingent Consideration. Payment of the Contingent Consideration is subject to two conditions: (1) if we obtain certain FDA regulatory clearance, then we will be paid $1 million of the Contingent Consideration; and (2) if A&E reaches certain revenue milestones, then we will be paid $5 million of the Contingent Consideration.

Concurrent with the divestiture, we entered into a Third Amended and Restated Loan Agreement, dated as of August 3, 2017 (the “2017 Loan Agreement”), among the Company, TD Bank, N.A. and First Tennessee Bank National Association, as Lenders (together with the various financial institutions as in the future may become parties thereto, the “Lenders”), and TD Bank, N.A., as administrative agent for the Lenders. The 2017 Loan Agreement represents a restructuring of our former loan agreement with TD Bank, N.A. and another lender under the Second Amended and Restated Loan Agreement dated July 16, 2013 between the Company, TD Bank, N.A. and Regions Bank (as amended, the “2013 Loan Agreement”).

The 2017 Loan Agreement provides for a revolving credit facility (the “Revolving Credit Facility”), in the aggregate principal amount of $42.5 million. A total of $35 million currently is outstanding on the Revolving Credit Facility. The 2017 Loan Agreement also contains a term loan facility in the aggregate principal amount of $25.4 million (the “Term Loan Facility” and, together with the Revolving Credit Facility the “Facility”). We used $22 million of the proceeds from the sale of the CT Business to partially pay down amounts owed under the 2013 Loan Agreement. The Facility is secured by substantially all of our assets and the assets of our domestic subsidiaries and is guaranteed by our domestic subsidiaries, as well as 65% of the stock of the Company’s foreign subsidiaries.

Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to 3.50%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1.1 million, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019.

As of June 30, 2017, we believe that our working capital, together with our borrowing ability under our revolving credit facility, will be adequate to fund our ongoing operations for the next twelve months.

As of June 30, 2017, we have no material off-balance sheet arrangements.

Certain Commitments.

Our short and long-term debt obligations and availability of credit as of June 30, 2017 are as follows:

 

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     Outstanding
Balance
     Available
Credit
 
     (In thousands)  

Term loan

   $ 47,139      $ —    

Credit facility

     33,000        9,500  
  

 

 

    

 

 

 

Total

   $ 80,139      $ 9,500  
  

 

 

    

 

 

 

The following table provides a summary of our debt obligations, operating lease obligations and other significant obligations as of June 30, 2017.

 

     Contractual Obligations Due by Period  
     Total      2017      2018      2019      2020      2021 and
Beyond
 
     (In thousands)  

Short and long-term obligations

   $ 80,139      $ 2,873      $ 77,266      $ —        $ —        $ —    

Operating leases

     3,923        977        1,297        961        559        129  

Other significant obligations (1)

     11,485        11,485        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 95,547      $ 15,335      $ 78,563      $ 961      $ 559      $ 129  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

We were in compliance with the financial covenants related to our senior secured credit facility as of June 30, 2017.

 

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Item 3. Quantitative and Qualitative 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 term loan and credit facility expose us to market risk related to changes in interest rates. As of June 30, 2017, our outstanding floating rate indebtedness totaled $80.1 million. The primary base interest rate is LIBOR. 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 2017. 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. We do not expect changes in exchange rates to have a material adverse effect on our income or our cash flows for the remainder of 2017. However, we can give no assurance that exchange rates will not significantly change in the future.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures include controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and 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 Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.

There have been no changes in our internal control over financial reporting during our last fiscal quarter that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of these claims that were outstanding as of June 30, 2017 will have a material adverse impact on its financial position or results of operations.

For a further description, we refer you to Part I, Item 1, Note 15 entitled “Legal Actions” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings.

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, 2016, as filed with the Securities and Exchange Commission on March 13, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

 

3.1(1) Amended and Restated Certificate of Incorporation of RTI Surgical, Inc.

 

3.2(2) Amended and Restated Bylaws of RTI Surgical, Inc.

 

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    XBRL Instance Document
101.SCH   

XBRL Taxonomy Extension Schema Document

101.CAL   

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF   

XBRL Taxonomy Extension Definition Linkbase Document

 

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101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-31271) filed by the Registrant on March 7, 2016.
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-31271) filed by the Registrant on July 11, 2016.

 

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SIGNATURES

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 SURGICAL, INC. (Registrant)
By:  

/s/ Camille Farhat

 

Camille Farhat

President and Chief Executive Officer

By:  

/s/ Robert P. Jordheim

 

Robert P. Jordheim

Executive Vice President and Chief Financial Officer

Date: August 9, 2017

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

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    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

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