Notes to Condensed Consolidated Financial Statements
For the
Three and Nine
Months Ended
September 30,
2018
and
2017
(Unaudited)
(In Thousands, Except Share and Per Share Data)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “K2M,” “the Company,” “we,” “us” and “our,” refer to K2M Group Holdings, Inc. together with its consolidated subsidiaries.
We are a global medical device provider of complex spine and minimally invasive solutions focused on achieving three-dimensional Total Body Balance. Since our inception, we have designed, developed and commercialized innovative complex spine and minimally invasive spine technologies and techniques used by spine surgeons to treat some of the most complicated spinal pathologies. K2M has leveraged these core competencies into Balance ACS™, a platform of products, services and research to help surgeons achieve three-dimensional spinal balance across the axial, coronal and sagittal planes, with the goal of supporting the full continuum of care to facilitate quality patient outcomes. The Balance ACS platform, in combination with our technologies, techniques and leadership in the 3D-printing of spinal devices, enable us to compete favorably in the global spinal surgery market.
Unaudited Interim Results
The accompanying condensed consolidated balance sheets as of
September 30, 2018
and
December 31, 2017
, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss for the
three and nine
months ended
September 30,
2018
and
2017
, the condensed consolidated statement of changes in stockholders’ equity for the
nine
months ended
September 30, 2018
, and the condensed consolidated statements of cash flows for the
nine
months ended
September 30, 2018
and
2017
are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis of accounting as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary to present fairly our financial position and results of operations and cash flows for the periods presented. The results for the
three and nine
months ended
September 30, 2018
are not necessarily indicative of future results. All information as of
September 30, 2018
and for the
three and nine
month periods ending
September 30, 2018
and
2017
within these notes to the condensed consolidated financial statements is unaudited.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We adopted ASU 2014-09,
Revenue from Contracts with Customers
(“Topic 606”), with a date of initial adoption of January 1, 2018. In preparing for the adoption of the new standard, we reviewed our revenue generating activities, identified the performance obligations related to those activities, and determined the appropriate timing and measurement of revenue related to the performance obligations in accordance with the standard. We applied Topic 606 retrospectively to each period reported, however, based on the results of our evaluation, there were no changes to our historical condensed consolidated financial statements for the
three and nine
months ended
September 30, 2018
as a result of this adoption.
For revenue recognition arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be
within the scope of Topic 606, we evaluate the goods or services promised within each contract related performance obligation, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
In our direct markets, we make our products available to hospitals that purchase specific products for use in a surgery on a case by case basis. We recognize revenue upon the use of such products in the completion of a surgical procedure following a receipt of a delivered order confirming that such products have been used in such procedure. In certain instances, hospital customers may purchase our products in advance of a surgical procedure. Revenue from these transactions is recognized following the completion of our performance obligations associated with the transaction which are distinct under the contract which typically includes our shipment of the purchased products and transfer of control to the hospital customer at the point of delivery.
International sales outside of our direct markets are contracted with international distributors, who then resell our products to their hospital customers. We recognize revenue upon completion of our performance obligations which includes shipment of the product to the distributor, who accepts title and control at the point of shipment. For these transactions, control transfers to the customer at the point of shipment.
We recognize revenue at the transaction price that reflects the net consideration to which we expect to be entitled in exchange for our surgical products. If the transaction price includes variable consideration such as a discount, rebate, right of return or other sales incentives that reduce the transaction price such variable consideration is estimated when revenue is recognized based on the expected value approach.
If taxes should be collected from customers relating to product sales and remitted to governmental authorities, they will be excluded from revenue. We expense incremental costs of obtaining a contract when incurred if the expected amortization period of the asset that we would have recognized is one year or less. We have determined that our contracts are short-term in nature and therefore no contract costs have been capitalized.
Net Loss per Share
Basic net loss per common share is determined by dividing the net loss allocable to common stockholders by the weighted average number of common shares outstanding during the periods presented, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock and common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of our stock option grants. The if-converted method is used to determine the dilutive effect of the outstanding Convertible Notes. The weighted average shares used to calculate both basic and diluted loss per share are the same because common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive. Although included in our outstanding shares total as of
September 30, 2018
and
2017
, shares of restricted stock are contingently issuable until their restrictions lapse and have been excluded from the weighted average shares outstanding.
Foreign Currency Translation and Other Comprehensive Loss
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Our reporting currency is the U.S. dollar, which is also the functional currency of our domestic entities, while the functional currency of our foreign subsidiaries are the British Pound, Euro and Swiss Franc. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenue and expenses are translated using the average exchange rate for the period. Net gains and losses resulting from the translation of foreign financial statements are recorded in other comprehensive income (loss). Net foreign currency gains or losses resulting from transactions in currencies other than the functional currencies are included in other expense, net on the consolidated statements of operations.
Other Recently Adopted and Issued Accounting Pronouncements
We adopted the following pronouncements effective January 1, 2018:
In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,
which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs and other diverse practices. It also provides clarifications related to separately identifiable cash-flows and application of the predominance principle based on evaluating the source and nature of the underlying cash flows when determining whether it is a financing, investing, operating or a combination of cash flow classifications. The adoption of this ASU did not have an impact on our financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash,
which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 requires that these amounts be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this ASU did not have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04,
Goodwill and Other
(Topic 350), Simplifying the Test for Goodwill Impairment,
which no longer requires an entity to measure a goodwill impairment loss by comparing the implied fair value to the carrying value of a reporting unit’s goodwill. Instead, any goodwill impairment charge will be recognized as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. In addition, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This update did not affect the optional qualitative assessment of goodwill impairment. The adoption of this ASU did not have an impact on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718), Scope of modification accounting,
which
provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. Under ASU 2017-09, a change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, inputs to the valuation technique used to value the award does not change, the vesting conditions do not change, and the classification as an equity or liability instrument do not change. The adoption of this ASU did not have an impact on our financial position, results of operations or cash flows.
Accounting Pronouncements we will adopt at a later date:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The revised guidance must be applied on a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Public companies will be required to comply with the guidance in 2019, and interim periods within that year. Early adoption is permitted for all entities. We are presently evaluating the impact of this guidance.
In March 2018, the FASB issued ASU 2018-05,
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”),
to state the income tax accounting implications of the Tax Cuts and Jobs Act (“New Tax Act”), which clarifies the measurement period time frame, changes in subsequent reporting periods and reporting requirements as a result of the New Tax Act of 2017. In accordance with SAB No. 118, a company must reflect the income tax effects of those aspects of the New Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the New Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the New Tax Act. SAB No. 118 provides a measurement period that should not extend beyond one year and it begins in the period that includes the enactment date which was December 22, 2017. We have not completed the accounting for the income tax effects of certain elements of the New Tax Act, which will become effective in future years. When additional guidance and regulations enable us to finalize tax positions, we will reflect the impact of this ASU 2018-05 on the tax provision and deferred tax calculation as of December 31, 2018.
2. MERGER AGREEMENT WITH STRYKER CORPORATION
On August 29, 2018, we, Stryker Corporation, a Michigan corporation (“Stryker”), and Austin Merger Sub Corp., a Delaware corporation and a wholly-owned subsidiary of Stryker (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into K2M (the “Merger”), with K2M continuing as the surviving corporation in the Merger and as a direct or indirect wholly owned subsidiary of Stryker. The boards of directors of each of K2M and Stryker have approved the Merger Agreement.
Upon the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger, K2M stockholders will have the right to receive $
27.50
per share in cash, without interest and less any applicable withholding taxes, for each share of K2M common stock that they own immediately prior to the effective time of the Merger (other than any shares held by us as treasury stock or held directly by Stryker or any subsidiary of Stryker (including Merger Sub)) and other than any shares owned by any stockholder who has properly exercised and perfected such holder’s demand for appraisal rights under Section 262 of
the General Corporation Law of the State of Delaware and not effectively withdrawn or lost such holder’s rights to appraisal). In addition, the Merger Agreement provides that outstanding equity-based awards issued under our equity incentive plans will be treated as set forth below:
|
|
•
|
Stock Options
.
Each option to purchase shares of K2M common stock that is outstanding and unexercised immediately prior to the effective time of the Merger, whether vested or unvested, will be cancelled and converted into the right to receive a cash payment (without interest) equal to the product of (A) the excess, if any, of the merger consideration over the per share exercise price of such option, and (B) the number of shares of K2M common stock subject to such option as of the effective time of the Merger, net of any applicable withholding taxes required to be withheld by applicable law. Options with a per share exercise price equal to or exceeding the merger consideration will be cancelled without payment.
|
|
|
•
|
Restricted Stock Awards and Restricted Stock Unit Awards
.
Each K2M restricted stock award and K2M restricted stock unit award that is outstanding immediately prior to the effective time of the Merger, whether vested or unvested, will be cancelled and converted into the right to receive a cash payment (without interest) equal to the product of (A) the merger consideration and (B) the number of shares of K2M common stock underlying the award as of the effective time of the Merger, net of any applicable withholding taxes required to be withheld by applicable law.
|
In addition, under the terms of our
4.125%
convertible senior notes due 2036 which we issued in 2016 (the ‘‘2016 Convertible Notes’’) and our
3.00%
convertible senior notes due 2025 which we issued in 2018 (the ‘‘2018 Convertible Notes’’ and, together with the 2016 Convertible Notes, the ‘‘Convertible Notes’’), from and after the effective time of the Merger, the Convertible Notes will no longer be convertible on the basis of K2M common stock and will instead be convertible into the cash consideration paid pursuant to the Merger. Pursuant to the terms of the respective indentures governing the Convertible Notes (the “Convertible Notes Indentures”), K2M and the trustee for each series of Convertible Notes will enter into supplemental indentures providing for such changes to the conversion right. The Convertible Notes will remain obligations of K2M following the Merger (until their conversion, repurchase, maturity or other cancellation).
Under the terms of the Convertible Notes, the Merger will constitute both a Fundamental Change and Make-Whole Fundamental Change (in each case, as defined in the applicable Convertible Notes Indenture). As a result, holders of the Convertible Notes will be permitted to choose to (i) convert their Convertible Notes at a temporarily increased conversion rate, (ii) require K2M to buy back their Convertible Notes for a price equal to their principal amount plus accrued but unpaid interest to, but not including, the repurchase date or (iii) continue holding their Convertible Notes; provided, however, that holders of the 2018 Convertible Notes will not have the right to require K2M to buy back their 2018 Convertible Notes if the cash consideration such holder would receive upon conversion of their 2018 Convertible Notes would exceed what they would receive upon a repurchase of their 2018 Convertible Notes in connection with such Fundamental Change.
If holders elect to convert their Convertible Notes in connection with the Merger, the conversion rate will be temporarily increased (as set forth in the applicable Convertible Notes Indenture) based upon (x) the date on which the Merger is consummated and (y) the per share merger consideration provided for in the Merger Agreement.
K2M and Stryker have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants that: (i) K2M will conduct its and its subsidiaries’ business in all material respects in the ordinary course of business and in a manner consistent with past practice during the interim period between the execution of the Merger Agreement and the effective time of the Merger, (ii) K2M will not, and will cause each of its subsidiaries not to, directly or indirectly engage in certain types of transactions or take certain actions during such period without the prior consent of Stryker, (iii) K2M will duly call, give notice of, convene and hold a special meeting of the K2M stockholders to consider and vote on a proposal to adopt the Merger Agreement, and (iv) unless there has been a Company Adverse Recommendation Change (as defined in the Merger Agreement) in compliance with the terms of the Merger Agreement, the Board of Directors of K2M will recommend adoption of the Merger Agreement by the stockholders of K2M. K2M has also made certain additional customary covenants, including, among others, covenants not to: (i) solicit or knowingly encourage any inquiries with respect to certain alternative business combination transactions or (ii) subject to certain exceptions designed to allow the Board of Directors of K2M to fulfill its fiduciary duties to K2M’s stockholders (described further below), engage in any discussions concerning, or provide any confidential information to, any person relating to certain alternative business combination transactions.
Prior to the adoption of the Merger Agreement by our stockholders, (i) the Board of Directors of K2M may, in certain circumstances, effect a Company Adverse Recommendation Change (as defined in the Merger Agreement) and (ii) with respect to a Company Superior Proposal (as defined in the Merger Agreement), K2M may terminate the Merger Agreement to concurrently enter into a definitive agreement with respect to such Company Superior Proposal, provided that K2M must pay to Stryker a termination fee of $
47,600
(the “Termination Fee”) prior to or concurrently with such termination. In the event that our Board of Directors effects a Company Adverse Recommendation Change permitted under the Merger Agreement (other
than with respect to a Company Superior Proposal), Stryker may terminate the Merger Agreement and receive payment of the Termination Fee. In connection with any such action described in this paragraph, we must comply with certain notice and other specified conditions giving Stryker the opportunity to propose revisions to the terms of the transaction contemplated by the Merger Agreement during one or more match right periods and, if requested by Stryker, engaging in good faith negotiations with Stryker during such match right periods.
K2M and Stryker have agreed to use their respective reasonable best efforts to consummate the Merger, including making filings with and seeking approvals from certain governmental entities necessary in connection with the Merger, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). In furtherance thereof, Stryker has agreed to accept certain restrictions on the assets of K2M and its subsidiaries, if and to the extent necessary to obtain such approvals, provided that Stryker will not be required to accept such restrictions if they would be material to the business of K2M and its subsidiaries taken as a whole.
Consummation of the Merger is subject to certain customary conditions, including (i) the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock (the “Stockholder Approval”), (ii) the absence of any law prohibiting or order preventing the consummation of the Merger, (iii) the expiration or termination of any applicable waiting period under the HSR Act and the receipt of authorization or consent under certain specified antitrust laws, (iv) the absence of a material adverse effect with respect to K2M, and (v) compliance in all material respects on the part of each of K2M and Stryker with such party’s covenants under the Merger Agreement. The obligation of each party to consummate the Merger is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions).
The Merger Agreement contains certain termination rights for both K2M and Stryker, including (i) in the event that the Stockholder Approval is not obtained at a duly convened meeting of K2M stockholders, (ii) in the event that the Merger is not consummated on or before August 29, 2019 (the “
Outside Date
”), or (iii) in the event that a governmental authority has issued a final and non-appealable order that prohibits the Merger. The Merger Agreement also provides for certain additional termination rights and provides that, upon termination of the Merger Agreement in certain circumstances, including if the Merger Agreement is terminated by Stryker in the event the Board of Directors of K2M effects a Company Adverse Recommendation Change, or by K2M in accordance with, and subject to, the terms of the Merger Agreement to enter into a definitive agreement with respect to a Company Superior Proposal, K2M would be required to pay Stryker the Termination Fee. In no circumstance will K2M be obligated to pay more than one Termination Fee.
The consummation of the Merger is not subject to any financing conditions. We anticipate that the total amount of funds necessary to consummate the Merger and the related transactions, not including fees and expenses, will be approximately $
1,400,000
, including the estimated funds needed to (i) pay our stockholders the consideration due to them under the Merger Agreement; (ii) make payments in respect of outstanding K2M stock options, K2M restricted stock awards and K2M restricted stock unit awards pursuant to the Merger Agreement; and (iii) pay the outstanding net indebtedness of K2M, including the consideration payable to holders of the outstanding Convertible Notes. We understand that Stryker expects to use cash and other available funds to fund the Merger.
In connection with the Merger, Piper Jaffray & Co. acted as financial advisor to K2M and will receive a fee from K2M, currently estimated to be approximately $
21,400
. Such fee is contingent upon the consummation of the Merger, except for $
1,000
of the fee which was paid to Piper Jaffray & Co. for rendering its fairness opinion to the K2M Board of Directors and is creditable against the total fee. We expensed the $
1,000
opinion fee as a general and administrative expense in the three months ended September 30, 2018.
3. ACCOUNTS RECEIVABLE
The following table summarizes accounts receivable, net of allowances:
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|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Accounts receivable
|
|
$
|
55,362
|
|
|
$
|
52,820
|
|
Allowances
|
|
(1,309
|
)
|
|
(2,346
|
)
|
Accounts receivable, net
|
|
$
|
54,053
|
|
|
$
|
50,474
|
|
4. INVENTORY
The following table summarizes inventory, net of allowances:
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|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Finished goods
|
|
$
|
130,784
|
|
|
$
|
109,342
|
|
Inventory allowances
|
|
(45,490
|
)
|
|
(37,918
|
)
|
Inventory, net
|
|
$
|
85,294
|
|
|
$
|
71,424
|
|
Inventory includes surgical instruments available for sale with a carrying value of $
10,415
and $
8,493
at
September 30, 2018
and
December 31, 2017
, respectively.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes prepaid expenses and other current assets:
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|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Prepaid expenses
|
|
$
|
2,882
|
|
|
$
|
3,419
|
|
Other
|
|
3,669
|
|
|
4,423
|
|
Total
|
|
$
|
6,551
|
|
|
$
|
7,842
|
|
6. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes property, plant and equipment:
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|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
September 30,
2018
|
|
December 31,
2017
|
Buildings under capital lease
|
16 years
|
|
$
|
26,469
|
|
|
$
|
26,469
|
|
Leasehold improvements, including property under capital lease
|
15 years
|
|
19,571
|
|
|
20,222
|
|
Equipment
|
3-5 years
|
|
4,718
|
|
|
4,290
|
|
Software
|
3 years
|
|
9,502
|
|
|
7,784
|
|
Computer equipment
|
3 years
|
|
1,276
|
|
|
1,165
|
|
Furniture and office equipment
|
5-7 years
|
|
3,854
|
|
|
3,823
|
|
Vehicles and other
|
3 years
|
|
859
|
|
|
878
|
|
Total
|
|
|
66,249
|
|
|
64,631
|
|
Less accumulated depreciation and amortization
|
|
|
(19,848
|
)
|
|
(15,431
|
)
|
Property, plant and equipment, net
|
|
|
$
|
46,401
|
|
|
$
|
49,200
|
|
Depreciation and amortization expense for property, plant and equipment was $
1,566
and $
1,522
for the
three
months ended
September 30, 2018
and
2017
, respectively, and $
4,663
and $
4,327
for the
nine
months ended
September 30, 2018
and
2017
, respectively. Included in this total is amortization expense for buildings and leasehold improvements under capital lease of $
416
for each of the
three
months ended
September 30, 2018
and
2017
and $
1,247
for each of the
nine
months ended
September 30, 2018
and
2017
. Interest expense on the capital lease obligation was $
555
and $
572
for the
three
months ended
September 30, 2018
and
2017
, respectively and $
1,678
and $
1,728
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
7. SURGICAL INSTRUMENTS
The following table summarizes surgical instruments:
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|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Surgical instruments
|
|
$
|
85,191
|
|
|
$
|
72,018
|
|
Less accumulated depreciation and allowances
|
|
(55,112
|
)
|
|
(45,768
|
)
|
Surgical instruments, net
|
|
$
|
30,079
|
|
|
$
|
26,250
|
|
Depreciation and allowance expense for surgical instruments was $
2,910
and $
2,502
for the
three
months ended
September 30, 2018
and
2017
, respectively, and $
9,344
and $
7,670
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
8. ACQUISITION
On May 1, 2018, we completed our acquisition of certain of the spine assets of Medcomtech, S.A., our distributor in Spain and Portugal. The assets acquired as part of the business combination consist of surgical implants and instrumentation, and customer contracts and relationships that will permit us to offer our products on a direct basis in these countries. In addition, we entered into an Agency and Services Agreement with Medcomtech, S.A. under which it will provide certain sales, market development and other support services to us. Based on the nature of the assets acquired and services to be provided by Medcomtech, S.A., we accounted for the acquisition as a business combination. A preliminary allocation of the fair value of the purchase consideration of
$5,236
was allocated to the inventory, surgical instruments and customer relationships acquired, as determined by a third party valuation. The acquisition was funded through an exchange of net accounts receivable owed to us by Medcomtech, S.A. The initial accounting for the business combination has not yet been completed because the valuation of such assets has not been finalized. We expect to finalize our allocation of fair value prior to completion of the fiscal year 2018.
Following the May 1, 2018 acquisition, we have recognized revenue from the use of our products in surgical procedures in Spain and Portugal consistent with our revenue recognition policies for our direct markets. Revenue recognized for the
three
months ended
September 30, 2018
was approximately $
2,299
compared to $
1,000
for the
three
months ended September 30,
2017
. For the period May 1, 2018 through September 30, 2018, we recognized revenue of $
4,644
compared to $
2,799
from the comparable period in 2017.
9. INTANGIBLE ASSETS
Intangible assets, net comprise the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Estimated
Useful Lives
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
—
|
|
$
|
12,900
|
|
|
$
|
—
|
|
|
$
|
12,900
|
|
In-process research and development
|
|
—
|
|
900
|
|
|
—
|
|
|
900
|
|
Other
|
|
—
|
|
234
|
|
|
—
|
|
|
234
|
|
Subtotal
|
|
|
|
14,034
|
|
|
—
|
|
|
14,034
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
Developed technology
|
|
4 - 6 years
|
|
62,000
|
|
|
(61,858
|
)
|
|
142
|
|
Licensed technology
|
|
4 - 6 years
|
|
52,800
|
|
|
(52,624
|
)
|
|
176
|
|
Customer relationships
|
|
4 - 10 years
|
|
30,280
|
|
|
(29,726
|
)
|
|
554
|
|
Patents and other
|
|
2 - 17 years
|
|
6,078
|
|
|
(1,996
|
)
|
|
4,082
|
|
Subtotal
|
|
|
|
151,158
|
|
|
(146,204
|
)
|
|
4,954
|
|
Intangible assets, net
|
|
|
|
$
|
165,192
|
|
|
$
|
(146,204
|
)
|
|
$
|
18,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Estimated
Useful Lives
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
—
|
|
$
|
12,900
|
|
|
$
|
—
|
|
|
$
|
12,900
|
|
In-process research and development
|
|
—
|
|
900
|
|
|
—
|
|
|
900
|
|
Other
|
|
—
|
|
242
|
|
|
—
|
|
|
242
|
|
Subtotal
|
|
|
|
14,042
|
|
|
—
|
|
|
14,042
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
Developed technology
|
|
4 - 6 years
|
|
62,000
|
|
|
(61,808
|
)
|
|
192
|
|
Licensed technology
|
|
4 - 6 years
|
|
52,800
|
|
|
(52,602
|
)
|
|
198
|
|
Customer relationships
|
|
4 - 7 years
|
|
29,700
|
|
|
(29,700
|
)
|
|
—
|
|
Patents and other
|
|
2 - 17 years
|
|
6,060
|
|
|
(1,593
|
)
|
|
4,467
|
|
Subtotal
|
|
|
|
150,560
|
|
|
(145,703
|
)
|
|
4,857
|
|
Intangible assets, net
|
|
|
|
$
|
164,602
|
|
|
$
|
(145,703
|
)
|
|
$
|
18,899
|
|
Amortization expense of intangible assets was $
174
and $
1,836
for the
three
months ended
September 30,
2018
and
2017
, respectively, and $
501
and $
6,581
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
As described in “
Note 8 - Acquisition”,
in May 2018, we acquired certain customer relationships of our former Spanish distributor in connection with our acquisition. These customer relationships will be amortized over an estimated useful life of
10
years.
As of
September 30, 2018
, the expected amortization expense for the remainder of
2018
and the following four years and thereafter is as follows:
|
|
|
|
|
|
|
|
September 30, 2018
|
2018
|
|
$
|
168
|
|
2019
|
|
662
|
|
2020
|
|
638
|
|
2021
|
|
576
|
|
2022
|
|
576
|
|
Thereafter
|
|
2,334
|
|
Total
|
|
$
|
4,954
|
|
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Accrued commissions
|
|
$
|
9,503
|
|
|
$
|
9,495
|
|
Accrued royalties
|
|
3,333
|
|
|
3,489
|
|
Other
|
|
8,132
|
|
|
9,249
|
|
Total
|
|
$
|
20,968
|
|
|
$
|
22,233
|
|
11. DEBT
Revolving Credit Facility
We maintain a senior secured credit facilities credit agreement (as amended from time to time, the “Credit Agreement”) with Silicon Valley Bank and Comerica Bank as lenders, which is secured primarily by the assets of our operating subsidiaries in the United States and United Kingdom and expires on April 26, 2019. The credit facility consists of revolving credit facility of $
55,000
, with a sub-facility for letters of credit in the aggregate availability amount of $
10,000
and a swingline sub-facility in the aggregate availability amount of $
5,000
. As of
September 30, 2018
, we were in compliance with all the financial and other covenants of the credit facility. We had
no
outstanding borrowings on the revolving credit facility at
September 30, 2018
.
On June 8, 2018, we entered into an amendment to the Credit Agreement, which permits us to make additional cash distributions, as appropriate for interest and other payments under our 2016 Convertible Notes and our 2018 Convertible Notes. Under the Credit Agreement as amended, we are permitted to distribute up to $
12,000
in aggregate to make interest payments on the Convertible Notes and up to $
5,000
in aggregate to make cash payments in connection with any conversions of the Convertible Notes.
We incurred interest expense of $
0
and $
31
related to the credit facility for the
three
months ended
September 30, 2018
and
2017
, respectively, and $
185
and $
92
for the
nine
months ended
September 30, 2018
and
2017
, respectively. The amortization expense of loan issuance fees was $
24
and $
31
for the
three
months ended
September 30, 2018
and
2017
, respectively, and $
65
and $
92
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
As of
September 30, 2018
, we had $
49,000
of unused borrowing capacity under the revolving credit facility, net of an issued but undrawn letter of credit for $
6,000
, representing a security deposit on our corporate headquarters and operations facilities lease.
Convertible Notes
Convertible Notes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
September 30,
2018
|
|
December 31,
2017
|
|
|
Carrying Value
|
|
Fair Value
|
2016 Covertible Notes
|
|
$
|
41,065
|
|
|
$
|
39,176
|
|
|
$
|
49,916
|
|
|
$
|
45,294
|
|
2018 Convertible Notes
|
|
51,951
|
|
|
—
|
|
|
74,550
|
|
|
—
|
|
Total
|
|
$
|
93,016
|
|
|
$
|
39,176
|
|
|
$
|
124,466
|
|
|
$
|
45,294
|
|
|
|
|
|
|
|
|
|
|
In August 2016, we issued $
50,000
aggregate principal amount of the 2016 Convertible Notes. The 2016 Convertible Notes are due August 15, 2036 unless earlier converted, redeemed or repurchased by us. The 2016 Convertible Notes pay interest at an annual rate of
4.125%
, payable semi-annually in arrears on February 15 and August 15 of each year.
In June 2018, we issued $
75,000
aggregate principal amount of the 2018 Convertible Notes. The 2018 Convertible Notes are due June 30, 2025 unless earlier converted, redeemed or repurchased by us. The 2018 Convertible Notes pay interest at an annual rate of
3.00%
, payable semi-annually in cash on June 30 and December 30 of each year beginning on December 30, 2018. We received net proceeds from the sale of the 2018 Convertible Notes of approximately $
71,452
, after deducting underwriting discounts and commissions and estimated offering expenses of $
3,564
. We used a portion of the proceeds to repay $
18,000
of borrowings outstanding under the credit facility.
The Convertible Notes are governed by, as applicable, (i) an indenture, dated as of August 11, 2016, between the Company and The Bank of New York Mellon, as trustee (the “Trustee”), relating to the 2016 Convertible Notes and (ii) an indenture, dated as of June 18, 2018 (the “2018 Indenture”), between the Company and the Trustee, relating to the 2018 Convertible Notes, each of which contain customary terms and covenants and events of default. The Convertible Notes are senior, unsecured obligations and are equal in right of payment with existing and future senior, unsecured indebtedness, senior in right of payment to our future indebtedness that is expressly subordinated to the Convertible Notes, and effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Convertible Notes are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and preferred equity (to the extent we are not a holder thereof), if any, of our subsidiaries.
Noteholders may convert their 2018 Convertible Notes at their option only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price (as defined in the 2018 Indenture) per share of our common stock for at least
20
trading days (as defined in the 2018 Indenture), whether or not consecutive, during the period of
30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter exceeds
130%
of the conversion price (as defined in the 2018 Indenture) on such trading day; (2) during the
five
consecutive business days immediately after any five consecutive trading day period (such
five
consecutive trading day period, the “measurement period”) if the trading price (as defined in the 2018 Indenture) per $
1,000
principal amount of 2018 Convertible Notes for each trading day of such measurement period was less than
98%
of the product of the last reported sale price per share of our common stock and the applicable conversion rate on such trading day; (3) upon the occurrence of certain corporate events or distributions on our common stock, as described in the 2018 Indenture; (4) if we call the 2018 Convertible Notes for redemption; and (5) at any time from, and including, March 30, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on the applicable conversion rate. The initial conversion rate is
35.2930
shares of common stock per $
1,000
principal amount of the 2018 Convertible Notes, which represents an initial conversion price of approximately $
28.33
per share of common stock, and is subject to adjustment upon certain events. Upon a “make-whole fundamental change” (as defined in the 2018 Indenture) or in connection with a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its 2018 Convertible Notes in connection with such make-whole fundamental change or notice of redemption.
The 2018 Convertible Notes are redeemable, in whole or in part, at our option at any time on or after July 5, 2022 if the last reported sale price per share of our common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days, whether or not consecutive, including the trading day immediately preceding the date on which we provide notice of redemption, during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. The redemption price will be equal to the principal amount of the 2018 Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to but not including, the redemption date. Upon a “fundamental change”, noteholders may require us to repurchase their 2018 Convertible Notes in whole or in part for cash at a cash repurchase price equal to the principal amount of the 2018 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.
Under the 2018 Indenture, if an event of default (as defined in the 2018 Indenture), other than certain bankruptcy and insolvency-related events of default with respect to the Company, occurs and is continuing, either the Trustee or the holders of at least
25%
in aggregate principal amount of the outstanding 2018 Convertible Notes may declare the principal amount of and the accrued and unpaid interest on the outstanding 2018 Convertible Notes to be due and payable by notice to the Company. If an event of default arising out of certain events of bankruptcy or insolvency involving the Company occurs, the principal amount of the 2018 Convertible Notes and accrued and unpaid interest, if any, will automatically become due and payable. Additionally, the 2018 Indenture provides that the Company may not consolidate with or merge with or into, or sell, lease or otherwise transfer all or substantially all of the consolidated assets of the Company and its subsidiaries, taken as a whole, to another person, unless: (a) the resulting, surviving or transferee person (if not the Company) is a corporation, duly organized and existing under the laws of the United States, any state thereof or the District of Columbia that expressly assumes by a supplemental indenture all of the Company’s obligations under the 2018 Convertible Notes and the 2018 Indenture; and (b) immediately after giving effect to such transaction, no default or event of default (each as defined in the 2018 Indenture), has occurred and is continuing.
Pursuant to ASC 470, we have bifurcated the debt and equity components of the 2018 Convertible Notes. The separation was performed by determining the fair value of a similar debt instrument without the associated equity component. That amount was then deducted from the initial gross proceeds of the 2018 Convertible Notes to arrive at a residual amount which was allocated to the conversion feature that is classified as equity. The difference between the principal amount of the 2018 Convertible Notes and estimated fair value of the liability component without the embedded equity component (representing
the fair value of the embedded equity component) is recorded as a debt discount and an increase to additional paid in capital on the issuance date.
The initial fair value of the indebtedness and the embedded conversion option of the 2018 Convertible Notes was $
53,829
and $
21,171
, respectively. The embedded conversion option was recorded in stockholders’ equity as debt discount, to be subsequently accreted to interest expense over the term of the 2018 Convertible Notes. Underwriting discounts and commissions and offering expenses for the 2018 Convertible Notes totaled approximately $
3,564
and were allocated between the liability and the equity component in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. As a result, $
2,558
attributable to the indebtedness was recorded as a reduction to the carrying value of the 2018 Convertible Notes, which will be amortized as interest expense over the term of 2018 Convertible Notes and $
1,006
attributable to the equity component was recorded a reduction to additional paid-in-capital in stockholders’ equity.
See “
Note 2. Merger Agreement with Stryker Corporation”
, for a description of the effect of the Merger on the Convertible Notes.
Interest expense related to the 2016 Convertible Notes was $
1,165
and $
1,096
for the
three
months ended
September 30, 2018
and
2017
, respectively, and $
3,437
and $
3,237
for the
nine
months ended
September 30, 2018
and
2017
, respectively. These amounts included accretion expense of the debt discounts of $
649
and $
580
for the three months ended
September 30, 2018
and
2017
, respectively, and $
1,890
and $
1,689
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Interest expense related to the 2018 Convertible Notes was $
1,164
and $
1,318
for the
three
and
nine
months ended
September 30, 2018
, respectively. These amounts included accretion of the debt discounts and issuance costs of $
601
and $
680
for these periods.
12. STOCK-BASED COMPENSATION
As of
September 30, 2018
, there was a total of
826,417
shares of common stock available for future grants under our stock purchase and equity award or incentive plans. The following table summarizes the stock-based compensation expense by financial statement line item and type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue
|
|
$
|
35
|
|
|
$
|
29
|
|
|
$
|
93
|
|
|
$
|
108
|
|
Research and development
|
|
27
|
|
|
35
|
|
|
156
|
|
|
224
|
|
Sales and marketing
|
|
313
|
|
|
240
|
|
|
821
|
|
|
942
|
|
General and administrative
|
|
1,338
|
|
|
1,137
|
|
|
3,782
|
|
|
3,048
|
|
Total
|
|
$
|
1,713
|
|
|
$
|
1,441
|
|
|
$
|
4,852
|
|
|
$
|
4,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Stock options
|
|
$
|
802
|
|
|
$
|
684
|
|
|
$
|
2,349
|
|
|
$
|
2,157
|
|
Restricted stock
|
|
692
|
|
|
594
|
|
|
1,955
|
|
|
1,353
|
|
Restricted stock units (“RSUs”)
|
|
145
|
|
|
81
|
|
|
336
|
|
|
487
|
|
Employee Stock Purchase Plan
|
|
74
|
|
|
82
|
|
|
212
|
|
|
325
|
|
Total
|
|
$
|
1,713
|
|
|
$
|
1,441
|
|
|
$
|
4,852
|
|
|
$
|
4,322
|
|
The following table summarizes stock option plans activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(1)
|
Outstanding at December 31, 2017
|
|
3,165,387
|
|
|
$
|
14.26
|
|
|
5.88
|
|
$
|
15,567
|
|
Granted
|
|
385,333
|
|
|
23.38
|
|
|
|
|
|
Exercised
|
|
(197,614
|
)
|
|
10.61
|
|
|
|
|
|
Expired
|
|
(23,990
|
)
|
|
13.36
|
|
|
|
|
|
Forfeited
|
|
(16,248
|
)
|
|
18.66
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
3,312,868
|
|
|
$
|
15.52
|
|
|
5.74
|
|
$
|
39,287
|
|
Vested:
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
2,499,803
|
|
|
$
|
13.57
|
|
|
4.70
|
|
$
|
34,487
|
|
Expected to vest:
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
813,065
|
|
|
$
|
21.51
|
|
|
1.97
|
|
$
|
4,800
|
|
(1) Calculated using the fair market value per-share of our common stock as of
September 30, 2018
and
December 31, 2017
of $
27.37
and $
18.00
, respectively.
A summary of restricted stock and RSU activity during the
nine
months ended
September 30, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Restricted Stock Units
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average
Remaining
Term (years)
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-Average
Remaining
Term (years)
|
Non-vested at December 31, 2017
|
|
265,684
|
|
|
$
|
19.46
|
|
|
2.03
|
|
46,247
|
|
|
$
|
20.30
|
|
|
2.28
|
Vested
(1)
|
|
(123,052
|
)
|
|
19.35
|
|
|
|
|
(15,917
|
)
|
|
19.94
|
|
|
|
Granted
|
|
137,069
|
|
|
23.39
|
|
|
|
|
31,914
|
|
|
22.72
|
|
|
|
Forfeited
|
|
(3,919
|
)
|
|
17.70
|
|
|
|
|
—
|
|
|
—
|
|
|
|
Non-vested at September 30, 2018
|
|
275,782
|
|
|
$
|
21.49
|
|
|
2.14
|
|
62,244
|
|
|
$
|
21.63
|
|
|
2.18
|
Vested or expected to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2018
|
|
275,782
|
|
|
$
|
21.49
|
|
|
2.14
|
|
62,244
|
|
|
$
|
21.63
|
|
|
2.18
|
(1)
Represents restricted stock and RSUs which vested in 2018. These shares and units were net settled, which resulted in the return of
16,009
shares, reflected as treasury shares and
3,542
units in lieu of withholding taxes for the
nine
months ended
September 30, 2018
.
See “
Note 2. Merger Agreement with Stryker Corporation
”, for a description of the effect of the Merger on equity-based awards.
13. COMMITMENTS AND CONTINGENCIES
Intellectual Property
In the normal course of business, we enter into agreements to obtain the rights to certain intellectual property. In addition to royalty payments based on the sale of the underlying product incorporating such intellectual property, these agreements may require an up-front payment and/or milestone payments under certain conditions such as when regulatory approval is received, cumulative sales milestones or subscriber levels are achieved and other events. Typically, we have certain rights to cancel these agreements, with notice, without additional payments due other than the amount due at the time of cancellation. Royalties ranging from
2%
to
10%
of net sales may be due on the sale of related products under these agreements and some of the agreements contain minimum annual royalty amounts.
As of
September 30, 2018
, several of these agreements could require us to make additional payments should certain conditions be met in the future. Of these amounts, (i) up to $
16,465
would be paid following the receipt of regulatory applications and approvals in the United States; (ii) up to $
1,500
would be paid following attainment of certain subscriber levels as of July 2019 and July 2020, and (iii) up to $
150
would be paid based on completion of software development in 2018 related to our Balance ACS platform.
In addition, milestone payments of $
500
, $
2,000
and $
4,000
are due upon the achievement of net sales of related products of $
10,000
, $
25,000
and $
50,000
, respectively, related to one of these agreements. A royalty payment of
7%
of net sales of related products may be due until such sales reach $
20,000
.
14. RELATED PARTIES
In January 2017, pursuant to an underwritten public offering, our prior sponsor Welsh, Carson, Anderson & Stowe XI, L.P., and certain of its affiliates completed the sale of
4,000,000
shares of our common stock. We incurred transaction fees of approximately $
225
which are reflected as general and administrative expenses for the
nine
months ended
September 30, 2017
. We did not receive any proceeds from the sale of these shares.
15. INCOME TAXES
The provision for income taxes includes both domestic and foreign minimum income taxes and changes in the valuation allowance. For the
three
months ended
September 30,
2018
and
2017
, the income tax expense was $
213
and $
40
, respectively, resulting in an effective tax rate of
(1.4)%
and
(0.5)%
, respectively. For the
nine
months ended
September 30, 2018
and
2017
, income tax (benefit) expense was $
(2,351)
and $
128
, respectively, resulting in an effective tax rate of
5.8%
and
(0.4)%
, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) was enacted in the U.S. which provided for the indefinite carryforward of domestic net operating losses generated in tax years ending after December 31, 2017. As a result of this change, the domestic net operating losses we incurred from January 1, 2018 to June 30, 2018 were recognized in the three months ended June 30, 2018 to the extent that they are available to offset our indefinite-lived deferred tax liabilities. The effective tax rate for the nine months ended September 30, 2018 differs from the statutory rate due to minimum income taxes, permanent differences and changes in valuation allowances.
16. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share attributable to our common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,813
|
)
|
|
$
|
(8,465
|
)
|
|
$
|
(38,005
|
)
|
|
$
|
(28,397
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares
outstanding
|
|
43,345,856
|
|
|
43,009,015
|
|
|
43,209,187
|
|
|
42,627,985
|
|
Basic and diluted loss per common share
|
|
$
|
(0.36
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.67
|
)
|
The following outstanding securities, using the treasury stock method, were excluded from the above computations of net loss per share because their impact would be antidilutive due to the net losses during the
nine
months ended
September 30,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Stock options
|
|
3,312,868
|
|
|
3,197,577
|
|
|
3,312,868
|
|
|
3,197,577
|
|
Restricted stock
|
|
275,782
|
|
|
265,684
|
|
|
275,782
|
|
|
265,684
|
|
RSUs
|
|
62,244
|
|
|
44,092
|
|
|
62,244
|
|
|
44,092
|
|
As discussed in Note 11, we have $
50,000
aggregate principal amount of 2016 Convertible Notes outstanding at
September 30,
2018
and
2017
and $
75,000
aggregate principal amount of 2018 Convertible Notes outstanding at
September 30,
2018
. The Convertible Notes may be settled, at our election, in cash, shares of our common stock or combination of cash and shares of our common stock. For purposes of calculating the maximum dilutive impact, it is presumed that the Convertible Notes will be settled in common stock with the resulting potential common shares included in diluted earnings per share if the effect is more dilutive. The effect of the conversion of the Convertible Notes is excluded from the calculation of diluted loss per share because the net loss for the
three and nine
months ended
September 30,
2018
and
2017
causes such securities to be antidilutive.
The potential dilutive effect of these securities is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Conversion of 2016 Convertible Notes
|
|
2,512,082
|
|
|
2,707,852
|
|
|
2,512,082
|
|
|
2,707,852
|
|
Conversion of 2018 Convertible Notes
|
|
3,239,363
|
|
|
—
|
|
|
3,239,363
|
|
|
—
|
|
17. SEGMENT AND GEOGRAPHICAL CONCENTRATION
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. We manage the business globally within
one
reporting segment. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Products are sold principally in the United States.
International revenue represented
26.4%
and
26.4%
for the
three and nine
months ended
September 30,
2018
, respectively, and no individual country represented
10%
or greater of our consolidated revenue.
One customer accounted for approximately
10.7%
and
11.1%
of total revenue for the three months ended
September 30,
2018
and
2017
, respectively, and
12.2%
and
10.5%
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
The following table represents total revenue by geographic area, based on the location of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
United States
|
|
$
|
52,491
|
|
|
$
|
48,474
|
|
|
$
|
156,707
|
|
|
$
|
145,456
|
|
International
|
|
18,868
|
|
|
14,179
|
|
|
56,108
|
|
|
44,774
|
|
Total
|
|
$
|
71,359
|
|
|
$
|
62,653
|
|
|
$
|
212,815
|
|
|
$
|
190,230
|
|
We classify sales within the United States into three categories: complex spine pathologies, minimally invasive procedures and degenerative and other conditions. A significant portion of our international revenue is derived from our distributor partners who do not report their product usage at the surgeon or hospital level, which prevents us from providing a specific breakdown for our international revenue among the three product categories. These sales transactions are settled when we ship the product to the distributor.
The following table represents domestic revenue by current procedure category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Complex spine
|
|
$
|
20,753
|
|
|
$
|
20,047
|
|
|
$
|
61,094
|
|
|
$
|
57,525
|
|
Minimally invasive
|
|
8,507
|
|
|
7,694
|
|
|
25,568
|
|
|
24,351
|
|
Degenerative
|
|
23,231
|
|
|
20,733
|
|
|
70,045
|
|
|
63,580
|
|
|
|
52,491
|
|
|
48,474
|
|
|
156,707
|
|
|
145,456
|
|
International
|
|
18,868
|
|
|
14,179
|
|
|
56,108
|
|
|
44,774
|
|
Total
|
|
$
|
71,359
|
|
|
$
|
62,653
|
|
|
$
|
212,815
|
|
|
$
|
190,230
|
|
ITEM 2.