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At any time after February 2012, and upon entering into a change of control transaction or Fundamental Transaction, as defined in the Debenture Agreement, the Company may deliver a notice to the Holders of its irrevocable election to redeem all of the then outstanding principal of the 2011 Convertible Notes for cash in an amount equal to the sum of (a) the greater of (i) the outstanding amount of the 2011 Convertible Notes divided by the conversion price on the date of the mandatory default amount, as defined in the Purchase Agreement, is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the Convertible Notes. |
Fair Value Measurements The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2012: The following summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2013: A summary of changes in the 2011 Convertible Notes, 2012 Convertible Notes, Third Tranche Convertible Notes, 2011 Warrants, 2012 Warrants, Third Tranche Warrants, and the February 2013 Warrants, February 2013 SPA Options, September 2013 Warrants, and September 2013 SPA Options as of December 31, 2012, February 22, 2013, September 18, 2013 and December 31, 2013 is as follows: The following is a roll forward of the Company’s Level 3 instruments for the year ended December 31, 2013: Valuation - Methodology and Significant Inputs Assumptions Fair values for the Company’s derivatives and financial instruments are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, market interest rates, forward yield curves and discount rates. |
This model requires the following key inputs with respect to the Company and/or instrument: PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2013 The following are significant assumptions utilized in developing the inputs: ● The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date; ● The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock; ● Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. |
Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates; ● Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock; ● The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term; ● With respect to the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date; ● With respect to the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the 2011 Convertible Notes, 2012 Convertible Notes and Third Tranche Convertible Notes, a low probability of a forced redemption; ● Upon a change of control redemption, the change of control redemption amount shall equal to the sum of: I. the greater of: (i) the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and II. |
Finally, even if we are successful in securing patent protection for some of our pending patent applications, or for additional intellectual property ideas in this field, we cannot predict when in the future any such potential patents may be issued, how strong such additional patent protection will prove to be, or whether these patents will be issued in a timely enough fashion to afford us any commercially meaningful advantage in marketing our RenalGuard System against other potentially competitive devices; · We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer needs; · If we deliver systems with defects, our credibility may be harmed, sales and market and regulatory approvals acceptance of our systems may decrease and we may incur liabilities associated with those defects; · If we require additional capital in the future, it may not be available, or if available, may not be on terms acceptable to us; · We are exposed to various risks related to the regulatory environment for medical devices. |
Compliance with medical device health and safety regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business; · Our share price will fluctuate based upon a number of factors including, but not limited to: · actual or anticipated fluctuations in our results of operations; · changes in estimates of our future results of operations by us or securities analysts; · announcements of technological innovations or new products or services by us or our competitors; · changes affecting the medical device industry; · announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; · additions or departures of key technical or management personnel; · issuances of debt or equity securities; · significant lawsuits, including patent or stockholder litigation; · changes in the market valuations of similar companies; · sales of our common stock by us or our stockholders in the future; · dilution caused by the conversion of convertible debt currently outstanding or which may be issued to our current secured lender and its assignees as well as the exercise of warrants issued to this lender, as well as by the exercise of employee stock options or the issuance of shares on the vesting of restricted stock units; · trading volume of our common stock; and · other events or factors that may directly or indirectly affect the value or perceived value of our business and/or prospects, including the risk factors identified in this prospectus. |
The term “internal control over financial reporting” is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: · Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; · Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and · Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
At any time after February 2012, and upon entering into a change of control transaction or Fundamental Transaction, as defined in the Debenture Agreement, the Company may deliver a notice to the Holders of its irrevocable election to redeem all of the then outstanding principal of the Convertible Notes for cash in an amount equal to the sum of (a) the greater of (i) the outstanding amount of the Convertible Notes divided by the Conversion Price on the date of the mandatory default amount, as defined in the Purchase Agreement, is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the Volume Weighted Average Price (“VWAP”) of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the Convertible Notes. |
This model requires the following key inputs with respect to the Company and/or instrument: PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2012 The following are significant assumptions utilized in developing the inputs: · The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date; · The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock; · Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. |
Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates; · Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock; · The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term; · With respect to the Convertible Notes and Second Tranche Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date; · With respect to the Convertible Notes and Second Tranche Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the Convertible Notes and Second Tranche Convertible Notes, a low probability of a forced redemption; · Upon a change of control redemption, the change of control redemption amount shall equal to the sum of: I. the greater of: (i) the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and II. |
Simultaneously with the closing of the SPA, GCP IV, LLC (“GCP”), the original holder of the Company’s Convertible Notes (which have an aggregate principal balance of $5,250,000 as of January 16, 2013) entered into an Amendment and Waiver Agreement (“Amendment and Waiver Agreement”) with the Company under which GCP has agreed to (a) increase the number of shares exercisable under warrants issued to GCP in 2011 and 2012 (the “2011 and 2012 Warrants”) from 50,000,000 shares to 81,578,946 shares and to modify both the exercise price and the “VWAP price” of the 2011 and 2012 Warrants to $0.098 and $0.155, respectively, (b) return to the Company for forfeiture the remaining warrants previously issued to GCP to purchase 12,500,000 shares of common stock, (c) extend the due date for the $4,000,000 term debenture issued by the Company to GCP in February 2011 from February 22, 2014 to June 30, 2015, (d) until February 22, 2014, without the prior written consent from the majority of the investors under the SPA, forbear from declaring any Event of Default (as defined in the original debenture, and (e) relinquish its right to purchase up to an additional $750,000 in debentures under the terms of the original 2011 Securities Purchase Agreement. |
Finally, even if we are successful in securing patent protection for some of our pending patent applications, or for additional intellectual property ideas in this field, we cannot predict when in the future any such potential patents may be issued, how strong such additional patent protection will prove to be, or whether these patents will be issued in a timely enough fashion to afford us any commercially meaningful advantage in marketing our RenalGuard System against other potentially competitive devices; · We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer needs; · If we deliver systems with defects, our credibility may be harmed, sales and market and regulatory approvals acceptance of our systems may decrease and we may incur liabilities associated with those defects; · If we require additional capital in the future, it may not be available, or if available, may not be on terms acceptable to us; · We are exposed to various risks related to the regulatory environment for medical devices. |
Compliance with medical device health and safety regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business; · Our share price will fluctuate based upon a number of factors including, but not limited to: · actual or anticipated fluctuations in our results of operations; · changes in estimates of our future results of operations by us or securities analysts; · announcements of technological innovations or new products or services by us or our competitors; · changes affecting the medical device industry; · announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; · additions or departures of key technical or management personnel; · issuances of debt or equity securities; · significant lawsuits, including patent or stockholder litigation; · changes in the market valuations of similar companies; · sales of our common stock by us or our stockholders in the future; · dilution caused by the conversion of convertible debt currently outstanding or which may be issued to our current secured lender and its assignees as well as the exercise of warrants issued to this lender, as well as by the exercise of employee stock options or the issuance of shares on the vesting of restricted stock units; · trading volume of our common stock; and · other events or factors that may directly or indirectly affect the value or perceived value of our business and/or prospects, including the risk factors identified in this prospectus. |
The term “internal control over financial reporting” is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: · Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; · Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and · Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
At any time after February 2012, and upon entering into a change of control transaction or Fundamental Transaction, as defined in the Debenture Agreement, the Company may deliver a notice to the Holders of its irrevocable election to redeem all of the then outstanding principal of the Convertible Notes for cash in an amount equal to the sum of (a) the greater of (i) the outstanding amount of the Convertible Notes divided by the Conversion Price on the date of the mandatory default amount, as defined in the Purchase Agreement, is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the Volume Weighted Average Price (“VWAP”) of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the Notes, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due under the various agreements covering issuance of the Convertible Notes. |
This model requires the following key inputs with respect to the Company and/or instrument: The following are significant assumptions utilized in developing the inputs: · The Company’s common stock shares are traded on the OTC Bulletin Board and, accordingly, the stock price input is based upon bid prices as of the valuation dates due to the extremely thin trading volume, broker-driven market (vs. exchange market) and the wide bid/ask spread as of the valuation date; · The expected future stock prices of the Company’s stock were modeled to include the effect of dilution upon conversion of the instruments to shares of common stock; · Stock volatility was estimated by considering (i) the annualized monthly volatility of the Company’s stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments (monthly data set is more relevant given the extremely thin trading volume of the Company’s common stock) and (ii) the annualized daily volatility of comparable companies’ stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instrument. |
Historic prices of the Company and comparable companies’ common stock were used to estimate volatility as the Company did not have traded options as of the valuation dates; · Based upon the Company’s historical operations and management’s expectations for the foreseeable future, the Company’s stock was assumed to be a non-dividend-paying stock; · The risk-free interest rate is based on the U.S. Treasury Yield curve in effect as of the valuation date for the expected term; · With respect to the Convertible Notes, the Company is expected to pay all accrued interest due to the Holders on each Interest Payment Date; · With respect to the Convertible Notes, based upon management’s expectations for a change of control or fundamental transaction to occur prior to the maturity date of the Convertible Notes, a low PLC SYSTEMS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2011 probability of a forced redemption; · Upon a change of control redemption, the change of control redemption amount shall equal to the sum of: I. the greater of: (i) the outstanding amount of the debt divided by the Conversion Price on the date of the mandatory default amount is either (A) demanded or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP of the date of the mandatory default amount is either (x) demanded or otherwise due or (y) paid in full, whichever has higher VWAP, plus all accrued and unpaid interest, or (ii) 130% of the outstanding principal amount of the debt, plus 100% of accrued and unpaid interest, and II. |
Finally, even if we are successful in securing patent protection for some of our pending patent applications, or for additional intellectual property ideas in this field, we cannot predict when in the future any such potential patents may be issued, how strong such additional patent protection will prove to be, or whether these patents will be issued in a timely enough fashion to afford us any commercially meaningful advantage in marketing our RenalGuard System against other potentially competitive devices; · We are exposed to risks associated with outsourcing activities, which could result in supply shortages that could affect our ability to meet customer needs; · If we deliver systems with defects, our credibility may be harmed, sales and market and regulatory approvals acceptance of our systems may decrease and we may incur liabilities associated with those defects; · If we require additional capital in the future, it may not be available, or if available, may not be on terms acceptable to us; · We are exposed to various risks related to the regulatory environment for medical devices. |
Compliance with medical device health and safety regulations may be very costly, and the failure to comply could result in liabilities, fines and cessation of our business; · Our share price will fluctuate based upon a number of factors including, but not limited to: · actual or anticipated fluctuations in our results of operations; · changes in estimates of our future results of operations by us or securities analysts; · announcements of technological innovations or new products or services by us or our competitors; · changes affecting the medical device industry; · announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; · additions or departures of key technical or management personnel; · issuances of debt or equity securities; · significant lawsuits, including patent or stockholder litigation; · changes in the market valuations of similar companies; · sales of our common stock by us or our stockholders in the future; · dilution caused by the conversion of convertible debt currently outstanding or which may be issued to our current secured lender and its assignees as well as the exercise of warrants issued to this lender, as well as by the exercise of employee stock options or the issuance of shares on the vesting of restricted stock units; · trading volume of our common stock; and · other events or factors that may directly or indirectly affect the value or perceived value of our business and/or prospects, including the risk factors identified in this prospectus. |
The term “internal control over financial reporting” is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: · Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; · Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and · Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
The Trust indenture provides, among other provisions, that: 1. the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; 2. the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding Trust units, or upon Trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; 3. the Trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; 4. the Trustee may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders; 5. the Trustee will make monthly cash distributions to unitholders (Note 3); and 6. the Trust will terminate upon the first occurrence of: a) disposition of all net profits interests pursuant to terms of the Trust indenture; b) gross revenue of the Trust is less than $1 million per year for two successive years; or c) a vote of holders of 80% or more of the outstanding Trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The Trust indenture provides, among other provisions, that: 1. the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; 2. the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding Trust units, or upon Trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; 3. the Trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; 4. the Trustee may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders; 5. the Trustee will make monthly cash distributions to unitholders (Note 3); and 6. the Trust will terminate upon the first occurrence of: a) disposition of all net profits interests pursuant to terms of the Trust indenture; b) gross revenue of the Trust is less than $1 million per year for two successive years; or c) a vote of holders of 80% or more of the outstanding Trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The Trust indenture provides, among other provisions, that: 1. the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; 2. the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding Trust units, or upon Trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; 3. the Trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; 4. the Trustee may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders; 5. the Trustee will make monthly cash distributions to unitholders (Note 3); and 6. the Trust will terminate upon the first occurrence of: a) disposition of all net profits interests pursuant to terms of the Trust indenture; b) gross revenue of the Trust is less than $1 million per year for two successive years; or c) a vote of holders of 80% or more of the outstanding Trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The Trust indenture provides, among other provisions, that: 1. the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; 2. the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding Trust units, or upon Trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; 3. the Trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; 4. the Trustee may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders; 5. the Trustee will make monthly cash distributions to unitholders (Note 3); and 6. the Trust will terminate upon the first occurrence of: a) disposition of all net profits interests pursuant to terms of the Trust indenture; b) gross revenue of the Trust is less than $1 million per year for two successive years; or c) a vote of holders of 80% or more of the outstanding Trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The Trust indenture provides, among other provisions, that: • the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; • the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding Trust units, or upon Trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; • the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; • the trustee may borrow funds required to pay Trust liabilities if fully repaid prior to further distributions to unitholders; • the trustee will make monthly cash distributions to unitholders (Note 3); and • the Trust will terminate upon the first occurrence of: • disposition of all net profits interests pursuant to terms of the Trust indenture, • gross revenue of the Trust is less than $1 million per year for two successive years, or • a vote of holders of 80% or more of the outstanding Trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The Trust indenture provides, among other provisions, that: • the Trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; • the Trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding trust units, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; • the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; • the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; • the trustee will make monthly cash distributions to unitholders (Note 3); and • the Trust will terminate upon the first occurrence of: • disposition of all net profits interests pursuant to terms of the Trust indenture, • gross revenue of the Trust is less than $1 million per year for two successive years, or • a vote of holders of 80% or more of the outstanding trust units to terminate the Trust in accordance with provisions of the Trust indenture. |
The trust indenture provides, among other provisions, that: • the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; • the trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding trust units, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; • the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; • the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; • the trustee will make monthly cash distributions to unitholders (Note 3); and • the trust will terminate upon the first occurrence of: disposition of all net profits interests pursuant to terms of the trust indenture, gross revenue of the trust is less than $1 million per year for two successive years, or a vote of holders of 80% or more of the outstanding trust units to terminate the trust in accordance with provisions of the trust indenture. |
U.S. Trust, Bank of America Private Wealth Management’s resignation is conditioned on the satisfaction or waiver by U.S. Trust, Bank of America Private Wealth Management of each of the following: (i) the appointment of Southwest Bank as trustee of Sabine Royalty Trust (another royalty trust for which U.S. Trust, Bank of America Private Wealth Management currently serves as trustee); (ii) the appointment of Southwest Bank or another successor trustee as trustee of the trust and five other royalty trusts for which U.S. Trust, Bank of America Private Wealth Management currently serves as trustee and as agent under a disbursing arrangement for which it currently serves as agent; (iii) the accuracy of certain representations and warranties and performance of certain agreements made by Southwest Bank in an agreement between U.S. Trust, Bank of America Private Wealth Management and Southwest Bank; and (iv) no governmental injunction, order or other action that would prohibit Southwest Bank’s appointment, U.S. Trust, Bank of America Private Wealth Management’s resignation or the other actions described above. |
The trust indenture provides, among other provisions, that: • the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; • the trust may not dispose of all or part of the net profits interests unless approved by holders of 80% or more of the outstanding trust units, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders on the next declared distribution; • the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; • the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; • the trustee will make monthly cash distributions to unitholders (Note 3); and • the trust will terminate upon the first occurrence of: disposition of all net profits interests pursuant to terms of the trust indenture, gross revenue of the trust is less than $1 million per year for two successive years, or a vote of holders of 80% or more of the outstanding trust units to terminate the trust in accordance with provisions of the trust indenture. |
U.S. Trust, Bank of America Private Wealth Management’s resignation is conditioned on the satisfaction or waiver by U.S. Trust, Bank of America Private Wealth Management of each of the following: (i) the appointment of Southwest Bank as trustee of Sabine Royalty Trust (another royalty trust for which U.S. Trust, Bank of America Private Wealth Management currently serves as trustee); (ii) the appointment of Southwest Bank or another successor trustee as trustee of the trust and five other royalty trusts for which U.S. Trust, Bank of America Private Wealth Management currently serves as trustee and as agent under a disbursing arrangement for which it currently serves as agent; (iii) the accuracy of certain representations and warranties and performance of CROSS TIMBERS ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS-(Continued) certain agreements made by Southwest Bank in an agreement between U.S. Trust, Bank of America Private Wealth Management and Southwest Bank; and (iv) no governmental injunction, order or other action that would prohibit Southwest Bank’s appointment, U.S. Trust, Bank of America Private Wealth Management’s resignation or the other actions described above. |
The trust indenture provides, among other provisions, that: • the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; • the trust may not dispose of all or part of the net profits interests unless approved by 80% of the unitholders, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders; • the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; • the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; • the trustee will make monthly cash distributions to unitholders (Note 3); and • the trust will terminate upon the first occurrence of: disposition of all net profits interests pursuant to terms of the trust indenture, gross revenue of the trust is less than $1 million per year for two successive years, or a vote of 80% of the unitholders to terminate the trust in accordance with provisions of the trust indenture. |
The trust indenture provides, among other provisions, that: - the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; - the trust may not dispose of all or part of the net profits interests unless approved by 80% of the unitholders, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders; - the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; - the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; - the trustee will make monthly cash distributions to unitholders (Note 3); and - the trust will terminate upon the first occurrence of: - disposition of all net profits interests pursuant to terms of the trust indenture, - gross revenue of the trust is less than $1 million per year for two successive years, or - a vote of 80% of the unitholders to terminate the trust in accordance with provisions of the trust indenture. |
The trust indenture provides, among other provisions, that: - the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; - the trust may not dispose of all or part of the net profits interests unless approved by 80% of the unitholders, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders; - the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; - the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; - the trustee will make monthly cash distributions to unitholders (Note 3); and - the trust will terminate upon the first occurrence of: - disposition of all net profits interests pursuant to terms of the trust indenture, - gross revenue of the trust is less than $1 million per year for two successive years, or - a vote of 80% of the unitholders to terminate the trust in accordance with provisions of the trust indenture. |
The trust indenture provides, among other provisions, that: - the trust may not engage in any business activity or acquire any assets other than the net profits interests and specific short-term cash investments; - the trust may not dispose of all or part of the net profits interests unless approved by 80% of the unitholders, or upon trust termination, and any sale must be for cash with the proceeds promptly distributed to the unitholders; - the trustee may establish a cash reserve for payment of any liability that is contingent or not currently payable; - the trustee may borrow funds required to pay trust liabilities if fully repaid prior to further distributions to unitholders; - the trustee will make monthly cash distributions to unitholders (Note 3); and - the trust will terminate upon the first occurrence of: - disposition of all net profits interests pursuant to terms of the trust indenture, - gross revenue of the trust is less than $1 million per year for two successive years, or - a vote of 80% of the unitholders to terminate the trust in accordance with provisions of the trust indenture. |
Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, Consolidation (Topic 810) ("ASU 2014-13") results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2020, as shown in the table below: Notes to Consolidated Financial Statements-(Continued) The following table represents income and expenses of the consolidated CLOs included in the Company's Consolidated Statements of Operations for the period indicated: As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company's own economic interests in the consolidated CLOs, which are eliminated upon consolidation: Fair Value Measurements of CIP The assets and liabilities of CIP measured at fair value on a recurring basis as of December 31, 2020 and 2019 by fair value hierarchy level were as follows: Notes to Consolidated Financial Statements-(Continued) The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company's CIP measured at fair value. |
Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2019, as shown in the table below: The following table represents income and expenses of the consolidated CLOs included in the Consolidated Statements of Operations for the period indicated: As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation: Fair Value Measurements of CIP The assets and liabilities of the CIP measured at fair value on a recurring basis by fair value hierarchy level were as follows: Notes to Consolidated Financial Statements-(Continued) The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s CIP measured at fair value. |
Assets Under Management by Product The following table summarizes our assets under management by product: (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds (2) Represents assets under management in liquidity strategies, including certain open-end funds and institutional accounts (3) Averages are calculated as follows: - Funds - average daily or weekly balances - Retail Separate Accounts - prior quarter ending balance or average of month-end balances in quarter - Institutional Accounts and Structured Products - average of month-end balances in quarter The following table summarizes asset flows by product: (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds (2) Represents open-end and closed-end fund distributions net of reinvestments, the net change in assets from liquidity strategies, and the impact on net flows from non-sales related activities such as asset acquisitions/(dispositions), seed capital investments/(withdrawals), structured products reset transactions and the use of leverage (3) Represents assets under management in liquidity strategies, including in certain open-end funds and institutional accounts The following table summarizes our assets under management by asset class: (1) Consists of real estate securities, mid-stream energy securities and master limited partnerships, options strategies and other (2) Represents assets under management in liquidity strategies, including certain open-end funds and institutional accounts Average Assets Under Management and Average Fees Earned The following table summarizes the average management fees earned in basis points and average assets under management: (1) Represents assets under management of U.S. retail funds, offshore funds and variable insurance funds (2) Averages are calculated as follows: - Funds - average daily or weekly balances - Retail Separate Accounts - prior-quarter ending balance or average of month-end balances in quarter - Institutional Accounts and Structured Products - average of month-end balances in quarter (3) Represents assets under management in liquidity strategies, including certain open-end funds and institutional accounts Average fees earned represent investment management fees, net of fees paid to third-party investment management service providers and investment management fees earned from consolidated investment products, divided by average net assets. |
Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative prescribed by ASU 2014-13, results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2018, as shown in the table below: The following table represents income and expenses of the consolidated CLOs included in the Company's Consolidated Statements of Operations for the period indicated: As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation: Notes to Consolidated Financial Statements-(Continued) Fair Value Measurements of Consolidated Investment Products The assets and liabilities of the consolidated investment products measured at fair value on a recurring basis by fair value hierarchy level were as follows: The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment products measured at fair value. |
Assets Under Management by Product The following table summarizes our assets under management by product: (1) Represents assets under management of U.S. 1940 Act mutual funds and UCITS (2) Averages are calculated as follows: - Funds - average daily or weekly balances - Retail Separate Accounts - prior quarter ending balance or average of month-end balances in quarter - Institutional Accounts - average of month-end balances in quarter (3) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts Asset Flows by Product The following table summarizes asset flows by product: (1) Represents assets under management of U.S. 1940 Act mutual funds and UCITS (2) Represents open-end and closed-end mutual fund distributions, net of reinvestments, net flows from non-sales related activities such as asset acquisitions/(dispositions), marketable securities investments/(withdrawals), the impact on assets from the use of leverage and the net change in assets for liquidity strategies The following table summarizes our assets under management by asset class: (1) Consists of real estate securities, master-limited partnerships, option strategies and other (2) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts Average Assets Under Management and Average Fees Earned The following table summarizes the average management fees earned in basis points and average assets under management: (1) Represents assets under management of U.S. 1940 Act mutual funds and UCITS (2) Averages are calculated as follows: - Funds - average daily or weekly balances - Retail Separate Accounts - prior quarter ending balance or average of month-end balances in quarter - Institutional Accounts - average of month-end balances in quarter (3) Represents assets under management in liquidity strategies, including open-end funds and institutional accounts Average fees earned represent investment management fees net of fees paid to third-party service providers for investment management related services and investment management fees earned from consolidated investment products, divided by average net assets. |
/S/ MARK C. TREANOR /S/ GEORGE R. AYLWARD Mark C. Treanor Director and Non-Executive Chairman George R. Aylward President, Chief Executive Officer and Director (Principal Executive Officer) /S/ JAMES R. BAIO /S/ SUSAN S. FLEMING James R. Baio Director Susan S. Fleming Director /S/ TIMOTHY A. HOLT /S/ SHEILA HOODA Timothy A. Holt Director Sheila Hooda Director /S/ MELODY L. JONES /S/ STEPHEN T. ZARRILLI Melody L. Jones Director Stephen T. Zarrilli Director /S/ MICHAEL A. ANGERTHAL Michael A. Angerthal Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Virtus Investment Partners, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). |
Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative, as adopted on January 1, 2016, prescribed by ASU 2014-13, results in the net assets of the consolidated CLOs shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2017, as shown in the table below: The following table represents income and expenses of the consolidated CLOs included in the Company's Consolidated Statements of Operations for the period indicated: Notes to Consolidated Financial Statements-(Continued) As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated CLOs, which are eliminated upon consolidation: Fair Value Measurements of Consolidated Investment Products The assets and liabilities of the consolidated investment products measured at fair value on a recurring basis by fair value hierarchy level were as follows: The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment products measured at fair value. |
Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative, prescribed by ASU 2014-13 and adopted on January 1, 2016, results in the net amount of the consolidated investment product shown above to be equivalent to the beneficial interests retained by the Company at December 31, 2016 as shown in the table below: The following table represents revenue and expenses of the consolidated investment product included in the Company’s Consolidated Statements of Operations for the periods indicated: As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated investment product which are eliminated upon consolidation: Virtus Investment Partners, Inc. Notes to Consolidated Financial Statements-(Continued) Fair Value Measurements of Consolidated Investment Product The assets and liabilities of the consolidated investment product measured at fair value on a recurring basis by fair value hierarchy level were as follows: As of December 31, 2016: As of December 31, 2015: The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated investment product measured at fair value: Cash equivalents represent investments in money market funds. |
/S/ MARK C. TREANOR Mark C. Treanor Director and Non-Executive Chairman /S/ GEORGE R. AYLWARD George R. Aylward President, Chief Executive Officer and Director (Principal Executive Officer) /S/ JAMES R. BAIO James R. Baio Director /S/ SUSAN S. FLEMING Susan S. Fleming Director /S/ DIANE M. COFFEY Diane M. Coffey Director /S/ RUSSEL C. ROBERTSON Russel C. Robertson Director /S/ TIMOTHY A. HOLT Timothy A. Holt Director /S/ EDWARD M. SWAN, JR. Edward M. Swan, Jr. Director /S/ MICHAEL A. ANGERTHAL Michael A. Angerthal Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Virtus Investment Partners, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Virtus Investment Partners, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. |
* Mark C. Treanor Director and Non-Executive Chairman /S/ GEORGE R. AYLWARD George R. Aylward President, Chief Executive Officer and Director (Principal Executive Officer) * James R. Baio Director * Susan S. Fleming Director * Diane M. Coffey Director * Hugh M. S. McKee Director * Timothy A. Holt Director * Edward M. Swan, Jr. Director /S/ MICHAEL A. ANGERTHAL Michael A. Angerthal Chief Financial Officer (Principal Financial and Accounting Officer) * Pursuant to Power of Attorney (filed herewith) /S/ GEORGE R. AYLWARD By: George R. Aylward Attorney-In-Fact INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Virtus Investment Partners, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Virtus Investment Partners, Inc. and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. |
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, as well as the following risks and uncertainties: (a) the effects of changes and volatility in political, economic or industry conditions, the interest rate environment, or financial and capital markets; (b) any poor relative investment performance of our asset management strategies and any resulting outflows of assets; (c) mutual fund sales in any period may be through a limited number of financial intermediaries, from a limited number of investment strategies, and impacted by relative performance and the breadth and type of investment products we offer; (d) any lack of availability of additional and/or replacement financing, as may be needed, on satisfactory terms or at all; (e) any inadequate performance of third-party relationships; (f) the withdrawal of assets from under our management; (g) our ability to attract and retain key personnel in a competitive environment; (h) the ability of independent trustees of our mutual funds and closed-end funds, and other clients, to terminate their relationships with us; (i) the possibility that our goodwill or intangible assets could become impaired, requiring a charge to earnings; (j) the competition we face in our business, including competition related to investment products and fees; (k) potential adverse regulatory and legal developments; (l) the difficulty of detecting misconduct by our employees, sub-advisors and distribution partners; (m) changes in accounting or regulatory standards or rules, including the impact of proposed rules which may be promulgated relating to Rule 12b-1 fees; (n) the ability to satisfy the financial covenants under existing debt agreements; and (o) certain other risks and uncertainties described in this Annual Report or in any of our other filings with the SEC, which are available on our website at www.virtus.com under “Investor Relations.” An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Annual Report or included in our other periodic reports filed with the SEC could materially and adversely affect our operations, financial results, cash flows, prospects, and liquidity. |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include, effective August 2, 2010: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $65.0 million, plus adjustments for net income, redemptions of convertible securities and equity issuances, if any, after September 1, 2009, (ii) minimum consolidated assets under management (excluding money market funds) of $15.0 billion as of each quarter end through March 31, 2012 and $18.0 billion as of any quarter end thereafter, (iii) minimum liquid assets having a fair value not less than $7.5 million, (iv) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 3.00:1, and (v) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 2.75:1. |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include, effective August 2, 2010: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $65.0 million, plus adjustments for net income, redemptions of convertible securities and equity issuances, if any, after September 1, 2009, (ii) minimum consolidated assets under management (excluding money market funds) of $15.0 billion as of each quarter end through March 31, 2012 and $18.0 billion as of any quarter end thereafter, (iii) minimum liquid assets having a fair value not less than $7.5 million, (iv) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 3.00:1, and (v) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 2.75:1. |
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, as well as the following risks and uncertainties: (a) the effects of adverse market and economic developments, including those related to global economic, political or social instability, on all aspects of our business; (b) any poor relative investment performance of our investment management strategies and any resulting outflows of assets; (c) any lack of availability of additional financing, as may be needed, on satisfactory terms or at all; (d) any inadequate performance of third-party relationships; (e) the withdrawal of assets from under our management; (f) our ability to attract and retain key personnel in a competitive environment; (g) the ability of independent trustees of our mutual funds and closed-end funds and other clients to terminate their relationships with us; (h) the possibility that our goodwill or intangible assets could become impaired, requiring a charge to earnings; (i) the increased competition we face in our business, including competition related to investment products and fees; (j) potential adverse regulatory and legal developments; (k) the difficulty of detecting misconduct by our employees, sub-advisors and distribution partners; (l) changes in accounting standards or rules, including the impact of proposed rules which may be promulgated related to Rule 12b-1 fees; (m) the ability to satisfy the financial covenants under existing debt agreements; and (n) certain other risks and uncertainties described in this Annual Report or in any of our other filings with the SEC. |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include, effective August 2, 2010: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $65.0 million, plus adjustments for net income, redemptions of convertible securities and equity issuances, if any, after September 1, 2009, (ii) minimum consolidated assets under management (excluding money market funds) of $15.0 billion as of each quarter end through March 31, 2012 and $18.0 billion as of any quarter end thereafter, (iii) minimum liquid assets having a fair value not less than $7.5 million, (iv) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 3.00:1, and (v) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 2.75:1. |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include, effective August 2, 2010: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $65.0 million, plus adjustments for net income, redemptions of convertible securities and equity issuances, if any, after September 1, 2009, (ii) minimum consolidated assets under management (excluding money market funds) of $15.0 billion as of each quarter end through March 31, 2012 and $18.0 billion as of any quarter end thereafter, (iii) minimum liquid assets having a fair value not less than $7.5 million, (iv) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 3.00:1, and (v) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 2.75:1. |
Our affiliated firms and their respective assets under management, styles and products are as follows: Affiliated Managers Duff & Phelps Investment Management SCM Advisors Kayne Anderson Rudnick Investment Management Zweig Advisors Other Assets Under Management at December 31, 2009 ($ in billions) $6.5 $3.1 $3.9 $1.6 $0.3 Location Chicago, IL San Francisco, CA Los Angeles, CA New York, NY Various Investment Approach Quality oriented, focusing on income Value-driven fixed income; fundamental growth equity Quality at a reasonable price Growth at a reasonable price; high quality fixed income Fundamental Investment Types Equities •REITs •Utilities •Global Infrastructure •Large and Small Cap Growth •Large, Mid and Small Cap Value and Core Growth •Tactical Asset Allocation •Large Cap Core •Small Cap Core, Growth and Value •Mid Cap Core Fixed Income •Core •Municipal Bonds •Core •Core Plus •High Yield •CA Municipal Bonds •Core •Core •Municipal Bonds Products Open-End Funds ü ü ü ü ü Closed-End Funds ü ü Separately Managed Accounts ü ü ü Institutional ü ü ü ü Our Investment Products Our assets under management are comprised of mutual fund assets (open- and closed-end), separately managed accounts (intermediary sponsored and private client) and institutional accounts (traditional institutional mandates and structured products). |
Market and economic developments have affected, or have the potential to affect, us adversely by: • reducing the value of the assets we manage, which has resulted in, and could continue to result in, lower fee revenues; • impacting the returns and attractiveness of our investment products, which has caused and may continue to cause existing clients to withdraw assets and diminish our ability to attract assets from new and existing clients, which would result in lower sales and fee revenues; • causing a change in the mix of our assets under management to less profitable products; • increasing the risk that we are not able to maintain compliance with our debt covenants; • increasing competition from competitors that may be larger than we are and have more resources than we do; • affecting the access to, and reliability of, our intermediary distribution channels and service providers, which could adversely affect our sales, redemptions and business operations; • causing regulators to change laws and regulations that affect us, which may result in greater compliance costs and restrictions on our ability to do business; • encouraging litigation, arbitration and regulatory action in response to the increased frequency and magnitude of investment losses, which may result in unfavorable judgments, awards and settlements, regulatory fines and an increase in our related legal expenses; • increasing the difficulty of performing administrative functions such as determining the value of assets we manage, which may affect our service levels and our ability to retain existing clients or attract new clients; • damaging our reputation indirectly by association with the industries most seriously affected by market and economic developments, or directly due to a decline in investment performance or service levels, which may affect our ability to retain existing clients or attract new clients; • damaging our reputation due to the inability of investors to redeem auction rate preferred securities, issued by certain of our closed-end funds, due to the failures of remarketing auctions caused by illiquidity in the auction rate preferred market, which previously provided investment liquidity to certain of our closed-end funds; and • damaging our reputation or creating pressure to support certain of our money market funds should these funds become at risk of falling below a $1.00 net asset value, referred to as “breaking the buck,” due to illiquidity in the money markets or credit-related impairments of their holdings. |
Section 203 prohibits a corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless: • the board of directors approved the business combination before the stockholder became an interested stockholder, or the board of directors approved the transaction that resulted in the stockholder becoming an interested stockholder; • upon completion of the transaction which resulted in the stockholder becoming an interested stockholder, such stockholder owned at least 85% of the voting stock outstanding when the transaction began other than shares held by directors who are also officers and other than shares held by certain employee stock plans; or • the board of directors approved the business combination after the stockholder became an interested stockholder and the business combination was approved at a meeting by at least two-thirds of the outstanding voting stock not owned by such stockholder. |
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, as well as the following risks and uncertainties: (a) the effects of adverse market and economic developments on all aspects of our business; (b) any poor relative investment performance of our investment management strategies and any resulting outflows of assets; (c) any lack of availability of additional financing, as may be needed, on satisfactory terms or at all; (d) any inadequate performance of third-party relationships; (e) the withdrawal of assets from under our management; (f) our ability to attract and retain key personnel in a competitive environment; (g) the ability of independent trustees of our mutual funds and closed-end funds, and other clients to terminate their relationships with us; (h) the possibility that our goodwill or intangible assets could become impaired, requiring a charge to earnings; (i) the strong competition we face in our business; (j) potential adverse regulatory and legal developments; (k) the difficulty of detecting misconduct by our employees, sub-advisors and distribution partners; (l) changes in accounting standards; (m) the ability to satisfy the financial covenants under existing debt agreements; and (n) certain other risks and uncertainties described in this Annual Report or in any of our other filings with the Securities and Exchange Commission (“SEC”). |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $55 million plus adjustments for future net income and equity issuances, if any, (ii) minimum consolidated assets under management of $15.0 billion (excluding money market funds) as of each quarter end, (iii) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 2.75:1 as of any fiscal quarter end through December 31, 2009 and 3.00:1 as of any fiscal quarter end on and after March 31, 2010, and (iv) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 3.50:1 through March 30, 2010 and 2.75:1 thereafter. |
In addition, the Credit Facility contains certain financial covenants, the most restrictive of which include: (i) minimum required consolidated net worth as of any fiscal quarter end (total stockholders’ equity plus the liquidation preference of outstanding convertible preferred shares) to be at least $55 million plus adjustments for future net income and equity issuances, if any, (ii) minimum consolidated assets under management of $15.0 billion (excluding money market funds) as of each quarter end, (iii) a minimum interest coverage ratio (generally, adjusted EBITDA to interest expense as defined in and for the period specified in the Credit Facility agreement) of at least 2.75:1 as of any fiscal quarter end through December 31, 2009 and 3.00:1 as of any fiscal quarter end on and after March 31, 2010, and (iv) a leverage ratio (generally, total indebtedness as of any date to adjusted EBITDA as defined in and for the period specified in the Credit Facility agreement) of no greater than 3.50:1 through March 30, 2010 and 2.75:1 thereafter. |
Recent market and economic developments have affected, or have the potential to affect, us adversely by: • reducing the value of the assets we manage, which has resulted in, and will continue to result in, lower fee revenues; • impacting the returns and attractiveness of our investment products, which has caused and may continue to cause existing clients to withdraw assets and diminish our ability to attract assets from new and existing clients, which would result in lower sales and fee revenues; • causing a change in the mix of our assets under management to lower margin products; • exacerbating the conditions which caused us to recognize impairments of goodwill and intangible assets during the year ended December 31, 2008, which may lead to future impairments; • reducing or eliminating our ability to obtain refinancing for our existing $20.0 million loan and for our future cash requirements; • increasing the risk of not complying with debt covenants; • increasing competition from competitors that may be larger than we are and have more resources than we do; • affecting the access to, and reliability of, our intermediary distribution channels and service providers, which could adversely affect our sales, redemptions and business operations; • causing regulators to change laws and regulations that affect us, which may result in greater compliance costs and restrictions on our ability to do business; • encouraging litigation, arbitration and regulatory action in response to the increased frequency and magnitude of investment losses, which may result in unfavorable judgments, awards and settlements, regulatory fines and an increase in our related legal expenses; • increasing the difficulty of performing administrative functions such as determining the value of assets we manage, which may affect our service levels and our ability to retain existing clients or attract new clients; • damaging our reputation indirectly by association with the industries most seriously affected by market and economic developments, or directly due to a decline in investment performance or service levels, which may affect our ability to retain existing clients or attract new clients; • damaging our reputation due to the inability of investors to redeem auction rate preferred securities due to the recent failures of such remarketing auctions caused by illiquidity in the auction rate preferred market, which previously provided investment liquidity to certain of our closed-end funds; and • damaging our reputation or creating pressure to contribute capital to certain of our money market funds should these funds become at risk of falling below a $1.00 net asset value, referred to as “breaking the buck,” due to illiquidity in the money markets or credit-related impairments of their holdings. |
Section 203 prohibits a corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless: • the board of directors approved the business combination before the stockholder became an interested stockholder, or the board of directors approved the transaction that resulted in the stockholder becoming an interested stockholder; • upon completion of the transaction which resulted in the stockholder becoming an interested stockholder, such stockholder owned at least 85% of the voting stock outstanding when the transaction began other than shares held by directors who are also officers and other than shares held by certain employee stock plans; or • the board of directors approved the business combination after the stockholder became an interested stockholder and the business combination was approved at a meeting by at least two-thirds of the outstanding voting stock not owned by such stockholder. |
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report, as well as the following risks and uncertainties: (a) the effects of recent adverse market and economic developments on all aspects of our business; (b) the poor performance of the securities markets; (c) the poor relative investment performance of some of our asset management strategies and the resulting outflows in our assets under management; (d) any lack of availability of additional financing on satisfactory terms or at all; (e) any inadequate performance of third-party relationships; (f) the withdrawal of assets from our management; (g) the impact of our separation from PNX; (h) our ability to attract and retain key personnel in a competitive environment; (i) the ability of independent trustees of our mutual funds and closed-end funds, intermediary program sponsors, managed account clients and institutional asset management clients to terminate their relationships with us; (j) the possibility that our goodwill or intangible assets could become further impaired, requiring a charge to earnings; (k) the strong competition we face in our business from mutual fund companies, banks and asset management firms most of which are larger than we are; (l) potential adverse regulatory and legal developments; (m) the difficulty of detecting misconduct by our employees, sub-advisors and distribution partners; (n) changes in accounting standards; (o) the difficulty in successfully completing future acquisitions; and (p) other risks and uncertainties described in this Annual Report or in any of our filings with the SEC. |
/S/ MARK C. TREANOR Mark C. Treanor /S/ GEORGE R. AYLWARD George R. Aylward Director and Non-Executive Chairman President, Chief Executive Officer and Director (Principal Executive Officer) /S/ JAMES R. BAIO James R. Baio /S/ SUSAN F. CABRERA Susan F. Cabrera Director Director /S/ DIANE M. COFFEY Diane M. Coffey /S/ BARRY M. COOPER Barry M. Cooper Director Director /S/ TIMOTHY A. HOLT Timothy A. Holt /S/ ROSS F. KAPPELE Ross F. Kappele Director Director /S/ EDWARD M. SWAN, JR. Edward M. Swan, Jr. Director INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Virtus Investment Partners, Inc. (formerly known as Phoenix Investment Partners, Ltd.): In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Virtus Investment Partners, Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. |
Growth initiatives include: • Continued expansion of our presence in the U.S cervical disc replacement market through surgeon training, the publication of clinical evidence, patient education, and sales channel support • A regular cadence or new product launches supporting our spine implant, biologics, and bone growth therapies portfolios • Ongoing, global sales channel optimization • Reinforcement of our bone growth stimulation business through the collection and dissemination of clinical evidence, and the delivery of new and novel value-added services • Conducting clinical research to support and broaden our spine implant, biologics, and bone growth stimulation portfolios • Acquiring or licensing products, technologies and companies to further expand the spine portfolio • Attracting, developing and retaining key talent Global Spine Principal Products The Global Spine reporting segment is largely represented by three principal product categories, i) Bone Growth Therapies, ii) Spinal Implants, and iii) Biologics. |
Our key strategies in this segment are: • Geographic market & product focus on: o Adult and pediatric limb reconstruction worldwide o Complex foot & ankle reconstruction in the U.S. o Complex fracture reconstruction • Securing our position as the company with the most complete portfolio in limb reconstruction, including both internal and external solutions, through a patient-centric approach and digital treatment journey • Promote the advantages of our JuniOrtho pediatric products portfolio and support tools • Leverage the market appeal and acceptance of our software platforms: HEX-ray and OrthoNext • Leverage our historical position as a company highly focused on complex and challenging niche conditions to be at the forefront of innovation in helping surgeons and patients alike in the management of the Charcot foot and ankle • Within the orthopedic trauma segment, focus on open and complex fracture management with additional attention to joint pathologies, like dislocations, of upper and lower limbs; we aim to develop new international business opportunities within trauma, becoming a trusted partner of Non-governmental Organizations (“NGOs”) and Military Medicine Organizations • Collaborate with physicians and healthcare partners to improve patients’ live through technology, digital transformation, clinical evidence, and our industry-leading medical education programs, such as Orthofix Academy • Continue the strong pace of new product launches • Acquire or license products, technologies, and companies to support these market opportunities. |
It consists of a 360° approach to the patient journey with dedicated tools to treat all stages of the healing process: collaterals, educational games, software applications, and patient apps for post-operative management Our JuniOtho portfolio includes, among the others: - A complete line of nailing systems for trauma and limb reconstruction, including our elastic nail, MJ-FLEX, and our rigid intramedullary nail for adolescents, Agile Nail; - The Galaxy Fixation Pediatric System; - The eight-Plate Guided Growth System (“eight-Plate”) and the eight-Plate Guided Growth System+ (“eight-Plate Plus”); - The JuniOrtho Plating System Product Primary Application eight-Plate and eight-Plate Plus The first and a market-leading system for gradual correction of the growth plate in pediatric patients TrueLok A surgeon-designed, lightweight external fixation system for trauma, limb lengthening, and deformity correction, which consists of circular rings and semi-circular external supports centered on the patient’s limb and secured to the bone by crossed, tensioned wires and half pins TrueLok Hexapod System (“TL-HEX”) A hexapod external fixation system for trauma and deformity correction with associated software, designed as a three-dimensional bone segment reposition module to augment the previously developed TrueLok frame. |
It allows a unique and realistic representation of the case using x-rays and providing accurate and user-friendly management of the surgery myHEXplan and mySuperheroAcademy Mobile apps developed to support patients treated with TrueLok and TL-HEX, which are designed to improve communication and connection with hospital staff (myHEXplan) or to help patients learn by playing a virtual game (mySuperheroAcademy) LRS advanced Limb Reconstruction System An external fixation for limb lengthening and corrections of deformity, which uses callus distraction to lengthen bone in a variety of procedures, including monofocal lengthening and corrections of deformity; its multifocal procedures include bone transport, simultaneous compression and distraction at different sites, bifocal lengthening, and correction of deformities with shortening FITBONE Intramedullary Limb-Lengthening System An intramedullary lengthening system intended for limb lengthening of the femur and tibia, surgically implanted in the bone through a minimally invasive procedure; it includes an external telemetry control set that manages the distraction process Galaxy Fixation System A pin-to-bar system for temporary and definitive fracture fixation, in the upper and lower limbs. |
The system incorporates a streamlined combination of clamps, with both pin-to-bar and bar-to-bar coupling capabilities, offering a complete range of applications, including specific anatomic units for the shoulder, elbow and wrist Galaxy Fixation Shoulder A unique solution for the treatment of proximal humeral fractures Chimaera Hip Fracture System (“Chimaera”) A strong, versatile hip nail that allows fixation to be adapted to the type of fracture being treated Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions G-BEAM Fusion Beaming System A system designed to address the specific demands of advanced deformity and trauma reconstructions of foot and ankle applications, such as Charcot, requiring fusion of the medial and/or lateral columns, with or without corrective osteotomies as well as for joint fusions within the mid- and hindfoot OSCAR An ultrasonic powered surgical system for revision arthroplasty We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. |
Healthcare fraud and abuse laws potentially applicable to our operations include: ● The federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs); ● The federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician or an immediate family member has a financial relationship with that entity; ● Federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and ● State and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including commercial insurers. |
2020 Compared to 2019 Net sales decreased $17.9 million, or 17.4% • Decrease of $18.7 million, primarily a result of the impact of COVID-19 on procedure volumes, particularly with our international stocking distributors • Partially offset by an increase of $0.8 million due to changes in foreign currency exchange rates, which had a positive impact on net sales for 2020 Gross Profit 2020 Compared to 2019 Gross profit decreased $54.7 million, or 15.2% • Decrease primarily due to the decline in net sales and lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes • Decrease also partially due to the recognition of non-cash inventory charges on products due to lower procedure volumes, largely as a result of COVID-19 Sales and Marketing Expense 2020 Compared to 2019 Sales and marketing expense decreased $19.2 million • Decrease largely attributable to reduced commissions as a result of the decline in net sales, partially offset by commission support provided to our direct sales representatives during the second quarter of 2020 • Decrease in travel, entertainment, and marketing expenses related to the cancellation of several sales events and conferences in 2020 and the leveraging of virtual trainings and events in response to the COVID-19 pandemic General and Administrative Expense 2020 Compared to 2019 General and administrative expense decreased $17.7 million • Decrease of $9.0 million attributable to lower succession and transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain executive officers and from targeted restructuring activities • Decrease of $6.3 million in expenses associated with lower strategic investments, largely due to diligence and integration costs associated with strategic initiatives • Decrease of $2.6 million attributable to lower legal judgments and settlements Research and Development Expense 2020 Compared to 2019 Research and development expense increased $4.4 million • Increase of $2.8 million related to costs to comply with recent medical device reporting regulations • Remaining increase primarily the result of our efforts to build out our internal team to support the acceleration of our new product innovation initiative Acquisition-related Amortization and Remeasurement 2020 Compared to 2019 Acquisition-related amortization and remeasurement decreased $34.7 million • Decrease of $36.4 million primarily related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets, primarily attributable to the effects and uncertainty of COVID-19 as it relates to the estimated likelihood and timing of potential milestone payments • Partially offset by an increase of $1.7 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions Non-operating Expense Non-operating income and expense largely consists of interest income and expense, transaction gains and losses from changes in foreign currency exchange rates, changes in fair value related to our equity holdings in certain privately-held companies, and credit losses recognized on certain convertible debt investments. |
2020 Compared to 2019 Interest expense, net, increased $2.4 million • Decrease of $1.5 million attributable interest income recognized on our investment in eNeura in 2019 • Increase of $0.8 million associated with interest expense incurred on our outstanding indebtedness under our secured revolving credit facility Other income (expense), net, increased $16.5 million • Increase of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security in 2019, prior to its settlement • Increase of $5.3 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement gain of $3.9 million in 2020 compared to a loss of $1.4 million in 2019 • Increase of $4.7 million attributable to funds received from the U.S. Department of Health and Human Services as part of the Provider Relief Fund included within the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Income Taxes 2020 Effective Tax Rate The increase in the effective tax rate during the year was primarily a result of the statute expirations of uncertain tax positions and the reduction in contingent consideration, offset by the increase in income before income taxes, increases in valuation allowance, and non-deductible executive compensation. |
Our key strategies in this product category are to: • Promote competitive advantages of our recently launched products and STIM onTrack mobile app • Support adoption and reimbursement with: o North American Spine Society’s (“NASS”) Coverage Policy Recommendation o Post-market clinical research • Continue to invest in expanding our sales force • Bring to market new PEMF products addressing unmet clinical needs Bone Growth Therapies Products The following table and discussion identify our principal Bone Growth Therapies products by trade name and describe their primary applications: Product Primary Application CervicalStim Spinal Fusion Therapy PEMF non-invasive cervical spinal fusion therapy used to enhance bone growth SpinalStim Spinal Fusion Therapy PEMF non-invasive lumbar spinal fusion therapy used to enhance bone growth PhysioStim Bone Healing Therapy PEMF non-invasive appendicular skeleton healing therapy used to enhance bone growth in nonunion fractures Spinal Therapy Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and the success rate of certain spinal fusions by stimulating the body’s own natural healing mechanism post-surgically. |
Our key strategies in this product category are: • Accelerate training and market acceptance in the U.S. for our M6-C artificial cervical disc • Continue creating differentiated products • Provide exceptional training and education programs for sales representatives and surgeons • Acquire or license products, technologies and companies to further expand the Spinal Implants portfolio Spinal Implants Products The following table and discussion identify our key Spinal Implants products by trade name and describe their primary applications: Product Primary Application M6-C Artificial Cervical Disc A next-generation artificial disc developed to replace an intervertebral disc damaged by cervical disc degeneration; the only artificial cervical disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design M6-L Artificial Lumbar Disc A next-generation artificial disc developed to replace an intervertebral disc damaged by lumbar disc degeneration; the only artificial lumbar disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design FORZA XP Expandable Spacer System A titanium expandable spacer system for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures featuring a large graft window with the ability to pack post expansion in situ CETRA Anterior Cervical Plate System An anterior cervical plate system offering a low profile plate with an intuitive locking mechanism, large graft windows, a high degree of screw angulation, and simplified instrumentation CONSTRUX Mini PEEK / Titanium Composite (“PTC”) Spacer System A cervical interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a Polyetheretherketones (“PEEK”) core to maintain imaging characteristics FORZA PTC Spacer System A posterior lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics PILLAR SA PTC PEEK Spacer System A standalone Anterior Lumbar Interbody Fusion (“ALIF”) lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics Product Primary Application FIREBIRD / FIREBIRD NXG Spinal Fixation System A system of rods, crossbars, and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure JANUS Midline Fixation Screw An addition to the Firebird Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory, when compared to traditional pedicle screws, and that provides surgeons with the option of a midline approach Connector System for revisions A comprehensive system to reduce the complexity of revising and extending existing spinal constructs; this eliminates the need to remove existing hardware while providing stability at adjacent levels CENTURION Posterior Occipital Cervico-Thoracic (“POCT”) System A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct FIREBIRD SI A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients FIREBIRD Deformity Correction System An extension to the Firebird Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures PHOENIX Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure LONESTAR Cervical Stand Alone (“CSA”) A stand-alone spacer system designed to provide the biomechanical strength to a traditional or minimal invasive Anterior Cervical Discectomy and Fusion (“ACDF”) procedure with less disruption of patient anatomy and to preserve the anatomical profile SKYHAWK Lateral Interbody Fusion System & Lateral Plate System Provides a complete solution for the surgeon to perform a Lateral Lumbar Interbody Fusion, an approach to spinal fusion in which the surgeon accesses the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues FORZA Spacer System PEEK interbody devices for PLIF and TLIF procedures Motion Preservation Solutions In 2018, we acquired Spinal Kinetics Inc., a privately held developer and manufacturer of artificial cervical and lumbar discs, namely the M6-C cervical and M6-L lumbar artificial discs, which are used to treat patients suffering from degenerative disc disease of the spine. |
Our key strategies in this product category are to: • Leverage sales channels of our spine and extremities businesses to expand coverage • Continue to leverage the surgeon-preferred Trinity ELITE characteristics and clinical evidence • Continue to expand and promote the breadth of the portfolio with offerings such as fiberFUSE • Accelerate new tissue development projects with MTF Biologics Products The following table and discussion identify the principal Biologics products by trade name and describe their primary applications: Product Primary Application Trinity ELITE A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure AlloQuent Structural Allografts Interbody devices made of cortical bone (or cortical-cancellous grafts) that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc during a spinal fusion procedure Collage Synthetic Osteoconductive Scaffold A synthetic bone void filler fiberFUSE An allograft comprised of a mixture of cancellous bone and demineralized cortical bone that creates a natural scaffold for revascularization, cellular ingrowth, and new bone formation VersaShield A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands The regenerative solutions offered as part of the Biologics product category’s portfolio include solutions for a variety of musculoskeletal defects used in spinal and extremity orthopedic procedures. |
Global Extremities Products The following table and discussion identify the principal Global Extremities products by trade name and describe their primary applications: Product Primary Application External Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus, XCaliber and Gotfried P.C.C.P Eight-Plate + Guided Growth System The 2nd generation plate for treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System External fixation for limb lengthening and corrections of deformity TrueLok Ring fixation system for trauma, limb lengthening, and deformity correction TL-HEX TrueLok Hexapod System (“TL-HEX”) Hexapod external fixation system for trauma and deformity correction with associated software HEX RAY An innovative software to manage pre-operation and post-operation planning in connection with the TL-HEX system Galaxy Fixation System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps VeroNail Trochanteric Nailing System Trochanteric titanium nailing system for hip fractures Centronail Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Ankle Hind Foot Nailing System (“AHN”) An extension of the Centronail range of intramedullary nails Chimaera Hip Fracture System A strong, versatile hip nail that allows fixation to be adapted to the type of fracture being treated Agile Nail A small rigid intramedullary nail to treat adolescent patients MJ FLEX An innovative elastic nail with a unique design to be used in pediatric patients OSCAR Ultrasonic bone cement removal Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions Contours Lapidus Plating System (“LPS”) A plate design contoured specifically for a tarsometatarsal (“TMT”) fusion Contours VPS Volar Plating System III The 3rd generation of plates to treat distal radius fractures RIVAL Foot & Ankle System A comprehensive offering of foot and ankle solutions across the range of two plating lines, Rival VIEW and Rival REDUCE, accompanied by Rival BITE, an extensive portfolio of headed cannulated and headless compression screws We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. |
Healthcare fraud and abuse laws potentially applicable to our operations include: • the federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs); • the federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician or an immediate family member has a financial relationship with that entity; • federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and • state and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including commercial insurers. |
Notable highlights and accomplishments in 2019 include the following: • Net sales were $460.0 million, an increase of 1.5% on a reported basis and 2.5% on a constant currency basis • Increase in Biologics net sales of 9.7% compared to the prior year, as we believe we now have the #1 market-share position within the U.S. Cellular Allogaft segment per SmartTRAK following the product category’s strong performance in 2019 • Net loss was $28.5 million, a decrease $42.3 million from the prior year, primarily driven by increases in acquisition-related amortization and remeasurement and sales and marketing expenses • Obtained approval in February 2019 from the U.S. Food and Drug Administration (“FDA”) for our M6-C artificial cervical disc acquired from Spinal Kinetics, Inc. (“Spinal Kinetics”) and achieved $4.1 million in net sales in the U.S. following approval • Changed our reporting segments to Global Spine and Global Extremities to optimize our structure and better serve our surgeon customers • Successful transition of Chief Executive Officer and Global Spine President positions Results of Operations The following table presents certain items in our consolidated statements of operations as a percent of net sales: Net Sales by Reporting Segment The following table provides net sales by major product category by reporting segment: Global Spine Global Spine offers the following products categories: - Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. |
2019 Compared to 2018 Net sales increased $10.6 million or 3.1% • Bone Growth Therapies net sales increased $1.9 million or 1.0%, primarily driven by a 2.8% increase in order volume during the year, partially offset by customer sales mix and product mix changes • Spinal Implants net sales increased $2.9 million or 3.1%, primarily driven by an increase of $7.6 million in motion preservation net sales, which includes a full 12 months of sales in 2019 as compared to only eight months in the prior year due to the acquisition of Spinal Kinetics in 2018 and our launch into the U.S. market in April 2019 following FDA approval for the M6-C artificial cervical disc; this increase was partially offset by a decrease in legacy Spine Fixation sales of $4.7 million, primarily resulting from disruptions in our U.S. distribution channel as we upgrade our legacy sales force with new, high-potential sales partners • Biologics net sales increased $5.8 million or 9.7%, primarily due to distribution added during the last year as volume increased related to Trinity tissues by 12.4%, partially offset by a low single-digit price decline as well as a contractual reduction in the marketing services fee we receive from MTF Biologics, which became effective during the first quarter of 2018 Global Extremities Global Extremities offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. |
2019 Compared to 2018 Net sales decreased $3.7 million, or 3.5% • Decrease of $4.1 due to the changes in foreign currency exchange rates, which had a negative impact on net sales • Increase of $0.4 largely attributed to variability in the timing of orders from our international stocking distributors and growth in our global direct-sales markets Gross Profit 2019 Compared to 2018 Gross profit increased $2.9 million, or 0.8% • Primarily due to the growth in net sales, partially offset by gross margin decreasing from 78.7% in 2018 to 78.1% in 2019 • Increase of $0.7 million attributable to a decrease in acquisition-related inventory fair market value adjustments for Spinal Kinetics Sales and Marketing Expense 2019 Compared to 2018 Sales and marketing expense increased $18.1 million • Increase largely attributable to increases in headcount, training, and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S. • Further increases relate to higher variable compensation rates in our Global Spine segment to support growth General and Administrative Expense 2019 Compared to 2018 General and administrative expense increased $2.4 million • Increase of $9.9 million attributable to succession and transition charges, including acceleration of certain share-based compensation expense, relating to the reitrment, transition, or termination of certain named executive officers and from targeted restructuring activities • Partially offset by a decrease of $3.9 million associated with strategic investments, largely due to diligence and integration costs related to the acquisition of Spinal Kinetics and expenses associated with our change in jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) in 2018 • Further offset by a decrease of $4.1 million in certain compensation expenses, such as share-based compensation expense, excluding the impact of succession and transition charges Research and Development Expense 2019 Compared to 2018 Research and development expense increased $1.4 million • Increase largely attributable to the Spinal Kinetics acquisition and the regulatory efforts associated with the FDA premarket approval of the M6 artificial cervical disc, which was obtained in February of 2019 • Increase of $1.0 million related to costs to comply with recent medical device reporting regulations in the European Union Acquisition-related Amortization and Remeasurement 2019 Compared to 2018 Acquisition-related amortization and remeasurement increased $29.9 million • Increase of $26.1 million related to the remeasurement of contingent milestone payments associated with the Spinal Kinetics acquisition that become due upon the achievement of certain revenue targets and upon FDA approval of the M6-C artificial certvical disc, which occurred in the first quarter of 2019 • The fair value associated with the contingent revenue-based milestones increased significantly in 2019, largely attributable to the initial success observed in the launch of the M6-C artificial cervical disc in the U.S. market, as our long-term forecasts of net sales now indicate a greater likelihood of achieving the contingent revenue-based milestones • Increase of $3.8 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions; of this amount, $2.9 million of the increase is attributable to the Spinal Kinetics acquisition, which includes amortization of acquired in-process research and development costs following the achievement of the FDA milestone Non-operating Expense Non-operating income and expense largely consists of interest income and expense, transaction gains and losses from changes in foreign currency exchange rates, changes in fair value related to our equity holdings in Bone Biologics, Inc. (“Bone Biologics”), and other-than-temporary impairments on the debt security of eNeura, Inc. (“eNeura”) that was settled on Octber 25, 2019. |
Investing Activities Cash flows from investing activities increased $38.1 million • Increase of $44.3 million associated with cash paid in relation to the Spinal Kinetics acquisition in 2018, net of cash acquired • Increase of $4.0 million related to the settlement of the eNeura debt security in 2019 • Increase of $0.9 million associated with the acquisition of certain intangible assets in transactions with former distributors and from our additional investment of $0.5 million in Bone Biologics in 2018 • Partially offset by $6.4 million associated with cash paid in relation to the acquisition of certain assets of Options Medical LLC, one of our former distributors, in 2019 • Further offset by an increase in capital expenditures of $5.3 million compared to the prior year, largely relating to the buildup of instruments to support new product launches, such as our launch of the M6-C artificial cervical disc in the U.S. Financing Activities Cash flows from financing activities decreased $13.7 million • Decrease of $13.7 million associated with our payment of the FDA Milestone associated with the Spinal Kinetics acquisition in 2019, which represents the acquisition-date fair value attributable to the FDA Milestone liability originally recognized • Decrease of $1.4 million associated with debt issuance costs, largely attributable to costs incurred in 2019 associated with our Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) • Decrease of $0.4 million attributable to principal payments made in 2019 relating to our finance lease and $0.9 million attributable to other financing cash flows, which primarily relate to deferred payments made in association with the acquisition of certain intangible assets in transactions with former distributors • Partially offset by an increase in net proceeds of $2.7 million from the issuance of common shares Credit Facilities On October 25, 2019, we entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which provides for a five year $300 million secured revolving credit facility. |
Our key strategies in this segment are: • Promote competitive advantages of our recently launched products and STIM onTrack mobile app • Support adoption and reimbursement with: o North American Spine Society’s (NASS) Coverage Policy Recommendation o Post-market clinical research • Continue to invest in expanding our sales force • Bring to market new PEMF products addressing unmet clinical needs Bone Growth Therapies Products The following table and discussion identify our principal Bone Growth Therapies products by trade name and describe their primary applications: Product Primary Application CervicalStim Spinal Fusion Therapy PEMF non-invasive cervical spinal fusion therapy used to enhance bone growth SpinalStim Spinal Fusion Therapy PEMF non-invasive lumbar spinal fusion therapy used to enhance bone growth PhysioStim Bone Healing Therapy PEMF non-invasive appendicular skeleton healing therapy used to enhance bone growth in nonunion fractures Spinal Therapy Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and the success rate of certain spinal fusions by stimulating the body’s own natural healing mechanism post-surgically. |
Our key strategies in this segment are: • Execute controlled, limited market launch and extensive training curriculum in the U.S. for our M6-C artificial cervical disc • Continue the strong pace of new product launches • Provide exceptional training and education programs for sales representatives and surgeons • Acquire or license products, technologies and companies to further expand the spinal implants portfolio Spinal Implants Products The following table and discussion identify our key Spinal Implants products by trade name and describe their primary applications: Product Primary Application M6-C Artificial Cervical Disc A next-generation artificial disc developed to replace an intervertebral disc damaged by cervical disc degeneration; the only artificial cervical disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design M6-L Artificial Lumbar Disc A next-generation artificial disc developed to replace an intervertebral disc damaged by lumbar disc degeneration; the only artificial lumbar disc that mimics the anatomic structure of a natural disc by incorporating an artificial viscoelastic nucleus and fiber annulus into its design Product Primary Application FORZA XP Expandable Spacer System A titanium expandable spacer system for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures featuring a large graft window with the ability to pack post expansion in situ CETRA Anterior Cervical Plate System An anterior cervical plate system offering a low profile plate with an intuitive locking mechanism, large graft windows, a high degree of screw angulation and simplified instrumentation CONSTRUX Mini PEEK / Titanium Composite (“PTC”) Spacer System A cervical interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a Polyetheretherketones (“PEEK”) core to maintain imaging characteristics FORZA PTC Spacer System A posterior lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics PILLAR SA PTC PEEK Spacer System A standalone Anterior Lumbar Interbody Fusion (“ALIF”) lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics FIREBIRD / FIREBIRD NXG Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure JANUS Midline Fixation Screw An addition to the Firebird Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory when compared to traditional pedicle screws and provides surgeons with the option of a midline approach Connector System for revisions A comprehensive system to reduce the complexity of revising and extending existing spinal constructs; this eliminates the need to remove existing hardware while providing stability at adjacent levels CENTURION Posterior Occipital Cervico-Thoracic (“POCT”) System A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct SAMBA-SCREW System A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients FIREBIRD Deformity Correction System An extension to the Firebird Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures PHOENIX Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure LONESTAR Cervical Stand Alone (“CSA”) A stand-alone spacer system designed to provide the biomechanical strength to a traditional or minimal invasive Anterior Cervical Discectomy and Fusion (“ACDF”) procedure with less disruption of patient anatomy and to preserve the anatomical profile SKYHAWK Lateral Interbody Fusion System & Lateral Plate System Provides a complete solution for the surgeon to perform a Lateral Lumbar Interbody Fusion, an approach to spinal fusion in which the surgeon accesses the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues FORZA Spacer System PEEK interbody devices for PLIF and TLIF procedures Motion Preservation Solutions On April 30, 2018, we acquired Spinal Kinetics Inc., a privately held developer and manufacturer of artificial cervical and lumbar discs, namely the M6-C Cervical and M6-L Lumbar Artificial Discs, which are used to treat patients suffering from degenerative disc disease of the spine. |
Our key strategies in this segment are: • Expand sales force coverage in the spine market and continue to expand into other orthopedic procedures • Continue to leverage the surgeon-preferred Trinity ELITE characteristics and clinical evidence • Accelerate new tissue development projects with MTF Biologics Products The following table and discussion identify the principal Biologics products by trade name and describe their primary applications: Product Primary Application Trinity ELITE A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure AlloQuent Structural Allografts Interbody devices made of cortical bone (or cortical-cancellous grafts) that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc during a spinal fusion procedure Collage Synthetic Osteoconductive Scaffold A synthetic bone void filler VersaShield A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands The regenerative solutions offered as part of the Biologics reporting segment’s portfolio include solutions for a variety of musculoskeletal defects used in spinal and extremity orthopedic procedures. |
Orthofix Extremities Products The following table and discussion identify the principal Orthofix Extremities products by trade name and describe their primary applications: Product Primary Application External Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus, XCaliber and Gotfried P.C.C.P Eight-Plate + Guided Growth System The 2nd generation plate for treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System External fixation for limb lengthening and corrections of deformity TrueLok Ring fixation system for trauma, limb lengthening, and deformity correction TL-HEX TrueLok Hexapod System (“TL-HEX”) Hexapod external fixation system for trauma and deformity correction with associated software HEX RAY An innovative software to manage pre-operation and post-operation planning in connection with the TL-HEX system Galaxy Fixation System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps VeroNail Trochanteric Nailing System Trochanteric titanium nailing system for hip fractures Centronail Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Ankle Hind Foot Nailing System (“AHN”) An extension of the Centronail range of intramedullary nails Product Primary Application Chimaera Hip Fracture System A strong, versatile hip nail that allows fixation to be adapted to the type of fracture being treated Agile Nail A small rigid intramedullary nail to treat adolescent patients MJ FLEX An innovative elastic nail with a unique design to be used in pediatric patients OSCAR Ultrasonic bone cement removal Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions Contours Lapidus Plating System (“LPS”) A plate design contoured specifically for a tarsometatarsal (“TMT”) fusion Contours VPS Volar Plating System III The 3rd generation of plates to treat distal radius fractures We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. |
Healthcare fraud and abuse laws potentially applicable to our operations include: • the federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs); • the federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician or an immediate family member has a financial relationship with that entity; • federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and • state and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including commercial insurers. |
2018 Compared to 2017 Net sales increased $9.7 million or 11.8% • Increase of $8.7 million driven by international sales of M6 Artificial Discs subsequent to our acquisition of Spinal Kinetics, which closed during the second quarter of 2018 • Increase of 3.4% in U.S. sales due to the annualized sales of new distributor partners added during 2017 and from the uptake of recent product introductions • Decrease in legacy international sales, primarily as a result of disruption to our distribution in our Australian and German subsidiaries 2017 Compared to 2016 Net sales increased $9.3 million or 12.8% • Increase of 20.6% in U.S. sales due to the addition of new distributor partners in the last several quarters; the uptake of recent product introductions, including our PTC family product lines and Cetra; and improved legacy distributor engagement • Despite strong performance in certain locations, such as Australia, year-over-year international sales decreased largely due to a decrease in order volumes from international stocking distributors Biologics Biologics provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. |
2018 Compared to 2017 Net sales increased $3.2 million or 3.1% • Increase largely due to the change in foreign currency exchange rates, which had a positive impact on net sales of $2.3 million • Increase of $1.4 million within the U.S. due to continued distribution expansion and adoption of our TrueLok products • Increase in international sales of $2.8 million, excluding the impact of changes in foreign currency exchange rates, due to continued expansion of our distributors and growth in European subsidiaries • Partially offset by an expected decrease of $3.3 million in Brazil as a result of our Orthofix Extremities restructuring during 2017 2017 Compared to 2016 Net sales increased $0.6 million or 0.5% • Growth in the U.S. and the U.K., largely due to the continued adoption of our TL-HEX product line • Increase of $1.5 million attributable to a favorable impact from foreign currency translation • Partially offset by a decrease of $3.6 million related to our Orthofix Extremities restructuring, which consisted of the divestiture of a non-core business in the U.K. and a reduction in sales in Brazil and Puerto Rico as we converted from a direct sales model to the use of stocking distributors • And additionally offset by a decrease in cash collections from specific international stocking distributors whose revenue is recognized upon cash receipt Gross Profit and Non-GAAP Net Margin 2018 Compared to 2017 Non-GAAP net margin, an internal metric that we define as gross profit less sales and marketing expense, increased $8.5 million • Gross profit increased $15.6 million o Primarily due to the growth in net sales with gross margin improving slightly from 78.6% in 2017 to 78.7% in 2018 o Partially offset by the addition of Spinal Kinetics acquisition-related inventory fair market value adjustments of $1.4 million within the Spinal Implants reporting segment • Sales and marketing expense increased $7.2 million o Primarily due to the increase in net sales, with sales and marketing expenses as a percentage of net sales improving slightly to 45.4% of net sales in 2018 compared to 45.7% in 2017 2017 Compared to 2016 Non-GAAP net margin increased $1.8 million • Gross profit increased $18.9 million o Largely driven by the increase in net sales for each of our reporting segments, as gross margin remained relatively flat o Partially offset by an increase of $0.2 million in expense relating to our Orthofix Extremities and U.S. restructurings • Sales and marketing expense increased $17.1 million o Primarily relating to higher commission expenses in 2017, relating to geographic mix in Orthofix Extremities and higher commission rates from new distributors for Biologics and Spinal Implants, and an increase in other compensation costs as a result of the increase in net sales The following table presents non-GAAP net margin by reporting segment. |
General and Administrative Expense 2018 Compared to 2017 General and administrative expense increased $12.6 million • Increase of $6.3 million in expenses associated with strategic investments, such as our due diligence and integration efforts in connection with the Spinal Kinetics acquisition and expenditures related to the Domestication • Increase in share-based compensation expense of $5.5 million, largely related to increases in expense attributable to our performance-based and market-based awards and a change in the timing of our annual grants to executives and key personnel • Increase of $1.8 million associated with legal judgments and settlements, including previous SEC and FCPA matters, largely as a result of the receipt of a favorable insurance settlement in 2017 of approximately $6.1 million associated with prior costs incurred • Increase of $0.9 million relating to the amortization of acquired intangibles associated with the Spinal Kinetics acquisition • Partially offset by decreases in certain compensation-related costs, including bonus incentives and benefits 2017 Compared to 2016 General and administrative expense decreased $4.5 million • We received a favorable insurance settlement in 2017 of approximately $6.1 million associated with prior costs incurred related to SEC and FCPA matters • Decrease of $3.6 million from a reduction in Project Bluecore expenses, as the project was completed in 2016 • Decrease in share-based compensation expense of $3.5 million, largely driven by a net decrease in expense attributable to performance-based and market-based awards • Core expense reductions through savings in other professional fees of $2.0 million • Partially offset by an increase in spending of $5.7 million for evaluation of strategic investments • Further offset by an unfavorable change related to legal settlements of $3.5 million, largely as a result of a favorable commercial litigation settlement received in 2016 of $3.0 million • Pursuant to our settlement of the SEC Investigation and FCPA matters in Brazil, we agreed to retain an independent compliance consultant for one year to review and test the Company’s FCPA compliance program, which began in March 2017 and resulted in an increase in expense of $1.8 million Research and Development Expense 2018 Compared to 2017 Research and development expense increased $3.5 million • Increase in research and development costs largely attributable to the Spinal Kinetics acquisition and the regulatory efforts associated with the U.S. Food and Drug Administration (“FDA”) premarket approval of the M6 Artificial Cervical Disc 2017 Compared to 2016 Research and development expense increased $0.9 million • Increase in costs associated with clinical trials of $0.7 million, primarily due to invested resources to identify potential new indications for our PEMF technology, such as for osteoarthritis of the knee or as an adjunct to rotator cuff repair • Increase in costs largely attributable to the initiation of the Company’s U.S. restructuring plan in 2017, which primarily affected our corporate shared services, and resulted in an increase in expense of $0.5 million Changes in Fair Value of Contingent Consideration 2018 Compared to 2017 The fair value of contingent consideration increased $3.1 million • Changes relate to the fair value of the potential future milestone payments of up to $60.0 million in cash associated with the Spinal Kinetics acquisition. |
2018 Compared to 2017 Other income (expense), net, decreased $2.4 million • Decrease of $5.3 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $3.3 million in 2018 compared to a gain of $1.9 million in 2017 • Decrease of $3.1 million from impairments and changes in fair value relating to our equity holdings and warrants in Bone Biologics common stock • Partially offset by an increase of $5.6 million associated with an other-than-temporary impairment on the eNeura debt security in 2017 that did not recur in 2018 2017 Compared to 2016 Other income (expense), net, decreased $1.2 million • Decrease of $2.9 million associated with other-than-temporary impairments on the eNeura debt security, as we recorded impairments of $5.6 million and $2.7 million before taxes in 2017 and 2016, respectively • Partially offset by an increase of $2.0 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement gain of $1.9 million in 2017 compared to a loss of less than $0.1 million in 2016 Income Taxes 2018 Effective Tax Rate The decrease in the effective tax rate during the year was primarily a result of the decrease in income before income taxes, the reduction of the US statutory tax rate from 35% to 21%, and the 2017 charge from recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”) that did not recur in 2018. |
Our key strategies are: • Promote competitive advantages of our recently launched products and STIM onTrack mobile app • Support adoption and reimbursement with: o North American Spine Society’s (NASS) Coverage Policy Recommendation o Post-market clinical research • Continue to invest in expanding our sales force • Bring to market new PEMF products addressing unmet clinical needs BioStim Products The following table and discussion identify our principal BioStim products by trade name and describe their primary applications: Product Primary Application CervicalStim Spinal Fusion Therapy PEMF non-invasive cervical spinal fusion therapy used to enhance bone growth SpinalStim Spinal Fusion Therapy PEMF non-invasive lumbar spinal fusion therapy used to enhance bone growth PhysioStim Bone Healing Therapy PEMF non-invasive appendicular skeleton healing therapy used to enhance bone growth in nonunion fractures Spinal Therapy Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and the success rate of certain spinal fusions by stimulating the body’s own natural healing mechanism post-surgically. |
Extremity Fixation Products The following table and discussion identify our principal Extremity Fixation products by trade name and describe their primary applications: Product Primary Application External Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus, XCaliber and Gotfried P.C.C.P Eight-Plate + Guided Growth System The 2nd generation plate for treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System External fixation for limb lengthening and corrections of deformity TrueLok Ring fixation system for trauma, limb lengthening, and deformity correction TL-HEX TrueLok Hexapod System (“TL-HEX”) Hexapod external fixation system for trauma and deformity correction with associated software HEX RAY An innovative software to manage pre-operation and post-operation planning in connection with the TL-HEX system Galaxy Fixation System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps VeroNail Trochanteric Nailing System Trochanteric titanium nailing system for hip fractures Centronail Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Ankle Hind Foot Nailing System (“AHN”) An extension of the Centronail range of intramedullary nails Chimaera Hip Fracture System A strong, versatile hip nail that allows fixation to be adapted to the type of fracture being treated Agile Nail A small rigid intramedullary nail to treat adolescent patients MJ FLEX An innovative elastic nail with a unique design to be used in pediatric patients OSCAR Ultrasonic bone cement removal Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions Product Primary Application Contours Lapidus Plating System (“LPS”) A plate design contoured specifically for a tarsometatarsal (“TMT”) fusion Contours VPS Volar Plating System III The 3rd generation of plates to treat distal radius fractures We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. |
Spine Fixation Products The following table and discussion identify our key Spine Fixation products by trade name and describe their primary applications: Product Primary Application FORZA XP Expandable Spacer System A titanium expandable spacer system for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures featuring a large graft window with the ability to pack post expansion in situ CETRA Anterior Cervical Plate System An anterior cervical plate system offering a low profile plate with an intuitive locking mechanism, large graft windows, a high degree of screw angulation and simplified instrumentation CONSTRUX Mini PEEK / Titanium Composite (“PTC”) Spacer System A cervical interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a Polyetheretherketones (“PEEK”) core to maintain imaging characteristics FORZA PTC Spacer System A posterior lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics PILLAR SA PTC PEEK Spacer System A standalone Anterior Lumbar Interbody Fusion (“ALIF”) lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics FIREBIRD / FIREBIRD NXG Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure JANUS Midline Fixation Screw An addition to the Firebird Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory when compared to traditional pedicle screws and provides surgeons with the option of a midline approach Connector System for revisions A comprehensive system to reduce the complexity of revising and extending existing spinal constructs; this eliminates the need to remove existing hardware while providing stability at adjacent levels CENTURION Posterior Occipital Cervico-Thoracic (“POCT”) System A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct SAMBA-SCREW System A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients FIREBIRD Deformity Correction System An extension to the Firebird Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures Product Primary Application PHOENIX Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure LONESTAR Cervical Stand Alone (“CSA”) A stand-alone spacer system designed to provide the biomechanical strength to a traditional or minimal invasive Anterior Cervical Discectomy and Fusion (“ACDF”) procedure with less disruption of patient anatomy and to preserve the anatomical profile SKYHAWK Lateral Interbody Fusion System & Lateral Plate System Provides a complete solution for the surgeon to perform a Lateral Lumbar Interbody Fusion, an approach to spinal fusion in which the surgeon accesses the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues FORZA Spacer System PEEK interbody devices for PLIF and TLIF procedures PILLAR PL & TL PEEK Vertebral Body Replacement (“VBR”) System PEEK interbody devices for PLIF and TLIF procedures Spinal Repair Solutions We provide a wide array of implants designed for use primarily in cervical, thoracic and lumbar fusion surgeries. |
Biologics Products The following table and discussion identify our principal Biologics products by trade name and describe their primary applications: Product Primary Application AlloQuent Structural Allografts Interbody devices made of cortical bone (or cortical-cancellous grafts) that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc during a spinal fusion procedure Trinity ELITE A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure VersaShield A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands Collage Synthetic Osteoconductive Scaffold A synthetic bone void filler The regenerative solutions offered as part of the Biologics SBU’s portfolio include solutions for a variety of musculoskeletal defects used in spinal and extremity orthopedic procedures. |
Healthcare fraud and abuse laws potentially applicable to our operations include: • the federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs); • the federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity providing designated health services if the physician or an immediate family member has a financial relationship with that entity; • federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and • state and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including commercial insurers. |
2017 Compared to 2016 Net sales increased $0.6 million or 0.5% • Growth in the U.S. and the U.K., largely due to the continued adoption of our TL-HEX product line • Increase of $1.5 million attributable to a favorable impact from foreign currency translation • Partially offset by a decrease of $3.6 million related to our Extremity Fixation restructuring, which consists of the divestiture of a non-core business in the U.K. and a reduction in sales in Brazil and Puerto Rico as we convert from a direct sales model to the use of stocking distributors • And additionally offset by a decrease in cash collections from specific international stocking distributors whose revenue is recognized upon cash receipt 2016 Compared to 2015 Net sales increased $6.6 million or 6.9% • Includes the negative impact from foreign currency translation of $2.6 million in 2016; on a constant currency basis, net sales increased $9.2 million, or 9.6% • Increase in cash collections of approximately 18% in 2016 from distributors whose revenue is recognized upon cash receipt • Growth in the U.S. due to the onboarding of new distributors and the continued adoption of our TL-HEX product line, which grew by approximately 50% in the U.S. compared to the prior year Spine Fixation Spine Fixation designs, develops and markets a broad portfolio of implant products used in surgical procedures of the spine. |
2017 Compared to 2016 Net sales increased $9.3 million or 12.8% • Increase of 20.6% in U.S. sales due to the addition of new distributor partners in the last several quarters; the uptake of recent product introductions, including our PTC family product lines and Cetra; and improved legacy distributor engagement • Despite strong performance in certain locations, such as Australia, year-over-year international sales decreased largely due to a decrease in order volumes from international stocking distributors 2016 Compared to 2015 Net sales decreased $3.0 million or 4.0% • Exclusion from a large national hospital group purchasing organization in the second quarter of 2016 • Loss of several key surgeon customers in early 2016 • Decrease in cash collections of approximately 6% in 2016 from distributors whose revenue is recognized upon cash receipt • Partially offset by revenue from additional distributors added in 2016 Biologics Biologics provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. |
2017 Compared to 2016 Net sales increased $4.8 million or 8.3% • Increase in volume for our Trinity products primarily driven by the addition of new distributors over the past year • Benefit from improving performance from our national distribution partner and the reacquisition of a national hospital contract 2016 Compared to 2015 Net sales decreased $1.9 million or 3.2% • A growing number of competitors in the stem cell allograft market and an associated 2.4% reduction in average selling price for our products • Exclusion from a large national hospital group purchasing organization in the second quarter of 2016 • Partially offset by an increase in the total number of independent distributors in 2016 Gross Profit and Non-GAAP Net Margin 2017 Compared to 2016 Non-GAAP net margin, an internal metric that we define as gross profit less sales and marketing expense, increased $1.8 million • Gross profit increased $18.9 million o Largely driven by the increase in net sales for our each of SBUs, as gross margin remained relatively flat o Partially offset by an increase of $0.2 million in expense relating to our Extremity Fixation and U.S. restructurings • Sales and marketing expense increased $17.1 million o Primarily relating to higher commission expenses in 2017, relating to geographic mix in Extremity Fixation and higher commission rates from new distributors for Biologics and Spine Fixation, and an increase in other compensation costs as a result of the increase in net sales 2016 Compared to 2015 Non-GAAP net margin increased $8.8 million • Gross profit increased $12.0 million o Increase in sales for BioStim and Extremity Fixation, partially offset by a decrease in sales for Biologics and Spine Fixation o Improved operating efficiencies through the absorption of fixed costs o Increase in inventory reserves of $1.7 million for certain slower moving product lines and obsolete inventory, a portion of which is a result of our planned restructuring in Brazil • Sales and marketing expense increased $3.2 million o Increase in compensation and benefits costs, including commissions, as a result of the increase in net sales o Partially offset by a reduction of certain indirect tax liabilities of $3.1 million in 2016 o Also partially offset by a decrease in bad debt expense of $2.3 million related to Puerto Rico The following table presents non-GAAP net margin by reporting segment. |
General and Administrative Expense 2017 Compared to 2016 General and administrative expense decreased less than $0.1 million • Decrease of $3.6 million from a reduction in Project Bluecore expenses, as the project was completed in 2016 • Decrease in share-based compensation expense of $3.5 million, largely driven by a net decrease in expense attributable to performance-based and market-based awards • Core expense reductions through savings in other professional fees of $2.0 million • Partially offset by an increase in spending of $5.7 million for evaluation of strategic investments • Further offset by an unfavorable change related to legal settlements of $3.5 million, largely as a result of a favorable commercial litigation settlement received in 2016 of $3.0 million 2016 Compared to 2015 General and administrative expense decreased $12.8 million • Decreases in professional fees of $7.9 million, largely associated with the completion in 2016 of our internal control remediation efforts and Project Bluecore, a company-wide infrastructure initiative to improve the reliability and efficiency of our systems, processes, and reporting • Reduced legal costs of $6.9 million, largely due to legal settlements incurred in the prior year and a commercial legal settlement in 2016 whereby we received $3.0 million • The moratorium on the medical device tax in 2016, which decreased expense by $1.3 million • Reduction in other controllable expenses • Overall decrease was partially offset by increased share-based compensation expense of $8.1 million, including $5.7 million associated with the determination in 2016 that achieving the performance criteria related to certain of our performance-based vesting restricted stock awards is probable Research and Development Expense 2017 Compared to 2016 Research and development expense increased $0.9 million • Increase in costs associated with clinical trials of $0.7 million, primarily due to invested resources to identify potential new indications for our PEMF technology, such as for osteoarthritis of the knee or as an adjunct to rotator cuff repair • Increase in costs largely attributable to the initiation of the Company’s U.S. restructuring plan in 2017, which primarily affected our corporate shared services, and resulted in an increase in expense of $0.5 million 2016 Compared to 2015 Research and development expense increased $2.4 million • Increased costs associated with clinical trials of $1.5 million, primarily due to invested resources to identify potential new clinical indications for our PEMF technology and to develop our next generation of bone growth stimulators, which were recently approved by the FDA and European Commission • A $1.3 million investment made in the first quarter of 2016 to expand the processing and storage capabilities of MTF, the supplier of our Trinity Evolution and Trinity ELITE tissue forms SEC / FCPA Matters and Related Costs 2017 Compared to 2016 SEC/FCPA matters and related costs decreased $4.5 million • We received a favorable insurance settlement in 2017 of approximately $6 million associated with prior costs incurred related to SEC and FCPA matters • Pursuant to our settlement of the SEC Investigation and FCPA matters in Brazil, we agreed to retain an independent compliance consultant for one year to review and test the Company’s FCPA compliance program, which began in March 2017 and resulted in an increase in expense of $1.8 million 2016 Compared to 2015 SEC/FCPA matters and related costs decreased $7.1 million • Decreased legal fees incurred as part of our two prior financial restatements completed in March 2015 and the related SEC Investigation; expected to continue declining in future periods • Costs incurred in 2015 were related to the second of these two restatements and legal costs from the resulting SEC Investigation and class action complaint Charges Related to U.S. Government Resolutions We recorded $14.4 million in 2016 for our settlements with the Division of Enforcement of the SEC related to the SEC’s investigation of (1) our prior accounting review and restatements of financial statements and (2) allegations of improper payments in Brazil. |
Biologics Products The following table and discussion identify our principal Biologics products by trade name and describe their primary applications: Product Primary Application AlloQuent Structural Allografts Interbody devices made of cortical bone (or cortical-cancellous grafts) that are designed to restore the space that has been lost between two or more vertebrae due to a degenerated disc during a spinal fusion procedure Trinity ELITE A fully moldable allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure Trinity Evolution An allograft with viable cells used during surgery that is designed to enhance the success of a spinal fusion or bone fusion procedure VersaShield A thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering for a variety of surgical demands Collage Synthetic Osteoconductive Scaffold A synthetic bone void filler The regenerative solutions offered as part of the Biologics SBU’s portfolio include solutions for a variety of musculoskeletal defects used in spinal and extremity orthopedic procedures. |
Extremity Fixation Products The following table and discussion identify our principal Extremity Fixation products by trade name and describe their primary applications: Product Primary Application Fixator External fixation and internal fixation, including the Sheffield Ring, limb-lengthening systems, DAF, ProCallus, XCaliber and Gotfried P.C.C.P Eight-Plate Guided Growth System Treatment for bowed legs or knock knees of children LRS Advanced Limb Reconstruction System External fixation for limb lengthening and corrections of deformity TrueLok Ring fixation system for limb lengthening and deformity correction TL-HEX TrueLok Hexapod System(“TL-HEX”) Hexapod external fixation system for trauma and deformity correction with associated software Galaxy Fixation System External fixation system for temporary and definitive fracture fixation, including anatomical specific clamps PREFIX and PREFIX 2 External fixation range for temporary fixation of fractures in trauma VeroNail Trochanteric Nailing System Trochanteric titanium nailing system for hip fractures Centronail Titanium Nailing System Complete range of intramedullary nails including the Humeral Nail Cemex Bone cement Product Primary Application OSCAR Ultrasonic bone cement removal Centronail Ankle Compression Nailing System (“ACN”) An extension of the Centronail range of intermedullary nails Ankle Hindfoot Nail (“AHN”) A differentiated solution for hindfoot fusions Contours Lapidus Plating System (“LPS”) A plate design contoured specifically for a tarsometatarsal (“TMT”) fusion Contours PHP Proximal Humeral Plate (“PHP”) An innovative plating solution for fraction fixation of the proximal humerus Contours VPS Volar Plating System III The 3rd generation of plates to treat distal radius fractures We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. |
Spine Fixation Products The following table and discussion identify our key Spine Fixation products by trade name and describe their primary applications: Product Primary Application Hallmark Anterior Cervical Plate System A cervical plating system implanted during anterior cervical spine fusion procedures Ascent LE Posterior Occipital Cervico-Thoracic (“POCT”) System A system of pedicle screws and rods implanted during a posterior spinal fusion procedure involving the stabilization of several degenerated or deformed cervical vertebrae CONSTRUX Mini PEEK / Titanium Composite (“PTC”) Spacer System A cervical interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a Polyetheretherketones (“PEEK”) core to maintain imaging characteristics PILLAR PL & TL PEEK Vertebral Body Replacement (“VBR”) System Interbody devices for Posterior Lumbar Interbody Fusion (“PLIF”) and Transforaminal Lumbar Interbody Fusion (“TLIF”) procedures FORZA Spacer System Interbody devices for PLIF and TLIF procedures FORZA PTC Spacer System A posterior lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a Polyetheretherketones (“PEEK”) core to maintain imaging characteristics PILLAR SA PTC PEEK Spacer System A standalone ALIF lumbar interbody with 3D printed porous titanium end plates that may promote bone ingrowth and a PEEK core to maintain imaging characteristics Firebird / Firebird NXG Spinal Fixation System A system of rods, crossbars and modular pedicle screws designed to be implanted during a posterior lumbar spine fusion procedure Firebird Deformity Correction System An extension to the Firebird Spinal Fixation System that provides additional instrument and implant options for complex thoracolumbar spine procedures Phoenix Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal Fixation System designed to be implanted during a posterior thoracolumbar spine fusion procedure JANUS Midline Fixation Screw An addition to the Firebird Spinal Fixation System designed to achieve more cortical bone purchase in the medial to lateral trajectory when compared to traditional pedicle screws and provides surgeons with the option of a midline approach Samba-Screw System A minimally invasive screw system that is intended for fixation of sacroiliac joint disruptions in skeletally mature patients LONESTAR Cervical Stand Alone (“CSA”) A stand-alone spacer system designed to provide the biomechanical strength to a tradition or minimal invasive Anterior Cervical Discectomy and Fusion (“ACDF”) procedure with less disruption of patient anatomy and preserve the anatomical profile SKYHAWK Lateral Interbody Fusion System & Lateral Plate System Provides a complete solution for the surgeon to perform a Lateral Lumbar Interbody Fusion, an approach to spinal fusion in which the surgeon access the intervertebral disc space using a surgical approach from the patient’s side that disturbs fewer structures and tissues CENTURION Posterior Occipital Cervico-Thoracic (“POCT”) System A multiple component system comprised of a variety of non-sterile, single use components made of titanium alloy or cobalt chrome that allow the surgeon to build a spinal implant construct Spinal Repair Solutions We provide a wide array of implants designed for use primarily in cervical, thoracic and lumbar fusion surgeries. |
2016 Compared to 2015 Net sales increased $6.6 million or 6.9% • Includes the negative impact from foreign currency translation of $2.6 million in 2016; on a constant currency basis, net sales increased $9.2 million, or 9.6% • Increase in cash collections of approximately 18% in 2016 from distributors whose revenue is recognized upon cash receipt • Growth in the U.S. due to the onboarding of new distributors and the continued adoption of our TL-HEX product line, which grew by approximately 50% in the U.S. compared to the prior year 2015 Compared to 2014 Net sales decreased $13.6 million or 12.4% • Includes the negative impact from foreign currency translation of $14.7 million in 2015; on a constant currency basis, net sales increased $1.1 million, or 1.0%, due to increased demand for our products • Partially offset by the impact of macroeconomic challenges in certain of our markets Spine Fixation Spine Fixation specializes in the design, development and marketing of a broad portfolio of implant products used in surgical procedures of the spine. |
2016 Compared to 2015 Net sales decreased $3.0 million or 4.0% • Exclusion from a large national hospital group purchasing organization in the second quarter of 2016 • Loss of several key surgeon customers in early 2016 • Decrease in cash collections of approximately 6% in 2016 from distributors whose revenue is recognized upon cash receipt • Partially offset by revenue from additional distributors added in 2016 2015 Compared to 2014 Net sales decreased $6.4 million or 7.8% • Short-term negative impact from our reorganization of the U.S. sales force in late 2014 • Decrease in cash collections in 2015 from distributors whose revenue is recognized upon cash receipt • Partially offset by revenue from additional distributors added in 2015 as part of our sales force rebuilding and expansion initiatives Net Margin 2016 Compared to 2015 Net margin increased $8.8 million • Gross profit increased $12.0 million o Increase in sales for BioStim and Extremity Fixation, partially offset by a decrease in sales for Biologics and Spine Fixation o Improved operating efficiencies through the absorption of fixed costs o Increase in inventory reserves of $1.7 million for certain slower moving product lines and obsolete inventory, a portion of which is a result of our planned restructuring in Brazil • Sales and marketing expense increased $3.2 million o Increase in compensation and benefits costs, including commissions, as a result of the increase in net sales o Partially offset by a reduction of certain indirect tax liabilities of $3.1 million in 2016 o Also partially offset by a decrease in bad debt expense of $2.3 million related to Puerto Rico 2015 Compared to 2014 Net margin decreased $4.9 million • Gross profit increased $6.6 million o Increase in sales mix from our BioStim and Biologics SBUs, which have higher margins, relative to our other SBUs o Improved inventory management and operating efficiencies • Sales and marketing expense increased $11.5 million o Increase in sales and field-based training personnel as part of the rebuilding and expansion of our sales organization o Sales commission quota overachievement in certain territories, resulting in increased compensation costs, including commissions, of approximately $6.8 million o Increase in bad debt expense of $2.4 million, of which $2.0 million related to Puerto Rico The following table presents net margin by reporting segment. |
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