RTI SURGICAL, INC. - FORM 10-Q

RTI SURGICAL, INC. - FORM 10-Q - November 3, 2017

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EX-32.2 - EX-32.2 - RTI SURGICAL, INC.	d457076dex322.htm
EX-32.1 - EX-32.1 - RTI SURGICAL, INC.	d457076dex321.htm
EX-31.2 - EX-31.2 - RTI SURGICAL, INC.	d457076dex312.htm
EX-31.1 - EX-31.1 - RTI SURGICAL, INC.	d457076dex311.htm
EX-10.6 - EX-10.6 - RTI SURGICAL, INC.	d457076dex106.htm
EX-10.5 - EX-10.5 - RTI SURGICAL, INC.	d457076dex105.htm
EX-10.4 - EX-10.4 - RTI SURGICAL, INC.	d457076dex104.htm
EX-10.3 - EX-10.3 - RTI SURGICAL, INC.	d457076dex103.htm
EX-10.2 - EX-10.2 - RTI SURGICAL, INC.	d457076dex102.htm
EX-10.1 - EX-10.1 - RTI SURGICAL, INC.	d457076dex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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

For the transition period from to

Commission file number 0-31271

RTI Surgical, Inc.

(Exact name of registrant as specified in its charter)


Delaware		59-3466543
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11621 Research Circle Alachua, Florida		32615
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

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

Shares of common stock, $0.001 par value, outstanding on October 27, 2017: 60,832,446

RTI SURGICAL, INC.

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

Index


	Page #
Part I Financial Information

Item 1 Unaudited Condensed Consolidated Financial Statements		3 – 18

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		19 – 26

Item 3 Quantitative and Qualitative Disclosures About Market Risk		27

Item 4 Controls and Procedures		27

Part II Other Information

Item 1 Legal Proceedings		28

Item 1A Risk Factors		28

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 3 Defaults Upon Senior Securities		28

Item 4 Mine Safety Disclosures		28

Item 5 Other Information		28

Item 6 Exhibits		28

Signatures		30

Part I Financial Information

Item 1.

Unaudited Condensed Consolidated Financial Statements

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share data)


	September 30, 2017			December 31, 2016
Assets
Current Assets:
Cash and cash equivalents	$	17,744		$	13,849
Accounts receivable—less allowances of $1,859 at September 30, 2017 and $1,728 at December 31, 2016		36,188			41,488
Inventories—net		114,568			119,743
Prepaid and other current assets		9,806			5,213
Assets held for sale		1,750			—

Total current assets		180,056			180,293
Property, plant and equipment—net		82,794			83,298
Deferred tax assets—net		18,543			24,968
Goodwill		46,242			54,887
Other intangible assets—net		23,806			23,994
Other assets—net		1,841			591

Total assets	$	353,282		$	368,031

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	24,445		$	26,112
Accrued expenses		20,482			22,030
Current portion of deferred revenue		4,793			4,742
Current portion of short and long-term obligations		4,268			6,080

Total current liabilities		53,988			58,964
Long-term obligations—less current portion		45,643			77,267
Other long-term liabilities		2,144			256
Deferred revenue		4,959			6,612

Total liabilities		106,734			143,099
Preferred stock Series A, $.001 par value: 5,000,000 shares authorized; 50,000 shares issued and outstanding		62,925			60,016
Stockholders’ equity:
Common stock, $.001 par value: 150,000,000 shares authorized; 60,544,896 and 58,433,397 shares issued and outstanding, respectively		59			58
Additional paid-in capital		420,503			417,428
Accumulated other comprehensive loss		(6,469	)		(8,316	)
Accumulated deficit		(229,413	)		(243,338	)
Less treasury stock, 410,396 and 368,949 shares, respectively, at cost		(1,057	)		(916	)

Total stockholders’ equity		183,623			164,916

Total liabilities and stockholders’ equity	$	353,282		$	368,031

See notes to unaudited condensed consolidated financial statements.

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Revenues	$	66,688		$	66,547		$	208,747		$	201,518
Costs of processing and distribution		33,177			32,273			102,494			97,270

Gross profit		33,511			34,274			106,253			104,248

Expenses:
Marketing, general and administrative		27,678			28,724			86,845			84,678
Research and development		2,801			3,789			10,229			12,034
Severance charges		2,820			328			10,623			1,039
Restructuring charges		—			—			—			1,107
Strategic review costs		—			650			—			650
CEO Retirement and transition costs		—			4,107			—			4,107
Contested proxy expenses		—			—			—			2,680
Gain on cardiothoracic closure business divestiture		(34,090	)		—			(34,090	)		—

Total operating (gain) expenses		(791	)		37,598			73,607			106,295

Operating income (loss)		34,302			(3,324	)		32,646			(2,047	)

Other (expense) income:
Interest expense		(741	)		(308	)		(2,475	)		(1,061	)
Interest income		—			1			—			8
Foreign exchange gain (loss)		60			(67	)		5			(59	)

Total other expense—net		(681	)		(374	)		(2,470	)		(1,112	)

Income (loss) before income tax (provision) benefit		33,621			(3,698	)		30,176			(3,159	)
Income tax (provision) benefit		(16,135	)		92			(16,251	)		(338	)

Net Income (loss)		17,486			(3,606	)		13,925			(3,497	)

Convertible preferred dividend		(938	)		(883	)		(2,772	)		(2,611	)

Net income (loss) applicable to common shares		16,548			(4,489	)		11,153			(6,108	)

Other comprehensive income (loss):
Unrealized foreign currency translation gain		434			241			1,847			147

Comprehensive income (loss)	$	16,982		$	(4,248	)	$	13,000		$	(5,961	)

Net income (loss) per common share—basic	$	0.28		$	(0.08	)	$	0.19		$	(0.10	)

Net income (loss) per common share—diluted	$	0.23		$	(0.08	)	$	0.19		$	(0.10	)

Weighted average shares outstanding—basic		59,704,533			58,353,110			59,045,372			58,173,580

Weighted average shares outstanding—diluted		75,188,161			58,353,110			59,954,964			58,173,580

See notes to unaudited condensed consolidated financial statements.

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2017

(Unaudited, in thousands)


	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Treasury Stock			Total
Balance, December 31, 2016	$	58	$	417,428		$	(8,316	)	$	(243,338	)	$	(916	)	$	164,916
Net income		—		—			—			13,925			—			13,925
Foreign currency translation adjustment		—		—			1,847			—			—			1,847
Exercise of common stock options		1		1,871			—			—			—			1,872
Stock-based compensation		—		4,113			—			—			—			4,113
Purchase of treasury stock		—		—			—			—			(141	)		(141	)
Amortization of preferred stock Series A issuance costs		—		(137	)		—			—			—			(137	)
Preferred stock Series A dividend		—		(2,772	)		—			—			—			(2,772	)

Balance, September 30, 2017	$	59	$	420,503		$	(6,469	)	$	(229,413	)	$	(1,057	)	$	183,623

See notes to unaudited condensed consolidated financial statements.

RTI SURGICAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Cash flows from operating activities:
Net income (loss)	$	17,486		$	(3,606	)	$	13,925		$	(3,497	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization expense		3,575			4,393			10,704			13,087
Provision for bad debts and product returns		256			451			816			946
Provision for inventory write-downs		735			2,052			4,488			4,422
Amortization of deferred revenue		(1,141	)		(1,216	)		(3,601	)		(3,650	)
Deferred income tax provision		5,873			485			5,312			366
Stock-based compensation		2,203			1,975			4,011			3,075
Gain on cardiothoracic closure business divestiture		(34,090	)		—			(34,090	)		—
Other		602			316			1,475			580
Change in assets and liabilities:
Accounts receivable		2,642			(1,668	)		4,770			7,872
Inventories		(998	)		(6,164	)		(831	)		(10,736	)
Accounts payable		(6,725	)		(3,400	)		(5,727	)		1,095
Accrued expenses		(728	)		(3,042	)		(2,112	)		(11,360	)
Deferred revenue		—			—			2,000			2,000
Other operating assets and liabilities		(3,161	)		6,249			(3,998	)		5,834

Net cash (used in) provided by operating activities		(13,471	)		(3,175	)		(2,858	)		10,034

Cash flows from investing activities:
Purchases of property, plant and equipment		(3,198	)		(3,371	)		(10,358	)		(12,774	)
Patent and acquired intangible asset costs		(279	)		(804	)		(2,124	)		(2,195	)
Cardiothoracic closure business divestiture		51,000			—			51,000			—

Net cash provided by (used in) investing activities		47,523			(4,175	)		38,518			(14,969	)

Cash flows from financing activities:
Proceeds from exercise of common stock options		297			—			1,872			14
Proceeds from long-term obligations		2,000			8,000			6,000			15,000
Net payments from short-term obligations		—			(662	)		—			(1,511	)
Payments on long-term obligations		(32,000	)		(1,125	)		(39,375	)		(9,424	)
Other financing activities		(315	)		—			(457	)		(108	)

Net cash (used in) provided by financing activities		(30,018	)		6,213			(31,960	)		3,971

Effect of exchange rate changes on cash and cash equivalents		35			7			195			(26	)

Net increase (decrease) in cash and cash equivalents		4,069			(1,130	)		3,895			(990	)
Cash and cash equivalents, beginning of period		13,675			12,754			13,849			12,614

Cash and cash equivalents, end of period	$	17,744		$	11,624		$	17,744		$	11,624

Supplemental cash flow disclosure:
Cash paid for interest	$	329		$	435		$	2,632		$	1,224
Cash paid for income taxes, net of refunds		12,000			106			12,032			282
Non-cash acquisition of property, plant and equipment		473			1,212			498			1,445
Stock-based compensation related to sale of CT business		102			—			102			—
Increase in accrual for dividend payable		938			883			2,772			2,611

See notes to unaudited condensed consolidated financial statements.

RTI SURGICAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. Operations and Organization

The Company is a leader in the use of natural tissues, metals and synthetics to produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues and improve surgical outcomes. The Company processes donated human musculoskeletal and other tissue, including bone, cartilage, tendon, ligament, fascia lata, pericardium, sclera and dermal tissue, and bovine and porcine animal tissue in producing allograft and xenograft implants utilizing proprietary BIOCLEANSE^®, TUTOPLAST^® and CANCELLE^® SP sterilization processes, and manufactures metal and synthetic implants for distribution to hospitals and surgeons. The Company processes tissue at two operating facilities in Alachua, Florida and one operating facility in Neunkirchen, Germany, and manufactures metal and synthetic implants in Marquette, Michigan and Greenville, North Carolina. The Company distributes its implants and services in all 50 states and in over 40 countries worldwide.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for the periods shown. The condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, therefore, do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations, comprehensive income (loss) and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

3. Recently Issued Accounting Standards

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

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

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

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

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

ASU 2016-09 requires recognition through opening retained earnings of any pre-adoption date net operating loss carryforwards from share-based payments, as well as recognition of all income tax effects from share based-payments in income tax expense. In addition, under ASU 2016-09 excess tax benefits no longer represent financing activities, but instead represent operating activities in the statement of cash flow. ASU 2016-09 allows companies to recognize excess tax benefits as an operating activity on a prospective or retrospective basis. The Company adopted ASU 2016-09 on January 1, 2017. The Company has decided to recognize this requirement on a prospective basis and has not adjusted prior periods. For the nine months ended September 30, 2017, there was no material impact on the Company’s condensed consolidated financial statements, apart from income tax expense of $451 recorded relating to tax deficiencies from share-based payment transactions.

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

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

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

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

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

4. Cardiothoracic Closure Business Divestiture

The Company completed the sale of substantially all of the assets related to its Cardiothoracic closure business (the “CT Business”) to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (“A&E”) pursuant to an Asset Purchase Agreement between the Company and A&E, dated August 3, 2017 (the “Asset Purchase Agreement”). The total consideration received by the Company under the Asset Purchase Agreement was composed of $54,000 in cash consideration, $3,000 of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any (the “Escrow Amount”), plus an additional $5,000 in contingent cash consideration if A&E reaches certain revenue milestones (the “Contingent Consideration”). The Company is also entitled to an additional $1,000 in consideration if the Company successfully obtains a certain FDA regulatory clearance. As a part of the transaction, the Company also entered into a multi-year Contract Manufacturing Agreement with A&E (the “Contract Manufacturing Agreement”). Under the Contract Manufacturing Agreement, the Company agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. The Company elected to account for the Contingent Consideration arrangement including the Escrow Amount, as a gain contingency in accordance with ASC 450 Contingencies. As such, the Contingent Consideration and Escrow Amount were excluded in measuring the fair value of the consideration to be received in connection with the transaction.

The calculation of the gain on the CT Business divestiture is as follows:


Proceeds from cardiothoracic closure business divestiture	$	51,000
Inventories—net		(2,893	)
Property, plant and equipment—net		(1,299	)
Goodwill		(8,645	)
Other intangible assets—net		(280	)
Cardiothoracic closure business divestiture expenses		(3,793	)

Gain on cardiothoracic closure business divestiture	$	34,090

5. Stock-Based Compensation

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

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

Stock Options

As of September 30, 2017, there was $3,532 of total unrecognized stock-based compensation related to nonvested stock options. The expense related to these stock options is expected to be recognized over a weighted-average period of 2.25 years.

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


	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2017		5,764,607		$	4.28
Granted		2,506,038			3.49
Exercised		(504,312	)		3.74
Forfeited or expired		(789,847	)		5.79

Outstanding at September 30, 2017		6,976,486		$	3.86		5.55	$	6,224

Vested or expected to vest at
September 30, 2017		6,495,458		$	3.88		5.40	$	5,760

Exercisable at September 30, 2017		3,726,630		$	4.06		4.33	$	2,992

Available for grant at September 30, 2017		2,427,543

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

Other information concerning stock options are as follows:


	For the Nine Months Ended September 30,
	2017		2016
Weighted average fair value of stock options granted	$	1.54	$	1.55
Aggregate intrinsic value of stock options exercised		641		6

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

Restricted Stock Awards

During the first quarter of 2017, the Company granted 187,500 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $3.15 per share and the Company granted 6,331 shares of time-based restricted stock with a weighted-average grant date fair value of $3.70 per share which vest over a one-year period. During the second quarter of 2017, the Company granted 218,000 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $4.60 per share and the Company granted 148,356 shares of time-based restricted stock with a weighted-average grant date fair value of $4.55 per share which vest over a one-year period. During the third quarter of 2017, the Company granted 50,000 shares of time-based restricted stock, which vest over a three-year period, with a weighted-average grant date fair value of $5.65 per share. As of September 30, 2017, there was $3,973 of total unrecognized stock-based compensation related to time-based and performance-based, nonvested restricted stock. The expense related to these restricted stock awards is expected to be recognized on a straight-line basis over a weighted-average period of 3.30 years.

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Stock-based compensation:
Costs of processing and distribution	$	33	$	33	$	78	$	99
Marketing, general and administrative		2,257		1,927		4,001		2,931
Research and development		15		15		34		45

Total	$	2,305	$	1,975	$	4,113	$	3,075

Inducement Grant

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

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

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

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

6. Net Income Per Common Share

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Basic shares		59,704,533		58,353,110		59,045,372		58,173,580
Effect of dilutive securities:
Stock options		1,244,082		—		909,592		—
Preferred stock Series A		14,239,546		—		—		—

Diluted shares		75,188,161		58,353,110		59,954,964		58,173,580

For the three months ended September 30, 2017 and 2016, approximately 1,418,182 and 4,854,771, respectively, and for the nine months ended September 30, 2017 and 2016, approximately 1,474,461 and 4,787,572, respectively, of issued stock options were not included in the computation of diluted net income per common share because they were anti-dilutive because

their exercise price exceeded the market price. For the three months ended September 30, 2016, options to purchase 278,766 and for the nine months ended September 30, 2016, options to purchase 306,527 of common stock were not included in the computation of diluted loss per share because dilutive shares are not factored into this calculation when a net loss is reported.

For the three months ended September 30, 2017, 50,000 shares of convertible preferred stock or 14,239,546 of converted common stock and accrued but unpaid dividends were dilutive on an as if-converted basis and were included in the computation of diluted net income per common share.

7. Inventories

Inventories by stage of completion are as follows:


	September 30, 2017		December 31, 2016
Unprocessed tissue, raw materials and supplies	$	23,026	$	31,745
Tissue and work in process		42,014		38,552
Implantable tissue and finished goods		49,528		49,446

	$	114,568	$	119,743

For the three months ended September 30, 2017 and 2016, the Company had inventory write-downs of $735 and $2,052, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had inventory write-downs of $4,488 and $4,422, respectively, relating primarily to product obsolescence.

8. Property, Plant and Equipment

Property, plant and equipment are as follows:


	September 30, 2017			December 31, 2016
Land	$	2,374		$	2,324
Buildings and improvements		57,350			59,187
Processing equipment		41,906			38,387
Surgical instruments		20,602			18,394
Office equipment, furniture and fixtures		1,561			1,701
Computer equipment and software		18,836			11,852
Construction in process		11,677			17,554

		154,306			149,399
Less accumulated depreciation		(71,512	)		(66,101	)

	$	82,794		$	83,298

For the three months ended September 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $2,623 and $3,459, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had depreciation expense in connection with property, plant and equipment of $7,947 and $10,295, respectively.

Owned property previously used for administrative, distribution and marketing functions with a cost basis of $1,750, to be disposed of, as of September 30, 2017, as a result of improving operational efficiencies were included in “Assets held for sale” on the Condensed Consolidated Balance Sheet as of September 30, 2017, are not included in the table above. On July 21, 2017, the Company entered into a sale agreement with a third party for the owned property. The transaction closed on October 20, 2017 for $1,818 net of selling costs.

9. Goodwill


	September 30, 2017		December 31, 2016
Balance at January 1	$	54,887	$	54,887
Goodwill disposed of related to sale of CT business		8,645		—

	$	46,242	$	54,887

10. Other Intangible Assets

Other intangible assets are as follows:


	September 30, 2017				December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Patents	$	11,938	$	4,811	$	11,559	$	4,159
Acquired licensing rights		14,497		8,841		12,204		8,302
Marketing and procurement intangible assets		20,181		9,158		20,694		8,002

Total	$	46,616	$	22,810	$	44,457	$	20,463

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

For the three months ended September 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $952 and $934, respectively, and for the nine months ended September 30, 2017 and 2016, the Company had amortization expense of other intangible assets of $2,757 and $2,792, respectively. At September 30, 2017, management’s estimates of future amortization expense for the next five years are as follows:


	Amortization Expense
2017	$	925
2018		3,800
2019		3,800
2020		3,700
2021		3,700
2022		3,500

	$	19,425

11. Accrued Expenses

Accrued expenses are as follows:


	September 30, 2017		December 31, 2016
Accrued compensation	$	5,689	$	4,904
Accrued severance charges		3,634		410
Accrued restructuring charges		—		95
Accrued CEO retirement and transition costs		822		2,406
Accrued distributor commissions		3,364		4,422
Accrued donor recovery fees		2,499		6,350
Other		4,474		3,443

	$	20,482	$	22,030

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

12. Short and Long-Term Obligations

Short and long-term obligations are as follows:


	September 30, 2017			December 31, 2016
Term loan	$	24,911		$	50,347
Credit facility		25,000			33,000

Total		49,911			83,347
Less current portion		(4,268	)		(6,080	)

Long-term portion	$	45,643		$	77,267

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

The 2017 Loan Agreement provides for a revolving credit facility (the “Revolving Credit Facility”), in the aggregate principal amount of $42,500 which is unchanged from the final Amendment to the 2013 Loan Agreement. The Company used $22,000 of the proceeds from the sale of the CT Business to partially pay down amounts owed under the 2013 Loan Agreement, and $10,000 to pay down amounts owed under the Revolving Credit Facility. Subsequent to the pay down, the outstanding principal balance on the 2013 Loan Agreement Term Loan amounted to $25,375 which became the principal amount of the 2017 Loan Agreement (the “Term Loan Facility” and, together with the Revolving Credit Facility the “Facility”). The Facility is secured by substantially all the assets of the Company and its domestic subsidiaries and is guaranteed by the Company’s domestic subsidiaries, as well as 65% of the stock of the Company’s foreign subsidiaries.

Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to 3.50%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1,125, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019, which represents an extension from the 2013 Loan Agreement maturity date of July 16, 2018. The Company may make optional prepayments on the Facility without penalty at the end of any LIBOR interest period.

At September 30, 2017, the interest rate for the Term Loan and Revolving Credit Facility is 4.74%. As of September 30, 2017, there was $25,000 outstanding on the revolving credit facility. The term loan facility requires aggregate principal payments of $7,875 from September 30, 2017 through June 30, 2019, with a final balloon principal payment of $17,500 on September 15, 2019. The credit agreement also contains various restrictive covenants which limit, among other things, indebtedness and liens, as well as payment of dividends, while requiring a minimum cash balance on hand of $10,000 and certain financial covenant ratios.

The total available credit on the Company’s revolving credit facility at September 30, 2017 was $17,500. The Company’s ability to access its revolving credit facility is subject to and can be limited by the Company’s compliance with the Company’s financial and other covenants. The Company was in compliance with the financial covenants related to its revolving credit facility as of September 30, 2017.

For the three months ended September 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs was $88 and $46, respectively, and for the nine months ended September 30, 2017 and 2016, interest expense associated with the amortization of debt issuance costs was $350 and $85, respectively.

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


	Term Loan		Credit Facility		Total
2017	$	1,068	$	—	$	1,068
2018		4,272		—		4,272
2019		19,571		25,000		44,571

	$	24,911	$	25,000	$	49,911

13. Income Taxes

The Company expects its deferred tax assets of $18,543, net of the valuation allowance at September 30, 2017 of $6,501, to be realized through the generation of future taxable income and the reversal of existing taxable temporary differences.

The Company evaluates the need for deferred tax asset valuation allowances based on a more likely than not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. It is difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company utilizes a rolling three years of actual results as the primary measure of cumulative losses in recent years.

On a rolling three years, the Company’s consolidated U.S. operations are in a cumulative income position. However, one U.S. entity (“Entity”) is in a three year cumulative loss position. Future taxable income exclusive of reversing temporary differences and carryforwards is one source of taxable income available that can be used to realize tax benefits. During 2017, the Company has undertaken various cost reduction activities to reduce complexity and increase operational excellence within the organization. The Entity anticipates generating significant cost savings from the various cost reduction activities. After adjusting the Entity’s cumulative losses to include the projected costs savings, the Entity’s operations project future profits sufficient to utilize the Entity’s separate state deferred tax assets before expiration. The Company considers this objectively verifiable evidence that all its U.S. deferred tax assets are more likely than not realizable.

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

As such, valuation allowances of $6,501 and $4,916 have been established at September 30, 2017 and December 31, 2016, respectively, against a portion of the deferred tax assets.

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

The Company’s 2015 U.S. federal income tax return is under examination by the Internal Revenue Service (“IRS”). Currently, there are no proposed adjustments by the IRS.

14. Preferred Stock

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

Preferred stock is as follows:


	Preferred Stock Liquidation Value		Preferred Stock Issuance Costs			Net Total
Balance at January 1, 2017	$	60,676	$	(660	)	$	60,016
Accrued dividend payable		2,772		—			2,772
Amortization of preferred stock issuance costs		—		137			137

Balance at September 30, 2017	$	63,448	$	(523	)	$	62,925

15. Severance Charges

The Company recorded severance charges to reduce headcount and improve operational efficiencies, which resulted in $2,820 and $10,623 of expenses for the three and nine months ended September 30, 2017, respectively. The total severance charges are expected to be paid in full by the fourth quarter of 2018. Severance payments are made to terminated employees over periods ranging from one month to twelve months and are not expected to have a material impact on cash flows of the Company in any quarterly period. The following table includes a rollforward of severance charges included in accrued expenses, see Note 11.


Accrued severance charges at January 1, 2017	$	410
Employee separation expenses accrued in 2017		10,623

Subtotal severance charges		11,033
Severance cash payments		(6,246	)
Stock based compensation		(1,153	)

Accrued severance charges at September 30, 2017	$	3,634

16. CEO Retirement and Transition Costs

In the third quarter of 2016, the Company recorded Chief Executive Officer retirement and transition costs related to the retirement of our former Chief Executive Officer pursuant to the Executive Transition Agreement dated August 29, 2012 (as amended and extended to date), which resulted in $4,404 of expenses for the year ended December 31, 2016. The total Chief Executive Officer retirement and transition costs are expected to be paid in full prior to the first quarter of 2019. The following table includes a rollforward of CEO retirement and transition costs included in accrued expenses, see Note 11.


Accrued CEO retirement and transition costs at January 1, 2017	$	2,406
Cash payments		(1,001	)
Other long-term liabilities portion		(583	)

Accrued CEO retirement and transition costs at September 30, 2017	$	822

17. Legal Actions

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

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

In addition to claims made directly against the Company, Coloplast, a distributor of TSM’s and certain allografts processed and private labeled for them under a contract with the Company, has also been named as a defendant in individual TSM cases in various federal and state courts. Coloplast requested that the Company indemnify or defend Coloplast in those claims which allege injuries caused by the Company’s allograft implants, and on April 24, 2014, Coloplast sued RTI Surgical, Inc. in the Fourth Judicial District of Minnesota for declaratory relief and breach of contract. On December 11, 2014, Coloplast entered into a settlement agreement with RTI Surgical, Inc. and Tutogen Medical, Inc. (the “Company Parties”)

resulting in dismissal of the case. Under the terms of the settlement agreement, the Company Parties are responsible for the defense and indemnification of two categories of present and future claims: (1) tissue only (where Coloplast is solely the distributor of Company processed allograft tissue and no Coloplast-manufactured or distributed synthetic mesh is identified) (“Tissue Only Claims”), and (2) tissue plus non-Coloplast synthetic mesh (“Tissue-Non-Coloplast Claims”) (the Tissue Only Claims and the Tissue-Non-Coloplast Claims being collectively referred to as “Indemnified Claims”). As of September 30, 2017, there are a cumulative total of 1,257 Indemnified Claims for which the Company Parties are providing defense and indemnification. The defense and indemnification of these cases are covered under the Company’s insurance policy subject to a reservation of rights by the insurer.

Based on the current information available to the Company, it is not possible to evaluate and estimate with reasonable certainty the impact that current or any future TSM litigation may have on the Company.

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

18. Regulatory Actions

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

19. Segment Data

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands)
Revenues:
Spine	$	18,131	$	17,775	$	57,888	$	52,514
Sports medicine and orthopedics		11,286		11,874		37,179		36,956
Surgical specialties		1,437		1,168		4,673		2,985
Cardiothoracic		1,340		2,893		8,164		8,332
International		5,077		4,352		16,739		15,532

Subtotal direct		37,271		38,062		124,643		116,319
Global commercial		26,807		25,297		76,225		75,396
Other revenues		2,610		3,188		7,879		9,803

Total revenues	$	66,688	$	66,547	$	208,747	$	201,518

Domestic revenues		60,973		60,959		189,808		183,192
International revenues		5,715		5,588		18,939		18,326

Total revenues	$	66,688	$	66,547	$	208,747	$	201,518

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Percent of revenues derived from:
Distributor
Zimmer Biomet Holdings, Inc.		15	%		18	%		17	%		16	%
Medtronic, PLC		8	%		8	%		9	%		9	%
International		10	%		8	%		9	%		9	%

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


	September 30, 2017		December 31, 2016
Property, plant and equipment—net:
Domestic	$	76,516	$	77,596
International		6,278		5,702

Total	$	82,794	$	83,298

20. Subsequent Events

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

1. Effective October 2, 2017, the Company appointed Jonathon Singer, a previous member of the Company’s board of directors, as Chief Financial and Administrative Officer. On September 18, 2017, the Company entered into an employment agreement, restricted stock award agreement and stock option agreement with Mr. Singer in which the Company agreed to an inducement payment award and equity. The aforementioned agreements are filed as exhibits with this quarterly report.

2. On October 20, 2017, the Company sold an owned property previously used for administrative, distribution and marketing functions for $1,818 net of selling costs.

Item 2.

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

Cautionary Statement Relating to Forward Looking Statements

Information contained in this filing contains “forward-looking statements” which can be identified by the use of forward-looking terminology such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “requires,” “hopes,” “assumes” or comparable terminology, or by discussions of strategy. There can be no assurance that the future results covered by these forward-looking statements will be achieved. Some of the matters described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016 or in subsequent Quarterly Reports on Form 10-Q (including this one), constitute cautionary statements which identify some of the factors regarding these forward-looking statements, including certain risks and uncertainties, that could cause actual results to vary materially from the future results indicated in these forward-looking statements. Other factors could also cause actual results to vary materially from the future results indicated in such forward-looking statements.

Management Overview

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

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

International distributions and services accounted for 9% of total revenues in the first nine months of 2017. Our implants are distributed in over 40 countries through a direct distribution force in Germany and through stocking distributors in the rest of the world outside of Germany and the U.S.

Our business is generally not seasonal in nature; however, the number of orthopedic implant surgeries and elective procedures generally declines during the summer months. During the third quarter of 2017, our operations in Florida experienced losses related to a hurricane. Based on our preliminary assessment, the negative impact to revenue and net income for both the three and nine months ended September 30, 2017, was $1.2 million and $0.5 million, respectively.

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

In line with our principal goals, we completed the sale of substantially all of the assets related to our Cardiothoracic closure business (the “CT Business”) to A&E Advanced Closure Systems, LLC (a subsidiary of A&E Medical Corporation) (“A&E”) pursuant to an Asset Purchase Agreement between us and A&E, dated August 3, 2017 (the “Asset Purchase Agreement”). The total consideration received by us under the Asset Purchase Agreement was composed of $54 million in cash consideration, $3 million of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any (the “Escrow Amount”), plus an additional $5 million in contingent cash consideration if A&E reaches certain revenue milestones (the “Contingent Consideration”). We are also entitled to an additional $1 million in consideration if we successfully obtain a certain FDA regulatory clearance. As a part of the transaction, we also entered into a multi-year Contract Manufacturing Agreement with A&E (the “Contract Manufacturing Agreement”). Under the Contract Manufacturing Agreement, we agreed to continue to support the CT Business by manufacturing existing products and engineering, developing, and manufacturing potential future products for A&E. We believe this is a significant step toward focusing our business and advancing our efforts to generate predictable and sustainable operating results through disciplined execution and building scale to extend distribution of our products in those areas that offer the greatest opportunities to benefit our patients and shareholders.

We continue to maintain our commitment to research and development and the introduction of new strategically targeted allograft, xenograft, metal and synthetic implants as well as focused clinical efforts to support their acceptance in the marketplace. In addition, we consider strategic acquisitions from time to time for new implants and technologies intended to augment our existing implant offerings, as well as strategic dispositions from time to time in response to market trends or industry developments.

Results of Operations

Consolidated Financial Results

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands)
Revenues:
Spine	$	18,131	$	17,775	$	57,888	$	52,514
Sports medicine and orthopedics		11,286		11,874		37,179		36,956
Surgical specialties		1,437		1,168		4,673		2,985
Cardiothoracic		1,340		2,893		8,164		8,332
International		5,077		4,352		16,739		15,532

Subtotal direct		37,271		38,062		124,643		116,319
Global commercial		26,807		25,297		76,225		75,396
Other revenues		2,610		3,188		7,879		9,803

Total revenues	$	66,688	$	66,547	$	208,747	$	201,518

Domestic revenues		60,973		60,959		189,808		183,192
International revenues		5,715		5,588		18,939		18,326

Total revenues	$	66,688	$	66,547	$	208,747	$	201,518

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

Total Revenues

Our total revenues of $66.7 million for the three months ended September 30, 2017, were comparable to the three months ended September 30, 2016. Our direct revenues decreased by $791,000, or 2.1%, to $37.3 million primarily as a result of an estimated $1.2 million loss in revenue due to a hurricane in Florida, and our global commercial revenues increased by $1.5 million, or 6.0%, to $26.8 million, primarily as a result of higher orders from certain commercial distributors, primarily in the trauma market.

Direct Revenues

Spine—Revenues from spinal implants increased $356,000, or 2.0%, to $18.1 million for the three months ended September 30, 2017, compared to $17.8 million for the three months ended September 30, 2016. Spine revenues increased primarily as a result of increased distributions of our map3^® implant, partially offset by lower spine hardware distributions.

Sports Medicine and Orthopedics—Revenues from sports medicine and orthopedics allografts decreased $588,000, or 5.0%, to $11.3 million for the three months ended September 30, 2017, compared to $11.9 million for the three months ended September 30, 2016. Sports medicine and orthopedics revenues decreased primarily as a result of decreased distributions of our BioCleanse^® processed tendons.

Surgical Specialties—Revenues from surgical specialty allografts increased $269,000, or 23.0%, to $1.4 million for the three months ended September 30, 2017, compared to $1.2 million for the three months ended September 30, 2016. Surgical specialties revenues increased primarily as a result of new customers and increased distributions of our Cortiva^TM implants.

Cardiothoracic—Revenues from cardiothoracic implants decreased $1.6 million, or 53.7%, to $1.3 million for the three months ended September 30, 2017, compared to $2.9 million for the three months ended September 30, 2016. This decrease was primarily the result of the August 3, 2017, sale of substantially all of the assets of our CT Business to A&E. Additionally, we have entered into a multi-year Contract Manufacturing Agreement with A&E whereby we will continue to support the CT Business under A&E’s ownership through the manufacturing of existing products, which will generate revenue for our global commercial business.

International Revenues—International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $725,000, or 16.7%, to $5.1 million for the three months ended September 30, 2017, compared to $4.4 million for the three months ended September 30, 2016. International revenues increased primarily as a result of higher distributions in Europe and Asia Pacific due to expanded distribution channels.

Global Commercial

Revenues from global commercial increased $1.5 million, or 6.0%, to $26.8 million for the three months ended September 30, 2017, compared to $25.3 million for the three months ended September 30, 2016. Global commercial revenues increased primarily as a result of higher orders from certain commercial distributors, primarily in the trauma market.

Other Revenues

Revenues from other sources consisting of service processing, tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased $578,000, or 18.1%, to $2.6 million for the three months ended September 30, 2017, compared to $3.2 million for the three months ended September 30, 2016. Other revenues decreased primarily as a result of lower tissue recovery fees.

Costs of Processing and Distribution

Costs of processing and distribution increased $904,000, or 2.8%, to $33.2 million for the three months ended September 30, 2017, compared to $32.3 million for the three months ended September 30, 2016. Costs of processing and distribution increased as a percentage of revenues from 48.5% for the three months ended September 30, 2016 to 49.7% for the three months ended September 30, 2017. The increase was primarily due to changes in distribution mix. In addition, our costs of processing and distribution was negatively impacted by an estimated $0.4 million by a hurricane in Florida.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses decreased $1.0 million, or 3.6%, to $27.7 million for the three months ended September 30, 2017, from $28.7 million for the three months ended September 30, 2016. The decrease was primarily due to lower variable compensation and distributor commission expenses on direct revenue distributions. Marketing, general and administrative expenses decreased as a percentage of revenues from 43.2% for the three months ended September 30, 2016 to 41.5% for the three months ended September 30, 2017.

Research and Development Expenses

Research and development expenses decreased $1.0 million, or 26.1%, to $2.8 million for the three months ended September 30, 2017, from $3.8 million for the three months ended September 30, 2016. The decrease was primarily due to lower compensation and research study related expenses. Research and development expenses decreased as a percentage of revenues from 5.7% for the three months ended September 30, 2016, to 4.2% for the three months ended September 30, 2017.

Severance Charges

Severance charges related to a reduction in headcount and improvement in operational efficiencies resulted in $2.8 million of expenses for the three months ended September 30, 2017 as compared to $328,000 of expenses for the three months ended September 30, 2016. This increase was driven largely by the departure of certain former executives during the three months ended September 30, 2017.

Gain on Cardiothoracic closure business divestiture

The Company completed the sale of substantially all of the assets related to its CT Business to A&E, which resulted in a $34.1 million gain for the three months ended September 30, 2017.

Net Other Expense

Net other expense, which includes interest expense, interest income and foreign exchange gain, increased $307,000, or 82.1%, to $681,000 for the three months ended September 30, 2017 from $374,000 for the three months ended September 30, 2016. The increase in net other expense is primarily attributable to higher interest expense of $433,000, as a result of higher interest rate and higher amortization of debt issuance costs as compared to $308,000 for the three months ended September 30, 2016.

Income Tax (Provision) Benefit

Income tax provision for the three months ended September 30, 2017, was $16.1 million compared to income tax benefit of $92,000 for the three months ended September 30, 2016. Our effective tax rate for the three months ended September 30, 2017, was 48.0% compared to 2.5% for the three months ended September 30, 2016. Our effective tax rate increased as a result of disposing of non-deductible goodwill relating to the sale of substantially all of the assets of the CT business to A&E. In addition, our effective tax rate for the three months ending September 30, 2016, was relatively low due to the Company recording a full valuation allowance of $1.2 million on its German subsidiary’s deferred tax assets for the three months ended September 30, 2016.

Nine Months Ended September 30, 2017 Compared With Nine Months Ended September 30, 2016

Total Revenues

Our total revenues of $208.7 million for the nine months ended September 30, 2017, increased $7.2 million, or 3.6%, compared to $201.5 million for the nine months ended September 30, 2016. Our direct revenues increased by $8.3 million, or 7.2%, to $124.6 million due to increased distributions, offset primarily as a result of an estimated $1.2 million loss in revenue due to a hurricane in Florida, and our global commercial revenues increased by $829,000, or 1.1%, to $76.2 million, primarily as a result of higher orders from certain commercial distributors, primarily in the dental and trauma markets.

Direct Revenues

Spine - Revenues from spinal implants increased $5.4 million, or 10.2%, to $57.9 million for the nine months ended September 30, 2017, compared to $52.5 million for the nine months ended September 30, 2016. Spine revenues increased primarily as a result of increased distributions of our map3^® implant.

Sports Medicine and Orthopedics—Revenues from sports medicine and orthopedics allografts increased $223,000, or 0.6%, to $37.2 million for the nine months ended September 30, 2017, compared to $37.0 million for the nine months ended September 30, 2016. Sports medicine and orthopedics revenues increased primarily as a result of increased distributions of our map3^® implants, offset by lower BioCleanse^® processed tendons distributions.

Surgical Specialties—Revenues from surgical specialty allografts increased $1.7 million, or 56.5%, to $4.7 million for the nine months ended September 30, 2017, compared to $3.0 million for the nine months ended September 30, 2016. Surgical specialties revenues increased primarily as a result of new customers and increased distributions of our Cortiva^TM implants.

Cardiothoracic—Revenues from cardiothoracic implants decreased $168,000, or 2.0%, to $8.2 million for the nine months ended September 30, 2017, compared to $8.3 million for the nine months ended September 30, 2016. This decrease was primarily the result of the August 3, 2017, sale of substantially all of the assets of the CT Business to A&E, which was partially offset by the increased distribution of sternal cables and sternal closure plates prior to the sale of the CT Business due to expanded investment in distribution channels. In addition, we have entered into a multi-year Contract Manufacturing Agreement with A&E whereby we will continue to support the CT Business under A&E’s ownership through the manufacturing of existing products , which will generate revenue for our global commercial business.

International Revenues—International revenues include distributions from our foreign affiliates as well as domestic export revenues. International revenues increased $1.2 million, or 7.8%, to $16.7 million for the nine months ended September 30, 2017, compared to $15.5 million for the nine months ended September 30, 2016. International revenues increased primarily as a result of higher distributions in Asia Pacific and Latin America due to expanded distribution channels.

Global Commercial

Revenues from global commercial increased $829,000, or 1.1%, to $76.2 million for the nine months ended September 30, 2017, compared to $75.4 million for the nine months ended September 30, 2016. Global commercial revenues increased primarily as a result of higher orders from certain commercial distributors, primarily in the dental and trauma markets.

Other Revenues

Revenues from other sources consisting of service processing, tissue recovery fees, biomedical laboratory fees, recognition of previously deferred revenues, shipping fees, distribution of reproductions of our allografts to distributors for demonstration purposes and restocking fees decreased $1.9 million, or 19.6%, to $7.9 million for the nine months ended September 30, 2017, compared to $9.8 million for the nine months ended September 30, 2016. Other revenues decreased primarily as a result of lower tissue recovery and service processing fees.

Costs of Processing and Distribution

Costs of processing and distribution increased $5.2 million, or 5.4%, to $102.5 million for the nine months ended September 30, 2017, compared to $97.3 million for the nine months ended September 30, 2016. Costs of processing and distribution increased as a percentage of revenues from 48.3% for the nine months ended September 30, 2016, to 49.1% for the nine months ended September 30, 2017. The increase was primarily due to changes in distribution mix. In addition, our costs of processing and distribution was negatively impacted by an estimated $0.4 million by a hurricane in Florida.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses increased $2.2 million, or 2.6%, to $86.8 million for the nine months ended September 30, 2017, from $84.7 million for the nine months ended September 30, 2016. The increase was primarily due to higher variable compensation and distributor commission expenses on direct revenue distributions. Marketing, general and administrative expenses decreased as a percentage of revenues from 42.0% for the nine months ended September 30, 2016 to 41.6% for the nine months ended September 30, 2017.

Research and Development Expenses

Research and development expenses decreased $1.8 million, or 15.0%, to $10.2 million for the nine months ended September 30, 2017, from $12.0 million for the nine months ended September 30, 2016. The decrease was primarily due to lower compensation and research study related expenses. Research and development expenses decreased as a percentage of revenues from 6.0% for the nine months ended September 30, 2016 to 4.9% for the nine months ended September 30, 2017.

Severance Charges

Severance charges related to a reduction in headcount and improvement in operational efficiencies resulted in $10.6 million of expenses for the nine months ended September 30, 2017 as compared to $1.0 million of expenses for the nine months ended September 30, 2016. This increase was driven largely by the departure of certain former executives during the nine months ended September 30, 2017.

Gain on Cardiothoracic closure business divestiture

The Company completed the sale of substantially all of the assets related to its CT Business to A&E, which resulted in a $34.1 million gain for the nine months ended September 30, 2017.

Net Other Expense

Net other expense, which includes interest expense, interest income and foreign exchange gain, increased $1.4 million, or 122.1%, to $2.5 million for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. The increase in net other expense is primarily attributable to higher interest expense of $1.4 million as a result of higher interest rate and higher amortization of debt issuance costs as compared to $1.1 million for the nine months ended September 30, 2016.

Income Tax Provision

Income tax provision for the nine months ended September 30, 2017, was $16.3 million compared to $338,000 for the nine months ended September 30, 2016. Our effective tax rate for the nine months ended September 30, 2017, was 53.9% compared to 10.7% for the nine months ended September 30, 2016. Our effective tax rate increased as a result of disposing of non-deductible goodwill relating to the sale of substantially all of the assets of the CT business to A&E. In addition, our effective tax rate for the nine months ending September 30, 2016, was relatively low due to the Company recording a full valuation allowance of $1.2 million on its German subsidiary’s deferred tax assets for the nine months ended September 30, 2016.

Non-GAAP Financial Measures

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

To supplement our unaudited condensed consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures that exclude certain amounts, including non-GAAP net income (loss) applicable to common shares, adjusted. The calculation of the tax effect on the adjustments between GAAP net income (loss) applicable to common shares and non-GAAP net income (loss) applicable to common shares is based upon our estimated annual GAAP tax

rate, adjusted to account for items excluded from GAAP net income (loss) applicable to common shares in calculating non-GAAP net income (loss) applicable to common shares. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures are included in the reconciliation below:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
	(In thousands)
Net income (loss) applicable to common shares, as reported	$	16,548		$	(4,489	)	$	11,153		$	(6,108	)
Severance charges		2,820			328			10,623			1,039
Restructuring charges		—			—			—			1,107
Strategic review costs		—			650			—			650
CEO Retirement and transition costs		—			4,107			—			4,107
Contested proxy expenses		—			—			—			2,680
European net operating loss valuation reserve		—			1,224			—			1,224
Gain on cardiothoracic closure business divestiture		(34,090	)		—			(34,090	)		—
Tax effect on adjustments		15,159			(1,773	)		13,855			(3,128	)

Non-GAAP net income applicable to common shares, adjusted	$	437		$	47		$	1,541		$	1,571

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

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

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

Strategic review costs—This adjustment represents charges relating to a comprehensive strategic review of the Company’s business lines and operations intended to leverage the Company’s expertise, technology and products and identify opportunities to increase stockholder value. Management removes the amount of these expenses from our operating results to supplement a comparison to our past operating performance.

CEO Retirement and transition costs—This adjustment represents charges relating to the retirement of our former Chief Executive Officer, and the resulting financial impact of such resignation under the Executive Transition Agreement dated August 29, 2012 and Executive Separation Agreement dated August 15, 2016. Management removes the amount of these expenses from our operating results to supplement a comparison to our past operating performance.

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

Gain on cardiothoracic closure business divestiture – This adjustment represents the gain relating to the sale of substantially all of the assets of our CT Business to A&E. Management removes the amount of this gain from our operating results to supplement a comparison to our past operating performance.

Liquidity and Capital Resources

Our working capital at September 30, 2017, increased $3.0 million to $124.3 million from $121.3 million at December 31, 2016, primarily as a result of the sale of the CT business and its associated working capital. We used $32 million of the proceeds from the sale of the CT Business to partially pay down our long-term obligations and $12 million of the proceeds to pay estimated income taxes associated with the aforementioned sale.

At September 30, 2017, we had 47 days of revenues outstanding in trade accounts receivable, a decrease of 8 days compared to December 31, 2016. The decrease was due to higher cash receipts from customers than shipments and corresponding billings to customers during the nine months ended September 30, 2017.

At September 30, 2017, we had 287 days of inventory on hand, a decrease of 24 days compared to December 31, 2016. The decrease in inventory days is primarily due to higher distributions during the nine months ended September 30, 2017. We believe that our inventory levels will be adequate to support our on-going operations for the next twelve months.

We had $17.7 million of cash and cash equivalents at September 30, 2017. At September 30, 2017, our foreign subsidiaries held $1.8 million in cash which is not available for use in the U.S. without incurring U.S. taxes. U.S. income taxes have not been paid or accrued for on the undistributed earnings of our foreign subsidiaries. We intend to indefinitely reinvest the earnings of our foreign subsidiaries. We do not believe that this policy of indefinitely reinvesting the earnings of our foreign subsidiaries will have a material adverse effect on the business as a whole.

Our short and long-term obligations at September 30, 2017, decreased $33.4 million to $49.9 million from $83.3 million at December 31, 2016. The decrease in short and long-term obligations was primarily due to principal payments on long-term obligations.

We completed the sale of substantially all of the assets related to our CT Business to A&E pursuant to an Asset Purchase Agreement between us and A&E, dated August 3, 2017. The total consideration received by us under the Asset Purchase Agreement was composed of $54 million in cash consideration, $3 million of which is being held in escrow for up to twelve months to satisfy possible indemnification obligations, if any, plus an additional $5 million in contingent cash consideration if A&E reaches certain revenue milestones. We are also entitled to an additional $1 million in consideration if we successfully obtain a certain FDA regulatory clearance.

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

The 2017 Loan Agreement provides for a revolving credit facility (the “Revolving Credit Facility”), in the aggregate principal amount of $42.5 million. As of September 30, 2017, there was $25 million outstanding on the Revolving Credit Facility. The 2017 Loan Agreement also contains a term loan facility in the aggregate principal amount of $25.4 million (the “Term Loan Facility” and, together with the Revolving Credit Facility. We used $32 million of the proceeds from the sale of the CT Business to partially pay down $22 million of amounts owed under the 2013 Loan Agreement and $10 million of amounts owed under the Revolving Credit Facility. The Revolving Credit Facility is secured by substantially all of our assets and the assets of our domestic subsidiaries and is guaranteed by our domestic subsidiaries, as well as 65% of the stock of the Company’s foreign subsidiaries.

Borrowings made under the 2017 Loan Agreement initially will bear interest at a rate per annum equal to monthly LIBOR plus a margin of up to 3.50%. As of September 30, 2017, the interest rate for the Term Loan Facility and the Revolving Credit Facility is 4.74%. Interest is payable quarterly in arrears, and principal on the Term Loan Facility is payable in quarterly payments of $1.1 million, each commencing October 1, 2017. The maturity date of the Facility is September 15, 2019.

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

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

Certain Commitments.

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


	Outstanding Balance		Available Credit
	(In thousands)
Term loan	$	24,911	$	—
Credit facility		25,000		17,500

Total	$	49,911	$	17,500

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


	Contractual Obligations Due by Period
	Total		2017		2018		2019		2020		2021 and Beyond
	(In thousands)
Short and long-term obligations	$	49,911	$	1,068	$	4,272	$	44,571	$	—	$	—
Operating leases		3,332		487		1,249		926		553		117
Other significant obligations (1)		11,323		11,323		—		—		—		—
Unrecognized tax benefits		926		—		—		—		—		926

Total	$	65,492	$	12,878	$	5,521	$	45,497	$	553	$	1,043

(1)

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

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based upon our financing, investing and cash management activities. We are exposed to interest rate risk in the United States and Germany. Changes in interest rates affect interest income earned on cash and cash equivalents and interest expense on revolving credit arrangements. We have not entered into derivative transactions related to cash and cash equivalents or debt. Our borrowings under our term loan and credit facility expose us to market risk related to changes in interest rates. As of September 30, 2017, our outstanding floating rate indebtedness totaled $49.9 million. The primary base interest rate is LIBOR. Other outstanding debt consists of fixed rate instruments. We do not expect changes in interest rates to have a material adverse effect on our income or our cash flows in 2017. However, we can give no assurance that interest rates will not significantly change in the future.

The value of the U.S. dollar compared to the Euro affects our financial results. Changes in exchange rates may positively or negatively affect revenues, gross margins, operating expenses and net income. Our international operations currently transact business primarily in the Euro. Assets and liabilities of foreign subsidiaries are translated at the period end exchange rate while revenues and expenses are translated at the average exchange rate for the period. Intercompany transactions are translated from the Euro to the U.S. dollar. We do not expect changes in exchange rates to have a material adverse effect on our income or our cash flows for the remainder of 2017. However, we can give no assurance that exchange rates will not significantly change in the future.

Item 4.

Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

For a further description, we refer you to Part I, Item 1, Note 17 entitled “Legal Actions” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings.

Item 1A.

Risk Factors

There has been no material change in our risk factors as previously disclosed in Part I, Item 1.A., Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 13, 2017.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits



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

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

10.1^*†		Asset Purchase Agreement dated as of August 3, 2017 by and between RTI Surgical, Inc. and A&E Advanced Closure Systems, LLC.

10.2^*†		Contract Manufacturing Agreement dated as of August 3, 2017 by and between RTI Surgical, Inc. and A&E Advanced Closure Systems, LLC.

10.3^*†		Third Amended and Restated Loan Agreement, dated as of August 3, 2017 by and among RTI Surgical, Inc., TD Bank, N.A. and First Tennessee Bank National Association, as Lenders (together with the various financial institutions as in the future may become parties thereto, the Lenders), and TD Bank, N.A., as administrative agent for the Lenders.

10.4^*		Employment Agreement, dated September 18, 2017, by and between Jonathon M. Singer and RTI Surgical, Inc.

10.5^*		Restricted Stock Award Agreement, dated September 18, 2017, by and between Jonathon M. Singer and RTI Surgical, Inc.

10.6^*		Stock Option Agreement, dated September 18, 2017, by and between Jonathon M. Singer and RTI Surgical, Inc.



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

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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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

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

^†	Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Commission.

^*	Filed herewith

SIGNATURES

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


RTI SURGICAL, INC. (Registrant)

By:		/s/ Camille Farhat
		Camille Farhat
		President and Chief Executive Officer

By:		/s/ Jonathon M. Singer
		Jonathon M. Singer
		Chief Financial and Administrative Officer

Date: November 3, 2017

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