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Orthofix Medical Inc. - Quarter Report: 2019 June (Form 10-Q)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from                      to                     .

Commission File Number: 0-19961

 

ORTHOFIX MEDICAL INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

98-1340767

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3451 Plano Parkway,

Lewisville, Texas

 

75056

(Address of principal executive offices)

 

(Zip Code)

(214) 937-2000

(Registrant’s telephone number, including area code)

 

Not applicable

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large Accelerated filer

Accelerated filer

 

 

 

 

Non-Accelerated filer

 

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

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

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

As of August 2, 2019, 19,031,280 shares of common stock were issued and outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.10 par value per share

 

OFIX

 

Nasdaq Global Select Market

 

 

 


 

 Table of Contents

 

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019, and December 31, 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended  June 30, 2019, and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

23

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

34

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

34

 

 

 

 

 

Item 5.

 

Other Information

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

SIGNATURES

 

36

2


 

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict, including the risks described Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) and other Securities and Exchange Commission (“SEC”) filings. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in the 2018 Form 10-K and other SEC filings, to reflect new information, the occurrence of future events or circumstances or otherwise.

 

 

Trademarks

Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

 

3


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ORTHOFIX MEDICAL INC.

Condensed Consolidated Balance Sheets

 

(U.S. Dollars, in thousands, except share data)

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,143

 

 

$

69,623

 

Restricted cash

 

 

 

 

 

2,566

 

Trade accounts receivable, net of allowances of $4,205 and $7,463, respectively

 

 

80,591

 

 

 

77,747

 

Inventories

 

 

79,141

 

 

 

76,847

 

Prepaid expenses and other current assets

 

 

20,954

 

 

 

17,856

 

Total current assets

 

 

232,829

 

 

 

244,639

 

Property, plant and equipment, net

 

 

64,402

 

 

 

42,835

 

Intangible assets, net

 

 

55,628

 

 

 

51,897

 

Goodwill

 

 

71,177

 

 

 

72,401

 

Deferred income taxes

 

 

37,566

 

 

 

33,228

 

Other long-term assets

 

 

27,204

 

 

 

21,641

 

Total assets

 

$

488,806

 

 

$

466,641

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

19,523

 

 

$

17,989

 

Current portion of finance lease liability

 

 

301

 

 

 

 

Other current liabilities

 

 

48,161

 

 

 

67,919

 

Total current liabilities

 

 

67,985

 

 

 

85,908

 

Long-term portion of finance lease liability

 

 

20,847

 

 

 

 

Other long-term liabilities

 

 

52,180

 

 

 

45,336

 

Total liabilities

 

 

141,012

 

 

 

131,244

 

Contingencies (Note 9)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized;

   18,831,581 and 18,579,688 issued and outstanding as of June 30,

   2019 and December 31, 2018, respectively

 

 

1,883

 

 

 

1,858

 

Additional paid-in capital

 

 

257,888

 

 

 

243,165

 

Retained earnings

 

 

86,561

 

 

 

87,078

 

Accumulated other comprehensive income

 

 

1,462

 

 

 

3,296

 

Total shareholders’ equity

 

 

347,794

 

 

 

335,397

 

Total liabilities and shareholders’ equity

 

$

488,806

 

 

$

466,641

 

The accompanying notes form an integral part of these condensed consolidated financial statements

4


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(Unaudited, U.S. Dollars, in thousands, except share and per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

115,850

 

 

$

111,547

 

 

$

224,962

 

 

$

220,256

 

Cost of sales

 

 

25,812

 

 

 

22,835

 

 

 

49,520

 

 

 

46,982

 

Gross profit

 

 

90,038

 

 

 

88,712

 

 

 

175,442

 

 

 

173,274

 

Sales and marketing

 

 

56,864

 

 

 

51,529

 

 

 

110,558

 

 

 

101,797

 

General and administrative

 

 

21,935

 

 

 

21,958

 

 

 

42,407

 

 

 

41,382

 

Research and development

 

 

8,980

 

 

 

7,891

 

 

 

18,209

 

 

 

14,828

 

Acquisition-related amortization and remeasurement (Note 13)

 

 

1,808

 

 

 

1,419

 

 

 

8,265

 

 

 

1,482

 

Operating income (loss)

 

 

451

 

 

 

5,915

 

 

 

(3,997

)

 

 

13,785

 

Interest income (expense), net

 

 

457

 

 

 

(251

)

 

 

200

 

 

 

(434

)

Other expense, net

 

 

(236

)

 

 

(3,643

)

 

 

(640

)

 

 

(731

)

Income (loss) before income taxes

 

 

672

 

 

 

2,021

 

 

 

(4,437

)

 

 

12,620

 

Income tax benefit (expense)

 

 

(1,219

)

 

 

(1,096

)

 

 

4,787

 

 

 

(6,469

)

Net income (loss)

 

$

(547

)

 

$

925

 

 

$

350

 

 

$

6,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.05

 

 

$

0.02

 

 

$

0.33

 

Diluted

 

 

(0.03

)

 

 

0.05

 

 

 

0.02

 

 

 

0.32

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

18,834,886

 

 

 

18,413,756

 

 

 

18,790,612

 

 

 

18,409,331

 

Diluted

 

 

18,834,886

 

 

 

18,835,560

 

 

 

19,179,057

 

 

 

18,811,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on debt security

 

 

 

 

 

1,960

 

 

 

(2,593

)

 

 

1,960

 

Reclassification adjustment for amortization of historical unrealized gains on debt security

 

 

(689

)

 

 

 

 

 

(689

)

 

 

 

Currency translation adjustment

 

 

147

 

 

 

(1,175

)

 

 

(302

)

 

 

(478

)

Other comprehensive income (loss) before tax

 

 

(542

)

 

 

785

 

 

 

(3,584

)

 

 

1,482

 

Income tax related to other comprehensive income (loss)

 

 

171

 

 

 

(432

)

 

 

812

 

 

 

(432

)

Other comprehensive income (loss), net of tax

 

 

(371

)

 

 

353

 

 

 

(2,772

)

 

 

1,050

 

Comprehensive income (loss)

 

$

(918

)

 

$

1,278

 

 

$

(2,422

)

 

$

7,201

 

The accompanying notes form an integral part of these condensed consolidated financial statements


5


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

 

 

(Unaudited, U.S. Dollars, in thousands, except share data)

 

Number of

Common

Shares

Outstanding

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

At December 31, 2018

 

 

18,579,688

 

 

$

1,858

 

 

$

243,165

 

 

$

87,078

 

 

$

3,296

 

 

$

335,397

 

Cumulative effect adjustment from adoption of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Cumulative effect adjustment from adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

(938

)

 

 

938

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

897

 

 

 

 

 

 

897

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,401

)

 

 

(2,401

)

Share-based compensation

 

 

 

 

 

 

 

 

5,685

 

 

 

 

 

 

 

 

 

5,685

 

Common shares issued, net

 

 

211,081

 

 

 

21

 

 

 

4,012

 

 

 

 

 

 

 

 

 

4,033

 

At March 31, 2019

 

 

18,790,769

 

 

$

1,879

 

 

$

252,862

 

 

$

87,108

 

 

$

1,833

 

 

$

343,682

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(547

)

 

 

 

 

 

(547

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(371

)

 

 

(371

)

Share-based compensation

 

 

 

 

 

 

 

 

5,849

 

 

 

 

 

 

 

 

 

5,849

 

Common shares issued, net

 

 

40,812

 

 

 

4

 

 

 

(823

)

 

 

 

 

 

 

 

 

(819

)

At June 30, 2019

 

 

18,831,581

 

 

$

1,883

 

 

$

257,888

 

 

$

86,561

 

 

$

1,462

 

 

$

347,794

 

 

 

(Unaudited, U.S. Dollars, in thousands, except share data)

 

Number of

Common

Shares

Outstanding

 

 

Common

Shares

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income

 

 

Total

Shareholders’

Equity

 

At December 31, 2017

 

 

18,278,833

 

 

$

1,828

 

 

$

220,591

 

 

$

70,402

 

 

$

3,787

 

 

$

296,608

 

Cumulative effect adjustment from adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

4,761

 

 

 

 

 

 

4,761

 

Cumulative effect adjustment from adoption of ASU 2016-16

 

 

 

 

 

 

 

 

 

 

 

(1,896

)

 

 

 

 

 

(1,896

)

Net income

 

 

 

 

 

 

 

 

 

 

 

5,226

 

 

 

 

 

 

5,226

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

697

 

 

 

697

 

Share-based compensation

 

 

 

 

 

 

 

 

3,916

 

 

 

 

 

 

 

 

 

3,916

 

Common shares issued, net

 

 

126,511

 

 

 

13

 

 

 

3,849

 

 

 

 

 

 

 

 

 

3,862

 

At March 31, 2018

 

 

18,405,344

 

 

$

1,841

 

 

$

228,356

 

 

$

78,493

 

 

$

4,484

 

 

$

313,174

 

Net income

 

 

 

 

 

 

 

 

 

 

 

925

 

 

 

 

 

 

925

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

353

 

 

 

353

 

Share-based compensation

 

 

 

 

 

 

 

 

5,215

 

 

 

 

 

 

 

 

 

5,215

 

Common shares issued, net

 

 

80,444

 

 

 

8

 

 

 

171

 

 

 

 

 

 

 

 

 

179

 

At June 30, 2018

 

 

18,485,788

 

 

$

1,849

 

 

$

233,742

 

 

$

79,418

 

 

$

4,837

 

 

$

319,846

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

6


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Cash Flows

 

 

 

Six Months Ended

June 30,

 

(Unaudited, U.S. Dollars, in thousands)

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

350

 

 

$

6,151

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,905

 

 

 

8,923

 

Amortization of operating lease assets, debt costs and other assets

 

 

1,750

 

 

 

592

 

Provision for doubtful accounts

 

 

638

 

 

 

(360

)

Deferred income taxes

 

 

(2,316

)

 

 

724

 

Share-based compensation

 

 

11,534

 

 

 

9,131

 

Interest and gain on valuation of investment securities

 

 

(1,023

)

 

 

(1,399

)

Change in fair value of contingent consideration

 

 

5,870

 

 

 

1,109

 

Other

 

 

477

 

 

 

847

 

Changes in operating assets and liabilities, net of effects of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,535

)

 

 

(363

)

Inventories

 

 

(2,389

)

 

 

5,251

 

Prepaid expenses and other current assets

 

 

(3,277

)

 

 

71

 

Accounts payable

 

 

1,626

 

 

 

(3,847

)

Other current liabilities

 

 

(8,138

)

 

 

(14,612

)

Payment of contingent consideration

 

 

(1,340

)

 

 

 

Other long-term assets and liabilities

 

 

(3,788

)

 

 

814

 

Net cash from operating activities

 

 

8,344

 

 

 

13,032

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of business, net of cash acquired

 

 

 

 

 

(43,749

)

Capital expenditures for property, plant and equipment

 

 

(9,595

)

 

 

(5,782

)

Capital expenditures for intangible assets

 

 

(743

)

 

 

(870

)

Asset acquisitions and other investments

 

 

(6,400

)

 

 

(1,148

)

Net cash from investing activities

 

 

(16,738

)

 

 

(51,549

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

6,523

 

 

 

5,416

 

Payments related to withholdings for share-based compensation

 

 

(3,309

)

 

 

(1,375

)

Payment of contingent consideration

 

 

(13,660

)

 

 

 

Payments related to finance lease obligation

 

 

(188

)

 

 

 

Other financing activities

 

 

(947

)

 

 

(356

)

Net cash from financing activities

 

 

(11,581

)

 

 

3,685

 

Effect of exchange rate changes on cash

 

 

(71

)

 

 

(639

)

Net change in cash, cash equivalents, and restricted cash

 

 

(20,046

)

 

 

(35,471

)

Cash, cash equivalents, and restricted cash at the beginning of period

 

 

72,189

 

 

 

81,157

 

Cash, cash equivalents, and restricted cash at the end of period

 

$

52,143

 

 

$

45,686

 

 

 

 

 

 

 

 

 

 

Components of cash, cash equivalents and restricted cash at the end of period

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,143

 

 

$

45,686

 

Restricted cash

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash at the end of period

 

$

52,143

 

 

$

45,686

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Purchase of intangible assets

 

$

 

 

$

1,181

 

Contingent consideration recognized at acquisition date

 

 

 

 

 

25,491

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

7


 

ORTHOFIX MEDICAL INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1. Business and basis of presentation

Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, the Company has two reporting segments: Global Spine and Global Extremities.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2018. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates including those related to revenue recognition; contractual allowances; allowance for doubtful accounts; inventories; valuation of intangible assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates.

Prior period reclassifications

Certain amortization expense related to intangible assets previously reported in general and administrative expenses have been reclassified to acquisition-related amortization and remeasurement based on use of the underlying intangible asset. This reclassification resulted in decreases to general and administrative expenses of $0.3 million and $0.4 million for the three and six months ended June 30, 2018, respectively, and increases in acquisition related amortization and remeasurement expense of $0.3 million and $0.4 million for the three and six months ended June 30, 2018, respectively.

Additionally, as disclosed in the Company’s Form 10-K for the year ended December 31, 2018, the Company reclassified $1.1 million of previously reported expense during the second quarter of 2018 related to changes in fair value of contingent consideration from other expense, net, to acquisition-related amortization and remeasurement to conform to current period presentation.

Change in Reporting Segments

The Company has changed its reportable business segments beginning with the first quarter of 2019, to align with changes in how the Company manages its business, reviews operating performance and allocates resources.  The Company now reports results under two reportable segments: Global Spine and Global Extremities, and measures operating performance of these two reportable segments based on EBITDA. For additional discussion regarding segments, see Note 12.

 

2. Recently adopted accounting standards and recently issued accounting pronouncements

 

Adoption of ASU 2016-02, Leases (Topic 842)

In February 2016 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, which changes how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company will recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be accounted for as finance leases similar to capital leases under the previous accounting standard.  Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The practical expedients adopted allow the Company to carry forward its historical lease classification and to not separate and allocate the consideration paid between lease and non-lease components included within a contract. The Company also adopted an optional transition method that waives the requirement to apply the ASU to the comparative periods presented within the financial statements in the year of adoption. Therefore, results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and

8


 

continue to be reported in accordance with the Company’s historic accounting policies under Topic 840. See Note 5 for additional discussion of the Company’s adoption of Topic 842 and its lease accounting policies.

Adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, which allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The Company adopted this guidance effective January 1, 2019, which resulted in an increase to accumulated other comprehensive income and a decrease in retained earnings of $0.9 million.

Other recently adopted accounting guidance

In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for the current year-to-date interim periods, with subtotals for each interim period. The Company adopted Release No. 33-10532 during the first quarter of 2019, which resulted in changes in shareholders’ equity presented within the Condensed Consolidated Statements of Changes in Shareholders’ Equity.

Recently issued accounting pronouncements

 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Financial Instruments - Credit Losses (ASU 2016-13), and subsequent amendments

 

Requires that credit losses for certain types of financial instruments be estimated based on expected losses and also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Applied using a modified retrospective approach, with early adoption permitted.

 

January 1, 2020

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

Goodwill

(ASU 2017-04)

 

Eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. Applied on a prospective basis, with early adoption permitted.

 

January 1, 2020

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a significant impact on its financial statements or disclosures.

Fair value measurement (ASU 2018-13)

 

Eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. Certain of the provisions are to be applied retrospectively with other provisions  applied prospectively.

 

January 1, 2020

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

9


 

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Implementation costs in a cloud computing arrangement that is a service contract (ASU 2018-15)

 

Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.

 

January 1, 2020

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

 

 

3. Acquisitions

Acquisition of Spinal Kinetics, Inc.

On April 30, 2018, the Company completed the acquisition of Spinal Kinetics Inc. (“Spinal Kinetics”), a privately held developer and manufacturer of artificial cervical and lumbar discs for $45.0 million in net cash, subject to certain adjustments, plus potential milestone payments of up to $60.0 million in cash. The acquisition date fair value of the consideration transferred was $76.6 million. The results of operations for Spinal Kinetics have been included in the Company’s financial results since the acquisition date, April 30, 2018. For additional discussion regarding the valuation of the contingent consideration, see Note 7.

The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date. During the first quarter of 2019, the Company finalized its valuation of assets acquired and liabilities assumed, which resulted in an adjustment between deferred income taxes and goodwill.

 

(U.S. Dollars, in thousands)

 

Preliminary Acquisition Date Fair Value as Previously Reported

 

 

Adjustments

 

 

Final Acquisition Date Fair Value

 

 

Assigned Useful Life

Assets acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,785

 

 

$

 

 

$

6,785

 

 

 

Restricted cash

 

 

30

 

 

 

 

 

 

30

 

 

 

Accounts receivable

 

 

1,705

 

 

 

 

 

 

1,705

 

 

 

Inventories

 

 

8,175

 

 

 

 

 

 

8,175

 

 

 

Prepaid expenses and other current assets

 

 

315

 

 

 

 

 

 

315

 

 

 

Property, plant and equipment

 

 

2,285

 

 

 

 

 

 

2,285

 

 

 

Other long-term assets

 

 

320

 

 

 

 

 

 

320

 

 

 

Developed technology

 

 

12,400

 

 

 

 

 

 

12,400

 

 

10 years

In-process research and development ("IPR&D")

 

 

26,800

 

 

 

 

 

 

26,800

 

 

10 years

Tradename

 

 

100

 

 

 

 

 

 

100

 

 

2 years

Deferred income taxes

 

 

2,374

 

 

 

1,220

 

 

 

3,594

 

 

 

Total identifiable assets acquired

 

$

61,289

 

 

$

1,220

 

 

$

62,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

351

 

 

$

 

 

$

351

 

 

 

Other current liabilities

 

 

2,873

 

 

 

(4

)

 

 

2,869

 

 

 

Other long-term liabilities

 

 

301

 

 

 

 

 

 

301

 

 

 

Total liabilities assumed

 

$

3,525

 

 

$

(4

)

 

$

3,521

 

 

 

Goodwill

 

 

18,836

 

 

 

(1,224

)

 

 

17,612

 

 

 

Total fair value of consideration transferred

 

$

76,600

 

 

$

 

 

$

76,600

 

 

 

 

10


 

On February 6, 2019, the Company obtained U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration and started amortizing IPR&D. The $17.6 million of goodwill recognized was assigned to the Global Spine reporting segment.

The Company did not recognize any acquisition related costs during the three and six months ended June 30, 2019 and recorded $1.5 million and $3.0 million of acquisition related costs during the three and six months ended June 30, 2018. These costs are included in the condensed consolidated statements of operations and comprehensive income (loss) within general and administrative expenses. The Company’s results of operations included net sales of $3.2 million and $2.3 million related to Spinal Kinetics for the three months ended June 30, 2019 and 2018, respectively, and net sales of $6.4 million and $2.3 million for the six months ended June 30, 2019 and 2018, respectively. Additionally, the Company’s results of operations included net losses of $3.4 million and $1.8 million related to Spinal Kinetics for the three months ended June 30, 2019 and 2018, respectively, and net losses of $7.4 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively.

The following table presents the unaudited pro forma results for the three and six months ended June 30, 2019 and 2018, which combines the historical results of operations of Orthofix and Spinal Kinetics as though the companies had been combined as of January 1, 2018. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$

115,850

 

 

$

115,129

 

 

$

224,962

 

 

$

227,584

 

Net income (loss)

 

 

(547

)

 

 

597

 

 

 

350

 

 

 

5,457

 

 

 

Options Medical, LLC Asset Acquisition

On January 31, 2019, the Company acquired certain assets of Options Medical, LLC, (“Options Medical”) a medical device distributor based in Florida. Under the terms of the acquisition, the parties agreed to terminate an existing exclusive sales representative agreement, employees of Options Medical became employees of the Company and the Company acquired all customer lists and customer information related to the sale of the Company’s products. As consideration for the assets acquired, the Company paid $6.4 million. Additionally, as an inducement to enter into employment with the Company, the Company provided 25,478 restricted stock units (“RSUs”), with a fair value of $1.4 million, to the Options Medical founder. These RSUs will vest in one-third annual increments beginning on the first anniversary of the grant date and are contingent upon continued employment. The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date.

 

(U.S. Dollars, in thousands)

 

Fair Value

 

 

Balance Sheet Classification

 

Assigned Useful Life

Assets acquired

 

 

 

 

 

 

 

 

Operating lease assets

 

$

175

 

 

Other long-term assets

 

 

Customer relationships

 

 

5,832

 

 

Intangible assets, net

 

10 years

Assembled workforce

 

 

568

 

 

Intangible assets, net

 

5 years

Total identifiable assets acquired

 

$

6,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

 

 

 

 

Operating lease liability - short-term

 

$

69

 

 

Other current liabilities

 

 

Operating lease liability - long-term

 

 

106

 

 

Other long-term liabilities

 

 

Total liabilities assumed

 

 

175

 

 

 

 

 

Total fair value of consideration transferred

 

$

6,400

 

 

 

 

 

 

 

11


 

4. Inventories

Inventories were as follows:

 

(U.S. Dollars, in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

Raw materials

 

$

7,752

 

 

$

8,463

 

Work-in-process

 

 

11,421

 

 

 

13,478

 

Finished products

 

 

59,968

 

 

 

54,906

 

Inventories

 

$

79,141

 

 

$

76,847

 

 

 

5. Leases

As discussed in Note 2, the Company adopted ASU No. 2016-02—Leases (Topic 842), as of January 1, 2019, using the modified retrospective approach. Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $20.2 million and $20.5 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact and the elimination of historical prepaid or deferred rent, was recorded as an adjustment to retained earnings. The net impact of adoption to the Company’s balance sheet as of January 1, 2019 is presented in the table below. The standard did not have a material impact to the Company’s condensed consolidated statements of operations and comprehensive income (loss) or cash flows.

 

(U.S. Dollars, in thousands)

 

December 31, 2018

 

 

Impact

of Adoption

of ASC 842

 

 

January 1,

2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash

 

$

72,189

 

 

$

 

 

$

72,189

 

Accounts receivable, net

 

 

77,747

 

 

 

 

 

 

77,747

 

Inventories

 

 

76,847

 

 

 

 

 

 

76,847

 

Prepaid expenses and other current assets

 

 

17,856

 

 

 

(15

)

 

 

17,841

 

Total current assets

 

 

244,639

 

 

 

(15

)

 

 

244,624

 

Property, plant, and equipment, net

 

 

42,835

 

 

 

 

 

 

42,835

 

Intangible assets, net and goodwill

 

 

124,298

 

 

 

 

 

 

124,298

 

Deferred income taxes

 

 

33,228

 

 

 

71

 

 

 

33,299

 

Other long-term assets

 

 

21,641

 

 

 

20,209

 

 

 

41,850

 

Total assets

 

$

466,641

 

 

$

20,265

 

 

$

486,906

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,989

 

 

$

 

 

$

17,989

 

Other current liabilities

 

 

67,919

 

 

 

2,166

 

 

 

70,085

 

Total current liabilities

 

 

85,908

 

 

 

2,166

 

 

 

88,074

 

Other long-term liabilities

 

 

45,336

 

 

 

18,028

 

 

 

63,364

 

Total liabilities

 

$

131,244

 

 

$

20,194

 

 

$

151,438

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Common shares

 

 

1,858

 

 

 

 

 

 

1,858

 

Additional paid-in capital

 

 

243,165

 

 

 

 

 

 

243,165

 

Retained earnings

 

 

87,078

 

 

 

71

 

 

 

87,149

 

Accumulated other comprehensive income

 

 

3,296

 

 

 

 

 

 

3,296

 

Total shareholders’ equity

 

 

335,397

 

 

 

71

 

 

 

335,468

 

Total liabilities and shareholders’ equity

 

$

466,641

 

 

$

20,265

 

 

$

486,906

 

 

12


 

The Company determines if an arrangement is a lease at inception. The Company’s leases primarily relate to facilities, vehicles, and equipment. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives.

The Company has made an accounting policy election for short-term leases, in that the Company will not recognize a lease liability or lease asset on the balance sheet for leases with a lease term of twelve months or less as of the commencement date. Rather, any short-term lease payments will be recognized as an expense on a straight-line basis over the lease term. The current period short-term lease expense reasonably reflects our short-term lease commitments.

The Company has made a policy election for all classifications of leases to combine lease and nonlease components and to account for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in which the obligation is incurred. Additionally, lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.

During the first quarter of 2019, the Company entered into an amendment for its corporate headquarters lease. As a result, the classification of this lease changed from an operating lease to a finance lease, resulting in an increase to both the lease liability and lease asset of approximately $8.0 million.

A summary of the Company’s lease portfolio as of June 30, 2019 is presented in the table below:

 

(U.S. Dollars, in thousands, except lease term and discount rate)

 

Classification

 

June 30, 2019

 

Assets

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

6,353

 

Finance leases

 

Property, plant and equipment, net

 

 

20,695

 

Total lease assets

 

 

 

 

27,048

 

Liabilities

 

 

 

 

 

 

Current

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

 

1,816

 

Finance leases

 

Current portion of finance lease liability

 

 

301

 

Long-term

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

4,609

 

Finance leases

 

Long-term portion of finance lease liability

 

 

20,847

 

Total lease liabilities

 

 

 

$

27,573

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

Operating leases

 

 

 

4.5 years

 

Finance leases

 

 

 

21.2 years

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

Operating leases

 

 

 

 

2.46

%

Finance leases

 

 

 

 

4.38

%

 

13


 

The components of lease costs were as follows:

 

(U.S. Dollars, in thousands)

 

Three Months ended June 30, 2019

 

 

Six Months Ended

June 30, 2019

 

Finance lease costs:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

245

 

 

$

484

 

Interest on finance lease liabilities

 

 

231

 

 

 

454

 

Operating lease costs

 

 

540

 

 

 

1,080

 

Short-term lease costs

 

 

72

 

 

 

134

 

Variable lease costs

 

 

176

 

 

 

328

 

Total lease costs

 

$

1,264

 

 

$

2,480

 

 

Supplemental cash flow information related to leases was as follows:

 

(U.S. Dollars, in thousands)

 

Six Months Ended

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

 

$

2,055

 

Operating cash flows from finance leases

 

 

454

 

Financing cash flows from finance leases

 

 

188

 

Right-of-use assets obtained in exchange for lease obligations

 

 

 

 

Operating leases

 

 

362

 

Finance leases

 

 

21,179

 

 

A summary of the Company’s remaining lease liabilities as of June 30, 2019 is included below:

 

(U.S. Dollars, in thousands)

 

Operating

Leases

 

 

Finance

Leases

 

2019

 

$

977

 

 

$

642

 

2020

 

 

1,808

 

 

 

1,013

 

2021

 

 

1,593

 

 

 

1,414

 

2022

 

 

1,312

 

 

 

1,443

 

2023

 

 

256

 

 

 

1,471

 

Thereafter

 

 

803

 

 

 

27,207

 

Total undiscounted value of lease liabilities

 

$

6,749

 

 

$

33,190

 

Less: Interest

 

 

(324

)

 

 

(12,042

)

Present value of lease liabilities

 

$

6,425

 

 

$

21,148

 

 

 

 

 

 

 

 

 

 

Current portion of lease liabilities

 

 

1,816

 

 

 

301

 

Long-term portion of lease liabilities

 

 

4,609

 

 

 

20,847

 

Total lease liabilities

 

$

6,425

 

 

$

21,148

 

 

 

6. Long-term debt

As of June 30, 2019, the Company had no borrowings under its five year $125 million secured revolving credit facility. In addition, the Company had no borrowings on its €5.5 million ($6.3 million) available lines of credit in Italy as of June 30, 2019.  The Company is in compliance with all required financial covenants as of June 30, 2019.

 

 

14


 

7. Fair value measurements

The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

(U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury securities

 

$

502

 

 

$

 

 

$

 

 

$

502

 

 

$

490

 

Bone Biologics equity warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bone Biologics equity securities

 

 

 

 

 

219

 

 

 

 

 

 

219

 

 

 

219

 

eNeura debt security

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,820

 

eNeura warrant

 

 

 

 

 

 

 

 

491

 

 

 

491

 

 

 

 

Total

 

$

502

 

 

$

219

 

 

$

491

 

 

$

1,212

 

 

$

18,529

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

(19,430

)

 

$

(19,430

)

 

$

(28,560

)

Deferred compensation plan

 

 

 

 

 

(1,314

)

 

 

 

 

 

(1,314

)

 

 

(1,275

)

Total

 

$

 

 

$

(1,314

)

 

$

(19,430

)

 

$

(20,744

)

 

$

(29,835

)

 

Bone Biologics Equity Warrants and Securities

The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics. The Company’s common stock investments are recorded within other long-term assets while the warrants are considered to have a fair value of zero. The equity securities are considered investments that do not have readily determinable fair values. As such, the Company measures these investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Bone Biologics equity securities and warrants beginning balance

 

$

219

 

 

$

4,897

 

 

$

219

 

 

$

2,768

 

Impact of adoption of ASU 2016-01 recognized in other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

1,629

 

Purchase of additional common stock

 

 

 

 

 

 

 

 

 

 

 

500

 

Fair value adjustments, expirations, and impairments recognized in other income (expense), net

 

 

 

 

 

(229

)

 

 

 

 

 

(229

)

Bone Biologics equity securities and warrants ending balance

 

$

219

 

 

$

4,668

 

 

$

219

 

 

$

4,668

 

 

eNeura Debt Security and Warrant

The Company holds a debt security of eNeura, Inc., a privately held medical technology company that is developing devices for the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, the Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura and which also eliminated the conversion feature included within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).

Prior to the restructuring on March 1, 2019, the debt security was accounted for as an available for sale debt security at fair value and included within other long-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow model and assumptions regarding the expected payback period for the debt security, requiring the Company to develop its own assumptions; therefore, the Company had categorized this asset as a Level 3 financial asset. Subsequent to the restructuring, the debt security is no longer classified as an available for sale debt security, but rather as a held to maturity debt security. As a result, the amounts included in accumulated other comprehensive income related to this debt security are now being amortized to interest

15


 

income over the extended term of the Restructured Debt Security. For additional discussion regarding the Restructured Debt Security, see Note 8.

The Warrant is recorded at fair value and included in other long-term assets. The fair value of the Warrant is based on significant unobservable inputs, including the use of a discounted cash flow model and an option-pricing model, requiring the Company to develop its own assumptions; therefore, the Company has categorized this asset as a Level 3 financial asset. As of June 30, 2019, the estimated fair value of the Warrant was $0.5 million. The Warrant is considered an investment that does not have a readily determinable fair value. As such, the Company measures the Warrant at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

The following table provides a reconciliation of the beginning and ending balances for the eNeura debt security and Warrant measured and reflected in the condensed consolidated balance sheets at fair value using significant unobservable inputs (Level 3):

 

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

eNeura debt security and Warrant at January 1

 

$

17,820

 

 

$

16,050

 

Gains or losses recorded for the period

 

 

 

 

 

 

 

 

Recognized in other comprehensive income (loss)

 

 

(2,593

)

 

 

1,960

 

Change in classification of debt security to held to maturity

 

 

(15,227

)

 

 

 

Issuance of warrant as consideration for extension

 

 

491

 

 

 

 

eNeura debt security and Warrant at June 30

 

$

491

 

 

$

18,010

 

 

 

Contingent Consideration

The contingent consideration at the acquisition date of Spinal Kinetics consisted of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) up to $15.0 million if the FDA grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments.

On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc. This approval triggered the Company’s payment obligation of $15.0 million for the achievement of the FDA Milestone and such obligation was paid on February 14, 2019. The fair value of the remaining contingent consideration was $19.4 million as of June 30, 2019; however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. The remaining liability attributable to the revenue-based milestones is included within other long-term liabilities. Any changes in fair value are recorded as an operating expense and included within acquisition-related amortization and remeasurement.

The Company estimated the fair value of the remaining potential future revenue-based milestone payments using a Monte Carlo simulation. This fair value measurement is based on significant inputs that are unobservable in the market, and thus represents a Level 3 measurement. The key assumptions in applying the Monte Carlo valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, discount rate applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.

The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

Contingent consideration at January 1

 

$

28,560

 

 

$

 

Acquisition date fair value

 

 

 

 

 

25,491

 

Increase in fair value recognized in acquisition-related amortization and remeasurement

 

 

5,870

 

 

 

1,109

 

Payment made

 

 

(15,000

)

 

 

 

Contingent consideration at June 30

 

$

19,430

 

 

$

26,600

 

 

 

16


 

8. Investments

As a result of the restructuring of the eNeura debt security discussed in Note 7, the eNeura debt security was reclassified from an available for sale debt security to a held to maturity debt security at its fair value on the date of the restructuring. The unrealized gain included in accumulated other comprehensive income at the restructuring date continues to be included in accumulated other comprehensive income and is now being amortized to interest income over the remaining life of the Restructured Debt Security. The Restructured Debt Security will be evaluated for impairment based on management’s estimate of future cash collections discounted using the debt security’s original effective interest rate of 8%. Management’s estimate of future cash flows involves significant judgment regarding the timing, expected events, and amount of future cash collections. Decreases in management’s estimate of future cash collections could result in an other than temporary impairment. As of June 30, 2019, the Company’s amortized cost basis in the Restructured Note was $15.1 million, which also represents its carrying value, compared to an estimated fair value of $16.0 million and an unpaid principal balance of $15.0 million. During the three and six months ended June 30, 2019, the Company recognized $0.2 and $0.3 million in interest income related to the eNeura debt security. The Company did not recognize any interest income during the three and six months ended June 30, 2018.

 

 

9. Contingencies

In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.

Italian Medical Device Payback (“IMDP”)

In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. The healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology sector that sell medical devices in Italy. A key provision of the law is a ‘payback’ measure, requiring companies selling medical devices in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the IMDP as sales and marketing expense and recorded expense of $0.3 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively and $0.7 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the Company has accrued $4.3 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.

Brazil

In July 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority inspected the offices of more than 30 companies, including the Company’s office in São Paulo, as part of an investigation into tender irregularities in the medical device industry. Before doing so, the authorities obtained a court order affecting the Company’s (and other companies’) local bank accounts resulting in the freezing of approximately $2.5 million of the Company’s cash, which the Company reclassified to restricted cash. On April 3, 2019, the Company’s appeal regarding the freezing of its local bank accounts was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the Company’s cash. The cash was then returned without any restrictions in April 2019. As such, this balance has been reclassified to cash and cash equivalents as of June 30, 2019.

 

 

17


 

10. Accumulated other comprehensive income

The components of and changes in accumulated other comprehensive income were as follows:

 

(U.S. Dollars, in thousands)

 

Currency

Translation

Adjustments

 

 

Debt Security

 

 

Accumulated Other

Comprehensive Income

 

Balance at December 31, 2018

 

$

(2,386

)

 

$

5,682

 

 

$

3,296

 

Cumulative effect adjustment from adoption of ASU 2018-02

 

 

 

 

 

938

 

 

 

938

 

Other comprehensive loss

 

 

(302

)

 

 

(2,593

)

 

 

(2,895

)

Income taxes

 

 

 

 

 

641

 

 

 

641

 

Reclassification adjustment to:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

 

 

 

(689

)

 

 

(689

)

Income taxes

 

 

 

 

 

171

 

 

 

171

 

Balance at June 30, 2019

 

$

(2,688

)

 

$

4,150

 

 

$

1,462

 

 

 

11. Revenue recognition and accounts receivable

Revenue Recognition

The Company has two reporting segments, which consist of Global Spine and Global Extremities.  Within the Global Spine reporting segment there are three product categories: Bone Growth Therapies, Spinal Implants and Biologics.

The tables below present net sales by major product category by reporting segment:

 

 

 

Three Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Change

 

Bone Growth Therapies

 

$

50,109

 

 

$

48,211

 

 

 

3.9

%

Spinal Implants

 

 

23,226

 

 

 

23,880

 

 

 

-2.7

%

Biologics

 

 

16,744

 

 

 

14,668

 

 

 

14.2

%

Global Spine

 

 

90,079

 

 

 

86,759

 

 

 

3.8

%

Global Extremities

 

 

25,771

 

 

 

24,788

 

 

 

4.0

%

Net sales

 

$

115,850

 

 

$

111,547

 

 

 

3.9

%

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Change

 

Bone Growth Therapies

 

$

97,392

 

 

$

94,374

 

 

 

3.2

%

Spinal Implants

 

 

46,129

 

 

 

44,587

 

 

 

3.5

%

Biologics

 

 

32,476

 

 

 

29,003

 

 

 

12.0

%

Global Spine

 

 

175,997

 

 

 

167,964

 

 

 

4.8

%

Global Extremities

 

 

48,965

 

 

 

52,292

 

 

 

-6.4

%

Net sales

 

$

224,962

 

 

$

220,256

 

 

 

2.1

%

 

Product Sales and Marketing Service Fees

The table below presents net sales, which includes product sales and marketing service fees, for the three and six months ended June 30, 2019 and 2018.

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Product sales

 

$

99,865

 

 

$

97,453

 

 

$

193,799

 

 

$

192,342

 

Marketing service fees

 

 

15,985

 

 

 

14,094

 

 

 

31,163

 

 

 

27,914

 

Net sales

 

$

115,850

 

 

$

111,547

 

 

$

224,962

 

 

$

220,256

 

 

18


 

Product sales primarily consist of the sale of bone growth therapy devices and internal and external fixation products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the Global Spine reporting segment. Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Shipping and handling costs for products shipped to customers are included in cost of sales.

Puerto Rico Settlement

In June 2019, the Company received a payment of $1.4 million from the Administration of Medical Services of Puerto Rico, a government-owned corporation, in settlement of approximately $2.5 million of outstanding accounts receivable. This $2.5 million of outstanding accounts receivable had previously been fully reserved between the Company’s allowances for doubtful accounts and contractual allowances. As a result of this settlement, and in accordance with the Company’s policy, the Company recorded the resulting adjustment to contractual allowances of $0.4 million within net sales and the recovery of the allowance for doubtful accounts as a credit to bad debt expense of $1.0 million.

Other Contract Assets

The Company’s contract assets, excluding trade accounts receivable (“other contract assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of Orthofix products. Other contract assets are included in other long-term assets or other current assets, dependent upon the original term of the related agreement, and totaled $3.9 million and $1.9 million as of June 30, 2019, and December 31, 2018, respectively.

 

12. Business segment information

During the first quarter of 2019, the Company changed its reporting segments from four reporting segments, previously reported as Bone Growth Therapies, Spinal Implants, Biologics, and Orthofix Extremities, to two reporting segments:  Global Spine and Global Extremities. Additionally, the Company changed the performance measure used to evaluate segment performance from Non-GAAP net margin to earnings before interest income (expense), net, income taxes, depreciation and amortization (“EBITDA”). These changes were made to align how the chief operating decision maker manages the business, reviews operating performance and allocates resources. The Company has revised its segment reporting to represent how the business is now managed and restated prior periods to conform to the current segment presentation. Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the two reporting segments, such as human resources, finance, legal, and information technology functions.

As part of the change in reporting segments, the Company performed a quantitative assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not result in an impairment. In addition, the net carrying value of goodwill that was previously reported under the prior reporting segments (i) Bone Growth Therapies (ii) Spinal Implants and (iii) Biologics have been consolidated and are included within the Global Spine reporting segment as of June 30, 2019.

As mentioned above, the primary metric used in managing the Company is EBITDA. The table below presents EBITDA by reporting segment:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Global Spine

 

$

16,523

 

 

$

19,030

 

 

$

27,098

 

 

$

37,855

 

Global Extremities

 

 

2,750

 

 

 

488

 

 

 

2,577

 

 

 

3,816

 

Corporate

 

 

(12,880

)

 

 

(12,692

)

 

 

(22,407

)

 

 

(19,694

)

Total EBITDA

 

$

6,393

 

 

$

6,826

 

 

$

7,268

 

 

$

21,977

 

Depreciation and amortization

 

 

(6,178

)

 

 

(4,554

)

 

 

(11,905

)

 

 

(8,923

)

Interest income (expense), net

 

 

457

 

 

 

(251

)

 

 

200

 

 

 

(434

)

Income (loss) before income taxes

 

$

672

 

 

$

2,021

 

 

$

(4,437

)

 

$

12,620

 

 

19


 

Geographical information

The table below presents net sales by geographic destination for each reporting unit and for the consolidated Company:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Global Spine

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

84,601

 

 

$

81,722

 

 

$

164,127

 

 

$

159,760

 

International

 

 

5,478

 

 

 

5,037

 

 

 

11,870

 

 

 

8,204

 

Total Global Spine

 

 

90,079

 

 

 

86,759

 

 

 

175,997

 

 

 

167,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Extremities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

6,844

 

 

 

7,023

 

 

 

13,442

 

 

 

13,939

 

International

 

 

18,927

 

 

 

17,765

 

 

 

35,523

 

 

 

38,353

 

Total Global Extremities

 

 

25,771

 

 

 

24,788

 

 

 

48,965

 

 

 

52,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

91,445

 

 

 

88,745

 

 

 

177,569

 

 

 

173,699

 

International

 

 

24,405

 

 

 

22,802

 

 

 

47,393

 

 

 

46,557

 

Net sales

 

$

115,850

 

 

$

111,547

 

 

$

224,962

 

 

$

220,256

 

 

 

 

13. Acquisition-related amortization and remeasurement

 

Acquisition-related amortization and remeasurement consists of amortization related to intangible assets acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement. Components of acquisition-related amortization and remeasurement for the three months and six months ended June 30, 2019 and 2018, respectively, are as follows:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Changes in fair value of contingent consideration

 

$

470

 

 

$

1,109

 

 

$

5,870

 

 

$

1,109

 

Amortization of acquired intangibles

 

 

1,338

 

 

 

310

 

 

 

2,395

 

 

 

373

 

Total

 

$

1,808

 

 

$

1,419

 

 

$

8,265

 

 

$

1,482

 

 

 

14. Share-based compensation

The following tables present the detail of share-based compensation by line item in the condensed consolidated statements of operations and comprehensive income (loss) as well as by award type:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cost of sales

 

$

180

 

 

$

132

 

 

$

367

 

 

$

257

 

Sales and marketing

 

 

692

 

 

 

473

 

 

 

1,302

 

 

 

922

 

General and administrative

 

 

4,564

 

 

 

4,249

 

 

 

9,128

 

 

 

7,294

 

Research and development

 

 

413

 

 

 

361

 

 

 

737

 

 

 

658

 

Total

 

$

5,849

 

 

$

5,215

 

 

$

11,534

 

 

$

9,131

 

 

20


 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Stock options

 

$

926

 

 

$

1,241

 

 

$

3,038

 

 

$

1,863

 

Time-based restricted stock awards and units

 

 

2,951

 

 

 

1,789

 

 

 

4,657

 

 

 

3,236

 

Performance-based restricted stock awards and units

 

 

 

 

 

270

 

 

 

 

 

 

759

 

Market-based restricted stock units

 

 

1,576

 

 

 

1,604

 

 

 

2,923

 

 

 

2,557

 

Stock purchase plan

 

 

396

 

 

 

311

 

 

 

916

 

 

 

716

 

Total

 

$

5,849

 

 

$

5,215

 

 

$

11,534

 

 

$

9,131

 

During the three months ended June 30, 2019 and 2018, the Company issued 40,812 and 80,444 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units. During the six months ended June 30, 2019 and 2018, the Company issued 251,893 and 206,955 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units.

On August 5, the Company entered into an employment agreement with its new President of Global Spine and awarded restricted stock units and stock options valued at approximately $1.5 million as inducement grants.

Share-Based Compensation Modifications

During the first quarter of 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the Company’s President and Chief Executive Officer.  As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to accelerate the vesting to the retirement date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a standard qualified retirement to up to four years, dependent upon the remaining contractual term of the options. The Company recognized approximately $1.5 million and $3.7 million in share-based compensation expense during the three and six months ended June 30, 2019, related to the Retirement Agreement, which was charged to general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).

 

 

15. Income taxes

Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items.  As a result, the Company’s interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.

For the three months ended June 30, 2019 and 2018, the effective tax rate was 181.4% and 54.2%, respectively. For the six months ended June 30, 2019 and 2018, the effective tax rate was 107.9% and 51.3%, respectively. The primary factors affecting the Company’s effective tax rate for the three and six months ended June 30, 2019, were increased limitation of the deductibility of executive compensation, financial expenses not deductible for tax purposes, and benefits related to effective settlement of the 2015 federal tax examination and statute expirations.

During the first quarter of 2019, the Internal Revenue Service concluded an examination of the Company’s federal income tax return for 2015, which resulted in a benefit of $1.8 million. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $13.0 million to $13.4 million as audits close and statutes expire.

 

21


 

16. Earnings per share (“EPS”)

The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three and six months ended June 30, 2019 and 2018, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS. The following is a reconciliation of the weighted average shares used in diluted EPS computations.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Weighted average common shares-basic

 

 

18,834,886

 

 

 

18,413,756

 

 

 

18,790,612

 

 

 

18,409,331

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options and stock purchase plan

 

 

 

 

 

327,171

 

 

 

259,967

 

 

 

318,047

 

Unvested restricted stock awards and units

 

 

 

 

 

94,633

 

 

 

128,478

 

 

 

83,978

 

Weighted average common shares-diluted

 

 

18,834,886

 

 

 

18,835,560

 

 

 

19,179,057

 

 

 

18,811,356

 

 

There were 1,987,907 and 413,296 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended June 30, 2019 and 2018, respectively, and 483,731 and 259,470 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the six months ended June 30, 2019 and 2018, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock awards and units, all necessary conditions had not been satisfied by the end of the respective period.

 

22


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of Orthofix Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.

Executive Summary

We are a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, we have two reporting segments: Global Spine and Global Extremities. Our products are widely distributed by our sales representatives and distributors.

Notable highlights and achievements in the second quarter of 2019 include the following:

 

Net sales were $115.9 million, an increase of 3.9% on a reported basis and 5.0% on a constant currency basis

 

Increase in Biologics net sales of 14.2% compared to the prior year period, as we believe we now have the #1 market-share position within the U.S. Cellular Allograft segment per SmartTRAK following strong performance in 2019

 

Net loss was $0.5 million, a decrease of $1.5 million compared to the prior year period

 

Decrease in earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) of $0.4 million, or 6.3%

Results of Operations

The following table provides certain items in our condensed consolidated statements of operations and comprehensive income (loss) as a percent of net sales:

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

(%)

 

 

2018

(%)

 

 

2019

(%)

 

 

2018

(%)

 

Net sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

22.3

 

 

 

20.5

 

 

 

22.0

 

 

 

21.3

 

Gross profit

 

 

77.7

 

 

 

79.5

 

 

 

78.0

 

 

 

78.7

 

Sales and marketing

 

 

49.1

 

 

 

46.2

 

 

 

49.1

 

 

 

46.2

 

General and administrative

 

 

18.9

 

 

 

19.7

 

 

 

18.9

 

 

 

18.8

 

Research and development

 

 

7.8

 

 

 

7.0

 

 

 

8.1

 

 

 

6.7

 

Acquisition-related amortization and remeasurement

 

 

1.5

 

 

 

1.3

 

 

 

3.7

 

 

 

0.7

 

Operating income (loss)

 

 

0.4

 

 

 

5.3

 

 

 

(1.8

)

 

 

6.3

 

Net income (loss)

 

 

(0.5

)

 

 

0.8

 

 

 

0.2

 

 

 

2.8

 

 

Net Sales by Product Category and Reporting Segment

The following tables provide net sales by major product category by reporting segment:

 

 

 

Three Months Ended

June 30,

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

50,109

 

 

$

48,211

 

 

 

3.9

%

 

 

3.9

%

Spinal Implants

 

 

23,226

 

 

 

23,880

 

 

 

-2.7

%

 

 

-2.0

%

Biologics

 

 

16,744

 

 

 

14,668

 

 

 

14.2

%

 

 

14.2

%

Global Spine

 

 

90,079

 

 

 

86,759

 

 

 

3.8

%

 

 

4.0

%

Global Extremities

 

 

25,771

 

 

 

24,788

 

 

 

4.0

%

 

 

8.5

%

Net sales

 

$

115,850

 

 

$

111,547

 

 

 

3.9

%

 

 

5.0

%

23


 

 

 

 

 

Six Months Ended

June 30,

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

97,392

 

 

$

94,374

 

 

 

3.2

%

 

 

3.2

%

Spinal Implants

 

 

46,129

 

 

 

44,587

 

 

 

3.5

%

 

 

4.3

%

Biologics

 

 

32,476

 

 

 

29,003

 

 

 

12.0

%

 

 

12.0

%

Global Spine

 

 

175,997

 

 

 

167,964

 

 

 

4.8

%

 

 

5.0

%

Global Extremities

 

 

48,965

 

 

 

52,292

 

 

 

-6.4

%

 

 

-1.4

%

Net sales

 

$

224,962

 

 

$

220,256

 

 

 

2.1

%

 

 

3.5

%

 

Global Spine

Global Spine offers the following products categories:

 

-

Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients.

 

-

Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.

 

-

Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.

Three months ended June 30, 2019 compared to 2018

Net sales increased $3.3 million or 3.8%

 

Bone Growth Therapies net sales increased $1.9 million or 3.9%, primarily driven by an increase in order volume in the quarter, partially offset by customer sales mix and product mix changes

 

Spinal Implants net sales decreased $0.7 million or 2.7%, primarily driven by abnormally high pricing pressures and ongoing disruption in our legacy sales force in preparation of bringing on larger sales partners in key geographies, which is expected to be reduced as we gain traction with our new distributors, and partially offset by an increase in Motion Preservation sales of $0.8 million

 

Biologics net sales increased $2.1 million or 14.2%, primarily due to distribution added during the last year and recovery in a previously underperforming region, as volume increased related to Trinity tissues by 17.3%, partially offset by a low single-digit price decline

Six months ended June 30, 2019 compared to 2018

Net sales increased $8.0 million or 4.8%

 

Bone Growth Therapies net sales increased $3.0 million or 3.2%, primarily driven by an increase in order volume in the quarter, partially offset by customer sales mix and product mix changes

 

Spinal Implants net sales increased $1.5 million or 3.5%, primarily driven by an increase of $3.9 million in Motion Preservation sales as we acquired Spinal Kinetics during the second quarter of 2018, and partially offset by a decrease in legacy U.S. sales of $2.4 million, primarily resulting from ongoing disruption in our legacy sales force in preparation of bringing on larger sales partners in key geographies, the impact of which is expected to be reduced as we gain traction with our new distributors and pricing pressures

 

Biologics net sales increased $3.5 million or 12.0%, primarily due to distribution added during the last year and recovery in a previously underperforming region, as volume increased related to Trinity tissues by 18.4%, partially offset by a low single-digit price decline as well as a contractual reduction in the marketing services fee we receive from MTF Biologics, which became effective during the first quarter of 2018

24


 

Global Extremities

Global Extremities offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. Global Extremities distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and health providers.

Three months ended June 30, 2019 compared to 2018

Net sales increased $1.0 million or 4.0%

 

Increase of $2.2 million largely attributed to variability in the timing of orders from our stocking distributors and growth in our direct-sales markets

 

Partially offset by a decrease of $1.1 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales

Six months ended June 30, 2019 compared to 2018

Net sales decreased $3.3 million or 6.4%

 

Decrease of $2.6 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales

 

Decrease of $0.7 million largely attributed to variability in the timing of orders from our stocking distributors

Gross Profit

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Net sales

 

$

115,850

 

 

$

111,547

 

 

 

3.9

%

 

$

224,962

 

 

$

220,256

 

 

 

2.1

%

Cost of sales

 

 

25,812

 

 

 

22,835

 

 

 

13.0

%

 

 

49,520

 

 

 

46,982

 

 

 

5.4

%

Gross profit

 

$

90,038

 

 

$

88,712

 

 

 

1.5

%

 

$

175,442

 

 

$

173,274

 

 

 

1.3

%

Gross margin

 

 

77.7

%

 

 

79.5

%

 

 

-1.8

%

 

 

78.0

%

 

 

78.7

%

 

 

-0.7

%

Three months ended June 30, 2019 compared to 2018

Gross profit increased $1.3 million

 

Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased to 77.7% compared to 79.5% in the prior year period, largely due to higher than normal charges related to the buildup of Spinal Implants inventory to support sales growth from our new sales partners in key geographies

Six months ended June 30, 2019 compared to 2018

Gross profit increased $2.2 million

 

Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased to 78.0% compared to 78.7% in the prior year period, largely due to higher than normal charges related to the buildup of Spinal Implants inventory to support sales growth from our new sales partners in key geographies

Sales and Marketing Expense

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Sales and marketing

 

$

56,864

 

 

$

51,529

 

 

 

10.4

%

 

$

110,558

 

 

$

101,797

 

 

 

8.6

%

As a percentage of net sales

 

 

49.1

%

 

 

46.2

%

 

 

2.9

%

 

 

49.1

%

 

 

46.2

%

 

 

2.9

%

25


 

Three months ended June 30, 2019 compared to 2018

Sales and marketing expense increased $5.3 million

 

Increase largely attributable to increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S.

 

Further increases relate to higher variable compensation rates to support growth in our Biologics product category

Six months ended June 30, 2019 compared to 2018

Sales and marketing expense increased $8.8 million

 

Increase largely attributable to increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S.

 

Further increases related to higher variable compensation rates to support growth in our Biologics product category

General and Administrative Expense

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

General and administrative

 

$

21,935

 

 

$

21,958

 

 

 

-0.1

%

 

$

42,407

 

 

$

41,382

 

 

 

2.5

%

As a percentage of net sales

 

 

18.9

%

 

 

19.7

%

 

 

-0.8

%

 

 

18.9

%

 

 

18.8

%

 

 

0.1

%

Three months ended June 30, 2019 compared to 2018

General and administrative expense decreased by less than $0.1 million

 

Increase of $1.3 million attributable to transition and succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers

 

Decrease of $0.7 million associated with other share-based compensation expenses, excluding the impact of succession charges described above

 

Further offset by a decrease of $0.4 million in certain other compensation expenses

Six months ended June 30, 2019 compared to 2018

General and administrative expense increased $1.0 million

 

Increase of $4.0 million attributable to transition and succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers

 

Partially offset by a decrease of $1.7 million in expenses associated with strategic investments, largely due to diligence costs related to the acquisition of Spinal Kinetics and expenses associated with the Domestication in 2018

 

Further offset by a decrease of $1.3 million associated with other share-based compensation expenses, excluding the impact of the succession charges described above

Research and Development Expense

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Research and development

 

$

8,980

 

 

$

7,891

 

 

 

13.8

%

 

$

18,209

 

 

$

14,828

 

 

 

22.8

%

As a percentage of net sales

 

 

7.8

%

 

 

7.0

%

 

 

0.7

%

 

 

8.1

%

 

 

6.7

%

 

 

1.4

%

26


 

Three months ended June 30, 2019 compared to 2018

Research and development expense increased $1.1 million

 

Increase largely due to additional headcount, the inclusion of one additional month of Motion Preservation expenses as Spinal Kinetics was acquired on April 30, 2018, and increased spend related to clinical trials within the Bone Growth Therapies product category

 

Increase also related to costs to comply with recent medical device reporting regulations in the European Union

Six months ended June 30, 2019 compared to 2018

Research and development expense increased $3.4 million

 

Increase largely attributable to the Spinal Kinetics acquisition and the regulatory efforts associated with the U.S. Food and Drug Administration (“FDA”) premarket approval of the M6 Cervical Disc, which was obtained in February of 2019

Acquisition-related Amortization and Remeasurement

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Acquisition-related amortization and remeasurement

 

$

1,808

 

 

$

1,419

 

 

 

27.4

%

 

$

8,265

 

 

$

1,482

 

 

 

457.7

%

As a percentage of net sales

 

 

1.5

%

 

 

1.3

%

 

 

0.3

%

 

 

3.7

%

 

 

0.7

%

 

 

3.0

%

Acquisition-related amortization and remeasurement consists of amortization related to intangibles acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement.

Three months ended June 30, 2019 compared to 2018

Acquisition-related amortization and remeasurment increased $0.4 million

 

Increase of $1.0 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions;  of this amount, $0.8 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA approval milestone during the first quarter of 2019

 

Partially offset by a decrease of $0.6 million related to changes in fair value recognized associated with the FDA milestone, which was achieved and paid during the first quarter of 2019, and potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition

Six months ended June 30, 2019 compared to 2018

Acquisition-related amortization and remeasurement increased $6.8 million

 

Increase of $3.2 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition

 

Increase of $1.6 million related to the remeasurement of the FDA milestone associated with the Spinal Kinetics acquisition, which was achieved and paid during the first quarter of 2019

 

Increase of $2.0 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions;  of this amount, $1.5 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA milestone during the first quarter of 2019

27


 

Non-operating Income and Expense

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Interest income (expense), net

 

$

457

 

 

$

(251

)

 

 

-282.1

%

 

$

200

 

 

$

(434

)

 

 

-146.1

%

Other expense, net

 

 

(236

)

 

 

(3,643

)

 

 

-93.5

%

 

 

(640

)

 

 

(731

)

 

 

-12.4

%

 

Three months ended June 30, 2019 compared to 2018

Other income (expense) increased $3.4 million

 

Increase of $3.5 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement gain of $0.3 million in the second quarter of 2019 compared to a loss of $3.3 million in the second quarter of 2018

Six months ended June 30, 2019 compared to 2018

Other income (expense) increased less than $0.1 million

 

Increase of $1.6 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $0.6 million in the first half of 2019 compared to a loss of $2.2 million in the first half of 2018

 

Partially offset by a decrease of $1.5 million related to net unrealized gains recorded in 2018 associated with the increase in fair value of our equity securities in Bone Biologics, Inc. (“Bone Biologics”) following the adoption of ASU 2016-01

Income Taxes

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

Income tax expense (benefit)

 

$

1,219

 

 

$

1,096

 

 

 

11.2

%

 

$

(4,787

)

 

$

6,469

 

 

 

-174.0

%

Effective tax rate

 

 

181.4

%

 

 

54.2

%

 

 

127.2

%

 

 

107.9

%

 

 

51.3

%

 

 

56.6

%

Three months ended June 30, 2019 compared to 2018

The increase in the effective tax compared to the prior year period rate was primarily a result of the following factors:

 

Decrease in pre-tax earnings

 

Increases in non-deductible executive compensation due to provisions of the Act

 

Increases in financial expenses not deductible for tax purposes

The primary factors affecting our effective tax rate for the second quarter of 2019 are as follows:

 

Increases in non-deductible executive compensation due to provisions of the Act

 

Certain financial expenses not deductible for tax purposes

Six months ended June 30, 2019 compared to 2018

The increase in the effective tax rate compared to the prior year period was primarily a result of the following factors:

 

Decrease in pre-tax earnings

 

Increases in non-deductible executive compensation due to provisions of the Act

 

Increases in financial expenses not deductible for tax purposes

 

Benefits related to effective settlement of the 2015 IRS exam and statute expirations

The primary factors affecting our effective tax rate for the six months ended June 30, 2019 are as follows:

 

Increases in non-deductible executive compensation due to provisions of the Act

 

Certain financial expenses not deductible for tax purposes

 

Benefits related to effective settlement of the 2015 IRS exam and statute expirations

28


 

Segment Review

As discussed above, we changed the performance measure used to evaluate segment performance from Non-GAAP net margin to EBITDA during the first quarter of 2019. When compared to the prior year period, EBITDA decreased $0.4 million for the three months ended June 30, 2019 and decreased $14.7 million for the six months ended June 30, 2019. These changes are largely driven by the fluctuations discussed above. The $14.7 million decrease for the six months ended June 30, 2019 compared to the prior year period is largely driven by the changes in sales and marketing expense and acquisition-related amortization and remeasurement. The following table reconciles EBITDA to income (loss) before income taxes:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Global Spine

 

$

16,523

 

 

$

19,030

 

 

$

27,098

 

 

$

37,855

 

Global Extremities

 

 

2,750

 

 

 

488

 

 

 

2,577

 

 

 

3,816

 

Corporate

 

 

(12,880

)

 

 

(12,692

)

 

 

(22,407

)

 

 

(19,694

)

Total EBITDA

 

$

6,393

 

 

$

6,826

 

 

$

7,268

 

 

$

21,977

 

Depreciation and amortization

 

 

(6,178

)

 

 

(4,554

)

 

 

(11,905

)

 

 

(8,923

)

Interest income (expense), net

 

 

457

 

 

 

(251

)

 

 

200

 

 

 

(434

)

Income (loss) before income taxes

 

$

672

 

 

$

2,021

 

 

$

(4,437

)

 

$

12,620

 

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash at June 30, 2019, totaled $52.1 million compared to $72.2 million at December 31, 2018, with the decrease largely a result of $15.0 million in cash paid in connection with achievement of the Spinal Kinetics FDA Milestone and $6.4 million related to the acquisition of certain assets of Options Medical, LLC (“Options Medical”) in 2019.

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Change

 

Net cash from operating activities

 

$

8,344

 

 

$

13,032

 

 

$

(4,688

)

Net cash from investing activities

 

 

(16,738

)

 

 

(51,549

)

 

 

34,811

 

Net cash from financing activities

 

 

(11,581

)

 

 

3,685

 

 

 

(15,266

)

Effect of exchange rate changes on cash

 

 

(71

)

 

 

(639

)

 

 

568

 

Net change in cash, cash equivalents and restricted cash

 

$

(20,046

)

 

$

(35,471

)

 

$

15,425

 

The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities.

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2019

 

 

2018

 

 

Change

 

Net cash from operating activities

 

$

8,344

 

 

$

13,032

 

 

$

(4,688

)

Capital expenditures

 

 

(10,338

)

 

 

(6,652

)

 

 

(3,686

)

Free cash flow

 

$

(1,994

)

 

$

6,380

 

 

$

(8,374

)

Operating Activities

Cash flows from operating activities decreased $4.7 million

 

Decrease in net income of $5.8 million

 

Net increase of $9.3 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration, depreciation and amortization, share-based compensation expense, and deferred income taxes

 

Net decrease of $8.2 million relating to changes in working capital accounts, primarily attributable to changes in inventories

Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 63 days at June 30, 2019 compared to 61 days at June 30, 2018. Inventory turns improved to 1.3 times as of June 30, 2019 compared to 1.2 times as of June 30, 2018.

29


 

Investing Activities

Cash flows from investing activities increased $34.8 million

 

Increase of $43.7 million associated with cash paid in relation to the Spinal Kinetics acquisition in 2018, net of cash acquired

 

Increase of $0.7 million associated with the acquisition of certain intangible assets in a transaction with a former distributor and by our additional investment of $0.5 million in Bone Biologics during the first quarter of 2018

 

Partially offset by $6.4 million associated with cash paid in relation to the acquisition of certain assets of Options Medical, one of our former distributors, during the first quarter of 2019

 

Further offset by $3.7 million attributable to increased capital expenditures compared to the prior year

Financing Activities

Cash flows from financing activities decreased $15.3 million

 

Decrease of $13.7 million associated with our payment of the FDA Milestone associated with the Spinal Kinetics acquisition during the first quarter of 2019, which represents the acquisition-date fair value attributable to the FDA Milestone liability originally recognized

 

Decrease in net proceeds of $0.8 million from the issuance of common shares

 

Decrease of $0.2 million attributable to principal payments made during 2019 relating to our finance lease and $0.6 million attributable to other financing cash flows, which primarily relate to deferred payments made associated with the acquisition of certain intangible assets in transactions with former distributors

Credit Facilities

There have been no material changes to our credit facilities as disclosed in our Form 10-K for the year ended December 31, 2018.

Other

For information regarding Contingencies, see Note 9 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.

Spinal Kinetics Acquisition

As part of the consideration for the Spinal Kinetics acquisition, we agreed to milestone payments in the future of up to $60.0 million in cash. One milestone payment was for $15.0 million upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”).  During the first quarter of 2019, we obtained FDA approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration and the FDA Milestone payment was triggered.  We paid the $15.0 million FDA Milestone payment on February 14, 2019 from cash on hand.

Two other milestone payments are comprised of revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The fair value of the contingent consideration arrangement as of June 30, 2019 was $19.4 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. The remaining liability attributable to the revenue-based milestones is included within other long-term liabilities. For additional discussion of this matter, see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

eNeura debt security

We hold a debt security of eNeura, Inc., a privately held medical technology company that is developing devices for the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, we entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura. As consideration for the extension, eNeura issued to us a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).

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We considered the restructuring of the eNeura debt security to be a Troubled Debt Restructuring (“TDR”).  A TDR exists when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. In making this determination, we considered eNeura’s current financial condition and whether the restructuring of the debt security resulted in the granting of a concession after taking into account all the facts and circumstances surrounding the restructuring. The restructuring was undertaken to improve the likelihood of our effort to recover the investment in the original the debt security.

As a result of the restructuring, the eNeura debt security is no longer accounted for at fair value, but rather in accordance with the accounting required for TDRs. The fair value of the debt security immediately prior to the restructuring was reclassified to be the carrying amount of the debt security, as such amount approximates our estimate of future cash collections discounted using the debt security’s effective interest rate of 8%. Our estimate of future cash flows involves significant judgment regarding the timing, expected events, and amount of future cash collections. Decreases in our estimate of future cash collections could result in a significant other-than-temporary impairment. Interest income on the restructured eNeura debt security is recorded using the interest income method; therefore, the amortized cost basis is accreted up to the amount of expected future cash flows over the term of the Restructured Debt Security. For additional information, see Notes 7 and 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Brazil

On April 3, 2019, our appeal regarding the freezing of our local bank accounts in Brazil was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the cash. Approximately $2.5 million was then returned without any restrictions in April 2019. As such, this balance has been reclassified to cash and cash equivalents as of June 30, 2019. For additional discussion regarding the matter, see Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Off-balance Sheet Arrangements

As of June 30, 2019, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2018.

Critical Accounting Estimates

Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes to our critical accounting estimates except for the following:

Leases

On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). We determine if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, our incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have made a policy election for all classifications of leases to combine lease and nonlease components and to account for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in which the obligation is incurred.

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Recently Issued Accounting Pronouncements

See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued accounting pronouncements.

Non-GAAP Financial Measures

We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics used to supplement information regarding the performance and underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate the effectiveness of the our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.

The non-GAAP financial measures used in this filing may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.

Constant Currency

Constant currency is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.

EBITDA

EBITDA is a non-GAAP metric defined as earnings before interest income (expense), net, income taxes, depreciation, and amortization. EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.

Free Cash Flow

Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities. Free cash flow is an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks as disclosed in our Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2019. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2019.

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Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting, known to the President and Chief Executive Officer or the Chief Financial Officer that occurred for the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

For information regarding legal proceedings, see Note 9 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein, which is incorporated by reference into this Part II, Item 1.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2018.

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

We have not made any repurchases of our common stock during the second quarter of 2019.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

There are no matters to be reported under this heading.


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Item 6. Exhibits

 

  10.1

 

Consulting Agreement, dated July 15, 2019, between Bradley V. Niemann and Orthofix Medical Inc. (filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 15, 2019 and incorporated herein by reference).

 

 

 

  31.1*

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

 

 

 

  31.2*

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

 

 

 

  32.1*

 

Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer.

 

 

 

  101*

 

The following materials from this Form 10-Q, formatted in Inline eXtensible Business Reporting Language(“iXBRL”), filed herewith: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to the Unaudited Condensed Consolidated Financial Statements.

*

Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

ORTHOFIX MEDICAL INC.

 

 

Date: August 5, 2019

By:

 

/s/ BRADLEY R. MASON

 

Name:

 

Bradley R. Mason

 

Title:

 

President and Chief Executive Officer

 

 

 

 

Date: August 5, 2019

By:

 

/s/ DOUG RICE

 

Name:

 

Doug Rice

 

Title:

 

Chief Financial Officer

 

 

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