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Orthofix Medical Inc. - Quarter Report: 2022 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, 2022

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

 

img220789128_0.jpg 

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 1, 2022, 20,003,637 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, 2022 and December 31, 2021

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

27

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

27

 

 

 

 

 

Item 5.

 

Other Information

 

27

 

 

 

 

 

Item 6.

 

Exhibits

 

28

 

 

 

 

 

SIGNATURES

 

29

 

2


 

Forward-Looking Statements

This Quarterly 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. Forward-looking statements include, but are not limited to, statements about:

our intentions, beliefs, and expectations regarding our operations, sales, expenses, and future financial performance;
our operating results;
our plans for future products and enhancements of existing products;
anticipated growth and trends in our business;
the timing of and our ability to maintain and obtain regulatory clearances or approvals;
our belief that our cash and cash equivalents, investments, and access to our revolving line of credit will be sufficient to satisfy our anticipated cash requirements;
our expectations regarding our revenues, customers, and distributors;
our expectations regarding our costs, suppliers, and manufacturing abilities;
our beliefs and expectations regarding our market penetration and expansion efforts;
our expectations regarding the benefits and integration of acquired businesses and/or products and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
our anticipated trends and challenges in the markets in which we operate; and
our expectations and beliefs regarding and the impact of investigations, claims, and litigation.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions that are difficult to predict. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise), and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, those set forth in Part I, Item 1A under the heading Risk Factors; Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and elsewhere throughout the Annual Report on Form 10-K for the year ended December 31, 2021, and in any other documents incorporated by reference. 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 update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, 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 par value data)

 

June 30,
2022

 

 

December 31,
2021

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,536

 

 

$

87,847

 

Accounts receivable, net of allowances of $5,589 and $4,944, respectively

 

 

77,069

 

 

 

78,560

 

Inventories

 

 

97,171

 

 

 

82,974

 

Prepaid expenses and other current assets

 

 

21,416

 

 

 

20,141

 

Total current assets

 

 

255,192

 

 

 

269,522

 

Property, plant, and equipment, net

 

 

58,676

 

 

 

59,252

 

Intangible assets, net

 

 

50,634

 

 

 

52,666

 

Goodwill

 

 

71,317

 

 

 

71,317

 

Deferred income taxes

 

 

1,454

 

 

 

1,771

 

Other long-term assets

 

 

24,383

 

 

 

22,095

 

Total assets

 

$

461,656

 

 

$

476,623

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

32,322

 

 

$

26,459

 

Current portion of finance lease liability

 

 

624

 

 

 

2,590

 

Other current liabilities

 

 

48,151

 

 

 

76,781

 

Total current liabilities

 

 

81,097

 

 

 

105,830

 

Long-term portion of finance lease liability

 

 

19,571

 

 

 

19,890

 

Other long-term liabilities

 

 

19,042

 

 

 

13,969

 

Total liabilities

 

 

119,710

 

 

 

139,689

 

Contingencies (Note 7)

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common shares $0.10 par value; 50,000 shares authorized;
    
20,000 and 19,837 issued and outstanding as of June 30,
    2022 and December 31, 2021, respectively

 

 

2,000

 

 

 

1,983

 

Additional paid-in capital

 

 

323,738

 

 

 

313,951

 

Retained earnings

 

 

19,029

 

 

 

21,000

 

Accumulated other comprehensive loss

 

 

(2,821

)

 

 

 

Total shareholders’ equity

 

 

341,946

 

 

 

336,934

 

Total liabilities and shareholders’ equity

 

$

461,656

 

 

$

476,623

 

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 per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net sales

 

$

118,070

 

 

$

121,394

 

 

$

224,488

 

 

$

226,987

 

Cost of sales

 

 

31,600

 

 

 

27,439

 

 

 

59,918

 

 

 

53,353

 

Gross profit

 

 

86,470

 

 

 

93,955

 

 

 

164,570

 

 

 

173,634

 

Sales and marketing

 

 

59,888

 

 

 

57,338

 

 

 

114,025

 

 

 

108,123

 

General and administrative

 

 

15,846

 

 

 

18,335

 

 

 

35,174

 

 

 

34,779

 

Research and development

 

 

12,758

 

 

 

13,121

 

 

 

23,970

 

 

 

24,018

 

Acquisition-related amortization and remeasurement (Note 11)

 

 

(8,663

)

 

 

894

 

 

 

(12,162

)

 

 

5,363

 

Operating income

 

 

6,641

 

 

 

4,267

 

 

 

3,563

 

 

 

1,351

 

Interest expense, net

 

 

(407

)

 

 

(550

)

 

 

(782

)

 

 

(967

)

Other income (expense), net

 

 

(3,192

)

 

 

951

 

 

 

(4,128

)

 

 

(1,739

)

Income (loss) before income taxes

 

 

3,042

 

 

 

4,668

 

 

 

(1,347

)

 

 

(1,355

)

Income tax expense

 

 

(553

)

 

 

(2,248

)

 

 

(624

)

 

 

(2,041

)

Net income (loss)

 

$

2,489

 

 

$

2,420

 

 

$

(1,971

)

 

$

(3,396

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

 

$

0.12

 

 

$

(0.10

)

 

$

(0.17

)

Diluted

 

 

0.12

 

 

 

0.12

 

 

 

(0.10

)

 

 

(0.17

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,031

 

 

 

19,651

 

 

 

19,965

 

 

 

19,575

 

Diluted

 

 

20,113

 

 

 

19,938

 

 

 

19,965

 

 

 

19,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, before tax

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on debt securities

 

 

161

 

 

 

98

 

 

 

(513

)

 

 

(628

)

Currency translation adjustment

 

 

(1,820

)

 

 

(155

)

 

 

(2,308

)

 

 

(1,182

)

Other comprehensive loss, before tax

 

 

(1,659

)

 

 

(57

)

 

 

(2,821

)

 

 

(1,810

)

Income tax benefit (expense) related to other comprehensive loss

 

 

 

 

 

(24

)

 

 

 

 

 

156

 

Other comprehensive loss, net of tax

 

 

(1,659

)

 

 

(81

)

 

 

(2,821

)

 

 

(1,654

)

Comprehensive income (loss)

 

$

830

 

 

$

2,339

 

 

$

(4,792

)

 

$

(5,050

)

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)

 

Number of
Common
Shares
Outstanding

 

 

Common
Shares

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Shareholders’
Equity

 

At December 31, 2021

 

 

19,837

 

 

$

1,983

 

 

$

313,951

 

 

$

21,000

 

 

$

 

 

$

336,934

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,460

)

 

 

 

 

 

(4,460

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,162

)

 

 

(1,162

)

Share-based compensation expense

 

 

 

 

 

 

 

 

4,332

 

 

 

 

 

 

 

 

 

4,332

 

Common shares issued, net

 

 

5

 

 

 

1

 

 

 

(70

)

 

 

 

 

 

 

 

 

(69

)

At March 31, 2022

 

 

19,842

 

 

$

1,984

 

 

$

318,213

 

 

$

16,540

 

 

$

(1,162

)

 

$

335,575

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,489

 

 

 

 

 

 

2,489

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,659

)

 

 

(1,659

)

Share-based compensation expense

 

 

 

 

 

 

 

 

4,460

 

 

 

 

 

 

 

 

 

4,460

 

Common shares issued, net

 

 

158

 

 

 

16

 

 

 

1,065

 

 

 

 

 

 

 

 

 

1,081

 

At June 30, 2022

 

 

20,000

 

 

$

2,000

 

 

$

323,738

 

 

$

19,029

 

 

$

(2,821

)

 

$

341,946

 

 

 

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

 

Number of
Common
Shares
Outstanding

 

 

Common
Shares

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Total
Shareholders’
Equity

 

At December 31, 2020

 

 

19,424

 

 

$

1,942

 

 

$

292,291

 

 

$

59,379

 

 

$

3,252

 

 

$

356,864

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,816

)

 

 

 

 

 

(5,816

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,573

)

 

 

(1,573

)

Share-based compensation expense

 

 

 

 

 

 

 

 

3,721

 

 

 

 

 

 

 

 

 

3,721

 

Common shares issued, net

 

 

51

 

 

 

5

 

 

 

1,617

 

 

 

 

 

 

 

 

 

1,622

 

At March 31, 2021

 

 

19,475

 

 

$

1,947

 

 

$

297,629

 

 

$

53,563

 

 

$

1,679

 

 

$

354,818

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,420

 

 

 

 

 

 

2,420

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(81

)

Share-based compensation expense

 

 

 

 

 

 

 

 

3,907

 

 

 

 

 

 

 

 

 

3,907

 

Common shares issued, net

 

 

194

 

 

 

20

 

 

 

1,200

 

 

 

 

 

 

 

 

 

1,220

 

At June 30, 2021

 

 

19,669

 

 

$

1,967

 

 

$

302,736

 

 

$

55,983

 

 

$

1,598

 

 

$

362,284

 

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)

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(1,971

)

 

$

(3,396

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

14,028

 

 

 

15,002

 

Amortization of operating lease assets, debt costs, and other assets

 

 

1,567

 

 

 

1,779

 

Provision for expected credit losses

 

 

1,139

 

 

 

(214

)

Deferred income taxes

 

 

236

 

 

 

3,936

 

Share-based compensation expense

 

 

8,792

 

 

 

7,628

 

Interest and (gain) loss on valuation of investment securities

 

 

188

 

 

 

(198

)

Change in fair value of contingent consideration

 

 

(16,214

)

 

 

(75

)

Other

 

 

1,149

 

 

 

(105

)

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

 

 

 

 

 

 

Accounts receivable

 

 

(208

)

 

 

(986

)

Inventories

 

 

(15,589

)

 

 

2,655

 

Prepaid expenses and other current assets

 

 

(1,769

)

 

 

(6,507

)

Accounts payable

 

 

7,176

 

 

 

(2,662

)

Other current liabilities

 

 

(7,495

)

 

 

(6,905

)

Contract liability (Note 9)

 

 

(4,791

)

 

 

(2,880

)

Payment of contingent consideration

 

 

 

 

 

(6,595

)

Other long-term assets and liabilities

 

 

1,140

 

 

 

(213

)

Net cash from operating activities

 

 

(12,622

)

 

 

264

 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures for property, plant, and equipment

 

 

(11,032

)

 

 

(9,035

)

Capital expenditures for intangible assets

 

 

(671

)

 

 

(757

)

Contingent consideration payments related to asset acquisitions

 

 

(1,500

)

 

 

 

Other investing activities

 

 

42

 

 

 

 

Net cash from investing activities

 

 

(13,161

)

 

 

(9,792

)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

2,400

 

 

 

4,685

 

Payments related to withholdings for share-based compensation

 

 

(1,388

)

 

 

(1,843

)

Payments related to finance lease obligation

 

 

(2,291

)

 

 

(260

)

Payment of contingent consideration

 

 

 

 

 

(8,405

)

Other financing activities

 

 

(45

)

 

 

(705

)

Net cash from financing activities

 

 

(1,324

)

 

 

(6,528

)

Effect of exchange rate changes on cash

 

 

(1,204

)

 

 

(243

)

Net change in cash, cash equivalents, and restricted cash

 

 

(28,311

)

 

 

(16,299

)

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

 

 

87,847

 

 

 

96,821

 

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

 

$

59,536

 

 

$

80,522

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,536

 

 

$

79,968

 

Restricted cash

 

 

 

 

 

554

 

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

 

$

59,536

 

 

$

80,522

 

 

 

 

 

 

 

 

Noncash investing activities - Purchase of intangible assets

 

$

2,000

 

 

$

 

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

Description of the Business

Orthofix Medical Inc. and its subsidiaries (the “Company”) is a global medical device company with a spine and orthopedics focus. The Company’s mission is to deliver innovative, quality-driven solutions while partnering with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic products are distributed in more than 60 countries via the Company's sales representatives and distributors.

Basis of Presentation

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, 2021. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2022.

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; allowances for expected credit losses; 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.

2. Recently issued accounting pronouncements

The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Recently issued ASU's that are determined to potentially affect the Company's condensed consolidated financial statements are summarized below:

Topic

 

Description of Guidance

 

Effective Date

 

Status of Company's Evaluation

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03)

 

Clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively.

 

January 1, 2024

 

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

Other recently issued ASUs, excluding those ASUs which have already been disclosed as adopted or described above, were assessed and determined not applicable, or are expected to have minimal impact on the Company's condensed consolidated financial statements. Furthermore, there have been no material changes during the six months ended June 30, 2022, to the Company's application of significant accounting policies and estimates as described in the Company’s Form 10-K for the year ended December 31, 2021.

8


 

3. Inventories

Inventories were as follows:

(U.S. Dollars, in thousands)

 

June 30,
2022

 

 

December 31,
2021

 

Raw materials

 

$

16,901

 

 

$

9,589

 

Work-in-process

 

 

14,879

 

 

 

15,096

 

Finished products

 

 

26,278

 

 

 

15,149

 

Field/consignment

 

 

39,113

 

 

 

43,140

 

Inventories

 

$

97,171

 

 

$

82,974

 

 

 

4. Leases

A summary of the Company’s lease portfolio as of June 30, 2022, and December 31, 2021, is presented in the table below:

(U.S. Dollars, in thousands)

 

Classification

 

June 30,
2022

 

 

December 31,
2021

 

Right-of-use assets ("ROU assets")

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

6,591

 

 

$

3,155

 

Finance leases

 

Property, plant and equipment, net

 

 

17,866

 

 

 

18,600

 

Total ROU assets

 

 

 

$

24,457

 

 

$

21,755

 

 

 

 

 

 

 

 

 

 

Lease Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

$

1,375

 

 

$

1,834

 

Finance leases

 

Current portion of finance lease liability

 

 

624

 

 

 

2,590

 

Long-term

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

5,329

 

 

 

1,443

 

Finance leases

 

Long-term portion of finance lease liability

 

 

19,571

 

 

 

19,890

 

Total lease liabilities

 

 

 

$

26,899

 

 

$

25,757

 

Supplemental cash flow information related to leases was as follows:

(U.S. Dollars, in thousands)

 

Six Months Ended
June 30, 2022

 

 

Six Months Ended
June 30, 2021

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

2,071

 

 

$

2,327

 

Operating cash flows from finance leases

 

 

443

 

 

 

452

 

Financing cash flows from finance leases

 

 

2,291

 

 

 

260

 

ROU assets obtained in exchange for lease obligations

 

 

 

 

 

 

Operating leases

 

 

4,592

 

 

 

415

 

Finance leases

 

 

 

 

 

149

 

 

 

5. Long-term debt

As of June 30, 2022, the Company had no borrowings outstanding under the secured revolving credit facility and was in compliance with all required financial covenants.

In addition, the Company had no borrowings on its available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.8 million) as of June 30, 2022.

 

9


 

6. Fair value measurements and investments

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

 

 

June 30,
2022

 

 

December 31,
2021

 

(U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreements

 

$

 

 

$

 

 

$

5,820

 

 

$

5,820

 

 

$

7,148

 

Neo Medical preferred equity securities

 

 

 

 

 

6,084

 

 

 

 

 

 

6,084

 

 

 

5,413

 

Bone Biologics equity securities

 

 

80

 

 

 

 

 

 

 

 

 

80

 

 

 

309

 

Other investments

 

 

 

 

 

 

 

 

1,666

 

 

 

1,666

 

 

 

1,505

 

Total

 

$

80

 

 

$

6,084

 

 

$

7,486

 

 

$

13,650

 

 

$

14,375

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spinal Kinetics contingent consideration

 

$

 

 

$

 

 

$

(986

)

 

$

(986

)

 

$

(17,200

)

Deferred compensation plan

 

 

 

 

 

(1,245

)

 

 

 

 

 

(1,245

)

 

 

(1,314

)

Total

 

$

 

 

$

(1,245

)

 

$

(986

)

 

$

(2,231

)

 

$

(18,514

)

Neo Medical Convertible Loan Agreements and Equity Investment

In October 2020, the Company purchased preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical"), for consideration of $5.0 million. The Company also entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance (the “Convertible Loan”). In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million, or $0.7 million as of the date of issuance.

The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

Fair value of Neo Medical preferred equity securities at January 1

 

$

5,413

 

 

$

5,000

 

Conversion of loan into preferred equity securities

 

 

671

 

 

 

 

Fair value of Neo Medical preferred equity securities at June 30

 

 

6,084

 

 

 

5,000

 

Cumulative unrealized gain on Neo Medical preferred equity securities

 

 

413

 

 

 

 

The Company made an election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The remaining Convertible Loan is recorded in other long-term assets as an available for sale debt security as of June 30, 2022. The Convertible Loan is recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flow model, requiring the Company to develop its own assumptions. Therefore, the Company categorized these investments as Level 3 financial assets.

Some of the more significant unobservable inputs used in the fair value measurement of the Convertible Loan include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loan. If the amortized cost of the Convertible Loan exceeds its estimated fair value, the security is deemed to be impaired, and must be evaluated for the recognition of a credit loss. As of June 30, 2022, the Company has not recognized any credit loss related to the Convertible Loan.

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

10


 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

Fair value of Neo Medical Convertible Loans at January 1

 

$

7,148

 

 

$

7,160

 

Interest recognized in interest income, net

 

 

217

 

 

 

198

 

Foreign currency remeasurement recognized in other expense, net

 

 

(257

)

 

 

(230

)

Unrealized loss recognized in other comprehensive loss

 

 

(615

)

 

 

(628

)

Conversion of loan into preferred equity securities

 

 

(671

)

 

 

 

Fair value of Neo Medical Convertible Loans at June 30

 

 

5,820

 

 

 

6,500

 

Amortized cost basis of Neo Medical Convertible Loans at June 30

 

 

5,496

 

 

 

5,247

 

The following table provides quantitative information related to certain key assumptions utilized within the valuation as of June 30, 2022:

(U.S. Dollars, in thousands)

 

Fair Value as of
 June 30, 2022

 

 

Unobservable inputs

 

Estimate

 

Neo Medical Convertible Loan

 

$

5,820

 

 

Cost of equity discount rate

 

 

17.0

%

 

 

 

 

 

Implied volatility

 

 

73.4

%

Bone Biologics Equity Securities

The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. Changes in the fair value of the investment recorded during the six months ended June 30, 2022 and 2021, are shown in the table below:

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

Bone Biologics equity securities at January 1

 

$

309

 

 

$

 

Fair value adjustments recognized in other expense, net

 

 

(186

)

 

 

 

Proceeds from the disposition of equity securities

 

 

(42

)

 

 

 

Bone Biologics equity securities at June 30

 

$

80

 

 

$

 

Other investments

Other investments represent assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability-weighted discounted cash flow models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of June 30, 2022, this balance was classified within other long-term assets.

Spinal Kinetics Contingent Consideration

The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with sales of the acquired artificial discs. To trigger the applicable payments, milestones must be achieved within five years of April 30, 2018. The FDA Milestone was achieved and paid in 2019 and a revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.

The following table provides a reconciliation of the beginning and ending balances for the Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3). The $16.2 million decrease in fair value of the contingent consideration liability in 2022 reflects the lower likelihood of the Company achieving the revenue-based milestone prior to April 30, 2023.

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

Spinal Kinetics contingent consideration estimated fair value at January 1

 

$

17,200

 

 

$

35,400

 

Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement

 

 

(16,214

)

 

 

300

 

Payment made

 

 

 

 

 

(15,000

)

Spinal Kinetics contingent consideration estimated fair value at June 30

 

$

986

 

 

$

20,700

 

 

11


 

The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was $1.0 million as of June 30, 2022. The estimated fair value reflects assumptions made by management as of June 30, 2022, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid, if achieved, could be higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the liability will be fully reversed if the milestone is not met within the required timeline). As of June 30, 2022, the Company has classified the $1.0 million liability within other current liabilities, as milestones must be achieved prior to April 30, 2023, to trigger payment. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.

The Company estimated the fair value of the remaining potential revenue-based milestone payment using a Monte Carlo simulation and a discounted cash flow model. 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 valuation model include the Company’s forecasted future revenues for the Motion Preservation product line (which is derived from the acquired Spinal Kinetics business), the expected timing of payment, applicable discount rates 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 range of key assumptions used within the valuation as of June 30, 2022:

 

(U.S. Dollars, in thousands)

 

Fair Value as of
June 30, 2022

 

 

Valuation Technique

 

Unobservable inputs

 

Range

Spinal Kinetics contingent consideration

 

$

986

 

 

Discounted cash flow

 

Revenue discount rate

 

5.9% - 7.3%

 

 

 

 

 

 

 

Payment discount rate

 

7.6% - 8.9%

 

7. 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. A key provision of the law is a ‘payback’ measure, requiring medical device companies 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 periodically reassesses this liability based upon current facts and circumstances. As a result, the Company recorded expense of $0.3 million and $0.6 million for the three and six months ended June 30, 2022, and expense of $0.1 million and $0.5 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, the Company has accrued $5.4 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.

8. Accumulated other comprehensive loss

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

 

(U.S. Dollars, in thousands)

 

Currency
Translation
Adjustments

 

 

Neo Medical Convertible Loans

 

 

Other Investments

 

 

Accumulated Other
Comprehensive Loss

 

Balance at December 31, 2021

 

$

(711

)

 

$

711

 

 

$

 

 

$

 

Other comprehensive loss

 

 

(2,308

)

 

 

(615

)

 

 

102

 

 

 

(2,821

)

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

$

(3,019

)

 

$

96

 

 

$

102

 

 

$

(2,821

)

 

12


 

9. Revenue recognition and accounts receivable

Revenue Recognition

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

The table below presents net sales by major product category by reporting segment:

 

 

 

Three Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

Change

 

Bone Growth Therapies

 

$

47,765

 

 

$

49,706

 

 

 

-3.9

%

Spinal Implants

 

 

28,222

 

 

 

30,092

 

 

 

-6.2

%

Biologics

 

 

14,795

 

 

 

14,852

 

 

 

-0.4

%

Global Spine

 

 

90,782

 

 

 

94,650

 

 

 

-4.1

%

Global Orthopedics

 

 

27,288

 

 

 

26,744

 

 

 

2.0

%

Net sales

 

$

118,070

 

 

$

121,394

 

 

 

-2.7

%

 

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

Change

 

Bone Growth Therapies

 

$

89,713

 

 

$

92,653

 

 

 

-3.2

%

Spinal Implants

 

 

54,837

 

 

 

55,793

 

 

 

-1.7

%

Biologics

 

 

28,887

 

 

 

28,544

 

 

 

1.2

%

Global Spine

 

 

173,437

 

 

 

176,990

 

 

 

-2.0

%

Global Orthopedics

 

 

51,051

 

 

 

49,997

 

 

 

2.1

%

Net sales

 

$

224,488

 

 

$

226,987

 

 

 

-1.1

%

Product Sales and Marketing Service Fees

The table below presents product sales and marketing service fees, which are both components of net sales:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Product sales

 

$

103,559

 

 

$

106,947

 

 

$

196,167

 

 

$

199,210

 

Marketing service fees

 

 

14,511

 

 

 

14,447

 

 

 

28,321

 

 

 

27,777

 

Net sales

 

$

118,070

 

 

$

121,394

 

 

$

224,488

 

 

$

226,987

 

 

Product sales primarily consist of the sale of bone growth therapies devices, spinal implants products, and orthopedics 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.

Accounts receivable and related allowances

The following table provides a detail of changes in the Company’s allowance for expected credit losses for the three and six months ended June 30, 2022 and 2021:

 

(U.S. Dollars, in thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Allowance for expected credit losses beginning balance

 

$

5,389

 

 

$

4,506

 

 

$

4,944

 

 

$

4,848

 

Current period provision (recovery) for expected credit losses

 

 

539

 

 

 

(32

)

 

 

1,139

 

 

 

(214

)

Write-offs charged against the allowance and other

 

 

(142

)

 

 

(34

)

 

 

(246

)

 

 

(80

)

Effect of changes in foreign exchange rates

 

 

(197

)

 

 

31

 

 

 

(248

)

 

 

(83

)

Allowance for expected credit losses ending balance

 

$

5,589

 

 

$

4,471

 

 

$

5,589

 

 

$

4,471

 

Contract Liabilities

The Company’s contract liabilities largely related to a prepayment of $13.9 million received in April 2020 from the Centers for Medicare and Medicaid Service ("CMS") as part of the Accelerated and Advance Payment Program of the Coronavirus Aid, Relief, and Economic Security Act. The remaining balance of the contract liability was recouped by CMS during the second quarter of 2022.

13


 

The following table provides a detail of changes in the Company’s contract liability associated with the Accelerated and Advanced Payment Program for the three and six months ended June 30, 2022 and 2021:

(U.S. Dollars, in thousands)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Contract liability beginning balance

 

$

1,396

 

 

$

13,851

 

 

$

4,791

 

 

$

13,851

 

Recoupment recognized in net sales

 

 

(1,396

)

 

 

(2,880

)

 

 

(4,791

)

 

 

(2,880

)

Contract liability ending balance

 

$

 

 

$

10,971

 

 

$

 

 

$

10,971

 

Other Contract Assets

The Company’s contract assets, excluding 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 the Company's 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 $1.0 million and $1.4 million as of June 30, 2022, and December 31, 2021, respectively.

10. Business segment information

The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company is earnings before interest, tax, depreciation, and amortization (“EBITDA”). Corporate activities comprise operating expenses and activities not directly identifiable within the two reporting segments, such as human resources, finance, legal, and information technology functions. The table below presents EBITDA by reporting segment:

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Global Spine

 

$

20,766

 

 

$

19,032

 

 

$

36,659

 

 

$

30,927

 

Global Orthopedics

 

 

(2,422

)

 

 

1,775

 

 

 

(5,518

)

 

 

(454

)

Corporate

 

 

(8,383

)

 

 

(8,030

)

 

 

(17,678

)

 

 

(15,859

)

Total EBITDA

 

$

9,961

 

 

$

12,777

 

 

$

13,463

 

 

$

14,614

 

Depreciation and amortization

 

 

(6,512

)

 

 

(7,559

)

 

 

(14,028

)

 

 

(15,002

)

Interest expense, net

 

 

(407

)

 

 

(550

)

 

 

(782

)

 

 

(967

)

Income (loss) before income taxes

 

$

3,042

 

 

$

4,668

 

 

$

(1,347

)

 

$

(1,355

)

 

Geographical information

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

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Global Spine

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

85,899

 

 

$

89,077

 

 

$

162,965

 

 

$

166,832

 

International

 

 

4,883

 

 

 

5,573

 

 

$

10,472

 

 

 

10,158

 

Total Global Spine

 

 

90,782

 

 

 

94,650

 

 

 

173,437

 

 

 

176,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Orthopedics

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

6,903

 

 

 

6,156

 

 

 

12,230

 

 

 

11,747

 

International

 

 

20,385

 

 

 

20,588

 

 

 

38,821

 

 

 

38,250

 

Total Global Orthopedics

 

 

27,288

 

 

 

26,744

 

 

 

51,051

 

 

 

49,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

92,802

 

 

 

95,233

 

 

 

175,195

 

 

 

178,579

 

International

 

 

25,268

 

 

 

26,161

 

 

 

49,293

 

 

 

48,408

 

Net sales

 

$

118,070

 

 

$

121,394

 

 

$

224,488

 

 

$

226,987

 

 

14


 

 

11. Acquisition-related amortization and remeasurement

Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) remeasurement of any related contingent consideration arrangements, and (iii) recognized costs associated with acquired in-process research and development (“IPR&D”) assets, which are recognized immediately upon acquisition. Components of acquisition-related amortization and remeasurement are as follows:

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Amortization of acquired intangibles

 

$

2,051

 

 

$

1,969

 

 

$

4,052

 

 

$

3,938

 

Changes in fair value of contingent consideration

 

 

(10,714

)

 

 

(1,575

)

 

 

(16,214

)

 

 

(75

)

Acquired IPR&D

 

 

 

 

 

500

 

 

 

 

 

 

1,500

 

Total

 

$

(8,663

)

 

$

894

 

 

$

(12,162

)

 

$

5,363

 

 

 

12. Share-based compensation

Components of share-based compensation expense are as follows:

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Cost of sales

 

$

205

 

 

$

209

 

 

$

416

 

 

$

387

 

Sales and marketing

 

 

1,000

 

 

 

957

 

 

 

1,981

 

 

 

1,674

 

General and administrative

 

 

2,958

 

 

 

2,607

 

 

 

6,176

 

 

 

5,136

 

Research and development

 

 

297

 

 

 

134

 

 

 

219

 

 

 

431

 

Total

 

$

4,460

 

 

$

3,907

 

 

$

8,792

 

 

$

7,628

 

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock options

 

$

205

 

 

$

398

 

 

$

564

 

 

$

1,059

 

Time-based restricted stock awards and units

 

 

2,410

 

 

 

2,019

 

 

 

4,580

 

 

 

3,746

 

Market-based / performance-based restricted stock units

 

 

1,497

 

 

 

1,053

 

 

 

2,941

 

 

 

1,950

 

Stock purchase plan

 

 

348

 

 

 

437

 

 

 

707

 

 

 

873

 

Total

 

$

4,460

 

 

$

3,907

 

 

$

8,792

 

 

$

7,628

 

 

 

During the three months ended June 30, 2022 and 2021, the Company issued 157,979 and 194,745 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, 2022 and 2021, the Company issued 162,864 and 245,255 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards and units.

13. Income taxes

Generally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items, with any changes affecting the estimated annual effective tax rate recorded in the interim period in which the change occurs. Due to the impact of losses not benefitted by the Company’s U.S. and Italian operations, the Company determined the estimated annual effective tax rate method would not provide a reliable estimate of the Company’s overall annual effective tax rate. As such, the Company has calculated the tax provision using the actual effective rate for the three and six months ended June 30, 2022. Due to the impact of temporary differences on the U.S. current tax liability without any deferred tax benefit, the actual effective rate may vary in future quarters.

For the three months ended June 30, 2022 and 2021, the effective tax rate was 18.2% and 48.2%, respectively. For the six months ended June 30, 2022 and 2021, the effective tax rate was (46.3%) and (150.6%), respectively. The primary factors affecting the Company’s effective tax rate for the three and six months ended June 30, 2022, were the changes in fair value of the Spinal Kinetics contingent consideration, which is not deductible for tax purposes, and losses not benefited in the U.S. and Italy.

15


 

14. 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, 2022, 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,

 

(In thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Weighted average common shares-basic

 

 

20,031

 

 

 

19,651

 

 

 

19,965

 

 

 

19,575

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options and stock purchase plan

 

 

23

 

 

 

171

 

 

 

 

 

 

 

Unvested restricted stock units

 

 

59

 

 

 

116

 

 

 

 

 

 

 

Weighted average common shares-diluted

 

 

20,113

 

 

 

19,938

 

 

 

19,965

 

 

 

19,575

 

 

There were 1.6 million and 0.8 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the three months ended June 30, 2022 and 2021, respectively, and 1.6 million and 1.4 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the six months ended June 30, 2022 and 2021, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock units, all necessary conditions had not been satisfied by the end of the respective period.

 

15. Subsequent Events

On July 30, 2022, the Company entered into a long-term strategic License and Distribution Agreement (the “Agreement”) with CGBio Co., Ltd. (“CGBio”), a developer of innovative, synthetic bone grafts. The Agreement grants Orthofix the exclusive right to conduct pre-clinical and clinical studies, commercialize, promote, market, and sell the Novosis™ recombinant human bone morphogenetic protein-2 (rhBMP-2) bone growth materials and other future tissue regenerative solutions in the U.S. and Canada. As consideration, the Company will pay CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones.

16


 

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 with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in more than 60 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com.

Notable financial metrics in the second quarter of 2022 and recent achievements include the following:

Net sales of $118.1 million, a decrease of 2.7% on a reported basis and flat on a constant currency basis over prior year
Global Orthopedics net sales growth of 11% on a constant currency basis driven by new products and channel investments
Executed partnership with CGBio to commercialize Novosis rhBMP-2 growth factor in the U.S. and Canada
Limited launch of Virtuos Lyograft, a first of its kind, shelf-stable and complete autograft substitute
Entered into a licensing partnership with LimaCorporate S.p.A. to provide a novel solution for patients with chronic high dislocation of the hip
 

Results of Operations

The following table provides certain items in our condensed consolidated statements of operations as a percent of net sales:

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2022
(%)

 

 

2021
(%)

 

 

2022
(%)

 

 

2021
(%)

 

Net sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

26.8

 

 

 

22.6

 

 

 

26.7

 

 

 

23.5

 

Gross profit

 

 

73.2

 

 

 

77.4

 

 

 

73.3

 

 

 

76.5

 

Sales and marketing

 

 

50.7

 

 

 

47.2

 

 

 

50.8

 

 

 

47.6

 

General and administrative

 

 

13.4

 

 

 

15.1

 

 

 

15.7

 

 

 

15.3

 

Research and development

 

 

10.8

 

 

 

10.8

 

 

 

10.7

 

 

 

10.6

 

Acquisition-related amortization and remeasurement

 

 

(7.3

)

 

 

0.8

 

 

 

(5.5

)

 

 

2.4

 

Operating income

 

 

5.6

 

 

 

3.5

 

 

 

1.6

 

 

 

0.6

 

Net income (loss)

 

 

2.1

 

 

 

2.0

 

 

 

(0.9

)

 

 

(1.5

)

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)

 

2022

 

 

2021

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

47,765

 

 

$

49,706

 

 

 

-3.9

%

 

 

-3.9

%

Spinal Implants

 

 

28,222

 

 

 

30,092

 

 

 

-6.2

%

 

 

-5.4

%

Biologics

 

 

14,795

 

 

 

14,852

 

 

 

-0.4

%

 

 

-0.4

%

Global Spine

 

 

90,782

 

 

 

94,650

 

 

 

-4.1

%

 

 

-3.8

%

Global Orthopedics

 

 

27,288

 

 

 

26,744

 

 

 

2.0

%

 

 

11.4

%

Net sales

 

$

118,070

 

 

$

121,394

 

 

 

-2.7

%

 

 

-0.5

%

 

17


 

 

 

 

Six Months Ended
June 30,

 

 

Percentage Change

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

89,713

 

 

$

92,653

 

 

 

-3.2

%

 

 

-3.2

%

Spinal Implants

 

 

54,837

 

 

 

55,793

 

 

 

-1.7

%

 

 

-1.0

%

Biologics

 

 

28,887

 

 

 

28,544

 

 

 

1.2

%

 

 

1.2

%

Global Spine

 

 

173,437

 

 

 

176,990

 

 

 

-2.0

%

 

 

-1.8

%

Global Orthopedics

 

 

51,051

 

 

 

49,997

 

 

 

2.1

%

 

 

9.4

%

Net sales

 

$

224,488

 

 

$

226,987

 

 

 

-1.1

%

 

 

0.7

%

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 spine fixation 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, 2022 compared to 2021

Net sales decreased $3.9 million or 4.1%

Bone Growth Therapies net sales decreased $1.9 million or 3.9%, largely as a result of the continued staffing issues and patient caution to seek elective surgery, including complex procedures
Spinal Implants net sales decreased $1.9 million or 6.2%, primarily due to lower-than-expected complex procedure case volumes in the U.S. for spine fixation and increasing global competitive headwinds in motion preservation
Biologics net sales were relatively flat as we saw positive trends from recent product introductions, such as FiberFuse, and from new distributors added in the last 12 months, which offset some of the macro headwinds impacting complex elective procedures

 

Six months ended June 30, 2022 compared to 2021

Net sales decreased $3.6 million or 2.0%

Bone Growth Therapies net sales decreased $2.9 million or 3.2%, primarily driven by a continued slowdown in complex procedure volumes due to hospital restrictions at the beginning of the year and continued staffing issues, which impacted complex spine procedures
Spinal Implants net sales decreased $1.0 million or 1.7%, primarily due to lower-than-expected complex procedure case volumes in the U.S. for spine fixation and increasing global competitive headwinds in motion preservation, with these movements partially offset by growth from certain international distributors at the beginning of the year
Biologics net sales increased $0.3 million or 1.2%, primarily attributable to sales from our new biologics offerings, such as FiberFuse, as we continue to broaden our Biologics portfolio

 

18


 

Global Orthopedics

Global Orthopedics offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions specifically related to limb reconstruction and deformity correction unrelated to the spine. Global Orthopedics distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and healthcare providers.

Three months ended June 30, 2022 compared to 2021

Net sales increased $0.5 million or 2.0%

Growth in international geographies on a constant currency basis driven by the positive impacts of recent sales force investments and increased orders from international distributors
In the U.S., we have started to see the positive benefits of the new sales leadership team put in place over the last 12 months
Partially offset by a decrease of $2.5 million due to changes in foreign currency exchange rates, which had a negative impact on net sales in 2022

Six months ended June 30, 2022 compared to 2021

Net sales increased $1.1 million or 2.1%

Growth in international geographies on a constant currency basis driven by the positive impacts of recent sales force investments and increased orders from international distributors
In the U.S., we have started to see the positive benefits of the new sales leadership team put in place over the last 12 months
Partially offset by a decrease of $3.7 million due to changes in foreign currency exchange rates, which had a negative impact on net sales in 2022

Gross Profit

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Net sales

 

$

118,070

 

 

$

121,394

 

 

 

(2.7

%)

 

$

224,488

 

 

$

226,987

 

 

 

(1.1

%)

Cost of sales

 

 

31,600

 

 

 

27,439

 

 

 

15.2

%

 

 

59,918

 

 

 

53,353

 

 

 

12.3

%

Gross profit

 

$

86,470

 

 

$

93,955

 

 

 

(8.0

%)

 

$

164,570

 

 

$

173,634

 

 

 

(5.2

%)

Gross margin

 

 

73.2

%

 

 

77.4

%

 

 

(4.2

%)

 

 

73.3

%

 

 

76.5

%

 

 

-3.2

%

Three months ended June 30, 2022 compared to 2021

Gross profit decreased $7.5 million

Decrease in gross profit primarily driven by changes in our sales mix as well as increased inventory reserves related to set builds for an expanding sales force and increased safety stock requirements driven by the risk of global supply chain disruption
Also unfavorably impacted by changes in foreign currency exchange rates, which had a negative impact on gross profit

Six months ended June 30, 2022 compared to 2021

Gross profit decreased $9.1 million

Decrease in gross profit primarily driven by changes in our sales mix as well as increased inventory reserves related to set builds for an expanding sales force and increased safety stock requirements
Increased component costs resulting from global supply chain disruptions within our Bone Growth Therapies product category
Also unfavorably impacted by changes in foreign currency exchange rates, which had a negative impact on gross profit

19


 

Sales and Marketing Expense

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Sales and marketing

 

$

59,888

 

 

$

57,338

 

 

 

4.4

%

 

$

114,025

 

 

$

108,123

 

 

 

5.5

%

As a percentage of net sales

 

 

50.7

%

 

 

47.2

%

 

 

3.5

%

 

 

50.8

%

 

 

47.6

%

 

 

3.2

%

Three months ended June 30, 2022 compared to 2021

Sales and marketing expense increased $2.6 million

Increase of $2.2 million largely the result of significant increases in travel, sales events, and surgeon and sales education trainings as in-person events have largely resumed in 2022
Increase of $0.4 million due to an investment in direct reps and sales management

Six months ended June 30, 2022 compared to 2021

Sales and marketing expense increased $5.9 million

Increase of $4.2 million largely the result of significant increases in travel, sales events, and surgeon and sales education trainings as in-person events have largely resumed in 2022
Increase also attributable to the hiring of additional sales and marketing headcount to support growth and initiatives across all product lines

General and Administrative Expense

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

General and administrative

 

$

15,846

 

 

$

18,335

 

 

 

(13.6

%)

 

$

35,174

 

 

$

34,779

 

 

 

1.1

%

As a percentage of net sales

 

 

13.4

%

 

 

15.1

%

 

 

(1.7

%)

 

 

15.7

%

 

 

15.3

%

 

 

0.4

%

Three months ended June 30, 2022 compared to 2021

General and administrative expense decreased $2.5 million

Decrease of $0.9 million in professional fees as we reallocate capital into product innovation and differentiation as well as commercial sales expansion
Decrease of $0.9 million in certain compensation costs, partly stemming from the departure of certain former executives and from macroeconomic pressures on certain variable compensation expenses
Decrease of $0.3 million in depreciation and amortization

Six months ended June 30, 2022 compared to 2021

General and administrative expense increased $0.4 million

Increase of $1.0 million in share-based compensation expenses as the tenure of our new management team increases
Partially offset by a decrease of $0.5 million associated with succession and transition costs related to former executives in 2021 that did not recur in 2022

Research and Development Expense

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Research and development

 

$

12,758

 

 

$

13,121

 

 

 

(2.8

%)

 

$

23,970

 

 

$

24,018

 

 

 

(0.2

%)

As a percentage of net sales

 

 

10.8

%

 

 

10.8

%

 

 

0.0

%

 

 

10.7

%

 

 

10.6

%

 

 

0.1

%

Three months ended June 30, 2022 compared to 2021

Research and development expense decreased $0.4 million

Decrease of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in 2021 that did not recur in the second quarter of 2022
Partially offset by an increase related to costs to comply with the European Union Medical Device Regulations and increases in new product development expenses

20


 

Further offset by an increase in costs associated with our ongoing 2-level M6-C artificial cervical disc clinical study

Six months ended June 30, 2022 compared to 2021

Research and development expense remained relatively flat

Decrease of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in 2021 that did not recur in 2022
Partially offset by an increase in expense of $0.5 million related to costs to comply with the European Union Medical Device Regulations
Further offset by an increase in costs associated with our ongoing 2-level M6-C artificial cervical disc clinical study

Acquisition-related Amortization and Remeasurement

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Acquisition-related amortization and remeasurement

 

$

(8,663

)

 

$

894

 

 

 

(1069.0

%)

 

$

(12,162

)

 

$

5,363

 

 

 

(326.8

%)

As a percentage of net sales

 

 

(7.3

%)

 

 

0.8

%

 

 

(8.1

%)

 

 

(5.4

%)

 

 

2.4

%

 

 

(7.8

%)

Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) remeasurement of any related contingent consideration arrangement, and (iii) recognized costs associated with acquired in-process research and development assets, which are recognized immediately upon acquisition.

Three months ended June 30, 2022 compared to 2021

Acquisition-related amortization and remeasurement decreased $9.6 million

Decrease of $9.5 million related to the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisition reflects the lower likelihood of the Company achieving the remaining revenue-based milestone prior to April 30, 2023 based on current net sales trends
Decrease of $0.5 million in costs associated with acquired in-process research and development assets, which were recognized immediately upon acquisition in the prior year period
Partially offset by an increase of $0.4 million associated with the reassessment of contingent consideration associated with the acquisition of a former distributor

Six months ended June 30, 2022 compared to 2021

Acquisition-related amortization and remeasurement decreased $17.5 million

Decrease of $16.5 million related to the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisition reflects the lower likelihood of the Company achieving the remaining revenue-based milestone prior to April 30, 2023
Decrease of $1.5 million in costs associated with acquired in-process research and development assets, which were recognized immediately upon acquisition in the prior year period
Partially offset by an increase of $0.4 million associated with the reassessment of contingent consideration associated with the acquisition of a former distributor

Non-operating Income and Expense

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Interest expense, net

 

$

(407

)

 

$

(550

)

 

 

(26.0

%)

 

$

(782

)

 

$

(967

)

 

 

(19.1

%)

Other expense, net

 

 

(3,192

)

 

 

951

 

 

 

(435.6

%)

 

 

(4,128

)

 

 

(1,739

)

 

 

137.4

%

Three months ended June 30, 2022 compared to 2021

Other expense, net decreased $4.1 million

21


 

Decrease primarily associated with changes in foreign currency exchange rates and the resulting gains and/or losses recorded in each period, with the change primarily attributable to the strengthening of the U.S. Dollar against the Euro in 2022

Six months ended June 30, 2022 compared to 2021

Other expense, net decreased $2.4 million

Decrease primarily associated with changes in foreign currency exchange rates and the resulting gains and/or losses recorded in each period, with the change primarily attributable to the strengthening of the U.S. Dollar against the Euro in 2022

Income Taxes

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

% Change

 

 

2022

 

 

2021

 

 

% Change

 

Income tax expense

 

$

553

 

 

$

2,248

 

 

 

(75.4

%)

 

$

624

 

 

$

2,041

 

 

 

(69.4

%)

Effective tax rate

 

 

18.2

%

 

 

48.2

%

 

 

(30.0

%)

 

 

(46.3

%)

 

 

(150.6

%)

 

 

104.3

%

Three months ended June 30, 2022 compared to 2021

Decrease in tax expense compared to the prior year period was primarily a result of changes in valuation allowances in the U.S. and Italy, as well as changes in the fair value of the Spinal Kinetics contingent consideration liability

Six months ended June 30, 2022 compared to 2021

Decrease in tax expense compared to the prior year period was primarily a result of changes in valuation allowances in the U.S. and Italy, as well as changes in the fair value of the Spinal Kinetics contingent consideration liability

Segment Review

Our business is managed through two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 10 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to income (loss) before income taxes:

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Global Spine

 

$

20,766

 

 

$

19,032

 

 

$

36,659

 

 

$

30,927

 

Global Orthopedics

 

 

(2,422

)

 

 

1,775

 

 

 

(5,518

)

 

 

(454

)

Corporate

 

 

(8,383

)

 

 

(8,030

)

 

 

(17,678

)

 

 

(15,859

)

Total EBITDA

 

$

9,961

 

 

$

12,777

 

 

$

13,463

 

 

$

14,614

 

Depreciation and amortization

 

 

(6,512

)

 

 

(7,559

)

 

 

(14,028

)

 

 

(15,002

)

Interest expense, net

 

 

(407

)

 

 

(550

)

 

 

(782

)

 

 

(967

)

Income (loss) before income taxes

 

$

3,042

 

 

$

4,668

 

 

$

(1,347

)

 

$

(1,355

)

Liquidity and Capital Resources

Cash and cash equivalents at June 30, 2022, totaled $59.5 million compared to $87.8 million at December 31, 2021.

 

 

Six Months Ended June 30,

 

(U.S. Dollars, in thousands)

 

2022

 

 

2021

 

 

Change

 

Net cash from operating activities

 

$

(12,622

)

 

$

264

 

 

$

(12,886

)

Net cash from investing activities

 

 

(13,161

)

 

 

(9,792

)

 

 

(3,369

)

Net cash from financing activities

 

 

(1,324

)

 

 

(6,528

)

 

 

5,204

 

Effect of exchange rate changes on cash

 

 

(1,204

)

 

 

(243

)

 

 

(961

)

Net change in cash and cash equivalents

 

$

(28,311

)

 

$

(16,299

)

 

$

(12,012

)

 

22


 


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)

 

2022

 

 

2021

 

 

Change

 

Net cash from operating activities

 

$

(12,622

)

 

$

264

 

 

$

(12,886

)

Capital expenditures

 

 

(11,703

)

 

 

(9,792

)

 

 

(1,911

)

Free cash flow

 

$

(24,325

)

 

$

(9,528

)

 

$

(14,797

)

Operating Activities

Cash flows from operating activities decreased $12.9 million

Increase in net income of $1.4 million
Net decrease of $16.9 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration
Net increase of $2.6 million relating to changes in working capital accounts, primarily attributable to changes in inventories, accounts payable, prepaid expenses and other current assets, and the payment of a contingent consideration milestone in the prior year
 

Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 59 days at June 30, 2022, compared to 55 days at June 30, 2021. Inventory turns remained consistent at 1.3 times as of June 30, 2022 and June 30, 2021.

Investing Activities

Cash flows from investing activities decreased $3.4 million

Decrease of $1.8 million associated with capital expenditures compared to the prior year period
Decrease of $1.5 million associated with the payment of a contingent consideration milestone associated related to an asset acquisition in 2022

Financing Activities

Cash flows from financing activities increased $5.2 million

Increase of $8.4 million associated with cash paid in 2021 for the achievement of a revenue-based milestone associated with the Spinal Kinetics acquisition; the milestone payment totaled $15.0 million with a portion of the payment reflected in both operating and financing activities.
Decrease of $2.0 million related to the conclusion of the FITBONE Contract Manufacturing and Supply Agreement with Wittenstein
Decrease in net proceeds of $1.7 million from the issuance of common shares, primarily related to the exercise of stock options in the prior year period
Partially offset by an increase of $0.7 million attributable to other financing activities

Credit Facilities

As of June 30, 2022, we had no borrowings outstanding under our secured revolving credit facility. In addition, we had no borrowings outstanding under our available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.8 million). We were in compliance with all required financial covenants as of June 30, 2022.

Other

For information regarding contingencies, see Note 7 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.

23


 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

In April 2020, we received $13.9 million in funds from the Centers for Medicare and Medicaid Service ("CMS") Accelerated and Advance Payment Program under the CARES Act. Recoupment of amounts received under the CMS Accelerated and Advance Payment Program was completed in the second quarter of 2022.

Spinal Kinetics Contingent Consideration

As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0 million. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019. A revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.

The remaining milestone payment is a revenue-based milestone payment of $30.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of June 30, 2022, was $1.0 million; however, the actual amount ultimately paid, if achieved, could be higher or lower than the fair value of the contingent consideration (ultimate payment will either be $30.0 million or the liability will be fully reversed if the milestone is not met within the required timeline). For additional discussion of this matter, see Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Neo Medical Convertible Loan

In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million ($5.0 million as of the issuance date) to Neo Medical. The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024; however, if a change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.

Related Party Transaction

In February 2021, we entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration was comprised of $1.0 million due at signing and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of 510(k) clearance or the attainment of certain net sales targets. None of the contingent consideration has been achieved as of June 30, 2022.

IGEA S.p.A Exclusive License and Distribution Agreement

In April 2021, we entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA S.p.A (“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. Per the terms of the License Agreement, we have the exclusive right to sell IGEA products in the U.S. and Canada. As consideration for the License Agreement, we agreed to pay up to $4.0 million, of which $0.5 million was paid in the second quarter of 2021, with certain payments contingent upon achieving an FDA milestone. We received FDA approval for the AccelStim device in May 2022, triggering an obligation to pay the remaining $3.5 million of consideration, of which $1.5 million was paid as of June 30, 2022. Of the remaining $2.0 million obligation, $1.0 million, which is due to be paid on the first anniversary of FDA approval, is classified within other current liabilities. The remaining $1.0 million, which is due to be paid on the second anniversary of FDA approval, is classified within other long-term liabilities. The License Agreement also includes certain minimum purchase requirements.

CGBio Co., Ltd. Exclusive License and Distribution Agreement

On July 30, 2022, we entered into a long-term strategic License and Distribution Agreement (the “Agreement”) with CGBio Co., Ltd. (“CGBio”), a developer of innovative, synthetic bone grafts. The Agreement grants us the exclusive right to conduct pre-clinical and clinical studies, commercialize, promote, market, and sell the Novosis™ recombinant human bone morphogenetic protein-2 (rhBMP-2) bone growth materials and other future tissue regenerative solutions in the U.S. and Canada. As consideration, we will pay CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones.

Off-balance Sheet Arrangements

As of June 30, 2022, 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.

24


 

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, 2021.

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, 2021. There have been no significant changes to our critical accounting estimates.

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 or adopted accounting pronouncements. As of June 30, 2022, we do not expect any of the issued Accounting Standards Updates to materially affect our condensed consolidated financial statements upon adoption.

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 to facilitate comparisons to historical operating results and internally evaluate the effectiveness of 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), 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. Management uses free cash flow as 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, 2021.

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

25


 

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, 2022. 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, 2022.

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.

26


 

PART II. OTHER INFORMATION

For information regarding legal proceedings, see Note 7 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

The following risk factors supplement and should be read in conjunction with those contained in the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2021, except as follows.

The conflict between Russia and Ukraine may continue to cause global economic instability and potentially disrupt supply chains.
 

In February 2022, Russia unlawfully invaded Ukraine, creating an ongoing humanitarian and global security crisis. In response, the U.S. and many other countries have imposed robust sanctions on Russia and may impose additional sanctions in the future. The ongoing invasion has caused significant damage and disruption to various aspects of the global economy. We have never conducted any meaningful business within Russia, and do not believe that the invasion will have material direct effects on our business or operations. However, we cannot predict the broader and longer-term consequences of this conflict or the sanctions imposed in response, and such consequences could include, among other things, general disruptions to global finance markets, exchange rates, and worldwide supply chains. Geopolitical instability and uncertainty resulting from the invasion could potentially have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions. These considerations could adversely affect our costs, risks, and efficiencies related to our supply chain and logistics. The potential effects of the conflict between Russia and Ukraine also could affect many of the other risk factors described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021.

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 2022.

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.

27


 

Item 6. Exhibits

 

  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.INS*

 

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

 

 

 

  101.SCH*

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

  101.CAL*

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

  101.DEF*

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

  101.LAB*

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

  101.PRE*

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

  104*

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

* Filed herewith.

 

28


 

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, 2022

By:

 

/s/ JON SERBOUSEK

 

Name:

 

Jon Serbousek

 

Title:

 

President and Chief Executive Officer, Director

 

 

 

 

Date: August 5, 2022

By:

 

/s/ DOUG RICE

 

Name:

 

Doug Rice

 

Title:

 

Chief Financial Officer

 

29