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Orthofix Medical Inc. - Quarter Report: 2023 September (Form 10-Q)

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 September 30, 2023

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

 

img221715532_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 November 6, 2023, 36,756,607 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 September 30, 2023, and December 31, 2022

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2023, and 2022

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2023, and 2022

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023, and 2022

 

7

 

 

 

 

 

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

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

 

35

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

35

 

 

 

 

 

Item 5.

 

Other Information

 

35

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

SIGNATURES

 

36

 

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. All statements, other than statements of historical fact, contained in this report, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or the negative version of those terms and other similar expressions. Forward-looking statements include, but are not limited to, statements about:

our future operations, sales, expenses, and financial performance;
the anticipated benefits of the merger with SeaSpine Holdings Corporation that was completed in January 2023, including the anticipated synergies and cost-savings from the merger, and our ability to successfully integrate SeaSpine's business with ours;
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 relationships with customers and distributors;
our manufacturing abilities and the performance of our suppliers;
our ability to achieve market penetration and the success of our expansion efforts;
anticipated trends and challenges in the markets in which we operate; and
the impact of investigations, claims, and litigation.

Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions. 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 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 of our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 10-K"); Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2022 10-K; and elsewhere throughout the 2022 10-K, and in our reports filed with the U.S. Securities and Exchange Commission (the "SEC") subsequent to the date we filed the 2022 10-K with the SEC. You should not place undue reliance on any forward-looking statements. Further, any forward-looking statement in this report speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. Except as required by law, 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)

 

September 30,
2023

 

 

December 31,
2022

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,663

 

 

$

50,700

 

Accounts receivable, net of allowances of $7,090 and $6,419, respectively

 

 

114,118

 

 

 

82,857

 

Inventories

 

 

221,745

 

 

 

100,150

 

Prepaid expenses and other current assets

 

 

24,170

 

 

 

22,283

 

Total current assets

 

 

393,696

 

 

 

255,990

 

Property, plant, and equipment, net

 

 

152,689

 

 

 

58,229

 

Intangible assets, net

 

 

121,021

 

 

 

47,388

 

Goodwill

 

 

194,767

 

 

 

71,317

 

Other long-term assets

 

 

43,479

 

 

 

25,705

 

Total assets

 

$

905,652

 

 

$

458,629

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

53,261

 

 

$

27,598

 

Current portion of finance lease liability

 

 

693

 

 

 

652

 

Other current liabilities

 

 

98,576

 

 

 

55,374

 

Total current liabilities

 

 

152,530

 

 

 

83,624

 

Long-term borrowings under credit facility

 

 

70,000

 

 

 

 

Long-term portion of finance lease liability

 

 

18,715

 

 

 

19,239

 

Other long-term liabilities

 

 

48,924

 

 

 

18,906

 

Total liabilities

 

 

290,169

 

 

 

121,769

 

Contingencies (Note 8)

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Common shares $0.10 par value; 100,000 shares authorized;
    
36,750 and 20,162 issued and outstanding as of September 30,
    2023 and December 31, 2022, respectively

 

 

3,675

 

 

 

2,016

 

Additional paid-in capital

 

 

741,638

 

 

 

334,969

 

Retained earnings (accumulated deficit)

 

 

(127,970

)

 

 

1,251

 

Accumulated other comprehensive loss

 

 

(1,860

)

 

 

(1,376

)

Total shareholders’ equity

 

 

615,483

 

 

 

336,860

 

Total liabilities and shareholders’ equity

 

$

905,652

 

 

$

458,629

 

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

4


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

184,006

 

 

$

113,996

 

 

$

546,226

 

 

$

338,484

 

Cost of sales

 

 

64,243

 

 

 

30,573

 

 

 

196,583

 

 

 

90,491

 

Gross profit

 

 

119,763

 

 

 

83,423

 

 

 

349,643

 

 

 

247,993

 

Sales and marketing

 

 

94,947

 

 

 

55,461

 

 

 

287,987

 

 

 

169,486

 

General and administrative

 

 

27,136

 

 

 

19,322

 

 

 

110,124

 

 

 

54,496

 

Research and development

 

 

18,559

 

 

 

11,943

 

 

 

61,290

 

 

 

35,913

 

Acquisition-related amortization and remeasurement (Note 12)

 

 

3,570

 

 

 

2,484

 

 

 

11,037

 

 

 

(9,678

)

Operating loss

 

 

(24,449

)

 

 

(5,787

)

 

 

(120,795

)

 

 

(2,224

)

Interest expense, net

 

 

(1,576

)

 

 

(277

)

 

 

(4,131

)

 

 

(1,059

)

Other expense, net

 

 

(2,360

)

 

 

(3,308

)

 

 

(1,704

)

 

 

(7,436

)

Loss before income taxes

 

 

(28,385

)

 

 

(9,372

)

 

 

(126,630

)

 

 

(10,719

)

Income tax expense

 

 

(472

)

 

 

(1,344

)

 

 

(2,591

)

 

 

(1,968

)

Net loss

 

$

(28,857

)

 

$

(10,716

)

 

$

(129,221

)

 

$

(12,687

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.77

)

 

$

(0.53

)

 

$

(3.53

)

 

$

(0.63

)

Diluted

 

 

(0.77

)

 

 

(0.53

)

 

 

(3.53

)

 

 

(0.63

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

37,249

 

 

 

20,091

 

 

 

36,588

 

 

 

20,007

 

Diluted

 

 

37,249

 

 

 

20,091

 

 

 

36,588

 

 

 

20,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, before tax

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on debt securities

 

 

(310

)

 

 

(236

)

 

 

8

 

 

 

(749

)

Currency translation adjustment

 

 

(1,442

)

 

 

(2,105

)

 

 

(492

)

 

 

(4,413

)

Other comprehensive loss, before tax

 

 

(1,752

)

 

 

(2,341

)

 

 

(484

)

 

 

(5,162

)

Income tax benefit (expense) related to other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

(1,752

)

 

 

(2,341

)

 

 

(484

)

 

 

(5,162

)

Comprehensive loss

 

$

(30,609

)

 

$

(13,057

)

 

$

(129,705

)

 

$

(17,849

)

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, 2022

 

 

20,162

 

 

$

2,016

 

 

$

334,969

 

 

$

1,251

 

 

$

(1,376

)

 

$

336,860

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(60,938

)

 

 

 

 

 

(60,938

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

430

 

 

 

430

 

Share-based compensation expense

 

 

 

 

 

 

 

 

13,020

 

 

 

 

 

 

 

 

 

13,020

 

Common shares issued in connection with SeaSpine merger

 

 

16,047

 

 

 

1,605

 

 

 

375,140

 

 

 

 

 

 

 

 

 

376,745

 

Common shares issued, net

 

 

254

 

 

 

26

 

 

 

(1,984

)

 

 

 

 

 

 

 

 

(1,958

)

At March 31, 2023

 

 

36,463

 

 

$

3,647

 

 

$

721,145

 

 

$

(59,687

)

 

$

(946

)

 

$

664,159

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(39,426

)

 

 

 

 

 

(39,426

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

838

 

 

 

838

 

Share-based compensation expense

 

 

 

 

 

 

 

 

13,246

 

 

 

 

 

 

 

 

 

13,246

 

Common shares issued, net

 

 

270

 

 

 

26

 

 

 

1,142

 

 

 

 

 

 

 

 

 

1,168

 

At June 30, 2023

 

 

36,733

 

 

$

3,673

 

 

$

735,533

 

 

$

(99,113

)

 

$

(108

)

 

$

639,985

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(28,857

)

 

 

 

 

 

(28,857

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,752

)

 

 

(1,752

)

Share-based compensation expense

 

 

 

 

 

 

 

 

6,274

 

 

 

 

 

 

 

 

 

6,274

 

Common shares issued, net

 

 

17

 

 

 

2

 

 

 

(169

)

 

 

 

 

 

 

 

 

(167

)

At September 30, 2023

 

 

36,750

 

 

$

3,675

 

 

$

741,638

 

 

$

(127,970

)

 

$

(1,860

)

 

$

615,483

 

 

 

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

 

Number of
Common
Shares
Outstanding

 

 

Common
Shares

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
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

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,716

)

 

 

 

 

 

(10,716

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,341

)

 

 

(2,341

)

Share-based compensation expense

 

 

 

 

 

 

 

 

4,729

 

 

 

 

 

 

 

 

 

4,729

 

Common shares issued, net

 

 

7

 

 

 

1

 

 

 

(80

)

 

 

 

 

 

 

 

 

(79

)

At September 30, 2022

 

 

20,007

 

 

$

2,001

 

 

$

328,387

 

 

$

8,313

 

 

$

(5,162

)

 

$

333,539

 

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

6


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Cash Flows

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(129,221

)

 

$

(12,687

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

39,094

 

 

 

21,598

 

Inventory reserve expenses

 

 

24,013

 

 

 

9,856

 

Amortization of inventory fair value step up

 

 

29,006

 

 

 

 

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

 

 

4,506

 

 

 

2,321

 

Provision for expected credit losses

 

 

905

 

 

 

1,713

 

Deferred income taxes

 

 

1,148

 

 

 

21

 

Share-based compensation expense

 

 

32,540

 

 

 

13,521

 

Change in valuation of investment securities

 

 

(82

)

 

 

254

 

Change in fair value of contingent consideration

 

 

(2,100

)

 

 

(17,200

)

Other

 

 

673

 

 

 

1,124

 

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

 

 

 

 

 

 

Accounts receivable

 

 

2,912

 

 

 

51

 

Inventories

 

 

(48,164

)

 

 

(29,875

)

Prepaid expenses and other current assets

 

 

925

 

 

 

16

 

Accounts payable

 

 

4,244

 

 

 

3,955

 

Other current liabilities

 

 

(20

)

 

 

(4,571

)

Contract liability

 

 

 

 

 

(4,791

)

Other long-term assets and liabilities

 

 

562

 

 

 

808

 

Net cash provided by (used in) operating activities

 

 

(39,059

)

 

 

(13,886

)

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures for property, plant, and equipment

 

 

(45,695

)

 

 

(16,159

)

Capital expenditures for intangible assets

 

 

(1,302

)

 

 

(1,101

)

Contingent consideration payments related to asset acquisitions

 

 

 

 

 

(1,500

)

Cash acquired in the SeaSpine merger

 

 

29,419

 

 

 

 

Other investing activities

 

 

(500

)

 

 

126

 

Net cash provided by (used in) investing activities

 

 

(18,078

)

 

 

(18,634

)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

2,377

 

 

 

2,400

 

Payments related to tax withholdings for share-based compensation

 

 

(3,334

)

 

 

(1,467

)

Payments related to finance lease obligation

 

 

(483

)

 

 

(2,441

)

Borrowings under credit facility

 

 

70,000

 

 

 

 

Payment of debt acquired from SeaSpine merger

 

 

(26,899

)

 

 

 

Contingent consideration milestone payment

 

 

(920

)

 

 

 

Other financing activities

 

 

(699

)

 

 

(68

)

Net cash provided by (used in) financing activities

 

 

40,042

 

 

 

(1,576

)

Effect of exchange rate changes on cash

 

 

58

 

 

 

(2,091

)

Net change in cash and cash equivalents

 

 

(17,037

)

 

 

(36,187

)

Cash and cash equivalents at the beginning of period

 

 

50,700

 

 

 

87,847

 

Cash and cash equivalents at the end of period

 

$

33,663

 

 

$

51,660

 

 

 

 

 

 

 

 

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. (“Orthofix”) and its subsidiaries (the "Company"), following its merger with SeaSpine Holdings Corporation ("SeaSpine") that was completed in January 2023, is a leading global spine and orthopedics company with a comprehensive portfolio of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system. The Company's products are distributed in approximately 68 countries worldwide.

The Company is headquartered in Lewisville, Texas, and has primary offices in Carlsbad, California, with a focus on spinal product innovation and surgeon education, and in Verona, Italy, with an emphasis on product innovation, production, and medical education for orthopedics. The combined Company's global research and development, commercial, and manufacturing footprint also includes facilities and offices in Irvine, California, Toronto, Canada, Sunnyvale, California, Wayne, Pennsylvania, Olive Branch, Mississippi, Maidenhead, United Kingdom, Munich, Germany, Paris, France, and Sao Paulo, Brazil.

The merger with SeaSpine was completed on January 5, 2023, with SeaSpine continuing as a wholly-owned subsidiary of Orthofix following the transaction. For additional discussion of the merger with SeaSpine, see Note 3. The shares of common stock of Orthofix, as the corporate parent entity in the combined company structure, continue to trade on NASDAQ under the symbol "OFIX". The combined company will be renamed at a later date and until then will continue to be known as Orthofix Medical Inc.

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, 2022. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2023.

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.

Changes in Presentation of Consolidated Financial Statements

Certain prior year balances have been reclassified in the condensed consolidated financial statements to conform to current period presentation.

2. Recently adopted accounting standards, recently issued accounting pronouncements

Adoption of Accounting Standards Update (“ASU”) 2021-08— Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, which aims to address diversity in practice and inconsistency related to the accounting for acquired revenue contracts with customers in a business combination. The amendments require that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. The Company adopted this standard effective January 1, 2023, on a prospective basis. Adoption of this standard resulted in the recognition of $2.2 million in contract liabilities associated with acquired revenue contracts as a result of the Company’s merger with SeaSpine, which closed on January 5, 2023.
 

8


 

Recently Issued Accounting Pronouncements

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.

Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative (ASU 2023-06)

 

Adds interim and annual disclosure requirements to a variety of subtopics in the Accounting Standards Codification, including those focusing on accounting changes, earnings per share, debt and repurchase agreements. The guidance will be applied prospectively. The effective date will be the date when the SEC's removal of the related disclosure requirement becomes effective, with early adoption prohibited.

 

Various

 

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

Other recently issued ASUs, excluding those ASUs that 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.

3. Merger and acquisitions

Merger with SeaSpine

On January 5, 2023, the Company and SeaSpine completed an all-stock merger of equals (the "Merger") to create a leading global spine and orthopedics company with highly complementary portfolios of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system. As a result of the Merger, each share of SeaSpine common stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive 0.4163 shares of Orthofix common stock.

The Merger is being accounted for as an acquisition of SeaSpine by Orthofix under the acquisition method of accounting for business combinations in accordance with U.S. GAAP. Therefore, Orthofix is treated as the acquirer for accounting purposes. In identifying the acquirer, Orthofix and SeaSpine considered the structure of the transaction and other actions contemplated by the merger agreement (the “Merger Agreement”), relative outstanding share ownership, market values, the composition of the combined company's board of directors, and the relative size of Orthofix and SeaSpine. Under the acquisition method of accounting, the assets and liabilities of SeaSpine and its subsidiaries have been recorded at their respective fair values as of the acquisition date.

The total estimated fair value of consideration associated with the Merger as of the acquisition date was comprised of:

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

 

 

 

Share Consideration:

 

 

 

Orthofix common shares to be issued in exchange for SeaSpine common shares

 

 

16,047,315

 

Orthofix closing price per share as of January 4, 2023

 

$

22.76

 

Estimated fair value of shares issued in exchange for SeaSpine common shares

 

$

365,237

 

Estimated fair value of Orthofix stock options and RSUs issued in exchange for outstanding SeaSpine equity awards

 

$

11,508

 

Total estimated fair value of consideration

 

$

376,745

 

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. Certain acquired assets and liabilities assumed were valued utilizing Level 3 inputs and assumptions. A final determination of the allocation of the purchase price to assets acquired and liabilities assumed has not been made and the following should be

9


 

considered preliminary. The final determination is subject to completion of the Company's valuation of the assets acquired and liabilities assumed, including contingent liabilities and deferred income taxes, which it expects to complete within one year of the acquisition date. Subsequent adjustments to the preliminary purchase price allocation could be material.

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

 

Previously Reported

 

 

Adjustments

 

 

As Revised

 

 

Assigned Useful Life

Assets acquired:

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,419

 

 

$

 

 

$

29,419

 

 

 

Accounts receivable, net

 

 

35,313

 

 

 

 

 

 

35,313

 

 

 

Inventories

 

 

132,636

 

 

 

 

 

 

132,636

 

 

 

Prepaid expenses and other current assets

 

 

4,590

 

 

 

 

 

 

4,590

 

 

 

Total current assets

 

 

201,958

 

 

 

 

 

 

201,958

 

 

 

Property, plant, and equipment, net

 

 

68,863

 

 

 

 

 

 

68,863

 

 

 

Customer relationships

 

 

33,100

 

 

 

 

 

 

33,100

 

 

13 years

Developed technology

 

 

47,200

 

 

 

 

 

 

47,200

 

 

6 - 8 years

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

 

 

5,750

 

 

 

 

 

 

5,750

 

 

Indefinite

Other long-term assets

 

 

20,501

 

 

 

 

 

 

20,501

 

 

 

Total identifiable assets acquired

 

$

377,372

 

 

$

 

 

$

377,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

21,602

 

 

$

 

 

$

21,602

 

 

 

Other current liabilities

 

 

40,304

 

 

 

3,040

 

 

 

43,344

 

 

 

Total current liabilities

 

 

61,906

 

 

 

3,040

 

 

 

64,946

 

 

 

Long-term borrowings under SeaSpine credit facility

 

 

26,298

 

 

 

 

 

 

26,298

 

 

 

Other long-term liabilities

 

 

32,833

 

 

 

 

 

 

32,833

 

 

 

Total liabilities assumed

 

 

121,037

 

 

 

3,040

 

 

 

124,077

 

 

 

Net identifiable assets acquired

 

$

256,335

 

 

$

(3,040

)

 

$

253,295

 

 

 

Total fair value of consideration transferred

 

 

376,745

 

 

 

 

 

 

376,745

 

 

 

Residual goodwill

 

$

120,410

 

 

$

3,040

 

 

$

123,450

 

 

 

The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired in the Merger. During the three months ended September 30, 2023, the Company identified a contingent liability that existed as of the merger date. As a result, the Company recorded a $3.0 million adjustment to other current liabilities with a corresponding increase in goodwill. As of September 30, 2023, the Company recorded goodwill totaling $123.5 million, which was assigned to the Global Spine reporting segment. Specifically, the goodwill includes the assembled workforce and synergies associated with the combined entity. The goodwill is not deductible for tax purposes.

The IPR&D intangible assets are considered an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition, these assets are not amortized but, instead, are subject to impairment assessment. Upon completion of each IPR&D project, the Company will determine the useful life of the asset and begin amortization.

The Company recognized $0.1 million and $9.9 million in direct acquisition-related costs, which exclude integration-related activities, that were expensed during the three and nine months ended September 30, 2023, respectively. These costs are included in the condensed consolidated statements of operations and comprehensive income (loss), primarily within general and administrative expenses. The Company's results of operations included $62.9 million and $188.2 million of net sales from SeaSpine for the three and nine months ended September 30, 2023, respectively, and a net loss attributable to SeaSpine of $19.2 million and $72.1 million for the three and nine months ended September 30, 2023, respectively.

Pro Forma Financial Information

Due to the Merger closing on January 5, 2023, all SeaSpine financial results for fiscal year 2023, except for the first four days of January, are included in Orthofix's condensed consolidated statement of operations and comprehensive loss. The following unaudited pro forma financial information for the three and nine months ended September 30, 2023, and 2022, are based on the Company's historical condensed consolidated financial statements adjusted to reflect as if the Merger closed as of January 1, 2022.

10


 

The unaudited pro-forma information makes certain adjustments to depreciation and amortization expense to reflect the fair value recognized in the purchase price allocation and to remove one-time transaction-related costs. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Merger closed as of January 1, 2022.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

184.0

 

 

$

181.1

 

 

$

546.2

 

 

$

512.6

 

Net loss

 

$

(21.2

)

 

$

(32.5

)

 

$

(96.5

)

 

$

(102.4

)

Integration and Restructuring Activities

The Company has incurred significant integration and restructuring costs in connection with the Merger. The following table summarizes integration costs incurred for the three and nine months ended September 30, 2023, and 2022.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Compensation-related integration costs

 

$

2.6

 

 

$

 

 

$

16.5

 

 

$

 

International spine restructuring

 

 

1.1

 

 

 

 

 

 

1.1

 

 

 

 

Fee paid to financial advisor to the Merger

 

 

 

 

 

 

 

 

5.5

 

 

 

 

Professional fees / consulting fees

 

 

0.2

 

 

 

 

 

 

5.2

 

 

 

 

Product rationalization charges

 

 

1.3

 

 

 

 

 

 

6.1

 

 

 

 

Other costs to complete

 

 

0.1

 

 

 

 

 

 

1.3

 

 

 

 

Total

 

$

5.3

 

 

$

 

 

$

35.7

 

 

$

 

In the first quarter of 2023, the Company approved and initiated certain restructuring activities to streamline costs and to better align talent with operational needs following the consummation of the Merger. This program was expanded in the third quarter of 2023 to include further restructuring activities related to the Company's international spine business. The Company expects to incur total pre-tax expense of approximately $18.3 million associated with the restructuring activities, which will be recognized within operating expenses. The table below provides a summary of restructuring costs incurred during the period and the resulting liability as of September 30, 2023, which is recognized within other current liabilities:

 

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

 

Balance as of
December 31, 2022

 

 

Charges Incurred

 

 

Payments Made

 

 

Balance as of
September 30, 2023

 

Severance costs

 

$

 

 

$

12.2

 

 

$

(5.2

)

 

$

7.0

 

Retention costs

 

 

 

 

 

4.0

 

 

 

(0.4

)

 

 

3.6

 

Payroll taxes

 

 

 

 

 

0.5

 

 

 

(0.1

)

 

 

0.4

 

Total

 

$

 

 

$

16.7

 

 

$

(5.7

)

 

$

11.0

 

 

4. Inventories

Inventories were as follows:

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

 

September 30,
2023

 

 

December 31,
2022

 

Raw materials

 

$

26,422

 

 

$

17,035

 

Work-in-process

 

 

54,631

 

 

 

19,243

 

Finished products

 

 

140,692

 

 

 

63,872

 

Inventories

 

$

221,745

 

 

$

100,150

 

 

11


 

 

5. Leases

A summary of the Company’s lease portfolio as of September 30, 2023, and December 31, 2022, is presented in the table below:

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

 

Classification

 

September 30,
2023

 

 

December 31,
2022

 

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

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

19,765

 

 

$

6,788

 

Finance leases

 

Property, plant and equipment, net

 

 

16,599

 

 

 

17,360

 

Total ROU assets

 

 

 

$

36,364

 

 

$

24,148

 

 

 

 

 

 

 

 

 

 

Lease Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

$

3,259

 

 

$

1,638

 

Finance leases

 

Current portion of finance lease liability

 

 

693

 

 

 

652

 

Long-term

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

17,171

 

 

 

5,376

 

Finance leases

 

Long-term portion of finance lease liability

 

 

18,715

 

 

 

19,239

 

Total lease liabilities

 

 

 

$

39,838

 

 

$

26,905

 

Supplemental cash flow information related to leases was as follows:

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

 

Nine Months Ended
September 30, 2023

 

 

Nine Months Ended
September 30, 2022

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

5,538

 

 

$

3,001

 

Operating cash flows from finance leases

 

 

643

 

 

 

665

 

Financing cash flows from finance leases

 

 

483

 

 

 

2,441

 

ROU assets obtained in exchange for lease obligations

 

 

 

 

 

 

Operating leases

 

 

15,771

 

 

 

5,429

 

Finance leases

 

 

 

 

 

 

 

6. Long-term debt

In connection with the closing of the Merger on January 5, 2023, the Company terminated SeaSpine's credit facility and all applicable commitments with Wells Fargo Bank, National Association and paid an aggregate amount of $26.9 million reflecting all of the outstanding obligations in respect of principal, interest, and fees, including a $0.6 million prepayment premium.

On January 3, 2023, the Company borrowed $30.0 million for working capital purposes, including to fund certain Merger-related expenses, under its secured revolving credit facility under the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., dated as of October 25, 2019 (as amended by the First Amendment thereto dated March 1, 2023, the "Prior Credit Agreement"), which credit facility had a maturity date of October 25, 2024. Subsequently, the Company borrowed an additional $40.0 million to fund working capital needs whereby, as of September 30, 2023, the Company had $70.0 million in principal amount of borrowings outstanding under the secured revolving credit facility. The table below provides a summary of borrowing activities during the nine months ended September 30, 2023:

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

 

Balance as of
December 31, 2022

 

 

Long-term Borrowings Assumed Under the SeaSpine Credit Facility

 

 

Additional Borrowings

 

 

Pre-payment Penalty Incurred to Interest Expense, Net

 

 

Repayments Made

 

 

Balance as of
September 30, 2023

 

SeaSpine credit facility

 

$

 

 

$

26,298

 

 

$

 

 

$

601

 

 

$

(26,899

)

 

$

 

Orthofix secured revolving credit facility

 

 

 

 

 

 

 

 

70,000

 

 

 

 

 

 

 

 

 

70,000

 

Long-term borrowings under credit facility

 

$

 

 

$

26,298

 

 

$

70,000

 

 

$

601

 

 

$

(26,899

)

 

$

70,000

 

As of September 30, 2023, the Company was in compliance with all required financial covenants under the Prior Credit Agreement. The effective interest rate on amounts borrowed was 7.3%, with interest accrued of $1.0 million as of September 30, 2023, within

12


 

other current liabilities. Subsequent to September 30, 2023, the Company borrowed an additional $9.0 million under the Prior Credit Agreement to fund working capital needs.

On November 6, 2023, the Company, as borrower, and certain subsidiaries of the Company as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, the Company repaid in full amounts outstanding and terminated all commitments under the Prior Credit Agreement. The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), the Company had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

Borrowings under the Financing Agreement were and may be used for, among other things, the repayment in full of the Prior Credit Agreement, working capital, and other general corporate purposes of the Company. Borrowings under the Credit Facilities bear interest at a floating rate, which will be, at the Company’s option, either the three-month SOFR rate (subject to a floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw Term Loan for the preceding month.

Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of the Company’s obligations under the Financing Agreement. The obligations of the Company and each of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all assets of the Company and each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.

The Financing Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its subsidiaries ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Financing Agreement contains financial covenants requiring the Company to maintain a minimum level of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly basis). The Financing Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated and/or the lenders’ commitments terminated.

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 September 30, 2023.

 

7. 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:

 

 

September 30,
2023

 

 

December 31,
2022

 

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

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neo Medical convertible loan agreements

 

$

 

 

$

 

 

$

7,670

 

 

$

7,670

 

 

$

7,140

 

Neo Medical preferred equity securities

 

 

 

 

 

6,084

 

 

 

 

 

 

6,084

 

 

 

6,084

 

Bone Biologics equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

 

 

 

 

 

 

 

1,286

 

 

 

1,286

 

 

 

1,726

 

Total

 

$

 

 

$

6,084

 

 

$

8,956

 

 

$

15,040

 

 

$

14,950

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lattus contingent consideration

 

$

 

 

$

 

 

 

(9,100

)

 

$

(9,100

)

 

$

 

Spinal Kinetics contingent consideration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation plan

 

 

 

 

 

(1,413

)

 

 

 

 

 

(1,413

)

 

 

(1,515

)

Total

 

$

 

 

$

(1,413

)

 

$

(9,100

)

 

$

(10,513

)

 

$

(1,515

)

 

13


 

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 the Company 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 a second Convertible Loan Agreement (the “Second Convertible Loan” and together with the Convertible Loan, the “Neo Medical Convertible Loans”), 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 preferred 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:

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

 

2023

 

 

2022

 

Fair value of Neo Medical preferred equity securities at January 1

 

$

6,084

 

 

$

5,413

 

Conversion of loan into preferred equity securities

 

 

 

 

 

671

 

Fair value of Neo Medical preferred equity securities at September 30

 

$

6,084

 

 

$

6,084

 

Cumulative unrealized gain on Neo Medical preferred equity securities

 

$

413

 

 

$

413

 

The Company elected to convert the Second Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The Convertible Loan is recorded in other long-term assets as an available for sale debt security as of September 30, 2023. 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 this investment as a Level 3 financial asset.

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 September 30, 2023, 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):

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

 

2023

 

 

2022

 

Fair value of Neo Medical Convertible Loans at January 1

 

$

7,140

 

 

$

7,148

 

Interest recognized in interest income, net

 

 

367

 

 

 

326

 

Foreign currency remeasurement recognized in other expense, net

 

 

54

 

 

 

(437

)

Unrealized gain (loss) recognized in other comprehensive loss

 

 

109

 

 

 

(766

)

Conversion of Second Convertible Loan into preferred equity securities

 

 

 

 

 

(671

)

Fair value of Neo Medical Convertible Loans at September 30

 

$

7,670

 

 

$

5,600

 

Amortized cost basis of Neo Medical Convertible Loans at September 30

 

$

6,328

 

 

$

5,425

 

The following table provides quantitative information related to certain key assumptions utilized within the valuation as of September 30, 2023:

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

 

Fair Value as of
 September 30, 2023

 

 

Unobservable inputs

 

Estimate

 

Neo Medical Convertible Loan

 

$

7,670

 

 

Cost of equity discount rate

 

 

19.4

%

 

 

 

 

 

Estimated equity volatility

 

 

80.6

%

Bone Biologics Equity Securities

14


 

Until August 2022, the Company held an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. The Company disposed of its remaining holdings in Bone Biologics equity securities during the third quarter of 2022.

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 is 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 September 30, 2023, 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 fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was concluded to be zero as of September 30, 2023, as the Company did not achieve the milestone prior to April 30, 2023, the end of the measurement period for achieving such milestone.

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):

 

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

 

2023

 

 

2022

 

Spinal Kinetics contingent consideration estimated fair value at January 1

 

$

 

 

$

17,200

 

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

 

 

 

 

 

(17,200

)

Spinal Kinetics contingent consideration estimated fair value at September 30

 

$

 

 

$

 

Lattus Contingent Consideration

In connection with the Merger, the Company assumed a contingent consideration obligation under a purchase agreement between SeaSpine and Lattus Spine LLC ("Lattus") executed in December 2022. Under the terms of the agreement, the Company may be required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products").

The estimated fair value of the Lattus contingent consideration as of the closing of the Merger, January 5, 2023, was $11.2 million. The estimated fair value of the Lattus contingent consideration is determined using a Monte Carlo simulation and a discounted cash flow model requiring significant inputs which are not observable in the market. The significant inputs include assumptions related to the timing and probability of certain product launch dates, estimated future sales of the products, revenue risk-adjusted discount rate, revenue volatility, and discount rates matched to the timing of payments. The following table provides a reconciliation of the beginning and ending balances for the Lattus contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):

 

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

 

2023

 

 

2022

 

Lattus contingent consideration estimated fair value at January 5

 

$

11,200

 

 

$

 

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

 

 

(2,100

)

 

 

 

Lattus contingent consideration estimated fair value at September 30

 

$

9,100

 

 

$

 

The following table provides quantitative information related to certain key assumptions utilized within the valuation as of September 30, 2023:

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

 

Fair Value as of
 September 30, 2023

 

 

Unobservable inputs

 

Estimate

 

Lattus Contingent Consideration

 

$

9,100

 

 

Counterparty discount rate

 

 

9.5

%

 

 

 

 

 

Revenue risk-adjusted discount rate

 

 

7.0

%

 

8. Commitments and Contingencies

Commitments

As a result of the Merger, the Company became party to agreements with certain distributor partners that provide the Company with an option to purchase, and an option for those partners to require the Company to purchase, the distribution business of those

15


 

partners at specified future dates. At such time, the Company or distributor may (in certain cases, subject to satisfying certain conditions) submit written notice to the other of its intention to exercise its rights and initiate or require the purchase. Upon receipt of the written notice, the Company and the distributor will work in good faith to consummate the purchase. Under these agreements, the purchase price would be paid in shares of the Company's common stock. Based on the closing price of the Company's common stock as of September 30, 2023, assuming the options under all the relevant agreements were exercised, the estimated total number of shares the Company would issue under these agreements was approximately 1.7 million shares. The Company has received notification from one such distributor, who has notified the Company of its decision to exercise its buyout option. The Company is currently in negotiations with this distributor in regard to the consummation of the potential acquisition.

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.

In the third quarter of 2022, the Italian Ministry of Health provided guidelines to the Italian regions and provinces on seeking payback of expenditure overruns relating to the years ended December 31, 2015, through December 31, 2018. Since receiving the guidelines, several regions and provinces have requested payment from affected medical device companies, including the Company. The Company has taken legal action to dispute the legality of such measures.

The Company accounts for the estimated cost of the IMDP as sales and marketing expense and periodically reassesses the liability based upon current facts and circumstances. As a result, the Company recorded an expense of $0.2 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, and an expense of $0.3 million and $0.9 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, the Company has accrued $7.0 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 all legal proceedings are resolved and upon further clarification of the IMDP by the Italian authorities for more recent fiscal years.

9. Accumulated other comprehensive loss

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

 

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

 

Currency
Translation
Adjustments

 

 

Neo Medical Convertible Loans

 

 

Other Investments

 

 

Accumulated Other
Comprehensive Loss

 

Balance at December 31, 2022

 

$

(2,482

)

 

$

1,005

 

 

$

101

 

 

$

(1,376

)

Other comprehensive income (loss)

 

 

(492

)

 

 

109

 

 

 

(101

)

 

 

(484

)

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2023

 

$

(2,974

)

 

$

1,114

 

 

$

 

 

$

(1,860

)

 

10. Revenue recognition and accounts receivable

Revenue Recognition

The Company has two reporting segments: Global Spine and Global Orthopedics. Within the Global Spine reporting segment, there are two product categories: (i) Bone Growth Therapies, and (ii) Spinal Implants, Biologics, and Enabling Technologies.

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

 

 

 

Three Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

Change

 

Bone Growth Therapies

 

$

53,359

 

 

$

46,531

 

 

 

14.7

%

Spinal Implants, Biologics, and Enabling Technologies

 

 

100,993

 

 

 

39,655

 

 

 

154.7

%

Global Spine

 

 

154,352

 

 

 

86,186

 

 

 

79.1

%

Global Orthopedics

 

 

29,654

 

 

 

27,810

 

 

 

6.6

%

16


 

Net sales

 

$

184,006

 

 

$

113,996

 

 

 

61.4

%

 

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

Change

 

Bone Growth Therapies

 

$

153,735

 

 

$

136,244

 

 

 

12.8

%

Spinal Implants, Biologics, and Enabling Technologies

 

 

307,799

 

 

 

123,379

 

 

 

149.5

%

Global Spine

 

 

461,534

 

 

 

259,623

 

 

 

77.8

%

Global Orthopedics

 

 

84,692

 

 

 

78,861

 

 

 

7.4

%

Net sales

 

$

546,226

 

 

$

338,484

 

 

 

61.4

%

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 September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Product sales

 

$

170,666

 

 

$

100,485

 

 

$

506,992

 

 

$

296,652

 

Marketing service fees

 

 

13,340

 

 

 

13,511

 

 

 

39,234

 

 

 

41,832

 

Net sales

 

$

184,006

 

 

$

113,996

 

 

$

546,226

 

 

$

338,484

 

 

Product sales primarily consist of the sale of bone growth therapies devices, spinal implants, certain biologics, enabling technologies, and orthopedics products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues sourced from MTF Biologics and relate solely to the Global Spine reporting segment. The Company partners with MTF Biologics to provide certain allograft solutions (HCT/Ps) for various spine, orthopedic and other bone repair needs, with this partnership allowing us to exclusively market certain biologic offerings.

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 nine months ended September 30, 2023 and 2022:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Allowance for expected credit losses beginning balance

 

$

7,015

 

 

$

5,589

 

 

$

6,419

 

 

$

4,944

 

Addition resulting from the Merger with SeaSpine

 

 

 

 

 

 

 

 

137

 

 

 

 

Current period provision for expected credit losses

 

 

415

 

 

 

574

 

 

 

905

 

 

 

1,713

 

Write-offs charged against the allowance and other

 

 

(214

)

 

 

10

 

 

 

(334

)

 

 

(236

)

Effect of changes in foreign exchange rates

 

 

(126

)

 

 

(225

)

 

 

(37

)

 

 

(473

)

Allowance for expected credit losses ending balance

 

$

7,090

 

 

$

5,948

 

 

$

7,090

 

 

$

5,948

 

 

11. Business segment information

The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company is adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA,” a non-GAAP financial measure). Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes the impact of share-based compensation, gains and losses related to changes in foreign exchange rates, charges related to the SeaSpine merger and other strategic investments, acquisition-related fair value adjustments, legal judgments and settlements, charges related to initial compliance with regulations set forth by the European Union Medical Device Regulation, and certain other activities. Corporate activities are comprised of operating expenses not directly identifiable within the two reporting segments, such as human resources, finance, legal, and information technology functions. The table below presents adjusted EBITDA by reporting segment:

17


 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Adjusted EBITDA by reporting segment

 

 

 

 

 

 

 

 

 

 

 

 

Global Spine

 

$

22,593

 

 

$

16,601

 

 

$

58,832

 

 

$

45,244

 

Global Orthopedics

 

 

477

 

 

 

2,648

 

 

 

386

 

 

 

2,624

 

Corporate

 

 

(9,549

)

 

 

(4,994

)

 

 

(32,574

)

 

 

(15,081

)

Consolidated adjusted EBITDA

 

$

13,521

 

 

$

14,255

 

 

$

26,644

 

 

$

32,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

$

1,576

 

 

$

277

 

 

$

4,131

 

 

$

1,059

 

Depreciation and amortization

 

 

13,097

 

 

 

7,570

 

 

 

39,094

 

 

 

21,598

 

Share-based compensation expense

 

 

6,274

 

 

 

4,729

 

 

 

32,540

 

 

 

13,521

 

Foreign exchange impact

 

 

1,909

 

 

 

3,253

 

 

 

1,057

 

 

 

7,486

 

SeaSpine merger-related costs

 

 

5,416

 

 

 

 

 

 

34,362

 

 

 

 

Strategic investments

 

 

913

 

 

 

3,390

 

 

 

1,883

 

 

 

6,184

 

Acquisition-related fair value adjustments

 

 

7,122

 

 

 

419

 

 

 

26,907

 

 

 

(15,795

)

Legal judgments/settlements

 

 

3,851

 

 

 

125

 

 

 

5,611

 

 

 

466

 

Medical device regulation

 

 

1,840

 

 

 

2,590

 

 

 

7,519

 

 

 

6,883

 

Business interruption - COVID-19

 

 

 

 

 

1,215

 

 

 

 

 

 

1,874

 

All other

 

 

(92

)

 

 

59

 

 

 

170

 

 

 

230

 

Loss before income taxes

 

$

(28,385

)

 

$

(9,372

)

 

$

(126,630

)

 

$

(10,719

)

Geographical information

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

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Global Spine

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

145,764

 

 

$

81,414

 

 

$

432,581

 

 

$

244,379

 

International

 

 

8,588

 

 

 

4,772

 

 

 

28,953

 

 

 

15,244

 

Total Global Spine

 

 

154,352

 

 

 

86,186

 

 

 

461,534

 

 

 

259,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Orthopedics

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

7,482

 

 

 

6,588

 

 

 

21,341

 

 

 

18,818

 

International

 

 

22,172

 

 

 

21,222

 

 

 

63,351

 

 

 

60,043

 

Total Global Orthopedics

 

 

29,654

 

 

 

27,810

 

 

 

84,692

 

 

 

78,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

153,246

 

 

 

88,002

 

 

 

453,922

 

 

 

263,197

 

International

 

 

30,760

 

 

 

25,994

 

 

 

92,304

 

 

 

75,287

 

Net sales

 

$

184,006

 

 

$

113,996

 

 

$

546,226

 

 

$

338,484

 

 

12. 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 IPR&D assets, which are recognized immediately upon acquisition. Components of acquisition-related amortization and remeasurement are as follows:

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Amortization of acquired intangibles

 

$

4,370

 

 

$

2,070

 

 

$

13,137

 

 

$

6,122

 

Changes in fair value of contingent consideration

 

 

(800

)

 

 

(986

)

 

 

(2,100

)

 

 

(17,200

)

Acquired IPR&D

 

 

 

 

 

1,400

 

 

 

 

 

 

1,400

 

Total

 

$

3,570

 

 

$

2,484

 

 

$

11,037

 

 

$

(9,678

)

 

18


 

 

 

13. Share-based compensation

Components of share-based compensation expense are as follows:

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cost of sales

 

$

463

 

 

$

195

 

 

$

1,416

 

 

$

611

 

Sales and marketing

 

 

2,092

 

 

 

948

 

 

 

6,892

 

 

 

2,929

 

General and administrative

 

 

2,832

 

 

 

3,285

 

 

 

21,103

 

 

 

9,461

 

Research and development

 

 

887

 

 

 

301

 

 

 

3,129

 

 

 

520

 

Total

 

$

6,274

 

 

$

4,729

 

 

$

32,540

 

 

$

13,521

 

 

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Stock options

 

$

1,429

 

 

$

294

 

 

$

6,582

 

 

$

858

 

Time-based restricted stock awards and units

 

 

4,263

 

 

 

2,467

 

 

 

24,344

 

 

 

7,047

 

Market-based / performance-based restricted stock units

 

 

54

 

 

 

1,626

 

 

 

167

 

 

 

4,567

 

Stock purchase plan

 

 

528

 

 

 

342

 

 

 

1,447

 

 

 

1,049

 

Total

 

$

6,274

 

 

$

4,729

 

 

$

32,540

 

 

$

13,521

 

 

 

Pursuant to the Merger Agreement, the equity awards of SeaSpine (including stock options and restricted stock units) outstanding as of immediately prior to the closing of the Merger were converted into equity awards denominated in shares of Orthofix common stock. The Company issued options to purchase 1.9 million shares of Orthofix common stock and 0.5 million shares of time-based vesting restricted stock in connection with the conversion of such awards. The estimated fair value of the portion of the SeaSpine equity awards for which the required service period had been completed at the time of the closing of the Merger was treated as purchase consideration. The remaining estimated fair value is recorded as compensation expense over the remainder of the service period associated with the awards.

During the three months ended September 30, 2023, and 2022, the Company issued 16,411 and 7,057 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 nine months ended September 30, 2023, and 2022, the Company issued 0.5 million and 0.2 million shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards and units.

On September 12, 2023, the Company announced the termination of the Company's former Chief Executive Officer, former Chief Financial Officer, and former Chief Legal Officer. This change in leadership resulted in a recognized benefit of $1.1 million and $0.1 million for the three and nine months ended September 30, 2023, related to the forfeiture of outstanding equity grants, net of any incremental share-based compensation expense related to interim leaders appointed to these roles.

14. 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 benefited 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 nine months ended September 30, 2023. 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 September 30, 2023, and 2022, the effective tax rate was (1.7%) and (14.3%), respectively. For the nine months ended September 30, 2023, and 2022, the effective tax rate was (2.0%) and (18.4%), respectively. The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2023, were certain losses not benefitted and tax amortization on certain acquired intangibles.

19


 

15. Earnings per share (“EPS”)

For the three and nine months ended September 30, 2023, no 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
September 30,

 

 

Nine Months Ended
September 30,

 

(Unaudited, In thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Weighted average common shares-basic

 

 

37,249

 

 

 

20,091

 

 

 

36,588

 

 

 

20,007

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

Unexercised stock options and stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

Unvested restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares-diluted

 

 

37,249

 

 

 

20,091

 

 

 

36,588

 

 

 

20,007

 

 

There were 6.3 million and 2.4 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the three months ended September 30, 2023, and 2022, respectively, and 6.8 million and 2.2 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the nine months ended September 30, 2023, and 2022, respectively, because inclusion of these awards was anti-dilutive.

16. Goodwill

The Company tests goodwill at least annually for impairment. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.

In the third quarter of 2023, the Company announced the termination of the former President and Chief Executive Officer, former Chief Financial Officer, and former Chief Legal Officer, from their respective roles. Immediately following the announcement, the Company's market capitalization decreased by approximately 30%, indicating that an impairment may exist. As a result, the Company performed an interim quantitative assessment of its goodwill as of September 30, 2023.

The Company estimated the fair value of each reporting unit using a weighted average of the fair value derived from both an income approach and a market approach (all Level 3 fair value measurements). Upon performing its assessment, the Company determined its Global Spine reporting unit's fair value exceed its carrying value of net assets as of September 30, 2023.

The following table presents the net carrying value of goodwill as of September 30, 2023, and any activity recognized during the year-to-date period, including accumulated goodwill impairment losses by reportable segment:

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

 

Balance as of
December 31, 2022

 

 

Goodwill Acquired in the Merger with SeaSpine

 

 

Impairment Recognized within Acquisition-related Amortization and Remeasurement

 

 

Balance as of
September 30, 2023

 

Global Spine - Gross

 

$

71,317

 

 

$

123,450

 

 

$

 

 

$

194,767

 

Global Spine - Accumulated Impairment Loss

 

 

 

 

 

 

 

 

 

 

$

 

Global Spine - Net

 

$

71,317

 

 

$

123,450

 

 

$

 

 

$

194,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global Orthopedics - Gross

 

$

11,822

 

 

$

 

 

$

 

 

$

11,822

 

Global Orthopedics - Accumulated Impairment Loss

 

 

(11,822

)

 

 

 

 

 

 

 

$

(11,822

)

Global Orthopedics - Net

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill, net of accumulated impairment losses

 

$

71,317

 

 

$

123,450

 

 

$

 

 

$

194,767

 

17. Subsequent Events

As further described above in Note 6, on November 6, 2023, the Company, as borrower, and certain subsidiaries of the Company as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent

20


 

and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, the Company repaid in full amounts outstanding and terminated all commitments under the Prior Credit Agreement. The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), the Company had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

21


 

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 operations should be read in conjunction with the discussion under the heading “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.

Executive Summary

Following our merger (the “Merger”) with SeaSpine Holdings Corporation ("SeaSpine"), which was completed in January 2023, the newly merged Orthofix-SeaSpine organization is a leading global spine and orthopedics company with a comprehensive portfolio of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in approximately 68 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com. Information included on our website is not incorporated into, or otherwise creates a part of, this report.

Notable financial metrics in the third quarter of 2023 and recent achievements include the following:

Net sales of $184.0 million, an increase of 61% on a reported and 60% on a constant currency basis over prior year, largely as a result of the Merger
Bone Growth Therapies growth of 15%, marking three consecutive quarters with double-digit net sales increases, with growth coming from both spine and fracture portfolios
Spinal Implants, Biologics, and Enabling Technologies sales growth of 155% on a reported basis over prior year
Global Orthopedics net sales increase of 7% on a reported basis over prior year

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
September 30,

 

 

Nine Months Ended
September 30,

 

(Unaudited)

 

2023
(%)

 

 

2022
(%)

 

 

2023
(%)

 

 

2022
(%)

 

Net sales

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

 

 

100.0

 

Cost of sales

 

 

34.9

 

 

 

26.8

 

 

 

36.0

 

 

 

26.7

 

Gross profit

 

 

65.1

 

 

 

73.2

 

 

 

64.0

 

 

 

73.3

 

Sales and marketing

 

 

51.7

 

 

 

48.7

 

 

 

52.7

 

 

 

50.1

 

General and administrative

 

 

14.7

 

 

 

16.9

 

 

 

20.2

 

 

 

16.1

 

Research and development

 

 

10.1

 

 

 

10.5

 

 

 

11.2

 

 

 

10.6

 

Acquisition-related amortization and remeasurement

 

 

1.9

 

 

 

2.2

 

 

 

2.0

 

 

 

(2.8

)

Operating loss

 

 

(13.3

)

 

 

(5.1

)

 

 

(22.1

)

 

 

(0.7

)

Net loss

 

 

(15.7

)

 

 

(9.4

)

 

 

(23.7

)

 

 

(3.7

)

Net Sales by Product Category and Reporting Segment

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

 

 

Three Months Ended
September 30,

 

 

Percentage Change

 

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

 

2023

 

 

2022

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

53,359

 

 

$

46,531

 

 

 

14.7

%

 

 

14.7

%

Spinal Implants, Biologics, and Enabling Technologies

 

 

100,993

 

 

 

39,655

 

 

 

154.7

%

 

 

154.5

%

Global Spine

 

 

154,352

 

 

 

86,186

 

 

 

79.1

%

 

 

79.0

%

Global Orthopedics

 

 

29,654

 

 

 

27,810

 

 

 

6.6

%

 

 

0.7

%

Net sales

 

$

184,006

 

 

$

113,996

 

 

 

61.4

%

 

 

59.9

%

 

22


 

 

 

 

Nine Months Ended
September 30,

 

 

Percentage Change

 

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

 

2023

 

 

2022

 

 

Reported

 

 

Constant Currency

 

Bone Growth Therapies

 

$

153,735

 

 

$

136,244

 

 

 

12.8

%

 

 

12.8

%

Spinal Implants, Biologics, and Enabling Technologies

 

 

307,799

 

 

 

123,379

 

 

 

149.5

%

 

 

149.5

%

Global Spine

 

 

461,534

 

 

 

259,623

 

 

 

77.8

%

 

 

77.8

%

Global Orthopedics

 

 

84,692

 

 

 

78,861

 

 

 

7.4

%

 

 

6.1

%

Net sales

 

$

546,226

 

 

$

338,484

 

 

 

61.4

%

 

 

61.1

%

Global Spine

Global Spine offers the following product categories:

-
Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices used adjunctively in high-risk spinal fusion procedures and to treat both non-union and acute fractures in the orthopedic space. Bone Growth Therapies uses distributors and a direct sales channel to sell its devices and provide associated support services to hospitals, healthcare providers, and patients in the U.S.
-
Spinal Implants, Biologics, and Enabling Technologies is comprised of a broad portfolio of spine fixation and motion preservation implant products used in surgical procedures of the spine, one of the most comprehensive biologics portfolios in both the demineralized bone matrix and cellular allograft market segments, and image-guided surgical solutions to facilitate degenerative, minimally invasive, and complex surgical procedures. Spinal Implants, Biologics, and Enabling Technologies products are sold through a network of distributors and sales representatives to hospitals and healthcare providers on a global basis for Spinal Implants and Enabling Technologies, and primarily within the U.S. for Biologics.

Three months ended September 30, 2023 compared to 2022

Net sales of $154.4 million, an increase of $68.2 million or 79.1%

Bone Growth Therapies net sales increased $6.8 million or 14.7%, largely driven by (i) an increase in complex spine procedures, which are typically paired within our CervicalStim and SpinalStim devices, (ii) increased reimbursement rates that were approved by Medicare for 2023, (iii) growth in our spine and fracture sales channels as a result of investments made in the commercial channel in the prior year, and (iv) the launch of AccelStim for the healing of fresh and non-union fractures
Spinal Implants, Biologics, and Enabling Technologies net sales increased $61.3 million or 154.7%, primarily due to the contribution of SeaSpine net sales in the third quarter of 2023 in addition to growth driven by the onboarding of new, high-volume distribution partners along with multiple recent product launches

 

Nine months ended September 30, 2023 compared to 2022

Net sales of $461.5 million, an increase of $201.9 million or 77.8%

Bone Growth Therapies net sales increased $17.5 million or 12.8%, largely driven by (i) a continued increase in complex spine procedures, (ii) increased reimbursement rates that were approved by Medicare for 2023, (iii) growth in our spine and fracture sales channels as a result of investments made in the prior year, and (iv) the launch of AccelStim
Spinal Implants, Biologics, and Enabling Technologies net sales increased $184.4 million or 149.5%, primarily due to the contribution of SeaSpine net sales and growth driven by the onboarding of new, high-volume distribution partners along with multiple recent product launches

 

 

23


 

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 September 30, 2023 compared to 2022

Net sales of $29.7 million, an increase of $1.8 million or 6.6%

Growth of 13.6% in the U.S., primarily due to recent product launches and commercial execution within our U.S. sales channel
International growth of 4.5% on a reported basis, largely due to favorable movements in foreign exchange rates, which had a favorable impact on net sales of $1.6 million in the quarter, partially offset by a small decrease in stocking distributor orders and in certain direct international markets as a result of macroeconomic headwinds

 

Nine months ended September 30, 2023 compared to 2022

Net sales of $84.7 million, an increase of $5.8 million or 7.4%

Growth of 13.4% in the U.S. largely as a result of investments made in recent product launches and commercial execution within our sales channel
International growth of 3.8% on a constant currency basis, largely due to an increase in stocking distributor orders and as a result of recent product launches
Increase of $1.0 million due to movement in foreign current exchange rates, which had a favorable impact on net sales in 2023

Gross Profit

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Net sales

 

$

184,006

 

 

$

113,996

 

 

 

61.4

%

 

$

546,226

 

 

$

338,484

 

 

 

61.4

%

Cost of sales

 

 

64,243

 

 

 

30,573

 

 

 

110.1

%

 

 

196,583

 

 

 

90,491

 

 

 

117.2

%

Gross profit

 

$

119,763

 

 

$

83,423

 

 

 

43.6

%

 

$

349,643

 

 

$

247,993

 

 

 

41.0

%

Gross margin

 

 

65.1

%

 

 

73.2

%

 

 

(8.1

%)

 

 

64.0

%

 

 

73.3

%

 

 

-9.3

%

Three months ended September 30, 2023 compared to 2022

Gross profit increased $36.3 million

Gross profit largely increased due to the contribution of SeaSpine results in the third quarter of 2023, as SeaSpine contributed approximately $62.9 million in net sales
Partially offset by $7.9 million in amortization of the inventory fair value step up at acquisition, which is being recognized over the expected sales cycles of the acquired inventory
Further offset by approximately $1.4 million in inventory-related charges as a result of product rationalization decisions that have been made related to the Merger

 

Nine months ended September 30, 2023 compared to 2022

Gross profit increased $101.7 million

Gross profit largely increased due to the contribution of SeaSpine results in the third quarter of 2023, as SeaSpine contributed approximately $188.2 million in net sales
Partially offset by $29.0 million in amortization of the inventory fair value step up at acquisition, which is being recognized over the expected sales cycles of the acquired inventory

24


 

Further offset by approximately $5.7 million in inventory-related charges as a result of product rationalization decisions that have been made related to the Merger

Sales and Marketing Expense

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(U.S. Dollars, in thousands)

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Sales and marketing

 

$

94,947

 

 

$

55,461

 

 

 

71.2

%

 

$

287,987

 

 

$

169,486

 

 

 

69.9

%

As a percentage of net sales

 

 

51.5

%

 

 

48.7

%

 

 

2.8

%

 

 

52.7

%

 

 

50.1

%

 

 

2.6

%

Three months ended September 30, 2023 compared to 2022

Sales and marketing expense increased $39.5 million

Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and the overall increase in net sales as compared to the prior year period, which resulted in increased variable expenses, such as commissions and bonus expenses associated with the achievement of sales objectives
Included within sales and marketing expenses for the third quarter of 2023 are integration-related expenses of $1.3 million, which are mainly severance and retention costs

 

Nine months ended September 30, 2023 compared to 2022

Sales and marketing expense increased $118.5 million

Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and the overall increase in net sales as compared to the prior year period, which resulted in increased variable expenses, such as commissions and bonus expenses associated with the achievement of sales objectives
Included within sales and marketing expenses for 2023 are integration-related expenses of $4.3 million, which are mainly related to severance and retention costs

General and Administrative Expense

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(U.S. Dollars, in thousands)

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

General and administrative

 

$

27,136

 

 

$

19,322

 

 

 

40.4

%

 

$

110,124

 

 

$

54,496

 

 

 

102.1

%

As a percentage of net sales

 

 

14.7

%

 

 

16.9

%

 

 

(2.2

%)

 

 

20.2

%

 

 

16.1

%

 

 

4.1

%

Three months ended September 30, 2023 compared to 2022

General and administrative expense increased $7.8 million

Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and resulting integration costs incurred as a result of the Merger
Increase also driven by approximately $3.4 million in costs associated with the Board of Directors' independent investigation conducted by independent outside legal counsel, which resulted in the termination of three former executives
Partially offset by a decrease of $2.9 million associated with due diligence efforts and transaction costs incurred in 2022 prior to the closing of the Merger
Further offset by a $0.5 million decrease in share-based compensation expense resulting from (i) a $1.1 million recognized benefit related to the forfeiture of outstanding equity grants due to executive leadership changes, partially offset by increases from (ii) a larger employee base post-Merger, and (iii) accelerated vesting of certain equity-based awards as a result of the Merger

 

Nine months ended September 30, 2023 compared to 2022

General and administrative expense increased $55.6 million

Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of the Merger, partially offset by a reduction in due diligence and transaction costs incurred prior to the closing of the Merger

25


 

Included within general and administrative expenses for 2023 are merger and integration related expense of $21.4 million, which are mainly comprised of (i) professional fees totaling $10.8 million, inclusive of a $5.5 million payment to Orthofix's financial advisor for the Merger upon closing of the transaction, and (ii) severance and retention costs totaling $9.9 million
Increase of $11.6 million in share-based compensation expense as a result of (i) a larger employee base post-Merger and (ii) from accelerated vesting of certain equity-based awards as a result of the Merger, partially offset by a recognized benefit related to the forfeiture of outstanding equity grants due to executive leadership changes
Increases of approximately $3.4 million in costs associated with the Board of Directors' independent investigation conducted by independent outside legal counsel, which resulted in the termination of three former executives

Research and Development Expense

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Research and development

 

$

18,559

 

 

$

11,943

 

 

 

55.4

%

 

$

61,290

 

 

$

35,913

 

 

 

70.7

%

As a percentage of net sales

 

 

10.1

%

 

 

10.5

%

 

 

(0.4

%)

 

 

11.2

%

 

 

10.6

%

 

 

0.6

%

Three months ended September 30, 2023 compared to 2022

Research and development expense increased $6.6 million

Increase largely due to the contribution of SeaSpine results in the third quarter of 2023 and resulting integration costs incurred as a result of the Merger
Included within research and development expenses for the third quarter of 2023 are merger and integration-related expenses of $0.4 million, which are mainly comprised of severance and retention costs
Partially offset by a decrease of $0.9 million in costs to comply with the European Union Medical Device Regulations

 

Nine months ended September 30, 2023 compared to 2022

Research and development expense increased $25.4 million

Increase largely due to the contribution of SeaSpine results in 2023 and resulting integration costs incurred as a result of the Merger
Included within research and development expenses for 2023 are merger and integration-related expenses of $2.4 million, which are mainly comprised of severance and retention costs
Increase of $0.8 million related to the attainment of a development milestone with MTF Biologics achieved in the first quarter of 2023
Partially offset by a decrease of $0.7 million in costs to comply with the European Union Medical Device Regulations

Acquisition-related Amortization and Remeasurement

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Acquisition-related amortization and remeasurement

 

$

3,570

 

 

$

2,484

 

 

 

43.7

%

 

$

11,037

 

 

$

(9,678

)

 

 

(214.0

%)

As a percentage of net sales

 

 

1.9

%

 

 

2.2

%

 

 

(0.3

%)

 

 

2.0

%

 

 

(3.0

%)

 

 

5.0

%

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 IPR&D assets, which are recognized immediately upon acquisition.

Three months ended September 30, 2023 compared to 2022

Acquisition-related amortization and remeasurement increased $1.1 million

Increase in amortization expense of $2.4 million during the third quarter of 2023 associated with intangible assets recognized as a result of the Merger

26


 

Partially offset by $1.4 million in costs recognized in the third quarter of 2022 associated with the acquisition of in-process research and development assets, recognized immediately upon acquisition, related to our License and Distribution Agreement with CGBio Co., Ltd.

 

Nine months ended September 30, 2023 compared to 2022

Acquisition-related amortization and remeasurement increased $20.7 million

Increase of $17.2 million related to a benefit recognized in 2022 from the remeasurement of potential revenue-based milestone payments associated with the Spinal Kinetics acquisitions; we did not achieve the remaining milestone prior to April 30, 2023, the end of the measurement period for achieving such milestone
Increase in amortization expense of $7.1 million during 2023 associated with intangible assets recognized as a result of the Merger
Partially offset by a benefit of $2.1 million recognized in 2023 associated with the remeasurement of a contingent consideration obligation with Lattus Spine LLC assumed in the Merger

Non-operating Income and Expense

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Interest expense, net

 

$

(1,576

)

 

$

(277

)

 

 

469.0

%

 

$

(4,131

)

 

$

(1,059

)

 

 

290.1

%

Other income (expense), net

 

 

(2,360

)

 

 

(3,308

)

 

 

(28.7

%)

 

 

(1,704

)

 

 

(7,436

)

 

 

(77.1

%)

Three months ended September 30, 2023 compared to 2022

Interest expense, net increased $1.3 million

Increase of $1.3 million attributable to an increase in secured revolving credit facility borrowings outstanding in the third quarter of 2023 as no such balance was outstanding in the prior year

 

Nine months ended September 30, 2023 compared to 2022

Interest expense, net increased $3.1 million

Increase of $2.6 million attributable to an increase in secured revolving credit facility borrowings outstanding in 2023 as no such balance was outstanding in the prior year
Increase of $0.6 million attributable to an early termination prepayment penalty associated with the payoff of the assumed indebtedness of SeaSpine as of the close of the Merger

Three months ended September 30, 2023 compared to 2022

Other income (expense), net increased $0.9 million

Increase of $1.3 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $1.9 million in the third quarter of 2023 compared to a loss of $3.3 million in the third quarter of 2022
Partially offset by the recognition of a $0.4 million impairment loss on a held-for-sale investment security in the third quarter of 2023

 

Nine months ended September 30, 2023 compared to 2022

Other income (expense), net increased $5.7 million

Increase of $6.4 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $1.1 million in 2023 compared to a loss of $7.5 million in 2022
Partially offset by the recognition of a $0.4 million impairment loss on a held-for-sale investment security in the third quarter of 2023

27


 

Income Taxes

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

% Change

 

 

2023

 

 

2022

 

 

% Change

 

Income tax expense

 

$

472

 

 

$

1,344

 

 

 

(64.9

%)

 

$

2,591

 

 

$

1,968

 

 

 

31.7

%

Effective tax rate

 

 

(1.7

%)

 

 

(14.3

%)

 

 

12.6

%

 

 

(2.0

%)

 

 

(18.4

%)

 

 

16.4

%

Three months ended September 30, 2023 compared to 2022

Decrease in tax expense compared to the prior year period is attributable to lower cash taxes in the US of $1.3 million partially offset by increased amortization expense on long lived intangible assets of $0.4 million.

 

Nine months ended September 30, 2023 compared to 2022

Increase in tax expense compared to the prior year period is attributable to increased amortization expense on long lived intangible assets of $1.2 million and higher taxes on foreign earnings of $0.4 million, offset by lower cash taxes in the US of $0.9 million.

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 adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA,” a non-GAAP financial measure) (which is described further in Note 11 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents adjusted EBITDA by segment and reconciles consolidated adjusted EBITDA to loss before income taxes:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Adjusted EBITDA by reporting segment

 

 

 

 

 

 

 

 

 

 

 

 

Global Spine

 

$

22,593

 

 

$

16,601

 

 

$

58,832

 

 

$

45,244

 

Global Orthopedics

 

 

477

 

 

 

2,648

 

 

 

386

 

 

 

2,624

 

Corporate

 

 

(9,549

)

 

 

(4,994

)

 

 

(32,574

)

 

 

(15,081

)

Consolidated adjusted EBITDA

 

$

13,521

 

 

$

14,255

 

 

$

26,644

 

 

$

32,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

$

1,576

 

 

$

277

 

 

$

4,131

 

 

$

1,059

 

Depreciation and amortization

 

 

13,097

 

 

 

7,570

 

 

 

39,094

 

 

 

21,598

 

Share-based compensation expense

 

 

6,274

 

 

 

4,729

 

 

 

32,540

 

 

 

13,521

 

Foreign exchange impact

 

 

1,909

 

 

 

3,253

 

 

 

1,057

 

 

 

7,486

 

SeaSpine merger-related costs

 

 

5,416

 

 

 

 

 

 

34,362

 

 

 

 

Strategic investments

 

 

913

 

 

 

3,390

 

 

 

1,883

 

 

 

6,184

 

Acquisition-related fair value adjustments

 

 

7,122

 

 

 

419

 

 

 

26,907

 

 

 

(15,795

)

Legal judgments/settlements

 

 

3,851

 

 

 

125

 

 

 

5,611

 

 

 

466

 

Medical device regulation

 

 

1,840

 

 

 

2,590

 

 

 

7,519

 

 

 

6,883

 

Business interruption - COVID-19

 

 

 

 

 

1,215

 

 

 

 

 

 

1,874

 

All other

 

 

(92

)

 

 

59

 

 

 

170

 

 

 

230

 

Loss before income taxes

 

$

(28,385

)

 

$

(9,372

)

 

$

(126,630

)

 

$

(10,719

)

 

28


 

Liquidity and Capital Resources

Cash and cash equivalents at September 30, 2023, totaled $33.7 million compared to $50.7 million at December 31, 2022. The following table presents the net change in cash and cash equivalents for the nine months ended September 30, 2023, and 2022, respectively:

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

Change

 

Net cash provided by (used in) operating activities

 

$

(39,059

)

 

$

(13,886

)

 

$

(25,173

)

Net cash provided by (used in) investing activities

 

 

(18,078

)

 

 

(18,634

)

 

 

556

 

Net cash provided by (used in) financing activities

 

 

40,042

 

 

 

(1,576

)

 

 

41,618

 

Effect of exchange rate changes on cash

 

 

58

 

 

 

(2,091

)

 

 

2,149

 

Net change in cash and cash equivalents

 

$

(17,037

)

 

$

(36,187

)

 

$

19,150

 


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:

 

 

Nine Months Ended September 30,

 

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

 

2023

 

 

2022

 

 

Change

 

Net cash provided by (used in) operating activities

 

$

(39,059

)

 

$

(13,886

)

 

$

(25,173

)

Capital expenditures

 

 

(46,997

)

 

 

(17,260

)

 

 

(29,737

)

Free cash flow

 

$

(86,056

)

 

$

(31,146

)

 

$

(54,910

)

Operating Activities

Cash flows from operating activities decreased $25.2 million

Unfavorable change in net loss of $116.9 million
Favorable change of $96.5 million associated with non-cash gains and losses, largely related to the amortization of the inventory fair value step up at acquisition, share-based compensation expense, changes in fair value of contingent consideration, depreciation and amortization, and inventory reserve expenses
Unfavorable change of $4.8 million relating to changes in working capital accounts, primarily attributable to changes in inventory levels, partially offset by recoupment activities associated with the CMS Accelerated and Advance Payment Program in prior year and favorable changes in other current liabilities, prepaid expenses and other current assets, and accounts receivable


Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 57 days at September 30, 2023, compared to 61 days at September 30, 2022. Inventory turns decreased to 1.0 times as of September 30, 2023 compared to 1.2 times as of September 30, 2022.

Investing Activities

Cash flows from investing activities increased $0.6 million

Increase of $29.4 million attributable to cash acquired as a result of the Merger
Increase of $0.9 million associated with the payment of a contingent consideration milestone achieved in 2022 related to a previous asset acquisition
Partially offset by an increase of $29.5 million in capital expenditures, largely due to the inclusion of SeaSpine's financial results within the 2023 financial results

Financing Activities

Cash flows from financing activities increased $41.6 million

Increase of $70.0 million associated with our secured revolving credit facility borrowings for working capital purposes, including to fund certain Merger-related expenses, during 2023

29


 

Increase of $2.0 million related to the conclusion of the FITBONE Contract Manufacturing and Supply Agreement with Wittenstein, resulting in a $2.0 million payment in the first quarter of 2022
Partially offset by a decrease of $26.9 million associated with the termination and repayment of SeaSpine's credit facility
Further offset by a decrease in net proceeds of $1.9 million from the issuance of common shares and a decrease in other financing activities of $1.6 million

Credit Facilities

On January 3, 2023, we borrowed $30.0 million for working capital purposes, including to fund certain Merger-related expenses under our secured revolving credit facility under the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., dated as of October 25, 2019 (as amended by the First Amendment thereto dated March 1, 2023, the "Prior Credit Agreement"), which credit facility had a maturity date of October 25, 2024. Following the completion of the Merger, we terminated SeaSpine's credit facility and all applicable commitments with Wells Fargo Bank, National Association and repaid all outstanding obligations in respect to principal, interest, and fees on January 5, 2023.

Additional borrowings were made under the Prior Credit Agreement subsequent to the closing of the Merger and as of September 30, 2023, we had $70.0 million borrowings outstanding under the Prior Credit Agreement. We borrowed an additional $9.0 million on October 10, 2023.

On November 6, 2023, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts outstanding and terminated all commitments under the Prior Credit Agreement. The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), we had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

Borrowings under the Financing Agreement were and may be used for, among other things, the repayment in full of the Prior Credit Agreement, working capital, and other general corporate purposes. Borrowings under the Credit Facilities bear interest at a floating rate, which will be, at our option, either the three-month SOFR rate (subject to a floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw Term Loan for the preceding month.

Certain of our existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of our obligations under the Financing Agreement. Our obligations and each of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all of our assets and the assets of each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.

The Financing Agreement contains customary affirmative and negative covenants, including limitations on our and our subsidiaries' ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Financing Agreement contains financial covenants requiring us to maintain a minimum level of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly basis). The Financing Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated and/or the lenders’ commitments terminated.

As of September 30, 2023, 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 of our credit facilities as of September 30, 2023.

30


 

Other

For information regarding contingencies, see Note 8 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.

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, with certain payments contingent upon achieving an FDA milestone. As of September 30, 2023, we have a remaining liability under this agreement of $1.0 million which is accrued within other current liabilities.

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 paid CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones. This agreement was terminated in the third quarter of 2023. No additional milestones were achieved and/or paid per this agreement.

Lattus Spine LLC ("Lattus") Contingent Consideration

In connection with the Merger, we assumed a contingent consideration obligation under a purchase agreement between SeaSpine and Lattus executed in December 2022. Under the terms of the agreement, we may be required to make installment payments at certain dates based on future net sales of certain products (the "Lateral Products"). The estimated fair value of the contingent consideration arrangement as of September 30, 2023, was $9.1 million; however, the actual amount ultimately paid could be higher or lower than the estimated fair value of the contingent consideration. As of September 30, 2023, we classified the remaining contingent consideration liability within other long-term liabilities. For additional discussion of this matter, see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Off-balance Sheet Arrangements

As of September 30, 2023, 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, 2022.

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 described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to our critical accounting estimates during the quarter covered by this report.

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.

31


 

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 financial measures 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.

Adjusted EBITDA

EBITDA is a non-GAAP financial measure defined as earnings before interest income (expense), income taxes, depreciation, and amortization. Adjusted EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business. Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes the impact of: share-based compensation, gains and losses related to changes in foreign exchange rates, SeaSpine Merger-related costs, strategic investments, acquisition-related fair value adjustments, legal judgments and settlements, charges related to initial compliance with regulations set forth by the European Union Medical Device Regulation, and certain other items.

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, 2022.

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 Interim Chief Executive Officer and our Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Interim Chief Executive Officer and the Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Based on this evaluation, our Interim Chief Executive Officer and our Interim Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2023.

On January 5, 2023, the Company completed a merger of equals with SeaSpine, whose financial statements reflect total assets and revenues constituting 52% and 35%, respectively, of the condensed consolidated financial statement amounts as of and for the nine months ended September 30, 2023. As permitted by the rules of the SEC, the Company will exclude SeaSpine from its annual assessment of the effectiveness on internal control over financial reporting for the year ending December 31, 2023, the year of acquisition. Management continues to monitor SeaSpine's internal controls over financial reporting.

32


 

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

33


 

PART II. OTHER INFORMATION

For information regarding legal proceedings, see Note 8 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 from the risk factors disclosed in "Part I, Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2022, or in "Part II, Item 1A. "Risk Factors" in our Form 10-Qs filed for the three months ended March 31, 2023, and six months ended June 30, 2023, except as follows.

 

We maintain a $150 million secured revolving credit facility secured by a pledge of substantially all of our property.

On November 6, 2023, we, as borrower, and certain of our subsidiaries, as guarantors, entered into a Financing Agreement (the “Financing Agreement”) with Blue Torch Finance LLC, as administrative agent and collateral agent (the “Agent”), and certain lenders party thereto. The Financing Agreement provides for a $100 million senior secured term loan (the “Initial Term Loan”), a $25 million senior secured delayed draw term loan facility (the “Delayed Draw Term Loan”), and a $25 million senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Initial Term Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each of which mature on November 6, 2027. In connection with entering into the Financing Agreement, we repaid in full amounts outstanding and terminated all commitments under our prior credit agreement (which had a maturity date of October 25, 2024). The Initial Term Loan was fully funded on November 6, 2023. As of the date of this filing (November 8, 2023), we had not made any borrowings under the Delayed Draw Term Loan or the Revolving Credit Facility.

Borrowings under the Financing Agreement were and may be used for, among other things, (i) the repayment in full of amount that we had outstanding under our prior credit agreement, (ii) working capital and (iii) other general corporate purposes. Borrowings under the Credit Facilities bear interest at a floating rate, which will be, at our option, either the three-month SOFR rate (subject to a floor of 3.00% and a credit spread adjustment of 0.26161%) (the “Adjusted Term SOFR Rate”) plus an applicable margin of 7.25%, or a base rate plus an applicable margin of 6.25%. A revolving unused line fee of 2.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s revolving credit commitments under the Revolving Credit Facility for the preceding month. A delayed draw unused fee equal to the Adjusted Term SOFR Rate plus a margin of 1.00% is payable monthly in arrears based on the average amount of the undrawn portion of each lender’s delayed draw term loan commitments in respect of the Delayed Draw Term Loan for the preceding month.

Certain of our existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of our obligations under the Financing Agreement. Our obligations and each of the Guarantors with respect to the Financing Agreement are secured by a pledge of substantially all of our assets and the assets of each of the Guarantors, including, without limitation, accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment, and equity interests in their respective subsidiaries.

The Financing Agreement contains customary affirmative and negative covenants, including limitations on our and our subsidiaries' ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Financing Agreement contains financial covenants requiring us to maintain a minimum level of liquidity at all times, a maximum consolidated leverage ratio (measured on a quarterly basis), and a minimum asset coverage ratio (measured on a monthly basis). The Financing Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated and/or the lenders’ commitments terminated.

We believe that we will be in compliance with the covenants in future fiscal quarters. However, there can be no assurance that we will be in such compliance, and if we are not, the failure to do so could result in an event of default, which could have a material adverse effect on our financial position in the event that we continue to have significant amounts drawn under the facility at such time.

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

We have not made any repurchases of our common stock during the third quarter of 2023.

34


 

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

During the last fiscal quarter, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated any contract, instruction, or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any "non-Rule 10b5-1 trading arrangement."

Item 6. Exhibits

 

 

 

10.1*

 

Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (October 2023 grant) under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan.

 

 

 

10.2*

 

Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (October 2023 Cathy Burzik grant) under the Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan.

 

 

 

10.3*

 

Change in Control and Severance Agreement, dated October 2, 2023, between Orthofix Medical Inc. and Geoffrey Gillespie.

 

 

 

10.4*

 

Change in Control and Severance Agreement, dated June 21, 2023, between Orthofix Medical Inc. and Puja Leekha.

 

 

 

  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.

# Furnished herewith.

 

35


 

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: November 8, 2023

By:

 

/s/ CATHERINE BURZIK

Name:

 

Catherine Burzik

Title:

 

Interim Chief Executive Officer, Director

 

 

 

 

Date: November 8, 2023

By:

 

/s/ GEOFFREY GILLESPIE

Name:

 

Geoffrey Gillespie

Title:

 

Interim Chief Financial Officer and VP, Corporate Controller

 

36