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, 20172023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-19961
ORTHOFIX INTERNATIONAL N.V.MEDICAL INC.
(Exact name of registrant as specified in its charter)
| 98-1340767 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
|
| |
(Address of principal executive offices) | (Zip Code) |
599-9-4658525(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 October 27, 2017, 18,231,334November 6, 2023, 36,756,607 shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Table of Contents
Title of each class | Trading Symbol(s) |
| ||
| Nasdaq Global Select Market |
Table of Contents
Page | ||||
PART I | ||||
|
| |||
Item 1. | 4 | |||
Condensed Consolidated Balance Sheets as of September 30, | 4 | |||
5 | ||||
6 | ||||
| ||||
Notes to the Unaudited Condensed Consolidated Financial Statements |
| |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ||
Item 3. |
| |||
Item 4. |
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PART II | ||||
Item 1. |
| |||
Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
Forward-Looking Statements
This reportQuarterly 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 terminologyterms 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 comparable terminology. These forward-lookingsimilar expressions. Forward-looking statements include, but are not limited to, statements about:
Forward-looking statements are not guarantees of our 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 difficultnot limited to, predict , including the risks described those set forth in Part I, Item 1A under the heading Risk Factors inof our Annual Report on Form 10-K for the year ended December 31, 20162022 ("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 “2016 Form 10-K”"SEC"). Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. subsequent to the date we filed the 2022 10-K with the SEC. You should not place undue reliance on any of these 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. WeExcept as required by law, we undertake no obligation to further update, and expressly disclaim any such statement,duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the risk factors described in the 2016 Form 10-K, to reflectdate hereof, new information, the occurrence of future events or circumstances or otherwise.
Trademarks
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. FINANCIALFINANCIAL INFORMATION
ORTHOFIX INTERNATIONAL N.V.MEDICAL INC.
Condensed Consolidated Balance Sheets
(U.S. Dollars, in thousands, except share data) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||
(U.S. Dollars, in thousands, except par value data) |
| September 30, |
|
| December 31, |
| ||||||||||
|
| (Unaudited) |
|
|
|
|
|
| (Unaudited) |
|
|
|
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 53,925 |
|
| $ | 39,572 |
|
| $ | 33,663 |
|
| $ | 50,700 |
|
Restricted cash |
|
| — |
|
|
| 14,369 |
| ||||||||
Accounts receivable, net of allowances of $8,925 and $8,396, respectively |
|
| 61,187 |
|
|
| 57,848 |
| ||||||||
Accounts receivable, net of allowances of $7,090 and $6,419, respectively |
|
| 114,118 |
|
|
| 82,857 |
| ||||||||
Inventories |
|
| 80,124 |
|
|
| 63,346 |
|
|
| 221,745 |
|
|
| 100,150 |
|
Prepaid expenses and other current assets |
|
| 18,172 |
|
|
| 19,238 |
|
|
| 24,170 |
|
|
| 22,283 |
|
Total current assets |
|
| 213,408 |
|
|
| 194,373 |
|
|
| 393,696 |
|
|
| 255,990 |
|
Property, plant and equipment, net |
|
| 46,678 |
|
|
| 48,916 |
| ||||||||
Patents and other intangible assets, net |
|
| 9,915 |
|
|
| 7,461 |
| ||||||||
Property, plant, and equipment, net |
|
| 152,689 |
|
|
| 58,229 |
| ||||||||
Intangible assets, net |
|
| 121,021 |
|
|
| 47,388 |
| ||||||||
Goodwill |
|
| 53,565 |
|
|
| 53,565 |
|
|
| 194,767 |
|
|
| 71,317 |
|
Deferred income taxes |
|
| 47,052 |
|
|
| 47,325 |
| ||||||||
Other long-term assets |
|
| 15,683 |
|
|
| 20,463 |
|
|
| 43,479 |
|
|
| 25,705 |
|
Total assets |
| $ | 386,301 |
|
| $ | 372,103 |
|
| $ | 905,652 |
|
| $ | 458,629 |
|
|
|
|
|
|
|
| ||||||||||
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accounts payable |
| $ | 13,352 |
|
| $ | 14,353 |
|
| $ | 53,261 |
|
| $ | 27,598 |
|
Current portion of finance lease liability |
|
| 693 |
|
|
| 652 |
| ||||||||
Other current liabilities |
|
| 60,718 |
|
|
| 69,088 |
|
|
| 98,576 |
|
|
| 55,374 |
|
Total current liabilities |
|
| 74,070 |
|
|
| 83,441 |
|
|
| 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 |
|
| 26,920 |
|
|
| 25,185 |
|
|
| 48,924 |
|
|
| 18,906 |
|
Total liabilities |
|
| 100,990 |
|
|
| 108,626 |
|
|
| 290,169 |
|
|
| 121,769 |
|
Contingencies (Note 6) |
|
|
|
|
|
|
|
| ||||||||
Contingencies (Note 8) |
|
|
|
|
|
| ||||||||||
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Common shares $0.10 par value; 50,000,000 shares authorized; 18,212,916 and 17,828,155 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively |
|
| 1,821 |
|
|
| 1,783 |
| ||||||||
Common shares $0.10 par value; 100,000 shares authorized; |
|
| 3,675 |
|
|
| 2,016 |
| ||||||||
Additional paid-in capital |
|
| 215,778 |
|
|
| 204,095 |
|
|
| 741,638 |
|
|
| 334,969 |
|
Retained earnings |
|
| 68,834 |
|
|
| 64,179 |
| ||||||||
Retained earnings (accumulated deficit) |
|
| (127,970 | ) |
|
| 1,251 |
| ||||||||
Accumulated other comprehensive loss |
|
| (1,122 | ) |
|
| (6,580 | ) |
|
| (1,860 | ) |
|
| (1,376 | ) |
Total shareholders’ equity |
|
| 285,311 |
|
|
| 263,477 |
|
|
| 615,483 |
|
|
| 336,860 |
|
Total liabilities and shareholders’ equity |
| $ | 386,301 |
|
| $ | 372,103 |
|
| $ | 905,652 |
|
| $ | 458,629 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX INTERNATIONAL N.V.MEDICAL INC.
Condensed Consolidated Statements of Operations and Comprehensive IncomeLoss
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net sales |
| $ | 105,247 |
|
| $ | 98,497 |
|
| $ | 316,927 |
|
| $ | 301,251 |
|
Cost of sales |
|
| 23,717 |
|
|
| 19,880 |
|
|
| 69,475 |
|
|
| 64,533 |
|
Gross profit |
|
| 81,530 |
|
|
| 78,617 |
|
|
| 247,452 |
|
|
| 236,718 |
|
Sales and marketing |
|
| 47,493 |
|
|
| 41,717 |
|
|
| 146,496 |
|
|
| 132,582 |
|
General and administrative |
|
| 18,068 |
|
|
| 19,272 |
|
|
| 56,759 |
|
|
| 54,822 |
|
Research and development |
|
| 6,935 |
|
|
| 6,858 |
|
|
| 21,246 |
|
|
| 21,294 |
|
Charges related to U.S. Government resolutions |
|
| — |
|
|
| 1,499 |
|
|
| — |
|
|
| 14,369 |
|
Operating income |
|
| 9,034 |
|
|
| 9,271 |
|
|
| 22,951 |
|
|
| 13,651 |
|
Interest income (expense), net |
|
| (15 | ) |
|
| 471 |
|
|
| 106 |
|
|
| 320 |
|
Other income (expense), net |
|
| 479 |
|
|
| (634 | ) |
|
| (3,284 | ) |
|
| 1,346 |
|
Income before income taxes |
|
| 9,498 |
|
|
| 9,108 |
|
|
| 19,773 |
|
|
| 15,317 |
|
Income tax benefit (expense) |
|
| (6,150 | ) |
|
| 1,276 |
|
|
| (13,998 | ) |
|
| (6,703 | ) |
Net income from continuing operations |
|
| 3,348 |
|
|
| 10,384 |
|
|
| 5,775 |
|
|
| 8,614 |
|
Discontinued operations (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
| 65 |
|
|
| (1,018 | ) |
|
| (1,762 | ) |
|
| (3,580 | ) |
Income tax benefit |
|
| 43 |
|
|
| 530 |
|
|
| 642 |
|
|
| 1,258 |
|
Net income (loss) from discontinued operations |
|
| 108 |
|
|
| (488 | ) |
|
| (1,120 | ) |
|
| (2,322 | ) |
Net income |
| $ | 3,456 |
|
| $ | 9,896 |
|
| $ | 4,655 |
|
| $ | 6,292 |
|
Net income (loss) per common share—basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
| $ | 0.18 |
|
| $ | 0.57 |
|
| $ | 0.32 |
|
| $ | 0.47 |
|
Net income (loss) from discontinued operations |
|
| 0.01 |
|
|
| (0.02 | ) |
|
| (0.06 | ) |
|
| (0.13 | ) |
Net income per common share—basic |
| $ | 0.19 |
|
| $ | 0.55 |
|
| $ | 0.26 |
|
| $ | 0.34 |
|
Net income (loss) per common share—diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
| $ | 0.18 |
|
| $ | 0.56 |
|
| $ | 0.31 |
|
| $ | 0.46 |
|
Net income (loss) from discontinued operations |
|
| 0.01 |
|
|
| (0.02 | ) |
|
| (0.06 | ) |
|
| (0.12 | ) |
Net income per common share—diluted |
| $ | 0.19 |
|
| $ | 0.54 |
|
| $ | 0.25 |
|
| $ | 0.34 |
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 18,180,845 |
|
|
| 18,091,650 |
|
|
| 18,071,093 |
|
|
| 18,238,533 |
|
Diluted |
|
| 18,572,791 |
|
|
| 18,382,118 |
|
|
| 18,394,542 |
|
|
| 18,569,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative instrument |
|
| — |
|
|
| (3 | ) |
|
| — |
|
|
| 124 |
|
Unrealized gain (loss) on debt securities |
|
| — |
|
|
| 4,703 |
|
|
| (3,220 | ) |
|
| 843 |
|
Reclassification adjustment for loss on debt securities in net income |
|
| — |
|
|
| — |
|
|
| 5,585 |
|
|
| — |
|
Currency translation adjustment |
|
| 1,111 |
|
|
| 820 |
|
|
| 3,993 |
|
|
| 1,471 |
|
Other comprehensive income before tax |
|
| 1,111 |
|
|
| 5,520 |
|
|
| 6,358 |
|
|
| 2,438 |
|
Income tax related to items of other comprehensive loss |
|
| — |
|
|
| (1,694 | ) |
|
| (900 | ) |
|
| (354 | ) |
Other comprehensive income, net of tax |
|
| 1,111 |
|
|
| 3,826 |
|
|
| 5,458 |
|
|
| 2,084 |
|
Comprehensive income |
| $ | 4,567 |
|
| $ | 13,722 |
|
| $ | 10,113 |
|
| $ | 8,376 |
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(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
ORTHOFIX INTERNATIONAL N.V.MEDICAL INC.
|
| Nine Months Ended September 30, |
| |||||
(Unaudited, U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
| $ | 4,655 |
|
| $ | 6,292 |
|
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 15,421 |
|
|
| 15,483 |
|
Amortization of debt costs and other assets |
|
| 1,072 |
|
|
| 1,259 |
|
Provision for doubtful accounts |
|
| 1,555 |
|
|
| 1,059 |
|
Deferred income taxes |
|
| 153 |
|
|
| 1,246 |
|
Share-based compensation |
|
| 9,124 |
|
|
| 12,154 |
|
Other-than-temporary impairment on debt securities |
|
| 5,585 |
|
|
| — |
|
Other |
|
| 823 |
|
|
| 663 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Restricted cash |
|
| 14,369 |
|
|
| — |
|
Accounts receivable |
|
| (4,302 | ) |
|
| 5,887 |
|
Inventories |
|
| (14,714 | ) |
|
| (6,638 | ) |
Prepaid expenses and other current assets |
|
| 1,377 |
|
|
| (568 | ) |
Accounts payable |
|
| (2,233 | ) |
|
| (2,291 | ) |
Other current liabilities |
|
| (11,639 | ) |
|
| 5,502 |
|
Other long-term assets and liabilities |
|
| 2,248 |
|
|
| (1,652 | ) |
Net cash from operating activities |
|
| 23,494 |
|
|
| 38,396 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment |
|
| (11,441 | ) |
|
| (12,934 | ) |
Capital expenditures for intangible assets |
|
| (1,849 | ) |
|
| (1,327 | ) |
Other investing activities |
|
| 474 |
|
|
| (3,613 | ) |
Net cash from investing activities |
|
| (12,816 | ) |
|
| (17,874 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
| 6,277 |
|
|
| 19,688 |
|
Payments related to withholdings for share-based compensation |
|
| (3,679 | ) |
|
| (2,354 | ) |
Repurchase and retirement of common shares |
|
| — |
|
|
| (54,996 | ) |
Net cash from financing activities |
|
| 2,598 |
|
|
| (37,662 | ) |
Effect of exchange rate changes on cash |
|
| 1,077 |
|
|
| 301 |
|
Net change in cash and cash equivalents |
|
| 14,353 |
|
|
| (16,839 | ) |
Cash and cash equivalents at the beginning of the period |
|
| 39,572 |
|
|
| 63,663 |
|
Cash and cash equivalents at the end of the period |
| $ | 53,925 |
|
| $ | 46,824 |
|
(Unaudited, U.S. Dollars, in thousands) |
| Number of |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
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 |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
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 INTERNATIONAL N.V.MEDICAL INC.
Condensed Consolidated Statements of Cash Flows
|
| Nine Months Ended |
| |||||
(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 International N.V.Medical Inc. (“Orthofix”) and its subsidiaries (the “Company”"Company"), following its merger with SeaSpine Holdings Corporation ("SeaSpine") that was completed in January 2023, is a diversified,leading global medical devicespine and orthopedics company focused on improving patients’ lives by providing superior reconstructivewith a comprehensive portfolio of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and regenerative orthopedic and spine solutions to physicians. 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 four strategic business units (“SBUs”) that areprimary 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 its reporting segments: BioStim, Biologics, Extremity Fixation,includes facilities and Spine Fixation.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, 2016. 2022. Operating results for the three and nine months ended September 30, 20172023, are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2017.2023.
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,recognition; contractual allowances; allowances doubtful accounts, inventories, goodwill andfor expected credit losses; inventories; valuation of intangible asset impairment,assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities, income taxes,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.
1.2. 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 | |||
|
| January 1, |
|
|
|
|
| |||
|
|
|
| |||
|
|
|
| |||
|
|
| The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. | |||
|
|
| The Company is |
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 |
|
|
|
2. Inventories
Inventories wereThe 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 follows:
(U.S. Dollars, in thousands) |
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Raw materials |
| $ | 5,269 |
|
| $ | 7,978 |
|
Work-in-process |
|
| 12,322 |
|
|
| 9,505 |
|
Finished products |
|
| 58,964 |
|
|
| 42,434 |
|
Deferred cost of sales |
|
| 3,569 |
|
|
| 3,429 |
|
|
| $ | 80,124 |
|
| $ | 63,346 |
|
3. Otherof 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 December 2016,the first quarter of 2023, the Company approved and initiated a plannedcertain restructuring which primarily affects the Extremity Fixation SBU (the “Extremity Fixation restructuring plan”),activities to streamline costs improveand to better align talent with operational performance, and wind down a non-coreneeds 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 Extremity Fixation restructuring plan consists primarily of severance charges and the write-down of certain assets. The Company expects to incur total pre-tax expense of approximately $3.1$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 |
|
| Charges Incurred |
|
| Payments Made |
|
| Balance as of |
| ||||
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, |
|
| December 31, |
| ||
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, |
|
| December 31, |
| ||
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 |
|
| Nine Months Ended |
| ||
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 connection with this restructuring activity and has incurred cumulative costs to dateprincipal amount of $2.4 million.borrowings outstanding under the secured revolving credit facility. The Company had an accrualtable below provides a summary of $1.5 million as of December 31, 2016 in other current liabilities related to the planned restructuring. Inborrowing activities during the nine months ended September 30, 2017, the Company incurred costs of2023:
(Unaudited, U.S. Dollars, in thousands) |
| Balance as of |
|
| Long-term Borrowings Assumed Under the SeaSpine Credit Facility |
|
| Additional Borrowings |
|
| Pre-payment Penalty Incurred to Interest Expense, Net |
|
| Repayments Made |
|
| Balance as of |
| ||||||
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 |
|
approximately $0.5 million and made additional payments of $1.6 million, resulting in an ending accrual of $0.4 million as of September 30, 2017.
In September 2017, the Company approved and executed an additional restructuring plan, which primarily affects the entity’s corporate shared services in the U.S. (the “U.S. restructuring plan”), to streamline costs and to improve operational performance. The U.S. restructuring plan consists primarily of severance charges. The Company estimates total pre-tax expense of approximately $1.8 million in connection with this restructuring activity, all of which was incurred during the third quarter of 2017, and recorded within operating expenses. No payments were made as of September 30, 2017; therefore, $1.8 million is accrued within other current liabilities at September 30, 2017.
4. Long-term debt
As of September 30, 2017,2023, the Company has not made any borrowings under the five year $125 million secured revolving credit facility it entered into in August 2015 with JPMorgan Chase Bank, N.A., as Administrative Agent, and certain lenders. The Company has also not made any borrowings on its €5.8 million ($6.9 million) available line of credit in Italy at September 30, 2017. The Company iswas 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, 2017.2023, 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.
5.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, |
|
| December 31, |
| ||||||||||||||
(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
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||
(U.S. Dollars, in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collective trust funds |
| $ | — |
|
| $ | 1,565 |
|
| $ | — |
|
| $ | 1,565 |
|
| $ | 1,584 |
|
Treasury securities |
|
| 522 |
|
|
| — |
|
|
| — |
|
|
| 522 |
|
|
| 467 |
|
Certificates of deposit |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 468 |
|
Debt security |
|
| — |
|
|
| — |
|
|
| 9,000 |
|
|
| 9,000 |
|
|
| 12,220 |
|
Total |
| $ | 522 |
|
| $ | 1,565 |
|
| $ | 9,000 |
|
| $ | 11,087 |
|
| $ | 14,739 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan |
| $ | — |
|
| $ | (1,307 | ) |
| $ | — |
|
| $ | (1,307 | ) |
| $ | (1,452 | ) |
Total |
| $ | — |
|
| $ | (1,307 | ) |
| $ | — |
|
| $ | (1,307 | ) |
| $ | (1,452 | ) |
Neo Medical Convertible Loan Agreements and Equity Investment
TheIn October 2020, the Company holds a debt securitypurchased preferred equity securities of eNeura, Inc.,Neo Medical SA, a privately held medical technologySwiss-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 developing devicesrecorded in other long-term assets as an available for the treatment of migraines. Thesale debt security is further described in Note 6 to the financial statements contained within ourForm 10-K for the year ended December 31, 2016.as of September 30, 2023. The fair value of the debt security, which is recorded within other long-term assets,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,assumptions. Therefore, the Company has categorized this assetinvestment 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, 2017,2023, the Company reassessed its estimatehas 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 basedusing 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 |
|
| 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 current financial information and other assumptions, resulting in aan individual basis. The fair value of $9.0 million, whichthese assets is consistentbased 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 Company’s estimated fair value from the first and second quartersacquisition of 2017. This compares to an amortized cost basisSpinal Kinetics in the debt security of $18.4 million.
2018. The Company evaluated the decline in fair value of the debt security, whichremaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was recorded during the first quarterconcluded to be zero as of 2017, to determine if the impairment was other-than-temporary. Based on this evaluation,September 30, 2023, as the Company recorded an other-than-temporary impairment charge of $5.6 million before income taxes, which is recorded in other expense. In additiondid not achieve the milestone prior to April 30, 2023, the decrease in fair value, the other-than-temporary impairment included a reclassificationend of the amount that was previously considered temporary and included in accumulated other comprehensive loss.measurement period for achieving such milestone.
The following table provides a reconciliation of the beginning and ending balances for debt securitiesthe Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
| ||
Balance at January 1 |
| $ | 12,220 |
|
| $ | 12,658 |
|
Accrued interest income |
|
| — |
|
|
| 969 |
|
Gains or losses recorded for the period |
|
|
|
|
|
|
|
|
Recognized in net income |
|
| (5,585 | ) |
|
| — |
|
Recognized in other comprehensive income |
|
| 2,365 |
|
|
| 843 |
|
Balance at September 30 |
| $ | 9,000 |
|
| $ | 14,470 |
|
(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 |
|
| $ | — |
|
6.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 |
|
| 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 with respectrelated to these additional matters are individually and collectively immaterial as to a possible loss and range of loss.
Italian Medical Device Payback (“IMDP”)
Discontinued Operations – Matters RelatedIn 2015, the Italian Parliament introduced rules for entities that supply goods and services to Bregthe 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 Possible Indemnification Obligationsprovinces 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.
On May 24, 2012,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 sold Breg torecorded an affiliateexpense of Water Street Healthcare Partners II, L.P. (“Water Street”). Under$0.2 million and $0.8 million for the termsthree and nine months ended September 30, 2023, respectively, and an expense of $0.3 million and $0.9 million for the agreement, the Company indemnified Water Streetthree and Breg with respect to certain specified matters.
At the time of its divestiture by the Company, Breg was engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases were filed, mostly in California state court. Innine months ended September 2014, the Company entered into a master settlement agreement resolving then pending pre-close cold therapy claims. Currently pending is a post-close cold therapy claim in California state court.30, 2022, respectively. As of September 30, 2017,2023, the Company has an accrual of $1.8accrued $7.0 million recordedrelated to the IMDP, which it has classified within other currentlong-term liabilities; however, the actual liability could be higher or lower than the amount accrued.
Charges incurred as a result of this indemnificationaccrued once all legal proceedings are reflected as discontinued operations in the condensed consolidated statements of operations.
Expiration of Corporate Integrity Agreement with HHS-OIG
In May 2012, the Company entered into a five-year corporate integrity agreement (the “CIA”) with the Office of Inspector Generalresolved and upon further clarification of the Department of Health and Human Services (“HHS-OIG”), in connection with a U.S. government settlement. In October 2017,IMDP by the Company received a letter from HHS-OIG confirming that the Company has satisfied its CIA requirements and that the CIA has expired.Italian authorities for more recent fiscal years.
7.9. Accumulated other comprehensive loss
The components of and changes in accumulated other comprehensive loss were as follows:
(U.S. Dollars, in thousands) |
| Currency Translation Adjustments |
|
| Debt Security |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at December 31, 2016 |
| $ | (5,115 | ) |
| $ | (1,465 | ) |
| $ | (6,580 | ) |
Other comprehensive income (loss) |
|
| 3,993 |
|
|
| (3,220 | ) |
|
| 773 |
|
Income taxes |
|
| — |
|
|
| 1,223 |
|
|
| 1,223 |
|
Reclassification adjustments to: |
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
| — |
|
|
| 5,585 |
|
|
| 5,585 |
|
Income taxes |
|
| — |
|
|
| (2,123 | ) |
|
| (2,123 | ) |
Balance at September 30, 2017 |
| $ | (1,122 | ) |
| $ | — |
|
| $ | (1,122 | ) |
(Unaudited, U.S. Dollars, in thousands) |
| Currency |
|
| Neo Medical Convertible Loans |
|
| Other Investments |
|
| Accumulated Other |
| ||||
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 | ) |
8.10. 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 which includesby 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 bothvarious 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, 20172023 and 2016.2022:
|
| 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 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Product sales |
| $ | 90,645 |
|
| $ | 84,997 |
|
| $ | 272,954 |
|
| $ | 261,490 |
|
Marketing service fees |
|
| 14,602 |
|
|
| 13,500 |
|
|
| 43,973 |
|
|
| 39,761 |
|
Net sales |
| $ | 105,247 |
|
| $ | 98,497 |
|
| $ | 316,927 |
|
| $ | 301,251 |
|
Product sales primarily consist of stimulation devices and fixation products. Marketing service fees are received from the Musculoskeletal Transplant Foundation (“MTF”) based on total sales of biologics tissues.
9.11. Business segment information
The table below present net sales, which includes product salesCompany has two reporting segments: Global Spine and marketing service fees, by reporting segment:
|
| Three Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
BioStim |
| $ | 44,427 |
|
| $ | 42,956 |
|
|
| 3.4 | % |
Biologics |
|
| 15,218 |
|
|
| 14,335 |
|
|
| 6.2 | % |
Extremity Fixation |
|
| 25,447 |
|
|
| 24,314 |
|
|
| 4.7 | % |
Spine Fixation |
|
| 20,155 |
|
|
| 16,892 |
|
|
| 19.3 | % |
Net sales |
| $ | 105,247 |
|
| $ | 98,497 |
|
|
| 6.9 | % |
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
BioStim |
| $ | 136,140 |
|
| $ | 128,758 |
|
|
| 5.7 | % |
Biologics |
|
| 45,866 |
|
|
| 42,685 |
|
|
| 7.5 | % |
Extremity Fixation |
|
| 74,139 |
|
|
| 75,840 |
|
|
| -2.2 | % |
Spine Fixation |
|
| 60,782 |
|
|
| 53,968 |
|
|
| 12.6 | % |
Net sales |
| $ | 316,927 |
|
| $ | 301,251 |
|
|
| 5.2 | % |
Global Orthopedics. The primary metric used in managing the Company is adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA,” a non-GAAP net margin, which is an internal metric thatfinancial measure). Adjusted EBITDA represents earnings before interest income (expense), income taxes, depreciation, and amortization and excludes the Company definesimpact 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 gross profit less saleshuman resources, finance, legal, and marketing expense. information technology functions. The table below presents non-GAAP net marginadjusted 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
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
BioStim |
| $ | 18,285 |
|
| $ | 19,996 |
|
| $ | 54,887 |
|
| $ | 54,980 |
|
Biologics |
|
| 6,010 |
|
|
| 6,821 |
|
|
| 18,651 |
|
|
| 19,642 |
|
Extremity Fixation |
|
| 7,723 |
|
|
| 8,834 |
|
|
| 20,901 |
|
|
| 24,170 |
|
Spine Fixation |
|
| 2,122 |
|
|
| 1,388 |
|
|
| 6,825 |
|
|
| 5,925 |
|
Corporate |
|
| (103 | ) |
|
| (139 | ) |
|
| (308 | ) |
|
| (581 | ) |
Non-GAAP net margin |
| $ | 34,037 |
|
| $ | 36,900 |
|
| $ | 100,956 |
|
| $ | 104,136 |
|
General and administrative |
|
| 18,068 |
|
|
| 19,272 |
|
|
| 56,759 |
|
|
| 54,822 |
|
Research and development |
|
| 6,935 |
|
|
| 6,858 |
|
|
| 21,246 |
|
|
| 21,294 |
|
Charges related to U.S. Government resolutions |
|
| — |
|
|
| 1,499 |
|
|
| — |
|
|
| 14,369 |
|
Operating income |
| $ | 9,034 |
|
| $ | 9,271 |
|
| $ | 22,951 |
|
| $ | 13,651 |
|
Interest income (expense), net |
|
| (15 | ) |
|
| 471 |
|
|
| 106 |
|
|
| 320 |
|
Other income (expense), net |
|
| 479 |
|
|
| (634 | ) |
|
| (3,284 | ) |
|
| 1,346 |
|
Income before income taxes |
| $ | 9,498 |
|
| $ | 9,108 |
|
| $ | 19,773 |
|
| $ | 15,317 |
|
The table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(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 |
|
| Nine Months Ended |
| ||||||||||
(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 | ) |
10.18
13. Share-based compensation
The following tables present the detailComponents of share-based compensation by line itemexpense are as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
(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 |
|
| Nine Months Ended |
| ||||||||||
(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 condensed consolidated statementsconversion of operationssuch 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 wellpurchase consideration. The remaining estimated fair value is recorded as by award type:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Cost of sales |
| $ | 151 |
|
| $ | 175 |
|
| $ | 437 |
|
| $ | 401 |
|
Sales and marketing |
|
| 394 |
|
|
| 331 |
|
|
| 1,073 |
|
|
| 887 |
|
General and administrative |
|
| 2,828 |
|
|
| 7,148 |
|
|
| 6,935 |
|
|
| 10,082 |
|
Research and development |
|
| 259 |
|
|
| 488 |
|
|
| 679 |
|
|
| 784 |
|
|
| $ | 3,632 |
|
| $ | 8,142 |
|
| $ | 9,124 |
|
| $ | 12,154 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Stock options |
| $ | 684 |
|
| $ | 425 |
|
| $ | 1,802 |
|
| $ | 1,367 |
|
Time-based restricted stock awards |
|
| 1,552 |
|
|
| 1,840 |
|
|
| 4,083 |
|
|
| 4,278 |
|
Performance-based restricted stock awards |
|
| 115 |
|
|
| 5,089 |
|
|
| 340 |
|
|
| 5,089 |
|
Performance-based and market-based restricted stock units |
|
| 997 |
|
|
| 472 |
|
|
| 1,935 |
|
|
| 472 |
|
Stock purchase plan |
|
| 284 |
|
|
| 316 |
|
|
| 964 |
|
|
| 948 |
|
|
| $ | 3,632 |
|
| $ | 8,142 |
|
| $ | 9,124 |
|
| $ | 12,154 |
|
The decreases in share-based compensation expense over the remainder of $4.5 million and $3.0 million, respectively, for the three and nine months ended September 30, 2017, as compared toservice period associated with the prior period were primarily attributable to certain performance-based awards that were first determined to be probable to vest during the third quarter of 2016, resulting in additional expense of $5.1 million during the third quarter of 2016.awards.
During the three months ended September 30, 20172023, and 2016,2022, the Company issued 93,48616,411 and 181,2357,057 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards.awards and units. During the nine months ended September 30, 20172023, and 2016,2022, the Company issued 384,7610.5 million and 710,0260.2 million shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards.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.
11.14. Income taxes
IncomeGenerally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result,items, with any changes affecting the Company’s interim effective tax rates may vary significantly from the statutory tax rate and theestimated 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, 20172023, and 2016,2022, the effective tax rate on continuing operations was 64.8%(1.7%) and (14.0%(14.3%), respectively. For the nine months ended September 30, 20172023, and 2016,2022, the effective tax rate on continuing operations was 70.8%(2.0%) and 43.8%.The(18.4%), respectively. The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2017,2023, were the method for estimating income taxes at interim periods, the mix of earnings amongcertain losses not benefitted and tax jurisdictions, increases in unrecognized tax benefits, and current period losses inamortization on certain jurisdictions for which the Company does not currently receive a tax benefit.acquired intangibles.
The Internal Revenue Service is currently conducting examinations of the Company’s federal income tax returns for 2012 and 2013. The Company cannot reasonably determine if these examinations will have a material impact on its financial statements and cannot predict the timing regarding resolution of these tax examinations.19
12.15. Earnings per share (“EPS”)
For the three and nine months ended September 30, 2017 and 2016,2023, no adjustments were made to net income (loss) 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 |
|
| Nine Months Ended |
| ||||||||||
(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 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Weighted average common shares-basic |
|
| 18,180,845 |
|
|
| 18,091,650 |
|
|
| 18,071,093 |
|
|
| 18,238,533 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised stock options and stock purchase plan |
|
| 249,667 |
|
|
| 194,922 |
|
|
| 164,716 |
|
|
| 181,126 |
|
Unvested time-based restricted stock awards and units |
|
| 94,470 |
|
|
| 95,546 |
|
|
| 117,320 |
|
|
| 150,202 |
|
Unvested market-based restricted stock units |
|
| 47,809 |
|
|
| — |
|
|
| 41,413 |
|
|
| — |
|
Weighted average common shares-diluted |
|
| 18,572,791 |
|
|
| 18,382,118 |
|
|
| 18,394,542 |
|
|
| 18,569,861 |
|
There were 503,7576.3 million and 571,6012.4 million weighted average outstanding stock options and restricted stock and performance-based or market-based equity awardsunits not included in the diluted earnings per shareEPS computation for the three months ended September 30, 20172023, and 2016,2022, respectively, and 534,2886.8 million and 468,2962.2 million weighted average outstanding stock options and restricted stock and performance-based or market-based equity awardsunits not included in the diluted earnings per shareEPS computation for the nine months ended September 30, 20172023, and 2016,2022, respectively, because inclusion of these awards was anti-dilutiveanti-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 performance-based and market-based awards, all necessary conditions had not been satisfied byimpairment at the endreporting 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 period.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 |
|
| Goodwill Acquired in the Merger with SeaSpine |
|
| Impairment Recognized within Acquisition-related Amortization and Remeasurement |
|
| Balance as of |
| ||||
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 International N.V.Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the 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
We areFollowing our merger (the “Merger”) with SeaSpine Holdings Corporation ("SeaSpine"), which was completed in January 2023, the newly merged Orthofix-SeaSpine organization is a diversified,leading global medical devicespine and orthopedics company focused on improving patients’ lives by providing superior reconstructivewith a comprehensive portfolio of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and regenerative orthopedic and spine solutions to physicians worldwide.a leading surgical navigation system. Headquartered in Lewisville, Texas, we have four strategic business units (“SBUs”) that are also our reporting segments: BioStim, Biologics, Extremity Fixationspine and Spine Fixation. Ourorthopedic products are widely distributed byin 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 highlights and achievementsfinancial metrics in the third quarter of 20172023 and recent achievements include the following:
Net sales were $105.2of $184.0 million, an increase of 6.9%61% on a reported and 60% on a constant currency basis over prior year, largely as a result of the Merger
Increase in net sales for all four of our strategic business units, with net sales for Spine Fixation increasing by 19.3%
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 |
|
| Nine Months Ended |
| ||||||||||
(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 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 (%) |
|
| 2016 (%) |
|
| 2017 (%) |
|
| 2016 (%) |
| ||||
Net sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of sales |
|
| 22.5 |
|
|
| 20.2 |
|
|
| 21.9 |
|
|
| 21.4 |
|
Gross profit |
|
| 77.5 |
|
|
| 79.8 |
|
|
| 78.1 |
|
|
| 78.6 |
|
Sales and marketing |
|
| 45.1 |
|
|
| 42.4 |
|
|
| 46.3 |
|
|
| 44.0 |
|
General and administrative |
|
| 17.2 |
|
|
| 19.6 |
|
|
| 17.9 |
|
|
| 18.2 |
|
Research and development |
|
| 6.6 |
|
|
| 7.0 |
|
|
| 6.7 |
|
|
| 7.1 |
|
Charges related to U.S. Government resolutions |
|
| — |
|
|
| 1.4 |
|
|
| — |
|
|
| 4.8 |
|
Operating income |
|
| 8.6 |
|
|
| 9.4 |
|
|
| 7.2 |
|
|
| 4.5 |
|
Net income from continuing operations |
|
| 3.2 |
|
|
| 10.5 |
|
|
| 1.8 |
|
|
| 2.9 |
|
Net Sales by Strategic Business UnitProduct Category and Reporting Segment
The following tables provide net sales by SBU:major product category by reporting segment:
|
| Three Months Ended |
|
| 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 |
|
| 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:
|
| Three Months Ended September 30, |
|
| Percentage Change |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Reported |
|
| Constant Currency |
| ||||
BioStim |
| $ | 44,427 |
|
| $ | 42,956 |
|
|
| 3.4 | % |
|
| 3.4 | % |
Biologics |
|
| 15,218 |
|
|
| 14,335 |
|
|
| 6.2 | % |
|
| 6.2 | % |
Extremity Fixation |
|
| 25,447 |
|
|
| 24,314 |
|
|
| 4.7 | % |
|
| 1.4 | % |
Spine Fixation |
|
| 20,155 |
|
|
| 16,892 |
|
|
| 19.3 | % |
|
| 19.1 | % |
Net sales |
| $ | 105,247 |
|
| $ | 98,497 |
|
|
| 6.9 | % |
|
| 6.0 | % |
|
| Nine Months Ended September 30, |
|
| Percentage Change |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Reported |
|
| Constant Currency |
| ||||
BioStim |
| $ | 136,140 |
|
| $ | 128,758 |
|
|
| 5.7 | % |
|
| 5.7 | % |
Biologics |
|
| 45,866 |
|
|
| 42,685 |
|
|
| 7.5 | % |
|
| 7.5 | % |
Extremity Fixation |
|
| 74,139 |
|
|
| 75,840 |
|
|
| -2.2 | % |
|
| -2.0 | % |
Spine Fixation |
|
| 60,782 |
|
|
| 53,968 |
|
|
| 12.6 | % |
|
| 12.5 | % |
Net sales |
| $ | 316,927 |
|
| $ | 301,251 |
|
|
| 5.2 | % |
|
| 5.2 | % |
BioStim
BioStimBone Growth Therapies, which manufactures, distributes, sells, and provides support services offor market leading devices that enhance bone fusion. BioStimused 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 representativeschannel to sell its devices and provide associated support services to hospitals, doctors, other healthcare providers, and patients.
Three months ended September 30, 2017 compared to 2016
Net sales increased $1.5 million, or 3.4%
Increase as we continue to leveragepatients in the engagementU.S.
Partially offset by the impact from recent hurricanes in Florida and southern Texas
Nine months ended September 30, 2017 compared to 2016
Net sales increased $7.4 million, or 5.7%
Increase as we continue to leverage the engagement of our expansive sales force, the positive North American Spine Society (“NASS”) coverage recommendation and the launch of our next generation products
Partially offset by the impact from recent hurricanes in Florida and southern Texas
Biologics
Biologics provides a broad portfolio of regenerativespine 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 tissue forms that allow physicianscellular allograft market segments, and image-guided surgical solutions to successfully treat a variety of spinalfacilitate degenerative, minimally invasive, and orthopedic conditions.complex surgical procedures. Spinal Implants, Biologics, markets its tissues primarily in the U.S.and Enabling Technologies products are sold through a network of distributors and independent sales representatives to supply to hospitals doctors, and other healthcare providers.
Three months ended September 30, 20172023 compared to 20162022
Net sales increased $0.9of $154.4 million, an increase of $68.2 million or 6.2%79.1%
IncreaseBone Growth Therapies net sales increased $6.8 million or 14.7%, largely driven by (i) an increase in volumecomplex 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 Trinity productsspine 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
Nine months ended September 30, 20172023 compared to 20162022
Net sales increased $3.2of $461.5 million, an increase of $201.9 million or 7.5%77.8%
IncreaseBone Growth Therapies net sales increased $17.5 million or 12.8%, largely driven by (i) a continued increase in volumecomplex spine procedures, (ii) increased reimbursement rates that were approved by Medicare for 2023, (iii) growth in our Trinity productsspine and fracture sales channels as a result of investments made in the prior year, and (iv) the launch of AccelStim
Benefit from improving performance from our nationalhigh-volume distribution partner and the reacquisition of a national hospital contract
Extremity Fixation
Extremity Fixation
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. Extremity FixationGlobal Orthopedics distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals doctors, and other healthhealthcare providers.
Three months ended September 30, 20172023 compared to 20162022
Net sales increased $1.1of $29.7 million, an increase of $1.8 million or 4.7%6.6%
Increase driven by growthGrowth of 13.6% in the U.S., primarily due to recent product launches and commercial execution within our U.S. sales channel
Nine months ended September 30, 2023 compared to 2022
Net sales of $84.7 million, an increase of $5.8 million or 7.4%
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
Nine months ended September 30, 2023 compared to 2022
Gross profit increased $101.7 million
24
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
Nine months ended September 30, 2023 compared to 2022
Sales and marketing expense increased $118.5 million
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
Nine months ended September 30, 2023 compared to 2022
General and administrative expense increased $55.6 million
25
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
Nine months ended September 30, 2023 compared to 2022
Research and development expense increased $25.4 million
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
26
Nine months ended September 30, 2023 compared to 2022
Acquisition-related amortization and remeasurement increased $20.7 million
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
Nine months ended September 30, 2023 compared to 2022
Interest expense, net increased $3.1 million
Three months ended September 30, 2023 compared to 2022
Other income (expense), net increased$0.9 million
Partially offset by a decrease related to our Extremity Fixation restructuring, which consists of the divestiturerecognition of a non-core business$0.4 million impairment loss on a held-for-sale investment security in the United Kingdom (“U.K”) and a reduction in sales in Brazil and Puerto Rico as we convert from a direct sales model to the usethird quarter of stocking distributors of $0.9 million
Nine months ended September 30, 20172023 compared to 20162022
Net sales decreased $1.7Other income (expense), net increased $5.7 million or 2.2%
DecreaseIncrease of $2.9$6.4 million related to our Extremity Fixation restructuring, which consists of the divestiture of a non-core businessassociated with changes in the United Kingdom and a reduction in sales in Brazil and Puerto Ricoforeign currency exchange rates, as we convert fromrecorded a direct sales modelnon-cash remeasurement loss of $1.1 million in 2023 compared to the usea loss of stocking distributors
Decrease in year-over-year cash collections for the quarter from international distributors whose revenue is recognized upon cash receipt
Partially offset by growththe recognition of a $0.4 million impairment loss on a held-for-sale investment security in the U.S. and the U.K., largely due to the continued adoptionthird quarter of our TL-HEX product line
Spine Fixation27
Spine Fixation specializes in the design, development and marketing of a portfolio of implant products used in surgical procedures of the spine. Spine Fixation distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals, doctors and other healthcare providers.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, 20172023 compared to 2016
Net sales increased $3.3 million or 19.3%2022
Increase of 21%Decrease in U.S. sales duetax expense compared to the addition of new distributor partnersprior year period is attributable to lower cash taxes in the last several quarters; the uptakeUS of recent product introductions, including our Polyetheretherketone (“PEEK”) / Titanium Composite (“PTC”) family product lines and Cetra; and improved legacy distributor engagement
Increase in year-over-year international sales, largely due to an increase in sales in Australia
Nine months ended September 30, 20172023 compared to 2016
Net sales increased $6.8 million or 12.6%2022
Increase of 20% in U.S. sales due to the addition of new distributor partners in the last several quarters; the uptake of recent product introductions, including our PTC family product lines and Cetra; and improved legacy distributor engagement
Despite strong performance in certain locations, such as Australia, year-over-year international sales have decreased 15%, largely due to a decrease in order volumes from international stocking distributors
Gross Profit and Non-GAAP Net Margin
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Gross profit |
| $ | 81,530 |
|
| $ | 78,617 |
|
|
| 3.7 | % |
| $ | 247,452 |
|
| $ | 236,718 |
|
|
| 4.5 | % |
Sales and marketing |
|
| (47,493 | ) |
|
| (41,717 | ) |
|
| 13.8 | % |
|
| (146,496 | ) |
|
| (132,582 | ) |
|
| 10.5 | % |
Non-GAAP net margin |
| $ | 34,037 |
|
| $ | 36,900 |
|
|
| -7.8 | % |
| $ | 100,956 |
|
| $ | 104,136 |
|
|
| -3.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 77.5 | % |
|
| 79.8 | % |
|
| -2.3 | % |
|
| 78.1 | % |
|
| 78.6 | % |
|
| -0.5 | % |
Non-GAAP net margin as a percentage of net sales |
|
| 32.3 | % |
|
| 37.5 | % |
|
| -5.2 | % |
|
| 31.9 | % |
|
| 34.6 | % |
|
| -2.7 | % |
Three months ended September 30, 2017 compared to 2016
Gross profit, sales and marketing expense, and non-GAAP net margin, an internal metric that we define as gross profit less sales and marketing expense, changed as follows:
Gross profit increased $2.9 million, primarily due to the growth in net sales. This increase was partially offset by an increase in mix from our Spine Fixation and Extremity Fixation SBUs, which have lower margins; the impact of our conversion to stocking distributors in Brazil and Puerto Rico, and $0.6 million in non-recurring expenses relating to our U.S. restructuring
Sales and marketing expense increased $5.8 million, primarily due to higher commission expenses in the third quarter of 2017 relating to geographic mix, higher rates from new distributors, and a sales and use tax benefit realized in the third quarter of 2016
Non-GAAP net margin decreased by $2.9 million as a result of the changes in gross profit and sales and marketing expense
Nine months ended September 30, 2017 compared to 2016
Gross profit, sales and marketing expense, and non-GAAP net margin, an internal metric that we define as gross profit less sales and marketing expense, changed as follows:
Gross profit increased $10.7 million, primarily due to the growth in net sales and partially offset by an increase in inventory-related charges taken for our Extremity Fixation and Spine Fixation SBUs in 2017; an increase in mix from our Spine Fixation and Extremity Fixation SBUs, which have lower margins; the impact of our conversion to stocking distributors in Brazil and Puerto Rico, and $0.6 million in non-recurring expenses relating to our U.S. restructuring
Sales and marketing expense increased $13.9 million, primarily due higher commission expenses in 2017 relating to geographic mix and higher rates from new distributors
Non-GAAP net margin decreased by $3.2 million as a result of the changes in gross profit and sales and marketing expense
The following table provides non-GAAP net margin by SBU. The reasons for the changes in non-GAAP net margin by SBU are generally consistent with the information provided above for gross profit and sales and marketing expense.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
BioStim |
| $ | 18,285 |
|
| $ | 19,996 |
|
|
| -8.6 | % |
| $ | 54,887 |
|
| $ | 54,980 |
|
|
| -0.2 | % |
Biologics |
|
| 6,010 |
|
|
| 6,821 |
|
|
| -11.9 | % |
|
| 18,651 |
|
|
| 19,642 |
|
|
| -5.0 | % |
Extremity Fixation |
|
| 7,723 |
|
|
| 8,834 |
|
|
| -12.6 | % |
|
| 20,901 |
|
|
| 24,170 |
|
|
| -13.5 | % |
Spine Fixation |
|
| 2,122 |
|
|
| 1,388 |
|
|
| 52.9 | % |
|
| 6,825 |
|
|
| 5,925 |
|
|
| 15.2 | % |
Corporate |
|
| (103 | ) |
|
| (139 | ) |
|
| -25.9 | % |
|
| (308 | ) |
|
| (581 | ) |
|
| -47.0 | % |
Non-GAAP net margin |
| $ | 34,037 |
|
| $ | 36,900 |
|
|
| -7.8 | % |
| $ | 100,956 |
|
| $ | 104,136 |
|
|
| -3.1 | % |
General and Administrative Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
General and administrative |
| $ | 18,068 |
|
| $ | 19,272 |
|
|
| -6.2 | % |
| $ | 56,759 |
|
| $ | 54,822 |
|
|
| 3.5 | % |
As a percentage of net sales |
|
| 17.2 | % |
|
| 19.6 | % |
|
| -2.4 | % |
|
| 17.9 | % |
|
| 18.2 | % |
|
| -0.3 | % |
Three months ended September 30, 2017 compared to 2016
General and administrative expense decreased $1.2 million
Decrease in share-based compensation expense of $4.3 million, largely related to performance-based awards which were first deemed probable to vest in the third quarter of 2016
Reductions in Project Bluecore (a multi-year, company-wide process and systems improvement initiative completed in 2016) expenses of $0.8 million and core expense reductions
Partially offset by a favorable commercial litigation settlement received in the prior year of $3.0 million
Further offset by increased costs associated with our Extremity Fixation and U.S. restructuring initiatives of $1.0 million and spending relating to strategic investments of $0.4 million
Nine months ended September 30, 2017 compared to 2016
General and administrative expense increased $1.9 million
Increase in legal settlements of $4.8 million, largely as a result of a favorable commercial litigation settlement received in the prior year of $3.0 million
Increases in spending of $3.7 million for strategic investments and $1.1 million as a result of our Extremity Fixation and U.S. restructuring initiatives
Partially offset by a decrease in share-based compensationtax expense of $3.1 million, largely driven by a net decrease in expense attributable to performance-based and market-based awards
Further offset by reductions in Project Bluecore expenses of $3.1 million, as the project was completed in 2016, and core expense reductions through savings in other professional fees of $1.6 million
Research and Development Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Research and development |
| $ | 6,935 |
|
| $ | 6,858 |
|
|
| 1.1 | % |
| $ | 21,246 |
|
| $ | 21,294 |
|
|
| -0.2 | % |
As a percentage of net sales |
|
| 6.6 | % |
|
| 7.0 | % |
|
| -0.4 | % |
|
| 6.7 | % |
|
| 7.1 | % |
|
| -0.4 | % |
Three months ended September 30, 2017 compared to 2016
Research and development expense increased by less than $0.1 million compared to the prior year
Nine months ended September 30, 2017 compared period is attributable to 2016
Research and developmentincreased amortization expense decreased by less than $0.1 million compared to the prior year
Charges Related to U.S. Government Resolutions
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Charges related to U.S. Government resolutions |
| $ | — |
|
| $ | 1,499 |
|
|
| -100.0 | % |
| $ | — |
|
| $ | 14,369 |
|
|
| -100.0 | % |
As a percentage of net sales |
|
| 0.0 | % |
|
| 1.4 | % |
|
| -1.4 | % |
|
| 0.0 | % |
|
| 4.8 | % |
|
| -4.8 | % |
Three and Nine months ended September 30, 2017 compared to 2016
Decreaseson long lived intangible assets of $1.5$1.2 million and $14.4higher taxes on foreign earnings of $0.4 million, respectively, related to charges for settlements withoffset by lower cash taxes in the DivisionUS of Enforcement 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 SECbusiness by segment is adjusted earnings before interest, tax, depreciation, and amortization (“adjusted EBITDA,” a non-GAAP financial measure) (which is described further in 2016 related to the SEC’s investigation of our prior self-reported (1) accounting review and restatements of financial statements and (2) allegations of improper payments in Brazil. For additional information, see Note 12 to the financial statements contained within our Form 10-K for the year ended December 31, 2016.
Non-operating Income and Expense
In the first quarter of 2017, we recorded an other-than-temporary impairment on the eNeura debt security of $5.6 million before income taxes. For additional discussion see Note 511 to the Notes to the Unaudited Condensed Consolidated Financial Statements.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 | ) |
Income Taxes28
Liquidity and Capital Resources
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
| ||||||
Income tax expense |
| $ | 6,150 |
|
| $ | (1,276 | ) |
|
| -582.0 | % |
| $ | 13,998 |
|
| $ | 6,703 |
|
|
| 108.8 | % |
Effective tax rate |
|
| 64.8 | % |
|
| -14.0 | % |
|
| 78.8 | % |
|
| 70.8 | % |
|
| 43.8 | % |
|
| 27.0 | % |
Three months endedCash and cash equivalents at September 30, 20172023, totaled $33.7 million compared to 2016
$50.7 million at December 31, 2022. The increase infollowing table presents the effective tax rate was primarily a result of the following factors:
Increases in unrecognized tax benefits
A beneficialnet change in estimate related to the deductibility of certain compensation expenses that did not recur in 2017
The primary factors affecting our effective tax rate for the third quarter of 2017 are as follows:
Increases in unrecognized tax benefits
The mix of earnings among tax jurisdictions
Current period losses in jurisdictions where we do not currently receive a tax benefit
Nine months ended September 30, 2017 compared to 2016
The increase in the effective tax rate was primarily a result of the following factors:
Increases in unrecognized tax benefits
A beneficial change in estimate related to the deductibility of certain compensation expenses that did not recur in 2017
Partially offset by Charges related to U.S. Government resolutions in 2016, which were non-deductible for tax purposes, that did not recur in 2017
The primary factors affecting our effective tax ratecash and cash equivalents for the nine months ended September 30, 2017 are as follows:
Increases in unrecognized tax benefits
The mix of earnings among tax jurisdictions
Current period losses in jurisdictions where we do not currently receive a tax benefit
Liquidity2023, and Capital Resources2022, 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 |
|
Cash and cash equivalents at September 30, 2017, were $53.9 million compared to $39.6 million at December 31, 2016.
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
Net cash from operating activities |
| $ | 23,494 |
|
| $ | 38,396 |
|
| $ | (14,902 | ) |
Net cash from investing activities |
|
| (12,816 | ) |
|
| (17,874 | ) |
|
| 5,058 |
|
Net cash from financing activities |
|
| 2,598 |
|
|
| (37,662 | ) |
|
| 40,260 |
|
Effect of exchange rate changes on cash |
|
| 1,077 |
|
|
| 301 |
|
|
| 776 |
|
Net change in cash and cash equivalents |
| $ | 14,353 |
|
| $ | (16,839 | ) |
| $ | 31,192 |
|
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.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 | ) |
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2017 |
|
| 2016 |
|
| Change |
| |||
Net cash from operating activities |
| $ | 23,494 |
|
| $ | 38,396 |
|
| $ | (14,902 | ) |
Capital expenditures |
|
| (13,290 | ) |
|
| (14,261 | ) |
|
| 971 |
|
Free cash flow |
| $ | 10,204 |
|
| $ | 24,135 |
|
| $ | (13,931 | ) |
Operating Activities
Cash flows from operating activities decreased $14.9$25.2 million
DecreaseUnfavorable change in net incomeloss of $1.6$116.9 million
Net decreaseUnfavorable change of $15.1$4.8 million relating to changes in working capital accounts, primarily attributable to increaseschanges in our inventory balance as a result of new product introductionslevels, partially offset by recoupment activities associated with the CMS Accelerated and increasesAdvance Payment Program in prior year and favorable changes in other current liabilities, prepaid expenses and other current assets, and accounts receivable as a result
Two of the increase in net sales
Our twoour primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 5357 days at September 30, 20172023, compared to 4961 days at September 30, 2016.2022. Inventory turns weredecreased to 1.0 times as of September 30, 2023 compared to 1.2 times as of September 30, 2017 compared to 1.3 times at September 30, 2016 as a result of increased inventory due to new product introductions, primarily in our Spine Fixation and Extremity Fixation SBUs.2022.
U.S. Government Resolutions
In January 2017, the U.S. Securities and Exchange Commission (the “SEC”) approved our offers of settlement in connection with the SEC’s investigations of self-reported accounting matters leading to our prior restatement of financial statements and our self-reported review of improper payments in Brazil. The settlements approved by the SEC resolved these two matters, and included payments to the SEC of amounts previously accrued and funded into escrow during 2016.
Investing Activities
Cash flows from investing activities increased $5.1$0.6 million
Increase of $3.6$29.4 million from the purchase of certain inventory and intellectual property assets of $2.6 million and our additional investment in Bone Biologics, Inc. of $1.0 million during 2016
Increase of $1.0 million relatedattributable to reduced capital expenditures, largelycash acquired as a result of completing Project Bluecorethe Merger
Financing Activities
Cash flows from financing activities increased $40.3$41.6 million
Increase of $55.0$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
Partially offset by a decrease of $26.9 million associated with the termination and repayment of SeaSpine's credit facility
Credit Facilities
There have been no material changesOn January 3, 2023, we borrowed $30.0 million for working capital purposes, including to fund certain Merger-related expenses under our debt instrumentssecured revolving credit facility under the Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., dated as disclosedof 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 Form 10-Ksubsidiaries, 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 year ended December 31, 2016.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.
OtherCertain 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,contingencies, see Note 68 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Off-balance Sheet ArrangementsIGEA 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, 2017,2023, 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, 2016.2022.
Critical Accounting Estimates
There have been no material changesOur discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to ourmake 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 asare described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2022. There have been no significant changes to our critical accounting estimates during the quarter covered by this report.
Recently Issued Accounting Pronouncements
See Note 12 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 metricsfinancial measures used to supplement information regarding the performance and underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate the effectiveness of the our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.
The non-GAAP financial measures used in this filing may have limitations as analytical tools and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.
Constant Currency
Constant currency is calculated by using foreign currency rates from the comparable, prior-year period to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.
Non-GAAP Net MarginAdjusted EBITDA
Non-GAAP net marginEBITDA is an internal metric that we definea non-GAAP financial measure defined as gross profit less salesearnings before interest income (expense), income taxes, depreciation, and marketing expense. Non-GAAP net marginamortization. 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. FreeManagement uses free cash flow isas 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, 2016.2022.
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 President andInterim Chief Executive Officer and our Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President andInterim Chief Executive Officer and the Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2023. Based on this evaluation, our President andInterim Chief Executive Officer and our Interim Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2017.2023.
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 werewas no changeschange in our internal control over financial reporting that occurred during the quarter ended September 30, 2017quarterly period covered by this report that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
For information regarding legal proceedings, see Note 68 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein, which is incorporated by reference into this Part II, Item 1.
There have been no material changes tofrom the risk factors disclosed in the “Risk"Part I, Item 1A. Risk Factors” section ofin our Form 10-K for the year ended December 31, 2016.2022, 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 2017.2023.
34
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
There are no mattersDuring 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 be reported under this heading.satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any "non-Rule 10b5-1 trading arrangement."
| ||
10.1* | ||
10.2* | ||
10.3* | ||
10.4* | ||
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. | |
| Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer. | |
|
| |
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 |
|
|
# 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 | |||
Date: | By: | /s/ | |
Name: |
| ||
Title: |
| ||
Date: | By: | /s/ | |
Name: |
| ||
Title: | Interim Chief Financial Officer and VP, Corporate Controller |
36
25