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, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 0-19961
ORTHOFIX MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 98-1340767 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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3451 Plano Parkway, Lewisville, Texas |
| 75056 |
(Address of principal executive offices) |
| (Zip Code) |
(214) 937-2000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | ☒ | Accelerated filer | ☐ |
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Non-Accelerated filer | ☐ | Smaller Reporting Company | ☐ |
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| 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 26, 2018, 18,920,82725, 2019, 19,055,154 shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, $0.10 par value per share | OFIX | Nasdaq Global Select Market |
Table of Contents
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PART I |
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Item 1. |
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| Condensed Consolidated Balance Sheets as of September 30, |
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| Notes to the Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II |
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Item 1. |
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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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| 36 |
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict, including the risks described Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 20172018 (the “2017“2018 Form 10-K”) and other Securities and Exchange Commission (“SEC”) filings. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in the 20172018 Form 10-K and other SEC filings, to reflect new information, the occurrence of future events or circumstances or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Balance Sheets
(U.S. Dollars, in thousands, except share data) |
| September 30, 2018 |
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| December 31, 2017 |
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| September 30, 2019 |
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| December 31, 2018 |
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 53,783 |
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| $ | 81,157 |
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| $ | 56,849 |
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| $ | 69,623 |
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Restricted cash |
|
| 2,459 |
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| — |
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| 654 |
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| 2,566 |
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Accounts receivable, net of allowances of $8,039 and $8,405, respectively |
|
| 74,356 |
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| 63,437 |
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Trade accounts receivable, net of allowances of $4,073 and $7,463, respectively |
|
| 79,690 |
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| 77,747 |
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Inventories |
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| 79,895 |
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| 81,330 |
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| 80,993 |
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| 76,847 |
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Prepaid expenses and other current assets |
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| 34,517 |
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| 25,877 |
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| 19,617 |
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| 17,856 |
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Total current assets |
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| 245,010 |
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| 251,801 |
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| 237,803 |
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| 244,639 |
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Property, plant and equipment, net |
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| 43,575 |
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| 45,139 |
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| 62,964 |
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| 42,835 |
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Intangible assets, net |
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| 51,637 |
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| 10,461 |
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| 53,613 |
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| 51,897 |
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Goodwill |
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| 70,747 |
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| 53,565 |
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| 71,177 |
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| 72,401 |
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Deferred income taxes |
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| 36,030 |
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| 23,315 |
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| 39,626 |
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| 33,228 |
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Other long-term assets |
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| 3,166 |
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| 21,073 |
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| 10,420 |
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| 21,641 |
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Total assets |
| $ | 450,165 |
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| $ | 405,354 |
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| $ | 475,603 |
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| $ | 466,641 |
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Liabilities and shareholders’ equity |
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Current liabilities |
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Accounts payable |
| $ | 15,426 |
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| $ | 18,111 |
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| $ | 17,892 |
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| $ | 17,989 |
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Current portion of finance lease liability |
|
| 293 |
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|
| — |
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Other current liabilities |
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| 61,387 |
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| 61,295 |
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| 70,323 |
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| 67,919 |
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Total current liabilities |
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| 76,813 |
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| 79,406 |
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| 88,508 |
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| 85,908 |
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Long-term portion of finance lease liability |
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| 20,767 |
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| — |
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Other long-term liabilities |
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| 50,002 |
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| 29,340 |
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| 59,894 |
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| 45,336 |
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Total liabilities |
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| 126,815 |
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| 108,746 |
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| 169,169 |
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| 131,244 |
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Contingencies (Note 6) |
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Contingencies (Note 8) |
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Shareholders’ equity |
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Common shares $0.10 par value; 50,000,000 shares authorized; 18,536,716 and 18,278,833 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively |
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| 1,854 |
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| 1,828 |
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Common shares $0.10 par value; 50,000,000 shares authorized; 18,875,184 and 18,579,688 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively |
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| 1,888 |
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| 1,858 |
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Additional paid-in capital |
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| 238,422 |
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| 220,591 |
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| 263,064 |
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| 243,165 |
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Retained earnings |
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| 78,207 |
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| 70,402 |
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| 46,063 |
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| 87,078 |
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Accumulated other comprehensive income |
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| 4,867 |
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| 3,787 |
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Accumulated other comprehensive income (loss) |
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| (4,581 | ) |
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| 3,296 |
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Total shareholders’ equity |
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| 323,350 |
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| 296,608 |
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| 306,434 |
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| 335,397 |
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Total liabilities and shareholders’ equity |
| $ | 450,165 |
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| $ | 405,354 |
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| $ | 475,603 |
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| $ | 466,641 |
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The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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Net sales |
| $ | 111,708 |
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| $ | 105,247 |
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| $ | 331,964 |
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| $ | 316,927 |
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Cost of sales |
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| 24,020 |
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| 23,717 |
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| 71,002 |
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| 69,475 |
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Gross profit |
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| 87,688 |
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| 81,530 |
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| 260,962 |
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| 247,452 |
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Sales and marketing |
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| 49,898 |
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| 47,493 |
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| 151,695 |
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| 146,496 |
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General and administrative |
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| 22,705 |
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| 18,068 |
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| 64,457 |
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| 56,759 |
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Research and development |
|
| 9,598 |
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| 6,935 |
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| 24,426 |
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| 21,246 |
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Changes in fair value of contingent consideration |
|
| 1,580 |
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| — |
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| 2,689 |
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| — |
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Operating income |
|
| 3,907 |
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| 9,034 |
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| 17,695 |
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| 22,951 |
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Interest income (expense), net |
|
| (181 | ) |
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| (15 | ) |
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| (615 | ) |
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| 106 |
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Other income (expense), net |
|
| (5,054 | ) |
|
| 479 |
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| (5,785 | ) |
|
| (3,284 | ) |
Income (loss) before income taxes |
|
| (1,328 | ) |
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| 9,498 |
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| 11,295 |
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| 19,773 |
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Income tax benefit (expense) |
|
| 115 |
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| (6,150 | ) |
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| (6,346 | ) |
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| (13,998 | ) |
Net income (loss) from continuing operations |
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| (1,213 | ) |
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| 3,348 |
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| 4,949 |
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| 5,775 |
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Discontinued operations (Note 6) |
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Income (loss) from discontinued operations |
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| — |
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| 65 |
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| (3 | ) |
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| (1,762 | ) |
Income tax benefit (expense) |
|
| 2 |
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| 43 |
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| (6 | ) |
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| 642 |
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Net income (loss) from discontinued operations |
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| 2 |
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| 108 |
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| (9 | ) |
|
| (1,120 | ) |
Net income (loss) |
| $ | (1,211 | ) |
| $ | 3,456 |
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| $ | 4,940 |
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| $ | 4,655 |
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Net income (loss) per common share—basic |
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Net income (loss) from continuing operations |
| $ | (0.07 | ) |
| $ | 0.18 |
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| $ | 0.26 |
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| $ | 0.32 |
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Net income (loss) from discontinued operations |
|
| — |
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|
| 0.01 |
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| — |
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| (0.06 | ) |
Net income (loss) per common share—basic |
| $ | (0.07 | ) |
| $ | 0.19 |
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| $ | 0.26 |
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| $ | 0.26 |
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Net income (loss) per common share—diluted |
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Net income (loss) from continuing operations |
| $ | (0.07 | ) |
| $ | 0.18 |
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| $ | 0.26 |
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| $ | 0.31 |
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Net income (loss) from discontinued operations |
|
| — |
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| 0.01 |
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| — |
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| (0.06 | ) |
Net income (loss) per common share—diluted |
| $ | (0.07 | ) |
| $ | 0.19 |
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| $ | 0.26 |
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| $ | 0.25 |
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Weighted average number of common shares: |
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Basic |
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| 18,562,204 |
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| 18,180,845 |
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| 18,460,848 |
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| 18,071,093 |
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Diluted |
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| 18,562,204 |
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| 18,572,791 |
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| 18,864,169 |
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| 18,394,542 |
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Other comprehensive income, before tax |
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Unrealized gain (loss) on debt securities |
|
| 1,240 |
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|
| — |
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| 3,200 |
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| $ | (3,220 | ) |
Reclassification adjustment for loss on debt securities in net income |
|
| — |
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|
| — |
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|
| — |
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|
| 5,585 |
|
Currency translation adjustment |
|
| (844 | ) |
|
| 1,111 |
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|
| (1,322 | ) |
|
| 3,993 |
|
Other comprehensive income before tax |
|
| 396 |
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|
| 1,111 |
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|
| 1,878 |
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|
| 6,358 |
|
Income tax related to items of other comprehensive income |
|
| (366 | ) |
|
| — |
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|
| (798 | ) |
|
| (900 | ) |
Other comprehensive income, net of tax |
|
| 30 |
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|
| 1,111 |
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|
| 1,080 |
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|
| 5,458 |
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Comprehensive income (loss) |
| $ | (1,181 | ) |
| $ | 4,567 |
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| $ | 6,020 |
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| $ | 10,113 |
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net sales |
| $ | 113,499 |
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| $ | 111,708 |
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| $ | 338,461 |
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| $ | 331,964 |
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Cost of sales |
|
| 24,896 |
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|
| 24,020 |
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|
| 74,416 |
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|
| 71,002 |
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Gross profit |
|
| 88,603 |
|
|
| 87,688 |
|
|
| 264,045 |
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|
| 260,962 |
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Sales and marketing |
|
| 54,805 |
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|
| 49,898 |
|
|
| 165,363 |
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|
| 151,695 |
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General and administrative |
|
| 21,090 |
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|
| 22,276 |
|
|
| 63,497 |
|
|
| 63,658 |
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Research and development |
|
| 7,982 |
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|
| 9,598 |
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|
| 26,191 |
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|
| 24,426 |
|
Acquisition-related amortization and remeasurement (Note 12) |
|
| 23,608 |
|
|
| 2,009 |
|
|
| 31,873 |
|
|
| 3,491 |
|
Operating income (loss) |
|
| (18,882 | ) |
|
| 3,907 |
|
|
| (22,879 | ) |
|
| 17,692 |
|
Interest income (expense), net |
|
| 186 |
|
|
| (181 | ) |
|
| 386 |
|
|
| (615 | ) |
Other expense, net |
|
| (8,146 | ) |
|
| (5,054 | ) |
|
| (8,786 | ) |
|
| (5,785 | ) |
Income (loss) before income taxes |
|
| (26,842 | ) |
|
| (1,328 | ) |
|
| (31,279 | ) |
|
| 11,292 |
|
Income tax benefit (expense) |
|
| (13,656 | ) |
|
| 117 |
|
|
| (8,869 | ) |
|
| (6,352 | ) |
Net income (loss) |
| $ | (40,498 | ) |
| $ | (1,211 | ) |
| $ | (40,148 | ) |
| $ | 4,940 |
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Net income (loss) per common share: |
|
|
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Basic |
| $ | (2.14 | ) |
| $ | (0.07 | ) |
| $ | (2.13 | ) |
| $ | 0.26 |
|
Diluted |
|
| (2.14 | ) |
|
| (0.07 | ) |
|
| (2.13 | ) |
|
| 0.26 |
|
Weighted average number of common shares: |
|
|
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|
|
|
|
|
|
|
|
|
|
Basic |
|
| 18,957,876 |
|
|
| 18,562,204 |
|
|
| 18,847,728 |
|
|
| 18,460,848 |
|
Diluted |
|
| 18,957,876 |
|
|
| 18,562,204 |
|
|
| 18,847,728 |
|
|
| 18,864,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Other comprehensive income (loss), before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on debt security |
|
| — |
|
|
| 1,240 |
|
|
| (2,593 | ) |
|
| 3,200 |
|
Reclassification adjustment for amortization of historical unrealized gains on debt security |
|
| (345 | ) |
|
| — |
|
|
| (1,034 | ) |
|
| — |
|
Reclassification adjustment for other-than-temporary impairment on debt security |
|
| (5,193 | ) |
|
| — |
|
|
| (5,193 | ) |
|
| — |
|
Currency translation adjustment |
|
| (1,893 | ) |
|
| (844 | ) |
|
| (2,195 | ) |
|
| (1,322 | ) |
Other comprehensive income (loss) before tax |
|
| (7,431 | ) |
|
| 396 |
|
|
| (11,015 | ) |
|
| 1,878 |
|
Income tax related to other comprehensive income (loss) |
|
| 1,388 |
|
|
| (366 | ) |
|
| 2,200 |
|
|
| (798 | ) |
Other comprehensive income (loss), net of tax |
|
| (6,043 | ) |
|
| 30 |
|
|
| (8,815 | ) |
|
| 1,080 |
|
Comprehensive income (loss) |
| $ | (46,541 | ) |
| $ | (1,181 | ) |
| $ | (48,963 | ) |
| $ | 6,020 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
(Unaudited, U.S. Dollars, in thousands, except share data) |
| Number of Common Shares Outstanding |
|
| Common Shares |
|
| Additional Paid-in Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Total Shareholders’ Equity |
| ||||||
At December 31, 2018 |
|
| 18,579,688 |
|
| $ | 1,858 |
|
| $ | 243,165 |
|
| $ | 87,078 |
|
| $ | 3,296 |
|
| $ | 335,397 |
|
Cumulative effect adjustment from adoption of ASU 2016-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 71 |
|
|
| — |
|
|
| 71 |
|
Cumulative effect adjustment from adoption of ASU 2018-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (938 | ) |
|
| 938 |
|
|
| — |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 897 |
|
|
| — |
|
|
| 897 |
|
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,401 | ) |
|
| (2,401 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,685 |
|
|
| — |
|
|
| — |
|
|
| 5,685 |
|
Common shares issued, net |
|
| 211,081 |
|
|
| 21 |
|
|
| 4,012 |
|
|
| — |
|
|
| — |
|
|
| 4,033 |
|
At March 31, 2019 |
|
| 18,790,769 |
|
| $ | 1,879 |
|
| $ | 252,862 |
|
| $ | 87,108 |
|
| $ | 1,833 |
|
| $ | 343,682 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (547 | ) |
|
| — |
|
|
| (547 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (371 | ) |
|
| (371 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,849 |
|
|
| — |
|
|
| — |
|
|
| 5,849 |
|
Common shares issued, net |
|
| 40,812 |
|
|
| 4 |
|
|
| (823 | ) |
|
| — |
|
|
| — |
|
|
| (819 | ) |
At June 30, 2019 |
|
| 18,831,581 |
|
| $ | 1,883 |
|
| $ | 257,888 |
|
| $ | 86,561 |
|
| $ | 1,462 |
|
| $ | 347,794 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (40,498 | ) |
|
| — |
|
|
| (40,498 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,043 | ) |
|
| (6,043 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,844 |
|
|
| — |
|
|
| — |
|
|
| 5,844 |
|
Common shares issued, net |
|
| 43,603 |
|
|
| 5 |
|
|
| (668 | ) |
|
| — |
|
|
| — |
|
|
| (663 | ) |
At September 30, 2019 |
|
| 18,875,184 |
|
| $ | 1,888 |
|
| $ | 263,064 |
|
| $ | 46,063 |
|
| $ | (4,581 | ) |
| $ | 306,434 |
|
(Unaudited, U.S. Dollars, in thousands, except share data) |
| Number of Common Shares Outstanding |
|
| Common Shares |
|
| Additional Paid-in Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Income |
|
| Total Shareholders’ Equity |
| ||||||
At December 31, 2017 |
|
| 18,278,833 |
|
| $ | 1,828 |
|
| $ | 220,591 |
|
| $ | 70,402 |
|
| $ | 3,787 |
|
| $ | 296,608 |
|
Cumulative effect adjustment from adoption of ASU 2014-09 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,761 |
|
|
| — |
|
|
| 4,761 |
|
Cumulative effect adjustment from adoption of ASU 2016-16 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,896 | ) |
|
| — |
|
|
| (1,896 | ) |
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,226 |
|
|
| — |
|
|
| 5,226 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 697 |
|
|
| 697 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 3,916 |
|
|
| — |
|
|
| — |
|
|
| 3,916 |
|
Common shares issued, net |
|
| 126,511 |
|
|
| 13 |
|
|
| 3,849 |
|
|
| — |
|
|
| — |
|
|
| 3,862 |
|
At March 31, 2018 |
|
| 18,405,344 |
|
| $ | 1,841 |
|
| $ | 228,356 |
|
| $ | 78,493 |
|
| $ | 4,484 |
|
| $ | 313,174 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 925 |
|
|
| — |
|
|
| 925 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 353 |
|
|
| 353 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,215 |
|
|
| — |
|
|
| — |
|
|
| 5,215 |
|
Common shares issued, net |
|
| 80,444 |
|
|
| 8 |
|
|
| 171 |
|
|
| — |
|
|
| — |
|
|
| 179 |
|
At June 30, 2018 |
|
| 18,485,788 |
|
| $ | 1,849 |
|
| $ | 233,742 |
|
| $ | 79,418 |
|
| $ | 4,837 |
|
| $ | 319,846 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,211 | ) |
|
| — |
|
|
| (1,211 | ) |
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30 |
|
|
| 30 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 5,261 |
|
|
| — |
|
|
| — |
|
|
| 5,261 |
|
Common shares issued, net |
|
| 50,928 |
|
|
| 5 |
|
|
| (581 | ) |
|
| — |
|
|
| — |
|
|
| (576 | ) |
At September 30, 2018 |
|
| 18,536,716 |
|
| $ | 1,854 |
|
| $ | 238,422 |
|
| $ | 78,207 |
|
| $ | 4,867 |
|
| $ | 323,350 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Cash Flows
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Unaudited, U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 4,940 |
|
| $ | 4,655 |
| ||||||||
Net income (loss) |
| $ | (40,148 | ) |
| $ | 4,940 |
| ||||||||
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 13,661 |
|
|
| 15,421 |
|
|
| 18,180 |
|
|
| 13,661 |
|
Amortization of debt costs and other assets |
|
| 818 |
|
|
| 1,072 |
| ||||||||
Amortization of operating lease assets, debt costs and other assets |
|
| 2,724 |
|
|
| 818 |
| ||||||||
Provision for doubtful accounts |
|
| (571 | ) |
|
| 1,555 |
|
|
| 861 |
|
|
| (571 | ) |
Deferred income taxes |
|
| (5,082 | ) |
|
| 153 |
|
|
| (3,309 | ) |
|
| (5,082 | ) |
Share-based compensation |
|
| 14,392 |
|
|
| 9,124 |
|
|
| 17,378 |
|
|
| 14,392 |
|
Other-than-temporary impairment on debt securities |
|
| — |
|
|
| 5,585 |
| ||||||||
Loss on valuation of equity securities |
|
| 3,050 |
|
|
| — |
| ||||||||
Interest and loss on valuation of investment securities |
|
| 5,000 |
|
|
| 3,050 |
| ||||||||
Change in fair value of contingent consideration |
|
| 2,689 |
|
|
| — |
|
|
| 28,140 |
|
|
| 2,689 |
|
Other |
|
| 1,040 |
|
|
| 823 |
|
|
| 1,307 |
|
|
| 1,040 |
|
Changes in operating assets and liabilities, net of effects of acquisition |
|
|
|
|
|
|
|
| ||||||||
Changes in operating assets and liabilities, net of effects of acquisitions |
|
|
|
|
|
|
|
| ||||||||
Accounts receivable |
|
| (225 | ) |
|
| (4,302 | ) |
|
| (3,298 | ) |
|
| (225 | ) |
Inventories |
|
| 6,880 |
|
|
| (14,714 | ) |
|
| (4,995 | ) |
|
| 6,880 |
|
Prepaid expenses and other current assets |
|
| 1,498 |
|
|
| 1,377 |
|
|
| 1,637 |
|
|
| 1,498 |
|
Accounts payable |
|
| (2,788 | ) |
|
| (2,233 | ) |
|
| 447 |
|
|
| (2,788 | ) |
Other current liabilities |
|
| (13,130 | ) |
|
| (11,639 | ) |
|
| 347 |
|
|
| (13,130 | ) |
Payment of contingent consideration |
|
| (1,340 | ) |
|
| — |
| ||||||||
Other long-term assets and liabilities |
|
| 1,657 |
|
|
| 2,248 |
|
|
| (2,841 | ) |
|
| 1,657 |
|
Net cash from operating activities |
|
| 28,829 |
|
|
| 9,125 |
|
|
| 20,090 |
|
|
| 28,829 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired |
|
| (43,749 | ) |
|
| — |
|
|
| — |
|
|
| (43,749 | ) |
Capital expenditures for property, plant and equipment |
|
| (9,586 | ) |
|
| (11,441 | ) |
|
| (13,737 | ) |
|
| (9,586 | ) |
Capital expenditures for intangible assets |
|
| (1,138 | ) |
|
| (1,849 | ) |
|
| (1,144 | ) |
|
| (1,138 | ) |
Asset acquisitions and other investments |
|
| (1,448 | ) |
|
| — |
|
|
| (6,400 | ) |
|
| (1,448 | ) |
Other investing activities |
|
| — |
|
|
| 474 |
| ||||||||
Net cash from investing activities |
|
| (55,921 | ) |
|
| (12,816 | ) |
|
| (21,281 | ) |
|
| (55,921 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares |
|
| 5,866 |
|
|
| 6,277 |
|
|
| 6,821 |
|
|
| 5,866 |
|
Payments related to withholdings for share-based compensation |
|
| (2,402 | ) |
|
| (3,679 | ) |
|
| (4,271 | ) |
|
| (2,402 | ) |
Payment of debt issuance costs and other financing activities |
|
| (476 | ) |
|
| — |
| ||||||||
Payment of contingent consideration |
|
| (13,660 | ) |
|
| — |
| ||||||||
Payments related to finance lease obligation |
|
| (276 | ) |
|
| — |
| ||||||||
Other financing activities |
|
| (1,224 | ) |
|
| (476 | ) | ||||||||
Net cash from financing activities |
|
| 2,988 |
|
|
| 2,598 |
|
|
| (12,610 | ) |
|
| 2,988 |
|
Effect of exchange rate changes on cash |
|
| (811 | ) |
|
| 1,077 |
|
|
| (885 | ) |
|
| (811 | ) |
Net change in cash, cash equivalents, and restricted cash |
|
| (24,915 | ) |
|
| (16 | ) |
|
| (14,686 | ) |
|
| (24,915 | ) |
Cash, cash equivalents, and restricted cash at the beginning of period |
|
| 81,157 |
|
|
| 53,941 |
|
|
| 72,189 |
|
|
| 81,157 |
|
Cash, cash equivalents, and restricted cash at the end of period |
| $ | 56,242 |
|
| $ | 53,925 |
|
| $ | 57,503 |
|
| $ | 56,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of cash, cash equivalents and restricted cash at the end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 53,783 |
|
| $ | 53,925 |
|
| $ | 56,849 |
|
| $ | 53,783 |
|
Restricted cash |
|
| 2,459 |
|
|
| — |
|
|
| 654 |
|
|
| 2,459 |
|
Cash, cash equivalents, and restricted cash at the end of period |
| $ | 56,242 |
|
| $ | 53,925 |
|
| $ | 57,503 |
|
| $ | 56,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible assets |
| $ | 1,581 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,581 |
|
Contingent consideration recognized at acquisition date |
|
| 25,491 |
|
|
| — |
|
|
| — |
|
|
| 25,491 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Business and basis of presentation
Orthofix Medical Inc. (previously Orthofix International N.V.), together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, the Company has four2 reporting segments: Bone Growth Therapies (formerly referred to as BioStim), Spinal Implants (formerly referred to asGlobal Spine Fixation), Biologics, and Orthofix Extremities (formerly referred to as Extremity Fixation).Global Extremities.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2017.2018. Operating results for the three and nine months ended September 30, 20182019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2018.2019.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition,recognition; contractual allowances,allowances; allowance for doubtful accounts, inventories, goodwill andaccounts; inventories; valuation of intangible asset impairment,assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities, contingent consideration, income taxes,liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates.
On July 31,Prior period reclassifications
Certain amortization expense related to intangible assets previously reported in general and administrative expenses has been reclassified to acquisition-related amortization and remeasurement based on use of the underlying intangible asset. This reclassification resulted in decreases to general and administrative expenses of $0.4 million and $0.8 million for the three and nine months ended September 30, 2018, respectively, and increases in acquisition related amortization and remeasurement expense of $0.4 million and $0.8 million for the three and nine months ended September 30, 2018, respectively.
Change in Reporting Segments
The Company has changed its reportable business segments beginning with the first quarter of 2019, to align with changes in how the Company completed a change inmanages its jurisdictionbusiness, reviews operating performance and allocates resources. The Company now reports results under two reportable segments: Global Spine and Global Extremities, and measures operating performance of organization from Curaçao to the State of Delaware (the “Domestication”) in accordance with the conversion procedures of Articles 304these two reportable segments based on earnings before interest, tax, depreciation, and 305 of Book 2 of the Curaçao Civil Code and the domestication procedures of Section 388 of Delaware General Corporation Law. The Company’s shareholders approved a proposal to adopt a shareholders’ resolution authorizing the Domestication at the Company’s 2018 Annual General Meeting of Shareholders held on July 17, 2018 (the “Annual General Meeting”amortization (“EBITDA”) by the affirmative vote of shareholders representing an absolute majority of the outstanding common shares of the Company as of the record date for the Annual General Meeting.
Upon the effectiveness of the Domestication, each common share of Orthofix International N.V. was automatically converted into one share of common stock of Orthofix Medical Inc. The Company’s common stock continues to be traded on the Nasdaq Global Select Market under the symbol “OFIX.”. For additional discussion regarding segments, see Note 11.
1.2. Recently adopted accounting standards and recently issued accounting pronouncements
Adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers2016-02, Leases (Topic 606)842)
In May 2014,February 2016 the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09. Topic 606 supersedes2016-02, which changes how lessees account for leases. For most leases, a liability will be recorded on the revenue recognition requirements in Topic 605, Revenue Recognition, and requires entities tobalance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company will recognize revenue when controllease costs on a straight-line basis based on the combined amortization of the promised goods or services is transferredlease obligation and the right-of-use asset. Other leases will be accounted for as finance leases similar to customers at an amount that reflectscapital leases under the previous accounting standard. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The practical expedients adopted allow the Company to carry forward its historical lease classification and to not separate and allocate the consideration to which the entity expects to be entitled in exchange for those goods or services.paid between lease and non-lease components included within a contract. The Company also adopted Accounting Standards Codification (“ASC”) 606 asan optional transition method that waives the requirement to apply the ASU to the comparative periods presented within the financial statements in the year of adoption. Therefore, results for reporting periods beginning after January 1, 2018 using the modified retrospective transition method. Results for2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be
reported in accordance with the Company’s historic accounting policies under the previous revenue recognition standard, Topic 605.840. See Note 85 for further details.additional discussion of the Company’s adoption of Topic 842 and its lease accounting policies.
Adoption of ASU 2016-01, Financial Instruments2018-02, Income Statement – Overall (Subtopic 825-10), and ASU 2018-03, Technical Corrections and Improvements to Financial Instruments– Overall (Subtopic 825-10)Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In January 2016,February 2018, the FASB issued ASU 2016-01,2018-02, which was then further clarified in ASU 2018-03, in February 2018. This guidance requires entities to generally measure equity investments at fair value and recognize any changes in fair value in net income. However, for certain equity investments that do not have readily determinable fair values, the new guidance allows entities to choosereclassify from accumulated other comprehensive income to measure these investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus changesretained earnings stranded tax effects resulting from observable pricethe Tax Cuts and Jobs Act (the "Tax Act"). The Company adopted this guidance effective January 1, 2019, which resulted in an increase to accumulated other comprehensive income and a decrease in retained earnings of $0.9 million.
Other recently adopted accounting guidance
In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in orderly transactionsthe information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for identical or similar investments of the same issuer.current year-to-date interim periods, with subtotals for each interim period. The Company prospectively adopted both ASU 2016-01 and ASU 2018-03Release No. 33-10532 during the first quarter of
2018 and elected to use the new measurement alternative for the Company’s equity investments in Bone Biologics, Inc. (“Bone Biologics”), which have historically been held at cost. This resulted in an increase in the previously recorded value of the Company’s equity investments in Bone Biologics, which were recorded within other current assets or long-term assets and other income (expense), of $1.6 million, or $0.09 per share before taxes, during the three months ended March 31, 2018. During the three months ended September 30, 2018, Bone Biologics completed a series of equity financing activities, which provided a new observable price change in an orderly transaction. As a result, the Company determined its investment to be impaired and recorded a charge of $4.4 million during the third quarter of 2018. See Note 5 for further details.
Adoption of ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, which reduces diversity in practice of accounting for intra-entity transfers of assets, particularly for intra-entity transfers of intellectual property. The new standard states an entity should recognize the income tax consequences of an intra-entity transfer when the transfer occurs, as opposed to historical U.S. GAAP guidance which prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. During the third and fourth quarters of 2017, the Company executed two intra-entity asset transfers that resulted in prepaid income taxes of $8.6 million. The Company adopted this new standard using a modified retrospective approach as of January 1, 2018, 2019, which resulted in a reductionchanges in shareholders’ equity presented within the Condensed Consolidated Statements of prepaid income taxes and an increaseChanges in deferred tax assets with these changes offset by an adjustment to the Company's opening retained earnings of approximately $1.9 million. Adoption of this guidance did not have a material impact to the Company’s condensed consolidated statements of operations and comprehensive income (loss) or to its condensed consolidated statements of cash flows.Shareholders’ Equity.
Adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU 2016-18, which reduces diversity in classification and presentation of restricted cash, including transfers between cash and restricted cash, on the statement of cash flows. The Company adopted this standard as of January 1, 2018 using a retrospective transition approach. Adoption of this ASU resulted in an increase in net cash from operating activities of $2.5 million for the nine months ended September 30, 2018 and a decrease in net cash from operating activities of $14.4 million for the nine months ended September 30, 2017.
Adoption of ASU 2017-01, Business Combinations (Topic 805)
In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business. This amendment states that when substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, that the set of assets acquired is not a business, which will likely result in more acquisitions being accounted for as asset acquisitions rather than business combinations. Based upon this guidance, which the Company adopted as of January 1, 2018, the Company accounted for certain transactions during the first and third quarters of 2018 for approximately $1.9 million and $0.7 million, respectively, as asset acquisitions rather than business combinations, as the sets of assets acquired did not meet the definition of a business.
Recently issued accounting pronouncements
Topic |
| Description of Guidance |
| Effective Date |
| Status of Company's Evaluation | |
|
| Requires |
| January 1, |
| The Company has | |
Goodwill (ASU 2017-04) |
| Eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. Applied on a prospective basis, with early adoption permitted. |
| January 1, 2020 |
| The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a significant impact on its financial statements or disclosures. | |
|
|
|
|
|
|
|
| |||
Fair value measurement (ASU 2018-13) |
| Eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively. |
| January 1, 2020 |
| The Company is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a significant impact on its financial statements but may have significant impact on disclosures for any level 3 assets or liabilities. |
Topic | Description of Guidance | Effective Date | Status of Company's Evaluation | |||
Implementation costs in a cloud computing arrangement that is a service contract (ASU 2018-15) |
| Aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. |
| January 1, 2020 |
| The Company plans to adopt this ASU prospectively to all implementation costs incurred after the date of adoption and is currently evaluating the impact this ASU may have on its consolidated financial statements. However, the Company does not expect this ASU to have a material impact to its consolidated financial statements. |
Other recently issued accounting guidance
In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for the current year-to-date interim periods, with subtotals for each interim period. The final rule is effective for all filings submitted on or after November 5, 2018. As a result, the Company anticipates that it will present a Condensed Consolidated Statement of Changes in Shareholders’ Equity within its interim financial statements beginning in its Form 10-Q for the quarter ending March 31, 2019.3. Acquisitions
2. Acquisition of Spinal Kinetics Inc.
On March 15,April 30, 2018, the Company entered into a definitive merger agreement (the “Merger Agreement”) to acquire 100% ofcompleted the outstanding stockacquisition of Spinal Kinetics Inc. (“Spinal Kinetics”), a privately held developer and manufacturer of artificial cervical and lumbar discs to strengthen the Company’s product portfolio and fill a strategic gap in the Spinal Implants business. On April 30, 2018, the Company completed the acquisition and all outstanding shares of Spinal Kinetics’ capital stock were converted into the right to receive at the closing an aggregate offor $45.0 million in net cash, subject to certain adjustments, plus potential milestone payments of up to $60.0 million in cash. The Company madeacquisition date fair value of the closing payments from cash on hand on April 30, 2018.consideration transferred was $76.6 million. The results of operations for Spinal Kinetics have been included in the Company’s financial results since the acquisition date, April 30, 2018.
The acquisition date fair value of the consideration transferred was $76.1 million, which consisted of the following:
(U.S. Dollars, in thousands) |
|
|
|
|
Fair value of consideration transferred |
|
|
|
|
Cash paid |
| $ | 50,564 |
|
Contingent consideration |
|
| 25,491 |
|
Total fair value of consideration transferred |
| $ | 76,055 |
|
The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments include (i) up to $15.0 million if the U.S. Food and Drug Administration (the “FDA”) grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments. The fair value of the contingent consideration arrangement at the acquisition date was $25.5 million and was $28.2 million as of September 30, 2018; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. The increase in fair value of $2.7 million was recorded as an operating expense labeled changes in fair value of contingent consideration. For additional discussion regarding the valuation of the contingent consideration, see Note 5.7.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. A final determinationdate:
(U.S. Dollars, in thousands) |
| Final Acquisition Date Fair Value |
|
| Assigned Useful Life | |
Assets acquired |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 6,785 |
|
|
|
Restricted cash |
|
| 30 |
|
|
|
Accounts receivable |
|
| 1,705 |
|
|
|
Inventories |
|
| 8,175 |
|
|
|
Prepaid expenses and other current assets |
|
| 315 |
|
|
|
Property, plant and equipment |
|
| 2,285 |
|
|
|
Other long-term assets |
|
| 320 |
|
|
|
Developed technology |
|
| 12,400 |
|
| 10 years |
In-process research and development ("IPR&D") |
|
| 26,800 |
|
| 10 years |
Tradename |
|
| 100 |
|
| 2 years |
Deferred income taxes |
|
| 3,594 |
|
|
|
Total identifiable assets acquired |
| $ | 62,509 |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
|
Accounts payable |
| $ | 351 |
|
|
|
Other current liabilities |
|
| 2,869 |
|
|
|
Other long-term liabilities |
|
| 301 |
|
|
|
Total liabilities assumed |
| $ | 3,521 |
|
|
|
Goodwill |
|
| 17,612 |
|
|
|
Total fair value of consideration transferred |
| $ | 76,600 |
|
|
|
��
On February 6, 2019, the Company obtained U.S. Food and Drug Administration (“FDA”) approval of the allocation of the purchase price to assets acquiredM6-C artificial cervical disc for patients suffering from cervical disease degeneration and liabilities assumed has not been made and the following should be considered preliminary.started amortizing IPR&D. The final determination is subject to completion of the Company’s valuation of the assets acquired and liabilities assumed, which it expects to complete within one year of the acquisition date.
(U.S. Dollars, in thousands) |
| As of April 30, 2018 |
|
| Assigned Useful Life | |
Assets acquired |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 6,785 |
|
|
|
Restricted cash |
|
| 30 |
|
|
|
Accounts receivable |
|
| 1,705 |
|
|
|
Inventories |
|
| 8,175 |
|
|
|
Prepaid expenses and other current assets |
|
| 315 |
|
|
|
Property, plant and equipment |
|
| 2,285 |
|
|
|
Other long-term assets |
|
| 320 |
|
|
|
Developed technology |
|
| 12,400 |
|
| 10 years |
In-process research and development ("IPR&D") |
|
| 26,800 |
|
| Indefinite |
Tradename |
|
| 100 |
|
| 2 years |
Deferred income taxes |
|
| 3,483 |
|
|
|
Total identifiable assets acquired |
| $ | 62,398 |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
|
Accounts payable |
| $ | 351 |
|
|
|
Other current liabilities |
|
| 2,873 |
|
|
|
Other long-term liabilities |
|
| 301 |
|
|
|
Total liabilities assumed |
|
| 3,525 |
|
|
|
Goodwill |
|
| 17,182 |
|
|
|
Total fair value of consideration transferred |
| $ | 76,055 |
|
|
|
The purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired from Spinal Kinetics. As a result, the Company recorded goodwill in connection with the acquisition. Specifically, the goodwill includes the assembled workforce and synergies associated with the combined entity and is not expected to be deductible for tax purposes. The $17.2$17.6 million of goodwill recognized was assigned to the Spinal ImplantsGlobal Spine reporting segment.
The IPR&D intangible asset is considered an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Accordingly,Company did 0t recognize any acquisition related costs during the development period after the acquisition, this asset is not amortized but, instead, is subject to impairment reviewthree and testing provisions. Upon completion of the IPR&D project, which the Company currently expects to occur mid-2019, the Company will determine the useful life of the assetnine months ended September 30, 2019 and begin amortization.
The Company recognizedrecorded $0.3 million and $3.3 million of acquisition related costs that were expensed during the three and nine months ended September 30, 2018, respectively.2018. These costs are included in the condensed consolidated statements of operations and comprehensive income (loss) within general and administrative expenses. The Company’s results of operations included net sales of $4.2 million and $2.9 million related to Spinal Kinetics for the three months ended September 30, 2019 and 2018, respectively, and net sales of $10.5 million and $5.2 million of revenue from Spinal Kinetics from the date of acquisition for the three and nine months ended September 30, 2019 and 2018, respectively. Additionally, the Company’s results of operations included net losses of $2.9 million and $2.1 million related to Spinal Kinetics for the three months ended September 30, 2019 and 2018, respectively, and net losslosses of $2.1$10.3 million and $3.5 million from the date of acquisition for the three and nine months ended September 30, 2019 and 2018, in the condensed consolidated statements of operations and comprehensive income (loss).respectively.
The following table presents the unaudited pro forma results for the three and nine months ended September 30, 20182019 and 2017,2018, which combines the historical results of operations of Orthofix and Spinal Kinetics as though the companies had been combined as of January 1, 2017.2018. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||||||
Net sales |
| $ | 111,708 |
|
| $ | 109,019 |
|
| $ | 336,882 |
|
| $ | 328,182 |
|
| $ | 113,499 |
|
| $ | 111,708 |
|
| $ | 338,461 |
|
| $ | 336,882 |
|
Net income from continuing operations |
|
| 78 |
|
|
| 1,415 |
|
|
| 7,055 |
|
|
| 448 |
| ||||||||||||||||
Net income (loss) |
|
| (40,498 | ) |
|
| (923 | ) |
|
| (40,148 | ) |
|
| 5,276 |
|
3.Options Medical, LLC Asset Acquisition
On January 31, 2019, the Company acquired certain assets of Options Medical, LLC (“Options Medical”), a medical device distributor based in Florida. Under the terms of the acquisition, the parties agreed to terminate an existing exclusive sales representative agreement, employees of Options Medical became employees of the Company, and the Company acquired all customer lists and customer information related to the sale of the Company’s products. As consideration for the assets acquired, the Company paid $6.4 million. Additionally, as an inducement to enter into employment with the Company, the Company provided 25,478 restricted stock units (“RSUs”), with a fair value of $1.4 million, to the Options Medical founder. These RSUs will vest in one-third annual increments beginning on the first anniversary of the grant date and are contingent upon continued employment. The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date.
(U.S. Dollars, in thousands) |
| Fair Value |
|
| Balance Sheet Classification |
| Assigned Useful Life | |
Assets acquired |
|
|
|
|
|
|
|
|
Operating lease assets |
| $ | 175 |
|
| Other long-term assets |
|
|
Customer relationships |
|
| 5,832 |
|
| Intangible assets, net |
| 10 years |
Assembled workforce |
|
| 568 |
|
| Intangible assets, net |
| 5 years |
Total identifiable assets acquired |
| $ | 6,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed |
|
|
|
|
|
|
|
|
Operating lease liability - short-term |
| $ | 69 |
|
| Other current liabilities |
|
|
Operating lease liability - long-term |
|
| 106 |
|
| Other long-term liabilities |
|
|
Total liabilities assumed |
|
| 175 |
|
|
|
|
|
Total fair value of consideration transferred |
| $ | 6,400 |
|
|
|
|
|
4. Inventories
Inventories were as follows:
(U.S. Dollars, in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||
Raw materials |
| $ | 8,488 |
|
| $ | 6,067 |
|
| $ | 7,760 |
|
| $ | 8,463 |
|
Work-in-process |
|
| 11,774 |
|
|
| 12,487 |
|
|
| 10,532 |
|
|
| 13,478 |
|
Finished products |
|
| 59,633 |
|
|
| 60,441 |
|
|
| 62,701 |
|
|
| 54,906 |
|
Deferred cost of sales |
|
| — |
|
|
| 2,335 |
| ||||||||
Inventories |
| $ | 79,895 |
|
| $ | 81,330 |
|
| $ | 80,993 |
|
| $ | 76,847 |
|
Prior to
5. Leases
As discussed in Note 2, the adoptionCompany adopted ASU No. 2016-02—Leases (Topic 842), as of ASU 2014-09, or for all periods presented prior to January 1, 2018, deferred cost2019, using the modified retrospective approach. Adoption of salesthe new standard resulted from certain transactions where the Company had shipped product or performed services for which all revenue recognition criteria had not yet been met. Once all revenue recognition criteria had been met, the revenue and associated cost of sales were recognized. Subsequent to the adoption of ASU 2014-09, the Company no longer has transactions which result in the recognition of operating lease assets and lease liabilities of $20.2 million and $20.5 million, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities, net of the deferred costtax impact, and the elimination of sales. See Note 8historical prepaid or deferred rent, was recorded as an adjustment to retained earnings. The net impact of adoption to the Company’s balance sheet as of January 1, 2019 is presented in the table below. The standard did not have a material impact to the Company’s condensed consolidated statements of operations and comprehensive income (loss) or cash flows.
(U.S. Dollars, in thousands) |
| December 31, 2018 |
|
| Impact of Adoption of ASC 842 |
|
| January 1, 2019 |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash |
| $ | 72,189 |
|
| $ | — |
|
| $ | 72,189 |
|
Accounts receivable, net |
|
| 77,747 |
|
|
| — |
|
|
| 77,747 |
|
Inventories |
|
| 76,847 |
|
|
| — |
|
|
| 76,847 |
|
Prepaid expenses and other current assets |
|
| 17,856 |
|
|
| (15 | ) |
|
| 17,841 |
|
Total current assets |
|
| 244,639 |
|
|
| (15 | ) |
|
| 244,624 |
|
Property, plant, and equipment, net |
|
| 42,835 |
|
|
| — |
|
|
| 42,835 |
|
Intangible assets, net and goodwill |
|
| 124,298 |
|
|
| — |
|
|
| 124,298 |
|
Deferred income taxes |
|
| 33,228 |
|
|
| 71 |
|
|
| 33,299 |
|
Other long-term assets |
|
| 21,641 |
|
|
| 20,209 |
|
|
| 41,850 |
|
Total assets |
| $ | 466,641 |
|
| $ | 20,265 |
|
| $ | 486,906 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 17,989 |
|
| $ | — |
|
| $ | 17,989 |
|
Other current liabilities |
|
| 67,919 |
|
|
| 2,166 |
|
|
| 70,085 |
|
Total current liabilities |
|
| 85,908 |
|
|
| 2,166 |
|
|
| 88,074 |
|
Other long-term liabilities |
|
| 45,336 |
|
|
| 18,028 |
|
|
| 63,364 |
|
Total liabilities |
| $ | 131,244 |
|
| $ | 20,194 |
|
| $ | 151,438 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
| 1,858 |
|
|
| — |
|
|
| 1,858 |
|
Additional paid-in capital |
|
| 243,165 |
|
|
| — |
|
|
| 243,165 |
|
Retained earnings |
|
| 87,078 |
|
|
| 71 |
|
|
| 87,149 |
|
Accumulated other comprehensive income |
|
| 3,296 |
|
|
| — |
|
|
| 3,296 |
|
Total shareholders’ equity |
|
| 335,397 |
|
|
| 71 |
|
|
| 335,468 |
|
Total liabilities and shareholders’ equity |
| $ | 466,641 |
|
| $ | 20,265 |
|
| $ | 486,906 |
|
The Company determines if an arrangement is a lease at inception. The Company’s leases primarily relate to facilities, vehicles, and equipment. Lease assets represent the Company’s right to use an underlying asset for further discussionthe lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company’s incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives.
The Company has made an accounting policy election for short-term leases, in that the Company will not recognize a lease liability or lease asset on the balance sheet for leases with a lease term of twelve months or less as of the commencement date. Rather, any short-term lease payments will be recognized as an expense on a straight-line basis over the lease term. The current period short-term lease expense reasonably reflects our short-term lease commitments.
The Company has made a policy election for all classifications of leases to combine lease and nonlease components and to account for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in which the obligation is incurred. Additionally, lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option.
During the first quarter of 2019, the Company entered into an amendment for its corporate headquarters lease. As a result, the classification of this lease changed from an operating lease to a finance lease, resulting in an increase to both the lease liability and lease asset of approximately $8.0 million.
A summary of the Company’s adoptionlease portfolio as of ASU 2014-09.September 30, 2019 is presented in the table below:
(U.S. Dollars, in thousands, except lease term and discount rate) |
| Classification |
| September 30, 2019 |
| |
Assets |
|
|
|
|
|
|
Operating leases |
| Other long-term assets |
| $ | 5,894 |
|
Finance leases |
| Property, plant and equipment, net |
|
| 20,451 |
|
Total lease assets |
|
|
|
| 26,345 |
|
Liabilities |
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Operating leases |
| Other current liabilities |
|
| 1,798 |
|
Finance leases |
| Current portion of finance lease liability |
|
| 293 |
|
Long-term |
|
|
|
|
|
|
Operating leases |
| Other long-term liabilities |
|
| 4,205 |
|
Finance leases |
| Long-term portion of finance lease liability |
|
| 20,767 |
|
Total lease liabilities |
|
|
| $ | 27,063 |
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term |
|
|
|
|
|
|
Operating leases |
|
|
| 4.3 years |
| |
Finance leases |
|
|
| 20.9 years |
| |
|
|
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
|
|
Operating leases |
|
|
|
| 2.45 | % |
Finance leases |
|
|
|
| 4.38 | % |
The components of lease costs were as follows:
(U.S. Dollars, in thousands) |
| Three Months ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Finance lease costs: |
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 244 |
|
| $ | 728 |
|
Interest on finance lease liabilities |
|
| 233 |
|
|
| 687 |
|
Operating lease costs |
|
| 538 |
|
|
| 1,618 |
|
Short-term lease costs |
|
| 61 |
|
|
| 195 |
|
Variable lease costs |
|
| 173 |
|
|
| 501 |
|
Total lease costs |
| $ | 1,249 |
|
| $ | 3,729 |
|
Supplemental cash flow information related to leases was as follows:
(U.S. Dollars, in thousands) |
| Nine Months Ended September 30, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
Operating cash flows from operating leases |
| $ | 3,037 |
|
Operating cash flows from finance leases |
|
| 687 |
|
Financing cash flows from finance leases |
|
| 276 |
|
Right-of-use assets obtained in exchange for lease obligations |
|
|
|
|
Operating leases |
|
| 598 |
|
Finance leases |
|
| 21,179 |
|
A summary of the Company’s remaining lease liabilities as of September 30, 2019 is included below:
(U.S. Dollars, in thousands) |
| Operating Leases |
|
| Finance Leases |
| ||
2019 |
| $ | 505 |
|
| $ | 321 |
|
2020 |
| $ | 1,863 |
|
| $ | 1,013 |
|
2021 |
| $ | 1,654 |
|
| $ | 1,414 |
|
2022 |
| $ | 1,333 |
|
| $ | 1,442 |
|
2023 |
| $ | 250 |
|
| $ | 1,471 |
|
Thereafter |
| $ | 782 |
|
| $ | 27,207 |
|
Total undiscounted value of lease liabilities |
| $ | 6,387 |
|
| $ | 32,868 |
|
Less: Interest |
|
| (384 | ) |
|
| (11,808 | ) |
Present value of lease liabilities |
| $ | 6,003 |
|
| $ | 21,060 |
|
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities |
|
| 1,798 |
|
|
| 293 |
|
Long-term portion of lease liabilities |
|
| 4,205 |
|
|
| 20,767 |
|
Total lease liabilities |
| $ | 6,003 |
|
| $ | 21,060 |
|
4.6. Long-term debt
On July 31, 2018, the Company amended and restated its previous Credit Agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), the Administrative Agent, and the lenders party thereto pursuant to a First Amended and Restated Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement is substantially the same as the previous Credit Agreement, except for certain amendments to, among other things, (i) effectuate the domestication of the Company from a Curaçao company to a Delaware corporation, (ii) limit the pledge by the Company and each domestic subsidiary of the Company of equity interests in their respective first tier foreign subsidiaries to 65% of the voting interests in such foreign subsidiaries, (iii) limit the guarantee and joint and several obligations of each subsidiary guarantor that is a foreign subsidiary so that such foreign subsidiary guarantors are only providing guarantees, or are jointly and severally obligated, for obligations of other foreign subsidiaries, and (iv) limit the secured obligations that are secured by collateral provided by subsidiary guarantors that are foreign subsidiaries to secured obligations of foreign subsidiaries.
As of September 30, 2018,2019, the Company had no0 borrowings under the Amended Credit Agreement.its five year $125 million secured revolving credit facility. In addition, the Company has nohad 0 borrowings on its €5.8€5.5 million ($6.76.0 million) available linelines of credit in Italy as of September 30, 2018.2019. The Company iswas in compliance with all required financial covenants as of September 30, 2018.2019.
On October 25, 2019, the Company, and certain of its wholly-owned subsidiaries (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $300 million secured revolving credit facility maturing on October 25, 2024 (the “Facility”), and amends and restates the previous $125 million secured revolving credit facility. As of October 28, 2019, the Borrowers have 0t made any borrowings under the Amended Credit Agreement.
Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions and permitted payments of dividends and other distributions). The Facility is available in US Dollars with up to $150 million of the Facility available to be borrowed in Euros and Pounds Sterling (the “Agreed Currencies”). The Facility further permits up to $50 million to be utilized for the issuance of letters of credit in the Agreed Currencies. The Borrowers have the ability to increase the amount of the Facility, which increases may take the form of increases to the revolving credit commitments or the issuance of new term A loans, by an aggregate amount of up to the greater of $150 million or an incremental amount such that the total amount of the Facility does not exceed 350% of consolidated EBITDA of the Company (as determined for the four fiscal quarter period most recently ended for which financial statements are available), upon satisfaction of customary conditions precedent for such increases or incremental loans and receipt of additional commitments by one or more existing or new lenders.
Borrowings under the Facility bear interest at a floating rate, which will be, at the Borrowers’ option, either LIBOR plus an applicable margin ranging from 1.25% to 2.25%, or a base rate plus an applicable margin ranging from 0.25% to 1.25% (in each case subject to adjustment based on the Company’s total net leverage ratio). An unused fee ranging from 0.15% to 0.25% (subject to adjustment based on the Company’s total net leverage ratio) is payable quarterly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility. Fees are payable on outstanding letters of credit at a rate equal to the applicable margin for LIBOR loans, plus certain customary fees payable solely to the issuer of the letter of credit.
Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of the Borrowers’ obligations under the Amended Credit Agreement. The obligations of the Borrowers and each of the Guarantors with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.
The Amended Credit 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 Amended Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0. The Amended Credit 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 Facility may be accelerated and/or the lenders’ commitments terminated.
5.7. Fair value measurements and investments
The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
|
| September 30, 2018 |
|
| December 31, 2017 |
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||||||
(U.S. Dollars, in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Total |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collective trust funds |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 100 |
| ||||||||||||||||||||
Treasury securities |
|
| 520 |
|
|
| — |
|
|
| — |
|
|
| 520 |
|
|
| 556 |
|
| $ | 447 |
|
| $ | — |
|
| $ | — |
|
| $ | 447 |
|
| $ | 490 |
|
Equity warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 311 |
| ||||||||||||||||||||
Equity securities |
|
| — |
|
|
| 219 |
|
|
| — |
|
|
| 219 |
|
|
| 2,457 |
| ||||||||||||||||||||
Debt security |
|
| — |
|
|
| — |
|
|
| 19,250 |
|
|
| 19,250 |
|
|
| 16,050 |
| ||||||||||||||||||||
Bone Biologics equity warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Bone Biologics equity securities |
|
| — |
|
|
| 219 |
|
|
| — |
|
|
| 219 |
|
|
| 219 |
| ||||||||||||||||||||
eNeura debt security |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,820 |
| ||||||||||||||||||||
eNeura warrant |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Total |
| $ | 520 |
|
| $ | 219 |
|
| $ | 19,250 |
|
| $ | 19,989 |
|
| $ | 19,474 |
|
| $ | 447 |
|
| $ | 219 |
|
| $ | — |
|
| $ | 666 |
|
| $ | 18,529 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
| $ | — |
|
| $ | — |
|
| $ | (28,180 | ) |
| $ | (28,180 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | (41,700 | ) |
| $ | (41,700 | ) |
| $ | (28,560 | ) |
Deferred compensation plan |
|
| — |
|
|
| (1,291 | ) |
|
| — |
|
|
| (1,291 | ) |
|
| (1,379 | ) |
|
| — |
|
|
| (1,242 | ) |
|
| — |
|
|
| (1,242 | ) |
|
| (1,275 | ) |
Total |
| $ | — |
|
| $ | (1,291 | ) |
| $ | (28,180 | ) |
| $ | (29,471 | ) |
| $ | (1,379 | ) |
| $ | — |
|
| $ | (1,242 | ) |
| $ | (41,700 | ) |
| $ | (42,942 | ) |
| $ | (29,835 | ) |
Bone Biologics Equity Warrants and Securities
The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics.Biologics, Inc. (“Bone Biologics”). The Company’s common stock investments are recorded within other long-term assets while the warrants are recorded within other current assets or other long-term assets, dependent upon the expiration date. Priorconsidered to 2018, these instruments were accounted for at cost as thehave a fair value of these instruments was not readily determinable. During the first quarter of 2018, the Company made an additional investment in Bone Biologics through the purchase of an additional 25,000 shares of common stock, after giving effect to a reverse stock split subsequent to the purchase, for $0.5 million.
Effective January 1, 2018, the Company is required to measure these0. The equity investments at fair value and recognize any changes in fair value in net income as a result of adopting ASU 2016-01. However, for certain equitysecurities are considered investments that do not have readily determinable fair values,values. As such, the new guidance allows entities to choose to measureCompany measures these investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company elected to use the new measurement alternative for these equity investments in Bone Biologics, which resulted in an increase in the previously recorded value
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Bone Biologics equity securities and warrants beginning balance |
| $ | 219 |
|
| $ | 4,668 |
|
| $ | 219 |
|
| $ | 2,768 |
|
Impact of adoption of ASU 2016-01 recognized in other income (expense), net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,629 |
|
Purchase of additional common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 500 |
|
Fair value adjustments, expirations, and impairments recognized in other income (expense), net |
|
| — |
|
|
| (4,449 | ) |
|
| — |
|
|
| (4,678 | ) |
Bone Biologics equity securities and warrants ending balance |
| $ | 219 |
|
| $ | 219 |
|
| $ | 219 |
|
| $ | 219 |
|
eNeura Debt Security and Warrant
As of the equity investments of $1.6 million, or $0.09 per share before taxes, based on an observable price in an orderly transaction during the three months ended March 31, 2018. During the three months ended September 30, 2018, Bone Biologics executed a series of equity financing activities which significantly diluted the Company’s ownership interest in the outstanding stock. After considering the new observable prices in these equity financing activities, and after giving consideration to going concern issues disclosed by Bone Biologics,2019, the Company determined this investment was impaired and recorded an impairment charge of $4.4 million relating to its investments in Bone Biologics. These changes are classified within other income and expense.
The changes in valuation of these securities for the three months and nine months ended September 30, 2018 and 2017 are shown below:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Equity securities and warrants beginning balance |
| $ | 4,668 |
|
| $ | 2,768 |
|
| $ | 2,768 |
|
| $ | 2,768 |
|
Impact of adoption of ASU 2016-01 recognized in other income |
|
| — |
|
|
| — |
|
|
| 1,629 |
|
|
| — |
|
Purchase of additional common stock |
|
| — |
|
|
| — |
|
|
| 500 |
|
|
| — |
|
Fair value adjustments, expirations, and impairments recognized in other expense |
|
| (4,449 | ) |
|
| — |
|
|
| (4,678 | ) |
|
| — |
|
Equity securities and warrants ending balance |
| $ | 219 |
|
| $ | 2,768 |
|
| $ | 219 |
|
| $ | 2,768 |
|
Debt Security
The Company holdsheld a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The debt security matureswas originally set to mature on March 4, 2019. The fair value ofOn March 1, 2019, the Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which is recordedextended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura, and which also eliminated the conversion feature included within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).
Prior to the restructuring on March 1, 2019, the debt security was accounted for as an available for sale debt security at fair value and included within other current assets, islong-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow model and assumptions regarding the expected payback period for the debt security, requiring the Company to develop its own assumptions; therefore, the Company hashad categorized this asset as a Level 3 financial asset.As of September 30, 2018,
Subsequent to the Company reassessedrestructuring, the debt security was no longer classified as an available for sale debt security, but rather as a held to maturity debt security. The debt security was reclassified from an available for sale debt security to a held to maturity debt security at its estimate of fair value based on current financial information andthe date of the restructuring. As a result, the unrealized gains included in accumulated other assumptions, resulting in acomprehensive income related to the debt security were to be subsequently amortized to interest income over the remaining term of the Restructured Debt Security.
The Warrant was recorded at fair value of $19.3 million, an increase of $3.2 million when compared to the Company’s estimatedand included in other long-term assets. The fair value of the Warrant was based on significant unobservable inputs, including the use of a discounted cash flow model and an option-pricing model, requiring the Company to develop its own assumptions; therefore, the Company categorized this asset as a Level 3 financial asset. The Warrant was considered an investment that does not have a readily determinable fair value. As such, the Company measured the Warrant at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
During the quarter ended September 30, 2019, the Company engaged in negotiations with eNeura to settle the Restructured Debt Security and on October 25, 2019, the Company and eNeura settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura. As such, at September 30, 2019, the Company determined the Restructured Debt Security and Warrant were impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million. Further, the Company also reclassified the remaining balance of the Restructured Debt Security to other current assets as payment was received within the next twelve months.
During the three and nine months ended September 30, 2019, the Company recognized $0.5 and $1.5 million in interest income related to the eNeura debt security as of December 31, 2017. This compares to an amortized cost basis insecurity. The Company did 0t recognize any interest income during the debt security of $9.0 million.three and nine months ended September 30, 2018.
The following table provides a reconciliation of the beginning and ending balances for the eNeura debt securitiessecurity and Warrant measured and reflected in the condensed consolidated balance sheets at fair value using significant unobservable inputs (Level 3): prior to the settlement discussed above:
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
| ||
Debt security at January 1 |
| $ | 16,050 |
|
| $ | 12,220 |
|
Accrued interest income |
|
| — |
|
|
| — |
|
Gains or losses recorded for the period |
|
|
|
|
|
|
|
|
Recognized in net income |
|
| — |
|
|
| (5,585 | ) |
Recognized in other comprehensive income |
|
| 3,200 |
|
|
| 2,365 |
|
Debt security at September 30 |
| $ | 19,250 |
|
| $ | 9,000 |
|
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
| ||
eNeura debt security and Warrant at January 1 |
| $ | 17,820 |
|
| $ | 16,050 |
|
Gains or losses recorded for the period |
|
|
|
|
|
|
|
|
Recognized in other comprehensive income (loss) |
|
| (2,593 | ) |
|
| 3,200 |
|
Change in classification of debt security to held to maturity |
|
| (15,227 | ) |
|
| — |
|
Issuance of Warrant as consideration for extension |
|
| 491 |
|
|
| — |
|
Impairment of Warrant |
|
| (491 | ) |
|
| — |
|
eNeura debt security and Warrant at September 30 |
| $ | — |
|
| $ | 19,250 |
|
Contingent Consideration
The contingent consideration consistsat the acquisition date of Spinal Kinetics consisted of potential future milestone payments of up to $60.0 million in cash associated with the Spinal Kinetics acquisition.cash. The milestone payments includeincluded (i) up to $15.0 million if the FDA grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments.
On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc. This approval triggered the Company’s payment obligation of $15.0 million for the achievement of the FDA Milestone and such obligation was paid on February 14, 2019. The estimated fair value of the remaining contingent consideration arrangement at the acquisition date was $25.5 million and was $28.2$41.7 million as of September 30, 2018;2019; however, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. The increaseThis resulted in the recognition of expense of $22.3 and $28.1 million during the three and nine months ended September 30, 2019, respectively, which was primarily attributable to a change in management’s forecast of future net sales of the artificial discs, including an acceleration of the expected timing of such future sales during the three months ended September 30, 2019, subsequent to the Company’s launch of the product in the U.S. At September 30, 2019, the Company has classified $14.5 million of the liability attributable to the revenue-based milestones within other current liabilities, as the Company expects to pay one of the revenue-based milestones in the next twelve months, and the remaining $27.2 million within other long-term liabilities. Any changes in fair value of $2.7 million wasare recorded as an operating expense labeled changes in fair value of contingent consideration. Approximately $13.6 million of this liability isand included within other current liabilitiesacquisition-related amortization and $14.6 million is included within other long-term liabilities.remeasurement.
The Company estimated the fair value of the contingent consideration attributable to the FDA Milestone using a probability-weighted discounted cash flow model. This fair value is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The key assumptions in applying the probability-weighted discounted cash flow model include the Company’s estimation of the probability and timing of obtaining FDA approval for the M6-C artificial disc. The Company currently expects to obtain approval from the FDA mid-2019. Significant changes in these assumptions could result in a significantly higher or lower fair value.
The Company estimated the fair value of theremaining potential future revenue-based milestone payments using a Monte Carlo simulation. This fair value measurement is based on significant inputs that are unobservable in the market, and thus represents a Level 3 measurement. The key assumptions in applying the Monte Carlo valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, discount rate applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.
The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2019 |
|
| 2018 |
| |||
Contingent consideration at January 1 |
| $ | — |
|
| $ | 28,560 |
|
| $ | — |
|
Acquisition date fair value |
|
| 25,491 |
|
|
| — |
|
|
| 25,491 |
|
Increase in fair value recognized in operating expenses |
|
| 2,689 |
| ||||||||
Increase in fair value recognized in acquisition-related amortization and remeasurement |
|
| 28,140 |
|
|
| 2,689 |
| ||||
Payment made |
|
| (15,000 | ) |
|
| — |
| ||||
Contingent consideration at September 30 |
| $ | 28,180 |
|
| $ | 41,700 |
|
| $ | 28,180 |
|
6.
8. Contingencies
In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.
Discontinued Operations – Matters Related to Breg and Possible Indemnification Obligations
On May 24, 2012, the Company sold Breg, Inc. (“Breg”), a former subsidiary of the Company, to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”). Under the terms of the agreement, the Company indemnified Water Street 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. In September 2014, the Company entered into a master settlement agreement resolving then pending pre-close cold therapy claims. In May 2018, Breg settled and resolved a post-close cold therapy claim in California state court, Gmeiner v. Breg, Inc. Pursuant to Orthofix’s indemnification obligations to Breg, Orthofix was obligated to make a final payment to its insurer, Berkley Life Sciences, in the amount of $1.7 million, which was the remaining balance on Orthofix’s Self-Insured Retention in its liability insurance policy, to help fund the Breg settlement in the Gmeiner matter.
Charges incurred as a result of this indemnification obligation to Breg are reflected as discontinued operations in the condensed consolidated statements of operations and comprehensive income (loss).
Italian Medical Device Payback (“IMDP”)
In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. TheThis healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology sector that sell medical devices in Italy. A key provision of the law is a ‘payback’ measure, requiring companies selling medical devices in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the IMDP as sales and marketing expense and asrecorded expense of $0.3 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $1.0 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2018,2019, the Company has accrued €3.0$4.5 million ($3.5 million) related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.
Brazil
In July 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority (CADE) inspected the offices of more than 30 companies, including Orthofix’sthe Company’s office in São Paulo, as part of an investigation into tender irregularities in the medical device industry. Before doing so, the authorities obtained a court order affecting Orthofix’sthe Company’s (and other companies’) local bank accounts resulting in the freezing of approximately $2.5 million of Orthofix’sthe Company’s cash, which the Company reclassified to restricted cash. Orthofix contestsOn April 3, 2019, the underlying basis forCompany’s appeal regarding the order. Based on information knownfreezing of its local bank accounts was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the Company’s cash. The cash was then returned without any restrictions in April 2019. As such, this balance was reclassified to date,cash and cash equivalents during the second quarter of 2019.
In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $0.7 million of the Company’s cash in Brazil was frozen upon request to satisfy a judgment. Although the Company does not believe thatis appealing the Brazilian authorities’ investigation will result in a material lossjudgment, this cash has been reclassified to restricted cash. As of September 30, 2019, the Company.Company has an accrual of $1.6 million related to this matter.
7.9. Accumulated other comprehensive income (loss)
The components of and changes in accumulated other comprehensive income were as follows:
(U.S. Dollars, in thousands) |
| Currency Translation Adjustments |
|
| Debt Security |
|
| Accumulated Other Comprehensive Income |
| |||
Balance at December 31, 2017 |
| $ | (563 | ) |
| $ | 4,350 |
|
| $ | 3,787 |
|
Other comprehensive income |
|
| (1,322 | ) |
|
| 3,200 |
|
|
| 1,878 |
|
Income taxes |
|
| — |
|
|
| (798 | ) |
|
| (798 | ) |
Balance at September 30, 2018 |
| $ | (1,885 | ) |
| $ | 6,752 |
|
| $ | 4,867 |
|
(U.S. Dollars, in thousands) |
| Currency Translation Adjustments |
|
| Debt Security |
|
| Accumulated Other Comprehensive Income (Loss) |
| |||
Balance at December 31, 2018 |
| $ | (2,386 | ) |
| $ | 5,682 |
|
| $ | 3,296 |
|
Cumulative effect adjustment from adoption of ASU 2018-02 |
|
| — |
|
|
| 938 |
|
|
| 938 |
|
Other comprehensive loss |
|
| (2,195 | ) |
|
| (2,593 | ) |
|
| (4,788 | ) |
Income taxes |
|
| — |
|
|
| 641 |
|
|
| 641 |
|
Reclassification adjustment to: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
| — |
|
|
| (1,034 | ) |
|
| (1,034 | ) |
Other expense, net |
|
| — |
|
|
| (5,193 | ) |
|
| (5,193 | ) |
Income taxes |
|
| — |
|
|
| 1,559 |
|
|
| 1,559 |
|
Balance at September 30, 2019 |
| $ | (4,581 | ) |
| $ | — |
|
| $ | (4,581 | ) |
8.10. Revenue recognition and accounts receivable
Adoption of ASU 2014-09, “Revenue from Contracts with Customers”
Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective transition method, which was applied to all contracts. Results for the three and nine months ended September 30, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under the previous revenue recognition standard, Topic 605.Recognition
The Company recorded a net increase to opening retained earningshas two reporting segments, which consist of $4.8 million as of January 1, 2018 due toGlobal Spine and Global Extremities. Within the cumulative impact of adopting Topic 606 as presented in the table below.
(U.S. Dollars, in thousands) |
| December 31, 2017 |
|
| Impact of Adoption of Topic 606 |
|
| January 1, 2018 |
| |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 81,157 |
|
| $ | — |
|
| $ | 81,157 |
|
Accounts receivable, net |
|
| 63,437 |
|
|
| 8,648 |
|
|
| 72,085 |
|
Inventories |
|
| 81,330 |
|
|
| (2,338 | ) |
|
| 78,992 |
|
Prepaid expenses and other current assets |
|
| 25,877 |
|
|
| — |
|
|
| 25,877 |
|
Total current assets |
|
| 251,801 |
|
|
| 6,310 |
|
|
| 258,111 |
|
Deferred income taxes |
|
| 23,315 |
|
|
| (1,549 | ) |
|
| 21,766 |
|
Other long-term assets |
|
| 130,238 |
|
|
| — |
|
|
| 130,238 |
|
Total assets |
| $ | 405,354 |
|
| $ | 4,761 |
|
| $ | 410,115 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
| $ | 108,746 |
|
| $ | — |
|
| $ | 108,746 |
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
| 1,828 |
|
|
| — |
|
|
| 1,828 |
|
Additional paid-in capital |
|
| 220,591 |
|
|
| — |
|
|
| 220,591 |
|
Retained earnings |
|
| 70,402 |
|
|
| 4,761 |
|
|
| 75,163 |
|
Accumulated other comprehensive income |
|
| 3,787 |
|
|
| — |
|
|
| 3,787 |
|
Total shareholders’ equity |
|
| 296,608 |
|
|
| 4,761 |
|
|
| 301,369 |
|
Total liabilities and shareholders’ equity |
| $ | 405,354 |
|
| $ | 4,761 |
|
| $ | 410,115 |
|
The impact primarily related to an increase in trade accounts receivable, net, from the Company’s stocking distributors, for which revenue was historically recognized when cash payment was received, and the recognition of previously deferred cost of sales for certain stocking distributor transactions, which were historically included within inventory. Adoption of Topic 606 had no impact to cash from or used in operating, investing, or financing activities on the condensed consolidated statement of cash flows.
The table below presents the impact to the Company’s condensed consolidated statement of operations for theGlobal Spine reporting segment there are three and nine months ended September 30, 2018 as a result of the adoption of Topic 606.
|
| Three Months Ended September 30, 2018 |
|
| Nine Months Ended September 30, 2018 |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| Based on historical accounting under Topic 605 |
|
| Impact of adoption |
|
| As reported under Topic 606 |
|
| Based on historical accounting under Topic 605 |
|
| Impact of adoption |
|
| As reported under Topic 606 |
| ||||||
Net sales |
| $ | 109,512 |
|
| $ | 2,196 |
|
| $ | 111,708 |
|
| $ | 324,274 |
|
| $ | 7,690 |
|
| $ | 331,964 |
|
Cost of sales |
|
| 23,784 |
|
|
| 236 |
|
|
| 24,020 |
|
|
| 68,975 |
|
|
| 2,027 |
|
|
| 71,002 |
|
Gross profit |
|
| 85,728 |
|
|
| 1,960 |
|
|
| 87,688 |
|
|
| 255,299 |
|
|
| 5,663 |
|
|
| 260,962 |
|
Sales and marketing |
|
| 49,766 |
|
|
| 132 |
|
|
| 49,898 |
|
|
| 151,741 |
|
|
| (46 | ) |
|
| 151,695 |
|
Other operating expenses |
|
| 33,883 |
|
|
| — |
|
|
| 33,883 |
|
|
| 91,572 |
|
|
| — |
|
|
| 91,572 |
|
Operating income |
| $ | 2,079 |
|
| $ | 1,828 |
|
| $ | 3,907 |
|
| $ | 11,986 |
|
| $ | 5,709 |
|
| $ | 17,695 |
|
Income tax expense |
|
| 677 |
|
|
| (562 | ) |
|
| 115 |
|
|
| (4,935 | ) |
|
| (1,411 | ) |
|
| (6,346 | ) |
Net income (loss) from continuing operations |
| $ | (2,479 | ) |
| $ | 1,266 |
|
| $ | (1,213 | ) |
| $ | 651 |
|
| $ | 4,298 |
|
| $ | 4,949 |
|
Net income (loss) from continuing operations per common share—basic |
| $ | (0.13 | ) |
| $ | 0.06 |
|
| $ | (0.07 | ) |
| $ | 0.04 |
|
| $ | 0.22 |
|
| $ | 0.26 |
|
Net income (loss) from continuing operations per common share—diluted |
| $ | (0.13 | ) |
| $ | 0.06 |
|
| $ | (0.07 | ) |
| $ | 0.03 |
|
| $ | 0.23 |
|
| $ | 0.26 |
|
Revenue Recognition Under Topic 606
The Company accounts for a contract when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. The Company’s contracts may contain one or more performance obligations. If a contract contains more than one performance obligation, the Company allocates the total transaction price to each of the performance obligations based upon the observable standalone selling price of the promised goods or services underlying each performance obligation. The Company recognizes revenue when control of the promised goods or services is transferred to the customer, which typically occurs at a point in time upon shipment, delivery, or utilization, in an amount that reflects the consideration which the Company expects to be entitled in exchange for the promised goods or services. The amount the Company expects to be entitled to in exchange for the goods or services reflects any fixed amount stated per the contract and estimates for any variable consideration, such as discounts, to the extent that is it probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Bone Growth Therapies
product categories: Bone Growth Therapies, revenue is largely attributable to the U.S.Spinal Implants and is comprised of third-party payor transactions and wholesale revenue.Biologics.
The largest portion of Bone Growth Therapies revenue is derived from third-party payors. This includes commercial insurance carriers, health maintenance organizations, preferred provider organizations and governmental payors such as Medicare, in connection with the sale of the Company’s stimulation products. The customer obtains control and revenue is recognized when the stimulation product is fitted to and accepted by the patient and all applicable documents that are required by the third-party payor have been obtained. Amounts paid by these third-party payors are generally based on fixed or allowable reimbursement rates. These revenues are recorded at the expected or preauthorized reimbursement rates, net of any contractual allowances or adjustments. Certain billings are subject to review by the third-party payors and may be subject to adjustment. Adoption of Topic 606 had an immaterial impact to the Bone Growth Therapies reporting segment.
Wholesale revenue is related to the sale of the Company’s bone growth stimulators directly to healthcare providers. Wholesale revenues are typically recognized upon shipment and receipt of a confirming purchase order, which is when the customer obtains control of the promised goods.
Orthofix Extremities and Spinal Implants
Orthofix Extremities and Spinal Implants products are distributed world-wide, with U.S. sales largely comprised of commercial revenue and international sales derived from commercial sales and through stocking distributor arrangements.
Commercial revenue is related to the sale of the Company’s internal and external fixation products, generally representing hospital customers. The customer obtains control and revenues are recognized when these products have been utilized and a confirming purchase order has been received from the hospital.
Certain revenues within the Orthofix Extremities and Spinal Implants reporting segments are derived from stocking distributors, who purchase the Company’s products and then re-sell them directly to customers, such as hospitals. For revenue from stocking distributor arrangements, subsequent to the adoption of Topic 606 effective January 1, 2018, the Company recognizes revenue upon shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the promised goods. The transaction price with stocking distributors is estimated based upon the Company’s historical collection experience with the stocking distributor. To derive this estimate, the Company analyzes twelve months of historical invoices by stocking distributor and the subsequent collections on those invoices, for a period of up to 24 months subsequent to the invoice date. This percentage, which is specific to each stocking distributor, is then used to calculate the transaction price. Cost of sales is also recorded upon transfer of control of the product to the customer.
Prior to the adoption of Topic 606, or for all periods presented prior to January 1, 2018, the Company recognized revenue from stocking distributor arrangements once the product was delivered to the end customer (the “sell-through method”). Because the Company did not have reliable information about when its distributors sold the product through to end customers, the Company used cash collection from distributors as a basis for revenue recognition under the sell-through method. Although in many cases the Company was legally entitled to the accounts receivable at the time of shipment, the Company did not recognize accounts receivables or any corresponding deferred revenues at the time of shipment associated with stocking distributor transactions for which revenue was recognized on the sell-through method. The Company also considered whether to match the related cost of sales with revenue or to recognize cost of sales upon shipment. In making this assessment, the Company considered the financial viability of its stocking distributors based on their creditworthiness to determine if collectability of amounts sufficient to realize the costs of the products shipped was reasonably assured at the time of shipment to these stocking distributors. In instances where the stocking distributor was determined to be financially viable, the Company deferred the costs of sales until the revenue was recognized.
Biologics
Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF Biologics (“MTF”), which extends through July 28, 2027, through which the Company markets tissue for bone repair and reconstruction under the brand names Trinity Evolution and Trinity ELITE. Under the terms of the agreement, MTF sources the tissue, processes it to create the bone growth matrix, packages and delivers it to the customer in accordance with orders received from the Company. The Company has exclusive global marketing rights for the Trinity Evolution and Trinity ELITE tissues as well as non-exclusive marketing rights for other products, and receives marketing fees from MTF based on total sales. MTF is considered the primary obligor in these arrangements and therefore the Company recognizes these marketing service fees on a net basis withintables below present net sales upon shipment of theby major product to the customer. Adoption of Topic 606 had an immaterial impact to the Biologicscategory by reporting segment.segment:
|
| Three Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| Change |
| |||
Bone Growth Therapies |
| $ | 48,836 |
|
| $ | 48,059 |
|
|
| 1.6 | % |
Spinal Implants |
|
| 22,947 |
|
|
| 22,102 |
|
|
| 3.8 | % |
Biologics |
|
| 16,308 |
|
|
| 14,636 |
|
|
| 11.4 | % |
Global Spine |
|
| 88,091 |
|
|
| 84,797 |
|
|
| 3.9 | % |
Global Extremities |
|
| 25,408 |
|
|
| 26,911 |
|
|
| -5.6 | % |
Net sales |
| $ | 113,499 |
|
| $ | 111,708 |
|
|
| 1.6 | % |
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| Change |
| |||
Bone Growth Therapies |
| $ | 146,228 |
|
| $ | 142,433 |
|
|
| 2.7 | % |
Spinal Implants |
|
| 69,076 |
|
|
| 66,689 |
|
|
| 3.6 | % |
Biologics |
|
| 48,784 |
|
|
| 43,639 |
|
|
| 11.8 | % |
Global Spine |
|
| 264,088 |
|
|
| 252,761 |
|
|
| 4.5 | % |
Global Extremities |
|
| 74,373 |
|
|
| 79,203 |
|
|
| -6.1 | % |
Net sales |
| $ | 338,461 |
|
| $ | 331,964 |
|
|
| 2.0 | % |
Product Sales and Marketing Service Fees
The table below presents net sales, which includes product sales and marketing service fees, for the three and nine months ended September 30, 20182019 and 2017.2018.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Product sales |
| $ | 97,604 |
|
| $ | 90,645 |
|
| $ | 289,946 |
|
| $ | 272,954 |
|
| $ | 97,833 |
|
| $ | 97,604 |
|
| $ | 291,632 |
|
| $ | 289,946 |
|
Marketing service fees |
|
| 14,104 |
|
|
| 14,602 |
|
|
| 42,018 |
|
|
| 43,973 |
|
|
| 15,666 |
|
|
| 14,104 |
|
|
| 46,829 |
|
|
| 42,018 |
|
Net sales |
| $ | 111,708 |
|
| $ | 105,247 |
|
| $ | 331,964 |
|
| $ | 316,927 |
|
| $ | 113,499 |
|
| $ | 111,708 |
|
| $ | 338,461 |
|
| $ | 331,964 |
|
Product sales primarily consist of the sale of bone growth stimulationtherapy devices and internal and external fixation products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the BiologicsGlobal Spine reporting segment. Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Shipping and handling costs for products shipped to customers are included in cost of sales.
Trade Accounts Receivable and AllowancesPuerto Rico Settlement
Payment terms vary byIn June 2019, the type and locationCompany received a payment of $1.4 million from the Administration of Medical Services of Puerto Rico, a government-owned corporation, in settlement of approximately $2.5 million of outstanding accounts receivable. This $2.5 million of outstanding accounts receivable had previously been fully reserved between the Company’s customers and the products or services offered. The term between invoicing and when payment is due is not significant. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reservesallowances for doubtful accounts and contractual allowances. RevisionsAs a result of this settlement, and in accordance with the Company’s policy, the Company recorded the resulting adjustment to contractual allowances of $0.4 million within net sales and the recovery of the allowance for doubtful accounts estimates are recorded as an adjustmenta credit to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. The Company’s estimates are periodically tested against actual collection experience.of $1.0 million.
Other Contract Assets
The Company’s contract assets, excluding trade accounts receivable (“other contract assets”Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of Orthofix products. Other contract assetsContract Assets are included in other long-term assets or other current assets, dependent
upon the original term of the related agreement, and were $1.1totaled $3.5 million and $1.0$1.9 million as of September 30, 2018,2019, and December 31, 2017,2018, respectively.
Other contract assets are amortized on a straight-line basis over the term of the related contract. There were no changes to such treatment as a result of adoption of Topic 606. No impairments were incurred for other contract assets in 2018 or 2017. Further, the Company has applied the practical expedient allowed within the guidance to expense sales commissions when incurred as the amortization period would be for one year or less.
9.11. Business segment information
TheDuring the first quarter of 2019, the Company has fourchanged its reporting segments:segments from 4 reporting segments, previously reported as Bone Growth Therapies, (formerly referred to as BioStim), Spinal Implants, (formerly referred to as Spine Fixation), Biologics, and Orthofix Extremities, (formerly referred to 2 reporting segments: Global Spine and Global Extremities. Additionally, the Company changed the performance measure used to evaluate segment performance from Non-GAAP net margin to EBITDA. These changes were made to align how the chief operating decision maker manages the business, reviews operating performance and allocates resources. The Company has revised its segment reporting to represent how the business is now managed and restated prior periods to conform to the current segment presentation. Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the 2 reporting segments, such as Extremity Fixation).The tables below presenthuman resources, finance, legal, and information technology functions.
As part of the change in reporting segments, the Company performed a quantitative assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not result in an impairment. In addition, the net sales, which includes product salescarrying value of goodwill that was previously reported under the prior reporting segments (i) Bone Growth Therapies, (ii) Spinal Implants, and marketing service fees, by(iii) Biologics has been consolidated and is now included within the Global Spine reporting segment:segment as of September 30, 2019.
|
| Three Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Bone Growth Therapies |
| $ | 48,059 |
|
| $ | 44,427 |
|
|
| 8.2 | % |
Spinal Implants |
|
| 22,102 |
|
|
| 20,155 |
|
|
| 9.7 | % |
Biologics |
|
| 14,636 |
|
|
| 15,218 |
|
|
| -3.8 | % |
Orthofix Extremities |
|
| 26,911 |
|
|
| 25,447 |
|
|
| 5.8 | % |
Net sales |
| $ | 111,708 |
|
| $ | 105,247 |
|
|
| 6.1 | % |
|
| Nine Months Ended September 30, |
| |||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
| |||
Bone Growth Therapies |
| $ | 142,433 |
|
| $ | 136,140 |
|
|
| 4.6 | % |
Spinal Implants |
|
| 66,689 |
|
|
| 60,782 |
|
|
| 9.7 | % |
Biologics |
|
| 43,639 |
|
|
| 45,866 |
|
|
| -4.9 | % |
Orthofix Extremities |
|
| 79,203 |
|
|
| 74,139 |
|
|
| 6.8 | % |
Net sales |
| $ | 331,964 |
|
| $ | 316,927 |
|
|
| 4.7 | % |
TheAs mentioned above, the primary metric used in managing the Company is non-GAAP net margin, which is an internal metric that the Company defines as gross profit less sales and marketing expense.EBITDA. The table below presents non-GAAP net marginEBITDA by reporting segment:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Bone Growth Therapies |
| $ | 21,151 |
|
| $ | 18,285 |
|
| $ | 61,395 |
|
| $ | 54,887 |
|
Spinal Implants |
|
| 1,812 |
|
|
| 2,122 |
|
|
| 5,960 |
|
|
| 6,825 |
|
Biologics |
|
| 6,654 |
|
|
| 6,010 |
|
|
| 18,981 |
|
|
| 18,651 |
|
Orthofix Extremities |
|
| 8,295 |
|
|
| 7,723 |
|
|
| 23,455 |
|
|
| 20,901 |
|
Corporate |
|
| (122 | ) |
|
| (103 | ) |
|
| (524 | ) |
|
| (308 | ) |
Non-GAAP net margin |
| $ | 37,790 |
|
| $ | 34,037 |
|
| $ | 109,267 |
|
| $ | 100,956 |
|
General and administrative |
|
| 22,705 |
|
|
| 18,068 |
|
|
| 64,457 |
|
|
| 56,759 |
|
Research and development |
|
| 9,598 |
|
|
| 6,935 |
|
|
| 24,426 |
|
|
| 21,246 |
|
Changes in fair value of contingent consideration |
|
| 1,580 |
|
|
| — |
|
|
| 2,689 |
|
|
| — |
|
Operating income |
| $ | 3,907 |
|
| $ | 9,034 |
|
| $ | 17,695 |
|
| $ | 22,951 |
|
Interest income (expense), net |
|
| (181 | ) |
|
| (15 | ) |
|
| (615 | ) |
|
| 106 |
|
Other income (expense), net |
|
| (5,054 | ) |
|
| 479 |
|
|
| (5,785 | ) |
|
| (3,284 | ) |
Income (loss) before income taxes |
| $ | (1,328 | ) |
| $ | 9,498 |
|
| $ | 11,295 |
|
| $ | 19,773 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Global Spine |
| $ | (6,033 | ) |
| $ | 15,637 |
|
| $ | 21,065 |
|
| $ | 53,492 |
|
Global Extremities |
|
| 1,229 |
|
|
| 3,357 |
|
|
| 3,806 |
|
|
| 7,173 |
|
Corporate |
|
| (15,949 | ) |
|
| (15,403 | ) |
|
| (38,356 | ) |
|
| (35,097 | ) |
Total EBITDA |
| $ | (20,753 | ) |
| $ | 3,591 |
|
| $ | (13,485 | ) |
| $ | 25,568 |
|
Depreciation and amortization |
|
| (6,275 | ) |
|
| (4,738 | ) |
|
| (18,180 | ) |
|
| (13,661 | ) |
Interest income (expense), net |
|
| 186 |
|
|
| (181 | ) |
|
| 386 |
|
|
| (615 | ) |
Income (loss) before income taxes |
| $ | (26,842 | ) |
| $ | (1,328 | ) |
| $ | (31,279 | ) |
| $ | 11,292 |
|
Geographical information
The table below presentpresents net sales by geographic destination for each reporting unit and for the consolidated Company:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Bone Growth Therapies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Global Spine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
U.S. |
| $ | 48,039 |
|
| $ | 44,427 |
|
| $ | 142,378 |
|
| $ | 136,128 |
|
| $ | 82,816 |
|
| $ | 79,502 |
|
| $ | 246,943 |
|
| $ | 239,262 |
|
International |
|
| 20 |
|
|
| — |
|
|
| 55 |
|
|
| 12 |
|
|
| 5,275 |
|
|
| 5,295 |
|
|
| 17,145 |
|
| $ | 13,499 |
|
Total Bone Growth Therapies |
|
| 48,059 |
|
|
| 44,427 |
|
|
| 142,433 |
|
|
| 136,140 |
| ||||||||||||||||
Total Global Spine |
|
| 88,091 |
|
|
| 84,797 |
|
|
| 264,088 |
|
|
| 252,761 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spinal Implants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Global Extremities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
U.S. |
|
| 16,829 |
|
|
| 17,085 |
|
|
| 53,261 |
|
|
| 51,170 |
|
| �� | 6,636 |
|
|
| 7,254 |
|
|
| 20,078 |
|
|
| 21,193 |
|
International |
|
| 5,273 |
|
|
| 3,070 |
|
|
| 13,428 |
|
|
| 9,612 |
|
|
| 18,772 |
|
|
| 19,657 |
|
|
| 54,295 |
|
|
| 58,010 |
|
Total Spinal Implants |
|
| 22,102 |
|
|
| 20,155 |
|
|
| 66,689 |
|
|
| 60,782 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Biologics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
U.S. |
|
| 14,634 |
|
|
| 15,202 |
|
|
| 43,623 |
|
|
| 45,816 |
| ||||||||||||||||
International |
|
| 2 |
|
|
| 16 |
|
|
| 16 |
|
|
| 50 |
| ||||||||||||||||
Total Biologics |
|
| 14,636 |
|
|
| 15,218 |
|
|
| 43,639 |
|
|
| 45,866 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Orthofix Extremities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
U.S. |
|
| 7,254 |
|
|
| 6,804 |
|
|
| 21,193 |
|
|
| 20,124 |
| ||||||||||||||||
International |
|
| 19,657 |
|
|
| 18,643 |
|
|
| 58,010 |
|
|
| 54,015 |
| ||||||||||||||||
Total Orthofix Extremities |
|
| 26,911 |
|
|
| 25,447 |
|
|
| 79,203 |
|
|
| 74,139 |
| ||||||||||||||||
Total Global Extremities |
|
| 25,408 |
|
|
| 26,911 |
|
|
| 74,373 |
|
|
| 79,203 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
| 86,756 |
|
|
| 83,518 |
|
|
| 260,455 |
|
|
| 253,238 |
|
|
| 89,452 |
|
|
| 86,756 |
|
|
| 267,021 |
|
|
| 260,455 |
|
International |
|
| 24,952 |
|
|
| 21,729 |
|
|
| 71,509 |
|
|
| 63,689 |
|
|
| 24,047 |
|
|
| 24,952 |
|
|
| 71,440 |
|
|
| 71,509 |
|
Net sales |
| $ | 111,708 |
|
| $ | 105,247 |
|
| $ | 331,964 |
|
| $ | 316,927 |
|
| $ | 113,499 |
|
| $ | 111,708 |
|
| $ | 338,461 |
|
| $ | 331,964 |
|
12. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of amortization related to intangible assets acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement. Components of acquisition-related amortization and remeasurement for the three months and nine months ended September 30, 2019 and 2018, respectively, are as follows:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Changes in fair value of contingent consideration |
| $ | 22,270 |
|
| $ | 1,580 |
|
| $ | 28,140 |
|
| $ | 2,689 |
|
Amortization of acquired intangibles |
|
| 1,338 |
|
|
| 429 |
|
|
| 3,733 |
|
|
| 802 |
|
Total |
| $ | 23,608 |
|
| $ | 2,009 |
|
| $ | 31,873 |
|
| $ | 3,491 |
|
10.13. Share-based compensation
The following tables present the detail of share-based compensation by line item in the condensed consolidated statements of operations and comprehensive income (loss) as well as by award type:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Cost of sales |
| $ | 151 |
|
| $ | 151 |
|
| $ | 408 |
|
| $ | 437 |
|
| $ | 169 |
|
| $ | 151 |
|
| $ | 536 |
|
| $ | 408 |
|
Sales and marketing |
|
| 514 |
|
|
| 394 |
|
|
| 1,436 |
|
|
| 1,073 |
|
|
| 583 |
|
|
| 514 |
|
|
| 1,885 |
|
|
| 1,436 |
|
General and administrative |
|
| 4,194 |
|
|
| 2,828 |
|
|
| 11,488 |
|
|
| 6,935 |
|
|
| 4,760 |
|
|
| 4,194 |
|
|
| 13,888 |
|
|
| 11,488 |
|
Research and development |
|
| 402 |
|
|
| 259 |
|
|
| 1,060 |
|
|
| 679 |
|
|
| 332 |
|
|
| 402 |
|
|
| 1,069 |
|
|
| 1,060 |
|
Total |
| $ | 5,261 |
|
| $ | 3,632 |
|
| $ | 14,392 |
|
| $ | 9,124 |
|
| $ | 5,844 |
|
| $ | 5,261 |
|
| $ | 17,378 |
|
| $ | 14,392 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Stock options |
| $ | 579 |
|
| $ | 684 |
|
| $ | 2,442 |
|
| $ | 1,802 |
|
| $ | 599 |
|
| $ | 579 |
|
| $ | 3,637 |
|
| $ | 2,442 |
|
Time-based restricted stock awards and units |
|
| 2,244 |
|
|
| 1,552 |
|
|
| 5,480 |
|
|
| 4,083 |
|
|
| 3,805 |
|
|
| 2,244 |
|
|
| 8,462 |
|
|
| 5,480 |
|
Performance-based restricted stock awards and units |
|
| 734 |
|
|
| 115 |
|
|
| 1,493 |
|
|
| 340 |
|
|
| — |
|
|
| 734 |
|
|
| — |
|
|
| 1,493 |
|
Market-based restricted stock units |
|
| 1,298 |
|
|
| 997 |
|
|
| 3,855 |
|
|
| 1,935 |
|
|
| 1,092 |
|
|
| 1,298 |
|
|
| 4,015 |
|
|
| 3,855 |
|
Stock purchase plan |
|
| 406 |
|
|
| 284 |
|
|
| 1,122 |
|
|
| 964 |
|
|
| 348 |
|
|
| 406 |
|
|
| 1,264 |
|
|
| 1,122 |
|
Total |
| $ | 5,261 |
|
| $ | 3,632 |
|
| $ | 14,392 |
|
| $ | 9,124 |
|
| $ | 5,844 |
|
| $ | 5,261 |
|
| $ | 17,378 |
|
| $ | 14,392 |
|
During the three months ended September 30, 20182019 and 2017,2018, the Company issued 50,92843,603 and 93,486 shares, respectively, of common stock related to stock option exercises and the vesting of restricted stock awards. During the nine months ended September 30, 2018 and 2017, the Company issued 257,883 and 384,76150,928 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, 2019 and 2018, the Company issued 295,496 and 257,833 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units.
On August 5, 2019 the Company entered into an employment agreement with its new President of Global Spine and awarded restricted stock units and stock options valued at approximately $1.5 million as inducement grants.
Share-Based Compensation Modifications
During the first quarter of 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the Company’s President and Chief Executive Officer. As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to accelerate the vesting to the retirement date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a standard qualified retirement to up to four years, dependent upon the remaining contractual term of the options. The Company recognized approximately $2.2 million and $5.9
million in share-based compensation expense during the three and nine months ended September 30, 2019, related to the Retirement Agreement, which was charged to general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
11.14. Income taxes
Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, the Company’s interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
For the three months ended September 30, 20182019 and 2017,2018, the effective tax rate on continuing operations was 8.7%(50.9%) and 64.8%8.8%, respectively. For the nine months ended September 30, 20182019 and 2017,2018, the effective tax rate on continuing operations was 56.2%(28.4%) and 70.8%56.3%, respectively. The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2018,2019, were the impairment of the Bone Biologics investment, the mix of earnings among tax jurisdictions, financial expenses not deductible for tax purposes, primarily related to acquisition-related items, which includes remeasurement of contingent consideration, increased limitation of the deductibility of executive compensation, and current period losses in certain jurisdictions for whichbenefits related to effective settlement of the Company does not currently receive a2015 federal tax benefit.examination and statute expirations.
During the first quarter of 2018,2019, the Internal Revenue Service concluded an examination of the Company’s federal income tax return for 2012 with no material impact on the financial statements. In November 2017, the Company was notified2015, which resulted in a benefit of an examination of its federal income tax return for 2015. The Company cannot reasonably determine if this examination, or any state and local tax examinations, will have a material impact on its financial statements and cannot predict the timing regarding resolution of these tax examinations.$1.8 million. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $4.4$13.0 million to $6.6$13.4 million as audits close and statutes expire.
In the fourth quarter of 2017, the Company recorded tax expense of $8.3 million that represents what it believes is the impact of the enactment of the Tax Act. The expense was based on currently available information and interpretations, which are continuing to evolve, and as a result, the expense is considered provisional. The Company has continued to analyze additional information and guidance related to the Tax Act as supplemental legislation, regulatory guidance, or evolving technical interpretations become available. Based on supplemental guidance issued during 2018, the Company recorded a tax benefit of $0.5 million during the first quarter. The Company will continue to refine such amounts within the measurement period as provided by Staff Accounting Bulletin No. 118 and expects to complete its analysis no later than the fourth quarter of 2018.
12.15. Earnings per share (“EPS”)
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three and nine months ended September 30, 20182019 and 2017,2018, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS. The following is a reconciliation of the weighted average shares used in diluted EPS computations.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Weighted average common shares-basic |
|
| 18,562,204 |
|
|
| 18,180,845 |
|
|
| 18,460,848 |
|
|
| 18,071,093 |
|
|
| 18,957,876 |
|
|
| 18,562,204 |
|
|
| 18,847,728 |
|
|
| 18,460,848 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised stock options and stock purchase plan |
|
| — |
|
|
| 249,667 |
|
|
| 312,320 |
|
|
| 164,716 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 312,320 |
|
Unvested restricted stock awards and units |
|
| — |
|
|
| 142,279 |
|
|
| 91,001 |
|
|
| 158,733 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 91,001 |
|
Weighted average common shares-diluted |
|
| 18,562,204 |
|
|
| 18,572,791 |
|
|
| 18,864,169 |
|
|
| 18,394,542 |
|
|
| 18,957,876 |
|
|
| 18,562,204 |
|
|
| 18,847,728 |
|
|
| 18,864,169 |
|
There were 2,088,8431,814,544 and 503,7572,088,843 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended September 30, 20182019 and 2017,2018, respectively, and 359,1721,880,423 and 534,288359,172 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the nine months ended September 30, 20182019 and 2017,2018, respectively, because inclusion of these awards was anti-dilutive a loss from continuing operations for the three months ended September 30, 2018, or, for performance-based and market-based restricted stock awards and units, all necessary conditions had not been satisfied by the end of the respective period.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Orthofix Medical Inc.’s (previously Orthofix International N.V. and sometimes(sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.
Executive Summary
We are a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, we have fourtwo reporting segments: Bone Growth Therapies (formerly referred to as BioStim), Spinal Implants (formerly referred to asGlobal Spine Fixation), Biologics, and Orthofix Extremities (formerly referred to as Extremity Fixation).Global Extremities. Our products are widely distributed by our sales representatives and distributors.
Notable highlights and achievements in the third quarter of 20182019 include the following:
| • | Net sales were |
| • |
|
| • |
|
• | Decrease in earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) of |
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations and comprehensive income (loss) as a percent of net sales:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2018 (%) |
|
| 2017 (%) |
|
| 2018 (%) |
|
| 2017 (%) |
|
| 2019 (%) |
|
| 2018 (%) |
|
| 2019 (%) |
|
| 2018 (%) |
| ||||||||
Net sales |
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
|
| 100.0 |
|
Cost of sales |
|
| 21.5 |
|
|
| 22.5 |
|
|
| 21.4 |
|
|
| 21.9 |
|
|
| 21.9 |
|
|
| 21.5 |
|
|
| 22.0 |
|
|
| 21.4 |
|
Gross profit |
|
| 78.5 |
|
|
| 77.5 |
|
|
| 78.6 |
|
|
| 78.1 |
|
|
| 78.1 |
|
|
| 78.5 |
|
|
| 78.0 |
|
|
| 78.6 |
|
Sales and marketing |
|
| 44.7 |
|
|
| 45.1 |
|
|
| 45.7 |
|
|
| 46.3 |
|
|
| 48.3 |
|
|
| 44.7 |
|
|
| 48.9 |
|
|
| 45.7 |
|
General and administrative |
|
| 20.3 |
|
|
| 17.2 |
|
|
| 19.4 |
|
|
| 17.9 |
|
|
| 18.6 |
|
|
| 19.9 |
|
|
| 18.8 |
|
|
| 19.2 |
|
Research and development |
|
| 8.6 |
|
|
| 6.6 |
|
|
| 7.4 |
|
|
| 6.7 |
|
|
| 7.0 |
|
|
| 8.6 |
|
|
| 7.7 |
|
|
| 7.4 |
|
Changes in fair value of contingent consideration |
|
| 1.4 |
|
|
| — |
|
|
| 0.8 |
|
|
| — |
| ||||||||||||||||
Operating income |
|
| 3.5 |
|
|
| 8.6 |
|
|
| 5.3 |
|
|
| 7.2 |
| ||||||||||||||||
Net income (loss) from continuing operations |
|
| (1.1 | ) |
|
| 3.2 |
|
|
| 1.5 |
|
|
| 1.8 |
| ||||||||||||||||
Acquisition-related amortization and remeasurement |
|
| 20.8 |
|
|
| 1.8 |
|
|
| 9.4 |
|
|
| 1.0 |
| ||||||||||||||||
Operating income (loss) |
|
| (16.6 | ) |
|
| 3.5 |
|
|
| (6.8 | ) |
|
| 5.3 |
| ||||||||||||||||
Net income (loss) |
|
| (35.7 | ) |
|
| (1.1 | ) |
|
| (11.9 | ) |
|
| 1.5 |
|
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
|
| Three Months Ended September 30, |
|
| Percentage Change |
|
| Three Months Ended September 30, |
|
| Percentage Change |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Reported |
|
| Constant Currency |
|
| 2019 |
|
| 2018 |
|
| Reported |
|
| Constant Currency |
| ||||||||
Bone Growth Therapies |
| $ | 48,059 |
|
| $ | 44,427 |
|
|
| 8.2 | % |
|
| 8.2 | % |
| $ | 48,836 |
|
| $ | 48,059 |
|
|
| 1.6 | % |
|
| 1.6 | % |
Spinal Implants |
|
| 22,102 |
|
|
| 20,155 |
|
|
| 9.7 | % |
|
| 10.0 | % |
|
| 22,947 |
|
|
| 22,102 |
|
|
| 3.8 | % |
|
| 4.4 | % |
Biologics |
|
| 14,636 |
|
|
| 15,218 |
|
|
| -3.8 | % |
|
| -3.8 | % |
|
| 16,308 |
|
|
| 14,636 |
|
|
| 11.4 | % |
|
| 11.4 | % |
Orthofix Extremities |
|
| 26,911 |
|
|
| 25,447 |
|
|
| 5.8 | % |
|
| 7.5 | % | ||||||||||||||||
Global Spine |
|
| 88,091 |
|
|
| 84,797 |
|
|
| 3.9 | % |
|
| 4.0 | % | ||||||||||||||||
Global Extremities |
|
| 25,408 |
|
|
| 26,911 |
|
|
| -5.6 | % |
|
| -2.4 | % | ||||||||||||||||
Net sales |
| $ | 111,708 |
|
| $ | 105,247 |
|
|
| 6.1 | % |
|
| 6.6 | % |
| $ | 113,499 |
|
| $ | 111,708 |
|
|
| 1.6 | % |
|
| 2.5 | % |
|
| Nine Months Ended September 30, |
|
| Percentage Change |
|
| Nine Months Ended September 30, |
|
| Percentage Change |
| ||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Reported |
|
| Constant Currency |
|
| 2019 |
|
| 2018 |
|
| Reported |
|
| Constant Currency |
| ||||||||
Bone Growth Therapies |
| $ | 142,433 |
|
| $ | 136,140 |
|
|
| 4.6 | % |
|
| 4.6 | % |
| $ | 146,228 |
|
| $ | 142,433 |
|
|
| 2.7 | % |
|
| 2.7 | % |
Spinal Implants |
|
| 66,689 |
|
|
| 60,782 |
|
|
| 9.7 | % |
|
| 9.6 | % |
|
| 69,076 |
|
|
| 66,689 |
|
|
| 3.6 | % |
|
| 4.3 | % |
Biologics |
|
| 43,639 |
|
|
| 45,866 |
|
|
| -4.9 | % |
|
| -4.9 | % |
|
| 48,784 |
|
|
| 43,639 |
|
|
| 11.8 | % |
|
| 11.8 | % |
Orthofix Extremities |
|
| 79,203 |
|
|
| 74,139 |
|
|
| 6.8 | % |
|
| 2.6 | % | ||||||||||||||||
Global Spine |
|
| 264,088 |
|
|
| 252,761 |
|
|
| 4.5 | % |
|
| 4.7 | % | ||||||||||||||||
Global Extremities |
|
| 74,373 |
|
|
| 79,203 |
|
|
| -6.1 | % |
|
| -1.8 | % | ||||||||||||||||
Net sales |
| $ | 331,964 |
|
| $ | 316,927 |
|
|
| 4.7 | % |
|
| 3.7 | % |
| $ | 338,461 |
|
| $ | 331,964 |
|
|
| 2.0 | % |
|
| 3.1 | % |
Bone Growth Therapies
Global Spine
Global Spine offers the following products categories:
- | Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients. |
- | Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers. |
- | Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives. |
Three months ended September 30, 20182019 compared to 20172018
Net sales increased $3.6$3.3 million or 8.2%3.9%
| • |
|
| • |
|
Nine months ended September 30, 2018 compared to 2017
Net sales increased $6.3 million or 4.6%
|
|
Spinal Implants
Spinal Implants designs, develops and markets a broad portfolio of implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.
Three months ended September 30, 2018 compared to 2017
Net sales increased $1.9 million or 9.7%
|
|
| • |
|
Nine months ended September 30, 2019 compared to 2018
Net sales increased $11.3 million or 4.5%
• | Bone Growth Therapies net sales increased $3.8 million or 2.7%, primarily driven by an increase in |
| • |
|
Nine months ended September 30, 2018 compared to 2017
Net sales increased $5.9 million or 9.7%
|
|
| • |
|
|
|
Biologics
Biologics provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.
Three months ended September 30, 2018 compared to 2017
Net sales decreased $0.6 million or 3.8%
|
|
|
|
Nine months ended September 30, 2018 compared to 2017Global Extremities
Net sales decreased $2.2 million or 4.9%
|
|
|
|
Orthofix Extremities
OrthofixGlobal Extremities offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. OrthofixGlobal Extremities distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and health providers.
Three months ended September 30, 20182019 compared to 20172018
Net sales increaseddecreased $1.5 million or 5.8%5.6%
| • |
|
|
|
|
|
Nine months ended September 30, 2018 compared to 2017
Net sales increased $5.1 million or 6.8%
|
|
| • |
|
|
|
Gross Profit and Non-GAAP Net Margin
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
Gross profit |
| $ | 87,688 |
|
| $ | 81,530 |
|
|
| 7.6 | % |
| $ | 260,962 |
|
| $ | 247,452 |
|
|
| 5.5 | % |
Sales and marketing |
|
| (49,898 | ) |
|
| (47,493 | ) |
|
| 5.1 | % |
|
| (151,695 | ) |
|
| (146,496 | ) |
|
| 3.5 | % |
Non-GAAP net margin |
| $ | 37,790 |
|
| $ | 34,037 |
|
|
| 11.0 | % |
| $ | 109,267 |
|
| $ | 100,956 |
|
|
| 8.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 78.5 | % |
|
| 77.5 | % |
|
| 1.0 | % |
|
| 78.6 | % |
|
| 78.1 | % |
|
| 0.5 | % |
Non-GAAP net margin as a percentage of net sales |
|
| 33.8 | % |
|
| 32.3 | % |
|
| 1.5 | % |
|
| 32.9 | % |
|
| 31.9 | % |
|
| 1.0 | % |
Three months ended September 30, 2018 compared to 2017
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:
|
|
|
|
|
|
Nine months ended September 30, 20182019 compared to 20172018
Gross profit,Net 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:
|
|
|
|
|
|
The following table provides non-GAAP net margin by reporting segment. The reasons for the changes in non-GAAP net margin by reporting segment 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) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
Bone Growth Therapies |
| $ | 21,151 |
|
| $ | 18,285 |
|
|
| 15.7 | % |
| $ | 61,395 |
|
| $ | 54,887 |
|
|
| 11.9 | % |
Spinal Implants |
|
| 1,812 |
|
|
| 2,122 |
|
|
| -14.6 | % |
|
| 5,960 |
|
|
| 6,825 |
|
|
| -12.7 | % |
Biologics |
|
| 6,654 |
|
|
| 6,010 |
|
|
| 10.7 | % |
|
| 18,981 |
|
|
| 18,651 |
|
|
| 1.8 | % |
Orthofix Extremities |
|
| 8,295 |
|
|
| 7,723 |
|
|
| 7.4 | % |
|
| 23,455 |
|
|
| 20,901 |
|
|
| 12.2 | % |
Corporate |
|
| (122 | ) |
|
| (103 | ) |
|
| 18.4 | % |
|
| (524 | ) |
|
| (308 | ) |
|
| 70.1 | % |
Non-GAAP net margin |
| $ | 37,790 |
|
| $ | 34,037 |
|
|
| 11.0 | % |
| $ | 109,267 |
|
| $ | 100,956 |
|
|
| 8.2 | % |
General and Administrative Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
General and administrative |
| $ | 22,705 |
|
| $ | 18,068 |
|
|
| 25.7 | % |
| $ | 64,457 |
|
| $ | 56,759 |
|
|
| 13.6 | % |
As a percentage of net sales |
|
| 20.3 | % |
|
| 17.2 | % |
|
| 3.1 | % |
|
| 19.4 | % |
|
| 17.9 | % |
|
| 1.5 | % |
Three months ended September 30, 2018 compared to 2017
General and administrative expense increased $4.6decreased $4.8 million
|
|
|
|
Nine months ended September 30, 2018 compared to 2017
General and administrative expense increased $7.7 million
|
|
|
|
|
|
Research and Development Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
Research and development |
| $ | 9,598 |
|
| $ | 6,935 |
|
|
| 38.4 | % |
| $ | 24,426 |
|
| $ | 21,246 |
|
|
| 15.0 | % |
As a percentage of net sales |
|
| 8.6 | % |
|
| 6.6 | % |
|
| 2.0 | % |
|
| 7.4 | % |
|
| 6.7 | % |
|
| 0.7 | % |
Three months ended September 30, 2018 compared to 2017
Research and development expense increased $2.7 million
|
|
Nine months ended September 30, 2018 compared to 2017
Research and development expense increased $3.2 million
|
|
Changes in Fair Value of Contingent Consideration
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
Changes in fair value of contingent consideration |
| $ | 1,580 |
|
| $ | — |
|
|
| 100.0 | % |
| $ | 2,689 |
|
| $ | — |
|
|
| 100.0 | % |
As a percentage of net sales |
|
| 1.4 | % |
|
| 0.0 | % |
|
| 1.4 | % |
|
| 0.8 | % |
|
| 0.0 | % |
|
| 0.8 | % |
Three months and nine months ended September 30, 2018 compared to 2017
The fair value of contingent consideration increased $1.6 million and $2.7 million, respectively
|
|
Non-operating Income and Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
| ||||||
Interest income (expense), net |
| $ | (181 | ) |
| $ | (15 | ) |
|
| 1106.7 | % |
| $ | (615 | ) |
| $ | 106 |
|
|
| -680.2 | % |
Other income (expense), net |
|
| (5,054 | ) |
|
| 479 |
|
|
| -1155.1 | % |
|
| (5,785 | ) |
|
| (3,284 | ) |
|
| 76.2 | % |
Three months ended September 30, 2018 compared to 2017
Other income (expense) decreased $5.5 million or 6.1%
| • | Decrease of |
| • | Decrease of $1.4 million |
Gross Profit
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
Net sales |
| $ | 113,499 |
|
| $ | 111,708 |
|
|
| 1.6 | % |
| $ | 338,461 |
|
| $ | 331,964 |
|
|
| 2.0 | % |
Cost of sales |
|
| 24,896 |
|
|
| 24,020 |
|
|
| 3.6 | % |
|
| 74,416 |
|
|
| 71,002 |
|
|
| 4.8 | % |
Gross profit |
| $ | 88,603 |
|
| $ | 87,688 |
|
|
| 1.0 | % |
| $ | 264,045 |
|
| $ | 260,962 |
|
|
| 1.2 | % |
Gross margin |
|
| 78.1 | % |
|
| 78.5 | % |
|
| -0.4 | % |
|
| 78.0 | % |
|
| 78.6 | % |
|
| -0.6 | % |
Three months ended September 30, 2019 compared to 2018
Gross profit increased $0.9 million
• | Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased slightly to 78.1% compared to 78.5% in the prior year period |
Nine months ended September 30, 20182019 compared to 20172018
Other income (expense)Gross profit increased $3.1 million
• | Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased to 78.0% compared to 78.6% in the prior year period |
• | Decrease in gross margin largely due to higher than normal charges related to the buildup of Spinal Implants inventory to support sales growth from our new sales partners in key geographies |
Sales and Marketing Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
Sales and marketing |
| $ | 54,805 |
|
| $ | 49,898 |
|
|
| 9.8 | % |
| $ | 165,363 |
|
| $ | 151,695 |
|
|
| 9.0 | % |
As a percentage of net sales |
|
| 48.3 | % |
|
| 44.7 | % |
|
| 3.6 | % |
|
| 48.9 | % |
|
| 45.7 | % |
|
| 3.2 | % |
Three months ended September 30, 2019 compared to 2018
Sales and marketing expense increased $4.9 million
• | Increase largely attributable to increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S. |
• | Further increases relate to higher variable compensation rates in our Global Spine segment to support growth |
Nine months ended September 30, 2019 compared to 2018
Sales and marketing expense increased $13.7 million
• | Increase largely attributable to increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S. |
• | Further increases relate to higher variable compensation rates in our Global Spine segment to support growth |
General and Administrative Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
General and administrative |
| $ | 21,090 |
|
| $ | 22,276 |
|
|
| -5.3 | % |
| $ | 63,497 |
|
| $ | 63,658 |
|
|
| -0.3 | % |
As a percentage of net sales |
|
| 18.6 | % |
|
| 19.9 | % |
|
| -1.3 | % |
|
| 18.8 | % |
|
| 19.2 | % |
|
| -0.4 | % |
Three months ended September 30, 2019 compared to 2018
General and administrative expense decreased $2.5by $1.2 million
| • | Decrease of |
| • |
|
| • | Partially offset by an increase of |
• | Further offset by an increase of $0.4 million in depreciation expense |
Nine months ended September 30, 2019 compared to 2018
General and administrative expense decreased by $0.2 million
• | Decrease of $3.3 million in expenses associated with strategic investments, largely due to diligence and integration costs related to the acquisition of Spinal Kinetics and expenses associated with the Domestication in 2018 |
• | Decrease of $3.3 million in certain compensation expenses, such as share-based compensation expense, excluding the impact of succession charges |
• | Partially offset by an increase of $5.2 million attributable to transition and succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers |
• | Further offset by an increase of $1.3 million in depreciation expense |
Research and Development Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
Research and development |
| $ | 7,982 |
|
| $ | 9,598 |
|
|
| -16.8 | % |
| $ | 26,191 |
|
| $ | 24,426 |
|
|
| 7.2 | % |
As a percentage of net sales |
|
| 7.0 | % |
|
| 8.6 | % |
|
| -1.6 | % |
|
| 7.7 | % |
|
| 7.4 | % |
|
| 0.3 | % |
Three months ended September 30, 2019 compared to 2018
Research and development expense decreased by $1.6 million
• | Decrease primarily due to higher regulatory spending in the third quarter of 2018 associated with the premarket approval process for the M6-C Cervical Disc, which was approved by the U.S. Food and Drug Administration (“FDA”) in February of 2019 |
Nine months ended September 30, 2019 compared to 2018
Research and development expense increased $1.8 million
• | Increase largely attributable to the Spinal Kinetics acquisition, which was acquired during the second quarter of 2018, and the regulatory efforts associated with the FDA premarket approval of the M6-C Cervical Disc, which was obtained in February of 2019 |
• | Increase also related to costs to comply with recent medical device reporting regulations in the European Union |
Acquisition-related Amortization and Remeasurement
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
Acquisition-related amortization and remeasurement |
| $ | 23,608 |
|
| $ | 2,009 |
|
|
| 1075.1 | % |
| $ | 31,873 |
|
| $ | 3,491 |
|
|
| 813.0 | % |
As a percentage of net sales |
|
| 20.8 | % |
|
| 1.8 | % |
|
| 19.0 | % |
|
| 9.4 | % |
|
| 1.0 | % |
|
| 8.4 | % |
Acquisition-related amortization and remeasurement consists of amortization related to intangibles acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement.
Three months ended September 30, 2019 compared to 2018
Acquisition-related amortization and remeasurement increased $21.6 million
• | Increase of $20.7 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets |
• | Increase of $0.9 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions; of this amount, $0.7 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA approval milestone during the first quarter of 2019 |
Nine months ended September 30, 2019 compared to 2018
Acquisition-related amortization and remeasurement increased $28.4 million
• | Increase of $24.0 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets |
• | Increase of $1.5 million related to the remeasurement of the FDA milestone associated with the Spinal Kinetics acquisition, which was achieved and paid during the first quarter of 2019 |
• | Increase of $2.9 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions; of this amount, $2.2 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA milestone during the first quarter of 2019 |
Non-operating Income and Expense
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||
Interest income (expense), net |
| $ | 186 |
|
| $ | (181 | ) |
|
| -202.8 | % |
| $ | 386 |
|
| $ | (615 | ) |
|
| -162.8 | % |
Other expense, net |
|
| (8,146 | ) |
|
| (5,054 | ) |
|
| 61.2 | % |
|
| (8,786 | ) |
|
| (5,785 | ) |
|
| 51.9 | % |
Three months ended September 30, 2019 compared to 2018
Other income (expense), net, decreased $3.1 million
• | Decrease of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security during the |
• | Decrease of $1.0 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $1.6 million in the third quarter of 2019 compared to a loss of $0.6 million in the third quarter of 2018 |
• | Partially offset by an increase of $4.4 million due to the impairment of our equity holdings and warrants in Bone Biologics, Inc. (“Bone Biologics”) common stock during the third quarter of 2018 |
Nine months ended September 30, 2019 compared to 2018
Other income (expense), net, decreased $3.0 million
• | Decrease of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security during the third quarter of 2019 |
• | Partially offset by a net increase of $3.1 million relating to changes in fair value and impairments of our equity holdings and warrants in Bone Biologics common stock during 2018 |
• | Further offset by an increase of $0.6 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $2.2 million in the nine months ended September 30, 2019 compared to a loss of $2.8 million in the nine months ended September 30, 2018 |
Income Taxes
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2018 |
|
| 2017 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| % Change |
| ||||||||||||
Income tax expense |
| $ | (115 | ) |
| $ | 6,150 |
|
|
| -101.9 | % |
| $ | 6,346 |
|
| $ | 13,998 |
|
|
| -54.7 | % | ||||||||||||||||||||||||
Income tax expense (benefit) |
| $ | 13,656 |
|
| $ | (117 | ) |
|
| -11771.8 | % |
| $ | 8,869 |
|
| $ | 6,352 |
|
|
| 39.6 | % | ||||||||||||||||||||||||
Effective tax rate |
|
| 8.7 | % |
|
| 64.8 | % |
|
| -56.1 | % |
|
| 56.2 | % |
|
| 70.8 | % |
|
| -14.6 | % |
|
| -50.9 | % |
|
| 8.8 | % |
|
| -59.7 | % |
|
| -28.4 | % |
|
| 56.3 | % |
|
| -84.7 | % |
Three months ended September 30, 20182019 compared to 20172018
The increasedecrease in the effective tax compared to the prior year period rate was primarily a result of the following factors:
| • | Decrease in pre-tax earnings |
| • |
|
| • |
|
|
|
The primary factors affecting our effective tax rate for the third quarter of 20182019 are as follows:
| • |
|
| • |
|
|
|
Nine months ended September 30, 20182019 compared to 20172018
The decrease in the effective tax rate compared to the prior year period was primarily a result of the following factors:
| • | Decrease in pre-tax earnings |
| • |
|
| • |
|
| • |
|
The primary factors affecting our effective tax rate for the nine months ended September 30, 20182019 are as follows:
| • |
|
| • |
|
| • |
|
Segment Review
As discussed above, we changed the performance measure used to evaluate segment performance from Non-GAAP net margin to EBITDA during the first quarter of 2019. When compared to the prior year period, EBITDA decreased $24.3 million for the three months ended September 30, 2019 and decreased $39.1 million for the nine months ended September 30, 2019. These changes are largely driven by the fluctuations discussed above, but are primarily attributable to changes in acquisition-related amortization and remeasurement and sales and marketing expense. The following table reconciles EBITDA to income (loss) before income taxes:
|
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(U.S. Dollars, in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Global Spine |
| $ | (6,033 | ) |
| $ | 15,637 |
|
| $ | 21,065 |
|
| $ | 53,492 |
|
Global Extremities |
|
| 1,229 |
|
|
| 3,357 |
|
|
| 3,806 |
|
|
| 7,173 |
|
Corporate |
|
| (15,949 | ) |
|
| (15,403 | ) |
|
| (38,356 | ) |
|
| (35,097 | ) |
Total EBITDA |
| $ | (20,753 | ) |
| $ | 3,591 |
|
| $ | (13,485 | ) |
| $ | 25,568 |
|
Depreciation and amortization |
|
| (6,275 | ) |
|
| (4,738 | ) |
|
| (18,180 | ) |
|
| (13,661 | ) |
Interest income (expense), net |
|
| 186 |
|
|
| (181 | ) |
|
| 386 |
|
|
| (615 | ) |
Income (loss) before income taxes |
| $ | (26,842 | ) |
| $ | (1,328 | ) |
| $ | (31,279 | ) |
| $ | 11,292 |
|
Liquidity and Capital Resources
Cash, cash equivalents, and restricted cash at September 30, 2018,2019, totaled $56.2$57.5 million compared to $81.2$72.2 million at December 31, 2017,2018, with the decrease largely a result of $15.0 million in cash paid in connection with achievement of the Spinal Kinetics acquisition.FDA Milestone in 2019.
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
|
| 2019 |
|
| 2018 |
|
| Change |
| ||||||
Net cash from operating activities |
| $ | 28,829 |
|
| $ | 9,125 |
|
| $ | 19,704 |
|
| $ | 20,090 |
|
| $ | 28,829 |
|
| $ | (8,739 | ) |
Net cash from investing activities |
|
| (55,921 | ) |
|
| (12,816 | ) |
|
| (43,105 | ) |
|
| (21,281 | ) |
|
| (55,921 | ) |
|
| 34,640 |
|
Net cash from financing activities |
|
| 2,988 |
|
|
| 2,598 |
|
|
| 390 |
|
|
| (12,610 | ) |
|
| 2,988 |
|
|
| (15,598 | ) |
Effect of exchange rate changes on cash |
|
| (811 | ) |
|
| 1,077 |
|
|
| (1,888 | ) |
|
| (885 | ) |
|
| (811 | ) |
|
| (74 | ) |
Net change in cash, cash equivalents and restricted cash |
| $ | (24,915 | ) |
| $ | (16 | ) |
| $ | (24,899 | ) |
| $ | (14,686 | ) |
| $ | (24,915 | ) |
| $ | 10,229 |
|
The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities.
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
(U.S. Dollars, in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
|
| 2019 |
|
| 2018 |
|
| Change |
| ||||||
Net cash from operating activities |
| $ | 28,829 |
|
| $ | 9,125 |
|
| $ | 19,704 |
|
| $ | 20,090 |
|
| $ | 28,829 |
|
| $ | (8,739 | ) |
Capital expenditures |
|
| (10,724 | ) |
|
| (13,290 | ) |
|
| 2,566 |
|
|
| (14,881 | ) |
|
| (10,724 | ) |
|
| (4,157 | ) |
Free cash flow |
| $ | 18,105 |
|
| $ | (4,165 | ) |
| $ | 22,270 |
|
| $ | 5,209 |
|
| $ | 18,105 |
|
| $ | (12,896 | ) |
Operating Activities
Cash flows from operating activities increased $19.7decreased $8.7 million
| • |
|
• | Net increase of $40.3 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration, depreciation and amortization, share-based compensation expense, and non-cash interest and losses on the valuation of investment securities |
| • | Net decrease of |
|
|
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 65 days at September 30, 2019 compared to 61 days at September 30, 2018 compared to 53 days at September 30, 2017, with the increase largely attributable to our adoption of Accounting Standards Update (“ASU”) 2014-09.2018. Inventory turns remained consistent at 1.2 times as of September 30, 20182019 and 2017.
Adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-18, which reduces diversity in classification and presentation of restricted cash, including transfers between cash and restricted cash, on the statement of cash flows. The Company adopted this standard as of January 1, 2018 using a retrospective transition approach. Adoption of this ASU resulted in an increase in net cash from operating activities of $2.5 million for the nine months ended September 30, 2018 and a decrease in net cash from operating activities of $14.4 million for the nine months ended September 30, 2017.2018.
Investing Activities
Cash flows from investing activities decreased $43.1increased $34.6 million
| • |
|
| • |
|
|
|
|
|
| • | Partially offset by |
• | Further offset by $4.2 million attributable to increased capital expenditures |
Financing Activities
Cash flows from financing activities increased $0.4decreased $15.6 million
| • |
|
• | Decrease in net proceeds of $0.9 million from the issuance of common shares |
| • |
|
Credit Facilities
On July 31, 2018, the Company amendedOctober 25, 2019, we entered into a Second Amended and restated its previousRestated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), theas Administrative Agent, and the lenders party thereto pursuant to a First Amended and Restated Credit Agreement (“Amended Credit Agreement”).certain lender parties thereto. The Amended Credit Agreement is substantiallyprovides for a $300 million secured revolving credit facility maturing on October 25, 2024 (the “Facility”), and amends and restates the same asexisting $125 million secured revolving credit facility. As of October 28, 2019, we have not made any borrowings under the previousAmended Credit Agreement.
Borrowings under the Amended Credit Agreement exceptmay be used for, certain amendments to, among other things, (i) effectuateworking capital and other general corporate purposes (including permitted acquisitions and permitted payments of dividends and other distributions). For information regarding the domestication ofAmended Credit Agreement, see Note 6 to the Company from a Curaçao companyNotes to a Delaware corporation, (ii) limit the pledge by the Company and each domestic subsidiary of the Company of equity interests in their respective first tier foreign subsidiaries to 65% of the voting interests in such foreign subsidiaries, (iii) limit the guarantee and joint and several obligations of each subsidiary guarantor that is a foreign subsidiary so that such foreign subsidiary guarantors are only providing guarantees, or are jointly and severally obligated, for obligations of other foreign subsidiaries, and (iv) limit the secured obligations that are secured by collateral provided by subsidiary guarantors that are foreign subsidiaries to secured obligations of foreign subsidiaries.Unaudited Condensed Consolidated Financial Statements contained herein.
Other
For information regarding Contingencies, see Note 68 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Spinal Kinetics Acquisition
As part of the consideration for the Spinal Kinetics acquisition, we agreed to pay an aggregate of $45.0 million in cash, subject to certain adjustments, upon closing plus milestone payments in the future of up to $60.0 million in cash. We closed on the acquisition on April 30, 2018 and paid the $45.0 million of cash, adjustedOne milestone payment was for certain items, due at close with cash on hand. The milestone payments include (i) up to $15.0 million if theupon FDA grants approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). During the first quarter of 2019, we obtained FDA approval of the M6-C artificial cervical disc for patients suffering
from cervical disease degeneration and (ii)the FDA Milestone payment was triggered. We paid the $15.0 million FDA Milestone payment on February 14, 2019 from cash on hand.
Two other milestone payments are comprised of revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The fair value of the contingent consideration arrangement as of September 30, 20182019 was $28.2$41.7 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. Approximately $13.6At September 30, 2019, we classified $14.5 million of thisthe liability is includedattributable to the revenue-based milestones within other current liabilities, as we expect to pay one of the revenue-based milestones in the next twelve months, and $14.6the remaining $27.2 million is included within other long-term liabilities. For additional discussion of this matter, see Note 27 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
eNeura debt security
As of September 30, 2019, we held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, we entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura. As consideration for the extension, eNeura issued to us a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).
We considered the restructuring of the eNeura debt security to be a Troubled Debt Restructuring (“TDR”). A TDR exists when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. In making this determination, we considered eNeura’s current financial condition and whether the restructuring of the debt security resulted in the granting of a concession after taking into account all the facts and circumstances surrounding the restructuring. The restructuring was undertaken to improve the likelihood of our effort to recover the investment in the original debt security.
Subsequent to the restructuring, the Restructured Debt Security was no longer accounted for at fair value, but rather in accordance with the accounting required for TDRs. The fair value of the debt security immediately prior to the restructuring was reclassified to be the carrying amount of the debt security, as such amount approximated our estimate of future cash collections discounted using the debt security’s effective interest rate of 8%. Our estimate of future cash flows involved significant judgment regarding the timing, expected events, and amount of future cash collections. Interest income on the restructured eNeura debt security was recorded using the interest income method; therefore, the amortized cost basis was accreted up to the amount of expected future cash flows over the term of the Restructured Debt Security.
During the quarter ended September 30, 2019, we engaged in negotiations with eNeura to settle the Restructured Debt Security and on October 25, 2019, we settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura. As such, at September 30, 2019, we determined the Restructured Debt Security and Warrant were impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million.
Brazil
On April 3, 2019, our appeal regarding the freezing of our local bank accounts in Brazil was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the cash. Approximately $2.5 million was then returned without any restrictions in April 2019. As such, this balance has been reclassified to cash and cash equivalents as of September 30, 2019.
In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $0.7 million of our cash in Brazil was frozen upon request to satisfy a judgment. Although we are appealing the judgment, this cash has been reclassified to restricted cash.
For additional discussion regarding these matters, see Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Off-balance Sheet Arrangements
As of September 30, 2018,2019, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2017, except as related to our acquisition of Spinal Kinetics. As part of the acquisition, we assumed the contractual obligations relating to Spinal Kinetics’ existing lease arrangements, which in the aggregate amount to future obligations totaling approximately $3.6 million as of September 30, 2018.
Critical Accounting Estimates
Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017.
Significant2018. There have been no significant changes to our critical accounting estimates except for the following:
Leases
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). We determine if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, our incremental borrowing rate is used as a resultdiscount rate, based on the information available at the commencement date, in determining the present value of adopting ASU 2014-09, Revenue from Contractslease payments. Lease assets also include the impact of any prepayments made and are reduced by impact of any lease incentives. Leases with Customers (Topic 606)an initial term of 12 months or less are discussed below. Other thannot recorded on the changesbalance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Lease terms may include options to our critical accounting policiesextend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for revenue recognition, allowancelease payments is recognized on a straight-line basis over the lease term.
We have made a policy election for doubtful accounts,all classifications of leases to combine lease and contractual allowancesnonlease components and to account for them as a result ofsingle lease component. Variable lease payments are excluded from the adoption of Topic 606, there have been no changes to our critical accounting estimates.
Revenue Recognition
The process for recognizing revenue involves significant assumptionslease liability and judgments for certain of our revenue streams. Revenue recognition policies are “critical accounting estimates” because changesrecognized in the assumptions used to developperiod in which the estimates could materially affect key financial measures, including net sales, gross margin, non-GAAP net margin, operating income, and net income.
Bone Growth Therapies revenueobligation is largely attributable to the U.S. and is comprised of third-party payor transactions and wholesale revenue.
For revenue derived from third-party payors, including commercial insurance carriers, health maintenance organizations, preferred provider organizations and governmental payors such as Medicare, in connection with the sale of our stimulation products, we recognize revenue when the stimulation product is fitted to and accepted by the patient and all applicable documents that are required by the third-party payor have been obtained. Amounts paid by these third-party payors are generally based on fixed or allowable reimbursement rates. These revenues are recorded at the expected or preauthorized reimbursement rates, net of any contractual allowances or adjustments. Certain billings are subject to review by the third-party payors and may be subject to adjustment.
Wholesale revenue is related to the sale of our bone growth stimulators directly to physicians and other healthcare providers. Wholesale revenues are recognized upon shipment and receipt of a confirming purchase order, which is when the customer obtains control of the promised goods.
Orthofix Extremities and Spinal Implants products are distributed world-wide, with U.S. sales largely comprised of commercial revenue and international sales derived from commercial sales and through stocking distributor arrangements.
Commercial revenue is related to the sale of our internal and external fixation products, generally representing hospital customers. Commercial revenues are recognized when these products have been utilized and a confirming purchase order has been received from the hospital.
Stocking distributors purchase our products and then re-sell them directly to customers, such as hospitals. For revenue derived from stocking distributor agreements, prior to the adoption of Topic 606, i.e. for all periods presented prior to January 1, 2018, we recognized revenue once the product was delivered to the end customer (the “sell-through method”). Because we did not have reliable information about when our distributors sold the product through to end customers, we used cash collection from distributors as a basis for revenue recognition under the sell-through method. Additionally, when we sold to these distributors, we considered whether to match the related cost of sales expense with revenue or to recognize expense upon shipment. In making this assessment, we considered the financial viability of our distributors based on their creditworthiness to determine if collectability of
amounts sufficient to realize the costs of the products shipped was reasonably assured at the time of shipment to these distributors. In instances where the distributor was determined to be financially viable, we deferred the costs of sales until the revenue was recognized.
Subsequent to the adoption of Topic 606, effective January 1, 2018, for revenue derived from stocking distributor arrangements, we recognize revenue upon shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the promised goods. The transaction price is estimated based upon our historical collection experience with the stocking distributor. To derive this estimate, we analyze twelve months of historical invoices by stocking distributor and the subsequent collections on those invoices, for a period of up to 24 months subsequent to the invoice date. This percentage, which is specific to each stocking distributor, is then used to calculate the transaction price. Cost of sales is also recorded upon transfer of control of the product to the customer, which is when the Company’s performance obligation has been satisfied.
Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF. We have exclusive global marketing rights and receive marketing fees from MTF based on products distributed by MTF. MTF is considered the principal in these arrangements; therefore, we recognize these marketing service fees on a net basis upon shipment of the product to the customer.
Allowance for Doubtful Accounts and Contractual Allowances
The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. Historical collections, write-offs, and payor reimbursement experience are integral parts of the estimation process related to reserves for doubtful accounts and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for doubtful accounts and contractual allowances. Revisions in allowances for doubtful accounts estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. Our estimates are periodically tested against actual collection experience. Our allowance for doubtful accounts and estimation of contractual allowances are “critical accounting estimates” because changes in the assumptions used to develop the estimates could materially affect key financial measures, including net sales, gross margin, net margin, operating income, net income, and trade accounts receivable.incurred.
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 accounting pronouncements.
Non-GAAP Financial Measures
We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics used to supplement information regarding the performance and underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate the effectiveness of the our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.
The non-GAAP financial measures used in this filing may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.
Constant Currency
Constant currency is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.
Non-GAAP Net MarginEBITDA
Non-GAAP net marginEBITDA is an internala non-GAAP metric that we definedefined as gross profit less salesearnings before interest income (expense), income taxes, depreciation, and marketing expense. Non-GAAP net marginamortization. EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.
Free Cash Flow
Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities. Free cash flow is an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives. In the first quarter of 2018, we adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which reduces diversity in classification and presentation of restricted cash, including transfers between cash and restricted cash, on the statement of cash flows. We adopted this accounting standard using a retrospective transition approach, which resulted in an increase in net cash from operating activities of $2.5 million for the nine months ended September 30, 2018 and a decrease in net cash from operating activities of $14.4 million for the nine months ended September 30, 2017
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, 2017.2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018.2019. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2018.2019.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, known to the President and Chief Executive Officer or the Chief Financial Officer that occurred for the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2017.2018.
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 2018.2019.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There are no matters to be reported under this heading.
Item 6. Exhibits
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10.4 |
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10.6 | ||
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31.1* |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2* |
| Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1* |
| Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer. |
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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 |
* | Filed herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ORTHOFIX MEDICAL INC. | ||
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Date: October | By: |
| /s/ BRADLEY R. MASON |
| Name: |
| Bradley R. Mason |
| Title: |
| President and Chief Executive Officer |
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|
|
Date: October | By: |
| /s/ DOUG RICE |
| Name: |
| Doug Rice |
| Title: |
| Chief Financial Officer |
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