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~~June 30, ~~2019~~2020


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

For the transition period from to .

Commission File Number: 0-19961

ORTHOFIX MEDICAL INC.

(Exact name of registrant as specified in its charter)

Delaware		98-1340767
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3451 Plano Parkway, Lewisville, Texas		75056
(Address of principal executive offices)		(Zip Code)

(214) 937-2000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated filer	☒	Accelerated filer	☐

Non-Accelerated filer	☐	Smaller Reporting Company	☐

		Emerging Growth Company	☐

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

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

As of ~~October 25, 2019, 19,055,154~~August 3, 2020, 19,327,526 shares of common stock were issued and outstanding.

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.10 par value per share		OFIX		Nasdaq Global Select Market

Table of Contents

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018~~2019	4

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 and ~~2018~~2019	5

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6

	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	7

	Notes to the Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2321

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3331

Item 4.	Controls and Procedures	3332

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3433

Item 1A.	Risk Factors	3433

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3435

Item 3.	Defaults Upon Senior Securities	3435

Item 4.	Mine Safety Disclosures	3435

Item 5.	Other Information	3435

Item 6.	Exhibits	3536

SIGNATURES		3637

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 in Part II Item 1A under the heading Risk Factors of this filing; Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”); Part II, Item 1A under the heading Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020; and other Securities and Exchange Commission (“SEC”) filings. ~~Therefore,~~In addition to the risks described there, factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the ongoing effects of the COVID-19 pandemic on our business, including (i) surgeries that use our products continuing to be delayed or cancelled as a result of hospitals and surgery centers being closed, limited to essential procedures or otherwise operating at reduced volume, (ii) portions of our global workforce being unable to work fully and/or effectively due to illness, quarantines, government actions (including "shelter in place" orders or advisories), facility closures, or other reasons related to the pandemic, (iii) disruptions to our supply chain, (iv) customers and payors being unable to satisfy contractual obligations to us, including the ability to make timely payment for purchases, (v) general economic weakness in markets in which we operate affecting customer spending, and (vii) other unpredictable aspects of the pandemic. To the extent that the COVID-19 pandemic continues to adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A under the heading Risk Factors in our 2019 Form 10-K, such as our need to generate sufficient cash flows to service indebtedness and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing, and other events that could have a security impact as a result of our remote working environment or otherwise. As a result of these various risks, our actual outcomes and results may differ materially from those expressed in these forward-looking statements.

This list of risks, uncertainties, and other factors is not complete. We discuss some of these matters more fully, as well as certain risk factors that could affect our business, financial condition, results of operations, and prospects, in reports we file from time-to-time with the SEC, which are available to read at www.sec.gov. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise), and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. 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, and expressly disclaim any ~~such statement,~~duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the ~~risk factors described in the 2018 Form 10-K and other SEC filings, to reflect~~date hereof, 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, 2019			December 31, 2018		June 30, 2020			December 31, 2019
	(Unaudited)					(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	56,849		$	69,623	$	172,888		$	69,719
Restricted cash		654			2,566		503			684
Trade accounts receivable, net of allowances of $4,073 and $7,463, respectively		79,690			77,747
Accounts receivable, net of allowances of $6,364 and $3,987, respectively							67,407			86,805
Inventories		80,993			76,847		82,046			82,397
Prepaid expenses and other current assets		19,617			17,856		20,726			20,948
Total current assets		237,803			244,639		343,570			260,553
Property, plant and equipment, net		62,964			42,835
Property, plant, and equipment, net							65,113			62,727
Intangible assets, net		53,613			51,897		57,527			54,139
Goodwill		71,177			72,401		82,997			71,177
Deferred income taxes		39,626			33,228		36,476			35,117
Other long-term assets		10,420			21,641		10,026			11,907
Total assets	$	475,603		$	466,641	$	595,709		$	495,620
Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	17,892		$	17,989	$	14,911		$	19,886
Current portion of finance lease liability		293			—		449			323
Other current liabilities		70,323			67,919		74,236			64,674
Total current liabilities		88,508			85,908		89,596			84,883
Long-term portion of finance lease liability		20,767			—		22,506			20,648
Other long-term liabilities		59,894			45,336		38,562			62,458
Long-term debt							100,000			—
Total liabilities		169,169			131,244		250,664			167,989
Contingencies (Note 8)
Contingencies (Note 9)
Shareholders’ equity
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		1,888			1,858
Common shares $0.10 par value; 50,000,000 shares authorized; 19,209,063 and 19,022,619 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively							1,921			1,902
Additional paid-in capital		263,064			243,165		282,287			271,019
Retained earnings		46,063			87,078		64,103			57,749
Accumulated other comprehensive income (loss)		(4,581	)		3,296
Accumulated other comprehensive loss							(3,266	)		(3,039	)
Total shareholders’ equity		306,434			335,397		345,045			327,631
Total liabilities and shareholders’ equity	$	475,603		$	466,641	$	595,709		$	495,620

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,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(Unaudited, U.S. Dollars, in thousands, except share and per share data)	2019			2018			2019			2018			2020			2019			2020			2019
Net sales	$	113,499		$	111,708		$	338,461		$	331,964		$	73,135		$	115,850		$	177,958		$	224,962
Cost of sales		24,896			24,020			74,416			71,002			23,166			25,812			46,575			49,520
Gross profit		88,603			87,688			264,045			260,962			49,969			90,038			131,383			175,442
Sales and marketing		54,805			49,898			165,363			151,695			43,479			56,864			97,792			110,558
General and administrative		21,090			22,276			63,497			63,658			15,047			21,935			32,912			42,407
Research and development		7,982			9,598			26,191			24,426			8,765			8,980			18,729			18,209
Acquisition-related amortization and remeasurement (Note 12)		23,608			2,009			31,873			3,491
Acquisition-related amortization and remeasurement (Note 13)														3,678			1,808			(3,904	)		8,265
Operating income (loss)		(18,882	)		3,907			(22,879	)		17,692			(21,000	)		451			(14,146	)		(3,997	)
Interest income (expense), net		186			(181	)		386			(615	)		(901	)		457			(1,324	)		200
Other expense, net		(8,146	)		(5,054	)		(8,786	)		(5,785	)
Other income (expense), net														5,069			(236	)		4,271			(640	)
Income (loss) before income taxes		(26,842	)		(1,328	)		(31,279	)		11,292			(16,832	)		672			(11,199	)		(4,437	)
Income tax benefit (expense)		(13,656	)		117			(8,869	)		(6,352	)		(1,592	)		(1,219	)		18,440			4,787
Net income (loss)	$	(40,498	)	$	(1,211	)	$	(40,148	)	$	4,940		$	(18,424	)	$	(547	)	$	7,241		$	350

Net income (loss) per common share:
Basic	$	(2.14	)	$	(0.07	)	$	(2.13	)	$	0.26		$	(0.96	)	$	(0.03	)	$	0.38		$	0.02
Diluted		(2.14	)		(0.07	)		(2.13	)		0.26			(0.96	)		(0.03	)		0.37			0.02
Weighted average number of common shares:
Basic		18,957,876			18,562,204			18,847,728			18,460,848			19,215,392			18,834,886			19,149,523			18,790,612
Diluted		18,957,876			18,562,204			18,847,728			18,864,169			19,215,392			18,834,886			19,271,467			19,179,057

Other comprehensive income (loss), before tax
Unrealized gain (loss) on debt security		—			1,240			(2,593	)		3,200
Other comprehensive gain (loss), before tax
Unrealized loss on debt security														—			—			—			(2,593	)
Reclassification adjustment for amortization of historical unrealized gains on debt security		(345	)		—			(1,034	)		—			—			(689	)		—			(689	)
Reclassification adjustment for other-than-temporary impairment on debt security		(5,193	)		—			(5,193	)		—
Currency translation adjustment		(1,893	)		(844	)		(2,195	)		(1,322	)		1,484			147			(227	)		(302	)
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
Other comprehensive gain (loss) before tax														1,484			(542	)		(227	)		(3,584	)
Income tax related to other comprehensive gain (loss)														—			171			—			812
Other comprehensive gain (loss), net of tax														1,484			(371	)		(227	)		(2,772	)
Comprehensive income (loss)	$	(46,541	)	$	(1,181	)	$	(48,963	)	$	6,020		$	(16,940	)	$	(918	)	$	7,014		$	(2,422	)

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

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited, U.S. Dollars, in thousands, except share data)	Number of Common Shares Outstanding		Common Shares		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity			Number of Common Shares Outstanding		Common Shares		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive 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			—
At December 31, 2019																		19,022,619	$	1,902	$	271,019	$	57,749		$	(3,039	)	$	327,631
Cumulative effect adjustment from adoption of ASU 2016-13																		—		—		—		(887	)		—			(887	)
Net income		—		—		—			897			—			897			—		—		—		25,665			—			25,665
Other comprehensive loss, net of tax		—		—		—			—			(2,401	)		(2,401	)		—		—		—		—			(1,711	)		(1,711	)
Share-based compensation		—		—		5,685			—			—			5,685			—		—		3,859		—			—			3,859
Common shares issued, net		211,081		21		4,012			—			—			4,033			33,559		4		808		—			—			812
At March 31, 2019		18,790,769	$	1,879	$	252,862		$	87,108		$	1,833		$	343,682
At March 31, 2020																		19,056,178	$	1,906	$	275,686	$	82,527		$	(4,750	)	$	355,369
Net loss		—		—		—			(547	)		—			(547	)		—		—		—		(18,424	)		—			(18,424	)
Other comprehensive loss, net of tax		—		—		—			—			(371	)		(371	)
Other comprehensive income, net of tax																		—		—		—		—			1,484			1,484
Share-based compensation		—		—		5,849			—			—			5,849			—		—		4,699		—			—			4,699
Common shares issued, net		40,812		4		(823	)		—			—			(819	)		152,885		15		1,902		—			—			1,917
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
At June 30, 2020																		19,209,063	$	1,921	$	282,287	$	64,103		$	(3,266	)	$	345,045

(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			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	)
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		—		—		—			5,226			—		5,226			—		—		—			897			—			897
Other comprehensive income, net of tax		—		—		—			—			697		697
Other comprehensive loss, net of tax																	—		—		—			—			(2,401	)		(2,401	)
Share-based compensation		—		—		3,916			—			—		3,916			—		—		5,685			—			—			5,685
Common shares issued, net		126,511		13		3,849			—			—		3,862			211,081		21		4,012			—			—			4,033
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
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		—		—		5,215			—			—		5,215			—		—		5,849			—			—			5,849
Common shares issued, net		80,444		8		171			—			—		179			40,812		4		(823	)		—			—			(819	)
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
At June 30, 2019																	18,831,581	$	1,883	$	257,888		$	86,561		$	1,462		$	347,794

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,						Six Months Ended June 30,
(Unaudited, U.S. Dollars, in thousands)	2019			2018			2020			2019
Cash flows from operating activities
Net income (loss)	$	(40,148	)	$	4,940
Net income							$	7,241		$	350
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		18,180			13,661			13,269			11,905
Amortization of operating lease assets, debt costs and other assets		2,724			818
Provision for doubtful accounts		861			(571	)
Amortization of operating lease assets, debt costs, and other assets								1,908			1,750
Provision for expected credit losses								1,564			638
Deferred income taxes		(3,309	)		(5,082	)		(1,184	)		(2,316	)
Share-based compensation		17,378			14,392			8,558			11,534
Interest and loss on valuation of investment securities		5,000			3,050			219			(1,023	)
Change in fair value of contingent consideration		28,140			2,689			(6,900	)		5,870
Other		1,307			1,040			(1,933	)		477
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable		(3,298	)		(225	)		16,291			(3,535	)
Inventories		(4,995	)		6,880			468			(2,389	)
Prepaid expenses and other current assets		1,637			1,498			43			(3,277	)
Accounts payable		447			(2,788	)		(4,782	)		1,626
Other current liabilities		347			(13,130	)		(1,022	)		(8,138	)
Contract liability (Note 11)								13,851			—
Payment of contingent consideration		(1,340	)		—			—			(1,340	)
Other long-term assets and liabilities		(2,841	)		1,657			(17,497	)		(3,788	)
Net cash from operating activities		20,090			28,829			30,094			8,344
Cash flows from investing activities
Acquisition of business, net of cash acquired		—			(43,749	)
Capital expenditures for property, plant and equipment		(13,737	)		(9,586	)
Acquisition of a business								(18,000	)		—
Capital expenditures for property, plant, and equipment								(8,560	)		(9,595	)
Capital expenditures for intangible assets		(1,144	)		(1,138	)		(772	)		(743	)
Asset acquisitions and other investments		(6,400	)		(1,448	)		(1,240	)		(6,400	)
Net cash from investing activities		(21,281	)		(55,921	)		(28,572	)		(16,738	)
Cash flows from financing activities
Proceeds from revolving credit facility								100,000			—
Proceeds from issuance of common shares		6,821			5,866			3,839			6,523
Payments related to withholdings for share-based compensation		(4,271	)		(2,402	)		(1,110	)		(3,309	)
Payment of contingent consideration		(13,660	)		—			—			(13,660	)
Payments related to finance lease obligation		(276	)		—			(124	)		(188	)
Other financing activities		(1,224	)		(476	)		(687	)		(947	)
Net cash from financing activities		(12,610	)		2,988			101,918			(11,581	)
Effect of exchange rate changes on cash		(885	)		(811	)		(452	)		(71	)
Net change in cash, cash equivalents, and restricted cash		(14,686	)		(24,915	)		102,988			(20,046	)
Cash, cash equivalents, and restricted cash at the beginning of period		72,189			81,157			70,403			72,189
Cash, cash equivalents, and restricted cash at the end of period	$	57,503		$	56,242		$	173,391		$	52,143

Components of cash, cash equivalents and restricted cash at the end of period
Cash and cash equivalents	$	56,849		$	53,783		$	172,888		$	52,143
Restricted cash		654			2,459			503			—
Cash, cash equivalents, and restricted cash at the end of period	$	57,503		$	56,242		$	173,391		$	52,143

Supplemental Disclosure of Cash Flow Information:
Noncash investing activities:
Purchase of intangible assets	$	—		$	1,581
Contingent consideration recognized at acquisition date		—			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, COVID-19 update, and CARES Act

Description of the Business

Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. The Company’s mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic extremities products are distributed in more than 70 countries via the ~~Company has 2 reporting segments: Global Spine~~Company's sales representatives and ~~Global Extremities.~~distributors.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, ~~2018.~~2019. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, ~~2019.~~2020.

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

~~Prior~~COVID-19 Update

The global Coronavirus Disease 2019 ("COVID-19") pandemic is significantly affecting the Company’s patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. Since March 2020, hospitals, ambulatory surgery centers and other medical facilities in the Company’s sales markets have cancelled or deferred elective surgery procedures and diverted resources to patients being treated for COVID-19. The pandemic has caused surgeons and patients to defer procedures in which the Company’s products otherwise would be used, and many facilities that specialize in such procedures have temporarily closed or reduced operating hours. In addition, broad economic factors resulting from the pandemic, including increased unemployment rates and reduced consumer spending, are affecting the Company’s patients and partners. These circumstances have negatively affected the Company’s net sales, particularly during the 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~~from March 2020 through May 2020, when surgery center closures were most pronounced, though these effects remain ongoing.

The Company ~~has changed~~remains focused on protecting the health and wellbeing of its ~~reportable~~employees, partners, patients, and the communities in which it operates while assuring the continuity of its business ~~segments beginning with~~operations. The Company's condensed consolidated financial statements reflect estimates and assumptions made by management that affect the ~~first~~reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.

At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of infection rates in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain.

Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect the Company’s business during the second half of 2020 and beyond. The expected effects of COVID-19 on the Company’s business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which

localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients.

During the second quarter of ~~2019, to align with changes in how~~2020, the Company ~~manages~~focused on making its facilities safe given updated COVID-19 public health guidelines, and management believes the employee workforce has adapted to the new environment. In particular, the Company has been able to continue its manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in the Company’s largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to manufacturing, distribution, administrative and other business ~~reviews operating performance~~operations (including downtime at manufacturing facilities and ~~allocates resources.~~ the interruption of the production of the Company’s products).

In addition, while the Company has not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).

The ~~Company now reports~~Company’s results ~~under two reportable segments: Global Spine~~of operations and ~~Global Extremities,~~liquidity have been materially impacted by the decrease in elective surgical procedures and ~~measures operating performance~~could be further impacted by delays in payments from customers, supply chain interruptions, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the pandemic. The Company’s results of operations and liquidity may also be affected by the rate at which and timing of when elective procedures resume at hospitals and other facilities, which may occur at a faster or slower pace than current expectations. As of the date of issuance of these condensed consolidated financial statements, the full extent to which COVID-19 could materially affect the Company’s financial condition, liquidity, or results of operations is uncertain. These matters are also described in Part II, Item 1A of this Form 10-Q under heading Risk Factors.

As precautionary measures to increase the Company’s cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, the Company (i) completed a borrowing of $100.0 million under its secured revolving credit facility on April 16, 2020 (of this amount, $50.0 million was subsequently repaid in July 2020; see Note 7 for further discussion), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two ~~reportable segments based on earnings before~~months during the second quarter of 2020, (iii) suspended the Company’s 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated travel restrictions and a significant slow-down in hiring.

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

On March 27, 2020, the President of the United States signed the CARES Act into federal law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy.The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act had no impact to the Company’s income tax benefit reported within the condensed consolidated statements of operations for the six months ended June 30, 2020.

In addition, the CARES Act has provided financial relief to the Company through other various programs, which are each described in further detail below.

In April 2020, the Company received $13.9 million in funds from the Centers for Medicare & Medicaid Services (“CMS”) Accelerated and ~~amortization (“EBITDA”).~~Advance Payment Program. For ~~additional~~ discussion ~~regarding segments,~~of the Company’s accounting for these funds, see Note 11.

The Company also automatically received, without request, $4.7 million in funds from the U.S. Department of Health and Human Services in April 2020 as part of the Provider Relief Fund. Upon review of the qualifying criteria required to retain the funding, which primarily relate to lost revenues or the incurrence of expenses attributable to COVID-19, it was determined that the Company met the criteria to permanently retain all of the proceeds received. During the quarter ended June 30, 2020, the Company recognized other income of $4.7 million related to this in-substance grant.

In addition, as part of the CARES Act, the Company is permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year, such that 50% of the taxes is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of June 30, 2020, the Company has deferred $1.3 million associated with this program, all of which is classified within other long-term liabilities.

2. Recently adopted accounting standards and recently issued accounting pronouncements

Adoption of Accounting Standards Update (“ASU”) ~~2016-02, Leases~~2016-13, Financial Instruments—Credit Losses (Topic ~~842)~~326): Measurement of Credit Losses on Financial Instruments and subsequent Amendments

In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2016-02,~~2016-13 (which was then further clarified in subsequent ASUs), which ~~changes how lessees account~~requires that credit losses for ~~leases. For most leases, a liability will~~certain types of financial instruments, including trade accounting receivables, be ~~recorded on the balance sheet~~estimated based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company will recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be accounted for as finance leases similar to capital leases under the previous accounting standard.expected credit losses among other changes. Effective January 1, ~~2019,~~2020, the Company adopted ASU ~~2016-02~~2016-13 using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The practical expedients adopted allow the Company to carry forward its historical lease classification and to not separate and allocate the consideration paid between lease and non-lease components included within a contract. The Company also adopted an optional transition method that waives the requirement to apply the ASU to the comparative periods presented within the financial statements in the year of adoption. Therefore, results for reporting periods ~~beginning~~ after January 1, ~~2019~~2020 are presented under Topic ~~842,~~326, while prior period amounts are not adjusted and continue to be

reported in accordance with the ~~Company’s historic~~historical accounting ~~policies under Topic 840.~~guidance. See Note 511 for additional discussion of the Company’s adoption of Topic ~~842~~326 and its ~~lease~~resulting accounting policies.

Adoption of ASU ~~2018-02, Income Statement – Reporting Comprehensive Income~~2017-04, Intangibles—Goodwill and Other (Topic ~~220)~~350): ~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~Simplifying the Test for Goodwill Impairment

In ~~February~~January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 of the previous goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. Under ASU 2017-04, a goodwill impairment loss will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The Company adopted this ASU effective January 1, 2020 on a prospective basis. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact the measurement of any future goodwill impairment.

Adoption of ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU ~~2018-02,~~2018-13, which ~~allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from~~eliminates certain disclosures, such as the ~~Tax Cuts~~amount and ~~Jobs Act (the "Tax Act").~~reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. The Company adopted this ~~guidance~~ASU effective January 1, ~~2019, which resulted~~2020, with certain provisions of the ASU applied retrospectively and other provisions provided prospectively. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of operations, or cash flows; however, adoption of the ASU did result in ~~an increase to accumulated other comprehensive income~~modified disclosures in Note 8.

Adoption of ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a ~~decrease in retained earnings of $0.9 million.~~

~~Other recently adopted accounting guidance~~Cloud Computing Arrangement That Is a Service Contract

In August 2018, the ~~Securities and Exchange Commission (the “SEC”~~FASB issued ASU 2018-15, which 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 ~~“Commission”) issued SEC Final Rule Release No. 33-10532,~~ ~~Disclosure Update and Simplification, which amends certain~~service element of ~~the Commission’s disclosure requirements~~a hosting arrangement 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,is a service contract was not affected by 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.this update. The Company adopted ~~Release No. 33-10532 during~~this ASU effective January 1, 2020 on a prospective basis. Adoption of this ASU did not have a material impact to the ~~first quarter~~Company’s condensed consolidated balance sheet, statements of ~~2019,~~operations, or cash flows, but is expected to impact future cloud computing arrangements.

Adoption of ASU 2020-04, Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU 2020-04, which ~~resulted in changes in shareholders’ equity presented within~~provides temporary optional guidance to ease the ~~Condensed Consolidated Statements~~potential financial reporting burden of ~~Changes in Shareholders’ Equity.~~the expected market transition away from LIBOR. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedge accounting, and other transactions affected by reference rate reform if certain criteria are met through December 31, 2022. The Company adopted this ASU effective March 12, 2020, the effective date of the ASU, on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact the future borrowing rate used for the Company’s secured revolving credit facility.

Recently issued accounting pronouncements

Topic	Description of Guidance	Effective Date	Status of Company's Evaluation
~~Financial Instruments - Credit Losses~~Simplifying the accounting for income taxes (ASU ~~2016-13), and subsequent amendments~~2019-12)	~~Requires that credit losses~~Reduces the complexity of accounting for income taxes by eliminating certain ~~types of financial instruments be estimated based on expected losses~~exceptions to the general principles in ASC 740, Income Taxes. Additionally, the ASU simplifies GAAP by amending the requirements related to the accounting for "hybrid" tax regimes and also ~~modifies~~adding the ~~impairment models for available-for-sale debt securities~~requirement to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination and ~~for purchased financial assets~~when it should be considered a separate transaction. Certain of the provisions are to be applied retrospectively with ~~credit deterioration since their origination. Applied using a modified retrospective approach, with early adoption permitted.~~other provisions applied prospectively.	January 1, ~~2020~~	The Company has formed an implementation team to evaluate the impact this ASU will have on its consolidated financial statements. Based on the Company's preliminary evaluation, the ASU is expected to primarily impact trade accounts receivable; however, the Company is continuing to evaluate the impact this ASU may have on its consolidated financial statements.
~~Goodwill~~ ~~(ASU 2017-04)~~	Eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. Applied on a prospective basis, with early adoption permitted.	~~January 1, 2020~~2021	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.

3. Acquisitions

~~Acquisition of Spinal Kinetics Inc.~~FITBONE Asset Purchase Agreement

On ~~April 30, 2018,~~February 3, 2020, the Company, ~~completed the acquisition of Spinal Kinetics Inc.~~through a wholly owned subsidiary, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE (“~~Spinal Kinetics”~~Wittenstein”), a ~~privately held developer~~privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and ~~manufacturer~~tibia bones. Under the terms of ~~artificial cervical and lumbar discs~~the Purchase Agreement, as consideration for ~~$45.0~~the acquired assets, the Company paid $18.0 million in ~~net~~ cash ~~subject to certain adjustments, plus potential milestone payments of up to $60.0 million in cash.~~consideration and entered into a Contract Manufacturing and Supply Agreement (“CMSA”) with Wittenstein. The Company has accounted for this acquisition as a business combination. The acquisition ~~date fair value of the consideration transferred~~ was $76.6 million. The results of operations for Spinal Kinetics have been included in the Company’s financial results since the acquisition date, April 30, 2018. For additional discussion regarding the valuation of the contingent consideration, see Note 7.completed on March 26, 2020.

The following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed at the acquisition ~~date:~~date. A final determination of the allocation of the purchase price to assets acquired and liabilities assumed has not been made and is subject to completion of the Company’s valuation of the assets acquired and liabilities assumed, which may take up to one year.

(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

(U.S. Dollars, in thousands)	Preliminary Acquisition Date Fair Value as Previously Reported		Adjustments			Revised Preliminary Acquisition Date Fair Value		Balance Sheet Classification	Assigned Useful Life
Assets acquired
Inventories	$	528	$	—		$	528	Inventories
Developed technology		4,500		—			4,500	Intangible assets, net	8 years
Customer relationships		800		—			800	Intangible assets, net	15 years
Trade name		600		—			600	Intangible assets, net	15 years
In-process research and development ("IPR&D")		440		(140	)		300	Intangible assets, net	Indefinite
Total identifiable assets acquired		6,868		(140	)		6,728
Goodwill		11,132		140			11,272
Total fair value of consideration transferred	$	18,000	$	—		$	18,000

��

~~On February 6, 2019,~~The Company recorded goodwill of $11.3 million in connection with the ~~Company obtained U.S. Food~~acquisition, of which $11.1 million was assigned to the Global Extremities reporting segment and ~~Drug Administration (“FDA”) approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration and started amortizing IPR&D. The $17.6~~$0.2 million ~~of goodwill recognized~~ was assigned to the Global Spine reporting segment. Specifically, goodwill includes synergies associated with the purchase of the acquired assets and is expected to be deductible for tax purposes.

The IPR&D intangible asset is considered an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition, this asset is not amortized but, instead,

is subject to impairment review and testing provisions. Upon completion of the IPR&D project, the Company will determine the useful life of the asset and begin amortization.

The Company also entered into a CMSA with Wittenstein for an initial term of up to two years to manufacture the FITBONE product line. The Company is accounting for the CMSA as a finance lease. See Note 5 for further discussion of the recognized finance lease.

The Company did 0t recognize ~~any acquisition related~~significant acquisition-related costs during the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019 and recorded ~~$0.3~~$0.4 million and ~~$3.3~~$0.3 million of acquisition related costs during the ~~three and nine~~six months ended ~~September~~June 30 ~~2018.~~2020 and 2019, respectively. 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~~ Additionally, the Company recognized $0.2 million ~~and $2.9 million~~in revenues 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 for the 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 losses of $10.3 million and $3.5 million for the nine months ended September 30, 2019 and 2018, respectively.

~~The following table presents the unaudited pro forma results for~~FITBONE product line during the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, which combines the historical results of operations of Orthofix and Spinal Kinetics as though the companies had been combined as of January 1, 2018. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.2020.

Three Months Ended September 30,

Nine Months Ended September 30,

(U.S. Dollars, in thousands)

2019

2018

2019

2018

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net sales

$
113,499

$
111,708

$
338,461

$
336,882

Net income (loss)

(40,498
)

(923
)

(40,148
)

5,276

~~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, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Raw materials	$	7,760	$	8,463	$	7,936	$	9,587
Work-in-process		10,532		13,478		11,635		14,027
Finished products		62,701		54,906		28,685		20,712
Field/consignment						33,790		38,071
Inventories	$	80,993	$	76,847	$	82,046	$	82,397

5. Leases

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

(U.S. Dollars, in thousands)

December 31, 2018

Impact
of Adoption
of ASC 842

January 1,
2019

Assets

Current assets

Cash, cash equivalents, and restricted cash

$
72,189

$
—

$
72,189

Accounts receivable, net

77,747

—

77,747

Inventories

76,847

—

76,847

Prepaid expenses and other current assets

17,856

(15
)

17,841

Total current assets

244,639

(15
)

244,624

Property, plant, and equipment, net

42,835

—

42,835

Intangible assets, net and goodwill

124,298

—

124,298

Deferred income taxes

33,228

71

33,299

Other long-term assets

21,641

20,209

41,850

Total assets

$
466,641

$
20,265

$
486,906

Liabilities and shareholders’ equity

Current liabilities

Accounts payable

$
17,989

$
—

$
17,989

Other current liabilities

67,919

2,166

70,085

Total current liabilities

85,908

2,166

88,074

Other long-term liabilities

45,336

18,028

63,364

Total liabilities

$
131,244

$
20,194

$
151,438

Shareholders’ equity

Common shares

1,858

—

1,858

Additional paid-in capital

243,165

—

243,165

Retained earnings

87,078

71

87,149

Accumulated other comprehensive income

3,296

—

3,296

Total shareholders’ equity

335,397

71

335,468

Total liabilities and shareholders’ equity

$
466,641

$
20,265

$
486,906

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

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

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

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

A summary of the Company’s lease portfolio as of ~~September~~June 30, 2020 and December 31, 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

(U.S. Dollars, in thousands)	Classification	June 30, 2020		December 31, 2019
Right-of-use assets ("ROU assets")
Operating leases	Other long-term assets	$	5,161	$	5,798
Finance leases	Property, plant and equipment, net		21,399		20,207
Total ROU assets			26,560		26,005
Lease Liabilities
Current
Operating leases	Other current liabilities		1,934		1,875
Finance leases	Current portion of finance lease liability		449		323
Long-term
Operating leases	Other long-term liabilities		3,411		4,084
Finance leases	Long-term portion of finance lease liability		22,506		20,648
Total lease liabilities		$	28,300	$	26,930

Supplemental cash flow information related to leases was as follows:

(U.S. Dollars, in thousands)	Nine Months Ended September 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	3,037	$	2,082	$	2,055
Operating cash flows from finance leases		687		304		454
Financing cash flows from finance leases		276		124		188
Right-of-use assets obtained in exchange for lease obligations
ROU assets obtained in exchange for lease obligations
Operating leases		598		400		362
Finance leases		21,179		1,949		21,179

~~A summary~~Wittenstein Contract Manufacturing and Supply Agreement

In March 2020, the Company entered into a CMSA with Wittenstein for an initial term of two years to manufacture the FITBONE product line. As consideration, the Company will pay $2.0 million to Wittenstein at the conclusion of the ~~Company’s remaining~~CMSA if certain conditions are met in relation to the prompt delivery of manufactured products. The Company is accounting for the CMSA as a finance lease ~~liabilities~~as the Company has the right to direct the use of and to obtain substantially all of the economic benefits of the dedicated equipment used to manufacture the products and has the option to obtain title and possession of the equipment at the conclusion of the CMSA. As a result, the Company recognized both a finance lease liability and a related ROU asset of $1.9 million 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

the commencement date of the CMSA.

6. Other current liabilities

In December 2019, the Company approved and initiated a targeted restructuring plan in the U.S. to streamline costs and to better align talent with the Company’s strategic initiatives. The plan consists primarily of the realignment of certain personnel, representing an extremely limited number of positions, which will require severance payments. As of December 31, 2019, the Company recorded a liability of $3.2 million in connection with this activity, all of which was recognized in 2019 within general and administrative expenses. During the three and six months ended June 30, 2020, the Company recorded additional accruals of $0.2 million and $1.3 million, respectively, associated with these activities, which included costs associated with the departure of a former executive officer during the first quarter. Payments were made during the three and six months ended June 30, 2020 totaling $0.9 million. As of June 30, 2020, the Company had a liability of $3.6 million associated with the restructuring plan.

7. Long-term debt

As discussed previously in Note 1, as a precautionary measure to increase the Company’s cash position and preserve financial flexibility in view of ~~September~~the current uncertainty resulting from the COVID-19 pandemic, the Company completed a borrowing of $100.0 million under its secured revolving credit facility on April 16, 2020.

As of June 30, ~~2019,~~2020, the Company had 0$100.0 million in borrowings under ~~its~~the five year ~~$125~~$300 million secured revolving credit facility. In addition, the Company had 0 borrowings on its €5.5 million ($~~6.0~~6.2 million) available lines of credit in ~~Italy as of September 30, 2019.~~Italy. The Company was in compliance with all required financial covenants as of ~~September~~June 30, ~~2019.~~2020.

~~On October 25, 2019,~~In July 2020, the Company ~~and certain of~~repaid $50.0 million related to its ~~wholly-owned subsidiaries (collectively with~~borrowings under 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,~~Subsequent to this payment, the ~~Borrowers have 0t made any~~Company had $50.0 million in 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 thesecured 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.facility.

7.8. 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, 2019											December 31, 2018			June 30, 2020											December 31, 2019
(U.S. Dollars, in thousands)	Level 1		Level 2			Level 3			Total			Total			Level 1		Level 2			Level 3			Total			Total
Assets
Treasury securities	$	447	$	—		$	—		$	447		$	490
Bone Biologics equity warrants		—		—			—			—			—
Bone Biologics equity securities		—		219			—			219			219		$	—	$	—		$	—		$	—		$	219
eNeura debt security		—		—			—			—			17,820
eNeura warrant		—		—			—			—			—
Total	$	447	$	219		$	—		$	666		$	18,529		$	—	$	—		$	—		$	—		$	219
Liabilities
Contingent consideration	$	—	$	—		$	(41,700	)	$	(41,700	)	$	(28,560	)	$	—	$	—		$	(35,800	)	$	(35,800	)	$	(42,700	)
Deferred compensation plan		—		(1,242	)		—			(1,242	)		(1,275	)		—		(1,285	)		—			(1,285	)		(1,255	)
Total	$	—	$	(1,242	)	$	(41,700	)	$	(42,942	)	$	(29,835	)	$	—	$	(1,285	)	$	(35,800	)	$	(37,085	)	$	(43,955	)

~~Bone Biologics Equity Warrants and Securities~~

The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics, Inc. (“Bone Biologics”). The Company’s common stock investments are recorded within other long-term assets while the warrants are considered to have a fair value of 0. The equity securities are considered investments that do not have readily determinable fair values. As such, the Company measures these investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.

Three Months Ended 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 September 30, 2019, the Company 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, the Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura, and which also eliminated the conversion feature included within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).

Prior to the restructuring on March 1, 2019, the debt security was accounted for as an available for sale debt security at fair value and included within other long-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow model and assumptions regarding the expected payback period for the debt security, requiring the ~~Company~~ ~~to develop its own assumptions; therefore, the Company had categorized this asset as a Level 3 financial asset.~~

~~Subsequent to the restructuring, the debt security 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 fair value on the date of the restructuring.~~ ~~As a result, the~~ ~~unrealized gains included~~ ~~in accumulated other comprehensive 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 and 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. The Company did 0t recognize any interest income during the three and nine months ended September 30, 2018.

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

(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 Company recognized a contingent consideration atobligation in connection with the acquisition ~~date~~ of Spinal Kinetics ~~consisted~~in 2018. The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) up to $15.0 million ~~if the FDA grants~~upon U.S. Food and Drug Administration (“FDA”) approval of ~~Spinal Kinetics’~~the 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~~acquired artificial ~~cervical disc and the M6-L artificial lumbar disc.~~discs. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments.

On In 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 was achieved and ~~such obligation was paid on February 14, 2019.~~ paid.

The estimated fair value of the remaining contingent consideration was ~~$41.7~~$35.8 million as of ~~September~~June 30, ~~2019; however,~~2020. The estimated fair value reflects assumptions made by management as of June 30, 2020, including the impact of COVID-19 on significant unobservable assumptions, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the impact of COVID-19 on the Company’s business remains highly uncertain and difficult to predict. As information surrounding the pandemic is continuing to evolve, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. ~~This resulted in the recognition of expense of $22.3 and $28.1 million during the three and nine months ended September~~At June 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, 2019,2020, the Company has classified $14.5 million of the liability attributable to the revenue-based ~~milestones~~milestone 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~~$21.3 million within other long-term liabilities. Any changes in fair value are recorded as an operating expense ~~and included~~ within acquisition-related amortization and remeasurement.

The 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)	2020			2019
Contingent consideration at January 1	$	42,700		$	28,560
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement		(6,900	)		5,870
Payment made		—			(15,000	)
Contingent consideration at June 30	$	35,800		$	19,430

The $6.9 million decrease in fair value in 2020 is primarily attributable to a change in management’s forecast of future net sales of artificial discs because of uncertainty in the market and the economy attributable to COVID-19.

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

The following table provides a range of key assumptions used within the valuation as of June 30, 2020.

(U.S. Dollars, in thousands)	Fair Value as of June 30, 2020		Valuation Technique	Unobservable inputs	Range
Contingent consideration	$	35,800	Discounted cash flow	Revenue discount rate	5.49% - 5.56%
				Payment discount rate	4.89% - 4.94%
				Projected year of payment	2021 - 2022

eNeura Debt Security and Warrant

Until October of 2019, the Company held a debt security and a related warrant to purchase common stock of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. On October 25, 2019, the Company and eNeura settled the debt security for a $4.0 million cash payment and agreed to transfer the warrant to eNeura.

The following table provides a reconciliation of the beginning and ending balances for the ~~contingent consideration~~eNeura debt security 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)

2019

2018

Contingent consideration at January 1

$
28,560

$
—

Acquisition date fair value

—

25,491

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

28,140

2,689

Payment made

(15,000
)

—

Contingent consideration at September 30

$
41,700

$
28,180

(U.S. Dollars, in thousands)	2020		2019
eNeura debt security and Warrant at January 1	$	—	$	17,820
Gains or losses recorded for the period
Recognized in other comprehensive income (loss)		—		(2,593	)
Change in classification of debt security to held to maturity		—		(15,227	)
Issuance of Warrant as consideration for extension		—		491
eNeura debt security and Warrant at June 30	$	—	$	491

8.9. Contingencies

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

Italian Medical Device Payback (“IMDP”)

In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. This 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~~device companies in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the IMDP as sales and marketing expense and recorded expense of ~~$0.3~~$0.4 million and ~~$0.2~~$0.3 million for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$1.0~~$0.7 million and ~~$0.8~~$0.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. As of ~~September~~June 30, ~~2019,~~2020, the Company has accrued ~~$4.5~~$5.7 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.

Brazil

In July 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority inspected the offices of more than 30 companies, including the Company’s office in São Paulo, as part of an investigation into tender irregularities in the medical device industry. Before doing so, the authorities obtained a court order affecting the Company’s (and other companies’) local bank accounts resulting in the freezing of approximately $2.5 million of the Company’s cash, which the Company reclassified to restricted cash. On April 3, 2019, the Company’s appeal regarding the freezing of its local bank accounts was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the Company’s cash. The cash was then returned without any restrictions in April 2019. As such, this balance was reclassified to 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~~$0.5 million (based upon foreign exchange rates as of June 30, 2020) of the Company’s cash in Brazil was frozen upon request to satisfy a judgment. Although the Company is appealing the judgment, this cash has been reclassified to restricted cash. As of ~~September~~June 30, ~~2019,~~2020, the Company has an accrual of ~~$1.6~~$1.3 million related to this matter.

9.10. Accumulated other comprehensive ~~income (loss)~~loss

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

(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
)

(U.S. Dollars, in thousands)	Currency Translation Adjustments			Accumulated Other Comprehensive Loss
Balance at December 31, 2019	$	(3,039	)	$	(3,039	)
Other comprehensive loss		(227	)		(227	)
Income taxes		—			—
Balance at June 30, 2020	$	(3,266	)	$	(3,266	)

~~10.~~11. Revenue recognition and accounts receivable

Revenue Recognition

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

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

	Three Months Ended September 30,							Three Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		Change			2020		2019		Change
Bone Growth Therapies	$	48,836	$	48,059		1.6	%	$	28,379	$	50,109		-43.4	%
Spinal Implants		22,947		22,102		3.8	%		18,594		23,226		-19.9	%
Biologics		16,308		14,636		11.4	%		11,125		16,744		-33.6	%
Global Spine		88,091		84,797		3.9	%		58,098		90,079		-35.5	%
Global Extremities		25,408		26,911		-5.6	%		15,037		25,771		-41.7	%
Net sales	$	113,499	$	111,708		1.6	%	$	73,135	$	115,850		-36.9	%

	Nine Months Ended September 30,							Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		Change			2020		2019		Change
Bone Growth Therapies	$	146,228	$	142,433		2.7	%	$	73,822	$	97,392		-24.2	%
Spinal Implants		69,076		66,689		3.6	%		41,520		46,129		-10.0	%
Biologics		48,784		43,639		11.8	%		25,074		32,476		-22.8	%
Global Spine		264,088		252,761		4.5	%		140,416		175,997		-20.2	%
Global Extremities		74,373		79,203		-6.1	%		37,542		48,965		-23.3	%
Net sales	$	338,461	$	331,964		2.0	%	$	177,958	$	224,962		-20.9	%

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, 2019 and 2018.~~which are both components of net sales:

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Product sales	$	97,833	$	97,604	$	291,632	$	289,946	$	62,435	$	99,865	$	153,856	$	193,799
Marketing service fees		15,666		14,104		46,829		42,018		10,700		15,985		24,102		31,163
Net sales	$	113,499	$	111,708	$	338,461	$	331,964	$	73,135	$	115,850	$	177,958	$	224,962

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

~~Puerto Rico Settlement~~Adoption of ASU 2016-13

~~In June 2019,~~As discussed in Note 2, the Company ~~received~~adopted ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments, using a ~~payment~~modified retrospective approach. Adoption of ~~$1.4~~the new standard resulted in an increase to the Company’s allowance for expected credit losses of $1.1 million, ~~from~~an increase in deferred income tax assets of $0.2 million, and a decrease in retained earnings of $0.9 million as of January 1, 2020. The net impact of adoption to the ~~Administration~~Company’s balance sheet as of ~~Medical Services~~January 1, 2020 is presented in the table below. The standard did not have a material impact to the Company’s condensed consolidated statements of ~~Puerto Rico, a government-owned corporation, in settlement~~operations or cash flows.

(U.S. Dollars, in thousands)	December 31, 2019			Impact of Adoption of ASC 326			January 1, 2020
Assets
Current assets
Cash, cash equivalents, and restricted cash	$	70,403		$	—		$	70,403
Accounts receivable, net		86,805			(1,120	)		85,685
Inventories		82,397			—			82,397
Prepaid expenses and other current assets		20,948			—			20,948
Total current assets		260,553			(1,120	)		259,433
Deferred income taxes		35,117			233			35,350
Other long-term assets		199,950			—			199,950
Total assets	$	495,620		$	(887	)	$	494,733
Liabilities and shareholders’ equity
Total liabilities	$	167,989		$	—		$	167,989
Shareholders’ equity
Common shares	$	1,902		$	—		$	1,902
Additional paid-in capital		271,019			—			271,019
Retained earnings		57,749			(887	)		56,862
Accumulated other comprehensive loss		(3,039	)		—			(3,039	)
Total shareholders’ equity		327,631			(887	)		326,744
Total liabilities and shareholders’ equity	$	495,620		$	(887	)	$	494,733

Accounts receivable and related allowances

Subsequent to the adoption of ~~approximately $2.5 million~~ASU 2016-13, the Company’s allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that an entity does not expect to collect over the receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivables, the aging of outstanding ~~accounts receivable. This $2.5 million~~receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of ~~outstanding accounts~~such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable ~~had previously been fully reserved between~~are analyzed on a quarterly basis to assess the ~~Company’s allowances~~adequacy of both reserves for ~~doubtful accounts~~expected credit losses and contractual allowances. ~~As a result of this settlement, and~~Revisions in ~~accordance with the Company’s policy, the Company~~allowances for expected credit loss estimates are recorded ~~the resulting~~as an adjustment ~~to contractual allowances of $0.4 million within net sales and the recovery of the allowance for doubtful accounts as a credit~~ to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, the Company analyzes its receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.

The following table provides a detail of ~~$1.0 million.~~changes in the Company’s allowance for expected credit losses for the three and six months ended June 30, 2020:

(U.S. Dollars, in thousands)	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
Allowance for expected credit losses beginning balance	$	5,591		$	3,987
Impact of adoption of ASU 2016-13		—			1,120
Current period provision for expected credit losses		885			1,564
Writeoffs charged against the allowance and other		(224	)		(338	)
Effect of changes in foreign exchange rates		112			31
Allowance for expected credit losses ending balance	$	6,364		$	6,364

Contract Liabilities

The Company’s contract liabilities largely relate to a prepayment of $13.9 million received in April 2020 from the CMS as part of the Accelerated and Advance Payment Program of the CARES Act intended to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. Repayment of this amount is required to begin 120 days after the issuance of the payment, or beginning in August 2020. After the 120 day period, every claim submitted by the Company will be offset against the accelerated / advanced payment. Thus, instead of receiving payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the claim amount.

This contract liability is included within other current liabilities and totaled $13.9 million as of June 30, 2020. The Company did 0t recognize any net sales during the three and six months ended June 30, 2020, respectively, attributable to the satisfaction of performance obligations related to the CMS prepayment; however, the Company expects to recognize the full amount of the prepayment as net sales in fiscal year 2020.

Other Contract Assets

The Company’s contract assets, excluding trade accounts receivable (“Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of Orthofix products. Other Contract Assets are included in other long-term assets or other current assets, dependent

upon the original term of the related agreement, and totaled ~~$3.5~~$2.6 million and ~~$1.9~~$3.7 million as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively.

~~11.~~12. Business segment information

~~During the first quarter of 2019, the~~The Company ~~changed its reporting segments from 4 reporting segments, previously reported as Bone Growth Therapies, Spinal Implants, Biologics, and Orthofix Extremities, to~~has 2 reporting segments: Global Spine and Global Extremities. ~~Additionally,~~The primary metric used in managing 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 performanceis earnings before interest, tax, depreciation, 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.~~amortization (“EBITDA”). Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the 2two reporting segments, such as human resources, finance, legal, and information technology functions.

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Global Spine	$	(6,033	)	$	15,637		$	21,065		$	53,492		$	(3,707	)	$	16,523		$	18,710		$	27,098
Global Extremities		1,229			3,357			3,806			7,173			(3,359	)		2,750			(5,253	)		2,577
Corporate		(15,949	)		(15,403	)		(38,356	)		(35,097	)		(1,923	)		(12,880	)		(10,063	)		(22,407	)
Total EBITDA	$	(20,753	)	$	3,591		$	(13,485	)	$	25,568		$	(8,989	)	$	6,393		$	3,394		$	7,268
Depreciation and amortization		(6,275	)		(4,738	)		(18,180	)		(13,661	)		(6,942	)		(6,178	)		(13,269	)		(11,905	)
Interest income (expense), net		186			(181	)		386			(615	)		(901	)		457			(1,324	)		200
Income (loss) before income taxes	$	(26,842	)	$	(1,328	)	$	(31,279	)	$	11,292		$	(16,832	)	$	672		$	(11,199	)	$	(4,437	)

Geographical information

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Global Spine
U.S.	$	82,816	$	79,502	$	246,943	$	239,262	$	55,236	$	84,601	$	132,342	$	164,127
International		5,275		5,295		17,145	$	13,499		2,862		5,478		8,074	$	11,870
Total Global Spine		88,091		84,797		264,088		252,761		58,098		90,079		140,416		175,997

Global Extremities
U.S.	��	6,636		7,254		20,078		21,193		4,040		6,844		10,083		13,442
International		18,772		19,657		54,295		58,010		10,997		18,927		27,459		35,523
Total Global Extremities		25,408		26,911		74,373		79,203		15,037		25,771		37,542		48,965

Consolidated
U.S.		89,452		86,756		267,021		260,455		59,276		91,445		142,425		177,569
International		24,047		24,952		71,440		71,509		13,859		24,405		35,533		47,393
Net sales	$	113,499	$	111,708	$	338,461	$	331,964	$	73,135	$	115,850	$	177,958	$	224,962

~~12.~~

13. Acquisition-related amortization and remeasurement

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020			2019
Changes in fair value of contingent consideration	$	22,270	$	1,580	$	28,140	$	2,689	$	2,100	$	470	$	(6,900	)	$	5,870
Amortization of acquired intangibles		1,338		429		3,733		802		1,578		1,338		2,996			2,395
Total	$	23,608	$	2,009	$	31,873	$	3,491	$	3,678	$	1,808	$	(3,904	)	$	8,265

14. Share-based compensation

~~13. Share-based compensation~~

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Cost of sales	$	169	$	151	$	536	$	408	$	205	$	180	$	386	$	367
Sales and marketing		583		514		1,885		1,436		1,533		692		2,229		1,302
General and administrative		4,760		4,194		13,888		11,488		2,639		4,564		5,169		9,128
Research and development		332		402		1,069		1,060		322		413		774		737
Total	$	5,844	$	5,261	$	17,378	$	14,392	$	4,699	$	5,849	$	8,558	$	11,534

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Stock options	$	599	$	579	$	3,637	$	2,442	$	750	$	926	$	1,054	$	3,038
Time-based restricted stock awards and units		3,805		2,244		8,462		5,480		2,751		2,951		5,172		4,657
Performance-based restricted stock awards and units		—		734		—		1,493
Market-based restricted stock units		1,092		1,298		4,015		3,855		810		1,576		1,480		2,923
Stock purchase plan		348		406		1,264		1,122		388		396		852		916
Total	$	5,844	$	5,261	$	17,378	$	14,392	$	4,699	$	5,849	$	8,558	$	11,534

During the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, the Company issued ~~43,603~~152,885 and ~~50,928~~40,812 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units. During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, the Company issued ~~295,496~~186,444 and ~~257,833~~251,893 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).

~~14.~~15. Income taxes

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

For the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, the effective tax rate was ~~(50.9%~~(9.5%) and ~~8.8%~~181.4%, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, the effective tax rate was ~~(28.4%)~~164.7% and ~~56.3%~~107.9%, respectively. The primary factors affecting the Company’s effective tax rate for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, were statute expirations related to unrecognized tax benefits, financial ~~expenses~~deductions not ~~deductible~~recognized for tax purposes, limits on executive compensation, and reversal of tax benefits related to certain performance stock units forfeited in the current year. The financial deductions not recognized for tax purposes are primarily related to ~~acquisition-related items, which includes~~the remeasurement of contingent ~~consideration, increased limitation~~consideration. The effective tax rate for the three months ended June 30, 2020 was further affected by the reversal of a $3.0 million tax benefit recorded in the first quarter related to a beneficial rate difference on a potential federal loss carryback available under the CARES Act that the Company no longer expects to benefit from.

The CARES Act, among other things, includes income tax provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. As of June 30, 2020, the Company does 0t expect a significant impact to its income tax expense (benefit) for fiscal year 2020 as a result of the ~~deductibility of executive compensation, and benefits related to effective settlement of the 2015 federal tax examination and statute expirations.~~CARES Act.

During the first quarter of ~~2019,~~2020, the ~~Internal Revenue Service concluded an examination~~statute of ~~the Company’s federal income~~limitations expired related to certain unrecognized tax ~~return for 2015,~~benefits, which resulted in the recognition of a net benefit of ~~$1.8~~$17.8 million. During the three and six months ended June 30, 2020, the Company recognized net expense of $0.1 million and a net benefit of $17.8 million, respectively, related to uncertain tax benefits. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by ~~$13.0~~$0.2 million to ~~$13.4~~$0.7 million as audits close and statutes expire.

~~15.~~16. Earnings per share (“EPS”)

The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Weighted average common shares-basic		18,957,876		18,562,204		18,847,728		18,460,848		19,215,392		18,834,886		19,149,523		18,790,612
Effect of dilutive securities
Unexercised stock options and stock purchase plan		—		—		—		312,320		—		—		57,249		259,967
Unvested restricted stock awards and units		—		—		—		91,001		—		—		64,695		128,478
Weighted average common shares-diluted		18,957,876		18,562,204		18,847,728		18,864,169		19,215,392		18,834,886		19,271,467		19,179,057

There were ~~1,814,544~~2,141,086 and ~~2,088,843~~1,987,907 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~1,880,423~~1,406,046 and ~~359,172~~483,731 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020, and ~~2018,~~2019, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock awards and units, all necessary conditions had not been satisfied by the end of the respective period.

17. Subsequent Events

In July 2020, the Company, through a wholly owned subsidiary, entered into an agreement to acquire certain assets of a medical device distributor. The Company has agreed to pay consideration of up to $7.6 million in accordance with the parties’ agreement.

In July 2020, the Company repaid $50.0 million related to its borrowings under the secured revolving credit facility. Subsequent to this payment, the Company had $50.0 million in borrowings under the secured revolving credit facility.

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

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

Executive Summary

We are a global medical device company focused on musculoskeletal products and therapies. Our mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, ~~we have two reporting segments: Global Spine~~our spine and ~~Global Extremities. Our~~orthopedic extremities products are ~~widely~~ distributed byin more than 70 countries via our sales representatives and distributors.

Notable ~~highlights~~financial metrics and achievements in the ~~third~~second quarter of ~~2019~~2020 include the following:

•

Net sales were ~~$113.5~~$73.1 million, ~~an increase~~a decrease of ~~1.6%~~36.9% on a reported basis and ~~2.5%~~36.6% on a constant currency basis

•

~~Biologics tissue service fees increased 11.4%, its second consecutive~~Record Motion Preservation sales quarter of ~~double-digit growth~~$3.6 million in the U.S., an increase of 24% sequentially

•

Net loss ~~was $40.5~~of $18.4 million, a decrease of ~~$39.3~~$17.9 million compared to the prior year period

•

Decrease in earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) of ~~$24.3~~$15.4 million, largely driven by ~~expenses recognized during~~ the ~~third quarter of 2019 for acquisition-related remeasurement~~decline in net sales

COVID-19 Update and Outlook

The global COVID-19 pandemic is significantly affecting our patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. Since March 2020, hospitals, ambulatory surgery centers and other medical facilities in our sales markets have cancelled or deferred elective surgery procedures and diverted resources to patients being treated for COVID-19. The pandemic has caused surgeons and patients to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in which our products otherwise would be used have temporarily closed or reduced operating hours. In addition, broad economic factors resulting from the pandemic, including increased unemployment rates and reduced consumer spending, are affecting our patients and partners. These circumstances have negatively affected the sales of our products, particularly during the period from March 2020 through May 2020 when surgery center closures were most pronounced, though these effects remain ongoing. However, we remain focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which we operate while assuring the continuity of our business operations.

Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our business during the second half of 2020 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients.

During the second quarter of 2020, we focused on making our facilities safe given updated COVID-19 public health guidelines, and we believe that our employee workforce has adapted to the new environment. In particular, we have been able to continue our manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in our largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to our manufacturing, distribution, administrative and other business operations (including downtime at our manufacturing facilities and the interruption of the production of our products).

In addition, while we have not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).

Our results of operations and liquidity have been materially impacted by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, supply chain interruptions, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the pandemic. Our results of operations and liquidity may also be affected by the rate at which and timing of when elective procedures resume at hospitals and other facilities, which may occur at a faster or slower pace than current expectations. As of the date of issuance of these condensed consolidated financial statements, the full extent to which COVID-19 could materially affect the Company’s financial condition, liquidity, or results of operations is uncertain.

As precautionary measures to increase our cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, we (i) completed a borrowing of $100.0 million under our secured revolving credit facility on April 16, 2020 (of this amount, $50.0 million was subsequently repaid in July 2020), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the our 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated travel restrictions and a significant slow-down in hiring.

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 June 30,						Six Months Ended June 30,
	2019 (%)			2018 (%)			2019 (%)			2018 (%)		2020 (%)			2019 (%)			2020 (%)			2019 (%)
Net sales		100.0			100.0			100.0			100.0		100.0			100.0			100.0			100.0
Cost of sales		21.9			21.5			22.0			21.4		31.7			22.3			26.2			22.0
Gross profit		78.1			78.5			78.0			78.6		68.3			77.7			73.8			78.0
Sales and marketing		48.3			44.7			48.9			45.7		59.5			49.1			55.0			49.1
General and administrative		18.6			19.9			18.8			19.2		20.6			18.9			18.5			18.9
Research and development		7.0			8.6			7.7			7.4		12.0			7.8			10.5			8.1
Acquisition-related amortization and remeasurement		20.8			1.8			9.4			1.0		4.9			1.5			(2.3	)		3.7
Operating income (loss)		(16.6	)		3.5			(6.8	)		5.3		(28.7	)		0.4			(7.9	)		(1.8	)
Net income (loss)		(35.7	)		(1.1	)		(11.9	)		1.5		(25.2	)		(0.5	)		4.1			0.2

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 June 30,				Percentage Change
(U.S. Dollars, in thousands)	2019		2018		Reported			Constant Currency			2020		2019		Reported			Constant Currency
Bone Growth Therapies	$	48,836	$	48,059		1.6	%		1.6	%	$	28,379	$	50,109		-43.4	%		-43.4	%
Spinal Implants		22,947		22,102		3.8	%		4.4	%		18,594		23,226		-19.9	%		-19.7	%
Biologics		16,308		14,636		11.4	%		11.4	%		11,125		16,744		-33.6	%		-33.6	%
Global Spine		88,091		84,797		3.9	%		4.0	%		58,098		90,079		-35.5	%		-35.4	%
Global Extremities		25,408		26,911		-5.6	%		-2.4	%		15,037		25,771		-41.7	%		-40.5	%
Net sales	$	113,499	$	111,708		1.6	%		2.5	%	$	73,135	$	115,850		-36.9	%		-36.6	%

	Nine Months Ended September 30,				Percentage Change						Six Months Ended June 30,				Percentage Change
(U.S. Dollars, in thousands)	2019		2018		Reported			Constant Currency			2020		2019		Reported			Constant Currency
Bone Growth Therapies	$	146,228	$	142,433		2.7	%		2.7	%	$	73,822	$	97,392		-24.2	%		-24.2	%
Spinal Implants		69,076		66,689		3.6	%		4.3	%		41,520		46,129		-10.0	%		-9.7	%
Biologics		48,784		43,639		11.8	%		11.8	%		25,074		32,476		-22.8	%		-22.8	%
Global Spine		264,088		252,761		4.5	%		4.7	%		140,416		175,997		-20.2	%		-20.1	%
Global Extremities		74,373		79,203		-6.1	%		-1.8	%		37,542		48,965		-23.3	%		-21.6	%
Net sales	$	338,461	$	331,964		2.0	%		3.1	%	$	177,958	$	224,962		-20.9	%		-20.5	%

Global Spine

Global Spine offers the following products categories:

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

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

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

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales ~~increased $3.3~~decreased $32.0 million or ~~3.9%~~35.5%

•

Bone Growth Therapies net sales ~~increased $0.8~~decreased $21.7 million or ~~1.6%~~43.4%, primarily driven by ~~an increase~~the disruption caused by COVID-19, which has led to lower order volumes and a longer revenue cycle for these products, particularly due to many patients only being able to be fitted for devices in ~~order volume in the quarter, partially offset by customer sales mix and product mix changes~~a virtual or telehealth environment

•

Spinal Implants net sales ~~increased $0.8~~decreased $4.6 million or ~~3.8%~~19.9%, primarily driven by the reduction in elective procedures in both the U.S. and internationally due to ~~a $1.4 million increase in~~COVID-19; however, Motion Preservation ~~due to our launch of the M6 artificial cervical disc~~net sales increased $3.4 million in the U.S. when compared to prior year as a result of increases in case volumes and ~~partially offset by timing in international stocking orders for legacy Spine Fixation products~~active surgeons

•

Biologics net sales ~~increased $1.7~~decreased $5.6 million or ~~11.4%~~33.6%, primarily ~~due to distribution added during the last year and the return to solid results in each~~driven by lower procedure volumes as a result of the ~~three U.S. sales regions, as volume increased related to Trinity tissues~~disruption caused by ~~14.0%, partially offset by a low single-digit price decline~~COVID-19

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales ~~increased $11.3~~decreased $35.6 million or ~~4.5%~~20.2%

•

Bone Growth Therapies net sales ~~increased $3.8~~decreased $23.6 million or ~~2.7%~~24.2%, primarily driven by ~~an increase~~the disruption caused by COVID-19, which has led to lower order volumes and a longer revenue cycle for these products, particularly due to many patients only being able to be fitted for devices in ~~order volume, partially offset by customer sales mix and product mix changes~~a virtual or telehealth environment

•

Spinal Implants net sales ~~increased $2.4~~decreased $4.6 million or ~~3.6%~~10.0%, primarily driven by ~~an increase of $5.3~~the reduction in elective procedures in both the U.S. and internationally due to COVID-19; however, Motion Preservation net sales increased $6.4 million in ~~Motion Preservation sales~~the U.S. when compared to prior year as ~~we acquired Spinal Kinetics during the second quarter~~a result of ~~2018,~~increases in case volumes and partially offset by a decrease in legacy Spine Fixation sales of $2.9 million, primarily resulting from disruptions in our U.S. distribution channel as we upgrade our legacy sales force with new, high-potential sales partnersactive surgeons

•

Biologics net sales ~~increased $5.1~~decreased $7.4 million or ~~11.8%~~22.8%, primarily ~~due to distribution added during the last year and the return to solid results in each~~driven by lower procedure volumes as a result of the ~~three U.S. sales regions, as volume increased related to Trinity tissues~~disruption caused by 16.9%, partially offset by a low single-digit price decline as well as a contractual reduction in the marketing services fee we receive from MTF Biologics, which became effective during the first quarter of 2018COVID-19

Global Extremities

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

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales decreased ~~$1.5~~$10.7 million or ~~5.6%~~41.7%

•

Decrease of ~~$0.9~~$10.4 million, primarily a result of the impact of COVID-19 on procedure volumes

•

Decrease of $0.3 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales

•

~~Decrease of $0.6 million largely attributed to variability in the timing of orders from our international stocking distributors and growth in our global direct-sales markets~~

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales decreased ~~$4.8~~$11.4 million or ~~6.1%~~23.3%

•

Decrease of ~~$3.4~~$10.6 million, primarily a result of the impact of COVID-19 on procedure volumes

•

Decrease of $0.8 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales

Gross Profit

	Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
Net sales	$	73,135		$	115,850			(36.9	%)	$	177,958		$	224,962			(20.9	%)
Cost of sales		23,166			25,812			(10.3	%)		46,575			49,520			(5.9	%)
Gross profit	$	49,969		$	90,038			(44.5	%)	$	131,383		$	175,442			(25.1	%)
Gross margin		68.3	%		77.7	%		(9.4	%)		73.8	%		78.0	%		-4.2	%

Three months ended June 30, 2020 compared to 2019

Gross profit decreased $40.1 million

•

Decrease ~~of $1.4 million largely attributed~~primarily due to ~~variability~~the decline in ~~the timing of orders~~net sales and lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes, as well as an increase in expense resulting from ~~our international stocking distributors and growth in our global direct-sales markets~~non-cash inventory reserves

~~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~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Gross profit ~~increased $0.9~~decreased $44.1 million

•

~~Increase~~Decrease primarily due to the ~~growth~~decline in net sales and ~~partially offset by a decrease~~lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes, as well as an increase in ~~gross margin, which decreased slightly to 78.1% compared to 78.5% in the prior year period~~expense resulting from non-cash inventory reserves

~~Nine~~Sales and Marketing Expense

	Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
Sales and marketing	$	43,479		$	56,864			(23.5	%)	$	97,792		$	110,558			(11.5	%)
As a percentage of net sales		59.5	%		49.1	%		10.4	%		55.0	%		49.1	%		5.9	%

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

~~Gross profit increased $3.1~~Sales and marketing expense decreased $13.4 million

•

~~Increase primarily due~~Decrease largely attributable to reduced commissions as a result of the ~~growth~~decline in net sales, ~~and~~ partially offset by ~~a decrease in gross margin, which decreased~~commission support provided to ~~78.0% compared to 78.6% in the prior year period~~our direct sales representatives

•

Decrease ~~in gross margin largely~~of $4.5 million associated with short-term expense savings actions for salary reductions, travel, entertainment, and professional fees due to ~~higher than normal charges related~~the limited mobility of our sales force and the conversion of many sales events from in-person events to ~~the buildup of Spinal Implants inventory to support sales growth from our new sales partners in key geographies~~virtual events

~~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~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Sales and marketing expense ~~increased $4.9~~decreased $12.8 million

•

~~Increase~~Decrease largely attributable to ~~increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch~~reduced commissions as a result of the ~~M6-C artificial cervical disc~~decline in ~~the U.S.~~net sales, partially offset by commission support provided to our direct sales representatives

•

~~Further increases relate~~Decrease of $5.2 million associated with short-term expense savings actions for travel, entertainment, and professional fees due to ~~higher variable compensation rates in~~the limited mobility of 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~~sales force and the ~~launch~~conversion of ~~the M6-C artificial cervical disc in the U.S.~~

•

~~Further increases relate~~many sales events from in-person events to ~~higher variable compensation rates in our Global Spine segment to support growth~~virtual events

General and Administrative Expense

	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			% Change			2019			2018			% Change			2020			2019			% Change			2020			2019			% Change
General and administrative	$	21,090		$	22,276			-5.3	%	$	63,497		$	63,658			-0.3	%	$	15,047		$	21,935			(31.4	%)	$	32,912		$	42,407			(22.4	%)
As a percentage of net sales		18.6	%		19.9	%		-1.3	%		18.8	%		19.2	%		-0.4	%		20.6	%		18.9	%		1.7	%		18.5	%		18.9	%		(0.4	%)

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

General and administrative expense decreased ~~by $1.2~~$6.9 million

•

Decrease of ~~$1.6~~$3.9 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 ~~our change in jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) in 2018~~strategic initiatives

•

Decrease of ~~$1.3~~$1.0 million attributable to succession and transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain executive officers and from targeted restructuring activities

•

Decrease of $0.9 million associated with share-based compensation expense, excluding amounts included within succession, transition, and restructuring activities discussed above

•

Decrease of $1.0 million related to short-term expense savings actions, such as salary reductions, travel and entertainment expenses and professional fees, primarily related to our legal, finance, information technology, and compliance functions

Six months ended June 30, 2020 compared to 2019

General and administrative expense decreased $9.5 million

•

Decrease of $4.8 million in expenses associated with strategic investments, largely due to diligence and integration costs associated with strategic initiatives

•

Decrease of $2.2 million attributable to succession and transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain executive officers and from targeted restructuring activities

•

Decrease of $0.9 million associated with share-based compensation expense, excluding amounts included within succession, transition, and restructuring activities discussed above

•

Decrease of $1.1 million related to short-term expense savings actions, such as salary reductions, travel and entertainment expenses ~~excluding the impact~~and professional fees, primarily related to our legal, finance, information technology, and compliance functions

Research and Development Expense

	Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
Research and development	$	8,765		$	8,980			(2.4	%)	$	18,729		$	18,209			2.9	%
As a percentage of net sales		12.0	%		7.8	%		4.2	%		10.5	%		8.1	%		2.4	%

Three months ended June 30, 2020 compared to 2019

Research and development expense decreased $0.2 million

•

Decrease of ~~succession charges~~$0.8 million associated with reduced spend for clinical study expenses

•

Partially offset by an increase of ~~$1.2~~$0.5 million ~~attributable~~related to ~~transition and succession charges, including acceleration of certain share-based compensation expense, relating~~costs to ~~retirement, transition, or termination of certain named executive officers~~comply with recent medical device reporting regulations

•

Further offset by ~~an increase of $0.4~~$0.2 million in ~~depreciation expense~~costs associated with our acquisition of the FITBONE assets, inclusive of transitional services

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

~~General~~Research and ~~administrative~~development expense ~~decreased by $0.2~~increased $0.5 million

•

~~Decrease~~Increase of ~~$3.3~~$1.1 million ~~in expenses associated with strategic investments, largely due to diligence and integration costs~~ related to ~~the acquisition of Spinal Kinetics and expenses associated~~costs to comply with ~~the Domestication in 2018~~recent medical device reporting regulations

•

~~Decrease~~Increase of ~~$3.3~~$0.4 million attributable to increased quality systems and regulatory improvements, largely related to increases in headcount

•

Increase of $0.2 million in ~~certain compensation expenses, such as share-based compensation expense, excluding~~costs associated with our acquisition of the ~~impact~~FITBONE assets, inclusive of ~~succession charges~~transitional services

•

Partially offset by ~~an increase~~a decrease of ~~$5.2~~$1.2 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~~reduced spend for ~~the M6-C Cervical Disc, which was approved by the U.S. Food~~clinical costs and ~~Drug Administration (“FDA”) in February of 2019~~

~~Nine months ended September 30, 2019 compared to 2018~~

~~Research and~~product 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,									Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			% Change			2019			2018			% Change			2020			2019			% Change			2020			2019			% Change
Acquisition-related amortization and remeasurement	$	23,608		$	2,009			1075.1	%	$	31,873		$	3,491			813.0	%	$	3,678		$	1,808			103.4	%	$	(3,904	)	$	8,265			(147.2	%)
As a percentage of net sales		20.8	%		1.8	%		19.0	%		9.4	%		1.0	%		8.4	%		4.9	%		1.5	%		3.4	%		(2.3	%)		3.7	%		(6.0	%)

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

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Acquisition-related amortization and remeasurement increased ~~$21.6~~$1.9 million

•

Increase of ~~$20.7~~$1.6 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~~$0.2 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 2019acquisitions

~~Nine~~

Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

Acquisition-related amortization and remeasurement ~~increased $28.4~~decreased $12.2 million

•

~~Increase~~Decrease of ~~$24.0~~$11.4 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, largely due to uncertainty attributable to COVID-19

•

~~Increase~~Decrease of ~~$1.5~~$1.4 million related to ~~the remeasurement~~achievement of the ~~FDA milestone associated with~~approval of the ~~Spinal Kinetics acquisition, which was achieved~~M6-C artificial cervical disc by the U.S. Food and ~~paid~~Drug Administration (“FDA” and the “FDA Milestone”) during the first quarter of 2019

•

~~Increase~~Partially offset by an increase of ~~$2.9~~$0.6 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 2019acquisitions

Non-operating Income and Expense

	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			% Change			2019			2018			% Change			2020			2019			% Change			2020			2019			% Change
Interest income (expense), net	$	186		$	(181	)		-202.8	%	$	386		$	(615	)		-162.8	%	$	(901	)	$	457			(297.2	%)	$	(1,324	)	$	200			(762.0	%)
Other expense, net		(8,146	)		(5,054	)		61.2	%		(8,786	)		(5,785	)		51.9	%
Other income (expense), net																				5,069			(236	)		(2247.9	%)		4,271			(640	)		(767.3	%)

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

~~Other~~Interest income (expense), net, decreased ~~$3.1~~$1.4 million

•

Decrease of ~~$6.5~~$0.8 million ~~associated with an other-than-temporary impairment~~attributable interest income recognized on ~~the~~our investment in eNeura ~~debt security during the third quarter of~~in 2019

•

Decrease of ~~$1.0~~$0.5 million associated with ~~changes in foreign currency rates,~~interest expense incurred on our outstanding indebtedness under our secured revolving credit facility

Other income (expense), net, increased $5.3 million

•

Increase of $4.7 million attributable to funds receivedfrom the U.S. Department of Health and Human Services as ~~we recorded a non-cash remeasurement loss~~part of ~~$1.6 million in~~ the ~~third quarter of 2019 compared to a loss of $0.6 million in~~Provider Relief Fund included within the ~~third quarter of 2018~~Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

•

~~Partially offset by an increase~~Increase of ~~$4.4~~$0.2 million ~~due to~~associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement gain of $0.5 million in the ~~impairment of our equity holdings and warrants in Bone Biologics, Inc. (“Bone Biologics”) common stock during the third~~second quarter of ~~2018~~2020 compared to a gain of $0.3 million in the second quarter of 2019

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

~~Other~~Interest income (expense), net, decreased ~~$3.0~~$1.5 million

•

Decrease of ~~$6.5~~$0.8 million attributable interest income recognized on our investment in eNeura in 2019

•

Decrease of $0.5 million associated with ~~an other-than-temporary impairment~~interest expense incurred on our outstanding indebtedness under our secured revolving credit facility

Other income (expense), net, increased $4.9 million

•

Increase of $4.7 million attributable to funds receivedfrom the ~~eNeura debt security during~~U.S. Department of Health and Human Services as part of the ~~third quarter~~Provider Relief Fund included within the CARES Act

•

Increase of $0.5 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $0.1 million in the for the six months ended June 30, 2020 compared to a loss of $0.6 million for the six months ended June 30, 2019

•

Partially offset by a ~~net increase~~decrease of ~~$3.1~~$0.2 million ~~relating to changes in fair value and impairments~~associated with the impairment of our ~~equity holdings and warrants~~investment 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, 2018Inc.

Income Taxes

	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended June 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			% Change			2019			2018			% Change			2020			2019			% Change			2020			2019			% Change
Income tax expense (benefit)	$	13,656		$	(117	)		-11771.8	%	$	8,869		$	6,352			39.6	%	$	1,592		$	1,219			30.6	%	$	(18,440	)	$	(4,787	)		285.2	%
Effective tax rate		-50.9	%		8.8	%		-59.7	%		-28.4	%		56.3	%		-84.7	%		(9.5	%)		181.4	%		(190.9	%)		164.7	%		107.9	%		56.8	%

Three months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

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

•

~~Decrease in pre-tax earnings~~

•

~~Increases~~Changes in financial expenses not ~~deductible~~recognized for tax purposes, primarily related to acquisition-related remeasurement

•

~~Increases in non-deductible executive compensation due to provisions~~Reversal of the ~~Tax Cuts and Jobs~~anticipated benefit of $3.0 million recorded in the first quarter of 2020 related to potential carryback under the CARES Act ~~(the “Tax Act”)~~

•

Reversal of tax benefits related to certain performance stock units that were forfeited in the current period

The primary factors affecting our effective tax rate for the ~~third~~second quarter of ~~2019~~2020 are as follows:

•

Financial expenses not ~~deductible~~recognized for tax purposes, primarily related to acquisition-related remeasurement

•

~~Non-deductible executive compensation due to provisions~~Reversal of the ~~Tax~~anticipated benefit of $3.0 million recorded in the first quarter of 2020 related to potential carryback under the CARES Act

•

Reversal of tax benefits related to certain performance stock units that were forfeited in the current period

~~Nine~~Six months ended ~~September~~June 30, ~~2019~~2020 compared to ~~2018~~2019

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

•

~~Decrease in pre-tax earnings~~

•

~~Increases~~Changes in financial expenses not ~~deductible~~recognized for tax purposes, primarily related to acquisition-related remeasurement

•

~~Increases~~Reversal of tax benefits related certain performance stock units that were forfeited in ~~non-deductible executive compensation due to provisions of~~ the ~~Tax Act~~current period

•

~~Benefits~~Partially offset by, benefits related to ~~effective settlement of the 2015 IRS exam and~~ statute expirations for previously unrecognized tax benefits

•

Further offset by decreases in non-deductible executive compensation

The primary factors affecting our effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are as follows:

•

Statute expirations related to previously unrecognized tax benefits

•

Financial ~~expenses~~benefits not ~~deductible~~recognized for tax purposes, primarily related to acquisition-related remeasurement

•

~~Non-deductible executive compensation due~~Reversal of tax benefits related to ~~provisions of~~certain performance stock units that were forfeited in the ~~Tax Act~~current period

•

~~Benefits related to effective settlement of the 2015 IRS exam and statute expirations~~Non-deductible executive compensation

Segment Review

~~As discussed above, we changed~~Our business is managed through two reporting segments: Global Spine and Global Extremities. The primary metric used in managing the ~~performance measure used to evaluate~~business by segment ~~performance from Non-GAAP net margin to~~is EBITDA ~~during the first quarter of 2019. When compared~~ (which is described further in Note 13 to the ~~prior year period, EBITDA decreased $24.3 million for~~Notes to 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.Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to income (loss) before income taxes:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Global Spine	$	(6,033	)	$	15,637		$	21,065		$	53,492		$	(3,707	)	$	16,523		$	18,710		$	27,098
Global Extremities		1,229			3,357			3,806			7,173			(3,359	)		2,750			(5,253	)		2,577
Corporate		(15,949	)		(15,403	)		(38,356	)		(35,097	)		(1,923	)		(12,880	)		(10,063	)		(22,407	)
Total EBITDA	$	(20,753	)	$	3,591		$	(13,485	)	$	25,568		$	(8,989	)	$	6,393		$	3,394		$	7,268
Depreciation and amortization		(6,275	)		(4,738	)		(18,180	)		(13,661	)		(6,942	)		(6,178	)		(13,269	)		(11,905	)
Interest income (expense), net		186			(181	)		386			(615	)		(901	)		457			(1,324	)		200
Income (loss) before income taxes	$	(26,842	)	$	(1,328	)	$	(31,279	)	$	11,292		$	(16,832	)	$	672		$	(11,199	)	$	(4,437	)

Liquidity and Capital Resources

Cash, cash equivalents, and restricted cash at ~~September~~June 30, ~~2019,~~2020, totaled ~~$57.5~~$173.4 million compared to ~~$72.2~~$70.4 million at December 31, ~~2018, with the decrease~~2019. This increase was largely a result of ~~$15.0~~our draw of $100.0 million under our secured revolving credit facility in 2020 and from proceeds received under the CARES Act totaling $18.5 million, partially offset by $18.0 million in cash paid ~~in connection~~to acquire assets associated with ~~achievement~~the FITBONE intramedullary lengthening system for limb lengthening of the ~~Spinal Kinetics FDA Milestone in 2019.~~femur and tibia bones.

	Nine Months Ended September 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			Change			2020			2019			Change
Net cash from operating activities	$	20,090		$	28,829		$	(8,739	)	$	30,094		$	8,344		$	21,750
Net cash from investing activities		(21,281	)		(55,921	)		34,640			(28,572	)		(16,738	)		(11,834	)
Net cash from financing activities		(12,610	)		2,988			(15,598	)		101,918			(11,581	)		113,499
Effect of exchange rate changes on cash		(885	)		(811	)		(74	)		(452	)		(71	)		(381	)
Net change in cash, cash equivalents and restricted cash	$	(14,686	)	$	(24,915	)	$	10,229		$	102,988		$	(20,046	)	$	123,034

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

	Nine Months Ended September 30,									Six Months Ended June 30,
(U.S. Dollars, in thousands)	2019			2018			Change			2020			2019			Change
Net cash from operating activities	$	20,090		$	28,829		$	(8,739	)	$	30,094		$	8,344		$	21,750
Capital expenditures		(14,881	)		(10,724	)		(4,157	)		(9,332	)		(10,338	)		1,006
Free cash flow	$	5,209		$	18,105		$	(12,896	)	$	20,762		$	(1,994	)	$	22,756

Operating Activities

Cash flows from operating activities ~~decreased $8.7~~increased $21.8 million

•

~~Decrease~~Increase in net income of ~~$45.1~~$6.9 million

•

Net decrease of $13.3 million in non-cash gains and losses, largely related to changes in fair value of contingent consideration

•

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 $3.9~~$28.2 million relating to changes in working capital accounts, primarily attributable to changes in ~~inventories,~~accounts receivable, a $13.9 million prepayment received under the Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program, and other current ~~liabilities,~~ and ~~other~~ long-term assets and liabilities, which included the expiration of statute of limitations related to certain unrecognized tax benefits in the first quarter of 2020

Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 6584 days at ~~September~~June 30, 2020 compared to 63 days at June 30, 2019, ~~compared~~with much of this increase attributable to ~~61 days at September 30, 2018.~~the significant decline in net sales as a result of COVID-19. Inventory turns ~~remained consistent at~~decreased to 1.2 times as of ~~September~~June 30, ~~2019 and 2018.~~2020 compared to 1.3 times as of June 30, 2019.

Investing Activities

Cash flows from investing activities ~~increased $34.6~~decreased $11.8 million

•

~~Increase~~Decrease of ~~$43.7~~$18.0 million associated with cash paid in ~~relation~~March 2020 to ~~the Spinal Kinetics acquisition in 2018, net of cash acquired~~

•

~~Increase of $0.9 million~~acquire assets associated with the ~~acquisition~~FITBONE intramedullary lengthening system for limb lengthening of ~~certain intangible assets in a transaction with a former distributor~~the femur and ~~by our additional investment of $0.5 million in Bone Biologics during the first quarter of 2018~~tibia bones

•

Partially offset by ~~$6.4~~a change of $5.2 million associated with cash paid ~~in relation~~for transactions to ~~the acquisition of~~acquire certain assets of ~~Options Medical, one of our~~ former distributors ~~during the first quarter of 2019~~

•

Further offset by ~~$4.2 million attributable to increased~~a decrease in capital expenditures ~~compared to the prior year~~of $1.0 million

Financing Activities

Cash flows from financing activities ~~decreased $15.6~~increased $113.5 million

•

~~Decrease~~Increase of $100.0 million from proceeds under our secured revolving credit facility in 2020 (of which $50.0 million was repaid after June 30, 2020)

•

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

•

~~Decrease in net proceeds of $0.9 million from the issuance of common shares~~

•

Decrease of $0.3 million attributable to principal payments made during 2019 relating to our finance lease and $0.7 million attributable to other financing cash flows, which primarily relate to deferred payments made associated with the acquisition of certain intangible assets in transactions with former distributors

Credit Facilities

~~On October 25, 2019,~~As of June 30, 2020, we entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain lender parties thereto. The Amended Credit Agreement provides for ahad $100.0 million of principal in borrowings outstanding under the five year $300 million secured revolving credit ~~facility maturing~~facility. In addition, we had no borrowings outstanding under on ~~October 25, 2024 (the “Facility”), and amends and restates~~our €5.5 million ($6.2 million) available lines of credit in Italy. We were in compliance with all required financial covenants as of June 30, 2020.

In July 2020, we repaid $50.0 million of principal outstanding under the ~~existing $125 million~~ secured revolving credit facility. AsSubsequent to this payment, we had $50.0 million of ~~October 28, 2019, we have not made any borrowings~~principal outstanding 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 (including permitted acquisitions and permitted payments of dividends and other distributions). ~~For information regarding the Amended Credit Agreement, see Note 6 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.~~secured revolving credit facility.

Other

For information regarding Contingencies, see Note 89 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.

~~Spinal Kinetics Acquisition~~Impact of COVID-19 and the CARES Act on Liquidity and Capital Resources

Our liquidity has been materially impacted over the last several months by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the COVID-19 pandemic. Our liquidity may also be affected by the rate at which and timing of when elective procedures fully resume at hospitals and other facilities, which may occur at a faster or slower pace than our expectations. As of the date of issuance of these condensed consolidated financial statements, the extent to which COVID-19 is likely to materially impact our liquidity in the future remains uncertain.

As precautionary measures to increase our cash position and preserve financial flexibility in view of ongoing uncertainty resulting from the COVID-19 pandemic, we (i) completed a borrowing of $100.0 million under our secured revolving credit facility on April 16, 2020 (of which, we have since repaid $50.0 million in principal), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated organizational travel restrictions and a temporary reduction in new hiring.

On March 27, 2020, the CARES Act was signed into U.S. federal law, which provided emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic.

In April 2020, we received $13.9 million in funds from the CMS Accelerated and Advance Payment Program to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. Repayment of this amount is required to begin 120 days after the issuance of the payment, or beginning in August 2020. After the 120 day period, every claim we submit will be offset against the accelerated / advanced payment. Thus, instead of receiving payment for newly submitted claims, our outstanding accelerated / advance payment balance will be reduced by the claim payment amount.

In addition, in April 2020, we automatically received, without request, $4.7 million in funds from the U.S. Department of Health and Human Services as part of the ~~consideration~~Provider Relief Fund. Upon review of the qualifying criteria required to retain the funding, which primarily relate to lost revenues or the incurrence of expenses attributable to COVID-19, it was determined that we met the criteria to permanently retain all of the proceeds received.

Further, as part of the CARES Act, we are permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year, such that 50% of the taxes is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of June 30, 2020, we have deferred $1.3 million associated with this program.

Spinal Kinetics Contingent Consideration

Under the terms of the acquisition agreement under which we acquired Spinal Kinetics, we agreed to make contingent milestone payments ~~in the future~~ of up to $60.0 million in ~~cash.~~cash to Spinal Kinetics’ former shareholders. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). ~~During the first quarter of 2019,~~ ~~we obtained FDA approval of the M6-C artificial cervical disc for patients suffering~~

~~from cervical disease degeneration and the~~The FDA Milestone ~~payment~~ was ~~triggered. We~~achieved and paid ~~the $15.0 million FDA Milestone payment on February 14, 2019 from cash on hand.~~in 2019.

~~Two other~~The remaining milestone payments are comprised of revenue-based milestone payments of up to $45.0 million in connection with future sales of the ~~M6-C~~acquired artificial ~~cervical disc and the M6-L artificial lumbar disc.~~discs. The fair value of the contingent consideration arrangement as of ~~September~~June 30, ~~2019~~2020 was ~~$41.7~~$35.8 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. ~~At September~~As of June 30, ~~2019,~~ 2020, wewe classified $14.5 million of the liability attributable to the revenue-based ~~milestones~~milestone within other current liabilities, as we expect to pay one of the revenue-based milestones in the next twelve months, and the remaining ~~$27.2~~$21.3 million within other long-term liabilities.For additional discussion of this matter, see Note 78 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

~~eNeura debt security~~FITBONE Asset Acquisition

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,~~February 3, 2020, we entered into an ~~Amended~~Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE (“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and ~~Restated Senior Secured Promissory Note~~tibia bones. Under the terms of the Purchase Agreement, as consideration for the acquired assets, we paid $18.0 million in cash consideration and entered into a Contract Manufacturing and Supply Agreement (“CMSA”) with ~~eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i)~~Wittenstein. The acquisition was completed on March ~~4, 2022, (ii) the effective date of~~26, 2020 and was treated as a ~~change in control, or (iii) the effective date of~~business combination.

The CMSA with Wittenstein has an initial ~~public offering by eNeura.~~term of up to two years to manufacture the FITBONE product line. As consideration for the ~~extension, eNeura issued~~CMSA, we will pay $2.0 million to ~~us a Warrant to Purchase Common Stock (the “Warrant”), exercisable~~Wittenstein at ~~$0.01 per share over a ten year contractual term, for a number of shares equal to 10%~~the conclusion 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~~CMSA if 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~~conditions are met in relation to the ~~debtor’s financial difficulties grants a concession~~prompt delivery of manufactured products.

Other Acquisitions

In July 2020, we entered into an agreement 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 grantingacquire certain assets of a ~~concession after taking into account all the facts and circumstances surrounding the restructuring. The restructuring was undertaken~~medical device distributor. We have agreed to ~~improve the likelihood~~pay consideration of ~~our effort~~up 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~~$7.6 million 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.parties’ agreement.

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~~$0.5 million (based upon foreign exchange rates as of June 30, 2020) 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 89 of the Notes to the Unaudited Condensed Consolidated Financial Statements.

Off-balance Sheet Arrangements

As of ~~September~~June 30, ~~2019,~~2020, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, ~~2018.~~2019.

Critical Accounting Estimates

Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of

revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. There have been no significant changes to our critical accounting estimates except for the following:

~~Leases~~Allowance for Expected Credit Losses and Contractual Allowances

~~On January 1, 2019,~~Subsequent to the adoption of ASU 2016-13, our allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that 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 paymentsdo not expect to collect over the ~~lease term. As our leases do not provide an implicit rate, our incremental borrowing rate is used~~receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivables, the aging of outstanding receivables, as ~~a discount rate, based on~~well as the ~~information available at~~historical collections, write-offs, and payor reimbursement experience over the ~~commencement date, in determining~~estimated contractual lives of such receivables, are integral parts of the ~~present value~~estimation process related to reserves for expected credit losses and the establishment of ~~lease payments. Lease assets also include the impact of any prepayments made and~~contractual allowances. Accounts receivable are ~~reduced by impact of any lease incentives. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases~~analyzed on a ~~straight-line~~quarterly basis ~~over~~to assess the ~~lease term. Lease terms may include options~~adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to ~~extend or terminate the lease when it is reasonably certain that~~bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, we ~~will exercise the option. Lease expense~~analyze our receivables by geography and by customer type, where appropriate, in developing estimates for ~~lease payments is recognized on a straight-line basis over the lease term.~~

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

Recently Issued Accounting Pronouncements

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

Non-GAAP Financial Measures

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

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

Constant Currency

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

EBITDA

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

Free Cash Flow

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our market risks as disclosed in our Form 10-K for the year ended December 31, ~~2018.~~2019.

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~~June 30, ~~2019.~~2020. 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~~June 30, ~~2019.~~2020.

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 89 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 following risk factors supplement and should be read in conjunction with those contained in the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, ~~2018.~~2019 and Form 10-Q for the quarter ended March 31, 2020.

The novel coronavirus pandemic has materially affected our business during the first half of 2020 and is likely to cause further unpredictable effects during the remainder of 2020 and beyond

The novel coronavirus discovered in late 2019, and the disease it causes known as COVID-19, has caused significant affects to our business during the first half of 2020, and is likely to cause significant affects during the second half of 2020 and into 2021. For Orthofix, the most significant effect to date on our business has been a significant reduction in elective surgery procedure volumes, which represent the majority of procedures in which our products are used. This reduction in procedure volumes began suddenly in March 2020 when shelter in place and social distancing instructions were instituted in the U.S. and many of our other sales markets, and caused a pronounced reduction in revenue during April 2020 and May 2020, when a significant number of hospitals were either closed for elective procedures or otherwise operating at significantly reduced volumes. Generally, this reduction in procedure volumes dissipated during June 2020 and July 2020, as many regions were able to reopen for elective procedures, with an existing patient backlog.

At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of seroprevalence in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain.

During the second quarter of 2020, we focused on making our facilities safe given updated COVID-19 public health guidelines, and we believe that our employee workforce has done excellent work in adapting to the new environment. In particular, we have been able to continue our manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in our largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to our manufacturing, distribution, administrative and other business operations (including downtime at our manufacturing facilities and the interruption of the production of our products).

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A under the heading Risk Factors in our 2019 Form 10-K, such as our need to generate sufficient cash flows to service indebtedness and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment or otherwise.

All of these factors, collectively, could materially adversely affect our business, financial condition and results of operations.

Our inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.

On October 25, 2019, we and certain of our wholly-owned subsidiaries (collectively, the “Borrowers”) 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. At the time that we entered into the Amended Credit Agreement, no amounts were borrowed thereunder. However, due to the uncertainty related to COVID-19, on April 16, 2020, we borrowed $100 million under the Amended Credit Agreement to preserve available cash to fund operations and strategic initiatives in the event that the COVID-19 pandemic results in a prolonged slowdown of elective surgical and other medical procedures, thereby decreasing our sales and revenue. In July 2020, we repaid $50 million of this amount.

Certain of our subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of any obligations under the Amended Credit Agreement. The obligations 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 our 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 us to maintain, on a consolidated basis 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.

We believe that we are in compliance with the covenants, and there were no events of default, at June 30, 2020 (and in prior periods). However, there can be no assurance that we will be able to meet such financial covenants in future fiscal quarters. The failure to do so could result in an event of default under such agreement (including an obligation that we repay the $50 million amount currently outstanding), which could have a material adverse effect on our financial position in the event that we have significant amounts drawn under the facility at such time.

In addition, issues related to financing sometimes are exacerbated in times of significant disruption and dislocation in the financial markets, such as those that have been experienced recently due to the COVID-19 pandemic. Though our lenders have not yet expressed any such concerns (and, to the contrary, have indicated that financing remains available and undisrupted), it is possible that our lenders could become unwilling or unable to provide us with financing under the Amended Credit Agreement, even if we were otherwise in compliance with its terms, due to macroeconomic or other concerns related to COVID-19, general economic conditions or otherwise. If we were unable to further access financing under the Amended Credit Agreement, our cost of financing could materially increase, or we could be unable to access such financing entirely. Any such events could materially and adversely affect our financial condition and results of operations.

The FDA recently scheduled a hearing for September 8, 2020 to consider whether bone growth stimulator devices should be down classified from Class III devices, and if such a down classification of this device category occurred, it could increase future competition for us in this product category and negatively affect our sales of such products.

We have the market-leading bone growth stimulation platform with the only cervical spinal indication granted by the U.S. Food and Drug Administration (the "FDA"), and the only mobile device app accessory designed to help patients adhere to their prescriptions and improve their clinical outcomes, STIM onTrack™ 2.1. We are also investing in investigational device exemption (“IDE”) studies to expand indications for use in areas such as rotator cuff tears. Our bone growth therapy products are designated as Class III devices. Class III devices are subject to the most rigorous pathway to approval for medical devices. The FDA may change classification of a device only if the proposed new class has sufficient regulatory controls to provide reasonable assurances of safety and effectiveness.

In 2015, the FDA included Class III bone growth stimulator products in its strategic priority work plan, as part of a list of 32 product categories it would review for possible down classification. The purpose of the listing and review by the FDA of these 32 product categories was to further one of the FDA’s general strategic priorities of reducing regulatory burdens. This action occurred after the FDA had convened an advisory panel in 2006 and ultimately determined at that time, for safety and efficacy reasons, to maintain the Class III status for these devices. Shortly after the issuance of the 2015 work plan, we and other manufacturers of bone growth stimulator products submitted a public comment letter opposing the possible down classification.

The FDA has announced that it will hold an Advisory Committee panel meeting on September 8, 2020 to consider whether bone growth stimulator products should be reclassified from Class III devices to Class II devices. Together with the other manufacturers of bone growth stimulators, we intend to participate in the panel meeting, as we did in 2006, and submit testimony supporting the importance of maintaining bone growth stimulator devices as Class III devices. However, if such a down classification were to occur, and new entrants to the market were able to create technologies with comparable efficacy to our devices, our bone growth therapy products could face additional competition, which could negatively affect our future sales and results of operations.

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

We have not made any repurchases of our common stock during the ~~third~~second quarter of ~~2019.~~2020.

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

10.1		~~Letter agreement, dated July 30, 2019, between~~Amendment No. 1 to the ~~Company~~Orthofix Medical Inc. Amended and ~~Jon Serbousek~~Restated 2012 Long-Term Incentive plan (filed as an exhibit to the ~~Company’s~~Company's Current Report on Form 8-K filed ~~on August 2, 2019~~June 9, 2020 and incorporated ~~herein~~ by reference).

10.2*		~~Change in Control and Severance~~Consulting Agreement, dated ~~August 5, 2019,~~July 4, 2020, between ~~Jon Serbousek~~Michael Finegan and Orthofix Medical Inc.

10.3*		~~Indemnification Agreement, dated August 5, 2019, between Jon C. Serbousek and Orthofix Medical Inc.~~

~~10.4~~		~~Employee Inducement Non-Qualified Stock Option Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form S-8 filed on August 5, 2019 and incorporated herein by reference).~~

~~10.5~~		~~Employee Inducement Restricted Stock Unit Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form S-8 filed on August 5, 2019 and incorporated herein by reference).~~

~~10.6~~		Consulting Agreement, dated July 15, 2019, between Bradley V. Niemann and Orthofix Medical Inc. (filed as an exhibit to the Company’s Current Report on Form 8-K filed on July 15, 2019 and incorporated herein by reference).

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

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

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

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

101.SCH*		Inline XBRL Taxonomy Extension Schema Document.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

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

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ORTHOFIX MEDICAL INC.

Date: ~~October 28, 2019~~August 6, 2020	By:	/s/ ~~BRADLEY R. MASON~~JON SERBOUSEK
	Name:	~~Bradley R. Mason~~Jon Serbousek
	Title:	President and Chief Executive Officer, Director

Date: ~~October 28, 2019~~August 6, 2020	By:	/s/ DOUG RICE
	Name:	Doug Rice
	Title:	Chief Financial Officer

3637

(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

(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

(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

(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	%

(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

(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

(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	)