UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended September 30, ~~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~~November 2, 2020, 19,333,698 shares of common stock were issued and outstanding.

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

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

Table of Contents

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	4

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

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

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

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 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	3331

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3432

Item 1A.	Risk Factors	3432

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3433

Item 3.	Defaults Upon Senior Securities	3433

Item 4.	Mine Safety Disclosures	3433

Item 5.	Other Information	34

Item 6.	Exhibits	3534

SIGNATURES		3635

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”)~~10-K); 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 effects of the COVID-19 pandemic on our business, including (i) surgeries that use our products being delayed or cancelled as a result of hospitals and surgery centers being closed or limited to life threatening and/or essential procedures, (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 ability to generate sufficient cash flows to run our business 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 Securities and Exchange Commission (“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		September 30, 2020			December 31, 2019
	(Unaudited)					(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	56,849		$	69,623	$	79,810		$	69,719
Restricted cash		654			2,566		490			684
Trade accounts receivable, net of allowances of $4,073 and $7,463, respectively		79,690			77,747
Accounts receivable, net of allowances of $5,524 and $3,987, respectively							73,053			86,805
Inventories		80,993			76,847		82,859			82,397
Prepaid expenses and other current assets		19,617			17,856		18,457			20,948
Total current assets		237,803			244,639		254,669			260,553
Property, plant and equipment, net		62,964			42,835
Property, plant, and equipment, net							63,689			62,727
Intangible assets, net		53,613			51,897		62,309			54,139
Goodwill		71,177			72,401		83,503			71,177
Deferred income taxes		39,626			33,228		38,047			35,117
Other long-term assets		10,420			21,641		14,915			11,907
Total assets	$	475,603		$	466,641	$	517,132		$	495,620
Liabilities and shareholders’ equity
Current liabilities
Accounts payable	$	17,892		$	17,989	$	16,943		$	19,886
Current portion of finance lease liability		293			—		498			323
Other current liabilities		70,323			67,919		75,938			64,674
Total current liabilities		88,508			85,908		93,379			84,883
Long-term portion of finance lease liability		20,767			—		22,463			20,648
Long-term debt							—			—
Other long-term liabilities		59,894			45,336		46,394			62,458
Total liabilities		169,169			131,244		162,236			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; 19,267,420 and 19,022,619 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively							1,927			1,902
Additional paid-in capital		263,064			243,165		285,203			271,019
Retained earnings		46,063			87,078		68,757			57,749
Accumulated other comprehensive income (loss)		(4,581	)		3,296
Accumulated other comprehensive loss							(991	)		(3,039	)
Total shareholders’ equity		306,434			335,397		354,896			327,631
Total liabilities and shareholders’ equity	$	475,603		$	466,641	$	517,132		$	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 September 30,						Nine Months Ended September 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			110,985		$	113,499		$	288,943		$	338,461
Cost of sales		24,896			24,020			74,416			71,002			26,243			24,896			72,818			74,416
Gross profit		88,603			87,688			264,045			260,962			84,742			88,603			216,125			264,045
Sales and marketing		54,805			49,898			165,363			151,695			52,926			54,805			150,718			165,363
General and administrative		21,090			22,276			63,497			63,658			16,541			21,090			49,453			63,497
Research and development		7,982			9,598			26,191			24,426			9,962			7,982			28,691			26,191
Acquisition-related amortization and remeasurement (Note 12)		23,608			2,009			31,873			3,491
Acquisition-related amortization and remeasurement (Note 13)														1,138			23,608			(2,766	)		31,873
Operating income (loss)		(18,882	)		3,907			(22,879	)		17,692			4,175			(18,882	)		(9,971	)		(22,879	)
Interest income (expense), net		186			(181	)		386			(615	)		(731	)		186			(2,055	)		386
Other expense, net		(8,146	)		(5,054	)		(8,786	)		(5,785	)
Other income (expense), net														1,817			(8,146	)		6,088			(8,786	)
Income (loss) before income taxes		(26,842	)		(1,328	)		(31,279	)		11,292			5,261			(26,842	)		(5,938	)		(31,279	)
Income tax benefit (expense)		(13,656	)		117			(8,869	)		(6,352	)		(607	)		(13,656	)		17,833			(8,869	)
Net income (loss)	$	(40,498	)	$	(1,211	)	$	(40,148	)	$	4,940		$	4,654		$	(40,498	)	$	11,895		$	(40,148	)

Net income (loss) per common share:
Basic	$	(2.14	)	$	(0.07	)	$	(2.13	)	$	0.26		$	0.24		$	(2.14	)	$	0.62		$	(2.13	)
Diluted		(2.14	)		(0.07	)		(2.13	)		0.26			0.24			(2.14	)		0.61			(2.13	)
Weighted average number of common shares:
Basic		18,957,876			18,562,204			18,847,728			18,460,848			19,335,718			18,957,876			19,217,057			18,847,728
Diluted		18,957,876			18,562,204			18,847,728			18,864,169			19,398,567			18,957,876			19,319,302			18,847,728

Other comprehensive income (loss), before tax
Unrealized gain (loss) on debt security		—			1,240			(2,593	)		3,200
Unrealized loss on debt security														—			—			—			(2,593	)
Reclassification adjustment for amortization of historical unrealized gains on debt security		(345	)		—			(1,034	)		—			—			(345	)		—			(1,034	)
Reclassification adjustment for other-than-temporary impairment on debt security		(5,193	)		—			(5,193	)		—			—			(5,193	)		—			(5,193	)
Currency translation adjustment		(1,893	)		(844	)		(2,195	)		(1,322	)		2,275			(1,893	)		2,048			(2,195	)
Other comprehensive income (loss) before tax		(7,431	)		396			(11,015	)		1,878			2,275			(7,431	)		2,048			(11,015	)
Income tax related to other comprehensive income (loss)		1,388			(366	)		2,200			(798	)		—			1,388			—			2,200
Other comprehensive income (loss), net of tax		(6,043	)		30			(8,815	)		1,080			2,275			(6,043	)		2,048			(8,815	)
Comprehensive income (loss)	$	(46,541	)	$	(1,181	)	$	(48,963	)	$	6,020		$	6,929		$	(46,541	)	$	13,943		$	(48,963	)

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	)
At June 30, 2020																		19,209,063	$	1,921	$	282,287		$	64,103		$	(3,266	)	$	345,045
Net income																		—		—		—			4,654			—			4,654
Other comprehensive income, net of tax																		—		—		—			—			2,275			2,275
Share-based compensation		—		—		5,844			—			—			5,844			—		—		3,841			—			—			3,841
Common shares issued, net		43,603		5		(668	)		—			—			(663	)		58,357		6		(925	)		—			—			(919	)
At September 30, 2019		18,875,184	$	1,888	$	263,064		$	46,063		$	(4,581	)	$	306,434
At September 30, 2020																		19,267,420	$	1,927	$	285,203		$	68,757		$	(991	)	$	354,896

(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 (Loss)			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
At June 30, 2019																	18,831,581	$	1,883	$	257,888		$	86,561		$	1,462		$	347,794
Net loss		—		—		—			(1,211	)		—		(1,211	)		—		—		—			(40,498	)		—			(40,498	)
Other comprehensive income, net of tax		—		—		—			—			30		30
Other comprehensive loss, net of tax																	—		—		—			—			(6,043	)		(6,043	)
Share-based compensation		—		—		5,261			—			—		5,261			—		—		5,844			—			—			5,844
Common shares issued, net		50,928		5		(581	)		—			—		(576	)		43,603		5		(668	)		—			—			(663	)
At September 30, 2018		18,536,716	$	1,854	$	238,422		$	78,207		$	4,867	$	323,350
At September 30, 2019																	18,875,184	$	1,888	$	263,064		$	46,063		$	(4,581	)	$	306,434

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

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, U.S. Dollars, in thousands)	2019			2018			2020			2019
Cash flows from operating activities
Net income (loss)	$	(40,148	)	$	4,940		$	11,895		$	(40,148	)
Adjustments to reconcile net income to net cash from operating activities
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization		18,180			13,661			22,299			18,180
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								2,811			2,724
Provision for expected credit losses								945			861
Deferred income taxes		(3,309	)		(5,082	)		(2,471	)		(3,309	)
Share-based compensation		17,378			14,392			12,399			17,378
Interest and loss on valuation of investment securities		5,000			3,050			219			5,000
Change in fair value of contingent consideration		28,140			2,689			(7,600	)		28,140
Other		1,307			1,040			(1,798	)		1,307
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable		(3,298	)		(225	)		11,551			(3,298	)
Inventories		(4,995	)		6,880			246			(4,995	)
Prepaid expenses and other current assets		1,637			1,498			2,453			1,637
Accounts payable		447			(2,788	)		(3,106	)		447
Other current liabilities		347			(13,130	)		5,742			347
Contract liability (Note 11)								13,851			—
Payment of contingent consideration		(1,340	)		—			—			(1,340	)
Other long-term assets and liabilities		(2,841	)		1,657			(17,455	)		(2,841	)
Net cash from operating activities		20,090			28,829			51,981			20,090
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								(11,625	)		(13,737	)
Capital expenditures for intangible assets		(1,144	)		(1,138	)		(1,079	)		(1,144	)
Purchase of investment securities								(5,000	)		—
Asset acquisitions and other investments		(6,400	)		(1,448	)		(7,240	)		(6,400	)
Net cash from investing activities		(21,281	)		(55,921	)		(42,944	)		(21,281	)
Cash flows from financing activities
Proceeds from revolving credit facility								100,000			—
Repayment of revolving credit facility								(100,000	)		—
Proceeds from issuance of common shares		6,821			5,866			3,839			6,821
Payments related to withholdings for share-based compensation		(4,271	)		(2,402	)		(2,029	)		(4,271	)
Payment of contingent consideration		(13,660	)		—			—			(13,660	)
Payments related to finance lease obligation		(276	)		—			(204	)		(276	)
Other financing activities		(1,224	)		(476	)		(1,023	)		(1,224	)
Net cash from financing activities		(12,610	)		2,988			583			(12,610	)
Effect of exchange rate changes on cash		(885	)		(811	)		277			(885	)
Net change in cash, cash equivalents, and restricted cash		(14,686	)		(24,915	)		9,897			(14,686	)
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		$	80,300		$	57,503

Components of cash, cash equivalents and restricted cash at the end of period
Cash and cash equivalents	$	56,849		$	53,783		$	79,810		$	56,849
Restricted cash		654			2,459			490			654
Cash, cash equivalents, and restricted cash at the end of period	$	57,503		$	56,242		$	80,300		$	57,503

Supplemental Disclosure of Cash Flow Information:
Noncash investing activities:
Purchase of intangible assets	$	—		$	1,581
Contingent consideration recognized at acquisition date		—			25,491
Noncash investing activities - Purchase of intangible assets							$	1,575		$	—

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 deliver innovative, quality-driven solutions while partnering with health care professionals on improving patients’ lives. 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 months ended September 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 has significantly affected the Company’s patients, communities, employees and business operations. The pandemic has led to the cancellation or deferral of elective surgeries and procedures within certain hospitals, ambulatory surgery centers, and other medical facilities; restrictions on travel; the implementation of physical distancing measures; and the temporary or permanent closure of certain businesses. 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~~from March 2020 through May 2020, when elective surgery restrictions were most pronounced, though these effects remain ongoing in certain geographical areas. However, the Company remains focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which it operates while assuring the continuity of its business operations.

~~Certain amortization expense related to intangible~~The Company's condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets ~~previously reported in general~~ and ~~administrative expenses has been reclassified to acquisition-related amortization~~liabilities and ~~remeasurement based on use~~disclosure of contingent assets and liabilities at the date of the ~~underlying intangible asset. This reclassification resulted~~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 uncertain, both in ~~decreases~~the U.S. and in other markets. 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 remainder of 2020 and beyond. The expected effects of COVID-19 on the Company’s business will depend on various factors including (i) the magnitude and length of increased case waves during the fall and winter, (ii) the comfort level of patients in returning to clinics and hospitals, (iii) the extent to which localized elective surgery shutdowns occur, (iv) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (v) general hospital capacity constraints occurring because of the need to treat COVID-19 patients.

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 ~~administrative expenses~~bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).

These matters are also described in Part II, Item 1A of ~~$0.4 million~~this Form 10-Q under the heading Risk Factors.

Coronavirus Aid, Relief, and ~~$0.8 million~~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 ~~three and~~ nine months ended September 30, ~~2018, respectively,~~2020.

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 ~~increases in acquisition related amortization and remeasurement expense~~Advance Payment Program. For discussion of ~~$0.4 million and $0.8 million~~the Company’s accounting for ~~the three and nine months ended September 30, 2018, respectively.~~

~~Change in Reporting Segments~~these funds, see Note 11.

The Company ~~has changed its reportable business segments beginning~~also automatically received, as a durable medical equipment provider, 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 retain the funds 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 ~~first quarter~~remaining 50% deferred until December 31, 2022. As of ~~2019, to align with changes in how~~September 30, 2020, the Company manages its business, reviews operating performance and allocates resources. The Company now reports results under two reportable segments: Global Spine and Global Extremities, and measures operating performancehas deferred $2.2 million associated with this program, all of ~~these two reportable segments based on earnings before interest, tax, depreciation, and amortization (“EBITDA”). For additional discussion regarding segments, see Note 11.~~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 accounts receivable, 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 U.S. 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 ~~fair values of assets acquired and liabilities assumed at the acquisition date:~~

(U.S. Dollars, in thousands)

Final Acquisition Date Fair Value

Assigned Useful Life
Assets acquired

Cash and cash equivalents

$
6,785

Restricted cash

30

Accounts receivable

1,705

Inventories

8,175

Prepaid expenses and other current assets

315

Property, plant and equipment

2,285

Other long-term assets

320

Developed technology

12,400

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

26,800

10 years
Tradename

100

2 years
Deferred income taxes

3,594

Total identifiable assets acquired

$
62,509

Liabilities assumed

Accounts payable

$
351

Other current liabilities

2,869

Other long-term liabilities

301

Total liabilities assumed

$
3,521

Goodwill

17,612

Total fair value of consideration transferred

$
76,600

��

On February 6, 2019, the Company obtained U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc for patients suffering from cervical disease degeneration and started amortizing IPR&D. The $17.6 million of goodwill recognized was assigned to the Global Spine reporting segment.

The Company did 0t recognize any acquisition related costs during the three and nine months ended September 30, 2019 and recorded $0.3 million and $3.3 million of acquisition related costs during the three and nine months ended September 30, 2018. These costs are included in the condensed consolidated statements of operations and comprehensive income (loss) within general and administrative expenses.The Company’s results of operations included net sales of $4.2 million and $2.9 million related to Spinal Kinetics for the three months ended September 30, 2019 and 2018, respectively, and net sales of $10.5 million and $5.2 million 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 the three and nine months ended September 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.

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 thepreliminary estimated fair values of assets acquired and liabilities assumed at the acquisition 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)	Preliminary Acquisition Date Fair Value		Balance Sheet Classification	Assigned Useful Life
Assets acquired
Inventories	$	528	Inventories
Developed technology		4,500	Intangible assets, net	8 years
Customer relationships		800	Intangible assets, net	15 years
Trade name		600	Intangible assets, net	15 years
In-process research and development ("IPR&D")		300	Intangible assets, net	Indefinite
Total identifiable assets acquired		6,728
Goodwill		11,272
Total fair value of consideration transferred	$	18,000

The Company recorded goodwill of $11.3 million in connection with the acquisition, of which $11.1 million was assigned to the Global Extremities reporting segment and $0.2 million 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 significant acquisition-related costs during the three months ended September 30, 2020 and 2019 and recorded $0.4 million and $0.3 million of acquisition related costs during the nine months ended September 30, 2020 and 2019, respectively. These costs are included in the condensed consolidated statements of operations within general and administrative expenses. Additionally, the Company recognized $0.8 million and $1.0 million in revenues related to the FITBONE product line during the three and nine months ended September 30, 2020.

Distributor Acquisition

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 agreed to pay consideration of up to $7.6 million in accordance with the parties’ agreement. The following table summarizes the fair values of assets acquired and of consideration paid:

(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)	Fair Value		Balance Sheet Classification	Assigned Useful Life
Fair Value of Consideration Transferred
Cash paid or payable	$	7,200
Contingent consideration		375
Total fair value of consideration transferred	$	7,575

Fair value of assets acquired
Customer relationships	$	7,340	Intangible assets, net	5 years
Assembled workforce		235	Intangible assets, net	5 years
Total fair value of assets acquired	$	7,575

4. Inventories

Inventories were as follows:

(U.S. Dollars, in thousands)	September 30, 2019		December 31, 2018		September 30, 2020		December 31, 2019
Raw materials	$	7,760	$	8,463	$	7,779	$	9,587
Work-in-process		10,532		13,478		12,050		14,027
Finished products		62,701		54,906		26,384		20,712
Field/consignment						36,646		38,071
Inventories	$	80,993	$	76,847	$	82,859	$	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 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	September 30, 2020		December 31, 2019
Right-of-use assets ("ROU assets")
Operating leases	Other long-term assets	$	4,972	$	5,798
Finance leases	Property, plant and equipment, net		21,001		20,207
Total ROU assets			25,973		26,005

Lease Liabilities
Current
Operating leases	Other current liabilities		1,999		1,875
Finance leases	Current portion of finance lease liability		498		323
Long-term
Operating leases	Other long-term liabilities		3,166		4,084
Finance leases	Long-term portion of finance lease liability		22,463		20,648
Total lease liabilities		$	28,126	$	26,930

Supplemental cash flow information related to leases was as follows:

(U.S. Dollars, in thousands)	Nine Months Ended September 30, 2019		Nine Months Ended September 30, 2020		Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	3,037	$	3,170	$	3,037
Operating cash flows from finance leases		687		458		687
Financing cash flows from finance leases		276		204		276
Right-of-use assets obtained in exchange for lease obligations
ROU assets obtained in exchange for lease obligations
Operating leases		598		619		598
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:~~the commencement date of the CMSA.

(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

6. Other current liabilities

~~6. Long-term debt~~

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 a limited number of positions, which 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 nine months ended September 30, 2020, the Company recorded additional accruals of $1.1 million and $2.5 million, respectively, associated with these activities. Payments were made during the three and nine months ended September 30, 2020 totaling $1.1 million and $2.1 million, respectively. As of September 30, ~~2019,~~2020, the Company had ~~0 borrowings~~a liability of $3.7 million associated with the restructuring plan.

7. Long-term debt

As a precautionary measure to increase the Company’s cash position and preserve financial flexibility during the uncertainty resulting from the COVID-19 pandemic, the Company completed a borrowing of $100.0 million under its five year ~~$125~~$300 million secured revolving credit ~~facility.~~ facility on April 16, 2020. The Company made payments of $100.0 million in the third quarter of 2020 to fully pay down the outstanding balance. As of September 30, 2020, the Company had no borrowings outstanding under the secured revolving credit facility and was in compliance with all required financial covenants.

In addition, the Company had 0 borrowings on its €5.5 million ($~~6.0~~6.4 million) available lines of credit in Italy as of September 30, ~~2019. The Company was in compliance with all required financial covenants as of September 30, 2019.~~

On October 25, 2019, the Company, and certain of its wholly-owned subsidiaries (collectively with the Company, the “Borrowers”), as borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $300 million secured revolving credit facility maturing on October 25, 2024 (the “Facility”), and amends and restates the previous $125 million secured revolving credit facility. As of October 28, 2019, the Borrowers have 0t made any borrowings under the Amended Credit Agreement.

Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes of the Company and its subsidiaries (including permitted acquisitions and permitted payments of dividends and other distributions). The Facility is available in US Dollars with up to $150 million of the Facility available to be borrowed in Euros and Pounds Sterling (the “Agreed Currencies”). The Facility further permits up to $50 million to be utilized for the issuance of letters of credit in the Agreed Currencies. The Borrowers have the ability to increase the amount of the Facility, which increases may take the form of increases to the revolving credit commitments or the issuance of new term A loans, by an aggregate amount of up to the greater of $150 million or an incremental amount such that the total amount of the Facility does not exceed 350% of consolidated EBITDA of the Company (as determined for the four fiscal quarter period most recently ended for which financial statements are available), upon satisfaction of customary conditions precedent for such increases or incremental loans and receipt of additional commitments by one or more existing or new lenders.

Borrowings under the Facility bear interest at a floating rate, which will be, at the Borrowers’ option, either LIBOR plus an applicable margin ranging from 1.25% to 2.25%, or a base rate plus an applicable margin ranging from 0.25% to 1.25% (in each case subject to adjustment based on the Company’s total net leverage ratio). An unused fee ranging from 0.15% to 0.25% (subject to adjustment based on the Company’s total net leverage ratio) is payable quarterly in arrears based on the daily amount of the undrawn portion of each lender’s revolving credit commitments under the Facility. Fees are payable on outstanding letters of credit at a rate equal to the applicable margin for LIBOR loans, plus certain customary fees payable solely to the issuer of the letter of credit.

Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of the Borrowers’ obligations under the Amended Credit Agreement. The obligations of the Borrowers and each of the Guarantors with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.

The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and its subsidiaries ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate transactions. In addition, the Amended Credit Agreement contains financial covenants requiring the Company on a consolidated basis to maintain, as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0. The Amended Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Facility may be accelerated and/or the lenders’ commitments terminated.2020.

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			September 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	)
Spinal Kinetics contingent consideration															$	—	$	—		$	(35,100	)	$	(35,100	)	$	(42,700	)
Other contingent consideration															$	—	$	—		$	(375	)	$	(375	)	$	—
Deferred compensation plan		—		(1,242	)		—			(1,242	)		(1,275	)		—		(1,366	)		—			(1,366	)		(1,255	)
Total	$	—	$	(1,242	)	$	(41,700	)	$	(42,942	)	$	(29,835	)	$	—	$	(1,366	)	$	(35,475	)	$	(36,841	)	$	(43,955	)

~~Bone Biologics Equity Warrants and Securities~~Contingent Consideration

The Company ~~holds investments~~recognized a contingent consideration obligation in ~~common stock~~connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and ~~warrants~~Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to ~~purchase shares~~$45.0 million in connection with future sales of ~~common stock~~the acquired artificial discs. Milestones must be achieved within five years of ~~Bone Biologics, Inc. (“Bone Biologics”).~~ April 30, 2018 to trigger applicable payments. In February 2019, the FDA Milestone was achieved and paid.

The estimated fair value of the remaining Spinal Kinetics contingent consideration was $35.1 million as of September 30, 2020. The estimated fair value reflects assumptions made by management as of September 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 ~~common stock investments are recorded~~business remains 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. At September 30, 2020, the Company has classified $14.7 million of the liability attributable to the revenue-based milestone within other current liabilities, as the Company currently expects to pay one of the revenue-based milestones in the next twelve months, and the remaining $20.4 million within other long-term ~~assets while~~liabilities. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.

The following table provides a reconciliation of the ~~warrants are considered~~beginning and ending balances for the Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):

(U.S. Dollars, in thousands)	2020			2019
Spinal Kinetics contingent consideration estimated fair value at January 1	$	42,700		$	28,560
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement		(7,600	)		28,140
Payment made		—			(15,000	)
Spinal Kinetics contingent consideration estimated fair value at September 30	$	35,100		$	41,700

The $7.6 million decrease in fair value in 2020 is primarily attributable to ~~have~~ 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 0.the remaining potential future revenue-based milestone payments using a Monte Carlo simulation and a discounted cash flow model. This fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The ~~equity securities are considered investments that do not have readily determinable fair values. As such,~~key assumptions in applying the ~~Company measures these investments at cost, less any impairments, plus or minus changes resulting from observable price~~valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, the expected timing of payment, applicable discount rates applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in ~~orderly transactions for identical~~these assumptions could result in a significantly higher or ~~similar investments~~lower fair value.

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

(U.S. Dollars, in thousands)	Fair Value as of September 30, 2020		Valuation Technique	Unobservable inputs	Range
Spinal Kinetics contingent consideration	$	35,100	Discounted cash flow	Revenue discount rate	7.41% - 7.49%
				Payment discount rate	4.33% - 4.40%
				Projected year of payment	2021 - 2022

Other contingent consideration is attributable to an agreement closed in the third quarter of 2020 to acquire certain assets of a medical device distributor as a portion of the ~~same issuer.~~consideration is based upon meeting certain revenue-based targets.

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

AsUntil October of ~~September 30,~~ 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. ~~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~~debt security for a $4.0 million cash payment and agreed to transfer the ~~Warrant~~warrant to ~~eNeura.~~eNeura as part of such settlement. 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~~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		2020		2019
eNeura debt security and Warrant at January 1	$	17,820		$	16,050	$	—	$	17,820
Gains or losses recorded for the period
Recognized in other comprehensive income (loss)		(2,593	)		3,200		—		(2,593	)
Change in classification of debt security to held to maturity		(15,227	)		—		—		(15,227	)
Issuance of Warrant as consideration for extension		491			—
Impairment of Warrant		(491	)		—
Issuance of Warrant as consideration for prior extension of debt maturity date							—		491
Impairment of warrant							—		(491	)
eNeura debt security and Warrant at September 30	$	—		$	19,250	$	—	$	—

~~Contingent Consideration~~

The contingent consideration at the acquisition date of Spinal Kinetics consisted 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 approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of April 30, 2018 to trigger applicable payments.

On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc. This approval triggered the Company’s payment obligation of $15.0 million for the achievement of the FDA Milestone and such obligation was paid on February 14, 2019. The estimated fair value of the remaining contingent consideration was $41.7 million as of September 30, 2019; however, 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 30, 2019, respectively, which was primarily attributable to a change in management’s forecast of future net sales of the artificial discs, including an acceleration of the expected timing of such future sales during the three months ended September 30, 2019, subsequent to the Company’s launch of the product in the U.S. At September 30, 2019, the Company has classified $14.5 million of the liability attributable to the revenue-based milestones within other current liabilities, as the Company expects to pay one of the revenue-based milestones in the next twelve months, and the remaining $27.2 million within other long-term liabilities. Any changes in fair value are recorded as an operating expense and included within acquisition-related amortization and remeasurement.

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

~~The following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):~~

(U.S. Dollars, in thousands)

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

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 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$1.0~~$1.1 million and ~~$0.8~~$1.0 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. As of September 30, ~~2019,~~2020, the Company has accrued ~~$4.5~~$6.3 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 September 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 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 income		2,048			2,048
Income taxes		—			—
Balance at September 30, 2020	$	(991	)	$	(991	)

~~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 September 30,
(U.S. Dollars, in thousands)	2019		2018		Change			2020		2019		Change
Bone Growth Therapies	$	48,836	$	48,059		1.6	%	$	47,066	$	48,836		-3.6	%
Spinal Implants		22,947		22,102		3.8	%		25,505		22,947		11.1	%
Biologics		16,308		14,636		11.4	%		15,245		16,308		-6.5	%
Global Spine		88,091		84,797		3.9	%		87,816		88,091		-0.3	%
Global Extremities		25,408		26,911		-5.6	%		23,169		25,408		-8.8	%
Net sales	$	113,499	$	111,708		1.6	%	$	110,985	$	113,499		-2.2	%

	Nine Months Ended September 30,							Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019		2018		Change			2020		2019		Change
Bone Growth Therapies	$	146,228	$	142,433		2.7	%	$	120,888	$	146,228		-17.3	%
Spinal Implants		69,076		66,689		3.6	%		67,025		69,076		-3.0	%
Biologics		48,784		43,639		11.8	%		40,319		48,784		-17.4	%
Global Spine		264,088		252,761		4.5	%		228,232		264,088		-13.6	%
Global Extremities		74,373		79,203		-6.1	%		60,711		74,373		-18.4	%
Net sales	$	338,461	$	331,964		2.0	%	$	288,943	$	338,461		-14.6	%

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 September 30,				Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Product sales	$	97,833	$	97,604	$	291,632	$	289,946	$	96,305	$	97,833	$	250,161	$	291,632
Marketing service fees		15,666		14,104		46,829		42,018		14,680		15,666		38,782		46,829
Net sales	$	113,499	$	111,708	$	338,461	$	331,964	$	110,985	$	113,499	$	288,943	$	338,461

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 receivable, 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 nine months ended September 30, 2020:

(U.S. Dollars, in thousands)	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
Allowance for expected credit losses beginning balance	$	6,364		$	3,987
Impact of adoption of ASU 2016-13		—			1,120
Current period provision (recovery) for expected credit losses		(619	)		945
Writeoffs charged against the allowance and other		(309	)		(647	)
Effect of changes in foreign exchange rates		88			119
Allowance for expected credit losses ending balance	$	5,524		$	5,524

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.

On October 1, 2020, the President of the United States signed the “Continuing Appropriations Act, 2021 and Other Extensions Act,” which relaxed a number of the Medicare Accelerated and Advance Payment Programs recoupment terms for providers and suppliers that received funds from the program. Under these new terms, recoupment will be delayed until one year after payment was issued. After that first year, Medicare will automatically recoup 25% of Medicare payments otherwise owed to the provider or supplier for 11 months. At the end of the 11-month period, recoupment will increase to 50% for another 6 months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full balance has been repaid.

As of September 30, 2020, the Company has classified $6.9 million of this contract liability within other current liabilities and $6.9 million within other long-term liabilities based upon the Company’s estimates of when such funds will be recouped. The Company did not recognize any net sales during the three and nine months ended September 30, 2020, respectively, attributable to the satisfaction of performance obligations related to the CMS prepayment.

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~~$2.3 million and ~~$1.9~~$3.7 million as of September 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 September 30,						Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Global Spine	$	(6,033	)	$	15,637		$	21,065		$	53,492		$	19,960		$	(6,033	)	$	38,670		$	21,065
Global Extremities		1,229			3,357			3,806			7,173			1,258			1,229			(3,995	)		3,806
Corporate		(15,949	)		(15,403	)		(38,356	)		(35,097	)		(6,196	)		(15,949	)		(16,259	)		(38,356	)
Total EBITDA	$	(20,753	)	$	3,591		$	(13,485	)	$	25,568		$	15,022		$	(20,753	)	$	18,416		$	(13,485	)
Depreciation and amortization		(6,275	)		(4,738	)		(18,180	)		(13,661	)		(9,030	)		(6,275	)		(22,299	)		(18,180	)
Interest income (expense), net		186			(181	)		386			(615	)		(731	)		186			(2,055	)		386
Income (loss) before income taxes	$	(26,842	)	$	(1,328	)	$	(31,279	)	$	11,292		$	5,261		$	(26,842	)	$	(5,938	)	$	(31,279	)

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 September 30,				Nine Months Ended September 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	$	83,477	$	82,816	$	215,819	$	246,943
International		5,275		5,295		17,145	$	13,499		4,339		5,275		12,413	$	17,145
Total Global Spine		88,091		84,797		264,088		252,761		87,816		88,091		228,232		264,088

Global Extremities
U.S.	��	6,636		7,254		20,078		21,193		6,356		6,636		16,439		20,078
International		18,772		19,657		54,295		58,010		16,813		18,772		44,272		54,295
Total Global Extremities		25,408		26,911		74,373		79,203		23,169		25,408		60,711		74,373

Consolidated
U.S.		89,452		86,756		267,021		260,455		89,833		89,452		232,258		267,021
International		24,047		24,952		71,440		71,509		21,152		24,047		56,685		71,440
Net sales	$	113,499	$	111,708	$	338,461	$	331,964	$	110,985	$	113,499	$	288,943	$	338,461

~~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,
(U.S. Dollars, in thousands)	2020			2019		2020			2019
Changes in fair value of contingent consideration	$	(700	)	$	22,270	$	(7,600	)	$	28,140
Amortization of acquired intangibles		1,838			1,338		4,834			3,733
Total	$	1,138		$	23,608	$	(2,766	)	$	31,873

Three Months Ended
September 30,

Nine Months Ended
September 30,

(U.S. Dollars, in thousands)

2019

2018

2019

2018

Changes in fair value of contingent consideration

$
22,270

$
1,580

$
28,140

$
2,689

Amortization of acquired intangibles

1,338

429

3,733

802

Total

$
23,608

$
2,009

$
31,873

$
3,491

~~13.~~14. 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 September 30,				Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Cost of sales	$	169	$	151	$	536	$	408	$	149	$	169	$	535	$	536
Sales and marketing		583		514		1,885		1,436		668		583		2,897		1,885
General and administrative		4,760		4,194		13,888		11,488		2,770		4,760		7,939		13,888
Research and development		332		402		1,069		1,060		254		332		1,028		1,069
Total	$	5,844	$	5,261	$	17,378	$	14,392	$	3,841	$	5,844	$	12,399	$	17,378

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Stock options	$	599	$	579	$	3,637	$	2,442	$	786	$	599	$	1,840	$	3,637
Time-based restricted stock awards and units		3,805		2,244		8,462		5,480		1,632		3,805		6,804		8,462
Performance-based restricted stock awards and units		—		734		—		1,493
Market-based restricted stock units		1,092		1,298		4,015		3,855		1,049		1,092		2,529		4,015
Stock purchase plan		348		406		1,264		1,122		374		348		1,226		1,264
Total	$	5,844	$	5,261	$	17,378	$	14,392	$	3,841	$	5,844	$	12,399	$	17,378

During the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company issued ~~43,603~~58,357 and ~~50,928~~43,603 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards and units. During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the Company issued ~~295,496~~244,801 and ~~257,833~~295,496 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 30, ~~2019~~2020 and ~~2018,~~2019, the effective tax rate was ~~(50.9%)~~11.5% and ~~8.8%~~(50.9)%, respectively. For the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, the effective tax rate was ~~(28.4%)~~300.3% and ~~56.3%~~(28.4)%, respectively. The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 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 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 September 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,~~three and nine months ended September 30, 2020, the ~~Internal Revenue Service concluded an examination of the Company’s federal income tax return for 2015, which resulted in~~Company recognized a net benefit of ~~$1.8 million.~~less than $0.1 million and $17.8 million, respectively, related to uncertain tax benefits. The net benefit resulted from expired statute of limitations related to certain unrecognized 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~~$0.1 million to ~~$13.4~~$0.6 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 months ended September 30, ~~2019 and 2018,~~2020, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS.

The following is a reconciliation of the weighted average shares used in diluted EPS computations.

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	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		19,335,718		18,957,876		19,217,057		18,847,728
Effect of dilutive securities
Unexercised stock options and stock purchase plan		—		—		—		312,320		10,607		—		41,701		—
Unvested restricted stock awards and units		—		—		—		91,001		52,242		—		60,544		—
Weighted average common shares-diluted		18,957,876		18,562,204		18,847,728		18,864,169		19,398,567		18,957,876		19,319,302		18,847,728

There were ~~1,814,544~~1,771,113 and ~~2,088,843~~1,814,544 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~1,880,423~~1,527,735 and ~~359,172~~1,880,423 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the nine months ended September 30, ~~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

Neo Medical SA

On October 1, 2020, the Company and Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery (“Neo Medical”), entered into a partnership that includes a co-development agreement covering the parties’ joint development of single use instruments for cervical spine procedures, and a distribution agreement under which Orthofix will exclusively distribute Neo Medical’s thoracolumbar procedure solutions to certain U.S. customer accounts.

Separately, the Company also purchased shares of Neo Medical’s preferred stock for consideration of $5.0 million and entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million (the “Convertible Loan”). The loan bears interest at 8.0%, with interest due semi-annually. At each interest payment date, the borrower may elect to capitalize any interest due to the then outstanding principal balance of the loan. The Convertible Loan matures on October 1, 2024, provided that if a change in control of Neo Medical occurs prior to the maturity date, the Convertible Loan shall become immediately due upon such event.

The Convertible Loan may be convertible by either party into shares of Neo Medical’s preferred stock. The price per share at which the loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising activities at the time of conversion, as specified within the agreement.

In relation to the purchased equity shares, the Company was required to pay the requisite funds into a blocked capital increase account administered by a third party on September 30, 2020, prior to the closing of the transaction. This amount is classified within other long-term assets as of September 30, 2020.

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 deliver innovative, quality-driven solutions as we partner with health care professionals on improving patients’ lives. 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 quarter of ~~2019~~2020 include the following:

•

Net sales ~~were $113.5~~of $111.0 million, an increase of ~~1.6% on a reported basis~~52% sequentially and ~~2.5% on a constant currency basis~~within 2% of our 2019 performance

•

~~Biologics tissue service fees~~US Spinal Implants third quarter net sales increased ~~11.4%, its second consecutive quarter of double-digit growth~~19% over the prior year

•

~~Net loss was $40.5~~Motion Preservation sales in the U.S. of $5.2 million, ~~a decrease~~an increase of ~~$39.3 million compared to the~~44% sequentially and over 400% over prior year ~~period~~

•

~~Decrease in earnings before interest, income taxes, depreciation,~~Entered into a $10.0 million investment and ~~amortization (“EBITDA”) of $24.3 million, largely driven by expenses recognized during the third quarter of 2019 for acquisition-related remeasurement~~co-development agreement with Neo Medical SA

COVID-19 Update and Outlook

The global COVID-19 pandemic has significantly affected our patients, communities, employees and business operations. The pandemic has led to the cancellation or deferral of elective surgeries and procedures with certain hospitals, ambulatory surgery centers, and other medical facilities; restrictions on travel; the implementation of physical distancing measures; and the temporary or permanent closure of businesses. 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 elective surgery restrictions were most pronounced, though these effects remain ongoing in certain geographical areas. However, we remain focused on protecting the health and wellbeing of our employees, partners, patients, and the communities in which we operate while assuring the continuity of our business operations.

At this time, the future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets. 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 our business during the remainder of 2020 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the magnitude and length of increased case waves during the fall and winter, (ii) the comfort level of patients in returning to clinics and hospitals, (iii) the extent to which localized elective surgery shutdowns occur, (iv) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (v) general hospital capacity constraints occurring because of the need to treat COVID-19 patients.

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).

Results of Operations

The following table provides certain items in our condensed consolidated statements of operations and comprehensive income (loss) as a percent of net sales:

	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	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		23.6		21.9			25.2			22.0
Gross profit		78.1			78.5			78.0			78.6		76.4		78.1			74.8			78.0
Sales and marketing		48.3			44.7			48.9			45.7		47.7		48.3			52.2			48.9
General and administrative		18.6			19.9			18.8			19.2		14.9		18.6			17.1			18.8
Research and development		7.0			8.6			7.7			7.4		9.0		7.0			9.9			7.7
Acquisition-related amortization and remeasurement		20.8			1.8			9.4			1.0		1.0		20.8			(0.9	)		9.4
Operating income (loss)		(16.6	)		3.5			(6.8	)		5.3		3.8		(16.6	)		(3.5	)		(6.8	)
Net income (loss)		(35.7	)		(1.1	)		(11.9	)		1.5		4.2		(35.7	)		4.1			(11.9	)

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
(U.S. Dollars, in thousands)	2020		2019		Reported			Constant Currency
Bone Growth Therapies	$	47,066	$	48,836		-3.6	%		-3.6	%
Spinal Implants		25,505		22,947		11.1	%		10.7	%
Biologics		15,245		16,308		-6.5	%		-6.5	%
Global Spine		87,816		88,091		-0.3	%		-0.4	%
Global Extremities		23,169		25,408		-8.8	%		-11.5	%
Net sales	$	110,985	$	113,499		-2.2	%		-2.9	%

	Three Months Ended September 30,				Percentage Change						Nine Months Ended September 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	%	$	120,888	$	146,228		-17.3	%		-17.3	%
Spinal Implants		22,947		22,102		3.8	%		4.4	%		67,025		69,076		-3.0	%		-2.9	%
Biologics		16,308		14,636		11.4	%		11.4	%		40,319		48,784		-17.4	%		-17.4	%
Global Spine		88,091		84,797		3.9	%		4.0	%		228,232		264,088		-13.6	%		-13.6	%
Global Extremities		25,408		26,911		-5.6	%		-2.4	%		60,711		74,373		-18.4	%		-18.2	%
Net sales	$	113,499	$	111,708		1.6	%		2.5	%	$	288,943	$	338,461		-14.6	%		-14.6	%

Nine Months Ended
September 30,

Percentage Change

(U.S. Dollars, in thousands)

2019

2018

Reported

Constant Currency

Bone Growth Therapies

$
146,228

$
142,433

2.7
%

2.7
%
Spinal Implants

69,076

66,689

3.6
%

4.3
%
Biologics

48,784

43,639

11.8
%

11.8
%
Global Spine

264,088

252,761

4.5
%

4.7
%
Global Extremities

74,373

79,203

-6.1
%

-1.8
%
Net sales

$
338,461

$
331,964

2.0
%

3.1
%

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 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales ~~increased $3.3~~decreased $0.3 million or ~~3.9%~~0.3%

•

Bone Growth Therapies net sales ~~increased $0.8~~decreased $1.8 million or ~~1.6%~~3.6%, primarily driven by ~~an increase in~~the disruption caused by COVID-19, which has led to lower order ~~volume in the quarter, partially offset by customer sales mix~~volumes and ~~product mix changes~~a longer revenue cycle for these products

•

Spinal Implants net sales increased ~~$0.8~~$2.6 million or ~~3.8%~~11.1%, ~~primarily due to a $1.4 million increase in~~as Motion Preservation ~~due to our launch of the M6 artificial cervical disc~~net sales increased $4.2 million in the U.S. compared to prior year as a result of increases in case volumes and active surgeons, partially offset by ~~timing~~a decrease in ~~international stocking orders for legacy~~ Spine Fixation ~~products~~net sales, driven by a reduction in elective procedures in both the U.S. and internationally due to COVID-19

•

Biologics net sales ~~increased $1.7~~decreased $1.1 million or ~~11.4%~~6.5%, 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 months ended September 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales ~~increased $11.3~~decreased $35.9 million or ~~4.5%~~13.6%

•

Bone Growth Therapies net sales ~~increased $3.8~~decreased $25.3 million or ~~2.7%~~17.3%, 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 $2.1 million or ~~3.6%~~3.0%, 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 $10.5 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 $8.5 million or ~~11.8%~~17.4%, 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 30, ~~2019~~2020 compared to ~~2018~~2019

Net sales decreased ~~$1.5~~$2.2 million or ~~5.6%~~8.8%

•

Decrease of ~~$0.9~~$2.9 million, primarily a result of the impact of COVID-19 on procedure volumes

•

Partially offset by an increase of $0.7 million due to the changes in foreign currency exchange rates, which had a positive impact on net sales in the third quarter of 2020

Nine months ended September 30, 2020 compared to 2019

Net sales decreased $13.7 million or 18.4%

•

Decrease of $13.5 million, primarily a result of the impact of COVID-19 on procedure volumes

•

Decrease of $0.1 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales for the year-to-date period in 2020

Gross Profit

	Three Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
Net sales	$	110,985		$	113,499			(2.2	%)	$	288,943		$	338,461			(14.6	%)
Cost of sales		26,243			24,896			5.4	%		72,818			74,416			(2.1	%)
Gross profit	$	84,742		$	88,603			(4.4	%)	$	216,125		$	264,045			(18.1	%)
Gross margin		76.4	%		78.1	%		(1.7	%)		74.8	%		78.0	%		-3.2	%

Three months ended September 30, 2020 compared to 2019

Gross profit decreased $3.9 million

•

Decrease in gross profit and gross margin primarily related to the recognition of non-cash inventory charges on products due to lower procedure volumes, largely as a result of COVID-19

Nine months ended September 30, 2020 compared to 2019

Gross profit decreased $47.9 million

•

Decrease primarily due to the decline in net sales and lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes

•

Decrease also partially due to the recognition of non-cash inventory charges on products due to lower procedure volumes, largely as a result of COVID-19

Sales and Marketing Expense

	Three Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
Sales and marketing	$	52,926		$	54,805			(3.4	%)	$	150,718		$	165,363			(8.9	%)
As a percentage of net sales		47.7	%		48.3	%		(0.6	%)		52.2	%		48.9	%		3.3	%

Three months ended September 30, 2020 compared to 2019

Sales and marketing expense decreased $1.9 million

•

Decrease is primarily a result of a shift in the timing of national sales conferences and the leveraging of virtual training and events as a result of the COVID-19 pandemic

Nine months ended September 30, 2020 compared to 2019

Sales and marketing expense decreased $14.6 million

•

Decrease largely attributable to reduced commissions as a result of the decline in net sales, partially offset by commission support provided to our direct sales representatives during the second quarter of 2020

•

Decrease also related to a shift in the timing of national sales conferences and the leveraging of virtual training and events as a result of the COVID-19 pandemic

General and Administrative Expense

	Three Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020			2019			% Change			2020			2019			% Change
General and administrative	$	16,541		$	21,090			(21.6	%)	$	49,453		$	63,497			(22.1	%)
As a percentage of net sales		14.9	%		18.6	%		(3.7	%)		17.1	%		18.8	%		(1.7	%)

Three months ended September 30, 2020 compared to 2019

General and administrative expense decreased $4.5 million

•

Decrease of $2.0 million attributable to lower 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 ~~$0.6~~$1.5 million ~~largely attributed to variability~~ in ~~the timing of orders from our international stocking distributors and growth in our global direct-sales markets~~

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

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

•

~~Decrease of $3.4 million~~expenses associated with lower strategic investments, largely due to ~~the changes in foreign currency exchange rates, which had a negative impact on net sales~~diligence and integration costs associated with strategic initiatives

•

Decrease of ~~$1.4~~$1.0 million ~~largely attributed~~attributable to ~~variability in the timing of orders from our international stocking distributors~~lower legal judgments and ~~growth in our global direct-sales markets~~

~~Gross Profit~~

Three Months Ended September 30,

Nine Months Ended September 30,

(U.S. Dollars, in thousands)

2019

2018

% Change

2019

2018

% Change

Net sales

$
113,499

$
111,708

1.6
%

$
338,461

$
331,964

2.0
%
Cost of sales

24,896

24,020

3.6
%

74,416

71,002

4.8
%
Gross profit

$
88,603

$
87,688

1.0
%

$
264,045

$
260,962

1.2
%
Gross margin

78.1
%

78.5
%

-0.4
%

78.0
%

78.6
%

-0.6
%

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

~~Gross profit increased $0.9 million~~

•

~~Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased slightly to 78.1% compared to 78.5% in the prior year period~~settlements

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

~~Gross profit increased $3.1 million~~

•

~~Increase primarily due to the growth in net sales and partially offset by a decrease in gross margin, which decreased to 78.0% compared to 78.6% in the prior year period~~

•

~~Decrease in gross margin largely due to higher than normal charges related to the buildup of Spinal Implants inventory to support sales growth from our new sales partners in key geographies~~

~~Sales and Marketing Expense~~

Three Months Ended September 30,

Nine Months Ended September 30,

(U.S. Dollars, in thousands)

2019

2018

% Change

2019

2018

% Change

Sales and marketing

$
54,805

$
49,898

9.8
%

$
165,363

$
151,695

9.0
%
As a percentage of net sales

48.3
%

44.7
%

3.6
%

48.9
%

45.7
%

3.2
%

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

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

•

~~Increase largely attributable to increases in headcount, training and education costs, and increased marketing efforts to support growth and the launch of the M6-C artificial cervical disc in the U.S.~~

•

~~Further increases relate to higher variable compensation rates in our Global Spine segment to support growth~~

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

~~Sales and marketing expense increased $13.7 million~~

•

~~Further increases relate to higher variable compensation rates in our Global Spine segment to support growth~~

~~General and Administrative Expense~~

Three Months Ended September 30,

Nine Months Ended September 30,

(U.S. Dollars, in thousands)

2019

2018

% Change

2019

2018

% Change

General and administrative

$
21,090

$
22,276

-5.3
%

$
63,497

$
63,658

-0.3
%
As a percentage of net sales

18.6
%

19.9
%

-1.3
%

18.8
%

19.2
%

-0.4
%

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

General and administrative expense decreased ~~by $1.2~~$14.0 million

•

Decrease of ~~$1.6~~$6.3 million in expenses associated with lower 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 million in certain compensation expenses, excluding the impact of succession charges~~

•

~~Partially offset by an increase of $1.2~~$4.3 million attributable to ~~transition~~lower succession and ~~succession~~transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain ~~named~~ executive officers

•

~~Further offset by an increase of $0.4 million in depreciation expense~~

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

~~General and administrative expense decreased by $0.2 million~~

•

~~Decrease of $3.3 million in expenses associated with strategic investments, largely due to diligence~~ and ~~integration costs related to the acquisition of Spinal Kinetics and expenses associated with the Domestication in 2018~~from targeted restructuring activities

•

Decrease of ~~$3.3~~$1.1 million in ~~certain compensation expenses, such as~~lower share-based compensation expense, excluding the impact of succession and transition charges

•

~~Partially offset by an increase~~Decrease of ~~$5.2~~$1.0 million attributable to ~~transition~~lower legal judgments and ~~succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers~~settlements

•

~~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,									Three Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019			2018			% Change			2019			2018			% Change			2020			2019			% Change			2020			2019			% Change
Research and development	$	7,982		$	9,598			-16.8	%	$	26,191		$	24,426			7.2	%	$	9,962		$	7,982			24.8	%	$	28,691		$	26,191			9.5	%
As a percentage of net sales		7.0	%		8.6	%		-1.6	%		7.7	%		7.4	%		0.3	%		9.0	%		7.0	%		2.0	%		9.9	%		7.7	%		2.2	%

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

~~Research and development expense decreased by $1.6 million~~

•

Decrease primarily due to higher regulatory spending in the third quarter of 2018 associated with the premarket approval process for the M6-C Cervical Disc, which was approved by the U.S. Food and Drug Administration (“FDA”) in February of 2019

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

Research and development expense increased ~~$1.8~~$2.0 million

•

Increase ~~largely attributable~~primarily the result of our efforts to build out our internal team to support the ~~Spinal Kinetics acquisition, which was acquired during the second quarter~~acceleration of ~~2018,~~our new product innovation initiative and ~~the regulatory efforts associated~~to comply with ~~the FDA premarket approval of the M6-C Cervical Disc, which was obtained in February of 2019~~recent medical device reporting regulations

•

Increase ~~also~~partially due to product development costs related to future planned organic product launches

Nine months ended September 30, 2020 compared to 2019

Research and development expense increased $2.5 million

•

Increase primarily the result of our efforts to build out our internal team to support the acceleration of our new product innovation initiative

•

Increase of $1.2 million 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 September 30,									Nine Months Ended September 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	%	$	1,138		$	23,608			(95.2	%)	$	(2,766	)	$	31,873			(108.7	%)
As a percentage of net sales		20.8	%		1.8	%		19.0	%		9.4	%		1.0	%		8.4	%		1.0	%		20.8	%		(19.8	%)		(0.9	%)		9.4	%		(10.3	%)

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 30, ~~2019~~2020 compared to ~~2018~~2019

Acquisition-related amortization and remeasurement ~~increased $21.6~~decreased $22.5 million

•

~~Increase~~Decrease of ~~$20.7~~$23.0 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets, primarily attributable to the effects and uncertainty of COVID-19 as it relates to the estimated likelihood and timing of potential milestone payments

•

~~Increase~~Partially offset by an increase of ~~$0.9~~$0.5 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 months ended September 30, ~~2019~~2020 compared to ~~2018~~2019

Acquisition-related amortization and remeasurement ~~increased $28.4~~decreased $34.6 million

•

~~Increase~~Decrease of ~~$24.0~~$35.7 million primarily 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, primarily attributable to the effects and uncertainty of COVID-19 as it relates to the estimated likelihood and timing of potential milestone payments

•

~~Increase~~Partially offset by an increase of ~~$1.5 million related to the remeasurement of the FDA milestone associated with the Spinal Kinetics acquisition, which was achieved and paid during the first quarter of 2019~~

•

~~Increase of $2.9~~$1.1 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 September 30,									Nine Months Ended September 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	%	$	(731	)	$	186			(493.0	%)	$	(2,055	)	$	386			(632.4	%)
Other expense, net		(8,146	)		(5,054	)		61.2	%		(8,786	)		(5,785	)		51.9	%
Other income (expense), net																				1,817			(8,146	)		(122.3	%)		6,088			(8,786	)		(169.3	%)

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

~~Other~~Interest income (expense), net, decreased ~~$3.1~~$0.9 million

•

Decrease of $0.5 million attributable interest income recognized on our investment in eNeura in 2019

•

Decrease of $0.2 million associated with interest expense incurred on our outstanding indebtedness under our secured revolving credit facility

Other income (expense), net, increased $10.0 million

•

Increase of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security during the third quarter of 2019

•

~~Decrease~~Increase of ~~$1.0~~$3.5 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement gain of $1.9 million in the third quarter of 2020 compared to a loss of $1.6 million in the third quarter of 2019 ~~compared to a loss~~

Nine months ended September 30, 2020 compared to 2019

Interest income (expense), net, decreased $2.4 million

•

Decrease of ~~$0.6~~$1.5 million attributable interest income recognized on our investment in ~~the third quarter of 2018~~eNeura in 2019

•

~~Partially offset by an increase~~Decrease of ~~$4.4~~$0.8 million ~~due to the impairment of~~associated with interest expense incurred on our ~~equity holdings and warrants in Bone Biologics, Inc. (“Bone Biologics”) common stock during the third quarter of 2018~~outstanding indebtedness under our secured revolving credit facility

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

Other income (expense), net, ~~decreased $3.0~~increased $14.9 million

•

~~Decrease~~Increase of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security during the third quarter of 2019

•

~~Partially offset by a net increase~~Increase of ~~$3.1~~$4.7 million ~~relating~~attributable to ~~changes in fair value~~funds receivedfrom the U.S. Department of Health and ~~impairments~~Human Services as part of ~~our equity holdings~~the Provider Relief Fund included within the Coronavirus Aid, Relief, and ~~warrants in Bone Biologics common stock during 2018~~Economic Security Act (“CARES Act”)

•

~~Further offset by an increase~~Increase of ~~$0.6~~$4.0 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement gain of $1.8 million in 2020 compared to a loss of $2.2 million in ~~the nine months ended September 30,~~ 2019 ~~compared to a loss of $2.8 million in the nine months ended September 30, 2018~~

Income Taxes

	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	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	%	$	607		$	13,656			(95.6	%)	$	(17,833	)	$	8,869			(301.1	%)
Effective tax rate		-50.9	%		8.8	%		-59.7	%		-28.4	%		56.3	%		-84.7	%		11.5	%		(50.9	%)		62.4	%		300.3	%		(28.4	%)		328.7	%

Three months ended September 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:

•

Changes in financial benefits not recognized for tax purposes, primarily related to acquisition-related remeasurement

•

Tax detriment related to the settlement of certain stock awards

•

Increase in pre-tax earnings

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

•

Changes in financial deductions not recognized for tax purposes, primarily related to acquisition-related remeasurement

•

Tax detriment related to the settlement of certain stock awards

Nine months ended September 30, 2020 compared to 2019

The increase 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~~benefits not ~~deductible~~recognized for tax purposes, primarily related to acquisition-related remeasurement

•

~~Increases~~Reversal of tax benefits related to certain performance stock units that were forfeited

•

Partially offset by, benefits related to statute expirations for previously unrecognized tax benefits

•

Further offset by decreases in non-deductible executive compensation ~~due to provisions of the Tax Cuts and Jobs Act (the “Tax Act”)~~

The primary factors affecting our effective tax rate for the ~~third quarter of 2019~~nine months ended September 30, 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 to provisions~~Reversal of ~~the Tax Act~~

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

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

•

~~Decrease in pre-tax earnings~~

•

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

•

~~Increases in non-deductible executive compensation due to provisions of the Tax Act~~

•

~~Benefits related to effective settlement of the 2015 IRS exam and statute expirations~~

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

•

~~Financial expenses not deductible for tax purposes, primarily related to acquisition-related remeasurement~~certain performance stock units that were forfeited

•

Non-deductible executive compensation ~~due to provisions of the Tax Act~~

•

~~Benefits related to effective settlement of the 2015 IRS exam and statute expirations~~

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 12 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,

(U.S. Dollars, in thousands)

2019

2018

2019

2018

Global Spine

$
(6,033
)

$
15,637

$
21,065

$
53,492

Global Extremities

1,229

3,357

3,806

7,173

Corporate

(15,949
)

(15,403
)

(38,356
)

(35,097
)
Total EBITDA

$
(20,753
)

$
3,591

$
(13,485
)

$
25,568

Depreciation and amortization

(6,275
)

(4,738
)

(18,180
)

(13,661
)
Interest income (expense), net

186

(181
)

386

(615
)
Income (loss) before income taxes

$
(26,842
)

$
(1,328
)

$
(31,279
)

$
11,292

Liquidity and Capital Resources

	Three Months Ended September 30,						Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2020			2019			2020			2019
Global Spine	$	19,960		$	(6,033	)	$	38,670		$	21,065
Global Extremities		1,258			1,229			(3,995	)		3,806
Corporate		(6,196	)		(15,949	)		(16,259	)		(38,356	)
Total EBITDA	$	15,022		$	(20,753	)	$	18,416		$	(13,485	)
Depreciation and amortization		(9,030	)		(6,275	)		(22,299	)		(18,180	)
Interest income (expense), net		(731	)		186			(2,055	)		386
Income (loss) before income taxes	$	5,261		$	(26,842	)	$	(5,938	)	$	(31,279	)

Cash, cash equivalents, and restricted cash at September 30, ~~2019,~~2020, totaled ~~$57.5~~$80.3 million compared to ~~$72.2~~$70.4 million at December 31, ~~2018, with the decrease largely a result of $15.0 million in cash paid in connection with achievement of the Spinal Kinetics FDA Milestone in~~ 2019.

	Nine Months Ended September 30,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019			2018			Change			2020			2019			Change
Net cash from operating activities	$	20,090		$	28,829		$	(8,739	)	$	51,981		$	20,090		$	31,891
Net cash from investing activities		(21,281	)		(55,921	)		34,640			(42,944	)		(21,281	)		(21,663	)
Net cash from financing activities		(12,610	)		2,988			(15,598	)		583			(12,610	)		13,193
Effect of exchange rate changes on cash		(885	)		(811	)		(74	)		277			(885	)		1,162
Net change in cash, cash equivalents and restricted cash	$	(14,686	)	$	(24,915	)	$	10,229		$	9,897		$	(14,686	)	$	24,583

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,									Nine Months Ended September 30,
(U.S. Dollars, in thousands)	2019			2018			Change			2020			2019			Change
Net cash from operating activities	$	20,090		$	28,829		$	(8,739	)	$	51,981		$	20,090		$	31,891
Capital expenditures		(14,881	)		(10,724	)		(4,157	)		(12,704	)		(14,881	)		2,177
Free cash flow	$	5,209		$	18,105		$	(12,896	)	$	39,277		$	5,209		$	34,068

Operating Activities

Cash flows from operating activities ~~decreased $8.7~~increased $31.9 million

•

~~Decrease~~Increase in net income of ~~$45.1~~$52.0 million

•

Net ~~increase~~decrease of ~~$40.3~~$43.5 million ~~for~~in 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~~increase of ~~$3.9~~$23.3 million relating to changes in working capital accounts, primarily attributable to changes in accounts receivable, a $13.9 million prepayment received under the Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program, inventories, 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 61 days at September 30, 2020 compared to 65 days at September 30, 2019, ~~compared~~with much of this decrease attributable to ~~61 days at September 30, 2018.~~a decrease in net sales as a result of COVID-19, coupled with continued collections on accounts receivable. Inventory turns remained consistent at 1.2 times as of September 30, ~~2019~~2020 and ~~2018.~~2019.

Investing Activities

Cash flows from investing activities ~~increased $34.6~~decreased $21.7 million

•

~~Increase~~Decrease of ~~$43.7~~$18.0 million associated with cash paid in ~~relation~~March 2020 to acquire assets associated with the ~~Spinal Kinetics acquisition in 2018, net~~FITBONE intramedullary lengthening system for limb lengthening of ~~cash acquired~~the femur and tibia bones

•

~~Increase~~Decrease of ~~$0.9~~$5.0 million associated with ~~the acquisition~~our purchase of ~~certain intangible assets~~preferred stock of Neo Medical SA in ~~a transaction with a former distributor and by our additional investment of $0.5 million in Bone Biologics during the first quarter of 2018~~2020

•

Partially offset by ~~$6.4 million associated with cash paid~~a decrease in ~~relation to the acquisition of 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~~ capital expenditures ~~compared to the prior year~~of $2.2 million

Financing Activities

Cash flows from financing activities ~~decreased $15.6~~increased $13.2 million

•

~~Decrease~~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~~$0.7 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,~~In the third quarter, 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 arepaid $100.0 million of outstanding principal under our five year $300 million secured revolving credit facility, ~~maturing on October 25, 2024 (the “Facility”), and amends and restates~~which was originally borrowed in the ~~existing $125 million~~second quarter. Therefore, as of September 30, 2020, we had no borrowings outstanding under the secured revolving credit facility. AsIn addition, we had no borrowings outstanding under on our €5.5 million ($6.4 million) available lines of ~~October 28, 2019, we have not made any borrowings under the Amended Credit Agreement.~~

~~Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general corporate purposes (including permitted acquisitions and permitted payments~~credit in Italy. We were in compliance with all required financial covenants as 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.~~September 30, 2020.

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

AsIn April 2020, as precautionary measures to increase our cash position and preserve financial flexibility in response to the uncertainty from the COVID-19 pandemic, we (i) completed a borrowing of $100.0 million under our secured revolving credit facility (which was subsequently repaid in full in the third quarter of 2020), (ii) instituted 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. On October 1, 2020, the President of the United States signed the “Continuing Appropriations Act, 2021 and Other Extensions Act,” which relaxed previously existing recoupment terms for providers and suppliers that received funds from the program. Under these new terms, recoupment will be delayed until one year after payment was issued. After that first year, Medicare will automatically recoup 25% of Medicare payments otherwise owed to the provider or supplier for 11 months. At the end of the 11-month period, recoupment will increase to 50% for another 6 months. Thus, during these time periods, rather than receiving the full amount of payment for newly submitted claims, our outstanding accelerated / advance payment balance will be reduced by the recoupment amount until the full balance has been repaid.

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 retain the funds 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 September 30, 2020, we have deferred $2.2 million associated with this program.

Given the various uncertainties attributable to the COVID-19 pandemic that remain, both in the U.S. and in other markets, our liquidity may be impacted in the future by the potential of continued decreases in elective surgical procedures, delays in payments from customers, facility closures, or other reasons related to the COVID-19 pandemic. 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.

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 30, ~~2019~~2020 was ~~$41.7~~$35.1 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent ~~consideration. At~~ consideration (though not greater than $45.0 million). As of September 30, ~~2019,~~ 2020, wewe classified ~~$14.5~~$14.7 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~~$20.4 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”)~~Wittenstein. The acquisition was completed on March 26, 2020 and was treated as a business combination.

The CMSA with Wittenstein has an initial term of up to ~~restructure~~two years to manufacture the ~~debt security, which extended~~FITBONE product line. As consideration for the ~~maturity date~~CMSA, we will pay $2.0 million to Wittenstein at the conclusion of the CMSA if certain conditions are met in relation to the ~~earlier~~prompt delivery of ~~(i) March 4, 2022, (ii)~~manufactured products.

Other Acquisitions

In July 2020, we entered into an agreement to acquire certain assets of a medical device distributor. We have agreed to pay consideration of up to $7.6 million in accordance with the ~~effective date~~parties’ agreement. As ofSeptember 30, 2020, we have paid $6.1 million per this agreement.

Neo Medical Investment and Convertible Loan

On October 1, 2020, we entered into a partnership with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), that includes a co-development agreement covering the parties’ joint development of single use instruments for cervical spine procedures, and a distribution agreement under which Orthofix will exclusively distribute Neo Medical’s thoracolumbar procedure solutions to certain U.S. customer accounts.

Separately, we also purchased shares of Neo Medical’s preferred stock for consideration of $5.0 million and entered into a Convertible Loan Agreement, whereby we loaned CHF 4.6 million to Neo Medical (the “Convertible Loan”). The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024, provided that if a change in control ~~or (iii)~~of Neo Medical occurs prior to maturity, the ~~effective date~~Convertible Loan shall become immediately due upon such event.

The Convertible Loan may be convertible by either party into shares of ~~an initial public offering by eNeura. As consideration for the extension, eNeura issued to us a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01~~Neo Medical’s preferred stock. The price per share ~~over a ten year contractual term, for a number~~at which the loan converts is dependent upon i) the party electing conversion and ii) Neo Medical’s price per share in its most recent fundraising activities at the time of ~~shares equal to 10% of~~conversion, as specified within 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).~~agreement.

~~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~~In relation to the ~~debtor’s financial difficulties grants~~purchased equity shares, the Company was required to pay the requisite funds into a concession to the debtor that it would not otherwise consider. In making this determination, we considered eNeura’s current financial condition and whether the restructuring of the debt security resulted in the granting ofblocked capital increase account administered by a concession after taking into account all the facts and circumstances surrounding the restructuring. The restructuring was undertaken to improve the likelihood of our effort to recover the investment in the original debt security.

Subsequent to the restructuring, the Restructured Debt Security was no longer accounted for at fair value, but rather in accordance with the accounting required for TDRs. The fair value of the debt security immediatelythird party on September 30, 2020, prior to the ~~restructuring was reclassified to be the carrying amount~~closing of the ~~debt security, as such~~transaction. This 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 inis classified within other ~~expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million.~~

~~Brazil~~

On April 3, 2019, our appeal regarding the freezing of our local bank accounts in Brazil was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the cash. Approximately $2.5 million was then returned without any restrictions in April 2019. As such, this balance has been reclassified to cash and cash equivalentslong-term assets as of September 30, ~~2019.~~2020.

Brazil

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 September 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 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 receivable, 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 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 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 our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, and June 30, 2020.

The novel coronavirus pandemic has materially affected our business in 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 in 2020, and is likely to cause significant effects during the remainder 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 the present time, volumes have rebounded significantly, though there residual reductions in demand continue.

The future trajectory of the COVID-19 pandemic remains uncertain, both in the U.S. and in other markets. Within the U.S., case counts appear to be increasing throughout much of the country as cold weather increases. Similarly, a recent surge of cases has occurred in Europe, and several countries have begun reinstituting lockdown measures. However, less cases appear to be progressing to severe disease than earlier in the year, and progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines remains uncertain.

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

During the second and third quarters 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.

An FDA panel recently recommended that bone growth stimulator devices be reclassified by the FDA from Class III to Class II devices, which could increase future competition for us in this product category and negatively affect our future 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 also are investing in investigational device exemption (“IDE”) studies to expand indications for use in areas such as rotator cuff tears. Our bone growth therapy products currently are designated as Class III devices. Class III devices are subject to the FDA’s most rigorous pathway to approval for medical devices in the U.S. 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 September 2020, the FDA’s Orthopaedic and Rehabilitation Devices Panel recommended that bone growth stimulator devices be reclassified from Class III to Class II devices with “special controls” to ensure patient safety and therapy efficacy. These proposed special controls include the condition that such devices be subject to rigorous clinical studies and post market surveillance for any new products. This would be in addition to other special controls and the Class II general requirement that any new products show “substantial equivalence” to already-cleared or approved devices.

We believe that the panel’s recommendation correctly recognizes the importance of premarket approval (PMA)-like clinical data for these devices, so that manufacturers continue to be required to submit robust clinical data under the approval or clearance process to ensure the safety and efficacy of these devices for patients. We, along with other bone growth stimulation manufacturers, submitted comments in response to the FDA’s proposed rulemaking to underscore the panel’s recommendation of the need for robust clinical data prior to approval or clearance of bone growth stimulator products, together with post market surveillance requirements.

In the long-term, the recommended reclassification could enhance the ability of competitors to enter the market if they are able to create technologies with comparable efficacy to our devices, which could result in our products facing additional competition, thereby negatively affecting our future sales of these products.

We have provided $10 million in investments and loans to a privately-held company in Switzerland and may not be able to recoup our investment.

In October 2020, we entered into agreements with Neo Medical SA, a privately-held Swiss-based medical technology company developing a new generation of products for spinal surgery (“Neo Medical”). Our collaboration with Neo Medical focuses on co-developing with them a cervical platform and deploying single-use, sterile-packed procedure solutions designed to increase operating room efficiencies, reduce procedural times and costs, improve patient outcomes through novel device designs and techniques, and reduce infection rates. These instruments are designed surgical settings including acute care hospitals, outpatient hospitals and also ambulatory surgery centers. Under our agreements with Neo Medical, we will also exclusively distribute Neo Medical’s thoracolumbar procedure solutions to certain U.S. accounts.

In connection with these arrangements, we purchased $5 million of Neo Medical’s preferred stock, and loaned $5 million to Neo Medical pursuant to a convertible loan agreement. The loan, which is denominated in Swiss Francs and accrues interest at an annual rate of 8%, is convertible by either party into additional shares of Neo Medical’s preferred stock. If not otherwise converted to preferred stock in the interim, the loan and all accrued interest become due and payable in October 2024.

Neo Medical is using the proceeds of our preferred stock purchase and loan to fund its ongoing operations. However, no assurance can be made that Neo Medical’s business ultimately will be successful. As such, we could ultimately be unable to recoup any value for the preferred stock that we purchased, and unable to recoup the amount of our loan.

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

We have not made any repurchases of our common stock during the third quarter of ~~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,~~Consulting Agreement, dated July ~~30, 2019,~~4, 2020, between ~~the Company~~Michael Finegan and ~~Jon Serbousek~~Orthofix Medical Inc. (filed as an exhibit to the Company’s ~~Current~~Quarterly Report on Form ~~8-K~~10-Q filed on August ~~2, 2019~~6, 2020 and incorporated herein by reference).

10.2*		Change in Control and Severance Agreement, dated ~~August 5, 2019,~~September 11, 2020, between ~~Jon Serbousek~~Paul Gonsalves 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~~November 5, 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~~November 5, 2020	By:	/s/ DOUG RICE
	Name:	Doug Rice
	Title:	Chief Financial Officer

3635

(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)	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	)