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 June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 0-19961
ORTHOFIX MEDICAL INC.
(Exact name of registrant as specified in its charter)
Delaware
98-1340767
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
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 August 1, 2022, 20,003,637 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 June 30, 2022 and December 31, 2021
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2022 and 2021
6
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021
7
Notes to the Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
25
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
27
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
28
SIGNATURES
29
2
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts, and projections. 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. Forward-looking statements include, but are not limited to, statements about:
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions that are difficult to predict. 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. Potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, those set forth in Part I, Item 1A under the heading Risk Factors; Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and elsewhere throughout the Annual Report on Form 10-K for the year ended December 31, 2021, and in any other documents incorporated by reference. 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 update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(U.S. Dollars, in thousands, except par value data)
June 30,2022
December 31,2021
(Unaudited)
Assets
Current assets
Cash and cash equivalents
$
59,536
87,847
Accounts receivable, net of allowances of $5,589 and $4,944, respectively
77,069
78,560
Inventories
97,171
82,974
Prepaid expenses and other current assets
21,416
20,141
Total current assets
255,192
269,522
Property, plant, and equipment, net
58,676
59,252
Intangible assets, net
50,634
52,666
Goodwill
71,317
Deferred income taxes
1,454
1,771
Other long-term assets
24,383
22,095
Total assets
461,656
476,623
Liabilities and shareholders’ equity
Current liabilities
Accounts payable
32,322
26,459
Current portion of finance lease liability
624
2,590
Other current liabilities
48,151
76,781
Total current liabilities
81,097
105,830
Long-term portion of finance lease liability
19,571
19,890
Other long-term liabilities
19,042
13,969
Total liabilities
119,710
139,689
Contingencies (Note 7)
Shareholders’ equity
Common shares $0.10 par value; 50,000 shares authorized; 20,000 and 19,837 issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
2,000
1,983
Additional paid-in capital
323,738
313,951
Retained earnings
19,029
21,000
Accumulated other comprehensive loss
(2,821
)
—
Total shareholders’ equity
341,946
336,934
Total liabilities and shareholders’ equity
The accompanying notes form an integral part of these condensed consolidated financial statements
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months EndedJune 30,
Six Months EndedJune 30,
(Unaudited, U.S. Dollars, in thousands, except per share data)
2022
2021
Net sales
118,070
121,394
224,488
226,987
Cost of sales
31,600
27,439
59,918
53,353
Gross profit
86,470
93,955
164,570
173,634
Sales and marketing
59,888
57,338
114,025
108,123
General and administrative
15,846
18,335
35,174
34,779
Research and development
12,758
13,121
23,970
24,018
Acquisition-related amortization and remeasurement (Note 11)
(8,663
894
(12,162
5,363
Operating income
6,641
4,267
3,563
1,351
Interest expense, net
(407
(550
(782
(967
Other income (expense), net
(3,192
951
(4,128
(1,739
Income (loss) before income taxes
3,042
4,668
(1,347
(1,355
Income tax expense
(553
(2,248
(624
(2,041
Net income (loss)
2,489
2,420
(1,971
(3,396
Net income (loss) per common share:
Basic
0.12
(0.10
(0.17
Diluted
Weighted average number of common shares:
20,031
19,651
19,965
19,575
20,113
19,938
Other comprehensive loss, before tax
Unrealized gain (loss) on debt securities
161
98
(513
(628
Currency translation adjustment
(1,820
(155
(2,308
(1,182
(1,659
(57
(1,810
Income tax benefit (expense) related to other comprehensive loss
(24
156
Other comprehensive loss, net of tax
(81
(1,654
Comprehensive income (loss)
830
2,339
(4,792
(5,050
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited, U.S. Dollars, in thousands)
Number ofCommonSharesOutstanding
CommonShares
AdditionalPaid-inCapital
RetainedEarnings
AccumulatedOtherComprehensiveIncome (Loss)
TotalShareholders’Equity
At December 31, 2021
19,837
Net loss
(4,460
(1,162
Share-based compensation expense
4,332
Common shares issued, net
1
(70
(69
At March 31, 2022
19,842
1,984
318,213
16,540
335,575
Net income
4,460
158
16
1,065
1,081
At June 30, 2022
20,000
At December 31, 2020
19,424
1,942
292,291
59,379
3,252
356,864
(5,816
(1,573
3,721
51
1,617
1,622
At March 31, 2021
19,475
1,947
297,629
53,563
1,679
354,818
3,907
194
20
1,200
1,220
At June 30, 2021
19,669
1,967
302,736
55,983
1,598
362,284
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization
14,028
15,002
Amortization of operating lease assets, debt costs, and other assets
1,567
1,779
Provision for expected credit losses
1,139
(214
236
3,936
8,792
7,628
Interest and (gain) loss on valuation of investment securities
188
(198
Change in fair value of contingent consideration
(16,214
(75
Other
1,149
(105
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable
(208
(986
(15,589
2,655
(1,769
(6,507
7,176
(2,662
(7,495
(6,905
Contract liability (Note 9)
(4,791
(2,880
Payment of contingent consideration
(6,595
Other long-term assets and liabilities
1,140
(213
Net cash from operating activities
(12,622
264
Cash flows from investing activities
Capital expenditures for property, plant, and equipment
(11,032
(9,035
Capital expenditures for intangible assets
(671
(757
Contingent consideration payments related to asset acquisitions
(1,500
Other investing activities
42
Net cash from investing activities
(13,161
(9,792
Cash flows from financing activities
Proceeds from issuance of common shares
2,400
4,685
Payments related to withholdings for share-based compensation
(1,388
(1,843
Payments related to finance lease obligation
(2,291
(260
(8,405
Other financing activities
(45
(705
Net cash from financing activities
(1,324
(6,528
Effect of exchange rate changes on cash
(1,204
(243
Net change in cash, cash equivalents, and restricted cash
(28,311
(16,299
Cash, cash equivalents, and restricted cash at the beginning of period
96,821
Cash, cash equivalents, and restricted cash at the end of period
80,522
Components of cash, cash equivalents, and restricted cash at the end of period
79,968
Restricted cash
554
Noncash investing activities - Purchase of intangible assets
1. Business and basis of presentation
Description of the Business
Orthofix Medical Inc. and its subsidiaries (the “Company”) is a global medical device company with a spine and orthopedics focus. The Company’s mission is to deliver innovative, quality-driven solutions while partnering with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic products are distributed in more than 60 countries via the Company's sales representatives and 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, 2021. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2022.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowances for expected credit losses; inventories; valuation of intangible assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates.
2. Recently issued accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Recently issued ASU's that are determined to potentially affect the Company's condensed consolidated financial statements are summarized below:
Topic
Description of Guidance
Effective Date
Status of Company's Evaluation
Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (ASU 2022-03)
Clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject tocontractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively.
January 1, 2024
The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.
Other recently issued ASUs, excluding those ASUs which have already been disclosed as adopted or described above, were assessed and determined not applicable, or are expected to have minimal impact on the Company's condensed consolidated financial statements. Furthermore, there have been no material changes during the six months ended June 30, 2022, to the Company's application of significant accounting policies and estimates as described in the Company’s Form 10-K for the year ended December 31, 2021.
3. Inventories
Inventories were as follows:
(U.S. Dollars, in thousands)
Raw materials
16,901
9,589
Work-in-process
14,879
15,096
Finished products
26,278
15,149
Field/consignment
39,113
43,140
4. Leases
A summary of the Company’s lease portfolio as of June 30, 2022, and December 31, 2021, is presented in the table below:
Classification
Right-of-use assets ("ROU assets")
Operating leases
6,591
3,155
Finance leases
Property, plant and equipment, net
17,866
18,600
Total ROU assets
24,457
21,755
Lease Liabilities
Current
1,375
1,834
Long-term
5,329
1,443
Total lease liabilities
26,899
25,757
Supplemental cash flow information related to leases was as follows:
Six Months EndedJune 30, 2022
Six Months EndedJune 30, 2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
2,071
2,327
Operating cash flows from finance leases
443
452
Financing cash flows from finance leases
2,291
260
ROU assets obtained in exchange for lease obligations
4,592
415
149
5. Long-term debt
As of June 30, 2022, 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 no borrowings on its available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.8 million) as of June 30, 2022.
9
6. Fair value measurements and investments
The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
Level 1
Level 2
Level 3
Total
Neo Medical convertible loan agreements
5,820
7,148
Neo Medical preferred equity securities
6,084
5,413
Bone Biologics equity securities
80
309
Other investments
1,666
1,505
7,486
13,650
14,375
Liabilities
Spinal Kinetics contingent consideration
(17,200
Deferred compensation plan
(1,245
(1,314
(2,231
(18,514
Neo Medical Convertible Loan Agreements and Equity Investment
In October 2020, the Company purchased preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical"), for consideration of $5.0 million. The Company also entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance (the “Convertible Loan”). In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million, or $0.7 million as of the date of issuance.
The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:
Fair value of Neo Medical preferred equity securities at January 1
5,000
Conversion of loan into preferred equity securities
671
Fair value of Neo Medical preferred equity securities at June 30
Cumulative unrealized gain on Neo Medical preferred equity securities
413
The Company made an election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The remaining Convertible Loan is recorded in other long-term assets as an available for sale debt security as of June 30, 2022. The Convertible Loan is recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flow model, requiring the Company to develop its own assumptions. Therefore, the Company categorized these investments as Level 3 financial assets.
Some of the more significant unobservable inputs used in the fair value measurement of the Convertible Loan include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loan. If the amortized cost of the Convertible Loan exceeds its estimated fair value, the security is deemed to be impaired, and must be evaluated for the recognition of a credit loss. As of June 30, 2022, the Company has not recognized any credit loss related to the Convertible Loan.
The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value using significant unobservable inputs (Level 3):
10
Fair value of Neo Medical Convertible Loans at January 1
7,160
Interest recognized in interest income, net
217
198
Foreign currency remeasurement recognized in other expense, net
(257
(230
Unrealized loss recognized in other comprehensive loss
(615
Fair value of Neo Medical Convertible Loans at June 30
6,500
Amortized cost basis of Neo Medical Convertible Loans at June 30
5,496
5,247
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of June 30, 2022:
Fair Value as of June 30, 2022
Unobservable inputs
Estimate
Neo Medical Convertible Loan
Cost of equity discount rate
17.0
%
Implied volatility
73.4
Bone Biologics Equity Securities
The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. Changes in the fair value of the investment recorded during the six months ended June 30, 2022 and 2021, are shown in the table below:
Bone Biologics equity securities at January 1
Fair value adjustments recognized in other expense, net
(186
Proceeds from the disposition of equity securities
(42
Bone Biologics equity securities at June 30
Other investments represent assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability-weighted discounted cash flow models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of June 30, 2022, this balance was classified within other long-term assets.
Spinal Kinetics Contingent Consideration
The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with sales of the acquired artificial discs. To trigger the applicable payments, milestones must be achieved within five years of April 30, 2018. The FDA Milestone was achieved and paid in 2019 and a revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.
The following table provides a reconciliation of the beginning and ending balances for the Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3). The $16.2 million decrease in fair value of the contingent consideration liability in 2022 reflects the lower likelihood of the Company achieving the revenue-based milestone prior to April 30, 2023.
Spinal Kinetics contingent consideration estimated fair value at January 1
17,200
35,400
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement
300
Payment made
(15,000
Spinal Kinetics contingent consideration estimated fair value at June 30
986
20,700
11
The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was $1.0 million as of June 30, 2022. The estimated fair value reflects assumptions made by management as of June 30, 2022, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid, if achieved, could be higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the liability will be fully reversed if the milestone is not met within the required timeline). As of June 30, 2022, the Company has classified the $1.0 million liability within other current liabilities, as milestones must be achieved prior to April 30, 2023, to trigger payment. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.
The Company estimated the fair value of the remaining potential revenue-based milestone payment 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 key assumptions in applying the valuation model include the Company’s forecasted future revenues for the Motion Preservation product line (which is derived from the acquired Spinal Kinetics business), the expected timing of payment, applicable discount rates applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.
The following table provides a range of key assumptions used within the valuation as of June 30, 2022:
Valuation Technique
Range
Discounted cash flow
Revenue discount rate
5.9% - 7.3%
Payment discount rate
7.6% - 8.9%
7. Contingencies
In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.
Italian Medical Device Payback (“IMDP”)
In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. A key provision of the law is a ‘payback’ measure, requiring medical device companies in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. 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 periodically reassesses this liability based upon current facts and circumstances. As a result, the Company recorded expense of $0.3 million and $0.6 million for the three and six months ended June 30, 2022, and expense of $0.1 million and $0.5 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, the Company has accrued $5.4 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.
8. Accumulated other comprehensive loss
The components of and changes in accumulated other comprehensive loss were as follows:
CurrencyTranslationAdjustments
Neo Medical Convertible Loans
Other Investments
Accumulated OtherComprehensive Loss
Balance at December 31, 2021
(711
711
Other comprehensive loss
102
Income taxes
Balance at June 30, 2022
(3,019
96
12
9. Revenue recognition and accounts receivable
Revenue Recognition
The Company has two reporting segments, which consist of Global Spine and Global Orthopedics. Within the Global Spine reporting segment there are three product categories: Bone Growth Therapies, Spinal Implants, and Biologics.
The table below presents net sales by major product category by reporting segment:
Three Months Ended June 30,
Change
Bone Growth Therapies
47,765
49,706
-3.9
Spinal Implants
28,222
30,092
-6.2
Biologics
14,795
14,852
-0.4
Global Spine
90,782
94,650
-4.1
Global Orthopedics
27,288
26,744
2.0
-2.7
Six Months Ended June 30,
89,713
92,653
-3.2
54,837
55,793
-1.7
28,887
28,544
1.2
173,437
176,990
-2.0
51,051
49,997
2.1
-1.1
Product Sales and Marketing Service Fees
The table below presents product sales and marketing service fees, which are both components of net sales:
Product sales
103,559
106,947
196,167
199,210
Marketing service fees
14,511
14,447
28,321
27,777
Product sales primarily consist of the sale of bone growth therapies devices, spinal implants products, and orthopedics 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.
Accounts receivable and related allowances
The following table provides a detail of changes in the Company’s allowance for expected credit losses for the three and six months ended June 30, 2022 and 2021:
Allowance for expected credit losses beginning balance
5,389
4,506
4,944
4,848
Current period provision (recovery) for expected credit losses
539
(32
Write-offs charged against the allowance and other
(142
(34
(246
(80
Effect of changes in foreign exchange rates
(197
31
(248
(83
Allowance for expected credit losses ending balance
5,589
4,471
Contract Liabilities
The Company’s contract liabilities largely related to a prepayment of $13.9 million received in April 2020 from the Centers for Medicare and Medicaid Service ("CMS") as part of the Accelerated and Advance Payment Program of the Coronavirus Aid, Relief, and Economic Security Act. The remaining balance of the contract liability was recouped by CMS during the second quarter of 2022.
13
The following table provides a detail of changes in the Company’s contract liability associated with the Accelerated and Advanced Payment Program for the three and six months ended June 30, 2022 and 2021:
Contract liability beginning balance
1,396
13,851
4,791
Recoupment recognized in net sales
(1,396
Contract liability ending balance
10,971
Other Contract Assets
The Company’s contract assets, excluding 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 the Company's 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 $1.0 million and $1.4 million as of June 30, 2022, and December 31, 2021, respectively.
10. Business segment information
The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company is earnings before interest, tax, depreciation, and amortization (“EBITDA”). Corporate activities comprise operating expenses and activities not directly identifiable within the two reporting segments, such as human resources, finance, legal, and information technology functions. The table below presents EBITDA by reporting segment:
20,766
19,032
36,659
30,927
(2,422
1,775
(5,518
(454
Corporate
(8,383
(8,030
(17,678
(15,859
Total EBITDA
9,961
12,777
13,463
14,614
(6,512
(7,559
(14,028
(15,002
Geographical information
The table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:
U.S.
85,899
89,077
162,965
166,832
International
4,883
5,573
10,472
10,158
Total Global Spine
6,903
6,156
12,230
11,747
20,385
20,588
38,821
38,250
Total Global Orthopedics
Consolidated
92,802
95,233
175,195
178,579
25,268
26,161
49,293
48,408
14
11. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) remeasurement of any related contingent consideration arrangements, and (iii) recognized costs associated with acquired in-process research and development (“IPR&D”) assets, which are recognized immediately upon acquisition. Components of acquisition-related amortization and remeasurement are as follows:
Amortization of acquired intangibles
2,051
1,969
4,052
3,938
Changes in fair value of contingent consideration
(10,714
(1,575
Acquired IPR&D
500
1,500
12. Share-based compensation
Components of share-based compensation expense are as follows:
205
209
416
387
1,000
957
1,981
1,674
2,958
2,607
6,176
5,136
297
134
219
431
Stock options
398
564
1,059
Time-based restricted stock awards and units
2,410
2,019
4,580
3,746
Market-based / performance-based restricted stock units
1,497
1,053
2,941
1,950
Stock purchase plan
348
437
707
873
During the three months ended June 30, 2022 and 2021, the Company issued 157,979 and 194,745 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 six months ended June 30, 2022 and 2021, the Company issued 162,864 and 245,255 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards and units.
13. Income taxes
Generally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items, with any changes affecting the estimated annual effective tax rate recorded in the interim period in which the change occurs. Due to the impact of losses not benefitted by the Company’s U.S. and Italian operations, the Company determined the estimated annual effective tax rate method would not provide a reliable estimate of the Company’s overall annual effective tax rate. As such, the Company has calculated the tax provision using the actual effective rate for the three and six months ended June 30, 2022. Due to the impact of temporary differences on the U.S. current tax liability without any deferred tax benefit, the actual effective rate may vary in future quarters.
For the three months ended June 30, 2022 and 2021, the effective tax rate was 18.2% and 48.2%, respectively. For the six months ended June 30, 2022 and 2021, the effective tax rate was (46.3%) and (150.6%), respectively. The primary factors affecting the Company’s effective tax rate for the three and six months ended June 30, 2022, were the changes in fair value of the Spinal Kinetics contingent consideration, which is not deductible for tax purposes, and losses not benefited in the U.S. and Italy.
15
14. 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 six months ended June 30, 2022, 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.
(In thousands)
Weighted average common shares-basic
Effect of dilutive securities
Unexercised stock options and stock purchase plan
23
171
Unvested restricted stock units
59
116
Weighted average common shares-diluted
There were 1.6 million and 0.8 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the three months ended June 30, 2022 and 2021, respectively, and 1.6 million and 1.4 million weighted average outstanding stock options and restricted stock units not included in the diluted EPS computation for the six months ended June 30, 2022 and 2021, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock units, all necessary conditions had not been satisfied by the end of the respective period.
15. Subsequent Events
On July 30, 2022, the Company entered into a long-term strategic License and Distribution Agreement (the “Agreement”) with CGBio Co., Ltd. (“CGBio”), a developer of innovative, synthetic bone grafts. The Agreement grants Orthofix the exclusive right to conduct pre-clinical and clinical studies, commercialize, promote, market, and sell the Novosis™ recombinant human bone morphogenetic protein-2 (rhBMP-2) bone growth materials and other future tissue regenerative solutions in the U.S. and Canada. As consideration, the Company will pay CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones.
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 with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in more than 60 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com.
Notable financial metrics in the second quarter of 2022 and recent achievements include the following:
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations as a percent of net sales:
2022(%)
2021(%)
100.0
26.8
22.6
26.7
23.5
73.2
77.4
73.3
76.5
50.7
47.2
50.8
47.6
13.4
15.1
15.7
15.3
10.8
10.7
10.6
Acquisition-related amortization and remeasurement
(7.3
0.8
(5.5
2.4
5.6
3.5
1.6
0.6
(0.9
(1.5
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
Percentage Change
Reported
Constant Currency
-5.4
-3.8
11.4
-0.5
-1.0
-1.8
9.4
0.7
Global Spine offers the following products categories:
Three months ended June 30, 2022 compared to 2021
Net sales decreased $3.9 million or 4.1%
Six months ended June 30, 2022 compared to 2021
Net sales decreased $3.6 million or 2.0%
18
Global Orthopedics offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions specifically related to limb reconstruction and deformity correction unrelated to the spine. Global Orthopedics distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and healthcare providers.
Net sales increased $0.5 million or 2.0%
Net sales increased $1.1 million or 2.1%
Gross Profit
% Change
(2.7
%)
(1.1
15.2
12.3
(8.0
(5.2
Gross margin
(4.2
Gross profit decreased $7.5 million
Gross profit decreased $9.1 million
19
Sales and Marketing Expense
4.4
5.5
As a percentage of net sales
3.2
Sales and marketing expense increased $2.6 million
Sales and marketing expense increased $5.9 million
General and Administrative Expense
(13.6
1.1
(1.7
0.4
General and administrative expense decreased $2.5 million
General and administrative expense increased $0.4 million
Research and Development Expense
(2.8
(0.2
0.0
0.1
Research and development expense decreased $0.4 million
Research and development expense remained relatively flat
Acquisition-related Amortization and Remeasurement
(1069.0
(326.8
(8.1
(5.4
(7.8
Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) remeasurement of any related contingent consideration arrangement, and (iii) recognized costs associated with acquired in-process research and development assets, which are recognized immediately upon acquisition.
Acquisition-related amortization and remeasurement decreased $9.6 million
Acquisition-related amortization and remeasurement decreased $17.5 million
Non-operating Income and Expense
(26.0
(19.1
Other expense, net
(435.6
137.4
Other expense, net decreased $4.1 million
21
Other expense, net decreased $2.4 million
Income Taxes
553
2,248
(75.4
2,041
(69.4
Effective tax rate
18.2
48.2
(30.0
(46.3
(150.6
104.3
Segment Review
Our business is managed through two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 10 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to income (loss) before income taxes:
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2022, totaled $59.5 million compared to $87.8 million at December 31, 2021.
(12,886
(3,369
5,204
(961
Net change in cash and cash equivalents
(12,012
22
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:
Capital expenditures
(11,703
(1,911
Free cash flow
(24,325
(9,528
(14,797
Operating Activities
Cash flows from operating activities decreased $12.9 million
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 59 days at June 30, 2022, compared to 55 days at June 30, 2021. Inventory turns remained consistent at 1.3 times as of June 30, 2022 and June 30, 2021.
Investing Activities
Cash flows from investing activities decreased $3.4 million
Financing Activities
Cash flows from financing activities increased $5.2 million
Credit Facilities
As of June 30, 2022, we had no borrowings outstanding under our secured revolving credit facility. In addition, we had no borrowings outstanding under our available lines of credit in Italy, which provide up to an aggregate amount of €5.5 million ($5.8 million). We were in compliance with all required financial covenants as of June 30, 2022.
For information regarding contingencies, see Note 7 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
In April 2020, we received $13.9 million in funds from the Centers for Medicare and Medicaid Service ("CMS") Accelerated and Advance Payment Program under the CARES Act. Recoupment of amounts received under the CMS Accelerated and Advance Payment Program was completed in the second quarter of 2022.
As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0 million. 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”). The FDA Milestone was achieved and paid in 2019. A revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.
The remaining milestone payment is a revenue-based milestone payment of $30.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of June 30, 2022, was $1.0 million; however, the actual amount ultimately paid, if achieved, could be higher or lower than the fair value of the contingent consideration (ultimate payment will either be $30.0 million or the liability will be fully reversed if the milestone is not met within the required timeline). For additional discussion of this matter, see Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million ($5.0 million as of the issuance date) to Neo Medical. The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024; however, if a change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.
Related Party Transaction
In February 2021, we entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration was comprised of $1.0 million due at signing and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of 510(k) clearance or the attainment of certain net sales targets. None of the contingent consideration has been achieved as of June 30, 2022.
IGEA S.p.A Exclusive License and Distribution Agreement
In April 2021, we entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA S.p.A (“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. Per the terms of the License Agreement, we have the exclusive right to sell IGEA products in the U.S. and Canada. As consideration for the License Agreement, we agreed to pay up to $4.0 million, of which $0.5 million was paid in the second quarter of 2021, with certain payments contingent upon achieving an FDA milestone. We received FDA approval for the AccelStim device in May 2022, triggering an obligation to pay the remaining $3.5 million of consideration, of which $1.5 million was paid as of June 30, 2022. Of the remaining $2.0 million obligation, $1.0 million, which is due to be paid on the first anniversary of FDA approval, is classified within other current liabilities. The remaining $1.0 million, which is due to be paid on the second anniversary of FDA approval, is classified within other long-term liabilities. The License Agreement also includes certain minimum purchase requirements.
CGBio Co., Ltd. Exclusive License and Distribution Agreement
On July 30, 2022, we entered into a long-term strategic License and Distribution Agreement (the “Agreement”) with CGBio Co., Ltd. (“CGBio”), a developer of innovative, synthetic bone grafts. The Agreement grants us the exclusive right to conduct pre-clinical and clinical studies, commercialize, promote, market, and sell the Novosis™ recombinant human bone morphogenetic protein-2 (rhBMP-2) bone growth materials and other future tissue regenerative solutions in the U.S. and Canada. As consideration, we will pay CGBio an upfront payment of $1.4 million with additional payments contingent upon the achievement of specified development milestones.
Off-balance Sheet Arrangements
As of June 30, 2022, 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.
24
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, 2021.
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, 2021. There have been no significant changes to our critical accounting estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued or adopted accounting pronouncements. As of June 30, 2022, we do not expect any of the issued Accounting Standards Updates to materially affect our condensed consolidated financial statements upon adoption.
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 to facilitate comparisons to historical operating results and internally evaluate the effectiveness of our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.
The non-GAAP financial measures used in this filing may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.
Constant currency 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. Management uses free cash flow as an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks as disclosed in our Form 10-K for the year ended December 31, 2021.
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 June 30, 2022. 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 June 30, 2022.
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.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 7 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
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, 2021, except as follows.
The conflict between Russia and Ukraine may continue to cause global economic instability and potentially disrupt supply chains.
In February 2022, Russia unlawfully invaded Ukraine, creating an ongoing humanitarian and global security crisis. In response, the U.S. and many other countries have imposed robust sanctions on Russia and may impose additional sanctions in the future. The ongoing invasion has caused significant damage and disruption to various aspects of the global economy. We have never conducted any meaningful business within Russia, and do not believe that the invasion will have material direct effects on our business or operations. However, we cannot predict the broader and longer-term consequences of this conflict or the sanctions imposed in response, and such consequences could include, among other things, general disruptions to global finance markets, exchange rates, and worldwide supply chains. Geopolitical instability and uncertainty resulting from the invasion could potentially have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions. These considerations could adversely affect our costs, risks, and efficiencies related to our supply chain and logistics. The potential effects of the conflict between Russia and Ukraine also could affect many of the other risk factors described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any repurchases of our common stock during the second quarter of 2022.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
There are no matters to be reported under this heading.
Item 6. Exhibits
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.
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.
Date: August 5, 2022
By:
/s/ JON SERBOUSEK
Name:
Jon Serbousek
Title:
President and Chief Executive Officer, Director
/s/ DOUG RICE
Doug Rice
Chief Financial Officer