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
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 October 25, 2019, 19,055,154 shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.10 par value per share
OFIX
Nasdaq Global Select Market
Table of Contents
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
4
Condensed Consolidated Balance Sheets as of September 30, 2019, and December 31, 2018
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2019, and 2018
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018
6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018
7
Notes to the Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
34
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
35
SIGNATURES
36
2
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict, including the risks described Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) and other Securities and Exchange Commission (“SEC”) filings. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in the 2018 Form 10-K and other SEC filings, to reflect new information, the occurrence of future events or circumstances or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(U.S. Dollars, in thousands, except share data)
September 30,
2019
December 31,
2018
(Unaudited)
Assets
Current assets
Cash and cash equivalents
$
56,849
69,623
Restricted cash
654
2,566
Trade accounts receivable, net of allowances of $4,073 and $7,463, respectively
79,690
77,747
Inventories
80,993
76,847
Prepaid expenses and other current assets
19,617
17,856
Total current assets
237,803
244,639
Property, plant and equipment, net
62,964
42,835
Intangible assets, net
53,613
51,897
Goodwill
71,177
72,401
Deferred income taxes
39,626
33,228
Other long-term assets
10,420
21,641
Total assets
475,603
466,641
Liabilities and shareholders’ equity
Current liabilities
Accounts payable
17,892
17,989
Current portion of finance lease liability
293
—
Other current liabilities
70,323
67,919
Total current liabilities
88,508
85,908
Long-term portion of finance lease liability
20,767
Other long-term liabilities
59,894
45,336
Total liabilities
169,169
131,244
Contingencies (Note 8)
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
Additional paid-in capital
263,064
243,165
Retained earnings
46,063
87,078
Accumulated other comprehensive income (loss)
(4,581
)
3,296
Total shareholders’ equity
306,434
335,397
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 Ended
Nine Months Ended
(Unaudited, U.S. Dollars, in thousands, except share and per share data)
Net sales
113,499
111,708
338,461
331,964
Cost of sales
24,896
24,020
74,416
71,002
Gross profit
88,603
87,688
264,045
260,962
Sales and marketing
54,805
49,898
165,363
151,695
General and administrative
21,090
22,276
63,497
63,658
Research and development
7,982
9,598
26,191
24,426
Acquisition-related amortization and remeasurement (Note 12)
23,608
2,009
31,873
3,491
Operating income (loss)
(18,882
3,907
(22,879
17,692
Interest income (expense), net
186
(181
386
(615
Other expense, net
(8,146
(5,054
(8,786
(5,785
Income (loss) before income taxes
(26,842
(1,328
(31,279
11,292
Income tax benefit (expense)
(13,656
117
(8,869
(6,352
Net income (loss)
(40,498
(1,211
(40,148
4,940
Net income (loss) per common share:
Basic
(2.14
(0.07
(2.13
0.26
Diluted
Weighted average number of common shares:
18,957,876
18,562,204
18,847,728
18,460,848
18,864,169
Other comprehensive income (loss), before tax
Unrealized gain (loss) on debt security
1,240
(2,593
3,200
Reclassification adjustment for amortization of historical unrealized gains on debt security
(345
(1,034
Reclassification adjustment for other-than-temporary impairment on debt security
(5,193
Currency translation adjustment
(1,893
(844
(2,195
(1,322
Other comprehensive income (loss) before tax
(7,431
396
(11,015
1,878
Income tax related to other comprehensive income (loss)
1,388
(366
2,200
(798
Other comprehensive income (loss), net of tax
(6,043
30
(8,815
1,080
Comprehensive income (loss)
(46,541
(1,181
(48,963
6,020
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited, U.S. Dollars, in thousands, except share data)
Number of
Common
Shares
Outstanding
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
At December 31, 2018
18,579,688
Cumulative effect adjustment from adoption of ASU 2016-02
71
Cumulative effect adjustment from adoption of ASU 2018-02
(938
938
Net income
897
Other comprehensive loss, net of tax
(2,401
Share-based compensation
5,685
Common shares issued, net
211,081
21
4,012
4,033
At March 31, 2019
18,790,769
1,879
252,862
87,108
1,833
343,682
Net loss
(547
(371
5,849
40,812
(823
(819
At June 30, 2019
18,831,581
1,883
257,888
86,561
1,462
347,794
5,844
43,603
(668
(663
At September 30, 2019
18,875,184
Income
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
Cumulative effect adjustment from adoption of ASU 2016-16
(1,896
5,226
Other comprehensive income, net of tax
697
3,916
126,511
13
3,849
3,862
At March 31, 2018
18,405,344
1,841
228,356
78,493
4,484
313,174
925
353
5,215
80,444
171
179
At June 30, 2018
18,485,788
1,849
233,742
79,418
4,837
319,846
5,261
50,928
(581
(576
At September 30, 2018
18,536,716
1,854
238,422
78,207
4,867
323,350
Condensed Consolidated Statements of Cash Flows
(Unaudited, U.S. Dollars, in thousands)
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization
18,180
13,661
Amortization of operating lease assets, debt costs and other assets
2,724
818
Provision for doubtful accounts
861
(571
(3,309
(5,082
17,378
14,392
Interest and loss on valuation of investment securities
5,000
3,050
Change in fair value of contingent consideration
28,140
2,689
1,307
1,040
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable
(3,298
(225
(4,995
6,880
1,637
1,498
447
(2,788
347
(13,130
Payment of contingent consideration
(1,340
Other long-term assets and liabilities
(2,841
1,657
Net cash from operating activities
20,090
28,829
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
Capital expenditures for intangible assets
(1,144
(1,138
Asset acquisitions and other investments
(6,400
(1,448
Net cash from investing activities
(21,281
(55,921
Cash flows from financing activities
Proceeds from issuance of common shares
6,821
5,866
Payments related to withholdings for share-based compensation
(4,271
(2,402
(13,660
Payments related to finance lease obligation
(276
Other financing activities
(1,224
(476
Net cash from financing activities
(12,610
2,988
Effect of exchange rate changes on cash
(885
(811
Net change in cash, cash equivalents, and restricted cash
(14,686
(24,915
Cash, cash equivalents, and restricted cash at the beginning of period
72,189
81,157
Cash, cash equivalents, and restricted cash at the end of period
57,503
56,242
Components of cash, cash equivalents and restricted cash at the end of period
53,783
2,459
Supplemental Disclosure of Cash Flow Information:
Noncash investing activities:
Purchase of intangible assets
1,581
Contingent consideration recognized at acquisition date
25,491
1. Business and basis of presentation
Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, the Company has two reporting segments: Global Spine and Global Extremities.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2019.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowance for doubtful accounts; 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 period reclassifications
Certain amortization expense related to intangible assets previously reported in general and administrative expenses has been reclassified to acquisition-related amortization and remeasurement based on use of the underlying intangible asset. This reclassification resulted in decreases to general and administrative expenses of $0.4 million and $0.8 million for the three and nine months ended September 30, 2018, respectively, and increases in acquisition related amortization and remeasurement expense of $0.4 million and $0.8 million for the three and nine months ended September 30, 2018, respectively.
Change in Reporting Segments
The Company has changed its reportable business segments beginning with the first quarter of 2019, to align with changes in how the Company 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 performance of these two reportable segments based on earnings before interest, tax, depreciation, and amortization (“EBITDA”). For additional discussion regarding segments, see Note 11.
2. Recently adopted accounting standards and recently issued accounting pronouncements
Adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842)
In February 2016 the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, which changes how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company will recognize 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. Effective January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. Upon adoption, the Company elected a package of practical expedients permitted within the new standard. The practical expedients adopted allow the Company to carry forward its historical lease classification and to not separate and allocate the consideration 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 are presented under Topic 842, while prior period amounts are not adjusted and continue to be
reported in accordance with the Company’s historic accounting policies under Topic 840. See Note 5 for additional discussion of the Company’s adoption of Topic 842 and its lease accounting policies.
Adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, which allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The Company adopted this guidance effective January 1, 2019, which resulted in an increase to accumulated other comprehensive income and a decrease in retained earnings of $0.9 million.
Other recently adopted accounting guidance
In August 2018, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain of the Commission’s disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment. However, in certain instances, the amendments expanded disclosure requirements, including those related to interim disclosures about changes in shareholders’ equity. As amended in the final rule, registrants must now analyze changes in shareholders’ equity, in the form of a reconciliation for the current year-to-date interim periods, with subtotals for each interim period. The Company adopted Release No. 33-10532 during the first quarter of 2019, which resulted in changes in shareholders’ equity presented within the Condensed Consolidated Statements of Changes in Shareholders’ Equity.
Recently issued accounting pronouncements
Topic
Description of Guidance
Effective Date
Status of Company's Evaluation
Financial Instruments - Credit Losses (ASU 2016-13), and subsequent amendments
Requires that credit losses for certain types of financial instruments be estimated based on expected losses and also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Applied using a modified retrospective approach, with early adoption permitted.
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.
(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.
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.
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.
9
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.
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.
On April 30, 2018, the Company completed the acquisition of Spinal Kinetics Inc. (“Spinal Kinetics”), a privately held developer and manufacturer of artificial cervical and lumbar discs for $45.0 million in net cash, subject to certain adjustments, plus potential milestone payments of up to $60.0 million in cash. 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.
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
6,785
1,705
8,175
315
Property, plant and equipment
2,285
320
Developed technology
12,400
10 years
In-process research and development ("IPR&D")
26,800
Tradename
100
2 years
3,594
Total identifiable assets acquired
62,509
Liabilities assumed
351
2,869
301
Total liabilities assumed
3,521
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.
10
The Company did not 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,
(unaudited)
336,882
(923
5,276
Options Medical, LLC Asset Acquisition
On January 31, 2019, the Company acquired certain assets of Options Medical, LLC (“Options Medical”), a medical device distributor based in Florida. Under the terms of the acquisition, the parties agreed to terminate an existing exclusive sales representative agreement, employees of Options Medical became employees of the Company, and the Company acquired all customer lists and customer information related to the sale of the Company’s products. As consideration for the assets acquired, the Company paid $6.4 million. Additionally, as an inducement to enter into employment with the Company, the Company provided 25,478 restricted stock units (“RSUs”), with a fair value of $1.4 million, to the Options Medical founder. These RSUs will vest in one-third annual increments beginning on the first anniversary of the grant date and are contingent upon continued employment. The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date.
Fair Value
Balance Sheet Classification
Operating lease assets
175
Customer relationships
5,832
Assembled workforce
568
5 years
6,575
Operating lease liability - short-term
69
Operating lease liability - long-term
106
6,400
11
4. Inventories
Inventories were as follows:
Raw materials
7,760
8,463
Work-in-process
10,532
13,478
Finished products
62,701
54,906
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.
December 31, 2018
Impact
of Adoption
of ASC 842
January 1,
Cash, cash equivalents, and restricted cash
Accounts receivable, net
(15
17,841
244,624
Property, plant, and equipment, net
Intangible assets, net and goodwill
124,298
33,299
20,209
41,850
20,265
486,906
2,166
70,085
88,074
18,028
63,364
20,194
151,438
Common shares
87,149
Accumulated other comprehensive income
335,468
12
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, 2019 is presented in the table below:
(U.S. Dollars, in thousands, except lease term and discount rate)
Classification
September 30, 2019
Operating leases
5,894
Finance leases
20,451
Total lease assets
26,345
Liabilities
Current
1,798
Long-term
4,205
Total lease liabilities
27,063
Weighted Average Remaining Lease Term
4.3 years
20.9 years
Weighted Average Discount Rate
2.45
%
4.38
The components of lease costs were as follows:
Three Months ended September 30, 2019
Finance lease costs:
Amortization of right-of-use assets
244
728
Interest on finance lease liabilities
233
687
Operating lease costs
538
1,618
Short-term lease costs
61
195
Variable lease costs
173
501
Total lease costs
1,249
3,729
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
3,037
Operating cash flows from finance leases
Financing cash flows from finance leases
276
Right-of-use assets obtained in exchange for lease obligations
598
21,179
A summary of the Company’s remaining lease liabilities as of September 30, 2019 is included below:
Operating
Leases
Finance
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
Long-term portion of lease liabilities
6. Long-term debt
As of September 30, 2019, the Company had no borrowings under its five year $125 million secured revolving credit facility. In addition, the Company had no borrowings on its €5.5 million ($6.0 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 not made any borrowings under the Amended Credit Agreement.
14
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.
7. Fair value measurements and investments
The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
Level 1
Level 2
Level 3
Treasury securities
490
Bone Biologics equity warrants
Bone Biologics equity securities
219
eNeura debt security
17,820
eNeura warrant
666
18,529
Contingent consideration
(41,700
(28,560
Deferred compensation plan
(1,242
(1,275
(42,942
(29,835
15
Bone Biologics Equity Warrants and Securities
The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics, Inc. (“Bone Biologics”). The Company’s common stock investments are recorded within other long-term assets while the warrants are considered to have a fair value of zero. The equity securities are considered investments that do not have readily determinable fair values. As such, the Company measures these investments at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Bone Biologics equity securities and warrants beginning balance
4,668
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
eNeura Debt Security and Warrant
As of September 30, 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, the Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura, and which also eliminated the conversion feature included within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).
Prior to the restructuring on March 1, 2019, the debt security was accounted for as an available for sale debt security at fair value and included within other long-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow model and assumptions regarding the expected payback period for the debt security, requiring the Company to develop its own assumptions; therefore, the Company had categorized this asset as a Level 3 financial asset.
Subsequent to the restructuring, the debt security was no longer classified as an available for sale debt security, but rather as a held to maturity debt security. The debt security was reclassified from an available for sale debt security to a held to maturity debt security at its fair value on the date of the restructuring. As a result, the unrealized gains included in accumulated other comprehensive income related to the debt security were to be subsequently amortized to interest income over the remaining term of the Restructured Debt Security.
The Warrant was recorded at fair value and included in other long-term assets. The fair value of the Warrant was based on significant unobservable inputs, including the use of a discounted cash flow model and an option-pricing model, requiring the Company to develop its own assumptions; therefore, the Company categorized this asset as a Level 3 financial asset. The Warrant was considered an investment that does not have a readily determinable fair value. As such, the Company measured the Warrant at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
During the quarter ended September 30, 2019, the Company engaged in negotiations with eNeura to settle the Restructured Debt Security and on October 25, 2019, the Company and eNeura settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura. As such, at September 30, 2019, the Company determined the Restructured Debt Security and Warrant were impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million. Further, the Company also reclassified the remaining balance of the Restructured Debt Security to other current assets as payment was received within the next twelve months.
16
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 not recognize any interest income during the three and nine months ended September 30, 2018.
The following table provides a reconciliation of the beginning and ending balances for the eNeura debt security and Warrant measured and reflected in the condensed consolidated balance sheets at fair value using significant unobservable inputs (Level 3) prior to the settlement discussed above:
eNeura debt security and Warrant at January 1
16,050
Gains or losses recorded for the period
Recognized in other comprehensive income (loss)
Change in classification of debt security to held to maturity
(15,227
Issuance of Warrant as consideration for extension
491
Impairment of Warrant
(491
eNeura debt security and Warrant at September 30
19,250
Contingent Consideration
The contingent consideration 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):
Contingent consideration at January 1
28,560
Acquisition date fair value
Increase in fair value recognized in acquisition-related amortization and remeasurement
Payment made
(15,000
Contingent consideration at September 30
41,700
28,180
17
8. Contingencies
In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.
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 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 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $1.0 million and $0.8 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the Company has accrued $4.5 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.
Brazil
In July 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority 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 million 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, the Company has an accrual of $1.6 million related to this matter.
9. Accumulated other comprehensive income (loss)
The components of and changes in accumulated other comprehensive income were as follows:
Currency
Translation
Adjustments
Debt Security
Accumulated Other
Comprehensive Income (Loss)
Balance at December 31, 2018
(2,386
5,682
Other comprehensive loss
(4,788
Income taxes
641
Reclassification adjustment to:
1,559
Balance at September 30, 2019
18
10. 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 net sales by major product category by reporting segment:
Change
Bone Growth Therapies
48,836
48,059
1.6
Spinal Implants
22,947
22,102
3.8
Biologics
16,308
14,636
11.4
Global Spine
88,091
84,797
3.9
Global Extremities
25,408
26,911
-5.6
146,228
142,433
2.7
69,076
66,689
3.6
48,784
43,639
11.8
264,088
252,761
4.5
74,373
79,203
-6.1
2.0
Product Sales and Marketing Service Fees
The table below presents net sales, which includes product sales and marketing service fees, for the three and nine months ended September 30, 2019 and 2018.
Product sales
97,833
97,604
291,632
289,946
Marketing service fees
15,666
14,104
46,829
42,018
Product sales primarily consist of the sale of bone growth therapy devices and internal and external fixation products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the 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
In June 2019, the Company received a payment of $1.4 million from the Administration of Medical Services of Puerto Rico, a government-owned corporation, in settlement of approximately $2.5 million of outstanding accounts receivable. This $2.5 million of outstanding accounts receivable had previously been fully reserved between the Company’s allowances for doubtful accounts and contractual allowances. As a result of this settlement, and in accordance with the Company’s policy, the Company recorded the resulting adjustment to contractual allowances of $0.4 million within net sales and the recovery of the allowance for doubtful accounts as a credit to bad debt expense of $1.0 million.
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
19
upon the original term of the related agreement, and totaled $3.5 million and $1.9 million as of September 30, 2019, and December 31, 2018, respectively.
11. Business segment information
During the first quarter of 2019, the Company changed its reporting segments from four reporting segments, previously reported as Bone Growth Therapies, Spinal Implants, Biologics, and Orthofix Extremities, to two reporting segments: Global Spine and Global Extremities. Additionally, the Company changed the performance measure used to evaluate segment performance from Non-GAAP net margin to EBITDA. These changes were made to align how the chief operating decision maker manages the business, reviews operating performance and allocates resources. The Company has revised its segment reporting to represent how the business is now managed and restated prior periods to conform to the current segment presentation. Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the two 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:
(6,033
15,637
21,065
53,492
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
(6,275
(4,738
(18,180
(13,661
Geographical information
The table below presents net sales by geographic destination for each reporting unit and for the consolidated Company:
U.S.
82,816
79,502
246,943
239,262
International
5,275
5,295
17,145
13,499
Total Global Spine
6,636
7,254
20,078
21,193
18,772
19,657
54,295
58,010
Total Global Extremities
Consolidated
89,452
86,756
267,021
260,455
24,047
24,952
71,440
71,509
20
12. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of amortization related to intangible assets acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement. Components of acquisition-related amortization and remeasurement for the three months and nine months ended September 30, 2019 and 2018, respectively, are as follows:
Changes in fair value of contingent consideration
22,270
1,580
Amortization of acquired intangibles
1,338
429
3,733
802
13. Share-based compensation
The following tables present the detail of share-based compensation by line item in the condensed consolidated statements of operations and comprehensive income (loss) as well as by award type:
169
151
536
408
583
514
1,885
1,436
4,760
4,194
13,888
11,488
332
402
1,069
1,060
Stock options
599
579
3,637
2,442
Time-based restricted stock awards and units
3,805
2,244
8,462
5,480
Performance-based restricted stock awards and units
734
1,493
Market-based restricted stock units
1,092
1,298
4,015
3,855
Stock purchase plan
348
406
1,264
1,122
During the three months ended September 30, 2019 and 2018, the Company issued 43,603 and 50,928 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 and 2018, the Company issued 295,496 and 257,833 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units.
On August 5, 2019 the Company entered into an employment agreement with its new President of Global Spine and awarded restricted stock units and stock options valued at approximately $1.5 million as inducement grants.
Share-Based Compensation Modifications
During the first quarter of 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the Company’s President and Chief Executive Officer. As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to accelerate the vesting to the retirement date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a standard qualified retirement to up to four years, dependent upon the remaining contractual term of the options. The Company recognized approximately $2.2 million and $5.9
million in share-based compensation expense during the three and nine months ended September 30, 2019, related to the Retirement Agreement, which was charged to general and administrative expense in the condensed consolidated statements of operations and comprehensive income (loss).
14. Income taxes
Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, the Company’s interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
For the three months ended September 30, 2019 and 2018, the effective tax rate was (50.9%) and 8.8%, respectively. For the nine months ended September 30, 2019 and 2018, the effective tax rate was (28.4%) and 56.3%, respectively. The primary factors affecting the Company’s effective tax rate for the three and nine months ended September 30, 2019, were financial expenses not deductible for tax purposes, primarily related to acquisition-related items, which includes remeasurement of contingent consideration, increased limitation of the deductibility of executive compensation, and benefits related to effective settlement of the 2015 federal tax examination and statute expirations.
During the first quarter of 2019, the Internal Revenue Service concluded an examination of the Company’s federal income tax return for 2015, which resulted in a benefit of $1.8 million. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $13.0 million to $13.4 million as audits close and statutes expire.
15. Earnings per share (“EPS”)
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three and nine months ended September 30, 2019 and 2018, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS. The following is a reconciliation of the weighted average shares used in diluted EPS computations.
Weighted average common shares-basic
Effect of dilutive securities
Unexercised stock options and stock purchase plan
312,320
Unvested restricted stock awards and units
91,001
Weighted average common shares-diluted
There were 1,814,544 and 2,088,843 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended September 30, 2019 and 2018, respectively, and 1,880,423 and 359,172 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the nine months ended September 30, 2019 and 2018, 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.
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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. Headquartered in Lewisville, Texas, we have two reporting segments: Global Spine and Global Extremities. Our products are widely distributed by our sales representatives and distributors.
Notable highlights and achievements in the third quarter of 2019 include the following:
•
Net sales were $113.5 million, an increase of 1.6% on a reported basis and 2.5% on a constant currency basis
Biologics tissue service fees increased 11.4%, its second consecutive quarter of double-digit growth
Net loss was $40.5 million, a decrease of $39.3 million compared to the prior year period
Decrease in earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) of $24.3 million, largely driven by expenses recognized during the third quarter of 2019 for acquisition-related remeasurement
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:
(%)
100.0
21.9
21.5
22.0
21.4
78.1
78.5
78.0
78.6
48.3
44.7
48.9
45.7
18.6
19.9
18.8
19.2
7.0
8.6
7.7
7.4
Acquisition-related amortization and remeasurement
20.8
1.8
9.4
1.0
(16.6
3.5
(6.8
5.3
(35.7
(1.1
(11.9
1.5
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
Percentage Change
Reported
Constant Currency
4.4
4.0
-2.4
2.5
4.3
4.7
-1.8
3.1
Global Spine offers the following products categories:
-
Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients.
Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.
Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.
Three months ended September 30, 2019 compared to 2018
Net sales increased $3.3 million or 3.9%
Bone Growth Therapies net sales increased $0.8 million or 1.6%, primarily driven by an increase in order volume in the quarter, partially offset by customer sales mix and product mix changes
Spinal Implants net sales increased $0.8 million or 3.8%, primarily due to a $1.4 million increase in Motion Preservation due to our launch of the M6 artificial cervical disc in the U.S. and partially offset by timing in international stocking orders for legacy Spine Fixation products
Biologics net sales increased $1.7 million or 11.4%, primarily due to distribution added during the last year and the return to solid results in each of the three U.S. sales regions, as volume increased related to Trinity tissues by 14.0%, partially offset by a low single-digit price decline
Nine months ended September 30, 2019 compared to 2018
Net sales increased $11.3 million or 4.5%
Bone Growth Therapies net sales increased $3.8 million or 2.7%, primarily driven by an increase in order volume, partially offset by customer sales mix and product mix changes
Spinal Implants net sales increased $2.4 million or 3.6%, primarily driven by an increase of $5.3 million in Motion Preservation sales as we acquired Spinal Kinetics during the second quarter of 2018, 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 partners
Biologics net sales increased $5.1 million or 11.8%, primarily due to distribution added during the last year and the return to solid results in each of the three U.S. sales regions, as volume increased related to Trinity tissues 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 2018
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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.
Net sales decreased $1.5 million or 5.6%
Decrease of $0.9 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales
Decrease of $0.6 million largely attributed to variability in the timing of orders from our international stocking distributors and growth in our global direct-sales markets
Net sales decreased $4.8 million or 6.1%
Decrease of $3.4 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales
Decrease of $1.4 million largely attributed to variability in the timing of orders from our international stocking distributors and growth in our global direct-sales markets
Gross Profit
% Change
4.8
1.2
Gross margin
-0.4
-0.6
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
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
9.8
9.0
As a percentage of net sales
3.2
25
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
Sales and marketing expense increased $13.7 million
General and Administrative Expense
-5.3
-0.3
-1.3
General and administrative expense decreased by $1.2 million
Decrease of $1.6 million in expenses associated with strategic investments, largely due to diligence and integration costs related to the acquisition of Spinal Kinetics and expenses associated with our change in jurisdiction of organization from Curaçao to the State of Delaware (the “Domestication”) in 2018
Decrease of $1.3 million in certain compensation expenses, excluding the impact of succession charges
Partially offset by an increase of $1.2 million attributable to transition and succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers
Further offset by an increase of $0.4 million in depreciation expense
General and administrative expense decreased by $0.2 million
Decrease of $3.3 million in expenses associated with strategic investments, largely due to diligence and integration costs related to the acquisition of Spinal Kinetics and expenses associated with the Domestication in 2018
Decrease of $3.3 million in certain compensation expenses, such as share-based compensation expense, excluding the impact of succession charges
Partially offset by an increase of $5.2 million attributable to transition and succession charges, including acceleration of certain share-based compensation expense, relating to retirement, transition, or termination of certain named executive officers
Further offset by an increase of $1.3 million in depreciation expense
Research and Development Expense
-16.8
7.2
-1.6
0.3
26
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
Research and development expense increased $1.8 million
Increase largely attributable to the Spinal Kinetics acquisition, which was acquired during the second quarter of 2018, and the regulatory efforts associated with the FDA premarket approval of the M6-C Cervical Disc, which was obtained in February of 2019
Increase also related to costs to comply with recent medical device reporting regulations in the European Union
Acquisition-related Amortization and Remeasurement
1075.1
813.0
19.0
8.4
Acquisition-related amortization and remeasurement consists of amortization related to intangibles acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement.
Acquisition-related amortization and remeasurement increased $21.6 million
Increase of $20.7 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets
Increase of $0.9 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions; of this amount, $0.7 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA approval milestone during the first quarter of 2019
Acquisition-related amortization and remeasurement increased $28.4 million
Increase of $24.0 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets
Increase of $1.5 million related to the remeasurement of the FDA milestone associated with the Spinal Kinetics acquisition, which was achieved and paid during the first quarter of 2019
Increase of $2.9 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions; of this amount, $2.2 million is attributable to the Spinal Kinetics acquisition, which occurred during the second quarter of 2018 and includes amortization of acquired in-process research and development costs following achievement of the FDA milestone during the first quarter of 2019
27
Non-operating Income and Expense
-202.8
-162.8
61.2
51.9
Other income (expense), net, decreased $3.1 million
Decrease of $6.5 million associated with an other-than-temporary impairment on the eNeura debt security during the third quarter of 2019
Decrease of $1.0 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $1.6 million in the third quarter of 2019 compared to a loss of $0.6 million in the third quarter of 2018
Partially offset by an increase of $4.4 million due to the impairment of our equity holdings and warrants in Bone Biologics, Inc. (“Bone Biologics”) common stock during the third quarter of 2018
Other income (expense), net, decreased $3.0 million
Partially offset by a net increase of $3.1 million relating to changes in fair value and impairments of our equity holdings and warrants in Bone Biologics common stock during 2018
Further offset by an increase of $0.6 million associated with changes in foreign currency rates, as we recorded a non-cash remeasurement loss of $2.2 million in the nine months ended September 30, 2019 compared to a loss of $2.8 million in the nine months ended September 30, 2018
Income Taxes
Income tax expense (benefit)
13,656
(117
-11771.8
8,869
6,352
39.6
Effective tax rate
-50.9
8.8
-59.7
-28.4
56.3
-84.7
The decrease in the effective tax compared to the prior year period rate was primarily a result of the following factors:
Decrease in pre-tax earnings
Increases in financial expenses not deductible for tax purposes, primarily related to acquisition-related remeasurement
Increases 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 are as follows:
Financial expenses not deductible for tax purposes, primarily related to acquisition-related remeasurement
Non-deductible executive compensation due to provisions of the Tax Act
The decrease in the effective tax rate compared to the prior year period was primarily a result of the following factors:
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
28
The primary factors affecting our effective tax rate for the nine months ended September 30, 2019 are as follows:
Segment Review
As discussed above, we changed the performance measure used to evaluate segment performance from Non-GAAP net margin to EBITDA during the first quarter of 2019. When compared to the prior year period, EBITDA decreased $24.3 million for the three months ended September 30, 2019 and decreased $39.1 million for the nine months ended September 30, 2019. These changes are largely driven by the fluctuations discussed above, but are primarily attributable to changes in acquisition-related amortization and remeasurement and sales and marketing expense. The following table reconciles EBITDA to income (loss) before income taxes:
Liquidity and Capital Resources
Cash, cash equivalents, and restricted cash at September 30, 2019, totaled $57.5 million compared to $72.2 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.
(8,739
34,640
(15,598
(74
Net change in cash, cash equivalents and restricted cash
10,229
The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities.
Capital expenditures
(14,881
(10,724
(4,157
Free cash flow
5,209
18,105
(12,896
29
Operating Activities
Cash flows from operating activities decreased $8.7 million
Decrease in net income of $45.1 million
Net increase of $40.3 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration, depreciation and amortization, share-based compensation expense, and non-cash interest and losses on the valuation of investment securities
Net decrease of $3.9 million relating to changes in working capital accounts, primarily attributable to changes in inventories, other current liabilities, and other long-term assets and liabilities
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 65 days at September 30, 2019 compared to 61 days at September 30, 2018. Inventory turns remained consistent at 1.2 times as of September 30, 2019 and 2018.
Investing Activities
Cash flows from investing activities increased $34.6 million
Increase of $43.7 million associated with cash paid in relation to the Spinal Kinetics acquisition in 2018, net of cash acquired
Increase of $0.9 million associated with the acquisition of certain intangible assets 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
Partially offset by $6.4 million associated with cash paid 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
Financing Activities
Cash flows from financing activities decreased $15.6 million
Decrease of $13.7 million associated with our payment of the FDA Milestone associated with the Spinal Kinetics acquisition during the first quarter of 2019, which represents the acquisition-date fair value attributable to the FDA Milestone liability originally recognized
Decrease in net proceeds of $0.9 million from the issuance of common shares
Decrease of $0.3 million attributable to principal payments made during 2019 relating to our finance lease and $0.7 million attributable to other financing cash flows, which primarily relate to deferred payments made associated with the acquisition of certain intangible assets in transactions with former distributors
Credit Facilities
On October 25, 2019, 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 a $300 million secured revolving credit facility maturing on October 25, 2024 (the “Facility”), and amends and restates the existing $125 million secured revolving credit facility. As 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 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.
For information regarding Contingencies, see Note 8 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Spinal Kinetics Acquisition
As part of the consideration for the Spinal Kinetics acquisition, we agreed to milestone payments in the future of up to $60.0 million in cash. One milestone payment was for $15.0 million 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 FDA Milestone payment was triggered. We paid the $15.0 million FDA Milestone payment on February 14, 2019 from cash on hand.
Two other milestone payments are comprised of revenue-based milestone payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The fair value of the contingent consideration arrangement as of September 30, 2019 was $41.7 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. At September 30, 2019, we classified $14.5 million of the liability attributable to the revenue-based milestones within other current liabilities, as we expect to pay one of the revenue-based milestones in the next twelve months, and the remaining $27.2 million within other long-term liabilities. For additional discussion of this matter, see Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
As of September 30, 2019, we held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, we entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the effective date of an initial public offering by eNeura. As consideration for the extension, eNeura issued to us a Warrant to Purchase Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject to certain anti-dilution provisions).
We considered the restructuring of the eNeura debt security to be a Troubled Debt Restructuring (“TDR”). A TDR exists when a creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. In making this determination, we considered eNeura’s current financial condition and whether the restructuring of the debt security resulted in the granting of a concession after taking into account all the facts and circumstances surrounding the restructuring. The restructuring was undertaken to improve the likelihood of our effort to recover the investment in the original debt security.
Subsequent to the restructuring, the Restructured Debt Security was no longer accounted for at fair value, but rather in accordance with the accounting required for TDRs. The fair value of the debt security immediately prior to the restructuring was reclassified to be the carrying amount of the debt security, as such amount approximated our estimate of future cash collections discounted using the debt security’s effective interest rate of 8%. Our estimate of future cash flows involved significant judgment regarding the timing, expected events, and amount of future cash collections. Interest income on the restructured eNeura debt security was recorded using the interest income method; therefore, the amortized cost basis was accreted up to the amount of expected future cash flows over the term of the Restructured Debt Security.
During the quarter ended September 30, 2019, we engaged in negotiations with eNeura to settle the Restructured Debt Security and on October 25, 2019, we settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura. As such, at September 30, 2019, we determined the Restructured Debt Security and Warrant were impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in accumulated other comprehensive income of $5.2 million.
On April 3, 2019, our appeal regarding the freezing of our local bank accounts in Brazil was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the cash. Approximately $2.5 million was then returned without any restrictions in April 2019. As such, this balance has been reclassified to cash and cash equivalents as of September 30, 2019.
In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $0.7 million of our cash in Brazil was frozen upon request to satisfy a judgment. Although we are appealing the judgment, this cash has been reclassified to restricted cash.
For additional discussion regarding these matters, see Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
31
Off-balance Sheet Arrangements
As of September 30, 2019, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2018.
Critical Accounting Estimates
Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes to our critical accounting estimates except for the following:
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842). We determine if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, our incremental borrowing rate is used as a 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. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense 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.
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.
32
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 cash flow is an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.
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.
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. 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.
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 8 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein, which is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any repurchases of our common stock during the third quarter of 2019.
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
10.1
Letter agreement, dated July 30, 2019, between the Company and Jon Serbousek (filed as an exhibit to the Company’s Current Report on Form 8-K filed on August 2, 2019 and incorporated herein by reference).
10.2*
Change in Control and Severance Agreement, dated August 5, 2019, between Jon Serbousek 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.
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: October 28, 2019
By:
/s/ BRADLEY R. MASON
Name:
Bradley R. Mason
Title:
President and Chief Executive Officer
/s/ DOUG RICE
Doug Rice
Chief Financial Officer