10-Q
Orthofix Medical Inc. (OFIX)
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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 March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|
For the transition period from to .
Commission File Number: 0-19961
ORTHOFIX MEDICAL INC.
(Exact name of registrant as specified in its charter)
| Delaware | 98-1340767 |
|---|---|
| (State or other jurisdiction of<br><br>incorporation or organization) | (I.R.S. Employer<br><br>Identification No.) |
| 3451 Plano Parkway,<br><br>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 May 2, 2022, 19,911,974 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 March 31, 2022 and December 31, 2021 | 4 | |
| Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021 | 5 | |
| Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021 | 6 | |
| Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 | 7 | |
| Notes to the Unaudited Condensed Consolidated Financial Statements | 8 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 |
| Item 4. | Controls and Procedures | 22 |
| PART II | OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 23 |
| Item 1A. | Risk Factors | 23 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
| Item 3. | Defaults Upon Senior Securities | 23 |
| Item 4. | Mine Safety Disclosures | 23 |
| Item 5. | Other Information | 23 |
| Item 6. | Exhibits | 24 |
| SIGNATURES | 25 |
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts, and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. Forward-looking statements include, but are not limited to, statements about:
• our intentions, beliefs, and expectations regarding our operations, sales, expenses, and future financial performance;
• our operating results;
• our plans for future products and enhancements of existing products;
• anticipated growth and trends in our business;
• the timing of and our ability to maintain and obtain regulatory clearances or approvals;
• our belief that our cash and cash equivalents, investments, and access to our revolving line of credit will be sufficient to satisfy our anticipated cash requirements;
• our expectations regarding our revenues, customers, and distributors;
• our expectations regarding our costs, suppliers, and manufacturing abilities;
• our beliefs and expectations regarding our market penetration and expansion efforts;
• our expectations regarding the benefits and integration of acquired businesses and/or products and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;
• our anticipated trends and challenges in the markets in which we operate; and
• our expectations and beliefs regarding and the impact of investigations, claims, and litigation.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates, and assumptions that are difficult to predict. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise), and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. Potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, those set forth in Part I, Item 1A under the heading Risk Factors; Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and elsewhere throughout the Annual Report on Form 10-K for the year ended December 31, 2021, and in any other documents incorporated by reference. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
Item 1. Financial Statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Balance Sheets
| (U.S. Dollars, in thousands, except share data) | December 31,<br>2021 | |||
|---|---|---|---|---|
| Assets | ||||
| Current assets | ||||
| Cash and cash equivalents | 71,917 | $ | 87,847 | |
| Accounts receivable, net of allowances of 5,389 and 4,944, respectively | 72,466 | 78,560 | ||
| Inventories | 88,832 | 82,974 | ||
| Prepaid expenses and other current assets | 21,888 | 20,141 | ||
| Total current assets | 255,103 | 269,522 | ||
| Property, plant, and equipment, net | 58,513 | 59,252 | ||
| Intangible assets, net | 50,171 | 52,666 | ||
| Goodwill | 71,317 | 71,317 | ||
| Deferred income taxes | 1,930 | 1,771 | ||
| Other long-term assets | 24,959 | 22,095 | ||
| Total assets | 461,993 | $ | 476,623 | |
| Liabilities and shareholders’ equity | ||||
| Current liabilities | ||||
| Accounts payable | 27,448 | $ | 26,459 | |
| Current portion of finance lease liability | 610 | 2,590 | ||
| Other current liabilities | 60,152 | 76,781 | ||
| Total current liabilities | 88,210 | 105,830 | ||
| Long-term portion of finance lease liability | 19,730 | 19,890 | ||
| Other long-term liabilities | 18,478 | 13,969 | ||
| Total liabilities | 126,418 | 139,689 | ||
| Contingencies (Note 7) | ||||
| Shareholders’ equity | ||||
| Common shares 0.10 par value; 50,000,000 shares authorized; 19,841,822 and 19,836,937 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 1,984 | 1,983 | ||
| Additional paid-in capital | 318,213 | 313,951 | ||
| Retained earnings | 16,540 | 21,000 | ||
| Accumulated other comprehensive loss | (1,162 | ) | — | |
| Total shareholders’ equity | 335,575 | 336,934 | ||
| Total liabilities and shareholders’ equity | 461,993 | $ | 476,623 |
All values are in US Dollars.
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
| Three Months Ended<br>March 31, | ||||||
|---|---|---|---|---|---|---|
| (Unaudited, U.S. Dollars, in thousands, except share and per share data) | 2022 | 2021 | ||||
| Net sales | $ | 106,418 | $ | 105,593 | ||
| Cost of sales | 28,318 | 25,914 | ||||
| Gross profit | 78,100 | 79,679 | ||||
| Sales and marketing | 54,137 | 50,785 | ||||
| General and administrative | 19,328 | 16,444 | ||||
| Research and development | 11,212 | 10,897 | ||||
| Acquisition-related amortization and remeasurement (Note 11) | (3,499 | ) | 4,469 | |||
| Operating loss | (3,078 | ) | (2,916 | ) | ||
| Interest expense, net | (375 | ) | (417 | ) | ||
| Other expense, net | (936 | ) | (2,690 | ) | ||
| Loss before income taxes | (4,389 | ) | (6,023 | ) | ||
| Income tax benefit (expense) | (71 | ) | 207 | |||
| Net loss | $ | (4,460 | ) | $ | (5,816 | ) |
| Net loss per common share: | ||||||
| Basic | $ | (0.22 | ) | $ | (0.30 | ) |
| Diluted | (0.22 | ) | (0.30 | ) | ||
| Weighted average number of common shares: | ||||||
| Basic | 19,897,695 | 19,526,872 | ||||
| Diluted | 19,897,695 | 19,526,872 | ||||
| Other comprehensive loss, before tax | ||||||
| Unrealized loss on debt securities | (674 | ) | (726 | ) | ||
| Currency translation adjustment | (488 | ) | (1,027 | ) | ||
| Other comprehensive loss, before tax | (1,162 | ) | (1,753 | ) | ||
| Income tax benefit related to other comprehensive loss | — | 180 | ||||
| Other comprehensive loss, net of tax | (1,162 | ) | (1,573 | ) | ||
| Comprehensive loss | $ | (5,622 | ) | $ | (7,389 | ) |
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
| (Unaudited, U.S. Dollars, in thousands, except share data) | Number of<br>Common<br>Shares<br>Outstanding | Common<br>Shares | Additional<br>Paid-in<br>Capital | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income (Loss) | Total<br>Shareholders’<br>Equity | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At December 31, 2021 | 19,836,937 | $ | 1,983 | $ | 313,951 | $ | 21,000 | $ | — | $ | 336,934 | |||||
| Net loss | — | — | — | (4,460 | ) | — | (4,460 | ) | ||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,162 | ) | (1,162 | ) | ||||||||
| Share-based compensation expense | — | — | 4,332 | — | — | 4,332 | ||||||||||
| Common shares issued, net | 4,885 | 1 | (70 | ) | — | — | (69 | ) | ||||||||
| At March 31, 2022 | 19,841,822 | $ | 1,984 | $ | 318,213 | $ | 16,540 | $ | (1,162 | ) | $ | 335,575 | ||||
| (Unaudited, U.S. Dollars, in thousands, except share data) | Number of<br>Common<br>Shares<br>Outstanding | Common<br>Shares | Additional<br>Paid-in<br>Capital | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Income (Loss) | Total<br>Shareholders’<br>Equity | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| At December 31, 2020 | 19,423,874 | $ | 1,942 | $ | 292,291 | $ | 59,379 | $ | 3,252 | $ | 356,864 | |||||
| Net loss | — | — | — | (5,816 | ) | — | (5,816 | ) | ||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (1,573 | ) | (1,573 | ) | ||||||||
| Share-based compensation expense | — | — | 3,721 | — | — | 3,721 | ||||||||||
| Common shares issued, net | 50,510 | 5 | 1,617 | — | — | 1,622 | ||||||||||
| At March 31, 2021 | 19,474,384 | $ | 1,947 | $ | 297,629 | $ | 53,563 | $ | 1,679 | $ | 354,818 |
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Cash Flows
| Three Months Ended<br>March 31, | ||||||
|---|---|---|---|---|---|---|
| (Unaudited, U.S. Dollars, in thousands) | 2022 | 2021 | ||||
| Cash flows from operating activities | ||||||
| Net loss | $ | (4,460 | ) | $ | (5,816 | ) |
| Adjustments to reconcile net loss to net cash from operating activities | ||||||
| Depreciation and amortization | 7,516 | 7,443 | ||||
| Amortization of operating lease assets, debt costs, and other assets | 798 | 889 | ||||
| Provision for expected credit losses | 600 | (182 | ) | |||
| Deferred income taxes | (36 | ) | (971 | ) | ||
| Share-based compensation expense | 4,332 | 3,721 | ||||
| Interest and (gain) loss on valuation of investment securities | (9 | ) | (96 | ) | ||
| Change in fair value of contingent consideration | (5,500 | ) | 1,500 | |||
| Other | 528 | 24 | ||||
| Changes in operating assets and liabilities, net of effects of acquisitions | ||||||
| Accounts receivable | 5,392 | 2,748 | ||||
| Inventories | (6,211 | ) | 16 | |||
| Prepaid expenses and other current assets | (1,891 | ) | 1,993 | |||
| Accounts payable | 1,387 | (1,457 | ) | |||
| Other current liabilities | (6,993 | ) | (7,719 | ) | ||
| Contract liability (Note 9) | (3,395 | ) | — | |||
| Other long-term assets and liabilities | 233 | 348 | ||||
| Net cash from operating activities | (7,709 | ) | 2,441 | |||
| Cash flows from investing activities | ||||||
| Capital expenditures for property, plant, and equipment | (5,329 | ) | (4,365 | ) | ||
| Capital expenditures for intangible assets | (338 | ) | (416 | ) | ||
| Net cash from investing activities | (5,667 | ) | (4,781 | ) | ||
| Cash flows from financing activities | ||||||
| Proceeds from issuance of common shares | — | 1,717 | ||||
| Payments related to withholdings for share-based compensation | (69 | ) | (95 | ) | ||
| Payments related to finance lease obligation | (2,141 | ) | (127 | ) | ||
| Other financing activities | (23 | ) | (385 | ) | ||
| Net cash from financing activities | (2,233 | ) | 1,110 | |||
| Effect of exchange rate changes on cash | (321 | ) | (534 | ) | ||
| Net change in cash, cash equivalents, and restricted cash | (15,930 | ) | (1,764 | ) | ||
| Cash, cash equivalents, and restricted cash at the beginning of period | 87,847 | 96,821 | ||||
| Cash, cash equivalents, and restricted cash at the end of period | $ | 71,917 | $ | 95,057 | ||
| Components of cash, cash equivalents, and restricted cash at the end of period | ||||||
| Cash and cash equivalents | $ | 71,917 | $ | 94,569 | ||
| Restricted cash | — | 488 | ||||
| Cash, cash equivalents, and restricted cash at the end of period | $ | 71,917 | $ | 95,057 |
The accompanying notes form an integral part of these condensed consolidated financial statements
ORTHOFIX MEDICAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. Business and basis of presentation
Description of the Business
Orthofix Medical Inc. and its subsidiaries (the “Company”) is a global medical device company with a spine and orthopedics focus. The Company’s mission is to deliver innovative, quality-driven solutions while partnering with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic products are distributed in more than 60 countries via the Company's sales representatives and distributors.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair statement have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2021. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2022.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowances for expected credit losses; inventories; valuation of intangible assets; goodwill; fair value measurements, including contingent consideration; litigation and contingent liabilities; tax matters; and share-based compensation. Actual results could differ from these estimates.
2. Recently issued accounting pronouncements
The Company considers the applicability and impact of all accounting standards updates ("ASUs"). Recently issued ASUs not listed were assessed and determined not applicable, or are expected to have minimal impact on the Company's condensed consolidated financial statements. Furthermore, there have been no material changes during the three months ended March 31, 2022, to the Company's application of significant accounting policies and estimates as described in the Company’s Form 10-K for the year ended December 31, 2021.
3. Inventories
Inventories were as follows:
| (U.S. Dollars, in thousands) | March 31,<br>2022 | December 31,<br>2021 | ||
|---|---|---|---|---|
| Raw materials | $ | 11,263 | $ | 9,589 |
| Work-in-process | 14,477 | 15,096 | ||
| Finished products | 24,553 | 15,149 | ||
| Field/consignment | 38,539 | 43,140 | ||
| Inventories | $ | 88,832 | $ | 82,974 |
4. Leases
A summary of the Company’s lease portfolio as of March 31, 2022, and December 31, 2021, is presented in the table below:
| (U.S. Dollars, in thousands) | Classification | March 31,<br>2022 | December 31, 2021 | ||
|---|---|---|---|---|---|
| Right-of-use assets ("ROU assets") | |||||
| Operating leases | Other long-term assets | $ | 7,093 | $ | 3,155 |
| Finance leases | Property, plant and equipment, net | 18,120 | 18,600 | ||
| Total ROU assets | $ | 25,213 | $ | 21,755 | |
| Lease Liabilities | |||||
| Current | |||||
| Operating leases | Other current liabilities | $ | 1,461 | $ | 1,834 |
| Finance leases | Current portion of finance lease liability | 610 | 2,590 | ||
| Long-term | |||||
| Operating leases | Other long-term liabilities | 5,742 | 1,443 | ||
| Finance leases | Long-term portion of finance lease liability | 19,730 | 19,890 | ||
| Total lease liabilities | $ | 27,543 | $ | 25,757 |
Supplemental cash flow information related to leases was as follows:
| (U.S. Dollars, in thousands) | Three Months Ended<br>March 31, 2022 | Three Months Ended<br>March 31, 2021 | ||
|---|---|---|---|---|
| Cash paid for amounts included in the measurement of lease liabilities | ||||
| Operating cash flows from operating leases | $ | 1,068 | $ | 1,147 |
| Operating cash flows from finance leases | 222 | 225 | ||
| Financing cash flows from finance leases | 2,141 | 127 | ||
| ROU assets obtained in exchange for lease obligations | ||||
| Operating leases | 4,470 | 248 | ||
| Finance leases | — | 76 |
5. Long-term debt
As of March 31, 2022, the Company had no borrowings outstanding under the secured revolving credit facility and was in compliance with all required financial covenants.
In addition, the Company had no borrowings on its €5.5 million ($6.1 million) available lines of credit in Italy as of March 31, 2022.
6. Fair value measurements and investments
The fair value measurements of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
| March 31,<br>2022 | December 31,<br>2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | Level 1 | Level 2 | Level 3 | Total | Total | |||||||||
| Assets | ||||||||||||||
| Neo Medical convertible loan agreements | $ | — | $ | — | $ | 5,780 | $ | 5,780 | $ | 7,148 | ||||
| Neo Medical preferred equity securities | — | 6,084 | — | 6,084 | 5,413 | |||||||||
| Bone Biologics equity securities | 243 | — | — | 243 | 309 | |||||||||
| Other investments | — | — | 1,535 | 1,535 | 1,505 | |||||||||
| Total | $ | 243 | $ | 6,084 | $ | 7,315 | $ | 13,642 | $ | 14,375 | ||||
| Liabilities | ||||||||||||||
| Spinal Kinetics contingent consideration | $ | — | $ | — | $ | (11,700 | ) | $ | (11,700 | ) | $ | (17,200 | ) | |
| Deferred compensation plan | — | (1,285 | ) | — | (1,285 | ) | (1,314 | ) | ||||||
| Total | $ | — | $ | (1,285 | ) | $ | (11,700 | ) | $ | (12,985 | ) | $ | (18,514 | ) |
9
Neo Medical Convertible Loan Agreements and Equity Investment
In October 2020, the Company purchased preferred equity securities of Neo Medical SA, a privately held Swiss-based company developing a new generation of products for spinal surgery ("Neo Medical"), for consideration of $5.0 million and entered into a Convertible Loan Agreement pursuant to which Orthofix loaned Neo Medical CHF 4.6 million, or $5.0 million at the date of issuance (the “Convertible Loan”). In October 2021, the Company entered into an additional Convertible Loan Agreement (the “Additional Convertible Loan”), pursuant to which the Company loaned Neo Medical an additional CHF 0.6 million (funded by the payment of $0.7 million as of the issuance date).
The equity securities are recorded in other long-term assets and are considered an investment that does not have a readily determinable fair value. As such, the Company measures this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
The table below presents a reconciliation of the beginning and ending balances of the Company’s investment in Neo Medical preferred equity securities:
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||
|---|---|---|---|---|
| Fair value of Neo Medical preferred equity securities at January 1 | $ | 5,413 | $ | 5,000 |
| Conversion of loan into preferred equity securities | 671 | — | ||
| Fair value of Neo Medical preferred equity securities at March 31 | 6,084 | 5,000 | ||
| Cumulative unrealized gain on Neo Medical preferred equity securities | 413 | — |
The Company made an election to convert the Additional Convertible Loan into shares of Neo Medical’s preferred equity securities in January 2022. The remaining Convertible Loan is recorded in other long-term assets as an available for sale debt security as of March 31, 2022. The Convertible Loan is recorded at fair value, with applicable interest recorded in interest income. The fair value of the Convertible Loan is based upon significant unobservable inputs, including the use of option-pricing models, Monte Carlo simulations for certain periods, and a probability-weighted discounted cash flows model, requiring the Company to develop its own assumptions. Therefore, the Company categorized these investments as Level 3 financial assets.
Some of the more significant unobservable inputs used in the fair value measurement of the Convertible Loan include applicable discount rates, implied volatility, the likelihood and projected timing of repayment or conversion, and projected cash flows in support of the estimated enterprise value of Neo Medical. Holding other inputs constant, changes in these assumptions could result in a significant change in the fair value of the Convertible Loan. If the amortized cost of the Convertible Loan exceeds its estimated fair value, the security is deemed to be impaired, and must be evaluated for the recognition of a credit loss. As of March 31, 2022, the Company has not recognized any credit loss related to the Convertible Loan.
The following table provides a reconciliation of the beginning and ending balances of the Convertible Loans, measured at fair value using significant unobservable inputs (Level 3):
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| Fair value of Neo Medical Convertible Loans at January 1 | $ | 7,148 | $ | 7,160 | ||
| Interest recognized in interest income, net | 112 | 96 | ||||
| Foreign currency remeasurement recognized in other expense, net | (69 | ) | (330 | ) | ||
| Unrealized loss recognized in other comprehensive income (loss) | (740 | ) | (726 | ) | ||
| Conversion of loan into preferred equity securities | (671 | ) | — | |||
| Fair value of Neo Medical Convertible Loans at March 31 | 5,780 | 6,200 | ||||
| Amortized cost basis of Neo Medical Convertible Loans at March 31 | 5,581 | 5,045 |
The following table provides quantitative information related to certain key assumptions utilized within the valuation as of March 31, 2022:
| (U.S. Dollars, in thousands) | Fair Value as of<br> March 31, 2022 | Unobservable inputs | Estimate | |||
|---|---|---|---|---|---|---|
| Neo Medical Convertible Loan | $ | 5,780 | Cost of equity discount rate | 16.9 | % | |
| Implied volatility | 71.3 | % |
10
Bone Biologics Equity Securities
The Company holds an investment in common stock of Bone Biologics Inc. (“Bone Biologics”, NASDAQ: BBLG), a developer of orthobiologic products. Changes in the fair value of the investment recorded during the three months ended March 31, 2022 and 2021, are shown in the table below:
| (U.S. Dollars, in thousands) | 2022 | 2021 | |||
|---|---|---|---|---|---|
| Bone Biologics equity securities at January 1 | $ | 309 | $ | — | |
| Fair value adjustments recognized in other expense, net | (66 | ) | — | ||
| Bone Biologics equity securities at March 31 | $ | 243 | $ | — |
Other investments
Other investments represent assets and investments recorded at fair value that are not deemed to be material for disclosure on an individual basis. The fair value of these assets are based upon significant unobservable inputs, such as probability-weighted discounted cash flows models, requiring the Company to develop its own assumptions. Therefore, the Company has categorized these assets as Level 3 financial assets. As of March 31, 2022, this balance was classified within other long-term assets.
Contingent Consideration
The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The Spinal Kinetics contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone payments included (i) $15.0 million upon U.S. Food and Drug Administration (“FDA”) approval of the M6-C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the acquired artificial discs. Milestones must be achieved within five years of April 30, 2018, to trigger applicable payments. The FDA Milestone was achieved and paid in 2019 and a revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.
The estimated fair value of the remaining Spinal Kinetics contingent consideration, attributable to a revenue-based milestone, was $11.7 million as of March 31, 2022. The estimated fair value reflects assumptions made by management as of March 31, 2022, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration (ultimate payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As of March 31, 2022, the Company has classified the $11.7 million liability within other current liabilities, as the Company currently expects to achieve the remaining milestone in the next twelve months, if achieved. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.
The following table provides a reconciliation of the beginning and ending balances for the Spinal Kinetics contingent consideration measured at estimated fair value using significant unobservable inputs (Level 3):
| (U.S. Dollars, in thousands) | 2022 | 2021 | |||
|---|---|---|---|---|---|
| Spinal Kinetics contingent consideration estimated fair value at January 1 | $ | 17,200 | $ | 35,400 | |
| Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement | (5,500 | ) | 1,500 | ||
| Spinal Kinetics contingent consideration estimated fair value at March 31 | $ | 11,700 | $ | 36,900 |
The Company estimated the fair value of the remaining potential revenue-based milestone payment using a Monte Carlo simulation and a discounted cash flow model. This fair value measurement is based on significant inputs that are unobservable in the market and thus represents a Level 3 measurement. The key assumptions in applying the valuation model include the Company’s forecasted future revenues for the Motion Preservation product line (which is derived from the acquired Spinal Kinetics business), the expected timing of payment, applicable discount rates applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.
11
The following table provides a range of key assumptions used within the valuation as of March 31, 2022:
| (U.S. Dollars, in thousands) | Fair Value as of <br>March 31, 2022 | Valuation Technique | Unobservable inputs | Range | |
|---|---|---|---|---|---|
| Spinal Kinetics contingent consideration | $ | 11,700 | Discounted cash flow | Revenue discount rate | 5.9% - 7.4% |
| Payment discount rate | 3.2% - 4.7% | ||||
| Projected year of achievement | 2023 |
7. Contingencies
In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.
Italian Medical Device Payback (“IMDP”)
In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. A key provision of the law is a ‘payback’ measure, requiring medical device companies in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings. Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the IMDP as sales and marketing expense and periodically reassesses this liability based upon current facts and circumstances. As a result, the Company recorded expense of $0.3 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the Company has accrued $5.4 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.
8. Accumulated other comprehensive loss
The components of and changes in accumulated other comprehensive loss were as follows:
| (U.S. Dollars, in thousands) | Currency<br>Translation<br>Adjustments | Neo Medical Convertible Loans | Other Investments | Accumulated Other<br>Comprehensive Income (Loss) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2021 | $ | (711 | ) | $ | 711 | $ | — | $ | — | ||
| Other comprehensive income (loss) | (488 | ) | (740 | ) | 66 | (1,162 | ) | ||||
| Income taxes | — | — | — | — | |||||||
| Balance at March 31, 2022 | $ | (1,199 | ) | $ | (29 | ) | $ | 66 | $ | (1,162 | ) |
9. Revenue recognition and accounts receivable
Revenue Recognition
The Company has two reporting segments, which consist of Global Spine and Global Orthopedics. Within the Global Spine reporting segment there are three product categories: Bone Growth Therapies, Spinal Implants, and Biologics.
The table below presents net sales by major product category by reporting segment:
| Three Months Ended March 31, | |||||||
|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | Change | ||||
| Bone Growth Therapies | $ | 41,948 | $ | 42,947 | -2.3 | % | |
| Spinal Implants | 26,615 | 25,701 | 3.6 | % | |||
| Biologics | 14,092 | 13,692 | 2.9 | % | |||
| Global Spine | 82,655 | 82,340 | 0.4 | % | |||
| Global Orthopedics | 23,763 | 23,253 | 2.2 | % | |||
| Net sales | $ | 106,418 | $ | 105,593 | 0.8 | % |
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Product Sales and Marketing Service Fees
The table below presents product sales and marketing service fees, which are both components of net sales:
| Three Months Ended<br>March 31, | ||||
|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||
| Product sales | $ | 92,608 | $ | 92,263 |
| Marketing service fees | 13,810 | 13,330 | ||
| Net sales | $ | 106,418 | $ | 105,593 |
Product sales primarily consist of the sale of bone growth therapies devices, spinal implants products, and orthopedics products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the Global Spine reporting segment.
Accounts receivable and related allowances
The following table provides a detail of changes in the Company’s allowance for expected credit losses for the three months ended March 31, 2022 and 2021 :
| (U.S. Dollars, in thousands) | Three Months Ended March 31, | |||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Allowance for expected credit losses beginning balance | $ | 4,944 | $ | 4,848 | ||
| Current period provision (recovery) for expected credit losses | 600 | (182 | ) | |||
| Write-offs charged against the allowance and other | (104 | ) | (46 | ) | ||
| Effect of changes in foreign exchange rates | (51 | ) | (114 | ) | ||
| Allowance for expected credit losses ending balance | $ | 5,389 | $ | 4,506 |
Contract Liabilities
The Company’s contract liabilities largely relate to a prepayment of $13.9 million received in April 2020 from the Centers for Medicare and Medicaid Service ("CMS") as part of the Accelerated and Advance Payment Program of the Coronavirus Aid, Relief, and Economic Security Act. The Company has classified the entire balance of this contract liability within other current liabilities based upon the Company’s estimates of when such funds will be recouped. The following table provides a detail of changes in the Company’s contract liability associated with the Accelerated and Advanced Payment Program for the three months ended March 31, 2022 and 2021:
| (U.S. Dollars, in thousands) | Three Months Ended March 31, | ||||
|---|---|---|---|---|---|
| 2022 | 2021 | ||||
| Contract liability beginning balance | $ | 4,791 | $ | 13,851 | |
| Recoupment recognized in net sales | (3,395 | ) | — | ||
| Contract liability ending balance | $ | 1,396 | $ | 13,851 |
Other Contract Assets
The Company’s contract assets, excluding accounts receivable (“Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of the Company's products. Other Contract Assets are included in other long-term assets or other current assets, dependent upon the original term of the related agreement, and totaled $1.2 million and $1.4 million as of March 31, 2022 and December 31, 2021, respectively.
10. Business segment information
The Company has two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the Company is earnings before interest, tax, depreciation, and amortization (“EBITDA”). Corporate activities are comprised of operating expenses and activities not directly identifiable within the two reporting segments, such as human resources, finance, legal, and information technology functions. The table below presents EBITDA by reporting segment:
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| Three Months Ended<br>March 31, | ||||||
|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||||
| Global Spine | $ | 15,893 | $ | 11,895 | ||
| Global Orthopedics | (3,096 | ) | (2,229 | ) | ||
| Corporate | (9,295 | ) | (7,829 | ) | ||
| Total EBITDA | $ | 3,502 | $ | 1,837 | ||
| Depreciation and amortization | (7,516 | ) | (7,443 | ) | ||
| Interest expense, net | (375 | ) | (417 | ) | ||
| Loss before income taxes | $ | (4,389 | ) | $ | (6,023 | ) |
Geographical information
The table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:
| Three Months Ended<br>March 31, | ||||
|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||
| Global Spine | ||||
| U.S. | $ | 77,066 | $ | 77,755 |
| International | 5,589 | 4,585 | ||
| Total Global Spine | 82,655 | 82,340 | ||
| Global Orthopedics | ||||
| U.S. | 5,327 | 5,591 | ||
| International | 18,436 | 17,662 | ||
| Total Global Orthopedics | 23,763 | 23,253 | ||
| Consolidated | ||||
| U.S. | 82,393 | 83,346 | ||
| International | 24,025 | 22,247 | ||
| Net sales | $ | 106,418 | $ | 105,593 |
11. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) the remeasurement of any related contingent consideration arrangements, and (iii) recognized costs associated with acquired in-process research and development (“IPR&D”) assets, which are recognized immediately upon acquisition. Components of acquisition-related amortization and remeasurement are as follows:
| Three Months Ended<br>March 31, | |||||
|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | |||
| Amortization of acquired intangibles | $ | 2,001 | $ | 1,969 | |
| Changes in fair value of contingent consideration | (5,500 | ) | 1,500 | ||
| Acquired IPR&D | — | 1,000 | |||
| Total | $ | (3,499 | ) | $ | 4,469 |
12. Share-based compensation
Components of share-based compensation expense are as follows:
| Three Months Ended<br>March 31, | |||||
|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | |||
| Cost of sales | $ | 211 | $ | 178 | |
| Sales and marketing | 981 | 717 | |||
| General and administrative | 3,218 | 2,529 | |||
| Research and development | (78 | ) | 297 | ||
| Total | $ | 4,332 | $ | 3,721 | |
| Three Months Ended<br>March 31, | |||||
| --- | --- | --- | --- | --- | |
| (U.S. Dollars, in thousands) | 2022 | 2021 | |||
| Stock options | $ | 359 | $ | 661 | |
| Time-based restricted stock awards and units | 2,170 | 1,727 | |||
| Market-based / performance-based restricted stock units | 1,444 | 897 | |||
| Stock purchase plan | 359 | 436 | |||
| Total | $ | 4,332 | $ | 3,721 |
During the three months ended March 31, 2022 and 2021, the Company issued 4,885 and 50,510 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises, and the vesting of restricted stock awards and units.
13. Income taxes
Generally, income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items, with any changes affecting the estimated annual effective tax rate recorded in the interim period in which the change occurs. Due to the impact of losses not benefitted by the Company’s U.S. and Italian operations, the Company determined the estimated annual effective tax rate method would not provide a reliable estimate of the Company’s overall annual effective tax rate. As such, the Company has calculated the tax provision using the actual effective rate for the three months ended March 31, 2022. Due to the impact of temporary differences on the U.S. current tax liability without any deferred tax benefit, the actual effective rate may vary in future quarters.
For the three months ended March 31, 2022 and 2021, the effective tax rate was (1.6%) and 3.4%, respectively. The primary factors affecting the Company’s effective tax rate for the three months ended March 31, 2022, were certain losses not benefitted.
14. Earnings per share (“EPS”)
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three months ended March 31, 2022, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS.
The following is a reconciliation of the weighted average shares used in diluted EPS computations.
| Three Months Ended<br>March 31, | ||||
|---|---|---|---|---|
| 2022 | 2021 | |||
| Weighted average common shares-basic | 19,897,695 | 19,526,872 | ||
| Effect of dilutive securities | ||||
| Unexercised stock options and stock purchase plan | — | — | ||
| Unvested restricted stock awards and units | — | — | ||
| Weighted average common shares-diluted | 19,897,695 | 19,526,872 |
There were 2,461,446 and 2,037,663 weighted average outstanding (i) stock options and (ii) restricted stock awards and units, respectively, not included in the diluted EPS computation for the three months ended March 31, 2022 and 2021, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock units, all necessary conditions had not been satisfied by the end of the respective period.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Orthofix Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.
Executive Summary
We are a global medical device company with a spine and orthopedics focus. Our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patient mobility. Headquartered in Lewisville, Texas, our spine and orthopedic products are distributed in more than 60 countries via our sales representatives and distributors. For more information, please visit www.Orthofix.com.
Notable financial metrics and achievements in the first quarter of 2022 include the following:
• Net sales of $106.4 million, an increase of 0.8% compared to the prior year on a reported basis and an increase of 2.0% on a constant currency basis
• New product sales drive solid growth in Biologics, Spinal Implants, and Orthopedics
• FDA grants PMA approval for AccelStim LIPUS bone growth stimulator, expanding our indications into fresh fracture care
• FDA clearance received for the TrueLok Evo Ring Fixation system, which enables clear radiographic visualization
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations as a percent of net sales:
| Three Months Ended<br>March 31, | ||||||
|---|---|---|---|---|---|---|
| 2022<br>(%) | 2021<br>(%) | |||||
| Net sales | 100.0 | 100.0 | ||||
| Cost of sales | 26.6 | 24.5 | ||||
| Gross profit | 73.4 | 75.5 | ||||
| Sales and marketing | 50.9 | 48.1 | ||||
| General and administrative | 18.2 | 15.6 | ||||
| Research and development | 10.5 | 10.3 | ||||
| Acquisition-related amortization and remeasurement | (3.3 | ) | 4.3 | |||
| Operating loss | (2.9 | ) | (2.8 | ) | ||
| Net loss | (4.2 | ) | (5.5 | ) |
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
| Three Months Ended<br>March 31, | Percentage Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | Reported | Constant Currency | ||||||
| Bone Growth Therapies | $ | 41,948 | $ | 42,947 | -2.3 | % | -2.3 | % | ||
| Spinal Implants | 26,615 | 25,701 | 3.6 | % | 4.2 | % | ||||
| Biologics | 14,092 | 13,692 | 2.9 | % | 2.9 | % | ||||
| Global Spine | 82,655 | 82,340 | 0.4 | % | 0.6 | % | ||||
| Global Orthopedics | 23,763 | 23,253 | 2.2 | % | 7.2 | % | ||||
| Net sales | $ | 106,418 | $ | 105,593 | 0.8 | % | 2.0 | % |
Global Spine
Global Spine offers the following products categories:
- Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients.
- Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and fixation implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.
- Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives.
Three months ended March 31, 2022 compared to 2021
Net sales increased $0.3 million or 0.4%
• Bone Growth Therapies net sales decreased $1.0 million or 2.3%, primarily driven by a slowdown in complex procedure volumes due to hospital restrictions and staff shortages, which impacted our ability to access both existing and prospective accounts
• Spinal Implants net sales increased $0.9 million or 3.6%, driven by international spine fixation sales and continued growth in the U.S. for our M6-C artificial cervical disc
• Biologics net sales increased $0.4 million or 2.9%, primarily attributable to sales from our new biologics offerings as we continue to broaden our Biologics portfolio
Global Orthopedics
Global Orthopedics offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions specifically related to limb reconstruction and deformity correction unrelated to the spine. Global Orthopedics distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and healthcare providers.
Three months ended March 31, 2022 compared to 2021
Net sales increased $0.5 million or 2.2%
• Increase partially attributable to recovery in our international markets aided by lessening COVID-19 restrictions as well as an increase in orders from international stocking distributors
• Continued strong contribution from our FITBONE limb-lengthening system
• Partially offset by a decrease of $1.2 million due to changes in foreign currency exchange rates, which had a negative impact on net sales in 2022
Gross Profit
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Net sales | $ | 106,418 | $ | 105,593 | 0.8 | % | |||
| Cost of sales | 28,318 | 25,914 | 9.3 | % | |||||
| Gross profit | $ | 78,100 | $ | 79,679 | (2.0 | %) | |||
| Gross margin | 73.4 | % | 75.5 | % | (2.1 | %) |
Three months ended March 31, 2022 compared to 2021
Gross profit decreased $1.6 million
• Decrease in gross profit is primarily driven by increased component costs resulting from global supply chain disruptions within our Bone Growth Therapies product category, unfavorable changes in our sales mix, and higher indirect operating expenses
Sales and Marketing Expense
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Sales and marketing | $ | 54,137 | $ | 50,785 | 6.6 | % | |||
| As a percentage of net sales | 50.9 | % | 48.1 | % | 2.8 | % |
Three months ended March 31, 2022 compared to 2021
Sales and marketing expense increased $3.4 million
• Increase primarily driven by increased marketing and professional fees, training expenses, travel expenses, and event spend compared to the prior year period
• Increase also attributable to the hiring of additional sales and marketing headcount to support growth and initiatives across all product lines
General and Administrative Expense
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| General and administrative | $ | 19,328 | $ | 16,444 | 17.5 | % | |||
| As a percentage of net sales | 18.2 | % | 15.6 | % | 2.6 | % |
Three months ended March 31, 2022 compared to 2021
General and administrative expense increased $2.9 million
• Increase in share-based compensation expense as the tenure of our new management team increases
• Increase in spending on legal settlements, strategic investments, and medical benefits compared to the prior year period
• Increase in travel and professional fees as a result of loosened COVID-19 restrictions as compared to the prior year period
Research and Development Expense
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Research and development | $ | 11,212 | $ | 10,897 | 2.9 | % | |||
| As a percentage of net sales | 10.5 | % | 10.3 | % | 0.2 | % |
Three months ended March 31, 2022 compared to 2021
Research and development expense increased $0.3 million
• Increase primarily driven by increases to support new product development, clinical studies, and costs associated with our European Union Medical Device Regulation compliance efforts
Acquisition-related Amortization and Remeasurement
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Acquisition-related amortization and remeasurement | $ | (3,499 | ) | $ | 4,469 | (178.3 | %) | ||
| As a percentage of net sales | (3.3 | %) | 4.3 | % | (7.6 | %) |
Acquisition-related amortization and remeasurement consists of (i) amortization related to intangible assets acquired through business combinations or asset acquisitions, (ii) the remeasurement of any related contingent consideration arrangement, and (iii) recognized costs associated with acquired in-process research and development assets, which are recognized immediately upon acquisition.
Three months ended March 31, 2022 compared to 2021
Acquisition-related amortization and remeasurement decreased $8.0 million
• Decrease of $7.0 million primarily related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets
• Decrease of $1.0 million in costs associated with acquired in-process research and development assets, which were recognized immediately upon acquisition in the prior year period
Non-operating Income and Expense
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Interest expense, net | $ | (375 | ) | $ | (417 | ) | (10.1 | %) | |
| Other expense, net | (936 | ) | (2,690 | ) | (65.2 | %) |
Three months ended March 31, 2022 compared to 2021
Interest expense, net was flat in comparison to the prior year period
Other expense, net decreased $1.8 million
• Decrease primarily associated with changes in foreign currency exchange rates and the resulting gains and/or losses recorded in each period
Income Taxes
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | % Change | ||||||
| Income tax (benefit) expense | $ | 71 | $ | (207 | ) | (134.3 | %) | ||
| Effective tax rate | (1.6 | %) | 3.4 | % | (5.0 | %) |
Three months ended March 31, 2022 compared to 2021
Income tax expense increased an immaterial amount for the period ended March 31, 2022, compared to March 31, 2021.
The primary factors affecting our tax expense for the first quarter of 2022 were certain losses not benefitted.
Segment Review
Our business is managed through two reporting segments: Global Spine and Global Orthopedics. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 10 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to loss before income taxes:
| Three Months Ended<br>March 31, | ||||||
|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | ||||
| Global Spine | $ | 15,893 | $ | 11,895 | ||
| Global Orthopedics | (3,096 | ) | (2,229 | ) | ||
| Corporate | (9,295 | ) | (7,829 | ) | ||
| Total EBITDA | $ | 3,502 | $ | 1,837 | ||
| Depreciation and amortization | (7,516 | ) | (7,443 | ) | ||
| Interest expense, net | (375 | ) | (417 | ) | ||
| Loss before income taxes | $ | (4,389 | ) | $ | (6,023 | ) |
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2022, totaled $71.9 million compared to $87.8 million at December 31, 2021.
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | Change | ||||||
| Net cash from operating activities | $ | (7,709 | ) | $ | 2,441 | $ | (10,150 | ) | |
| Net cash from investing activities | (5,667 | ) | (4,781 | ) | (886 | ) | |||
| Net cash from financing activities | (2,233 | ) | 1,110 | (3,343 | ) | ||||
| Effect of exchange rate changes on cash | (321 | ) | (534 | ) | 213 | ||||
| Net change in cash and cash equivalents | $ | (15,930 | ) | $ | (1,764 | ) | $ | (14,166 | ) |
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:
| Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| (U.S. Dollars, in thousands) | 2022 | 2021 | Change | ||||||
| Net cash from operating activities | $ | (7,709 | ) | $ | 2,441 | $ | (10,150 | ) | |
| Capital expenditures | (5,667 | ) | (4,781 | ) | (886 | ) | |||
| Free cash flow | $ | (13,376 | ) | $ | (2,340 | ) | $ | (11,036 | ) |
Operating Activities
Cash flows from operating activities decreased $10.2 million
• Increase in net income of $1.4 million
• Net decrease of $4.1 million for non-cash gains and losses, largely related to changes in fair value of contingent consideration, share-based compensation expense, deferred income taxes, and our provision for expected credit losses
• Net decrease of $7.4 million relating to changes in working capital accounts, primarily attributable to changes in inventories
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 61 days at March 31, 2022, compared to 59 days at March 31, 2021. Inventory turns remained consistent at 1.3 times as of March 31, 2022 and March 31, 2021.
Investing Activities
Cash flows from investing activities decreased $0.9 million
• Decrease of $0.9 million associated with capital expenditures compared to the prior year period
Financing Activities
Cash flows from financing activities decreased $3.3 million
• Decrease of $2.0 million related to the conclusion of the FITBONE Contract Manufacturing and Supply Agreement with Wittenstein
• Decrease in net proceeds of $1.7 million from the issuance of common shares, primarily related to the exercise of stock options in the prior year period
• Partially offset by an increase of $0.4 million attributable to other financing activities
Credit Facilities
As of March 31, 2022, we had no borrowings outstanding under our secured revolving credit facility. In addition, we had no borrowings outstanding under on our €5.5 million ($6.1 million) available lines of credit in Italy. We were in compliance with all required financial covenants as of March 31, 2022.
Other
For information regarding contingencies, see Note 7 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
In April 2020, we received $13.9 million in funds from the Centers for Medicare and Medicaid Service Accelerated and Advance Payment Program under the CARES Act. Starting in April 2021, Medicare began to recoup 25% of Medicare payments otherwise owed to the provider or supplier for submitted claims. Beginning in March 2022, recoupment increased to 50%, which will remain in effect for another six months. Thus, during this period, rather than receiving the full amount of payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance is reduced by the recoupment amount until the full balance has been repaid. As of March 31, 2022, the contract liability balance associated with the Accelerated and Advance Payment Program of the CARES Act totaled $1.4 million. The Company has classified the entire balance of this contract liability within other current liabilities based upon the Company’s estimates of when such funds will be recouped.
Spinal Kinetics Contingent Consideration
As part of the consideration for the Spinal Kinetics acquisition, we agreed to make contingent milestone payments of up to $60.0 million. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019. A revenue-based milestone payment, totaling $15.0 million, was achieved and paid in 2021 upon meeting certain net sales targets.
The remaining milestone payment is a revenue-based milestone payment of $30.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of March 31, 2022, was $11.7 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration (ultimate payment will either be $30.0 million or the liability will be reversed if the milestone is not met within the required timeline). As of March 31, 2022, the remaining contingent consideration liability was classified within other current liabilities. For additional discussion of this matter, see Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Neo Medical Convertible Loan
In October 2020, we entered into a Convertible Loan Agreement (the “Convertible Loan”) with Neo Medical SA, a privately held Swiss-based Medtech company (“Neo Medical”), whereby we loaned CHF 4.6 million ($5.0 million as of the issuance date) to Neo Medical. The loan bears interest at 8.0%, with interest due semi-annually. The Convertible Loan matures in October 2024; however, if a change in control of Neo Medical occurs prior to maturity, the Convertible Loan shall become immediately due upon such event.
Related Party Transaction
In February 2021, we entered into a technology assignment and royalty agreement with a medical device technology company partially owned and controlled by the wife of President and Chief Executive Officer, Jon Serbousek, whereby we acquired the intellectual property rights to certain assets for consideration of up to $10.0 million. Consideration was comprised of $1.0 million due at signing and $9.0 million in contingent consideration, dependent upon multiple milestones, such as receipt of 510(k) clearance or the attainment of certain net sales targets. None of the contingent consideration has been paid as of March 31, 2022.
IGEA S.p.A Exclusive License and Distribution Agreement
In April 2021, we entered into an Exclusive License and Distribution Agreement (the “License Agreement”) with IGEA S.p.A (“IGEA”), an Italian manufacturer and distributor of bone and cartilage stimulation systems. Per the terms of the License Agreement, we have the exclusive right to sell IGEA products in the U.S. and Canada. As consideration for the License Agreement, we agreed to pay up to $4.0 million, of which $0.5 million was paid in the second quarter of 2021, with certain payments contingent upon achieving an FDA milestone. The License Agreement also includes certain minimum purchase requirements.
Off-balance Sheet Arrangements
As of March 31, 2022, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2021.
Critical Accounting Estimates
Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our critical accounting estimates are detailed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes to our critical accounting estimates.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued or adopted accounting pronouncements. As of March 31, 2022, we do not expect any of the issued Accounting Standards Updates to materially affect our condensed consolidated financial statements upon adoption.
Non-GAAP Financial Measures
We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics used to supplement information regarding the performance and underlying trends of our business operations to facilitate comparisons to historical operating results and internally evaluate the effectiveness of our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-GAAP financial measures.
The non-GAAP financial measures used in this filing may have limitations as analytical tools, and should not be considered in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows.
Constant Currency
Constant currency is calculated by using foreign currency rates from the comparable, prior-year period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most commonly used by management to analyze net sales without the impact of changes in foreign currency rates.
EBITDA
EBITDA is a non-GAAP metric defined as earnings before interest income (expense), income taxes, depreciation, and amortization. EBITDA is the primary metric used by our Chief Operating Decision Maker in managing the business.
Free Cash Flow
Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities. Management uses free cash flow as an important indicator of how much cash is generated or used by our normal business operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and cash flow initiatives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks as disclosed in our Form 10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, known to the President and Chief Executive Officer or the Chief Financial Officer that occurred for the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 7 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein, which is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
The following risk factors supplement and should be read in conjunction with those contained in the risk factors disclosed in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2021, except as follows.
The conflict between Russia and Ukraine may continue to cause global economic instability and potentially disrupt supply chains.
In February 2022, Russia unlawfully invaded Ukraine, creating an ongoing humanitarian and global security crisis. In response, the U.S. and many other countries have imposed robust sanctions on Russia and may impose additional sanctions in the future. The ongoing invasion has caused significant damage and disruption to various aspects of the global economy. We have never conducted any meaningful business within Russia, and do not believe that the invasion will have material direct effects on our business or operations. However, we cannot predict the broader and longer-term consequences of this conflict or the sanctions imposed in response, and such consequences could include, among other things, general disruptions to global finance markets, exchange rates, and worldwide supply chains. Geopolitical instability and uncertainty resulting from the invasion could potentially have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions. These considerations could adversely affect our costs, risks, and efficiencies related to our supply chain and logistics. The potential effects of the conflict between Russia and Ukraine also could affect many of the other risk factors described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any repurchases of our common stock during the first quarter of 2022.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There are no matters to be reported under this heading.
Item 6. Exhibits
| 31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|---|---|
| 31.2* | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
| 32.1* | Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer. |
| 101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ORTHOFIX MEDICAL INC. | ||
|---|---|---|
| Date: May 6, 2022 | By: | /s/ JON SERBOUSEK |
| Name: | Jon Serbousek | |
| Title: | President and Chief Executive Officer, Director | |
| Date: May 6, 2022 | By: | /s/ DOUG RICE |
| Name: | Doug Rice | |
| Title: | Chief Financial Officer |
EX-31.1
Exhibit 31.1
CERTIFICATION
I, Jon Serbousek, certify that:
I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2022, of Orthofix Medical Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
- The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: May 6, 2022 | By: | /s/ JON SERBOUSEK |
|---|---|---|
| Name: | Jon Serbousek | |
| Title: | President and Chief Executive Officer, Director |
EX-31.2
Exhibit 31.2
CERTIFICATION
I, Doug Rice, certify that:
I have reviewed this quarterly report on Form 10-Q for the quarterly period ended March 31, 2022, of Orthofix Medical Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has material affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
- The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: May 6, 2022 | By: | /s/ DOUG RICE |
|---|---|---|
| Name: | Doug Rice | |
| Title: | Chief Financial Officer |
EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Orthofix Medical Inc. (“Orthofix”) on Form 10-Q for the quarterly period ended March 31, 2022, (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, Jon Serbousek, Chief Executive Officer and President of Orthofix, and Doug Rice, Chief Financial Officer, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Orthofix.
| Dated: May 6, 2022 | /s/ JON SERBOUSEK | |
|---|---|---|
| Name: | Jon Serbousek | |
| Title: | President and Chief Executive Officer | |
| Dated: May 6, 2022 | /s/ DOUG RICE | |
| Name: | Doug Rice | |
| Title: | Chief Financial Officer |