|
||||||||||||||||||||||||||
| SEC Info℠ | | | Home | | | Search | | | My Interests | | | Help | | | Sign In | | | Please Sign In | |||||||
|
||||||||||||||||||||||||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/06/20 Orthofix Medical Inc. 10-Q 6/30/20 81:10M ActiveDisclosure/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 969K
2: EX-10.2 Material Contract HTML 96K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
12: R1 Document and Entity Information HTML 77K
13: R2 Condensed Consolidated Balance Sheets HTML 108K
14: R3 Condensed Consolidated Balance Sheets HTML 35K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Income and HTML 114K
Comprehensive Income (Loss)
16: R5 Condensed Consolidated Statements of Changes in HTML 75K
Shareholders' Equity
17: R6 Condensed Consolidated Statements of Cash Flows HTML 123K
18: R7 Business, basis of presentation, COVID-19 update, HTML 41K
and CARES Act
19: R8 Recently adopted accounting standards and recently HTML 46K
issued accounting pronouncements
20: R9 Acquisitions HTML 93K
21: R10 Inventories HTML 46K
22: R11 Leases HTML 102K
23: R12 Other current liabilities HTML 27K
24: R13 Long-term debt HTML 27K
25: R14 Fair value measurements and investments HTML 155K
26: R15 Contingencies HTML 29K
27: R16 Accumulated other comprehensive loss HTML 46K
28: R17 Revenue recognition and accounts receivable HTML 260K
29: R18 Business segment information HTML 183K
30: R19 Acquisition-Related Amortization and Remeasurement HTML 55K
31: R20 Share-based compensation HTML 108K
32: R21 Income taxes HTML 31K
33: R22 Earnings per share ("Eps") HTML 69K
34: R23 Subsequent Events HTML 27K
35: R24 Recently adopted accounting standards and recently HTML 38K
issued accounting pronouncements (Policies)
36: R25 Acquisitions (Tables) HTML 92K
37: R26 Inventories (Tables) HTML 47K
38: R27 Leases (Tables) HTML 102K
39: R28 Fair value measurements and investments (Tables) HTML 159K
40: R29 Accumulated other comprehensive loss (Tables) HTML 45K
41: R30 Revenue recognition and accounts receivable HTML 259K
(Tables)
42: R31 Business segment information (Tables) HTML 180K
43: R32 Acquisition-Related Amortization and Remeasurement HTML 54K
(Tables)
44: R33 Share-based compensation (Tables) HTML 108K
45: R34 Earnings per share ("Eps") (Tables) HTML 67K
46: R35 Business, basis of presentation, COVID-19 update, HTML 51K
and CARES Act - Additional information (Detail)
47: R36 Recently Adopted Accounting Standards and Recently HTML 54K
Issued Accounting Pronouncements - Additional
Information (Detail)
48: R37 Acquisitions - Additional Information (Detail) HTML 57K
49: R38 Acquisitions - Summary of Fair Values of Assets HTML 68K
Acquired and Liabilities Assumed (Detail)
50: R39 Inventories - Schedule of Inventories (Detail) HTML 35K
51: R40 Leases - Summary of Lease Portfolio (Detail) HTML 52K
52: R41 Leases - Summary of Supplemental Cash Flow HTML 38K
Information Related to Leases (Detail)
53: R42 Leases - Additional Information (Detail) HTML 37K
54: R43 Other Current Liabilities - Additional Information HTML 35K
(Detail)
55: R44 Long-Term Debt - Additional Information (Detail) HTML 44K
56: R45 Fair Value Measurements and Investments - Schedule HTML 43K
of Financial Assets and Liabilities Measured at
Fair Value on Recurring Basis (Detail)
57: R46 Fair Value Measurements and Investments - HTML 50K
Additional Information (Detail)
58: R47 Fair Value Measurements and Investments - Schedule HTML 33K
of Reconciliation For Contingent Consideration
Measured At Fair Value Using Significant
Unobservable Inputs (Level 3) (Detail)
59: R48 Fair Value Measurements and Investments - Schedule HTML 43K
of Valuation Methodology and Unobservable Inputs
for Level 3 Assets and Liabilities Measured at
Fair Value (Detail)
60: R49 Fair Value Measurements and Investments - Schedule HTML 38K
of Reconciliation of Debt Security and Warrant
(Detail)
61: R50 Contingencies - Additional Information (Detail) HTML 32K
62: R51 Accumulated Other Comprehensive Loss - Components HTML 36K
of Changes in Accumulated Other Comprehensive Loss
(Detail)
63: R52 Revenue Recognition and Accounts Receivable - HTML 45K
Schedule of Net Sales by Major Product Category by
Reporting Segment (Detail)
64: R53 Revenue Recognition and Accounts Receivable - HTML 33K
Schedule of Components of Net Sales (Detail)
65: R54 Revenue Recognition and Accounts Receivable - HTML 48K
Additional Information (Detail)
66: R55 Revenue Recognition and Accounts Receivable - HTML 97K
Schedule of Net Impact of Adoption to Balance
Sheet (Detail)
67: R56 Revenue Recognition and Accounts Receivable - HTML 34K
Schedule of Allowance for Expected Credit Losses
(Detail)
68: R57 Business Segment Information - Additional HTML 26K
Information (Detail)
69: R58 Business Segment Information - Summary of EBIDTA HTML 44K
by Reporting Segment (Detail)
70: R59 Business Segment Information - Summary of Net HTML 44K
Sales by Geographic Destination for Each Reporting
Segment (Detail)
71: R60 Acquisition-Related Amortization and Remeasurement HTML 31K
- Components of Acquisition-Related Amortization
and Remeasurement (Detail)
72: R61 Share-based Compensation - Schedule of Components HTML 47K
of Share-Based Compensation Expense (Detail)
73: R62 Share-based Compensation - Additional Information HTML 26K
(Detail)
74: R63 Income Taxes - Additional Information (Detail) HTML 42K
75: R64 Earnings Per Share ("EPS") - Schedule of HTML 39K
Reconciliation of Weighted Average Shares Used in
Diluted EPS (Detail)
76: R65 Earnings Per Share ("EPS") - Additional HTML 30K
Information (Detail)
77: R66 Subsequent Events - Additional Information HTML 43K
(Detail)
79: XML IDEA XML File -- Filing Summary XML 151K
11: XML XBRL Instance -- ofix-10q_20200630_htm XML 2.75M
78: EXCEL IDEA Workbook of Financial Reports XLSX 90K
7: EX-101.CAL XBRL Calculations -- ofix-20200630_cal XML 176K
8: EX-101.DEF XBRL Definitions -- ofix-20200630_def XML 561K
9: EX-101.LAB XBRL Labels -- ofix-20200630_lab XML 1.14M
10: EX-101.PRE XBRL Presentations -- ofix-20200630_pre XML 921K
6: EX-101.SCH XBRL Schema -- ofix-20200630 XSD 187K
80: JSON XBRL Instance as JSON Data -- MetaLinks 367± 562K
81: ZIP XBRL Zipped Folder -- 0001564590-20-037284-xbrl Zip 212K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM i 10-Q
(Mark one)
|
i ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, i 2020 /
OR
|
i ☐ |
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: i 0-19961
i ORTHOFIX MEDICAL INC.
(Exact name of registrant as specified in its charter)
|
i Delaware |
|
i 98-1340767 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
i 3451 Plano Parkway, i Lewisville, i Texas |
|
i 75056 |
|
(Address of principal executive offices) |
|
(Zip Code) |
( i 214) i 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. ☒ i 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). ☒ i 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 |
i ☐ |
|
|
|
|
|
|
|
|
Emerging Growth Company |
i ☐ |
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). i ☐ Yes ☒ No
As of August 3, 2020, i 19,327,526 shares of common stock were issued and outstanding.
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
i Common stock, $0.10 par value per share |
|
i OFIX |
|
i Nasdaq Global Select Market |
|
|
|
|
|
Page |
|
PART I |
|
|
|
|
|
|
|
|
|
|
|
Item 1. |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019 |
|
4 |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 |
|
7 |
|
|
|
|
|
|
|
|
|
Notes to the Unaudited Condensed Consolidated Financial Statements |
|
8 |
|
|
|
|
|
|
|
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
21 |
|
|
|
|
|
|
|
Item 3. |
|
|
31 |
|
|
|
|
|
|
|
|
Item 4. |
|
|
32 |
|
|
|
|
|
|
|
|
PART II |
|
|
|
|
|
|
|
|
|
|
|
Item 1. |
|
|
33 |
|
|
|
|
|
|
|
|
Item 1A. |
|
|
33 |
|
|
|
|
|
|
|
|
Item 2. |
|
|
35 |
|
|
|
|
|
|
|
|
Item 3. |
|
|
35 |
|
|
|
|
|
|
|
|
Item 4. |
|
|
35 |
|
|
|
|
|
|
|
|
Item 5. |
|
|
35 |
|
|
|
|
|
|
|
|
Item 6. |
|
|
36 |
|
|
|
|
|
|
|
|
|
37 |
|||
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 in Part II Item 1A under the heading Risk Factors of this filing; Part I, Item 1A under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”); Part II, Item 1A under the heading Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020; and other Securities and Exchange Commission (“SEC”) filings. In addition to the risks described there, factors that could cause or contribute to such differences may include, but are not limited to, risks relating to the ongoing effects of the COVID-19 pandemic on our business, including (i) surgeries that use our products continuing to be delayed or cancelled as a result of hospitals and surgery centers being closed, limited to essential procedures or otherwise operating at reduced volume, (ii) portions of our global workforce being unable to work fully and/or effectively due to illness, quarantines, government actions (including "shelter in place" orders or advisories), facility closures, or other reasons related to the pandemic, (iii) disruptions to our supply chain, (iv) customers and payors being unable to satisfy contractual obligations to us, including the ability to make timely payment for purchases, (v) general economic weakness in markets in which we operate affecting customer spending, and (vii) other unpredictable aspects of the pandemic. To the extent that the COVID-19 pandemic continues to adversely affect our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A under the heading Risk Factors in our 2019 Form 10-K, such as our need to generate sufficient cash flows to service indebtedness and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing, and other events that could have a security impact as a result of our remote working environment or otherwise. As a result of these various risks, our actual outcomes and results may differ materially from those expressed in these forward-looking statements.
This list of risks, uncertainties, and other factors is not complete. We discuss some of these matters more fully, as well as certain risk factors that could affect our business, financial condition, results of operations, and prospects, in reports we file from time-to-time with the SEC, which are available to read at www.sec.gov. Any or all forward-looking statements that we make may turn out to be wrong (due to inaccurate assumptions that we make or otherwise), and our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to update, and expressly disclaim any duty to update, our forward-looking statements, whether as a result of circumstances or events that arise after the date hereof, new information, or otherwise.
Trademarks
Solely for convenience, our trademarks and trade names in this report are referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ORTHOFIX MEDICAL INC.
Condensed Consolidated Balance Sheets
|
(U.S. Dollars, in thousands, except share data) |
|
|
|
|
||||
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
i 172,888 |
|
|
$ |
i 69,719 |
|
|
Restricted cash |
|
|
i 503 |
|
|
|
i 684 |
|
|
Accounts receivable, net of allowances of $ i 6,364 and $ i 3,987, respectively |
|
|
i 67,407 |
|
|
|
i 86,805 |
|
|
Inventories |
|
|
i 82,046 |
|
|
|
i 82,397 |
|
|
Prepaid expenses and other current assets |
|
|
i 20,726 |
|
|
|
i 20,948 |
|
|
Total current assets |
|
|
i 343,570 |
|
|
|
i 260,553 |
|
|
Property, plant, and equipment, net |
|
|
i 65,113 |
|
|
|
i 62,727 |
|
|
Intangible assets, net |
|
|
i 57,527 |
|
|
|
i 54,139 |
|
|
Goodwill |
|
|
i 82,997 |
|
|
|
i 71,177 |
|
|
Deferred income taxes |
|
|
i 36,476 |
|
|
|
i 35,117 |
|
|
Other long-term assets |
|
|
i 10,026 |
|
|
|
i 11,907 |
|
|
Total assets |
|
$ |
i 595,709 |
|
|
$ |
i 495,620 |
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
i 14,911 |
|
|
$ |
i 19,886 |
|
|
Current portion of finance lease liability |
|
|
i 449 |
|
|
|
i 323 |
|
|
Other current liabilities |
|
|
i 74,236 |
|
|
|
i 64,674 |
|
|
Total current liabilities |
|
|
i 89,596 |
|
|
|
i 84,883 |
|
|
Long-term portion of finance lease liability |
|
|
i 22,506 |
|
|
|
i 20,648 |
|
|
Other long-term liabilities |
|
|
i 38,562 |
|
|
|
i 62,458 |
|
|
Long-term debt |
|
|
i 100,000 |
|
|
|
— |
|
|
Total liabilities |
|
|
i 250,664 |
|
|
|
i 167,989 |
|
|
Contingencies (Note 9) |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
Common shares $ i i 0.10 / par value; i i 50,000,000 / shares authorized; i i 19,209,063 / and i i 19,022,619 / issued and outstanding as of June 30, 2020 and December 31, 2019, respectively |
|
|
i 1,921 |
|
|
|
i 1,902 |
|
|
Additional paid-in capital |
|
|
i 282,287 |
|
|
|
i 271,019 |
|
|
Retained earnings |
|
|
i 64,103 |
|
|
|
i 57,749 |
|
|
Accumulated other comprehensive loss |
|
|
( i 3,266 |
) |
|
|
( i 3,039 |
) |
|
Total shareholders’ equity |
|
|
i 345,045 |
|
|
|
i 327,631 |
|
|
Total liabilities and shareholders’ equity |
|
$ |
i 595,709 |
|
|
$ |
i 495,620 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
4
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(Unaudited, U.S. Dollars, in thousands, except share and per share data) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net sales |
|
$ |
i 73,135 |
|
|
$ |
i 115,850 |
|
|
$ |
i 177,958 |
|
|
$ |
i 224,962 |
|
|
Cost of sales |
|
|
i 23,166 |
|
|
|
i 25,812 |
|
|
|
i 46,575 |
|
|
|
i 49,520 |
|
|
Gross profit |
|
|
i 49,969 |
|
|
|
i 90,038 |
|
|
|
i 131,383 |
|
|
|
i 175,442 |
|
|
Sales and marketing |
|
|
i 43,479 |
|
|
|
i 56,864 |
|
|
|
i 97,792 |
|
|
|
i 110,558 |
|
|
General and administrative |
|
|
i 15,047 |
|
|
|
i 21,935 |
|
|
|
i 32,912 |
|
|
|
i 42,407 |
|
|
Research and development |
|
|
i 8,765 |
|
|
|
i 8,980 |
|
|
|
i 18,729 |
|
|
|
i 18,209 |
|
|
Acquisition-related amortization and remeasurement (Note 13) |
|
|
i 3,678 |
|
|
|
i 1,808 |
|
|
|
( i 3,904 |
) |
|
|
i 8,265 |
|
|
Operating income (loss) |
|
|
( i 21,000 |
) |
|
|
i 451 |
|
|
|
( i 14,146 |
) |
|
|
( i 3,997 |
) |
|
Interest income (expense), net |
|
|
( i 901 |
) |
|
|
i 457 |
|
|
|
( i 1,324 |
) |
|
|
i 200 |
|
|
Other income (expense), net |
|
|
i 5,069 |
|
|
|
( i 236 |
) |
|
|
i 4,271 |
|
|
|
( i 640 |
) |
|
Income (loss) before income taxes |
|
|
( i 16,832 |
) |
|
|
i 672 |
|
|
|
( i 11,199 |
) |
|
|
( i 4,437 |
) |
|
Income tax benefit (expense) |
|
|
( i 1,592 |
) |
|
|
( i 1,219 |
) |
|
|
i 18,440 |
|
|
|
i 4,787 |
|
|
Net income (loss) |
|
$ |
( i 18,424 |
) |
|
$ |
( i 547 |
) |
|
$ |
i 7,241 |
|
|
$ |
i 350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
( i 0.96 |
) |
|
$ |
( i 0.03 |
) |
|
$ |
i 0.38 |
|
|
$ |
i 0.02 |
|
|
Diluted |
|
|
( i 0.96 |
) |
|
|
( i 0.03 |
) |
|
|
i 0.37 |
|
|
|
i 0.02 |
|
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
i 19,215,392 |
|
|
|
i 18,834,886 |
|
|
|
i 19,149,523 |
|
|
|
i 18,790,612 |
|
|
Diluted |
|
|
i 19,215,392 |
|
|
|
i 18,834,886 |
|
|
|
i 19,271,467 |
|
|
|
i 19,179,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss), before tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on debt security |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 2,593 |
) |
|
Reclassification adjustment for amortization of historical unrealized gains on debt security |
|
|
— |
|
|
|
( i 689 |
) |
|
|
— |
|
|
|
( i 689 |
) |
|
Currency translation adjustment |
|
|
i 1,484 |
|
|
|
i 147 |
|
|
|
( i 227 |
) |
|
|
( i 302 |
) |
|
Other comprehensive gain (loss) before tax |
|
|
i 1,484 |
|
|
|
( i 542 |
) |
|
|
( i 227 |
) |
|
|
( i 3,584 |
) |
|
Income tax related to other comprehensive gain (loss) |
|
|
— |
|
|
|
i 171 |
|
|
|
— |
|
|
|
i 812 |
|
|
Other comprehensive gain (loss), net of tax |
|
|
i 1,484 |
|
|
|
( i 371 |
) |
|
|
( i 227 |
) |
|
|
( i 2,772 |
) |
|
Comprehensive income (loss) |
|
$ |
( i 16,940 |
) |
|
$ |
( i 918 |
) |
|
$ |
i 7,014 |
|
|
$ |
( i 2,422 |
) |
The accompanying notes form an integral part of these condensed consolidated financial statements
5
ORTHOFIX MEDICAL INC.
|
(Unaudited, U.S. Dollars, in thousands, except share data) |
|
Number of Common Shares Outstanding |
|
|
Common Shares |
|
|
Additional Paid-in Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Loss |
|
|
Total Shareholders’ Equity |
|
||||||
|
|
|
i 19,022,619 |
|
|
$ |
i 1,902 |
|
|
$ |
i 271,019 |
|
|
$ |
i 57,749 |
|
|
$ |
( i 3,039 |
) |
|
$ |
i 327,631 |
|
|
|
Cumulative effect adjustment from adoption of ASU 2016-13 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 887 |
) |
|
|
— |
|
|
|
( i 887 |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 25,665 |
|
|
|
— |
|
|
|
i 25,665 |
|
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1,711 |
) |
|
|
( i 1,711 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 3,859 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3,859 |
|
|
Common shares issued, net |
|
|
i 33,559 |
|
|
|
i 4 |
|
|
|
i 808 |
|
|
|
— |
|
|
|
— |
|
|
|
i 812 |
|
|
|
|
i 19,056,178 |
|
|
$ |
i 1,906 |
|
|
$ |
i 275,686 |
|
|
$ |
i 82,527 |
|
|
$ |
( i 4,750 |
) |
|
$ |
i 355,369 |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 18,424 |
) |
|
|
— |
|
|
|
( i 18,424 |
) |
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,484 |
|
|
|
i 1,484 |
|
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 4,699 |
|
|
|
— |
|
|
|
— |
|
|
|
i 4,699 |
|
|
Common shares issued, net |
|
|
i 152,885 |
|
|
|
i 15 |
|
|
|
i 1,902 |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,917 |
|
|
|
|
i 19,209,063 |
|
|
$ |
i 1,921 |
|
|
$ |
i 282,287 |
|
|
$ |
i 64,103 |
|
|
$ |
( i 3,266 |
) |
|
$ |
i 345,045 |
|
|
|
(Unaudited, U.S. Dollars, in thousands, except share data) |
|
Number of Common Shares Outstanding |
|
|
Common Shares |
|
|
Additional Paid-in Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Income |
|
|
Total Shareholders’ Equity |
|
||||||
|
|
|
i 18,579,688 |
|
|
$ |
i 1,858 |
|
|
$ |
i 243,165 |
|
|
$ |
i 87,078 |
|
|
$ |
i 3,296 |
|
|
$ |
i 335,397 |
|
|
|
Cumulative effect adjustment from adoption of ASU 2016-02 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 71 |
|
|
|
— |
|
|
|
i 71 |
|
|
Cumulative effect adjustment from adoption of ASU 2018-02 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 938 |
) |
|
|
i 938 |
|
|
|
— |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 897 |
|
|
|
— |
|
|
|
i 897 |
|
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 2,401 |
) |
|
|
( i 2,401 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 5,685 |
|
|
|
— |
|
|
|
— |
|
|
|
i 5,685 |
|
|
Common shares issued, net |
|
|
i 211,081 |
|
|
|
i 21 |
|
|
|
i 4,012 |
|
|
|
— |
|
|
|
— |
|
|
|
i 4,033 |
|
|
|
|
i 18,790,769 |
|
|
$ |
i 1,879 |
|
|
$ |
i 252,862 |
|
|
$ |
i 87,108 |
|
|
$ |
i 1,833 |
|
|
$ |
i 343,682 |
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 547 |
) |
|
|
— |
|
|
|
( i 547 |
) |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 371 |
) |
|
|
( i 371 |
) |
|
Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
i 5,849 |
|
|
|
— |
|
|
|
— |
|
|
|
i 5,849 |
|
|
Common shares issued, net |
|
|
i 40,812 |
|
|
|
i 4 |
|
|
|
( i 823 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 819 |
) |
|
|
|
i 18,831,581 |
|
|
$ |
i 1,883 |
|
|
$ |
i 257,888 |
|
|
$ |
i 86,561 |
|
|
$ |
i 1,462 |
|
|
$ |
i 347,794 |
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
6
ORTHOFIX MEDICAL INC.
Condensed Consolidated Statements of Cash Flows
|
|
|
Six Months Ended June 30, |
|
|||||
|
(Unaudited, U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
i 7,241 |
|
|
$ |
i 350 |
|
|
Adjustments to reconcile net income to net cash from operating activities |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
i 13,269 |
|
|
|
i 11,905 |
|
|
Amortization of operating lease assets, debt costs, and other assets |
|
|
i 1,908 |
|
|
|
i 1,750 |
|
|
Provision for expected credit losses |
|
|
i 1,564 |
|
|
|
i 638 |
|
|
Deferred income taxes |
|
|
( i 1,184 |
) |
|
|
( i 2,316 |
) |
|
Share-based compensation |
|
|
i 8,558 |
|
|
|
i 11,534 |
|
|
Interest and loss on valuation of investment securities |
|
|
i 219 |
|
|
|
( i 1,023 |
) |
|
Change in fair value of contingent consideration |
|
|
( i 6,900 |
) |
|
|
i 5,870 |
|
|
Other |
|
|
( i 1,933 |
) |
|
|
i 477 |
|
|
Changes in operating assets and liabilities, net of effects of acquisitions |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
i 16,291 |
|
|
|
( i 3,535 |
) |
|
Inventories |
|
|
i 468 |
|
|
|
( i 2,389 |
) |
|
Prepaid expenses and other current assets |
|
|
i 43 |
|
|
|
( i 3,277 |
) |
|
Accounts payable |
|
|
( i 4,782 |
) |
|
|
i 1,626 |
|
|
Other current liabilities |
|
|
( i 1,022 |
) |
|
|
( i 8,138 |
) |
|
Contract liability (Note 11) |
|
|
i 13,851 |
|
|
|
— |
|
|
Payment of contingent consideration |
|
|
— |
|
|
|
( i 1,340 |
) |
|
Other long-term assets and liabilities |
|
|
( i 17,497 |
) |
|
|
( i 3,788 |
) |
|
Net cash from operating activities |
|
|
i 30,094 |
|
|
|
i 8,344 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Acquisition of a business |
|
|
( i 18,000 |
) |
|
|
— |
|
|
Capital expenditures for property, plant, and equipment |
|
|
( i 8,560 |
) |
|
|
( i 9,595 |
) |
|
Capital expenditures for intangible assets |
|
|
( i 772 |
) |
|
|
( i 743 |
) |
|
Asset acquisitions and other investments |
|
|
( i 1,240 |
) |
|
|
( i 6,400 |
) |
|
Net cash from investing activities |
|
|
( i 28,572 |
) |
|
|
( i 16,738 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
i 100,000 |
|
|
|
— |
|
|
Proceeds from issuance of common shares |
|
|
i 3,839 |
|
|
|
i 6,523 |
|
|
Payments related to withholdings for share-based compensation |
|
|
( i 1,110 |
) |
|
|
( i 3,309 |
) |
|
Payment of contingent consideration |
|
|
— |
|
|
|
( i 13,660 |
) |
|
Payments related to finance lease obligation |
|
|
( i 124 |
) |
|
|
( i 188 |
) |
|
Other financing activities |
|
|
( i 687 |
) |
|
|
( i 947 |
) |
|
Net cash from financing activities |
|
|
i 101,918 |
|
|
|
( i 11,581 |
) |
|
Effect of exchange rate changes on cash |
|
|
( i 452 |
) |
|
|
( i 71 |
) |
|
Net change in cash, cash equivalents, and restricted cash |
|
|
i 102,988 |
|
|
|
( i 20,046 |
) |
|
Cash, cash equivalents, and restricted cash at the beginning of period |
|
|
i 70,403 |
|
|
|
i 72,189 |
|
|
Cash, cash equivalents, and restricted cash at the end of period |
|
$ |
i 173,391 |
|
|
$ |
i 52,143 |
|
|
|
|
|
|
|
|
|
|
|
|
Components of cash, cash equivalents and restricted cash at the end of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
i 172,888 |
|
|
$ |
i 52,143 |
|
|
Restricted cash |
|
|
i 503 |
|
|
|
— |
|
|
Cash, cash equivalents, and restricted cash at the end of period |
|
$ |
i 173,391 |
|
|
$ |
i 52,143 |
|
The accompanying notes form an integral part of these condensed consolidated financial statements
7
ORTHOFIX MEDICAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
i1. Business, basis of presentation, COVID-19 update, and CARES Act
Description of the Business
Orthofix Medical Inc., together with its subsidiaries (the “Company” or “Orthofix”) is a global medical device company focused on musculoskeletal products and therapies. The Company’s mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, Orthofix’s spine and orthopedic extremities products are distributed in more than 70 countries via the Company'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, 2019. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for other interim periods or the year ending December 31, 2020.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition; contractual allowances; allowance for 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.
COVID-19 Update
The global Coronavirus Disease 2019 ("COVID-19") pandemic is significantly affecting the Company’s patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. Since March 2020, hospitals, ambulatory surgery centers and other medical facilities in the Company’s sales markets have cancelled or deferred elective surgery procedures and diverted resources to patients being treated for COVID-19. The pandemic has caused surgeons and patients to defer procedures in which the Company’s products otherwise would be used, and many facilities that specialize in such procedures have temporarily closed or reduced operating hours. In addition, broad economic factors resulting from the pandemic, including increased unemployment rates and reduced consumer spending, are affecting the Company’s patients and partners. These circumstances have negatively affected the Company’s net sales, particularly during the period from March 2020 through May 2020, when surgery center closures were most pronounced, though these effects remain ongoing.
The Company remains focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which it operates while assuring the continuity of its business operations. The Company's condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.
At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of infection rates in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain.
Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect the Company’s business during the second half of 2020 and beyond. The expected effects of COVID-19 on the Company’s business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which
8
localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients.
During the second quarter of 2020, the Company focused on making its facilities safe given updated COVID-19 public health guidelines, and management believes the employee workforce has adapted to the new environment. In particular, the Company has been able to continue its manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in the Company’s largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to manufacturing, distribution, administrative and other business operations (including downtime at manufacturing facilities and the interruption of the production of the Company’s products).
In addition, while the Company has not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).
The Company’s results of operations and liquidity have been materially impacted by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, supply chain interruptions, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the pandemic. The Company’s results of operations and liquidity may also be affected by the rate at which and timing of when elective procedures resume at hospitals and other facilities, which may occur at a faster or slower pace than current expectations. As of the date of issuance of these condensed consolidated financial statements, the full extent to which COVID-19 could materially affect the Company’s financial condition, liquidity, or results of operations is uncertain. These matters are also described in Part II, Item 1A of this Form 10-Q under heading Risk Factors.
As precautionary measures to increase the Company’s cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, the Company (i) completed a borrowing of $ i 100.0 million under its secured revolving credit facility on April 16, 2020 (of this amount, $ i 50.0 million was subsequently repaid in July 2020; see Note 7 for further discussion), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the Company’s 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated travel restrictions and a significant slow-down in hiring.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
On March 27, 2020, the President of the United States signed the CARES Act into federal law, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act had no impact to the Company’s income tax benefit reported within the condensed consolidated statements of operations for the six months ended June 30, 2020.
In addition, the CARES Act has provided financial relief to the Company through other various programs, which are each described in further detail below.
In April 2020, the Company received $ i 13.9 million in funds from the Centers for Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program. For discussion of the Company’s accounting for these funds, see Note 11.
The Company also automatically received, without request, $ i i 4.7 / million in funds from the U.S. Department of Health and Human Services in April 2020 as part of the Provider Relief Fund. Upon review of the qualifying criteria required to retain the funding, which primarily relate to lost revenues or the incurrence of expenses attributable to COVID-19, it was determined that the Company met the criteria to permanently retain all of the proceeds received. During the quarter ended June 30, 2020, the Company recognized other income of $ i 4.7 million related to this in-substance grant.
In addition, as part of the CARES Act, the Company is permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year, such that i 50% of the taxes is deferred until December 31, 2021, with the remaining i 50% deferred until December 31, 2022. As of June 30, 2020, the Company has deferred $ i 1.3 million associated with this program, all of which is classified within other long-term liabilities.
9
i
2. Recently adopted accounting standards and recently issued accounting pronouncements
i
Adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent Amendments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 (which was then further clarified in subsequent ASUs), which requires that credit losses for certain types of financial instruments, including trade accounting receivables, be estimated based on expected credit losses among other changes. Effective i January 1, 2020, the Company adopted ASU 2016-13 using a modified retrospective approach. Therefore, results for reporting periods after January 1, 2020 are presented under Topic 326, while prior period amounts are not adjusted and continue to be reported in accordance with the historical accounting guidance. See Note 11 for additional discussion of the Company’s adoption of Topic 326 and its resulting accounting policies.
Adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, which eliminates Step 2 of the previous goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. Under ASU 2017-04, a goodwill impairment loss will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The Company adopted this ASU effective i January 1, 2020 on a prospective basis. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact the measurement of any future goodwill impairment.
Adoption of ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, which eliminates certain disclosures, such as the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and adds new disclosure requirements for Level 3 measurements. The Company adopted this ASU effective i January 1, 2020, with certain provisions of the ASU applied retrospectively and other provisions provided prospectively. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of operations, or cash flows; however, adoption of the ASU did result in modified disclosures in Note 8.
Adoption of ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued ASU 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract was not affected by the amendments in this update. The Company adopted this ASU effective i January 1, 2020 on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact future cloud computing arrangements.
Adoption of ASU 2020-04, Reference Rate Reform (Topic 848)
In March 2020, the FASB issued ASU 2020-04, which provides temporary optional guidance to ease the potential financial reporting burden of the expected market transition away from LIBOR. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedge accounting, and other transactions affected by reference rate reform if certain criteria are met through December 31, 2022. The Company adopted this ASU effective i March 12, 2020, the effective date of the ASU, on a prospective basis. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows, but is expected to impact the future borrowing rate used for the Company’s secured revolving credit facility.
/ /
10
Recently issued accounting pronouncements
|
Topic |
|
Description of Guidance |
|
Effective Date |
|
Status of Company's Evaluation |
|
Simplifying the accounting for income taxes (ASU 2019-12) |
|
Reduces the complexity of accounting for income taxes by eliminating certain exceptions to the general principles in ASC 740, Income Taxes. Additionally, the ASU simplifies GAAP by amending the requirements related to the accounting for "hybrid" tax regimes and also adding the requirement to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination and when it should be considered a separate transaction. 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. |
i
3. Acquisitions
FITBONE Asset Purchase Agreement
On i February 3, 2020, the Company, through a wholly owned subsidiary, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE (“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones. Under the terms of the Purchase Agreement, as consideration for the acquired assets, the Company paid $ i 18.0 million in cash consideration and entered into a Contract Manufacturing and Supply Agreement (“CMSA”) with Wittenstein. The Company has accounted for this acquisition as a business combination. The acquisition was completed on i March 26, 2020.
iThe following table summarizes the preliminary estimated fair values of assets acquired and liabilities assumed at the acquisition date. A final determination of the allocation of the purchase price to assets acquired and liabilities assumed has not been made and is subject to completion of the Company’s valuation of the assets acquired and liabilities assumed, which may take up to one year.
|
(U.S. Dollars, in thousands) |
|
Preliminary Acquisition Date Fair Value as Previously Reported |
|
|
Adjustments |
|
|
Revised Preliminary Acquisition Date Fair Value |
|
|
Balance Sheet Classification |
|
Assigned Useful Life |
|||
|
Assets acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
i 528 |
|
|
$ |
— |
|
|
$ |
i 528 |
|
|
Inventories |
|
|
|
Developed technology |
|
|
i 4,500 |
|
|
|
— |
|
|
|
i 4,500 |
|
|
Intangible assets, net |
|
i 8 years |
|
Customer relationships |
|
|
i 800 |
|
|
|
— |
|
|
|
i 800 |
|
|
Intangible assets, net |
|
i 15 years |
|
Trade name |
|
|
i 600 |
|
|
|
— |
|
|
|
i 600 |
|
|
Intangible assets, net |
|
i 15 years |
|
In-process research and development ("IPR&D") |
|
|
i 440 |
|
|
|
( i 140 |
) |
|
|
i 300 |
|
|
Intangible assets, net |
|
i Indefinite |
|
Total identifiable assets acquired |
|
|
i 6,868 |
|
|
|
( i 140 |
) |
|
|
i 6,728 |
|
|
|
|
|
|
Goodwill |
|
|
i 11,132 |
|
|
|
i 140 |
|
|
|
i 11,272 |
|
|
|
|
|
|
Total fair value of consideration transferred |
|
$ |
i 18,000 |
|
|
$ |
— |
|
|
$ |
i 18,000 |
|
|
|
|
|
The Company recorded goodwill of $ i 11.3 million in connection with the acquisition, of which $ i 11.1 million was assigned to the Global Extremities reporting segment and $ i 0.2 million was assigned to the Global Spine reporting segment. Specifically, goodwill includes synergies associated with the purchase of the acquired assets and is expected to be deductible for tax purposes.
The IPR&D intangible asset is considered an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition, this asset is not amortized but, instead,
/11
is subject to impairment review and testing provisions. Upon completion of the IPR&D project, the Company will determine the useful life of the asset and begin amortization.
The Company also entered into a CMSA with Wittenstein for an initial term of up to i two years to manufacture the FITBONE product line. The Company is accounting for the CMSA as a finance lease. See Note 5 for further discussion of the recognized finance lease.
The Company did i i no / t recognize significant acquisition-related costs during the three months ended June 30, 2020 and 2019 and recorded $ i 0.4 million and $ i 0.3 million of acquisition related costs during the six months ended June 30 2020 and 2019, respectively. These costs are included in the condensed consolidated statements of operations within general and administrative expenses. Additionally, the Company recognized $ i i 0.2 / million in revenues related to the FITBONE product line during the three and six months ended June 30, 2020.
i
4. Inventories
iInventories were as follows:
|
(U.S. Dollars, in thousands) |
|
|
|
|
||||
|
Raw materials |
|
$ |
i 7,936 |
|
|
$ |
i 9,587 |
|
|
Work-in-process |
|
|
i 11,635 |
|
|
|
i 14,027 |
|
|
Finished products |
|
|
i 28,685 |
|
|
|
i 20,712 |
|
|
Field/consignment |
|
|
i 33,790 |
|
|
|
i 38,071 |
|
|
Inventories |
|
$ |
i 82,046 |
|
|
$ |
i 82,397 |
|
/
/ i
5. Leases
i
A summary of the Company’s lease portfolio as of June 30, 2020 and December 31, 2019 is presented in the table below:
|
(U.S. Dollars, in thousands) |
|
Classification |
|
|
|
||||
|
Right-of-use assets ("ROU assets") |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Other long-term assets |
|
$ |
i 5,161 |
|
$ |
i 5,798 |
|
|
Finance leases |
|
Property, plant and equipment, net |
|
|
i 21,399 |
|
|
i 20,207 |
|
|
Total ROU assets |
|
|
|
|
i 26,560 |
|
|
i 26,005 |
|
|
Lease Liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Other current liabilities |
|
|
i 1,934 |
|
|
i 1,875 |
|
|
Finance leases |
|
Current portion of finance lease liability |
|
|
i 449 |
|
|
i 323 |
|
|
Long-term |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Other long-term liabilities |
|
|
i 3,411 |
|
|
i 4,084 |
|
|
Finance leases |
|
Long-term portion of finance lease liability |
|
|
i 22,506 |
|
|
i 20,648 |
|
|
Total lease liabilities |
|
|
|
$ |
i 28,300 |
|
$ |
i 26,930 |
|
Supplemental cash flow information related to leases was as follows:
|
(U.S. Dollars, in thousands) |
|
Six Months Ended |
|
|
Six Months Ended |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
i 2,082 |
|
|
$ |
i 2,055 |
|
|
Operating cash flows from finance leases |
|
|
i 304 |
|
|
|
i 454 |
|
|
Financing cash flows from finance leases |
|
|
i 124 |
|
|
|
i 188 |
|
|
ROU assets obtained in exchange for lease obligations |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
i 400 |
|
|
|
i 362 |
|
|
Finance leases |
|
|
i 1,949 |
|
|
|
i 21,179 |
|
12
Wittenstein Contract Manufacturing and Supply Agreement
In March 2020, the Company entered into a CMSA with Wittenstein for an initial term of i two years to manufacture the FITBONE product line. As consideration, the Company will pay $ i 2.0 million to Wittenstein at the conclusion of the CMSA if certain conditions are met in relation to the prompt delivery of manufactured products. The Company is accounting for the CMSA as a finance lease as the Company has the right to direct the use of and to obtain substantially all of the economic benefits of the dedicated equipment used to manufacture the products and has the option to obtain title and possession of the equipment at the conclusion of the CMSA. As a result, the Company recognized both a finance lease liability and a related ROU asset of $ i i 1.9 / million as of the commencement date of the CMSA.
i
6. Other current liabilities
In December 2019, the Company approved and initiated a targeted restructuring plan in the U.S. to streamline costs and to better align talent with the Company’s strategic initiatives. The plan consists primarily of the realignment of certain personnel, representing an extremely limited number of positions, which will require severance payments. As of December 31, 2019, the Company recorded a liability of $ i 3.2 million in connection with this activity, all of which was recognized in 2019 within general and administrative expenses. During the three and six months ended June 30, 2020, the Company recorded additional accruals of $ i 0.2 million and $ i 1.3 million, respectively, associated with these activities, which included costs associated with the departure of a former executive officer during the first quarter. Payments were made during the three and six months ended June 30, 2020 totaling $ i i 0.9 / million. As of June 30, 2020, the Company had a liability of $ i 3.6 million associated with the restructuring plan.
/ i
7. Long-term debt
As discussed previously in Note 1, as a precautionary measure to increase the Company’s cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, the Company completed a borrowing of $ i 100.0 million under its secured revolving credit facility on April 16, 2020.
As of June 30, 2020, the Company had $ i 100.0 million in borrowings under the i five year $ i 300 million secured revolving credit facility. In addition, the Company had i no borrowings on its € i 5.5 million ($ i 6.2 million) available lines of credit in Italy. The Company was in compliance with all required financial covenants as of June 30, 2020.
In July 2020, the Company repaid $ i 50.0 million related to its borrowings under the secured revolving credit facility. Subsequent to this payment, the Company had $ i 50.0 million in borrowings under the secured revolving credit facility.
/ i
8. Fair value measurements and investments
iThe fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:
|
|
|
|
|
|
||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Total |
|
|||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bone Biologics equity securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 219 |
|
|
Total |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 219 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
( i 35,800 |
) |
|
$ |
( i 35,800 |
) |
|
$ |
( i 42,700 |
) |
|
Deferred compensation plan |
|
|
— |
|
|
|
( i 1,285 |
) |
|
|
— |
|
|
|
( i 1,285 |
) |
|
|
( i 1,255 |
) |
|
Total |
|
$ |
— |
|
|
$ |
( i 1,285 |
) |
|
$ |
( i 35,800 |
) |
|
$ |
( i 37,085 |
) |
|
$ |
( i 43,955 |
) |
Contingent Consideration
The Company recognized a contingent consideration obligation in connection with the acquisition of Spinal Kinetics in 2018. The contingent consideration consists of potential future milestone payments of up to $ i 60.0 million in cash. The milestone payments included (i) up to $ 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 $ i 45.0 million in connection with future sales of the acquired artificial discs. Milestones must be achieved within i five years of April 30, 2018 to trigger applicable payments. In February 2019, the FDA Milestone was achieved and paid.
/13
The estimated fair value of the remaining contingent consideration was $ i 35.8 million as of June 30, 2020. The estimated fair value reflects assumptions made by management as of June 30, 2020, including the impact of COVID-19 on significant unobservable assumptions, such as the expected timing and volume of elective procedures and the impact of these procedures on future revenues. However, the impact of COVID-19 on the Company’s business remains highly uncertain and difficult to predict. As information surrounding the pandemic is continuing to evolve, the actual amount ultimately paid could be higher or lower than the fair value of the remaining contingent consideration. At June 30, 2020, the Company has classified $ i 14.5 million of the liability attributable to the revenue-based milestone within other current liabilities, as the Company expects to pay one of the revenue-based milestones in the next i twelve months, and the remaining $ i 21.3 million within other long-term liabilities. Any changes in fair value are recorded as an operating expense within acquisition-related amortization and remeasurement.
iThe following table provides a reconciliation of the beginning and ending balances for the contingent consideration measured at fair value using significant unobservable inputs (Level 3):
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Contingent consideration at January 1 |
|
$ |
i 42,700 |
|
|
$ |
i 28,560 |
|
|
Increase (decrease) in fair value recognized in acquisition-related amortization and remeasurement |
|
|
( i 6,900 |
) |
|
|
i 5,870 |
|
|
Payment made |
|
|
— |
|
|
|
( i 15,000 |
) |
|
Contingent consideration at June 30 |
|
$ |
i 35,800 |
|
|
$ |
i 19,430 |
|
The $ i 6.9 million decrease in fair value in 2020 is primarily attributable to a change in management’s forecast of future net sales of artificial discs because of uncertainty in the market and the economy attributable to COVID-19.
The Company estimated the fair value of the remaining potential future revenue-based milestone payments using a Monte Carlo simulation 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 Spinal Kinetics products, the expected timing of payment, applicable discount rates applied, and assumptions for potential volatility of the Company’s forecasted revenue. Significant changes in these assumptions could result in a significantly higher or lower fair value.
iThe following table provides a range of key assumptions used within the valuation as of June 30, 2020.
|
(U.S. Dollars, in thousands) |
|
Fair Value as of |
|
|
Valuation Technique |
|
Unobservable inputs |
|
Range |
|
|
Contingent consideration |
|
$ |
i 35,800 |
|
|
Discounted cash flow |
|
Revenue discount rate |
|
5.49% - 5.56% |
|
|
|
|
|
|
|
|
|
Payment discount rate |
|
4.89% - 4.94% |
|
|
|
|
|
|
|
|
|
Projected year of payment |
|
2021 - 2022 |
eNeura Debt Security and Warrant
Until October of 2019, the Company held a debt security and a related warrant to purchase common stock of eNeura, Inc. (“eNeura”), a privately held medical technology company that is developing devices for the treatment of migraines. On October 25, 2019, the Company and eNeura settled the debt security for a $ i 4.0 million cash payment and agreed to transfer the warrant to eNeura.
iThe following table provides a reconciliation of the beginning and ending balances for the eNeura debt security and warrant measured and reflected in the condensed consolidated balance sheets at fair value using significant unobservable inputs (Level 3) prior to the settlement discussed above:
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
||
|
eNeura debt security and Warrant at January 1 |
|
$ |
i — |
|
|
$ |
i 17,820 |
|
|
Gains or losses recorded for the period |
|
|
|
|
|
|
|
|
|
Recognized in other comprehensive income (loss) |
|
|
i — |
|
|
|
( i 2,593 |
) |
|
Change in classification of debt security to held to maturity |
|
|
i — |
|
|
|
( i 15,227 |
) |
|
Issuance of Warrant as consideration for extension |
|
|
i — |
|
|
|
i 491 |
|
|
eNeura debt security and Warrant at June 30 |
|
$ |
i — |
|
|
$ |
i 491 |
|
14
i
9. Contingencies
In addition to the matters described below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to these matters are individually and collectively immaterial as to a possible loss and range of loss.
Italian Medical Device Payback (“IMDP”)
In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System. This healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology sector that sell medical devices in Italy. A key provision of the law is a ‘payback’ measure, requiring 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 recorded expense of $ i 0.4 million and $ i 0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $ i 0.7 million and $ i 0.7 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the Company has accrued $ i 5.7 million related to the IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount accrued once the law has been clarified by the Italian authorities.
Brazil
In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $ i 0.5 million (based upon foreign exchange rates as of June 30, 2020) of the Company’s cash in Brazil was frozen upon request to satisfy a judgment. Although the Company is appealing the judgment, this cash has been reclassified to restricted cash. As of June 30, 2020, the Company has an accrual of $ i 1.3 million related to this matter.
/i
10. Accumulated other comprehensive loss
i The components of and changes in accumulated other comprehensive loss were as follows:
|
(U.S. Dollars, in thousands) |
|
Currency Translation Adjustments |
|
|
|
Accumulated Other Comprehensive Loss |
|
||
|
Balance at December 31, 2019 |
|
$ |
( i 3,039 |
) |
|
|
$ |
( i 3,039 |
) |
|
Other comprehensive loss |
|
|
( i 227 |
) |
|
|
|
( i 227 |
) |
|
Income taxes |
|
|
— |
|
|
|
|
— |
|
|
Balance at June 30, 2020 |
|
$ |
( i 3,266 |
) |
|
|
$ |
( i 3,266 |
) |
/ i
11. Revenue recognition and accounts receivable
Revenue Recognition
The Company has two reporting segments, which consist of Global Spine and Global Extremities. Within the Global Spine reporting segment there are three product categories: Bone Growth Therapies, Spinal Implants and Biologics.
iThe tables below presents net sales by major product category by reporting segment:
|
|
|
Three Months Ended June 30, |
|
|||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Bone Growth Therapies |
|
$ |
i 28,379 |
|
|
$ |
i 50,109 |
|
|
|
- i 43.4 |
% |
|
Spinal Implants |
|
|
i 18,594 |
|
|
|
i 23,226 |
|
|
|
- i 19.9 |
% |
|
Biologics |
|
|
i 11,125 |
|
|
|
i 16,744 |
|
|
|
- i 33.6 |
% |
|
Global Spine |
|
|
i 58,098 |
|
|
|
i 90,079 |
|
|
|
- i 35.5 |
% |
|
Global Extremities |
|
|
i 15,037 |
|
|
|
i 25,771 |
|
|
|
- i 41.7 |
% |
|
Net sales |
|
$ |
i 73,135 |
|
|
$ |
i 115,850 |
|
|
|
- i 36.9 |
% |
/ /
15
|
|
|
Six Months Ended June 30, |
|
|||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Bone Growth Therapies |
|
$ |
i 73,822 |
|
|
$ |
i 97,392 |
|
|
|
- i 24.2 |
% |
|
Spinal Implants |
|
|
i 41,520 |
|
|
|
i 46,129 |
|
|
|
- i 10.0 |
% |
|
Biologics |
|
|
i 25,074 |
|
|
|
i 32,476 |
|
|
|
- i 22.8 |
% |
|
Global Spine |
|
|
i 140,416 |
|
|
|
i 175,997 |
|
|
|
- i 20.2 |
% |
|
Global Extremities |
|
|
i 37,542 |
|
|
|
i 48,965 |
|
|
|
- i 23.3 |
% |
|
Net sales |
|
$ |
i 177,958 |
|
|
$ |
i 224,962 |
|
|
|
- i 20.9 |
% |
Product Sales and Marketing Service Fees
iThe table below presents product sales and marketing service fees, which are both components of net sales:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Product sales |
|
$ |
i 62,435 |
|
|
$ |
i 99,865 |
|
|
$ |
i 153,856 |
|
|
$ |
i 193,799 |
|
|
Marketing service fees |
|
|
i 10,700 |
|
|
|
i 15,985 |
|
|
|
i 24,102 |
|
|
|
i 31,163 |
|
|
Net sales |
|
$ |
i 73,135 |
|
|
$ |
i 115,850 |
|
|
$ |
i 177,958 |
|
|
$ |
i 224,962 |
|
/
Product sales primarily consist of the sale of bone growth therapies devices, motion preservation products, and internal and external fixation products. Marketing service fees are received from MTF Biologics based on total sales of biologics tissues and relate solely to the Global Spine reporting segment. Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Shipping and handling costs for products shipped to customers are included in cost of sales.
Adoption of ASU 2016-13
As discussed in Note 2, the Company adopted ASU No. 2016-13 - Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments, using a modified retrospective approach. Adoption of the new standard resulted in an increase to the Company’s allowance for expected credit losses of $ i 1.1 million, an increase in deferred income tax assets of $ i 0.2 million, and a decrease in retained earnings of $ i 0.9 million as of January 1, 2020. i The net impact of adoption to the Company’s balance sheet as of January 1, 2020 is presented in the table below. The standard did not have a material impact to the Company’s condensed consolidated statements of operations or cash flows.
|
(U.S. Dollars, in thousands) |
|
|
|
Impact of Adoption of ASC 326 |
|
|
|
|||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash |
|
$ |
i 70,403 |
|
|
$ |
— |
|
|
$ |
i 70,403 |
|
|
Accounts receivable, net |
|
|
i 86,805 |
|
|
|
( i 1,120 |
) |
|
|
i 85,685 |
|
|
Inventories |
|
|
i 82,397 |
|
|
|
— |
|
|
|
i 82,397 |
|
|
Prepaid expenses and other current assets |
|
|
i 20,948 |
|
|
|
— |
|
|
|
i 20,948 |
|
|
Total current assets |
|
|
i 260,553 |
|
|
|
( i 1,120 |
) |
|
|
i 259,433 |
|
|
Deferred income taxes |
|
|
i 35,117 |
|
|
|
i 233 |
|
|
|
i 35,350 |
|
|
Other long-term assets |
|
|
i 199,950 |
|
|
|
— |
|
|
|
i 199,950 |
|
|
Total assets |
|
$ |
i 495,620 |
|
|
$ |
( i 887 |
) |
|
$ |
i 494,733 |
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
i 167,989 |
|
|
$ |
— |
|
|
$ |
i 167,989 |
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
$ |
i 1,902 |
|
|
$ |
— |
|
|
$ |
i 1,902 |
|
|
Additional paid-in capital |
|
|
i 271,019 |
|
|
|
— |
|
|
|
i 271,019 |
|
|
Retained earnings |
|
|
i 57,749 |
|
|
|
( i 887 |
) |
|
|
i 56,862 |
|
|
Accumulated other comprehensive loss |
|
|
( i 3,039 |
) |
|
|
— |
|
|
|
( i 3,039 |
) |
|
Total shareholders’ equity |
|
|
i 327,631 |
|
|
|
( i 887 |
) |
|
|
i 326,744 |
|
|
Total liabilities and shareholders’ equity |
|
$ |
i 495,620 |
|
|
$ |
( i 887 |
) |
|
$ |
i 494,733 |
|
16
Accounts receivable and related allowances
Subsequent to the adoption of ASU 2016-13, the Company’s allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that an entity does not expect to collect over the receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivables, the aging of outstanding receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, the Company analyzes its receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.
iThe following table provides a detail of changes in the Company’s allowance for expected credit losses for the three and six months ended June 30, 2020:
|
(U.S. Dollars, in thousands) |
|
Three Months Ended June 30, 2020 |
|
|
Six Months Ended June 30, 2020 |
|
||
|
Allowance for expected credit losses beginning balance |
|
$ |
i 5,591 |
|
|
$ |
i 3,987 |
|
|
Impact of adoption of ASU 2016-13 |
|
|
— |
|
|
|
i 1,120 |
|
|
Current period provision for expected credit losses |
|
|
i 885 |
|
|
|
i 1,564 |
|
|
Writeoffs charged against the allowance and other |
|
|
( i 224 |
) |
|
|
( i 338 |
) |
|
Effect of changes in foreign exchange rates |
|
|
i 112 |
|
|
|
i 31 |
|
|
Allowance for expected credit losses ending balance |
|
$ |
i 6,364 |
|
|
$ |
i 6,364 |
|
Contract Liabilities
The Company’s contract liabilities largely relate to a prepayment of $ i 13.9 million received in April 2020 from the CMS as part of the Accelerated and Advance Payment Program of the CARES Act intended to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. Repayment of this amount is required to begin 120 days after the issuance of the payment, or beginning in August 2020. After the 120 day period, every claim submitted by the Company will be offset against the accelerated / advanced payment. Thus, instead of receiving payment for newly submitted claims, the Company’s outstanding accelerated / advance payment balance will be reduced by the claim amount.
This contract liability is included within other current liabilities and totaled $ i 13.9 million as of June 30, 2020. The Company did i i no / t recognize any net sales during the three and six months ended June 30, 2020, respectively, attributable to the satisfaction of performance obligations related to the CMS prepayment; however, the Company expects to recognize the full amount of the prepayment as net sales in fiscal year 2020.
Other Contract Assets
The Company’s contract assets, excluding trade accounts receivable (“Other Contract Assets”), largely consist of payments made to certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive distribution of Orthofix products. Other Contract Assets are included in other long-term assets or other current assets, dependent upon the original term of the related agreement, and totaled $ i 2.6 million and $ i 3.7 million as of June 30, 2020, and December 31, 2019, respectively.
17
i
12. Business segment information
The Company has i two reporting segments: Global Spine and Global Extremities. The primary metric used in managing the Company is earnings before interest, tax, depreciation, and amortization (“EBITDA”). 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. i The table below presents EBITDA by reporting segment:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Global Spine |
|
$ |
( i 3,707 |
) |
|
$ |
i 16,523 |
|
|
$ |
i 18,710 |
|
|
$ |
i 27,098 |
|
|
Global Extremities |
|
|
( i 3,359 |
) |
|
|
i 2,750 |
|
|
|
( i 5,253 |
) |
|
|
i 2,577 |
|
|
Corporate |
|
|
( i 1,923 |
) |
|
|
( i 12,880 |
) |
|
|
( i 10,063 |
) |
|
|
( i 22,407 |
) |
|
Total EBITDA |
|
$ |
( i 8,989 |
) |
|
$ |
i 6,393 |
|
|
$ |
i 3,394 |
|
|
$ |
i 7,268 |
|
|
Depreciation and amortization |
|
|
( i 6,942 |
) |
|
|
( i 6,178 |
) |
|
|
( i 13,269 |
) |
|
|
( i 11,905 |
) |
|
Interest income (expense), net |
|
|
( i 901 |
) |
|
|
i 457 |
|
|
|
( i 1,324 |
) |
|
|
i 200 |
|
|
Income (loss) before income taxes |
|
$ |
( i 16,832 |
) |
|
$ |
i 672 |
|
|
$ |
( i 11,199 |
) |
|
$ |
( i 4,437 |
) |
Geographical information
iThe table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Global Spine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
i 55,236 |
|
|
$ |
i 84,601 |
|
|
$ |
i 132,342 |
|
|
$ |
i 164,127 |
|
|
International |
|
|
i 2,862 |
|
|
|
i 5,478 |
|
|
|
i 8,074 |
|
|
$ |
i 11,870 |
|
|
Total Global Spine |
|
|
i 58,098 |
|
|
|
i 90,079 |
|
|
|
i 140,416 |
|
|
|
i 175,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Extremities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
i 4,040 |
|
|
|
i 6,844 |
|
|
|
i 10,083 |
|
|
|
i 13,442 |
|
|
International |
|
|
i 10,997 |
|
|
|
i 18,927 |
|
|
|
i 27,459 |
|
|
|
i 35,523 |
|
|
Total Global Extremities |
|
|
i 15,037 |
|
|
|
i 25,771 |
|
|
|
i 37,542 |
|
|
|
i 48,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
i 59,276 |
|
|
|
i 91,445 |
|
|
|
i 142,425 |
|
|
|
i 177,569 |
|
|
International |
|
|
i 13,859 |
|
|
|
i 24,405 |
|
|
|
i 35,533 |
|
|
|
i 47,393 |
|
|
Net sales |
|
$ |
i 73,135 |
|
|
$ |
i 115,850 |
|
|
$ |
i 177,958 |
|
|
$ |
i 224,962 |
|
/ i
13. Acquisition-related amortization and remeasurement
Acquisition-related amortization and remeasurement consists of amortization related to intangible assets acquired through business combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement. i Components of acquisition-related amortization and remeasurement are as follows:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Changes in fair value of contingent consideration |
|
$ |
i 2,100 |
|
|
$ |
i 470 |
|
|
$ |
( i 6,900 |
) |
|
$ |
i 5,870 |
|
|
Amortization of acquired intangibles |
|
|
i 1,578 |
|
|
|
i 1,338 |
|
|
|
i 2,996 |
|
|
|
i 2,395 |
|
|
Total |
|
$ |
i 3,678 |
|
|
$ |
i 1,808 |
|
|
$ |
( i 3,904 |
) |
|
$ |
i 8,265 |
|
/
18
i
14. Share-based compensation
i
Components of share-based compensation expense are as follows:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Cost of sales |
|
$ |
i 205 |
|
|
$ |
i 180 |
|
|
$ |
i 386 |
|
|
$ |
i 367 |
|
|
Sales and marketing |
|
|
i 1,533 |
|
|
|
i 692 |
|
|
|
i 2,229 |
|
|
|
i 1,302 |
|
|
General and administrative |
|
|
i 2,639 |
|
|
|
i 4,564 |
|
|
|
i 5,169 |
|
|
|
i 9,128 |
|
|
Research and development |
|
|
i 322 |
|
|
|
i 413 |
|
|
|
i 774 |
|
|
|
i 737 |
|
|
Total |
|
$ |
i 4,699 |
|
|
$ |
i 5,849 |
|
|
$ |
i 8,558 |
|
|
$ |
i 11,534 |
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Stock options |
|
$ |
i 750 |
|
|
$ |
i 926 |
|
|
$ |
i 1,054 |
|
|
$ |
i 3,038 |
|
|
Time-based restricted stock awards and units |
|
|
i 2,751 |
|
|
|
i 2,951 |
|
|
|
i 5,172 |
|
|
|
i 4,657 |
|
|
Market-based restricted stock units |
|
|
i 810 |
|
|
|
i 1,576 |
|
|
|
i 1,480 |
|
|
|
i 2,923 |
|
|
Stock purchase plan |
|
|
i 388 |
|
|
|
i 396 |
|
|
|
i 852 |
|
|
|
i 916 |
|
|
Total |
|
$ |
i 4,699 |
|
|
$ |
i 5,849 |
|
|
$ |
i 8,558 |
|
|
$ |
i 11,534 |
|
During the three months ended June 30, 2020 and 2019, the Company issued i 152,885 and i 40,812 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units. During the six months ended June 30, 2020 and 2019, the Company issued i 186,444 and i 251,893 shares, respectively, of common stock related to stock purchase plan issuances, stock option exercises and the vesting of restricted stock awards and units.
/i
15. Income taxes
Income tax provisions for interim periods are based on an estimated annual income tax rate, adjusted for discrete tax items. As a result, the Company’s interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
For the three months ended June 30, 2020 and 2019, the effective tax rate was ( i 9.5%) and i 181.4%, respectively. For the six months ended June 30, 2020 and 2019, the effective tax rate was i 164.7% and i 107.9%, respectively. The primary factors affecting the Company’s effective tax rate for the three months and six months ended June 30, 2020, were statute expirations related to unrecognized tax benefits, financial deductions not recognized for tax purposes, limits on executive compensation, and reversal of tax benefits related to certain performance stock units forfeited in the current year. The financial deductions not recognized for tax purposes are primarily related to the remeasurement of contingent consideration. The effective tax rate for the three months ended June 30, 2020 was further affected by the reversal of a $ i 3.0 million tax benefit recorded in the first quarter related to a beneficial rate difference on a potential federal loss carryback available under the CARES Act that the Company no longer expects to benefit from.
The CARES Act, among other things, includes income tax provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. As of June 30, 2020, the Company does i not expect a significant impact to its income tax expense (benefit) for fiscal year 2020 as a result of the CARES Act.
During the first quarter of 2020, the statute of limitations expired related to certain unrecognized tax benefits, which resulted in the recognition of a net benefit of $ i 17.8 million. During the three and six months ended June 30, 2020, the Company recognized net expense of $ i 0.1 million and a net benefit of $ i 17.8 million, respectively, related to uncertain tax benefits. The Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits related to the resolution of federal, state and foreign matters could be reduced by $ i 0.2 million to $ i 0.7 million as audits close and statutes expire.
/
19
i
16. Earnings per share (“EPS”)
The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). For the three and six months ended June 30, 2020 and 2019, no significant adjustments were made to net income for purposes of calculating basic and diluted EPS.
iThe following is a reconciliation of the weighted average shares used in diluted EPS computations.
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended |
|
||||||||||
|
|
|
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|||||
|
Weighted average common shares-basic |
|
|
i 19,215,392 |
|
|
|
i 18,834,886 |
|
|
|
i 19,149,523 |
|
|
|
i 18,790,612 |
|
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised stock options and stock purchase plan |
|
|
— |
|
|
|
— |
|
|
|
i 57,249 |
|
|
|
i 259,967 |
|
|
Unvested restricted stock awards and units |
|
|
— |
|
|
|
— |
|
|
|
i 64,695 |
|
|
|
i 128,478 |
|
|
Weighted average common shares-diluted |
|
|
i 19,215,392 |
|
|
|
i 18,834,886 |
|
|
|
i 19,271,467 |
|
|
|
i 19,179,057 |
|
There were i 2,141,086 and i 1,987,907 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the three months ended June 30, 2020 and 2019, respectively, and i 1,406,046 and i 483,731 weighted average outstanding stock options and restricted stock awards and units not included in the diluted EPS computation for the six months ended June 30, 2020, and 2019, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based restricted stock awards and units, all necessary conditions had not been satisfied by the end of the respective period.
/i
17. Subsequent Events
In July 2020, the Company, through a wholly owned subsidiary, entered into an agreement to acquire certain assets of a medical device distributor. i The Company has agreed to pay consideration of up to $ i 7.6 million in accordance with the parties’ agreement. /
In July 2020, the Company repaid $ i 50.0 million related to its borrowings under the secured revolving credit facility. Subsequent to this payment, the Company had $ i 50.0 million in borrowings under the secured revolving credit facility.
/
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of Orthofix Medical Inc.’s (sometimes referred to as “we,” “us” or “our”) financial condition and results of our operations should be read in conjunction with the “Forward-Looking Statements” and our condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q.
Executive Summary
We are a global medical device company focused on musculoskeletal products and therapies. Our mission is to improve patients' lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in Lewisville, Texas, our spine and orthopedic extremities products are distributed in more than 70 countries via our sales representatives and distributors.
Notable financial metrics and achievements in the second quarter of 2020 include the following:
|
|
• |
Net sales were $73.1 million, a decrease of 36.9% on a reported basis and 36.6% on a constant currency basis |
|
|
• |
Record Motion Preservation sales quarter of $3.6 million in the U.S., an increase of 24% sequentially |
|
|
• |
Net loss of $18.4 million, a decrease of $17.9 million compared to the prior year period |
|
|
• |
Decrease in earnings before interest, income taxes, depreciation, and amortization (“EBITDA”) of $15.4 million, largely driven by the decline in net sales |
COVID-19 Update and Outlook
The global COVID-19 pandemic is significantly affecting our patients, communities, employees and business operations. The pandemic has led to the temporary closure of businesses, restrictions on travel and the implementation of physical distancing measures around the world. Since March 2020, hospitals, ambulatory surgery centers and other medical facilities in our sales markets have cancelled or deferred elective surgery procedures and diverted resources to patients being treated for COVID-19. The pandemic has caused surgeons and patients to defer procedures in which our products otherwise would be used, and many facilities that specialize in the procedures in which our products otherwise would be used have temporarily closed or reduced operating hours. In addition, broad economic factors resulting from the pandemic, including increased unemployment rates and reduced consumer spending, are affecting our patients and partners. These circumstances have negatively affected the sales of our products, particularly during the period from March 2020 through May 2020 when surgery center closures were most pronounced, though these effects remain ongoing. However, we remain focused on protecting the health and wellbeing of its employees, partners, patients, and the communities in which we operate while assuring the continuity of our business operations.
At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of infection rates in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain.
Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our business during the second half of 2020 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients.
During the second quarter of 2020, we focused on making our facilities safe given updated COVID-19 public health guidelines, and we believe that our employee workforce has adapted to the new environment. In particular, we have been able to continue our manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in our largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to our manufacturing, distribution, administrative and other business operations (including downtime at our manufacturing facilities and the interruption of the production of our products).
In addition, while we have not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).
21
Our results of operations and liquidity have been materially impacted by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, supply chain interruptions, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the pandemic. Our results of operations and liquidity may also be affected by the rate at which and timing of when elective procedures resume at hospitals and other facilities, which may occur at a faster or slower pace than current expectations. As of the date of issuance of these condensed consolidated financial statements, the full extent to which COVID-19 could materially affect the Company’s financial condition, liquidity, or results of operations is uncertain.
As precautionary measures to increase our cash position and preserve financial flexibility in view of the current uncertainty resulting from the COVID-19 pandemic, we (i) completed a borrowing of $100.0 million under our secured revolving credit facility on April 16, 2020 (of this amount, $50.0 million was subsequently repaid in July 2020), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the our 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated travel restrictions and a significant slow-down in hiring.
Results of Operations
The following table provides certain items in our condensed consolidated statements of operations and comprehensive income (loss) as a percent of net sales:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended |
|
||||||||||
|
|
|
(%) |
|
|
2019 (%) |
|
|
2020 (%) |
|
|
2019 (%) |
|
||||
|
Net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost of sales |
|
|
31.7 |
|
|
|
22.3 |
|
|
|
26.2 |
|
|
|
22.0 |
|
|
Gross profit |
|
|
68.3 |
|
|
|
77.7 |
|
|
|
73.8 |
|
|
|
78.0 |
|
|
Sales and marketing |
|
|
59.5 |
|
|
|
49.1 |
|
|
|
55.0 |
|
|
|
49.1 |
|
|
General and administrative |
|
|
20.6 |
|
|
|
18.9 |
|
|
|
18.5 |
|
|
|
18.9 |
|
|
Research and development |
|
|
12.0 |
|
|
|
7.8 |
|
|
|
10.5 |
|
|
|
8.1 |
|
|
Acquisition-related amortization and remeasurement |
|
|
4.9 |
|
|
|
1.5 |
|
|
|
(2.3 |
) |
|
|
3.7 |
|
|
Operating income (loss) |
|
|
(28.7 |
) |
|
|
0.4 |
|
|
|
(7.9 |
) |
|
|
(1.8 |
) |
|
Net income (loss) |
|
|
(25.2 |
) |
|
|
(0.5 |
) |
|
|
4.1 |
|
|
|
0.2 |
|
Net Sales by Product Category and Reporting Segment
The following tables provide net sales by major product category by reporting segment:
|
|
|
Three Months Ended June 30, |
|
|
Percentage Change |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Reported |
|
|
Constant Currency |
|
||||
|
Bone Growth Therapies |
|
$ |
28,379 |
|
|
$ |
50,109 |
|
|
|
-43.4 |
% |
|
|
-43.4 |
% |
|
Spinal Implants |
|
|
18,594 |
|
|
|
23,226 |
|
|
|
-19.9 |
% |
|
|
-19.7 |
% |
|
Biologics |
|
|
11,125 |
|
|
|
16,744 |
|
|
|
-33.6 |
% |
|
|
-33.6 |
% |
|
Global Spine |
|
|
58,098 |
|
|
|
90,079 |
|
|
|
-35.5 |
% |
|
|
-35.4 |
% |
|
Global Extremities |
|
|
15,037 |
|
|
|
25,771 |
|
|
|
-41.7 |
% |
|
|
-40.5 |
% |
|
Net sales |
|
$ |
73,135 |
|
|
$ |
115,850 |
|
|
|
-36.9 |
% |
|
|
-36.6 |
% |
22
|
|
|
Six Months Ended June 30, |
|
|
Percentage Change |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Reported |
|
|
Constant Currency |
|
||||
|
Bone Growth Therapies |
|
$ |
73,822 |
|
|
$ |
97,392 |
|
|
|
-24.2 |
% |
|
|
-24.2 |
% |
|
Spinal Implants |
|
|
41,520 |
|
|
|
46,129 |
|
|
|
-10.0 |
% |
|
|
-9.7 |
% |
|
Biologics |
|
|
25,074 |
|
|
|
32,476 |
|
|
|
-22.8 |
% |
|
|
-22.8 |
% |
|
Global Spine |
|
|
140,416 |
|
|
|
175,997 |
|
|
|
-20.2 |
% |
|
|
-20.1 |
% |
|
Global Extremities |
|
|
37,542 |
|
|
|
48,965 |
|
|
|
-23.3 |
% |
|
|
-21.6 |
% |
|
Net sales |
|
$ |
177,958 |
|
|
$ |
224,962 |
|
|
|
-20.9 |
% |
|
|
-20.5 |
% |
Global Spine
Global Spine offers the following products categories:
|
|
- |
Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide associated services to hospitals, healthcare providers, and patients. |
|
|
- |
Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and fixation implant products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers. |
|
|
- |
Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of employed and independent sales representatives. |
Three months ended June 30, 2020 compared to 2019
Net sales decreased $32.0 million or 35.5%
|
|
• |
Bone Growth Therapies net sales decreased $21.7 million or 43.4%, primarily driven by the disruption caused by COVID-19, which has led to lower order volumes and a longer revenue cycle for these products, particularly due to many patients only being able to be fitted for devices in a virtual or telehealth environment |
|
|
• |
Spinal Implants net sales decreased $4.6 million or 19.9%, primarily driven by the reduction in elective procedures in both the U.S. and internationally due to COVID-19; however, Motion Preservation net sales increased $3.4 million in the U.S. when compared to prior year as a result of increases in case volumes and active surgeons |
|
|
• |
Biologics net sales decreased $5.6 million or 33.6%, primarily driven by lower procedure volumes as a result of the disruption caused by COVID-19 |
Six months ended June 30, 2020 compared to 2019
Net sales decreased $35.6 million or 20.2%
|
|
• |
Bone Growth Therapies net sales decreased $23.6 million or 24.2%, primarily driven by the disruption caused by COVID-19, which has led to lower order volumes and a longer revenue cycle for these products, particularly due to many patients only being able to be fitted for devices in a virtual or telehealth environment |
|
|
• |
Spinal Implants net sales decreased $4.6 million or 10.0%, primarily driven by the reduction in elective procedures in both the U.S. and internationally due to COVID-19; however, Motion Preservation net sales increased $6.4 million in the U.S. when compared to prior year as a result of increases in case volumes and active surgeons |
|
|
• |
Biologics net sales decreased $7.4 million or 22.8%, primarily driven by lower procedure volumes as a result of the disruption caused by COVID-19 |
23
Global Extremities
Global Extremities offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions unrelated to the spine. Global Extremities distributes its products globally through a network of distributors and sales representatives to sell orthopedic products to hospitals and health providers.
Three months ended June 30, 2020 compared to 2019
Net sales decreased $10.7 million or 41.7%
|
|
• |
Decrease of $10.4 million, primarily a result of the impact of COVID-19 on procedure volumes |
|
|
• |
Decrease of $0.3 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales |
Six months ended June 30, 2020 compared to 2019
Net sales decreased $11.4 million or 23.3%
|
|
• |
Decrease of $10.6 million, primarily a result of the impact of COVID-19 on procedure volumes |
|
|
• |
Decrease of $0.8 million due to the changes in foreign currency exchange rates, which had a negative impact on net sales |
Gross Profit
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Net sales |
|
$ |
73,135 |
|
|
$ |
115,850 |
|
|
|
(36.9 |
%) |
|
$ |
177,958 |
|
|
$ |
224,962 |
|
|
|
(20.9 |
%) |
|
Cost of sales |
|
|
23,166 |
|
|
|
25,812 |
|
|
|
(10.3 |
%) |
|
|
46,575 |
|
|
|
49,520 |
|
|
|
(5.9 |
%) |
|
Gross profit |
|
$ |
49,969 |
|
|
$ |
90,038 |
|
|
|
(44.5 |
%) |
|
$ |
131,383 |
|
|
$ |
175,442 |
|
|
|
(25.1 |
%) |
|
Gross margin |
|
|
68.3 |
% |
|
|
77.7 |
% |
|
|
(9.4 |
%) |
|
|
73.8 |
% |
|
|
78.0 |
% |
|
|
-4.2 |
% |
Three months ended June 30, 2020 compared to 2019
Gross profit decreased $40.1 million
|
|
• |
Decrease primarily due to the decline in net sales and lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes, as well as an increase in expense resulting from non-cash inventory reserves |
Six months ended June 30, 2020 compared to 2019
Gross profit decreased $44.1 million
|
|
• |
Decrease primarily due to the decline in net sales and lower fixed cost absorption, primarily attributable to COVID-19 and its negative effect on elective procedure volumes, as well as an increase in expense resulting from non-cash inventory reserves |
Sales and Marketing Expense
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Sales and marketing |
|
$ |
43,479 |
|
|
$ |
56,864 |
|
|
|
(23.5 |
%) |
|
$ |
97,792 |
|
|
$ |
110,558 |
|
|
|
(11.5 |
%) |
|
As a percentage of net sales |
|
|
59.5 |
% |
|
|
49.1 |
% |
|
|
10.4 |
% |
|
|
55.0 |
% |
|
|
49.1 |
% |
|
|
5.9 |
% |
Three months ended June 30, 2020 compared to 2019
Sales and marketing expense decreased $13.4 million
|
|
• |
Decrease largely attributable to reduced commissions as a result of the decline in net sales, partially offset by commission support provided to our direct sales representatives |
|
|
• |
Decrease of $4.5 million associated with short-term expense savings actions for salary reductions, travel, entertainment, and professional fees due to the limited mobility of our sales force and the conversion of many sales events from in-person events to virtual events |
24
Six months ended June 30, 2020 compared to 2019
Sales and marketing expense decreased $12.8 million
|
|
• |
Decrease largely attributable to reduced commissions as a result of the decline in net sales, partially offset by commission support provided to our direct sales representatives |
|
|
• |
Decrease of $5.2 million associated with short-term expense savings actions for travel, entertainment, and professional fees due to the limited mobility of our sales force and the conversion of many sales events from in-person events to virtual events |
General and Administrative Expense
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
General and administrative |
|
$ |
15,047 |
|
|
$ |
21,935 |
|
|
|
(31.4 |
%) |
|
$ |
32,912 |
|
|
$ |
42,407 |
|
|
|
(22.4 |
%) |
|
As a percentage of net sales |
|
|
20.6 |
% |
|
|
18.9 |
% |
|
|
1.7 |
% |
|
|
18.5 |
% |
|
|
18.9 |
% |
|
|
(0.4 |
%) |
Three months ended June 30, 2020 compared to 2019
General and administrative expense decreased $6.9 million
|
|
• |
Decrease of $3.9 million in expenses associated with strategic investments, largely due to diligence and integration costs associated with strategic initiatives |
|
|
• |
Decrease of $1.0 million attributable to succession and transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain executive officers and from targeted restructuring activities |
|
|
• |
Decrease of $0.9 million associated with share-based compensation expense, excluding amounts included within succession, transition, and restructuring activities discussed above |
|
|
• |
Decrease of $1.0 million related to short-term expense savings actions, such as salary reductions, travel and entertainment expenses and professional fees, primarily related to our legal, finance, information technology, and compliance functions |
Six months ended June 30, 2020 compared to 2019
General and administrative expense decreased $9.5 million
|
|
• |
Decrease of $4.8 million in expenses associated with strategic investments, largely due to diligence and integration costs associated with strategic initiatives |
|
|
• |
Decrease of $2.2 million attributable to succession and transition charges, including acceleration of certain share-based compensation expense, relating to the retirement, transition, or termination of certain executive officers and from targeted restructuring activities |
|
|
• |
Decrease of $0.9 million associated with share-based compensation expense, excluding amounts included within succession, transition, and restructuring activities discussed above |
|
|
• |
Decrease of $1.1 million related to short-term expense savings actions, such as salary reductions, travel and entertainment expenses and professional fees, primarily related to our legal, finance, information technology, and compliance functions |
Research and Development Expense
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Research and development |
|
$ |
8,765 |
|
|
$ |
8,980 |
|
|
|
(2.4 |
%) |
|
$ |
18,729 |
|
|
$ |
18,209 |
|
|
|
2.9 |
% |
|
As a percentage of net sales |
|
|
12.0 |
% |
|
|
7.8 |
% |
|
|
4.2 |
% |
|
|
10.5 |
% |
|
|
8.1 |
% |
|
|
2.4 |
% |
Three months ended June 30, 2020 compared to 2019
Research and development expense decreased $0.2 million
|
|
• |
Decrease of $0.8 million associated with reduced spend for clinical study expenses |
|
|
• |
Partially offset by an increase of $0.5 million related to costs to comply with recent medical device reporting regulations |
|
|
• |
Further offset by $0.2 million in costs associated with our acquisition of the FITBONE assets, inclusive of transitional services |
25
Six months ended June 30, 2020 compared to 2019
Research and development expense increased $0.5 million
|
|
• |
Increase of $1.1 million related to costs to comply with recent medical device reporting regulations |
|
|
• |
Increase of $0.4 million attributable to increased quality systems and regulatory improvements, largely related to increases in headcount |
|
|
• |
Increase of $0.2 million in costs associated with our acquisition of the FITBONE assets, inclusive of transitional services |
|
|
• |
Partially offset by a decrease of $1.2 million associated with reduced spend for clinical costs and product development |
Acquisition-related Amortization and Remeasurement
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Acquisition-related amortization and remeasurement |
|
$ |
3,678 |
|
|
$ |
1,808 |
|
|
|
103.4 |
% |
|
$ |
(3,904 |
) |
|
$ |
8,265 |
|
|
|
(147.2 |
%) |
|
As a percentage of net sales |
|
|
4.9 |
% |
|
|
1.5 |
% |
|
|
3.4 |
% |
|
|
(2.3 |
%) |
|
|
3.7 |
% |
|
|
(6.0 |
%) |
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.
Three months ended June 30, 2020 compared to 2019
Acquisition-related amortization and remeasurement increased $1.9 million
|
|
• |
Increase of $1.6 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets |
|
|
• |
Increase of $0.2 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions |
Six months ended June 30, 2020 compared to 2019
Acquisition-related amortization and remeasurement decreased $12.2 million
|
|
• |
Decrease of $11.4 million related to the remeasurement of potential future revenue-based milestone payments associated with the Spinal Kinetics acquisition that become due upon achievement of certain revenue targets, largely due to uncertainty attributable to COVID-19 |
|
|
• |
Decrease of $1.4 million related to achievement of the approval of the M6-C artificial cervical disc by the U.S. Food and Drug Administration (“FDA” and the “FDA Milestone”) during the first quarter of 2019 |
|
|
• |
Partially offset by an increase of $0.6 million related to the amortization of intangible assets acquired through business combinations or asset acquisitions |
Non-operating Income and Expense
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Interest income (expense), net |
|
$ |
(901 |
) |
|
$ |
457 |
|
|
|
(297.2 |
%) |
|
$ |
(1,324 |
) |
|
$ |
200 |
|
|
|
(762.0 |
%) |
|
Other income (expense), net |
|
|
5,069 |
|
|
|
(236 |
) |
|
|
(2247.9 |
%) |
|
|
4,271 |
|
|
|
(640 |
) |
|
|
(767.3 |
%) |
Three months ended June 30, 2020 compared to 2019
Interest income (expense), net, decreased $1.4 million
|
|
• |
Decrease of $0.8 million attributable interest income recognized on our investment in eNeura in 2019 |
|
|
• |
Decrease of $0.5 million associated with interest expense incurred on our outstanding indebtedness under our secured revolving credit facility |
26
Other income (expense), net, increased $5.3 million
|
|
• |
Increase of $4.7 million attributable to funds received from the U.S. Department of Health and Human Services as part of the Provider Relief Fund included within the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) |
|
|
• |
Increase of $0.2 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement gain of $0.5 million in the second quarter of 2020 compared to a gain of $0.3 million in the second quarter of 2019 |
Six months ended June 30, 2020 compared to 2019
Interest income (expense), net, decreased $1.5 million
|
|
• |
Decrease of $0.8 million attributable interest income recognized on our investment in eNeura in 2019 |
|
|
• |
Decrease of $0.5 million associated with interest expense incurred on our outstanding indebtedness under our secured revolving credit facility |
Other income (expense), net, increased $4.9 million
|
|
• |
Increase of $4.7 million attributable to funds received from the U.S. Department of Health and Human Services as part of the Provider Relief Fund included within the CARES Act |
|
|
• |
Increase of $0.5 million associated with changes in foreign currency exchange rates, as we recorded a non-cash remeasurement loss of $0.1 million in the for the six months ended June 30, 2020 compared to a loss of $0.6 million for the six months ended June 30, 2019 |
|
|
• |
Partially offset by a decrease of $0.2 million associated with the impairment of our investment in Bone Biologics, Inc. |
Income Taxes
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Income tax expense (benefit) |
|
$ |
1,592 |
|
|
$ |
1,219 |
|
|
|
30.6 |
% |
|
$ |
(18,440 |
) |
|
$ |
(4,787 |
) |
|
|
285.2 |
% |
|
Effective tax rate |
|
|
(9.5 |
%) |
|
|
181.4 |
% |
|
|
(190.9 |
%) |
|
|
164.7 |
% |
|
|
107.9 |
% |
|
|
56.8 |
% |
Three months ended June 30, 2020 compared to 2019
The decrease in the effective tax compared to the prior year period rate was primarily a result of the following factors:
|
|
• |
Changes in financial expenses not recognized for tax purposes, primarily related to acquisition-related remeasurement |
|
|
• |
Reversal of the anticipated benefit of $3.0 million recorded in the first quarter of 2020 related to potential carryback under the CARES Act |
|
|
• |
Reversal of tax benefits related to certain performance stock units that were forfeited in the current period |
The primary factors affecting our effective tax rate for the second quarter of 2020 are as follows:
|
|
• |
Financial expenses not recognized for tax purposes, primarily related to acquisition-related remeasurement |
|
|
• |
Reversal of the anticipated benefit of $3.0 million recorded in the first quarter of 2020 related to potential carryback under the CARES Act |
|
|
• |
Reversal of tax benefits related to certain performance stock units that were forfeited in the current period |
Six months ended June 30, 2020 compared to 2019
The increase in the effective tax compared to the prior year period rate was primarily a result of the following factors:
|
|
• |
Changes in financial expenses not recognized for tax purposes, primarily related to acquisition-related remeasurement |
|
|
• |
Reversal of tax benefits related certain performance stock units that were forfeited in the current period |
|
|
• |
Partially offset by, benefits related to statute expirations for previously unrecognized tax benefits |
|
|
• |
Further offset by decreases in non-deductible executive compensation |
The primary factors affecting our effective tax rate for the six months ended June 30, 2020 are as follows:
|
|
• |
Statute expirations related to previously unrecognized tax benefits |
|
|
• |
Financial benefits not recognized for tax purposes, primarily related to acquisition-related remeasurement |
|
|
• |
Reversal of tax benefits related to certain performance stock units that were forfeited in the current period |
|
|
• |
Non-deductible executive compensation |
27
Segment Review
Our business is managed through two reporting segments: Global Spine and Global Extremities. The primary metric used in managing the business by segment is EBITDA (which is described further in Note 13 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein). The following table presents EBITDA by segment and reconciles consolidated EBITDA to income (loss) before income taxes:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Global Spine |
|
$ |
(3,707 |
) |
|
$ |
16,523 |
|
|
$ |
18,710 |
|
|
$ |
27,098 |
|
|
Global Extremities |
|
|
(3,359 |
) |
|
|
2,750 |
|
|
|
(5,253 |
) |
|
|
2,577 |
|
|
Corporate |
|
|
(1,923 |
) |
|
|
(12,880 |
) |
|
|
(10,063 |
) |
|
|
(22,407 |
) |
|
Total EBITDA |
|
$ |
(8,989 |
) |
|
$ |
6,393 |
|
|
$ |
3,394 |
|
|
$ |
7,268 |
|
|
Depreciation and amortization |
|
|
(6,942 |
) |
|
|
(6,178 |
) |
|
|
(13,269 |
) |
|
|
(11,905 |
) |
|
Interest income (expense), net |
|
|
(901 |
) |
|
|
457 |
|
|
|
(1,324 |
) |
|
|
200 |
|
|
Income (loss) before income taxes |
|
$ |
(16,832 |
) |
|
$ |
672 |
|
|
$ |
(11,199 |
) |
|
$ |
(4,437 |
) |
Liquidity and Capital Resources
Cash, cash equivalents, and restricted cash at June 30, 2020, totaled $173.4 million compared to $70.4 million at December 31, 2019. This increase was largely a result of our draw of $100.0 million under our secured revolving credit facility in 2020 and from proceeds received under the CARES Act totaling $18.5 million, partially offset by $18.0 million in cash paid to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones.
|
|
|
Six Months Ended June 30, |
|
|||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Net cash from operating activities |
|
$ |
30,094 |
|
|
$ |
8,344 |
|
|
$ |
21,750 |
|
|
Net cash from investing activities |
|
|
(28,572 |
) |
|
|
(16,738 |
) |
|
|
(11,834 |
) |
|
Net cash from financing activities |
|
|
101,918 |
|
|
|
(11,581 |
) |
|
|
113,499 |
|
|
Effect of exchange rate changes on cash |
|
|
(452 |
) |
|
|
(71 |
) |
|
|
(381 |
) |
|
Net change in cash, cash equivalents and restricted cash |
|
$ |
102,988 |
|
|
$ |
(20,046 |
) |
|
$ |
123,034 |
|
The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from operating activities:
|
|
|
Six Months Ended June 30, |
|
|||||||||
|
(U.S. Dollars, in thousands) |
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Net cash from operating activities |
|
$ |
30,094 |
|
|
$ |
8,344 |
|
|
$ |
21,750 |
|
|
Capital expenditures |
|
|
(9,332 |
) |
|
|
(10,338 |
) |
|
|
1,006 |
|
|
Free cash flow |
|
$ |
20,762 |
|
|
$ |
(1,994 |
) |
|
$ |
22,756 |
|
Operating Activities
Cash flows from operating activities increased $21.8 million
|
|
• |
Increase in net income of $6.9 million |
|
|
• |
Net decrease of $13.3 million in non-cash gains and losses, largely related to changes in fair value of contingent consideration |
|
|
• |
Net increase of $28.2 million relating to changes in working capital accounts, primarily attributable to changes in accounts receivable, a $13.9 million prepayment received under the Medicare & Medicaid Services (“CMS”) Accelerated and Advance Payment Program, and other current and long-term assets and liabilities, which included the expiration of statute of limitations related to certain unrecognized tax benefits in the first quarter of 2020 |
Two of our primary working capital accounts are accounts receivable and inventory. Days sales in receivables were 84 days at June 30, 2020 compared to 63 days at June 30, 2019, with much of this increase attributable to the significant decline in net sales as a result of COVID-19. Inventory turns decreased to 1.2 times as of June 30, 2020 compared to 1.3 times as of June 30, 2019.
28
Investing Activities
Cash flows from investing activities decreased $11.8 million
|
|
• |
Decrease of $18.0 million associated with cash paid in March 2020 to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones |
|
|
• |
Partially offset by a change of $5.2 million associated with cash paid for transactions to acquire certain assets of former distributors |
|
|
• |
Further offset by a decrease in capital expenditures of $1.0 million |
Financing Activities
Cash flows from financing activities increased $113.5 million
|
|
• |
Increase of $100.0 million from proceeds under our secured revolving credit facility in 2020 (of which $50.0 million was repaid after June 30, 2020) |
|
|
• |
Increase of $13.7 million associated with the payment of the Spinal Kinetics FDA Milestone during the first quarter of 2019, which represented the acquisition-date fair value attributable to the FDA Milestone liability originally recognized |
Credit Facilities
As of June 30, 2020, we had $100.0 million of principal in borrowings outstanding under the five year $300 million secured revolving credit facility. In addition, we had no borrowings outstanding under on our €5.5 million ($6.2 million) available lines of credit in Italy. We were in compliance with all required financial covenants as of June 30, 2020.
In July 2020, we repaid $50.0 million of principal outstanding under the secured revolving credit facility. Subsequent to this payment, we had $50.0 million of principal outstanding under the secured revolving credit facility.
Other
For information regarding Contingencies, see Note 9 to the Notes to the Unaudited Condensed Consolidated Financial Statements contained herein.
Impact of COVID-19 and the CARES Act on Liquidity and Capital Resources
Our liquidity has been materially impacted over the last several months by the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the COVID-19 pandemic. Our liquidity may also be affected by the rate at which and timing of when elective procedures fully resume at hospitals and other facilities, which may occur at a faster or slower pace than our expectations. As of the date of issuance of these condensed consolidated financial statements, the extent to which COVID-19 is likely to materially impact our liquidity in the future remains uncertain.
As precautionary measures to increase our cash position and preserve financial flexibility in view of ongoing uncertainty resulting from the COVID-19 pandemic, we (i) completed a borrowing of $100.0 million under our secured revolving credit facility on April 16, 2020 (of which, we have since repaid $50.0 million in principal), (ii) executed temporary salary reductions for U.S. employees and the Board of Directors, which were in effect for two months during the second quarter of 2020, (iii) suspended the 401(k) match program through the remainder of fiscal year 2020, and (iv) initiated organizational travel restrictions and a temporary reduction in new hiring.
On March 27, 2020, the CARES Act was signed into U.S. federal law, which provided emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic.
In April 2020, we received $13.9 million in funds from the CMS Accelerated and Advance Payment Program to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. Repayment of this amount is required to begin 120 days after the issuance of the payment, or beginning in August 2020. After the 120 day period, every claim we submit will be offset against the accelerated / advanced payment. Thus, instead of receiving payment for newly submitted claims, our outstanding accelerated / advance payment balance will be reduced by the claim payment amount.
In addition, in April 2020, we automatically received, without request, $4.7 million in funds from the U.S. Department of Health and Human Services as part of the Provider Relief Fund. Upon review of the qualifying criteria required to retain the funding, which primarily relate to lost revenues or the incurrence of expenses attributable to COVID-19, it was determined that we met the criteria to permanently retain all of the proceeds received.
29
Further, as part of the CARES Act, we are permitted to defer all employer social security payroll tax payments for the remainder of the 2020 calendar year, such that 50% of the taxes is deferred until December 31, 2021, with the remaining 50% deferred until December 31, 2022. As of June 30, 2020, we have deferred $1.3 million associated with this program.
Spinal Kinetics Contingent Consideration
Under the terms of the acquisition agreement under which we acquired Spinal Kinetics, we agreed to make contingent milestone payments of up to $60.0 million in cash to Spinal Kinetics’ former shareholders. One milestone payment, which was for $15.0 million, became due upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA Milestone”). The FDA Milestone was achieved and paid in 2019.
The remaining milestone payments are comprised of revenue-based milestone payments of up to $45.0 million in connection with future sales of the acquired artificial discs. The fair value of the contingent consideration arrangement as of June 30, 2020 was $35.8 million; however, the actual amount ultimately paid could be higher or lower than the fair value of the contingent consideration. As of June 30, 2020, we classified $14.5 million of the liability attributable to the revenue-based milestone within other current liabilities, as we expect to pay one of the revenue-based milestones in the next twelve months, and the remaining $21.3 million within other long-term liabilities. For additional discussion of this matter, see Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
FITBONE Asset Acquisition
On February 3, 2020, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE (“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening system for limb lengthening of the femur and tibia bones. Under the terms of the Purchase Agreement, as consideration for the acquired assets, we paid $18.0 million in cash consideration and entered into a Contract Manufacturing and Supply Agreement (“CMSA”) with Wittenstein. The acquisition was completed on March 26, 2020 and was treated as a business combination.
The CMSA with Wittenstein has an initial term of up to two years to manufacture the FITBONE product line. As consideration for the CMSA, we will pay $2.0 million to Wittenstein at the conclusion of the CMSA if certain conditions are met in relation to the prompt delivery of manufactured products.
Other Acquisitions
In July 2020, we entered into an agreement to acquire certain assets of a medical device distributor. We have agreed to pay consideration of up to $7.6 million in accordance with the parties’ agreement.
Brazil
In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $0.5 million (based upon foreign exchange rates as of June 30, 2020) of our cash in Brazil was frozen upon request to satisfy a judgment. Although we are appealing the judgment, this cash has been reclassified to restricted cash.
For additional discussion regarding these matters, see Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Off-balance Sheet Arrangements
As of June 30, 2020, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no material changes in any of our material contractual obligations as disclosed in our Form 10-K for the year ended December 31, 2019.
Critical Accounting Estimates
Our discussion of operating results is based upon the condensed consolidated financial statements and accompanying notes. The preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of
30
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, 2019. There have been no significant changes to our critical accounting estimates except for the following:
Allowance for Expected Credit Losses and Contractual Allowances
Subsequent to the adoption of ASU 2016-13, our allowance for expected credit losses represents the portion of the receivable’s amortized cost basis that we do not expect to collect over the receivable’s contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. The determination of the contractual life of accounts receivables, the aging of outstanding receivables, as well as the historical collections, write-offs, and payor reimbursement experience over the estimated contractual lives of such receivables, are integral parts of the estimation process related to reserves for expected credit losses and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of both reserves for expected credit losses and contractual allowances. Revisions in allowances for expected credit loss estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are recorded as an adjustment to net sales. These estimates are periodically tested against actual collection experience. In addition, we analyze our receivables by geography and by customer type, where appropriate, in developing estimates for expected credit losses.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements for detailed information regarding the status of recently issued accounting pronouncements.
Non-GAAP Financial Measures
We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to the information used by senior management in its financial and operational decision-making. We believe it is important to provide investors with the same non-GAAP metrics used to supplement information regarding the performance and underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate the effectiveness of 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, 2019.
31
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, known to the President and Chief Executive Officer or the Chief Financial Officer that occurred for the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 9 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, 2019 and Form 10-Q for the quarter ended March 31, 2020.
The novel coronavirus pandemic has materially affected our business during the first half of 2020 and is likely to cause further unpredictable effects during the remainder of 2020 and beyond
The novel coronavirus discovered in late 2019, and the disease it causes known as COVID-19, has caused significant affects to our business during the first half of 2020, and is likely to cause significant affects during the second half of 2020 and into 2021. For Orthofix, the most significant effect to date on our business has been a significant reduction in elective surgery procedure volumes, which represent the majority of procedures in which our products are used. This reduction in procedure volumes began suddenly in March 2020 when shelter in place and social distancing instructions were instituted in the U.S. and many of our other sales markets, and caused a pronounced reduction in revenue during April 2020 and May 2020, when a significant number of hospitals were either closed for elective procedures or otherwise operating at significantly reduced volumes. Generally, this reduction in procedure volumes dissipated during June 2020 and July 2020, as many regions were able to reopen for elective procedures, with an existing patient backlog.
At this time, the future trajectory of the COVID-19 pandemic remains very uncertain, both in the U.S. and in other markets. Within the U.S., for example, new infection counts have significantly decreased in some regions, while other regions have seen increases in recent weeks. The exact reasons for varying case trajectories remains unclear, including the level of seroprevalence in different states and geographic areas. As a result, it is not yet clear whether the future trajectory of the pandemic is likely to include one or more future waves of cases, or whether case counts may slowly decline from this point forward. In addition, progress continues to be made on therapeutic treatments and vaccine candidates, though the efficacy and timing of various treatments and vaccines is uncertain.
Given these various uncertainties, it is unclear the extent to which lingering slowdowns in elective procedures will affect our business during the second half of 2020 and beyond. We expect that the effects of COVID-19 on our business will depend on various factors including (i) the comfort level of patients in returning to clinics and hospitals, (ii) the extent to which localized elective surgery shutdowns occur, (iii) the unemployment rate’s effect on potential patients lacking medical insurance coverage, and (iv) general hospital capacity constraints occurring because of the need to treat high volumes of COVID-19 patients.
During the second quarter of 2020, we focused on making our facilities safe given updated COVID-19 public health guidelines, and we believe that our employee workforce has done excellent work in adapting to the new environment. In particular, we have been able to continue our manufacturing activities to keep pace with customer orders. However, given the potential for further shelter in place orders in our largest manufacturing and operational centers (particularly, Lewisville, Texas and Verona, Italy), there remains a risk that a significant localized surge in the virus could cause disruption to our manufacturing, distribution, administrative and other business operations (including downtime at our manufacturing facilities and the interruption of the production of our products).
In addition, while we have not seen such effects to date, risk remains that COVID-19 could have material negative effects on contractual counterparties, leading to supply chain disruptions or counterparty payment defaults and bankruptcies (including bankruptcies to hospital systems that significantly rely on revenue from elective surgeries).
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in Part I, Item 1A under the heading Risk Factors in our 2019 Form 10-K, such as our need to generate sufficient cash flows to service indebtedness and our ability to protect our information technology networks and infrastructure from unauthorized access, misuse, malware, phishing and other events that could have a security impact as a result of our remote working environment or otherwise.
All of these factors, collectively, could materially adversely affect our business, financial condition and results of operations.
33
Our inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.
On October 25, 2019, we and certain of our wholly-owned subsidiaries (collectively, the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $300 million secured revolving credit facility maturing on October 25, 2024. At the time that we entered into the Amended Credit Agreement, no amounts were borrowed thereunder. However, due to the uncertainty related to COVID-19, on April 16, 2020, we borrowed $100 million under the Amended Credit Agreement to preserve available cash to fund operations and strategic initiatives in the event that the COVID-19 pandemic results in a prolonged slowdown of elective surgical and other medical procedures, thereby decreasing our sales and revenue. In July 2020, we repaid $50 million of this amount.
Certain of our subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of any obligations under the Amended Credit Agreement. The obligations with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.
The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the Amended Credit Agreement contains financial covenants requiring us to maintain, on a consolidated basis as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0. The Amended Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Facility may be accelerated and/or the lenders’ commitments terminated.
We believe that we are in compliance with the covenants, and there were no events of default, at June 30, 2020 (and in prior periods). However, there can be no assurance that we will be able to meet such financial covenants in future fiscal quarters. The failure to do so could result in an event of default under such agreement (including an obligation that we repay the $50 million amount currently outstanding), which could have a material adverse effect on our financial position in the event that we have significant amounts drawn under the facility at such time.
In addition, issues related to financing sometimes are exacerbated in times of significant disruption and dislocation in the financial markets, such as those that have been experienced recently due to the COVID-19 pandemic. Though our lenders have not yet expressed any such concerns (and, to the contrary, have indicated that financing remains available and undisrupted), it is possible that our lenders could become unwilling or unable to provide us with financing under the Amended Credit Agreement, even if we were otherwise in compliance with its terms, due to macroeconomic or other concerns related to COVID-19, general economic conditions or otherwise. If we were unable to further access financing under the Amended Credit Agreement, our cost of financing could materially increase, or we could be unable to access such financing entirely. Any such events could materially and adversely affect our financial condition and results of operations.
The FDA recently scheduled a hearing for September 8, 2020 to consider whether bone growth stimulator devices should be down classified from Class III devices, and if such a down classification of this device category occurred, it could increase future competition for us in this product category and negatively affect our sales of such products.
We have the market-leading bone growth stimulation platform with the only cervical spinal indication granted by the U.S. Food and Drug Administration (the "FDA"), and the only mobile device app accessory designed to help patients adhere to their prescriptions and improve their clinical outcomes, STIM onTrack™ 2.1. We are also investing in investigational device exemption (“IDE”) studies to expand indications for use in areas such as rotator cuff tears. Our bone growth therapy products are designated as Class III devices. Class III devices are subject to the most rigorous pathway to approval for medical devices. The FDA may change classification of a device only if the proposed new class has sufficient regulatory controls to provide reasonable assurances of safety and effectiveness.
In 2015, the FDA included Class III bone growth stimulator products in its strategic priority work plan, as part of a list of 32 product categories it would review for possible down classification. The purpose of the listing and review by the FDA of these 32 product categories was to further one of the FDA’s general strategic priorities of reducing regulatory burdens. This action occurred after the FDA had convened an advisory panel in 2006 and ultimately determined at that time, for safety and efficacy reasons, to maintain the Class III status for these devices. Shortly after the issuance of the 2015 work plan, we and other manufacturers of bone growth stimulator products submitted a public comment letter opposing the possible down classification.
34
The FDA has announced that it will hold an Advisory Committee panel meeting on September 8, 2020 to consider whether bone growth stimulator products should be reclassified from Class III devices to Class II devices. Together with the other manufacturers of bone growth stimulators, we intend to participate in the panel meeting, as we did in 2006, and submit testimony supporting the importance of maintaining bone growth stimulator devices as Class III devices. However, if such a down classification were to occur, and new entrants to the market were able to create technologies with comparable efficacy to our devices, our bone growth therapy products could face additional competition, which could negatively affect our future sales and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We have not made any repurchases of our common stock during the second quarter of 2020.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
There are no matters to be reported under this heading.
35
Item 6. Exhibits
|
10.1 |
|
|
|
10.2* |
|
Consulting Agreement, dated July 4, 2020, between Michael Finegan and Orthofix Medical Inc. |
|
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). |
36
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: August 6, 2020 |
By: |
|
/s/ JON SERBOUSEK |
|
|
Name: |
|
|
|
|
Title: |
|
President and Chief Executive Officer, Director |
|
|
|
|
|
|
Date: August 6, 2020 |
By: |
|
/s/ DOUG RICE |
|
|
Name: |
|
|
|
|
Title: |
|
Chief Financial Officer |
37
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/25/24 | ||||
| 12/31/22 | ||||
| 12/31/21 | ||||
| 1/1/21 | ||||
| 12/31/20 | 10-K, SD | |||
| 9/8/20 | ||||
| Filed on: | 8/6/20 | 8-K | ||
| 8/3/20 | ||||
| For Period end: | 6/30/20 | |||
| 4/16/20 | ||||
| 3/31/20 | 10-Q, 8-K | |||
| 3/27/20 | ||||
| 3/26/20 | 8-K | |||
| 3/12/20 | 4 | |||
| 2/3/20 | 8-K | |||
| 1/1/20 | ||||
| 12/31/19 | 10-K, SD | |||
| 10/25/19 | 8-K | |||
| 6/30/19 | 10-Q | |||
| 3/31/19 | 10-Q | |||
| 12/31/18 | 10-K, SD | |||
| 4/30/18 | 10-Q, 8-K, 8-K/A, S-8 | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/26/21 Orthofix Medical Inc. 10-K 12/31/20 124:22M ActiveDisclosure/FA 11/05/20 Orthofix Medical Inc. 10-Q 9/30/20 82:10M ActiveDisclosure/FA 9/14/20 Orthofix Medical Inc. S-8 9/14/20 5:388K ActiveDisclosure/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 6/09/20 Orthofix Medical Inc. 8-K:5,7,9 6/08/20 12:212K ActiveDisclosure/FA |