12.	Contingencies

The Company records accruals for certain outstanding legal proceedings, investigations or claims when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed. In addition, legal fees and other directly related costs are expensed as incurred.

In addition to the matters described in the paragraphs 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.

Commercial Litigation Settlement

During the third quarter of 2016, the Company entered into an agreement to settle an outstanding commercial litigation matter, whereby the Company became entitled to receive a $3.0 million cash payment, which payment was made to the Company during the fourth quarter of 2016, which was recorded as a credit to general and administrative expense.

Audit Committee Review and SEC Investigation

In July 2013, the Audit Committee of our Board of Directors began conducting an independent review, with the assistance of outside professionals, of certain accounting matters. This review resulted in restatements of our previously filed consolidated financial statements. In connection with the Audit Committee’s review, the Company initiated contact with the staff of the Division of Enforcement of the SEC (the “SEC Enforcement Staff”) in July 2013. The SEC conducted a formal investigation of these matters, and both the Company and the Audit Committee cooperated fully with the SEC.

After discussions with the SEC Enforcement Staff, the Company reached an agreement in principle with the SEC Enforcement Staff that any negotiated resolution would include a civil money penalty of approximately $8.25 million, and the Company recorded a charge in this amount during 2016 for this matter.

In December 2016, the Company formally submitted an offer of settlement to the SEC, and deposited $8.25 million into escrow, which was restricted for subsequent distribution to the SEC. In January 2017, the SEC approved the Company’s offer of settlement, pursuant to which the Company consented to the entry of an SEC administrative order instituting cease and desist proceedings pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934. Pursuant to such order, the Company agreed to pay the $8.25 million previously accrued. The full amount of such payment was released to the SEC in January 2017.

Deferred Prosecution Agreement and Review of Potential Improper Payments Involving Brazil Subsidiary

In 2012, the Company entered into definitive agreements with the U.S. Department of Justice (the “DOJ”) and the SEC agreeing to settle a self-initiated and self-reported internal investigation of our former Mexican subsidiary, Promeca S.A. de C.V. (“Promeca”), regarding non-compliance by Promeca with the U.S. Foreign Corrupt Practices Act (the “FCPA”). As part of the settlement, the Company entered into a three-year deferred prosecution agreement (“DPA”) with the DOJ and a consent to final judgment (the “Consent”) with the SEC. The Company periodically reported to the government during the terms of the DPA and Consent regarding remediation measures and implementation of compliance measures.

In August 2013, during the terms of the DPA and Consent, the Company’s internal legal department was notified of certain allegations involving potentially improper payments with respect to its Brazilian subsidiary, Orthofix do Brasil Ltda., and promptly contacted both the DOJ and the SEC Enforcement Staff to voluntarily self-report the allegations. Following the self-report, the Company cooperated fully with the DOJ’s investigation of those allegations. On June 15, 2015, the Company and the DOJ agreed to extend the term of the DPA for two months (through September 17, 2015) to permit the DOJ additional time to evaluate the Company’s compliance with the internal controls and compliance undertakings in the DPA and to further investigate the Brazil-related allegations. On September 17, 2015, the DOJ extended the term of the DPA for an additional ten months (through July 17, 2016), stating that the Company’s efforts to comply with the internal controls and compliance requirements of the DPA during the first eighteen months of the DPA were insufficient. On July 17, 2016, the DPA expired; on July 29, 2016, the DOJ filed with the court a dismissal of the underlying Promeca-related case; and, on August 1, 2016, the court entered an order granting the DOJ’s motion to dismiss such case without prejudice.

The Company also fully cooperated with the SEC’s investigation of the allegations in Brazil. After discussions with the SEC Enforcement Staff, the Company reached an agreement in principle with the SEC Enforcement Staff, and the Company accrued collective charges of approximately $6.1 million during the second and third quarters of 2016.

In December 2016, the Company formally submitted an offer of settlement to the SEC, and deposited the accrued amount into escrow, which was restricted for subsequent distribution to the SEC. In January 2017, the SEC approved the Company’s offer of settlement, pursuant to which the Company consented to the entry of an SEC administrative order instituting cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934. Pursuant to such order, the Company agreed to pay disgorgement, interest and penalties in the amount previously accrued. The full amount of such payment was released to the SEC in January 2017. Pursuant to the offer of settlement and related order, the Company has agreed to retain an independent compliance consultant for one year to review and test the Company’s FCPA compliance program.

Corporate Integrity Agreement with HHS-OIG

On June 6, 2012, in connection with our settlement of a U.S. government investigation and related qui tam complaint related to our regenerative stimulation business, and our settlement of a U.S. government investigation and related qui tam complaint related to Blackstone Medical, Inc. (“Blackstone”), we entered into a five-year corporate integrity agreement (the “CIA”) with the Office of Inspector General of the Department of Health and Human Services (“HHS-OIG”). The CIA requires that we continue to maintain during the term of the CIA a compliance program designed to promote compliance with federal healthcare and FDA requirements. The CIA requires that we conduct certain compliance-related activities during the term of the CIA, including various training and monitoring procedures, and maintaining a disciplinary process for compliance obligations. We are also subject to periodic reporting and certification requirements attesting that the provisions of the CIA are being implemented and followed, as well as certain document and record retention mandates. The CIA provides that in the event of an uncured material breach of the CIA, we could be excluded from participation in federal healthcare programs and/or subject to prosecution and subject to other monetary penalties.

In connection with this settlement and the guilty plea of our subsidiary, Orthofix Inc., to one felony count of obstruction of a federal audit, the court imposed a five-year term of probation on Orthofix Inc., with special conditions that mandate certain non-disparagement obligations and order Orthofix Inc. to continue complying with the terms of the CIA through the expiration of its term. In the event that we fail to satisfy these terms of probation, we could be subject to additional criminal penalties or prosecution, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Discontinued Operations – Matters Related to Breg and Possible Indemnification Obligations

On May 24, 2012, the Company sold Breg to an affiliate of Water Street Healthcare Partners II, L.P. (“Water Street”). Under the terms of the agreement, the Company indemnified Water Street and Breg with respect to certain specified matters, including the following:

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Breg was engaged in the manufacturing and sale of local infusion pumps for pain management from 1999 to 2008. Since 2008, numerous product liability cases have been filed in the United States alleging that the local anesthetic, when dispensed by such infusion pumps inside a joint, causes a rare arthritic condition called “chondrolysis.” The Company incurred losses for settlements and judgments in connection with these matters during 2016, 2015 and 2014 of $0.9 million, $0.3 million and $3.8 million, respectively. In addition, several cases remain outstanding for which the Company currently cannot reasonably estimate the possible loss, or range of loss.

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At the time of its sale, Breg was engaged in the manufacturing and sales of motorized cold therapy units used to reduce pain and swelling. Several domestic product liability cases have been filed in recent years, mostly in California state court, alleging the use of cold therapy causes skin and/or nerve injury and seeking damages on behalf of individual plaintiffs who were allegedly injured by such units or who would not have purchased the units had they known they could be injured. In September 2014, the Company entered into a master settlement agreement resolving all pending pre-close claims. Pursuant to the terms of the settlement agreement, the Company paid approximately $1.3 million, and additional amounts owed under the settlement were paid directly by the Company’s insurance providers. Remaining cold therapy claims include a plaintiff’s appeal to the California Supreme Court after the intermediate appellate court reduced an adverse July 2012 jury verdict, and a post-close cold therapy claim pending in California state court. As of December 31, 2016, the Company has an accrual of $2.4 million recorded within other current liabilities for the July 2012 verdict and post-close cold therapy liabilities; however, the actual liability could be higher or lower than the amount accrued.

Charges incurred as a result of this indemnification are reflected as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss).