0001564590-20-023255.txt : 20200508 0001564590-20-023255.hdr.sgml : 20200508 20200508083142 ACCESSION NUMBER: 0001564590-20-023255 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 82 CONFORMED PERIOD OF REPORT: 20200331 FILED AS OF DATE: 20200508 DATE AS OF CHANGE: 20200508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Orthofix Medical Inc. CENTRAL INDEX KEY: 0000884624 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19961 FILM NUMBER: 20858819 BUSINESS ADDRESS: STREET 1: 3451 PLANO PARKWAY CITY: LEWISVILLE STATE: TX ZIP: 75056 BUSINESS PHONE: 214-937-2000 MAIL ADDRESS: STREET 1: 3451 PLANO PARKWAY CITY: LEWISVILLE STATE: TX ZIP: 75056 FORMER COMPANY: FORMER CONFORMED NAME: ORTHOFIX INTERNATIONAL N V DATE OF NAME CHANGE: 19970708 10-Q 1 ofix-10q_20200331.htm 10-Q ofix-10q_20200331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     .

Commission File Number: 0-19961

 

ORTHOFIX MEDICAL INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

98-1340767

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3451 Plano Parkway,

Lewisville, Texas

 

75056

(Address of principal executive offices)

 

(Zip Code)

(214) 937-2000

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer

Accelerated filer

 

 

 

 

Non-Accelerated filer

Smaller Reporting Company

 

 

 

 

 

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

As of May 4, 2020, 19,202,587 shares of common stock were issued and outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.10 par value per share

 

OFIX

 

Nasdaq Global Select Market

 

 

 

 


 

 Table of Contents

 

 

 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended  March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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

 

20

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

29

 

 

 

 

 

Item 1A.

 

Risk Factors

 

29

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

31

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

31

 

 

 

 

 

Item 5.

 

Other Information

 

31

 

 

 

 

 

Item 6.

 

Exhibits

 

32

 

 

 

 

 

SIGNATURES

 

33

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”); 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 effects of the COVID-19 pandemic on our business, including (i) surgeries that use our products being delayed or cancelled as a result of hospitals and surgery centers being closed or limited to life-threatening and/or essential procedures, (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) volatility in global capital markets limiting our access to financing for potential acquisitions or working capital, (v) customers and payors being unable to satisfy contractual obligations to us, including the ability to make timely payment for purchases, (vi) general economic weakness in markets in which we operate affecting customer spending, and (vii) other unpredictable aspects of the pandemic. 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. 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 our 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)

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,739

 

 

$

69,719

 

Restricted cash

 

 

529

 

 

 

684

 

Accounts receivable, net of allowances of $5,591 and $3,987, respectively

 

 

77,798

 

 

 

86,805

 

Inventories

 

 

82,744

 

 

 

82,397

 

Prepaid expenses and other current assets

 

 

21,185

 

 

 

20,948

 

Total current assets

 

 

239,995

 

 

 

260,553

 

Property, plant and equipment, net

 

 

64,836

 

 

 

62,727

 

Intangible assets, net

 

 

58,770

 

 

 

54,139

 

Goodwill

 

 

82,646

 

 

 

71,177

 

Deferred income taxes

 

 

36,133

 

 

 

35,117

 

Other long-term assets

 

 

11,110

 

 

 

11,907

 

Total assets

 

$

493,490

 

 

$

495,620

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

19,641

 

 

$

19,886

 

Current portion of finance lease liability

 

 

357

 

 

 

323

 

Other current liabilities

 

 

45,963

 

 

 

64,674

 

Total current liabilities

 

 

65,961

 

 

 

84,883

 

Long-term portion of finance lease liability

 

 

22,471

 

 

 

20,648

 

Other long-term liabilities

 

 

49,689

 

 

 

62,458

 

Total liabilities

 

 

138,121

 

 

 

167,989

 

Contingencies (Note 9)

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common shares $0.10 par value; 50,000,000 shares authorized;

   19,056,178 and 19,022,619 issued and outstanding as of March 31,

   2020 and December 31, 2019, respectively

 

 

1,906

 

 

 

1,902

 

Additional paid-in capital

 

 

275,686

 

 

 

271,019

 

Retained earnings

 

 

82,527

 

 

 

57,749

 

Accumulated other comprehensive loss

 

 

(4,750

)

 

 

(3,039

)

Total shareholders’ equity

 

 

355,369

 

 

 

327,631

 

Total liabilities and shareholders’ equity

 

$

493,490

 

 

$

495,620

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

4


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

 

 

 

Three Months Ended

March 31,

 

(Unaudited, U.S. Dollars, in thousands, except share and per share data)

 

2020

 

 

2019

 

Net sales

 

$

104,823

 

 

$

109,112

 

Cost of sales

 

 

23,409

 

 

 

23,708

 

Gross profit

 

 

81,414

 

 

 

85,404

 

Sales and marketing

 

 

54,313

 

 

 

53,694

 

General and administrative

 

 

17,865

 

 

 

20,472

 

Research and development

 

 

9,964

 

 

 

9,229

 

Acquisition-related amortization and remeasurement (Note 13)

 

 

(7,582

)

 

 

6,457

 

Operating income (loss)

 

 

6,854

 

 

 

(4,448

)

Interest expense, net

 

 

(423

)

 

 

(257

)

Other expense, net

 

 

(798

)

 

 

(404

)

Income (loss) before income taxes

 

 

5,633

 

 

 

(5,109

)

Income tax benefit

 

 

20,032

 

 

 

6,006

 

Net income

 

$

25,665

 

 

$

897

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

Basic

 

$

1.33

 

 

$

0.05

 

Diluted

 

 

1.32

 

 

 

0.05

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

Basic

 

 

19,143,934

 

 

 

18,750,184

 

Diluted

 

 

19,299,820

 

 

 

19,191,146

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, before tax

 

 

 

 

 

 

 

 

Unrealized loss on debt security

 

 

 

 

 

(2,593

)

Currency translation adjustment

 

 

(1,711

)

 

 

(449

)

Other comprehensive loss before tax

 

 

(1,711

)

 

 

(3,042

)

Income tax related to other comprehensive loss

 

 

 

 

 

641

 

Other comprehensive loss, net of tax

 

 

(1,711

)

 

 

(2,401

)

Comprehensive income (loss)

 

$

23,954

 

 

$

(1,504

)

The accompanying notes form an integral part of these condensed consolidated financial statements

5


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

 

(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

 

At December 31, 2019

 

 

19,022,619

 

 

$

1,902

 

 

$

271,019

 

 

$

57,749

 

 

$

(3,039

)

 

$

327,631

 

Cumulative effect adjustment from adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

(887

)

 

 

 

 

 

(887

)

Net income

 

 

 

 

 

 

 

 

 

 

 

25,665

 

 

 

 

 

 

25,665

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,711

)

 

 

(1,711

)

Share-based compensation

 

 

 

 

 

 

 

 

3,859

 

 

 

 

 

 

 

 

 

3,859

 

Common shares issued, net

 

 

33,559

 

 

 

4

 

 

 

808

 

 

 

 

 

 

 

 

 

812

 

At March 31, 2020

 

 

19,056,178

 

 

$

1,906

 

 

$

275,686

 

 

$

82,527

 

 

$

(4,750

)

 

$

355,369

 

 

 

(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

 

At December 31, 2018

 

 

18,579,688

 

 

$

1,858

 

 

$

243,165

 

 

$

87,078

 

 

$

3,296

 

 

$

335,397

 

Cumulative effect adjustment from adoption of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

 

 

 

71

 

Cumulative effect adjustment from adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

(938

)

 

 

938

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

897

 

 

 

 

 

 

897

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,401

)

 

 

(2,401

)

Share-based compensation

 

 

 

 

 

 

 

 

5,685

 

 

 

 

 

 

 

 

 

5,685

 

Common shares issued, net

 

 

211,081

 

 

 

21

 

 

 

4,012

 

 

 

 

 

 

 

 

 

4,033

 

At March 31, 2019

 

 

18,790,769

 

 

$

1,879

 

 

$

252,862

 

 

$

87,108

 

 

$

1,833

 

 

$

343,682

 

 

The accompanying notes form an integral part of these condensed consolidated financial statements

6


 

ORTHOFIX MEDICAL INC.

Condensed Consolidated Statements of Cash Flows

 

 

Three Months Ended

March 31,

 

(Unaudited, U.S. Dollars, in thousands)

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

25,665

 

 

$

897

 

Adjustments to reconcile net income to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,327

 

 

 

5,727

 

Amortization of operating lease assets, debt costs, and other assets

 

 

1,005

 

 

 

773

 

Provision for expected credit losses

 

 

679

 

 

 

46

 

Deferred income taxes

 

 

(1,027

)

 

 

(1,582

)

Share-based compensation

 

 

3,859

 

 

 

5,685

 

Interest and loss on valuation of investment securities

 

 

219

 

 

 

(593

)

Change in fair value of contingent consideration

 

 

(9,000

)

 

 

5,400

 

Other

 

 

(744

)

 

 

586

 

Changes in operating assets and liabilities, net of effects of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,712

 

 

 

(2,027

)

Inventories

 

 

(848

)

 

 

(2,477

)

Prepaid expenses and other current assets

 

 

(496

)

 

 

1,427

 

Accounts payable

 

 

28

 

 

 

1,883

 

Other current liabilities

 

 

(1,333

)

 

 

(12,439

)

Payment of contingent consideration

 

 

 

 

 

(1,340

)

Other long-term assets and liabilities

 

 

(18,582

)

 

 

(3,005

)

Net cash from operating activities

 

 

12,464

 

 

 

(1,039

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of a business

 

 

(18,000

)

 

 

 

Capital expenditures for property, plant and equipment

 

 

(4,285

)

 

 

(4,643

)

Capital expenditures for intangible assets

 

 

(659

)

 

 

(273

)

Asset acquisitions and other investments

 

 

(1,240

)

 

 

(6,400

)

Net cash from investing activities

 

 

(24,184

)

 

 

(11,316

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common shares

 

 

948

 

 

 

6,331

 

Payments related to withholdings for share-based compensation

 

 

(136

)

 

 

(2,298

)

Payment of contingent consideration

 

 

 

 

 

(13,660

)

Payments related to finance lease obligation

 

 

(92

)

 

 

(99

)

Other financing activities

 

 

(405

)

 

 

(670

)

Net cash from financing activities

 

 

315

 

 

 

(10,396

)

Effect of exchange rate changes on cash

 

 

(730

)

 

 

(230

)

Net change in cash, cash equivalents, and restricted cash

 

 

(12,135

)

 

 

(22,981

)

Cash, cash equivalents, and restricted cash at the beginning of period

 

 

70,403

 

 

 

72,189

 

Cash, cash equivalents, and restricted cash at the end of period

 

$

58,268

 

 

$

49,208

 

 

 

 

 

 

 

 

 

 

Components of cash, cash equivalents and restricted cash at the end of period

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,739

 

 

$

46,668

 

Restricted cash

 

 

529

 

 

 

2,540

 

Cash, cash equivalents, and restricted cash at the end of period

 

$

58,268

 

 

$

49,208

 

 

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

1. Business, basis of presentation, and COVID-19 update

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 months ended March 31, 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

In March 2020, the World Health Organization categorized Coronavirus Disease 2019 ("COVID-19") as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. 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.

The impact of COVID-19 on the Company’s business is highly uncertain and difficult to predict, as information surrounding the pandemic is rapidly evolving.  Although the President of the United States has recently announced a plan to ease social distancing and quarantine measures, with other countries, such as Italy, announcing similar plans, there are still many unknowns and risks, such as the rate at which and timing of when elective surgical procedures will resume, the impact to capital markets and the possibility of local and global economic recession. Any resulting economic disruption could have a material impact on our business.  In addition, the long-term impact of COVID-19 on the Company’s business will depend on many factors, including, but not limited to, the duration and severity of the pandemic and the impact it has on our partners, patients and communities in which we operate, all of which are uncertain.  The Company’s future results of operations and liquidity will be materially impacted due to the decrease in elective surgical procedures and could be further impacted by delays in payments from customers, supply chain interruptions, extended "shelter in place" orders or advisories, facility closures or other reasons related to the pandemic.  As of the date of issuance of these condensed consolidated financial statements, the extent to which COVID-19 could materially impact the Company’s financial conditions, liquidity or results of operations is uncertain. These matters are further described in Part II, Item 1A of this Form 10-Q under heading Risk Factors.

On March 27, 2020, the President of the United States signed into federal law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), 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 a $3.0 million impact to the Company’s condensed

8


 

consolidated financial statements for the three months ended March 31, 2020 as a result of a beneficial rate difference on the potential federal loss carryback. The Company is in the process of analyzing provisions related to certain payroll tax credits to determine the financial impact on our condensed consolidated financial statements impacts of the various provisions of the CARES Act to the condensed consolidated financial statements. For additional discussion, see Notes 15 and 17.

 

2. Recently adopted accounting standards and recently issued accounting pronouncements

 

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 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 January 1, 2020 on a prospective basis. Adoption of this ASU did not impact the Company’s condensed consolidated balance sheet, statements of income, 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 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 income, 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 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 income, 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 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 income, or cash flows, but is expected to impact the future borrowing rate used for the Company’s secured revolving credit facility.

 

9


 

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.

 

January 1, 2021

 

The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

 

3. Acquisitions

FITBONE Asset Purchase Agreement

On 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 $18 million in cash consideration and entered into a manufacturing supply contract with Wittenstein. The Company has accounted for this acquisition as a business combination. The acquisition was completed on March 26, 2020.

The 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)

 

Fair Value

 

 

Balance Sheet Classification

 

Assigned Useful Life

Assets acquired

 

 

 

 

 

 

 

 

Inventories

 

$

528

 

 

Inventories

 

 

Developed technology

 

 

4,500

 

 

Intangible assets, net

 

8 years

Customer relationships

 

 

800

 

 

Intangible assets, net

 

15 years

Trade name

 

 

600

 

 

Intangible assets, net

 

15 years

In-process research and development ("IPR&D")

 

 

440

 

 

Intangible assets, net

 

Indefinite

Total identifiable assets acquired

 

 

6,868

 

 

 

 

 

Goodwill

 

 

11,132

 

 

 

 

 

Total fair value of consideration transferred

 

$

18,000

 

 

 

 

 

 

The Company recorded goodwill of $11.1 million in connection with the acquisition, which was assigned to the Global Extremities 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, 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.

10


 

In addition, the Company also entered into a Contract Manufacturing and Supply Agreement (“CMSA”) with Wittenstein for an initial term of up to 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 recognized $0.4 million and $0.3 million of acquisition related costs that were expensed during the three months ended March 31, 2020 and 2019, respectively. These costs are included in the condensed consolidated statements of income and comprehensive income (loss) within general and administrative expenses.

 

4. Inventories

Inventories were as follows:

(U.S. Dollars, in thousands)

 

March 31,

2020

 

 

December 31,

2019

 

Raw materials

 

$

7,479

 

 

$

9,587

 

Work-in-process

 

 

10,618

 

 

 

14,027

 

Finished products

 

 

35,242

 

 

 

20,712

 

Field/consignment

 

 

29,405

 

 

 

38,071

 

Inventories

 

$

82,744

 

 

$

82,397

 

 

 

5. Leases

 

A summary of the Company’s lease portfolio as of March 31, 2020 and December 31, 2019 is presented in the table below:

(U.S. Dollars, in thousands, except lease term and discount rate)

 

Classification

 

March 31,

2020

 

December 31, 2019

 

Right-of-use assets ("ROU assets")

 

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term assets

 

$

5,530

 

$

5,798

 

Finance leases

 

Property, plant and equipment, net

 

 

21,911

 

 

20,207

 

Total ROU assets

 

 

 

 

27,441

 

 

26,005

 

Lease Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

Operating leases

 

Other current liabilities

 

 

1,902

 

 

1,875

 

Finance leases

 

Current portion of finance lease liability

 

 

357

 

 

323

 

Long-term

 

 

 

 

 

 

 

 

 

Operating leases

 

Other long-term liabilities

 

 

3,786

 

 

4,084

 

Finance leases

 

Long-term portion of finance lease liability

 

 

22,471

 

 

20,648

 

Total lease liabilities

 

 

 

$

28,516

 

$

26,930

 

 

Supplemental cash flow information related to leases was as follows:

(U.S. Dollars, in thousands)

 

Three Months Ended

March 31, 2020

 

 

Three Months Ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,059

 

 

$

950

 

Operating cash flows from finance leases

 

 

229

 

 

 

222

 

Financing cash flows from finance leases

 

 

92

 

 

 

99

 

ROU assets obtained in exchange for lease obligations

 

 

 

 

 

 

 

 

Operating leases

 

 

275

 

 

 

200

 

Finance leases

 

 

1,949

 

 

 

21,179

 

 

Wittenstein Contract Manufacturing and Supply Agreement

In March 2020, the Company entered into a CMSA with Wittenstein for an initial term of two years to manufacture the FITBONE product line. As consideration for the CMSA, the Company will pay $2.0 million to Wittenstein if certain conditions are met in

11


 

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 lease finance liability and a related ROU asset of $1.9 million as of the commencement date of the CMSA.

 

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 $3.2 million in connection with this activity, all of which was recognized in 2019 within general and administrative expenses. During the first quarter of 2020, the Company recorded an additional accrual of $1.2 million associated with the departure of a former executive officer. As of March 31, 2020, the Company had a liability of $4.4 million associated with this restructuring plan.

 

7. Long-term debt

As of March 31, 2020, the Company had no borrowings under its five year $300 million secured revolving credit facility. In addition, the Company had no borrowings on its €5.5 million ($6.1 million) available lines of credit in Italy. The Company was in compliance with all required financial covenants as of March 31, 2020.

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 subsequently completed a borrowing of $100.0 million under its secured revolving credit facility on April 16, 2020.

 

8. Fair value measurements and investments

The fair value of the Company’s financial assets and liabilities measured on a recurring basis were as follows:

 

 

 

March 31,

2020

 

 

December 31,

2019

 

(U.S. Dollars, in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bone Biologics equity securities

 

$

 

 

$

 

 

$

 

 

$

 

 

$

219

 

Total

 

$

 

 

$

 

 

$

 

 

$

 

 

$

219

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

(33,700

)

 

$

(33,700

)

 

$

(42,700

)

Deferred compensation plan