Orthofix(OFIX) - 2020 Q3 - Quarterly Report

Report Overview This section provides an overview of the company's SEC filing, forward-looking statements, and associated risks Filing Information This section details the company's SEC filing information, including its status as a large accelerated filer and common stock details - Orthofix Medical Inc. filed a Quarterly Report on Form 10-Q for the period ended September 30, 2020[2] - The registrant is a large accelerated filer and not a shell company[3][4] Common Stock Information as of November 2, 2020 | Title of Class | Trading Symbol | Exchange Registered | |---|---|---| | Common stock, $0.10 par value per share | OFIX | Nasdaq Global Select Market | Shares Issued and Outstanding: 19,333,698 shares Forward-Looking Statements This section provides a cautionary note regarding forward-looking statements, highlighting inherent risks and uncertainties, particularly those related to the COVID-19 pandemic, and disclaims any obligation to update these statements - The report contains forward-looking statements based on current beliefs, assumptions, expectations, estimates, forecasts, and projections[10] - These statements are not guarantees of future performance and involve risks and uncertainties, including those detailed in Part II Item 1A (Risk Factors) and the 2019 Form 10-K[10] - Specific risks related to COVID-19 include delayed/cancelled surgeries, workforce disruptions, supply chain issues, customer payment defaults, and general economic weakness[10] - The company disclaims any obligation to update forward-looking statements[11] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, recent acquisitions, and the impact of the COVID-19 pandemic Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (September 30, 2020 vs. December 31, 2019) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | Change (Absolute) | Change (%) | |---|---|---|---|---| | Assets | | | | | | Cash and cash equivalents | $79,810 | $69,719 | $10,091 | 14.5% | | Total current assets | $254,669 | $260,553 | $(5,884) | -2.3% | | Total assets | $517,132 | $495,620 | $21,512 | 4.3% | | Liabilities | | | | | | Total current liabilities | $93,379 | $84,883 | $8,496 | 10.0% | | Total liabilities | $162,236 | $167,989 | $(5,753) | -3.4% | | Shareholders' Equity | | | | | | Total shareholders' equity | $354,896 | $327,631 | $27,265 | 8.3% | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Condensed Consolidated Statements of Operations (Three Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change (Absolute) | Change (%) | |---|---|---|---|---| | Net sales | $110,985 | $113,499 | $(2,514) | -2.2% | | Gross profit | $84,742 | $88,603 | $(3,861) | -4.4% | | Operating income (loss) | $4,175 | $(18,882) | $23,057 | 122.1% | | Net income (loss) | $4,654 | $(40,498) | $45,152 | 111.5% | | Basic EPS | $0.24 | $(2.14) | $2.38 | 111.2% | | Diluted EPS | $0.24 | $(2.14) | $2.38 | 111.2% | Condensed Consolidated Statements of Operations (Nine Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change (Absolute) | Change (%) | |---|---|---|---|---| | Net sales | $288,943 | $338,461 | $(49,518) | -14.6% | | Gross profit | $216,125 | $264,045 | $(47,920) | -18.1% | | Operating income (loss) | $(9,971) | $(22,879) | $12,908 | 56.4% | | Net income (loss) | $11,895 | $(40,148) | $52,043 | 129.6% | | Basic EPS | $0.62 | $(2.13) | $2.75 | 129.1% | | Diluted EPS | $0.61 | $(2.13) | $2.74 | 128.6% | Condensed Consolidated Statements of Changes in Shareholders' Equity Changes in Shareholders' Equity (Nine Months Ended September 30, 2020) | Metric (in thousands) | At Dec 31, 2019 | At Sep 30, 2020 | Change (Absolute) | |---|---|---|---| | Common Shares | $1,902 | $1,927 | $25 | | Additional Paid-in Capital | $271,019 | $285,203 | $14,184 | | Retained Earnings | $57,749 | $68,757 | $11,008 | | Accumulated Other Comprehensive Loss | $(3,039) | $(991) | $2,048 | | Total Shareholders' Equity | $327,631 | $354,896 | $27,265 | - Key changes include net income of $11.9 million, share-based compensation of $12.4 million, and common shares issued (net) of $1.8 million for the nine months ended September 30, 2020[18] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Cash Flow Activity (in thousands) | 2020 | 2019 | Change (Absolute) | |---|---|---|---| | Net cash from operating activities | $51,981 | $20,090 | $31,891 | | Net cash from investing activities | $(42,944) | $(21,281) | $(21,663) | | Net cash from financing activities | $583 | $(12,610) | $13,193 | | Net change in cash, cash equivalents, and restricted cash | $9,897 | $(14,686) | $24,583 | | Cash, cash equivalents, and restricted cash at end of period | $80,300 | $57,503 | $22,797 | - Operating cash flows significantly increased due to higher net income and changes in working capital, while investing activities saw a substantial increase in outflows primarily due to business acquisitions[19] Notes to the Unaudited Condensed Consolidated Financial Statements Note 1. Business, basis of presentation, COVID-19 update, and CARES Act - Orthofix Medical Inc. is a global medical device company focused on musculoskeletal products and therapies, headquartered in Lewisville, Texas, distributing products in over 70 countries[20] - The COVID-19 pandemic negatively impacted net sales, particularly from March to May 2020, due to deferred elective surgeries, travel restrictions, and economic factors, with future impacts remaining uncertain[23][25] - The company received $13.9 million from the CMS Accelerated and Advance Payment Program and $4.7 million from the Provider Relief Fund under the CARES Act, also deferring $2.2 million in employer social security payroll taxes[28][29][30] Note 2. Recently adopted accounting standards and recently issued accounting pronouncements This note details the adoption of new accounting standards, including those for credit losses, goodwill impairment, fair value measurement, cloud computing, and reference rate reform, and their financial impact - Adopted ASU 2016-13 (Credit Losses) effective January 1, 2020, increasing allowance for expected credit losses by $1.1 million and decreasing retained earnings by $0.9 million[31][66] - Adopted ASU 2017-04 (Goodwill Impairment) and ASU 2018-13 (Fair Value Measurement Disclosure) effective January 1, 2020, with no material impact on financial statements but affecting future impairment measurement and disclosures[32][33] - Adopted ASU 2018-15 (Cloud Computing Implementation Costs) and ASU 2020-04 (Reference Rate Reform) effective January 1, 2020, and March 12, 2020, respectively, with no material current impact but expected future effects[34][35] - Currently evaluating ASU 2019-12 (Simplifying the accounting for income taxes) effective January 1, 2021[36] Note 3. Acquisitions This note outlines the company's recent acquisition activities, including the purchase of FITBONE assets and a medical device distributor, detailing the consideration transferred and assets acquired - Acquired FITBONE intramedullary lengthening system assets from Wittenstein SE for $18.0 million cash on March 26, 2020, recording $11.3 million in goodwill[37][39] FITBONE Acquisition - Preliminary Fair Values of Assets Acquired (in thousands) | Asset Acquired | Fair Value | |---|---| | Inventories | $528 | | Developed technology | $4,500 | | Customer relationships | $800 | | Trade name | $600 | | In-process research and development ("IPR&D") | $300 | | Total identifiable assets acquired | $6,728 | | Goodwill | $11,272 | | Total fair value of consideration transferred | $18,000 | - Acquired certain assets of a medical device distributor in July 2020 for up to $7.6 million, primarily customer relationships ($7.34 million) and assembled workforce ($0.235 million)[43] Note 4. Inventories This note provides a breakdown of inventory categories and their changes between reporting periods Inventories (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | |---|---|---| | Raw materials | $7,779 | $9,587 | | Work-in-process | $12,050 | $14,027 | | Finished products | $26,384 | $20,712 | | Field/consignment | $36,646 | $38,071 | | Total Inventories | $82,859 | $82,397 | - Total inventories increased slightly by $0.462 million from December 31, 2019, to September 30, 2020, with a notable increase in finished products and a decrease in raw materials and work-in-process[44] Note 5. Leases This note summarizes the company's lease portfolio and significant lease agreements Lease Portfolio Summary (in thousands) | Category | Sep 30, 2020 | Dec 31, 2019 | |---|---|---| | Total Right-of-Use (ROU) assets | $25,973 | $26,005 | | Total lease liabilities | $28,126 | $26,930 | - In March 2020, the company entered into a Contract Manufacturing and Supply Agreement (CMSA) with Wittenstein, accounted for as a finance lease, recognizing a $1.9 million finance lease liability and ROU asset[46] Note 6. Other current liabilities This note details other current liabilities, specifically focusing on accruals and payments related to a U.S. restructuring plan - As of September 30, 2020, the company had a $3.7 million liability associated with a U.S. restructuring plan initiated in December 2019, primarily involving severance payments[47] - Additional accruals of $1.1 million and $2.5 million were recorded for the three and nine months ended September 30, 2020, respectively, with payments totaling $1.1 million and $2.1 million[47] Note 7. Long-term debt This note describes the company's long-term debt activities, including borrowings and repayments under its credit facilities - The company borrowed $100.0 million under its $300 million secured revolving credit facility in April 2020 as a precautionary measure due to COVID-19, but fully repaid the outstanding balance in the third quarter of 2020[48] - As of September 30, 2020, there were no outstanding borrowings under the secured revolving credit facility or the €5.5 million lines of credit in Italy, and the company was in compliance with all financial covenants[48][49] Note 8. Fair value measurements and investments This note provides information on the fair value of financial liabilities, particularly contingent consideration related to acquisitions Fair Value of Financial Liabilities (in thousands) | Liability | Sep 30, 2020 | Dec 31, 2019 | |---|---|---| | Spinal Kinetics contingent consideration | $(35,100) | $(42,700) | | Other contingent consideration | $(375) | $0 | | Deferred compensation plan | $(1,366) | $(1,255) | | Total Liabilities | $(36,841) | $(43,955) | - The estimated fair value of Spinal Kinetics contingent consideration decreased by $7.6 million to $35.1 million as of September 30, 2020, primarily due to changes in management's forecast of future net sales of artificial discs, impacted by COVID-19 uncertainty[52][53] - The company expects to pay $14.7 million of the Spinal Kinetics contingent consideration within the next twelve months, classifying it as a current liability[52] Note 9. Contingencies This note details various contingencies, including accruals for the Italian Medical Device Payback and a legal dispute in Brazil - The company accrued $6.3 million related to the Italian Medical Device Payback (IMDP) as of September 30, 2020, with $0.4 million and $1.1 million expensed for the three and nine months ended September 30, 2020, respectively, though the actual liability remains uncertain[60] - Approximately $0.5 million of cash in Brazil was frozen in September 2019 due to a legal dispute with a former distributor, reclassified as restricted cash, with an accrual of $1.3 million as of September 30, 2020[61] Note 10. Accumulated other comprehensive loss This note explains the changes in accumulated other comprehensive loss, primarily driven by currency translation adjustments Changes in Accumulated Other Comprehensive Loss (in thousands) | Metric | Dec 31, 2019 | Sep 30, 2020 | Change | |---|---|---|---| | Currency Translation Adjustments | $(3,039) | $(991) | $2,048 | | Total Accumulated Other Comprehensive Loss | $(3,039) | $(991) | $2,048 | - The accumulated other comprehensive loss improved by $2.048 million, primarily due to positive currency translation adjustments for the nine months ended September 30, 2020[62] Note 11. Revenue recognition and accounts receivable This note provides a detailed breakdown of net sales by product category, discusses the impact of new accounting standards on credit losses, and outlines contract liabilities Net Sales by Product Category (Three Months Ended September 30) | Product Category (in thousands) | 2020 | 2019 | Change (%) | |---|---|---|---| | Bone Growth Therapies | $47,066 | $48,836 | -3.6% | | Spinal Implants | $25,505 | $22,947 | 11.1% | | Biologics | $15,245 | $16,308 | -6.5% | | Global Spine | $87,816 | $88,091 | -0.3% | | Global Extremities | $23,169 | $25,408 | -8.8% | | Net sales | $110,985 | $113,499 | -2.2% | Net Sales by Product Category (Nine Months Ended September 30) | Product Category (in thousands) | 2020 | 2019 | Change (%) | |---|---|---|---| | Bone Growth Therapies | $120,888 | $146,228 | -17.3% | | Spinal Implants | $67,025 | $69,076 | -3.0% | | Biologics | $40,319 | $48,784 | -17.4% | | Global Spine | $228,232 | $264,088 | -13.6% | | Global Extremities | $60,711 | $74,373 | -18.4% | | Net sales | $288,943 | $338,461 | -14.6% | - The adoption of ASU 2016-13 resulted in a $1.1 million increase in the allowance for expected credit losses and a $0.9 million decrease in retained earnings as of January 1, 2020[66] - Contract liabilities include a $13.9 million prepayment from CMS under the CARES Act, with $6.9 million classified as current and $6.9 million as long-term[71][73] Note 12. Business segment information This note provides a breakdown of EBITDA by reporting segment and net sales by geographic destination EBITDA by Reporting Segment (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Global Spine | $19,960 | $(6,033) | $38,670 | $21,065 | | Global Extremities | $1,258 | $1,229 | $(3,995) | $3,806 | | Corporate | $(6,196) | $(15,949) | $(16,259) | $(38,356) | | Total EBITDA | $15,022 | $(20,753) | $18,416 | $(13,485) | Net Sales by Geographic Destination (Nine Months Ended September 30, 2020) | Segment | U.S. (in thousands) | International (in thousands) | Total (in thousands) | |---|---|---|---| | Global Spine | $215,819 | $12,413 | $228,232 | | Global Extremities | $16,439 | $44,272 | $60,711 | | Consolidated | $232,258 | $56,685 | $288,943 | Note 13. Acquisition-related amortization and remeasurement This note details the changes in acquisition-related amortization and remeasurement, primarily driven by adjustments to contingent consideration fair value Acquisition-related Amortization and Remeasurement (in thousands) | Component | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Changes in fair value of contingent consideration | $(700) | $22,270 | $(7,600) | $28,140 | | Amortization of acquired intangibles | $1,838 | $1,338 | $4,834 | $3,733 | | Total | $1,138 | $23,608 | $(2,766) | $31,873 | - The significant decrease in total acquisition-related amortization and remeasurement for both periods is primarily due to a $23.0 million (Q3) and $35.7 million (YTD) decrease in the fair value of contingent consideration, largely driven by COVID-19's impact on estimated milestone payments[116] Note 14. Share-based compensation This note provides a breakdown of share-based compensation expense by category and highlights the overall decrease in expense Share-based Compensation Expense (in thousands) | Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Stock options | $786 | $599 | $1,840 | $3,637 | | Time-based restricted stock awards and units | $1,632 | $3,805 | $6,804 | $8,462 | | Market-based restricted stock units | $1,049 | $1,092 | $2,529 | $4,015 | | Stock purchase plan | $374 | $348 | $1,226 | $1,264 | | Total | $3,841 | $5,844 | $12,399 | $17,378 | - Total share-based compensation decreased by $2.0 million for the three months and $5.0 million for the nine months ended September 30, 2020, primarily due to lower time-based and market-based restricted stock awards and units[80] Note 15. Income taxes This note presents the income tax expense (benefit) and effective tax rate, explaining significant factors influencing the rate Income Tax Expense (Benefit) and Effective Tax Rate | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Income tax expense (benefit) (in thousands) | $607 | $13,656 | $(17,833) | $8,869 | | Effective tax rate | 11.5% | (50.9%) | 300.3% | (28.4%) | - The effective tax rate for the nine months ended September 30, 2020, was 300.3%, significantly impacted by statute expirations related to unrecognized tax benefits and financial deductions not recognized for tax purposes[82][120] - The CARES Act is not expected to have a significant impact on income tax expense for fiscal year 2020[83] Note 16. Earnings per share ("EPS") This note provides details on the calculation of basic and diluted earnings per share, including the weighted average common shares and the effect of dilutive securities Weighted Average Common Shares for Diluted EPS | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Weighted average common shares-basic | 19,335,718 | 18,957,876 | 19,217,057 | 18,847,728 | | Effect of dilutive securities | 62,849 | 0 | 102,245 | 0 | | Weighted average common shares-diluted | 19,398,567 | 18,957,876 | 19,319,302 | 18,847,728 | - Approximately 1.77 million (Q3 2020) and 1.53 million (YTD 2020) weighted average outstanding stock options and restricted stock awards were excluded from diluted EPS calculations due to being anti-dilutive or not meeting vesting conditions[88] Note 17. Subsequent Events This note describes significant events occurring after the reporting period, including a new partnership and related financial investments - On October 1, 2020, the company partnered with Neo Medical SA, including a co-development agreement for cervical spine instruments and exclusive distribution rights for thoracolumbar solutions in certain U.S. accounts[89][140] - As part of the Neo Medical partnership, Orthofix purchased $5.0 million in preferred stock and provided a CHF 4.6 million convertible loan (approx. $5.0 million) with an 8.0% interest rate, maturing October 1, 2024[90][141] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results, highlighting the impact of COVID-19, key financial metrics, segment performance, liquidity, and critical accounting estimates Executive Summary This summary provides an overview of Orthofix's business, recent financial performance, and the ongoing impact of the COVID-19 pandemic - Orthofix is a global medical device company focused on musculoskeletal products and therapies, distributing in over 70 countries[95] - Q3 2020 net sales were $111.0 million, an increase of 52% sequentially and within 2% of 2019 performance[100] - US Spinal Implants net sales increased 19% year-over-year in Q3, and Motion Preservation sales increased over 400% year-over-year[100] - The COVID-19 pandemic significantly impacted business, particularly from March to May 2020, due to deferred elective surgeries, with future effects remaining uncertain[96][98] Results of Operations This section analyzes the company's financial performance, detailing changes in net sales, gross profit, operating expenses, and net income, and the factors influencing these changes Key Financial Metrics as % of Net Sales (Three Months Ended September 30) | Metric | 2020 (%) | 2019 (%) | Change (pp) | |---|---|---|---| | Net sales | 100.0 | 100.0 | 0.0 | | Cost of sales | 23.6 | 21.9 | 1.7 | | Gross profit | 76.4 | 78.1 | -1.7 | | Sales and marketing | 47.7 | 48.3 | -0.6 | | General and administrative | 14.9 | 18.6 | -3.7 | | Research and development | 9.0 | 7.0 | 2.0 | | Operating income (loss) | 3.8 | (16.6) | 20.4 | | Net income (loss) | 4.2 | (35.7) | 39.9 | Net Sales by Product Category (Three Months Ended September 30) | Product Category (in thousands) | 2020 | 2019 | Reported Change (%) | Constant Currency Change (%) | |---|---|---|---|---| | Bone Growth Therapies | $47,066 | $48,836 | -3.6% | -3.6% | | Spinal Implants | $25,505 | $22,947 | 11.1% | 10.7% | | Biologics | $15,245 | $16,308 | -6.5% | -6.5% | | Global Spine | $87,816 | $88,091 | -0.3% | -0.4% | | Global Extremities | $23,169 | $25,408 | -8.8% | -11.5% | | Net sales | $110,985 | $113,499 | -2.2% | -2.9% | - Gross profit decreased by $3.9 million (4.4%) for Q3 2020 and $47.9 million (18.1%) for the nine months, primarily due to non-cash inventory charges and lower procedure volumes from COVID-19[105][110] - Sales and marketing expense decreased by $1.9 million (Q3) and $14.6 million (YTD) due to shifts in national sales conferences and increased virtual training[108][109][111] - General and administrative expense decreased by $4.5 million (Q3) and $14.0 million (YTD), driven by lower succession/transition charges, reduced strategic investment costs, and lower legal judgments[109][112] - Research and development expense increased by $2.0 million (Q3) and $2.5 million (YTD) due to efforts to build internal teams for new product innovation and compliance with medical device reporting regulations[114][115] - Acquisition-related amortization and remeasurement decreased significantly by $22.5 million (Q3) and $34.6 million (YTD), mainly due to a decrease in the fair value of contingent consideration related to the Spinal Kinetics acquisition, impacted by COVID-19 uncertainty[116] - Net income (loss) improved significantly, with a $45.2 million increase for Q3 2020 and a $52.0 million increase for the nine months, largely driven by the decrease in acquisition-related remeasurement and other income[17] Segment Review This section reviews the financial performance of the company's operating segments, focusing on EBITDA contributions and changes EBITDA by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | |---|---|---|---|---| | Global Spine | $19,960 | $(6,033) | $38,670 | $21,065 | | Global Extremities | $1,258 | $1,229 | $(3,995) | $3,806 | | Corporate | $(6,196) | $(15,949) | $(16,259) | $(38,356) | | Total EBITDA | $15,022 | $(20,753) | $18,416 | $(13,485) | - Global Spine EBITDA significantly improved, turning from a loss of $6.0 million in Q3 2019 to a profit of $19.9 million in Q3 2020, and increasing from $21.1 million to $38.7 million year-to-date[121] - Corporate EBITDA losses decreased substantially, from $(15.9) million to $(6.2) million in Q3 and from $(38.4) million to $(16.3) million year-to-date[121] Liquidity and Capital Resources This section analyzes the company's cash flows, liquidity position, and capital resources, including the impact of operating, investing, and financing activities Cash Flow Summary (Nine Months Ended September 30) | Cash Flow Activity (in thousands) | 2020 | 2019 | Change (Absolute) | |---|---|---|---| | Net cash from operating activities | $51,981 | $20,090 | $31,891 | | Net cash from investing activities | $(42,944) | $(21,281) | $(21,663) | | Net cash from financing activities | $583 | $(12,610) | $13,193 | | Net change in cash, cash equivalents and restricted cash | $9,897 | $(14,686) | $24,583 | Free Cash Flow (Nine Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change (Absolute) | |---|---|---|---| | Net cash from operating activities | $51,981 | $20,090 | $31,891 | | Capital expenditures | $(12,704) | $(14,881) | $2,177 | | Free cash flow | $39,277 | $5,209 | $34,068 | - Cash, cash equivalents, and restricted cash increased to $80.3 million at September 30, 2020, from $70.4 million at December 31, 2019[121] - Operating cash flows increased by $31.9 million, driven by a $52.0 million increase in net income and a $23.3 million increase from changes in working capital, including a $13.9 million prepayment from CMS[123][124] - Investing cash outflows increased by $21.7 million, primarily due to the $18.0 million FITBONE acquisition and a $5.0 million purchase of Neo Medical preferred stock[126] - Financing cash flows increased by $13.2 million, largely due to the repayment of the $100.0 million revolving credit facility, offsetting the prior year's contingent consideration payment[126] - The company fully repaid its $100.0 million secured revolving credit facility in Q3 2020 and had no outstanding borrowings as of September 30, 2020[126] - The COVID-19 pandemic's impact on liquidity remains uncertain, with potential for continued decreases in elective surgeries and payment delays[134] Critical Accounting Estimates This section discusses the critical accounting estimates, specifically focusing on the allowance for expected credit losses and the significant judgments involved in its estimation - The allowance for expected credit losses, following ASU 2016-13 adoption, represents the uncollectible portion of receivables over their contractual life, considering past events, current conditions, and future economic forecasts[148] - Estimating ultimate collection involves significant assumptions and judgments, including contractual life, aging, historical collections, and payor reimbursement experience, with quarterly analysis and periodic testing[149] Recently Issued Accounting Pronouncements This section directs readers to Note 2 for detailed information on recently issued accounting pronouncements - Refer to Note 2 for detailed information regarding the status of recently issued accounting pronouncements[150] Non-GAAP Financial Measures This section explains the company's use of non-GAAP financial measures to provide enhanced transparency and facilitate financial comparisons - Non-GAAP measures like Constant Currency, EBITDA, and Free Cash Flow are used to provide greater transparency into management's financial and operational decision-making and to facilitate comparisons[152] - Constant currency adjusts net sales for foreign exchange rate changes, EBITDA is earnings before interest, taxes, depreciation, and amortization, and Free Cash Flow is operating cash flow minus capital expenditures[154][155][156] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risks since its Form 10-K for the year ended December 31, 2019 - No material changes to market risks were disclosed compared to the Form 10-K for the year ended December 31, 2019[157] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2020, and reports no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of September 30, 2020[158] - There were no material changes in internal control over financial reporting during the quarter[159] PART II. OTHER INFORMATION This part provides additional information beyond the financial statements, covering legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 9 of the financial statements for information regarding legal proceedings - Information regarding legal proceedings is incorporated by reference from Note 9 to the Unaudited Condensed Consolidated Financial Statements[160] Item 1A. Risk Factors This section supplements previously disclosed risk factors, focusing on the ongoing and unpredictable effects of the COVID-19 pandemic, the potential impact of FDA reclassification of bone growth stimulators, and the risks associated with the investment in Neo Medical SA - The COVID-19 pandemic has materially affected the business in 2020, primarily through significant reductions in elective surgery volumes, and is expected to cause further unpredictable effects[162][164] - An FDA panel's recommendation to reclassify bone growth stimulator devices from Class III to Class II could increase future competition and negatively affect sales of these products[169][172] - The company's $10 million investment and loan to Neo Medical SA carries the risk of not being recouped if Neo Medical's business is unsuccessful[173][174][175] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that the company did not repurchase any common stock during the third quarter of 2020 - No repurchases of common stock were made during the third quarter of 2020[176] Item 3. Defaults Upon Senior Securities This section indicates that there are no applicable defaults upon senior securities - Not applicable[177] Item 4. Mine Safety Disclosures This section indicates that there are no applicable mine safety disclosures - Not applicable[178] Item 5. Other Information This section states that there are no other matters to be reported under this heading - No matters to be reported under this heading[179] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including consulting agreements, certifications, and XBRL documents - Exhibits include consulting agreements, change in control and severance agreements, CEO/CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and Inline XBRL documents[180] SIGNATURES This section contains the official signatures of the registrant's authorized officers, confirming the filing of the report Signatures Details This section contains the official signatures of the registrant's authorized officers, confirming the filing of the report - The report was signed on November 5, 2020, by Jon Serbousek, President and Chief Executive Officer, Director, and Doug Rice, Chief Financial Officer[184]