Orthofix(OFIX) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Orthofix Medical Inc.'s unaudited condensed consolidated financial statements and notes for Q3 2021 and FY2020 are presented Condensed Consolidated Balance Sheets Total assets decreased to $500.39 million by Q3 2021, driven by reduced cash and liabilities, with equity slightly increasing | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Assets | | | | Cash and cash equivalents | $82,710 | $96,291 | | Total current assets | $260,212 | $270,379 | | Total assets | $500,395 | $525,861 | | Liabilities & Equity | | | | Total current liabilities | $80,004 | $103,899 | | Total liabilities | $135,562 | $168,997 | | Total shareholders' equity | $364,833 | $356,864 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) The company reported a net loss of $2.17 million in Q3 2021 and $5.57 million for the nine months, despite increased net sales | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $112,428 | $110,985 | $339,415 | $288,943 | | Gross profit | $84,121 | $84,742 | $257,755 | $216,125 | | Operating income (loss) | $(313) | $4,175 | $1,038 | $(9,971) | | Net income (loss) | $(2,171) | $4,654 | $(5,567) | $11,895 | | Basic EPS | $(0.11) | $0.24 | $(0.28) | $0.62 | | Diluted EPS | $(0.11) | $0.24 | $(0.28) | $0.61 | - Net sales increased by 1.3% for the three months ended September 30, 2021, and by 17.5% for the nine months ended September 30, 2021, compared to the respective prior-year periods[16] Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $364.83 million by Q3 2021, driven by share-based compensation and common shares issued, despite net loss | Metric (in thousands) | At Dec 31, 2020 | At Sep 30, 2021 | | :-------------------------------- | :-------------- | :-------------- | | Total Shareholders' Equity | $356,864 | $364,833 | | Net loss (9 months) | N/A | $(5,816) | | Share-based compensation expense (9 months) | N/A | $11,470 | | Common shares issued, net (9 months) | N/A | $4,054 | Condensed Consolidated Statements of Cash Flows Operating cash flow significantly decreased to $6.70 million for the nine months, leading to an overall decrease in cash and equivalents | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash from operating activities | $6,696 | $51,981 | | Net cash from investing activities | $(14,031) | $(42,944) | | Net cash from financing activities | $(5,673) | $583 | | Net change in cash, cash equivalents, and restricted cash | $(13,606) | $9,897 | | Cash, cash equivalents, and restricted cash at end of period | $83,215 | $80,300 | Notes to the Unaudited Condensed Consolidated Financial Statements Detailed notes provide crucial context on business, accounting policies, acquisitions, debt, contingencies, and financial performance Note 1. Business, basis of presentation, and CARES Act Orthofix is a global medical device company; COVID-19 and CARES Act relief significantly impacted operations and financial reporting - Orthofix Medical Inc. is a global medical device company specializing in spine and orthopedics, distributing products in over 60 countries[19] - The company received $13.9 million from the CMS Accelerated and Advance Payment Program in April 2020, with recoupment starting in April 2021[24][56][106] - Deferred $0.6 million in social security payroll taxes under the CARES Act, which were fully repaid in January 2021[25][107] Note 2. Recently adopted accounting standards and recently issued accounting pronouncements ASU 2019-12 adoption for income tax accounting had no material impact on financial statements - Adopted ASU 2019-12 (Simplifying the accounting for income taxes) effective January 1, 2021, with no material impact on financial statements[28] Note 3. Acquisitions Acquired intellectual property rights for up to $10.0 million from a related party, including $1.0 million cash and $9.0 million contingent consideration - Acquired intellectual property rights for up to $10.0 million on February 2, 2021, including $1.0 million cash and $9.0 million in contingent consideration[29][113] - The transaction was accounted for as an asset acquisition, with contingent consideration recognized when applicable contingencies are resolved[29] Note 4. Inventories Total inventories remained stable at $84.68 million, with a shift from finished products to field/consignment inventories | Inventory Category (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Raw materials | $7,992 | $8,442 | | Work-in-process | $14,977 | $12,149 | | Finished products | $17,164 | $29,142 | | Field/consignment | $44,545 | $34,902 | | Total Inventories | $84,678 | $84,635 | Note 5. Leases ROU assets decreased to $22.69 million and lease liabilities to $26.33 million by Q3 2021 | Lease Metric (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total ROU assets | $22,685 | $25,392 | | Total lease liabilities | $26,329 | $27,886 | | Operating cash flows from operating leases (9 months) | $3,469 | $3,170 | | Financing cash flows from finance leases (9 months) | $395 | $204 | Note 6. Long-term debt No outstanding borrowings under credit facilities as of Q3 2021, with compliance to all financial covenants - No outstanding borrowings under the secured revolving credit facility or Italian lines of credit as of September 30, 2021[34][103] - The company was in compliance with all required financial covenants[34][103] Note 7. Fair value measurements and investments Investments include Neo Medical equity ($5.0 million) and convertible loan ($7.08 million); Spinal Kinetics contingent consideration decreased to $18.4 million | Asset/Liability (in thousands) | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Neo Medical preferred equity securities | $5,000 | $5,000 | | Neo Medical convertible loan agreement | $7,080 | $7,160 | | Spinal Kinetics contingent consideration | $(18,400) | $(35,400) | | Total Assets (Fair Value) | $12,080 | $12,160 | | Total Liabilities (Fair Value) | $(19,805) | $(37,216) | - A $15.0 million milestone payment for the Spinal Kinetics acquisition was achieved in Q1 2021 and paid in Q2 2021[43][108] - The fair value of the remaining Spinal Kinetics contingent consideration was $18.4 million as of September 30, 2021, reflecting management's assumptions on future revenues[44][109] Note 8. Contingencies Contingencies include $7.7 million for IMDP and a Brazilian legal dispute with $0.5 million restricted cash and $0.8 million accrual - Accrued $7.7 million for the Italian Medical Device Payback (IMDP) measure as of September 30, 2021[49] - Approximately $0.5 million of cash in Brazil is restricted due to a legal dispute with a former distributor, with an $0.8 million accrual related to this matter[50][115] Note 9. Accumulated other comprehensive income (loss) Accumulated other comprehensive income decreased to $1.26 million due to currency adjustments and Neo Medical loan unrealized loss | Component (in thousands) | Dec 31, 2020 | Sep 30, 2021 | | :----------------------- | :----------- | :----------- | | Currency Translation Adjustments | $1,833 | $(68) | | Neo Medical Convertible Loan | $1,419 | $1,332 | | Total Accumulated Other Comprehensive Income (Loss) | $3,252 | $1,264 | Note 10. Revenue recognition and accounts receivable Net sales increased 1.3% (Q3) and 17.5% (9 months); Global Orthopedics grew, Global Spine declined in Q3, CMS liability decreased to $7.9 million | Segment/Category (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Bone Growth Therapies | $45,168 | $47,066 | -4.0% | | Spinal Implants | $28,151 | $25,505 | 10.4% | | Biologics | $12,806 | $15,245 | -16.0% | | Global Spine | $86,125 | $87,816 | -1.9% | | Global Orthopedics | $26,303 | $23,169 | 13.5% | | Net sales | $112,428 | $110,985 | 1.3% | | Segment/Category (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :----- | | Bone Growth Therapies | $137,821 | $120,888 | 14.0% | | Spinal Implants | $83,943 | $67,025 | 25.2% | | Biologics | $41,351 | $40,319 | 2.6% | | Global Spine | $263,115 | $228,232 | 15.3% | | Global Orthopedics | $76,300 | $60,711 | 25.7% | | Net sales | $339,415 | $288,943 | 17.5% | - The contract liability from the CMS Accelerated and Advance Payment Program decreased to $7.9 million as of September 30, 2021, due to recoupments[58][59] Note 11. Business segment information Global Spine EBITDA decreased in Q3 but increased for nine months; Global Orthopedics negative EBITDA; Corporate expenses impacted total EBITDA | Segment EBITDA (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Global Spine | $13,908 | $19,960 | $44,835 | $38,670 | | Global Orthopedics | $(196) | $1,258 | $(650) | $(3,995) | | Corporate | $(8,663) | $(6,196) | $(24,522) | $(16,259) | | Total EBITDA | $5,049 | $15,022 | $19,663 | $18,416 | | Net Sales by Geography (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | U.S. (Consolidated) | $85,993 | $89,833 | $264,572 | $232,258 | | International (Consolidated) | $26,435 | $21,152 | $74,843 | $56,685 | | Total Net Sales | $112,428 | $110,985 | $339,415 | $288,943 | Note 12. Acquisition-related Amortization and Remeasurement Acquisition-related amortization was a $0.34 million benefit in Q3, but a $5.03 million expense for nine months due to IPR&D and amortization | Component (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Changes in fair value of contingent consideration | $(2,300) | $(700) | $(2,375) | $(7,600) | | Amortization of acquired intangibles | $1,965 | $1,838 | $5,903 | $4,834 | | Acquired IPR&D | — | — | $1,500 | — | | Total | $(335) | $1,138 | $5,028 | $(2,766) | - Entered into an Exclusive License and Distribution Agreement with IGEA S.p.A, paying $0.5 million in Q2 2021 for acquired IPR&D costs[63][114] Note 13. Share-based Compensation Share-based compensation expense was stable at $3.84 million in Q3, decreasing to $11.47 million for the nine-month period | Expense Category (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of sales | $200 | $149 | $587 | $535 | | Sales and marketing | $831 | $668 | $2,505 | $2,897 | | General and administrative | $2,531 | $2,770 | $7,667 | $7,939 | | Research and development | $280 | $254 | $711 | $1,028 | | Total | $3,842 | $3,841 | $11,470 | $12,399 | Note 14. Income Taxes Effective tax rate was 14.4% in Q3 and (43.1%) for nine months, influenced by losses, contingent consideration, and tax ruling | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax benefit (expense) (in thousands) | $(364) | $607 | $1,677 | $(17,833) | | Effective tax rate | 14.4% | 11.5% | (43.1%) | 300.3% | - The effective tax rate for the nine months ended September 30, 2021, was significantly impacted by certain losses not benefited, remeasurement of contingent consideration, and a favorable tax ruling[66][97] Note 15. Earnings Per Share ("EPS") Basic and diluted EPS were $(0.11) (Q3) and $(0.28) (9 months), with anti-dilutive stock options excluded from diluted EPS | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average common shares-basic | 19,769,823 | 19,335,718 | 19,633,782 | 19,217,057 | | Weighted average common shares-diluted | 19,769,823 | 19,398,567 | 19,633,782 | 19,319,302 | | Basic EPS | $(0.11) | $0.24 | $(0.28) | $0.62 | | Diluted EPS | $(0.11) | $0.24 | $(0.28) | $0.61 | - 2,055,405 weighted average outstanding stock options and restricted stock awards were not included in diluted EPS for the three months ended September 30, 2021, as their inclusion would have been anti-dilutive[70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Orthofix's financial condition, operational results, COVID-19 impact, segment performance, and liquidity, including acquisitions and non-GAAP measures Executive Summary Orthofix reported $112.4 million net sales in Q3 2021 (1.3% increase), with double-digit growth in Spinal Implants and Orthopedics, amidst COVID-19 uncertainty - Net sales reached $112.4 million in Q3 2021, an increase of 1.3% compared to the prior year[76] - Achieved double-digit growth in global Spinal Implants and Orthopedics during Q3 2021[76] - The COVID-19 pandemic continues to cause uncertainty, affecting elective surgeries, travel, and potentially leading to supply chain disruptions and labor shortages[74][75] Results of Operations Net sales increased 1.3% (Q3) and 17.5% (9 months), but Q3 saw decreased gross profit margin and net operating losses | Metric (%) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | 100.0 | 100.0 | 100.0 | 100.0 | | Gross profit | 74.8 | 76.4 | 75.9 | 74.8 | | Operating income (loss) | (0.3) | 3.8 | 0.3 | (3.5) | | Net income (loss) | (1.9) | 4.2 | (1.6) | 4.1 | Net Sales by Product Category and Reporting Segment Q3 2021 Global Spine net sales decreased 1.9%, while Global Orthopedics grew 13.5%; nine-month sales showed strong growth for both | Segment/Category (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Reported Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------- | | Bone Growth Therapies | $45,168 | $47,066 | -4.0% | | Spinal Implants | $28,151 | $25,505 | 10.4% | | Biologics | $12,806 | $15,245 | -16.0% | | Global Spine | $86,125 | $87,816 | -1.9% | | Global Orthopedics | $26,303 | $23,169 | 13.5% | | Net sales | $112,428 | $110,985 | 1.3% | | Segment/Category (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Reported Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------- | | Bone Growth Therapies | $137,821 | $120,888 | 14.0% | | Spinal Implants | $83,943 | $67,025 | 25.2% | | Biologics | $41,351 | $40,319 | 2.6% | | Global Spine | $263,115 | $228,232 | 15.3% | | Global Orthopedics | $76,300 | $60,711 | 25.7% | | Net sales | $339,415 | $288,943 | 17.5% | Global Spine Global Spine net sales decreased 1.9% in Q3 due to COVID-19 impacts, but increased 15.3% for nine months due to pandemic recovery - Bone Growth Therapies net sales decreased 4.0% in Q3 2021, primarily due to increased COVID-19 restrictions affecting complex overnight procedures[78] - Spinal Implants net sales increased 10.4% in Q3 2021, driven by growth in Spine Fixation internationally and Motion Preservation in the U.S[78] - For the nine months, Global Spine net sales increased 15.3%, with Bone Growth Therapies up 14.0%, Spinal Implants up 25.2%, and Biologics up 2.6%, reflecting recovery from the pandemic[79][83] Global Orthopedics Global Orthopedics net sales increased 13.5% (Q3) and 25.7% (9 months), driven by international orders and FITBONE growth - Global Orthopedics net sales increased 13.5% in Q3 2021 and 25.7% for the nine months ended September 30, 2021[81] - Growth was attributed to increased international stocking distributor orders, continued growth in the FITBONE product line, and recovery from COVID-19 impacts[84] Gross Profit Gross profit decreased by $0.6 million (-0.7%) in Q3 due to mix and procurement costs, but increased $41.6 million (+19.3%) for nine months | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Gross profit | $84,121 | $84,742 | (0.7%) | | Gross margin | 74.8% | 76.4% | (1.5%) | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Gross profit | $257,755 | $216,125 | 19.3% | | Gross margin | 75.9% | 74.8% | 1.1% | - Q3 2021 gross profit decrease was mainly due to changes in geography and product mix and a $1.0 million increase in electronic procurement costs from a global semiconductor chip shortage[85] Sales and Marketing Expense Sales and marketing expense increased by $3.2 million (+6.0%) in Q3 and $13.5 million (+9.0%) for nine months, due to marketing and compensation | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Sales and marketing | $56,097 | $52,926 | 6.0% | | As a percentage of net sales | 49.9% | 47.7% | 2.2% | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Sales and marketing | $164,220 | $150,718 | 9.0% | | As a percentage of net sales | 48.4% | 52.2% | (3.8%) | - Increase in sales and marketing expense for the nine months was driven by a $10.9 million increase in variable compensation and a $2.7 million increase in marketing events, trade shows, and travel[89] General and Administrative Expense G&A expense decreased $0.2 million (-1.4%) in Q3 but increased $1.6 million (+3.3%) for nine months due to reversal of 2020 savings | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | General and administrative | $16,312 | $16,541 | (1.4%) | | As a percentage of net sales | 14.5% | 14.9% | (0.4%) | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | General and administrative | $51,091 | $49,453 | 3.3% | | As a percentage of net sales | 15.1% | 17.1% | (2.0%) | - The nine-month increase was largely due to the cessation of 2020 savings initiatives (e.g., temporary salary reductions, 401(k) match suspension) and increased medical claims costs in 2021[87] Research and Development Expense R&D expense increased by $2.4 million (+24.1%) in Q3 and $7.7 million (+26.8%) for nine months, driven by EU regulations and new product development | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Research and development | $12,360 | $9,962 | 24.1% | | As a percentage of net sales | 11.0% | 9.0% | 2.0% | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Research and development | $36,378 | $28,691 | 26.8% | | As a percentage of net sales | 10.7% | 9.9% | 0.8% | - The increase in R&D expense was driven by $4.1 million related to EU medical device reporting regulations, increased spending on new product development, and the cessation of 2020 savings initiatives[92] Acquisition-related Amortization and Remeasurement Acquisition-related amortization decreased by $1.5 million in Q3, but increased by $7.8 million for nine months due to IPR&D and amortization | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | | Acquisition-related amortization and remeasurement | $(335) | $1,138 | (129.4%) | | As a percentage of net sales | (0.3%) | 1.0% | (1.3%) | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | | Acquisition-related amortization and remeasurement | $5,028 | $(2,766) | (281.8%) | | As a percentage of net sales | 1.4% | (0.9%) | 2.3% | - The nine-month increase was primarily due to a $5.5 million increase in contingent consideration remeasurement, $1.5 million in acquired IPR&D assets, and $1.1 million in amortization of intangibles[93] Non-operating Income and Expense Interest expense decreased by $0.3 million (Q3) and $0.7 million (9 months); other income decreased by $3.6 million (Q3) and $9.6 million (9 months) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Interest expense, net | $(433) | $(731) | (40.8%) | | Other income (expense), net | $(1,789) | $1,817 | (198.5%) | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Interest expense, net | $(1,400) | $(2,055) | (31.9%) | | Other income (expense), net | $(3,528) | $6,088 | (158.0%) | - The decrease in other income (expense), net, for the nine months was due to a $5.0 million foreign currency remeasurement loss and a $4.7 million decrease from the prior year's Provider Relief Fund[96] Income Taxes Effective tax rate was 14.4% (Q3) and (43.1%) (9 months), influenced by losses, remeasurement, and a favorable tax ruling | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Income tax (benefit) expense | $(364) | $607 | (160.0%) | | Effective tax rate | 14.4% | 11.5% | 2.9% | | Metric (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | | Income tax (benefit) expense | $1,677 | $(17,833) | (109.4%) | | Effective tax rate | (43.1%) | 300.3% | (343.4%) | - A favorable tax ruling in Q1 2021 resulted in a net benefit of $0.3 million for the nine months ended September 30, 2021[67] Segment Review Total EBITDA decreased to $5.05 million in Q3 due to Global Spine decline and Corporate expenses, but increased to $19.66 million for nine months | Segment EBITDA (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Global Spine | $13,908 | $19,960 | $44,835 | $38,670 | | Global Orthopedics | $(196) | $1,258 | $(650) | $(3,995) | | Corporate | $(8,663) | $(6,196) | $(24,522) | $(16,259) | | Total EBITDA | $5,049 | $15,022 | $19,663 | $18,416 | Liquidity and Capital Resources Cash and equivalents decreased to $83.2 million; operating cash flow declined by $45.3 million, resulting in $(6.09) million negative free cash flow | Cash Flow (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :----------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash from operating activities | $6,696 | $51,981 | $(45,285) | | Net cash from investing activities | $(14,031) | $(42,944) | $28,913 | | Net cash from financing activities | $(5,673) | $583 | $(6,256) | | Net change in cash | $(13,606) | $9,897 | $(23,503) | | Free Cash Flow (in thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change | | :---------------------------- | :-------------------------- | :-------------------------- | :----- | | Free cash flow | $(6,085) | $39,277 | $(45,362) | - The decrease in operating cash flow was primarily due to a $17.5 million decrease in net income, a $10.1 million net increase in non-cash gains/losses, and a $38.0 million net decrease in working capital[102] Impact of COVID-19 and the CARES Act on Liquidity and Capital Resources CARES Act provided $13.9 million from CMS, with $7.9 million remaining liability; deferred payroll taxes were fully repaid - The balance of the contract liability from the CMS Accelerated and Advance Payment Program was $7.9 million as of September 30, 2021, with recoupment ongoing[106] - All $0.6 million in deferred employer social security payroll tax payments under the CARES Act were repaid in January 2021[107] Spinal Kinetics Contingent Consideration A $15.0 million Spinal Kinetics milestone was paid; remaining $30.0 million milestone has a fair value of $18.4 million - A $15.0 million milestone payment for the Spinal Kinetics acquisition was achieved in Q1 2021 and paid in Q2 2021[108] - The remaining revenue-based milestone payment is $30.0 million, with an estimated fair value of $18.4 million as of September 30, 2021[109] FITBONE Asset Acquisition Acquired FITBONE system assets in February 2020; a $2.0 million contingent payment to Wittenstein is expected in Q1 2022 - Acquired assets for the FITBONE intramedullary lengthening system in February 2020[111] - A $2.0 million contingent payment to Wittenstein for manufacturing is expected in Q1 2022[111] Neo Medical Convertible Loan Loaned CHF 4.6 million (approx. $6.4 million) to Neo Medical SA via a convertible loan, bearing 8.0% interest - Loaned CHF 4.6 million (approximately $6.4 million) to Neo Medical SA in October 2020 through a convertible loan agreement[112] - The convertible loan bears 8.0% interest and matures in October 2024[112] Related Party Transaction Acquired IP rights from a related party for up to $10.0 million, including $1.0 million upfront and $9.0 million contingent consideration - Acquired intellectual property rights from a related party for up to $10.0 million on February 2, 2021[113] - Consideration included $1.0 million at signing and $9.0 million in contingent consideration tied to milestones[113] IGEA S.p.A Exclusive License and Distribution Agreement Entered exclusive license with IGEA S.p.A for U.S./Canada, with consideration up to $4.0 million, including $0.5 million paid in Q2 2021 - Entered an exclusive license and distribution agreement with IGEA S.p.A on April 7, 2021, for U.S. and Canada markets[114] - Consideration up to $4.0 million, with $0.5 million paid in Q2 2021 and remaining payments contingent on FDA milestones[114] Brazil (Legal Dispute) Brazilian legal dispute resulted in $0.5 million restricted cash and an $0.8 million accrual - Approximately $0.5 million of cash in Brazil is restricted due to an ongoing legal dispute with a former distributor[115] - An accrual of $0.8 million related to this matter is classified within other current liabilities[115] Off-balance Sheet Arrangements No material off-balance sheet arrangements as of September 30, 2021 - No material off-balance sheet arrangements as of September 30, 2021[116] Contractual Obligations No material changes to contractual obligations since the December 31, 2020 Form 10-K - No material changes to contractual obligations since the December 31, 2020 Form 10-K[117] Critical Accounting Estimates No significant changes to critical accounting estimates since the December 31, 2020 Form 10-K - No significant changes to critical accounting estimates[119] Recently Issued Accounting Pronouncements No material impact expected from recently issued Accounting Standards Updates upon adoption - No material impact expected from recently issued Accounting Standards Updates upon adoption[120] Non-GAAP Financial Measures Defines non-GAAP financial measures (Constant Currency, EBITDA, Free Cash Flow) for transparency and comparison, acknowledging limitations - Non-GAAP measures (Constant Currency, EBITDA, Free Cash Flow) are used to provide transparency and facilitate comparisons, but have limitations[121][122] - EBITDA is the primary metric used by the Chief Operating Decision Maker[124] - Free cash flow is calculated by subtracting capital expenditures from net cash from operating activities and indicates cash generated or used by normal business operations[125] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market risks since the December 31, 2020 Form 10-K - No material changes to market risks since the December 31, 2020 Form 10-K[126] Item 4. Controls and Procedures Management concluded Orthofix's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021 - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2021[127] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting during the quarter - No material changes in internal control over financial reporting during the quarter[128] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note 8 - Legal proceedings information is incorporated by reference from Note 8[129] Item 1A. Risk Factors Supplements prior 10-K risk factors, highlighting continuing material impact of COVID-19 pandemic and supply chain disruptions - The COVID-19 pandemic and related supply chain/raw material disruptions (e.g., semiconductor chips) could continue to materially impact global operations, manufacturing, and financial condition[131] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common stock repurchases were made during Q3 2021 - No repurchases of common stock were made during the third quarter of 2021[132] Item 3. Defaults Upon Senior Securities Not applicable - Not applicable[133] Item 4. Mine Safety Disclosures Not applicable - Not applicable[134] Item 5. Other Information No other matters to be reported - No other matters to be reported[135] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and Inline XBRL documents - Includes Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer and Chief Financial Officer[136] - Includes Section 1350 Certifications of each of the Chief Executive Officer and Chief Financial Officer[136] - Includes Inline XBRL Instance Document and Taxonomy Extension Documents[136][137] SIGNATURES Report signed by Jon Serbousek (President & CEO) and Doug Rice (CFO) on November 5, 2021 - Report signed by Jon Serbousek, President and CEO, and Doug Rice, CFO, on November 5, 2021[142]