Orthofix Medical Inc. Annual Report 2019

FY2019 Annual Report · Orthofix Medical Inc.

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Annual Report

ORTHOFIX MEDICAL INC.

Cover photo: Orthofix Spine Patient Laura Wilkinson displays
her 2000 Olympic Gold Medal, 2004 World Cup Gold Medal,
2005 World Championship Gold Medal, and other medals.

Orthofix Patient Laura Wilkinson
Goes For Olympic Glory Once Again

Laura Wilkinson made history at the 2000 Olympics when she became the first
American woman since 1964 to win a Gold Medal in platform diving. Laura
continued to make history when she became the first woman to win all
three world titles in platform diving (the 2004 World Cup, the 2005 World
Championship, and the 2000 Olympic Games).

After she was diagnosed with cervical disc degeneration in 2018, Laura had a
successful fusion surgery using an Orthofix cervical plate system to stabilize
her spine in combination with the Trinity ELITE™ allograft to aid in bone
fusion. During her recovery, Laura wore an Orthofix CervicalStim™ device
to stimulate bone growth at the fusion site. After six months of recovery
and wearing the CervicalStim device, Laura was deemed fully fused by her
physician. Soon she was back in the water and proceeded to secure
a spot to compete during the Olympic trials.

Orthofix is a proud sponsor of Laura’s quest for the Summer Olympics
in Tokyo, now postponed to summer 2021.

Letter to our shareholders

Jon Serbousek

I write this letter to you in the midst of the global health crisis of
COVID-19. I am hopeful that by the time you receive it, we will have
started to “flatten the curve” to bring COVID-19 under control. We
here at Orthofix are working hard to ensure patients and health
care providers continue to receive the highest quality products and
service they need, when they need them. We are doing so while
working to keep our employees and communities safe. Although
Orthofix is well positioned financially, this is an unprecedented
challenge for all of us in the medical device industry. Orthofix has
been in existence for 40 years, we are resilient, and we are dedicated
to improving the lives of patients around the world.

After joining Orthofix in August 2019, I spent a significant amount
of time talking with our global teams, as well as with our many
surgeon customers, distributor partners, and hospital advisors. As a
result of these conversations, and despite the COVID-19 challenges,
I am even more enthusiastic today about the opportunity in front of
us than when I first joined the company.

Prior to 2018, Orthofix was organized into four divisions focused on
specialty groups. In mid-2018 under the prior leadership, Orthofix
initiated a reorganization into two businesses. This initiative
realigned the legacy businesses of Bone Growth Therapies, Biologics,
Spinal Implants, and Motion Preservation into a single Global Spine
business unit while maintaining the structure of our Global Extremities
business. The goal of this reorganization was to centralize and align
the company in order to better leverage our products and solutions
across our businesses and present ourselves more effectively
to our unique Spine and Extremity customers. Orthofix started on
this journey two years ago, positioning itself for the future. The
company began this journey with the successful acquisition and
integration of Spinal Kinetics in 2018, followed by the U.S. Food and
Drug Administration (FDA) approval of the M6-C™ artificial cervical
disc in 2019. I am honored to assume the role of Orthofix’s President
and CEO and excited at the opportunity to continue shaping the future
of this great company. In 2020 and the years ahead, I look forward to
capitalizing on the investments we are making now.

A Winning Product Portfolio
First and foremost, we currently have well-defined market and
technology leadership positions in bone growth stimulation therapies,
cellular-based allografts, artificial disc replacement, and extremity
deformity correction products. There is opportunity for us to enhance
and build around these strong offerings. Additionally, we have the
most comprehensive offering of cervical spine solutions, and with
the recently announced acquisition of the FITBONE® intramedullary
lengthening system, we will be the only company offering both
internal and external limb-lengthening options. Collectively, these
are impressive positions for a company our size.

Apart from our product and technology strengths, the talented
team at Orthofix has done a great job creating a solid business
foundation from which we can grow. With our strong infrastructure,
legal, finance, accounting, order-to-cash, and compliance programs,
Orthofix is well positioned to build and execute commercially.

Transformation
In 2020, we have embarked on an ambitious strategic plan—our
road map for business transformation. Our plan is not to
change where we are going, but how we will do it. While this
transformation won’t happen overnight, our strategic plan
is built around four pillars that we believe will accelerate our
growth and take Orthofix to the next level:

• Structure and Leadership

• Operational Execution

• Product Innovation and Differentiation

• Commercial Channel Development

Structure and Leadership
The Orthofix of today is strongly aligned around the two platforms
mentioned above that will propel us forward: Spine and Extremities.
These businesses share many strategic leverage points, enabling us
to maximize revenues across our entire organization.

While Orthofix continued to deliver on our commitment to bringing
innovative products to the market in 2019, I want to acknowledge
that we did not fully deliver on our growth expectations last year.
Our sales growth was lower than expected due to a number of
factors, but two of the primary limitations were the distraction
from the CEO transition combined with key leadership departures
in the Spine business. As a result, we experienced a great deal of
organizational uncertainty and lacked a clear path forward. Filling
some of the vacancies and adding to our talented leadership team
has been a key focus for me since I arrived at Orthofix, and I am

“ All of our patients may not be Olympic Gold Medalists like Laura Wilkinson,
but we’re proud to help them on their journeys.”

very pleased with the progress we have made in this area. I firmly
believe that investing in the people who work in our business and
on our technologies is just as important as investing in the
technology itself. Today we have enhanced our expertise and
solidified our leadership team by bringing on seasoned executives
that we believe will give us a huge advantage in the marketplace.
Combining these new additions and roles with the existing strong
Orthofix talent will position us for success, and I look forward to
this team coalescing as we execute commercially.

Operational Execution
Operational execution for Orthofix means we will work hard to
ensure that we are providing our high-quality products and tissues
to our customers WHEN they want it and HOW they want it.
The WHEN entails optimizing our supply chain, and the HOW will
be driven by being more focused on our customers’ needs. We are
creating the view that everyone at Orthofix owns the total
customer experience. This will have benefits not only near term,
but down the road as we work to create an agile, competitive
culture focused on flawless execution and winning.

Product Innovation and Differentiation
It is easy to talk about new product innovation but executing on
these initiatives requires a focused plan. There are market trends
today that are creating unmet needs that require solutions. We
are going to be laser focused on both developing and acquiring
high-value products and procedural solutions that solve these
unmet needs.

As we focus on accelerating our new product innovation cycle,
we will also invest in our Clinical and Regulatory execution with
the launch of our M6-C artificial cervical disc two-level study to
expand our future market opportunity. Post-market studies in our
Spine and Extremities businesses are also planned.

On the inorganic front, we will continue to be disciplined acquirers
of assets that are strong strategic fits that we can purchase at
a reasonable price, thereby adding significant value. As mentioned
above, we started 2020 with a targeted acquisition of the FITBONE
intramedullary lengthening system for limb lengthening of the
femur and tibia bones. Additionally, this transaction brings other
potential applications of the technology, which are in development,
including the FITSPINE® system for early onset scoliosis.

Both our acquisitions of Spinal Kinetics and the FITBONE technology
are good examples of the types of deals that we are looking to
execute on. In both cases, we acquired differentiated products that
strengthen our portfolio and represent areas where Orthofix can

add substantial value to the market. We believe that both of these
acquisitions will drive revenue growth in the future.

Commercial Channel Development
With the leadership teams we have recently created in both the
Spine and Extremity businesses, we intend to transform and invest
in our Commercial Channels. Over the next 24 months and beyond,
we will focus on adding or developing long-term, strategic sales
partners. These partners will share in our vision for differentiation
and growth and sell multiple Orthofix product lines. This will enable
us to realize inherent synergies across our product lines and realize
sustained growth. The fundamental thread to our sales partners is
that we will be highly aligned to collectively grow our businesses
together over the long-term.

The Path Forward
Our global team has a unified vision for the future. We have set
a course to strengthen our core businesses and better serve our
customers. Orthofix already has a strong margin profile for its size
and scale. By investing to accelerate our organic growth rate and
achieving scale in our businesses, we see a pathway to ultimately
produce higher margins and free cash flow generation three to five
years down the road.

On behalf of the Board of Directors and all of us at Orthofix, we
thank our shareholders for the continued support and trust you
place in us. Together, we will continue to grow the business for a
successful future.

I would also like to thank all of our Orthofix team members for
their strong work ethic through a year of change, and during the
current period of uncertainty around the globe. Whether working
directly with products, customers or patients, or supporting our
business in other ways, our team makes it possible for Orthofix
to improve the lives of patients around the world. The future for
Orthofix is bright.

Sincerely,

Jon Serbousek
President and Chief Executive Officer
Orthofix Medical Inc.cc

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

☒☒

☐☐

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

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

For the fiscal year ended December 31, 2019
or

For the transition period from

to
Commission File Number: 0-19961

ORTHOFIX MEDICAL INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

3451 Plano Parkway,
Lewisville, Texas
(Address of principal executive offices)

98-1340767
(I.R.S. Employer
Identification No.)

75056
(Zip Code)

(214) 937-2000
(Registrants telephone number, including area code)

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

Common Stock, $0.10 par value
(Title of Class)

OFIX
(Trading Symbol)

Nasdaq Global Select Market
(Name of Exchange on Which Registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, a smaller reporting company, or 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

Non-accelerated filer

☒

☐

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 Act). Yes ☐ No ☒

The aggregate market value of registrants common stock held by non-affiliates, based upon the closing price of the common stock on the last business day of the
fiscal quarter ended June 30, 2019, as reported by the Nasdaq Global Select Market, was approximately $995.8 million.
As of February 20, 2020, 19,179,120 shares of common stock were issued and outstanding.

Certain sections of the registrants definitive proxy statement to be filed with the Commission in connection with the Orthofix Medical Inc. 2020 Annual General
Meeting of Shareholders are incorporated by reference in Part III of this Annual Report.

DOCUMENTS INCORPORATED BY REFERENCE

Orthofix Medical Inc.

PART I

Form 10-K for the Year Ended December 31, 2019
Table of Contents

Page

Business ....................................................................................................................................................................

Item 1.
4
Item 1A. Risk Factors............................................................................................................................................................... 20
Item 1B. Unresolved Staff Comments..................................................................................................................................... 30
Properties ................................................................................................................................................................. 31
Item 2.
Legal Proceedings ..................................................................................................................................................... 31
Item 3.
Mine Safety Disclosure ............................................................................................................................................. 31
Item 4.

PART II

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 32
Item 5.
Selected Financial Data............................................................................................................................................. 34
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations..................................... 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................................................................. 48
Financial Statements and Supplementary Data ....................................................................................................... 49
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 49
Item 9A. Controls and Procedures .......................................................................................................................................... 49
Item 9B. Other Information .................................................................................................................................................... 52

PART III

Item 10. Directors, Executive Officers and Corporate Governance........................................................................................ 52
Item 11. Executive Compensation .......................................................................................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................ 52
Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................................ 52
Item 14. Principal Accountant Fees and Services ................................................................................................................... 52

PART IV

Item 15. Exhibits, Financial Statement Schedules .................................................................................................................. 53
56
Item 16. Form 10-K Summary .................................................................................................................................................

Forward-Looking Statements

This Annual 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 I, Item 1A, Risk Factors. Therefore, 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 further update any such statement, to reflect new
information, the occurrence of future events or circumstances or otherwise.

Solely for convenience, our trademarks and trade names in this Annual 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.

Trademarks

Item 1.

Business

PART I

In this Annual Report, the terms we, us,
Orthofix,
of Orthofix Medical Inc. and its consolidated subsidiaries and affiliates, unless the context requires otherwise.

the Company

and our

our,

Company refer to the combined operations

Company Overview

We are a global medical device company focused on musculoskeletal products and therapies. Our mission is to improve patients’
lives by providing superior reconstruction and regenerative musculoskeletal solutions to physicians worldwide. Headquartered in
Lewisville, Texas, our spine and orthopedic extremities products are distributed in more than seventy countries via our sales
representatives and distributors.

We have administrative and training facilities in the United States (U.S.), Italy, Brazil, the United Kingdom (U.K.), France, and
Germany, and manufacturing facilities in the U.S. and Italy. We directly distribute products in the U.S., Italy, the U.K., Germany, and
France. In several of these and other markets, we also distribute our products through independent distributors.

The Company originally was formed in 1987 in Curaçao and is now a corporation operating under the laws of the State of Delaware.
In 2018, the Company completed a change in its jurisdiction of organization from Curaçao to the State of Delaware and changed its
name to Orthofix Medical Inc.

Available Information and Orthofix Website

Our filings with the Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, Annual Proxy Statement on Schedule 14A, any registration statements, and
amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are filed with,
or furnished to, the SEC. Information on our website or connected to our website is not incorporated by reference into this Annual
Report. Our website is located at www.orthofix.com. Our SEC filings are also available on the SEC website at www.sec.gov.

Business Segments

We manage our business by our two reporting segments, Global Spine and Global Extremities, which accounted for 78% and 22%,
respectively, of our total net sales in 2019. The chart below presents net sales, which includes product sales and marketing service
fees, by reporting segment for each of the years ended December 31, 2019, 2018, and 2017.

$357

$347

$331
$331

$103

$106

$103

Global Spine

Global Extremities

s
n
o

i
l
l
i

$400

$350

$300

$250

$200

$150

$100

$50

2019

2018

2017

Financial information regarding our reportable business segments and certain geographic information is included in Part II, Item 7 of
this Annual Report under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations, and
Note 15 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

Global Spine

The Global Spine reporting segment is largely represented by three product categories, i) Bone Growth Therapies, ii) Spinal Implants,
and iii) Biologics. Our strategies within the Global Spine reporting segment for each of these product categories, and the principal
products within each of these categories, are described below in further detail:

Bone Growth Therapiesp

Within the Bone Growth Therapies product category of the Global Spine reporting segment, we manufacture, distribute, and provide
support services for market-leading bone growth stimulation devices that enhance bone fusion. These class III medical devices are
indicated as an adjunctive, noninvasive treatment to improve fusion success rates in the cervical and lumbar spine as well as a
therapeutic treatment for non-spinal, appendicular fractures that have not healed (nonunions). These devices utilize Orthofix’s
patented pulsed electromagnetic field (PEMF) technology, the safety and efficacy of which is supported by basic mechanism of
action data in the scientific literature, as well as published data from level one randomized controlled clinical trials. The devices are
compatible with the STIM onTrack mobile application, which includes a first-to-market feature that enables physicians to remotely
view and assess patient adherence to treatment protocols and patient reported outcome measures. We currently have research and
a clinical study underway to identify potential clinical indications for treating rotator cuff tears. We sell our Bone Growth Therapies
products almost exclusively in the U.S. using distributors and direct sales representatives to sell and deliver our devices to hospitals,
healthcare providers, and patients.

Bone Growth Therapies Strategy

Our strategy for the Bone Growth Therapies product category is to expand patient access to bone growth therapy devices that
deliver noninvasive treatment for promoting healing in fractured bones and spinal fusions. Our key strategies in this product
category are to:

•

Promote competitive advantages of our recently launched products and STIM onTrack mobile app

Support adoption and reimbursement with:

o North American Spine Society’s (NASS) Coverage Policy Recommendation
o

Post-market clinical research

Continue to invest in expanding our sales force

Bring to market new PEMF products addressing unmet clinical needs

Bone Growth Therapies Products

The following table and discussion identify our principal Bone Growth Therapies products by trade name and describe their primary
applications:

Product

Primary Application

CervicalStim Spinal Fusion Therapy

PEMF non-invasive cervical spinal fusion therapy used to enhance bone growth

SpinalStim Spinal Fusion Therapy

PEMF non-invasive lumbar spinal fusion therapy used to enhance bone growth

PhysioStim Bone Healing Therapy

PEMF non-invasive appendicular skeleton healing therapy used to enhance
bone growth in nonunion fractures

Spinal Therapy

Our bone growth therapy devices used in spinal applications are designed to enhance bone growth and the success rate of certain
spinal fusions by stimulating the body’s own natural healing mechanism post-surgically. These non-invasive portable devices are
intended to be used as part of a home treatment program prescribed by a physician.

We offer two spinal fusion therapy devices: the SpinalStim and CervicalStim devices. Our stimulation products use a PEMF
technology designed to enhance the growth of bone tissue following surgery and are placed externally over the site to be healed.
Research data shows that our PEMF signal induces mineralization and results in a process that stimulates new regeneration at the
spinal fusion site. Some spine fusion patients are at greater risk of not achieving a solid fusion of new bone around the fusion site.
These patients typically have one or more risk factors such as smoking, obesity, or diabetes, or their surgery involves the revision of
a failed fusion or the fusion of multiple levels of vertebrae in one procedure. For these patients, post-surgical bone growth therapy
has been shown to significantly increase the probability of fusion success.

The SpinalStim device is a non-invasive spinal fusion stimulator system that has been commercially available in the U.S. since 1990. It
is designed for the treatment of the lumbar region of the spine. The device uses proprietary technology and a wavelength to
generate a PEMF signal. The U.S. Food and Drug Administration (the FDA) has approved the SpinalStim system as a spinal fusion
adjunct to increase the probability of fusion success and as a non-operative treatment for salvage of failed spinal fusion at least nine
months post-operatively.

Our CervicalStim product remains the only FDA-approved bone growth stimulator on the market indicated for use as an adjunct to
cervical spine fusion surgery in patients at high-risk for non-fusion. The FDA approved this device in 2004 and it has been
commercially available in the U.S. since 2005.

In 2016, the NASS issued first-of-its-kind coverage recommendations for electrical bone growth stimulators. These evidence-based
coverage policy recommendations support the use of PEMF devices as an adjunct to spinal fusion surgery in high-risk patients. The
NASS coverage policy recommends coverage of the use of electrical stimulation for spinal fusion healing in all regions of the spine,
including cervical and lumbar regions. The validation of PEMF electrical stimulation from this leading surgical society has and is
expected to continue to further support our efforts to expand the availability and use of the therapy to the many patients who can
benefit from it.

In 2017, we announced FDA and European Commission CE mark approval for our next-generation SpinalStim and CervicalStim bone
growth stimulators. The CervicalStim and SpinalStim systems available in the U.S. are accompanied by a new application for mobile
devices called STIM onTrack. The mobile app includes a first-to-market feature that enables physicians to remotely view patient
adherence to prescribed treatment protocols and patient reported outcome measures. Designed for use with smartphones and
other mobile devices, the STIM onTrack tool helps patients follow their prescription with daily treatment reminders and a device
usage calendar. The app is free and available through the iTunes App Store. In addition to the app, the next-generation bone growth
stimulators include patient enhancements aimed at improving fit, comfort, and ease of use.

Orthopedic Therapy

Our PhysioStim bone healing therapy products use PEMF technology similar to that used in our spine stimulators. The primary
difference is that the PhysioStim devices are designed for use on the appendicular skeleton.

A bone’s regenerative power results in most fractures healing naturally within a few months. However, in the presence of certain
risk factors, some fractures do not heal or heal slowly, resulting in nonunions. Traditionally, orthopedists have treated such
nonunion conditions surgically, often by means of a bone graft with fracture fixation devices, such as bone plates, screws, or
intramedullary rods. These are examples of invasive treatments. Our patented PhysioStim bone healing therapy products are
designed to use a low level of PEMF signals to noninvasively activate the body’s natural healing process. The devices are
anatomically designed, allowing ease of placement, patient mobility, and the ability to cover a large treatment area.

In 2018, we announced the FDA and European Commission CE mark approval for our next-generation PhysioStim bone growth
stimulator. Similar to the next-generation CervicalStim and SpinalStim systems, the PhysioStim device is also accompanied by the
STIM onTrack mobile app, enabling physicians treating patients with nonunion fractures to remotely view and assess patient
adherence to prescribed treatment protocols and patient reported outcome measures. In addition to the app, the next-generation
PhysioStim devices also include patient enhancements aimed at improving fit, comfort, and ease of use.

Future Applications

We have sponsored research at the University of Pennsylvania, Cleveland Clinic, New York University, and University of California
San Francisco, where scientists conducted animal and cellular studies to identify the mechanisms of action of our PEMF signals on
bone and tendon and efficacy of healing. From these efforts, many studies have been published in peer-reviewed journals. Among
other insights, the studies illustrate positive effects of PEMF on callus formation and bone strength as well as proliferation and

differentiation of cells involved in regeneration and healing. Furthermore, we believe that the research work with Cleveland Clinic
and the University of Pennsylvania, allowing for characterization and visualization of the Orthofix PEMF waveform, is paving the way
for signal optimization for a variety of new applications and indications. This collection of pre-clinical data, along with additional
clinical data, could represent new clinical indication opportunities for our regenerative stimulation solutions.

p
Spinal Implants

Within the Spinal Implants product category of the Global Spine reporting segment, we design, develop and market a portfolio of
motion preservation and fixation implant products used in surgical procedures of the spine. We distribute these products globally
through a network of distributors and sales representatives to sell spine products to hospitals and healthcare providers.

Spinal Implants Strategy

Our vision for the Spinal Implants product category is to become a first choice for surgeons, healthcare providers, and payers by
demonstrating strength in partnership. Our key strategies in this product category are:

(cid:3)

Accelerate training and market acceptance in the U.S. for our M6-C artificial cervical disc

Continue creating differentiated products

Provide exceptional training and education programs for sales representatives and surgeons

Acquire or license products, technologies and companies to further expand the Spinal Implants portfolio

Spinal Implants Products

The following table and discussion identify our key Spinal Implants products by trade name and describe their primary applications:

Product

M6-C Artificial Cervical Disc

M6-L Artificial Lumbar Disc

FORZA XP Expandable Spacer System

CETRA Anterior Cervical Plate System

Primary Application

A next-generation artificial disc developed to replace an intervertebral disc
damaged by cervical disc degeneration; the only artificial cervical disc that
mimics the anatomic structure of a natural disc by incorporating an artificial
viscoelastic nucleus and fiber annulus into its design

A next-generation artificial disc developed to replace an intervertebral disc
damaged by lumbar disc degeneration; the only artificial lumbar disc that
mimics the anatomic structure of a natural disc by incorporating an artificial
viscoelastic nucleus and fiber annulus into its design

A titanium expandable spacer system for Posterior Lumbar Interbody Fusion
(PLIF) and Transforaminal Lumbar Interbody Fusion (TLIF) procedures
featuring a large graft window with the ability to pack post expansion in situ

An anterior cervical plate system offering a low profile plate with an intuitive
locking mechanism, large graft windows, a high degree of screw angulation,
and simplified instrumentation

CONSTRUX Mini PEEK / Titanium Composite

(PTC) Spacer System

A cervical interbody with 3D printed porous titanium end plates that may
promote bone ingrowth and a Polyetheretherketones (PEEK) core to
maintain imaging characteristics

FORZA PTC Spacer System

PILLAR SA PTC PEEK Spacer System

A posterior lumbar interbody with 3D printed porous titanium end plates that
may promote bone ingrowth and a PEEK core to maintain imaging
characteristics

A standalone Anterior Lumbar Interbody Fusion (ALIF) lumbar interbody with
3D printed porous titanium end plates that may promote bone ingrowth and a
PEEK core to maintain imaging characteristics

Product
FIREBIRD / FIREBIRD NXG Spinal Fixation System

A system of rods, crossbars, and modular pedicle screws designed to be
implanted during a posterior lumbar spine fusion procedure

Primary Application

JANUS Midline Fixation Screw

Connector System for revisions

An addition to the Firebird Spinal Fixation System designed to achieve more
cortical bone purchase in the medial to lateral trajectory, when compared to
traditional pedicle screws, and that provides surgeons with the option of a
midline approach

A comprehensive system to reduce the complexity of revising and extending
existing spinal constructs; this eliminates the need to remove existing
hardware while providing stability at adjacent levels

CENTURION Posterior Occipital Cervico-Thoracic

(POCT) System

A multiple component system comprised of a variety of non-sterile, single use
components made of titanium alloy or cobalt chrome that allow the surgeon to
build a spinal implant construct

FIREBIRD SI

A minimally invasive screw system that is intended for fixation of sacroiliac
joint disruptions in skeletally mature patients

FIREBIRD Deformity Correction System

An extension to the Firebird Spinal Fixation System that provides additional
instrument and implant options for complex thoracolumbar spine procedures

PHOENIX Minimally Invasive Spinal Fixation System A multi-axial extended reduction screw body used with the Firebird Spinal

LONESTAR Cervical Stand Alone (CSA)

SKYHAWK Lateral Interbody Fusion System &

Lateral Plate System

Fixation System designed to be implanted during a posterior thoracolumbar
spine fusion procedure

A stand-alone spacer system designed to provide the biomechanical strength
to a traditional or minimal invasive Anterior Cervical Discectomy and Fusion
(ACDF) procedure with less disruption of patient anatomy and to preserve
the anatomical profile

Provides a complete solution for the surgeon to perform a Lateral Lumbar
Interbody Fusion, an approach to spinal fusion in which the surgeon accesses
the intervertebral disc space using a surgical approach from the patient’s side
that disturbs fewer structures and tissues

FORZA Spacer System

PEEK interbody devices for PLIF and TLIF procedures

Motion Preservation Solutions

In 2018, we acquired Spinal Kinetics Inc., a privately held developer and manufacturer of artificial cervical and lumbar discs, namely
the M6-C cervical and M6-L lumbar artificial discs, which are used to treat patients suffering from degenerative disc disease of the
spine. The M6 discs are the only artificial discs that mimic the anatomic structure of a natural disc by incorporating an artificial
viscoelastic nucleus and fiber annulus into their design. Like a natural disc, this unique construct allows for shock absorption at the
implanted level, as well as provides a controlled range of motion when the spine transitions in its combined complex movements.
Both discs have European Commission CE mark approval and prior to 2019, had historically been exclusively distributed outside the
U.S. In February 2019, we received FDA approval of the M6-C artificial cervical disc to treat patients with cervical disc degeneration.
We released the M6-C artificial cervical disc in the U.S. in 2019 through a controlled market launch accompanied by an extensive
training and education curriculum for surgeons. As of December 31, 2019, we have recorded $4.1 million in motion preservation
sales within the U.S. market. In addition, we are in the planning phase of a 2-level investigational device exemption study for the
M6-C artificial cervical disc, which we plan to initiate in 2020.

Spinal Repair Solutions

We provide a wide array of implants designed for use primarily in cervical, thoracic, and lumbar fusion surgeries. These implants are
made of either metal or a thermoplastic compound called PEEK. The majority of the implants that we offer are made of titanium
metal. The Spinal Fixation System, the Firebird Spinal Fixation System, the Phoenix Minimally Invasive Spinal Fixation System, the
Ascent, Ascent LE, and the Centurion POCT Systems are sets of rods, cross connectors and screws that are implanted during

posterior fusion procedures. The Firebird Modular and pre-assembled Spinal Fixation Systems are designed to be used in either open
or minimally-invasive posterior lumbar fusion procedures with our ProView MAP System. To complement our plates, rods and screw
fixation options we offer an entire portfolio of cervical and thoracolumbar PEEK interbody devices within our Pillar and Forza
product lines. This interbody portfolio includes two stand-alone devices, Lonestar and Pillar SA, as well as the Construx Mini PTC
system, a novel titanium composite spacer, which offers a superior alternative to other plasma spray coated options currently
available on the market. We also offer specialty plates and screws that are used in less common procedures, and as such, are not
manufactured by many device makers.

Biologicsg

Within the Biologics product category of the Global Spine reporting segment, we provide a portfolio of regenerative products and
tissue forms that allow physicians to successfully treat a variety of spinal and orthopedic conditions. This product category
specializes in the marketing of regeneration tissue forms and distributes MTF Biologics (MTF) tissues to hospitals and healthcare
providers, primarily in the U.S., through a network of independent distributors and sales representatives. Our partnership with MTF
allows us to exclusively market the Trinity ELITE and Trinity Evolution tissue forms for musculoskeletal defects to enhance bony
fusion.

Biologics Strategy

In order to drive further adoption and use of our products, our strategy for the Biologics product category is to educate physicians,
both directly and through our sales force, of the surgical and patient benefits of using our portfolio of regenerative tissues and
products to augment their surgical procedures and results. Our key strategies in this product category are to:

(cid:3)

Leverage sales channels of our spine and extremities businesses to expand coverage

Continue to leverage the surgeon-preferred Trinity ELITE characteristics and clinical evidence

Continue to expand and promote the breadth of the portfolio with offerings such as fiberFUSE

Accelerate new tissue development projects with MTF

Biologics Products

The following table and discussion identify the principal Biologics products by trade name and describe their primary applications:

Product

Trinity ELITE

Trinity Evolution

AlloQuent Structural Allografts

Primary Application

A fully moldable allograft with viable cells used during surgery that is designed
to enhance the success of a spinal fusion or bone fusion procedure

An allograft with viable cells used during surgery that is designed to enhance
the success of a spinal fusion or bone fusion procedure

Interbody devices made of cortical bone (or cortical-cancellous grafts) that are
designed to restore the space that has been lost between two or more
vertebrae due to a degenerated disc during a spinal fusion procedure

Collage Synthetic Osteoconductive Scaffold

A synthetic bone void filler

fiberFUSE

VersaShield

An allograft comprised of a mixture of cancellous bone and demineralized
cortical bone that creates a natural scaffold for revascularization, cellular
ingrowth, and new bone formation

A thin hydrophilic amniotic membrane designed to serve as a wound or tissue
covering for a variety of surgical demands

The regenerative solutions offered as part of the Biologics product category’s portfolio include solutions for a variety of
musculoskeletal defects used in spinal and extremity orthopedic procedures.

Regenerative Solutions

The premier biologics tissues we market include the Trinity ELITE and Trinity Evolution tissue forms, which are cortical cancellous
allografts that contain viable cells and are used during surgery in the treatment of musculoskeletal defects for bone reconstruction
and repair. These allografts are intended to offer a viable alternative to an autograft procedure, as harvesting autograft has been
shown to add risk of an additional surgical procedure and related patient discomfort in conjunction with a repair surgery.

To provide structural support and facilitate bone growth in spine fusion procedures, we offer a full line of AlloQuent allograft
structural spacers derived from human cadaveric bone. These spacers are used to restore the height lost between vertebral bodies
when discs are removed in fusion procedures and to facilitate spine fusion.

We offer the Collage product as an osteoconductive scaffold and a bone graft substitute product. The product is a combination
synthetic bone graft substitute comprised of beta tri-calcium phosphate and type 1 bovine collagen.

The fiberFUSE tissue is the newest biologics tissue form with handling characteristics analogous to Trinity ELITE and expands the
offering to address a broader scope of surgical applications. This tissue offering was developed by MTF in close collaboration to
expand the Orthofix portfolio and provides an opportunity to serve a great number of clinical indications addressed by surgeons.

We also market the VersaShield tissue form, a thin hydrophilic amniotic membrane designed to serve as a wound or tissue covering
for a variety of surgical demands. Amniotic tissue forms derived from donated human placenta are used in a wide variety of
applications and are valued for their healing properties, scar reduction and anti-adhesion characteristics. The VersaShield tissue is
derived from the human placental layers, amnion and chorion, thin elastic membranes that allow the tissue to conform to the
surface of the surgical site.

We receive marketing fees through our collaboration with MTF for the Trinity ELITE, Trinity Evolution, fiberFUSE, and VersaShield
tissues. MTF processes the tissues, maintains inventory, and invoices hospitals and surgery centers and other points of care for
service fees, which are submitted by customers via purchase orders. We have exclusive worldwide rights to market the Trinity ELITE
and Trinity Evolution tissue forms. We market the VersaShield tissue under a private label brand via a non-exclusive marketing
agreement for the tissue form.

To date, our Biologics products are offered primarily in the U.S. market due in part to restrictions on providing U.S. human donor
tissue in other countries.

Global Extremities

The Global Extremities reporting segment offers products and solutions that allow physicians to successfully treat a variety of
orthopedic conditions unrelated to the spine. This reporting segment specializes in the design, development, and marketing of the
Company’s orthopedic products used in fracture repair, deformity correction, and bone reconstruction procedures. We distribute
these products through a global network of distributors and sales representatives to sell our orthopedic products to hospitals and
healthcare providers.

Global Extremities Strategy

Our strategy for the Global Extremities reporting segment is to continue to provide highly valued external and internal temporary to
definitive fixation devices used in fracture repair, deformity correction, and bone reconstruction. Our key strategies in this segment
are:

•

Geographic market & product focus on:

Pediatrics & deformity correction worldwide

Foot & ankle in the U.S.

Trauma in selected geographies

Promote the advantages of our JuniOrtho pediatric portfolio and support tools

Leverage the market acceptance of the TL-Hex platform

Close on the FITBONE asset acquisition transaction and Integrate the FITBONE business

•

Continue the strong pace of new product launches

Acquire or license products, technologies and companies to support these market opportunities.

Global Extremities Products

The following table and discussion identify the principal Global Extremities products by trade name and describe their primary
applications:

Product

External Fixator

Eight-Plate + Guided Growth System

Primary Application

External fixation and internal fixation, including the Sheffield Ring, limb-
lengthening systems, DAF, ProCallus, XCaliber and Gotfried P.C.C.P

The 2nd generation plate for treatment for bowed legs or knock knees of
children

LRS Advanced Limb Reconstruction System

External fixation for limb lengthening and corrections of deformity

TrueLok

Ring fixation system for trauma, limb lengthening, and deformity correction

TL-HEX TrueLok Hexapod System (TL-HEX)

Hexapod external fixation system for trauma and deformity correction with
associated software

HEX RAY

Galaxy Fixation System

An innovative software to manage pre-operation and post-operation planning
in connection with the TL-HEX system

External fixation system for temporary and definitive fracture fixation,
including anatomical specific clamps

VeroNail Trochanteric Nailing System

Trochanteric titanium nailing system for hip fractures

Centronail Titanium Nailing System

Complete range of intramedullary nails including the Humeral Nail

Ankle Hind Foot Nailing System (AHN)

An extension of the Centronail range of intramedullary nails

Chimaera Hip Fracture System

A strong, versatile hip nail that allows fixation to be adapted to the type of
fracture being treated

Agile Nail

MJ FLEX

OSCAR

A small rigid intramedullary nail to treat adolescent patients

An innovative elastic nail with a unique design to be used in pediatric patients

Ultrasonic bone cement removal

Ankle Hindfoot Nail (AHN)

A differentiated solution for hindfoot fusions

Contours Lapidus Plating System (LPS)

A plate design contoured specifically for a tarsometatarsal (TMT) fusion

Contours VPS Volar Plating System III

The 3rd generation of plates to treat distal radius fractures

RIVAL Foot & Ankle System

A comprehensive offering of foot and ankle solutions across the range of two
plating lines, Rival VIEW and Rival REDUCE, accompanied by Rival BITE, an
extensive portfolio of headed cannulated and headless compression screws

We provide internal and external fixation solutions for extremity repair and deformity correction, both for adults and children. Our
fracture repair products consist of fixation devices designed to stabilize a broken bone until it can heal. With these devices, we can
treat simple and complex fracture patterns, along with achieving deformity corrections.

External Fixation

External fixation devices are used to stabilize fractures and offer an ideal treatment for complex fractures, fractures near the joints,
and in patients with known risk factors or co-morbidities. The treatment method entails the use of bone screws and/or wires which
are inserted percutaneously into the bone and stabilized with an external device. The treatment is minimally invasive and allows
external manipulation of the bone to obtain and maintain final bone alignment (reduction). The bone is fixed in this way until
healing. External fixation devices may also be used temporarily in complex trauma cases to stabilize the fracture prior to treating it
definitively. In these situations, the device offers rapid fracture stabilization, which is important in life saving as well as limb salvage
procedures.

The Galaxy Fixation System is a modular external fixation system indicated for fracture treatment in the upper and lower limbs. The
system incorporates a streamlined combination of clamps, with both pin-to-bar and bar-to-bar coupling capabilities, offering a
complete range of applications, including specific anatomic units for the elbow, shoulder, and wrist. It is designed both for
temporary and definitive fracture fixation. It is also available in sterile kits for convenience and ease of use.

The XCaliber external fixator, made of lightweight radiolucent material, offers improved X-ray visualization of the fracture and
alignment. It is available in three configurations for the treatment of long bone fractures, fractures near joints, and ankle fractures.
XCaliber fixators are supplied pre-assembled, ready to use, in sterile kits to decrease time in the operating room.

The LRS Advanced Limb Reconstruction System uses callus distraction to lengthen bone in a variety of procedures, including
monofocal lengthening and corrections of deformity. Its multifocal procedures include bone transport, simultaneous compression
and distraction at different sites, bifocal lengthening, and correction of deformities with shortening.

The TrueLok Ring Fixation System is a surgeon-designed, lightweight external fixation system for limb lengthening and deformity
correction. In essence, a ring fixation construct consists of circular rings and semi-circular external supports centered on the
patient’s limb and secured to the bone by crossed, tensioned wires and half pins. The rings are connected externally to provide
stable bone fixation. The main external connecting elements are threaded rods, linear distractors, or hinges and angular distractors,
which allow the surgeon to adjust the relative position of rings to each other. The ring positions are manipulated either acutely or
gradually in precise increments to perform the correction of the deformity, limb lengthening, or bone segment transportation as
required by the surgeon. Created with pre-assembled function blocks, the TrueLok products are a simple, stable, versatile ring
fixation system.

The TL-HEX System is a hexapod-based system designed at Texas Scottish Rite Hospital for Children as a three-dimensional bone
segment reposition module to augment the previously developed TrueLok frame. The system consists of circular and semi-circular
external supports secured to the bones by wires and half pins and interconnected by six struts. This allows multi-planar adjustment
of the external supports. The rings’ positions are adjusted either rapidly or gradually in precise increments to perform bone segment
repositioning in three-dimensional space. All the basic components from the TrueLok Ring Fixation System (wire and half pin fixation
bolts, posts, threaded rods, plates, and other assembly components and instrumentation) can be utilized with the TL-HEX system;
therefore, external supports from both systems can be connected to each other when building fixation blocks.

The addition of HEX-Ray software to the TL-HEX platform allows a unique and realistic representation of the case using real x-rays
and providing more accurate and user-friendly management of the surgery. The software is intended to help the surgeon save time
by avoiding undesired corrections and mistakes related to software management.

Linked to the TrueLok and TL-HEX lines, we have also developed an app to support the patient. The patient is an active part in the
healing process and the app is designed to improve the communication and connection with the hospital staff by saving time,
optimizing the number of visits to the clinic, and supporting the patient with motivational messages and an online tutorial to sort
out the most common issues. Also related to the TrueLok and TL-HEX lines, but specifically developed for younger patients, we
created the Edugame, an online app to help patients learn by playing a virtual game. It has been developed with psychologist
involvement in order to deliver useful information in an effective way.

Our proprietary XCaliber bone screws are designed to be compatible with our external fixators and reduce inventory for our
customers. Some of these screws are covered with hydroxyapatite, a mineral component of bone that reduces superficial
inflammation of soft tissue and improves bone grip. Other screws in this proprietary line do not include the hydroxyapatite coating,
but offer different advantages, such as patented thread designs for better adherence in hard or poor quality bone. We also offer

cylindrical screws, which are geared towards the trauma applications of the Galaxy Fixation System. We believe we have a full line of
bone screws to meet the demands of the market.

In 2017, we introduced JuniOrtho, a brand identity for extremity fixation pediatric products. JuniOrtho is a range of products and
resources dedicated to pediatrics and young adults with bone fractures and deformities that brings together our expertise and
products in the pediatric space.

Internal Fixation

Internal fixation devices come in various sizes, depending on the bone that requires treatment, and consist of either long rods,
commonly referred to as nails, or plates that are attached with the use of screws. A nail is inserted into the medullary canal of a
fractured long bone of the human arm or leg (e.g., humerus, femur, or tibia). Alternatively, a plate is attached by screws to an area
such as a broken wrist, hip, or foot. Examples of our internal fixation devices include:

(cid:3)

The Chimaera Hip Nailing System, which is indicated for the treatment of hip fractures. The Chimaera hip nail is designed to
offer improvements over currently available nails by taking advantage of decades of knowledge in hip nailing. The result is a
strong, versatile nail that allows fixation to be adapted to the type of fracture being treated. An all-in-one dedicated
instrument tray contains a color-coded instrument set designed for increased precision during the surgical steps as well as
intuitive instrument selection.

The VeroNail Trochanteric Nailing System, which is indicated for the treatment of hip fractures. The nail design is minimally-
invasive to reduce surgical trauma and allow patients to begin walking again shortly after the operation. It uses a dual screw
configuration that we believe provides more stability than previous single screw designs.

The Centronail Titanium Nailing System, which comprises a range of titanium nails to stabilize fractures in the femur, tibia,
and humerus. The system offers improved mechanical distal targeting and minimal instrumentation to optimize inventory.

The Ankle Hindfoot Nail, which is an arthrodesis nailing system designed to improve upon the stability, simplicity, and
flexibility of current hindfoot nails.

The Agile Nail, which is designed to treat femoral fractures in patients where a small rigid nail is needed. Its unique design
requires less inventory and is the smallest titanium nail currently available in the market. This provides further benefits such
as reduced invasiveness and lightness.

The MJ Flex, which is an elastic nail system that innovates a technique considered to be the gold standard in the treatment
of pediatric fractures. The unique shape of the nail offers improved strength, better visibility, more rigidity, and potentially
a reduced usage of x-rays. The system is available in different sizes, both in titanium and stainless steel.

The RIVAL Foot & Ankle System, which is a comprehensive offering of foot and ankle solutions across the range of two
plating lines, Rival VIEW and Rival REDUCE, accompanied by Rival BITE, an extensive portfolio of headed cannulated and
headless compression screws. The system is comprised of titanium plates and screws for the stabilization and fixation of
fresh fractures, revision procedures, joint fusion, and reconstruction of small bones of the hand, feet, wrist, ankles, fingers,
and toes.

In addition to treating bone fractures, we also design, manufacture and distribute devices intended to treat congenital bone
conditions, such as angular deformities (e.g., bowed legs in children), or degenerative diseases, as well as conditions resulting from a
previous trauma. An example of a product offered in this area is the Eight-Plate Guided Growth System.

Product Development

Our primary research and development facilities are located in Verona, Italy and Lewisville, Texas. We work with leading hospital
research institutions, as well as with MTF, physicians, and other consultants, on the long-term scientific planning and evolution of
our products and therapies. Several of the products that we market have been developed through these collaborations. In addition,
we periodically receive suggestions for new products and product enhancements from the scientific and medical community, some
of which result in us entering into assignment or license agreements with physicians and third parties.

In 2019, 2018, and 2017, we incurred $34.6 million, $33.2 million, and $29.7 million, respectively, of research and development
expense.

FITBONE Asset Acquisition

On February 3, 2020, we entered into an Asset Purchase Agreement (the Purchase Agreement) with Wittenstein SE
(Wittenstein), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening
system for limb lengthening of the femur and tibia bones. Under the terms of the Purchase Agreement, as consideration for the
acquired assets, we will pay $18 million in cash consideration and will enter into manufacturing supply contract with Wittenstein.
The acquisition is anticipated to close by the end of the first quarter of 2020, subject to customary closing conditions.

Patents, Trade Secrets, Assignments and Licenses

We rely on a combination of patents, trade secrets, assignment and license agreements, and non-disclosure agreements to protect
our proprietary intellectual property. We own numerous U.S. and foreign patents, have numerous pending patent applications, and
have license rights under patents held by third parties. Our primary products are patented in the major markets in which they are
sold. No assurance can be given that pending patent applications will result in issued patents, that patents issued or assigned to or
licensed by us will not be challenged or circumvented by competitors, or that such patents will be found to be valid or sufficiently
broad to protect our technology or to provide us with any competitive advantage or protection. Third parties might also obtain
patents that would require assignments to or licensing by us to conduct our business. We rely on confidentiality and non-disclosure
agreements with employees, consultants, and other parties to protect, in part, trade secrets and other proprietary technology.

We obtain assignments or licenses of varying durations for certain of our products from third parties. We typically acquire rights
under such assignments or licenses in exchange for lump-sum payments or arrangements under which we pay a percentage of sales
to the licensor. However, while assignments or licenses to us generally are irrevocable, no assurance can be given that these
arrangements will continue to be made available to us on terms that are acceptable to us, or at all. The terms of our license and
assignment agreements vary in length from a specified number of years to the life of product patents or the economic life of the
product. These agreements generally provide for royalty payments and termination rights in the event of a material breach.

Compliance and Ethics Program

It is a fundamental policy of our Company to conduct business in accordance with the highest ethical and legal standards. We have a
comprehensive compliance and ethics program, which is overseen by our Chief Ethics and Compliance Officer who reports directly to
our Chief Executive Officer and the Compliance Committee of the Board of Directors. The program is intended to promote lawful
and ethical business practices throughout our domestic and international businesses. It is designed to prevent and detect violations
of applicable federal, state, and local laws in accordance with the standards set forth in guidance issued by the U.S. Department of
Justice (Evaluation of Corporate Compliance Programs (updated April 2019)), the Office of Inspector General (HCCA-OIG
Measuring Compliance Program Effectiveness: A Resource Guide (March 2017)) and the U.S. Sentencing Commission (Effective
Compliance and Ethics Programs (November 2014)). Key elements of the program include:

(cid:3) Organizational oversight by senior-level personnel responsible for the compliance function within our Company;

(cid:3) Written standards and procedures, including a Corporate Code of Conduct;

(cid:3) Methods for communicating compliance concerns, including anonymous reporting mechanisms;

(cid:3)

Investigation and remediation measures to ensure prompt response to reported matters and timely corrective action;

Compliance education and training for employees and contracted business associates;

Auditing and monitoring controls to promote compliance with applicable laws and assess program effectiveness;

Disciplinary guidelines to enforce compliance and address violations;

Due diligence reviews of high risk intermediaries and exclusion lists screening of employees and contracted business
associates; and

Risk assessments to identify areas of compliance risk.

Government Regulation

Classification and Approval of Products by the FDA and other Regulatory Authorities

Our research, development, and clinical programs, and our manufacturing and marketing operations, are subject to extensive
regulation in the U.S. and other countries. Most notably, all of our products sold in the U.S. are subject to the Federal Food, Drug,
and Cosmetic Act and the Public Health Services Act as implemented and enforced by the FDA. The regulations that cover our
products and facilities vary widely from country to country. The amount of time required to obtain approvals or clearances from
regulatory authorities also differs from country to country.

Unless an exemption applies, each medical device we commercially distribute in the U.S. is covered by premarket notification
(510(k)) clearance, letter to file, approval of a premarket approval application (PMA), or some other approval from the FDA. The
FDA classifies medical devices into one of three classes, which generally determine the type of FDA approval required. Devices
deemed to pose low risk are placed in class I, while devices that are considered to pose moderate risk are placed in class II, and
devices deemed to pose the greatest risks requiring more regulatory controls necessary to provide a reasonable assurance of safety
and effectiveness, or devices deemed not substantially equivalent to a device that previously received 510(k) clearance (as described
below), are placed in class III. Our Spinal Implants and Global Extremities products are, for the most part, class II devices and the
instruments used in conjunction with these products are generally class I. Our Bone Growth Therapies products and the M6-C
artificial cervical disc are classified as class III by the FDA, and have been approved for commercial distribution in the U.S. through
the PMA process.

The medical devices we develop, manufacture, distribute, and market are subject to rigorous regulation by the FDA and numerous
other federal, state, and foreign governmental authorities. The process of obtaining FDA clearance and other regulatory approvals to
develop and market a medical device, particularly from the FDA, can be costly and time-consuming, and there can be no assurance
such approvals will be granted on a timely basis, if at all. While we believe we have obtained all necessary clearances and approvals
for the manufacture and sale of our products and that they are in material compliance with applicable FDA and other material
regulatory requirements, there can be no assurance that we will be able to continue such compliance.

To market our devices within the member states of the European Union (E.U.), we are required to comply with the European
Medical Device Directives. Under the European Medical Device Directives, all medical devices must bear the CE mark. To obtain
authorization to affix the CE mark to our products, a recognized European Notified Body must assess our quality systems and the
product’s conformity to the requirements of the European Medical Device Directives. We are subject to an annual inspection by a
Notified Body for compliance with these requirements.

In 2017, the E.U. adopted the E.U. Medical Device Regulation (Council Regulations 2017/745) which imposes stricter requirements
for the marketing and sale of medical devices, including new quality system and post-market surveillance requirements. The
regulation provides a transition period until May 2020 for currently-approved medical devices to meet the additional requirements
and for certain devices this transition period can be extended until May 2024. After this transition period, all medical devices
marketed in the E.U. will require certification according to these new requirements. Complying with this new regulation will require
us to incur significant costs over the transition period and failure to meet the requirements of the regulation could adversely impact
our business in the EU and other countries that utilize or rely on E.U. requirements for medical device registrations.

Within our Biologics product category, we market tissue for bone repair and reconstruction under the brand names Trinity ELITE,
Trinity Evolution, and fiberFUSE, our allogeneic bone matrices comprised of cancellous bone containing viable stem cells and a
demineralized cortical bone component. These allografts are regulated under the FDA’s Human Cell, Tissues and Cellular and Tissue-
Based Products, or HCT/P, regulatory paradigm and not as a medical device, biologic, or a drug. The Biologics product category also
distributes certain surgical implant products known as allograft products that are derived from human tissues and which are used
for bone reconstruction or repair and are surgically implanted into the human body. These tissues are regulated by the FDA as
minimally-manipulated tissue and are covered by the FDA’s Good Tissues Practices regulations, which cover all stages of allograft
processing. There can be no assurance our suppliers will continue to meet applicable regulatory requirements or that those
requirements will not be changed in ways that could adversely affect our business. Further, there can be no assurance these
products will continue to be made available to us or that applicable regulatory standards will be met or remain unchanged.
Moreover, products derived from human tissue or bones are from time to time subject to recall for certain administrative or safety
reasons and we may be affected by one or more such recalls. For a further description of some of these risks, see Item 1A of this
Annual Report under the heading Risk Factors.

Certain Other Product and Manufacturing Regulations

After a device is placed on the market, numerous regulatory requirements continue to apply. Those regulatory requirements
include: product listing and establishment registration; Quality System Regulation (QSR), which require manufacturers, including
third-party manufacturers, to follow stringent design, testing, control, documentation, and other quality assurance procedures
during all aspects of the manufacturing process; labeling regulations and governmental prohibitions against the promotion of
products for uncleared, unapproved, or off-label uses or indications; clearance of product modifications that could significantly
affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; approval of product
modifications that affect the safety or effectiveness of one of our PMA approved devices; Medical Device Adverse Event Reporting
regulations, which require that manufacturers report to the FDA and other foreign governmental agencies if their device may have
caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or
serious injury if the malfunction of the device or a similar device were to recur; post-approval restrictions or conditions, including
post-approval study commitments; post-market surveillance regulations, which apply when necessary to protect the public health or
to provide additional safety and effectiveness data for the device; the FDA’s recall authority, whereby it can ask, or under certain
conditions, order device manufacturers to recall a product from the market that is in violation of governing laws and regulations;
regulations pertaining to voluntary recalls; and notices of corrections or removals.

We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA and European Notified
Bodies to determine our compliance with the FDA’s QSR and other international regulations. If the FDA were to find that we or
certain of our suppliers have failed to comply with applicable regulations, the agency could institute a wide variety of enforcement
actions, ranging from a public warning letter to more severe sanctions such as fines and civil penalties against us, our officers, our
employees, or our suppliers; unanticipated expenditures to address or defend such actions; delays in clearing or approving, or
refusal to clear or approve, our products; withdrawal or suspension of approval of our products or those of our third-party suppliers
by the FDA or other regulatory bodies; product recall or seizure; interruption of production; operating restrictions; injunctions; and
criminal prosecution. In addition to FDA inspections, all manufacturing facilities of the Company are subject to annual Notified Body
inspections.

Moreover, governmental authorities outside the U.S. have become increasingly stringent in their regulation of medical devices. Our
products may become subject to more rigorous regulation by non-U.S. governmental authorities in the future. U.S. or non-U.S.
government regulations may be imposed in the future that may have a material adverse effect on our business and operations. For a
description of some of these risks, see Item 1A of this Annual Report under the heading Risk Factors.

Accreditation Requirements

Our subsidiary, Orthofix Inc., has been accredited by the Accreditation Commission for Health Care, Inc. (ACHC) for medical supply
provider services with respect to durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). ACHC, a private, not-
for-profit corporation, which is certified to ISO 9001:2000 standards, was developed by home care and community-based providers
to help companies improve business operations and quality of patient care. Although accreditation is generally a voluntary activity
where healthcare organizations submit to peer review their internal policies, processes, and patient care delivery against national
standards, the Centers for Medicare and Medicaid Services (CMS) required DMEPOS suppliers to become accredited. We believe
that by attaining accreditation, Orthofix Inc. has demonstrated its commitment to maintain a higher level of competency and strive
for excellence in its products, services, and customer satisfaction.

Third-Party Payor Requirements

Our products may be reimbursed by third-party payors, such as government programs, including Medicare, Medicaid, and Tricare, or
private insurance plans and healthcare networks. Third-party payors may deny reimbursement if they determine that a device
provided to a patient or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance
benefits are limited. Also, non-government third-party payors are increasingly challenging the medical necessity and prices paid for
our products and services. The Medicare program is expected to continue to implement a new payment mechanism for certain
DMEPOS items via the implementation of its competitive bidding program. Bone growth therapy devices are currently exempt from
this competitive bidding process.

Laws Regulating Healthcare Fraud and Abuse; State Healthcare Laws

Our sales and marketing practices are also subject to a number of U.S. laws regulating healthcare fraud and abuse such as the
federal Anti-Kickback Statute and the federal Physician Self-Referral Law (known as the Stark Law), the Civil False Claims Act, and

the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as well as numerous state laws regulating healthcare and
insurance. These laws are enforced by the Office of Inspector General within the U.S. Department of Health and Human Services, the
U.S. Department of Justice, and other federal, state, and local agencies. Among other things, these laws and others generally
(1) prohibit the provision of anything of value in exchange for the referral of patients for, or the purchase, order, or
recommendation of, any item or service reimbursed by a federal healthcare program, (including Medicare and Medicaid); (2) require
that claims for payment submitted to federal healthcare programs be truthful; (3) prohibit the transmission of protected healthcare
information to persons not authorized to receive that information; and (4) require the maintenance of certain government licenses
and permits.

Laws Protecting the Confidentiality of Health Information

U.S. federal and state laws protect the confidentiality of certain health information, in particular individually identifiable information
such as medical records, and restrict the use and disclosure of that protected information. At the federal level, the Department of
Health and Human Services promulgates health information privacy and security rules under HIPAA. These rules protect health
information by regulating its use and disclosure, including for research and other purposes. Failure of a HIPAA “covered entity” to
comply with HIPAA regarding such “protected health information” could constitute a violation of federal law, subject to civil and
criminal penalties. Covered entities include healthcare providers (including certain of those that sell devices or equipment) that
engage in particular electronic transactions, including, as we do, the transmission of claims to health plans. Consequently, health
information that we access, collect, analyze, and otherwise use and/or disclose includes protected health information that is subject
to HIPAA. As noted above, many state laws also pertain to the confidentiality of health information. Such laws are not necessarily
preempted by HIPAA, in particular those state laws that afford greater privacy protection to the individual than HIPAA. These state
laws typically have their own penalty provisions, which could be applied in the event of an unlawful action affecting health
information.

In the European Union, the General Data Protection Regulation (“GDPR”), which became enforceable in May 2018, includes, among
other things, a requirement for prompt notice of data breaches to data subjects and supervisory authorities in certain circumstances
and significant fines for non-compliance. Internationally, some countries have also passed laws that require individually identifiable
data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data.

These laws and regulations impact the ways in which we use and manage personal data, protected health information, and our
information technology systems. They also impact our ability to move, store, and access data across geographic boundaries.
Compliance with these requirements may require changes in business practices, complicate our operations, and add complexity and
additional management and oversight needs. They also may complicate our clinical research activities, as well as product offerings
that involve transmission or use of clinical data.

Physician Payments Sunshine Provision of the Affordable Care Act

The Physician Payments Sunshine Provision of the Affordable Care Act (Section 6002) (the “Sunshine Act”), which was enacted in
2010 and became subject to final CMS rules in 2013, requires public disclosure to the United States government of payments to
physicians and teaching hospitals, including in-kind transfers of value such as gifts or meals. The Act also provides penalties for non-
compliance. The Act requires that we file an annual report on March 31st of a calendar year for the transfers of value incurred for the
prior calendar year.

In 2018, the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act
(the “SUPPORT Act”) was signed into law. The SUPPORT Act expands the reporting obligation under the Sunshine Act to include
payments and other transfers of value made to physician assistants, nurse practitioners, clinical nurse specialists, certified registered
nurse anesthetists, and certified nurse midwives. These expanded reporting obligations are effective for payments reported in 2022,
with payment tracking beginning in 2021. Non-compliance with the Sunshine Act or SUPPORT Act is subject to civil monetary
penalties.

In addition to the Sunshine Act, as expanded by the SUPPORT Act, we seek to comply with other international and individual state
transparency laws, like Massachusetts and Vermont.

Sales, Marketing and Distribution

General Trends

We believe that demographic trends, principally in the form of a better informed, more active, and aging population in the major
healthcare markets of the U.S., Western Europe, and Japan, together with opportunities in emerging markets such as the Asia-Pacific
Region and Latin America, as well as our focus on innovative products, will continue to have a positive effect on the demand for our
products.

Reporting Segments and Product Categories

Our revenues are generated from the sales of products in our two reporting segments, Global Spine and Global Extremities. Further,
our Global Spine reporting segment is comprised of three primary product categories: Bone Growth Therapies, Spinal Implants, and
Biologics. See the following chart for the distribution of sales between each of our reporting segments and product categories for
each of the years ended December 31, 2019, 2018, and 2017.

s
n
o

i
l
l
i

(cid:3)$400

(cid:3)$350

(cid:3)$300

(cid:3)$250

(cid:3)$200

(cid:3)$150

(cid:3)$100

(cid:3)$50

(cid:3)$(cid:882)

$357

$197
(55%)

$95
(26%)

$66
(18%)

Global(cid:3)
Spine

2019

2018

2017

$347

$195
(56%)

$92
(26%)

$60
(17%)

$106

$103

Global(cid:3)
Extremities

Global(cid:3)
Spine

Global(cid:3)
Extremities

$331

$186
(56%)

$82
(25%)

$63
(19%)

Global(cid:3)
Spine

$103

Global(cid:3)
Extremities

Bone(cid:3)Growth(cid:3)Therapies

Biologics

Spinal(cid:3)Implants

Global(cid:3)Extremities

Sales Network

We have a broad sales network comprised of direct sales representatives, sales agents, and distributors. This established sales
network provides us with a platform to introduce new products and expand sales of existing products. We distribute our products
worldwide in more than 70 countries.

In our largest market, the U.S., our sales network is generally comprised of four sales forces, each addressing one of our primary
product categories; however, many independent distributors sell products for more than one of our product categories. Within our
Global Spine reporting segment, a hybrid distribution network of direct sales representatives and independent distributors sells
products in our Bone Growth Therapies product category, while primarily independent distributors sell products in our Spinal
Implants and Biologics product categories. In the U.S., our Global Extremities reporting segment products are primarily sold by
independent distributors.

Outside the U.S., we employ direct sales representatives and contract with independent distributors. In order to provide support to
our independent sales network, we have sales and product specialists who regularly visit independent distributors to provide
training and product support.

Marketing and Product Education

We market and sell our products principally to physicians, hospitals, ambulatory surgery centers, integrated health delivery systems,
and other purchasing organizations.

We support our sales force through specialized training workshops in which physicians and sales specialists participate. We also
produce marketing and training materials, including materials outlining surgical procedures, for our customers, sales force, and
distributors in a variety of languages using printed, video, and multimedia formats. We require all of our sales force, direct and
independent, to undergo extensive product, policy, and compliance training to ensure adherence to our standards, policies, and
applicable law.

To provide additional advanced training for physicians, consistent with the AdvaMed Code of Ethics (“AdvaMed Code”) and the
MedTech Europe Code of Ethical Business Practice (“MedTech Code”), we organize regular multilingual teaching seminars in multiple
locations. Those places include our facility in Verona, Italy, various locations in Latin America, and in Lewisville, Texas. In recent
years, thousands of surgeons from around the world attended these product education seminars, which have included a variety of
lectures from specialists, as well as demonstrations and hands-on workshops.

Competition

Our Bone Growth Therapies product category competes principally with similar products marketed by Zimmer Biomet, Inc.; DJO
Global; and Bioventus. The Biologics HCT/P and Spinal Implants products we market compete with products marketed by
Medtronic, Inc.; DePuy Synthes, a division of Johnson and Johnson; Stryker Corp.; Zimmer Biomet, Inc.; NuVasive, Inc.; Globus
Medical Inc.; and various smaller public and private companies. For Global Extremities devices, our principal competitors include
DePuy Synthes; Zimmer Biomet, Inc.; Stryker Corp.; Smith & Nephew plc; and Wright Medical Group N.V.

We believe that we enhance our competitive position by focusing on product features such as ease of use, versatility, cost, and
patient acceptability, together with value-added services, such as the STIM onTrack mobile app, HEX RAY software, and our
JuniOrtho educational products and services. We attempt to avoid competing based solely on price. Overall cost and medical
effectiveness, innovation, reliability, value-added service, and training are the most prevalent methods of competition in the
markets for our products, and we believe we compete effectively.

Manufacturing and Sources of Supply

We generally design, develop, assemble, test and package our stimulation, orthopedic, and spinal implant products, and subcontract
the manufacture of a substantial portion of the component parts and instruments. We design and develop our AlloQuent Allograft
HCT/Ps and subcontract its manufacturing. Through subcontracting a portion of our manufacturing, we attempt to maintain
operating flexibility in meeting demand while focusing our resources on product development, education, and marketing, as well as
quality assurance standards. Although certain of our key raw materials are obtained from a single source, we believe alternate
sources for these materials are available. Further, we believe an adequate inventory supply is maintained to avoid product flow
interruptions. Historically, we have not experienced difficulty in obtaining the materials necessary to meet our production schedules.

The Trinity ELITE, Trinity Evolution, and fiberFUSE HCT/Ps, for which we have exclusive marketing rights, are allograft tissue forms
that are supplied to customers by MTF in accordance with orders received directly from us. MTF sources, processes, and packages
the tissue forms and is the sole supplier of the Trinity ELITE and Trinity Evolution HCT/Ps to our customers.

Our products are currently manufactured and assembled in the U.S. and Italy. We believe our plants comply in all material respects
with the requirements of the FDA and all relevant regulatory authorities outside the U.S. For a description of the laws to which we
are subject, see Item 1, “Business”, under the subheadings “Corporate Compliance and Ethics Program” and “Government
Regulation.” We actively monitor each of our subcontractors in order to maintain manufacturing and quality standards and product
specification conformity.

Employees

At December 31, 2019, we had 1,055 employees worldwide. Of these, 774 were employed in the U.S. and 281 were employed at
other non-U.S. locations. Our relations with our Italian employees, who numbered 196 at December 31, 2019, are governed by the
provisions of a National Collective Labor Agreement setting forth mandatory minimum standards for labor relations in the metal
mechanic workers industry. We are not a party to any other collective bargaining agreement. We believe we have good relations
with our employees.

Item 1A.

Risk Factors

In addition to the other information contained in this Annual Report and the exhibits hereto, you should carefully consider the risks
described below. These risks are not the only ones that we may face. Additional risks not presently known to us or that we currently
consider immaterial may also impair our business operations. This Annual Report also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including the risks faced by us described below or elsewhere in this Annual Report. Investing in our
common stock involves a high degree of risk and if any of these risks or uncertainties occur, the trading price of our common stock
could decline and you could lose part or all of your investment.

Risks Related to our Legal and Regulatory Environment

If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal control over financial
reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the
trading price of our common stock.

Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent
financial fraud. We are required to periodically evaluate the effectiveness of the design and operation of our internal controls. As
has occurred in several years prior, these evaluations may result in the conclusion that enhancements, modifications, or changes to
our internal controls are necessary or desirable. While management evaluates the effectiveness of our internal controls on a regular
basis, these controls may not always be effective. There are inherent limitations on the effectiveness of internal controls, including
collusion, management override, and failure of human judgment. Because of this, control procedures are designed to reduce rather
than eliminate business risks. If we fail to maintain an effective system of internal controls or if management or our independent
registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce
reliable financial reports or prevent fraud, which could harm our financial condition and operating results, and could result in a loss
of investor confidence and a decline in our stock price.

We have previously settled violations of the Foreign Corrupt Practices Act and any future violations could further subject us to
adverse consequences.

In 2013, we self-reported to the U.S. Department of Justice (the “DOJ”) and the SEC an internal investigation of improper payments
by our Brazilian subsidiary, Orthofix do Brasil Ltda., regarding non-compliance by such subsidiary with the Foreign Corrupt Practices
Act (the “FCPA”). This followed a prior matter that we self-reported to the DOJ and SEC in 2011, and settled in 2012, involving FCPA-
related non-compliance by our then Mexican subsidiary, Promeca S.A. de C.V. In January 2017, we consented to a cease-and-desist
order with the SEC to settle the Brazil-related violations, pursuant to which we agreed to pay approximately $6.1 million in
disgorgement and penalties, and agreed to retain an independent compliance consultant for one year to review and test our FCPA
compliance program. Our engagement of the independent compliance consultant concluded on March 16, 2018.

The FCPA and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making
improper payments to foreign government officials for the purpose of obtaining or retaining business. The FCPA also imposes
accounting standards and requirements on U.S. publicly traded entities and their foreign affiliates, which are intended to prevent
the diversion of corporate funds to the payment of bribes and other improper payments. Because of the predominance of
government-sponsored healthcare systems around the world, many of our customer relationships outside of the United States are
with governmental entities and are therefore subject to such anti-bribery laws.

In connection with our self-reported FCPA violations, we instituted extensive remediation measures, including terminating
employees as well as relationships with third-party representatives and distributors, conducting a global review of our anti-
corruption and anti-bribery program, implementing regular audits of our third-party distributors and sales agents, developing and
implementing new global accounting policies to provide further structure and guidance to foreign subsidiaries, establishing an
internal audit function, improving the quality of personnel in our Compliance department, and implementing enhanced anti-
corruption compliance training for employees and certain third parties. However, notwithstanding these efforts to make FCPA-
related compliance a priority, our compliance policies and procedures may not always protect us from reckless or criminal acts
committed by our employees, distributors, or agents.

Any failure to comply with applicable legal and regulatory obligations in the United States or abroad could adversely affect us in a
variety of ways that include, but are not limited to, significant criminal, civil, and administrative penalties, including imprisonment of
individuals, fines and penalties, denial of export privileges, seizure of shipments, restrictions on certain business activities,
disgorgement and other remedial measures, disruptions of our operations, and significant management distraction. Also, the failure
to comply with applicable legal and regulatory obligations could result in the disruption of our distribution and sales activities. Any
reduction in international sales, or our failure to further develop our international markets, could have a material adverse effect on
our business, results of operations and financial condition.

We are subject to federal and state healthcare fraud, abuse, and anti-self-referral laws, and could face substantial penalties if we are
determined not to have fully complied with such laws.

Healthcare fraud and abuse regulations by federal and state governments impact our business. Healthcare fraud and abuse laws
potentially applicable to our operations include:

(cid:3)

the federal Anti-Kickback Statute, which prohibits knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, in exchange for or to induce the purchase or recommendation of an item or service
reimbursable under a federal healthcare program (such as the Medicare or Medicaid programs);

the federal Stark law, which prohibits physician self-referral, specifically a referral by a physician of a Medicare or Medicaid
patient to an entity providing designated health services if the physician or an immediate family member has a financial
relationship with that entity;

federal false claims laws, which prohibit, among other things, knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid, or other federal government payors that are false or fraudulent; and

state and non-U.S. laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may
apply to items or services reimbursed by non-governmental or non-U.S. governmental third-party payors, including
commercial insurers.

Due to the breadth of some of these laws, there can be no assurance that we will not be found to be in violation of any such laws,
and as a result we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring
of our operations, or the exclusion from participation in federal, non-U.S. or state healthcare programs. Any penalties could
adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if
we successfully defend against them, could cause us to incur significant legal expenses and divert our management’s attention from
the operation of our business.

Reimbursement policies of third parties, cost containment measures, and healthcare reform could adversely affect the demand for
our products and limit our ability to sell our products.

Our products are sold either directly by us or by independent sales representatives to customers or to our independent distributors
and purchased by hospitals, healthcare providers, and patients. These products may be reimbursed by third-party payors, such as
government programs, including Medicare, Medicaid, and Tricare, or private insurance plans and healthcare networks. Major third-
party payors for medical services in the U.S. and internationally continue to work to contain health care costs and are increasingly
challenging the policies and the prices charged for medical products and services. Any medical policy developments that eliminate,
reduce, or materially modify coverage of our reimbursement rates for our products could have an impact on our ability to sell our
products. In addition, third-party payors may deny reimbursement if they determine that a device or product provided to a patient
or used in a procedure does not meet applicable payment criteria or if the policyholder’s healthcare insurance benefits are limited.
These policies and criteria may be revised from time-to-time.

Limits put on reimbursement could make it more difficult to buy our products and substantially reduce, or possibly eliminate,
patient access to our products. In addition, should governmental authorities continue to enact legislation or adopt regulations that
affect third-party coverage and reimbursement, access to our products and coverage by private or public insurers may be reduced
with a consequential material adverse effect on our sales and profitability.

CMS, in its ongoing implementation of the Medicare program, periodically reviews medical study literature to determine how the
literature addresses certain procedures and therapies in the Medicare population. The impact that this information could have on
Medicare coverage policy for our products is currently unknown, but we cannot provide assurances that the resulting actions will
not restrict Medicare coverage for our products. There can be no assurance that we or our distributors will not experience
significant reimbursement problems in the future related to these or other proceedings. Globally, our products are sold in many

countries, such as the U.K., Germany, France, and Italy, which have publicly funded healthcare systems. The ability of hospitals
supported by such systems to purchase our products is dependent, in part, upon public budgetary constraints. Any increase in such
constraints may have a material adverse effect on our sales and collection of accounts receivable from such sales.

As required by law, CMS has continued efforts to implement a competitive bidding program for selected durable medical
equipment, prosthetic, orthotic supplies (“DMEPOS”) items paid for by the Medicare program. In this program, Medicare rates are
based on bid amounts for certain products in designated geographic areas, rather than the Medicare fee schedule amount. Bone
growth stimulation products are currently exempt from this competitive bidding process. We cannot predict which products from
any of our businesses may ultimately be affected or whether or when the competitive bidding process may be extended to our
businesses. There can be no assurance that the implementation of the competitive bidding program will not have an adverse impact
on the sales of some of our products.

We and certain of our suppliers may be subject to extensive government regulation that increases our costs and could limit our ability
to market or sell our products.

The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state, and
foreign governmental authorities. These authorities regulate the development, approval, classification, testing, manufacturing, labeling,
marketing, and sale of medical devices. Likewise, our use and disclosure of certain categories of health information may be subject to
federal and state laws, implemented and enforced by governmental authorities that protect health information privacy and security.
For a description of these regulations, see Item 1, “Business,” under the subheading “Government Regulation.”

The approval or clearance by governmental authorities, including the FDA in the U.S., is generally required before any medical
devices may be marketed in the U.S. or other countries. We cannot predict whether, in the future, the U.S. or foreign governments
may impose regulations that have a material adverse effect on our business, financial condition, results of operations, or cash flows.
The process of obtaining FDA clearance and approvals to develop and market a medical device can be costly, time-consuming, and
subject to the risk that such clearances or approvals will not be granted on a timely basis, if at all. The regulatory process may delay
or prohibit the marketing of new products and impose substantial additional costs if the FDA lengthens review times for new
devices. The FDA has the ability to change the regulatory classification of a cleared or approved device from a higher to a lower
regulatory classification, or to reclassify an HCT/P, either of which could materially adversely impact our ability to market or sell our
devices. For example, the FDA included Class III bone growth stimulator products in its 2015 strategic priority work plan, as part of a
list of 21 product categories it would review for possible down classification. Shortly after the issuance of the work plan, we and
other manufacturers of bone growth stimulator products submitted a public comment letter opposing the possible down
classification. The FDA did not respond to the comment letter and has not taken any action with respect to the bone growth
stimulator product category since publication of the 2015 work plan. If a down classification were to occur and new entrants to the
market were able to create technologies with comparable efficacy to our devices, our Bone Growth Therapies products could face
additional competition, which could negatively affect our future sales.

In addition, we may be subject to compliance actions, penalties, or injunctions if we are determined to be promoting the use of our
products for unapproved or off-label uses, or if the FDA challenges one or more of our determinations that a product modification
did not require new approval or clearance by the FDA. Device manufacturers are permitted to promote products solely for the uses
and indications set forth in the approved product labeling. A number of enforcement actions have been taken against manufacturers
that promote products for “off-label” uses, including actions alleging that federal health care program reimbursement of products
promoted for “off-label” uses are false and fraudulent claims to the government. The failure to comply with “off-label” promotion
restrictions can result in significant administrative obligations and costs, and potential penalties from, and/or agreements with, the
federal government.

We and certain of our suppliers also are subject to announced and unannounced inspections by the FDA to determine our
compliance with FDA’s QSR and other regulations. If the FDA were to find that we or certain of our suppliers have failed to comply
with applicable regulations, the agency could institute a wide variety of enforcement actions, ranging from a public warning letter to
more severe sanctions such as: fines and civil penalties against us, our officers, our employees, or our suppliers; unanticipated
expenditures to address or defend such actions; delays in clearing or approving, or refusal to clear or approve, our products;
withdrawal or suspension of approval of our products or those of our third-party suppliers by the FDA or other regulatory bodies;
product recall or seizure; interruption of production; operating restrictions; injunctions; and criminal prosecution. The FDA also has
the authority to request repair, replacement, or refund of the cost of any medical device manufactured or distributed by us. Any of
the foregoing actions could have a material adverse effect on our development of new laboratory tests, business strategy, financial
condition, results of operations, or cash flows.

Moreover, governmental authorities outside the U.S. have become increasingly stringent in their regulation of medical devices, and
our products may become subject to more rigorous regulation by non-U.S. governmental authorities in the future. U.S. or non-U.S.
government regulations may be imposed in the future that may have a material adverse effect on our business and operations. The
European Commission (“EC”) has harmonized national regulations for the control of medical devices through European Medical
Device Directives with which manufacturers must comply. Under these new regulations, manufacturing plants must have received a
full Quality Assurance Certification from a “Notified Body” in order to be able to sell products within the member states of the
European Union. This Certification allows manufacturers to stamp the products of certified plants with a “CE” mark. Products
covered by the EC regulations that do not bear the CE mark cannot be sold or distributed within the European Union. We have
received certification for all currently existing manufacturing facilities.

The impact of the Affordable Care Act and other United States healthcare reform legislation on us remains uncertain.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (or collectively the
“ACA”), made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. The
ACA is far-reaching and is intended to expand access to health insurance coverage, improve quality, and reduce costs over time.
Among other things, the ACA:

(cid:3)

establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical
effectiveness research in an effort to coordinate and develop such research; and

implements payment system reforms including a national pilot program on payment bundling to encourage hospitals,
physicians, and other providers to improve the coordination, quality, and efficiency of certain healthcare services through
bundled payment models.

Certain legislative changes to and regulatory changes under the ACA occurred in the 115th United States Congress. For example, the
Tax Cuts and Jobs Act enacted on December 22, 2017, eliminated the shared responsibility payment for individuals who fail to
maintain minimum essential coverage under section 5000A of the Internal Revenue Code of 1986, commonly referred to as the
individual mandate, beginning in 2019, as well as the tax on generous employer-sponsored employee-sponsored healthcare plans.

In addition, U.S. government agencies continue efforts to modify provisions of the ACA. For example, CMS began permitting states
to impose work requirements on persons covered by Medicaid expansion plans; certain federal subsidies to insurers have ended;
and certain short-term insurance plans not offering the full array of ACA benefits have been allowed to extend in duration. Some of
these changes are being challenged in U.S. courts and so their long-term impact remains uncertain. This changing federal landscape
has both positive and negative impacts on the U.S. healthcare industry with much remaining uncertain as to how various provisions
of federal law, and potential modification or repeal of these laws, will ultimately affect the industry. Any future changes to the ACA
or other such legislation, depending on their nature, could have an adverse effect on our ability to maintain or increase sales of any
of our products and achieve profitability.

We are subject to differing customs and import/export rules in several jurisdictions in which we operate.

We import and export our products to and from a number of different countries around the world. These product movements
involve subsidiaries and third parties operating in jurisdictions with different customs and import/export rules and regulations.
Customs authorities in such jurisdictions may challenge our treatment of customs and import/export rules relating to product
shipments under aspects of their respective customs laws and treaties. If we are unsuccessful in defending our treatment of customs
and import/export classifications, we may be subject to additional customs duties, fines, or penalties that could adversely affect our
profitability.

In addition, changes in U.S. or foreign policies regarding international trade could also negatively impact our business. The
enactment of or increases in tariffs, or other such charges, on specific products that we sell or with which our products compete,
may have an adverse effect on our business or on our results of operations.

Risks Related to our Business and Industry

Our business may be adversely affected if consolidation in the healthcare industry leads to demand for price concessions or if a group
purchasing organization or similar entity excludes us from being a supplier.

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms have been launched by
legislators, regulators, and third-party payors to curb these costs. As a result, there has been a consolidation trend in the healthcare
industry to create larger companies, including medical device companies and hospitals, each with greater market power. As the
healthcare industry consolidates, competition to provide products and services to industry participants has become and may
continue to become more intense. This has resulted and may continue to result in greater pricing pressures and the exclusion of
certain suppliers from important markets as group purchasing organizations (“GPOs”), independent delivery networks, and large
single accounts continue to use their market power to consolidate purchasing decisions and as larger manufacturers use their broad
offerings to secure exclusive arrangements. If a GPO were to exclude us from their supplier list, our net sales could be adversely
impacted. We expect that market demand, government regulation, third-party reimbursement policies, and societal pressures will
continue to change the worldwide healthcare industry, which may exert further downward pressure on the prices of our products.

The industry in which we operate is highly competitive. New developments by others could make our products or technologies non-
competitive or obsolete.

The medical devices industry is highly competitive. We compete with a large number of companies, many of which have significantly
greater financial, manufacturing, marketing, distribution, and technical resources than we do. Many of our competitors may be able
to develop products and processes competitive with, or superior to, our own. Furthermore, we may not be able to successfully
develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer
purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. For more
information regarding our competitors, see Item 1, “Business,” under the subheading “Competition.”

In addition, the orthopedic medical device industry in which we compete is undergoing, and is characterized by, rapid and significant
technological change. We expect competition to intensify as technological advances are made. New technologies and products
developed by other companies are regularly introduced into the market, which may render our products or technologies non-
competitive or obsolete.

Our ability to market products successfully depends, in part, upon the acceptance of the products not only by consumers, but also by
independent third parties.

Our ability to market our products successfully depends, in part, on the acceptance of the products by independent third parties
(including hospitals, physicians, other healthcare providers, and third-party payors) as well as patients. Unanticipated side effects or
unfavorable publicity concerning any of our products could have an adverse effect on our ability to maintain hospital approvals or
achieve acceptance by prescribing physicians, managed care providers and other retailers, customers, and patients.

Our allograft and mesenchymal stem cell allografts could expose us to certain risks that could

disrupt our business.

Our Biologics business markets allograft tissues that are derived from human cadaveric donors, and our ability to market the tissues
depends on our supplier continuing to have access to donated human cadaveric tissue, as well as the maintenance of high standards
by the supplier in its processing methodology. The supply of such donors is inherently unpredictable and can fluctuate over time.
The allograft tissues are regulated under the FDA’s HCT/P regulatory paradigm and not as a medical device, biologic, or drug. There
can be no assurance that the FDA will not at some future date re-classify the allograft tissues, and the reclassification of this product
from a human tissue to a medical device could have adverse consequences for us or for the supplier of this product and make it
more difficult or expensive for us to conduct this business by requiring premarket clearance or approval as well as compliance with
additional post-market regulatory requirements.

We may not be able to successfully introduce new products to the market, and market opportunities that we expect to develop for
our products may not be as large as we expect.

We plan to continue to make improvements in our products, to develop new products, and to introduce our products into new
markets. Despite our planning, the process of developing and introducing new products (including product enhancements) is
inherently complex and uncertain, and involves risks, including the ability of such new products to satisfy customer needs, gain
broad market acceptance (including by physicians), and obtain regulatory approvals. These events can depend on the product

achieving broad clinical acceptance, the level of third-party reimbursement, and the introduction of competing technologies, among
other things. In addition, these risks make it inherently difficult to forecast and predict the future net sales of our products. If the
market opportunities that we expect to develop for our products, including new products, are not as large as we expect, it could
adversely affect our ability to grow our business.

Growing our business requires that we properly educate and train physicians regarding the distinctive characteristics, benefits,s
safety, clinical efficacy, and cost-effectiveness of our products.

Acceptance of our products depends in part on our ability to (i) educate the medical community as to the distinctive characteristics,
benefits, safety, clinical efficacy, and cost-effectiveness of our products compared to alternative products, procedures, and therapies,
and (ii) train physicians in the proper use and implementation of our products. This is particularly true in instances of newly launched
products or in the introduction of a product into a new market, such as our launch of the M6-C artificial cervical disc within the U.S.
We support our sales force and distributors through specialized training workshops in which surgeons and sales specialists
participate. We also produce marketing materials, including materials outlining surgical procedures, for our sales force and
distributors in a variety of languages using printed, video, and multimedia formats. To provide additional advanced training for
surgeons, consistent with the AdvaMed Code and the MedTech Code, we organize regular multilingual teaching seminars in multiple
locations. However, we may not be successful in our efforts to educate the medical community and properly train physicians. If
physicians are not properly trained, they may misuse or ineffectively use our products, which may result in unsatisfactory patient
outcomes, patient injury, negative publicity, or lawsuits against us. In addition, a failure to educate the medical community regarding
our products may impair our ability to achieve market acceptance of our products.

We may be adversely affected by any disruption in our information technology systems, which could adversely affect our cash flows,
operating results, and financial condition.

Our operations are dependent upon our information technology systems, which encompass all of our major business functions. We
rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely
basis, to coordinate our sales activities across all of our products and services, and to coordinate our administrative activities. A
substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system
capacity limits from unexpected increases in our volume of business, outages, or delays in our service) could result in delays in
receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems
might be damaged or interrupted by natural or man-made events, or by computer viruses, physical or electronic break-ins, and
similar disruptions affecting the global Internet. There can be no assurance that such delays, problems, or costs will not have a
material adverse effect on our cash flows, operating results, and financial condition.

As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and infrastructure
while maintaining the reliability and integrity of our systems and infrastructure. An expansion of our systems and infrastructure may
require us to commit substantial financial, operational, and technical resources before the volume of our business increases, with no
assurance that the volume of business will increase. Any such upgrades to our systems and information technology, or new
technology, now and in the future, require that our management and resources be diverted from our core business to assist in
compliance with those requirements. There can be no assurance that the time and resources our management will need to devote
to these upgrades, service outages, or delays due to the installation of any new or upgraded technology (and customer issues
therewith), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect
on our cash flows, operating results and financial condition.

A significant portion of our operations run on a single Enterprise Resource Planning (“ERP”) platform. To manage our international
operations efficiently and effectively, we rely heavily on our ERP system, internal electronic information and communications
systems, and on systems or support services from third parties. Any of these systems are subject to electrical or telecommunications
outages, computer hacking, or other general system failure. It is also possible that future acquisitions will operate on different ERP
systems and that we could face difficulties in integrating operational and accounting functions of new acquisitions. Difficulties in
upgrading or expanding our ERP system or system-wide or local failures that affect our information processing could adversely affect
our cash flows, operating results, and financial condition.

We may be adversely affected by a failure or compromise from a cyberattack or data breach, which could have an adverse effect on
our business

We rely on information technology systems to perform our business operations, including processing, transmitting and storing
electronic information, and interacting with customers, suppliers, healthcare payors, and other third parties. Like other medical
device companies, the size and complexity of our information technology systems makes them vulnerable to a cyber-attack,
malicious intrusion, breakdown, destruction, loss of data privacy, or other significant disruption. Our information systems require an
ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep
pace with continuing changes in information processing technology, evolving systems and regulatory standards, the increasing need
to protect financial or personal information related to patients and customers, and changing customer patterns.

For example, third parties may attempt to hack into our products to obtain data relating to patients or disrupt performance of our
products or to access our proprietary information. Any failure by us to maintain or protect our information technology systems and
data integrity, including from cyber-attacks, intrusions or other breaches, could result in the unauthorized access to patient data and
personally identifiable information, theft of intellectual property or other misappropriation of assets, or otherwise compromise our
confidential or proprietary information and disrupt our operations. In the U.S., Federal and State privacy and security laws require
certain of our operations to protect the confidentiality of personal information including patient medical records and other health
information. In Europe, the Data Protection Directive requires us to manage individually identifiable information in the EU and, the
new General Data Protection Regulation may impose fines of up to four percent of our global revenue in the event of violations.
Internationally, some countries have also passed laws that require individually identifiable data on their citizens to be maintained on
local servers and that may restrict transfer or processing of that data. We believe that we meet the expectations of applicable
regulations and that the ongoing costs of compliance with such rules are not material to our business but could become material
due to new regulations. There is no guarantee that we will be able to comply with these regulations, or otherwise avoid the negative
reputational and other affects that might ensue from a significant data breach or failure to comply with applicable data privacy
regulations, each of which could have significant adverse effects on our business, financial condition, or results of operations.

In recent years, companies around the world are seeing a surge in wire transfer “phishing” attacks that attempt to trick employees
into wiring money from company bank accounts to criminals’ bank accounts. In some cases, companies have lost millions of dollars
to such relatively simple attacks, and these funds often are not recovered. While we take efforts to train employees to be cognizant
of these types of attacks and take appropriate precautions, the level of technological sophistication being used by attackers has
increased in recent years, and a successful attack against us could lead to the loss of significant funds.

We are dependent on third-party manufacturers for many of our products.

We contract with third-party manufacturers to produce many of our products, like many other companies in the medical device
industry. If we or any such manufacturer fail to meet production and delivery schedules, it can have an adverse impact on our ability
to sell such products. Further, whether we directly manufacture a product or utilize a third-party manufacturer, shortages and
spoilage of materials, labor stoppages, product recalls, manufacturing defects and other similar events can delay production and
inhibit our ability to bring a new product to market in timely fashion. For example, the supply of the Trinity ELITE and Trinity
Evolution allografts are derived from human cadaveric donors, and our ability to market the tissues depends on MTF continuing to
have access to donated human cadaveric tissue, as well as, the maintenance of high standards by MTF in its processing
methodology.

Termination of our existing relationships with our independent sales representatives or distributors could have an adverse effecff
our business.

t on

We sell our products in many countries through independent distributors. Generally, our independent sales representatives and our
distributors have the exclusive right to sell our products in their respective territories. The terms of these agreements vary in length,
generally from one to ten years. Under the terms of our distribution agreements, each party has the right to terminate in the event
of a material breach by the other party and we generally have the right to terminate if the distributor does not meet agreed sales
targets or fails to make payments on time. Any termination of our existing relationships with independent sales representatives or
distributors could have an adverse effect on our business unless and until commercially acceptable alternative distribution
arrangements are put in place. In addition, we operate in areas of the world that have been or may be disproportionately affected
by recessions or disasters and we bear risk that existing or future accounts receivable may be uncollected if these distributors or
hospitals experience disruptions to their business that cause them to discontinue paying ongoing accounts payable or become
insolvent.

We depend on our senior management team.

Our success depends upon the skill, experience, and performance of members of our senior management team, who have been
critical to the management of our operations and the implementation of our business strategy. We do not have key man insurance
on our senior management team, and the loss of one or more key executive officers could have a material adverse effect on our
operations and development. Further, any turnover in our senior management team could adversely affect our operating results and
cash flows.

In order to compete, we must attract, retain and motivate key employees, and our failure to do so could have an adverse effect on
our results of operations.

In order to compete, we must attract, retain and motivate executives and other key employees, including those in managerial,
technical, sales, marketing, research, development, finance, information and technology, and other support positions. Hiring and
retaining qualified executives, engineers, technical staff and sales representatives are critical to our business, and competition for
experienced employees in the medical device industry can be intense. To attract, retain, and motivate qualified executives and key
employees, we utilize stock-based incentive awards, such as employee stock options, restricted stock, and restricted stock units.
Certain awards vest based upon the passage of time while others vest upon the achievement of certain performance-based or
market-based conditions. If the value of such stock awards does not appreciate as measured by the performance of the price of our
common stock and ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate our employees could be
adversely impacted, which could negatively affect our results of operations and/or require us to increase the amount we expend on
cash and other forms of compensation.

Our business is subject to economic, political, regulatory and other risks associated with international sales and operations.

Because we sell our products in many different countries, our business is subject to risks associated with conducting business
internationally. We anticipate that net sales from international operations will continue to represent a substantial portion of our
total net sales. In addition, a number of our manufacturing facilities and suppliers are located outside the U.S. Accordingly, our
future results could be harmed by a variety of factors, including:

•

changes in a specific country’s or region’s political or economic conditions;

trade protection measures and import or export licensing requirements or other restrictive actions by foreign governments;

tariff increases and import or export restrictions

consequences from changes in tax or customs laws;

difficulty in staffing and managing widespread operations;

differing labor regulations;

differing protection of intellectual property;

unexpected changes in regulatory requirements; and

violation by our independent agents of the FCPA or other anti-bribery or anti-corruption laws.

Risks Related to our Intellectual Property

We depend on our ability to protect our intellectual property and proprietary rights, but we may not be able to maintain the
confidentiality, or assure the protection, of these assets.

Our success depends, in large part, on our ability to protect our current and future technologies and products and to defend our
intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market
products similar to, or that compete directly with, ours. Numerous patents covering our technologies have been issued to us, and we
have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in
various countries, including the U.S. Some patent applications in the U.S. are maintained in secrecy until the patent is issued.
Because the publication of discoveries tends to follow their actual discovery by several months, we may not be the first to invent, or
file patent applications on any of our discoveries. Patents may not be issued with respect to any of our patent applications and
existing or future patents issued to, or licensed by, us and may not provide adequate protection or competitive advantages for our
products. Patents that are issued may be challenged, invalidated, or circumvented by our competitors. Furthermore, our patent

rights may not prevent our competitors from developing, using, or commercializing products that are similar or functionally
equivalent to our products.

We also rely on trade secrets, unpatented proprietary expertise, and continuing technological innovation that we protect, in part, by
entering into confidentiality agreements with assignors, licensees, suppliers, employees, and consultants. These agreements may be
breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of
intellectual property or the applicability or enforceability of confidentiality agreements. Moreover, our trade secrets and proprietary
technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect
to our products arising from research, we may not be able to maintain the confidentiality of information relating to these products.
In addition, if a patent relating to any of our products lapses or is invalidated, we may experience greater competition arising from
new market entrants.

Third parties may claim that we infringe on their proprietary rights and may prevent us from manufacturing and selling certain of our
products.

There has been substantial litigation in the medical device industry with respect to the manufacture, use, and sale of new products. These
lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to defend against
allegations relating to the infringement of patent or proprietary rights of third parties. Any such litigation could, among other things:

•

require us to incur substantial expense, even if we are successful in the litigation;

require us to divert significant time and effort of our technical and management personnel;

result in the loss of our rights to develop or make certain products; and

require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties or to
satisfy judgments or to settle actual or threatened litigation.

Although patent and intellectual property disputes within the orthopedic medical devices industry have often been settled through
assignments, licensing, or similar arrangements, costs associated with these arrangements may be substantial and could include the
long-term payment of royalties. Furthermore, the required assignments or licenses may not be made available to us on acceptable
terms. Accordingly, an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary assignments
or licenses could prevent us from manufacturing and selling some products or increase our costs to market these products.

Risks Related to Litigation and Product Liability Matters

We may be subject to product and other liability claims that may not be covered by insurance and could require us to pay substantial
sums. Moreover, fluctuations in insurance expense could adversely affect our profitability.

We are subject to an inherent risk of, and adverse publicity associated with, product liability and other liability claims, whether or
not such claims are valid. We maintain product liability insurance coverage in amounts and scope that we believe are reasonable and
adequate. There can be no assurance, however, that product liability or other claims will not exceed our insurance coverage limits or
that such insurance will continue to be available on reasonable, commercially acceptable terms, or at all. A successful product
liability claim that exceeds our insurance coverage limits could require us to pay substantial sums and could have a material adverse
effect on our financial condition.

In addition to product liability insurance coverage, we hold a number of other insurance policies, including directors’ and officers’
liability insurance, property insurance, and workers’ compensation insurance. If the costs of maintaining adequate insurance
coverage should increase significantly in the future, our operating results could be materially adversely impacted.

Risks Related to Potential Acquisitions and Divestitures

Our efforts to identify, pursue, and implement new business opportunities (including acquisitions) may be unsuccessful and may have
an adverse effect on our business.

Our growth depends, in large part, on our ability to identify, pursue, and implement new business opportunities that expand our
product offerings, capabilities, and geographic presence, and we compete with other medical device companies for these
opportunities. Our efforts to identify such opportunities focus primarily on potential acquisitions of new businesses, products or

technologies, licensing arrangements, commercialization arrangements, and other transactions with third parties. We may not be
able to identify business opportunities that meet our strategic criteria or are acceptable to us or our shareholders. Even if we are
able to identify acceptable business opportunities, we may not be able to pursue or implement such business opportunities (or, in
the case of acquisitions or other transactions, complete such acquisitions or other transactions) in a timely manner or on a cost-
effective basis (or at all), and we may not realize the expected benefits of such business opportunities. If we are not able to identify,
pursue, and implement new business opportunities, it will adversely affect our ability to grow our business.

In addition, pursuing and implementing new business opportunities (particularly acquisitions) may involve significant costs and entail
risks, uncertainties and disruptions to our business, especially where we have limited experience as a company developing or
marketing a particular product or technology or operating in a particular geographic region. We may be unable to integrate a new
business, product, or technology effectively, or we may incur significant charges related to an acquisition or other business
opportunity (for example, amortization of acquired assets or asset impairment charges), which may adversely affect our business,
financial condition, and results of operations. Newly acquired technology or products may require additional development efforts
prior to commercial sale, including clinical testing and approval by the FDA and applicable foreign regulatory authorities; such
additional development efforts may involve significant expense and ultimately be unsuccessful. Any cross-border acquisitions or
transactions may involve unique risks in addition to those mentioned above, including those related to integration of operations
across different cultures and languages, currency risks, and the particular economic, political and regulatory risks associated with
specific countries. To the extent we issue additional equity in connection with acquisitions, this may dilute our existing
shareholders.

We may incur significant costs or retain liabilities associated with disposition activity.

We may from time to time sell, license, assign or otherwise dispose of or divest assets, the stock of subsidiaries or individual
products, product lines or technologies, which we determine are no longer desirable for us to own, some of which may be material.
Any such activity could result in us incurring costs and expenses from these efforts, some of which could be significant, as well as
retaining liabilities related to the assets or properties disposed of even though, for instance, the income-generating assets have been
disposed of. These costs and expenses may be incurred at any time and may have a material impact on our results of operations.

Risks Related to Our Financial Results and Need for Financing

Our quarterly operating results may fluctuate.

Our quarterly operating results have fluctuated significantly in the past. Our future quarterly operating results may fluctuate
significantly, and we may experience losses depending on a number of factors, including the extent to which our products continue
to gain or maintain market acceptance, the rate and size of expenditures incurred as we expand our domestic and establish our
international sales and distribution networks, the timing and level of reimbursement for our products by third-party payors, the
extent to which we are subject to government regulation or enforcement, the valuation of certain assets and liabilities, and other
factors, many of which are outside our control.

We face risks related to foreign currency exchange rates.

Because some of our revenue, operating expenses, assets and liabilities are denominated in foreign currencies, we are subject to
foreign exchange risks that could adversely affect our operations and reported results. To the extent that we incur expenses or earn
revenue in currencies other than the U.S. Dollar, any change in the values of those foreign currencies relative to the U.S. Dollar could
cause our profits to decrease or our products to be less competitive against those of our competitors. To the extent that our current
assets denominated in foreign currency are greater or less than our current liabilities denominated in foreign currencies, we have
potential foreign exchange exposure. The fluctuations of foreign exchange rates during 2019 have had an unfavorable impact of $4.7
million on net sales outside of the U.S. Although we seek to manage our foreign currency exposure by matching non-dollar revenues
and expenses, exchange rate fluctuations could have a material adverse effect on our results of operations in the future. To
minimize such exposures, we may enter into currency hedges from time to time.

Our global operations may expose us to tax risks

We are subject to taxes in the U.S. and numerous foreign jurisdictions. Significant judgment and interpretation of tax laws are
required to estimate our tax liabilities. Tax laws and rates in various jurisdictions may be subject to significant change as a result of
political and economic conditions. Our effective income tax rate could be adversely affected by changes in those tax laws; changes in

the mix of earnings among tax jurisdictions; changes in the valuation of our deferred tax assets and liabilities; and the resolution of
matters arising from tax audits.

Certain of our subsidiaries sell products directly to other Orthofix subsidiaries or provide marketing and support services to other
Orthofix subsidiaries. These intercompany sales and support services involve subsidiaries operating in jurisdictions with differing tax
rates, and we must determine the appropriate allocation of income to each jurisdiction based on current interpretations of complex
income tax regulations. Tax authorities in these jurisdictions may challenge our treatment of such intercompany transactions. If we
are unsuccessful in defending our treatment of intercompany transactions, we may be subject to additional tax liability, interest, or
penalty, which could adversely affect our profitability.

We maintain a $300 million secured revolving credit facility secured by a pledge of substantially all of our property.

On October 25, 2019, we and certain of our wholly-owned subsidiaries (collectively, the “Borrowers”) entered into a Second
Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $300
million secured revolving credit facility maturing on October 25, 2024, and amends and restates the previous $125 million secured
revolving credit facility. No amounts have been drawn on the credit facility as of the date hereof, but the Company may draw on
this facility in the future.

Certain of our subsidiaries (collectively, the “Guarantors”) are required to guarantee the repayment of any obligations under the
Amended Credit Agreement. The obligations with respect to the Amended Credit Agreement are secured by a pledge of
substantially all of the personal property assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit
accounts, intellectual property, investment property, inventory, equipment and equity interests in their respective subsidiaries.

The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on our ability to incur
additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of
assets, pay dividends and distributions, pay subordinated indebtedness, and enter into affiliate transactions. In addition, the
Amended Credit Agreement contains financial covenants requiring us to maintain, on a consolidated basis as of the last day of any
fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be permitted to increase to 4.0 to 1.0 for no
more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio of at least 3.0 to 1.0. The Amended
Credit Agreement also includes events of default customary for facilities of this type and upon the occurrence of such events of
default, subject to customary cure rights, all outstanding loans under the Facility may be accelerated and/or the lenders’
commitments terminated.

We believe that we are in compliance with the covenants, and there were no events of default, at December 31, 2019 (and in prior
periods). However, there can be no assurance that we will be able to meet such financial covenants in future fiscal quarters. The failure
to do so could result in an event of default under such agreement, which could have a material adverse effect on our financial position
in the event that we have significant amounts drawn under the facility at such time.

Item 1B.

Unresolved Staff Comments

None.

Item 2.

p
Properties

Our principal facilities as of December 31, 2019 are as follows:

Facility
Manufacturing, warehousing, distribution, research and development, and

Location

Approx.
Square
Feet

Ownership

administrative facility for Corporate and all reporting segments

Lewisville, TX

140,000

Leased

Manufacturing, warehousing, distribution, research and development, and

administrative facility for motion preservation

Sunnyvale, CA

25,000

Leased

Research and development, component manufacturing, quality control and
training facility for fixation products and sales management, distribution
and administrative facility for Italy

International distribution center for Orthofix products
Mechanical workshop for Orthofix products
Sales management, distribution and administrative facility for United Kingdom
Sales management, distribution and administrative facility for Brazil
Sales management, distribution and administrative facility for France
Sales management, distribution and administrative facility for Germany

Verona, Italy
Verona, Italy
Verona, Italy
Maidenhead, England
São Paulo, Brazil
Arcueil, France
Ottobrunn, Germany

38,000
18,000
9,000
5,580
22,000
8,500
18,300

Owned
Leased
Leased
Leased
Leased
Leased
Leased

Item 3.

g
Legal Proceedings

For a description of our material pending legal proceedings, refer to Note 12 of the Notes to the Consolidated Financial Statements in
Item 8 of this Annual Report.

Item 4.

y
Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Our Common Stock

Our common stock is traded on the Nasdaq Global Select Market under the symbol “OFIX.” As of February 20, 2020, we had 318
holders of record of our common stock. The closing price of our common stock on February 20, 2020 was $45.36. The following table
shows the high and low sales prices for our common stock for each of the two most recent fiscal years.

2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Dividends

High

Low

61.00
61.86
61.98
63.57

74.44
57.85
55.17
54.02

51.01
51.38
50.41
48.00

47.79
48.02
48.77
39.75

We have not paid dividends to holders of our common stock in the past and have no present intention to pay dividends in the
foreseeable future. Additionally, we have restrictions on the ability to pay dividends in certain circumstances pursuant to our
Amended Credit Agreement. We currently intend to retain all of our consolidated earnings to finance the continued growth of our
business.

In the event that we decide to pay a dividend to holders of our common stock in the future with dividends received from our
subsidiaries, we may, based on prevailing rates of taxation, be required to pay additional withholding and income tax on such
amounts.

Recent Sales of Unregistered Securities

We did not sell any unregistered securities during the fourth quarter of 2019.

Performance Graph

The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A
or 14C or to the liabilities of Section 18 of the Exchange Act. This information will not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate this information
by reference.

The graph below compares the five-year total shareholder return on Orthofix common stock with the returns of two indexes: the
Nasdaq Stock Market and Nasdaq stocks for surgical, medical, and dental instruments and supplies. The graph assumes that you
invested $100 in Orthofix Common Stock and in each of the indexes on December 31, 2014. Points on the graph represent the
performance as of the last business day of each of the years indicated.

$250

$200

$150

$100

$50

2014

2015

2016

2017

2018

2019

Orthofix Medical Inc.

NASDAQ Stock Market (US and Foreign Companies)

NASDAQ Stocks (SIC 3840-3849 US & Foreign) Surgical, Medical, and Dental Instruments and Supplies

Item 6.

Selected Financial Data

The following selected financial data has been derived from our audited consolidated financial statements.

(U.S. Dollars, in thousands, except margin and per share data)
Consolidated operating results
Net sales
Gross profit
Gross margin
Operating income (loss) (1)
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss) (2)
Net income (loss) per common share (cid:177) basic

(cid:177)

Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)

Net income (loss) per common share (cid:177) diluted

(cid:177)

Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)

(1)

Includes the following:

2019

2018

Year ended December 31,
2017

2016

2015

$ 459,955
359,348

$ 453,042
356,414

$ 433,823
340,786

$ 409,788
321,935

$ 396,489
309,964

78%
(18,784)
(28,462)
(cid:178)
(28,462) $

(1.51) $
(cid:178)
(1.51) $

79%

78%

30,094
13,811
(cid:178)
13,811

0.73
(cid:178)
0.73

0.72
(cid:178)
0.72

40,811
7,291
(1,068)
6,223

0.40
(0.06)
0.34

0.39
(0.05)
0.34

21,067
3,497
(441)
3,056

0.19
(0.02)
0.17

9,225
(2,342)
(467)
(2,809)

(0.12)
(0.03)
(0.15)

•

Legal, accounting, and other professional fees incurred in 2019, 2018, 2017, 2016, and 2015 of $0.2 million, $1.1
million, $3.4 million, $2.0 million, and $9.1 million, respectively, in connection with the accounting review and
restatements (incurred through March 2015) and legal fees associated with the SEC Investigation, a related securities
class action complaint and Brazil subsidiary compliance review. In addition, the Company received an insurance
settlement related to these matters of approximately $6.1 million in 2017

Charges related to U.S. Government resolutions in 2016 of $14.4 million

(2) Dividends have not been paid in any of the years presented

(U.S. Dollars, in thousands)
Consolidated financial position
Total assets
Long-term debt
Shareholders(cid:182) equity

2019

2018

As of December 31,
2017

2016

2015

$ 495,620
(cid:178)
327,631

$ 466,641
(cid:178)
335,397

$ 405,354
(cid:178)
296,608

$ 372,103
(cid:178)
263,477

400,222
(cid:178)
290,311

Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and result of operations should be read in conjunction with
“Forward-Looking Statements” and our consolidated financial statements and notes thereto appearing elsewhere in this Annual
Report. The discussion and analysis below is focused on our 2019 and 2018 financial results, including comparisons of our year-over-
year performance between these years. Discussion and analysis of our 2017 fiscal year specifically, as well as the year-over-year
comparison of our 2018 financial performance to 2017, is located in Part II, Item 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed
with the SEC on February 25, 2019, which is available on our website at www.orthofix.com and the SEC’s website at www.sec.gov.

Executive Summary

We are a global medical device company focused on musculoskeletal products and therapies. Headquartered in Lewisville, Texas, we
have two reporting segments: Global Spine and Global Extremities. Our products are distributed by our sales representatives and
distributors in more than 70 countries.

Notable highlights and accomplishments in 2019 include the following:

•

Net sales were $460.0 million, an increase of 1.5% on a reported basis and 2.5% on a constant currency basis

Increase in Biologics net sales of 9.7% compared to the prior year, as we believe we now have the #1 market-share position
within the U.S. Cellular Allograft segment per SmartTRAK following the product category’s strong performance in 2019

Net loss was $28.5 million, a decrease $42.3 million from the prior year, primarily driven by increases in acquisition-related
amortization and remeasurement and sales and marketing expenses

Obtained approval in February 2019 from the U.S. Food and Drug Administration (“FDA”) for our M6-C artificial cervical disc
acquired from Spinal Kinetics, Inc. (“Spinal Kinetics”) and achieved $4.1 million in net sales in the U.S. following approval

Changed our reporting segments to Global Spine and Global Extremities to optimize our structure and better serve our
surgeon customers

Successful transition of Chief Executive Officer and Global Spine President positions

Results of Operations

The following table presents certain items in our consolidated statements of operations as a percent of net sales:

Net sales
Cost of sales
Gross profit

Sales and marketing
General and administrative
Research and development
Acquisition-related amortization and remeasurement

Operating income (loss)
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)

Year ended December 31,

2019
(%)

2018
(%)

2017
(%)

100.0
21.9
78.1
48.6
18.6
7.5
7.5
(4.1)
(6.2)

(6.2)

100.0
21.3
78.7
45.4
18.4
7.3
1.0
6.6
3.0

3.0

100.0
21.4
78.6
45.7
16.6
6.9

9.4
1.7
(0.3)
1.4

Net Sales by Reporting Segment

The following table provides net sales by major product category by reporting segment:

2019
$ 197,181
94,544
65,496
357,221
102,734
$ 459,955

2018
$ 195,252
91,658
59,684
346,594
106,448
$ 453,042

2017
$ 185,900
81,957
62,724
330,581
103,242
$ 433,823

2019/2018

Reported

Percentage Change

2019/2018
Constant
Currency

2018/2017

Reported

2018/2017
Constant
Currency

1.0%
3.1%
9.7%
3.1%
-3.5%
1.5%

1.0%
3.8%
9.7%
3.2%
0.3%
2.6%

5.0%
11.8%
-4.8%
4.8%
3.1%
4.4%

5.0%
11.9%
-4.8%
4.9%
0.9%
3.9%

(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants
Biologics
Global Spine
Global Extremities
Net sales

Global Spine

Global Spine offers the following products categories:

Bone Growth Therapies, which manufactures, distributes, sells, and provides support services for market leading devices
that enhance bone fusion. Bone Growth Therapies uses distributors and sales representatives to sell its devices and provide
associated services to hospitals, healthcare providers, and patients.

Spinal Implants, which designs, develops and markets a broad portfolio of motion preservation and fixation implant
products used in surgical procedures of the spine. Spinal Implants distributes its products globally through a network of
distributors and sales representatives to sell spine products to hospitals and healthcare providers.

Biologics, which provides a portfolio of regenerative products and tissue forms that allow physicians to successfully treat a
variety of spinal and orthopedic conditions. Biologics markets its tissues to hospitals and healthcare providers, primarily in
the U.S., through a network of employed and independent sales representatives.

2019 Compared to 2018

Net sales increased $10.6 million or 3.1%

•

Bone Growth Therapies net sales increased $1.9 million or 1.0%, primarily driven by a 2.8% increase in order volume during
the year, partially offset by customer sales mix and product mix changes

Spinal Implants net sales increased $2.9 million or 3.1%, primarily driven by an increase of $7.6 million in motion
preservation net sales, which includes a full 12 months of sales in 2019 as compared to only eight months in the prior year
due to the acquisition of Spinal Kinetics in 2018 and our launch into the U.S. market in April 2019 following FDA approval for
the M6-C artificial cervical disc; this increase was partially offset by a decrease in legacy Spine Fixation sales of $4.7 million,
primarily resulting from disruptions in our U.S. distribution channel as we upgrade our legacy sales force with new, high-
potential sales partners

Biologics net sales increased $5.8 million or 9.7%, primarily due to distribution added during the last year as volume
increased related to Trinity tissues by 12.4%, partially offset by a low single-digit price decline as well as a contractual
reduction in the marketing services fee we receive from MTF Biologics, which became effective during the first quarter of
2018

Global Extremities

Global Extremities offers products and solutions that allow physicians to successfully treat a variety of orthopedic conditions
unrelated to the spine. Global Extremities distributes its products globally through a network of distributors and sales
representatives to sell orthopedic products to hospitals and healthcare providers.

2019 Compared to 2018

Net sales decreased $3.7 million, or 3.5%

•

Decrease of $4.1 due to the changes in foreign currency exchange rates, which had a negative impact on net sales

Increase of $0.4 largely attributed to variability in the timing of orders from our international stocking distributors and
growth in our global direct-sales markets

Gross Profit

(U.S. Dollars, in thousands)
Net sales
Cost of sales
Gross profit
Gross margin

2019 Compared to 2018

Gross profit increased $2.9 million, or 0.8%

2019
$ 459,955
100,607
$ 359,348

2018
$ 453,042
96,628
$ 356,414

2017
$ 433,823
93,037
$ 340,786

78.1%

78.7%

78.6%

Percentage Change

2019/2018

2018/2017

1.5%
4.1%
0.8%
-0.6%

4.4%
3.9%
4.6%
0.1%

•

Primarily due to the growth in net sales, partially offset by gross margin decreasing from 78.7% in 2018 to 78.1% in 2019

Increase of $0.7 million attributable to a decrease in acquisition-related inventory fair market value adjustments for Spinal
Kinetics

Sales and Marketing Expense

(U.S. Dollars, in thousands)
Sales and marketing
As a percentage of net sales

2019
223,676

2018
205,527

2017
$ 198,370

48.6%

45.4%

45.7%

Percentage Change

2019/2018

2018/2017

8.8%
3.2%

3.6%
-0.3%

2019 Compared to 2018

Sales and marketing expense increased $18.1 million

•

Increase largely attributable to increases in headcount, training, and education costs, and increased marketing efforts to
support growth and the launch of the M6-C artificial cervical disc in the U.S.

Further increases relate to higher variable compensation rates in our Global Spine segment to support growth

General and Administrative Expense

(U.S. Dollars, in thousands)
General and administrative
As a percentage of net sales

2019 Compared to 2018

2019
85,607

2018
83,251

2017
71,905

18.6%

18.4%

16.6%

Percentage Change

2019/2018

2018/2017

2.8%
0.2%

15.8%
1.8%

General and administrative expense increased $2.4 million

•

Increase of $9.9 million attributable to succession and transition charges, including acceleration of certain share-based
compensation expense, relating to the retirement, transition, or termination of certain named executive officers and from
targeted restructuring activities

•

Partially offset by a decrease of $3.9 million associated with strategic investments, largely due to diligence and integration
costs related to the acquisition of Spinal Kinetics and expenses associated with our change in jurisdiction of organization
from Curaçao to the State of Delaware (the “Domestication”) in 2018

Further offset by a decrease of $4.1 million in certain compensation expenses, such as share-based compensation expense,
excluding the impact of succession and transition charges

Research and Development Expense

(U.S. Dollars, in thousands)
Research and development
As a percentage of net sales

2019 Compared to 2018

2019
34,637

2018
33,218

2017
29,700

7.5%

7.3%

6.9%

Percentage Change

2019/2018

2018/2017

4.3%
0.2%

11.8%
0.4%

Research and development expense increased $1.4 million

•

Increase largely attributable to the Spinal Kinetics acquisition and the regulatory efforts associated with the FDA premarket
approval of the M6 artificial cervical disc, which was obtained in February of 2019

Increase of $1.0 million related to costs to comply with recent medical device reporting regulations in the European Union

Acquisition-related Amortization and Remeasurement

(U.S. Dollars, in thousands)
Acquisition-related amortization and
remeasurement
As a percentage of net sales

2019 Compared to 2018

2019

2018

2017

2019/2018

2018/2017

Percentage Change

34,212

4,324

7.5%

1.0%

0.0%

691.2%
6.5%

100.0%
1.0%

Acquisition-related amortization and remeasurement increased $29.9 million

•

Increase of $26.1 million related to the remeasurement of contingent milestone payments associated with the Spinal
Kinetics acquisition that become due upon the achievement of certain revenue targets and upon FDA approval of the M6-C
artificial cervical disc, which occurred in the first quarter of 2019

The fair value associated with the contingent revenue-based milestones increased significantly in 2019, largely attributable
to the initial success observed in the launch of the M6-C artificial cervical disc in the U.S. market, as our long-term forecasts
of net sales now indicate a greater likelihood of achieving the contingent revenue-based milestones

Increase of $3.8 million related to the amortization of intangible assets acquired through business combinations or asset
acquisitions; of this amount, $2.9 million of the increase is attributable to the Spinal Kinetics acquisition, which includes
amortization of acquired in-process research and development costs following the achievement of the FDA milestone

Non-operating Expense

(U.S. Dollars, in thousands)
Interest expense, net
Other expense, net

2019

2018

2017

2019/2018

2018/2017

(122) $

(8,143)

(828)
(6,381)

(416)
(4,004)

-85.3%
27.6%

99.0%
59.4%

Percentage Change

Non-operating income and expense largely consists of interest income and expense, transaction gains and losses from changes in
foreign currency exchange rates, changes in fair value related to our equity holdings in Bone Biologics, Inc. (“Bone Biologics”), and
other-than-temporary impairments on the debt security of eNeura, Inc. (“eNeura”) that was settled on October 25, 2019. Foreign
exchange gains and losses are primarily a result of several of our foreign subsidiaries holding trade and intercompany payables or
receivables in currencies (most notably the U.S. Dollar) other than their functional currency.

2019 Compared to 2018

Other expense, net, increased $1.8 million

•

Increase of $6.5 million associated with an other-than-temporary impairment of the eNeura debt security, which was
settled in 2019

Partially offset by a net decrease of $3.1 million relating to impairment and changes in fair value of our equity holdings and
warrants in Bone Biologics during 2018 that did not recur in 2019

Partially offset by an decrease of $1.9 million associated with changes in foreign currency rates, as we recorded a non-cash
remeasurement loss of $1.4 million in 2019 compared to a loss of $3.3 million in 2018

Income Taxes

(U.S. Dollars, in thousands)
Income tax expense
Effective tax rate

2019 Effective Tax Rate

2019

2018

1,413

9,074

2017
29,100

-5.2%

39.7%

80.0%

Percentage Change

2019/2018

2018/2017

-84.4%
-44.9%

-68.8%
-40.3%

The decrease in the effective tax rate during the year was primarily a result of the decrease in income before income taxes, full year
benefit of our Domestication completed in 2018, and statute expirations and effective settlement of uncertain tax positions, offset
by non-deductible executive compensation and non-deductible increase in contingent consideration. The primary factors affecting
our tax rate for 2019 are as follows:

•

Non-deductible increases in the fair value of contingent consideration

Statute expirations and effective settlement of uncertain tax positions

Executive compensation that is not deductible as a result of the Tax Act

State taxes and foreign income taxed at differing rates

2018 Effective Tax Rate

The decrease in the effective tax rate during the year was primarily a result of the decrease in income before income taxes, the
reduction of the US statutory tax rate from 35% to 21%, and the 2017 charge from recording the impact of the Tax Cuts and Jobs Act
(the “Tax Act”) that did not recur in 2018. The primary factors affecting our tax rate for 2018 are as follows:

•

Current period losses in jurisdictions where we do not currently receive a tax benefit

State taxes and foreign income taxed at differing rates

Benefits of deductible equity compensation in excess of financial statement impact

Segment Review

In conjunction with our change in reporting segments in 2019, we also changed the performance measure used to evaluate segment
performance from Non-GAAP net margin, an internal metric that we defined as gross profit less sales and marketing expense, to
EBITDA. When compared to the prior year, EBITDA decreased $44.6 million, largely driven by the fluctuations discussed above, but
primarily attributable to changes in acquisition-related amortization and remeasurement and sales and marketing expense.

The following table reconciles EBITDA to income (loss) before income taxes:

(U.S. Dollars, in thousands)

Global Spine
Global Extremities
Corporate
Total EBITDA
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes

Liquidity and Capital Resources

2019

Year Ended December 31,
2018

2017

39,528
7,496
(49,252)
(2,228)
(24,699)
(122)
(27,049) $

76,545
9,453
(43,626)
42,372
(18,659)
(828)
22,885

84,034
7,143
(34,246)
56,931
(20,124)
(416)
36,391

Cash, cash equivalents, and restricted cash at December 31, 2019 was $70.4 million compared to $72.2 million at December 31, 2018.

(U.S. Dollars, in thousands)
Net cash from operating activities
Net cash from investing activities
Net cash from financing activities
Effect of exchange rate changes on cash and restricted cash
Net change in cash, cash equivalents, and restricted cash

Year Ended December, 31,

2019

2018

Change

32,033
(22,924)
(10,688)
(207)
(1,786)

49,918
(60,998)
2,993
(881)
(8,968)

(17,885)
38,074
(13,681)
674
7,182

The following table presents free cash flow, a non-GAAP financial measure, which is calculated by subtracting capital expenditures
from net cash from operating activities.

(U.S. Dollars, in thousands)
Net cash from operating activities
Capital expenditures
Free cash flow

Operating Activities

Year Ended December, 31,

2019

2018

Change

32,033
(20,524)
11,509

49,918
(15,256)
34,662

(17,885)
(5,268)
(23,153)

Cash flows from operating activities decreased $17.9 million

•

Decrease in net income of $42.3 million

Net increase of $46.8 million for non-cash gains and losses, primarily related to changes in fair value of contingent
consideration, depreciation and amortization, share-based compensation expense, and deferred income taxes

Net decrease of $22.4 million relating to changes in working capital, primarily attributable to changes in inventories and
trade accounts receivable

Two of our primary working capital accounts are trade accounts receivable and inventory. Day’s sales in receivables were 66 days at
December 31, 2019 compared to 59 days at December 31, 2018, largely due to a delay in payment from certain third party payors.
Inventory turns were 1.2 times as of December 31, 2019 compared to 1.3 times at December 31, 2018, primarily resulting from
increases in inventory and instruments in 2019 to support certain product launches.

Investing Activities

Cash flows from investing activities increased $38.1 million

•

Increase of $44.3 million associated with cash paid in relation to the Spinal Kinetics acquisition in 2018, net of cash acquired

Increase of $4.0 million related to the settlement of the eNeura debt security in 2019

•

Increase of $0.9 million associated with the acquisition of certain intangible assets in transactions with former distributors
and from our additional investment of $0.5 million in Bone Biologics in 2018

Partially offset by $6.4 million associated with cash paid in relation to the acquisition of certain assets of Options Medical
LLC, one of our former distributors, in 2019

Further offset by an increase in capital expenditures of $5.3 million compared to the prior year, largely relating to the
buildup of instruments to support new product launches, such as our launch of the M6-C artificial cervical disc in the U.S.

Financing Activities

Cash flows from financing activities decreased $13.7 million

•

Decrease of $13.7 million associated with our payment of the FDA Milestone associated with the Spinal Kinetics acquisition
in 2019, which represents the acquisition-date fair value attributable to the FDA Milestone liability originally recognized

Decrease of $1.4 million associated with debt issuance costs, largely attributable to costs incurred in 2019 associated with
our Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”)

Decrease of $0.4 million attributable to principal payments made in 2019 relating to our finance lease and $0.9 million
attributable to other financing cash flows, which primarily relate to deferred payments made in association with the
acquisition of certain intangible assets in transactions with former distributors

Partially offset by an increase in net proceeds of $2.7 million from the issuance of common shares

Credit Facilities

On October 25, 2019, we entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”),
which provides for a five year $300 million secured revolving credit facility. The Amended Credit Agreement has a maturity date of
October 25, 2024, and amends and restates the previous $125 million secured revolving credit facility.

Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general
corporate purposes (including share repurchases, permitted acquisitions and permitted payments of dividends and other
distributions). As of December 31, 2019, we have not made any borrowings under the Amended Credit Agreement. For additional
information regarding the credit facility, see Note 10 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual
Report.

We had no borrowings and an unused available line of credit of 5.5 million ($6.2 million and $6.3 million) at December 31, 2019
and 2018, respectively, on our Italian line of credit. This unsecured line of credit provides us the option to borrow amounts in Italy at
rates which are determined at the time of borrowing.

Other

For information regarding Contingencies, see Note 12 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual
Report.

Spinal Kinetics Acquisition and Contingent Consideration

As part of the consideration for the Spinal Kinetics acquisition, we agreed to milestone payments in the future of up to $60.0 million
in cash. One milestone payment was for $15.0 million upon FDA approval of Spinal Kinetics’ M6-C artificial cervical disc (the “FDA
Milestone”). During the first quarter of 2019, we obtained FDA approval of the M6-C artificial cervical disc for patients suffering
from cervical disease degeneration and the FDA Milestone payment was triggered. We paid the $15.0 million FDA Milestone
payment on February 14, 2019 from cash on hand.

The remaining two milestones are comprised of revenue-based milestone payments of up to $45.0 million in connection with future
sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The fair value of the contingent consideration
arrangement as of December 31, 2019 was $42.7 million; however, the actual amount ultimately paid could be higher or lower than
the fair value of the contingent consideration. At December 31, 2019, we classified $14.7 million of the liability attributable to the
revenue-based milestones within other current liabilities, as we expect to pay one of the revenue-based milestones in the next
twelve months, and the remaining $28.0 million within other long-term liabilities. For additional discussion of this matter, see Note
12 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.

FITBONE Asset Acquisition

On February 3, 2020, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Wittenstein SE
(“Wittenstein”), a privately-held German-based company, to acquire assets associated with the FITBONE intramedullary lengthening
system for limb lengthening of the femur and tibia bones. Under the terms of the Purchase Agreement, as consideration for the
acquired assets, we will pay $18 million in cash consideration and will enter into manufacturing supply contract with Wittenstein.

The acquisition is anticipated to close by the end of the first quarter of 2020, subject to customary closing conditions.

Debt Security

Until October of 2019, we held a debt security of eNeura, a privately held medical technology company that is developing devices for
the treatment of migraines. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, we entered into an
Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to restructure the debt
security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in control, or (iii) the
effective date of an initial public offering by eNeura. As consideration for the extension, eNeura issued to us a Warrant to Purchase
Common Stock (the “Warrant”), exercisable at $0.01 per share over a ten year contractual term.

During the third quarter of 2019, we engaged in negotiations with eNeura to settle the Restructured Debt Security and on October
25, 2019, we settled the Restructured Debt Security for a $4.0 million cash payment and agreed to transfer the Warrant to eNeura.
As such, prior to its settlement, we determined the Restructured Debt Security and Warrant were impaired and adjusted the
carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net other-than-temporary
impairment of $6.5 million in other expense, net, which includes a reclassification of the related unrealized gains included in
accumulated other comprehensive income (loss) of $5.2 million.

Brazil

In 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority inspected the
offices of more than 30 companies, including the Company’s office in São Paulo, as part of an investigation into tender irregularities
in the medical device industry. Before doing so, the authorities obtained a court order affecting the Company’s (and other
companies’) local bank accounts resulting in the freezing of the Company’s cash. On April 3, 2019, our appeal regarding the freezing
of our local bank accounts was heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the
unfreezing of our cash. Approximately $2.5 million was then returned without any restrictions in April 2019. As such, this balance
has been reclassified from restricted cash to cash and cash equivalents as of December 31, 2019.

In September 2019, in relation to an ongoing legal dispute with a former Brazilian distributor, approximately $0.7 million of our cash
in Brazil was frozen upon request to satisfy a judgment. Although we are appealing the judgment, this cash has been reclassified to
restricted cash.

For additional discussion regarding these matters, see Note 12 of the Notes to the Consolidated Financial Statements in Item 8 of
this Annual Report.

Unremitted Foreign Earnings

Prior to the Domestication, as an entity incorporated in Curaçao, “foreign earnings” referred to both U.S. and non-U.S. earnings. As
a result of the Domestication, only income sourced outside of the U.S. is considered unremitted foreign earnings. Unremitted
foreign earnings decreased from $50.4 million at December 31, 2018 to $49.2 million at December 31, 2019, due to currency
translation. As a result of the 2017 Tax Act, current year earnings have been deemed to be repatriated. Our investment in foreign
subsidiaries continues to be indefinite in nature, however, we may periodically repatriate a portion of these earnings to the extent
that we do not incur significant additional tax liability.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2019:

(U.S. Dollars, in thousands)
Operating leases
Finance leases
Total (1)(2)

Payments Due by Period

Total

2020

2021 - 2023

2024

2025 and
thereafter

6,234
32,547
38,781

1,979
1,013
2,992

3,426
4,327
7,753

143
1,501
1,644

686
25,706
26,392

(1)

(2)

Associated with the acquisition of Spinal Kinetics, we may be required to make conditional revenue-based milestone
payments of up to $45.0 million in connection with future sales of the M6-C artificial cervical disc and M6-L artificial lumbar
disc. We expect to make a $15.0 million payment related to these contingent milestones in 2020 and a $30.0 million
payment in 2021; however, the timing of cash settlement, if any, could vary from these estimates. Accordingly, these
contingent payments have been excluded from the contractual obligations table above. For further information regarding
these contingent payments, see Note 11 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual
Report.

We may be required to make payments related to our uncertain tax positions. However, we are unable to reliably estimate
the timing of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits, including
interest and penalties, of $23.5 million as of December 31, 2019 have been excluded from the contractual obligations table
above. For further information, see Note 19 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual
Report.

Off-balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, cash flows,
liquidity, capital expenditures or capital resources that are material to investors. In addition, we do not consider the backlog of firm
orders to be material.

Critical Accounting Estimates

Our discussion of operating results is based upon the consolidated financial statements and accompanying notes. The preparation of
these statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. On an ongoing basis, we evaluate these estimates, which are based on historical experience
and various other assumptions that management believe to be reasonable under the circumstances at that point in time. Actual
results may differ, significantly at times, from these estimates.

We believe the estimates described below are the most critical in preparing our consolidated financial statements. We have
reviewed these critical accounting estimates with the Audit Committee of the Board of Directors.

Revenue Recognition

The process for recognizing revenue involves significant assumptions and judgments for certain of our revenue streams. Revenue
recognition policies are “critical accounting estimates” because changes in the assumptions used to develop the estimates could
materially affect key financial measures, including net sales, gross margin, operating income, EBITDA, and net income.

Bone Growth Therapies revenue is largely attributable to the U.S. and is comprised of third-party payor transactions and wholesale
revenue.

For revenue derived from third-party payors, including commercial insurance carriers, health maintenance organizations, preferred
provider organizations and governmental payors, such as Medicare, in connection with the sale of our stimulation products, we
recognize revenue when the stimulation product is fitted to and accepted by the patient and all applicable documents that are

required by the third-party payor have been obtained. Amounts paid by these third-party payors are generally based on fixed or
allowable reimbursement rates. These revenues are recorded at the expected or preauthorized reimbursement rates, net of any
contractual allowances or adjustments. Certain billings are subject to review by the third-party payors and may be subject to
adjustment.

Wholesale revenue is related to the sale of our bone growth stimulators directly to physicians and other healthcare providers.
Wholesale revenues are recognized upon shipment and receipt of a confirming purchase order, which is when the customer obtains
control of the promised goods.

Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF. We have
exclusive global marketing rights and receive marketing fees from MTF based on products distributed by MTF. MTF is considered the
principal in these arrangements; therefore, we recognize these marketing service fees on a net basis upon shipment of the product
to the customer.

Spinal Implants and Global Extremities products are distributed world-wide, with U.S. sales largely comprised of commercial revenue
and international sales derived from commercial sales and through stocking distributor arrangements.

Commercial revenue is largely related to the sale of our Spinal Implants and Global Extremities products to hospital customers.
Commercial revenues are recognized when these products have been utilized and a confirming purchase order has been received
from the hospital.

Stocking distributors purchase our products and then re-sell them directly to customers, such as hospitals. For revenue derived from
stocking distributor agreements, prior to the adoption of ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), i.e. for
all periods presented prior to January 1, 2018, we recognized revenue once the product was delivered to the end customer (the
“sell-through method”). Because we did not have reliable information about when our distributors sold the product through to end
customers, we used cash collection from distributors as a basis for revenue recognition under the sell-through method. Additionally,
when we sold to these distributors, we considered whether to match the related cost of sales expense with revenue or to recognize
expense upon shipment. In making this assessment, we considered the financial viability of our distributors based on their
creditworthiness to determine if collectability of amounts sufficient to realize the costs of the products shipped was reasonably
assured at the time of shipment to these distributors. In instances where the distributor was determined to be financially viable, we
deferred the costs of sales until the revenue was recognized.

Subsequent to the adoption of Topic 606, effective January 1, 2018, for revenue derived from stocking distributor arrangements, we
recognize revenue upon shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the
promised goods. The transaction price is estimated based upon our historical collection experience with the stocking distributor. To
derive this estimate, we analyze twelve months of historical invoices by stocking distributor and the subsequent collections on those
invoices, for a period of up to 24 months subsequent to the invoice date. This percentage, which is specific to each stocking
distributor, is then used to calculate the transaction price. Cost of sales is also recorded upon transfer of control of the product to
the customer, which is when the Company’s performance obligation has been satisfied.

Allowance for Doubtful Accounts and Contractual Allowances

The process for estimating the ultimate collection of accounts receivable involves significant assumptions and judgments. Historical
collections, write-offs, and payor reimbursement experience are integral parts of the estimation process related to reserves for
doubtful accounts and the establishment of contractual allowances. Accounts receivable are analyzed on a quarterly basis to assess
the adequacy of both reserves for doubtful accounts and contractual allowances. Revisions in allowances for doubtful accounts
estimates are recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual
allowances are recorded as an adjustment to net sales. Our estimates are periodically tested against actual collection experience.
We believe our allowance for doubtful accounts is sufficient to cover customer credit risks; however, a 10% change in our allowance
for doubtful accounts as of December 31, 2019 would result in an increase or decrease to sales and marketing expense of $0.4
million. Additionally, we believe our estimate to establish contractual allowances is sufficient to cover customer credit risks;
however, a 10% change in our reserve for contractual allowances as of December 31, 2019 would result in an increase or decrease
to net sales of $0.6 million. Our allowance for doubtful accounts and estimation of contractual allowances are “critical accounting
estimates” because changes in the assumptions used to develop the estimates could materially affect key financial measures,
including net sales, gross margin, operating income, EBITDA, net income, and trade accounts receivable.

Inventory Allowances

Reserves for excess, slow moving, and obsolete inventory are calculated as the difference between the cost of inventory and market
value, and are based on assumptions and judgments about new product launch periods, overall product life cycles, forecasted
demand, and market conditions. In the event of a decrease in demand for our products, excess product production, or a higher
incidence of inventory obsolescence, we could be required to increase our inventory reserves, which would increase cost of sales
and decrease gross profit. We regularly evaluate our exposure for inventory write-downs. If conditions or assumptions used in
determining the market value or forecasted demand change, additional inventory adjustments in the future may be necessary. Our
inventory allowance is a “critical accounting estimate” because changes in the assumptions used to develop the estimate could
materially affect key financial measures, including gross profit, operating income, EBITDA, net income, and inventory.

Valuation of Intangible Assets

Our intangible assets are comprised primarily of patents, acquired or developed technology, licensing arrangements, trademarks,
and in-process research and development (“IPR&D”). We make significant judgments in relation to the valuation of intangible assets
resulting from business combinations or asset acquisitions. Intangible assets acquired in a business combination that are used for
IPR&D activities are considered to have indefinite lives until the completion or abandonment of the associated project. Upon
reaching the end of the relevant project, we will either amortize the acquired IPR&D over its estimated useful life or expense the
acquired IPR&D should the project be unsuccessful with no future alternative use.

Significant judgment is required related to the forecasting of future operating results within our discounted cash flow valuation
models to determine the valuation of intangible assets. Key assumptions include the anticipated useful lives of acquired intangibles,
the projected cash flows associated with each intangible asset, the estimated probability of success for acquired IPR&D projects, and
projected growth rates and discount rates. It is possible that significant changes in plans or assumptions may affect the
recoverability of these assets and could potentially result in impairment. Our valuation of intangible assets is a “critical accounting
estimate” because changes in the assumptions used to develop these estimates could materially affect key financial measures,
including operating income, EBITDA, net income, and intangible assets, net.

Goodwill

Our goodwill represents the excess of cost over fair value of net assets acquired from business combinations. The determination of
the value of goodwill and intangible assets arising from business combinations requires extensive use of accounting estimates and
judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired.

We test goodwill at least annually for impairment, and between annual tests if indicators of potential impairment exist. These
indicators include, among others, declines in sales, earnings or cash flows, or the development of a material adverse change in the
business climate. Assessing goodwill impairment involves a high degree of judgment due to the estimates and assumptions used. We
believe the estimates and assumptions involved in the impairment assessment to be critical because significant changes in such
estimates and assumptions could materially affect key financial measures, including operating income, EBITDA, and net income.

In connection with our change in reporting segments, which occurred during the first quarter of 2019, we performed a quantitative
assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not
result in an impairment. In addition, the net carrying value of goodwill that was previously reported under the prior reporting
segments of (i) Bone Growth Therapies, (ii) Spinal Implants, and (iii) Biologics was consolidated and is now included within the Global
Spine reporting segment.

In the fourth quarters of 2019 and 2018, we performed a qualitative assessments for our annual goodwill impairment analysis, which
did not result in any impairment charge. This qualitative analysis considered all relevant factors specific to the reporting units,
including macroeconomic conditions, industry and market considerations, overall financial performance and relevant entity-specific
events.

Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The two most significant items that are or were recorded at fair value include (i) contingent consideration attributable to the Spinal
Kinetics acquisition and (ii) our eNeura debt security (prior to its restructuring and settlement in 2019).

The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash associated with the
Spinal Kinetics acquisition, which must be achieved within five years of the acquisition date to be paid. The milestone payments
include (i) up to $15.0 million for meeting the FDA Milestone and (ii) revenue-based milestone payments of up to $45.0 million in
connection with future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. The FDA milestone was achieved
and paid in February of 2019.

Prior to its attainment in 2019, we estimated the fair value of the FDA Milestone using a probability-weighted discounted cash flow
model. This fair value was based on significant inputs not observable in the market, with key assumptions including our estimation of
the probability of FDA approval for the M6-C artificial cervical disc, the timing of approval, and the discount rate applied. Significant
changes in these assumptions could have resulted in a significantly higher or lower fair value prior to obtaining FDA approval.

We estimate the fair value of the potential future revenue-based milestone payments using a Monte Carlo simulation. This fair value
measurement is based on significant inputs that are unobservable in the market, with key assumptions including the our forecasted
future revenues for Spinal Kinetics, the discount rate applied, and assumptions for potential volatility of the forecasted revenue.
Significant changes in these assumptions could result in a significantly higher or lower fair value. Holding other inputs constant, an
increase in our forecasted future revenues by 5% would have resulted in an increase in the fair value of the contingent consideration
of $0.3 million, whereas a decrease in our forecasted future revenues by 5% would have resulted in a decrease in the fair value of
the contingent consideration by $0.4 million.

Prior to its restructuring and settlement in 2019 for $4.0 million, the fair value of the eNeura debt security was based upon
significant unobservable inputs, including the use of a discounted cash flows model, requiring us to develop our own assumptions.
Some of the more significant unobservable inputs used in the fair value measurement of the eNeura debt security were our
estimates related to the timing and likelihood of conversion as a result of a change in control event, the timing and likelihood of
repayment, and the applicable discount rate.

Further, we were required to determine whether any decline in the fair value of the debt security below its basis was other-than-
temporary. In making this determination, we considered our intentions to hold or sell the security, whether it more likely than not
that we would be required to sell the security before the recovery of its amortized cost basis, and our best estimate of the amount
that we ultimately expected to collect from the security. The estimated amount we expected to collect was based upon significant
unobservable inputs, requiring us to develop our own assumptions.

Our fair value measurements are a “critical accounting estimate” because changes in the assumptions used to develop the estimate
could materially affect key financial measures, including operating income, EBITDA, and net income.

Litigation and Contingent Liabilities

From time to time, we are parties to or targets of lawsuits, investigations and proceedings, including product liability, personal
injury, patent and intellectual property, health and safety and employment and healthcare regulatory matters, which are handled
and defended in the ordinary course of business. These lawsuits, investigations or proceedings could involve a substantial number of
claims and could also have an adverse impact on our reputation and customer base. Although we maintain various liability insurance
programs for liabilities that could result from such lawsuits, investigations or proceedings, we are self-insured for a significant
portion of such liabilities.

We accrue for such claims when it is probable that a liability has been incurred and the amount can be reasonably estimated. The
assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable,
often involve a series of complex judgments about future events. Among the factors that we consider in this assessment are the
nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably
estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the
involvement of the U.S. Government and its agencies in such proceedings, our experience in similar matters and the experience of
other companies, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the
proceeding, investigation or claim. Our assessment of these factors may change over time as individual proceedings, investigations
or claims progress. For matters where we are not currently able to reasonably estimate the range of reasonably possible loss, the
factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an
investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters
involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions
with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement

have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, we
believe that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible
eventual loss, fine, penalty or business impact, if any.

Changes in the facts and circumstances associated with a claim could have a material impact on our results of operations and cash
flows in the period that reserve estimates are recorded or revised. We believe our insurance coverage and reserves are sufficient to
cover currently estimated exposures, but we cannot give any assurance that we will not incur liabilities in excess of recorded
reserves or our present insurance coverage. Litigation and contingent liabilities are “critical accounting estimates” because changes
in the assumptions used to develop the estimates could materially affect key financial measures, including operating income,
EBITDA, and net income.

Tax Matters

We and each of our subsidiaries are taxed at the rates applicable within each of their respective jurisdictions. Our income tax
expense, effective tax rate, deferred tax assets and deferred tax liabilities will vary according to the jurisdiction in which profits arise.
Further, certain of our subsidiaries sell products directly to our other subsidiaries or provide administrative, marketing and support
services to our other subsidiaries. These intercompany sales and support services involve subsidiaries operating in jurisdictions with
differing tax rates. The tax authorities in such jurisdictions may challenge our treatments under residency criteria, transfer pricing
provisions, or other aspects of their respective tax laws, which could affect our composite tax rate and provisions.

We sometimes engage in transactions in which tax consequences may be subject to uncertainty. We account for these uncertain tax
positions in accordance with applicable accounting guidance, which requires significant judgment in assessing the estimated tax
consequences of a transaction. We evaluate the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position
will be sustained on audit, including resolution of any related appeals or litigation processes. We measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon ultimate settlement. We re-evaluate our income tax positions
periodically to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled
issues under audit and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit
or an additional charge to the tax provision, which could have a material impact to the financial statements.

We establish a valuation allowance when measuring deferred tax assets if it is more likely than not that certain deferred tax assets
will not be realized in the foreseeable future. This process requires significant judgment as we must project the current tax liability
and estimate the deferred tax assets and liabilities into future periods, including net operating loss and tax credit carry forwards. In
assessing the need for a valuation allowance, we consider recent operating results, availability of taxable income in carryback years,
future reversals of taxable temporary differences, future taxable income projections (exclusive of reversing temporary differences)
and all prudent and feasible tax planning strategies.

Tax matters are “critical accounting estimates” because changes in the assumptions used to develop the estimates could materially
affect key financial measures, including net income.

Share-based compensation

Determining the appropriate fair value model and calculating the fair value of employee stock awards requires estimates and
judgments. Our share-based compensation is a “critical accounting estimate” because changes in the assumptions used to develop
estimates of fair value or the requisite service period could materially affect key financial measures, including gross profit, operating
income, EBITDA, and net income.

We use the Black-Scholes valuation model to calculate the fair value of service-based stock options. The value is recognized as
expense over the service period net of actual forfeitures. The expected term of options granted is estimated based on a number of
factors, including the vesting and expiration terms of the award, historical employee exercise behavior for both options that are
currently outstanding and options that have been exercised or are expired, the historical volatility of our common stock and an
employee’s average length of service. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate
with a contractual life that approximates the expected term of the option award. We estimate expected volatility based on the
historical volatility of our stock.

We use the Monte Carlo valuation methodology to calculate the fair value of market-based stock options and stock units. The value
is recognized as expense over the requisite service period and adjusted for forfeitures as they occur. The Monte Carlo methodology
that we use to estimate the fair value of market-based options incorporates the possibility that the market condition may not be
satisfied.

The fair value of performance-based restricted stock awards and stock units is calculated based upon the closing stock price at the
date of grant. The value is recognized as expense over the derived requisite service period beginning in the period in which they are
deemed probable to vest. Vesting probability is assessed based upon forecasted earnings and financial results and requires
significant judgment.

Non-GAAP Financial Measures

We believe that providing non-GAAP financial measures that exclude certain items provides investors with greater transparency to
the information used by senior management in its financial and operational decision-making. We believe it is important to provide
investors with the same non-GAAP metrics that senior management uses to supplement information regarding the performance and
underlying trends of our business operations in order to facilitate comparisons to historical operating results and internally evaluate
the effectiveness of our operating strategies. Disclosure of these non-GAAP financial measures also facilitates comparisons
of our underlying operating performance with other companies in the industry that also supplement their GAAP results with non-
GAAP financial measures.

The non-GAAP financial measures used in this Annual Report may have limitations as analytical tools and should not be considered
in isolation or as a replacement for GAAP financial measures. Some of the limitations associated with the use of these non-GAAP
financial measures are that they exclude items that reflect an economic cost that can have a material effect on cash flows. Similarly,
certain non-cash expenses, such as equity compensation expense, do not directly impact cash flows, but are part of total
compensation costs accounted for under GAAP.

Constant Currency

Constant currency is a non-GAAP measure, which is calculated by using foreign currency rates from the comparable, prior-year
period, to present net sales at comparable rates. Constant currency can be presented for numerous GAAP measures, but is most
commonly used by management to analyze net sales without the impact of changes in foreign currency rates.

EBITDA

EBITDA is defined as earnings before interest income (expense), net, income taxes, depreciation and amortization. EBITDA is the
primary metric used by our Chief Operating Decision Maker in managing the business.

Free Cash Flow

Free cash flow is a non-GAAP financial measure, which is calculated by subtracting capital expenditures from net cash from
operating activities. Free cash flow is an important indicator of how much cash is generated or used by our normal business
operations, including capital expenditures. Management uses free cash flow as a measure of progress on its capital efficiency and
cash flow initiatives.

Item 7A.

Q
Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business operations. Primary exposures include changes in interest rates
and foreign currency fluctuations. These exposures can impact sales, cost of sales, costs of operations and the cost of financing and
yields on cash and short-term investments. We may use derivative financial instruments, where appropriate, to manage these risks.
However, our risk management policy does not allow us to hedge positions we do not hold nor do we enter into derivative or other
financial investments for trading or speculative purposes.

We are exposed to interest rate risk in connection with our Revolving Credit Facility, which bears interest at floating rates based on
LIBOR, or possibly an alternative reference rate to be used in place of LIBOR upon the occurrence of a benchmark transition event,
plus an applicable borrowing margin or at a base rate (as defined in the Amended Credit Agreement) plus an applicable borrowing
margin. Therefore, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and

cash flows, assuming other factors are held constant. As we do not have any balance outstanding associated with the Amended
Credit Agreement as of December 31, 2019, this risk is currently minimal.

We believe that a concentration of credit risk related to our trade accounts receivable is limited because our customers are
geographically dispersed and the end users are diversified across several industries. It is reasonably possible that changes in global
economic conditions and/or local operating and economic conditions in the regions these customers operate, or other factors, could
affect the future realization of these accounts receivable balances.

Our foreign currency exposure results from fluctuating currency exchange rates, primarily the U.S. Dollar against the Euro, Brazilian
Real, or British Pound. We are subject to cost of sales currency exposure when we produce products in foreign currencies such as the
Euro, Brazilian Real, or British Pound and sell those products in U.S. Dollars. We are subject to transactional currency exposures when
our subsidiaries (or the Company itself) enter into transactions denominated in a currency other than their functional currency. For the
year ended December 31, 2019, we recorded a foreign currency loss of $1.4 million on the statement of operations and comprehensive
income (loss) resulting from gains and losses in foreign currency transactions.

We also are subject to currency exposure from translating the results of our global operations into the U.S. Dollar at exchange rates
that fluctuate during the period. The U.S. Dollar equivalent of international sales denominated in foreign currencies was unfavorably
impacted during the years ended December 31, 2019 and December 31, 2018 by monthly foreign currency exchange rate
fluctuations of the U.S. dollar against all of the foreign functional currencies for our international operations. As we continue to
distribute and manufacture our products in selected foreign countries, we expect that future sales and costs associated with our
activities in these markets will continue to be denominated in the applicable foreign currencies, which could cause currency
fluctuations to materially impact our operating results. An analysis was performed to determine the sensitivity of our current year
net sales and operating income to changes in foreign currency exchange rates. We determined that if the U.S. Dollar decreased in
value by 10% relative to all foreign currencies of our international operations it would result in an increase in net sales of $8.6 million
and an increase in operating income of $0.8 million. If the U.S. Dollar increased in value by 10% relative to all foreign currencies of
our international operations it would result in a decrease in net sales of $8.6 million and a decrease in operating income of $0.8
million.

Item 8.

Financial Statements and Supplementary Data

See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report.

Item 9.

None.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this Annual Report, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial Officer, we performed an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our President and Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our
disclosure controls and procedures were effective.

Managements Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as
such term is defined in the Exchange Act Rule 13a-15(f)). The Company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.

Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of
directors regarding the preparation of reliable financial statements for external purposes in accordance with U.S. GAAP. Because of
the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or
detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to
financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as
of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because
of changes in conditions or that the degree of compliance with the policies and procedures may decline.

In connection with the preparation and filing of this Annual Report, the Company’s management, including our President and Chief
Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2019, based on the framework set forth in “Internal ControlIntegrated Framework (2013)” issued by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on its evaluation, the
Company’s management concluded that, as of December 31, 2019, the Company’s internal control over financial reporting is
effective based on the specified criteria.

Ernst & Young has issued an audit report on the effectiveness of our internal control over financial reporting, which follows this
report.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fourth quarter of 2019 that have
materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Orthofix Medical Inc.

Opinion on Internal Control over Financial Reporting

We have audited Orthofix Medical Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Orthofix Medical Inc. (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of
operations and comprehensive income (loss), changes in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes and our report dated February 24, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
reporting included in the accompanying Management’s Report on Internal
of the effectiveness of internal control over financial
Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Dallas, Texas
February 24, 2020

Item 9B.

Other Information

Not applicable.

Information required by Items 10, 11, 12, 13 and 14 of Form 10-K is omitted from this Annual Report and will be filed in a definitive
proxy statement or by an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this
Annual Report.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

We will provide information that is responsive to this Item 10 regarding executive compensation in our definitive proxy statement or
in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in
either case under the caption “Information About Directors,” “Section 16 (a) Beneficial Ownership Reporting Compliance” and
others possibly elsewhere therein. That information is incorporated in this Item 10 by reference.

Item 11.

Executive Compensation

We will provide information that is responsive to this Item 11 regarding executive compensation in our definitive proxy statement or
in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in
either case under the caption “Executive Compensation,” and possibly elsewhere therein. That information is incorporated in this
Item 11 by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We will provide information that is responsive to this Item 12 regarding ownership of our securities by certain beneficial owners and
our directors and executive officers, as well as information with respect to our equity compensation plans, in our definitive proxy
statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual
Report, in either case under the captions “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders” and “Equity Compensation Plan Information,” and possibly elsewhere therein. That information is incorporated in this
Item 12 by reference.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

We will provide information that is responsive to this Item 13 regarding transactions with related parties and director independence
in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year
covered by this Annual Report, in either case under the caption “Certain Relationships and Related Transactions,” and “Director
Independence” and possibly elsewhere therein. That information is incorporated in this Item 13 by reference.

Item 14.

Principal Accountant Fees and Services

We will provide information that is responsive to this Item 14 regarding principal accountant fees and services in our definitive proxy
statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual
Report, in either case under the caption “Principal Accountant Fees and Services,” and possibly elsewhere therein. That information
is incorporated in this Item 14 by reference.

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a)

Documents filed as part of report on Form 10-K

The following documents are filed as part of this Annual Report on Form 10-K:

Financial Statements

See “Index to Consolidated Financial Statements” on page F-1 of this Form 10-K.

Financial Statement Schedules

No schedules are required because either the required information is not present or is not present in amounts sufficient
to require submission of the schedule, or because the information required is included in the consolidated financial
statements or the notes thereto.

Exhibits

Exhibit
Number

2.1

3.1

3.2

4.1

Description

Agreement and Plan of Merger, entered into March 15, 2018, by and among Blackstone Medical, Inc., Summit
Development, Inc., and Spinal Kinetics, Inc. (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2018 and incorporated herein by reference).

Orthofix Medical Inc. Certificate of Incorporation (filed as an exhibit to the Company’s Current Report on Form 8-K dated
August 1, 2018 and incorporated herein by reference).

Orthofix Medical Inc. Bylaws (filed as an exhibit to the Company’s Current Report on Form 8-K dated August 1, 2018 and
incorporated herein by reference).

Form of Stock Certificate (filed as an exhibit to the Company’s Current Report on Form 8-K dated August 1, 2018 and
incorporated herein by reference).

4.2*

Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

10.1

Second Amended and Restated Credit Agreement, dated October 25, 2019, among Orthofix Medical Inc., Orthofix Inc.,
Orthofix Spinal Implants Inc., Orthofix International B.V., Orthofix III B.V., and certain subsidiaries of Orthofix Medical Inc.
as guarantors, the several banks and other financial institutions as may from time to time become parties thereunder as
lenders, and JPMorgan Chase, N.A., as administrative agent (filed as an exhibit to the Company’s Current Report on Form 8-
K filed on November 1, 2019 and incorporated herein by reference).

10.2 Matrix Commercialization Collaboration Agreement, entered into July 24, 2008, by and between Orthofix Holdings, Inc. and
Musculoskeletal Transplant Foundation (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 and incorporated herein by reference).

10.3

10.4

10.5

10.6

Amendment No. 1 to Matrix Commercialization Collaboration Agreement, dated as of December 15, 2010, by and between
Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2010 and incorporated herein by reference).

Amendment No. 2 to Matrix Commercialization Collaboration Agreement, dated as of January 9, 2012, by and between
Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to amendment no. 1 to the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2011 and incorporated herein by reference).

Amendment No. 3 to Matrix Commercialization Collaboration Agreement, entered into on July 1, 2013 and effective as of
June 25, 2013, by and between Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit
to the Company’s Current Report on Form 8-K filed July 8, 2013 and incorporated herein by reference).

Amendment No. 4 to Matrix Commercialization Collaboration Agreement, entered into on April 1, 2014, by and between
Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to the Company’s Current
Report on Form 8-K filed April 7, 2014 and incorporated herein by reference).

Exhibit
Number

10.7

10.8

10.9

Description

Amendment No. 5 to Matrix Commercialization Collaboration Agreement, entered into on March 10, 2016, by and
between Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to the Company’s
Current Report on Form 8-K filed March 14, 2016 and incorporated herein by reference).

Amendment No. 6 to Matrix Commercialization Collaboration Agreement, entered into on December 29, 2017, by and
between Musculoskeletal Transplant Foundation, Inc. and Orthofix Holdings, Inc. (filed as an exhibit to the Company’s
Annual Report on Form 10-K filed February 26, 2018 and incorporated herein by reference).

Orthofix Medical Inc. Second Amended and Restated Stock Purchase Plan, as Amended (filed as an exhibit to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and incorporated herein by
reference).

10.10

Orthofix Medical Inc. Amended and Restated 2012 Long-Term Incentive Plan (filed as an exhibit to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2018 and incorporated herein by reference).

10.11*

Form of Employee Performance Stock Unit Agreement under the Orthofix Medical Inc. Amended and Restated 2012 Long-
Term Incentive Plan

10.12*

Employee Time-Based Vesting Restricted Stock Unit Grant Agreement for Bradley R. Mason under the Orthofix Medical Inc.
Amended and Restated 2012 Long-Term Incentive Plan.

10.13*

Form of Time-Based Vesting Employee Restricted Stock Unit Grant Agreement (2019 Executive Retention Grants) under the
Orthofix Medical Inc. Amended and Restated 202 Long-Term Incentive Plan.

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

Form of Time-Based Vesting Employee Restricted Stock Grant Agreement under the Orthofix International N.V.
Term Incentive Plan (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 8, 2016 and incorporated
here by reference).

Employee Restricted Stock Grant Agreement under the Orthofix International N.V. 2012 Long-

Form of Employee Restricted Stock Grant Agreement under the Orthofix International N.V. 2012 Long-Term Incentive Plan
July 2014-June 2016 (Time-Based Vesting) (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2014 and incorporated herein by reference).

Form of Time-Based Vesting Employee Non-
Long-Term Incentive Plan (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 8, 2016 and
incorporated here by reference).

Qualified Stock Option Agreement under the Orthofix International N.V. 2012

under the Orthofix International N.V.

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. 2012 Long-Term Incentive
Plan July 2014-June 2016 (Time-Based Vesting) (filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2014 and incorporated herein by reference).

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. 2012 Long-Term Incentive
Plan (pre-2014 grants) (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2012 and incorporated herein by reference).

Form of Non-Employee Director Restricted Stock Unit Agreement under the Orthofix International N.V. 2012 Long-Term
Incentive Plan (filed as an exhibit to the Company’s Form 10-Q filed on August 7, 2017 and incorporated herein by
reference).

Form of Time-Based Vesting Non-Employee Director Non-Qualified Stock Option Agreement under the Orthofix
)
International N.V. 2012 Long-Term Incentive Plan (initial grant (filed as an exhibit to the Company
Form 8-K filed July 8, 2016 and incorporated here by reference).

Non-Qualified Stock Option Agreement

’s Current Report on

Form of Non-Employee Director Non-Qualified Stock Option Agreement under the Orthofix International N.V. 2012 Long
Term Incentive Plan. (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2012 and incorporated herein by reference).

10.22

Employee Inducement Restricted Stock Unit Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form S-8
filed on August 5, 2019 and incorporated herein by reference).

Exhibit
Number

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

Description

Employee Inducement Non-Qualified Stock Option Agreement for Jon Serbousek (filed as an exhibit to the Company’s Form
S-8 filed on August 5, 2019 and incorporated herein by reference).

Employee Inducement Restricted Stock Unit Agreement for Beth Stevenson (filed as an exhibit to the Company’s Form S-8
filed on February 2, 2019 and incorporated herein by reference).

Inducement Plan for Spinal Kinetics Employees (filed as an exhibit to the Company’s Form S-8 filed on April 30, 2018 and
incorporated herein by reference).

Form of Inducement Grant Non-Qualified Stock Option Agreement (filed as an exhibit to the Company’s Form S-8 filed on
April 30, 2018 and incorporated herein by reference).

Form of Inducement Grant Restricted Stock Agreement (filed as an exhibit to the Company’s Form S-8 filed on April 30,
2018 and incorporated herein by reference).

Inducement Grant Non-Qualified Stock Option Agreement, dated March 13, 2013, between Orthofix International N.V. and
Bradley R. Mason (filed as an exhibit to the Company’s Current Report on Form 8-K filed March 13, 2013 and incorporated
herein by reference).

Amended and Restated 2004 Long Term Incentive Plan (filed as an exhibit to the Company’s quarterly report on Form 10-Q
for the quarter ended June 30, 2009 and incorporated herein by reference).

Form of Employee Non-Qualified Stock Option Agreement under the Orthofix International N.V. Amended and Restated
2004 Long-Term Incentive Plan (post-2008 grants made under the 2004 Long Term Incentive Plan prior to the adoption of
the 2012 Long Term Incentive Plan) (filed as an exhibit to the Company’s Current Report on Form 8-K filed July 7, 2009 and
incorporated herein by reference).

Form of Indemnification Agreement between Orthofix Medical Inc. and its directors and officers (incorporated by reference
to Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-224407) filed April 23, 2018).

Amended Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and
Bradley R. Mason (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2016 and incorporated herein by reference).

Transition and Retirement Agreement, dated February 25, 2019, between Bradley R. Mason and Orthofix Medical Inc. (filed
as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and incorporated
herein by reference).

Consulting Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Bradley R. Mason (filed as an Exhibit
to the Company’s Current Report on Form 8-K filed November 1, 2019 and incorporated herein by reference).

Change in Control and Severance Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Jon Serbousek
(filed as an Exhibit to the Company’s Current Report on Form 8-K filed November 1, 2019 and incorporated herein by
reference).

10.37*

Letter agreement, dated December 4, 2019, between the Company and Kevin Kenny.

10.38* Change in Control and Severance Agreement, dated November 1, 2019, between Orthofix Medical Inc. and Kevin Kenny.

10.39

10.40

Amended Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and
Doug Rice (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016
and incorporated herein by reference).

Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and Kimberley
Elting (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and
incorporated herein by reference).

Exhibit
Number

10.41

10.42

10.43

10.44

Description

Amended Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and
Michael M. Finegan (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2016 and incorporated herein by reference).

Change in Control and Severance Agreement, dated September 7, 2016, between Orthofix International N.V. and Davide
Bianchi (filed as an exhibit to the Company’s Current Report on Form 8-K filed September 9, 2016 and incorporated herein
by reference).

Amended and Restated Employment Contract, dated July 31, 2018 between Orthofix AG and Davide Bianchi (filed as an
exhibit to the Company’s Current Report on Form 8-K filed August 6, 2018 and incorporated herein by reference).

Amended Change in Control and Severance Agreement, dated November 1, 2016, between Orthofix International N.V. and
Bradley V. Niemann (filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2016 and incorporated herein by reference).

21.1*

List of Subsidiaries.

23.1*

Consent of Independent Registered Public Accounting Firm.

31.1*

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2*

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1*

Section 1350 Certification of Chief Executive Officer and Certification of Chief Financial Officer.

101

104

The following financial statements from Orthofix Medical Inc. on Form 10-K for the year ended December 31, 2019 filed on
February 24, 2020, formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of
Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated
Financial Statements.

The cover page from Orthofix Medical Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted
in Inline XBRL and contained in Exhibit 101.

Filed with this Form 10-K.
Certain confidential portions of this exhibit were omitted by means of redacting a portion of the text. This exhibit has been
filed separately with the Secretary of the Commission without redactions pursuant to our Application Requesting Confidential
Treatment under the Securities Exchange Act of 1934.

Item 16.

Form 10-K Summaryy

None

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Dated: February 24, 2020

ORTHOFIX MEDICAL INC.

By:
Name:
Title:

/s/ JON SERBOUSEK
Jon Serbousek
President and Chief Executive Officer, Director

/s/ DOUG RICE
Doug Rice
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

Name

Title

Date

/s/ JON SERBOUSEK
Jon Serbousek

/s/ DOUG RICE
Doug Rice

/s/ RONALD A. MATRICARIA
Ronald A. Matricaria

/s/ JAMES HINRICHS
James Hinrichs

/s/ ALEXIS V. LUKIANOV
Alexis V. Lukianov

/s/ LILLY MARKS
Lilly Marks

/s/ MICHAEL E. PAOLUCCI
Michael E. Paolucci

/s/ MARIA SAINZ
Maria Sainz

/s/ JOHN SICARD
John Sicard

President and Chief Executive Officer, Director
(Principal Executive Officer)

February 24, 2020

Chief Financial Officer
(Principal Financial and Accounting Officer)

February 24, 2020

Chairman of the Board of Directors

February 24, 2020

Director

ORTHOFIX MEDICAL INC.
Statement of Managements Responsibility for Financial Statements

To the Shareholders of Orthofix Medical Inc.:

Management is responsible for the preparation of the consolidated financial statements and related information that are presented
in this Annual Report. The consolidated financial statements, which include amounts based on management’s estimates and
judgments, have been prepared in conformity with accounting principles generally accepted in the United States. Other financial
information in the report to shareholders is consistent with that in the consolidated financial statements.

The Company maintains accounting and internal control systems to provide reasonable assurance at a reasonable cost that assets
are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing financial
statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure
providing division of responsibilities and careful selection and training of qualified personnel.

The Company engaged Ernst & Young LLP, independent registered public accountants, to audit and render an opinion on the
consolidated financial statements in accordance with auditing standards of the Public Company Accounting Oversight Board (United
States). These standards include an assessment of the systems of internal controls and test of transactions to the extent considered
necessary by them to support their opinion.

The Board of Directors, through its Audit Committee consisting solely of outside directors of the Company, meets periodically with
management and our independent registered public accountants to ensure that each is meeting its responsibilities and to discuss
matters concerning internal controls and financial reporting. Ernst & Young LLP has full and free access to the Audit Committee.

James Hinrichs
Chairman of the Audit Committee

Jon Serbousek
President and Chief Executive Officer, Director

Doug Rice
Chief Financial Officer

ORTHOFIX MEDICAL INC.

Index to Consolidated Financial Statements

Index to Consolidated Financial Statements .................................................................................................................................
Report of Independent Registered Public Accounting Firm ..........................................................................................................
Consolidated Balance Sheets as of December 31, 2019 and 2018 ................................................................................................
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2019, 2018,

and 2017 ...................................................................................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018, and 2017 ..........
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 ............................................
Notes to the Consolidated Financial Statements ..........................................................................................................................

Page

F-1
F-2
F-5

F-6
F-7
F-8
F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Orthofix Medical Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Orthofix Medical Inc. (the Company) as of December 31, 2019
and 2018, the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and
our report dated February 24, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in Notes 2, 8 and 14 to the consolidated financial statements, the Company changed its methods of accounting for 1)
leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), 2) recognition of revenue from contracts with customers
in 2018 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers, and 3) measurement of equity
investments at fair value and the recognition of any changes in fair value in 2018 due to the adoption of ASU No. 2016-01, Financial
Instruments and ASU 2018-03, Technical Connections and Improvements to Financial Instruments.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.

F-2

Contingent Consideration Spinal Kinetics

Description of
the Matter

As described in Note 11 to the consolidated financial statements, the Company’s contingent consideration at
the acquisition date of Spinal Kinetics, Inc. consisted of potential milestone payments of $15.0 million for
achieving FDA approval and up to $45 million in connection with certain future product sales. At December 31,
2019, the fair value of contingent consideration was $42.7 million.

Auditing the Company’s accounting for the fair value of its contingent consideration involved a high degree of
subjectivity in evaluating management’s estimates and the fair value is sensitive to changes in unobservable
inputs, such as the forecasted future revenues for the Spinal Kinetics, Inc. products, discount rate applied, and
assumptions for potential volatility in the forecasted revenues.

How We
Addressed the
Matter in Our
Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that
address the risks of material misstatement relating to the measurement and valuation of the contingent
consideration liability. For example, we tested controls over the Company’s process to estimate the fair value
of the contingent consideration, management’s review of the significant estimation assumptions and methods
used to develop the fair value estimate, the accuracy of the calculations included within the fair value model,
and the underlying data used in the model.

To test the fair value of the contingent consideration liability, we performed audit procedures that included,
among others, assessing the terms of the arrangement, including the criteria required to achieve the
contingent consideration, and evaluating the significant assumptions and underlying data used by the
Company in the valuation model. In addition, we involved a valuation specialist to assist in evaluating the
appropriateness of the valuation model, certain of the valuation model’s assumptions, and to test the model’s
computational accuracy. We also tested the completeness and accuracy of the underlying data used in the
model.

Inventory Excess and Obsolescence Reserves

Description of
the Matter

At December 31, 2019, the Company’s inventory balance is $82.4 million, which is net of management’s
estimate of inventory excess and obsolescence reserves. As described in Note 4 to the consolidated financial
statements, management adjusts the value of its inventory to net realizable value to the extent it determines
inventory cost cannot be recovered due to obsolescence or other factors. In order to make these
determinations, management estimates future demand and sales prices to determine the appropriate
inventory reserves and to make corresponding adjustments to the carrying value of these inventories to reflect
the lower of cost or net realizable value.

Auditing management’s estimate of the inventory excess and obsolescence reserves involved a high degree of
subjectivity because the estimate was sensitive to changes in assumptions, including forecasted product
demand, length of product life cycles, and the period required to evaluate the level of market acceptance for
new products. These assumptions have a significant effect on the measurement of inventory excess and
obsolescence reserves.

How We
Addressed the
Matter in Our
Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that
address the risks of material misstatement relating to the measurement and valuation of inventory excess and
obsolescence reserves. For example, we tested controls over the Company’s processes to estimate the
inventory excess and obsolescence reserves, management’s review and approval of the model used to
estimate the inventory excess and obsolescence reserve, including the data inputs and outputs of such model
and management’s qualitative adjustments to the model.

To test the inventory excess and obsolescence reserve balance, we performed audit procedures that included,
among others, evaluating the significant assumptions and qualitative adjustments described above and the
underlying data used by the Company in its analysis. Our audit procedures included testing the completeness

F-3

and accuracy of the underlying data used in the model and evaluating whether such data was representative
of current circumstances. We assessed the historical accuracy of management’s estimates and performed
sensitivity analyses of significant assumptions to evaluate the changes in the inventory excess and
obsolescence reserves that would result from changes in the assumptions.

Revenue Recognition (ASC 606) - Risk of Side Agreements with Distributors

Description of
the Matter

As described in Note 14 to the consolidated financial statements, the Company recognizes revenue from
stocking distributors (“distributor revenue”) upon shipment and receipt of a confirming purchase order, which
is when the distributor obtains control of the promised goods. Those revenues are based on the Company’s
historical collection experience, which considers the potential for, among other things, the return of
previously sold products.

Auditing the Company’s measurement of any potential variable consideration under the distributor contracts
is especially challenging due to the potential of side agreements that may allow for the return of previously
sold products.

How We
Addressed the
Matter in Our
Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over
the Company’s process to (i) review and approve new distributor agreements; (ii) review and approve all
changes made to existing arrangements; (iii) review and approve product returns; and (iv) identify and report
potential distributor side agreements by inspecting source documentation used during management’s review.

Our audit procedures included, among others, confirmation of the terms and conditions of material
distributor agreements. In addition, we evaluated whether the Company’s actual returns of product from
distributors were appropriately approved and considered in management’s application of its revenue
recognition policy for distributor revenue.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2002.

Dallas, Texas
February 24, 2020

F-4

ORTHOFIX MEDICAL INC.

Consolidated Balance Sheets as of December 31, 2019 and 2018

(U.S. Dollars, in thousands except share and per share data)
Assets
Current assets

Cash and cash equivalents
Restricted cash
Trade accounts receivable, net of allowances of $3,987 and $7,463, respectively
Inventories
Prepaid expenses and other current assets

Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Deferred income taxes
Other long-term assets
Total assets
Liabilities and shareholders equity
Current liabilities

Trade accounts payable
Current portion of finance lease liability
Other current liabilities

Total current liabilities
Long-term portion of finance lease liability
Other long-term liabilities
Total liabilities
Contingencies (Note 12)
Shareholders equity

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

19,022,619 and 18,579,688 issued and outstanding as of December 31,
2019 and 2018, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)

Total shareholders equity
Total liabilities and shareholders equity

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

2019

2018

69,719
684
86,805
82,397
20,948
260,553
62,727
54,139
71,177
35,117
11,907
495,620

19,886
323
64,674
84,883
20,648
62,458
167,989

1,902
271,019
57,749
(3,039)
327,631
495,620

69,623
2,566
77,747
76,847
17,856
244,639
42,835
51,897
72,401
33,228
21,641
466,641

17,989

67,919
85,908

45,336
131,244

1,858
243,165
87,078
3,296
335,397
466,641

F-5

ORTHOFIX MEDICAL INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)
For the years ended December 31, 2019, 2018, and 2017

(U.S. Dollars, in thousands, except share and per share data)
Net sales
Cost of sales
Gross profit

Sales and marketing
General and administrative
Research and development
Acquisition-related amortization and remeasurement

Operating income (loss)
Interest expense, net
Other expense, net

Income (loss) before income taxes
Income tax expense
Net income (loss) from continuing operations
Discontinued operations (Note 12)

Loss from discontinued operations
Income tax benefit

Net loss from discontinued operations
Net income (loss)
Net income (loss) per common sharebasic

Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss) per common sharebasic
Net income (loss) per common sharediluted

Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss) per common sharediluted
Weighted average number of common shares:

Basic
Diluted

Other comprehensive income (loss), before tax
Unrealized gain (loss) on debt security
Reclassification adjustment for amortization of historical unrealized
gains on debt security
Reclassification adjustment for loss on debt security in net income
Currency translation adjustment

Other comprehensive income (loss), before tax

Income tax benefit (expense) related to items of other comprehensive
income (loss)

Other comprehensive income (loss), net of tax
Comprehensive income (loss)

2019

2018

2017

459,955
100,607
359,348
223,676
85,607
34,637
34,212
(18,784)
(122)
(8,143)
(27,049)
(1,413)
(28,462)

(28,462) $

(1.51) $

453,042
96,628
356,414
205,527
83,251
33,218
4,324
30,094
(828)
(6,381)
22,885
(9,074)
13,811

13,811

0.73

0.72

433,823
93,037
340,786
198,370
71,905
29,700

40,811
(416)
(4,004)
36,391
(29,100)
7,291

(1,759)
691
(1,068)
6,223

0.40
(0.06)
0.34

0.39
(0.05)
0.34

18,903,289
18,903,289

18,494,002
18,911,610

18,117,405
18,498,745

(2,593)

(1,034)
(5,193)
(653)
(9,473)

1,770

(1,823)
(53)

2,201
(7,272)
(35,734) $

(438)
(491)
13,320

3,830

5,585
4,552
13,967

(3,600)
10,367
16,590

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

F-6

ORTHOFIX MEDICAL INC.

Consolidated Statements of Changes in Shareholders Equity
For the years ended December 31, 2019, 2018, and 2017

(U.S. Dollars, in thousands, except share data)
At December 31, 2016
Net income
Other comprehensive income, net of tax
Share-based compensation
Common shares issued
At December 31, 2017
Cumulative effect adjustment from adoption

of ASU 2014-09

Cumulative effect adjustment from adoption

of ASU 2016-16

Net income
Other comprehensive loss, net of tax
Share-based compensation
Common shares issued
At December 31, 2018
Cumulative effect adjustment from adoption

of ASU 2016-02

Cumulative effect adjustment from adoption

of ASU 2018-02

Net loss
Other comprehensive loss, net of tax
Share-based compensation
Common shares issued
At December 31, 2019

Number of
Common
Shares
Outstanding
17,828,155 $

450,678
18,278,833 $

300,855
18,579,688 $

442,931
19,022,619 $

Common
Shares

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders
Equity

1,783 $ 204,095 $ 64,179 $

12,557
3,939

6,223

1,828 $ 220,591 $ 70,402 $

10,367

(6,580) $ 263,477
6,223
10,367
12,557
3,984
3,787 $ 296,608

4,761

18,930
3,644

(1,896)
13,811

(491)

(1,896)
13,811
(491)
18,930
3,674
3,296 $ 335,397

1,858 $ 243,165 $ 87,078 $

(937)

(28,462)

21,540

6,314

937

(7,272)

(28,462)
(7,272)
21,540
6,358
(3,039) $ 327,631

1,902 $ 271,019 $ 57,749 $

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

F-7

ORTHOFIX MEDICAL INC.

Consolidated Statements of Cash Flows
For the years ended December 31, 2019, 2018, and 2017

(U.S. Dollars, in thousands)
Cash flows from operating activities

Net income (loss)

2019

2018

2017

(28,462) $

13,811

6,223

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization
Amortization of debt costs and other assets
Provision for doubtful accounts
Deferred income taxes
Share-based compensation
Interest and loss on the valuation of investment securities
Change in fair value of contingent consideration
Other

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

Trade accounts receivable
Inventories
Prepaid expenses and other current assets
Trade accounts payable
Other current liabilities
Contingent consideration milestone payment
Other long-term assets and liabilities

Net cash from operating activities
Cash flows from investing activities

Acquisition of business, net of cash acquired
Capital expenditures for property, plant and equipment
Capital expenditures for intangible assets
Asset acquisitions and other investments

Net cash from investing activities
Cash flows from financing activities

Proceeds from issuance of common shares
Payments related to withholdings for share-based compensation
Contingent consideration milestone payment
Payments related to finance lease obligation
Payment of debt issuance costs and other financing activities

Net cash from financing activities
Effect of exchange rate changes on cash and restricted cash
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at the beginning of the year
Cash, cash equivalents, and restricted cash at the end of the year

Components of cash, cash equivalents, and restricted cash at the end of the year
Cash and cash equivalents
Restricted cash
Cash, cash equivalents, and restricted cash at the end of the year

24,699
3,778
1,891
1,393
21,540
5,000
29,140
2,433

(11,037)
(5,712)
(3,698)
2,138
(7,716)
(1,340)
(2,014)
32,033

(18,997)
(1,527)
(2,400)
(22,924)

11,551
(5,193)
(13,660)
(365)
(3,021)
(10,688)
(207)
(1,786)
72,189
70,403

69,719
684
70,403

Supplemental disclosure of cash flow information:
Noncash investing activities:

Intangible assets acquired in asset acquisitions
Contingent consideration recognized at acquisition date

1,600

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

F-8

18,659
1,024
(599)
(2,661)
18,930
3,050
3,069
1,633

(3,706)
9,698
(1,127)
(170)
(7,563)

(4,130)
49,918

(44,294)
(13,592)
(1,664)
(1,448)
(60,998)

7,100
(3,425)

(682)
2,993
(881)
(8,968)
81,157
72,189

69,623
2,566
72,189

2,015
25,491

20,124
1,712
1,639
21,286
12,557
5,585

1,398

(6,562)
(15,645)
(6,352)
2,324
(11,412)

6,095
38,972

(14,665)
(2,283)
474
(16,474)

7,783
(3,800)

(445)
3,538
1,180
27,216
53,941
81,157

81,157

ORTHOFIX MEDICAL INC.

Notes to the Consolidated Financial Statements

Business and basis of consolidation

Orthofix Medical Inc. (previously Orthofix International N.V.) and its subsidiaries (the “Company”) 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, the
Company has two reporting segments: Global Spine and Global Extremities. Orthofix products are widely distributed via the
Company's sales representatives and distributors.

In 2018, the Company completed a change in its jurisdiction of organization from Curaçao to the State of Delaware (the
“Domestication”) in accordance with the conversion procedures of Articles 304 and 305 of Book 2 of the Curaçao Civil Code and the
domestication procedures of Section 388 of Delaware General Corporation Law. Upon the effectiveness of the Domestication, each
common share of Orthofix International N.V. was automatically converted into one share of common stock of Orthofix Medical Inc.
This transaction was accounted for as a transfer of assets and liabilities between entities under common control, similar to a pooling
of interest. As a result, the assets and liabilities were carried forward at their historical carrying amounts. The Company’s common
stock continues to be traded on the Nasdaq Global Select Market under the symbol “OFIX.”

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation.

Significant accounting policies

The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to contractual allowances,
doubtful accounts, inventories, goodwill, fair value measurements, litigation and contingent liabilities, income taxes, and share-
based compensation. We base our estimates on historical experience, future expectations, and other relevant assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Information on our accounting policies and methods used in the preparation of our consolidated financial statements are included,
where applicable, in the respective footnotes that follow.

Footnote

Recently adopted accounting standards and recently issued accounting pronouncements
Acquisitions
Inventories
Property, plant and equipment
Intangible assets
Goodwill
Leases
Other current liabilities
Long-term debt
Fair value measurements and investments
Commitments and contingencies
Shareholders' equity
Revenue recognition and accounts receivable
Business segment information
Acquisition-related amortization and remeasurement
Share-based compensation
Defined contribution plans and deferred compensation

F-9

Footnote
Reference
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

Income taxes
Earnings per share
Quarterly financial data
Subsequent events

Footnote

Footnote
Reference
19
20
21
22

The following is a discussion of accounting policies and methods used in our consolidated financial statements that are not
presented within other footnotes.

Prior period reclassifications

Certain amortization expense related to intangible assets previously reported in general and administrative expenses has been
reclassified to acquisition-related amortization and remeasurement based on use of the underlying intangible asset. This
reclassification resulted in a decrease to general and administrative expense of $1.3 million for the year ended December 31, 2018.

Market risk

In the ordinary course of business, the Company is exposed to the impact of changes in interest rates and foreign currency fluctuations.
The Company’s objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, the
Company seeks to balance its non-U.S. Dollar denominated income and expenditures.

The financial statements for operations outside the United States are generally maintained in their local currency. All foreign
currency denominated balance sheet accounts, except shareholders’ equity, are translated to U.S. Dollars at year end exchange
rates and revenue and expense items are translated at average rates of exchange prevailing during the year. Gains and losses
resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income (loss) component of
shareholders’ equity. Transactional foreign currency gains and losses, including those generated from intercompany operations, are
included in other expense, net and were a loss of $1.4 million, loss of $3.3 million, and a gain of $1.9 million for the years ended
December 31, 2019, 2018 and 2017, respectively.

Financial instruments and concentration of credit risk

Financial instruments that could subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents,
restricted cash, and accounts receivable. Generally, cash is held at large financial institutions and cash equivalents consist of highly
liquid money market funds. The Company performs ongoing credit evaluations of customers, generally does not require collateral, and
maintains a reserve for potential credit losses. The Company believes that a concentration of credit risk related to the accounts
receivable is limited because customers are geographically dispersed and end users are diversified across several industries.

Net sales to our customers based in Europe were approximately $69 million in 2019, which represents a substantial portion of our
trade accounts receivable balance as of December 31, 2019. It is at least reasonably possible that changes in global economic
conditions and/or local operating and economic conditions in the regions, or other factors, could affect the future realization of
these accounts receivable balances.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted cash as of December 31, 2018 related to a court order affecting the Company’s local bank accounts for its office in São
Paulo, Brazil, as part of an investigation of more than 30 companies, which resulted in the freezing of approximately $2.6 million of
the Company’s cash. On April 3, 2019, the Company’s appeal regarding the freezing of its local bank accounts was heard by the Brazil
Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the Company’s cash. The cash was then
returned without any restrictions in April 2019. As such, this balance was reclassified to cash and cash equivalents during the second
quarter of 2019.

F-10

In September 2019, approximately $0.7 million of the Company’s cash in Brazil was frozen upon request to satisfy a judgment
related to an ongoing legal dispute with a former Brazilian distributor. Although the Company is appealing this judgment, this cash
has been reclassified to restricted cash. Refer to Note 12 for further discussion of this matter.

Advertising costs

Advertising costs are expensed as incurred. Advertising costs are included within sales and marketing expense and totaled $0.8
million, $0.6 million, and $0.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Research and development costs, including in-process research and development (IPR&D
) costs

Expenditures for research and development are expensed as incurred. Expenditures related to the collaborative arrangement with
MTF Biologics (“MTF”) are expensed based on the terms of the related agreement. No research and development expenditures were
incurred for the years ended December 31, 2019 or 2018 under the collaborative arrangement with MTF. Research and
development expenditures totaled $0.9 million for the year ended December 31, 2017 under the arrangement with MTF.

In connection with the Spinal Kinetics Inc. acquisition in 2018, the Company recognized $26.8 million of IPR&D costs within patents
and other intangible assets, net and recorded additional research and development costs to further develop this acquired IPR&D.
See Note 6 for further details.

Acquired IPR&D represents the fair value assigned to acquired research and development assets that have not reached technological
feasibility. The fair value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting revenues from the projects, and discounting the net cash flows to present
value. The revenue and cost projections used to value acquired IPR&D are, as applicable, reduced based on the probability of
success of developing the asset. Additionally, estimated revenues consider the relevant market sizes and growth factors, expected
trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The
rates utilized to discount the net cash flows to their present value are commensurate with the stage of development of the project
and uncertainties in the economic estimates used in the projections. Any future costs to further develop the IPR&D subsequent to
acquisition are recorded to research and development expense as incurred. See Note 6 for additional policy discussion related to
amortization and impairment testing for IPR&D.

Recently adopted accounting standards and recently issued accounting pronouncements

AAdoption of Accounting Standards Update (ASU
) 2016-02, Leases (Topic 842)

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, which changes how lessees account for
leases. For most leases, the standard requires a liability to be recorded on the balance sheet based on the present value of future
lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company is now required to
recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset.
Other leases are will be accounted for as finance leases, similar to capital leases under the previous accounting standard. Effective
January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. Upon adoption, the Company elected
a package of practical expedients permitted within the new standard. The elected practical expedients allow the Company to carry
forward its historical lease classification and to not separate and allocate the consideration paid between lease and non-lease
components included within a contract. The Company also elected an optional transition method that waives the requirement to
apply the ASU to the comparative periods presented within the financial statements in the year of adoption. Therefore, results for
reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and
continue to be reported in accordance with the Company’s historic accounting policies under Topic 840. See Note 8 for additional
discussion of the Company’s adoption of Topic 842 and its lease accounting policies.

AAdoption of ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
ffrom Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts
and Jobs Act (the "Tax Act") from accumulated other comprehensive income (loss) to retained earnings. The Company adopted this
guidance effective January 1, 2019, using a modified retrospective approach, which resulted in an increase to accumulated other
comprehensive income (loss) and a decrease in retained earnings of $0.9 million.

F-11

Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU 2014-09. Topic 606 supersedes the revenue recognition requirements in Topic 605, Revenue
Recognition, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers
at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
Company adopted Accounting Standards Codification (“ASC”) 606 as of January 1, 2018 using the modified retrospective transition
method, which was applied to all contracts. Results for prior period amounts were not adjusted and continue to be reported in
accordance with the Company’s historic accounting under the previous revenue recognition standard, Topic 605. See Note 14 for
further discussion of the Company’s revenue recognition policies.

Adoption of ASU 2016-01, Financial Instruments Overall (Subtopic 825-10), and ASU 2018-03, Technical Corrections and
Improvements to Financial Instruments Overall (Subtopic 825-10)

In January 2016, the FASB issued ASU 2016-01, which was then further clarified in ASU 2018-03, in February 2018. This guidance
required entities to measure equity investments at fair value and recognize any changes in fair value in net income. However, for
certain equity investments that do not have readily determinable fair values, the new guidance allows companies to measure the
investments using a new measurement alternative, which values the investments at cost, less any impairments, plus or minus
changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The
Company prospectively adopted both ASU 2016-01 and ASU 2018-03 as of January 1, 2018, and now uses the new measurement
alternative for the Company’s equity investments in Bone Biologics, Inc. (“Bone Biologics”), which historically had been measured at
cost. See Note 11 for further discussion related to our investment in Bone Biologics.

Recently issued accounting pronouncements

Topic

Financial Instruments -
Credit Losses (ASU 2016-
13), and subsequent
amendments

Effective Date
January 1,
2020

Description of Guidance
Requires that credit losses for certain types of
financial instruments, including trade
accounts receivable, be estimated based on
expected losses and also modifies the
impairment models for available-for-sale
debt securities and for purchased financial
assets with credit deterioration since their
origination. Applied using a modified
retrospective approach, with early adoption
permitted.

Goodwill
(ASU 2017-04)

January 1,
2020

Eliminates Step 2 of the current goodwill
impairment test, which requires a
hypothetical purchase price allocation to
measure goodwill impairment. A goodwill
impairment loss will instead be measured at
the amount by which a reporting unit's
carrying value exceeds its fair value, not to
exceed the recorded amount of goodwill.
Applied on a prospective basis, with early
adoption permitted.

Status of Company's Evaluation

The Company formed an implementation
team to evaluate the impact this ASU will
have on its consolidated financial
statements. Based on its preliminary
evaluation, the Company expects to record
an increase in its allowance for doubtful
accounts of approximately $1.1 million, an
increase in deferred income taxes of
approximately $0.2 million, and a decrease
in retained earnings of approximately $0.9
million. The Company does not expect
material impacts to its consolidated
statements of operations and
comprehensive income (loss) or to its
consolidated statements of cash flows.
The Company does not expect this ASU to
have a significant impact on its financial
statements or disclosures.

F-12

Effective Date
January 1,
2020

Status of Company's Evaluation
The Company does not expect the ASU to
have a significant impact on its financial
statements, but the ASU may have a
significant impact on disclosures for any
level 3 assets or liabilities.

January 1,
2020

The Company plans to adopt this ASU
prospectively on January 1, 2020. However,
the Company does not expect this ASU to
have a material impact to its consolidated
financial statements.

January 1,
2021

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

Topic
Fair value measurement
(ASU 2018-13)

Implementation costs in
a cloud computing
arrangement that is a
service contract (ASU
2018-15)

Simplifying the
accounting for income
taxes (ASU 2019-12)

Description of Guidance
Eliminates such disclosures as the amount of
and reasons for transfers between Level 1
and Level 2 of the fair value hierarchy and
adds new disclosure requirements for Level 3
measurements. Certain of the provisions are
to be applied retrospectively with other
provisions applied prospectively.
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 is not
affected by the amendments in this update.
Applied either retrospectively or
prospectively to all implementation costs
incurred after the date of adoption.
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.

Acquisitions

On April 30, 2018, the Company completed the acquisition of Spinal Kinetics Inc. (“Spinal Kinetics”), a privately held developer and
manufacturer of artificial cervical and lumbar discs for $45.0 million in net cash, subject to certain adjustments, plus potential
milestone payments of up to $60.0 million in cash. The results of operations for Spinal Kinetics have been included in the Company’s
financial results since the acquisition date, April 30, 2018.

The fair value of the consideration transferred was $76.6 million, which consisted of the following:

(U.S. Dollars, in thousands)
Fair value of consideration transferred

Cash paid
Contingent consideration

Total fair value of consideration transferred

51,109
25,491
76,600

F-13

The contingent consideration consists of potential future milestone payments of up to $60.0 million in cash. The milestone
payments include (i) up to $15.0 million if the U.S. Food and Drug Administration (the “FDA”) grants approval of Spinal Kinetics’ M6-
C artificial cervical disc (the “FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with
future sales of the M6-C artificial cervical disc and the M6-L artificial lumbar disc. Milestones must be achieved within five years of
the Acquisition Date to trigger applicable payments. Refer to Note 11 for further discussion of the valuation of the contingent
milestone payments.

The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date:

(U.S. Dollars, in thousands)
Assets acquired

Cash and cash equivalents
Restricted cash
Trade accounts receivable
Inventories
Prepaid expenses and other current assets
Property, plant and equipment
Other long-term assets
Developed technology
In-process research and development ("IPR&D")
Tradename
Deferred income taxes

Total identifiable assets acquired

Liabilities assumed

Trade accounts payable
Other current liabilities
Other long-term liabilities

Total liabilities assumed
Goodwill
Total fair value of consideration transferred

Preliminary
Acquisition
Date Fair Value
as Previously
Reported

Final
Acquisition
Date Fair
Value

Assigned Useful
Life

Adjustments

6,785
30
1,705
8,175
315
2,285
320
12,400
26,800
100
2,374
61,289

351
2,873
301
3,525
18,836
76,600

1,220
1,220

$
(4)

(4)
(1,224)

6,785
30
1,705
8,175
315
2,285
320
12,400
26,800
100
3,594
62,509

351
2,869
301
3,521
17,612
76,600

10 years
Indefinite
2 years

The $17.6 million of goodwill recognized was assigned to the Global Spine reporting segment.

On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc for patients suffering from cervical
disease degeneration. Following FDA approval, the Company transferred $26.8 million from IPR&D to developed technology, and
began amortization over 10 years.

The Company did not recognize any acquisition related costs during the year ended December 31, 2019 and recorded $3.3 million
and $0.8 million of acquisition related costs during the years ended December 31, 2018 and December 31, 2017, respectively, within
general and administrative expenses. The Company’s results of operations included net sales of $12.4 million and $8.7 million
related to Spinal Kinetics for the years ended December 31, 2019 and 2018, respectively. Additionally, the Company’s results of
operations included net losses of $9.3 million and $5.8 million related to Spinal Kinetics for the years ended December 31, 2019 and
2018, respectively.

Options Medical, LLC Asset Acquisition

On January 31, 2019, the Company acquired certain assets of Options Medical, LLC (“Options Medical”), a medical device distributor
based in Florida. Under the terms of the acquisition, the parties agreed to terminate an existing exclusive sales representative
agreement, employees of Options Medical became employees of the Company, and the Company acquired all customer lists and
customer information related to the sale of the Company’s products. As consideration for the assets acquired, the Company paid
$6.4 million. The following table summarizes the fair values of assets acquired and liabilities assumed at the acquisition date:

F-14

(U.S. Dollars, in thousands)
Assets acquired

Operating lease assets
Customer relationships
Assembled workforce

Total identifiable assets acquired

Liabilities assumed

Operating lease liability - short-term
Operating lease liability - long-term

Total liabilities assumed
Total fair value of consideration transferred

Inventories

Fair Value

Balance Sheet Classification

Assigned Useful Life

175
5,832
568
6,575

69
106
175
6,400

Other long-term assets
Intangible assets, net
Intangible assets, net

10 years
5 years

Other current liabilities
Other long-term liabilities

Inventories are valued at the lower of cost or estimated net realizable value, after provision for excess, obsolete or impaired items,
which is reviewed and updated on a periodic basis by management. For inventory procured or produced, whether internally or through
contract manufacturing arrangements, at our manufacturing facility in Italy, cost is determined on a weighted-average basis, which
approximates the first-in, first-out (“FIFO”) method. For inventory procured or produced, whether internally or through contract
manufacturing arrangements, at our manufacturing facilities in Texas and California, standard costs, which approximates actual cost on
the FIFO method, is used to value inventory. Standard costs are reviewed annually by management, or more often in the event
circumstances indicate a change in cost has occurred.

Work-in-process, finished products, and field/consignment inventory include material, labor and production overhead costs.
Field/consignment inventory represents immediately saleable finished products inventory that is in the possession of the Company’s
independent sales representatives or located at third party customers, such as distributors and hospitals.

(U.S. Dollars, in thousands)
Raw materials
Work-in-process
Finished products
Field/consignment
Inventories

December 31,

2019

2018

9,587
14,027
20,712
38,071
82,397

8,463
13,478
18,244
36,662
76,847

The Company adjusts the value of its inventory to the extent management determines that the cost cannot be recovered due to
obsolescence or other factors. In order to make these determinations, management uses estimates of future demand and sales
prices for each product to determine the appropriate inventory reserves and to make corresponding adjustments to the carrying
value of these inventories to reflect the lower of cost or market value.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation, or when acquired as part of a business combination,
at estimated fair value. Costs include all expenditures necessary to place the asset in service, generally including freight and sales
and use taxes. Property, plant and equipment includes instrumentation held by customers, which is generally used to facilitate the
implantation of the Company’s products.

F-15

The useful lives of these assets are generally as follows:

Buildings
Plant and equipment
Instrumentation
Computer software
Furniture and fixtures

Years

25 to 33
1 to 10
3 to 4
3 to 7
4 to 8

The Company evaluates the useful lives of these assets on an annual basis. Depreciation is computed on a straight-line basis over the
useful lives of the assets. Depreciation of leasehold improvements is computed over the shorter of the lease term or the useful life
of the asset. Total depreciation expense was $17.7 million, $15.9 million and $18.3 million for the years ended December 31, 2019,
2018 and 2017, respectively.

Expenditures for maintenance and repairs and minor renewals and improvements, which do not extend the lives of the respective
assets, are expensed as incurred. All other expenditures for renewals and improvements are capitalized. The assets and related
accumulated depreciation are adjusted for property retirements and disposals, with the resulting gain or loss included in earnings.
Fully depreciated assets remain in the accounts until retired from service.

(U.S. Dollars, in thousands)
Cost
Buildings
Plant and equipment
Instrumentation
Computer software
Furniture and fixtures
Construction in progress
Finance lease assets
Property, plant, and equipment, gross
Accumulated depreciation
Property, plant, and equipment, net

December 31,

2019

2018

3,731
46,470
82,327
49,696
7,328
2,201
21,179
212,932
(150,205)
62,727

3,746
45,744
75,542
47,322
6,599
2,909

181,862
(139,027)
42,835

The Company capitalizes system development costs related to internal-use software during the application development stage.
Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is
amortized on a straight-line basis over its estimated useful life, generally three to seven years.

During the first quarter of 2019, the Company entered into an amendment for its corporate headquarters lease. As a result, the
classification of this lease changed from an operating lease to a finance lease. This resulted in an increase to both the lease liability
and lease asset of approximately $8.0 million, when compared to the original operating lease assets and liabilities recorded upon the
adoption of ASU 2016-02.

Long-lived assets are evaluated for impairment whenever events or changes in circumstances have occurred that would indicate
impairment. For purposes of the evaluation, the Company groups its long-lived assets with other assets and liabilities at the lowest
level of identifiable cash flows if the asset does not generate cash flows independent of other assets and liabilities. If the carrying
value of the asset or asset group exceeds the undiscounted cash flows expected to result from the use and eventual disposition of
the asset group, the Company will write the carrying value down to the fair value in the period identified.

The Company generally determines fair value of long-lived assets as the present value of estimated future cash flows. In determining
the estimated future cash flows associated with the assets, the Company uses estimates and assumptions about future revenue
contributions, cost structures and remaining useful lives of the asset group. The use of alternative assumptions, including estimated
cash flows, discount rates, and alternative estimated remaining useful lives could result in different calculations of impairment.

F-16

Intangible assets

Intangible assets are recorded at cost, or when acquired as a part of a business combination, at estimated fair value. These assets
are amortized on a straight-line basis over the useful lives of the assets.

(U.S. Dollars, in thousands)
Cost

Patents
Developed technology
IPR&D
Customer relationships
License and other
Trademarksfinite lived

Accumulated amortization

Patents
Developed technology
Customer relationships
License and other
Trademarksfinite lived

Patents and other intangible assets, net

Weighted Average
Amortization Period

December 31,

2019

2018

10 years
10 years
Indefinite
9 years
7 years
10 years
9 years

42,034
39,200

7,430
15,960
942
105,566

(38,246) $

(4,523)
(535)
(7,701)
(422)
(51,427)
54,139

39,085
12,400
26,800

14,654
840
93,779

(35,016)
(827)

(5,744)
(295)
(41,882)
51,897

Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the
associated research and development efforts. During the period the assets are considered indefinite-lived, they are not amortized
but tested for impairment. Impairment testing is performed at least annually or when a triggering event occurs that could indicate a
potential impairment. If and when development is complete, which generally occurs when regulatory approval to market a product
is obtained, the associated assets are deemed finite-lived and are amortized over a period that best reflects the economic benefits
provided by these assets. On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc for patients
suffering from cervical disease degeneration. Following FDA approval, the Company transferred $26.8 million from IPR&D to
developed technology, and began amortization over 10 years.

Amortization expense for intangible assets was $7.0 million, $2.7 million and $1.8 million for the years ended December 31, 2019,
December 31, 2018 and 2017, respectively. Future amortization expense for intangible assets is estimated as follows:

(U.S. Dollars, in thousands)
2020
2021
2022
2023
2024
Thereafter
Total

Amortization

7,420
7,317
7,337
6,668
5,799
19,598
54,139

F-17

Goodwill

The Company tests goodwill at least annually for impairment. The Company tests more frequently if indicators are present or
changes in circumstances suggest that impairment may exist. These indicators include, among others, declines in sales, earnings or
cash flows, or the development of a material adverse change in the business climate. The Company assesses goodwill for
impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.

As part of the change in reporting segments, which occurred during the first quarter of 2019, the Company performed a quantitative
assessment of goodwill immediately prior to and subsequently following the change in reporting segments. The analysis did not
result in an impairment. In addition, the net carrying value of goodwill that was previously reported under the prior reporting
segments of (i) Bone Growth Therapies, (ii) Spinal Implants, and (iii) Biologics has been consolidated and is now included within the
Global Spine reporting segment.

At the beginning of the fourth quarters of 2019 and 2018, the Company performed a qualitative assessment for its annual goodwill
impairment analysis, which did not result in impairment. This qualitative analysis considers all relevant factors specific to the
reporting units, including macroeconomic conditions, industry and market considerations, overall financial performance, and
relevant entity-specific events.

The following table presents the net carrying value of goodwill, and a rollforward of such balances from December 31, 2018, by
reportable segment:

(U.S. Dollars, in thousands)
Global Spine
Global Extremities
Goodwill

Leases

December 31,
2018

Adjustments

December 31,
2019

72,401

(1,224) $

71,177

As discussed in Note 2, the Company adopted ASU No. 2016-02Leases (Topic 842), as of January 1, 2019, using the modified
retrospective approach. Adoption of the new standard resulted in the recognition of operating lease assets and lease liabilities of
$20.2 million and $20.5 million, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities, net
of the deferred tax impact, and the elimination of historical prepaid or deferred rent, was recorded as an adjustment to retained
earnings. The net impact of adoption to the Company’s balance sheet as of January 1, 2019 is presented in the table below. The
standard did not have a material impact to the Company’s consolidated statements of operations and comprehensive income (loss)
or cash flows.

F-18

(U.S. Dollars, in thousands)
Assets
Current assets

Cash, cash equivalents, and restricted cash
Accounts receivable, net
Inventories
Prepaid expenses and other current assets

Total current assets
Property, plant, and equipment, net
Intangible assets, net and goodwill
Deferred income taxes
Other long-term assets
Total assets
Liabilities and shareholders equity
Current liabilities

Accounts payable
Other current liabilities

Total current liabilities
Other long-term liabilities
Total liabilities
Shareholders equity
Common shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income

Total shareholders equity
Total liabilities and shareholders equity

December 31,
2018

Impact
of Adoption
of ASC 842

January 1,
2019

72,189
77,747
76,847
17,856
244,639
42,835
124,298
33,228
21,641
466,641

17,989
67,919
85,908
45,336
131,244

1,858
243,165
87,078
3,296
335,397
466,641

(15)
(15)

71
20,209
20,265

2,166
2,166
18,028
20,194

71
20,265

72,189
77,747
76,847
17,841
244,624
42,835
124,298
33,299
41,850
486,906

17,989
70,085
88,074
63,364
151,438

1,858
243,165
87,149
3,296
335,468
486,906

The Company determines if an arrangement is a lease at inception. The Company’s leases primarily relate to facilities, vehicles, and
equipment. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
the obligation to make lease payments arising from the lease. Lease assets and liabilities are recognized at commencement date
based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the
Company’s incremental borrowing rate is used as a discount rate, based on the information available at the commencement date, in
determining the present value of lease payments. Lease assets also include the impact of any prepayments made and are reduced by
impact of any lease incentives.

The Company has made an accounting policy election for short-term leases, in that the Company does not recognize a lease liability
or lease asset on the balance sheet for leases with a lease term of twelve months or less as of the commencement date. Rather, any
short-term lease payments are recognized as an expense on a straight-line basis over the lease term. The current period short-term
lease expense reasonably reflects our short-term lease commitments.

The Company has made a policy election for all classifications of leases to combine lease and nonlease components and to account
for them as a single lease component. Variable lease payments are excluded from the lease liability and recognized in the period in
which the obligation is incurred. Additionally, lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise the option.

During the first quarter of 2019, the Company entered into an amendment for its corporate headquarters lease. As a result, the
classification of this lease changed from an operating lease to a finance lease, resulting in an increase to both the lease liability and
lease asset of approximately $8.0 million.

F-19

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

Classification

December 31, 2019

Other long-term assets
Property, plant and equipment, net

Other current liabilities
Current portion of finance lease liability

Other long-term liabilities
Long-term portion of finance lease liability

5,798
20,207
26,005

1,875
323

4,084
20,648
26,930

4.2 years
20.7 years

2.33%
4.38%

For the Year Ended December 31,
2019

972
919
2,161
255
749
5,056

For the Year Ended December 31,
2019

4,075
919
365

878
21,179

(U.S. Dollars, in thousands, except lease term and discount rate)
Assets
Operating leases
Finance leases
Total lease assets
Liabilities
Current

Operating leases
Finance leases

Long-term

Operating leases
Finance leases
Total lease liabilities

Weighted Average Remaining Lease Term
Operating leases
Finance leases

Weighted Average Discount Rate
Operating leases
Finance leases

The components of lease costs were as follows:

(U.S. Dollars, in thousands)
Finance lease costs:

Amortization of right-of-use assets
Interest on finance lease liabilities

Operating lease costs
Short-term lease costs
Variable lease costs
Total lease costs

Supplemental cash flow information related to leases was as follows:

(U.S. Dollars, in thousands)
Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases

Right-of-use assets obtained in exchange for lease obligations

Operating leases
Finance leases

F-20

A summary of the Company’s remaining lease liabilities as of December 31, 2019 is included below:

(U.S. Dollars, in thousands)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted value of lease liabilities
Less: Interest
Present value of lease liabilities

Current portion of lease liabilities
Long-term portion of lease liabilities
Total lease liabilities

Other current liabilities

(U.S. Dollars, in thousands)
Accrued expenses
Salaries, bonuses, commissions and related taxes payable
Accrued distributor commissions
Accrued legal and settlement expenses
Contingent consideration liability
Short-term operating lease liability
Non-income taxes payable
Other payables
Other current liabilities

Operating
Leases

Finance
Leases

1,979
1,758
1,409
259
143
686
6,234
(275)
5,959

1,875
4,084
5,959

1,013
1,414
1,442
1,471
1,501
25,706
32,547
(11,576)
20,971

323
20,648
20,971

December 31,

2019

2018

5,571
14,008
12,286
9,227
14,700
1,875
4,021
2,986
64,674

6,206
21,608
10,073
4,196
13,600

3,638
8,598
67,919

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.

10.

Long-term debt

On October 25, 2019, the Company, and certain of its wholly-owned subsidiaries (collectively with the Company, the “Borrowers”),
as borrowers, and certain material subsidiaries of the Company as guarantors, entered into a Second Amended and Restated Credit
Agreement (the “Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as Administrative Agent, and certain
lender parties thereto. The Amended Credit Agreement provides for a $300 million secured revolving credit facility (the “Facility”)
amending and restating the $125 million secured revolving credit facility that previously existed with such lenders. The Credit
Agreement has a maturity date of October 25, 2024. As of December 31, 2019, the Company has no borrowings outstanding under
the Credit Agreement.

F-21

Borrowings under the Amended Credit Agreement may be used for, among other things, working capital and other general
corporate purposes of the Company and its subsidiaries (including permitted acquisitions and permitted payments of dividends and
other distributions). The Facility is available in U.S. Dollars with up to $150 million of the Facility available to be borrowed in Euros
and British Pounds (the “Agreed Currencies”). The Facility further permits up to $50 million of the Facility to be utilized for the
issuance of letters of credit in the Agreed Currencies. The Borrowers have the ability to increase the amount of the Facility, which
increases may take the form of increases to the revolving credit commitments or the issuance of new term A loans, by an aggregate
amount of up to the greater of $150 million or an incremental amount such that the total amount of the Facility does not exceed
350% of consolidated EBITDA of the Company (as determined for the four fiscal quarter period most recently ended for which
financial statements are available), upon satisfaction of customary conditions precedent for such increases or incremental loans and
receipt of additional commitments by one or more existing or new lenders.

Borrowings under the Facility bear interest at a floating rate, which is, at the Borrowers’ option, either LIBOR, or possibly an
alternative reference rate to be used in place of LIBOR upon the occurrence of a benchmark transition event, plus an applicable
margin ranging from 1.25% to 2.25% or a base rate plus an applicable margin ranging from 0.25% to 1.25% (in each case subject to
adjustment based on the Company’s total leverage ratio). An unused fee ranging from 0.15% to 0.25% (subject to adjustment based
on the Company’s total leverage ratio) is payable quarterly in arrears based on the daily amount of the undrawn portion of each
lender’s revolving credit commitment under the Facility. Fees are payable on outstanding letters of credit at a rate equal to the
applicable margin for LIBOR loans, plus certain customary fees payable solely to the issuer of the letter of credit.

Certain of the Company’s existing and future material subsidiaries (collectively, the “Guarantors”) are required to guarantee the
repayment of the Borrowers’ obligations under the Amended Credit Agreement. The obligations of the Borrowers and each of the
Guarantors with respect to the Amended Credit Agreement are secured by a pledge of substantially all of the personal property
assets of the Borrowers and each of the Guarantors, including accounts receivables, deposit accounts, intellectual property,
investment property, inventory, equipment and equity interests in their respective subsidiaries.

The Amended Credit Agreement contains customary affirmative and negative covenants, including limitations on the Company’s and
its subsidiaries ability to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or
consolidate with others, dispose of assets, pay dividends and distributions, pay subordinated indebtedness and enter into affiliate
transactions. In addition, the Amended Credit Agreement contains financial covenants requiring the Company on a consolidated
basis to maintain, as of the last day of any fiscal quarter, a total net leverage ratio of not more than 3.5 to 1.0 (which ratio can be
permitted to increase to 4.0 to 1.0 for no more than 4 fiscal quarters following a material acquisition) and an interest coverage ratio
of at least 3.0 to 1.0. The Amended Credit Agreement also includes events of default customary for facilities of this type and upon
the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Facility may be
accelerated and/or the lenders’ commitments terminated. The Credit Agreement also includes events of default customary for
facilities of this type, and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans
under the Facility may be accelerated and/or the lenders’ commitments terminated. The Company is in compliance with all required
financial covenants as of December 31, 2019.

In conjunction with obtaining the Facility, the Company has paid $1.5 million in debt issuance costs and has capitalized a total of $1.8
million associated with the Facility. These costs are being amortized over the life of the Facility. The debt issuance costs are included
in other long-term assets, net of accumulated amortization. As of December 31, 2019 and December 31, 2018, debt issuance costs,
net of accumulated amortization, were $1.7 million and $0.6 million, respectively. Debt issuance costs amortized or expensed
totaled $0.4 million, $0.4 million, and $1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The Company has an unused available line of credit of 5.5 million ($6.2 million and $6.3 million) at December 31, 2019 and 2018,
respectively, in its Italian line of credit. This unsecured line of credit provides the Company the option to borrow amounts in Italy at
interest rates determined at the time of borrowing.

The Company paid cash related to interest of $0.8 million, $0.8 million, and $0.8 million for the years ended December 31, 2019,
2018, and 2017, respectively.

11.

Fair value measurements and investments

F-22

Non-financial assets and liabilities of the Company measured at fair value include any long-lived assets that are impaired in a
currently reported period or equity securities measured at observable prices in orderly transactions. The authoritative guidance also
describes three levels of inputs that may be used to measure fair value:

Level 1: quoted prices in active markets for identical assets and liabilities

Level 2: observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3: unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its

own assumptions

The Company’s financial instruments include cash equivalents, restricted cash, collective trust funds, treasury securities, trade
accounts receivable, accounts payable, long-term secured debt, equity warrants, equity securities, available for sale debt securities,
contingent consideration and deferred compensation plan liabilities. The carrying value of cash equivalents, restricted cash, trade
accounts receivable, and accounts payable approximate fair value due to the short-term maturities of these instruments. The
Company’s credit facilities carry a floating rate of interest, and therefore, the carrying value of long-term debt is considered to
approximate the fair value.

The Company’s collective trust funds, treasury securities, equity warrants, equity securities, debt security, contingent consideration, and
deferred compensation plan liabilities are the only financial instruments recorded at fair value on a recurring basis as follows:

(U.S. Dollars, in thousands)
Assets

Total
Liabilities

ntingent consideration
Deferred compensation plan

Total

(U.S. Dollars, in thousands)
Assets

Equity securities
Debt security

Total
Liabilities

Deferred compensation plan

Total

Balance
December 31,
2019

$
$

219
219

$
$

(42,700) $
(1,255)
(43,955) $

Balance
December 31,
2018

$
$

490
219
17,820
18,529

(28,560)

(1,275) $
(29,835) $

Level 1

Level 2

Level 3

$
$

219
219

$
$

(1,255)
(1,255) $

(42,700)

Level 1

Level 2

Level 3

490

$
$

219

17,820
17,820

(1,275) $
(1,275) $

(28,560)

The fair value of treasury securities was determined based on quoted prices in active markets for identical assets, therefore, the
Company categorized these instruments as Level 1 financial instruments.

The fair value of the Company’s collective trust funds, equity warrants, equity securities, and deferred compensation plan liabilities are
determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted
markets; therefore, the Company has categorized these instruments as Level 2 financial instruments.

F-23

Equity Warrants and Securities

The Company holds investments in common stock and warrants to purchase shares of common stock of Bone Biologics. The
Company’s common stock investments are recorded within other long-term assets although the fair value of the warrants was
reduced to zero in 2018. The equity securities are considered investments that do not have readily determinable fair values. As such,
the Company measures these investments at cost, less any impairments, plus or minus changes resulting from observable price
changes in orderly transactions for identical or similar investments of the same issuer. In 2018, Bone Biologics completed a series of
equity financing activities, which provided a new observable price change in an orderly transaction. As a result, the Company
determined its investment was impaired and recorded a charge of $4.4 million in other expense, net.

As of December 31, 2019, the Company holds common stock of Bone Biologics and warrants to purchase approximately 13 thousand
shares at a weighted average exercise price of $10.00 per share (after adjusting the shares and exercise price for a reverse stock split
executed by Bone Biologics in 2018). Under the terms of the warrant purchase agreements, the warrants to purchase common stock
in Bone Biologics are exercisable over a seven year period, which expires in 2020, and are transferable by the holder to other parties.

The changes in valuation of these securities for the years ended December 31, 2019, 2018, and 2017 are shown below:

(U.S. Dollars, in thousands)
Equity securities and warrants at January 1

Impact of adoption of ASU 2016-01 recognized in other income
Purchase of additional common stock
Fair value adjustments, expirations, and impairments recognized in
other expense

Equity securities and warrants at December 31

2019

2018

2017

219

2,768
1,629
500

(4,678)
219

2,768

Debt Security

Until October of 2019, the Company held a debt security of eNeura, Inc. (“eNeura”), a privately held medical technology company that
is developing devices for the treatment of migraines. The principal amount of the debt security was $15.0 million and accrued interest
at 8.0%, with payment due at maturity. The debt security was originally set to mature on March 4, 2019. On March 1, 2019, the
Company entered into an Amended and Restated Senior Secured Promissory Note with eNeura (the “Restructured Debt Security”) to
restructure the debt security, which extended the maturity date to the earlier of (i) March 4, 2022, (ii) the effective date of a change in
control, or (iii) the effective date of an initial public offering by eNeura, and which also eliminated the conversion feature included
within the original note. As consideration for the extension, eNeura issued to the Company a Warrant to Purchase Common Stock (the
“Warrant”), exercisable at $0.01 per share over a ten year contractual term, for a number of shares equal to 10% of the sum of the
outstanding principal and accrued interest on the Amended and Restated Debt Security as of March 1, 2019, divided by $1.00 (subject
to certain anti-dilution provisions).

Prior to the restructuring, the debt security was accounted for as an available for sale debt security at fair value and included within
other long-term assets. The fair value was based upon significant unobservable inputs, including the use of a discounted cash flow
model and assumptions regarding the expected payback period for the debt security, requiring the Company to develop its own
assumptions; therefore, the Company had categorized this asset as a Level 3 financial asset. The Company evaluated any declines in fair
value, if any, each quarter to determine if impairments are other-than-temporary. The debt security had an amortized cost basis of $9.0
million at the time of the restructuring and as of December 31, 2018.

Subsequent to the restructuring, the debt security was no longer classified as an available for sale debt security, but rather as a held to
maturity debt security. The debt security was reclassified from an available for sale debt security to a held to maturity debt security at
its fair value on the date of the restructuring. As a result, the unrealized gains included in accumulated other comprehensive income
(loss) related to the debt security were to be subsequently amortized to interest income over the remaining term of the Restructured
Debt Security.

The Warrant was recorded at fair value and included in other long-term assets. The fair value of the Warrant was based on significant
unobservable inputs, including the use of a discounted cash flow model and an option-pricing model, requiring the Company to develop
its own assumptions; therefore, the Company categorized this asset as a Level 3 financial asset. The Warrant was considered an
investment that does not have a readily determinable fair value. As such, the Company measured the Warrant at cost, less any
impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments
of the same issuer.

F-24

During the quarter ended September 30, 2019, the Company engaged in negotiations with eNeura to settle the Restructured Debt
Security and on October 25, 2019, the Company and eNeura settled the Restructured Debt Security for a $4.0 million cash payment and
agreed to transfer the Warrant to eNeura. As such, the Company determined the Restructured Debt Security and Warrant were
impaired and adjusted the carrying value of the Restructured Debt Security to $4.0 million, its settlement value, by recording a net
other-than-temporary impairment of $6.5 million in other expense, net, which included a reclassification of the related unrealized gains
included in accumulated other comprehensive income (loss) of $5.2 million.

The following table provides a reconciliation of the beginning and ending balances for debt securities measured at fair value using
significant unobservable inputs (Level 3):

(U.S. Dollars, in thousands)
Balance at January 1

2019

2018

2017

17,820

16,050

12,220

Gains (losses) recorded for the period
Recognized in other expense, net
Recognized in other comprehensive income (loss)

Change in classification of debt security to held to maturity
Issuance of Warrant as consideration for extension
Impairment of Warrant

(2,593)
(15,227)
491
(491)

Balance at December 31

1,770

17,820

(5,585)
9,415

16,050

Contingent Consideration

Contingent consideration consists of potential future milestone payments of up to $60.0 million in cash associated with the Spinal
Kinetics acquisition. The milestone payments include (i) up to $15.0 million upon FDA approval of the M6-C artificial cervical disc (the
“FDA Milestone”) and (ii) revenue-based milestone payments of up to $45.0 million in connection with future sales of the acquired
artificial discs (the “Revenue Milestones”). Milestones must be achieved within five years of April 30, 2018 to trigger applicable
payments.

On February 6, 2019, the Company obtained FDA approval of the M6-C artificial cervical disc. This approval triggered the Company’s
payment obligation of $15.0 million for the achievement of the FDA Milestone, which was paid on February 14, 2019. Prior to its
payment, the Company estimated the fair value of the FDA Milestone using a probability-weighted discounted cash flow model. The
fair value was based on significant unobservable inputs and thus represented a Level 3 measurement. The key assumptions affecting
the fair value of the milestone payment included the Company’s estimation of the timing and probability of FDA approval.

The Company estimates the fair value of the Revenue Milestones using a Monte Carlo simulation. This fair value measurement is
based on significant unobservable inputs and thus represents a Level 3 measurement. The key assumptions in applying the Monte
Carlo valuation model include the Company’s forecasted future revenues for Spinal Kinetics products, the discount rates applied,
and assumptions for potential volatility of forecasted revenue. Significant changes in these assumptions could result in a significantly
higher or lower fair value. As of December 31, 2019, the estimated fair value of the remaining Revenue Milestones was
$42.7 million; however, the actual amount ultimately paid could be higher or lower than this amount. As of December 31, 2019, the
Company has classified $14.7 million of the liability within other current liabilities, as the Company expects to pay one of the
Revenue Milestones in the next twelve months, and the remaining $28.0 million within other long-term liabilities.

Any changes in fair value related to contingent consideration are recorded as an operating expense and included within acquisition-
related amortization and remeasurement. The following table provides a reconciliation of the beginning and ending balances for the
contingent consideration measured at fair value using significant unobservable inputs (Level 3):

(U.S. Dollars, in thousands)
Contingent consideration at January 1

Acquisition date fair value
Increase in fair value recognized in acquisition-related amortization and
remeasurement
Payment made

Contingent consideration at December 31

2019

2018

28,560

29,140
(15,000)
42,700

25,491

3,069

28,560

F-25

The $29.1 million increase in fair value in 2019 is primarily attributable to a change in management’s forecast of future net sales of
the artificial discs, including an acceleration of the expected timing of such future sales, subsequent to the Company’s launch of the
product in the U.S. market upon receiving FDA approval.

12.

Commitments and Contingencies

Contingencies policy

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

In addition to the matters described in the paragraphs below, in the normal course of its business, the Company is involved in
various lawsuits from time to time and may be subject to certain other contingencies. The Company believes any losses related to
these matters are individually and collectively immaterial as to a possible loss and range of loss.

January 2017 SEC Settlements

In January 2017, the SEC approved the Company’s offers of settlement in connection with the SEC’s investigations of accounting
matters leading to the Company’s prior restatement of financial statements and the Company’s review of improper payments with
respect to its subsidiary in Brazil. The settlements approved by the SEC resolved these two matters, and included payments totaling
$14.4 million to the SEC of amounts previously accrued and funded into escrow during 2016. In addition, in 2017, the Company
received a favorable insurance settlement of approximately $6 million associated with prior costs incurred related to these matters,
which was recognized within general and administrative expenses.

Discontinued Operations Matters Related to Breg and Indemnification Obligations

On May 24, 2012, the Company sold Breg, Inc. (“Breg”), a former subsidiary, to an affiliate of Water Street Healthcare Partners II, L.P.
(“Water Street”). Under the terms of the agreement, the Company indemnified Water Street and Breg with respect to certain specified
matters. In May 2018, Breg settled and resolved a post-close cold therapy claim in California state court. Pursuant to the Company’s
indemnification obligation, the Company made a final payment to its insurer in the amount of $1.7 million to help fund the Breg
settlement. Charges incurred as a result of this indemnification were reflected as discontinued operations in our consolidated
statements of operations and comprehensive income (loss). The Company does not expect any additional charges related to this
discontinued operation.

Italian Medical Device Payback (IMDP

)

In 2015, the Italian Parliament introduced rules for entities that supply goods and services to the Italian National Healthcare System.
The healthcare law is expected to impact the business and financial reporting of companies operating in the medical technology
sector that sell medical devices in Italy. A key provision of the law is a payback’ measure, requiring companies selling medical
devices in Italy to make payments to the Italian government if medical device expenditures exceed regional maximum ceilings.
Companies are required to make payments equal to a percentage of expenditures exceeding maximum regional caps. There is
considerable uncertainty about how the law will operate and what the exact timeline is for finalization. The Company’s current
assessment of the IMDP involves significant judgment regarding the expected scope and actual implementation terms of the
measure as the latter have not been clarified to date by Italian authorities. The Company accounts for the estimated cost of the
IMDP as sales and marketing expense and recorded expense of $1.3 million, $1.0 million, and $0.9 million for the years ended
December 31, 2019, 2018, and 2017, respectively. As of December 31, 2019, the Company has accrued $4.9 million related to the
IMDP, which it has classified within other long-term liabilities; however, the actual liability could be higher or lower than the amount
accrued once the law has been clarified by the Italian authorities.

F-26

Brazil

In July 2018, the Federal Prosecution Service in Rio de Janeiro and representatives from the Brazilian antitrust authority inspected
the offices of more than 30 companies, including the Company’s office in São Paulo, as part of an investigation into tender
irregularities in the medical device industry. Before doing so, the authorities obtained a court order affecting the Company’s (and
other companies’) local bank accounts resulting in the freezing of approximately $2.5 million of the Company’s cash, which the
Company reclassified to restricted cash. On April 3, 2019, the Company’s appeal regarding the freezing of its local bank accounts was
heard by the Brazil Federal Court of Appeals of Rio de Janeiro, in which the Court ordered the unfreezing of the Company’s cash. The
cash was then returned without any restriction in April 2019. As such, this balance was reclassified to cash and cash equivalents in
2019.

In September 2019, approximately $0.7 million of the Company’s cash in Brazil was frozen upon request to satisfy a judgment
related to an ongoing legal dispute with a former Brazilian distributor. Although the Company is appealing the judgment, this cash
has been reclassified to restricted cash. As of December 31, 2019, the Company has accrued $1.7 million related to this matter.

13.

Shareholders equity

Dividends

The Company has not paid dividends to holders of its common stock in the past. Certain subsidiaries of the Company have
restrictions on their ability to pay dividends in certain circumstances pursuant to the Amended Credit Agreement. In the event that
the Company decides to pay a dividend to holders of its common stock in the future with dividends received from its subsidiaries,
the Company may, based on prevailing rates of taxation, be required to pay additional withholding and income tax on such amounts
received from its subsidiaries.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is comprised of foreign currency translation adjustments and the unrealized gains
(losses) on the Company’s debt security, which was settled in 2019. The components of and changes in accumulated other
comprehensive income (loss) are as follows:

(U.S. Dollars, in thousands)
Balance at December 31, 2017
Other comprehensive income (loss)
Income taxes
Balance at December 31, 2018
Cumulative effect adjustment from adoption of ASU 2018-02
Other comprehensive loss
Income taxes
Reclassification adjustment to:

Interest income (expense), net
Other expense, net
Income taxes

Balance at December 31, 2019

14.

Revenue recognition and accounts receivable

Revenue Recognition

Currency
Translation
Adjustments

Debt Security

Accumulated Other
Comprehensive
Income (Loss)

(563) $

(1,823)

(2,386) $

(653)

(3,039) $

4,350
1,770
(438)
5,682
937
(2,593)
642

(1,034)
(5,193)
1,559

3,787
(53)
(438)
3,296
937
(3,246)
642

(1,034)
(5,193)
1,559
(3,039)

The Company accounts for a contract when there is approval and commitment from both parties, the rights of the parties are
identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. The
Company’s contracts may contain one or more performance obligations. If a contract contains more than one performance
obligation, the Company allocates the total transaction price to each of the performance obligations based upon the observable
standalone selling price of the promised goods or services underlying each performance obligation. The Company recognizes
revenue when control of the promised goods or services is transferred to the customer, which typically occurs at a point in time

F-27

upon shipment, delivery, or utilization, in an amount that reflects the consideration which the Company expects to be entitled in
exchange for the promised goods or services. The amount the Company expects to be entitled to in exchange for the goods or
services reflects any fixed amount stated per the contract and estimates for any variable consideration, such as discounts, to the
extent that is it probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved.

The following sections discuss the Company’s revenue recognition policies by significant product category:

Bone Growth Therapies

Bone Growth Therapies revenue is largely attributable to the U.S. and is comprised of third-party payor transactions and wholesale
revenue.

The largest portion of Bone Growth Therapies revenue is derived from third-party payors. This includes commercial insurance
carriers, health maintenance organizations, preferred provider organizations, and governmental payors, such as Medicare. Revenue
is recognized when the product is fitted to and accepted by the patient and all applicable documents required by the third-party
payor have been obtained. Amounts paid by third-party payors are generally based on fixed or allowable reimbursement rates.
These revenues are recorded at the expected or preauthorized reimbursement rates, net of any contractual allowances or
adjustments. Certain billings are subject to review by the third-party payors and may be subject to adjustment.

Wholesale revenue is related to the sale of the Company’s bone growth stimulators directly to durable medical equipment suppliers.
Wholesale revenues are typically recognized upon shipment and receipt of a confirming purchase order, which is when the customer
obtains control of the promised goods.

Biologics

Biologics revenue is largely attributable to the U.S. and is primarily related to a collaborative arrangement with MTF, which extends
through July 28, 2027. Under this arrangement, the Company markets tissue for bone repair and reconstruction under the brand
names Trinity Evolution and Trinity ELITE. Per the terms of the agreement, MTF sources the tissue, processes it to create the bone
growth matrix, packages, and delivers the tissue to the customer in accordance with orders received from the Company. The
Company has exclusive global marketing rights for the Trinity Evolution and Trinity ELITE tissues, as well as non-exclusive marketing
rights for other products, and receives marketing fees from MTF based on total sales. MTF is considered the primary obligor in these
arrangements; therefore, the Company recognizes marketing service fees on a net basis within net sales upon shipment of the
product to the customer.

Spinal Implants and Global Extremities

Spinal Implants and Global Extremities products are distributed world-wide, with U.S. sales largely comprised of commercial sales
and international sales derived from both commercial sales and through stocking distributor arrangements.

Commercial revenue is largely related to the sale of the Company’s Spinal Implants and Global Extremities products to hospital
customers. The customer obtains control and revenues are recognized when these products have been utilized and a confirming
purchase order has been received from the hospital.

Other revenues within the Spinal Implants and Global Extremities product categories are derived from stocking distributors, who
purchase the Company’s products and then re-sell them directly to customers, such as hospitals. For revenue from stocking
distributor arrangements, subsequent to the adoption of Topic 606 effective January 1, 2018, the Company recognizes revenue upon
shipment and receipt of a confirming purchase order, which is when the distributor obtains control of the promised goods. The
transaction price with stocking distributors is estimated based upon the Company’s historical collection experience with the stocking
distributor. To derive this estimate, the Company analyzes twelve months of historical invoices by stocking distributor and the
subsequent collections on those invoices for a period of up to 24 months subsequent to the invoice date. The historical collection
percentage, which is specific to each stocking distributor, is then used to calculate the transaction price. Cost of sales is also
recorded upon transfer of control of the product to the customer subsequent to the adoption of Topic 606.

Prior to the adoption of Topic 606, or for all periods presented prior to January 1, 2018, the Company recognized revenue from
stocking distributor arrangements once the product was delivered to the end customer (the “sell-through method”). Because the
Company did not have reliable information about when its distributors sold the product through to end customers, the Company
used cash collection from distributors as a basis for revenue recognition under the sell-through method. Although in many cases the

F-28

Company was legally entitled to the accounts receivable at the time of shipment, the Company did not recognize accounts
receivables or any corresponding deferred revenues at the time of shipment associated with stocking distributor transactions for
which revenue was recognized on the sell-through method. The Company also considered whether to match the related cost of sales
with revenue or to recognize cost of sales upon shipment. In making this assessment, the Company considered the financial viability
of its stocking distributors, based on their creditworthiness, to determine if collectability of amounts sufficient to realize the costs of
the products shipped was reasonably assured at the time of shipment. In instances where the stocking distributor was determined
to be financially viable, the Company deferred the costs of sales until revenue was recognized.

Product Sales and Marketing Service Fees

The table below presents net sales, which includes product sales and marketing service fees, for each of the years ended
December 31, 2019, 2018, and 2017.

(U.S. Dollars, in thousands)
Product sales
Marketing service fees
Net sales

For the year ended December 31,
2018

2017

2019

397,064
62,891
459,955

395,589
57,453
453,042

373,538
60,285
433,823

Product sales primarily consists of the sale of Bone Growth Therapies, Spinal Implants, and Global Extremities products. Marketing
service fees are received from MTF based on total sales of biologics tissues and relates solely to the Biologics product category
within the Global Spine reporting segment. Marketing service fees received from MTF were $62.9 million, or approximately 96% of
total Biologics revenues, for the year ended December 31, 2019. As MTF is the Company’s single supplier for the Trinity Evolution
and Trinity ELITE tissue forms, which are derived from human cadaveric donors, any event or circumstance that would impact MTF’s
continued access to donated human cadaveric tissue or the Company’s ability to market these tissues may adversely impact the
Company’s financial results.

Revenues exclude any value added or other local taxes, intercompany sales and trade discounts. Shipping and handling costs for
products shipped to customers are included in cost of sales, and were $2.8 million, $2.7 million and $3.0 million for the years ended
December 31, 2019, 2018, and 2017, respectively.

Trade Accounts Receivable and Allowances

Payment terms vary by the type and location of the Company’s customers and the products or services offered. The term between
invoicing and when payment is due is not significant. Accounts receivable are analyzed on a quarterly basis to assess the adequacy of
both reserves for doubtful accounts and contractual allowances. Revisions in allowances for doubtful accounts estimates are
recorded as an adjustment to bad debt expense within sales and marketing expenses. Revisions to contractual allowances are
recorded as an adjustment to net sales. The Company’s estimates are periodically tested against actual collection experience.

The Company will generally sell receivables from certain Italian hospitals each year to accelerate cash collections. During 2019, 2018,
and 2017 the Company sold 9.8 million, 9.8 million, and 9.8 million ($10.9 million, $11.5 million, and $11.2 million) of
receivables, respectively. The estimated related fees for 2019, 2018, and 2017 were $0.3 million, $0.3 million and $0.3 million,
respectively, which is recorded as interest expense. Trade accounts receivables sold without recourse are removed from the balance
sheet at the time of sale.

Puerto Rico Settlement

In June 2019, the Company received a payment of $1.4 million from the Administration of Medical Services of Puerto Rico, a
government-owned corporation, in settlement of approximately $2.5 million of outstanding accounts receivable. This $2.5 million of
outstanding accounts receivable had previously been fully reserved between the Company’s allowances for doubtful accounts and
contractual allowances. As a result of this settlement, and in accordance with the Company’s policy, the Company recorded the
resulting adjustment to contractual allowances of $0.4 million within net sales and the recovery of the allowance for doubtful
accounts as a credit to bad debt expense of $1.0 million.

Other Contract Assets

The Company’s contract assets, excluding trade accounts receivable (“other contract assets”), largely consist of payments made to
certain distributors to obtain contracts, gain access to customers in certain territories, and to provide the benefit of the exclusive

F-29

distribution of the Company’s products. Other contract assets are included in other long-term assets and were $3.7 million and
$1.9 million as of December 31, 2019 and 2018, respectively.

Other contract assets are amortized on a straight-line basis over the term of the related contract. No impairments were incurred for
other contract assets in 2019 or 2018. Further, the Company has applied the practical expedient allowed within Topic 606 to
expense sales commissions when incurred, as the applicable amortization period would be for one year or less.

15.

Business segment information

The Company changed its reportable business segments, beginning with the first quarter of 2019, to align with changes in how the
Company manages its business, reviews operating performance and allocates resources. The Company now reports results under
two reportable segments: Global Spine and Global Extremities. These reporting segments represent the operating segments for
which the Chief Executive Officer, who is also Chief Operating Decision Maker (the “CODM”), reviews financial information and
makes resource allocation decisions among businesses. The primary metric used by the CODM in managing the Company is earnings
before interest, tax, depreciation, and amortization (“EBITDA”). The Company neither discretely allocates assets, other than
goodwill, to its operating segments nor evaluates the operating segments using discrete asset information. Accordingly, the
reporting segment information has been prepared based on these two reporting segments. Prior periods have been recast to
present the change in reporting segments.

Global Spine

The Global Spine reporting segment offers three primary product categories: Bone Growth Therapies, Spinal Implants, and Biologics.

The Bone Growth Therapies product category manufactures, distributes, and provides support services of market leading bone
growth stimulator devices that enhance bone fusion. These Class III medical devices are indicated as an adjunctive, noninvasive
treatment to improve fusion success rates in the cervical and lumbar spine as well as a therapeutic treatment for non-spine fractures
that have not healed (non-unions). This product category uses distributors and sales representatives to sell its devices to hospitals,
healthcare providers, and patients, primarily in the U.S.

The Spinal Implants product category designs, develops, and markets a broad portfolio of motion preservation and fixation implant
products used in surgical procedures of the spine. Spinal Implants distributes its products through a network of distributors and sales
representatives to sell spine products to hospitals and healthcare providers, globally.

The Biologics product category provides a portfolio of regenerative products and tissue forms that allow physicians to successfully
treat a variety of spinal and orthopedic conditions. This product category specializes in the marketing of the Company’s exclusive
regeneration tissue forms and distributes its tissues to hospitals and healthcare providers, primarily in the U.S., through a network of
independent distributors and sales representatives. The partnership with MTF allows the Company to exclusively market the Trinity
Evolution and Trinity ELITE tissue forms for musculoskeletal defects to enhance bony fusion.

Global Extremities

The Global Extremities reporting segment offers products and solutions that allow physicians to successfully treat a variety of
orthopedic conditions unrelated to the spine. This reporting segment specializes in the design, development, and marketing of the
Company’s orthopedic products used in fracture repair, deformity correction and bone reconstruction procedures. Global
Extremities distributes its products through a network of distributors and sales representatives to sell orthopedic products to
hospitals, and healthcare providers, globally.

Corporate

Corporate activities are comprised of the operating expenses and activities of the Company not necessarily identifiable within the
two reporting segments.

F-30

The table below presents net sales by major product category by reporting segment:

(U.S. Dollars, in thousands)
Bone Growth Therapies
Spinal Implants
Biologics
Global Spine
Global Extremities
Net sales

2019

Net Sales
$ 197,181
94,544
65,496
357,221
102,734
$ 459,955

Year Ended December 31,
2018

Percent of
Total Net
Sales

Net Sales

Percent of
Total Net
Sales

2017

Percent of
Total Net
Sales

Net Sales

42.9% $ 195,252
91,658
20.6%
59,684
14.2%
346,594
77.7%
106,448
22.3%
100.0% $ 453,042

43.1% $ 185,900
81,957
20.2%
62,724
13.2%
330,581
76.5%
103,242
23.5%
100.0% $ 433,823

42.9%
18.9%
14.4%
76.2%
23.8%
100.0%

The following table presents EBITDA, the primary metric used in managing the Company, by reporting segment:

(U.S. Dollars, in thousands)

Global Spine
Global Extremities
Corporate
Total EBITDA
Depreciation and amortization
Interest expense, net
Income (loss) before income taxes

2019

Year Ended December 31,
2018

2017

39,528
7,496
(49,252)
(2,228)
(24,699)
(122)
(27,049) $

76,545
9,453
(43,626)
42,372
(18,659)
(828)
22,885

The following table presents depreciation and amortization by reporting segment:

(U.S. Dollars, in thousands)
Global Spine
Global Extremities
Corporate
Total

Geographical information

The following data includes net sales by geographic destination:

(U.S. Dollars, in thousands)
U.S.
Italy
Germany
United Kingdom
Brazil
Others
Net sales

2019

Year Ended December 31,
2018

14,329
5,575
4,795
24,699

9,512
5,342
3,805
18,659

2019

Year Ended December 31,
2018

361,939
19,560
12,688
10,090
7,685
47,993
459,955

355,353
19,331
11,606
8,731
7,120
50,901
453,042

F-31

84,034
7,143
(34,246)
56,931
(20,124)
(416)
36,391

2017

9,834
6,040
4,250
20,124

2017

345,145
17,059
7,063
8,725
10,356
45,475
433,823

The table below presents net sales by geographic destination for each reporting segment and for the consolidated Company:

(U.S. Dollars, in thousands)
Global Spine
U.S.
International
Total Global Spine

Global Extremities
U.S.
International
Total Global Extremities

Consolidated
U.S.
International
Net sales

2019

Year Ended December 31,
2018

2017

335,410
21,811
357,221

326,994
19,600
346,594

26,529
76,205
102,734

28,359
78,089
106,448

361,939
98,016
459,955

355,353
97,689
453,042

318,227
12,354
330,581

26,918
76,324
103,242

345,145
88,678
433,823

The following data includes property, plant and equipment by geographic area:

(U.S. Dollars, in thousands)
U.S.
Italy
Germany
United Kingdom
Brazil
Others
Total

2019

2018

51,278
7,937
849
1,082
141
1,440
62,727

31,344
7,732
861
896
191
1,811
42,835

16. Acquisition-related amortization and remeasurement

Acquisition-related amortization and remeasurement consists of amortization related to intangible assets acquired through business
combinations or asset acquisitions and the remeasurement of any related contingent consideration arrangement. Components of
acquisition-related amortization and remeasurement for the twelve months ended December 31, 2019, 2018, and 2017, respectively,
are as follows:

(U.S. Dollars, in thousands)
Changes in fair value of contingent consideration
Amortization of acquired intangibles
Total

17.

Share-based compensation

2019

Year Ended December 31,
2018

2017

29,140
5,072
34,212

3,069
1,255
4,324

At December 31, 2019, and 2018, the Company had stock option and award plans, and a stock purchase plan.

2012 Long Term Incentive Plan

The Board of Directors adopted the Amended and Restated 2012 Long-Term Incentive Plan (the “2012 LTIP”) on April 13, 2012, which
was subsequently provided by shareholder ratification. The 2012 LTIP provides for the grant of options to purchase shares of the
Company’s common stock, stock awards (including restricted stock, unrestricted stock, and stock units), stock appreciation rights,

F-32

performance-based awards and other equity-based awards. All of the Company’s employees and the employees of the Company’s
subsidiaries and affiliates are eligible and may receive awards under the 2012 LTIP. In addition, the Company’s non-employee directors,
consultants, and advisors who perform services for the Company and its subsidiaries and affiliates may receive awards under the 2012
LTIP. Incentive share options; however, are only available to the Company’s employees. Awards granted under the 2012 LTIP expire no
later than ten years after the date of grant. At December 31, 2019, the Company reserves a total of 4,750,000 shares of common stock
for issuance pursuant to the 2012 LTIP, subject to certain adjustments set forth in the 2012 LTIP. At December 31, 2019, there were
1,067,947 options outstanding under the 2012 LTIP, of which 714,180 were exercisable. In addition, there were 119,217 shares of
unvested restricted stock outstanding and 560,844 restricted stock units outstanding, some of which contain market-based vesting
conditions, under the 2012 LTIP as of December 31, 2019.

2004 Long Term Incentive Plan

The 2004 Long Term Incentive Plan (the “2004 LTIP”) reserved 3.1 million shares for issuance, subject to certain adjustments set
forth in the 2004 LTIP. At December 31, 2019, there were 25,500 options outstanding under the 2004 LTIP, all of which were
exercisable.

Inducement Plans

The Inducement Plan for Spinal Kinetics Employees (the “Spinal Kinetics Inducement Plan”) reserved 51,705 shares for issuance to
employees of Spinal Kinetics as an inducement to continue employment with the Company. At December 31, 2019, there were 7,156
options outstanding under the Spinal Kinetics Inducement Plan, all of which were exercisable, and 5,608 shares of unvested
restricted stock outstanding.

In conjunction with the Options Medical acquisition, an inducement grant of 25,478 restricted stock units, with a fair value of $1.4
million, was awarded to the Options Medical founder. The award vests in one-third annual increments beginning on the first
anniversary of the grant date and is contingent upon continued employment. As of December 31, 2019, there were 25,478 shares of
unvested restricted stock outstanding relating to this inducement.

In August 2019, the Company appointed a new President of Global Spine, who was then subsequently promoted to President and
Chief Executive Officer. As an inducement to accept employment with the Company, the individual was awarded a grant of stock
options to acquire up to 50,711 shares of common stock and an award of 14,743 restricted stock units. Both awards will vest in one-
fourth annual increments beginning on the first anniversary of the grant date. As of December 31, 2019, there were 50,711 options
outstanding under this inducement, none of which were exercisable, and 14,743 shares of unvested restricted stock outstanding.

Stock Purchase Plan

The Second Amended and Restated Stock Purchase Plan, as Amended (the “Stock Purchase Plan”) provides for the issuance of
shares of the Company’s common stock to eligible employees and directors of the Company and its subsidiaries that elect to
participate in the plan and acquire shares of common stock through payroll deductions (including executive officers).

During each purchase period, eligible employees may designate between 1% and 25% of their compensation to be deducted for the
purchase of common stock under the plan (or such other percentage in order to comply with regulations applicable to Employees
domiciled in or resident of a member state of the European Union). For eligible directors, the designated percentage will be applied
to an amount equal to his or her director compensation paid in cash for the current plan period. The purchase price of the shares
under the plan is equal to 85% of the fair market value on the first day of the plan period or, if lower, on the last day of the plan
period.

Due to the compensatory nature of such plan, the Company records the related share-based compensation in the consolidated
statement of operations. Compensation expense is estimated using the Black-Scholes valuation model, with such value recognized
as expense over the plan period. As of December 31, 2019, the aggregate number of shares reserved for issuance under the Stock
Purchase Plan is 2,350,000. As of December 31, 2019, 1,827,147 shares had been issued.

F-33

Share-Based Compensation Expense

Share-based compensation expense is recorded in the same line of the consolidated statements of operations as the employee’s
cash compensation. The following tables present the detail of share-based compensation by line item in the consolidated
statements of income as well as by award type, for the years ended December 31, 2019, 2018, and 2017:

(U.S. Dollars, in thousands)
Cost of sales
Sales and marketing
General and administrative
Research and development
Total

(U.S. Dollars, in thousands)
Stock options
Time-based restricted stock awards and stock units
Performance-based restricted stock awards and stock units
Market-based restricted stock units
Stock purchase plan
Total

2019

Year Ended December 31,
2018

2017

715
2,512
16,872
1,441
21,540

522
1,802
15,197
1,409
18,930

2019

Year Ended December 31,
2018

4,054
11,084

4,733
1,669
21,540

3,061
7,265
1,998
5,256
1,350
18,930

486
1,471
9,671
929
12,557

2,388
5,540
462
2,904
1,263
12,557

2017

The income tax benefit related to this expense was $3.5 million, $3.2 million, and $3.4 million for the years ended December 31,
2019, 2018, and 2017, respectively.

Stock Options

The fair value of time-based stock options is determined using the Black-Scholes valuation model, with such value recognized as
expense over the service period, which is typically four years, net of actual forfeitures. The fair value of market-based stock options
is determined at the date of the grant using the Monte Carlo valuation methodology, with such value recognized as expense over
the requisite service period adjusted for forfeitures as they occur. The Monte Carlo methodology incorporates into the valuation the
possibility that the market condition may not be satisfied.

A summary of the Company’s assumptions used in determining the fair value of the stock options granted during the year is shown
in the following table.

Assumptions:

Expected term (in years)
Expected volatility
Risk free interest rate
Dividend yield

Weighted average grant date fair value

Year Ended December 31,

2019

2018

2017

5.0
29.7% 31.0%
1.38% 2.31%

14.64

4.5
28.7% 30.1%
2.55% 2.79%

16.28

4.5
31.2%
1.93%

13.32

The expected term of the options granted is estimated based on a number of factors, including the vesting and expiration terms of
the award, historical employee exercise behavior for both options that are currently outstanding and options that have been
exercised or are expired, and an employee’s average length of service. Expected volatility is based on the historical volatility of the
Company’s common stock. The risk-free interest rate is determined based upon a constant U.S. Treasury security rate with a
contractual life that approximates the expected term of the option.

F-34

Summaries of the status of the Company’s stock option plans as of December 31, 2019 and 2018 and changes during the year ended
December 31, 2019 are presented below:

Outstanding at December 31, 2018
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

41.87
49.17
37.20
54.84
42.92
42.92
39.97

5.69
5.69
4.24

Options
1,175,887
279,248
(74,729)
(79,092)
1,301,314
1,301,314
896,836

$
$
$
$
$
$
$

As of December 31, 2019, the unamortized compensation expense relating to options granted and expected to be recognized was
$3.7 million. This amount is expected to be recognized through December 2023 over a weighted average period of approximately
1.7 years. The total intrinsic value of options exercised was $1.4 million, $3.2 million and $2.2 million for the years ended
December 31, 2019, 2018, and 2017, respectively. For the year ended December 31, 2019 we received $2.8 million in cash from
stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $0.3 million. The aggregate
intrinsic value of options outstanding and options exercisable as of December 31, 2019 is calculated as the difference between the
exercise price of the underlying options and the market price of the Company’s common stock for options that had exercise prices
lower than $46.18, the closing price of the Company’s stock on December 31, 2019. The aggregate intrinsic value of options
outstanding was $7.3 million, $13.6 million, and $18.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.
The aggregate intrinsic value of options exercisable was $6.7 million, $11.0 million, and $12.4 million for the years ended
December 31, 2019, 2018, and 2017, respectively.

Time-based Restricted Stock Awards and Stock Units

During the year ended December 31, 2019, the Company granted to employees and non-employee directors 319,189 shares of time-
based restricted stock awards or stock units, which vest at various dates through December 2023. The compensation expense, which
represents the fair value of the stock measured at the market price at the date of grant, is recognized on a straight-line basis over
the vesting period, which is typically four years, net of actual forfeitures.

Since 2017, the annual grant to non-employee directors has been made in the form of one-year vesting restricted stock units with
deferred delivery (“DSUs”), whereby shares are not settled until after the director ceases service as a director. As of December 31,
2019, there were 47,077 DSUs outstanding that are vested but not settled.

The aggregate fair value of time-based restricted stock awards and stock units that vested during the years ended December 31,
2019, 2018 and 2017 was $9.5 million, $8.0 million and $7.3 million, respectively. Unamortized compensation expense related to
time-based restricted stock awards and stock units amounted to $15.3 million at December 31, 2019, and is expected to be
recognized over a weighted average period of approximately 2.5 years. The aggregate intrinsic value of time-based restricted stock
awards and stock units outstanding was $21.6 million, $18.8 million and $17.8 million for the years ended December 31, 2019, 2018,
and 2017, respectively.

Performance-based Restricted Stock Awards and Stock Units

The Company’s performance-based restricted stock awards and stock units contain performance-based vesting conditions.

The fair value of performance-based restricted stock awards and stock units is calculated based upon the closing stock price at the
date of grant. Such value is recognized as expense over the derived requisite service period beginning in the period in which they are
deemed probable to vest, net of actual forfeitures. Vesting probability is assessed based upon forecasted earnings and financial
results. The Company did not grant any performance-based restricted stock awards or stock units to employees during the years
ended December 31, 2019, 2018, or 2017.

F-35

During the year ended December 31, 2015, the Company granted to employees 110,660 shares of performance-based restricted
stock awards, which vested based upon the achievement of certain earnings or return on invested capital targets. No compensation
expense was recorded for these awards in 2019 as the performance targets were obtained in prior years. Approximately $0.4 million
and $0.5 million of compensation expense was recorded for the years ended December 31, 2018 and 2017, respectively, associated
with these performance-based restricted stock awards. The fair value of performance-based restricted stock awards that vested
during the years ended December 31, 2019, 2018, and 2017, were $3.2 million, $0.0 million, and $4.9 million, respectively. No
unamortized compensation expense related to performance-based restricted stock awards remains as of December 31, 2019. The
aggregate intrinsic value of performance-based restricted stock awards outstanding was $0.0 million, $2.9 million and $3.0 million
for the years ended December 31, 2019, 2018, and 2017, respectively.

During the year ended December 31, 2015, the Company also granted 55,330 shares of performance-based restricted stock units to
employees, which vested based upon the achievement of certain earnings or return on invested capital targets for the year ended
December 31, 2018. The Company recognized compensation expense of $0.0 million, $1.6 million, and $0.0 million associated with
these 2015 performance-based restricted stock units for the years ended December 31, 2019, 2018, and 2017, respectively. The fair
value of performance-based restricted stock units that vested during the years ended December 31, 2019, 2018, and 2017, were
$2.7 million, $0.0 million, and $0.0 million, respectively. No unamortized compensation expense remains as of December 31, 2019
related to these 2015 performance-based restricted stock units. The aggregate intrinsic value of performance-based restricted stock
units outstanding was $0.0 million, $2.5 million, and $3.0 million for the years ended December 31, 2019, 2018, and 2017,
respectively.

Market-based Restricted Stock Units

The Company’s market-based restricted stock units contain market-based vesting conditions.

The fair value of market-based restricted stock units is determined at the date of the grant using the Monte Carlo valuation
methodology, with any discounts for post-vesting restrictions estimated using the Chaffe Model. The Monte Carlo methodology
incorporates into the valuation the possibility that the market condition may not be satisfied. Such value is recognized on a straight-
line basis over the vesting period, net of actual forfeitures. The awards, if the market conditions are achieved, will be settled in
shares of common stock, with one share of common stock issued per restricted stock unit if targets are achieved at the 100% level.
Awards may be achieved at a minimum level of 50% and a maximum of 200%. The market conditions for the awards are based on
the Company’s stock achieving certain total shareholder return targets relative to specified index companies during a 3-year
performance period beginning on each respective grant date. The Company recorded $4.7 million $5.3 million, and $2.9 million in
compensation expense for the years ended December 31, 2019, 2018, and 2017, respectively, related to market-based restricted
stock units. Unamortized compensation expense for market-based restricted stock units amounted to $3.8 million at December 31,
2019, and is expected to be recognized over a weighted average period of approximately 1.2 years. The aggregate intrinsic value of
market-based restricted stock units outstanding was $11.9 million, $14.2 million, and $10.2 million for the years ended December
31, 2019, 2018, and 2017, respectively.

A summary of the status of our time-based, performance-based and market-based restricted stock awards and stock units as of
December 31, 2019 and 2018 and changes during the year ended December 31, 2019 are presented below:

Outstanding at December 31, 2018
Granted
Vested and settled
Cancelled
Outstanding at December 31, 2019

Time-based Restricted Stock
Awards and Stock Units
Weighted
Average
Grant
Date Fair
Value

Shares
$
357,592
319,189
$
(157,053) $
(51,000) $
$
468,728

49.77
52.48
46.82
52.85
51.96

F-36

Performance-based
Restricted Stock
Awards and Stock Units
Weighted
Average
Grant
Date Fair
Value

Shares
102,155

$
$
(102,155) $
$
$

33.12

Market-based
Restricted Stock Units

Weighted
Average
Grant
Date Fair
Value

57.44
65.27

15.92
60.08

Shares
271,295
60,722

$
$
$
(74,855) $
$
257,162

Retirement of the Companys President and Chief Executive Officer

On February 25, 2019, the Company entered into a Transition and Retirement Agreement (the “Retirement Agreement”) with the
Company’s President and Chief Executive Officer, Brad Mason. Under the Retirement Agreement, the parties agreed that Mr. Mason
would continue to serve in his role until his successor was appointed by the Board and commenced employment, which occurred on
October 31, 2019 (the “Retirement Date”). The parties agreed that Mr. Mason would provide ongoing transition assistance to the
Company pursuant to a consulting arrangement during the 12 months following the Retirement Date, and that Mr. Mason will be
paid $40,000 per month for such transition consulting services.

As part of the Retirement Agreement, certain time-based stock options and restricted stock awards were modified to vest on the
Retirement Date. In addition, stock options were modified to extend the post-termination exercise period from 18 months under a
standard qualified retirement to up to four years, dependent upon the remaining contractual terms of the options. For fiscal year
2019, in lieu of Mr. Mason’s normal annual incentive awards under the 2012 LTIP, and in recognition of the ongoing transition
assistance that he agreed to provide, Mr. Mason was granted an award of RSUs on April 1, 2019, with a grant date fair market value
of $2.0 million that will vest on the first anniversary of the date of grant, subject to him continuing to provide transition consulting
services through his Retirement Date. The full fair value of the award was recorded as expense in 2019. The Company recognized
approximately $6.5 million in share-based compensation expense during the year ended December 31, 2019 related to the
Retirement Agreement, which was charged to general and administrative expense in the consolidated statements of operations and
comprehensive income (loss).

18. Defined contribution plans and deferred compensation

Defined Contribution Plans

Orthofix Inc. sponsors a defined contribution plan (the “401(k) Plan”) covering substantially all full time U.S. employees. The
401(k) Plan allows participants to contribute up to 80% of their pre-tax compensation, subject to certain limitations, with the
Company matching 100% of the first 2% of the employee’s base compensation and 50% of the next 4% of the employee’s base
compensation if contributed to the 401(k) Plan. During the years ended December 31, 2019, 2018, and 2017, expenses incurred
relating to the 401(k) Plan, including matching contributions, were approximately $2.7 million, $2.3 million, and $2.0 million,
respectively.

The Company also operates defined contribution plans for its international employees meeting minimum service requirements. The
Company’s expenses for such contributions during each of the years ended December 31, 2019, 2018, and 2017 were $1.0 million,
$1.1 million and $1.1 million, respectively.

Deferred Compensation Plans

Under Italian Law, our Italian subsidiary accrues, on behalf of its employees, deferred compensation, which is paid on termination of
employment. The accrual for deferred compensation is based on a percentage of the employee’s current annual remuneration plus
an annual charge. Deferred compensation is also accrued for the leaving indemnity payable to agents in case of dismissal, which is
regulated by a national contract and is equal to approximately 3.8% of total commissions earned from the Company. The Company’s
relations with its Italian employees, who represent 18.6% of total employees at December 31, 2019, are governed by the provisions
of a National Collective Labor Agreement setting forth mandatory minimum standards for labor relations in the metal mechanic
workers industry. The Company is not a party to any other collective bargaining agreement. The balance in other long-term liabilities
as of December 31, 2019 and 2018 was $1.3 million, and represents the amount which would be payable if all the employees and
agents had terminated employment at that date.

19.

Income taxes

Income (loss) from continuing operations before provision for income taxes consisted of the following:

(U.S. Dollars, in thousands)

U.S.
Non-U.S.

Income (loss) before income taxes

2019

Year Ended December 31,
2018

2017

(24,890) $

(2,159)

(27,049) $

28,642
(5,757)
22,885

27,774
8,617
36,391

F-37

The provision for income taxes on continuing operations consists of the following:

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

Current
Deferred

Non-U.S.

Current
Deferred

Income tax expense

2019

Year Ended December 31,
2018

2017

(1,911) $
2,008
97

1,931
(615)
1,316
1,413

9,480
(3,430)
6,050

2,255
769
3,024
9,074

3,620
20,222
23,842

4,062
1,196
5,258
29,100

The differences between the income tax provision at the U.S. federal statutory tax rate and the Company’s effective tax rate for the
years ended December 31, 2019, 2018, and 2017 consist of the following:

(U.S. Dollars, in thousands, except percentages)
Statutory U.S. federal income tax rate
State taxes, net of U.S. federal benefit
Foreign rate differential, including withholding taxes
Valuation allowances, net
Research credits
Italian subsidiary intangible asset
Domestic manufacturing deduction
Unrecognized tax benefits, net of settlements
Impact of the Tax Act
Equity compensation
Executive compensation
Contingent consideration
Other, net
Income tax expense/effective rate

2019

2018

20171

Amount

Percent

Amount

Percent

Amount

Percent

(5,680)
1,043
131
(165)
(829)

(2,745)

626
1,504
5,678
1,850
1,413

21.0% $
(3.9)
(0.5)
0.6
3.1

10.1

(2.3)
(5.6)
(21.0)
(6.7)
(5.2)% $

4,806
1,038
784
4,116
(710)
(230)

81
(560)
(1,646)
606
528
261
9,074

4.5
3.4
18.0
(3.1)
(1.0)

0.4
(2.4)
(7.2)
2.6
2.3
1.2

21.0% $ 12,737
1,598
(3,849)
3,548
(397)
(381)
(818)
6,002
8,347
272
123

1,918
39.7% $ 29,100

35.0%
4.4
(10.6)
9.7
(1.1)
(1.0)
(2.2)
16.5
22.9
0.7
0.3

5.4
80.0%

1 The rate reconciliation for 2017 is based on the U.S. federal income tax rate, rather than the Company’s country of domicile rate at that time. The Company
believes, given the large proportion of taxable income earned in the U.S., this presentation is more meaningful.

Certain items within the tables of this footnote have been recast for previous years to conform to current year presentation.

On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. Changes include,
but are not limited to, a U.S. corporate rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017,
the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the
mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The Company calculated its best estimate
of the impact of the Tax Act in the 2017 income tax provision in accordance with its understanding of the Tax Act and guidance
available as of the date of this filing. As a result, the Company recorded $8.3 million of additional income tax expense in the fourth
quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain
deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future was $8.6 million. The
provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was zero. The
Company also recorded a benefit of $0.3 million related to an income tax liability recorded in 2016 related to repatriation of
earnings from our subsidiary in Puerto Rico.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in
situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we

F-38

determined that the $8.6 million of the deferred tax expense recorded in connection with the remeasurement of certain deferred
tax assets and liabilities and the zero transition tax on the mandatory deemed repatriation of foreign earnings was a provisional
amount and a reasonable estimate at December 31, 2017. A more detailed analysis of the Company’s deferred tax assets and
liabilities and its historical foreign earnings as well as potential correlative adjustments was completed in 2018, which resulted in an
additional benefit of $0.6 million in the first quarter of 2018 and minimal adjustments in the fourth quarter of 2018. As of December
31, 2018, the Company has completed its accounting for the tax effects of enactment of the Tax Act.

The Company paid cash relating to taxes totaling $8.1 million, $15.6 million, and $3.3 million for the years ended December 31,
2019, 2018, and 2017, respectively.

The Company’s deferred tax assets and liabilities are as follows:

(U.S. Dollars, in thousands)
Intangible assets and goodwill
Inventories and related reserves
Deferred revenue and cost of goods sold
Other accruals and reserves
Accrued compensation
Allowance for doubtful accounts
Net operating loss and tax credit carryforwards
Lease liabilities
Other, net

Valuation allowance
Deferred tax asset
Withholding taxes
Property, plant and equipment
Right-of-use lease assets
Deferred tax liability
Net deferred tax assets

December 31,

2019

2018

1,390
13,216
4,652
4,337
9,221
971
44,230
6,268
1,567
85,852
(38,741)
47,111
(40)
(5,881)
(6,073)
(11,994)
35,117

1,682
12,151
4,652
2,799
8,317
2,346
52,664

2,200
86,811
(49,014)
37,797

(4,569)

(4,569)
33,228

The Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences between the financial reporting and income tax basis
of assets and liabilities, and for operating losses and credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the years in which those items are expected to be realized. Tax law and rate changes are recorded in
the period such changes are enacted. The Company establishes a valuation allowance when it is more likely than not that certain
deferred tax assets will not be realized in the foreseeable future.

The valuation allowance is primarily attributable to net operating loss carryforwards and temporary differences in certain foreign
jurisdictions. The net decrease in the valuation allowance of $10.3 million during the year principally relates to the decrease of
valuation allowances on net operating loss carryforwards in foreign jurisdictions due to expiration, statutory rate changes, and
changes regarding the realizability of net deferred tax assets. It is reasonably possible that the valuation allowance will decrease in
2020 related to expiration of foreign net operating losses.

The Company has federal net operating loss carryforwards of $25.5 million and research and development credits of $1.6 million as
a result of the acquisition of Spinal Kinetics. These carryforwards are subject to limitation under the provisions of Section 382 and
will begin to expire in 2026. The Company has state net operating loss carryforwards of approximately $35.5 million, of which $22.0
million relates to Spinal Kinetics and begins to expire in 2020. Additionally, the Company has net operating loss carryforwards in
various foreign jurisdictions of approximately $145.3 million that begin to expire in 2020, the majority of which relate to the
Company’s Netherlands and Brazil operations.

F-39

Prior to the Domestication, as an entity incorporated in Curaçao, “foreign earnings” referred to both U.S. and non-U.S. earnings. As
a result of the Domestication, only income sourced outside of the U.S. is considered unremitted foreign earnings. Unremitted
foreign earnings decreased from $50.4 million at December 31, 2018 to $49.2 million at December 31, 2019. The decrease is due to
the impact of currency translation. As a result of the 2017 Tax Act, current year earnings have been deemed to be repatriated. Those
foreign subsidiary earnings that are subject to U.S. taxation as a component of Global Intangible Low Taxed Income (GILTI) under the
Tax Act are included as a component of current tax expense. The Company’s investment in foreign subsidiaries continues to be
indefinite in nature; however, the Company may periodically repatriate a portion of these earnings to the extent that it does not
incur significant additional tax liability.

The Company records a benefit for uncertain tax positions when the weight of available evidence indicates that it is more likely than
not, based on an evaluation of the technical merits, that the tax position will be sustained on audit. The tax benefit is measured as
the largest amount that is more than 50% likely to be realized upon settlement. The Company re-evaluates income tax positions
periodically to consider changes in facts or circumstances such as changes in or interpretations of tax law, effectively settled issues
under audit, and new audit activity. The Company includes interest and any applicable penalties related to income tax issues as part
of income tax expense in its consolidated financial statements.

The Company’s unrecognized tax benefit was $16.9 million and $21.4 million for the years ended December 31, 2019 and 2018,
respectively. The Company recorded net interest and penalties expense (benefit) on unrecognized tax benefits of $(0.1) million, $1.4
million, and $2.3 million for the years ended December 31, 2019, 2018, and 2017, respectively, and had approximately $6.6 million
and $6.7 million accrued for payment of interest and penalties as of December 31, 2019 and 2018, respectively. The entire amount
of unrecognized tax benefits, including interest, would favorably impact the Company’s effective tax rate if recognized. The
Company believes it is reasonably possible that, in the next 12 months, the amount of unrecognized tax benefits, exclusive of
interest and penalties, related to the resolution of federal, state and foreign matters could be reduced by $13.0 million to $13.5
million as audits close and statutes expire.

A reconciliation of the gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2019,
2018, and 2017 follows:

(U.S. Dollars, in thousands)
Balance as of January 1,
Additions for current year tax positions
Increases for prior year tax positions
Settlements of prior year tax positions
Expiration of statutes
Balance as of December 31,

2019

2018

21,351
309
1,711
(1,183)
(5,284)
16,904

23,676
170
1,653
(1,499)
(2,649)
21,351

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in certain state and foreign jurisdictions,
including Italy and the United Kingdom. The statute of limitations with respect to federal and state tax filings is closed for years prior
to 2014. The statute of limitations with respect to the major foreign tax filing jurisdictions is closed for years prior to 2015.

During the third quarter of 2015, the Internal Revenue Service commenced an examination of the Company’s federal income tax
return for 2012. The Company concluded this examination in the first quarter of 2018 with no material impact to the financial
statements. In October 2016, the Company was notified of an examination of its federal income tax return for 2013 and in
December 2017, the examination for 2013 was concluded with no change. In November 2017, the Company was notified of an
examination of its federal income tax return for 2015. In February 2019, the Company reached an agreement and concluded this
examination. As a result, the Company recognized a benefit of approximately $1.8 million during 2019. The Company cannot
reasonably determine if any state and local or foreign examinations, will have a material impact on its financial statements and
cannot predict the timing regarding resolution of these tax examinations.

20.

Earnings per share (EPS)

The Company uses the two-class method of computing basic EPS due to the existence of non-vested restricted stock awards with
nonforfeitable rights to dividends or dividend equivalents (referred to as participating securities). Basic EPS is computed using the
weighted average number of common shares outstanding during each of the respective years. Diluted EPS is computed using the
weighted average number of common and common equivalent shares outstanding during each of the respective years using the

F-40

more dilutive of either the treasury stock method or two-class method. The difference between basic and diluted shares, if any,
largely results from common equivalent shares, which represents the dilutive effect of the assumed exercise of certain outstanding
share options, the assumed vesting of restricted stock granted to employees and directors, or the satisfaction of certain necessary
conditions for contingently issuable shares (see Note 17).

For each of the three years ended December 31, 2019, 2018, and 2017, no significant adjustments were made to net income for
purposes of calculating basic and diluted EPS. The following is a reconciliation of the weighted average shares used in the diluted EPS
computations.

Weighted average common shares-basic
Effect of diluted securities:

Unexercised stock options and employee stock purchase plan
Unvested time-based restricted stock awards
Unvested performance-based restricted stock awards

Weighted average common shares-diluted

2019

Year Ended December 31,
2018

2017

18,903,289

18,494,002

18,117,405

18,903,289

313,648

103,960
18,911,610

209,691
123,592
48,057
18,498,745

There were 1,704,708, 349,930 and 418,859 weighted average outstanding options, restricted stock, and performance-based or
market-based equity awards not included in the diluted earnings per share computation for the years ended December 31, 2019,
2018, and 2017, respectively, because inclusion of these awards was anti-dilutive or, for performance-based and market-based
awards, all necessary conditions have not been satisfied by the end of the respective period.

Year
459,955
100,607
359,348
378,132
(18,784)
(28,462)
(28,462)

(1.51)
(1.51)

$
$

21. Quarterly financial data (unaudited)

(U.S. Dollars, in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expense
Operating income (loss)
Net income (loss) from continuing operations
Net income (loss)
Net income (loss) per common share basic:

1st Quarter
$ 109,112
23,708
85,404
89,852
(4,448)
897
897

2019

2nd Quarter
$ 115,850
25,812
90,038
89,587
451
(547)
(547) $

3rd Quarter
$ 113,499
24,896
88,603
107,485
(18,882)
(40,498)
(40,498) $

4th Quarter
$ 121,494
26,191
95,303
91,208
4,095
11,686
11,686

Net income (loss) from continuing operations
Net income (loss)

Net income (loss) per common share diluted:

Net income (loss) from continuing operations
Net income (loss)

$
$

0.05
0.05

$
$

(0.03) $
(0.03) $

(2.14) $
(2.14) $

(0.03) $
(0.03) $

(2.14) $
(2.14) $

0.61
0.61

0.60
0.60

F-41

(U.S. Dollars, in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expense1, 2
Operating income1, 2
Net income (loss) from continuing operations2
Net income (loss)
Net income (loss) per common share basic:

1st Quarter
$ 108,709
24,147
84,562
76,692
7,870
5,226
5,226

2nd Quarter
$ 111,547
22,835
88,712
82,797
5,915
925
925

2018

3rd Quarter
$ 111,708
24,020
87,688
83,781
3,907
(1,211)
(1,211) $

4th Quarter
$ 121,078
25,626
95,452
83,050
12,402
8,871
8,871

Net income (loss) from continuing operations
Net income (loss)

Net income (loss) per common share diluted:

Net income (loss) from continuing operations
Net income (loss)

$
$

0.28
0.28

0.27
0.27

$
$

0.05
0.05

$
$

(0.07) $
(0.07) $

0.47
0.47

0.46
0.46

Year
453,042
96,628
356,414
326,320
30,094
13,811
13,811

0.73
0.73

0.72
0.72

$
$

1 The Company reclassified $1.1 million of previously reported expense during the second quarter of 2018 related to changes in fair
value of contingent consideration in the table above to conform to current period presentation.
2 The Company reclassified less than $10 thousand of previously reported net income (loss) from discontinued operations during the
first, second, and third quarters of 2018 to continuing operations to conform to current period presentation.

22. Subsequent events

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 will pay $18 million in cash consideration and will enter into
manufacturing supply contract with Wittenstein.

The acquisition is anticipated to close by the end of the first quarter of 2020, subject to customary closing conditions.

F-42

Orthofix S.A.
21-37 Rue de Stalingrad, 24/28 Villa Baudran
94110 Arcueil
France
Tel: +33.1.41983333

Spinal Kinetics France SARL
an Orthofix Company
259 Rue Saint-Honr’e
75001 Paris, France

Orthofix Australia Pty. Ltd.
c/o Baker McKenzie
Level 46, Tower One
International Towers Sydney
100 Barangaroo Avenue
Barangaroo NSW 2000
Australia
Tel: +61.2.9493.4448

Orthofix Ltd.
6 Waltham Park
Waltham Road
White Waltham
Maidenhead, Berkshire
SL6 3TN
United Kingdom
Tel: +44.1628.594500

COMMON STOCK
Approximately 318 shareholders of record.
Traded on the NASDAQ
Symbol: OFIX

TRANSFER AGENT
Computershare Investor Services
P.O. BOX 30170
College Station, TX 77842-3170
1.877.205.0957
www.computershare.com/investor

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Dallas, TX

CORPORATE HEADQUARTERS - U.S. SALES,
MANUFACTURING & DISTRIBUTION

Orthofix Medical Inc.
3451 Plano Parkway
Lewisville, TX 75056
USA
Tel: 214.937.2000

Orthofix Medical Inc.
(Manufacturing & Distribution for the
M6 artificial discs)
501 Mercury Drive
Sunnyvale, CA 94085
USA
Tel: 408.636.2500

INTERNATIONAL SALES, MANUFACTURING
& DISTRIBUTION SUBSIDIARIES

Orthofix S.r.l.
Via delle Nazioni 9
37012 Bussolengo
Verona, Italy
Tel: +39.045.6719000

Orthofix S.r.l.
(International Distribution Center)
Via della Filanda 7/9
37060 Lugagnano di Sona
Verona, Italy
Tel: +39.045.6719000

Orthofix do Brasil Ltda.
Rua Alves Guimarães, 1216
Pinheiros 05410-002
São Paulo – SP
Brazil
Tel: +55.11.30872260

Orthofix GmbH / Orthofix Spine GmbH
Siemensstraße 5
85521 Ottobrunn
Munich, Germany
Tel: +49.89.35499990

Spinal Kinetics Gmbh
an Orthofix Company
Gottlieb-Daimler-Str. 6
D-89150 Laichingen, Germany
Tel: +49.7333.925.9986

Orthofix.com